A new Congress heard testimony from a new Postmaster General and a panel of postal industry leaders on the state of the Postal Service at a hearing held on March 2, 2011.  Postmaster General Patrick R. Donahoe made his first Congressional appearance as head of the Postal Service when he testified at these hearings, ominously entitled: “Pushing the Envelope:  The Looming Crisis at USPS.”

The House Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy is chaired by Rep. Dennis Ross, a Republican from Florida’s 12th District.  The Vice Chair is Rep. Justin Amash, a Republican from Michigan’s 3rd District.  The ranking Democratic member is Rep. Stephen Lynch from Massachusetts’s 9th District.  Other Subcommittee members include Republicans Jim Jordan (Ohio), Jason Chaffetz (Utah), Connie Mack (Florida), Tim Walberg (Michigan), Trey Gowdy (South Carolina); and Democrats Eleanor Holmes Norton (Delegate from D.C.), Gerald Connolly (Virginia), and Danny Davis (Illinois).

The following is a brief summary of the prepared statements submitted by hearing witnesses:

Postmaster General Pat Donahoe

Postmaster General Patrick Donahoe noted that the Postal Service’s core business will always be delivery and service.   He described the enormous scope of USPS’s daily operations, which include processing and delivering 584 million pieces of mail each day to more than 150 million locations.  The Postal Service also serves some 7 million customers at 36,000 retail locations and 1.2 million who visit online.  The postal industry itself is a major driver of the economy that employs millions of people and generates over $1 trillion in revenue each year.

Donahoe noted that the Postal Service has aggressively moved to better manage and control costs that are in its control.  Over the last three years, the Postal Service has reduced the number of career employees by 102,721, or 15.1% of its workforce.  Donahoe has intensified those efforts, and announced a 16% reduction in officer ranks, a flattened organizational structure, closure of an Area Office, and streamlining operations in certain non-delivery service areas.

To understand the significant challenges facing the Postal Service, Donahoe pointed to the change in the mix of mail volumes.  While total system mail volume increased by 1.5 percent over the last quarter, revenues declined by 2.6 percent because there is less First Class Mail and more Standard Mail.  First Class Mail has been on a downward spiral for nearly a decade.

Without some legislative fix, Donahoe noted, the Postal Service will become insolvent on September 30 when a $5.5 payment is due to be paid into the Retiree Health Benefits Fund.  On the very next day, October 1, the Postal Service will also owe the federal government $1.2 billion for its annual payment on workers’ compensation liability.  Having maximized the amount it can borrow, the Postal Service will fall between $2 and $3 billion short in meeting these obligations.

Donahoe outlined four strategies to improve the fiscal health of the Postal Service including:

  1. Strengthening the business to consumer channel.  Mail remains one of the most highly effective means of promoting and marketing business.  Direct mail is especially crucial to small and medium-size businesses.  USPS is working to simplify its mailing requirements and make it easier to do business with.
  2. Improving the customer experience.  USPS wants every customer experience to be a positive one.  USPS aims to improve that experience at both the retail and carrier level.  USPS will also make every First Class single-piece stamp a Forever stamp.
  3. Competing for the package business.  With the continued rise in e-commerce, package delivery is a major growth area for USPS.  The Priority Mail Flat Rate Box has grown by 58% since debuting in 2004 and last year generated $1.2 billion in revenue.
  4. Becoming a leaner, faster, and smarter organization.  Streamlining the postal network, and removing redundancies, to manage declining mail volumes.  USPS is constantly evaluating its procedures for mail processing, transportation, and delivery.  USPS continues to seek Congressional approval to move to a five-day delivery model, which could be implemented within six months after approval.

Donahoe called for changes in existing law to solve the onerous burden imposed by prefunding retiree benefits.   The Postal Service also seeks legislative solutions to remove constraints on delivery frequency, workforce flexibility, and facility alignment.  Until then, the Postal Service will continue to  control what is in its capacity to control and carry out the four strategies listed above.

PRC Chair Ruth Goldway

PRC Chair Ruth Goldway noted that the Postal Regulatory Commission Is in its fifth year of operation under the Postal Accountability and Enhancement Act of 2006 (PAEA). Postal Accountability and Enhancement Act pdf  The PRC believes that the PAEA has been a positive force for change, while keeping postage rates low and service at acceptable levels. The price cap imposed by PAEA has been a powerful incentive toward the Postal Service achieving $11 billion in cost reductions over the past three years.

To date, the Postal Service has contributed $42 billion toward the Retiree Health Benefit Fund, which is now a substantial postal asset. The results of a PRC commissioned study show that annual payments to the fund could be lowered by more than $2 billion per year and still meet prefunding goals.  In addition, the PRC believes that from the time the Postal Service was established in 1971, it has overpaid an estimated $50-55 billion to fund pension obligations.

Goldway noted that PAEA imposed some potentially irreconcilable requirements.  For example, the law requires that all products cover their costs. But if a product is not covering its costs, the Postal Service still cannot raise its rate beyond the inflation rate cap. The inflation cap may not provide sufficient room for a rate increase sufficient to cover that product’s costs.

The PRC conducted extensive hearings on the Postal Service’s proposal to send Saturday mail delivery service.  Goldway described this issue as the most difficult and multi-faceted one she has faced in her 13 years as a PRC Commissioner.  After the hearing, on March 24, 2011, the PRC issued its report on the USPS proposal to move to five-day delivery.  PRC Advisory Opinion on Five-Day Delivery – March 24 2011.pdf

GAO Director Phil Herr

Phil Herr, Director of the Government Accountability Office’s (GAO) Physical Infrastructure team, reported on the Postal Service’s deteriorating financial condition.  He concluded that the Postal Service’s financial outlook is “grim in both the short- and long-term” and will not be fixed easily or quickly.  GAO has identified five key areas where action is needed to modernize and restructure USPS to achieve financial viability:

  1. Realign postal service with customers’ changing use of mail.  USPS cannot afford its present day level of delivery and retail services, and could save $3 billion annually if it eliminated Saturday delivery.
  2. Realign operations, networks, and workforce.  USPS’s operations, networks, and workforce need to be realigned with changes in mail usage and customer behavior, as USPS now has costly excess capacity.
  3. Reduce compensation and benefit costs.  Wages and benefits represent 80 percent of USPS’s annual costs ($60 billion).  One of the most difficult yet critical challenges is making changes to USPS’s compensation system.   The Office of Management and Budget suggested outsourcing in situations where it results in cost savings.
  4. Generate additional revenue through new or enhanced products and services.  A key issue is whether USPS can generate sufficient new revenues under existing law or whether changes to PAEA are needed.
  5. Funding postal retiree health benefits:  The Postal Service cannot meet the annual prefunding payments that are due.  Several proposals are pending that would change current prefunding requirements.

Valpak’s Jim Sampey

Jim Sampey, Executive VP and Chief Operating Officer of Cox Target Media (owner of Valpak), stated that much of the Postal Service’s problems lie with PAEA, enacted five years ago.  Sampey urged Congress to fix that flawed legislation.   PAEA imposed the extraordinary obligation of prefunding all of USPS’s estimated retiree health care benefits over 10 years.  When payments to the Retiree Health Benefit Fund are taken out of the picture, the Postal Service actually had a $601 million operating profit over the last four fiscal years.  In addition to imposing this extraordinary burden, PAEA tied the hands of the Postal Service in achieving revenue growth and cost reductions.

But even if all of PAEA’s ills were cured, the Postal Service would need to take further action to become a healthy, self-sustaining entity.  Sampey stated that USPS needs to “focus on increasing operating income with a vengeance.”  This includes not just eliminating Saturday delivery, but also beginning to replace expensive door delivery with curb delivery.  Sampey noted that door delivery alone has an average daily cost of $1.15.  Sampey also called for reducing the cost of the retail network by closing uneconomic and redundant post offices.

Arthur Sackler

Arthur Sackler is a Coordinator of the Coalition for a 21st Century Postal Service and  Executive Director of the National Postal Policy Council, an organization of large business users of First Class Mail.  Sackler urged the Subcommittee to correct the $50 billion or more in overpayments made by USPS to the Civil Service Retirement System and $7 billion to the Federal Employees Retirement Systems.  Sackler emphasized that this was not a “bailout” of the Postal Service — it is money that was already paid into the system by the Postal Service.

Sackler noted that the alternative is insolvency.  Should USPS default on its $5.5 billion obligation to prefund retiree health care, due on September 30, the legal consequences are unknown.  Sackler noted that holders of U.S. bonds and securities, especially those overseas, might see a USPS default as the first string in the unraveling of the nation’s ball of yarn.  This could in turn increase the cost of borrowing to the United States Treasury.

NALC’s Fredric Rolando

Fredric Rolando is the President of the National Association of Letter Carriers (NALC).  [NALC’s collective bargaining agreement with USPS expires later this year.]  NALC has nearly 290,000 members.  Rolando stated that the Postal Service provides a vital infrastructure service through which $30 trillion of transactions moves annually.

While the Postal Service’s $20 billion of losses over the past four years are jaw-dropping, they are misleading and cannot be accurately compared to those reported by other companies.  The losses are the result of three main causes:  (1) prefunding retiree health benefits; (2) a large drop in mail volume caused by the recession; and (3) the impact of mail volume lost to electronic diversion.  PAEA’s prefunding requirement was, in hindsight, a terrible mistake.

NALC has been a responsible and reliable partner with USPS in reacting to the steep drop in mail volume.  Carrier routes have been adjusted nationally three times over the past 18 months to ensure 8-hour assignments, and a new round of adjustments is taking place now.  But endless downsizing, cutting service, and eliminating Saturday delivery is not the answer to the Postal Service’s long-term challenges.  Instead, Congress should fix the prefunding requirement and credit to USPS $50 to $75 billion in pension cost overcharges paid into the system since 1971.

Eliminating six-day service would, in NALC’s view, be a strategic business blunder.  It would save little money (only a 4% cost reduction for a 17% delivery service reduction) and risk the loss of far more revenue over time.  At a time when the nation is suffering an acute jobs crisis, throwing 80,000 decent jobs away does not make sense when there are better alternatives.  Rolando also urged Congress not to tamper with the postal collective bargaining process by requiring arbitrators to take account of USPS’s fiscal health.  Arbitrators already do this, and adding a new requirement along these lines would unfairly tip the scales in favor of management’s position.

[Thanks to Kyle Gilster, Senior Counsel at Husch Blackwell LLP’s Government Affairs practice group, who assisted in the writing of this column.]