[Senate Hearing 108-369] [From the U.S. Government Publishing Office] S. Hrg. 108-369 THE REPORT OF THE PRESIDENTIAL COMMISSION ON THE U.S. POSTAL SERVICE: PRESERVING ACCESS AND AFFORDABILITY ======================================================================= HEARING before the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS FIRST SESSION __________ NOVEMBER 5, 2003 __________ Printed for the use of the Committee on Governmental Affairs 91-039 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas Michael D. Bopp, Staff Director and Chief Counsel Ann C. Fisher, Deputy Staff Director Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel Susan E. Propper, Minority Counsel Amy B. Newhouse, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Collins.............................................. 1 Senator Akaka................................................ 4 Senator Stevens.............................................. 5 Senator Carper............................................... 7 Senator Pryor................................................ 9 WITNESSES Wednesday, November 5, 2003 Hon. John E. Potter, Postmaster General, U.S. Postal Service..... 10 Hon. David M. Walker, Comptroller General, U.S. General Accounting Office (GAO)........................................ 17 Alphabetical List of Wistnesses Potter, Hon. John E.: Testimony.................................................... 10 Prepared Statement........................................... 27 Walker, Hon. David M.: Testimony.................................................... 17 Prepared Statement........................................... 44 APPENDIX Post-Hearing Questions and Responses for the Record from: Hon. John Potter............................................. 103 Hon. David Walker............................................ 117 ADDITIONAL MATERIALS SUBMITTED FOR THE RECORD American Business Media.......................................... 137 ADVO, Inc........................................................ 138 Alliance of Nonprofit Mailers.................................... 142 American Forest & Paper Association (AF&PA)...................... 144 Americans for Tax Reform......................................... 147 Amercian Postal Workers Union, AFL-CIO (APWU).................... 148 Association of American Publishers, Inc. (AAP)................... 153 Association for Postal Commerce (PostComm)....................... 158 Association of Priority Mail Users, Inc. (APMU).................. 180 Association of United States Postal Lessors (AUSPL).............. 188 Consumer Action.................................................. 191 Cox Target Media, Inc. and Valpak Direct Marketing Systems, Inc. (Valpak)....................................................... 193 Direct Marketing Association (The DMA)........................... 203 Envelope Manufacturers Association (EMA)......................... 208 Financial Services Roundtable.................................... 213 Free Speech Coalition, Inc. (FSC)................................ 218 Greeting Card Association (GCA).................................. 226 Institute for Research on the Economics of Taxation (IRET)....... 229 International Paper (IP)......................................... 234 Lexington Institute.............................................. 235 Magazine Publishers of America (MPA)............................. 238 Mail Order Association of America (MOAA)......................... 250 McGraw-Hill Companies, The....................................... 253 National Association of Presort Mailers (NAPM)................... 259 National Farmers Union........................................... 263 National League of Postmasters................................... 265 National Star Route Mail Contractors Association................. 276 National Taxpayers Union (NTU)................................... 280 Parcel Shippers Association (PSA)................................ 282 Pitney Bowes..................................................... 290 Postal Rate Commission (PRC)..................................... 298 Printing Industries of America, Inc. (PIA)....................... 313 Publishers Clearing House........................................ 315 Small Business Survival Committee (SBSC)......................... 317 Spencer Press Inc................................................ 326 Time Warner, Inc................................................. 327 THE REPORT OF THE PRESIDENTIAL COMMISSION ON THE U.S. POSTAL SERVICE: PRESERVING ACCESS AND AFFORDABILITY ---------- WEDNESDAY, NOVEMBER 5, 2003 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 2 p.m., in room SD-342, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Committee, presiding. Present: Senators Collins, Stevens, Akaka, Carper, and Pryor. OPENING STATEMENT OF SENATOR COLLINS Chairman Collins. The Committee will come to order. Good afternoon. Today marks the second in a series of hearings that the Governmental Affairs Committee will hold to review the reforms recommended by the Presidential Commission on the Postal Service. At our first hearing in September the Committee heard from the Commission's Co-Chair Jim Johnson, who outlined the rationale behind the Committee's recommendations. Commissioner Johnson also made the very important point that although the Postal Service will end this fiscal year with a net income of more than $4 billion, reduced debt, and a smaller workforce, Congress cannot ignore the fundamental reality that the Postal Service is an institution in serious jeopardy. The Commission presented its assessment in stark terms. It said, ``an incremental approach to Postal Service reform will yield too little, too late given the enterprise's bleak fiscal outlook, the depth of current debt and unfunded obligations, the downward trend in First-Class mail volumes, and the limited potential of its legacy postal network that was built for a bygone era.'' That is a very strong conclusion and one that challenges both the Postal Service itself and the Congress to embrace far- reaching reforms. I have long been a supporter of having an independent commission take a look at the Postal Service, and I want to commend the Commission for its very thorough review. The financial and operational problems confronting the Postal Service are indeed serious. At present, the Postal Service is paying down $7 billion in debt to the Treasury and its long-term liabilities are enormous, to the tune of nearly $6 billion for workers compensation claims, $5 billion for retirement costs, and perhaps as much as $45 billion to cover retiree health care costs. Last year, when the Office of Personnel Management discovered that the Postal Service was paying too much into the Civil Service Retirement System fund, I joined with my colleague, Senator Carper, in introducing legislation, which was also co-sponsored by Senator Akaka and others on this Committee, to correct the funding problem. This means that the Postal Service was able to delay its next rate increase until 2006 and move aggressively to pay down billions of dollars in debt owed to the U.S. Treasury. There are other issues with that legislation, however, involving an escrow account which we will discuss today. Despite the reprieve afforded the Postal Service by the Collins-Carper bill, many problems remain and they have a significant economic impact. The Postal Service itself has more than 750,000 career employees. But less well-known is the fact that it is also the linchpin of a $900 billion mailing industry that employs 9 million Americans in fields as diverse as direct mailing, printing, catalog production, and paper manufacturing. The health of the Postal Service is essential to the continued vitality of thousands of companies and the millions of Americans they employ. One of the greatest challenges for the Postal Service is the decrease in First-Class mail volume as business communications, bills, and payments move more and more to the Internet. This is highly significant, given that First-Class mail accounts for 48 percent of total mail volume and the revenue it generates pays for more than two-thirds of the Postal Service's institutional costs. The Postal Service also faces the difficult task of trying to cut costs from its nationwide infrastructure and transportation network at a time when carriers must still deliver 6 days a week and the number of addresses served has only continued to grow. In many ways the work of the Commission builds upon actions already undertaken by the Postal Service. The Senate took the advice of the Comptroller General and requested that the Postmaster General deliver to Congress in April 2002 a comprehensive transformation plan. The Postal Service, in its plan, determined what changes could be made within existing constraints that would result in improved operations, performances and finances. The transformation plan has been recognized as a very positive first step but that is exactly what it is, a first step. Without legislation many of the necessary reforms highlighted in the Commission's report simply cannot happen. As a Senator representing a largely rural State whose citizens depend heavily on the Postal Service, I appreciate the Commission's strong endorsement of the basic features of universal service, affordable rates, frequent delivery, and convenient community access to retail postal services. It is important to me that my constituents, whether they live in the Northern Woods or on the islands off our coast, or in our many small rural communities have the same access to quality postal services as the people of our cities. Most commercial enterprises would find it uneconomical, if not impossible, to deliver mail and packages to rural Americans at the rates that the postal service offers. So the preservation of universal service is my top priority. Nevertheless, the Postal Service has reached a critical juncture. It is time for a thorough evaluation of its operations and requirements. It is time for action. Senator Carper and I have committed to working together with other interested Members of this Committee to draft a bipartisan postal reform bill. Now, given the history of previous attempts to pass postal reform legislation, I recognize that this is a daunting challenge. But it is essential that we seize the opportunity presented by the Commission's report, supplemented by the transformation plan, to build on the excellent work already underway and to complete the job. I am going to submit the rest of my statement and my full statement in the record. We are expecting, unfortunately, to have three back-to-back votes at 2:30. So I am eager to hear Senator Akaka's remarks and then hear from our two excellent witnesses today, Postmaster General Jack Potter, and Comptroller General David Walker. Both of them have considerable insights that will be very helpful to the Committee. [The prepared opening statement of Senator Collins follows:] PREPARED OPENING STATEMENT OF SENATOR COLLINS Today marks the second in a series of hearings the Committee will hold to review the reforms recommended by the Presidential Commission on the Postal Service. At our first hearing in September, the Committee heard from Commission Co-Chair Jim Johnson. His testimony provided Committee members with the rationale behind the recommendations. Commissioner Johnson also made the very important point that although the Postal Service will end this fiscal year with net income of more than $4 billion, reduced debt, and a smaller workforce, Congress cannot ignore the fundamental reality that the Postal Service is an institution in serious jeopardy. The Commission presented its assessment in stark terms, and I quote, ``an incremental approach to Postal Service reform will yield too little, too late, given the enterprise's bleak fiscal outlook, the depth of current debt and unfunded obligations, the downward trend in First-Class mail volumes and the limited potential of its legacy postal network that was built for a bygone era.'' That is a very strong statement, and one that challenges both the Postal Service and Congress to embrace far-reaching reforms. From the outset, I have been a strong proponent of the Commission. In the Summer of 2002, I introduced my own bill to establish a Presidential Postal Commission charged with examining the problems the Postal Service faces, and with developing specific legislative and administrative proposals that Congress and the Postal Service could implement. Naturally, I was pleased to have such a Commission issue this type of report just one year later. Under the effective leadership of Co-Chairs Harry Pearce and James Johnson, the Commission put together a highly comprehensive report on an extremely complex issue-- identifying the operational, structural, and financial challenges facing the U.S. Postal Service. To the relief of many, including myself, the Commission did not recommend privatization of the Postal Service. Instead, the Commission worked toward finding a way for the Postal Service to do, as Mr. Johnson described it to me, ``an overwhelmingly better job under the same general structure.'' The Commission's recommendations are designed to help this 225-year-old Service remain viable through at least the next two decades. The financial and operational problems confronting the Postal Service are serious. At present, the Postal Service is paying down $7 billion in debt to the U.S. Treasury, and its long-term liabilities are enormous--to the tune of nearly $6 billion for Workers' Compensation claims, $5 billion for retirement costs, and perhaps as much as $45 billion to cover retiree health care costs. In an unexpected turn of events, last year the Office of Personnel Management discovered that if postal payments into the Civil Service Retirement System Fund were to continue on the basis required under existing law, the Postal Service would over-fund its estimated retirement liability by approximately $71 billion dollars over a period of 60 years. In February, Senator Carper and I introduced legislation to correct this funding problem. That bill's enactment this past April enabled the Postal Service to delay its next rate increase until 2006 and to more aggressively pay down billions in debt owed to the U.S. Treasury. The bill also required the Postal Service to submit to Congress a proposal regarding the use of the ``savings'' resulting from the Act, beginning in 2006. Those ``savings'' would be placed in an escrow account and may not be spent until a pending plan is approved and authorized by Congress. It is my intention to address this issue as part of an overall postal reform bill. Despite the reprieve afforded the Postal Service by the Collins- Carper bill, many problems remain, and they have a significant economic impact. The Postal Service itself has more than 750,000 career employees. Less well known is the fact that it is also the linchpin of a $900-billion mailing industry that employs 9 million Americans in fields as diverse as direct mailing, printing, catalog production, and paper manufacturing. The health of the Postal Service is essential to the vitality of thousands of companies and the millions that they employ. One of the greatest challenges for the Postal Service is the decrease in mail volume as business communications, bills and payments move more and more to the Internet. The Postal Service has faced declining volumes of First-Class mail for the past 4 years. This is highly significant, given that First-Class mail accounts for 48 percent of total mail volume, and the revenue it generates pays for more than two-thirds of the Postal Service's institutional costs. The Postal Service also faces the difficult task of trying to cut costs from its nationwide infrastructure and transportation network. These costs are difficult to cut. Even though volumes may be decreasing, carriers must still deliver 6 days a week to more than 139 million addresses. In many ways, the work of the Commission builds upon work already started by the Postal Service. In late 2001, the Senate took the advice of Comptroller General David Walker and requested that Postmaster General Jack Potter deliver to Congress, in April of 2002, a comprehensive Transformation Plan designed, and again I quote, ``to ensure the continuation of affordable universal service and to prepare the organization for the challenges of change in a dynamic marketplace.'' In the Transformation Plan, the Postal Service determined what changes could be made, within existing constraints, that would result in improved operations, performance and finances. This plan has been widely recognized as a good ``first step,'' but that's exactly what it is--a first step. Without legislation, many of the necessary reforms highlighted in the Commission's report simply will not happen. As a Senator representing a largely rural State whose citizens depend on the Postal Service, I appreciate the Commission's strong endorsement of the basic features of universal service--affordable rates, frequent delivery, and convenient community access to retail postal services. It is important to me that my constituents living in the northern woods, or on islands, or in our many rural small towns, have the same access to postal services as the people of our cities. If the Postal Service were no longer to provide universal service and deliver mail to every customer, the affordable communication link upon which many Americans rely would be jeopardized. Most commercial enterprises would find it uneconomical, if not impossible, to deliver mail and packages to rural Americans at rates that the Postal Service has been offering. The preservation of universal service, and many more issues, must be examined in depth if we are to save and strengthen this vital service upon which so many Americans rely for communication and their livelihoods. The Postal Service has reached a critical juncture. It is time for a thorough evaluation of the Postal Service's operations and requirements. It is time for action. Senator Carper and I have committed to work together with other interested members to draft a bi-partisan postal reform bill. Given the history of previous attempts at legislative reforms, I know this will be a challenging goal, but it is essential that we seize the opportunity provided by the Commission' excellent work. I welcome our witnesses today, Postmaster General Jack Potter and Comptroller General David Walker, and look forward to hearing their views and insights on the recommendations of the Presidential Commission on the Postal Service. Chairman Collins. Senator Akaka. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you, very much, Chairman Collins. I want you to know, it is indeed an honor and a pleasure and privilege to serve as your Ranking Member today. And I want to add my welcome to our two distinguished witnesses. I also want to commend our panelists for their focused attention, determination, and passion on what I consider a key public policy issue, which is how to modernize and sustain the U.S. Postal Service. And I want to add that both of you are such pleasant people to work with and I look forward to working with you in the future. Even before the Presidential Postal Commission was convened, GAO warned that the long-term financial outlook of the Postal Service was at risk without significant changes. At this Committee's request, the Service developed a transformation plan that offered its vision for the future. The U.S. economy depends on a strong and viable Postal Service, which anchors a $900 billion mailing industry that generates 8 percent of our gross domestic product. Nor can we ignore that, for many Americans, the Postal Service is their only contact with the Federal Government. The delivery of mail 6 days a week at an affordable rate is an essential service and a critical lifeline for many citizens living in the rural areas or States like Hawaii and Alaska. The good news is that productivity is up, overnight performance is at its highest level, and over 93 percent of consumers are satisfied with their service. However, the continued decline in First-Class mail is just one reminder that the long-term stability of the Postal Service remains at risk. This Committee understands and appreciates the challenges facing the Postal Service. It is in this spirit that I look forward to discussing the Commission's recommendations with both Postmaster General Potter and Comptroller General Walker. Although we may disagree on some of the recommendations, I am hopeful that our common goal of guaranteeing the future of the Postal Service will bridge any chasm. I will work with our Chairman on bipartisan legislation that will preserve universal service at an affordable price and honor the Postal Service's commitments to its employees and retirees. Thank you very much, Chairman Collins. Chairman Collins. Thank you, Senator Akaka, it is always a great pleasure to have you serve as the Ranking Member of the Committee. Senator Stevens. OPENING STATEMENT OF SENATOR STEVENS Senator Stevens. Thank you very much. I just came in in time. It is nice to see you, Mr. Postmaster General. We are working on a few matters around here, non-controversial of course. Madam Chairman, I am here today to commend Postmaster General Jack Potter for his efforts which have guided the Postal Service now since June 1, 2001. He took on great responsibility when he agreed to become the 72nd Postmaster General of United States and has helped us develop and institute a transformation plan for the Postal Service. His leadership has facilitated increased productivity and has improved customer satisfaction. I understand the purpose of this hearing is to comment on and evaluate the recommendations made by the President's Commission on the U.S. Postal Service. The Commission also took on great responsibility when they agreed to study the Postal Service and provide these recommendations to improve it. Although I believe further reform of the Postal Service is necessary, it is my belief that many aspects of the existing Postal Service should be preserved. I was pleased to hear and read that the Commission and the Postmaster General have pledged their commitment to preserve universal mail service throughout the United States. For my State of Alaska, the concept of universal service is absolutely essential. Alaska does not have access to the infrastructure found in what we call the lower Forty-Eight. For many Alaskans the mail service is a lifeline. We do not use roads. We only travel by air primarily. We have one railroad that goes north to south. But each day it is the Postal Service that delivers 2 million pieces of mail to Alaskan homes and businesses, including vital products that would otherwise not be available in the bush of Alaska. I remember one time, John, when one of my constituents figured out how to get hay. He just mailed it and put a postage stamp on it. And he just had to fly planes for each 1,000 pounds, that is all. The services you provide through the Postal Service reach every home and business in America and are essential to American commerce and society. The Commission's report also provided a comprehensive evaluation of the Postal Service's workforce, operation, leadership, and financial outlook. The President's Commission made several recommendations to reduce the Postal Service's outstanding debt. One recommendation suggests that the Treasury Department should be obligated to fund the cost of CSRS benefits that current and former Postal Service employees have earned through military service. I also believe that the Postal Service should not be responsible for financing military pension benefits. If the Postal Service was required to pay the military portion of CSRS benefits, the Postal Service would be the only Federal Agency required to pay such costs. In the early 1970's I, along with several other Senators, joined together to create the Postal Service out of the old Post Office Department. And in 1971, President Nixon signed into law the Postal Reorganization Act. In the years which have gone by since the Postal Reorganization Act was originally adopted, technological advances coupled with the financial state of the Postal Service have demonstrated the need for more postal modernization. All recommendations made by the President's Commission should be closely scrutinized and assessed, I think, by every Member of this Committee to ensure the future vitality of the Postal Service. I am committed to working with you, Madam Chairman, on the Postal Service. I think labor unions, other Members of Congress, and all who helped create this legislation to reform the Postal Service and ensure the core of the mission of the Postal Service is preserved, need to work together. I thank you, Madam Chairman, for holding this hearing. I do have some questions I would like to leave behind. We are in the middle of a conference. But as I said in the beginning, the Postal Service is in good hands. And I am most pleased to be able to work with you, John. He is a fishing buddy now, so it is a first name. Once you are a fishing buddy you are on a first-name basis up my way. I am very serious. I have now served on this Committee longer than any member in history and I am very proud of my relationship with the Postal Service and with those who have held your position. It is a very vital necessity in rural America in particular. Be assured that we will maintain what the Constitution dreamed of, which was a universal service of mail delivery to all Americans as long as it is needed. I congratulate you and thank you very much for your help, my friend. Thank you, I have to go back to my conference. Chairman Collins. Thank you, Senator Stevens. We are very honored to have your insights, given your long association with the Postal Service. Thank you. Senator Carper, now during my opening statement, I pledged that we are going to solve this problem. So do not say anything that undercuts that, since you were not here to hear what I pledged that you were going to do. OPENING STATEMENT OF SENATOR CARPER Senator Carper. I always try to live up to your pledges for me and will continue to do that. My family and I went up on vacation to Alaska in August and went fishing on the Kenai River. I do not know, General Potter, if you went fishing there with Chairman Stevens, but that is a great place to fish. We spent a night in a lodge. They had pictures of all kinds of people up on the wall who had been fishing there on the Kenai and had done pretty well. I think they had more pictures of him than anyone else--there were hundreds of pictures of him, a lot of pictures of him. He is a fellow who knows how to catch fish. He also knew 32 years ago how to create the Postal Service out of the old Post Office Department. The Postal Service has endured for a long, long time and has served our country well. Senator Akaka and Senator Collins, the idea that any of us could create a legacy, something as important as the Postal Service, that would stand for over three decades, with relatively little change is, I think, remarkable. In 1971, though, a lot was different than it is now. In 1971, I was over in Southeast Asia in the Navy and we did not have E-mail. We did not have the ability to pick up a cell phone and talk to people on the other side of the world. We wrote letters, sent them first class. We did not have direct deposit for our checks. There is just a whole lot that is different today than it was then and it impacts on the Postal Service. What is incumbent on us, I think, is to build on the legacy really that Senator Stevens has provided for us, to stand on the shoulders of those who came before. And they are, as it turns out, pretty broad shoulders. I think we are fortunate, as we try to figure what kind of Postal Service we want to have in the first half of the 21st Century, to have a Chairman of this Committee who understands the issues as well as she does and is interested in working with folks on her side and our side. I am delighted to have a chance to work with my friend, Senator Akaka. I think the sun, the moon, and the stars may be in alignment here. There is a realization on the part of the people in this country, certainly the people who are served by the Postal Service, that maybe it is time to change some things and to modify the way we operate. There is also a realization that coming out of the legislation I introduced last year, what Congressman McHugh and others have introduced in the House, out of the recommendations of the Postal Commission itself, there is a fair amount of convergence of opinion in what we should do. And that gives us, I think, another reason to be hopeful that maybe in 2004 we will be able to make great progress and end up with a Postal Service that not only stands the test in 2004 and 2005 but for a whole lot longer. Madam Chairman, I have a statement I would like to enter into the record, if I could. Chairman Collins. Without objection. [The prepared statement of Senator Carper follows:] PREPARED OPENING STATEMENT OF SENATOR CARPER Thank you, Madam Chairman, for holding this important series of hearings on the report from the President's Commission on the United States Postal Service. By all accounts, the Postal Service has been a success. It receives virtually no taxpayer support and the service its hundreds of thousands of employees provide to every American nearly every day is second to none. More than 30 years after its birth, the Postal Service is a key part of the nation's economy, delivering to more than 100 million addresses and supporting a massive mailing industry. Thirty years of success, however, does not mean postal reform will be easy. Now is not the time to tinker with the current system in hopes that mail volume will recover or that cost-cutting will buy the Postal Service a few more years. As my colleagues are aware, mail volume has not been what we'd like it to be in recent years. In fact, many observers believe that First Class Mail, the Postal Service's largest and most important product, has been in decline since the 1980's. The Postal Service itself estimates that advertising mail could overtake First Class Mail as the Postal Service's leading product less than 2 years from now. At the same time that First Class Mail is on the decline, the Postal Service continues to add nearly two million new delivery points each year. This creates the need for new routes, more letter carriers and new postal facilities. As more and more customers turn to electronic forms of communication, however, letter carriers will likely bring fewer and fewer pieces of mail to each address they serve. The rate increases that will be needed to maintain the Postal Service's current infrastructure, to finance retirement obligations to its current employees, and to pay for new letter carriers and new facilities will only further erode mail volume. The Postal Service has been trying to improve on its own. They are making progress but there is only so much they can do. Now is the time for Congress to step in. In order to ensure that the Postal Service is as successful in the 21st Century as it was in the final years of the 20th, we will need to make fundamental changes to the way it operates. Fortunately, there is probably general agreement on about what 90 percent of those changes should be. Congress has been at work on postal reform for nearly a decade now, mostly in the House. The work done in the House influenced the postal reform legislation I introduced earlier this year--S. 1285, the Postal Accountability and Enhancement Act. I was pleased to learn this summer that the final recommendations from the President's commission on the Postal Service were very similar to that bill in a number of respects. Like my bill, the commission's final report calls for the preservation of universal service and the Postal Service's monopoly over the mailbox. The commission also recommends, like I do, turning the Postal Service's Board of Governors into a stronger, more independent body that would be better able to manage a business the size of the Postal Service. Both my bill and the commission's report would also give the Postal Service significant pricing flexibility and turn the Postal Rate Commission into a stronger regulatory body. They would also streamline the Postal Service's physical infrastructure and encourage them to adopt new technology that would improve productivity and add value to their products. We began the process of postal reform at the beginning of this year with the successful passage of the Postal Civil Service Retirement System Funding Reform Act, which I joined Senator Collins in introducing. That bill has given mailers a break from rate increases. It has also allowed the Postal Service to run a surplus this year. The facts show, however, that this situation will not last. We have a brief window now to get real postal reform done. I hope that these hearings we are holding begin the process of working out bipartisan postal reform legislation that we can pass in the first few months of next year. Senator Carper. I really look forward to working with you and Senator Akaka and other colleagues. And General Potter, you and your team on the management side, the labor side, the rank and file, we are proud of the work that you are doing, and grateful for the work that you are doing. I do not know if there is anybody here representing the Commission today, I suspect there is, and we are grateful for the fine work that you have done, your willingness to talk with us, and to receive broad input and we look forward to hearing from our Comptroller General, as well, and others who are going to be testifying. Thanks very much. Chairman Collins. Thank you very much. It is now my pleasure to call on Senator Pryor. OPENING STATEMENT OF SENATOR PRYOR Senator Pryor. Thank you, Madam Chairman. I want to thank you for your leadership and Senator Carper and others for your leadership. I know recently you guided us to the successful passage of the Postal Civil Service Retirement System Funding Act of 2003 and I think that was an important step for the Postal Service. Also, I think now, as we look at what we are talking about today, we understand there are lots of challenges that the Post Office is facing. I think that most Senators I have talked to want to make sure that we keep the word service in mind with Postal Service, that we are serving the people of this country in the ways that we feel like it was designed to do. But also, we need to look at possible administrative changes and we need to certainly consider postal workers, but other factors in how we modernize our postal system and make it more efficient, but also to meet the challenges that lay ahead. So Senator Collins, Senator Akaka, and Senator Carper, I really look forward to working with you on this and look forward to today's hearing. Thanks for having it. Chairman Collins. Thank you, Senator. I would now like to call upon our first witness for the day. It is Postmaster General John Potter. I want to join my colleagues in commending you for your outstanding leadership of the Postal Service during very challenging times. Since taking the helm as Postmaster General in 2001 you have made great strides in reducing inefficiencies, improving service and productivity, strengthening labor relations, and cutting costs. And I think that is a tribute to how well you know the Postal Service as a 24-year veteran of the Postal Service. You know it inside out. So we are very pleased to have you with us today. You may proceed. TESTIMONY OF HON. JOHN E. POTTER,\1\ POSTMASTER GENERAL, U.S. POSTAL SERVICE Mr. Potter. Good afternoon, Chairman Collins, and thank you for those kind remarks and good afternoon to the Members of the Committee. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Potter appears in the Appendix on page 27. --------------------------------------------------------------------------- I welcome this opportunity to discuss postal legislative reform. My complete prepared testimony has been submitted for the record, so I will keep my remarks brief. I want to thank the Committee for advancing the notion last year that a President's Commission on the Postal Service might enable legislative change to move forward. The Commission was one of the most important developments during 2003. As Postmaster General, I am grateful for the Commission's efforts. They took on a complex assignment over a short period of time and they did an outstanding job of learning about our business through input from a variety of industry stakeholders. They made difficult decisions in arriving at their final report. We all owe each of the members of the Commission our sincere thanks. I am pleased that the Commission acknowledged that the Postal Service, through implementation of the transformation plan, is making substantial progress in adapting to an uncertain future. The plan is taking us in the right direction and I appreciate the support of this Committee as we work to create and now execute the plan. The transformation plan is all about delivering for our customers. To that point, we have brought service and customer satisfaction to historic performance levels. The year 2000 marked the first of a record four straight years of increased total factor productivity. We have reduced our career employee complement by 70,000 from its peak level in 1999. We have delivered $5 billion in cost savings since then. We have established pay for performance systems for managers and executives. We have also seen, I might add, increases in employee satisfaction as well as a reduction in the backlog of employee grievances awaiting arbitration. In sum, we are aggressively managing the business. In addition, the recent legislation adjusting our payments to the Civil Service Retirement System, combined with our cost control efforts, will enable us to hold rates steady until 2006. We are particularly grateful for the understanding and cooperation of the Chairman and this Committee for your prompt action in addressing the potential overpayment of the Postal Service pension funds. The Civil Service Retirement System legislation has contributed to the reduction of outstanding USPS debt by more than one-third from $11.1 billion to $7.3 billion this year. At the same time, the legislation presents very definite challenges. First it shifts the responsibility for funding CSRS retirement benefits earned by postal employees for time served in the military from the Treasury to the Postal Service. GAO estimates this transferred an obligation of more than $27 billion from taxpayers to postal ratepayers. These costs for other Federal departments and agencies continue to be paid by the Treasury. The Postal Service is the only exception. We agree with the recommendation of the President's Commission that the Postal Service should not be responsible for military service cost. The CSRS legislation also asks the Postal Service for proposals regarding the use of savings resulting from the Act beginning in 2006. Those savings are to be placed in an escrow account pending Congressional authorization of how they will be used. For 2003 and 2004 there are actual funds available, savings, to use for other purposes and we will use those funds to pay down debt. In 2005 those funds will be used for operating expenses and capital investments, allowing us to extend the rate cycle. We are doing everything we can to extend the rate cycle beyond 2005, but we expect that we will have to raise rates in 2006 due to inflationary cost increases. Should the escrow account or escrow funds not be eliminated, postage rates will have to rise even more than is necessary. Thus, without further legislation, postal customers will find themselves back where they started, reinstating the overfunding the legislation was designed to correct. We have provided our comments on these issues to Congress, the administration, and the GAO, and we hope that you will act on our recommendations. Many in the Postal Service and the mailing community and Congress have long recognized that our basic business model is outdated and lacks flexibility. The stellar service performance and $3.9 billion net income projected for fiscal year 2003 should not deter us from moving forward with legislative reforms. Besides, about $3 billion of the $3.9 billion positive net income is due to the CSRS legislation. The reality is that mail volume declined in each of the last 3 fiscal years, dropping nearly 6 billion pieces overall. During the same 3- year period, the number of addresses we serve increased by 5.2 million. The President's Commission recognized that electronic media threatens First-Class mail and the Postal Service's long-term success. The Commission also understood the need to act before a crisis imposes hardships on the American public, American businesses, or on postal employees. We accept most of the Commission's views and are working to implement those where we can. For example, we are enhancing our financial reporting, transitioning to Securities and Exchange Commission requirements where those requirements make sense when applied to a non-stockholder owned company. We support the Commission's recommendation that the Postal Service requires additional flexibility to manage, especially when it comes to rate-making. Let me assure you that the Postal Service is committed to the collective bargaining process and continually seeks to enhance its relationship with our employees. We have demonstrated our preference for negotiated settlements and seek to avoid the use of arbitrators to settle our disputes. In the event the parties reach impasse, we agree with the Commission that the collective bargaining process could be enhanced with a mandatory mediation step providing another opportunity for settlement prior to arbitration. It is our intention to negotiate with each of our unions to add mediation to the current process. In addition, collective bargaining should give all parties the ability to negotiate for benefits as well as wages. And let me assure you again though, it is not our intention to reduce the benefits already enjoyed by current and retired employees. In short, on many key issues, the Commission and management have a basic level of agreement. There are, however, some areas where we have reservations. As an example, in the area of governance, the Commission recommends significant changes to our governing board. The Governors of the Postal Service are today appointed by the President with the advice and consent of the Senate. The law requires that no more than five may belong to the same political party. This has allowed the Postal Service to enjoy bipartisan oversight for the last three decades. The Commission's proposed new board of directors could change this. In addition, the Commission proposes a Postal Regulatory Board with discretionary policy authority in a wide range of areas to replace the current Postal Rate Commission which has a more limited mandate. For instance, the Postal Regulatory Board can revisit the vital national issue of postal monopoly and universal service. From the perspective of the Postal Service, these are clearly issues of broad public policy. They are not regulatory issues. Without the fine limits or guidelines, the regulator could conceivably limit the monopoly in such a way as to jeopardize universal service or even redefine the scope of the Nation's mail service itself. The powers of the proposed regulatory board could also affect the outcome of the collective bargaining process. They could define the range within which wages may be negotiated. They would also be charged with making a wage comparability determination. This, too, is something that should be part of the collective bargaining process. Under the proposals of the Commission, the powers given to a regulatory board would essentially destroy meaningful collective bargaining. We do not think that it is in the Nation's best interests. When considering the role of a regulator, there should be a clear line between what is appropriately a management function with board oversight, regulatory function, and that which is public policy reserved for the Nation's lawmakers. I am encouraged by the interest of this Committee and the interest that you have demonstrated by holding a series of hearings to explore the recommendations of the President's Commission on the Postal Service. The Commission has added a new voice to the important conversation about the future of America's mail system. Chairman Collins, I have been asked on many occasions for my vision of the Postal Service's future. In my opinion, America needs a Postal Service that has an incentive to improve service and productivity, a Postal Service that is given the flexibility to reduce costs, a Postal Service that can implement rates that are responsive to the market and that will mitigate large counterproductive rate increases. America also needs a Postal Service that has the ability to work with and treat customers as individuals with individual needs, where our products, services, and systems are available to those customers where they are located, not just where post offices are. And finally and most importantly, America needs a Postal Service that can retain a motivated and informed workforce to provide universal service to every home and business in the Nation. Thank you, Madam Chairman and I will be happy to answer any questions. Chairman Collins. Thank you very much, Mr. Potter. You outlined some areas where you believe the Commission's recommendations should be altered. Could you tell us what you view to be the most important recommendation of the Commission as far as ensuring the long-term viability and strength of the Postal Service? Mr. Potter. I think there are two areas that the Commission focused on that I think are helpful to the Postal Service. The first is the area of rates and the need to change the rate system so that we can manage that process better than we have in the past. In addition to that, I think the other area of focus is the notion that management has the ability to control its costs through the network of post offices and processing centers throughout the country, through which we deliver service to America. Chairman Collins. Thank you. The Postal Service has recently reported, and you said in your testimony today, that it has reduced the workforce by some 70,000 over the past 5 years. I want to commend you for the way in which you have done this. I think that it has been done in a way that has avoided disruption to service and to the lives of the individual employees involved by placing a great reliance on attrition or early retirement programs, even those without particular financial incentives. At the Committee's hearing in September, Commissioner Johnson noted that by the year 2010 approximately 47 percent of the Postal Service's workforce, the career workforce, will be eligible for retirement. Does this offer an opportunity for you to right-size the organization without resorting to widespread layoffs that would obviously be painful for the employees involved? Mr. Potter. We have committed to our unions that we would not lay people off. In fact, we have signed contracts with two of our unions a year in advance of their expiring. The reason we did that was to address the concerns of our employees that we had plans to lay people off. I believe that the level of attrition that we anticipate happening over the next decade is sufficient to handle any restructuring that might occur within the Postal Service. And I do not believe we are going to have to resort to layoffs. Chairman Collins. One of the recommendations made by the Commission was that the pension and other benefits of postal employees should be made a matter of collective bargaining. I believe you endorsed that recommendation today but I just wanted to clarify that for the record. Mr. Potter. I endorsed that recommendation, particularly for new hires. But I believe that we have a contract with our current employees and those who have retired from the Postal Service and I do not believe that those changes should occur other than through collective bargaining. Chairman Collins. The Commission made some controversial recommendations, in terms of creating an independent commission that would look at the capacity of the Postal Service, particularly your mail processing centers. It would be modeled on a base closure commission. Some of us who have experience with base closure commissions do not have positive feelings about that process. I wondered if you could share with us whether you think that we need to create a base closure-like commission to review the structure of the Postal Service, the infrastructure of the Postal Service, or whether you think that there is a better way to identify excess capacity to the extent it exists? Mr. Potter. The Postal Service has been evolving for over 200 years. In the past 2 years alone we have modified our network. We have closed over 50 facilities. I think that evolution will continue to take place. I personally think that the expertise to make decisions about which facilities are necessary and which are not rests within the Postal Service. I think we are the best experts in the world when it comes to mail and we know what opportunities exist. The other thing about the Postal Service is we are everywhere and we intend to stay everywhere. When it comes to making decisions about networks and facilities, these really are local issues, in a sense they are metropolitan issues. And I believe they need to be dealt with by postal management at the local level and the communities, politicians, employees in that local area. So I think that the value of a national commission is questionable. It may help but I think we would have to see further details about how they might approach this issue which I believe for the most part are local in the sense that they deal with metropolitan issues and not national issues. Chairman Collins. Thank you. Senator Akaka. Senator Akaka. Thank you very much, Madam Chairman. Thank you for your testimony, Mr. Potter. I want to add to what I said earlier in my statement. You have been the right man in the right place at the right time since you were named the Nation's 72nd Postmaster General. Again, it is a pleasure to work with you and I look forward to that. Mr. Potter, you spoke of the need to shift the obligation to cover military retirement costs of postal employees back to the Treasury from the Postal Service. This shift is supported by the President's Commission. I understand that the resulting savings would be used to fund future retiree health benefits. I am curious why the Postal Service did not oppose the requirement that it cover military service payments when Congress was considering the CSRS legislation. Would you please comment on that? Mr. Potter. At the time that the legislation was drafted, it had a clause that asked for later comment. So we chose to follow that path, get the benefits that we could, and deal with that issue as outlined in the legislation at future hearings like this and in future legislation that dealt with the escrow account. Senator Akaka. Thank you. The Commission recommends providing the proposed Postal Regulatory Board with a number of new authorities including defining universal service and the mail monopoly, setting revenue requirements, and studying wage comparability. A great deal of this tracks legislation considered by the House of Representatives last year which the Postal Service supported. My question to you is will you support similar provisions in the future? Mr. Potter. What we did last year, we supported a comprehensive legislative bill. We did not necessarily support every item in that bill. And I think we are pretty clear on our feelings about the role of the regulator, the role that management should play, and we feel that we should have the ability to manage our networks, our systems, our people. And we believe that the Congress should have a role when it comes to defining universal service and outlining for the Postal Service what our obligations are to the American public. Senator Akaka. My final question, and I appreciate your responses to my other questions, Mr. Potter. The Commission recommends using the Postal Service's core strength, the first mile and the last mile. United Parcel Service recently announced a test program utilizing the Postal Service for deliveries to homes in some rural areas. Does this relationship require any special contractual arrangement with UPS governing the handling of items that UPS gives to the Postal Service for delivery? Mr. Potter. No, UPS is accessing a rate, a parcel select rate, where they deposit mail at a delivery unit and we carry it the last leg to the customer's door. So they are simply accessing an existing postal rate. It is not an exclusive rate. Anybody in America can access that rate and we hope that all package companies use us for the last mile. Senator Akaka. Thank you, Madam Chairman. Chairman Collins. Thank you very much, Senator. I would inform everyone that there are about 6 minutes left in this vote. My hope is we could get through some questions-- unfortunately we have three votes back to back--and then take a 20-minute recess, and then go on to our second witness. Senator Carper. Senator Carper. Mr. Postmaster General, Senator Collins asked a question relating to a BRAC-like procedure to address the issue of identifying post offices that might be candidates for realignment, for closure, or whatever. Let me ask a variation of that question, but one that focuses more on processing centers, distribution centers, that kind of thing. I know that the Postal Service is taking steps to close or make other changes in its processing centers across the country. I think it was announced in September that three--I think you call them remote encoding centers--I think one was in Kentucky and maybe another in New York--but three centers would be closed by early next year. In Delaware, as you know, there are a number of changes that have been made. We only have one processing/distribution center, just south of Wilmington. Those changes have resulted in some work moving up to Philadelphia where I am told they are planning to build a very large new processing center close to the Philadelphia airport, which as it turns out is closer to my home than it is to the home of the mayor of Philadelphia. I am sure that similar changes have been reported across the country. I guess my question is is there some strategy behind what the Postal Service is doing with its processing facilities? And if there is, could you share that with us today? Mr. Potter. As I said earlier, the Postal Service has evolved over the years. At one point in our history we had 74,000 post offices and over 1,000 places that processed originating mail and acted as plants. Over the course of time, deployment of equipment, first mechanized equipment and now automated equipment, has enabled the Postal Service to consolidate the processing of that mail. As I said earlier, we are constantly looking at our networks to determine where and how we can efficiently process mail. So the examination or the discussion of the network and what alternatives might exist to make the network more efficient, while delivering better service, has been something that we have been participating in for 25 years. So I consider it to be again part of the evolution of the Postal Service. Senator Carper. Do I gather from that that there is no strategy behind what you are doing in this area? Mr. Potter. The strategy is to become efficient, provide high levels of service, to accommodate employees as best we can through the contract to make this network more and more efficient. That is the basic concept of what we are doing and it is something that is part and parcel with the Postal Service and it has been part and parcel at the Postal Service for at least the 25 years I have been at it. Senator Carper. When you look at what the Commission is recommending, and maybe consider the legislation that I introduced earlier this year, and what you are trying to do in terms of bringing the Postal Service into the 21st Century, the discussions you had with organized labor and your customers, what would you pick out as just a handful of the toughest issues that we face as we take up early next year the issues of postal reform? Mr. Potter. I think one of the toughest issues that any postal administration has faced throughout the world is this notion of how you provide access to postal services. And whether that is a brick and mortar post office versus a rural carrier, which we have, a post office on wheels. People like their post office and the notion that there are other ways of providing that service other than through brick and mortar is something that all postal administration's around the world struggle with. So that is something that I believe we will struggle with as well. The notion of the role of a regulator, we recognize that there will be a regulator. The question is what is appropriate for the regulator to do, what is appropriate to allow management to do with oversight by the presidentially appointed board. That is a tough decision. What should you be keeping, in terms of your oversight when it comes to universal service and the monopoly, issues which are very important to your communities. Those are the issues that I think you will probably hear the most debate about and be concerned about. In addition to that, anytime you deal with labor and labor issues, they are very sensitive and everybody is concerned about the way they are treated as an individual, including me, what your pay, what your benefits are, and what your working conditions are. So anything that would affect that is sensitive. And those, I think, are the key issues that you will face as you work through legislation. You have done it before. I hope I hit the ones that people have been commenting to you on. Senator Carper. Thanks. Madam Chairman, my time has expired, and I think our time has almost expired. Chairman Collins. It has indeed. I want to thank Senator Carper for his questions. Postmaster General Potter, you are a lucky individual today because this series of votes is going to spare you a second round of questions. So we will excuse you but we will look forward to working closely with you. The Committee will be in recess for approximately 20 minutes and then we will turn to the Comptroller General. Thank you for being here today. [Recess.] Chairman Collins. The Committee will come to order. First of all, let me apologize to our witness and to the members of our audience for the delay. We did have three back to back votes this afternoon, something that was neither anticipated nor scheduled at the time we scheduled this hearing. I am now pleased to welcome our second witness, U.S. Comptroller General David M. Walker. As Comptroller General, Mr. Walker is the Nation's chief accountability officer and the head of the U.S. General Accounting Office. Mr. Walker has also been a leader in the effort to review and transform the U.S. Postal Service. We are very pleased to have you with us today and we appreciate your patience and your insights. You may proceed. TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. GENERAL ACCOUNTING OFFICE (GAO) Mr. Walker. Madam Chairman, thank you very much. Senator Carper, it's good to see you again. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Walker appears in the Appendix on page 44. --------------------------------------------------------------------------- I am pleased to be here to participate in this hearing on the President's Commission on the U.S. Postal Service. I would like for my entire statement to be entered into the record, if that is possible, Madam Chairman. Chairman Collins. Without objection. Mr. Walker. Thank you. I will move to summarize the key points for your consideration. I think it is important to note that the U.S. Postal Service has gained some financial breathing room recently as a result of the pension legislation that both of you sponsored and pushed. That legislation resulted in a significant benefit to the Postal Service and its stakeholders within the last year. At the same point in time, I think it is important to recognize that the Service's long-term financial challenges remain. And accordingly, the Service's long-term outlook and transformation effort remains on our high-risk list. Since we placed the Service on our high-risk list in April 2001, the Service has developed its 2002 transformation plan, cut various costs, and improved its productivity. These are all positive, important steps which Postmaster General Potter ought to be commended for. At the same point in time, these modest incremental steps cannot resolve the fundamental and systemic issues associated with the Postal Service's current business model. And as you said, Madam Chairman, this is a positive first step but much more needs to be done in order to get us to where we need to be. With regard to the Commission's report, we believe that the Commission's report provides a valuable contribution to assist the Congress, the Service, the Executive Branch, and the stakeholders in considering the actions needed to transform the Postal Service to a more high performing, results oriented, transparent, sustainable, and accountable organization. The Commission's recommendations echo many of GAO's prior reports, and address concerns that we have raised in the past. We agree with the Commission that an incremental approach to Postal Service reform will likely yield too little, too late. We believe that the time has come for Congress to enact comprehensive postal reform legislation that would clarify the Service's mission and role, including defining universal postal service in a 21st Century world, enhance its governance structure, accountability, oversight, and transparency mechanisms, improve regulation of postal rates, and make important human capital reforms. As noted in my statement, we agree with many of the Commission's recommendations, but have some concerns with regard to certain recommendations. For example, with regard to the basis for appointing certain members of the Board of Governors, the role and responsibilities of the new Postal Regulatory Board, and certain other issues such as negotiated service agreements. In addition to statutory reform, we agree with the Commission that the Service has many opportunities to become more efficient, notably by standardizing its operations and reducing excess capacity in connection with its network and otherwise. This vision is achievable if approached in a comprehensive, integrated fashion, based upon a strategy and a formal plan. And it is also something that has to be done in conjunction with the various postal stakeholders, both internally and externally, in order to maximize the chance for success. The impending retirement of much of the Service's workforce provides an opportunity to right-size the organization with minimal disruption. However, the Service has not provided adequate transparency, in our opinion, of its plans to rationalize its infrastructure and workforce, as well as on the status of the initiatives that are outlined in its transformation plan. While incremental progress has been made, more needs to be done. There needs to be more specificity and there needs to be more transparency with regard to these important initiatives, in our view. To facilitate the Service's progress in implementing actions under the existing system, we recommend that the Postmaster General develop a comprehensive and integrated plan to optimize its infrastructure and workforce in collaboration with its key stakeholders and to make that plan available to the Congress and the general public. In addition, the Postmaster General should provide periodic updates to Congress and the public on the status of implementing its transformation initiatives and other Commission recommendations--and also GAO recommendations I might add--that fall within the scope of its existing authority. We believe it is important to have a strategy, to have a plan with key milestones with appropriate transparency and accountability mechanisms. We also share the Commission's concerns that the Service's funding of its approximate $92 billion in liabilities and other obligations should be a matter of serious concern. Although recent legislation has addressed how the Service will cover its CSRS pension obligations over the next 4 years, the Service continues to make minimum payments for its substantial obligations which are currently financed on a pay-as-you-go basis. In this regard, in our view, given the legal nature and the economic substance of the Service's retiree health obligations, these costs and related obligations should be accounted for on an accrual basis, not a cash basis. This is an important matter that demands timely attention. This issue also involves $48 billion in discounted present value terms. We recognize that building accrual base measures for retiree health costs into the current rate base, either through a change in accounting or otherwise, may be difficult considering the pressure to hold down rate and defer rate increases. However, in our view, we believe it is more prudent, appropriate and equitable to address the unfunded obligations in a manner that is fair and balanced to both current and future ratepayers. At the same time, in our view, consideration should be given to possible transition adjustments for rate setting purposes in connection with any related change in accounting or funding for retiree health benefits. Basically what is happening right now is they are accounting and building these costs into rates on a pay-as-you- go basis which backloads the cost and puts additional pressure on rate increases in the future, which is a matter of concern given the demographics of the workforce and the competitive posture that the Postal Service faces. In summary, we and the Commission agree that the Service faces an uncertain future. We also agree that both Congressional action on comprehensive postal reform legislation and additional actions by the Postal Service to make improvements under its existing authority are necessary to ensure the future viability of the Postal Service. The simple truth is that the Service's current business model is not sustainable in today's competitive environment. Progress has been made, there is no question about it. But in our view, the time has come for both comprehensive postal legislative reform as well as additional administrative actions by the Postal Service to help assure that it can meet the needs of its customers and our country in the 21st Century. The status quo is not only unsustainable, it is arguably unacceptable. We look forward to working with the Congress, with both of you, the Postal Service and other stakeholders to address these challenges. Thank you, Madam Chairman and I would be happy to answer any questions that either one of you might have. Chairman Collins. Thank you very much, Mr. Walker. I am going to give Senator Carper the opportunity to question first, because I know he has a commitment over on the House side. Senator Carper. Thank you so much, Madam Chairman. General Walker, how are you? Good to see you. Mr. Walker. Well, Senator. How are you? Senator Carper. I am doing fine. Thanks so much for being here, and for your help on this and a lot of other things. It is reported, I think in the Postal Service's last 5-year strategic plan, that the Postal Service will begin delivering more advertising mail than First-Class mail sometime, I want to say before the end of 2005. I just wondered, in your own thoughts, what might this mean for the future of the Postal Service? Will its financial health be even more dependent on the health of the overall economy? Will customers no longer see as much value in the Postal Service if, when they open their mailboxes--as I did last night--and find mostly items that were not First-Class mail but were largely solicitations? Mr. Walker. Well, there are a number of issues here, Senator Carper. As you know, First-Class mail covers about 70 percent of the institutional cost of the Postal Service. So to the extent that you have a decline in the volume of First-Class mail, which has occurred in the last couple of years, it is a matter of real concern. Second, to the extent that volume is increasing in other areas, it can help to offset that concern. However, it depends upon what the nature of the volume is and what alternative delivery mechanisms might be available other than through the mail to deliver that type of advertising, whether it be through the newspaper, whether it be through the Internet, on television, or otherwise, if you will. It is hard to say what the ultimate impact is going to be. I will tell you this, if I look in my home mailbox, I sort between personal correspondence which is not very frequent in today's world, advertisements, which are of growing volume, and bills which I am not happy to receive but nonetheless I do receive and I must pay on a timely basis. I think that is one of the issues that is also relevant in defining what is an appropriate definition for universal postal service in the 21st Century. I think it might be different in rural Alaska and rural Maine than it is in urban New York City. What kinds of things are being delivered? And what is the sense of urgency and the need for frequency with regard to some of these types of things. I think these factors need to be considered as well. Senator Carper. Thanks. The President's Commission suggests, I believe, that the new rate system that they call for goes into effect after the completion of one final rate case under the old rules. Since the outcome of this rate case will serve as really the baseline for all future rate changes under the new system, I am just wondering how can we ensure that the process is not bogged down with the usual disagreements? What steps should we in Congress or the Postal Service or among the regulators, take in order to ensure that the case goes a little bit more smoothly than some of our other rate cases have gone in the past? Mr. Walker. Senator, there is no question that there have been concerns expressed by a variety of parties with regard to how long it takes in order to move a rate case, and therefore how far in advance the Postal Service has to begin putting together the necessary filings in order to provide reasonable assurance that they will have the revenues when they need them. I will talk with my very capable staff and see if I can come up with some specific thoughts to provide you for the record, but there is nothing that comes to the forefront of my mind at the present point in time. Senator Carper. Thanks very much. Madam Chairman, you have been mighty gracious to let me go first. I very much appreciate it and look forward to working with you on these issues as we go forward and certainly to working with GAO and John. Thank you. Chairman Collins. Thank you, Senator. Mr. Walker, the preservation of universal service at affordable rates is my key goal when I look at the Commission's report. One surprising recommendation to me that the Commission made was to allow an independent regulatory body to shape the private express statutes or to make recommendations on whether or not the monopoly on First-Class mail that the Postal Service has, which is so linked to universal service, should be changed. What is your judgment on that? Do you think that an independent regulatory commission should be making those decisions? Or are those decisions that are more appropriately continued to be vested in the Congress? Mr. Walker. As I mentioned before, we had some concerns about the role and responsibilities that the Commission proposed for the Postal Regulatory Board. I think you have to divide these roles and responsibilities into three possible categories. One would be public policy. Another would be regulatory in nature. And a third would be oversight. I think to the extent that you are dealing with a public policy issue, such as the definition of universal postal service and some of those issues, I think they are properly reserved to the Congress. In this regard, there may be recommendations coming forth by postal management, endorsed hopefully by the Board of Governors, and possibly commented on by this new regulatory body. But when you are dealing with a major public policy issue, I think those types of decisions need to be made by the Congress. The real question is, on some of these issues, how do you ensure timely action by the Congress? But when you are dealing with universal service, I think the Congress has to play a role. Chairman Collins. The Commission's report makes many recommendations affecting the postal workforce. One of those is to move toward a pay for performance system. You have had a great deal of experience at GAO in modernizing your personnel system, including, I believe, incorporating elements of a pay for performance system. I want to compliment you on how you have proceeded, because you have really involved the employees in designing the system. You have ensured that they are well-trained. And thus, a lot of the changes that you have made have been well regarded and well accepted. Could you share with us any thoughts based on your experience in transforming the GAO workforce that might apply to the challenges facing the Postal Service? Mr. Walker. First, philosophically I am a believer in pay for performance where it makes sense. I might note that at the present point in time about 80 percent of GAO's workforce is on a pay for performance system. It is our objective that 95 percent plus of our workforce will be on a pay for performance system within the next couple of years. There are certain occupations, however, that we do not propose to put on pay for performance based upon the nature of what their roles and responsibilities are. These are priority wage grade personnel. So from a philosophical standpoint, I am a believer in pay for performance, where you can end up trying to link institutional goals and objectives with individual performance and to recognize and reward people who can help to contribute towards desired institutional outcomes. I do, however, believe it is not for everybody. I also believe that you have to be very careful as to how you go about designing any type of pay for performance approach. You have to involve unions. You have to involve employees to the extent that they do not have union representatives. And you have to have their involvement in the very early stages of the process. You also have to have a modern, effective, and credible, and preferably validated performance appraisal system because the performance appraisal system would be the basis under which a lot of the decisions would be made under a pay for performance approach. You need to have adequate safeguards such as independent reviews, in our case by our Human Capital Office and our Office of Opportunity Inclusiveness, to maximize the chance that it is fairly and consistently applied, and minimize the possibility of abuse or discrimination. You need to have appeal rights that exist, both informally, and through a more formal internal grievance process and independent mechanisms, as appropriate. You need to recognize that it will take time to design and effectively implement an effective and credible pay for performance system. Frankly, you will need to modify it and continuously improve it over time, based upon actual experience. So I believe philosophically it has great merit, but I think one has to be very careful about how you approach it. Chairman Collins. Another of the Commission's recommendations was that the Postal Service pension and post retirement health-care plans should be subject to collective bargaining. What is your opinion of that recommendation and what impact do you believe separating out the postal retirement benefits from the rest of the Federal workforce would have on the overall financial stability and health of the Federal retirement plans? Mr. Walker. From a philosophical standpoint, I am a general believer in collective bargaining. And therefore, to the extent that you can subject compensation, all forms of compensation to bargaining, then philosophically I think that is a good thing to do. Obviously, we do however have to recognize that the Postal Service is a major Federal employer. It is also a major element of the Civil Service Retirement System. You just had legislation to deal with that. It is also a major player in the FEHBP, the Federal Employees Health Benefits Program. Now candidly, and it is my understanding that a separate accounting and reporting has already been done with regard to the Postal Service on the pension issue, which was the subject of the legislation that you recently passed. Furthermore, there is a separate accounting that is being done right now at our request and also the Congress' request to look at the retiree health obligations to try to find out whether or not that $48 billion number is a reasonable number or whether or not there are problems associated with it. It is also my understanding that the Postal Service has the authority right now if they want to pull out of the FEHBP and to have their own plan for active employees as long as they provide a comparable plan. So I think philosophically it makes sense to consider subjecting this to collective bargaining. I think that there would be clearly similar issues associated with the balance of the Federal Government, but those are not insurmountable obstacles and I think those could be worked through. Chairman Collins. Senator Akaka told me that he was going to be returning to ask questions. I am going to ask his staff to see if they can check on that, so that we can see whether I should continue to question you in order to buy some time for him to return or whether the end is almost in sight for you. Mr. Walker. Do I have a vote, Senator? Chairman Collins. Right. Mr. Walker, you were the leader who first suggested to this Committee that the Postal Service come up with a transformation plan. And the Postal Service did so in April 2002 and has been implementing it. How would you grade the success of the Postal Service in following its own transformation plan at this point? Mr. Walker. I would not want to give them a grade. I will, however, say the following. I believe that they have taken it seriously. I believe that they have taken a number of positive steps to begin to implement some of the critical elements of the plan. I believe that the plan needs to provide for more specificity than it does right now. I also believe that there needs to be more transparency with regard to what they are doing and what they have accomplished, and also what they plan to do going forward with regard to the transformation plan, especially in the area of rationalizing infrastructure and workforce modernization. Chairman Collins. The Postal Service has been criticized, despite recent progress that has been made, for having opaque and difficult to follow financial statements. Could you comment on the issue of the need for more transparency in that area and give us your evaluation of the financial reporting systems that the Postal Service has in place? Mr. Walker. First, I think we have to keep in mind that the Postal Service is one of the largest employers in the United States. If it was a Fortune company, it would be a Fortune 10 company. So it is a very large and important enterprise. It is also one that is important not only to its customers but also to our country. I do not believe that the current amount of financial transparency is adequate. I do believe that the recommendation that the Commission made, and that frankly we have made before, whereby the Postal Service should consider voluntarily complying with the substance--not necessarily the detail--but the substance of the major reporting requirements that apply to large public companies, would be a step in the right direction. You might note that there is a difference between the number that the Postal Service reported for their preliminary net income estimate for this fiscal year, namely what is in their testimony versus ours. We said $4.2 billion, they said $3.9 billion. That changed within the last 24 hours and we did not find out about it until after we had sent our testimony up to the Hill. So I think they need to be more transparent and I think that following some of the principles that apply to public companies that relate to SEC reporting would be a step in the right direction. Chairman Collins. You notice that in my statement I picked a number between your two numbers, but you are right. When we are talking about billions of dollars and such a large enterprise, there is a lot more, in my judgment, that I think could be done. And complying with some of the standard SEC-type of reporting requirements, I think, would be a step in the right direction. Finally, let me ask you is there any recommendation of the Commission that you think is particularly important if we are to ensure the long-term viability of the Postal Service? Mr. Walker. There are a number of recommendations that I believe are important, but there are ones that I think are particularly important that are also going to be particularly controversial and difficult. Looking at their mission, what should their scope be, including the issue of universal postal service in the 21st Century. Second, rationalizing their infrastructure. And third, modernizing their workforce policies and practices. Those, I think, are the three probably most important. They arguably are also the three most complicated and controversial. But I hope that we are going to be able to make progress on these because I think it is essential that we do so in order to achieve an effective transformation. Chairman Collins. I thank you very much not only for your testimony today but for the excellent work that the GAO has done on postal transformation. We look forward to continuing to work very closely with you and your staff as we begin the process of drafting postal reform legislation. My approach to Senator Akaka's absence, since I know he is delayed on the Floor, is to ask for your cooperation in answering any questions that he might have for the record. And the hearing record will remain open for 15 days. I want to thank you very much for being here today. It has been very helpful for the Committee to hear firsthand the views of the Postmaster General and the Comptroller General as we continue with what will be a series of hearings evaluating the Commission's report and other ideas for postal reform. These hearings will continue early next year and we look forward to working with all interested parties. I also want to thank Ann Fisher on my staff who has spent a great deal of time working on these issues and will continue to do so next year. Thank you and this hearing is now adjourned. 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