[Senate Hearing 107-70] [From the U.S. Government Publishing Office] S. Hrg. 107-70 THE FINANCIAL OUTLOOK OF THE U.S. POSTAL SERVICE ======================================================================= HEARING before the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ MAY 15, 2001 __________ Printed for the use of the Committee on Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 73-392 WASHINGTON : 2002 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENTAL AFFAIRS FRED THOMPSON, Tennessee, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut SUSAN M. COLLINS, Maine CARL LEVIN, Michigan GEORGE V. VOINOVICH, Ohio DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico RICHARD J. DURBIN, Illinois THAD COCHRAN, Mississippi ROBERT G. TORRICELLI, New Jersey JUDD GREGG, New Hampshire MAX CLELAND, Georgia ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware JEAN CARNAHAN, Missouri Hannah S. Sistare, Staff Director and Counsel Dan G. Blair, Senior Counsel Ann C. Fisher, Professional Staff Member, Subcommittee on International Security, Proliferation, and Federal Services Joyce A. Rechtschaffen, Democratic Staff Director and Counsel Susan E. Propper, Democratic Counsel Yvonne Sanchez, Democratic GAO Detailee Nanci E. Langley, Democratic Deputy Staff Director, Subcommittee on International Security, Proliferation, and Federal Services Darla D. Cassell, Chief Clerk C O N T E N T S ------ Page Opening statements: Senator Thompson............................................. 1 Senator Carper............................................... 2 Senator Cochran.............................................. 3 Senator Stevens.............................................. 4 Senator Collins.............................................. 5 Senator Carnahan............................................. 9 Prepared statements: Senator Akaka................................................ 7 Senator Cleland.............................................. 8 WITNESSES Tuesday, May 15, 2001 Hon. David M. Walker, Comptroller General, U.S. General Accounting Office.............................................. 11 Hon. William J. Henderson, Postmaster General, U.S. Postal Service........................................................ 13 Hon. Robert F. Rider, Chairman, Board of Governors, U.S. Postal Service........................................................ 14 Hon. George A. Omas, Vice Chairman, Postal Rate Commission....... 16 Alphabetical List of Witnesses Henderson, Hon. William J.: Testimony.................................................... 13 Prepared statement........................................... 77 Omas, Hon. George A.: Testimony.................................................... 16 Prepared statement........................................... 88 Rider, Hon. Robert F.: Testimony.................................................... 14 Prepared statement........................................... 83 Walker, Hon. David M.: Testimony.................................................... 11 Prepared statement........................................... 48 Appendix Senator Byron L. Dorgan, a U.S. Senator from the State of North Dakota, prepared statement..................................... 47 Responses from Postmaster General Henderson to questions asked during the hearing............................................. 108 Karla W. Corcoran, Inspector General, U.S. Postal Service, prepared statement............................................. 118 Ruth Y. Goldway, Commissioner, Postal Rate Commission, prepared statement...................................................... 137 Thomas Schatz, President, Council for Citizens Against Government Waste, letter dated May 9, 2001, sent to Chairman Thompson..... 141 ``Future Directions in Postal Reform,'' edited by Michael A. Crew, Center for Research in Regulated Industries, Graduate School of Management, Rutgers University, and Paul R. Kleindorfer, Risk Management and Decision Process Center, The Wharton School, University of Pennsylvania..................... 142 Post-hearing questions and responses from: Comptroller General Walker................................... 146 Postmaster General Henderson................................. 149 Mr. Rider.................................................... 178 Mr. Omas with attached letter................................ 193 THE FINANCIAL OUTLOOK OF THE U.S. POSTAL SERVICE ---------- TUESDAY, MAY 15, 2001 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 10 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Fred Thompson, Chairman of the Committee, presiding. Present: Senators Thompson, Carper, Cochran, Stevens, Collins, and Carnahan. OPENING STATEMENT OF SENATOR THOMPSON Chairman Thompson. Let's come to order, please. I want to welcome everyone to the Committee on Governmental Affairs this morning, our hearing on the financial outlook of the U.S. Postal Service, along with Senator Cochran and his Subcommittee, who have done so much fine work in this area. We are here this morning because of our increasing concern over the financial condition of the Postal Service. The Committee welcomes our witnesses, Comptroller General David Walker, Postmaster General William Henderson, Postal Service Board of Governors Chairman Robert Rider, and Postal Rate Commission Vice Chairman George Omas. I hope our assembled panel can shed some light on the course the postal finances have taken over the past year. While we will discuss many aspects of this problem in hopes of achieving a better understanding of the reason for the current situation, certain things seem to be clear. The Postal Service framework, established by Congress in 1970, appears to be near a breaking point. We established a system whereby the Postal Service would have the characteristics of a Federal agency and the characteristics of a business enterprise. On the one hand, we require that the Postal Service provide universal service to every home and business in America. We give them little control over the rates they charge and their labor cost. We require that they leave unprofitable post offices open. We leave them open to the swings in the economy, along with fluctuations in transportation and fuel cost. Finally, we require them to break even. On the other hand, we provide the Postal Service with an absolute monopoly on the delivery of letter mail. We provide that they do not have to pay taxes or be subject to antitrust laws, the way that businesses are. This system worked for several years. However, circumstances changed. Two trends developed that changed the face of the Postal Service. First was a technological revolution, which is in the process of changing the way in which people communicate with each other. That technology is rapidly finding business applications in all aspects of society. The second change was that the Postal Service eventually and inevitably began to take on the characteristics of most Federal agencies. It continued to grow without a focused strategic plan. It developed serious financial management problems, including wildly fluctuating projections of cost and income. It is unable to utilize technology to increase its efficiency and productivity even after spending billions of dollars. It wastes tremendous sums of money due to mismanagement. A combination of these factors results in the difficulties that we see before us, as laid out by the GAO-- billions of dollars in deficits in the coming years and an inability to deliver the services we want and costs that are sustainable. Clearly, the Postal Service must address its productivity and its management issues. An 11 percent growth in productivity over the course of 30 years is not good, to say the least. Reports by the Postal Service Inspector General of $1.4 billion in waste and mismanagement fuel further cynicism about agency operations. Just as clear, however, is the recognition that Congress must revisit the 30-year-old statutory framework under which the Service now operates. As we proceed, we must ask ourselves some pointed questions. We, in Congress, must ask what services we want the Postal Service to provide and what price we are willing to pay for them, and do we really expect the Postal Service to hold costs at a reasonable level when we are mandating so many things that make that impossible. The Postal Service must ask itself if it really expects reform that gives it more discretion when it has not demonstrated the ability to make financial projections, hold down costs, or increase productivity. Stakeholders should ask themselves, even though they may be more comfortable under the current situation, where will they be if the Postal Service falls apart? I approach this issue with no preconceived notion as to the precise measures that should be taken. There is a lot that we need to understand about the nature of this problem. However, it is my belief that nothing should be left off the table, including the future of the postal monopoly itself. Senator Carper. OPENING STATEMENT OF SENATOR CARPER Senator Carper. Mr. Chairman, thank you very much. To our witnesses today, welcome. It is nice to see some of you again. One of you looks really familiar. Mr. Rider, where are you from? Mr. Rider. Rehoboth Beach, Delaware, sir. Senator Carper. A lot of people who work over in this part of the country are going to be heading for your hometown in about 2 weeks, when Memorial Day weekend is upon us. We look forward to seeing some of you this summer, and as they make their way to Rehoboth Beach, they can go through Bridgeville, where I believe your business is, for the Apple-Scrapple Festival later this year. That is a great combination, as I am sure you can tell everybody. I understand your testimony focuses on that very thing. We are really pleased to see you here--you and I used to be the same thing. We use to be governors together, and now you are chairman of the governors, and I am just a former Governor, but we are delighted that you are with us. To our other witnesses today, Mr. Henderson, I understand you are going to be stepping down as Postmaster General after several years of Service, and I just want to say publicly, thank you for your work and your leadership of the men and women who are part of the Postal Service. Mr. Walker, we look forward to being with you here today. Your people are doing great work, and we are looking forward to your comments. Just a couple of quick comments. I really look forward to your comments and to the give and take that we have here today. Mr. Rider and I had a chance to chat on the phone not too long ago about a couple of things, and as you look for ways to raise revenues and to hold down your cost, I would again urge you to focus on workplace safety. The cost that I think we discussed on the phone was about $1.5 billion, and some of that is hard to control. Some of that is more easily controlled. We talked a bit about the good work that has taken place at Alcoa, under the leadership of the fellow who is now our Secretary of the Treasury. We talked a bit about, closer to home, the work that goes on at the duPont Company, where my wife works, and a lot of other Delawareans work, as well, and stay focused on workplace safety to help to drive down their cost. I understand that is a focal point, but as you look for Mr. Henderson's successor, I sure hope that you will keep in mind it would be great to have a leader who understands how much money actually could be saved, is being saved, and could be saved. The other thing I would say is my hope is, as we go through our testimony today, we will have the opportunity to find out some ways that you are raising revenues, would like to raise revenues, and ways that you are raising productivity and would like to raise productivity, some ways you are trying to hold down your costs and would like to further hold down your costs. What I am looking for are ideas where we can be a partner, where we can help to assist you in those efforts and ultimately provide better service to the folks that we represent. Again, I am glad that you are here and we look forward to this give and take. This is an important hearing for everybody in every State, and we thank you for joining us today, especially Mr. Rider, who I think may have been in Hawaii visiting his daughter, and it was good of you to come back here. We have offered you some great weather, so you should not be complaining, my friend. But we thank you for making this trip and we apologize for disrupting your plans with your family. Chairman Thompson. We are holding our hearing today in conjunction with Senator Cochran's Subcommittee, so I will call on Senator Cochran next for any comments. OPENING STATEMENT OF SENATOR COCHRAN Senator Cochran. Mr. Chairman, it is a pleasure to join you this morning in convening this hearing. We think it is an important and timely hearing. There are all kinds of suggestions even being made in advertisements in the Washington Post this morning about what the Postal Service needs to do to get its house in order financially, and to turn a profit rather than a deficit, and therefore obviate the need for a postal rate increase. It would be good to hear the witnesses' reaction to that suggestion. I think the underlying message is that the Postal Service has too many people and it can solve all its problems by cutting down the number of employees it has. That will be an interesting thing for you to respond to, as well. Mr. Omas, it is a pleasure to recognize you, specifically. What State are you from? Mr. Omas. Mississippi. Senator Cochran. I just wanted to be sure I remembered that right. Who was your dormitory manager when you were at Guess Hall, at the University of Mississippi? Mr. Omas. I think his name was Thad Cochran. [Laughter.] Senator Cochran. It is good that you remembered all that, as well, and we look forward to visiting with you further on these issues. Thank you, Mr. Chairman. Chairman Thompson. All right. Mr. Henderson, where did you used to be a postmaster? Mr. Henderson. Memphis, Tennessee. [Laughter.] Chairman Thompson. Beg your pardon? Mr. Henderson. Memphis, Tennessee. Chairman Thompson. That's what I thought you said. [Laughter.] Chairman Thompson. While we are at it, Senator Stevens? Senator Stevens. Mr. Henderson, what State have you spent more time in, in the last 5 years? Mr. Henderson. Alaska. [Laughter.] OPENING STATEMENT OF SENATOR STEVENS Senator Stevens. Mr. Chairman, I am delighted that you are having this hearing. I have three going on this morning, but I did want to come and participate here, particularly to thank again the Postmaster General for his service. I have worked with all the gentlemen at the table, but Postmaster General Henderson has come to Alaska quite often to try and see what we can do to solve the problems of postal delivery and the deficit that they run up there, which is a matter of necessity, and that is one of the reasons I am here. We have no roads. There is only one main road in Alaska. Seventy-five percent of our transportation of goods is by air, and that is primarily by parcel post. The system that the Constitution guaranteed for maintenance of post offices and post roads has real meeting in my State, and Postmaster General Henderson, you have recognized that and we appreciate that. Beyond that, I came because I listened to the statement of the Chairman and I have great respect for him, but I hope he would keep in mind that it is 30 years ago now that I tried to get the Post Office to be involved in something that we now call E- mail. This Committee decided that was not proper. That was a system that was going to grow in the private sector, and it was probably a good decision, because it has grown very well. But it competes highly with the Postal Service, and I do not think that the monopoly and the printed word is one thing. I do not think the Post Office has a monopoly anymore in terms of mail. But that is a generational thing, and I would hope you keep that in mind. It is an urban thing. The capability of my people to go on the Internet is not yours, because we automatically changed long distance rules. Intrastate calls in Alaska are long-distance calls. Our competition here is with the printed word and the generational concept that I mention to you is in an aging population, and our population is aging. The majority of those people who are aging are not computer capable, and they are still dependent upon this postal system. I am going to oppose any radical change in the Postal Service until we are assured that the access is not limited to the younger generations, in terms of capability to communicate. Just think of it. All of you can think about it. The mail you primarily get, the personal letters you primarily get today, if you are computer-capable, are from your relatives that are my age. Now, I happen to be fortunate and communicate with my children by E-mail. But not many people do that, and I think we have to keep in mind this postal system must be maintained to deliver the printed word, so long as a substantial portion of the population is dependent upon that service. I know that there are losses out there. I know that there are things that can be changed. But every year we look at a deficit in the Postal Service revenue for our State, and you all know it is there, and I know it is there, but the difference is if you want to eliminate it, then give us about $3 billion a year to build roads, and remove the opposition in the environmental community to building those roads. That is the same in other areas of the country, particularly the rural areas of the country, that do not have access to the Internet, at least equal access to the Internet. On another Committee, we are working on this concept, Mr. Chairman, of equal access to the Internet, and I believe the day will come when the printed word, as far as personal communication, will be gone. But until that day comes, the Postal Service will be our way of complying with the Constitution; and I hope we all keep that in mind as we look at this. Mr. Walker, I am interested in your report, and I am not criticizing the report, but I think some of the things that are analyzed as being losses are expenses of being involved in a business that is not bottom-line cost effective. So I hope we can keep that in mind. Again, I welcome you all and I thank you for the courtesy, because I have to go to another meeting. Thank you very much Chairman Thompson. Thank you very much. Senator Collins. OPENING STATEMENT OF SENATOR COLLINS Senator Collins. Thank you very much, Mr. Chairman. Gentlemen, which State would you most like to spend August in? [Laughter.] After Senator Stevens leaves, I can get a unanimous answer of Maine from each of you. Mr. Chairman, I have a lengthy statement which I would like to submit for the record in the interest of time. Chairman Thompson. It will be made a part of the record. Senator Collins. I just want to say that I am troubled by how quickly the financial picture of the Postal Service has darkened. It was only in February 2000 that the Postal Service still had a net income of $1 billion, and yet now we are seeing projections of very significant losses, and I am further troubled that the first response to those losses is to seek higher rates, to look at eliminating Saturday delivery, and to look again at closing small post offices, which, in many parts of my State, are absolutely critical and are truly the heart of a community. So I look forward to exploring these issues with our witnesses today. The Postal Service in Maine, as in Alaska, is absolutely critical. We need to maintain the universal service requirement, and I am very concerned about the financial stakes that we now face. So, Mr. Chairman, I would put my statement in the record, and I look forward to hearing from our witnesses. [The prepared statement of Senator Collins follows:] OPENING PREPARED STATEMENT OF SENATOR SUSAN M. COLLINS Thank you, Mr. Chairman. The U.S. Postal Service has origins that predate the birth of the United States itself. In 1775, the Continental Congress appointed Benjamin Franklin as the first Postmaster General. The value of a national postal service was so apparent to our nation's founders that the power to establish post offices and roads comprises one of only 18 clauses of legislative authority explicitly granted to Congress in our Constitution. This is not to say, Mr. Chairman, that the Postal Service has not changed with the times. Under congressional statute, it expanded service via navigable waterways in 1823 and the railroads in 1838. Airmail followed as early as 1918. The Postal Service apparently even experimented with an even more spectacular form of delivery--``missile mail''--in 1959. Though missile-borne cross-country mail proved rather less successful than other forms, the episode certainly demonstrated the Postal Services' willingness to try new innovations. Another, far more successful Postal Service innovation occurred in 1863: the institution of universal postage rates without regard to distance. This system would eventually allow all Americans to reach out to one another easily and effectively, regardless of where they lived or how far the mail had to travel. For a short journey or a long one, the Postal Service would charge a single, affordable rate. Even in the middle of a terribly destructive and divisive civil war, the Postal Service recognized that we were one nation and took important steps to help bring that nation together as one. Combining this single-rate service with its near-universal penetration of the American countryside, the Postal Service helped knit together the nation we know today. Since 1971, the Postal Service has been organized as a separate entity, albeit one different than any other government agency. As such, it receives no general fund revenues. Instead, it relies upon sound business practices and a watchful Board of Governors to ensure that it carries out its mandate to deliver the people's mail in a convenient, efficient and uniform manner. Still, much has changed in the three decades since we established the modern United States Postal Service. The advent of new technologies has proven to be a special challenge to the fulfillment of the Postal Service's traditional role. Recently, a confluence of factors ranging from high gas prices to the advent of E-mail and electronic bill payments have caused some to question whether the Postal Service can continue to do ``business as usual.'' From September of last year through this February, the Postal Service lost $260 million. Today, the Service estimates it may lose between $1.6 billion and $2.4 billion for this year, and perhaps even more in 2002. These trends, therefore, call into question the Postal Service's ability to continue to provide its current level of services at uniform prices and reasonable rates. Alarmingly, the Postal Service has accumulated so much debt that it is now approaching its statutory borrowing limit of $15 billion. Many Postal Service stakeholders have told Congress that the Service needs changes in the law to allow it to be more efficient in its pricing, labor relations, and financing operations. GAO recently testified that the USPS had increased its efficiency by only 11 percent over the past three decades--during a time in which the productivity of the private sector has been exploding. To cope with these its tremendous problems, the Postal Service is considering a reduction of core services--including the closing of smaller postal facilities and the elimination of Saturday mail delivery. At the same time, however, it continues to carry on non-core services, such as E-commerce operations, that we are told lose substantial sums of money. According to a 1998 GAO study, for example, the Postal Service had instituted 19 outside business ventures since 1991. During the first three quarters in 1998, only four were reported to be profitable. GAO found in their 1998 report that, during the seven year period it reviewed, the Postal Service lost approximately $85 million on such things as coffee mugs, ties, and phone cards. Because the Postal Service has not released current information showing whether these non- core services are actually profitable, this is a contradiction that needs to be explored further, Mr. Chairman. When most businesses lose revenue, providing less service for higher prices and forsaking core services for money-losing side ventures is usually not their response. I am especially concerned about the impact of closing post offices in smaller communities. It would be unfortunate indeed if the Postal Service's failure to meet today's challenges results in its abandonment of aspects of the core service that made the service indispensable to so many Americans, especially in rural areas. We cannot allow this to occur. I have no doubt that the Postal Service may need some reforms. The world has changed significantly since 1971. Other nations are also carrying out interesting postal experiments that bear watching. Ours is a large nation, and what works in one country may not work here. Nevertheless, we must be open to the idea that things can be done better than they are today--and aware that we can learn from the experiences of other nations to provide the best postal service for the American people. I agree with our outgoing Postmaster General when he says that ``a seriously weakening postal system would find it more and more difficult to carry the full load of universal service.'' It is for that reason that this hearing is so important. A weakening postal system must concern us all. In the end, we all want the same thing: the best postal delivery system for all Americans that we can possibly have. I look forward to the testimony of the witnesses and thank you for calling this important hearing today, Mr. Chairman. Chairman Thompson. Thank you very much. I understand that Senator Akaka has been delayed and wishes to have his statement made a part of the record. Senator Cleland has also submitted a statement for the record. [The prepared statements of Senators Akaka and Cleland follow:] PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA Given the Postal Service's projected $2-$3 billion deficit this year, it is crucial that Congress examine the actions of the Service which affect each and every American. I hope this hearing will assure Hawaii's consumers and businesses that Congress is taking their concerns seriously. Last week's decision by the Postal Board of Governors to modify the 2000 rate increase has ignited a new round of debate. Some believe raising rates may put the Postal Service in a death spiral. What we do know is that rate increases alone will not fix the serious cash flow and debt problems facing the Postal Service. A good indicator of the seriousness of the situation is that the Postal Service has been reported to be preparing for yet another rate increase filing this summer. I am interested in learning from the Board whether this report is true and learning from management exactly how the Service plans to make up its possible $2-$3 billion projected loss. The U.S. mail is a basic and fundamental public service. Hawaii's postal patrons and those of other states are entitled to reliable and efficient mail service at a fair and reasonable cost. With a dedicated workforce of over 800,000 employees, it is the largest federal civilian employer and operates more postal facilities than the number of McDonalds, Wal-Marts, Blockbuster Videos and Starbucks, combined. This infrastructure fuels the private mailing industry that generates $155 billion nationwide annually and employs 6.2 million people. It is essential that an organization the size of the Postal Service be governed by short and long-term financial goals that support its core mission--providing universal mail service to all Americans at affordable prices. Because the Service has appropriately sounded the alarm over declining volume and decreasing revenue, I am pleased to have the Comptroller General with us. By placing the Postal Service on the list of high-risk federal programs, Mr. Walker has spotlighted the serious financial and operational problems facing the Service. The Postal Service has received a lot of attention in the last several months after announcing a freeze on new construction projects, studying the elimination of Saturday mail deliveries, and raising rates. While I support reviewing all options and believe it is prudent, I want to make it clear that before Congress grants the Postal Service greater flexibility, we should understand why the Service is facing a $2-$3 billion projected loss, and what can be done differently. I wish to invite my colleagues to join the newly formed Congressional Postal Caucus, on which I serve as the vice chairman. Congress should shoulder some of the responsibilities. I am confident that by offering a forum to educate and brief members of Congress on postal matters and concerns, we will be better prepared to work with all stakeholders in finding solutions to our common concerns. I look forward to reviewing the testimony presented at this hearing. __________ PREPARED STATEMENT OF SENATOR MAX CLELAND Thank you Mr. Chairman for giving me the opportunity to speak at today's hearing and address the Postmaster General, Mr. William Henderson, the Vice Chairman of the Postal Rate Commission, Mr. George Omas, the Chairman of the Board of Governors, Mr. Robert Rider and the Comptroller General of the United States General Accounting Office, Mr. David Walker. As you know, the United States Postal Service (USPS) was established by the Postal Reorganization Act of 1970. This act chartered the USPS to perform as a business enterprise, with the freedom to provide ``non-postal services,'' ensuring that USPS could provide universal service reliably, efficiently and as inexpensively as possible for years to come. Furthermore, the USPS was mandated to operate on a self-supporting, break-even basis, with particular emphasis on restraining postal rate increases and providing ``honest, efficient, and economical management.'' The Postal Service is an amazing organization. Its Universal Service program binds the country together by providing inexpensive and reliable First Class mail delivery for every American and every business. The USPS stops at approximately 134 million addresses six days a week and delivers approximately 670 million pieces of mail every day. The Postal Service generates approximately $64 billion in revenue, ranking it 8th in the United States in the Fortune 500 Global listing. In addition, the Postal Service employs approximately 800,000 individuals giving it the nation's second largest payroll, and USPS operates approximately 38,000 postal facilities. Managing any organization this size can be a very difficult challenge, but it was done profitably for much of the latter half of the 1990's. In 1997 the Postal Service turned a $1.2 billion profit, and had been profitable for the years 1995-1999. But in 2000, the Service showed a net loss of $199 million. The Service originally predicted a deficit for 2001 of approximately $500 million. Early in 2001 that projected loss was revised to between $2 to $3 billion, and with a new rise in rates effective July 1, 2001, the loss is expected to be between $1.6 and $2.4 billion. The Service has gone from profitability to billion dollar losses in less than two years. In order to cut costs and pay its bills the Postal Service has frozen all existing capital construction projects, it is studying the feasibility of eliminating Saturday delivery, the Board of Governors voted to modify the most recent rate decision by raising certain rates, and the Service expects to save $3 to $4 billion by 2005 through its ``breakthrough productivity'' plan. I applaud several of the efforts of the Postal Service in attempting to meet this challenge, however, I am concerned about the need to promptly eliminate waste and how these cost cutting measures will affect postal consumers. The Inspector General found approximately $1.4 billion in waste, fraud and mismanagement within the Postal Service. I am aware that eliminating such waste will not alone keep the Postal Service out of debt. However, I would like assurances that USPS is addressing the problems that the Inspector General identified, and I would like to know specifically what USPS is doing to address these issues. Successful attention to these matters could appreciably increase the credibility of the Service in the eyes of the public and could help USPS meet its financial crisis without decreasing service to postal consumers. I have heard from many communities across Georgia that they are experiencing service problems at their existing Post Offices. The lines are too long, there is not enough parking or the Post Office is not big enough to handle the volume of mail going through its facility. Georgia has experienced one of the largest growth rates in the country and many existing facilities are being squeezed in their effort to provide prompt, efficient and reliable service. I have been informed by USPS that projects in Buena Vista, Butler, Columbus-Beallwood, Cotton, Darien, Gray, Guyton, Hawkinsville, Kathleen, Lyons, Macon-Downtown, Marble Hill, Marshallville, McCaysville, Monroe, Monticello, Pine Mountain, Pooler, Pulaski, Roberta, Rupert, Sharpsburg and Townsend will be affected by the freeze. I am very concerned about what the freeze in capital construction projects will mean to these growing communities in Georgia and how long it will last. Furthermore, USPS is studying the feasibility of eliminating Saturday delivery in order to cut costs. While eliminating such delivery may decrease transportation and labor costs, the amount of mail will not decrease and mail delivery will either be delayed or carriers will be paid overtime in order to deliver the mail efficiently in five days instead of six. I would like assurances from the Postal Service that efforts will be made to eliminate waste and increase productivity before any services are cut. Once again, I would like to thank the Chairman and the participants in this hearing for allowing me to speak to you about my concerns. I will review the report for this hearing when it is released and I look forward to working with you in the future on these and other important issues. Senator Carper. If we could do that, we would be grateful, sir. Chairman Thompson. Without objection. Senator Carnahan. OPENING STATEMENT OF SENATOR CARNAHAN Senator Carnahan. Thank you, Mr. Chairman. I would feel remiss if I did not ask you gentlemen which State you would go to, to watch Mark McGwire hit a home run, eat the best barbecue, and enjoy the best country western music? Chairman Thompson. Now, wait a minute. [Laughter.] We will discuss this later. [Laughter.] Senator Carnahan. Thank you, Mr. Chairman. I would like to thank each of the witnesses for being here today. I can remember, as a young girl growing up, the excitement I felt when the postman would arrive with our mail everyday. He might bring us messages from as far away as New York or Los Angeles. He would deliver a letter to any of my relatives, even those who lived in the rural areas. It is an idea as old as the country itself, a National Postal Service, efficient and convenient--connecting every American to every other American. It is a part of our collective experience, but increasingly this idea is in danger. At the recent House Government Reform Committee hearing, Mr. Walker, you testified that the Postal Service is at growing risk of not being able to continue providing universal postal service, vital to the national economy, while maintaining reasonable rates and remaining self-supporting through postal revenue. I am deeply troubled by the current estimates of the U.S. Postal Service's financial situation. I am particularly concerned at the prospect that the Postal Service may reach its $15 billion debt ceiling in just 2 years. I believe that, overall, the Postal Service does an excellent job in delivering the mail. Postal workers in Missouri and all over the country are dedicated and hard- working, but when Americans see postal rates rise twice in 6 months and hear that Saturday service may be eliminated, the Postal Service's reputation is badly undermined. Before we eliminate services, we should ask if the Postal Service can be run more efficiently. Before we raise rates, we should think about the impact on our families and businesses. This situation is serious and warrants attention, both by the management of the Postal Service and by Congress, which is why we are here today. I believe there are three fundamental principles the U.S. Postal Service must abide by. It must provide universal service to the public. It must offer reasonable rates, and it must be self-supporting. If the Postal Service doesn't live up to these three principles, then it's failing its mission and failing the American people. The first principle is that postal delivery is a public service and must be available to all. People depend on it. From those operating small businesses to seniors living in rural areas, who receive life-sustaining medication through the mail. The second principles in ensuring reasonable rates. This is important on many levels, from the individual consumer who mails a few items a week, to the large company, whose livelihood depends on shipping its products to its customers. The Postal Service is an integral part of our Nation's economy. Any changes in postal rates, no matter how small, have ripple effects across Missouri and every State in the Nation. While sometimes rate increases are warranted, they should be carefully considered and evaluated with discretion. The third principle is that the Postal Service must be self-supporting. The Postal Service is a business. There are certain budget realities and constraints that come with that. I sympathize that rising fuel costs make delivery more expensive. This is an issue that businesses and families across the country are struggling with, but fuel costs are not the only factor. We need to look at both the long-term and short-term. I look forward to hearing each of the witnesses' testimony on how costs can be reduced without displacing workers or eliminating services. There are two points that I would like to leave the panelists today. First, such drastic changes in financial projections in such a short amount of time are unacceptable. Our families have to balance their checkbooks and pay their bills, and they expect the same from our government agencies. This service is too important for the books not to be kept in top order. I am eager to learn what steps the Postal Service can take to prevent this from happening again. Second, 6-day mail delivery service must be maintained. This service is essential for Missourians, particularly those in rural areas. It is also important for thousands of small businesses struggling to make it on a very small profit margin. That is why I am supporting Senator Harkin's Senate resolution regarding the need to preserve 6-day mail delivery. The resolution opposes the elimination of Saturday home and business delivery. It calls on the Postal Service to take all the necessary steps to assure that these services are not reduced. Just last week, the Postal Rate Commission approved yet another rate increase. If we cut services while raising rates, we're asking our citizens to pay more for less. We owe them better than that. While I will not be able to stay for the entire hearing, as I have a prior commitment for this same time period. I look forward to reviewing each of the witnesses' testimony and learning from your expertise. Thank you, Mr. Chairman. Chairman Thompson. Thank you very much. Mr. Walker. TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. GENERAL ACCOUNTING OFFICE Mr. Walker. Thank you, Mr. Chairman. I have a full statement which, with your permission, I would live to have inserted into the record and I will move now to summarize. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Walker appears in the Appendix on page 48. --------------------------------------------------------------------------- Chairman Thompson. It will be made a part of the record, without objection. Mr. Walker. Thank you, Mr. Chairman. I am pleased to be here today to participate in this joint hearing on the financial outlook and transformational challenges of the U.S. Postal Service. Overall, the Service faces major challenges that collectively call for a structural transformation if it is to remain viable in the 21st Century. A structural transformation of the Service is called for because the Service faces major financial, operational and human capital challenges. It is a growing risk of not being able to continue providing universal postal service, vital to the national economy, at reasonable rates, while remaining self-supporting from postal revenues, the three criteria that Senator Carnahan articulated. Accordingly, in April 2001, GAO placed the Service's transformational efforts and its long-term outlook on our high-risk list. This inclusion on our high-risk list will focus needed attention on the dilemmas facing the Service before the situation escalates into a crisis where the options for action may be more limited and costly. The key factors that contributed to our decision to place the Service's transformational efforts and its long-term outlook on our high-risk list included the following: The Service's financial outlook has deteriorated significantly. Its borrowing is increasing, and the Service's debt is approaching the $15 billion statutory limit without having a specified debt reduction plan in place. In addition, the large number of retirements expected over the next several years will place even more pressure on the Service's expenses and its need for cash. The Service recently deferred capital investments to conserve cash, thus delaying certain needed infrastructure improvements. These deferrals appear likely to continue in the current environment. In March 2001, the Postal Service Board of Governors wrote to the President and the Congress, asking for a comprehensive review of postal laws, and noting that the threat was serious and significant with regard to whether or not the Postal Service would be able to continue to achieve its mission in future years. Potential losses in First-Class mail volume over the next decade could create large financial deficits, leading to a situation where universal postal service could ultimately be threatened, prices would likely increase at a much faster rate, and other options would need to be explored. The Service is subject to several statutory and other restrictions that serve to limit its transformational efforts; the binding arbitration requirement, the rates-setting process and the facility closure restrictions being examples of these restrictions. The Service has also had periodic conflicts with some of its key stakeholders, including the postal unions and the Postal Rate Commission. We have noted longstanding labor- management relations problems that have hindered improvement efforts, including three labor agreements that cover over half of the Postal Service's workforce, that expired in November 2000, and will now evidently be resolved through binding arbitration. In addition, the Postal Service and the Postal Rate Commission have had long-standing disagreements concerning pricing decisions. Finally, two key leadership positions need to be filled regarding postal operations and rate setting; namely, a successor to Postmaster General Henderson and a successor to the chair of the Postal Rate Commission. Although the Service has announced some steps to address its growing challenges, it does not have a comprehensive plan to address the numerous financial, operational or human capital challenges that we have noted. In April 2001, we recommended that the Postal Service provide quarterly reporting on its financial and operating results and projections, in order to enhance transparency and improve accountability in connection with these matters. In addition, we also recommended that the Postal Service develop a transformation plan in conjunction with Congress and other key stakeholders that would address the major challenges facing the Service. Postal Service officials told us that they generally agree with our recommendations, and in that regard I recently met with Deputy Postmaster General Nolan, and we discussed ways in which the Service could move to begin to address our recommendations. We appreciate the difficulty of this task, given the long- standing nature of the structural problems and major differences in stakeholder views, many of which are outlined in my statement. As I mentioned, we at GAO have already started to reach out to some of the affected stakeholders, to try to obtain an understanding as to their current positions. Some of that is outlined in my statement, and I think you will note that there are some significant differences of opinion in that regard. But the sense of urgency in connection with the Postal Service is growing. The basic statutory framework that governs the Postal Service has not changed since 1970, despite the fact that there have been significant developments in technology and a much more competitive marketplace that provide alternative forms of communication and delivery choices to both businesses and consumers, and these are likely to continue to escalate in the future. The Service's ability to provide universal postal service at reasonable rates will be increasingly threatened unless changes are made, both within the constructure of current law, as well as through relooking at the legal and regulatory framework that governs the Service. I thank you, Mr. Chairman. I would be more than happy to answer any questions at your pleasure. Chairman Thompson. Thank you very much. Mr. Henderson. TESTIMONY OF HON. WILLIAM J. HENDERSON,\1\ POSTMASTER GENERAL, U.S. POSTAL SERVICE Mr. Henderson. Thank you, Mr. Chairman. First, I want to thank the Senate for its cooperation. I have 17 days left after 30 years of public service in the Postal Service, and I have enjoyed it very much. It has been an interesting job, from being postmaster of Memphis, Tennessee for several years, to postmaster of Greensboro, postmaster of Stockton, California, and running plants all across America. It has been very interesting. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Henderson appears in the Appendix on page 77. --------------------------------------------------------------------------- Let me say a couple of things, and I will submit my statement for the record. First of all, we agree with the General Accounting Office on their assessment of the Postal Service and of the Postal Service's future. There is no disagreement there, and it is something we have had extensive discussions on. Second, and let me try to put the future of the Postal Service in kind of precise terms. What do you do when your revenues decline and your labor costs are controlled by an independent arbitrator? If you look at the structure of the expenses, you have 14 Presidentially-appointed individuals. That is the Board of Governors and the Postal Rate Commission, whose primary job it is, is to ensure affordable prices for the American public, 14 Presidential appointees, constructed in 1970 by the Postal Reorganization Act. In effect, when you look back 30 years, and you look at what controls the price of postage--it has been the cost per hour, which has been determined by an independent arbitrator; and that fact is something that needs to be changed. I am not opposing collective bargaining, and no one in the Postal Service is; but the fact that when we constructed--the United States constructed--the Congress constructed the PRA, one of the most important aspects of that construction was how do you control postage rates? How do you do that? Do you set it up with administrative law judges? How do you do that? The major mandate, the major obligation, of nine Presidentially- appointed Governors and five Presidentially-appointed Postal Rate Commissioners, is to set the rate of postage, and, in effect, causally, that rate is set by an independent arbitrator, and that is something that creates a problem for the Postal Service. You put that in the context of now what do you do when your revenues--that is, the demand for postage--goes down? You have whatever it be, mergers and acquisitions, Internet as opposed to standard A, competitors as opposed to packages--how do you respond to that? It is very difficult for the Postal Service to respond to a lessening of demand. For example, your letter carrier delivers, on the average, about $1.75 postage to every household in America today. That is to break even. So what happens when you get 20 percent less postage? You do not stop delivering mail. You do not do those sorts of things. You do not go from overnight to 2- or 3-day service. You simply absorb that cost. What happens when the price of fuel--how long has the price of fuel been going up now? A year-and-a-half? I bought a Dodge Durango 3 years ago, and I filled it up with regular gas at 99 cents a gallon. Today, that is almost $2 a gallon. For every penny in gasoline, it costs the Postal Service $5 million. It does not have the ability to put a surcharge, like our competitors have, or like the airlines have, or even now, I went into a hotel--I stayed in a hotel the other day; had a surcharge on my room for energy cost. The Postal Service does not have that ability. It accumulates those costs and then dumps them at a point when it changes prices. Those are antiquated ways of dealing with the future, I would urge you to look at that in the coming days, to look at the statutory construction of the Postal Service, because it is my belief that it is very important to America to have universal service, to have affordable rates, to have an access system. We talk about the digital divide. One of the things that we are doing with Senator Stevens in Alaska is providing access vehicles, small devices in lobbies and certain places, testing them, so that Alaskans who cannot afford to buy computers or cannot afford to buy access modems, can go to their post office and cross that digital divide without having a barrier of $1,500 or $1,000 for an Internet device, and I think that is very important. So I think the Postal Service is relevant today. It has a strong ubiquity all across America, and it needs to be reexamined in light of its statutory construction. Thank you, Mr. Chairman. I would be happy, at the appropriate time, to answer any questions. Chairman Thompson. Thank you very much. Mr. Rider. TESTIMONY OF HON. ROBERT F. RIDER,\1\ CHAIRMAN, BOARD OF GOVERNORS, U.S. POSTAL SERVICE Mr. Rider. Good morning, Mr. Chairman and Members of the Committee. I am Bob Rider. I am Chairman of the Postal Service Board of Governors. I appreciate very much this opportunity to discuss the challenging universal mail service and the necessity for legislative reform. However, before I start, I would like to publicly recognize the 30 years of service given to the U.S. public by our Postmaster General, Bill Henderson. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Rider appears in the Appendix on page 83. --------------------------------------------------------------------------- Bill, as you are all well aware, is retiring on May 31, and we all want to wish you well. Mr. Henderson. Thank you. Mr. Rider. The mission entrusted to the Postal Service by Congress is to provide universal mail service to every address in all communities and neighborhoods throughout the United States at affordable prices. This mission of inclusion and facilitation for the Nation's business and personal life is as fresh and relevant today as in the country's beginning. The American people have always enjoyed among the lowest rates and best service in the world. Throughout its history, the Postal Service has grown with the Nation. We still add over 30,000 new addresses each week to the distribution and delivery network, while keeping average price increases below the rate of inflation. This is the equivalent of a brand new city of Chicago every year. We have had only two rate filings since 1995, both times just a penny on First-Class rate. We have done this by restraining cost and improving productivity, as service networks expand to handle the Nation's growth. In recent months, several forces have combined to upset the balance between revenue and cost for this year. Postal revenue growth has slowed with a weak economy, accounting for an expected shortfall between $500 million and $1.5 million. The Postal Rate Commission recommended rates lower than those the Postal Service had proposed and our financial plan had assumed, increasing our net loss by $100 million. Other costs, such as fuel, have grown due to rising prices, adding about $150 million in this fiscal year. Taking these factors in combination, we currently believe the fiscal year 2001 net loss could exceed $2 billion. The law provides us a limited opportunity to deal with this shortfall. As finances have suffered, the board has attacked the problem with the tools that we have available to us. Earlier this month, the Governors reluctantly decided we must exercise our authority on the record of the most recent rate case, to modify postage rates to adjust a shortfall of about $1 billion, through a rate adjustment averaging 1.6 percent. We took this action to protect the financial integrity of the universal mail system. Because the adjustment comes so late in the fiscal year, this move yields only about $200 million in a shortfall in the remainder of this fiscal year. In recent years, the Postal Service has had good success with programs for managing work hours and other controllable cost elements. Last year's productivity improvement of 2.5 percent was the best since 1993. In current circumstances, however, extraordinarily and, unfortunately, painful additional measures are essential. First, we have eliminated $1 billion from the capital commitment budget for this fiscal year in order to conserve the cash to pay our bills, and to reduce future commitments to match cash flow. Next, we have directed management to prepare another rate filing, to get the Postal Service back on a pay-as-you-go footing, maintain financial viability and achieve breakeven, as the law mandates. Also, we have directed management to take a fresh look at all operating expenses, to realize additional savings. A number of these actions are now in place, among these are a hiring freeze at headquarters. Management has eliminated over 1,100 headquarters and headquarters-related positions since the beginning of this fiscal year, along with 20 percent, or 232 of the positions in our area offices. These reductions are continuing at headquarters, area and district offices. Also, a nationwide freeze in the hiring of processing and distribution clerks. So far, we have over 7,000 fewer career clerks on the rolls than at the end of last fiscal year; also, a series of comprehensive area mail processing studies, which identify opportunities to consolidate operations and to reduce expenses. Many of the delayed capital projects are badly needed. Their postponement will make it difficult to meet the needs of our customers and our employees. The board's responsibilities, nevertheless, require us to make sure that financial resources are on hand to pay bills when they come due. Every 2 weeks, these bills include one of the Nation's largest payrolls, providing the livelihood of more than 800,000 postal families. In the years ahead, cost-cutting and rate increases within our current statutory framework are not sufficient for the Postal Service to keep pace with today's market dynamics. More businesslike management is required to maintain the financial integrity of the Postal Service and the foundation for universal mail service. The outdated statutory framework both contributes to current financial problems and severely limits what can be done about them. The Postal Service has limited authority over its prices, services, wages and other management levers in the postal system. The cumbersome history of the recent rate case, which took almost 2 years to complete, from preparation to finish, spending periods of both economic boom and economic slowdown, illustrates part of our problem. None of the private firms whose services compete with or substitute for the mail go to every household every day. The Postal Service delivers to 136 million addresses 6 days a week. To break even, we need an average of about $1.75 to $2.00 in postage for each delivery point every day. Three-quarters of all households do not receive that much mail each day. If universal service does not remain economically viable, many Americans will not get the level of service or the affordable prices they are accustomed to receive. The most advanced nations around the world are rapidly modernizing and reorienting their postal systems. The Postal Service delivers 40 percent of the world's mail, but America lags far behind in postal reform. The overseas posts are reorganizing to protect their universal service and keep their rates affordable. Many now come over here to compete for some of our mail. Without vigorous postal reform in the United States, this country faces increasing pressure on the economic foundation for universal service at affordable prices. The American people should not have to face this result. The United States should continue to have the best, most modern postal structures and services in the world. We pledge that the Postal Service will do all that we can, both to manage the current challenge and to contribute to the success of a comprehensive postal reform measure. Thank you, Mr. Chairman. I would be pleased to respond to any questions at the appropriate time. Chairman Thompson. Thank you very much. Mr. Omas. TESTIMONY OF HON. GEORGE A. OMAS,\1\ VICE CHAIRMAN, POSTAL RATE COMMISSION Mr. Omas. Thank you, Mr. Chairman. My name is George Omas. With me today are my fellow commissioners, Danny Covington, Ruth Goldway,\2\ and Trey LeBlanc. As you know, and has already been mentioned, the position of Chairman of the Postal Rate Commission is currently vacant. I was elected vice chairman by my colleagues and have been performing the administrative functions of the chairman since February. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Omas appears in the Appendix on page 88. \2\ The prepared statement of Ms. Goldway appears in the Appendix on page 137. --------------------------------------------------------------------------- Mr. Chairman, at this point, I would like to request the Committee accept my written testimony that I submitted in advance of this morning. Chairman Thompson. It will be made a part of the record. Mr. Omas. I would like to focus my statement this morning on responding to a specific question; the letter inviting me to testify here today asked whether I concurred with the Postal Service's projection of a $2 billion to $3 billion deficit. The short answer to that is that I cannot evaluate that estimate. The Postal Service has not provided any systematic explanation of its multi-billion dollar projections. The imprecision of its forecasts makes it impossible to evaluate their reliability. The Postal Service may have detailed analyses that justify these forecasts, but such analysis have not be made available to the public or to the Postal Rate Commission. The Commission's primary function is to respond to the Service's requests for rate and classification decisions. The Postal Service provides detailed supporting cost data when it asks the Commission to recommend rates. However, after the Commission provides its recommendation, the Commission does not have ready access to data that would enable it to know what portion of the Postal Service's rate case cost projections were mis-estimated. From the limited data available to the Commission, it appears that the major causes of the current losses are costs that are substantially higher than the Service projected just a few months ago. Some of those who think that drastic legislative action is necessary, think that projected deficits may have resulted from a decline in volume caused by growth of electronic communication, but mail volumes are not declining. It also has been suggested that the mix of mail has changed and that the Service is now delivering less-expensive mail. But from the data currently available to the Commission, it appears that the major cause of operating losses are costs that are higher than the Postal Service expected. The Commission has examined the Postal Service's limited preliminary cost reports for the first half of fiscal year 2001. We have annualized these results for the first six accounting periods of 2001 data and compared those figures with the revised annual projections estimated for fiscal year 2001 at the end of the most recent case. This comparison is quite revealing. Comparing seven important cost elements, the Commission finds that if current cost patterns continue, the Postal Service is likely to incur $1.8 billion more in cost in 2000 than it had estimated to the Commission in July 2000. My written testimony, on page 14, includes a table that shows the seven cost elements and how inaccurate the Postal Service cost projections may have been. To me, this result undermines many of the arguments suggesting that radical reform of price-setting mechanism is necessary. Mr. Chairman, skyrocketing costs are not the result of volume losses to electronic mail. Skyrocketing costs are not the result of mailers doing more work sharing or switching to less-expensive postal products. Skyrocketing costs, again, are not the result of a failure to rapidly bring new products to the market. I thank you, Mr. Chairman. I would be pleased to answer any questions. Chairman Thompson. Thank you very much. Well, you have touched on a lot of things that we need to get into today, but I would like to try to lay a little groundwork. Most of our conversation, when we talk to you gentlemen, has to do with rate increases. We demand that you do not increase rates, nor cut any services, and I am sure we will go through all of that. But what I am interested in, is about our particular State--our neck of the woods--I want to make sure nothing has changed there. We have got to protect ourselves, protect our constituents--but even that is really the tip of the iceberg. I think what today can do is provide us a useful forum for discussing the reasons for these cost increases. It can help us get underneath some of the causes of what is going on with the Postal Service, fundamentally, and what we need to do about it. It seems to me at the outset that, clearly, Congress is going to have to recognize that we cannot continue to demand the same kind and quality of services that we have always demanded. We cannot make such demands while putting requirements on the Postal Service that drive up costs and mandate losing operations, such as post offices and things of that nature, which are desirable, but just not cost-effective. We have got to revisit these issues. On the one hand, there are certain things that you have no control over like requirements we put on the Postal Service. On the other hand, there are also certain things that you do have control over. And as far as labor and other groups that are interested--competitors, customers and so forth--we all have our interests. We are all going to have to come to the table and do something different, because it is quite obvious, if you know the GAO and read the reports, and know Mr. Walker, you know that he is not given to hyperbole. I read between the lines. It is obvious that the ox is in the ditch, big-time. Mr. Walker, just for a minute, let's project out as to what we are dealing with here and what we are looking at. What do we know? Well, first of all, we know that there have been two rate increases already this year. The estimates of where they are have wildly fluctuated, from a surplus at the beginning of last year to estimates of a $2 to $3 billion deficit in February of this year. Now, they are talking about somewhere in the neighborhood of a $2 billion deficit, even after the rate increases, somewhere between $1.6 billion and $2.4 billion for 2001; is that correct, basically? Mr. Walker. That's correct, Mr. Chairman. Chairman Thompson. This assumes more optimistic economic forecasts, otherwise the numbers would be worse. It also assumes meeting certain aggressive revenue growth and cost reduction objectives; doesn't it? Mr. Walker. It does make certain assumptions. Chairman Thompson. Objectives that have never been met before; have they? Mr. Walker. Not consistently. Chairman Thompson. So I think the $2.4 billion possibility is probably low, if you look historically. We have two rate increases. It looks like we are probably going to have another one in July, right, Mr. Henderson? Is that the way it is looking? Mr. Henderson. Actually, it depends on what the economy does, and, as you were talking about, where the losses end up. I think July is probably a bit early, based on current information, but certainly it is looking at another rate increase in the near-term. Chairman Thompson. The near-term would certainly be sometime later this year? Mr. Henderson. That is correct. Chairman Thompson. The speculation has been in the 10 to 15 percent range. Is that reasonable? Mr. Henderson. Based on the existing economy, that is in the range of what it looks like, although we do have a committee that is looking to some alternatives to that type of a rate increase, to try to minimize the impact on the customer. That is being headed up by the Deputy Postmaster General, John Nolan. Chairman Thompson. So, again, getting back to the groundwork. That will be three rate increases in 1 year, a multi-billion-dollar deficit. No real feeling as to what effect that is going to have on business. Some of your postal business, of course, is very cost sensitive, and when your rates go up, your business goes down in some of these areas. Is that not correct? Mr. Henderson. That is correct. Chairman Thompson. So we will have to figure that in, too, which will again exacerbate the problem. As I say, this is based on, to me--these are my words--kind of rosy estimates in terms of revenue growth and cost reduction objectives. So that is where we are. Looking out into the future, Mr. Walker, correct me if my analysis is wrong here. But it is not really an analysis, it is really a rendition of the factors that we are going to have to deal with. One is that in all probability we are going to see a decrease in First-Class mail. First-Class mail is about two-thirds your revenue, is it not, Mr. Henderson? Mr. Henderson. Right. Chairman Thompson. We will probably see a decrease in First-Class mail. Your labor situation is not going to get any better, is it, Mr. Henderson? Mr. Henderson. No. Chairman Thompson. And certainly not in the near-term. The thing that jumped out at me, too, along those lines, Mr. Walker, is the retirement cost that you do not hear a lot of talk about. You say in your report, ``The Service has mounting debt and many billions of dollars in liability for future retirement and worker's compensation expenses. These liabilities have increased in part because the Service was statutorily mandated to assume responsibility for funding all cost of living adjustments and health benefits for its retirees since July 1, 1971. For the remainder of this decade, these liabilities will continue to have an increasing impact on the Service's future cash flows, placing the Service under growing financial pressure.'' We talk a lot about the fact that many government workers, almost half, are going to be eligible to retire in 5 years. It is certainly true with regard to the Postal Service. You are going to have a high rate of potential retirement in the near- term, and that is going to have a major impact. You are already up to some high numbers, in terms of retirement benefits, which are projected to reach $14 billion in fiscal year 2010. So these retirement payments are going to have a major impact, in addition to everything else that we are talking about. It is going to be an additional load on the back of the Postal Service; is it not, Mr. Walker? What is the significance of that? Mr. Walker. There will be a significant cash flow drain associated with being able to make the payments for these retirement benefits. There is about a $30 billion liability that the Service has right now, I believe, attributable to unfunded past service-related cost for CSRS. The $14 billion, I believe you referred to, Mr. Chairman, is the Service's anticipated future annual retirement cost in fiscal year 2010, which also includes employees that are under FERS and the Federal Thrift Savings Plan, as well. Mr. Henderson. Mr. Chairman, if I could add to that, there is a talent drain, too. The executive ranks of the Postal Service, which account for about the top 1,000 executives, 71 percent of those are over the age of 50. There are only nine executives in the Postal Service under the age of 40--no, seven. I take that back--seven executives under the age of 40. So not only is it a financial trade, you are going to have a huge brain drain here. Chairman Thompson. Mr. Walker has been telling us and trying to explain to us for some time now that this is a government-wide problem. We have reduced our workforce with no strategic plan. We have a requirement for more and more qualified people, highly-qualified people, especially in the technical branches. We have been reducing our workforce with no plan toward what the government needs to do. I am sure that this is true in the Postal Service, as well as everywhere else. So, again the factors we are going to continue to see are probably rate increases, if we go on the current pattern. That has got to affect the bottom line in these areas that are cost sensitive. Some people are going to quit using the Postal Service because of the price. We are going to see a decline in First-Class mail continue. You are going to see continuing labor problems. Your labor situation is built-in, and the retirement part of all of that is going to be increasingly onerous. Your productivity, while you are trying, has been a real failure of the Postal Service. I mean, it does not look like to me like you are going to increase our productivity enough to make any measurable difference. While you have increased productivity 11 percent since 1970, your productivity has actually declined in 5 of the last 7 years. This occurred even though the Postal Service has spent billions of dollars in automation and technology trying to improve productivity. With regard to the Postal Service's efforts to have other businesses to generate alternative streams of income, such as e-commerce and things of that nature, you budgeted $230 million. You wound up making $2 million for fiscal year 2001. There does not seem to be any Lone Ranger coming over the horizon to save that day, in terms of making money in these new ventures. There is no plan, as I understand, Mr. Walker, with regard to these financial problems that the Postal Service has. Either with regard to the finances, or the costs, or the projections, or the human capital part of the equation, there is no plan, is that correct? Mr. Walker. There is not a comprehensive, integrated plan that would include transformational proposals, as well. No, there is not. Chairman Thompson. We are losing our Postmaster General and we are losing the Chairman of the Rate Commission. Other than that, everything is all right. [Laughter.] So the idea that we can spend all of our time on these details and not recognize that we have got serious underlying problems is really keeping our head in the sand. Mr. Walker. Mr. Walker. If I may, Mr. Chairman, I think the bottom line is the status quo is not sustainable. We must recognize that there are a variety of structural problems that need to be addressed. The answer is not merely to increase rates or merely pursue incrementalism, to do a little bit more here, a little bit more there. We need to engage in a fundamental reexamination and transformation debate in connection with the Postal Service. Quite frankly, we need to be able to put on the table things that historically have not been put on the table. For example, what is the definition of universal postal service? Right now, the definition might be 6 days a week everywhere. Clearly, whatever that definition is has to be met in rural Maine, rural Alaska, and other remote areas, irrespective of the cost. That is essential, because it is part of the fundamental definition. But what is the appropriate definition of universal postal service, given changes in technology, given alternative forms of communication that exist today? Chairman Thompson. And what are we willing to pay for it? Mr. Walker. And what are we willing to pay for it, and should one size fit all? For example, in many areas such as health care, you have a basic guarantee and you have options. If you want more than the basic, you can get it, but the question is at what price? So what we need to do is rather than looking back--yes, we need to learn from the past--but the status quo is unsustainable. We need to basically engage in a fundamental examination and we need to look forward, in light of not just today, but the changes that we know are coming tomorrow, some of which you mentioned; the fact that more and more bills are being transmitted and paid electronically. Other countries have already seen this. A lot of that involves First-Class postage, the 34-cent postage, the transmittal of payments. First-Class postage covers about 70 percent of the Postal Service's overhead costs. So there are fundamental issues here that we have got to deal with, and we are not going to be able to deal with then through incrementalism. We are going to have to put some proposals on the table, with pros and cons, that you have to look at as a package, because if we look at each element by itself, it can easily be torn down; but then again, we have to keep in mind, the status quo is unsustainable. It is like Social Security and Medicare; the status quo is unsustainable. Ultimately, we have to do something. Chairman Thompson. You have touched on something very important about government, and that is the fact that there are some areas where that is true, and the status quo is unsustainable. The question is not whether or not it is unsustainable, because it clearly is. The question is whether or not it has to get a lot worse before it gets any better. Whether or not the whole thing has to collapse and we have got to have a massive infusion of appropriated funds up here overnight someday. It is going to be a surprise to everyone. Or whether or not we can go about doing something before then. We are going to be here for awhile, but I do not want to take all the time this morning. So I am going to wait till my next turn for some other questions. Senator Carper. Senator Carper. Thank you, Mr. Chairman. Hockey great Wayne Gretzky was once asked, ``Why are you such a good hockey player,'' and he replied, as some of you have heard, ``I go where the puck will be, not where the puck is.'' We have talked today about what your business was like 30 years ago, Mr. Henderson, when you joined up, and 20 years ago, 10 years ago, today, the environment in which you compete. Let's talk about what it is going to be like a few years down the line. I turned to the Chairman during, I think, Mr. Rider's comments, and I said, ``You know, it would be interesting if we had a futurist here, who actually thought about these kinds of issues and could look down the road and take us with him or her.'' Let me just ask each of you to put on your futurists hats for a minute, a minute apiece, and we will start over here with Mr. Omas. But I am just going to ask you, put on your hat as a futurist. Where are we going to be 10 years from now? What is the environment that the Postal Service is going to be competing in 10 years from now? Mr. Omas. Well, I think that one of the places the Postal Service should look is at its core business, that is, of delivering mail. Many of the new markets, whether it be in electronic mail or whatever, have not really--as we all know-- turned any revenue for them. In fact, it has cost the Postal Service a great deal of money. As one GAO report said a couple of years ago, I think they lost over $88 million on several endeavors like T-shirts. I think that in the future the Postal Service should look at--it has a tremendous ability to deliver--they have the household--they have the structure, and I think they should look at that core business and expand on developing other products or whatever to be delivered by the Postal Service. Senator Carper. Thank you. Mr. Rider, what will be the competitive environment 10 years from now for the Postal Service? Mr. Rider. Well, looking back, Senator, we have not done such a bad job. In 1971, when the Postal Reorganization Act was passed, postage was 8 cents. It has gone up 325 percent since then, but the CPI has gone up 343 percent. In the last 10 years, postage went up 36 percent and the CPI went up 37 percent. In the last 5 years, postage went up 6 percent---- Senator Carper. Excuse me. This is all well and good. I appreciate your setting the record straight. These are important things to get straight, but that is not what I am asking. What I am asking is where are we going to be 10 years from now? What will the competitive environment be like 10 years from now? Mr. Rider. We are mandated to give universal service, and I think it is very important, as the Senator from Alaska has stated. We need to give universal service, but we have got to have the tools to work with, in order to provide that, and those tools have to come through reform. Senator Carper. You have answered two questions, neither of which I have asked. [Laughter.] And those are good answers, but unfortunately not the question I am asking. Just think about it for a minute. Mr. Rider. What is it in the future? Senator Carper. Ten years from now, what do you think it is going to be like out here--to compete with? Are we going to have more E-mail, more fax machines? Mr. Rider. You will be ordering stuff over the Internet just like that, but you cannot deliver it over the Internet. It is going to have to come from point A to point B to get to your house. That is where we should come in. Senator Carper. Mr. Henderson, 10 years from now, you will have your feet up somewhere. Mr. Henderson. That is right. I will be looking at a partially-privatized Postal Service. I think that the Congress, over the next decade, will privatize the Postal Service and make it an independent organization. I think a monopoly will be gradually reduced and open to competition. The reason I say that is not because of any insight into the U.S. Postal Service, but insight into the Postal Service's world. If you look at the Deutsche Post, which has testified before Congress, they are on the open market. I think that is going to happen, and I think there is a lot of resistance to it today. It is kind of like speaking about the devil, but eventually that is going to happen and this Congress is going to do that. Senator Carper. Thank you. Mr. Walker. Mr. Walker. I think evolving technologies will continue to have an adverse effect on the traditional services provided by the Postal Service. I think competition will increase, and I think because of that, the Postal Service needs to step back and say what is core? What are the core products and services that need to be provided? What is universal service? To what extent should non-core services be provided, and, if they are going to be provided, based upon what market analysis? What competitive advantage does the Postal Service have to be able to do that, verses private sector entities? In many cases, I think there will be more public-private partnerships. I think, as Postmaster General Henderson mentioned, whether or not the Postal Service will ever be privatized or partially privatized is obviously a major issue, and I am not going to comment on whether it should be or not. That is not my job. But I will tell you we have to look overseas and find out what other countries are doing. We are a much larger country. We are much more geographically dispersed, and we have different wants and needs than other countries do, but we can learn from what some other countries have done in this area. Chairman Thompson. Excuse me, but their postal services are now over here, competing with us in some instances, isn't that correct? Mr. Walker. That is right, for international bulk mail, and presumably they could try to expand that, to compete in other areas where they could skim. Senator Carper. If you would turn to your employees, the folks who are out there sorting mail today, the people that are out there delivering mail today, and say to them, ``Help us solve this dilemma,'' any kind of idea what kind of recommendations they would make, the people actually close to it, do it every day? What kind of recommendations would they make? Mr. Henderson. I think they would say put pay-for- performance in, which is an issue; incentivize both revenue and cost-reduction efforts. Senator Carper. Have you had the opportunity to experiment with that at all? Mr. Henderson. We have in management, but not with the unions. We are pursuing that right now with the unions, in collective bargaining. Senator Carper. Is there any interest on the other side, on the labor side? Mr. Henderson. There is a discussion. I would not call it an interest. There is a discussion. I would say that they would say have more self-management, cut back supervision because everybody is an adult. They would say take out the monotonous tasks, capitalize it--when I say capitalize it, I mean automate it, the monotonous tasks, because people really want to--they want to be involved in their work. They want to contribute. The average postal worker is a very dedicated, educated individual. So they want to contribute. It is the system where they do not contribute. It is the fact that you stack mail on a sorter, and that is what you do. That is a job we ought to eliminate. They would say reengineer some of that work. It is much like the automobile industry where you are putting a lug on a wheel. You want to eliminate that job, because that is not something that a human being wants to do all day long. They would give you that kind of feedback. But they are very dedicated to service. My father was a railway mail clerk for 38 years, and service was just--if you missed a pouch at a post office on a train, he would go nuts. They would try to stop the train, and I think you have that attitude, especially amongst letter carriers and rural carriers in America. That is why you have mail service at the high levels that it is today, measured by Price Waterhouse. It is because of a lot of dedication. Senator Carper. Let me ask, and I am not sure who to direct this question to, and this will be my last one, Mr. Chairman, and then I will pass it on. In terms of initiatives that have been launched by the Postal Service in the last several years, where you have attempted to be more entrepreneurial, can you cite for me some examples where you think you have been pretty successful, maybe an example or two where you think you could be if we would allow you to be? Mr. Henderson. I think the area where we could be, if you would allow us to be entrepreneurial, is in negotiated rates with customers who provide efficiencies in mail preparation that we could pass on. Right now, it is essentially one-rate- fits-all, and, I mean, you have all been in business at some level or another. You know that if you do not control your pricing or do not have the ability to control your pricing on a near-term basis, you are very limited in what you can deal with, and I think that is a fundamental problem with the Postal Service. The other thing in being entrepreneurial is speed-to-market is very important. I have been in business prior to the Postal Service. If you do not have speed-to-market, you are not going to be entrepreneurial, and we have no ability to really have speed-to-market. We have to go through a public hearing, and if we are going to sell a very entrepreneurial service and you have to have a public hearing, somebody is going to beat you to the market. So the limit of pricing and speed-to-market are two inhibitors that are just obvious to anybody who has run a business. Senator Carper. Mr. Rider. Mr. Rider. I was just going to say that freedom in pricing does not necessarily mean the freedom to raise rates. It means the freedom to reduce them during periods of low-volume. We have periods during the year when our volume is just normally low. We have periods when the volume is high. If we had the freedom of pricing flexibility, we could encourage people to mail during that off-season and raise the rates during the heavy season, to help even out that mail flow. Senator Carper. Mr. Omas. Mr. Omas. Senator Carper, I think that the statute, Title 39, as it now stands, allows for flexibility. There is nothing in the law that says that they cannot innovate. Because it is a monopoly, before the Service can negotiate a contract, it should be brought out in the public so that competitors--to see what effect it will have on the stakeholders that do the mailing. As far as--we have done a number of expedited cases in the last couple of years that, in essence, are a form of negotiated service contracts. We did the ride-along and things like this that specifically hit a market. So there is flexibility now, except that the law requires that it be brought to the public's attention before these services are negotiated. Senator Carper. Thank you. Mr. Walker, the last word? Mr. Walker. One of the problems, Senator Carper, is if you look at the cost structure of the Postal Service, a very high percentage of their costs are fixed costs, rather than variable costs, which means that they have very little ability to be able to adapt quickly to changes in revenue streams, and that is one of the things that is going to have to be looked at. They have a significant fixed cost structure, and it goes beyond just the issue of infrastructure, which, quite frankly, is not just a Postal Service issue. It is a government-wide issue, in light of technological changes that have occurred over the years, but it is also in the area of labor cost, as well. I know, for example--at least it is my understanding-- correct, me if I am wrong, Mr. Henderson, that they have, for example, a policy whereby when people are hired in, they are on probation for 2 years. So theoretically they can do something with regard to headcount with regard to those individuals, but for people that have more than 2 years, they have very limited flexibility. The problem is the last thing in the world you want to do, in light of the retirement eligibility rates that the Postmaster General mentioned earlier, is to say if you have just been here for 2 years, you are going to be the first one to go. That compounds your problem, and so one of the things that has to be looked at are some of these structural issues and how they can gain more flexibility over some of these. Senator Carper. Well, Mr. Chairman, I find this whole issue just fascinating. I do not know who on this Committee is interested in leading the charge, if it is you or Mr. Cochran over there or others, but I want to sign up to be a part of the solution and to work with folks here at the table, the people who will be taking your seats, and those who represent the employees of the Postal Service. This is an important issue and it is one that I look forward to joining you. Chairman Thompson. Thank you very much. I now call on the Subcommittee on International Security, Proliferation and Federal Service's Chairman, Senator Cochran. Senator Cochran. That is quite a title. It is hard to live up to all that. Mr. Rider, you mentioned the time it took to respond to the last rate increase request. It seemed like a long period of time to me. One question that I have is whether or not we should impose a statutory limitation of time within which a request for a rate increase must either be denied or approved. Mr. Rider. Well, that would certainly help, but with the regulations as they are today, it takes us 6 months or more to prepare for a rate case. With the Postal Rate Commission, it usually takes them---- Mr. Omas. The statutes allow 10 months. Mr. Rider. Ten months. Senator Cochran. So there is a limitation. Mr. Omas. There is a limitation. Senator Cochran. Should it be shorter? Is that justified? Why does it take so long? Mr. Omas. The problem is that when the Postal Service submits their rate recommendation or a rate case, it is the first time that we have ever seen the figures, and by the time those figures are published and you get them out to the stakeholders and those who are in the mailing community have a stake in what the rates will be, they must then present a case, and then that takes about 3 months, and then the Postal Service rebuts their case. So the thing we get from the stakeholders and the community all the time is there is not enough time. Actually, at the end of the 3 months for the stakeholders and approximately 3 months for the Postal Service to review the case, we at the Commission have about 6 weeks actually to put together and to analyze the public record to make our decision. Senator Cochran. Let me ask a question on another subject. We have had an interest in the new businesses that the Postal Service has gotten into, and Mr. Henderson and Mr. Walker will realize that we have had a couple of hearings. We have had two GAO reports on this subject, specifically dealing with the e- commerce activity of the Postal Service. One question that I have is how much revenue is the Service counting on from its new products and services, such as e-commerce? Is the Service on track to achieve this target? I should ask Mr. Henderson. Mr. Henderson. It is minuscule. The Postal Service is a $65 billion organization. It is not going to reinvent itself into another $65 billion organization. If you look at what the Internet does--I will tell you in a nutshell what the strategy is. The biggest strategy the Postal Service has for the Internet, and it is what large businesses across America are doing, is using the Internet to take friction out of itself. In other words, take personnel. Do it on a Web site instead of going to a personnel system. Take purchasing, do it electronically instead of talking to a purchasing agent. It has nothing to do with selling a business. It has everything to do with cost-cutting. The second thing that the Postal Service is doing with the Internet is creating an information platform that allows customers to watch their mail, and that adds value. Whether or not we charge for that insight or not is yet to be determined. It develops an activity-based accounting system, and it allows managers to have better information about things that are going on in the Postal Service so they can make better decisions. Those are the two biggest initiatives of the new technology age, and it is not really about selling services. There has been a lot of hype. We have experimented with some of that. We have eBill Pay, for example, the largest electronic bill payment site. The major use of that is to see what the trends are, because we have $17 billion of our $65 billion in bill payments and presentment. We think that is going to go away. The GAO has talked about that, about the potential for that, and we learn from that site. We learn about consumer habits and what drives them in one direction or the other, and it has been misconstrued in the media. We are not trying to reinvent ourselves into some e-commerce organization. We use e-commerce constructively, but we are, at our core business, a mail delivery system, and that is what we will be in the future. Senator Cochran. The GAO report indicated some actions that could be taken by the Postal Service to eliminate some inconsistencies with its estimates of cost and revenues with respect to e-commerce activity. Has there been any action taken by the Postal Service to respond to those suggestions? Mr. Henderson. We agreed with all those suggestions. Actually, we worked very closely with GAO. They were very helpful in looking at our fledgling e-commerce business. We made some mistakes in the beginning, when we launched it, and they were very helpful in suggesting procedures to be put in place, and we have implemented those procedures, and I am almost positive that Mr. Walker will have a follow-up review of the Postal Service in those areas, and we are prepared for that. Senator Cochran. Is there ever any decision made to abandon a service or a product if it fails to meet its revenue? Mr. Henderson. Yes, under the e-commerce areas, we will-- the Board of Governors has put very strict mandates on us to have a lifecycle of the products. We have a learning curve, and then we make some decisions on whether or not to stay in it or get out of it. So, yes, there are some strict guidelines on management. Senator Cochran. Are these decisions made by the Board of Governors or made by you? Who makes those decisions? Mr. Henderson. Well, they are made by management in most instances, as a result of the board requiring certain restrictions on us. We agree to stay in a business so long or get out of it. If it does not have a net income opportunity or it does not have a learning situation, in which we are learning a lot about our core business, then we are going to get out of that sort of thing. Senator Cochran. Have any products of this kind, or services, been canceled? Mr. Henderson. Yes, in fact, I will provide a list of all the products and services we have, and those that have been canceled and those that have positive net incomes. Senator Cochran. That would be good to have for the record. Thank you very much.\1\ --------------------------------------------------------------------------- \1\ Responses from Postmaster General Henderson appears in the Appendix on page 108. --------------------------------------------------------------------------- One other sort of macro question: Both Mr. Walker and Mr. Henderson talked about the statutory framework, and the fact that there has not been change to this framework since the Postal Service was created in 1970. What changes should be made, based on your knowledge of what is happening and the evolution of technology, demand, and cost? Mr. Walker, do you have in your reports to the Committee any specific suggestions for statutory framework changes? Mr. Walker. We have not gotten to the point, Senator, where we outlined specific recommendations. Frankly, we have recommended, however, a process that needs to be followed in order to come up with that. My view is, if you look at the statutory framework, there are several problems. One problem is it is cost-based. It is cost-based from the standpoint of determining what revenues are. One key question is how do you define cost? Second, if it is cost-based, how do you define labor cost. Obviously, I am a strong believer in collective bargaining, as I am sure you and others are. Basically, what has happened over time is it has been cost- based, without enough market-based principles. There is binding arbitration, which I understand might have been done as a trade-off back in 1970, in order to avoid the possibility of a strike. Obviously, needless to say, Postal Service workers are dedicated professionals and they are essential to our economy. There is no question about it. But there are other important elements, as well. There are issues with regard to inability to close facilities in some circumstances, even in urban areas where there can be clear and compelling cases they are not needed, and therefore they do not really affect the ability to reach remote areas and to meet any reasonable definition of universal service, even under the current definition of universal service. So I think there are a number of things; and candidly, Senator, I think what has to happen is there has to be a set of proposals come up, a package that comes up to the Congress, that deals with these major problems, with various pros and cons, so that you can engage in a debate about what needs to be done, and to look at it as a package, rather than individual elements, and as compared to the status quo, because everything is relative, and I think that is what we think has to happen here. Senator Cochran. One other statement that you made to the Committee in your prepared statement was the need for a comprehensive plan. I think that was your phrase. Is this the same thing as a strategic plan? Somebody else mentioned a strategic plan. Is that the same thing? Mr. Walker. I think it is more than that, Mr. Chairman. The issue is that clearly there is a lot of opportunity to help make progress in the existing law by focusing on people, process, and technology, to reduce cost and increase productivity. There is clearly opportunity to do that, but that is only going to delay the day of reckoning before the Postal Service has to deal with the underlying structural problems. Clearly, you need a strategic plan as to where you are going and how you are going to get there, but I think the transformational plan also embodies, not just actions that could be taken within the context of current law, but also possibly what type of legislative changes might be necessary. A strategic plan typically is what enterprises are going to do within the context of current law, and we need to come up with specific options, pros and cons, with regard to how do you deal with some of the underlying structural problems associated with the Service. I think, frankly, the board has a major responsibility for leadership in that regard. I mean, they need to be involved in strategic planning. They need to be involved in succession planning, and I think they need to help facilitate this public dialogue and debate, because we are on a path that is not a positive path. Senator Cochran. Is the GAO capable or are you qualified as an agency to help develop this comprehensive plan? Mr. Walker. Well, candidly, I believe, Mr. Chairman, it would be better if the plan was developed by management or in consultation with stakeholders or by an independent business- oriented authority. We would be happy to review that and comment on it, but I do not know that it is appropriate for the GAO to come up with, ``the plan.'' We can clearly contribute to it. My personal view is that it should not be a single plan. It should be various options, and there may be more than one alternative that could be looked at, with various pros and cons that then could be discussed and debated. I think the idea that you are going to come up with one plan that you are going to get a consensus on just does not exist. So, in the end, we are going to end up having to come up with what is the best of available options. Senator Cochran. What is your reaction to that, Mr. Henderson? Mr. Henderson. I agree with it. Senator Cochran. How about you, Mr. Rider? Mr. Rider. I agree with it, and we are working on it. Senator Cochran. You are working on a comprehensive plan? Mr. Henderson. Yes. Senator Cochran. When can we expect to hear about it, and what the details may be, and will it require congressional action to implement? Mr. Henderson. Yes. In fact, we can provide you with a copy of our initial efforts. We will provide that for the record. It is signed by the chairman. Senator Cochran. So it has been completed? You have completed a comprehensive plan and you are ready to submit it to the Congress; is that it? Mr. Henderson. Preliminary efforts on statutory reform. Senator Cochran. I see. Mr. Rider. That is one part. Senator Cochran. Who is doing the other part? Mr. Rider. We are working on the other part, too. Senator Cochran. This is beginning to sound George Orwellian here, Kafkaesque. Mr. Rider. The legislative reform package we have done, it will---- Senator Cochran. All right. We will talk about it some more. I am using up too much time. Mr. Chairman, thank you. Chairman Thompson. Thank you very much. Senator Collins. Senator Collins. Thank you, Mr. Chairman. Mr. Henderson, I want to talk with you about an area of avoidable cost. Before I do so, I do want to thank you for your many years of service to the Postal Service and your country, and before I launch into this issue, which concerns me greatly, I want to make clear that I do not think, in any way, that you condone the issue I am about to discuss. As you may know, the Postal Service in southern Maine has been sued at least five times since 1998 for sexual harassment of female employees, producing jury awards and settlements that have exceeded $2.6 million. Those are just the settlements that we know about. In three of the cases, the settlement amounts were not disclosed publicly. So, undoubtedly, the cost is even higher. Obviously, the vast majority of postal employees in Maine and elsewhere do not participate in sexual harassment. They do not condone or tolerate it in any way. But clearly there is a serious pattern and problem when you have five cases in that short of a time, that produce awards totaling more than $2.6 million. That is an area of avoidable cost. It also, obviously, more fundamentally concerns me because it harms the employees of the Postal Service, who have been subjected to absolutely unacceptable sexual harassment. What is the Postal Service doing to prevent these kind of cases in the future, which obviously have an adverse impact on morale, are unfair to the employees, and cost the Postal Service real money to settle? Mr. Henderson. Well, first of all, let me say we have a zero tolerance for sexual harassment. I have actually fired four or five people in my career for sexual harassment. I was an investigator 25 years ago in those instances. These cases crop up, and they are terrible, and we do not like this, but when you have 800,000-plus employees, you have these situations exist. It takes an incredible amount of communications and training to tell people, to show people, what the work place should be and what the standard is, and we constantly have this. I actually go through the training myself. We have a requirement that all of our managers go through sexual harassment training. In the case of Maine, we have had to put special teams in there, sensitivity teams. We are in the process of reviewing whether or not disciplinary action should be taken against individuals. It is a day-in and day-out issue in any large organization in America, and we are very vigilant about it. We are very apologetic when it occurs, and where we find culprits, we take very swift and decisive action with regard to that. Senator Collins. What concerns me is there appears to be a disturbing pattern here when you have five essential successful cases--five cases settled for millions of dollars in a period of 3 years. That is just not acceptable. Mr. Henderson. No, I agree with that. I absolutely agree with that. Senator Collins. Do you know how much the Postal Service is spending nationwide to settle sexual harassment cases? Mr. Henderson. Yes, we track all of those settlements. I will be happy to provide that for the record. I do not happen to know off the top of my head what it is, but we do track all of our settlements, both in-court and out-of-court settlements, with regard to complainants.\1\ --------------------------------------------------------------------------- \1\ Responses from Postmaster General Henderson appears in the Appendix on page 108. --------------------------------------------------------------------------- Senator Collins. Obviously, as an employer, the Postal Service would not want to, in any way, tolerate sexual harassment, but there is a monetary implication here when you are paying out millions of dollars to settle cases that never should have occurred in the first place. So this is something that I think deserves more attention by senior managers at the Postal Service, because no employees should be subjected to sexual harassment. Also, at a time when you are facing such financial constraints, you should not have to be paying out this kind of money every year to settle cases that should never be occurring in any work environment. Mr. Henderson. I actually agree with that. I think there is a greater moral principle than there is a financial principle. Senator Collins. I agree. I wanted to link it to the purpose of this hearing, but it is of great concern to me. Mr. Rider, it is my understanding, and I think you referred to this, that the Postal Service in March wrote to the President and the Congress, asking for a comprehensive review of postal laws. The letter that you sent was provided to me first by the President of L.L. Bean, probably Maine's best- known company and a company whose future depends on an efficient Postal Service. The President of L.L. Bean wrote to me and not only provided me with the letter that the Board of Governors had sent to the President, but also suggested that perhaps it would be helpful to have some sort of Presidential Commission created to look at the operation of the Postal Service and provide specific recommendations. Could you give me your reaction to that recommendation by L.L. Bean? Mr. Rider. Yes, we would certainly agree to that--any way that we can get the job done. The danger in doing that would be the time that it would take to organize a Commission and bring them up to speed and get it done. We have sent a reform package, as I mentioned earlier, to the House, and that will be provided to you right away, and that is what we had in the way of reform. We are also working on our strategic planning committee, to get a strategic plan to go along with the reform. Senator Collins. But do you think that an independent look by an outside Presidential Commission would be helpful? Mr. Rider. That would be fine. Senator Collins. Thank you. Mr. Walker, I want to follow up on the issue that the Chairman raised about productivity in the Postal Service. GAO has testified that, at a time when we have seen unprecedented technological advancement and really an explosion in private- sector productivity that has helped keep inflation down and prices down, that the Postal Service has increased its productivity by only 11 percent over the past 3 decades; and, indeed, the Chairman noted that during one period--I think it was between 1993 through 1999--that productivity actually declined in the Postal Service, which is contrary to the experience of many large private organizations. It is my understanding that the GAO is studying whether or not the Postal Service's breakthrough productivity plan will produce the kinds of cost savings, which I think are in the neighborhood of $3 to $4 billion over the next 5 years, that the Postal Service is projecting. Do you have any preliminary findings or any assessment of whether that plan is a realistic one that could help break this disturbing trend? Mr. Walker. We do not have the preliminary findings yet, Senator Collins. I will tell you, as you pointed out, that while the Postal Service has had a near record year this past year in productivity increases, about 2.5 percent, it has been a roller coaster. Since 1970--it is only an 11 percent increase since 1970. There are a variety of reasons for that. In some cases, as we pointed out in prior reports, we have noticed that there has not been enough focus on the design of this technology and the implementation of these technologies in a universal manner throughout the Postal Service. There are other issues that we have raised, as well, including the incentives associated with it, down to the level of people who are actually doing the work. We will be looking at this area, and I will be happy to provide back to you and the Committee our findings, but it is too early to have preliminary conclusions yet. Senator Collins. Thank you. I look forward to receiving those results. Thank you, Mr. Chairman. Chairman Thompson. Thank you very much. Gentlemen, primarily Mr. Henderson, Mr. Rider, and Mr. Omas, I want to talk a bit about your rate case procedure and the facts leading to these last, most recent rate increases. I want to discuss how they came about, because there is clearly a disagreement or difference of views between the Postal Service and the Rate Commission on this. I think most people would probably be surprised to know exactly how it works. That is, that the Postal Service goes before the Rate Commission and presents a requested rate increase. Then, if the Postal Service does not get what it wants, it can come back to them again. If it still does not get what it wants, it can come back to the Rate Commission a third time. Finally, if it still does not get what it wants, the Postal Service, by unanimous vote, can do what it wants to do anyway, right? Mr. Henderson. That is right. Chairman Thompson. So that is one thing that might bear a little discussion--whether or not that is what happened here in this particular case. Within that framework, what happened in this latest instance was that, in January of last year, you filed your case with the Commission. You asked for a 6 percent increase, including a $1.7 million contingency amount; is that correct? Mr. Henderson. That is right. Chairman Thompson. At that time, you were projecting a surplus of $500 million for fiscal year 2001. As has been pointed out, the Commission has 10 months to consider this. I can only imagine how laborious this process is. I have read a little bit about it. There have got to be huge law firms doing nothing in this town except handling rate cases. It reminds me of the old transportation cases, back when that was regulated. As I understand, there are over 70 parties to the procedure-- everybody has got a dog in the fight. Everybody has witnesses. Two-ton trucks pull up with documents. I mean, literately, right? You go through that for 10 months. So you went through that, and in November, you, Mr. Omas, and the Commission, decided against a 6 percent increases. You decided instead on a 4.6 percent increase, and instead of a $1.7 billion contingency amount, you decided on a $700 million contingency amount. Is that correct? Mr. Omas. That is correct, $1 billion contingency is what we actually gave them. They asked for $1.7 billion and---- Chairman Thompson. You cut it by $700 billion. Mr. Omas. Yes, sir. Chairman Thompson. That is right. The Governors agreed to allow the recommended rates to be implemented, but to do so under protest. So, they implemented the new rates and then the Postal Service came back to the Commission and requested that the full revenue request be restored. Is that correct? Mr. Omas. That is correct. Chairman Thompson. Here is where we have an issue, at least one or two. As I understand it, your position is, the Postal Service did not give you any material that would indicate to you the need for what it was asking for. Mr. Omas. That is correct. Chairman Thompson. At the time you first turned the Postal Service down, it is your position that the evidence before you did not justify that kind of increase. Mr. Omas. That is correct. Chairman Thompson. You turned them down, then they came back to you again and did not supplement the record with additional information; is that correct? Mr. Omas. That is correct. Chairman Thompson. To justify the increase---- Mr. Omas. And we had offered them the opportunity to reopen the case, and they declined to reopen the case. Chairman Thompson. Let's stop right there before we continue on our little chronology. Let's ask Mr. Henderson and/ or Mr. Rider to comment up to this point, as to whether or not that is true. Mr. Henderson. Well, we obviously do not agree or we would not be in the controversy right here. I will give this to you, for the record, as the testimony on what the current situation was in the Postal Service. Chairman Thompson. Let me ask you some specific questions. Then you can comment however you want to, but break it down a little bit. Do you disagree that you were projecting at that point, in January 2000, a $500 million dollar surplus? Mr. Henderson. No--you are correct. Chairman Thompson. And you supplied information to the Commission, and with those projections, they turned you down. When you came back to them again, did you supplement the record or did you open up the proceedings, as was your right? Did you supplement the record with any additional figures or numbers or projections? Mr. Henderson. We did not reopen the record, but we gave sufficient testimony, in our opinion, to have an accurate view of what the economy was doing at the time. I will say that in the year 2000 we began to see shortfalls in revenues, which we reported to the Commission, of about $240 million. We then were forced--we reduced, using good business judgment, our revenue forecast in 2001 by $630 million, and then we were hit with fuel inflation on the order of magnitude of--in the case of $300 million, and we had an unexpected cost of living adjustment, because fuel drives our COLA cost, of about $430 million. Chairman Thompson. As I recall, your transportation costs constitute about 10 percent of your costs, is that correct? Mr. Henderson. That is right. Chairman Thompson. And fuel is a part of that? Mr. Henderson. Every penny, as I testified earlier, costs the Postal Service $5 million, every penny of gasoline. Chairman Thompson. So what percentage of your overall costs does fuel constitute? We know it is less than 10 percent. Mr. Henderson. It is a major driver in our transportation costs, and transportation, as you said, runs about 10 percent of our costs. Chairman Thompson. Do we know how much of that 10 percent is fuel? Mr. Henderson. Yes, I can provide that for the record. I do not know it off the top of my head.\1\ --------------------------------------------------------------------------- \1\ Responses from Postmaster General Henderson appears in the Appendix on page 108. --------------------------------------------------------------------------- Chairman Thompson. You understand that you are mentioning some facts here that would indicate that some circumstances were in the process of changing. Mr. Omas' position, as I understand it, is that you did not lay out sufficient facts to him at that time to justify a reconsideration. Is that what you are saying? Mr. Omas. Mr. Chairman, in July 2000, just prior to the last of the hearings of the case, we asked the Postal Service to give us updated, accurate figures for 1999, cost and revenue analysis for fiscal year 1999, which they did. At that time, we adjusted their original request by approximately $587 million, somewhere along in there, which included the ECI, which is the employment index. In the case, we usually did ECI minus one. In this instance, we gave them a full ECI. We took into consideration fuel costs, and we took into consideration the recently concluded labor contract negotiations, which they had brought up, that they would be going in there. So, the total package that we gave them---- Chairman Thompson. Also productivity fluctuations, too---- Mr. Omas. Yes, and we added that to the case. That was in the decision we issued in November. Chairman Thompson. You understand what Mr. Henderson is saying is that, after November, some circumstances changed. As I understand what he is saying, they brought oral testimony to your attention. You are saying they did not open up the record and supply it. What's the gap here? Where are we missing each other on this? Mr. Omas. There was no oral testimony, Mr. Chairman. They submitted to us a request, on remand, that we restore the contingency, which we had cut, and several other things. There were a total of about $1 billion, which they eventually restored. On the first remand, we offered them the opportunity to open up the case and we would try to expedite it. They declined to take that. They did a second request, and in the second request, they again declined to open up the case. Chairman Thompson. Between that request and the second request, they came out with some revised projections, projecting a $2-$3 billion deficit for 2001. I think that was February of this year. Mr. Omas. That is right. Chairman Thompson. Then they came back after that. They came back to the Commission again to ask for reconsideration. Mr. Omas. But they never presented new data. As far as we are concerned, as I said in my opening statement and in my full statement, we have no analyses of where they are losing the money exactly, and we must--we are charged with following the evidentiary record, and we had no record established as to what the new shortfalls, the loss of $2-$3 billion, were coming from. Chairman Thompson. Mr. Henderson, do you take issue with any of that? Mr. Henderson. I, frankly, do not know. When I say that, I say that from--I am not in the lawyering process in the Rate Commission. I do know that what was going on was obvious, and our appeal stated quite clearly what was happening in the Postal Service. These were not projections. This is what was actually happening. I mean, our revenues just went south, and we were saying to the Postal Rate Commission, ``Look, we need more money. Your revenue projections are not accurate.'' Chairman Thompson. See, the problem that a lot of us have is that these are very formal proceedings. Testimony is taken under oath, and you go through them every 2, 3, or 4 years. You go to all this trouble and all this expense, and take all this time in 10 months. You cannot, just in the middle of it or at the end of it, start sending stuff over the transom. If you have got stuff like this that is relevant and that is clear, you open up the proceedings. You make that a part of the record, because the Commission can only make their decision based on what is in the formal record. Mr. Henderson. I agree with you, but I think if you were to examine the formal record, you would see that these things occurred before the record had closed. In other words, in our opinion, the sufficient evidence was on the record to justify the revenue requirement. I do not mean to say these things happened after the record closed. Chairman Thompson. But you will agree that there was no formal opening up of the record or live witnesses presented with this new information? Mr. Henderson. Yes, we did not feel that we needed it, and we did not want to start the process over again, so that the 10-month period would re-click. We needed the money. As it is, the Governors went through the statutory process that allows them to implement the rate case after two submissions and denials by the Rate Commission. Chairman Thompson. What happened and the reasons why you did it are two different things. I am just trying to get, first of all, at what happened. It would seem to me that having been turned down twice and with all these things happening, that you would dot the i's and cross the t's necessary to get this before the people. One might think you were not comfortable with your own projections. We talk about economic downturns and so forth. We know that, at the last quarter of last year, that we were growing at 1 percent. And at the first quarter of this year, we are growing at 2 percent. So it is hardly a recession, but you had your cost fluctuations, labor costs and fuel, and all of that in the record as of July of last year. The issue is, when you were projecting a surplus, what circumstances changed so dramatically, so that you were, the next day, as it were, projecting huge deficits? I do not know why. There is obviously more here than meets the eye, and I am not smart enough to figure it out. It does not make a whole lot of sense to me. Senator Cochran. Senator Cochran. Mr. Chairman, you mentioned and one of the witnesses did, as well, the statutory borrowing limit of $15 billion, and that this might pose a problem in the near future. The borrowing up to the end of fiscal year 2000 has amounted to $9.3 billion. My question is, when do you think, Mr. Walker or Mr. Henderson or both, the Service is likely to reach its borrowing limit? Mr. Walker. My understanding is without an additional rate increase, above and beyond the one that has recently been approved by the Board of Governors, it would be in 2003. Senator Cochran. Mr. Henderson, is that your estimate, as well? Mr. Henderson. I think, yes, 2002, September 2002 or 2003. Yes, we will have a problem. Yes. Senator Cochran. What is the practical consequence of that? If you reach that limit, what happens? Does Congress have to raise the limit or do we have to excuse---- Mr. Henderson. No, you have to raise the limit. Senator Cochran. We have to raise the limit. Mr. Henderson. If you look at the limit, $10 billion was set in 1970. We are in the year 2001, and it has only been raised to $15 billion. You say what do we do with the capital? What does that mean? We either raise capital through net income or we borrow it. We use capital to substitute for labor, that is to mechanize the Postal Service and to upgrade its infrastructure. So, it would put handcuffs on both the infrastructure upgrades and on the further mechanization or automation of the Postal Service. Senator Cochran. Does the Board of Governors come into play here? Do you have a role to play in connection with the statutory borrowing limit? Mr. Rider. I believe they did. That was before my time. Mr. Henderson. They approve, they being the Board of Governors, approves every capital expenditure of $10 million or over. They have a role in spending the money. They have no role in setting the limit. That is purely the purview of Congress. That is a statutory---- Senator Cochran. And the board has to approve the borrowing? Mr. Henderson. That is right, $10 million and over. That is correct. Senator Cochran. Does the board have a position on whether or not this limitation ought to be changed? Mr. Rider. I am confused. The limit of $10 million we have is on projects we approve, capital projects we approve. Everything over $10 million, the board approves. Less than that, we do not. So, we have control over the capital expenditures that are being made. Mr. Henderson. That is not a statutory limit. That is something they approve by bylaws. Senator Cochran. We are mixing up two things. Mr. Rider. The $15 billion is set by Congress, as I understand it. Senator Cochran. Mr. Walker. Mr. Walker. Mr. Chairman, the $15 billion limit on borrowing, the statutory limit, is an action-forcing event. That is going to occur sometime between 2002 and 2003, depending upon what actual experience is versus projected experience. That means, among other things, that we have some time to be able to come up with a set of comprehensive proposals. Obviously, one of the things that needs to be looked at is, part of that set of comprehensive proposals, is whether and to what extent that limit should be raised. But, at some point in time, as Postmaster General Henderson said, something has got to give. When you end up coming up and you have negative cash flows, you can cut back your capital spending only so far. Some of that is only a timing difference. Some of that hurts your productivity improvement efforts. But, hopefully, what can happen is, if we can have a comprehensive set of plans or proposals that will consider what is to be done structurally before you hit this wall, because that is basically what the limit is. It is a wall that is going to require congressional action. Mr. Henderson. That is right. Mr. Rider. Let me also indicate that the board does not favor raising the debt ceiling. Senator Cochran. That was my question. That is what I was wondering. Mr. Rider. We do not favor raising. We would like not to do that, because if we raise the debt ceiling, we are raising our interest cost. That is just digging our hole a little deeper. Senator Cochran. But if you do not raise the ceiling, what happens? Mr. Rider. We hope that we are going to be able to get reform and be able to operate within those constraints. Senator Cochran. So you think it would be something that would put pressure on the Congress, to enact statutory reforms that are needed; is that correct? Mr. Rider. It is not a matter of putting pressure on. It is a matter of trying to get the job done so that we can stay in business. Senator Cochran. Either that or the Postal Service can change the way it is managing its business, in order to keep the costs from increasing. Is that the other answer? Mr. Rider. Yes, that is, sir. Senator Cochran. But why hasn't that been done? Mr. Rider. We are working on that now, sir. Senator Cochran. One of the suggestions is that the costs of operating the business are out of control. I have heard that from critics who have come to see me, to say that it is time for the Postal Service to change the way it operates, so that it does not permit these costs to run out of control. Do you share that view, Mr. Rider? Mr. Rider. No response. Senator Cochran. Can cost be cut further without statutory reforms or new authorities by Congress? Mr. Rider. We are in the process of cutting those costs just as much as we can, but 76 percent of our cost is labor--76 percent of our total cost is in labor. With that, we have to have the mailmen deliver to every house every day. We cannot cut back on that end. We are cutting back on headquarters and right on down to that. There is a point beyond which we can cut and still provide universal service and good service. Our customer satisfaction is quite high. It is in the 90 percent-- 93 precent---- Mr. Henderson. Right. Mr. Rider [continuing]. Percent customer satisfaction. In the capital business, part of the capital that we spend is for machinery which has a good ROI. Part of it is for facilities, and that gives us no ROI whatsoever. With adding on the volume of deliveries and the business that we are doing, it requires some of these antiquated facilities to be expanded, and we do not get an ROI for that. Mr. Walker. Mr. Chairman, if I may? Senator Cochran. Mr. Walker. Mr. Walker. There is unquestionably an opportunity to be able to further cut costs and enhance productivity; however, without underlying structural reforms, you are not going to solve the problem. You are not going to solve the problem, because even if you end up spending more money on, for example, capital improvements, to enhance technology, to further automate a number of activities that might be able to be automated, in order to achieve the savings on that, you have got to do something with the labor costs. Under the current structure, it is difficult to do that. You also have to look at the infrastructure costs associated with the Postal Service. Ultimately, something has got to be done with that. We are not going to change evolving technologies. We are not going to change the competitive climate. The day of reckoning is going to come, and the question is when do we want to deal with it. Mr. Henderson. I would add--I would agree with everything that Mr. Walker said, and just point out that last year we had the best productivity we have had in almost a decade, and we lost $199 million, primarily due to softening demand. This year, we have better-than-planned productivity, and we have costs under our plan, and we are losing money because of softening demand for postal products, in other words, our revenues, and we are not even being hit by the Internet today. As I said earlier, $17 billion of our $65 billion are bill payment and presentment. We all know it is not if, but when, that is going to go electronic. AT&T, for example, spends $1.75 or somewhere in that neighborhood, to send you a bill. If they could take that out of their cost structure, they could save $1 billion on the bottom line. Somebody is going to figure out how to do that. It is not going to happen tomorrow, it is not going to happen maybe 3 years from now, but it is going to happen. And, when it happens, you are going to have this same phenomenon of how does the Postal Service--as the Chairman mentioned, continue to do what is mandated under universal service, which is regularly scheduled mail delivery in urban and rural areas, 6 days a week across America, and opening post offices, keeping post offices opened--this is not a matter of good and evil, where it is not cost-effective? I will give you a classic example of that. Cape Cod has 7 townships, 53 post offices. President Kennedy had a great hand in that. Chairman Thompson. Is that Massachusetts? Several of them ought to be closed. Mr. Henderson. I will not go any further. Senator Cochran. Thank you, Mr. Chairman. Chairman Thompson. Thank you very much. Mr. Henderson, you talk about softening demand, but how much more is demand going to soften as these rates continue to increase? Mr. Henderson. It is a problem. I agree with you. Chairman Thompson. It is a Catch-22, isn't it? Mr. Henderson. That is exactly right. It really represents what your opening statement said. It is a Catch-22. Chairman Thompson. Let's get back to that for a minute. Mr. Walker, sitting here listening to this and listening to you, we have had this conversation before with regard to other governmental agencies. It seems to me that we have the same problems here that we have in most all governmental agencies-- financial management problems, projections, trying to determine where you are, information technology problems, inability to use technology to help themselves, capital management problems, same kinds of difficulty in changing the culture. What we have done here is tried to combine a Federal agency entity with a private entity. To put them all together and give them characteristics of both. It worked for a while and now it is not working anymore. Factors such as the technological revolution that is going on and because the bigger it gets, the more it begins to behave like other governmental entities. The Postal Service has 900,000 employees and we cannot seem to do very much about it. Obviously, part of that is because of the mandates. If we are going to keep all these post offices opened, somebody has got to be in them, and therein lies your employee situation to a great extent. Aren't these just the kind of characteristics that should not surprise us at all? The question is, in some sense, why haven't these problems happened sooner than they have? Mr. Walker. The Postal Service is a major and important case study in the two questions, as you know, Mr. Chairman, that I have raised before; and that is, now is the time that we need to ask what the government should do and how should the government do business in the 21st Century. We have to move beyond incrementalism. Minor changes here, minor changes there--we have to recognize it is a new ballgame and we need to fundamentally re-examine some issues, not just with regard to the Postal Service, which is why we are here today, and it is very pressing and is very important, but in a whole range of areas, as well, because many of the challenges they face are shared by other entities. The Postal Service is supposed to achieve a specifically-defined mission and they are supposed to be self-supporting. So, it is more visible with them and it is more universal with them, because every American can identify with the Postal Service. Chairman Thompson. Mr. Henderson, you were very candid in your statement awhile ago about how you saw the future. You saw a total or partially privatized Post Office. I said in my opening statement that everything ought to be on the table, including the question of the postal monopoly. What makes sense in the kind of world that we live in? You and I both know that if that were to come about, it is certainly going to have to get--well, that is not going to come about in short order, if ever. And whether it should or not is what we are going to be discussing here. Mr. Rider, what would be your ideas, and Mr. Omas, also, what would be your ideas about something that might right the ship. Or, less than that, something that might be more politically doable than going in that direction? Is it worth the effort or should we just wait until we can revolutionize it before we do anything? I know that you have had certain reform ideas. Congress ought to do something about your labor situation. You ought to be able to raise rates whenever you want to, essentially, is the way I read it. Are those the only proposals that you have that might be done, that might be doable, less than privatization? Mr. Henderson. Well, let me comment, because you raised the issue of privatization and monopoly. You cannot talk about monopoly without talking about universal service. Universal service is an obligation we have, and it is an obligation to go into areas of rural Tennessee and rural Mississippi, where we do not make any money. There are 40,000 post offices. The 26,000 smallest ones, it costs over $2 to take in a dollar. So, there is an infrastructure in place that is called universal service, that is there, and it is protected by a monopoly, and the two cannot--you cannot break one without breaking the other one. You also have an issue of affordable rates. It costs the same amount of money to send a First-Class letter from Dresden, Tennessee, to Memphis, as it does to Anchorage, Alaska. That is something people accept as a fundamental right of living in America. So those are at the core of the U.S. Postal Service, and I agree with you, we are not going to break those tomorrow. You are not going to break them for a long time, and I think we all recognize that because of the impact on America. As to the changes that can be made, yes, I think you can get price freedom, but as the chairman of the board pointed out, it is not just to raise prices, it is to lower prices. We make all our money--the Postal Service has a business cycle. It begins in September. Halfway through the year, we make all the money we are going to make. The last half of the year, we lose money. It is purely a function of volume. The first half of the year is robust. The Postal Service is very efficient with that robust volume. Last half of the year, the volume goes away, and the Postal Service scrambles. It is impossible to say you are going to have 800,000 people in the first half of the year and 500,000 at the last half of the year. It does not work. There is a trade-off. Pricing freedoms--to change that business cycle in the last half of the year just like a retail store does. At the end of their business cycle, what do they do? They put their clothes on sale. That sounds strange, but we could incentivize mailers in that fashion. We could incentivize large mailers. Senator Collins talked about my good friend, Leon Gorman at L.L. Bean. If he gave us packages for Japan--well, Japan is a bad example. If he gave us packages for the United States in a certain fashion, we could give him certain discounts, having more freedoms. It is not just a matter--do not think of it as a model of just increasing prices, it is being able to adjust your prices. In the final analysis, unless you change the accountability of the labor conflict solution at the Postal Service--I am talking about the wage increases--unless that has a different criteria, where the voice of the customer is heard, you are not changing anything. We can incentivize some growth, maybe. I actually question in my own mind how much we can incentivize. If you look back 30 years, mail volume growth has mirrored GDP. The correlation is almost a plus-one. So, if you do not get control over the work-hour cost---- Chairman Thompson. When you say have the customer have a bigger input in that, what are you talking about? Mr. Henderson. Well, today, the customer has no input in it. It is an arbitrator who makes an independent decision, and he makes a decision without regard to what that impact will be on the price of postage. And if you look back 30 years, you see that the cost per hour and the revenue per piece, which is postage, correlate. In effect, you have an arbitrator driving postage rates. Chairman Thompson. I have read where management-negotiated contracts were not much different than the ones that arbitrators---- Mr. Henderson. In the 1970's, that was true. In the 1970's, there was a belief that the postal workers were underpaid. I participated in the 1973, 1975, 1978, 1981, and 1984 negotiations, not as a principal, but as a person there. There was a belief in the 1970's that postal workers were underpaid, and they did put in provisions that were in the private sector at that time. In the 1980's, most of those provisions were taken out of the private sector, like cost-of-living allowances, for example. Some took strikes---- Chairman Thompson. Do all postal workers have COLAs? Mr. Henderson. Yes, all craftworkers have COLAs, not management. Arbitrators have a tendency not to take out provisions that have been agreed to, and have been in there for long periods of time. Chairman Thompson. What do you think, philosophically, as you go along? You are talking about things that might make you more competitive and Congress might be able to help you out in that regard. But, philosophically, what do you think, as you see these businesses around you who are beginning to provide some of the same services you are? They say they can do it, that they can compete with one another and hold down prices, and maybe they can. What do you think about that? Should we shut them out? Should government be doing something that private enterprise can do? Should we carve certain portions of it out? In every other aspect of government, we are outsourcing an awful lot. What are your thoughts about that? Mr. Henderson. I think that is actually the key question of the future of the Postal Service, and that is, what is the role of this quasi-government agency in the future, and should it compete where the private sector competes? I think the answer to that lies in the answer to another question, and that is, is a healthy Postal Service important to America? If the answer to the question is yes, then you do take steps to allow it to compete. If the answer to that is no, that a healthy Postal Service is not necessarily important, and you want to shrink it down--and there is a sale, there are two philosophical camps-- then you do not do that and you just say size down. My own view is that a healthy Postal Service is very important to America and will be for a long time to come, and that the Congress ought to act in unison and make reforms that allow the Postal Service to be more competitive. But, you can choose a different ideology. That is legitimate. Chairman Thompson. Mr. Rider, what are your thoughts on all of this in terms of what we can feasibly do? Mr. Rider. I agree, and I was just thinking on our labor situation. We are not allowed labor differentials in areas. Some of our postal workers in cities like New York, or Los Angeles, California, for example, are paid the same as those in Dresden, Tennessee, which is not right. Chairman Thompson. I understand that your position is, or that there has been testimony to the fact, that there is a 23 percent wage premium, in terms of the private sector, that the postal employees have. Is that correct? Mr. Rider. I have not seen that figure. Have you? Mr. Henderson. Well, we will provide that economic information, but I will say that we are not saying that postal workers are overpaid. We do not talk like that about our employees. Our employees do a very fine job every day and earn their money. We will let the economists fight over that. Chairman Thompson. I agree. I used to be one of them. One of the multifaceted jobs I have had. When I dropped out of college 1 year to work a couple of different jobs, to save a little money, one of them where I worked was the Post Office in Lawrenceburg, Tennessee. Mr. Henderson. Oh, really? Chairman Thompson. Yes, I think the wage was about a dollar-and-a-quarter then, as I recall, but it was better than anybody else was making. Mr. Rider, do you have anything further? Mr. Omas, do you have any thoughts? Mr. Omas. Well, Mr. Chairman, that is a bit of a difficult question. I think there may be certain areas in the Postal Service that could be privatized to make it more efficient, and I think all of that needs to be looked at in the overall--where the Postal Service is going to go and what we want the Postal Service to look like. But I go back to what I said earlier, to Senator Carper, is I think the Postal Service's main business is its core business, and that is the delivery of mail. They have the network. They have the ability and there are companies now who are doing a great deal of work-sharing, which I think saves money for the Postal Service. We think it does. They bring their mail down to sectional center facilities for drop- shipping. In other words, they take a lot of work out of processing the mail. So maybe encouraging that is something the Postal Service should look at expanding. Chairman Thompson. Senator Cochran. Senator Cochran. One final question. There is a requirement in the statute that you have to break even, not that you have to make a profit. It is still the Postal Service, not the Postal Business, in the statute. Should either one of these concepts be changed in the comprehensive reform that we undertake? Mr. Henderson. That is an interesting question. I really do not have an answer to that question today. I will say it is much easier to manage a business for profit than it is to break even. You say how does that make a difference? Well, in 1997, in July, we were given the authority to raise rates, and because we were making so much money at that time, we decided to postpone that decision of implementing that rate increase until January. If we would have been operating for a profit, we would have put those rates in in July, and just increase our profit. Because we were making so much money, we decided to postpone it for a year. So, it does have an impact on you. I think, from a public policy point of view, for our customers, it is probably a good notion to have a not-for-profit Postal Service. From a management point of view, I would much rather manage an organization that runs for profit than one that does not run for profit. It is much easier. Mr. Rider. May I add that we do need to have some way--if we are going to be breakeven, we have to have some way of raising capital to take care of our capital needs, both facilities and machinery. If we are just in a breakeven situation, the only thing we can do there is fund it out of depreciation, and depreciation does not take care of even replacement today. Senator Cochran. Mr. Walker, do you have any observations about that issue? Mr. Walker. I think it is one of the issues that has to be looked at as part of comprehensive reform. In my view, in sitting here and listening today, to me, there were several things that were evident right off. First, there is a need for additional transparency and accountability with regard to the Postal Service's financial and operating results and projections. There is a need for enhanced communication and coordination between the board, management, the unions and the Postal Rate Commission on these issues. There is a need to try and consider additional contingencies, with regard to variances that could exist with regard to either the revenue side or the cost side in order to minimize the frequency of postal rate increases. There is a need to continue to push, to try to improve productivity and minimize cost and minimize rate increases, but there is also a need to get on with the effort to develop a comprehensive transformation plan, because, in the end, we are not going to be able to change the trends that are impacting the Postal Service; the technology, the competition. In the end, there is going to have to be much more comprehensive change to deal with the underlying structural problems. Senator Cochran. Thank you, Mr. Chairman. Chairman Thompson. I think that pretty well says it all. That is probably a good place to end right there. I think what you have laid out for us is a job for Congress and a job for the Postal Service. Clearly, we have laid some requirements on the Postal Service that are important. Universal service is important and it is going to remain so, regardless of what it costs, probably. Mr. Rider talks about the need to raise capital. The direction we are going in, you are going to be raising it right up here, before the Appropriations Committee. I might just ask Mr. Walker, what is the significance--if they are about to reach their debt limit of $15 billion--if we continue anywhere near where we are going right now? I think the picture is probably a little worse than what we are laying out because of these assumptions that are not going to pan out, but let's say next year, or the year after that, we reach the debt limit, what is the significance of that? Obviously, they will have to start paying expenses in cash. I mean, in terms of retirement payments and all of that, that is a significant landmark; isn't it? Congress could, obviously, come in and throw a few billion dollars into the pot, but, short of that-- -- Mr. Walker. You could take some fairly dramatic and, some would argue, Draconian actions. You could freeze all capital spending. You could end up engaging in massive layoffs for people who you have the ability to lay off. I do not think any of these are desirable. You could end up taking some short-term actions that might end up dealing with the problem in the short-term, but it could exacerbate your long-term challenge. We have a window of opportunity here, because one of the issues that the Congress is going to have to deal with--it is going to have to deal with this debt limit issue, the way things are going right now. So one of the things we hopefully will do is to be able to take a look at this window of opportunity, do what you can in the context of current law, and come up with a more fundamental transformation plan, including any necessary restructuring, before you hit that limit. Chairman Thompson. And, as a part of that, and because it needs to be done, and because it can help the bottom line, and because it gives us the political ability to get something more done, the Postal Service is going to have to do something better. In terms of productivity, in terms of managing its costs, in terms of financial management and things of that nature the Postal Service must do better. I think it is not to lay blame on anyone, it is just a matter of fact. I hate to leave on that note, as a matter of fact, especially with Mr. Henderson. You have given a lot of good public service to your country over the years, and I want you to know we appreciate it. As I say, this is probably not the best way to go out, unless you have another hearing or two you are going to have to go to on the other side. Mr. Henderson. I enjoy the hearings. I would like to enter into the record the statement of Karla Corcoran, Inspector General.\1\ --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Corcoran appears in the Appendix on page 118. --------------------------------------------------------------------------- Chairman Thompson. You are in a position now, and will be, to have a perspective to look back on all this. To really give some candid advice to us, as to some things that we can do and maybe as to what your successor can do, some of the things you have done and some of the things you wish you had done. Thank you for your service, and, gentlemen, thank all of you as we proceed to try to make progress in this area. The record will remain open for a week after the close of the hearing. If there is nothing further, we are adjourned. [Whereupon, at 12:26 p.m., the Committee was adjourned.] A P P E N D I X ---------- PREPARED STATEMENT OF SENATOR BYRON L. DORGAN, A U.S. SENATOR FROM THE STATE OF NORTH DAKOTA Mr. Chairman and Members of the Committee: I thank you for the opportunity to share my views with you. As you know, the Postal Service recently announced that it will be facing a projected deficit in the range of $2 to $3 billion during fiscal year 2001. A number of options have been proposed to help the Postal Service become more financially stable. Construction projects, affecting more than 800 postal facilities, were put on hold earlier this year. Also, last week the Postal Service announced yet another set of rate increases in an effort to curtail the projected deficit. In April, the Board of Governors called for a study of one of these proposals, namely, to cut delivery by the Postal Service to five days a week. This is particularly troubling to me because of the negative impact this would have on rural areas. I understand the many challenges facing the Postal Service. Not only are some costs rising--such as fuel prices for delivery vehicles-- but other methods of communicating and doing business have caused a decrease in the volume of First-Class mail. Many people are using the Internet to pay their bills, to go shopping, and to contact their friends and family. However, not all Americans have enjoyed the benefits of these technological advances. People in rural areas, like much of North Dakota, are hampered by limited access to these technologies. These people depend heavily on the Postal Service. It seems to me that eliminating Saturday mail service affects rural areas disproportionately. To those in rural areas, Saturday mail service gives people one more day to receive mail, conduct business, order and receive prescription drugs, send bill payments, and read the news from local and national newspapers. Furthermore, while those in urban areas have easy access to other delivery services, such as the United Parcel Service (UPS) or Fed Ex, it is often not convenient for those in rural areas to use these services or they may not be offered at all. Doing away with Saturday delivery from the Postal Service is just another way that rural America would be left behind. It's also important to remember that taking away Saturday delivery won't take away the mail that is now being delivered on Saturday. Instead, mail carriers would be forced to deliver a larger volume of mail each day. Anytime we have a national holiday, the mail backs up, creating delays and higher workloads for carriers. Carriers may be forced to work overtime, just to keep up with the steady stream of mail. The idea to reduce mail delivery to five days a week is not a new one. Back in the early 1980's, there were substantial reforms relating to the Postal Service, and at that time, some suggested that delivery service be reduced to five days a week. Federal subsidies for the Postal Service were greatly reduced in the budget, and Members of Congress were looking for ways to cut costs. But five day service was a bad idea then, and it's a bad idea now. In response to those proposals, language was inserted into the Treasury/Postal Appropriations bill, requiring the Postal Service to maintain service at 1983 levels. As the Ranking Member of the Senate Subcommittee on Treasury/Postal Appropriations, I intend to work with my colleagues to ensure that this language is retained. Limiting mail delivery to five days a week would be detrimental to rural communities which must already overcome the obstacle of isolation. I will work to prevent this misguided proposal to cut delivery service from becoming reality. I commend this Committee for holding this hearing and I look forward to working with you on this important issue. 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