[Senate Hearing 116-97]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 116-97
 
               A PATH TO SUSTAINABILITY: RECOMMENDATIONS
  FROM THE PRESIDENT'S TASK FORCE ON THE UNITED STATES POSTAL SERVICE

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS


                             FIRST SESSION

                               __________

                             MARCH 12, 2019

                               __________

        Available via the World Wide Web: http://www.govinfo.gov

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs
        
        
        
        
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                    RON JOHNSON, Wisconsin, Chairman
ROB PORTMAN, Ohio                    GARY C. PETERS, Michigan
RAND PAUL, Kentucky                  THOMAS R. CARPER, Delaware
JAMES LANKFORD, Oklahoma             MAGGIE HASSAN, New Hampshire
MITT ROMNEY, Utah                    KAMALA D. HARRIS, California
RICK SCOTT, Florida                  KYRSTEN SINEMA, Arizona
MICHAEL B. ENZI, Wyoming             JACKY ROSEN, Nevada
JOSH HAWLEY, Missouri

                Gabrielle D'Adamo Singer, Staff Director
       Patrick J. Bailey, Chief Counsel for Governmental Affairs
              Jennifer L. Selde, Professional Staff Member
               David M. Weinberg, Minority Staff Director
      Ashley E. Poling, Minority Director of Governmental Affairs
       Annika W. Christensen, Minority Professional Staff Member
                     Laura W. Kilbride, Chief Clerk
                     Thomas J. Spino, Hearing Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Johnson..............................................     1
    Senator Carper...............................................     3
    Senator Enzi.................................................    12
    Senator Lankford.............................................    14
    Senator Peters...............................................    17
    Senator Scott................................................    20
    Senator Hawley...............................................    26
Prepared statements:
    Senator Johnson..............................................    47
    Senator Peters...............................................    48
    Senator Carper...............................................    49

                               WITNESSES
                        Tuesday, March 12, 2019

Hon. David C. Williams, Vice Chairman, Board of Governors, U.S. 
  Postal Service.................................................     7
Hon. Robert G. Taub, Chairman, Postal Regulatory Commission......     9
Gary Grippo, Deputy Assistant Secretary for Public Finance, U.S. 
  Department of Treasury.........................................    10
Hon. Margaret Weichert, Deputy Director of Management, Office of 
  Management and Budget, and Acting Director, Office of Personnel 
  Management.....................................................    37

                     Alphabetical List of Witnesses

Grippo, Gary:
    Testimony....................................................    10
    Prepared statement...........................................    85
Taub, Hon. Robert G.:
    Testimony....................................................     9
    Prepared statement...........................................    55
Weichert, Hon. Margaret:
    Testimony....................................................    37
    Prepared statement...........................................   101
Williams, Hon. David C.:
    Testimony....................................................     7
    Prepared statement...........................................    52

                                APPENDIX

U.S. Postal Service Chart........................................   105
Board of Governors Chart.........................................   106
Statements submitted for the Record from:
    Robert M. Duncan, Chairman of the U.S. Postal Service Board 
      of Governors...............................................   107
    American Consumer Institute Center for Citizen Research......   110
    American Postal Workers Union, AFL-CIO.......................   116
    eBAY.........................................................   119
    Greeting Card Association....................................   122
    National Association of Federally-Insured Credit Unions......   130
    National Association of Letter Carriers......................   132
    National Association of Postal Supervisors...................   154
    Association for Postal Commerce..............................   160
    Parcel Shippers Association..................................   162
    Taxpayers Protection Alliance................................   172
    United Postmasters and Managers of America...................   205
Responses to post-hearing questions for the Record:
    Mr. Williams.................................................   209
    Mr. Taub.....................................................   225
    Mr. Grippo...................................................   250
    Ms. Weichert.................................................   265


                       A PATH TO SUSTAINABILITY:



                  RECOMMENDATIONS FROM THE PRESIDENT'S



             TASK FORCE ON THE UNITED STATES POSTAL SERVICE

                              ----------                              


                        TUESDAY, MARCH 12, 2019

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 3:14 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Ron Johnson, 
Chairman of the Committee, presiding.
    Present: Senators Johnson, Lankford, Scott, Enzi, Hawley, 
Peters, Carper, Hassan, and Sinema.

             OPENING STATEMENT OF CHAIRMAN JOHNSON

    Chairman Johnson. Good afternoon. This hearing will come to 
order.
    I want to first apologize for starting this hearing late to 
the witnesses and to the audience. It is kind of nice to see 
interest in this hearing. It is an important issue. We have 
some people lined out here. So, if you are getting bored, 
somebody is going to take your place.
    I want to welcome my old wingman. Perhaps it is wrong to 
call him ``old wingman,'' but my former wingman, Senator Carper 
will be acting as Ranking for most of this hearing. But he will 
be doing it from his chair.
    I would also ask consent that my written statement be 
entered into the record.\1\
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    \1\ The prepared statement of Senator Johnson appears in the 
Appendix on page 47.
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    I just want to make a couple opening comments.
    We have some sheets in front of everybody as well as we got 
a chart that very few will be able to actually read this unless 
you have the sheet in front of you.
    Two things I want to talk about is just the basic 
historical and projected financial condition of the United 
States Postal Service (USPS), which is what this hearing is all 
about, and what can we do to make it a sustainable entity.
    I have a four-column income statement and cash-flow 
statement\2\ showing performance 10 years ago, last year, 
cumulated 10 years, last 10 years, and projected 10 years. The 
numbers I want to point out is the third column, the 10-year 
actual.
---------------------------------------------------------------------------
    \2\ The chart referenced by Senator Johnson appears in the Appendix 
on page 105.
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    $682 billion worth of operating revenue, $2.7 billion of 
operating income, that is 0.4 percent. In business, I think 
Senator Scott and others will agree with me that is not an 
acceptable operating margin.
    Throw on top of that, then, the pension and health care 
funding obligations it has. You end up with a $61.1 billion 
loss over 10 years.
    Now, that was mitigated. Not all expenses are cash 
expenses, so we have adjustments to cash. You have depreciation 
less investments. It ends up being about $22 billion. So you 
end up with $39.3 billion of negative cash.
    Then we defaulted on prefunding the retiree health benefits 
and the current retiree benefits as well. That is $48 billion 
of default over the last 10 years. So, magically, we end up 
with almost $9 billion in cash-flow, which still in an almost 
$700 billion 10-year entity is not even close to sustainable.
    Looking to the future, the Post Office--and they have 
agreed to let us share these projections--projected about $724 
billion worth of revenue in operating loss of $25 billion, loss 
after all the pension funding of $125 billion. Cash adjustments 
do not even begin--well, they do mitigate that quite a bit. We 
are still in a $40 billion negative cash situation over the 
next 40 years.
    Obviously, this is not a financial viable entity in the 
long term or even the short term. Something has to be done, and 
we have been kicking this can down the road for quite some 
time. I know my Ranking Member has been working on this problem 
diligently.
    Senator Carper. Since birth. [Laughter.]
    Chairman Johnson. He even gives me chocolates on 
Valentine's Day with little notes about we have to do something 
on Postal.
    Senator Carper. If we get this done, you will get a lot 
more than chocolates.
    Chairman Johnson. So, anyway, something has to be done.
    I just want to commend the Administration. In this 
Committee, we talk about the problem-solving process, gathering 
the information, defining the problem, root-cause analysis, 
then based on that gathering of information, setting achievable 
goals, then working on solutions.
    From my standpoint, the task force went through exactly 
that process, diligently gather the information, talk to all 
the stakeholders, and I think they have put together a really 
solid report. Again, nothing is easy about this, but I think 
they have also made some pretty solid recommendations that do 
not include at this point in time any kind of taxpayer bailout, 
which I am also in support of.
    Anyway, that is the situation, what this Administration has 
done with this Postal Task Force, which is what we will be 
talking about in this hearing.
    The next chart\1\ I want to put up is the next thing I want 
to talk about, which is the dysfunction and a lack of quorum in 
the Board of Governors. There is plenty of bipartisan blame to 
go around in terms of why are at what I would consider 
embarrassing situation right here, where we do not have a 
quorum of a Board of Governors.
---------------------------------------------------------------------------
    \1\ The chart referenced by Senator Johnson appears in the Appendix 
on page 106.
---------------------------------------------------------------------------
    You can take a look. I did not make my staff go all the way 
back to the establishment of the Board of Governors in 1970, 
but they went back far enough to show that from 1987 to about 
2010, pretty good performance. There were a couple of years 
where we are missing a Governor or two, but we had a full and 
functioning Board of Governors for the Postal System, which is 
the main governing body.
    But then 2011 occurred, and other than--both the Obama 
administration and Trump administration have both had two 
Governors confirmed. It is not even close to enough to make up 
for all the retirees due to the lapsing of their terms.
    The low point, obviously, is in 2017 where we had zero 
Governors on the board, and right now, we have two. They can 
somewhat function, but it is two below a quorum. Ideally, you 
really want five. So we have actually got the capability of not 
having ties with votes, and we can break a tie. They can 
actually fully function as a Board of Governors. Obviously, it 
would be nice to have nine, but we are a long way from that 
right now.
    I just want to point that out. I think Congress, I think 
the Administration, we ought to get their act together, get 
nominees, get them confirmed. Hopefully, we will not see the 
obstruction. Again, there has been bipartisan obstruction. I 
have my own opinions where there may have been more 
obstruction, but I will not even mention that right now.
    I think this is a serious issue. The U.S. Postal Service 
deserves a Board of Governors so they can actually set the 
policy, set the direction, and hopefully implement some of the 
good ideas that the Administration has.
    With that, I will turn it over to Senator Carper for his 
opening statement.

             OPENING STATEMENT OF SENATOR CARPER\1\

    Senator Carper. Thanks. Thanks so much, Mr. Chairman. 
Thanks for the opportunity to sit in for a while until our 
Ranking Member gets here. This is an issue that I care about a 
whole lot. I know other Members of this Committee do. Clearly, 
the folks in the room do.
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator Carper appears in the 
Appendix on page 49.
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    I will just play off of a couple of things that our 
Chairman has said. Imagine a Fortune 500, Fortune 100 company 
operating for a month without a Board of Governors or a Board 
of Directors, much less years. It is unacceptable.
    The last Administration actually nominated, near the end of 
their tenure, three Democrats and I think three Republicans, 
and they came out of Committee.
    We had them on the floor right through eleventh hour to 
finish up our session of the Congress. It was a time when one 
member could object and sadly did. So we ended up that Congress 
really with nobody, as I recall, and we went, as you suggested 
a year or two without a single independent Governor serving. It 
is just an unacceptable situation.
    I am happy to have two Governors now. Governor Williams 
said we are both Governors. I am former; he is a current. But 
we appreciate his service, but the two of you are doing the 
work of a whole lot more people, and I think the Administration 
has identified a couple of other folks to nominate. I look 
forward to working with Senator Peters and with our Chairman 
and our colleagues to move those names through the process.
    Meanwhile, we have the Chairman of the Postal Regulatory 
Commission (PRC) with us here today. As I recall, there is a 
couple of positions on the PRC that might be about to expire, 
and I understand the Administration has identified at least one 
person to nominate to fill the Republican soon-to-be vacant 
seat, and that she might actually be sitting behind you over 
your left shoulder. I just want to say that would be great. We 
hope that is true and looking forward to working to make that 
nomination move smoothly.
    Having said that, the other thing I would say, the Chairman 
has given us a fair amount of material here on this sheet. I 
have not had a chance to look at it closely, but I would 
certainly agree that these balance sheets are not acceptable. 
The Postal Services needs to be--I will use the word 
``reformed.'' It is probably used too much around here, but we 
need to stop the bleedings as well, and we need to pass a bill 
to give the Postal Service some breathing room, so we can 
better reform the business models that are before us.
    But thank you. Thanks, Mr. Chairman. I am happy to be 
pinch-hitting, too, today for our Ranking Member for a while as 
we discuss one of my favorite subjects.
    My wife asks me from time to time, more than you would 
believe, when she says, ``What would you like on your tombstone 
when you die?''
    I said, ``Honey, I feel fine.'' [Laughter.]
    She is always bugging me. We are going through getting our 
estate planning right now, and she asked me again last night. 
She said, ``What do you want on your tombstone?'' and I gave 
her the same answer I have always given her, ``Return to 
Sender.'' [Laughter.]
    She is looking for another husband, I think.
    Chairman Johnson. By the way, now I really feel bad about 
calling you my ``old wingman.'' [Laughter.]
    Senator Carper. Mr. Chairman, I want to thank you for 
having this hearing and giving us a chance to discuss the 
recommendations made by the President's Postal Service Task 
Force. We thank the task force for their attendance today and 
for Gary Grippo for his leadership.
    We thank you all for being here. I like to say in adversity 
lies opportunity. There is plenty of adversity for the Postal 
Service. There has to be some opportunity here, and part of our 
challenge is to not just focus on the adversity but to also 
come up with some real opportunities. My gut says there has to 
be some.
    For the last couple of years, the all-too-common headline 
regarding the Postal Service has been that it is in financial 
crisis, and I believe that it is, in no small part, due to our 
failure to act on significant legislative reforms that the 
Postal Service desperately needs to operate.
    It is also partially due to the Senate's failure to confirm 
nominees to serve, as I said, on the Postal Board of Governors 
in a timely fashion.
    One of my top goals since I joined this Committee, 18 years 
ago, has been to address these challenges and give the Postal 
Service the tools that it needs to improve service and thrive 
in the 21st Century.
    The Postal Service operates, as we know, as the center of a 
$1.4 trillion mailing industry, $1.4 trillion mailing industry 
that employs about 7.5 million people across our country, 
accounting for 6 percent of our Nation's jobs. Think about 
that: 6 percent of our Nation's jobs are in the balance here. 
The Postal Service is a cornerstone of our economy and has been 
for a long time.
    Companies large and small, urban and rural, and in every 
line of people depend on the Postal Service. It is a one-of-a-
kind retail, processing, and delivery network.
    Today, we are at a crossroads. There are real questions 
about what the future holds for the Postal Service.
    I have some significant concerns with this report that we 
have received, particularly given the fact that our staff was 
told last week by representatives from the Treasury Department 
that the task force did not know ``quantitative analysis'' on 
its recommendations to reform the Postal Service's business 
model.
    I would just ask for us to think about that for just a 
second: no quantitative analysis.
    I believe that doing quantitative analysis means collecting 
and assessing data in order to evaluate a business performance 
or model.
    Now we have learned that a task force charged with 
overhauling the Postal Service's business model apparently did 
not in fact conduct the data-driven analysis that would be 
required to provide sound recommendations on this agency's 
financial outlook.
    I hope I am mistaken at that. We will find out if I am.
    I, years ago, received an MBA from the University of 
Delaware after I had been in the Navy for a while, and I 
started my career as an elected official. My first job was 
State treasurer. Nobody wanted it. We had the worst credit 
rating in the Country. So I got to run because nobody wanted 
to.
    But even with my humble credentials, going back all those 
years, I am still a little surprised with the part of the 
analysis I think might be missing here.
    With that said, I think the report does outline a key 
notion that everyone can agree on, and that is the United 
States Postal Service is an essential linchpin to our economy, 
and it must evolve. And the question is how.
    Despite having finished 2018 with cash on hand, which was 
due largely to a now-expired temporary rate increase, the 
Postal Service continues to report billions of dollars in 
losses, and its debt exceeds its revenue.
    Postal Service has maxed out its $15 billion line of credit 
with the Treasury Department. This left Postal management with 
no choice but to continue to default on health care and pension 
payments. According to the Treasury Department, this puts the 
Postal Service at more than $60 billion in the hole.
    Complicating matters, the Postal Service only has, as we 
said, two sitting Governors on its board who alone are charged 
with overseeing operations, approving major business decisions, 
and holding senior management accountable.
    At a time when the Postal Service is in such desperate need 
of oversight and direction and fresh thinking, it is 
irresponsible for Congress not to act.
    This report has some very sound points, and let me just say 
that again. This report has some very sound points, and I want 
to mention a couple that stand out.
    One is that the Postal Service should be self-sustaining.
    Two, the Postal Service should not be privatized.
    Three, the Postal Service is still needed for broad swaths 
of America, particularly the rural parts of our Nation that we 
have in almost every State in the Country.
    And, finally, the Postal Service's business model needs to 
be reformed.
    But those points are just that, a series of bullet points 
in this report, and unfortunately, this report does not really 
come close to a real business plan. This report, while it is 
long overdue, is not what some of us has hoped it might be, and 
that would be a silver bullet. It is not that. This is 
especially concerning given the need to stabilize the Postal 
Service now.
    I have been working with a bunch of folks on this Committee 
and people who used to be on this Committee for some time on 
bipartisan reforms with the Postal Service and stakeholders, as 
has the House Oversight and reform Committee over there, 
including Elijah Cummings and Mark Meadows. But time is running 
out to protect our ratepayers from losing an essential service. 
We no longer have the luxury of kicking the can any further 
down the road.
    The Postal Service is as big as a Fortune 500 company in 
both size and scope. In fact, it is bigger in many ways, bigger 
than most Fortune 500 companies, but let us be clear. It is not 
a business in the classic sense of the word. It is a government 
agency with Federal mandates on pay, benefits, and service that 
must be taken into account.
    I hope the discussion today will provide Members an 
opportunity to better understand the opportunities and the 
challenges of the Postal Service and help begin the process of 
addressing reform quickly this year.
    We must help the Postal Service move in a more thoughtful 
direction and develop new ways to ensure that the Postal 
Service remains relevant in this digital age, and it is both a 
challenge and an opportunity.
    I look forward to working with our witnesses and to a lot 
of folks in this audience and people in this panel to make sure 
that we do not let this challenge phase go by without finding 
the opportunity or two.
    Thank you so much.
    Chairman Johnson. Thanks, Senator Carper.
    Senator Peters does intend to come here. He will not be 
able to stay real long, but he will make an opening statement 
when he comes. We will let him do that in between other 
testimony.
    It is the tradition of this Committee to swear in 
witnesses. So if you all stand and raise your right hand.
    Do you swear that the testimony you will give before this 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Mr. Taub. I do.
    Mr. Grippo. Yes.
    Mr. Williams. Yes.
    Chairman Johnson. Please be seated.
    Our first witness is the Hon. David Williams. Mr. Williams 
is the Vice Chairman of the Postal Service Board of Governors, 
following his confirmation last August. He has previously 
served as the Inspector General (IG) for the Postal Service, 
the Department of Housing and Urban Development (HUD), and the 
Internal Revenue Service (IRS), among other agencies. Mr. 
Williams.

TESTIMONY OF HON. DAVID C. WILLIAMS,\1\ VICE CHAIRMAN, BOARD OF 
                 GOVERNORS, U.S. POSTAL SERVICE

    Mr. Williams. Thank you, Mr. Chairman and Senator Carper 
and Members of the Committee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Williams appears in the Appendix 
on page 52.
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    During the tenure of the task force, their staff met with 
Postal Governors several times to discuss the ongoing progress. 
The effort, though very fast, was well done. The task force 
held an impressive number of stakeholder interviews and 
conducted complex analyses.
    The work produced an econometric model that incorporate 
savings and revenue opportunities, featuring a sophisticated 
monetizing tool.
    The task force recommendations represent an aggressive 
attempt to provide viable options and incorporate the voices of 
our stakeholders, even our competitors, who urged a major 
increase in parcel delivery prices. However, I believe the role 
of a public infrastructure is not to maximize profit, but to 
maximize value to our American supply chains and to citizens, 
especially those in rural and underserved urban areas.
    High shipping prices steal from American supply chains, all 
the way from producers' assembly lines to the wallets of 
American citizens.
    Also, reflecting our competitors' voices, the report called 
for the Postal Service to use a 100 percent cost attribution 
models.
    The PRC and Federal Appellate Courts have joined leading 
economists for the last 50 years in dismissing that credited 
economic theory. So, here again, we have to be careful to avoid 
overcharging our customers.
    The private shipping companies find value in using the cost 
attribution models to weed out unprofitable customers. In 
contrast, we deliver to each American doorway. And forcing the 
Postal Service to use a dissimilar industry's playbook would 
simply shelter private shipping companies from being subject to 
efficient market forces.
    The report introduced some important fresh ideas. The study 
suggested that essential mail prices should be reclassified and 
low priced, and were distinguished from market-priced mail used 
in normal commerce.
    The report recommended that we explore new business lines 
and provide revenue to support the Universal Service Obligation 
(USO), as is done in most other world posts.
    There is a very strong congressional demand for our Post 
Office network, which could be met in this manner.
    The Task Force called for an Office of Personnel Management 
(OPM) recalculation of our historically overstated retiree 
health benefit fund liability, finally enabling accurate 
billing for us.
    The recent introduction of Postal-specific assumptions 
alone lowered the pension liability by approximately $15 
billion. Any recalculation should closely review OPM's 
liability assumptions.
    Recent interest rates have been held low to stimulate the 
economy. If discount rates were assumed to be just 1.5 points 
higher, our pension funds in aggregate would be fully funded, 
and our health care liability would decline by approximately 
$23 billion additional.
    Health care estimates are also notoriously impossible to 
estimate. I would also recommend that we look at our current 
fund investment vehicle. Our retirement funds were handed over 
to the Treasury to manage, with no representative named to 
speak for the Postal retirees. The Treasury immediately 
borrowed the entire $335 billion, at rates that are killing the 
fund. Had the funds been invested, even with the government's 
conservative Thrift Savings Plan (TSP) blue chip retirement 
fund, the accounts would now be fully funded.
    I do believe that the task force's effort to identify cost 
savings and revenue-enhancing measures were sincere. 
Understandably, a substantial number of saving options were not 
identified during the brief review.
    As a more complete list of options are integrated into the 
model, more solutions begin to appear that are less disruptive 
for our customers, America's supply chains, and for our 
employees.
    The Postal Service also has much to do to remain modern and 
efficient also. We need to review a number of programs and 
recent actions. We need to look at pricing simplification, 
discount management, the middle mile of sorting and 
transportation, next-generation neighborhood delivery vehicles, 
store-to-door delivery, intelligent mailboxes, post office 
delivery towers, and post office services that expand citizen 
access to government.
    All of the proposals must be aligned with the Postal 
Service's mission of binding the Nation through universal 
service to Americans, giving them level playing field, access 
to other Americans and to the world, providing affordable 
prices, providing reasonable rates and timely delivery, and 
respecting the sanctity of mail.
    I thank the task force. It now falls to us to consider 
their sophisticated econometric model and fresh ideas for our 
emerging business plan. I believe that moderate adjustments to 
our numerous savings and revenue opportunities will enable the 
Postal Service to serve the current and emergent needs of 
American enterprise and citizens.
    Thank you, sir.
    Chairman Johnson. Thank you, Mr. Williams.
    Our next witness is the Hon. Robert Taub. Mr. Taub is the 
Chairman of the Postal Regulatory Commission, the regulatory 
body for the United States Postal Service.
    He previously served as chief of staff for Representative 
John M. McHugh, both when he served as Secretary of the Army 
and when he was on the House Government Reform Committee, 
including during passage of the 2006 Postal reform bill, the 
Postal Accountability and Enhancement Act (PAEA). Mr. Taub.

     TESTIMONY OF HON. ROBERT G. TAUB,\1\ CHAIRMAN, POSTAL 
                     REGULATORY COMMISSION

    Mr. Taub. Chairman Johnson, pinch-hitting Ranking Member 
Carper, Members of the Committee, good afternoon.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Taub appears in the Appendix on 
page 55.
---------------------------------------------------------------------------
    I will highlight a few key points from the Commission's 
written testimony.
    Now much has changed from my last appearance here 28 months 
ago. In summary, the Postal Service still faces significant 
financial obstacles for the future. With its growing liability 
of retiree health benefits, the inability to borrow for needed 
capital investments and the continued loss of high-margin 
First-Class Mail, the important task of improving the financial 
condition of the Postal Service remains daunting. Its total 
liabilities exceed its total assets by $63 billion.
    The fundamental problem is that the Postal Service cannot 
currently generate sufficient funds to cover its mandated 
expenses and invest in critically deferred capital needs, such 
as new delivery vehicles and package sorting equipment.
    The pressing question is, what needs to be done to improve 
the financial condition of the Postal Service? The President's 
task force attempted to answer this critical question.
    A few caveats before I proceed. While required to consult 
with me, I was not a member of the task force. So my fellow 
witnesses representing it are in a better position to elaborate 
on any specific recommendations.
    Also, any decision taken by the Commission in furtherance 
of the task force's recommendations would require a majority 
vote of the commissioners in office, as is the case with all 
Commission decisions. Therefore, I cannot say for certain what 
the Commission's final outcome would be on any of the task 
force recommendations, yet regardless of whether any 
recommended actions are initiated by the Postal Service or the 
Commission, nearly all of the administrative recommendations 
would require open and transparent proceedings before the 
Commission.
    That means public notice and comment proceedings in the 
light of day, in compliance with the Administrative Procedures 
Act (APA), before anything could be finalized.
    Working with the Treasury Department and the Postal 
Service, we intend to further explore the task force 
suggestions.
    I note that the task forced considered its recommendations 
to be ``first steps'' and would be options to consider ``in 
whole or in part.''
    Among the many task force recommendations, one of them in 
particular stands out to me and is consistent with the 
Commission's recommendations made to Congress in the past. I 
believe that the single most important thing that can be done 
is to clearly define the Postal Service's Universal Service 
Obligation. Only by defining the USO clearly can we begin to 
design a system that will fund the services required. It is our 
Nation's mission statement for the Postal Service, and it needs 
to be clear.
    The Commission has significant experience exploring the 
question of the USO. Our 2006 law directed the Commission to 
annually estimate the USO costs and also to prepare a 
comprehensive report in 2008 on the USO. The Commission clearly 
estimates that the total cost of USO is more than $4.5 billion.
    Unlike other countries, the USO within the United States is 
largely undefined and instead is comprised of a broad set of 
policy statements with only a few legislative prescriptions.
    In the absence of a clear definition of the USO, 
particularly given the Postal Service's current financial 
challenges, each of us may have different views of what 
services and operations the Postal Service must provide to 
fulfill the USO, and all of our views will have different price 
tags.
    As part of the financial pressure of generating sufficient 
funds to remain solvent, make capital investments, and pay 
retiree costs, the Postal Service must consider how to fund 
this $4.5 billion annual cost and universal service 
obligations. Given the Commission's substantial work on the 
USO, we can collaborate with this Committee on designing a 
solution.
    Thank you, Mr. Chairman, for convening this hearing to 
shine a spotlight on this critical part of our Nation's 
infrastructure. I know you deeply appreciate the importance of 
these issues. There are no easy answers, but answer we must. 
The Commission stands ready to help in your search for 
solutions.
    On behalf of all the commissioners and the entire 
hardworking agency staff, thank you for the opportunity to 
testify today.
    Chairman Johnson. Well, thank you, Mr. Taub.
    Our final witness is Gary Grippo. Mr. Grippo has served as 
the Deputy Assistant Secretary for Public Finance at the U.S. 
Department of Treasury since June 2011. He has previously 
served as the Deputy Fiscal Assistant Secretary at the 
Department of Treasury and Assistant Commissioner for Federal 
Finance at the Financial Management Service. Mr. Grippo.

  TESTIMONY OF GARY GRIPPO,\1\ DEPUTY ASSISTANT SECRETARY FOR 
          PUBLIC FINANCE, U.S. DEPARTMENT OF TREASURY

    Mr. Grippo. Chairman Johnson, Senator Carper, Members of 
the Committee, as was just stated, I am the Deputy Assistant 
Secretary for Public Finance at the Treasury Department.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Grippo appears in the Appendix on 
page 85.
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    I am a career Federal employee, and for the last 8 years, 
one of my responsibilities has been oversight of the Federal 
Financing Bank, which is an instrumentality of the Treasury.
    The Federal Financing Bank is the Postal Service's lender 
and the sole holder of Postal Service debt. Treasury's role in 
the task force and its interest in a sustainable Postal Service 
is rooted in this financial relationship.
    I was part of the team supporting the task force on the 
United States Postal System created by Executive Order (EO) of 
the President.
    Let me start with the problem. The Postal Service has lost 
$69 billion in the last 12 years. The liabilities on its 
balance sheet exceed assets by $63 billion. Its unfunded 
liabilities for retiree benefits, workers' compensation, and 
debt have reached $140 billion.
    In the face of this financial decline, over the last 7 
years, the Postal Service has been able to preserve enough cash 
to continue operations only by failing to pay $48 billion in 
statutorily required payments to the Office of Personnel 
Management.
    The causes of the Postal Service's financial problems are 
straightforward. First, use of mail is in permanent decline 
because citizens and businesses are increasingly communicating 
online. Between 2007 and 2018, the Postal Service's total mail 
volume declined 33 percent and its First-Class Mail volume 
declined 42 percent.
    Second, under current rules, caps on mail postage rates 
prevent the Postal Service from raising prices on mail services 
in response to the volume declines.
    Third, the Postal Service has suffered from a severe lack 
of institutional governance, which has prevented it from 
developing an appropriate business strategy in response to its 
deterioration.
    From 2016 to 2018, the Postal Service had no Governors, and 
today, it only has two serving Governors out of nine positions.
    Under its current business model, the Postal Service is not 
operationally viable. Its financial losses and its failure to 
pay intergovernmental obligations will continue to grow until 
it runs out of operating cash. If the Postal Service were to 
resume paying its statutorily required payments to OPM as and 
when due, the Postal Service is projected to run out of cash 
next year.
    If it continues to fail to make those payments to OPM, as 
it has done in recent years to conserve operating cash, it may 
be able to function for an additional 2 to 3 years.
    Without a significant change in its business model, 
therefore, the Postal Service will have insufficient cash to 
pay employees' salaries and vendors. The only way to continue 
Postal delivery of mail and packages in the United States and 
to avoid a disruption to the United States economy would be a 
taxpayer bailout of the Postal Service.
    To prevent this outcome, the task force developed a series 
of administrative and legislative recommendations to reform the 
Postal Service's business model. These recommendations include 
strengthening governance, more clearly defining the universal 
service obligation, implementing new pricing and cost 
allocation models, controlling labor costs, and developing new 
sources of revenue that do not entail more balance sheet risk.
    These recommendations are based on core principles the task 
force developed during its research, including, number one, the 
Postal Service should continue as a government entity, and it 
should remain under a mandate for self-sustainability.
    Two, saving the Postal Service requires a fundamentally new 
business model, not simply relief from financial liabilities.
    Three, reform of the Postal Service should not shift costs 
or risks to the taxpayer or to the general fund of the 
Treasury.
    Four, the Postal Service must distinguish between essential 
mail and packages and commercially oriented mail and packages. 
Essential mail and packages have a strong social or 
macroeconomic rationale for government protection in the form 
of price caps or subsidies. Mail and packages that are more 
commercial in nature do not have a basis for government price 
protection.
    And, five, the Postal Service must price these commercially 
oriented mail and package to generate sufficient revenue to pay 
for its operating expenses, capital expenses, and long-term 
liabilities.
    Finally, let me be clear about what the task force is not 
recommending. It is not recommending the closure of post 
offices. It is not recommending eliminating the requirement 
that the Postal Service serve all addresses in the country, and 
it is not recommending that small, rural, or remote areas pay 
more for service than urban areas.
    Indeed, the task force strongly believes that any potential 
solution should not disadvantage rural or remote locations.
    The task force further believes that the Postal Service's 
comprehensive uniform delivery network is a national asset and 
part of our Nation's critical infrastructure. The ultimate goal 
of the task force's recommendations is a sustainable Postal 
Service that preserves this asset.
    Thank you, Mr. Chairman, for the opportunity to answer any 
questions.
    Chairman Johnson. Thank you, Mr. Grippo.
    Out of respect for our Members who showed up which I, by 
the way, appreciate their attendance, I will defer my 
questioning until later in the hearing.
    Senator Carper, do you want to go?
    Senator Carper. I am happy to yield.
    Chairman Johnson. Then it will be Senator Enzi.

               OPENING STATEMENT OF SENATOR ENZI

    Senator Enzi. Thank you, Mr. Chairman. I appreciate you 
holding this hearing, and I appreciate the information that 
should be available from these witnesses.
    I was glad to hear Mr. Grippo say that they recommended no 
additional closures on post offices. I am from the least 
populated State in the Nation but people that still write 
letters and send package and rely on those for their 
pharmaceuticals. We have had some closures, and they have 
really hurt some people.
    But our biggest thing was we had a sorting facility close 
down in Rock Springs, and they moved it to another State. So 
our mail does not get sorted in Wyoming, but the post office 
has a policy that if people do not want to move to the new 
jobs, then they get to do something in their present location.
    I asked for an evaluation of that closure to see how much 
it saved, and because of the employees that would not move, 
there was not any savings for it. But now there is an extremely 
different time lag between it having to go from, say, Rock 
Springs over to Salt Lake and back again to be delivered.
    There used to be local delivery boxes, but there are not 
anymore. Everything has to go to the sorting facility and come 
back again. So those do not make sense to my constituents.
    My newspapers are upset because, again, the sorting thing, 
they have to sort theirs in order to get the rate they get, but 
it still has to go to the sorting facility out of State and 
come back again, which delays the newspaper. All of them are 
hoping that the people receive those when they are still news 
and not history. I am hoping some changes can be made there.
    But the biggest thing that I get letters about has to do 
with nonprofit postage being so much less than regular mail. It 
seems like those have to be delivered the same way that the 
regular mail is delivered, and I suspect that the reason I am 
getting calls on it is because several of them have mentioned 
that they send a contribution and the next thing they do is get 
five more letters from the nonprofit they just sent them to. 
But they are sending those for a nickel as opposed to the 55 
cents.
    Can you give me any idea if that can be changed, should be 
changed, should not be changed, whatever?
    I am not sure whose jurisdiction that would fall in.
    Mr. Taub. Senator, your last issue would fall at least in 
part within the jurisdiction of the Postal Regulatory 
Commission since we have final authority over the rates the 
Postal Service sets, and products they offer.
    However, reduced-rate mailings are embodied in statute. 
They date, in some cases, back to Ben Franklin and before the 
Republic, when newspapers and others were able to be mailed for 
free. Their rates are codified. Reduced-rate mail is locked in 
at 60 percent of commercial rates. In fact, we estimate the 
costs for reduced rate mail as part of the universal service 
obligation.
    I would observe that since the enactment of the 2006 law, 
the total cost of the Postal Service for providing reduced and 
preferential rates has been about $13 billion.
    So, again, this goes to the idea of it being part of the 
law. Nonprofit mail is viewed as part of a universal service 
mission for the government, but you are highlighting an 
important point that it does create a revenue deficit for the 
Postal Service.
    In terms of some of the operational perspective, I would 
defer to my colleague from the Postal Service.
    Senator Enzi. Since my time is limited, I will move to a 
different question, and I will follow up with some ones in 
writing that ask for more specificity on it.
    Mr. Grippo, you mentioned that there needed to be some 
changes in service for essential versus non-essential goods. I 
am kind of worrying and wondering what the circumstances would 
be surrounding those definitions. For example, delivering 
winter gloves to someone in Wyoming in January may be very 
essential but doing the same thing for Florida might not be. Is 
there a definition set up on this essential versus non-
essential?
    Mr. Grippo. The task force report lays out principles for 
defining what it calls ``essential mail and packages'' versus 
more commercial-oriented mail and packages.
    Let me give you some examples to help define that 
principle. Examples of essential mail and packages might be the 
delivery of maintenance pharmaceuticals. That would be 
considered an essential use of the Postal Service to deliver a 
package like that.
    Other essential mail and packages might be consumer 
notices, or person-to-person correspondence and package 
delivery. Most transactional mail, actual payments and 
billings, would also be considered essential.
    Examples of more commercial-oriented mail and packages 
would be marketing mail, catalogs, and your typical e-commerce 
delivery of a package.
    The distinction is that for essential mail and packages, we 
are trying to protect users who are captive to the Postal 
Service. They have few other options. Whereas, the more 
commercial-oriented users are using the Postal Service based 
upon some return on investment or some business proposition. 
That gives you an idea of the thinking of the task force's 
distinction.
    Senator Enzi. Thank you.
    I really appreciate the baseline forecast chart that you 
did. I assume that was you. A lot of good information there. I 
am going to ask for some further clarification on it, though, 
but since I am running out of time, I will not do that right 
now because I am interested in that volume, which is 
decreasing, and concerned about which classes of postage might 
be the ones that are decreasing.
    I noticed a significant increase in delivery points. I 
assume that must be to houses, but I will ask some more 
questions about that in writing so that I can get more detailed 
answers.
    I appreciate your testimony and your answers. Thank you.
    Chairman Johnson. Senator Lankford.

             OPENING STATEMENT OF SENATOR LANKFORD

    Senator Lankford. Mr. Chairman, thank you.
    I thank all of you, and to all of the Postal employees and 
staff and the people that surround them that work exceptionally 
hard, we really do appreciate it.
    It is a long, cold winter in many parts of the Country, and 
we have had some folks that are both in the field and folks 
that have done incredible work in distribution centers and 
everything else around the country, and we are exceptionally 
grateful for their ongoing work and their dedication to it.
    I hope this conversation continues a conversation toward an 
answer. That has been the unresolved issue for a very long time 
right now on the Postal Service.
    This issue about a quorum for the Board of Governors, 
though, seems to be the first item for business to be able to 
try to get resolved.
    How do we actually get that and the importance of that? 
What does that mean?
    Mr. Williams, let me start with you on this. What is the 
importance of getting a quorum for the Board of Governors for 
USPS?
    Mr. Williams. Thank you, Senator.
    Probably a good place to begin is the mission of the Board 
of Governors, and that is to structure a strategy and oversee 
the execution of the strategy for the Postal Service and to 
deal with the problems that we have identified today and to 
provide guidance to the senior leadership of the Postal 
Service.
    That is done through a number of committees that the Board 
of Governors has and with the direct communications with the 
Postmaster General and her staff. That is very difficult 
certainly when there were no Governors. A backlog began, and we 
have been trying to attack the backlog. We believe it is gone. 
We have dealt with a number of other things they could catch up 
on if that conversation turns that way.
    The huge job before us is to construct the business plan of 
the future of the organization that will deal with the 
problems, clear out the ones that have accumulated, and look 
forward to serving emergent needs of customers and current 
needs of customers. I mentioned store-to-door and some other 
emerging issues and retail and other sectors of the economy.
    So it has been very difficult.
    Senator Lankford. How many Governors are we missing right 
now?
    Mr. Williams. There are seven Governors missing, sir. There 
are two of us present, and I think before the Committee, there 
have been some names submitted for about three more of the 
positions.
    Senator Lankford. Right. I would recommend to the White 
House they just continue to be able to nominate so we can 
actually get this resolved. Long term, we have to make the 
standard a full Board of Governors. Right now, we are fighting 
for a quorum.
    Mr. Williams. Right.
    Senator Lankford. That seems like an exceptionally low 
threshold to be able to fight for, just to be able to get 
enough to have a quorum. It would be better to go ahead and 
have a full contingency of our Governors.
    I am going to run out of time, so I want to be able to 
identify several things.
    Mr. Taub, I want to ask you about this conversation about 
specific lines of business that fit the profile, but they are 
lines of business that do not affect the balance sheet and put 
everything at risk as well. That has been thrown around. What 
lines of business do you anticipate that USPS could take on and 
that would be beneficial to actually help but are not 
necessarily a risk as well?
    Mr. Taub. Good question, Senator. I know that was a 
recommendation from the task force report.
    Senator Lankford. Right.
    Mr. Taub. I would observe a couple things. The 2006 law 
drew a very bright line and said that the Postal Service can 
only offer Postal products.
    Senator Lankford. Right.
    Mr. Taub. And so they are barred from getting into anything 
that is non-Postal.
    I do think the Postal Service has tried to explore, to a 
large extent over the last several years, pushing that envelope 
a bit, but again, given the lack of Governors as we were just 
talking about, it is critical they have that top-level 
oversight and also leadership to maybe explore that further.
    So when it comes to a Postal product or service, things 
that we could think of now or that we could not think of, the 
sky is the limit for the Postal Service. It simply would be 
regulated as competitive or market dominant, but as for non-
Postal, unless the law changes, they are barred from getting 
into that.
    Senator Lankford. Right.
    Gary, what is the recommendation from the task force on 
that?
    Mr. Grippo. Let me explain the recommendation and then 
perhaps give a few examples.
    The recommendation is that the Postal Service has a large 
retail footprint. It has many excellent Federal employees.
    Senator Lankford. Right.
    Mr. Grippo. They have a competency to provide certain 
services.
    We think the Postal Service should explore using that 
footprint and those employees consistent with that competency.
    Now, one example that I believe is in the report is the 
fact that the Postal Service provides services to the State 
Department for processing passports. So one conceivable new 
service within that competency would be to provide services to 
State, local, and Federal agencies that need access to the 
citizenry through retail offices.
    I think the task force would caution about getting into 
anything that would entail a risk to Postal operations, and 
there are two types of risks I think the task force is 
concerned with. One is getting into something that is not 
currently in its core competency. Given the financial 
turnaround facing the Postal Service in the coming years, we do 
not believe that it is wise to take on new businesses that 
require it to develop new fundamental capabilities or new human 
capital. It should stick within the capabilities it has now.
    Second, given its financial problems, these new businesses 
should not entail balance sheet risk, and so new services such 
as Postal banking would fall outside of what the task force 
believes would be a prudent activity for the Postal Service.
    Senator Lankford. OK. There is also a recommendation on 
looking at the frequency of delivery and allowing greater 
flexibility on the Universal Service Obligation to also 
determine frequency. Talk to me a little bit about that.
    Mr. Grippo. So, within the context of the Universal Service 
Obligation, Universal Service Obligation covers the geographic 
scope of delivery, the frequency of delivery, the mode of 
delivery. There are a lot of attributes to it.
    To be clear, the task force is saying that the Postal 
Service as part of the Universal Service Obligation should 
visit all addresses in the Country. No one should be left out, 
and the network that enables that should be maintained.
    Frequency goes to how many days of the week the Postal 
Service delivers. There is no specific recommendation to cut 
frequency. However, the task force recognizes that there are 
many things affecting how frequently mail and packages could be 
delivered.
    For example, the trend in package delivery is toward more 
7-day delivery. It is increasing delivery. As the Postal 
Service looks at implementing the Universal Service Obligation 
and hopefully distinguishing essential mail versus commercial 
mail, perhaps it could make distinctions on the frequency 
between essential mail delivery, which might be required more 
frequently on certain routes, or commercial mail delivery, 
where maybe it is not as frequent. That is just an example. The 
idea is to let the Postal Service, give the Postal Service 
flexibility to determine that on a financially sustainable 
basis.
    Senator Lankford. OK. Thank you.
    Chairman Johnson. Senator Peters.

             OPENING STATEMENT OF SENATOR PETERS\1\

    Senator Peters. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator Peters appears in the 
Appendix on page 48.
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    Without objection, I would like to take a couple of minutes 
to give a short opening statement before my questions, if 
possible.
    Chairman Johnson. No objection.
    Senator Peters. Thank you, Mr. Chairman, and thank you, 
Senator Carper. I am looking forward to partnering with you, 
with this Congress to address the Postal Service's significant 
financial challenges.
    The Postal Service plays a vital role in our society and 
our economy by connecting every community, business, and 
household across the country.
    The Postal Service has a public service mission to serve 
all Americans, regardless of where they live, providing equal 
service to people in rural, suburban, and urban communities.
    The Postal Service's reach is unmatched in government or 
the private sector, and it employs more than 634,000 
hardworking people to fulfill its mission of universal service.
    About one out of every six of those employees are veterans, 
who are now committed to serving their hometown communities 
after serving their Nation in the armed forces. I highlighted 
the important role veterans play in the Postal Service when I 
introduced a bipartisan resolution with Senator Moran last 
week. This resolution recognizes the Postal Service's unique 
role and opposes any potential privatization of this vital 
institution.
    No one disputes that the Postal Service is in an 
unsustainable financial condition, and we know what factors 
have exacerbated these challenges: the burdensome requirement 
to prefund retiree health benefits, the Great Recession, and 
changes in technology that have led to declining mail volumes.
    Congress has been working for some time on solutions that 
are bipartisan, evidence-based, and have the support from 
stakeholders across the Postal community. I cannot say the same 
about the task force's proposals, unfortunately, especially 
since we have not yet seen all the evidence behind them.
    The Postal Service is a public entity with a public 
mission. It has an obligation to provide universal service, and 
this must remain at the heart of its business model.
    Congress must prioritize the Postal customer and get the 
Postal Service back on track as soon as possible.
    So, with that, a few questions.
    Mr. Grippo, my main concern, as evident by that opening 
statement, is to ensure that every area of the country has 
access to affordable and reliable Postal services consistent 
with the Postal Service's Universal Service Obligation. I 
appreciate Senator Lankford's questions related to that.
    Individuals in every area of Michigan from St. Clair to 
Iron Mountain rely on this unique service to receive life-
saving prescriptions, to pay bills, to vote, to communicate 
with loved ones, and even to get their local paper, when those 
exist.
    And small businesses from the Upper Peninsula to Detroit 
rely on Postal services for billing, payroll, and affordably 
shipping their products to reach new customers across the 
country and around the world.
    While the task force recognizes the importance of 
affordable services in rural communities, some of the 
recommendations seem to cut at the very heart of this service.
    Mr. Grippo, did the task force conduct any economic 
analysis of how each of its recommendations would impact rural 
areas if implemented?
    Mr. Grippo. The task force did do analysis on the Postal 
Service's economic effect on different areas of the Country. If 
you look at the Executive Order, that is one of the mandates of 
the task force's work.
    There were several economists who were involved as part of 
the task force staff, and that was part of an economic and 
quantitative analysis that went into the basic research before 
we started developing recommendations.
    Now, as you indicate, some of that research and analysis 
did not end up in the report, which focused on the 
recommendations, but that was a foundational part of the 
Executive Order. We did look at studies that were available 
from academics and looked at information that was available 
from the Postal Service to determine the economic value and 
footprint of the Postal Service in different communities.
    Senator Peters. Specifically, did you look at rural versus 
urban areas and the impact? Is that differentiated in some way? 
Did you do economic analysis to do that?
    Mr. Grippo. We did general economic analysis.
    Senator Peters. What does ``general'' mean? General looking 
at rural versus suburban versus urban?
    Mr. Grippo. Yes. Looking at the----
    Senator Peters. You actually differentiated those, and we 
will be able to see the data as to how the service will be 
impacted?
    Mr. Grippo. Yes. There was considerable research on the 
question of how to define rural areas, the size of rural areas, 
the volume to rural areas, and the like.
    Senator Peters. Well, how to define rural areas is 
different than how the service is going to be impacted.
    Mr. Grippo. Indeed. I mean, the definition is to determine 
the effect of potential policies.
    Ultimately, as I have stated, the decision of the task 
force, the recommendation of the task force is that certain 
services need to be deemed essential in large part because 
rural areas are dependent on them.
    I do not think there is anything in the task force's report 
that would disadvantage rural areas; in fact, the opposite. The 
task force report tries to make clear that access in rural 
areas in terms of the number of post offices, that delivery in 
rural areas in terms of the number of routes, and that the 
pricing in rural areas and the affordability of Postal services 
should remain consistent nationally so as not to disadvantage 
rural areas.
    Senator Peters. We will see the analysis as to the exact 
impact that it has had on rural areas. Is that what I am 
hearing from you?
    Mr. Grippo. We can certainly show you the analysis that we 
used in formulating the recommendations.
    Senator Peters. OK.
    Mr. Williams, I have concerns that the task force 
recommends removing collective bargaining for compensation. 
Collective bargaining is certainly, in my mind, an essential 
tool and one that works best when labor and management share 
the same goals.
    The Postal Service and its workers are united in their 
commitment to providing service to all Americans, regardless of 
where they live, and I am not clear on how removing collective 
bargaining for compensation would help deliver quality 
services, while recruiting, we have to recruit and retain a 
quality workforce as well.
    My question for you, Mr. Williams, there is broad consensus 
that the prefunding obligation is probably the most significant 
drain on Postal Service finances today. In your estimation, 
would removing employees' ability to collectively bargain over 
compensation solve this prefunding problem and lift this 
obligation?
    Mr. Williams. I can think of no way in which it would 
impact it at all.
    Senator Peters. It is not addressing the most fundamental 
reason why we are here?
    Mr. Williams. I agree with that, Senator.
    Senator Peters. Mr. Williams, issues with reliable mail 
service are undeniably connected to the financial challenge 
that we are discussing.
    A Postal processing facility was closed in Kalamazoo, 
Michigan, in 2015 due to the Postal Service's realignment and 
its financial situation, and I have heard from Michiganders who 
have experienced service delays and other problems as a result 
of some of these decisions.
    The Postal Service's financial challenges ultimately impact 
service. I think it is difficult to separate those two. You are 
going to have service delays as a result of these changes.
    My question to you, Mr. Williams, is, how has the 
prefunding burden affected service in your mind, which is 
creating real challenges for customers as well as the overall 
spiral we are seeing in the Postal Service?
    Mr. Williams. Thank you, sir.
    It has been devastating. It wiped out our entire ability to 
make capital investments. It put a strain on all the adjacent 
budget areas. We are forced to do cutbacks, and we are forced 
to do cutbacks at a nearly reckless rate. We are having to cut 
back so fast, we cannot understand fully the impact of what it 
is we are doing. It has been very serious.
    I agree with you that it is the number one problem for 
Postal operations. If you separate out our operational losses, 
which are small, from our prefunding aspirations, which are 
very large, it tells you a story of an agency that has done 
well since 1970 until this happened. At that point, it 
immediately fell into crisis. We were unable to even make the 
first payment of prefunding, and we have been unable since 
then.
    Senator Peters. Thank you.
    Chairman Johnson. Senator Scott.

               OPENING STATEMENT OF SENATOR SCOTT

    Senator Scott. Thanks for your hard work trying to make the 
Postal Service profitable.
    Can a consumer just make the decision, ``I do not want to 
get any more mail''?
    Mr. Williams. To my knowledge, they cannot. We delivery 
mail to--if a letter is addressed to that address, we will make 
every effort to deliver it to that address.
    If the consumer makes that impossible, they will be held at 
the post office and then returned to the sender. I am not sure 
there is an option like that, but as a practical matter, you 
can make it impossible for us to deliver, at which point it 
would be returned to the sender.
    Senator Scott. Has the post office ever asked consumers how 
often they want their mail? So I travel up here. I am up here 
Tuesday, Wednesday, Thursday. I travel up here Monday, get home 
Friday. What if I just said I wanted mail once a week? Can I do 
that?
    Mr. Williams. That is not one of the options that I am 
familiar with. I hope I am corrected if I am wrong.
    You would not have the option of having mail today sent 
from certain days to one address and certain days to another 
address.
    We are working on what is called the ``Smart Mailbox,'' 
which would allow you to do just that. You could reprogram 
where it is you would like mail and parcels sent.
    Senator Scott. Do you think that if consumers said they 
only want mail once a week or if you just gave people an option 
that said I just want mail once a week or I do not want any 
more mail because I know I do not get anything positive, I just 
get a lot of ads, would that save money?
    Mr. Williams. It is more driven by the mail that is coming 
than by the receiver. It would probably not save money. In 
fact, it would probably cause some additional cost in terms of 
returning it each day and holding it.
    You can have it held at the post office and picked up 
there. So that would be an option that I am aware of, but until 
we introduce the next wave of technology, these Smart Mailboxes 
that are reprogrammable, it would not have that impact.
    I do agree with you that we need to survey the public on 
how often they would like mail and how often they would like 
parcels. I am not sure we know the answer to that today, and we 
need the answer to that if we are to go forward and introduce a 
new business plan.
    Senator Scott. So on package delivery, do you feel like you 
compete with Federal Express (FedEx) and United Parcel Service 
(UPS)?
    Mr. Williams. Yes, sir. We represent the public option for 
the Nation in assuring that logistics delivery remains at an 
affordable price.
    Senator Scott. Do you negotiate with Amazon on how you 
price for packaging?
    Mr. Williams. Yes, sir, as well as UPS and FedEx. Those are 
all negotiated service agreements.
    Senator Scott. Right. So you have to reduce your price to 
compete with UPS and FedEx.
    Mr. Williams. Yes, sir.
    Senator Scott. To get the business, right? OK.
    Then on package delivery, from what I saw, it is not broken 
down by what you provide today, by package delivery. Then it is 
unprofitable, just like the rest of the business is 
unprofitable.
    Mr. Williams. Well, actually, we go to every single 
address. We have a very complementary relationship with UPS and 
FedEx. We are going to that home, anyway, either with a full 
armload or with a partial armload. So we actually are able to 
make a profit, where they are not able to make a profit, 
because of our ability to mix mail and parcels.
    Senator Scott. Then the way to think about it is taxpayers 
are subsidizing Amazon's ability to ship to every household? 
Because you are not getting--if you go to all areas, are you 
getting paid a price from Amazon that you can make money all 
across the country?
    Mr. Williams. Yes, sir.
    Senator Scott. Do you make money in the suburban area and 
downtown area and then lose money in the rural areas?
    Mr. Williams. With regard to Amazon, we make money for each 
package that cover our costs, and then it also has a margin 
that allows us to contribute to the Universal Service 
Obligation. So we are making money, enough to cover the cost, 
and we are making money enough to contribute to USO.
    With regard to the second part of the question, all of the 
mail from the cities, the high-density areas tend to also 
contribute to the USO for the less densely populated areas.
    Senator Scott. You do not charge Amazon differently to 
deliver in a rural area than an urban area?
    Mr. Williams. We do not charge anyone a difference. Our job 
is to bind the Nation. We care as much about the person that 
lives in a sparsely populated area as we do for someone that 
lives in a very wealthy, dense neighborhood.
    Senator Scott. Is it by law that you could not charge more 
to Amazon, not necessarily to the consumer, but to Amazon? You 
could not charge them more to go to a rural area than to an 
urban area. Is that true, or do you know?
    Mr. Williams. I am not certain if we can do that. I am not 
sure we ever would do that. All that would do is cause Amazon 
to charge people in rural and remote areas more money. It would 
be passed through to them, and we are really dedicated to 
supporting people in rural areas.
    Senator Scott. We could pass a law that does not Internet, 
sales in Amazon or whatever, charge more for a rural area, 
then, just like you do not? We could do the same. We could do 
the same thing.
    Mr. Williams. I believe that you could. All of the 
delivery----
    Senator Scott. Right. Not that we should necessarily, but 
we could?
    Mr. Williams. Correct.
    I believe we are the only carrier that does not have a 
rural surcharge. All the private carriers charge that, except 
for us, and it is because of our mission.
    Senator Scott. OK. Thank you.
    Mr. Williams. Yes, sir.
    Chairman Johnson. Before I turn it over to Senator Sinema, 
I do want a quick follow up on that because it is a very 
interesting line of questioning.
    Mr. Williams, you talked about we made profit on all this, 
but I want to go to Mr. Grippo or Commissioner Taub. We do not 
have a very good cost allocation model here, right? Certainly 
not one that a private-sector business would use. Do you want 
to speak to the fact whether you believe we actually make money 
off of this or that we are now subsidizing Amazon for the 
delivery of that last model, particularly in rural areas?
    Mr. Williams. I will, and Chairman Taub is quite an expert 
on this too.
    We go to great lengths to avoid that as a possibility of 
ever occurring. The PRC instructs us how to submit the analysis 
and the data to assure that all of the products cover their 
costs and make a contribution to the USO.
    If you would permit me, I really do think that Chairman 
Taub would have an important part of the answer here.
    Chairman Johnson. Well, then Chairman Taub and then I will 
go to Mr. Grippo.
    Mr. Taub. Sure thing.
    Under the law, as it exists since 1970, the Postal Service 
has to attribute its costs based on reliably identified causal 
relationships.
    For the last 49 years, that has been built up under data 
systems that can show whether a particular product's costs are 
caused by its delivery, transportation, etc. If it cannot, it 
then gets allocated to institutional cost.
    So, under that framework, frankly, parcels are the one 
bright spot remaining in the Postal Service. Under law, each of 
those products, even negotiated service agreements, have to 
cover their attributable cost. They do. Not only that, we have 
to ensure there is a floor to show that in the competitive 
marketplace, collectively, so they are not pricing everything 
at cost, they contribute a minimum to the overhead that would 
demonstrate that at least at that minimum, they are 
contributing an appropriate share.
    That share is almost 10 percent. Last year, parcels 
contributed 30 percent. Although it is a huge part of their 
revenue, parcels are less than 4 percent of the volume, and yet 
they are contributing 30 percent to the institutional cost of 
the Postal Service.
    Chairman Johnson. Volume by piece, not necessarily by 
weight?
    Mr. Taub. This is how the costing systems have been 
developed, indeed, and we can always improve them. We are 
looking to modify and improve.
    In fact, a few years ago, to their credit, United Parcel 
Service came before the Commission and requested we revisit 
this issue of costing, and for the first time in 45 years, we 
redefined attributable cost and expanded it to include what we 
call ``inframarginal cost.''
    Chairman Johnson. But a big old heavy package costs a lot 
more to deliver, but your cost allocation is based on per 
piece.
    Mr. Grippo, why do not you just quickly chime in here, and 
then I will turn it over to Senator Sinema.
    Mr. Grippo. Sure. Let me provide the task force's view of 
this.
    Chairman Taub provided the regulatory definition and the 
regulatory manner in which costs need to be allocated.
    The task force view was looking at this in terms of what 
would be business best practice, and the view of the task force 
is that on that basis, the cost allocation method is dated. It 
is 50 years old, and it has not significantly been updated as 
markets and technology and, indeed, the regulatory environment 
have changed.
    Clearly, cost drivers are changing. The increase in the 
volume of packages changes, what is driving certain costs and 
certain cost decisions, and the task force believes that 
because of all that, management at the Postal Service probably 
is not getting the right information out of that cost 
allocation system to make proper decisions on investment, on 
determining the profitability of a given product, on resource 
allocation. That is a matter of best practice. That cost 
allocation method should be updated based upon business 
principles.
    Chairman Johnson. OK, quickly.
    Senator Carper. I have not had my shot in asking questions. 
I may have to leave at 4:30.
    Chairman Johnson. OK.
    Senator Carper. If it is OK, I would like to go ahead and 
ask a couple of questions, if I could.
    Before Senator Scott leaves the room, I would just ask a 
question. My understanding----
    Senator Scott, before you leave, let me just ask this quick 
question.
    My understanding, I have been told repeatedly that the 
Postal Service in the last year earned from their package and 
parcels delivery $7 billion in profit. Is that a correct number 
or not?
    Chairman Taub.
    Mr. Taub. Roughly, the Postal Service, above the costs, it 
is getting in about $7 billion, yes. It is roughly a third of 
the revenue; 30 percent of the revenue that they are achieving 
is based again on a small part of the volume. But the costs are 
being picked up.
    For example, package delivery costs are six times higher 
than that for a market dominant product, a letter. So the 
system does acknowledge that. The Postal Service makes less 
profit per piece delivering a package, but that is the one 
bright spot for the Postal Service.
    Senator Carper. All right. Thanks so much. Thank you.
    Thanks for staying, Senator Scott.
    Last week, Mr. Grippo--again, I want to say to you, to the 
folks on the task force, thanks very much for the work that you 
did, that you have done, and continue to do. But last week, I 
understand that you said to our staff, Committee staff, that 
the report that you all have worked on did no quantitative 
analysis on the recommendations' impact on the financial 
condition of the Postal Service.
    A few minutes ago, you told Senator Peters that analysis, 
that quantitative analysis was done, and they seem to be 
contradicting statements, what I am told that the staff heard 
and what you just said in response to a question from Senator 
Peters.
    I would just ask for the record, would you just provide a 
full scope of documents, materials, and other items that were 
reviewed to this Committee so we can understand what was done. 
Would you do that for us?
    Mr. Grippo. Consistent with approvals from the Postal 
Service, since much of this information is their information 
and we have it only under nondisclosure, yes.
    Senator Carper. Good. Thanks so much.
    Let me just follow up with a second question. I think we 
can all agree that the long-term business model of the Postal 
Service needs to be reformed. The Postal Service, however, 
continues to have its hands tied, as you know, in a number of 
ways. The Postal Service is constrained in how it can raise its 
rates. The Postal Service has already cut its network to the 
bare bones, and you cannot get any more blood out of that 
turnip, or at least not much more.
    The Postal Service is maxed out on its line of credit, and 
it is legally prohibited from accessing private capital 
markets, as has been mentioned here today.
    The Postal Service has to deliver less mail in more homes, 
not fewer homes--less mail to more homes every year, and the 
Postal Service is saddled with huge liabilities, and no private 
company would ever agree to prefund.
    To what extent do the recommendations address these 
concerns, recommendations of the Committee--task force?
    Mr. Grippo. The recommendations are designed to help the 
Postal Service become financially sustainable, such that it is 
generating enough revenue to cover its operating costs, its 
long-term liabilities, and its capital expenditures. That is 
the purpose of the report.
    Senator Carper. All right.
    Mr. Grippo, I am concerned that the task force may have 
ignored what I call the ``elephant in the room,'' and that is a 
requirement of the Postal Service to set aside 100 percent of 
the cost to address its retiree health care liabilities.
    I propose solving this liability, the way the private 
sector does it, and that is through Medicare integration. The 
prefunding liability is something that no private company is 
mandated to do, as far as I can tell, and in fact, almost no 
private company does it to a level that we are requesting the 
Postal Service to meet.
    My staff and I looked at Fortune 100 companies, Fortune 500 
companies, Fortune 1,000 companies. We also looked at State and 
local governments, and we did so to see if any of them were 
setting aside 100 percent of the retiree health care liability. 
Almost none were.
    If a company does not prefund the set-aside, generally less 
than 30 percent of the cost, I am told, and in fact, we also 
looked at State governments, as I said, and we find that most 
State governments prefund very little in terms of the mandate 
to prefund for health care liabilities, of pensioners.
    Further, the Postal Service, unlike States and private 
companies, is prohibited from mandating retirees, take Medicare 
as part of their retiree health care benefits.
    So, given all of this and the recommendations the task 
force report made to change pricing to compete with private 
markets, why does the task force oppose Medicare integration to 
level the playing field? If the task force wants them to price 
like a business, should not they all be able to have the 
operating freedom of a private business?
    Mr. Grippo. On the question of Medicare integration, I 
think there are two elements that the task force considered. 
One is sort of a practical consideration, and the other is the 
policy approach of the task force.
    As a practical matter, the task force, in trying to develop 
a self-sustaining model, felt that Medicare integration, while 
it would provide relief, does not solve the underlying business 
problem. So it might buy a year or two of operations, but after 
that, the underlying problem with the business model would 
still be there, and the Postal Service would be facing the same 
problem.
    In a sense, it does not go to the core of the problem. It 
just delays it. So that was the first issue, in practical 
terms.
    In policy terms, the task force--this is in the Executive 
Order, and this was embodied in the task force's work--felt 
that under the self-sustaining mission of the Postal Service, 
costs should not be shifted to the general taxpayer or to 
another fund in the Treasury. So, after 50 years of being 
required to price its products in order to cover retiree health 
benefits, the task force did not feel that a change should be 
made in that self-sustaining mandate and take retiree health 
benefits out and shift them to the Medicare Trust Fund.
    Senator Carper. The truth of the matter is, colleagues, the 
Postal Service pays probably as much as just about any private 
employer in the Country into Medicare for their employees. They 
do not get fair value. Their employees can get Medicare Part A. 
They can get Medicare Part B but not Part D. They basically 
subsidize the cost of Medicare for their competitors, and that 
to me just does not make sense. There is a real inequity here, 
and it cries out to be addressed.
    We do not have time to get into it any further here today, 
but this is a point.
    And this by itself will not resolve the dilemma for the 
Postal Service, but a bunch of other--if you couple it with a 
lot of other issues, the question of whether the moneys that 
has been set aside to meet these liabilities, does it make 
sense that they can only draw interest as equal to the U.S. 
Treasury yield? Does that make sense?
    There is a number of other questions, a whole host of 
questions and issues, which put together might actually help 
resolve this issue.
    Thank you.
    Chairman Johnson. I have been asking for 4 years how much 
the Postal system workers pay into Medicare and how much they 
use, and I cannot get the information. Senator Hawley.

              OPENING STATEMENT OF SENATOR HAWLEY

    Senator Hawley. Thank you, Mr. Chairman.
    Thank you all for being here, and thank you for the work 
that went into the report that you have given us.
    I want to go back to Senator Peters' questions about the 
effect of any reforms on rural areas. I represent the State of 
Missouri that has a substantial population of folks, including 
the place where I grew up, that relies on the rural services 
that the post office provides.
    We have over 15,000 employees, Postal employees in the 
State of Missouri, and of course, many of those are in exurban 
and rural areas, again, like Lexington, Missouri, which is 
where I am from.
    Mr. Grippo, if I could just go back to something you said 
to Senator Peters, you said that certain services need to be 
deemed essential because rural areas depend on them, and the 
Universal Service Obligation needs to be defined accordingly. 
Have I got that right?
    Mr. Grippo. That is correct.
    Senator Hawley. Can you just say something more about it? 
Explain what you mean by that.
    Mr. Grippo. Right now, all mail operates under, in general, 
the same pricing regime, meaning price increases on all mail 
products are capped at Consumer Price Index (CPI). So there is 
an affordability component to all mail.
    What the task force is suggesting for mail as well as for 
packages is that distinctions need to be drawn--that some mail 
is essential: a consumer notice, a tax notice, a small business 
payment, as I mentioned, the delivery of pharmaceuticals to a 
rural area.
    We think there is a strong policy rationale to ensure that 
is affordable and should be subject to a price cap.
    Other types of mail, regardless of where it is going, is 
really more commercially oriented, and the senders are using 
the Postal Service more based on a return on investment, based 
upon sending out a catalog or delivering a package. The task 
force is suggesting that that latter category, commercial-
oriented mail, should have a different set of pricing rules, 
and that the Postal Service needs to price that based upon what 
the market will bear with profitability in mind, so that it can 
continue to deliver the other essential mail with price caps, 
where it cannot generate more revenue.
    Senator Hawley. In the category of commercial mail, are we 
talking about potentially items that consumers living in rural 
areas order, they purchase online, and that are shipped to 
them? Is that the kind of thing that----
    Mr. Grippo. It could. The principles, and these can be 
implemented in different ways. In general, if the user is 
captive and is really reliant on the Postal Service and does 
not have a viable alternative, in general, we would say that 
should be an essential product or service and should be 
protected.
    If it is not a captive customer or if it is really just a 
commercially driven use of the Postal Service, we are saying it 
does not necessarily deserve those protections.
    What products fall into which category would have to be 
figured out, but that is the principle to allow the Post to 
generate more revenue based upon what the market would bear on 
the more commercially oriented items.
    Senator Hawley. Chairman Taub, do you want to weigh in on 
this?
    Mr. Taub. To the extent that there would be any change, it 
would go through the Postal Regulatory Commission process. In 
the light of day, notice and comment, we would take into 
account the users of the product in question, the impact on 
small business concerns.
    As Mr. Grippo indicated, this is a notional idea. We 
certainly are going to be continuing dialogue with Treasury and 
the Postal Service to deep-dive a little more on these 
recommendations, but at this stage, anything that would--or we 
are a long way from anything being finalized, and a lot of 
these details would be hashed out in the light of day with all 
interested parties convening. Frankly, even if a majority of 
commissioners chose to do X or Y, like any agency decision, 
folks can take us to the D.C. Circuit. So we are a long way 
off.
    But given the financial problems of the Postal Service, I 
think all ideas need to be on the table, and we really need to 
look at the fundamentals, which as I talked about in my opening 
statement, includes the USO. And this goes to one of the 
attributes of the USO itself.
    Senator Hawley. Well, thanks very much for that.
    I just want to say that, of course, as we move forward with 
Postal reform, which I think we agree is all necessary, I am 
keenly interested to see that it does not disadvantage in any 
way rural areas or draw back from the Postal Service's longtime 
commitment and laudable commitment to serving those areas and 
connecting them. I cannot tell you what a difference it makes 
for small towns, like the one that I am from, to be able to be 
connected to the outside world, and oftentimes, the post office 
is the only means of getting goods in the mail. They do not 
have viable alternatives, certainly not cost-effective 
alternatives.
    The Postal Service and what those local post offices mean 
to small towns is crucially important and, therefore, crucially 
important to me.
    Thank you so much.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Hawley.
    Because it is in front of me, let me quickly ask this 
question because I have the information.
    I cannot remember which Senator was talking about 
collective bargaining, but in your report, Mr. Grippo--I 
believe it is in your report--you state that in the 10-K 
filings in 2017, the per-employee cost of the United States 
Postal System was $85,800 compared to UPS at $76,200. Now, UPS 
is a unionized organization, correct?
    [No response.]
    And then FedEx is $53,900. They are non-union.
    Mr. Grippo. In terms of their delivery staff, I believe 
that is right.
    Chairman Johnson. So define what we are talking. What do 
you mean in terms of their delivery staff?
    Mr. Grippo. So you have staff that is running routes and 
doing deliveries. You have management. You have people working 
in processing plants. You have pilots.
    Chairman Johnson. You are talking about FedEx now?
    Mr. Grippo. Running the air network.
    I think if you are just looking at delivery personnel, 
then, yes, FedEx is contracted, non-unionized, whereas the UPS 
is.
    Chairman Johnson. OK. But, again, those are the correct 
numbers, right?
    Mr. Grippo. Yes.
    Chairman Johnson. So, again, USPS, $85,800. UPS is $76,200 
per employees, and FedEx is $53,900. That kind of answers the 
question why we may want to take a look at the collective 
bargaining situation at USPS versus who they compete with, UPS, 
another union shop, and then FedEx, a non-union ship, correct?
    Mr. Williams, do you want to pipe in on that?
    Mr. Williams. Thanks, Senator.
    We do not agree with that. We believe that conducting the 
analysis the way it was conducted caused all of the FedEx 
drivers to be omitted from the analysis, and they were, 
instead, put under a category of transportation because they 
are independent contractors.
    In the case of UPS----
    Chairman Johnson. Do you agree the cost of UPS is $76,200?
    Mr. Williams. I think those averages had a--the methodology 
for computing those averages had problems, and we have asked 
the Treasury for additional figures on it.
    Our analysis shows a very different picture, but with 
regard to----
    Chairman Johnson. Do you think the U.S. Postal Service 
workers make less than UPS or FedEx? The cost is less?
    Mr. Williams. For entry-level employees, I am going to try 
to omit naming FedEx and UPS, if I may. But one of them starts 
their employees at 40-to $45,000. Ours is $36,000.
    The other analysis we have is an hourly. They begin their 
employees with $20. Our employees begin with about $17.
    At the career level, it continues to parallel and track 
that. It takes our employees a much longer period, 12.5 years 
versus 48 months to drive----
    Chairman Johnson. Again, we are trying to break, get rid of 
all the complexities and just kind of look at a basic number 
for comparison.
    Again, according to the task force, it is about $85,000 to 
$86,000 for USPS, $76,000 for UPS, another union shop, and then 
$50-some for--again, I am just----
    Mr. Williams. We are working with them to try to overcome 
very different outcomes.
    Chairman Johnson. OK.
    Mr. Williams. Something is wrong with the numbers.
    Chairman Johnson. In terms of definition of the Universal 
Service Obligation, basically Congress would have to write that 
definition, correct?
    Mr. Taub. I would suggest that--well, first of all, it 
would take some legislative action. I think there is a model we 
can look at, which is the 1996 Telecommunications Act. As we 
are entering into the Internet age, Congress included a 
provision in there which mandated that the Federal 
Communications Commission (FCC) by regulation define universal 
service under a variety of criteria and guidelines that 
Congress put in place, and then, hence, it was a process that 
could be informed through regulation. It could be modified and 
updated, and I think that has worked generally pretty 
successful there.
    So you could envision as one way to do this, Congress by 
legislation laying out guidelines and empowering the Postal 
Regulatory Commission to undertake a similar process that the 
FCC did.
    Chairman Johnson. Mr. Grippo, is that your understanding as 
well?
    Mr. Grippo. The task force view regarding the statutes that 
broadly define the USO is that, with one exception, everything 
that the task force is proposing could be done administratively 
without new legislation, meaning the Postal Service and the 
Postal Regulatory Commission through administrative or 
regulatory action could implement the concepts we have in the 
report.
    Chairman Johnson. What is the one exception?
    Mr. Grippo. Well, right now, of course, there is a rider 
that requires, in essence, 6-day delivery, and there is nothing 
in the report that says do not deliver 6 days. We are not 
recommending directly cutting that, but since that has been 
specified in statute, delivery frequency is the one thing that 
is in legislation. But we think everything else is very broadly 
defined in statute and would allow for the kind of 
implementation we are talking about.
    Chairman Johnson. Mr. Taub, I think you said in your 
testimony, you gave the cost of Universal Service Obligation?
    Mr. Taub. Yes. The Commission annually estimates that as 
required by law.
    Chairman Johnson. And that is?
    Mr. Taub. $4.53 billion. $2.2 billion of that is our 
estimate of the cost of providing 6-day delivery. Another $1.7 
billion of that is for reduced and preferential rates, and then 
beyond that, you start getting into the cost of maintaining 
small post offices and some other areas.
    Chairman Johnson. Included in that is the nonprofit 
discount, which I think----
    Mr. Taub. Correct. Yes. That would fall----
    Chairman Johnson. That is $9 to $12 billion over 10 years? 
That is part of that Universal Service Obligation?
    Mr. Taub. Indeed, reduced-rate mail, we view in our annual 
estimate as a cost of universal service.
    Chairman Johnson. Obviously, service to rural areas is a 
real sensitive topic, as you are hearing throughout. Has 
anybody broken down the cost of that rural subsidy? Would that 
be just wrapped into that cost of universal service? Is it 
broken down, urban universal service versus rural? Is there any 
kind of cost breakdown in terms of that subsidy?
    Mr. Taub. We have not recently done a deep dive on that.
    Our 2008 report that was mandated by the 1906 law, looking 
at the USO and the monopoly, did observe that really it is not 
so much a subsidy of urban to rural as it is really a subsidy 
based on the amount of mail one gets each day, which might be 
correlated more to income. Higher income folks may be getting 
more mail delivered than those that are not.
    It is an issue for the Postal Service of density, because 
they have to go to every door every day, whether they have 
nothing to deliver or one item versus someone getting 12 
pieces. Certainly, geographically, when you are spread out in a 
rural area, there is a cost, but it actually could be higher 
where you are in an urban area and you have less delivery 
density where you are delivering.
    There is clearly a subsidy that is inherent in the system, 
but it may be less urban rural, and more about how much mail a 
recipient is getting each day.
    Chairman Johnson. Mr. Grippo, have you seen anything in 
terms of kind of what that cost might be?
    Mr. Grippo. I do not know that I can provide you an 
estimate on that specific cost.
    As a general proposition, the uniform pricing of Postal 
services in this country, in any country, would entail some 
subsidy of more dense areas where delivery costs are less to 
rural areas or less dense areas where delivery costs are 
higher. The uniformity of pricing would tend to deliver an 
appropriate subsidy on that basis.
    Chairman Johnson. Senator Carper, I have a few more 
questions. Do you have more questions for this panel?
    Senator Carper. Thanks, Mr. Chairman.
    Chairman has heard me say this before, but I want to say it 
again. When I was elected State treasurer, I was 29, and we had 
the worst credit rating in the Country. Basically, we were 
closed out of credit markets, not because of my election, I 
hope.
    Fast forward, 20-some years later, I was Governor of 
Delaware, and we had had a series of good Governors, Pete du 
Pont and Mike Castle. I hope I was a pretty good one. But we 
went from the worst credit rating to the best. We ended up with 
AAA credit ratings, I think in 1999.
    I remember when we got the call from Moody's, Standard and 
Poor (S&P), and Fitch with great news in 1 week. It was one of 
the best weeks, maybe my best week as Governor. And they said, 
``We are raising you to AAA.'' Well, that was great. We never 
had a AAA rating in the history of the State of Delaware.
    But they also added this caveat. They said, ``You have done 
a great job funding, fully funding your pension fund, your 
pension obligations. You have done a good job,'' and all kinds 
of great financial management and cash and stuff, the stuff we 
are doing in education. They said, ``The one thing you have not 
done, you have not acknowledged that you have a liability for 
the cost of health care for your pensioners,'' funded our 
pensioners. We have not funded that--we have not even 
recognized that liability, and they said it is a real liability 
and we need to acknowledge it and begin to fund it.
    We acknowledged it, and we began to fund it and still 
continue to fund it. I think today, this is like 20-some years 
later. I think the State of Delaware has funded it less than 10 
percent of the obligation, less than 10 percent. My guess is, 
if you looked at other States, municipal governments, it is 
probably a very similar situation.
    And you look at companies. This is one that they have 
actually recognized, this liability, their health care 
liability for their pensioners. My guess is it is probably 
pretty much the same.
    I think we hold the Postal Service to a different standard 
here, and over the years, a lot of people talk about why do not 
we treat the Postal Service like a real business. Well, if we 
did, one, we would not tell them how to fund, within 10 years, 
this liability, and two, we would say if you set aside money to 
meet that liability and you could invest that money at a rate 
of return, it would be a whole lot better than the Treasury 
rate of return.
    State of Delaware, we created a cash management system so 
that we did not just get the Treasury rate of return. We 
actually got a much better rate of return, and it helped us a 
whole lot with our bottom line.
    Would you all react to that? Governor Williams, would you 
just react to those comments, just briefly, please?
    Mr. Williams. I definitely agree that--we are a very odd 
candidate, but we actually have the best prefunding account in 
the world, as far as I know. It is thanks to Congress that we 
began it. It is huge now.
    It has not matched 100 percent of the goal that we aspire 
to and that we want to move toward, but it greatly exceeds 
those of the Federal Government and of the private sector. I 
think it greatly exceeds the targets of those. We are going for 
100 percent. I think they aspire in the private sector to reach 
60 percent. The Federal Government for health care has zero 
percent. They pay as they go.
    It is important to us. We value it. We appreciate the fact 
that we have that in there. It needs to be invested in a 
retirement fund.
    Right now, we are killing the fund because of the way we 
have it invested. That is the last thing in the world we want 
to do.
    I am also not sure the liability has ever been accurately 
assessed, and that needs to be done because we do not know what 
100 percent is as long as we have continuously wrong estimates 
of the liability.
    The $5 billion target contributing to that was a mistake. 
It was way too much than anyone could ever afford, and we had 
been structured very carefully to break even. We had no ability 
to pay any contribution because we had been disciplined to 
break even always.
    So this did not always go well. There is still time to save 
it and to get the rest of the way. This represents the lion's 
share, more than the lion's share of our losses. Their 
operational losses were not $164 billion. They were about 3-
last year, and they were $0.8 billion the year before. That 
directly tracks to the withdrawal of the exigent increase that 
was worth $4.2 billion. We could not make all that up. It was 
withdrawn.
    I know that you are trying to restore it. Grateful to that.
    So, operationally, I think I know what went wrong. With 
regard to the fund, we have the best in the world. I want it to 
be better, and I know that you want it to be better as well.
    Senator Carper. I would just say, Mr. Chairman, in closing, 
people say to me almost every day, going back and forth on the 
train to Delaware, ``I would not want your job for all the tea 
in China. You must hate your job.''
    I say, ``No. I like my job. I feel lucky. 1,900 people in 
the history of the Country got to do the job that we do, and it 
is a real privilege to serve.''
    Whenever I see a problem or a challenge, I do not run away 
from it. I know you do not either. I say how do we find 
opportunity here, how do we fix this problem, how do we put a 
team together and fix it.
    A big part of that team--you have mentioned this already, 
and I would again--we need a fully operational Board of 
Governors, Democrat and Republican, people with the right kind 
of experience that can come in here and help move the needle on 
this organization. We need to make sure we have the right 
people and the right complement of people, Democrats and 
Republicans, on the PRC.
    To the extent that Gary and folks that work with him on 
this task force, they have done good work, and we would be 
foolish to ignore it. To the extent we can work on it, we 
should.
    I think I will just leave it here for now. We need to 
address this. We need to get it done, and as our leader, you 
have a key role, as you know. And given your experience in 
business, you certainly have the ability to help us get this 
done, and I want to be your partner--and also with Senator 
Peters, and other Senators on this Committee.
    Thank you.
    Chairman Johnson. I appreciate that, and I know how 
dedicated you have been to trying to fix this problem.
    I have really got three lines of questioning. Let us start 
with the 800-pound gorilla, which really is the pension, those 
liabilities, the prefunding, those types of things.
    Mr. Williams, you talked about--I think you said $335 
billion.
    Mr. Williams. Correct, sir.
    Chairman Johnson. That is what has been set aside. 
Unfortunately paid to the Federal Government, money is fungible 
is they use the funds.
    So there is no credit given for $335 billion worth of an 
asset in terms of the Postal Service's financial? Because then 
that is what I heard you say.
    Mr. Williams. It is invested in Treasury bonds.
    Chairman Johnson. So they do get the interest rate off of 
that?
    Mr. Williams. Yes, sir, we do.
    Chairman Johnson. OK.
    Mr. Williams. It is a little over 2 percent.
    Chairman Johnson. OK. So they are getting some, but your 
suggestion would be why not invest that like other pensions, 
where you might have long term if you actually--without stock 
market investments, over a long period of time? I know in the 
course, the reason they do not is there is investment risk, but 
over a long period of time, there is probably more of an 
average of 6 to 9 percent, correct?
    Mr. Williams. That is correct.
    I do not think there is a person in this room that would 
not fire a fund manager that said 2 percent was all they could 
do. They would be out the door.
    Chairman Johnson. Well, again, that is dictated by law, 
right?
    Mr. Williams. Yes, sir.
    Chairman Johnson. That was the 535-member Board of 
Directors that dictated that, correct?
    Mr. Williams. Correct, sir.
    Chairman Johnson. OK.
    The recalculation of the liability, I know that is part of 
the task force recommendation as well. Do we have any sense, 
any estimate in terms of what that would mean? How much do we 
have it overstated right now? Because I would imagine that is 
one of the reasons we are talking about recalculating because 
we probably think we have overestimated that cost.
    Mr. Grippo. The task force is recommending that that 
liability, which would include the roughly $43 billion in 
defaulted prefunding payments to OPM as well as the actuarial 
unfunded liability, that that be refinanced and re-amortized 
over a new 40-year period.
    So that goes back to this principle that the Postal Service 
should not be relieved of that liability. It should not be 
shifted anywhere else, but we think it needs to be refinanced 
and re-amortized.
    If it is done on the basis that the task force is 
recommending, it would save the Postal Service in terms of 
long-term liability about $20 billion.
    Now, it would increase annual contributions because there 
is $43 billion in defaulted payments that now have to be re-
amortized.
    On an annual basis, it would increase costs. On an overall 
basis, it would reduce the total liability, then unfunded 
liability, by $20 billion.
    Chairman Johnson. We obviously cannot go back and reinvest 
$335 billion in a higher rate of return. Does anybody suggest 
should we invest them in something different now as part of 
this reevaluation? Probably not, correct?
    Mr. Williams. Well, actually, I would suggest that, but the 
money is gone. It came. It has all been spent.
    Chairman Johnson. That is what I have always said about 
Social Security too. The money is spent; it is gone, 
unfortunately.
    Mr. Williams. But, as we have new investments, I think they 
should all be placed inside one of the government retirement 
funds. They are very conservative. They passed through, 
arguably, the worst financial downturn ever, and they still 
came out with these kinds of numbers and profits. So I think--
--
    Chairman Johnson. What has been the rate of return of those 
other funds?
    Mr. Williams. The one I mentioned in testimony was over 8 
percent. I think the average in the Country is around 7 percent 
versus 2 percent.
    Chairman Johnson. We have just come through a pretty 
dramatic increase since March 2009, the stock market, but those 
things happen. You have these long-term averages.
    What is the most restrictive congressional mandate? We can 
take a look at that one. It has not been a real winning 
strategy, but what about other ones?Commissioner Taub.
    Mr. Taub. Where to begin? I think, to me, the biggest--I 
would not call it a restrictive mandate, but really, I go back 
again, is the fundamentals. I appreciate Mr. Grippo's 
suggestion that the Postal Service and the Commission have 
regulatory authority to look at these various attributes of 
universal service. While technically correct, I think that is 
too important an issue to leave to the regulatory process.
    I do think there is some important guidance that the 
Congress could provide. Waiting for Congress to define it, I 
think was like waiting for Godot, but----
    Chairman Johnson. Well, you are asking Congress to have a 
little courage to actually do something that might be a little 
difficult. It might produce some angst, but it might save the 
Postal Service.
    Mr. Taub. Having spent 15 years on the House side and 
realizing, look, folks got to run for reelection every 2 years 
or 6 years, I well understand the, small ``p,'' political 
environment everyone works in. That is why my suggestion of 
looking at the Telecommunications Act model of 1996, where 
Congress put its guidance in place but left it to the regulator 
to sort out the details, I think is a possible way forward that 
could get those 218 votes in the House and 51 in the Senate and 
to me go to that most fundamental issue.
    You talk about the restriction. The Postal Service and the 
good folks on the Board of Governors are flying right now 
without a clear mission statement. Why else is the United 
States Postal Service part of the United States Government? 
Well, it is to provide universal service. Well, what is it? And 
we have not specifically defined it in the United States, and 
therefore, my concern is we cannot be rest assured that when we 
are looking to fix the financials, we ensure that the 
financials are right to provide that universal service mission.
    So we have to fix that, and to me, everything else can flow 
from that. But unless you have your mission statement right, we 
have 535 different views of what the USO should be, and all of 
them are correct.
    Chairman Johnson. So, again, I said the most restrictive 
congressional mandate, and both of you agree with that, or do 
you have another one?
    Mr. Grippo, do you want a quick chime-in?
    Mr. Grippo. Well, among the task force recommendations, the 
ones that are clearly within Congress' realm relate to employee 
compensation and benefits, without judging those individual 
recommendations. The other recommendations on the Universal 
Service Obligation, on the approach to pricing, on the approach 
to strategy, we feel are administrative in nature.
    On the cost side of the ledger--and labor costs are 76 
percent of operating costs--statute governs. So in the mix of 
reforms, the benefits--the wages and compensation and 
benefits--would be within Congress' purview.
    Chairman Johnson. Mr. Williams, did you want a quick chime-
in?
    Mr. Williams. Thanks, Senator.
    I would add that post office network. Everybody wants that 
network. There are enormous reactions every time we try to trim 
it down, but they are not allowed to pay for themselves. Around 
the world, the post offices are allowed to diversity the 
products and services offered there, so that that can break 
even rather than be a loss.
    Chairman Johnson. That actually leads into my next 
question. It was about the alternate products revenue sources.
    I come from the position I really do not think we want the 
Postal Service, which to a certain extent is subsidized, 
competing with the private sector. So I am very sensitive about 
that.
    Mr. Grippo, I think in your task force, you are not really 
recommending to go into things that they have no core 
competency in or that they do not have kind of a basic capital 
structure to actually provide.
    Can you just quickly speak to that? Then we will have to 
move on to our next panel.
    Mr. Grippo. That is correct. The task force is not 
recommending that the Post get into anything that is outside 
its current core competency.
    The task force is not recommending that new commercially 
oriented activities are a wise idea. They would be too risky.
    The post is a turnaround entity, and as such, the task 
force is not recommending getting into other lines of business.
    Other national Postal services have done that, but they did 
that over many decades when Postal finances were healthy. Given 
where the post is now, we do not see a path or a reason to do 
that.
    Chairman Johnson. Do you agree with that position of the 
task force, or do you disagree?
    Mr. Taub. To the extent of it all that the Postal Service 
would be empowered, there would have to be legislation to allow 
them to look into other areas. I think we have a mature 
regulator that can be counted on to call balls and strikes and 
be concerned about the competitive aspects.
    I would concur given the financial house is on fire and I 
think the first order of business is looking at what is that 
core competency in stabilizing that fire, and to the extent of 
it all, broadening the aperture of what they get into. I would 
suggest the Commission could be one to help play that role of 
ensuring some balls and strikes and fair competition.
    Chairman Johnson. Mr. Williams you brought up.
    What is your comment?
    Mr. Williams. I think there are a number of things we could 
do, services we could offer that would not compete with the 
local community but would strengthen the local community.
    I also think----
    Chairman Johnson. Can you quickly list them, for example?
    Mr. Williams. We could do front-office services as we do 
for passports for a number of the government departments and 
local government and State government. We could equip our 
trucks with collection devices for the Internet of Things 
(IOT). We could provide broadband coverage for the community. 
None of those would even require--our employees would not even 
know they were being done. I think there are a large number of 
things that we could do.
    We mentioned financial services. I know that for now, that 
is an area that is being debated, but banks are being--and they 
are on the front end of a major disruption. I think we could be 
of assistance to them, probably at their request, in helping to 
combat these growing bank deserts, where you cannot have any 
services whatsoever.
    Money orders. I think we provide electronic money orders to 
Mexico. We should be expanding that to Asia and other--
Southwest Asia and Southeast Asia and China.
    There are a very long list of things that I think we could 
do, and we certainly have the expertise for this.
    Chairman Johnson. I appreciate that. Senator Carper.
    Senator Carper. Mr. Chairman, I would just add to your line 
of questioning.
    If we had a full complement of Governors on the Board of 
Governors, ideally they would serve, if they had the right kind 
of background, as a fount of ideas, a great source of ideas and 
some of--many of which may not be practical and not be 
acceptable, but some probably would. And that would be helpful.
    So we need good names from the Administration, and we need 
to process them and get them done. Thank you.
    I thank you very much for being here, all of you, for your 
service.
    I am going to have to slip out and not be here for the rest 
of the next panel, but if I can get back before you leave, I 
certainly will do that.
    Chairman Johnson. OK. Thank you, Senator Carper.
    Again, I want to thank our witnesses, and you are 
dismissed.
    We will call up Ms. Weichert.
    [Pause.]
    Ms. Weichert, it looks like you got me. Do not get too 
comfortable because you are going to have to stand up here 
pretty quick and get sworn in.
    Ms. Weichert. Fantastic.
    Chairman Johnson. Do you swear the testimony you will give 
before this Committee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Ms. Weichert. I do.
    Chairman Johnson. Thank you.
    We have before us now the Hon. Margaret Weichert, and Ms. 
Weichert is the Deputy Director for Management at the Office of 
Management and Budget (OMB) and serves as the Acting Director 
of the Office of Personnel Management. Ms. Weichert began her 
career in public service last year after two decades of private 
sector experience in financial services and consulting. Ms. 
Weichert.

     TESTIMONY OF MARGARET WEICHERT,\1\ DEPUTY DIRECTOR OF 
    MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET, AND ACTING 
            DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT

    Ms. Weichert. Chairman Johnson, Ranking Member Peters, 
Members of the Committee, thank you for the invitation to 
discuss the future of the U.S. Postal Service.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Weichert appears in the Appendix 
on page 101.
---------------------------------------------------------------------------
    This proud organization is the modern-day descendent of an 
institution established in 1775 with Ben Franklin as the first 
Postmaster General. Its importance was reinforced in Article I 
of the Constitution, which authorized Congress to establish 
post offices and post roads.
    The Postal Service has played a critical role in every 
stage of our Country's development, and Postal employee 
commitment is memorialized in its unofficial motto, ``Neither 
snow nor rain nor heat nor gloom of night, stays these couriers 
from the swift completion of their appointed rounds.''
    My own family is connected in a small way to this 
quintessentially American institution. My grandmother, Sarah 
Drury Morgan, was a proud Postal employee who emigrated from 
Ireland in the 1920s. For my dad's entire family, Postal 
employment was part of their American Dream story, enabling my 
grandmother to put two children through college while serving 
her country.
    Unfortunately, due to declining mail volume and legacy 
structural costs, this cherished institution faces an 
unsustainable financial future. The Postal Service has run up 
billions in debt since 2010 and is behind on $43 billion in 
retiree health care payments, and owes an additional $5 billion 
in pension liability payments.
    That is why last summer's Government Reform and 
Reorganization Plan recommended restructuring to achieve three 
objectives: better enable universal service obligations, 
establish a financially sustainable model that does not unduly 
burden taxpayers, and create a realistic path forward for 
Postal employee benefits.
    The reorganization plan outlined a vision of fundamental 
Postal reform but deferred final recommendations to the 
Presidential task force on the U.S. Postal System. That task 
force report was issued in December 2018.
    The task force analyzed structural reform opportunities 
giving particular attention to operational changes, cost 
allocation issues, and pricing flexibilities.
    In addition, significant attention was given to the 
differentiation of essential or Universal Service Obligations 
from competitive market-driven services.
    Although there are many perspectives on the task force 
recommendations, nearly everyone familiar with Postal financial 
woes agrees that the status quo is economically unsustainable.
    The Postal Service must be restructured to preserve 
foundational infrastructure for our democracy and our economy, 
maintaining communication links for millions while serving as a 
bedrock distribution network for American commerce. From our 
oldest citizens to our youngest, our rural communities to our 
growing cities, all Americans benefit from a revitalized, 
economically viable Postal system.
    As Deputy Director for Management at the Office of 
Management and Budget, I lead a range of government 
modernization efforts to better meet mission, service, and 
stewardship realities in the 21st Century. As technology and 
customer needs evolve, our government institutions must also 
evolve, and the Postal Service should be no exception.
    As the acting Director of the Office of Personnel 
Management, I am also keenly interested in structural reforms 
that resolve nearly $50 billion in Postal liabilities owed to 
the Office of Personnel Management. These unpaid liabilities 
place a burden on OPM and our mission of providing world-class 
benefits to all government employees, including 6 million 
Federal pension participants.
    Without reform, these liabilities will grow, threatening 
the viability of OPM services, including health, retirement, 
and other benefits that are critical not only to Postal 
employees, but also to other public servants, including Members 
of Congress who participate in OPM-managed retirement programs.
    Healthy organizations are designed to change and adapt. It 
is unacceptable that the Federal Government operates under a 
20th Century paradigm, despite dramatic changes in technology, 
society, and the needs of the American people.
    The Postal Service must pursue foundational, structural 
reform to preserve universal service, reestablish economic 
viability, and lead to a sustainable path for Postal benefits. 
To achieve these objectives, the task force identified 
operational, pricing, and cost-allocation changes to put the 
Postal Service on a sound footing.
    This Administration looks forward to working with Congress 
to reenergize efforts to find solutions to historical 
challenges.
    Finally, I would like to thank this Committee for recently 
confirming two members of the Postal Board of Governors. The 
Administration recognizes the importance of improved Postal 
governance and will continue to work with this Committee to 
that end.
    We remain hopeful that a fully constituted board will drive 
a new strategic direction for the Postal Service adopting 
relevant recommendations and making tough reform choices.
    Thank you again having me today. I look forward to your 
questions.
    Chairman Johnson. Thank you, Ms. Weichert.
    Yes, two down, seven to go, Board of Governors.
    Mr. Weichert. Yes.
    Chairman Johnson. First of all, let me apologize for this 
being so late.
    Mr. Weichert. That is OK. Thank you for having me.
    Chairman Johnson. So how long were you able to listen to 
the first panel?
    Mr. Weichert. I listened intermittently for most of it.
    Chairman Johnson. OK. I would just kind of like your 
reaction to that testimony, to their answers to our questions. 
Do you have any thoughts on that?
    Mr. Weichert. I think it was a good coverage of a number of 
the core issues. I think the most fundamental issue is we need, 
first and foremost, agreement on what are the fundamental 
Universal Service Obligations and get clarity around that 
because that is the piece that today is driving a huge amount 
of cost without clarity of exactly how that is going to be paid 
for.
    I think the other thing that was critical was the notion of 
the economics needing to be self-sustaining, and I think there 
were a little bit of inherent comments made that might suggest 
that it was not necessary for the Postal Service to maintain 
itself as a fully funded capability. I want to say, 
categorically, that I think most American taxpayers and most 
Americans believe that the Postal Service should be self-
funding.
    Chairman Johnson. We are probably referring to ``Medicare 
integration,'' which is a nice, little, sounding term.
    Just confirm whether I have this correct. Medicare 
integration basically takes about $50 billion of retiree health 
benefit, pension liability off of the Postal Service's balance 
sheet, off of their liabilities, transfer that to the American 
taxpayer, but because that liability is stretched over many 
years, the supposedly 10-year cost is about, I think, $7 
billion. Is that correct?
    Mr. Weichert. Yes. So, basically, there is an annual cost, 
but what we have seen and part of why the challenges were not 
seen to be as great when the decision to prefund was initially 
made is the population is living longer and is sicker than was 
initially thought to be. So those costs continue to grow, and 
they are real liabilities. They are liabilities that I have to 
sign off on at the OPM financial statements to basically say I 
understand you are not going to pay me this year, but you are 
agreeing to pay me in the future, so that my books balance. It 
is a meaningful number. $50 billion is a pretty big number, and 
it is a real cost.
    So just moving it from my books to someone else's books, 
first of all, does not make the cost any less, but second, it 
affects my books. If I have to write that of or move that, I 
have to really look at what does that do to my balance sheet.
    Chairman Johnson. But, again, my concern is in the public 
sphere of debate. It only costs $7 billion, because we are 
always focusing on that, but it truly is a $50 billion cost.
    You also mentioned--because I have been doing this now for 
a number of years. Often the argument is, well, one of the 
reasons you have to restate that liability--and this is not a 
good thing, but Postal workers actually do not live as long, 
and they really do not have as large a liability as normally 
calculated. But you are saying the exact opposite.
    Mr. Weichert. So, basically, I think there were assumptions 
made to that end. I cannot speak to the actual detail of every 
assumption, but the notion is this is happening not just in the 
government context, but in all programs that are looking at 
long-term health and long-term health care delivery costs.
    I would add that Postal Service is not the only entity, 
even in government, that prefunds some of its health care 
liabilities. So the Department of Defense (DOD) does the same 
thing around TriCare for active participants who are expected 
to be eligible.
    Chairman Johnson. You mentioned universal service. One of 
the things we talked about is who is going to define that. Is 
it going to have to be done legislatively? Does Congress have 
to lay this out, or do we use a different model? Do you 
actually have the administrative capability?
    One of the issues raised in your governmental reforms is 
what can you do administratively versus what is going to 
require legislation.
    I do not know if you were kind of following that debate. 
Where do you come down on that issue when it comes--because I 
agree. I think we really do need to define universal service, 
what is essential. That they began doing that in 2006, but we 
need to further refine that if we are going to make the Postal 
Service sustainable.
    Mr. Weichert. Well, I defer on the definitive answer to 
some of the folks who were on the earlier panel. I think 
particularly the PRC would have to weigh in on that according 
to the dictates of that governance body.
    I think the further work that I mentioned that needs to 
happen between the Executive and the Legislative Branches is 
really to get clarity and then put proposals out there. To the 
extent that they have the agreement of that governance 
community, we could then determine does it need to be further 
codified in law.
    Chairman Johnson. So one issue was collective bargaining.
    Mr. Weichert. Yes.
    Chairman Johnson. Could you explain what is different in 
terms of what USPS does in terms of treating its employees and 
bargaining with them versus the rest of Federal Government 
workers?
    Also, in the task force, they laid out the difference 
between USPS, which is about $85,000 or $86,000, cost per 
employee. With UPS, it is around $76,000; FedEx, about $53,000. 
Can you make that comparison with other--again, how we treat 
Postal employees versus Federal Government employees in terms 
of the bargaining and wage and benefit calculations, that type 
of thing?
    Mr. Weichert. Yes. I think that is a critical point.
    While the Administration emphatically supports the ability 
of employees to collectively bargain, most of the unions in 
government are not collectively bargaining over salary. What 
you can see empirically is the annual raises and the annual 
salary considerations under a collective bargaining situation 
such as the Postal Service has, they rise faster than some of 
the other elements in government. I think that is the core 
difference that collective bargaining over environment and the 
nature of how employees are treated and what their work 
environment is like, that is absolutely something that 
continues to be in force in all of the government unions which 
support our employees. But the Postal Service stands out as 
unique in terms of the collective bargaining over salary.
    Chairman Johnson. So you have said you can witness 
empirically a higher increase in wages in the Postal Service 
versus other Federal workers. Do you have a dollar number on 
that?
    Mr. Weichert. I would have to get back to give you that 
exact figure.
    Chairman Johnson. OK.
    A big issue really is cost allocation. You come from the 
private sector.
    Mr. Weichert. Yes.
    Chairman Johnson. It is just crucial. Do you understand 
what your costs are, how they are changing? Allocation methods, 
just from when I had my big old cost accounting book, have 
changed dramatically in the last 50 years. If we are literally 
allocating cost based on a 50-year-old model, I would say 
something probably needs to change.
    Can you talk about how significant that is to the Postal 
Service, how the lack of good information might be affecting 
how they are pricing products and how they are competing and 
what they are offering to the Amazons of the world?
    Mr. Weichert. Absolutely.
    I think the two areas that there is, I think, a pretty good 
understanding of what the cost to serve is in the private 
sector, the first mile, or how pickup words, if you think about 
models of pickup, whether it is UPS or FedEx, Kinko's, they 
have models of both retail drop-off and some pickup services 
for the first mile. They also really understand what their 
middle mile looks--moving things between cities. I think we do 
not have necessarily the same level of granularity, but we have 
some sense around that.
    I think that the challenge in terms of where the model has 
shifted the most is that last mile. So what used to be a huge 
volume of First-Class Mail, interpersonal communication, and 
paper delivery of documents has fallen way down, and so our 
cost structure is heavily oriented, both in terms of labor and 
physical property, like vehicles, toward that last mile. That 
is a huge challenge when you have to spread the costs and 
particularly the variable costs around personnel on a much 
smaller basis of volume, and I think that is the real critical 
area for improvement.
    It is frankly a place where there are opportunities, even 
as a couple of the earlier panel has mentioned, to think about 
how do we charge differently for others who want to leverage 
our last-mile capabilities. We do not have the flexibility to 
do that, nor do we really have an understanding of what costs 
we would need to cover there.
    Chairman Johnson. Is it your belief that because the Postal 
system has that monopoly in First-Class Mail and really geared 
toward delivery of those letters that even to this day, they do 
not allocate properly between First-Class Mail and parcel?
    Mr. Weichert. Absolutely.
    Chairman Johnson. And under-allocate to parcel?
    Mr. Weichert. Absolutely.
    Chairman Johnson. Do you have any feel for how many 
billions that may be?
    Mr. Weichert. Again, I defer to some of the more detailed 
experts, but I would be happy to get that specific number for 
the record.
    Chairman Johnson. Because it did sound from both the 
Governor and the commissioner that they really felt they had a 
pretty good handle on that and that they were making money on 
parcel, which would indicate they seem to be allocating cost 
properly.
    Mr. Weichert. I think making money and making enough money 
to meet that whole test of the self-sufficiency is the 
question, and as you know, if you do not actually factor in a 
cross-subsidy into your overall pricing model, then you can be 
in a situation where you have a declining part of your business 
that you feel you need to keep and, in this case, legally have 
to keep. But if you are not allocating the cost from that part 
of the business to the other part of the business, you are 
actually not at the macro level covering your cost.
    Chairman Johnson. In our little sheet here, over 10 years, 
the way we figured out what operating income was, it is a 0.4 
percent return on sales, which is completely inadequate for--no 
investor invests in a business that way.
    Mr. Weichert. Well, nor would anyone, I am looking at a 
letter that I received from the Postal Service, came to OPM in 
September, that basically said if we were to pay OPM what was 
owed on September 30 for last fiscal year, our remaining 
liquidity reserves would only amount to about 23 days of 
operating expenses. So not only do they not have what you said, 
but also, just from a prudent reserve standpoint, even for a 
not-for-profit, that is not sufficient prudent reserves.
    On a marginal cost basis, we may have a handle on our 
costs, but if we do not understand our semi-variable cost and 
our fixed cost for the whole enterprise and are not allocating 
to that, where the cost and the liability is and where the 
revenue is are not the same place.
    Chairman Johnson. Again, my recommendation is do not be 
holding your breath, to getting those liabilities paid off.
    Let us talk about that because that is, as I said earlier, 
the 800-pound gorilla.
    Mr. Williams was talking about the fact--and this may be 
true--that the Postal system really as an entity has done a 
pretty good job at funding its overall pension liability. They 
still have unfunded, but overall, they have done a pretty good 
job. Can you comment on that?
    Mr. Weichert. I cannot comment on--I have not done an 
extensive study about how the Postal system pension funding 
compares to either the private sector or every other entity.
    I think the thing that is really different is the Postal 
has an obligation that the rest of government does not have to 
be self-sustaining. So all of the other parts of our government 
are, straight up, expected, transparently, to be funded through 
appropriations or other mechanisms that the folks who hold the 
purse here in Congress have established for us. Congress 
established for the Postal Service the notion of fully funding 
liabilities, and we know a number of private-sector companies, 
to the extent they have gotten it wrong, end up in real trouble 
and then looking to the American taxpayer for a bailout.
    Chairman Johnson. What happens in the private sector is 
they go through a reorganization under the protection of 
bankruptcy.
    Mr. Weichert. Chapter 11, yes.
    Chairman Johnson. Where a judge who is experienced in this 
can take a look at contracts and union contracts and that type 
of thing----
    Mr. Weichert. Yes. This entity would have gone there a long 
time ago.
    Chairman Johnson [continuing]. And modify them to make sure 
that at the tail end of that process, you can come out as a 
viable economic entity----
    Mr. Weichert. Correct.
    Chairman Johnson [continuing]. Which, of course, the Postal 
system does not have that remedy available to them.
    Mr. Weichert. Right.
    Chairman Johnson. But Congress said, ``We are going to set 
you free, and you have to fund your pension and health care 
liabilities yourself.''
    Mr. Weichert. Right.
    Chairman Johnson. Anybody looking at the financial systems 
or financial statements back then would realize, well, they are 
not going to be able to do that, correct?
    Mr. Weichert. Right.
    Chairman Johnson. So you talked about restructuring these 
liabilities. You said we have to reform; we have to do certain 
reforms. What reforms? What are you suggesting here? What do we 
need to do in order to fund that excess liability or unfunded 
liability?
    Mr. Weichert. I think we need to look at the structural 
reforms on all of the dimensions that I mentioned in my opening 
statement.
    In terms of the operations, the actual cost drivers have to 
be looked at. So we do have to look at elements of days of 
service. We need to look at exactly how we structure the last 
mile. Does it all have to go to individual locations? There is 
already flexibility to deliver to hubs and other more 
centralized capabilities.
    Chairman Johnson. In other words, they cannot be as they 
are right now, basically in a break-even footing. They actually 
have to be looking at themselves as what you would have to do 
in the private sector. You have to make a certain return on 
sales to fund all those things, correct?
    Mr. Weichert. I characterized it as prudent reserves. So 
even a not-for-profit is not seeking to bank money to return to 
shareholders, but they maintain prudent reserves so that they 
are not using OPM and the rest of government as a line of 
credit, which is what they are doing today.
    Chairman Johnson. Again, coming from the private sector, 
would not you be taking a look at this and go, OK, on $724 
billion of sales over 10 years, I need to make a 10 percent 
return on that, operationally?
    Mr. Weichert. Yes.
    Chairman Johnson. I have to be making $72 billion, and that 
will fund X, Y, and Z. So then you take a look at your costs. 
Can I raise prices?
    Mr. Weichert. Right.
    Chairman Johnson. There is going to be a certain price 
elasticity. Sitting down and talking to the task force, they 
have a lot of those elasticities.
    Mr. Weichert. Right
    Chairman Johnson. I mean, they have really detailed models 
to----
    Mr. Weichert. Right.
    Chairman Johnson [continuing]. Take a look at it if we go 
up 10 percent, 20 percent, 5 percent, what that would do in 
terms of volume. That is what we have to do, right?
    Mr. Weichert. Right. It involves even looking at how do you 
free up capital in order to invest in technology that will get 
you on a better future footing, and that is another critical 
element. Technology enhancement could help get them on a 
sustainable footing, but they would actually need capital to do 
that.
    Chairman Johnson. If the Postal system really were a 
private-sector company with a Chief Executive Officer (CEO) and 
Board of Directors, they would be looking at this and go, 
``What do we need to do to get this rate of return on sales, so 
we can fund the capex? We need to be sustainable long term''?
    Mr. Weichert. Right. And that is why--yes.
    Chairman Johnson. But when you have a 535-member Board of 
Directors----
    Mr. Weichert. Right.
    Chairman Johnson [continuing]. That becomes----
    Mr. Weichert. So pricing is another one of the things that 
absolutely needs to be looked at.
    Chairman Johnson. We have to first allocate cost properly.
    Mr. Weichert. Allocate cost, get a cost model that works.
    Chairman Johnson. So you can look at pricing. Understand 
the price elasticity of your products.
    Mr. Weichert. And then the operating opportunities to lower 
your expense base to meet your current revenues, but I think 
the third thing is pricing flexibilities that would actually 
allow you to look at places where there is that inelasticity.
    And then I think the other really important one is new 
revenue models, and I think there was a lot of good discussion 
about new revenue models should be possible without requiring 
fundamentally orthogonal capabilities, and so I would look--and 
I think the task force was looking--at what are models that 
would use capabilities you already have today, including the 
passport services we provide to State. There is a lot of things 
that other entities provide on behalf of other administrative 
entities. That would be a real opportunity.
    I think there are a whole lot of other things. That if you 
looked at a revenue per-square-foot model, which is what a lot 
of retailers would do, you would figure out how do I get more 
revenue, even without having to provide the service myself.
    Chairman Johnson. My concern is competing with the private 
sector and looking at that as the machine of the gods. I mean, 
this is the salvation for the Postal system. We can get in 
these other lines of business and just magically have those 
things solve this entire problem.
    I am really concerned that that is what people take a look 
at, and it is just another one of these projections. Based on 
these projections, we solve the problem, and we end up not 
doing the fundamental reforms----
    Mr. Weichert. Fundamental reforms.
    Chairman Johnson [continuing]. That you have to with an 
entity that in the private sector would be going through, 
again, that reorganization under the bankruptcy process, which 
is very powerful.
    Mr. Weichert. Yes.
    Chairman Johnson. It gives an organization the best chance 
of coming out the other end viable.
    Mr. Weichert. Yes, absolutely agreed. I think that is why 
that new revenue models was sort of at the bottom of that list. 
You have to do that form operations component, the cost 
modeling, and then the pricing changes. Those are the most 
fundamental structural changes.
    If you want to sell these things in the front of the store 
and have someone else bringing that in--I am not saying that is 
the right answer. I have not evaluated that.
    Chairman Johnson. No, I understand.
    Mr. Weichert. But that is how a lot of retailers look for 
new opportunities to get money out of their retail footprint.
    Chairman Johnson. Right.
    Well, again, the bottom line is you have to bring a 
private-sector mindset to this in terms of cost allocations so 
you know where to price the efficient use of what assets you 
have. That is what we need to do.
    I have pretty well gone through the list of questions I 
had. Do you have anything else other than your testimony that 
you just have a burning desire to comment on?
    Mr. Weichert. No. I thank you for the opportunity. I think 
this was a very productive conversation. I listened intently to 
the earlier panel, and I imagine there will be a lot more 
opportunity for dialogue. I appreciate the opportunity, and I 
think this is precisely the kind of thing the Administration 
was hoping to catalyze with the Government Reform and 
Reorganization Plan, is to put ideas out there, get people to 
drill down on them, get a fact base, get an evidence base, and 
then actually have discussions about what is the path forward.
    So I thank you very much for this opportunity.
    Chairman Johnson. Well, again, I thank you for taking the 
time, being patient with us.
    One of the parts of our mission statement of this Committee 
is to promote more efficient and effective government, and we 
have somebody with your private-sector background and your 
experience. And we get to pay you one salary and have you do 
two jobs. [Laughter.]
    It does not get more efficient than that.
    Again, we certainly appreciate all that you do.
    This hearing record will remain open for 15 days until 
March 27 at 5 p.m. for the submission of statements and 
questions for the record.
    This hearing is adjourned.
    Mr. Weichert. Thank you.
    [Whereupon, at 5:34 p.m., the Committee was adjourned.]

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