Hearing of the Federal Workforce, Postal Service and the District of Columbia Subcommittee of the House Oversight and Government Reform Committee - Restoring the Financial Stability of the U.S. Postal Service: What Needs to be Done?

Statement

Hearing of the Federal Workforce, Postal Service and the District of Columbia Subcommittee of the House Oversight and Government Reform Committee - Restoring the Financial Stability of the U.S. Postal Service: What Needs to be Done?

Chaired by: Rep. Stephen F. Lynch

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REP. LYNCH: Good morning. The subcommittee on Federal Workforce, Postal Service, and the District of Columbia's first hearing on the -- in the 111th Congress will now come to order.

I want to welcome Ranking Member Chaffetz, and members of the subcommittee, hearing witnesses, and all those in attendance today. This hearing will examine the financial stability of the United States Postal Service. The chair, and the ranking member, and the subcommittee members will each have five minutes to make an opening statement, and all members will have three days to submit statements for the record.

Hearing no objection, so ordered. I also want to note that Mr. Turner, not a member of the subcommittee without objection and through unanimous consent will be agreed to -- it will be agreed that he will participate fully in the hearing; without objection.

Mr. Connolly, you have a point of order?

REP. GERRY CONNOLLY (D-VA): Not a point of order, Mr. Chairman. I just want to make sure that on the previous vote, although it wasn't a recorded vote, that my statement was entered into the record.

REP. LYNCH: Yeah, you had submitted your record, and I made a motion to enter your submission into the record, and so you --

REP. CONNOLLY: Happy to support this discussion. Thank you, Mr. Chairman.

REP. LYNCH: Okay. Thank you, Mr. Connolly.

Welcome, Ranking Member Chaffetz, and members and staff of the subcommittee, and today's witnesses as we hold the first subcommittee hearing of the 111th Congress. I'd like to give a special welcome to the Oversight Committee Chairman Mr. Towns, who is with us this morning, and Ranking Member Mr. Issa for joining us this morning.

This hearing on the financial stability of the United States Postal Service is not only timely but critical to the American expectation of affordable six-day mail delivery. The subcommittee will now examine the nationwide economic downturn and technological advancements that have produced declining volumes and revenues for the Postal Service.

With the Postal Service facing unprecedented budget shortfalls, the subcommittee will consider a number of options to restore financial stability to the Postal Service. We will also examine ways for the Postal Service to continue to operate without cutting services.

On March 20, 2009, the Postal Service announced new efforts to cut costs. Among these plans are to close 6 of its 80 district offices, eliminate 15 percent of administrative staff positions across all districts, eliminate more than 1,400 mail processing supervisor and management positions, and offer voluntary retirement -- excuse me, offer voluntary early retirement opportunities to nearly 150,000 employees.

These recent announcement and new reports of the Postal Service's dire financial condition are of concern to myself, the members of this committee, and the American public. I expect that today's witnesses will offer effective and short and long-term strategies to reduce costs and improve efficiency in order to help ensure financial viability of the Postal Service.

In addition, to better understand compensation at the Postal Service, I will question the board of governors on executives' compensation packages. Thank you and I look forward to having a very informative hearing this morning and I -- at this point, I will yield to our Ranking Member Mr. Chaffetz of Utah.

REP. JASON CHAFFETZ (R-UT): Thank you, Mr. Chairman. I thank you for holding this hearing. It is critical in this time. This is the first of our oversight hearings on the Postal Service and our first hearing overall. We are here today to review the lifeblood issues involving the United States Postal Service.

The United States Postal Service touches everyone. There are -- there are hundreds of thousand of employees. The postal industry generates hundreds of billions of dollars as the postal system and personnel process literally hundreds of billions of letters and packages. We all need the postal system to thrive. The task at hand is enormous.

In 2006, the Congress passed the Postal Accountability and Enhancement Act marked up in this committee as H.R. 22. There's now another H.R. 22 before us which would change the way the Postal Service pre-funds retiree health care. The requirement that the United States Postal Service pre-fund the employer's portion of this -- of the future retiree's health benefits, while paying premiums for current retirees, is seen as an unnecessary cost burden.

One thing is for sure. The United States Postal Service is in serious financial trouble. In January -- on January 28, 2009, the Government Accountability Office issued a significant study regarding the deteriorating postal finances, requiring aggressive actions to reduce costs.

We must continue to do our utmost to ensure that the Postal Service is managed responsibly, effectively, and with the greatest integrity. And that we're constantly looking for savings in other ways to be creative within the Postal Service, to provide maximum service to the American people as it's articulated within the United States Constitution, and making sure that we are providing a service that will allow our businesses, our friendships, the personal notes that will go through the Postal Service, and that that system continues to thrive.

With that in mind, we must also inquire into the postmaster general's compensation package, possible consolidation policies within the system itself, and the relocation policy in force, and other issues that will become before us. With that, I look forward to the testimony, Mr. Chairman, and appreciate being able to participate today.

REP. LYNCH: Thank you. At this point, the chair would like to recognize the full committee chairman, the gentleman from Brooklyn, Mr. Towns, for five minutes.

REP. ED TOWNS (D-NY): Thank you very much, Chairman Lynch. Before starting my opening statement, I would like to congratulate you on becoming chairman of the important subcommittee, and thank you for your leadership and insight in holding today's hearing on the Postal Service.

Also I would like to congratulate the gentleman from Utah, Mr. Chaffetz, who as a freshman, has already taken on an important leadership role in the House by serving as ranking member of this subcommittee. Congratulations.

Today's hearing is fittingly entitled "Restoring the financial stability of the United States Postal Service; what needs to be done?" Charged with the awesome task of providing prompt, reliable, and efficient universal mailing service to all communities, businesses, and households throughout the United States in territorial areas, the United States Postal Service has certainly withstood the test of time. But the massive operational and financial challenges confronting the Postal Service are unlike any we have ever seen before.

Having ended the last fiscal year with a net loss of nearly $3 billion -- and that's "b" as in "boy" -- the deteriorating economic condition of the United States Postal Service can no longer be ignored or deferred. With electronic communications taking more and more customers out of the lobby of the post office, coupled with the enormous contractions of the United States economy, the Postal Service is struggling to remain a financially solvent and viable entity for both now, as well as in the future. Yet the question remains how exactly will such stability be gained, and more importantly, maintained in the new and evolving 21st century economy.

As mail volumes decline and costs from labor, energy, and expansion in the delivery network continues to increase, the Postal Service, it's union affiliates, the Congress, and the country must take some difficult -- make some difficult decisions to get us through difficult times.

And so Mr. Chairman, it is my hope that today's witnesses will allow us to get at some of those answers, and to help us determine what may have already been done to curtail costs, what innovations are currently in the works to reinvent and revive the Postal Service, and lastly, what we in Congress may need to do to restore the Postal Service's financial standings and to ensure the Postal Service's extraordinary reliability and service. Again, I thank you, Mr. Chairman, for holding such a timely hearing, and I look forward to hearing from the witnesses. Thank you, and I yield back.

REP. LYNCH: Thank you, Mr. Chairman. It's an honor to have you here with us.

The chair now recognizes the gentleman from Indiana, Mr. Souder for five minutes. The gentleman passes.

Chair recognizes the gentleman from Ohio, Mr. Turner, for five minutes.

REP. MICHAEL TURNER (R-OH): Thank you, Mr. Chairman. I'd like to thank Chairman Lynch, and the Ranking Member Chaffetz for allowing me to participate in today's hearing on the financial state of the United States Postal Service. I look forward to reviewing the testimony from all of today's witnesses.

General Potter, I want to thank you for participating in today's hearing. In the materials we have received in preparation for today's hearing, the Postal Service has increased their long-term debt from $0 in FY 2005 to over $7 billion in FY 2008. I know that the members of this committee are concerned by these figures and want to work with the Postal Service to find cost savings, in measures that will help maintain the viability of the post office in the future.

That said, as some of you know, DHL which operated their North American operations within my congressional district, recently ceased their domestic express shipping business, leaving essentially UPS and Federal Express as private shippers in the U.S. domestic shipping market. I am concerned that this market consolidation will have an impact on costs in domestic shipping, and was hoping that during this hearing that you could comment on how this development in the private shipping markets could impact the Postal Service's ability to remain competitive.

Given that the U.S. Postal Service actually contracts with private shippers for some of its delivery services, how might this consolidation in the market affect these contracts, and how might these costs result in increases overall for the Postal Service?

Again, I look forward to working with you to find effective ways to helping the Postal Service remain competitive and am interested in your comments concerning the consolidations in the market.

Thank you, Mr. Chairman.

REP. LYNCH: The chairman neglected to note at the beginning of the hearing that because we have five panels today in this committee, we will be here very late unless we adhere very strictly to the five- minute rule. So members will have five minutes to ask a question and have it answered, and when the time runs out at the end of the five minutes, when that light turns red, whoever is speaking may have the opportunity to complete their thought, but we're going to maintain a fairly strict five-minute limit. Otherwise, we would be here again, very, very late.

At this point, the chair recognizes the gentleman from Illinois, Mr. Davis, for five minutes.

REP. DANNY DAVIS (D-IL): Thank you very much, Mr. Chairman, and I want to commend you on your leadership and also thank you for this very timely hearing. Last week, the Postal Service announced that it was closing offices, and offering early retirement to nearly a 150,000 employees, almost a quarter of its workforce. The agency indicated this action was necessary because of sharply lower mail volumes, due to the recession.

Supported solely by mailing and shipping revenues, not taxpayers, the Postal Service is experiencing a short-term financial crisis. I believe that Congress can act to provide some immediate breathing room, at no cost to taxpayers, by supporting the bill that I've co- sponsored with Representative John McHugh of New York. Our bill H.R. 22 removes an outdated retiree health benefit mandate designed for much happier times.

When we passed the PAEA, the Postal Accountability and Enhancement Act, the climate was a bit different then than what it is now. Times have changed.

The national economy is in a recession, and there is no place more reflective of that than the economic reality that the Postal Service, which has seen a steep decline in mail volume and revenue since December of 2007.

Despite declines in mail volumes and revenue, the Postal Service nevertheless is obligated to cover the cost of operating an extensive network of facilities, delivery vehicles, and personnel, necessary to serve the nation six days a week.

Even with continuing extraordinary steps to cut costs, the enormous fixed cost of operating the national mail service threatens to overwhelm the ability of the Postal Service to operate. The aggressive approach to pre-funding future retiree health benefits that appeared doable two short years ago is now untenable in my estimation.

I hope that this hearing will give us an opportunity to thoroughly explore the problems and difficulties being faced by what I consider to be one of our great national treasures that is the Postal Service.

Actually, this time has been coming for quite some time, and we've been putting off, delaying, deferring, not dealing with, hoping that somehow or another the inevitable we would not have to face up to. But I think the time has now come, that unequivocally, no doubt in my mind, that some serious reevaluation of our Postal Service must take place, and I believe that that evaluation will begin this morning. So I want to thank you for this hearing.

And certainly welcome, Mr. Potter.

REP. LYNCH: Thank you. Chair recognizes the gentleman from Maryland, Mr. Cummings, for five minutes for an opening statement.

REP. ELIJAH CUMMINGS (D-MD): Thank you very much, Mr. Chairman. I thank you too, I join my colleagues in expressing our appreciation for this hearing. We hold this hearing today at a time when our national economy is struggling, and the United States Postal Service is not immune to that trend.

Postmaster General John Potter, who will testify before us today, recently testified before the Senate Committee on Homeland Security and Governmental Affairs that the Postal Service operated at a $2.8 billion loss for fiscal year 2008. He said the loss can be attributed largely to two factors, the unprecedented decline in mail volume due to increased use of electronic communications and other factors, and the economic recession that is affecting all sectors.

Mr. Potter further outlined his plan for action to achieve fiscal solvency. In addition to raising postal rates, the Postal Service has been able to identify over $2 billion in cost reductions, ranging from consolidation and modernization, plan operations to cut into city delivery options. Many tough decisions have had to be made, not the least of which is a cutback of 15 million work-hours in the first two months of this year, in addition to the -- in addition to the 50 million work-hours saved in 2008, and the 36 million work-hours saved in 2007.

The Postal Service's 600,000 career employees have had to face serious cutbacks to ensure the agency's viability and we commend them for their sacrifice. Still, this may not be enough. Mr. Potter indicated in his testimony before the Senate panel that the Postal Service may have to reduce delivery service to five days a week, rather than the current six day schedule. The headline-grabbing reality served as a wakeup call to the American public and to those of us in Congress who represent them.

The United States Postal Service is currently the most dependable, expansive mail delivery system in the world. Ours is the only system that guarantees timely delivery to every address in the country six days a week without fail. That is why we must do all in our power to ensure that it continues to thrive.

Some tough choices will have to be made, including both short- term solutions like that proposed by H.R. 22, which would allow the Postal Service to use its reserves to pay employee health benefits, to more long-term decisions such as cutting back work-hours in service delivery. I expect that with the leadership of the Postal Service will have to make some sacrifices as well, including Mr. Potter himself.

I want to thank you, Mr. Chairman. I yield back.

REP. LYNCH: Thank you. Chair now recognizes the gentle lady from the District of Columbia, Ms. Norton, for five minutes.

DEL. ELEANOR HOLMES NORTON (D-DC): I thank you, Mr. Chairman. This is perhaps the real moment of truth for the Postal Service and for the Congress of the United States. We have sat with you, Mr. Chairman, before you became chair in hearing after hearing where we noted the decline of Postal Service through frankly no fault of its own.

Even if it were the most efficient corporation in the United States, it could not have been the same Postal Service it was when all of us were children, given competition from private carriers and particularly -- and perhaps most importantly competition from other forms of communication.

We are -- the decline in the so-called volume of postal -- postal volume now, during what we are politely calling a recession, which is taking down jobs in 50 states, has to be seen on top of what the Postal Service was already experiencing. The Postal Service had been driven into many economic efficiency moves by the factors I have named.

Today, I will be interested in what further can be done in efficiencies. It's not hard to believe that the Postal Service, given what it was already up against, hadn't exhausted efficiencies. I do note that the Postal Service is like other large American corporations, having to deal with health care.

And I also note that health care paid a major -- was a major element in the takedown of the American industry that literally created the American middleclass, the automobile industry.

And I think that somehow or the other, everybody has to look at that when it comes to this particular corporation. There's no question in my mind it could take it down, so the question becomes what do we do to keep that from happening. There may be some temporary things we can do. We have to watch out what give. Something has got to give.

I don't blame the postmaster for talking about five day a week service. I know he doesn't want to do more layoffs, but if something has got to give, we've got to find out what it is, if we want to remain a country that has a national postal service.

And I thank you, Mr. Chairman.

REP. LYNCH: I thank the gentle lady. The chair now recognizes the gentleman from Virginia, Mr. Connolly, for five minutes for opening statement.

REP. CONNOLLY: Thank you, Mr. Chairman, and I'm delighted to be here today.

And welcome, Mr. Potter.

Just wanted to note that obviously the Postal Service is struggling in this economy like everybody else, and they're struggling to try to make itself a more solvent organization. I'm pleased to be a cosponsor of H.R. 22, which if enacted, we believe, would save as much as $2 billion in retirement payments this year for the Postal Service.

I do want to stress however, Mr. Chairman, that just as we have seen a concern about issues like bonuses in non-performing companies, or companies that can't meet their financial goals, I think the Postal Service has to look to itself in that regard as well, and I would hope this hearing would examine that.

I also -- as somebody who until nine weeks ago was the head of a local -- a very large local government, I think about my own jurisdiction, the Merco (ph) post office which serves all of Northern Virginia or most of Northern Virginia, always got changed with almost no communication to local governments.

And so I would hope that as we explore in this hearing the operations of the Postal Service, we can also talk about improving communication with our local officials, so that if there are changes contemplated, there's an advance notification, and the opportunity for some kind of dialogue before those changes are effectuated, and having to be absorbed and explained by local officials who had nothing to do with those changes.

So I look forward to this hearing, Mr. Chairman. I may be in and out because we're marking up the budget committee today -- the budget today in the budget committee, but I want to thank you, Mr. Chairman, for hosting this hearing.

REP. LYNCH: Thank you.

Chair now recognizes the gentle lady from New York, Ms. Maloney, for five minutes for an opening statement.

REP. CAROLYN MALONEY (D-NY): Thank you. I just want to welcome the postmaster general, and express my support for the Postal Service in H.R. 22.

Likewise, I'm in a markup in another committee meeting, but to note their bravery through the anthrax attacks and their efforts to get the job done in rural areas and all across our country, and my support for working with you in this hearing, and for more solutions to make the Postal Service more efficient and to be supportive of the workers and their important contribution to our country. Thank you.

REP. LYNCH: Thank you. The committee will now hear testimony from today's witnesses. It is the committee policy that all witnesses are sworn in. I invite Mr. Potter, please rise and raise your right hand.

(The witness was sworn in.)

REP. LYNCH: Let the record show that the witness has responded in the affirmative.

Welcome, Mr. Potter. Mr. John E. Potter, postmaster general and CEO of the United States Postal Service was named 72nd postmaster general of the United States of America on June 1, 2001. He currently sits on the Postal Service Board of Governors, and is vice-chairman of the International Post Corporation, an association of 23 national posts in Europe, North America, and the Asia Pacific.

Welcome, Mr. Potter.

MR. POTTER: Thank you, Mr. Chairman, and good morning, Congressman Chaffetz, and members of the committee.

It's an honor to be here representing the hardworking men and women of the United States Postal Service, to discuss the financial challenges facing our great institution. We are working hard to serve America, and we are proud of our accomplishments.

For example, in 2008, service and customer satisfaction reached record levels. Employee satisfaction hit an all-time high, as workplace accidents were at an all-time low. For the fifth straight year, the Postal Service was rated the most trusted federal agency, and one of the 10 most trusted organizations in America. We reduced our cost by over $2 billion.

Let me assure you that we are concerned about the future, and we are investing in the future. We are modernizing our website, adding new automated equipment, introducing next-generation barcodes to improve efficiency, and we're using the pricing flexibility from the Postal Act of 2006 to grow mail volumes. But despite these positive efforts, a diversion of mail to electronic communications, and the severe contraction of the economy have left the Postal Service in a very precarious position.

Over the years, first-class mail volume has declined due to the divergence of the Internet. These has been somewhat offset by growth in advertising and other mail. However, ad mail produces less revenue per piece than first-class mail. This, combined with a growing number of delivery addresses, has caused our entire organization to focus on productivity to close the revenue gap.

We've taken billions in dollars of cost out of our base, and we've done that for the past eight years. None of us though anticipated the dramatic downturn in the economy. By the end of this fiscal year, mail volume is projected to fall by more than 30 billion pieces from 2007 levels, the equivalent of $12 billion in lost revenue.

Our people have responded heroically. We're working together with our unions and management associations. We plan to reduce cost by $5.9 billion this year alone. To make this happen, we've instituted a nationwide hiring freeze. We're consolidating operations, using fewer machines on fewer work-shifts, and fewer facilities with fewer mail carriers.

We are eliminating thousands of administrative and supervisory positions, and we are offering voluntary early retirement to 150,000 employees. And despite these unprecedented efforts, and based on current volume projections, we'll come up approximately $6 billion short of breaking even this year.

Even with a cash carryover of $1.4 billion, and an ability to borrow $3 billion from the Treasury, we will still run out of cash with approximately $1.6 billion in obligations that we cannot meet this year. And I know that the House cares very much about the Postal Service. That's why I'm urgently requesting that you enact H.R. 22, introduced by Representatives John McHugh and Danny Davis of this subcommittee, and cosponsored by over 200 members of Congress.

H.R. 22 would permit the Postal Service to pay its share of health benefit costs for current retirees from our retiree health benefit trust fund, which today has a balance of $32 billion. The Postal Service contributes more than $5 billion to that fund each year.

H.R. 22 addresses our critical cash flow. But we also need to be prudent and look ahead. Mail has helped build this great nation, but with the decline in mail volume -- even with the decline in mail volume we remain a conduit for a trillion dollars in commerce.

And a strong Postal Service will -- you know, we cannot put Postal Service at risk. But our law limits our ability to act and adjust to changes in mail use when it comes to pricing, delivery frequency, the number of post offices, and the types of products that we can offer. These restrictions will put our post at risk if we don't step up and change them.

The time for change is now. That's why I'm urging -- engaging all our stakeholders, consumers, mailers, industry and employee groups, the Congress, the PRC, and others in a dialogue about how we can keep the Postal Service strong. It will require structural changes to match our service levels with the changing demand.

Demand for mail delivery reached a peak of 5.9 pieces of mail delivered to each address in 2000. Today, we're delivering 4.7 pieces of mail. Given this trend, I believe the Postal Service Board of Governors needs the flexibility to change delivery frequency from six to five days.

This would help us reconfigure our operation in line with today's demand, keeping rates affordable. We cannot lose sight of the fact that our customers pay the cost of our services. We are not funded by Congressional appropriations. We have to find the right balance between service and affordability, and we have to do all we can to avoid having the burden of long-term retiree cost fall on taxpayers. By taking necessary actions today, I believe we can accomplish both.

There is a path to success. I remain bullish on the mail. I'm convinced that mail volume must grow as the economy grows. The mail is important to America. I'm convinced it's a key to helping the economy grow. A viable Postal Service requires change. We are pushing the boundaries of change within the Postal Service, and with your support, we can modify the law to assure a strong and bright future.

Thank you, Mr. Chairman. That concludes my remarks.

REP. LYNCH: Thank you, Mr. Potter. Now let me begin the questioning. Before I do, we have invited members to submit their questions in writing, for those who are unable to attend, and I'd like to enter into the record the questions -- for the record on behalf of Representative Jose Serrano before this committee, and with unanimous consent I'll enter those into the record.

Mr. Potter, let me get right to one issue that is probably uncomfortable for you and myself as well, and that is the matter of your salary, and compensation, let me broaden that out. There have been some reports in the press that when you dig into the facts they're not necessarily reflective of an accurate assessment of your compensation. But we in our districts, myself with a heavy postal population in my district, have been confronted with this. Well, I'll tell you exactly. I was at the Stop & Shop the other night, and a older gentleman, a retiree of the post office, confronted me, as my constituents sometimes wont to do, and said, "Let me get this straight, Congressman. You paid CEO Potter $800,000 to lose $3 billion last year. Couldn't we get somebody to do that job for less?" That was basically how they laid it on me.

I tried to explain our position and yours, but I want to give you a full opportunity to do that. Given today's environment, and I'm sure you're aware of the whole situation with AIG and bonuses, and going to Merrill Lynch, in this environment, in these difficult financial times, can we justify -- can the Postal Service justify your compensation package, which I'd like you to clarify?

I'm sure it's been exaggerated, I've already looked at the numbers here, but I want you to basically tell us what your compensation package represents and how it's broken down. I want you to inform the committee at least your side of the story.

MR. POTTER: Thank you, Mr. Chairman. Well, first let me talk about elements of this $800,000 plus number. The first element that I believe probably shouldn't be there in terms of compensation is the fact that I have a security detail, which is attributed as a revenue to me, or paid to me, of some $66,000. That service is performed by the United States Postal Inspection Service. So that's an element of my pay.

The -- my base pay as prescribed by law, is up to a 120 percent of the vice president's salary. Prior to the Postal Accountability and Enhancement Act, it was much less. It was, you know, the equivalent --

REP. LYNCH: Postmaster General, can you -- is there a historic reason why your pay was tied to the vice president of the United States? I don't see any similarity in responsibilities, not to reflect poorly on either one of you, but --

MR. POTTER: Well, I'm just describing what it is, and I -- the rationale was the Congress's, not mine.

REP. LYNCH: I see.

MR. POTTER: Okay? I was not employing people for a pay raise. The board of governors had asked the Congress for additional flexibility to hire and retain talent in the Postal Service. So again, by law, my pay is $263,575. Since -- and as a result of me being a career employee, at my age, every year that I stay, I get 2 percent additional credit in the civil service retirement system.

REP. LYNCH: How long have you been in that system?

MR. POTTER: I've been in that system since 1978, so almost 31 years.

REP. LYNCH: Okay.

MR. POTTER: And so each year that I stay I get an extra 2 percent in my pay. In addition to that, since I'm not 55 yet, every year I stay there's 2 percent of a penalty that would accrue if I were to leave early. And so automatically every year I stay, there's a 4 percent growth in terms of my pension. And the other thing that drives the pension is the three year high for employees. They take an average of your top 3 years pay. And since I got such a steep increase in pay as a result of the law, it produces in terms of pension, over the course of my life, a value of some $300,000 plus.

REP. LYNCH: I only have about 30 seconds left, and I've got to hold myself to the same rule.

MR. POTTER: Okay.

REP. LYNCH: The bonus -- I have a -- you have a statute that I reviewed that says your pay is basically equal to -- your salary is equal to the vice president's ($)263,000 or something like that, and then I see you get a ($)130,000 something in a bonus, and quite frankly, last year, they lost, you know, the post office lost $3 billion.

MR. POTTER: Well, that was an incentive payment that was tied to goals agreed to between myself and the board of governors. The things that drove the incentive pay were -- service performance was a major element, and obviously, we set record levels. Employee satisfaction, accidents were record -- accidents at record low, employee satisfaction at record high, customer satisfaction at record levels. And I think there was a recognition by the board of governors that I wasn't in control of the economy, and that we did eliminate 50 million work-hours.

REP. LYNCH: All right. I'm going to hold myself to the same rule, and I'm going to yield and recognize the Ranking Member Mr. Chaffetz for five minutes for questioning.

REP. CHAFFETZ: Thank you, Mr. Chairman.

And thank you, Mr. Potter for being here. My congratulations and hats off to the entire postal community for the great savings and efficiency that were accomplished under your watch, and under -- and with the great work with literally thousands and thousands of others. So congratulations for that.

Obviously, this committee is Oversight and Government Reform, and while we need to talk about some of the huge, massive changes that need to happen in order to put the Postal Service back into the black, I do feel compelled to ask you about a report that was brought to my attention just a very short time ago.

I need to ask you about this; on March 19, 2009, there was a report done by the Republican committee here that said -- "Friends of Angelo" is the name of this report; "Friends of Angelo, Countrywide's systemic and successful efforts to buy influence and block reform."

On page 38, paragraph 3 it says, "Fees were also waived for Postmaster General John Potter. Potter benefited from an encounter with Mozilo in 2003. Potter was in the process of arranging a quote, 'complicated' unquote bridge loan, when he quote 'coincidentally' end quote ran into Mozilo.

"Mozilo instructed Countrywide's K. Garfen (ph) to quote 'let Potter know that we/CW,'" which I take it to be Countrywide, "'will take care of it,' end quote. Mozilo instructed Perry (ph) to quote 'take one point off,' end quote, Potter's rate, and to charge quote 'no extra fees,' end quote.

"Potter was referred to Mozilo and/or the VIP program by former Fannie Mae Chief Executive Jim Johnson."

In an e-mail that was issued -- that was written in May 21, 2003, sent by K. Garfen of Countrywide, let me read that -- it says, "Coincidentally Angelo just ran into Mr. Jack Potter (postmaster general), and Mr. Potter will be calling on Friday. Angelo wanted to make sure you were given a heads up to quote 'let Mr. Potter know we/CW will take care of it,' end quote. Also per Angelo, quote 'take one point off, and no extra fees, deal a little complicated, bridge loan, dot, dot, dot,' end quote. Please let Angelo know as soon as you hear from Mr. Potter, thank you."

In light of this, I need to ask if you knew about this, did you accept the loan? And do you feel like you were given favor by Countrywide through this encounter?

MR. POTTER: Well, first, I do have a loan from Countrywide. I believe that the terms of my loan were the result of a good credit history, and of my financial position, and the fact that I was buying -- purchasing a home, and putting in a little over half of the money down in cash. And the discussions were strictly between myself and Countrywide were all about the loan. There was no linkings to any expectations of official acts or you know, anything to do with the relationship with any elected officials that has been, you know --

REP. CHAFFETZ: My understanding is the inspector general has started investigation.

Are you willing to cooperate with the investigation as completely as possible, by turning over all documents, consent to an interview or deposition with the investigator general -- investigators, and are you willing to make other people -- help and assist with other people, acknowledge of the terms of the loan available for the Inspector General's Office?

MR. POTTER: Yes.

REP. CHAFFETZ: How -- how much did you save by taking a discounted loan?

MR. POTTER: Again, I think the terms of my loan was consistent with my credit history.

REP. CHAFFETZ: How were you -- what was the nature of you actually coming in contact -- in fact you were referred to Countrywide's VIP program by former Fannie Mae CEO Jim Johnson, correct? How did that come about?

MR. POTTER: Well, at the time Jim Johnson was the co-chair of the President's Commission on the United States Postal Service. So Jim Johnson was working with us as chairman of that committee during that period of time.

REP. CHAFFETZ: And did Johnson indicate to you that you should expect preferential treatment and discounts from Countrywide?

MR. POTTER: No, Johnson indicated to me that, because I had -- he and I had a discussion -- he had overheard me having a discussion with somebody, and he basically came up to me and said, oh, congratulations, you're buying a house.

I had told them that at the time of the discussion that I hadn't closed yet, that I had made an offer. And he told me that -- we had a long discussion about how long I was going to work as post master general, and how long I anticipated being in the home. He suggested to me that I consider a 723 loan. He also suggested to me that I consider using Countrywide, which is a group that provided him with a loan.

REP. CHAFFETZ: And you'll complete -- you'll cooperate full then with the inspector general's investigation?

MR. POTTER: Yes.

REP. CHAFFETZ: Thank you, Mr. Chairman.

REP. LYNCH: The chair now recognizes the gentleman from Illinois, Mr. Davis for five minutes.

REP. DAVIS: Thank you very much, Mr. Chairman.

And while I appreciate your purchasing a new house let me try to get down to the post office, and what we might be able to do about it. We know that we've got serious problems. And we gone over and over those.

I appreciate the cost cutting approaches that you have developed within the system. I appreciate the proposals that have been made. I appreciate the approaches to streamlining the operation. Of course, I still get people who complain that they don't get what they would hope that they could get, which leads me to the point of recognizing that whatever it is that we get we've got to pay for it one way or another.

I'm reminded of Fredrick Douglas who said he knew one thing if he didn't know anything else, and that is that in this world we may not get everything that we paid for, but we most certainly will pay for everything that we get.

I'm trying to -- some of us believe that H.R. 22 is one way of effectuating some short term fix to some of the problems that currently exist. Let's say if we, for some reason, were not successful in passing this legislation, within the next two years, what would you predict the Postal Service would be forced into, all we'd have to do to try and make ends meet?

MR. POTTER: Congressman, that's a very difficult question. The key for us right now is volume. And I believe that we have to pull up all the stops when it comes to growing volume. I think that we have lost, for example, 20 percent of our advertising mail in each of the last two months.

I believe that that's going to come back, because if you look at advertising in general, it's down. So what we need to do is we need to get past this downturn in the economy. We need to understand how much of mail volume will come back.

There is no doubt that some of the mail lost will not come back. We'll have to step up our efforts to save money. We've planned to save ($)5.9 billion this year. We plan, and have a plan to save another -- almost $4 billion next year. And the reason that we can't do it all at once is because of the fact that it does take time to make adjustments in staffing.

I do think that we face -- the most critical thing we face this year is we're going to run out of money. And so, you know, we're going to have to decide what -- which bill not to pay.

I intend to pay the salaries of our employees. We may have to forego paying the Treasury, you know, part of what we owe for retiree health benefit trust fund.

We would, you know, then be faced with -- again the thing that we put on the table is the notion that we can only cost cut so much. We have to get at some point at the structural aspects of our business.

The reason we talk about moving from six-day to five-day delivery is because our costs are -- there is a variability in cost that we can manage. Fixed cost, we cannot. So this year we have volume that's down some 12 percent year to date.

We have taken out 15 percent in our mail processing cost, because of the variability in an operation. We've taken out 12 percent in our post office cost to match the decline of volume. But we cannot and have not been able to take it out of delivery cost, because if you have the cost of going to every door every day it's in a sense fixed. The only variable is how much time the carrier spends casing mail.

And so that's the dilemma. And that why we proposed and think we need to explore how do you take and make structural changes that will have minimal impact on the American public and the users of the mail. But at the same time enable us to lower our cost.

REP. DAVIS: Let me just say that I appreciate your optimism relative to the ability to grow volume. I just don't see how you're going to be able to do it. As a matter of fact we are increasing the use of electronic communication as opposed to decreasing it. I wish you well.

MR. POTTER: If I could -- okay.

REP. LYNCH: Gentleman's time has expired. I'm sorry, the gentleman's time has expired.

The chair now recognizes the gentleman from Indiana, Mr. Souder for five minutes.

REP. MARK E. SOUDER (R-IN): Thank you, Mr. Chairman.

Let me fist ask you a quick question on the -- separate from the structural problems, isn't it as far as the deficit that you're running in the relationship to income and so on, isn't it always been true on the post office that the money is made right after a postal rate increase and you show profit. And then towards the point where you're going to do the next postal rate increase you tend to show losses, isn't that the historic pattern?

MR. POTTER: That was the historic patter. It was addressed in the Postal Act of 2006. And what we went -- the change that was made was we went to annual price increases, smaller annual price increases versus we were on a three-year cycle of very large increases.

And so the law addressed that a lot of customers were very concerned about what you just described, the fact that we had these peaks and valleys. And there was major impact on the use of the mail in a year when we had double digit price increases.

REP. SOUDER: So you're saying that the loss that you currently have is predominantly somewhat structural, but also very -- the reason it's more severe because you couldn't annually adjust because business dropped so fast?

MR. POTTER: Well, exactly. And if you think about us as a service institution versus manufacturing, in manufacturing when demand goes down what you end up with is a lot more inventory. You know, a lot of cars in lots that were produced at same productivity.

In the service sector you can adjust service because the demand changes on any given day. And so we've been trying to chase the decline in demand and adjust service to those lower levels of demand. And so it created a gap. It's a productivity gap. And we're constantly trying to bring that in line.

Where we have not been able to do it, as I just said, is delivery.

REP. SOUDER: I just wanted to make sure that the record understands that the correlation between income and loss in not exactly the same as it in the financial institutions or in others because of what you just described which is somewhat of a change from the rate.

But there are -- there is a structural problem that Mr. Davis just referred to, and that is that changing the way people communicate.

And so I have two specific things I want to quickly run by you. One problem the most -- other than limiting a day of delivery, closing smaller post offices it seems to me which is also a jobs question, but if -- window access, but also a procedure question coming from a small town myself.

It seems to me in the age of computer technology as we look at the centers like in Portland, Indiana where I am from they have very automated. But we ought to be able to program to keep people's identity.

Small towns are losing the schools, they are losing everything else. And this is just unbelievably political pressure at least with the identity of smaller communities to get absorbed. And just -- I'd like your comment on that.

And the second question is that as we watch daily newspapers collapse at a amazing rate right now and as a former retailer myself, and if you pull Saturday delivery, and we lose daily newspapers.

For example, Donnelley has a huge facility in my district. How do they get things to people in a timely fashion when weekends are the biggest sales period? That -- it seems to me that as you structurally look at this somehow merging some delivery system, communication systems -- I mean, that means do you have to deliver in the morning rather than later in the day?

Do newspapers have to adjust from the Sunday to a Saturday? That habits are nice, and patterns are nice. But the technology has changed so much we could watch you getting hammered and restricted tremendously. At the same time newspapers are going out. And how do we communicate and keep our structure moving as how we move goods in the United States.

MR. POTTER: At first let me address the question of community identity. Our systems -- you know, our zip code based systems are strictly geography based. It's usually a five digit code, geography based. But we have changed our systems to allow numerous names for cities, towns or geography within zip codes.

So there is flexibility within our system to allow that. It's more rigid when it comes to zip codes because of -- we don't have an infinite amount of zip codes. And so we have to be careful when it comes to that. So --

REP. SOUDER: Seven digit won't -- wouldn't allow you to expand that? I mean --

MR. POTTER: There is the discussion -- we have -- right now we have nine digit zip codes.

REP. SOUDER: No, that's what I --

MR. POTTER: And we could literally, you know, carve pieces of it out. And as a result of that we have enabled communities to use their community name as an alternate to what might be the name of the formal town. And so we allow multiple names within a geographic area. But there are segments of the country where we are out of zip codes.

Now, regarding delivery, as I said earlier, we are reaching out to everybody, all the stake holders. It's not a fact that we would eliminate Saturday, but we do need to have flexibility there. Sorry, chairman.

REP. LYNCH: Gentleman's time has expired.

Gentleman -- chair recognizes the gentleman from Maryland, Mr. Cummings, for five minutes.

REP. CUMMINGS: Thank you very much, Mr. Chairman.

Mr. Potter, we've recognized that there were certain delivery routes such as those in more rural areas. We realize those apparently had to be contracted out. We were concerned with the more widespread implementation of that practice.

Has the Postal Service expanded its contracting out of -- (inaudible) -- areas? And if so, can you prove that it has resulted in cost savings?

MR. POTTER: Congressman, we can prove that contracting out delivery is less expensive than using postal employees. We do have and have stopped contracting out delivery in city areas and in most rural areas.

The reason is not because it's less expensive, but because of this downturn in the economy, and the lack of volume. Bottom line is right now we're in a position where we have too many folks. And so --

REP. CUMMINGS: In other words, you had too many folks that you were contracting out to, is that --

MR. POTTER: No, we have too many postal employees. So as new -- today we still have -- despite the fact that we have a downturn in the economy -- we have a growth of about a million addresses a year, over a million addresses a year. Those new addresses are largely being delivered to by career employees.

And we have an excess number of employees that we're downsizing. So it would make no sense in this time to begin contracting out or expand contracting out.

REP. CUMMINGS: Talk to me about this whole doing away of -- you know, we've talked about this before, this doing away with delivery on Saturday. I mean, is that something that's real? I mean, I've heard it before.

And then it seems like everybody gets upset. And then next thing you're going to hear about it for a while. Talk to me about that.

I know that you before this Senate you again advocated for that change. And to be frank with you, and you know this, probably one Saturday of delivery, and what can we do to maintain it?

MR. POTTER: First of all, let me assure you that being a career employee and coming from a postal family I did not make that request lightly. I took it very seriously.

I'm very concerned about the future health of the Postal Service. I -- we're working very hard with our unions and management associations to try and streamline our operations. The real key here going forward is do we have enough source of revenue to support the post?

And we're looking at all options. One, we've been looking around the world to see how they are doing it. Some places posts are banks. And that how posts are earning money to help pay for the services that are provided in terms of hardcopy delivery.

So as far as I'm -- but we're precluded by law from exploring other forms of revenue. So I think if we put everything on the table, you know, everything there is, including product choices, how we run our plants, that we might find a way to get there.

But the key -- the overall key is that there is a decline in mail volume. If that continues, whether it's next year or five years from now, we are going to have to face that -- the need to structurally change some thing. And the most obvious place, unfortunately, is in delivery.

REP. CUMMINGS: What have you done to try to increase revenue? Anything?

MR. POTTER: Well, we have a number of things. One is, we have offered rates, and we have opened up our system to others to use our system for delivery. So our biggest -- believe it or not -- package customers are UPS and FedEx. Basically we'll give them access to our system.

We have click and ship where people can get online at home, pay for postage, print out a label, put it on the package. We pick it up. We are offering pick up service now. FedEx is -- I mean, the UPS, we have an experiment to do that.

In the ad category, ad mail area we are offering and working with customers to come up with new pricing schemes to incent volume growth. Bottom line is we're making our products much more effective than they have been. We're adding a barcode to -- we're introducing a new barcode on the mail.

REP. CUMMINGS: Okay. Let me ask you this last question, because I want to obey the chairman's orders.

MR. POTTER: Sure.

REP. CUMMINGS: This H.R. 22 -- I mean, what -- is that the -- do you consider that to be a solution? Is that a long-term solution? Is it -- and what do you like so much about it?

MR. POTTER: It's a short-term solution, what I like about it?

REP. CUMMINGS: Yeah. H.R. 22.

MR. POTTER: H.R. 22 is a short-term solution for us. It doesn't -- you know, won't overcome the longer-term issue that I just described. I like the fact that it's an eight-year bill, and that we can plan for eight years what our costs are going to be for retiree health benefits.

REP. CUMMINGS: Thank you, Mr. Chairman.

REP. LYNCH: Chair recognizes the gentle lady from the District of Columbia, Mr. Norton, for five minutes.

DEL. NORTON: Thank you Mr. Chairman.

Mr. Potter, the GAO -- and I'm going to read to you what it said -- noted that you had made -- you and the Postal Service had made unprecedented cost cutting -- cost cuts over the years. But then it went on to say, "Given the growing gap between revenues and expenses, the USPS' business model and its ability to remain self-financing may be in jeopardy."

I want to ask you now rather than later, because this clinking problem could put the Postal Service out of existence. Do you believe that the Postal Service would totally rethink its business model? Have you give any thought to that in the form it would take.

And do you believe the Postal Service can sustain itself as a self-financing entity as the 1970 statute made the service.

MR. POTTER: Congresswoman, I believe that we can do that, that we can be a self-sustaining organization for a long time to come.

DEL. NORTON: Out of present business model?

MR. POTTER: Not on the present business model. I believe that we are going to have to make changes, whether that the frequency of delivery, whether that's the type of products that we can offer. I think that everything has to be on the table, including the mix of our workforce.

We are not in a position today looking forward where we can sit still. The sooner we act, the better off we'll be, and the more viable we will be.

The one thing that -- the biggest trap, I think, we have is that we don't act quickly enough, and we create a financial burden --

DEL. NORTON: If I may ask Mr. Potter, that's my problem about -- quickly enough. So you suggested, we may have to go from six days to five days. This sounds like an incremental approach rather than a business model approach.

If one looked at the entire business model it may be that you came out not with, for example, going from six to five days, who knows.

But if everything is on the table, my question is, is it on the table? Who is doing the re-thinking of the business model? When can this subcommittee expect to get some evidence of thinking on a new business model?

MR. POTTER: Well, I -- if that's an invitation we'll gladly --

DEL. NORTON: If not you -- are you sure you wouldn't want people who are not in this -- in the business of the Postal Service like ourselves to be the first to come forward and take a hack at it.

MR. POTTER: I think --

DEL. NORTON: And I use the word "hack" very advisably. Because the moment anything gets cut, every member of Congress, including those who most just want to spend money on anything will say, you still can't do that in my community.

But I looked at your press conference. I asked you about six to five days because again that seems to me to be more of the same. Thinking of doing that way seems to me dismembers parts of the body piece by piece rather than looking at the body and its core and seeing what can be left standing.

In your press release of March 20th, you talk about aggressive steps to cut cost. You talk about offering another round of early retirement. And then you spoke about positions that you expect to save funds from.

Now, staff positions at the district level nationwide, 1,400 processing, supervisor and management positions. Are these positions, are these layoffs? Will layoffs occur? Have they occurred?

MR. POTTER: There will be a reduction in force according to --

DEL. NORTON: So there will be layoffs.

MR. POTTER: At the end it could be. But we hope to be able to offer everyone a job.

DEL. NORTON: Let me ask you about early retirement. Have postal employees been quick to take early retirement when they see the condition of the Postal Service ?

MR. POTTER: We've had, I believe, some 9,000 people take advantage of the early --

DEL. NORTON: How many were offered or expected to take early retirement?

MR. POTTER: That was a little bit above what was expected. It was well over a 100,000 people who were offered.

DEL. NORTON: It does seem to me the -- if one is talking about big reductions that could come given the business model. Let me just ask you again, another round of early retirement that might be offered, if so what kind of cost does that entail, relative to keeping these people onboard?

MR. POTTER: We've just opened up voluntary early retirement to -- all postal employees through the end of this year. And so when people are being told that their positions are eliminated they have an opportunity to either seek a different position and/or they have the option of retiring if they are eligible.

DEL. NORTON: I think that's a very important thing you're doing that way. And I do think people know how to take care of themselves. And they can see the business model just like we can. And they know that you've been trying.

If it's not done one way, it may do another way that really hurts the Postal Service. Got to keep as many people employed as we must have in order to deliver the mail.

Thank you, Mr. Chairman.

REP. LYNCH: Thank you.

Chair now recognizes the gentleman from Missouri, Mr. Clay, for five minutes.

REP. WILLIAM CLAY (D-MO): Thank you, Mr. Chairman. And thank you for conducting this hearing.

Mr. Potter, thank you for being here today. You know, I understand that you are looking at a huge deficit within the Postal Service in the coming years. And I understand the proposal to reduce service from six days to five. What would be the savings to go from six days to five day? How much would that save?

MR. POTTER: $3.5 billion.

REP. CLAY: Annually.

MR. POTTER: Annually.

REP. CLAY: Annually.

MR. POTTER: Annually.

REP. CLAY: Is that right? Okay. How is -- how have your -- in industries like the auto industry, labor and management have found a new found friendship or relationship. How is that relationship with management and labor in the Postal Services? Does everybody -- has everyone come to the table and said, okay, we know we're going to have to do some belt tightening. Is that pretty healthy relationship?

MR. POTTER: We've -- I've always had a healthy relationship with unions and management associations. And we have been meeting on a regular basis now that we face this crisis. And everything is being discussed. That's on the table. We've made a number of changes.

Probably the most prominent example is, in delivery work with the NALC to expedite changes in routes. With the rural carriers we have a count that's going on right now. We have talked at our last meeting, which was last Friday -- we had a discussion, and were talking about working -- enabling people to move from job to job more easily because we have some pockets of need and some places were overstaffed.

So we're working through to try and get at both efficiency as well as making sure we're accommodating employees.

REP. CLAY: And so the labor community understands what the Postal Services confront --

MR. POTTER: Without a doubt.

REP. CLAY: Wonderful.

Are there any advances in technology on the horizon for the Postal Service to help reduce cost? And are there any new ideas to grow the business?

MR. POTTER: We're deploying, as we speak, the next generation of flat sorting equipment, which will enable us to put mail into walk sequence, flat mail catalogues, magazines, and oversized envelopes into walk sequence for delivery. That will make that operation much more efficient.

We are also introducing next generation of barcode which will enable us to actually count mail as it's sorted, as opposed to accepting it. And again it'll eliminate some steps and make the mail more efficient for us to handle. And it will be more transparent to customers. So they will have a window into how we're processing the mail.

So there are a lot of innovations in terms of -- you know, that are on the table, that are being implemented to get the Postal Service into the 21 century.

REP. CLAY: Let me hear what your -- if you could -- your wish list for a long-term fix to the retiree health benefit, what would that be, or you would will to give them?

MR. POTTER: Well, if it was my wish list I would like to just revisit this whole motion of the pace at which we pave into the retiree health benefit trust fund, because no other organization I'm aware of in America that has the requirement that we have.

If we run the GAAP principles we would not be paying into this trust fund. I understand the need to do it. But at a time when we're financially strapped, if this was private sector we would not make that contribution this year. We would pass on it.

The payments that we're making into that fund are not tied into an actuarial kind of analysis. It was really a hold over from payments that we are making into the civil service retirement fund.

So I would much refer. I love H.R. 22. And I want it to pass. But if you had to step back, I think we should rethink the way we're paying into this. And it would more of a benefit to the Postal Service in the short run if we did.

REP. CLAY: And your costs are higher than other federal employees, about 10 percent --

MR. POTTER: No, they're about the same. But we're the only ones that have that pre-funding mechanism.

REP. CLAY: All right.

Now, just as informal survey that I conducted among Postal Service employees, they indicated to me that they would prefer to have -- the day that you eliminate the service would be Saturday and not Monday, just to share that --

MR. POTTER: I like my weekends off too.

REP. CLAY: All right.

Thank you, Mr. Chairman.

REP. LYNCH: I thank the gentleman.

Mr. Potter, because of the interest in all of the issues here, we're going to ask you to stay for one more round of questioning.

And let me begin that by asking you -- you know, we're hearing your plan, which is, you know, we're going to slash service possibly from six to five days at a significant burden to the customer. We're going to close post offices.

We've already closed six administrative facilities. We're going to get rid of 150,000 employees. And then after all that you're projecting we're going to lose $6 billion.

If that is the future here, if that is the future next year, do you think you deserve a bonus for that performance?

MR. POTTER: My incentive is based on performance parameters that are agreed to with the board of governance at the beginning of the year. Based on where I stand, year-to-date, in terms of our financial position, I would not get a performance bonus this year or incentive payment this year.

REP. LYNCH: Okay.

MR. POTTER: And I'm working very hard, because I would just like to mention that all of our administrative employees, our managers, our supervisors are tied into a National Performance Assessment program.

They are paying, whether they get a raise, or whether they get any kind of an incentive pay in any year is tied to the bottom line of the Postal Service. So -- I mean, I don't want to be cavalier about this. It's extremely important that we work hard to do well so that not just -- not that I can earn a performance incentive, but that those folks on the front line actually get a pay increase.

REP. LYNCH: I understand that.

MR. POTTER: So I think that's a great motivating tool for our institution.

REP. LYNCH: Just want to be clear on that.

H.R. 22 -- I mean, the fact that it's sponsored by Mr. Davis of Illinois, and Mr. McHugh of New York, two folks -- two guys who I admire greatly and respect their opinion, I'm inclined to be receptive of that.

But I also looked at numbers that said that if we do that, if we paid the premiums out of the trust fund rather than putting ($)5 billion a year into the trust fund, that down the line, not very long, 2017 we end up with $75 billion, an unfunded liability -- for health benefits -- for my postal employees. I don't want to face that. So you know, are we under the same impression that that's what's going to happen under this scenario?

MR. POTTER: H.R. 22 will have us continue to pay $5.4-5.6 billion into the trust fund each of the next eight years. It relieves us of the burden of paying for retiree health benefits directly in each of those eight years. The monies come out of the trust fund. The trust fund will grow in each of those years.

After that point in time, there will be a determination around what the requirements, the future requirements of the fund are, and those costs will be amortized, I believe, over a 40-year period of time. So I believe that the mechanism that is laid out in the current law and the proposal that's put forth by H.R. 22 has the double benefit of protecting our people as well as giving us short-term relief.

REP. LYNCH: All right. Let me just say for the record I am not there yet. I'm open to it. You know, I've seen some numbers that concern me about what's going to happen to my postal employees in 2017. And I -- you know, I don't want to be holding a bag to the tune of $75 billion for their health benefits, you know, stone cold, you know, in 2017 looking at that problem.

MR. POTTER: Appreciate the opportunity to come back and talk --

REP. LYNCH: Yeah, let's do that. All right. Last thing is, you know, I do have some familiarity with the Postal Service, and I recognized it in your last early retirement incentive. It had no incentive. It was just an early out, voluntary early retirement. And you're looking to get rid of 150,000 people.

That's not going to happen if you have the same plan you had last time. You almost added employees in your early retirement program with no incentives. Is there going to be any incentive for -- look at the economy. Look at the economy. You think people are going to go out the door when everything is so precarious?

I'm just wondering are you going to offer any type of incentive to any of these employees. I realize you've got some employees who would not be eligible because of the importance of their positions. But will there be any attempt to offer any incentive to get people out the door?

MR. POTTER: It's under consideration, but we have over 120,000 people who are currently eligible to retire. We also have 150,000 who will be offered voluntary early retirement. When we say that we are going to reduce 150,000 people, it's the equivalent of 150,000 people. That includes overtime.

We have employees -- non-career employees who we can let go today as we speak, but 30,000 fewer career employees than we were at this time last year, 10,000 non-career. So we have the flexibility to do that, we have a flexibility to take our part-time flexible employees and only work them four hours every two weeks.

Believe me, there's enough flexibility in our system to accomplish what you describe. But that's not to say that every option isn't on the table. We would consider bonuses -- I mean, you know, incentives to go sometime in the future, but we don't need that today.

REP. LYNCH: Okay. I'm violating my own rule. Chair recognizes the gentleman, Mr. Chaffetz, for five minutes.

REP. CHAFFETZ: Thank you, Mr. Chairman.

A few years ago, the president's commission on the U.S. Postal Service made a number of recommendations. One of those recommendations was to a Postal Network Optimization Commission, somewhat similar to -- a sort of a BRAC commission that was on a military basis. Is it something you're supportive of, something you want to see done? Why wasn't it done? With 34,000 postal facilities, is this something we should be doing? And where is it on your list of priorities?

MR. POTTER: The BRAC commission concept, as I understood it back then, was focused on our now processing plant network. And it also probably could apply to our post office network. The thing that makes us a little different than the approach in the BRAC commission is that we have to serve every community in America.

So we have to be in every location. Our plans have to be, you know, within a reasonable reach of each of our post offices. So there is, by its very nature, a network that exists. And it doesn't lend itself, in my opinion at the time, did not lend itself to some analysis at a national level.

And so, you know, in effect you could have it at the state and local level with state and local politicians, but not necessarily something that really made sense to me at the time.

REP. CHAFFETZ: So do you think we're at the optimal level now or do you --

MR. POTTER: Well, I think we're going to continue to evolve. I think there are a number of discussions that we're talking about here today when it comes to, you know, the future of delivery. Well, to me, delivery is tied to demand. And so if the demand today means that we go to every house five -- you know, six days a week, fine, if it's lower it goes to five, some point it might go to three.

I still think we need to evolve. I think our plan network has evolved, and we'll continue to evolve. And we do -- and have been consolidating operations. I'm open to -- you know, if it's a BRAC commission or some other group coming in taking a look at the data and making recommendations, we'd look at them.

REP. CHAFFETZ: Okay. You're not doing anything internally right now to look at some of the consolidation or --

MR. POTTER: We're constantly looking at that.

REP. CHAFFETZ: Constantly?

MR. POTTER: Constantly looking at that. We're constantly closing facilities. As I said earlier, we're consolidating -- moving now from one facility to another facility where it makes sense. For example, West Mail was put into mailboxes everyday.

So we have fewer facilities today that cancel mail and sort mail for the world than did, you know, 10 years ago.

REP. CHAFFETZ: Okay. Let me -- time is short here. You mentioned the 150,000 employees nationwide that are given the opportunity to take early retirement. How many do you expect that would actually take advantage of that opportunity?

MR. POTTER: Oh, I would expect that maybe in the neighborhood of 10 (thousand) to 15,000.

REP. CHAFFETZ: Ten to fifteen thousand?

MR. POTTER: But you also have 120,000 people who are eligible to retire and who will retire over time.

REP. CHAFFETZ: Are you suggesting -- are you taking a firm commitment to say we're making a recommendation to move to five-day service, or are you just saying that's on the table at this point?

MR. POTTER: What I'm saying is that given what I know today, that we have to make a structural change. The one that makes more sense to me is to give the Board of Governors the flexibility to move from six-day to five-day delivery. I think that they will exercise their judgment on whether or not we need to move to that in its entirety, whether we would do that, and I've sent it to the Senate.

I propose to do that during our light-volume periods. And that's where this whole thing began. And one of the senators asked me does that mean that you're only asking for the summer period. I said no. We want to have the flexibility given to the Board of Governors, people who are presidentially appointed, Senate approved, to make that change as necessary to assure the financial stability of the Postal Service.

REP. CHAFFETZ: Do you believe that will be a permanent change or --

MR. POTTER: I think once made, it would be.

REP. CHAFFETZ: Thank you, Mr. Chairman.

REP. LYNCH: Thank you.

Chair recognizes the gentleman from Illinois, Mr. Davis, for five minutes.

REP. DAVIS: Thank you, Mr. Chairman. And I won't take five minutes, because I don't believe that you can actually get blood out of a turnip.

REP. LYNCH: Want a turnip? (Laughs.)

REP. DAVIS: I think you can blight it, you can dice it, you can curry it, you can sautee it, you can squeeze it, you can piece it, and you still end up with turnip juice. But we were about to explore just for a moment your optimism relative to the ability to grow volume. And I was saying that it was difficult for me to see any room, any possibility, because you --

MR. POTTER: Let me just say that the Postal Service is in a number of markets. So one of the products that we have is an advertising product. When I say grow, I'm talking about growing from where we are today. If 20 percent of advertising mail went away, which it has -- and by the way, it's reflective of what's going on in the marketplace for advertising.

If people now want to make investments in advertising, I think that now is going to be a channel that they're going to consider. Prior to this downturn in the economy, our market share of advertising dollars, total advertising dollars that were spent on mail, had been growing. Why? Because people were looking to have the ability to target different customers and they wanted measurability, and mail is very measurable.

And so my belief is that as the economy comes back, advertising mail will grow again. Will it get back to the levels that was before the economy went down? I hope so. But I know it's going to grow beyond where it is today. Likewise, packages. Our package business is down. When I do a comparison of where we are versus the competition and looked at what's the impact of the downturn in the economy on their revenues, we're very comparable.

I don't think there's anyone in this room who doesn't think that if the economy comes back, our competitions, packages, and their volume won't grow. So I have faith that our market share will be maintained as volume grows. The one area that -- Congressmen, where we have a real problem is first-class mail. It's transactional in nature, it's bill presentment, bill payment.

Once someone goes online and begins to pay bills online, they're not going to come back to the Postal Service, because you know, of the very nature of -- you know, once you have that happen, you're not going to do it. So when I talk about growth, that's what I'm talking about. I'm talking about those categories of mail where we have a natural strength in the marketplace. And I believe that we will bounce back in those areas.

Even first-class mail; we were declining in first-class mail about 3-5 percent per year in terms of volume. But we are down over 10 percent. And I believe that the difference between 3 and 5 and 10 is largely driven by the economy. When the economy comes back, we may see an uptake in first-class mail. And so that's what I'm talking about growth. And I'm talking about computing in certain sectors, and growing our market share.

REP. DAVIS: Well, let me thank you very much, because I, like Chairman Lynch, don't want to be left holding the bag in 2017 even if it's a mailbag. So I hope that we are indeed able to make these ideas work. And I thank you very much, Mr. Potter, for your service.

REP. LYNCH: I thank the gentleman.

Chair recognizes the gentleman from Maryland, Mr. Cummings, for five minutes.

REP. CUMMINGS: I'm sitting here, I'm thinking, I'm just listening to you, and I'm trying to make sure I'm making heads or tails of this. Let's go to your salary. I'm not going to beat you up on your salary. You don't have to worry about that. But the 66 -- you're telling me that $66,000 of your -- what they say is your compensation, you will pay as security, is that right?

MR. POTTER: Yeah.

REP. CUMMINGS: What are they securing you from? I mean that you -- they worry about you? Who -- is that mandated?

MR. POTTER: Well, I can tell you when it started. I can tell you when it started. It started when we were -- after we came under attack from anthrax.

REP. CUMMINGS: Okay.

MR. POTTER: And I was somewhere, and my chief inspector got a call from someone -- and I think it might have been --

REP. CUMMINGS: But you know, certainly you don't pay taxes on it.

MR. POTTER: No.

REP. CUMMINGS: Okay.

MR. POTTER: No. But it's considered for some reason compensation, you know --

REP. CUMMINGS: And give me the other one -- the other pieces of your compensation.

MR. POTTER: Well, the other piece is the salary, and then the other piece is I'm a 31-year postal employee --

REP. CUMMINGS: Fine. Okay, you went --

MR. POTTER: -- and my three-year high is going up because I got a salary increase.

And that --

REP. CUMMINGS: So --

MR. POTTER: -- that's almost half of the money they're talking about, because they're projecting, you know, my age, I'll live to 80 something and here is how much money you'll get over those years.

REP. CUMMINGS: Okay. Let me go back to this. The -- you know, when we look at all those methods of communicating today, over the Internet and what have you, clearly -- and you testified to this that that cuts some of your -- a substantial amount of your business. Are we using -- Mr. Potter, are we taking full advantage of our advances in technology in within the postal system? Are there things that we could do to cut our cost further? And -- that's number one.

And number two, when we look at the whole idea of the salary service -- and I can tell you I would bet everything I've got that that's not going to happen -- just cutting the -- (inaudible) -- service. So you might want to take that off the table. But let me ask you this. Have we figured out which part of that is -- I mean how do you figure out your savings?

In other words, is most of your savings and people actually going, our delivery people delivering the mail, and I'm thinking if the volume is still the same, I'm trying to figure out, you know, while they may be delivering Monday through Friday, if the volume is still the same, I'm just -- there is certain manpower that goes into preparing the mail to be delivered.

So I'm just trying to figure out how do make that divide and what percentage -- you follow my question?

MR. POTTER: I understand exactly what you're saying.

REP. CUMMINGS: Okay.

MR. POTTER: So today, over 90 percent of the mail that a carrier brings down the street, letter mail, is sorted by a machine into walk sequence. So they don't come into the office anymore and case every letter. And for this we're down to the point where less than two hours of a carrier's day is spent in the office preparing mail to go out on the street. So that's the letter side.

We're automating the flat side. That's coming next. And so when you look at the savings associated with not delivering mail on any day of the week, it's having over 200,000 people leaving office and go out on the street driving to their delivery, and then you know, spending the day on their route. We do recognize that some sorting that would have gone on the morning of the day that we eliminate will have to move to the next day.

So we account for the fact that that occurs. We also account for the fact in our cost savings that rural carriers on the sixth day of the rural routes, excuse me, are covered by rural carrier lease folks who make less money than our career people. And so we recognize that the career people will be the ones working five days a week. Now, part of what drives us is what does the American public think. And there have been a number of surveys of the American public.

And when it comes to the future and now, really wish we respond to the American public. And what they are saying by the Rasmussen poll and a Gallup poll is that they much prefer to have, you know, lesser frequency of delivery than they would have pay additional postage, you know, pay for -- you know, pay for the fact that our costs are going up because we're so labor intensive.

And ultimately you have to, I think, you know, we have to respond to. And so believe me, it's -- (laughs) -- I don't think that's that likely at all, you know. Again, I grew up in a postal family and you know, I'm not popular these days because I'm out there talking about it. But if the choice is mail delivery in the future or no mail delivery, I think you have to say let's make the changes so we can assure that we reach every home in America.

I'm sorry, Mr. Chairman.

REP. CUMMINGS: Thank you, Mr. Chairman.

REP. LYNCH: Gentleman's time has expired.

The chair now recognizes the gentle lady from District of Columbia, Ms. Eleanor Holmes Norton.

DEL. NORTON: Mr. Potter, I am particularly interested in the health care cost, and I note again that you've proposed that over an eight-year period the statutory mandate that we imposed two years back to pre-fund annuitants health care should be relieved.

Now, the GAO says they would prefer two years, but that neither option may do much for the Postal Service. In what way do you think this would fix the problem, the overall problem of the Postal Service? And if not pre-funded, how would you make up for the funding of the annuitants?

MR. POTTER: Well, let me clarify again. Right now, this year we're required to pay $7.4 billion into -- for retiree health benefits. That's well over 10 percent of the revenues that we take in. And so the relief that we're seeking is the $2 billion. We'll continue to pay according to -- as proposed by H.R. 22. We'll continue to pay into the trust fund $5.4 to $5.6 billion a year for eight years. That's more money going into the trust fund than would come out to pay for the $2 billion --

DEL. NORTON: So you don't think it would have any effect then?

MR. POTTER: No, I think the effect would be that the obligation for the Postal Service in future years, beyond 2016, will be greater for contributory retiree health benefits than it is today. But I would say that we are paying too much today, that we're not paying a fair share, that we're paying much too much. And so I think this -- what's offered is --

DEL. NORTON: But the GAO says two years, so then it would rethink this notion. This goes back to my business model question. Do you think that we all need to sit down and think the entire model before jumping to one big cut like that -- one big change, I'm sorry, like that?

MR. POTTER: Well, personally, I believe that H.R. 22 has the short-term benefit of getting us through the year and enabling us to pay our bills. And it helps us in subsequent years to do that. I do think that you're on a parallel path, though, that we need that as well as the discussion that you just described about, you know, we need to look at all of our options, we need to come up with a plan, and we need to execute it.

Again, I think in timing, the timing of when we execute it is based on the anticipated demand for Postal Services so --

DEL. NORTON: And I know we can't predict the future and incremental death is a pretty terrible death. So again, I'm looking for a way to deal with the problem that is to say short-term yes, but then to look at its consequences and I hear what you're saying and understand it.

How green is the Postal Service? You do a lot of -- perhaps as much as anyone in the country, traveling by motor. Would you tell us how you are conserving -- if you are conserving fuel, and how you are conserving it?

MR. POTTER: Well, first when it comes to fuel -- right-hand drive -- I mean we've changed our delivery route to make sure that we have as many right-hand turns in there as possible --

DEL. NORTON: How often do you buy new vehicles?

MR. POTTER: Well, we haven't bought vehicles in some 17 years.

DEL. NORTON: You haven't what?

MR. POTTER: We haven't bought -- we have a fleet -- our fleet of vehicles is some 17 years old. We are very anxious to take that fleet, modernize that fleet, and --

DEL. NORTON: If one goes down, it's just let down and you don't replace it?

MR. POTTER: Well, we have aluminum-bodied vehicles. We have added some vans to that fleet as deliveries have grown.

But we bought a special vehicle --

DEL. NORTON: What fuel are those that --

MR. POTTER: Right now they are gasoline.

DEL. NORTON: Why?

MR. POTTER: Well, because of the fact that -- there was a number of reasons, but one of the reasons is that up until last year we were limited in terms of alternate fuel vehicles that we consider. Hybrids and the like we were not given credit for in the -- you know, from the federal government. We have -- that law has now since been changed, I think --

DEL. NORTON: Is not given credit for -- what do you mean by "not given credit for"?

MR. POTTER: Well, there were -- we were required to have a certain percentage of our fleet be alternative fuel vehicles. The definition of what an alternative fuel vehicle was very narrow. We worked with the Department of Energy and with the folks up here on the Hill, and Congressman Davis and others to get that definition expanded so that we could consider other types of vehicles.

Right now, we are testing as we speak. Hydrogen-fuelled vehicles, gas-powered fuel vehicles -- you know, natural gas vehicles. We're testing a number of different alternatives.

DEL. NORTON: Mr. Chairman, could I ask you if you would allow this witness to submit to you an inventory of the complement of vehicles they have now based on precisely what form of fuel they use, so we can get a sense of that?

MR. POTTER: I'd also be proud to submit with that, Congresswoman, all of our activities in terms of going green, because we have a very good racket, and I'd like to do it justice by submitting that as well.

DEL. NORTON: Thank you very much --

REP. LYNCH: I think we can work that out. I know that you did present a vehicle count inventory, but I don't think it was broken down as Ms. Norton would like. So perhaps you could just look through that and get the information to the committee as soon as possible.

MR. POTTER: We'll be happy to do that.

REP. LYNCH: Okay. Mr. Potter, having no further questions, I want to thank you for your attendance here. And I wish you good day.

MR. POTTER: Thank you.

REP. LYNCH: As you've probably heard, we have some votes currently on the floor. I understand there are at least three in this series. This probably means we will not be back for about -- at a minimum a half hour, probably a little bit longer. So everybody is welcome to stretch your legs, and we'll be back, like I say, in about 30 to 40 minutes.

(Recess)

REP. LYNCH: The subcommittee hearing will now come to order. I want to welcome Ms. Gallagher and the honorable Dan Blair as witnesses. It is the committee policy that all witnesses are to be sworn in. Would you please rise and raise your right hand?

(The witnesses were sworn.)

REP. LYNCH: The committee is pleased to welcome Ms. Carolyn Gallagher, chairman of the Board of Governors of the United States Postal Service. Carolyn Gallagher was named the governor of U.S. Postal Service by President George W. Bush in November of 2004. She currently serves as chairman of the Compensation and Management Resources Committee and is vice chair of the Audit and Finance Committee.

The honorable Dan Blair is chairman of the Postal Regulatory Commission. Mr. Blair serves as the first chairman of the Postal Regulatory Commission, a successor agency to the former Postal Rate Commission. He was unanimously confirmed as the commissioner of the former Postal Rate Commission in December of 2006 by United States Senate, and was designated chairman by President George W. Bush during the same year.

I now welcome -- the committee would now welcome opening statements. Ms. Gallagher.

MS. GALLAGHER: Thank you. Good afternoon, Chairman Lynch, Ranking Member Chaffetz, and members of the subcommittee. Thank you for inviting me. It's an honor to be here.

The current economic downturn has hit our country with a speed and a depth that the Postal Service, like most other businesses, could not anticipate. The dramatic decline in mail volume over the past 18 months is simply outpacing the rate at which we can reduce our cost, given the tools available to us.

Adding to this unprecedented financial challenge is the requirement passed in the postal law of 2006 that the Postal Service make payments of $5.4 billion or more per year to fund future retiree health care obligation. If not for this payment, the Postal Service would have earned a profit of $2.8 billion in 2008, an exceptionally challenging year.

The postmaster general and his team are responding quickly and decisively to these challenges. They are undertaking a range of efforts, including the elimination of work hours, major reduction to the administrative overhead, and aggressive network consolidations that will eliminate almost ($)10 billion in the next two fiscal years. Yet, even with our best efforts, we will still come up short.

Under current law, we cannot close the widening gap between revenue and cost and still finance today's service levels for this fiscal year. Despite our aggressive plan to reduce cost over the next two years, our projections show that we will still lose another $13 billion over that period. The Postal Service has been a self-funded government entity for more than 30 years. And we plan to remain so.

Today, we respectfully request your urgent attention in providing the Postal Service not with financial assistance but with a flexibility needed to better align our resources and our responsibility. Our first request is for a change to fund our retiree health benefit premium from the retirement health benefits fund rather than from operating revenue.

The Postal Act of 2006 requires an extraordinary obligation that no other federal agency or private sector company has to meet. Maintaining the current accelerated payment schedule for future obligations and having to borrow money to do so when we cannot make ends meet today, puts the Postal Service in an unnecessarily perilous position. It's like planning to add a new room to your home when the house is on fire.

We greatly appreciate the efforts of Representatives John McHugh and Danny Davis who introduced H.R. 22 which would allow this funding change and save at least ($)2 billion per year for eight years. We ask all members of this subcommittee to support this legislation. But even if H.R. 22 is enacted, we will still forecast a loss of $9 billion over the next two fiscal years. Therefore, additional and immediate action is needed.

The board agrees with management and believes that going to five- day per week delivery is the best option to restoring our financial health and ensuring our long-term future. The volume of mail we are delivering no longer produces enough revenue to cover the cost of six- day delivery to 150 million households and businesses. We need to adapt our network to reflect the changing demand for our products and services.

Going to five-day delivery once fully implemented could reduce cost by $3.5 billion per year, and can be achieved without substantial impact on our customers and our employees. In fact, two recent public opinion polls show that the American people prefer the option of five- day delivery over a significant increase in stamp prices.

Another critical element ensuring the long-term financial health of the Postal Service is strong and effective leadership. And on this matter, the governors are certain that the Postal Service has the right leader in Jack Potter. I welcome your request to address the issue of the postmaster general's compensation package.

Our board formed the Compensation and Management Resources Committee three years ago, because we know how important it is to attract, retain, and develop outstanding leadership for the Postal Service. Congress recognized this when it enacted a law requiring that executive pay at the Postal Service be comparable to jobs with similar responsibilities in the private sector.

In 2008 the postmaster general's salary was $263,575, the amount permitted by Congress. In addition, they funded outstanding leadership in a very difficult time. The governors awarded Mr. Potter a performance incentive of $135,041 which is deferred and will be paid in 10 annual installments after he leaves Postal Service employment.

The balance of his compensation package includes the cost of Mr. Potter's security detail provided by the Postal Inspection Service, an estimated change in the future value of his federal pension through the civil service retirement system based on his 31 years of service.

Mr. Potter has earned the compensation he received. The governors believe his achievements in 2008 were both remarkable and unprecedented. Last year the postmaster general and his team reduced cost by over $2 billion, more than double what was planned, while still providing record levels of service to the American people.

The governors have complete confidence in Mr. Potter. And we need his leadership now more than ever to lead us through the crisis we face.

In conclusion, Mr. Chairman, I want to emphasize that our current financial situation is dire. The legislative changes we're requesting will not cost the federal government anything or require an appropriation by Congress, but they will allow us much needed flexibility to meet our obligations and to adapt the Postal Service to a changing business environment.

Thank you, Mr. Chairman and members of the subcommittee. I'd be happy to answer any questions.

MR. BLAIR: Chairman Lynch, Ranking Member Chaffetz, Mr. Davis, thank you for this chance to testify this afternoon. Today, the Postal Service is facing --

REP. LYNCH: Sir, would you -- I'm sorry -- would you move that mike closer to you?

MR. BLAIR: Absolutely, sorry about that.

REP. LYNCH: Thank you, sir.

MR. BLAIR: Today, the Postal Service is facing dire financial difficulties. They're likely to worsen before they improve. The current economic crisis has substantially impacted Postal Service volumes and revenues.

The first quarter of fiscal year 2009 showed volume declines for all classes. First class mail declined an additional 7.3 percent and standard mail declined 11 percent and all total volume in the first quarter declined 9.3 percent.

This trend is continuing into calendar year 2009 at an accelerated rate. The total mail volume in January 2009 is 16 percent, below levels reported in January 2008. The service reported a loss of almost $0.75 billion dollars in January as well.

We expected to report a further deteriorating condition for February with continued dramatic volume decreases as well as a significant decrease in revenues.

Should double-digit volume in revenue declines continue commission analysis shows a cash shortfall could be expected by the end of the fiscal year.

Based on information given to the commission, the Postal Service projects a $12.4 billion net operating deficit for the fiscal year. To address this situation the Postal Service has identified internal cost savings reductions of ($)5.9 billion for FY 2009.

However, further reductions are needed if the Postal Service is to meet its payroll and other expenses. To address this, the Postal Service has asked Congress for authority to reduce delivery days from six days a week to five.

Based on the commission's universal service study, we estimate potential annual savings of almost ($)2 billion. However, this action carries the risk. The customers will be harmed and some mailers may choose to mail less or leave the mail stream all together.

The service has also sought relief in seeking suspension of its retiree health premium payments. This is the approach taken in H.R. 22. For fiscal year '09, those payments could be almost $2 billion. However, more relief maybe required to meet the services cash flow needs this year should current trends continue.

Determining the amount of needed relief begins in viewing the service's debt ceiling and borrowing authority. Over the last three years the Postal Service has increased its long-term debt from $0 in FY 2005 to $6.5 billion through the first quarter of fiscal year 2009. The Postal Service has a $15 billion debt ceiling and may increase their debt load no more than $3 billion in any one year.

Borrowing against its debt ceiling and suspension of the retiree health benefit premium will likely prove insufficient to make up for the cash shortfall. Congress should review the required $5.4 billion payment required to pre-fund retiree health benefits. This payment could be suspended in part or adjusted in an effort to ensure the service remains financially viable.

The Postal Service can raise additional revenues from rate adjustments. Last week the commission improved their service's rate increase request to adjust postal rates by 3.8 percent. These adjustments will take effect May 11th. This amount is an inflation- based increase as intended by the Postal Accountability and Enhancement Act.

Should current inflation trends continue, the price adjustment for 2010 will likely be less than 1 percent. Other cost reduction measures must be considered as well, but these impact difficult policy areas where Congress has expressed, at least in years past, a desire for the maintenance of the status quo.

The commission's role is to provide transparency in the postal financial operations. I hope today's testimony shed some light on the tough choices in helping the subcommittee evaluate the service's financial situation.

REP. LYNCH: Thank you very much for your testimony. Let me begin -- now, I'm going to recognize myself for five minutes.

Ms. Gallagher, let's start of with Mr. Potter's compensation. I understand you're the chair of the compensation committee, is that correct?

MS. GALLAGHER: I was chair of that committee until I became the chair of the board.

REP. LYNCH: When did that happen?

MS. GALLAGHER: In February.

REP. LYNCH: Okay, so --

MS. GALLAGHER: Early February.

REP. LYNCH: So with respect to Mr. Potter's previous salary -- for 2008 salary you were --

MS. GALLAGHER: I was chair --

REP. LYNCH: You were chair, okay.

MS. GALLAGHER: -- of the compensation and management resources.

REP. LYNCH: You know, I've been reviewing Mr. Potter's record. He has had some good years, but you know, I just want to point out in 2007, the post office lost $5 billion. In '08, it lost $2.8 billion.

And now, you know, based on testimony here in '09, we should expect, you know, loses somewhere in the range of $9 billion to $10 billion unless we do something drastic and bite into those loses with significant cuts in service.

Now, there are a couple of statutes that -- there on the compensation of the postmaster general. One is really a statute that's -- that tied his compensation or ties his compensation to that -- to the salary of the vice president of the United States. He has to earn no more than 120 percent of what Joe Biden earns.

There is another statute that you referred to, passed in 2006, that indicates that the salary should be comparable in some way with those in the private sector.

Can you tell me how we ended up paying all those money to Mr. Potter in '08 when -- what was the thinking of the compensation committee when we lost $3 billion and we gave Mr. Potter an entire package -- now, I understand some of that is his pension of about $800,000?

MS. GALLAGHER: I'd be happy to, Mr. Chairman. First, Mr. Potter's salary, the amount that he actually was paid in 2008 was ($)263,000. That was the limit that was set by Congress in the Postal Accountability Act of 2006.

In addition, the board did award Mr. Potter a performance incentive award of $135,000 based on what we believe was remarkable and unprecedented achievement. In the face of a very difficult year falling volumes because of the recession Mr. Potter reacted quickly and decisively. And he and his team reduced work hours by 15 million work hours.

They saved the Postal Service over $2 billion, more than double what was originally planned. All this -- while doing those changes, they also were able to provide record levels of service to the American people. And we believe that's a remarkable accomplishment.

I also believe that when you look at Mr. Potter's compensation, you have to consider the size of the job. The postmaster general is running one of the largest organizations in the country, indeed the world. The Postal Service has 650,000 employees about the amount of Federal Express and UPS combined with 75 billion in revenues. We would be in the top tier of Fortune 100 companies if we were on that list.

We have 37,000 facilities and retail outlets. We do have a statute, which says that we should pay the executives comparable to their peers in the private sector. Yet based on an outside consultant who specializes in executive compensation, Mr. Potter and his team make a small fraction, only 15 percent, of what people running similarly sized organizations were making.

We believe we are lucky to have a postmaster general with the caliber of Mr. Potter and we believe that he earned every penny that he was paid.

REP. LYNCH: I understand the frustration in the public though. When they take the whole picture here, they're looking at the prospect of five-day delivery, they're looking at the prospect of the post office closing, they're looking at the prospect of, you know, 150,000 employees retiring or going away from the post office, regional centers closing down and here we have -- and their rates going up, I might add, and we're giving the gentleman $135,000 bonus.

It's just, you know, I understand the idea of comparable salary. However, I don't agree with the premise that just because AIG or Merrill Lynch is giving people bonuses for driving the company into the ground that we should emulate that.

That's certainly not the idea here, right. We're trying to reward, you know, positive performance. And like I said, you know, '07 we lose ($)5 billion, '08 ($)2.8 billion we lose, and then now we have the prospect of losing somewhere in the area of $2 billion in '09 with all of this pain.

It just defies logic to me. And we're not talking about a 10 percent or 20 percent bonus, we're talking about 50 percent of the gentleman's salary.

It just -- I know it's not taxpayer fund. This is from revenues generated by the Postal Service, but still given the need in the system, I just -- I question the wisdom of this. I don't know when exactly did you determine his salary.

MS. GALLAGHER: Well, first, Mr. Chairman, I have to take exception at the comparison of United States Postal Service to AIG. The Postal Service is the most trusted government agency and has been for the past five years. It's one of the most trusted organizations in the country.

Mr. Potter and his team saved billions of dollars, $8 billion over last seven years, $2 billion last year for the Postal Service. He was a dedicated public servant for 31 years. He's been one of the most successful postmaster generals in the history of the Postal Service.

(Cross talk)

REP. LYNCH: You know, what I will say is this. I compared the practice of giving bonuses in the financial services industry to people who were losing money, to the practice of giving bonuses to executives at the post office at a time when they're losing money. I think that's the comparison.

I'm not comparing the United States Postal Service to AIG. However, there is this comparability language in the statute. And I just want to make sure that it -- we are comparing apples to apples.

And that the practice that we're trying to emulate in the private sector is when they do a good job and get a bonus, we'll use that example at the post office and not reward a performance that is less than satisfactory.

I'm violating my own rule here. So I'm going to allow Mr. Chaffetz from Utah, the ranking member, to ask questions for five minutes.

REP. CHAFFETZ: Thank you, Mr. Chairman. I thank you both for being here. I appreciate your dedication and commitments to the public service. I also appreciate what Mr. Potter and the whole organization, I wouldn't give Mr. Potter all the credit, certainly, he has a talented team and men and women at all levels, who are performing great work and have accomplished many things, the reduction in over-time hours and so -- and such. It really is no doubt a team effort.

But nevertheless, I have some deep concerns. You may have a football team that's fighting and doing everything they can and you want to pat some people on the back. But if you're losing the game and you come up in the red, I just don't see any room to -- at some point and say, we just can't be handing out bonuses to the coach.

And so my question is -- and I also hear you talk and express the concern that he is under-compensated, in your view, in many ways for his base salary to try to compare it to a $10 million salary for a comparable private sector job and maybe we should revisit that whole scenario.

But is this $135,000 bonus just a way to run around this statute and give him extra compensation that you feel is deserved? I mean, at what point do you actually cut it off and say, we lost money.

And we're either going to have to go to the taxpayers or we're going to have to continue to suck it up until we get to the -- into the black?

MS. GALLAGHER: Congressman Chaffetz, I think there is a very important distinction here and that is that the Postal Service would have made a profit of $2.6 billion -- or $2.8 billion in 2008 if it were not for the requirement passed by Congress that we pre-fund our retiree health care obligation. And we had to make a payment of $5.6 billion in 2008. And if not for that payment, the Postal Service would have made a profit of $2.6 billion.

Despite the fact that our volume had the biggest loss in the history of the Postal Service, the fact that Mr. Potter and his team were able to offset that volume loss and reduce headcount or work force by 15 million work hours and save the Postal Service $2 billion while maintaining the best service levels we've ever had is truly remarkable.

And I do believe that he earned more than we're able to pay him as a public servant.

REP. CHAFFETZ: So you would have actually compensated even more than what you did?

MS. GALLAGHER: No, I believe that he was paid fairly as a public servant. But I think the work that he did and the accomplishments that he made for the Postal Service were worth more.

REP. CHAFFETZ: Just my own personal belief, I do think there is a difference in the rank and file, and then accomplishing the goals set forward by executive management.

But in this case, I just -- I'm so concerned that we're taking a special effect on somebody who has to deal with everything but the if -- you can't just say if, if.

The reality is we lost money and now we're coming to the point where we have to make some dramatic changes, dramatic changes. And this is some what symbolic of the challenges that we face. I mean, if we adjust Mr. Potter's compensation pack, that's not going to have a material effect on the overall, but he is the leadership, he is the CEO, he is the leader there.

Do you have any plans or inclination or anything in the works to actually change the way executives are bonused out.

MS. GALLAGHER: Absolutely not, we believe that the remarkable -- the achievements of postmaster general and his team have been remarkable given the challenges they are facing, that we are lucky to have a team of the caliber that we have, who are willing to work at a small fraction, only 15 percent of what their peers or what they could make in the private sector.

We believe that they have saved billions of dollars while providing record levels of services and that they are earning every penny that they are paid.

REP. CHAFFETZ: What is the total -- he is certainly wasn't the only person to get a bonus, correct? What is the total amount -- what total dollars that were paid out in bonuses to the executive level in the Postal Services overall?

MS. GALLAGHER: Congressman Chaffetz, that was fully disclosed in our 10K.

REP. CHAFFETZ: I just don't know what the answer is --

MS. GALLAGHER: And I don't have those facts and figures, but I'll certainly --

(Cross talk)

REP. CHAFFETZ: Is it in the millions of dollars? Is it --

MS. GALLAGHER: No, sir. I mean the incentive payment for Mr. Potter was ($)135,000.

REP. CHAFFETZ: No, I mean, for the executive level Postal Service employees. What is the total?

MS. GALLAGHER: I'm sorry, I don't have that, but I'll be happy to get you that. It was fully disclosed. I just don't have facts and figures.

REP. CHAFFETZ: Okay. Yeah, I'd appreciate it if you submit that in somewhat of a timely fashion at certain -- last question in this round here.

You expect -- you expressed, quote, "Complete confidence," end quote, in Mr. Potter. In light of this investigation that is now going to move forward, is that tinging (ph) or have any bearing on how your -- your concerns about Mr. Potter?

MS. GALLAGHER: No, sir, not at all. Jack Potter is one of the most successful postmaster generals in the history of the Postal Service. Soon after taking office in 2001, he was hit with the events of 9/11 and then the anthrax tragedy that followed soon after.

He restored the public's confidence in the U.S. Mail, returned us to financial health. He has saved the Postal Service billions of dollars. He and his team -- while providing record levels of service.

We're very lucky to have a postmaster general with the caliber of Mr. Potter. And the board has complete confidence in him. And he is uniquely and singularly qualified to lead us forward through the situations we face today.

REP. CHAFFETZ: Thank you, Mr. Chairman.

REP. LYNCH: Thank you.

The chair recognizes the gentleman from Illinois, Mr. Davis for five minutes.

REP. DAVIS: Thank you very much, Mr. Chairman, and Ms. Gallagher, and Mr. Blair, it is good to see you both.

Let me begin with you, Mr. Blair, perhaps to ask you the Postal Service is not a private corporation or is it, it's not a government agency or is it, what is it?

MR. BLAIR: It's an independent establishment within the executive branch totally owned by the federal government. Employees of the Postal Service receive benefits just like any other federal employee does.

And so in many respects it is treated like a federal agency. I think the overriding -- two overriding distinctions is its governance structure. Postmaster general is appointed by the board of governors -- excuse me -- by the governors as opposed to being a cabinet level member such as he was in 1970. And the revenues -- that pay their operating expenses are generated through the sale of goods and services unlike most federal agencies.

REP. DAVIS: So it's not exactly a government agency, but it functions in many ways like a government agency.

MR. BLAIR: I think generally, yes.

REP. DAVIS: It's not exactly a private corporation, but it functions in many ways like a private corporation. So I guess I'm wondering whether or not there is any possibility that sometimes there could be mixed signals. For example, if Congress directs the board of governors to compensate postal executives in a comparable way similar to what takes place in private corporations or private industry, would that appear to be what the board of governors may have been --

MR. BLAIR: I think oftentimes legislation sends some mixed signals. And I think that's just part of the balancing factor that public services have to undergo and evaluate. It's told to operate and act like a business, but it has substantial public service mandates.

We've outlined a number of those mandates in our universal service study. One of the most significant of those mandates is providing six-day week delivery.

REP. DAVIS: There is a culture in corporate America in relationship to the executive compensation that many people now are taking a hard look at, and not just the Postal Service, not just pseudo governmental agencies. But people are taking a real hard look at the culture that has developed relative to executive compensation in corporate America.

And Ms. Gallagher, my question is, given this look that is taking place, has the postal board of governors had discussions of reviewing any of it's policies in relationship to response to the public outcry that we are currently experiencing relative to this issue?

MS. GALLAGHER: Well, first let me say Congressman Davis that the board did struggle greatly to try to balance two competing statutes and come up with a compensation that we felt like was the best balance between the two.

However, we still believe firmly that the compensation for postmaster general and his team is more than fair given the achievements and the challenges that they are facing and the actions they are taking to try to keep the Postal Service financially sound in this crisis. So we have -- we have full confidence in what they are doing and believe they are paid fairly.

REP. DAVIS: So the board of governors is in fact cognizant and displays sensitivity to the increasing concern about the issue?

MS. GALLAGHER: Of course.

REP. DAVIS: We've heard Mr. Potter talk about the -- his optimism in relationship to the ability of the Postal Service to grow volume. And of course I'm trying to rationalize in my own mind the ability to do that. How does the board of governors be in relationship to that?

MS. GALLAGHER: We certainly share the postmaster general's confidence in the future viability of the Postal Service with the help obviously from Congress as we've requested. There are opportunities for us to grow this business.

We do have new flexibility that was given to us under the Postal Accountability Act especially in terms of pricing our shipping products. And we want to take full advantages of it. We are trying to take full advantage of it and in fact we are growing market share in our expedited mail products. And we are very proud of that.

As the postmaster general discussed this morning, we are making technological investments that we think will add value to the mail, intelligent mail barcode being the best example of that.

So we think there are opportunities. That being said, there is a structural change in the way Americans are communicating and the Postal Service needs to change with it. We need to make sure we match our resources and adjust our resources with the changing demand for our products and services.

REP. DAVIS: Thank you very much.

Thank you, Mr. Chairman.

REP. LYNCH: Thank you. Mr. Gallagher, we have a sort of a parade of horribles that are growing out here in 2009. We are looking at, you know, the possibilities of losing $10 billion unless we do something drastic. We are looking at post office closings and cuts in service, perhaps major cuts in service.

Not only that but we are looking at the possibility of bumping up against the debt limit, the statutory debt limit for the post office as well, depending on how things go. In that environment, now, looking at 2009, do you -- when I asked Postmaster General Potter about the possibility of him getting a bonus in 2009, he said, based on where we are at -- I'm paraphrasing here -- I should not -- this is not a quote -- but words to the effect, I don't expect a bonus in 2009. I'm just asking you, is that in line, as someone who sat at one point on the compensation committee, what are your views on that in 2009?

MS. GALLAGHER: Mr. Chairman, it's too early to know what his compensation would be -- the board -- it's a decision for the full board. Mr. Potter is right. He -- it is a very difficult year for us and he has very difficult and challenging goals.

But the full board has not discussed that yet. And it is the decision for the full board.

REP. LYNCH: Well, I think something you should chew on is that if you do end up bumping up against your statutory debt limit, you are going to have to come to Congress to have that increased. And it would be very difficult for members of Congress to, you know, approve a system or provide support to a system that they thought was not being fair in terms of leading by example.

You know, if you're going to ask the American people to absorb the pain in closings and increased debt, there needs to be some type of reflection in the management team that acknowledges we are in some tough times. It can't be -- it cannot be business as usual or business as we hoped it to be, but, you know, we got to -- we need to be in this together.

MS. GALLAGHER: Mr. Chairman, can I -- I'd like to say that I believe increasing our debt limit is the last thing we should do. By the end of this year, we will have $10 billion in debt. Any additional debt will just put further financial pressure on the Postal Service. It will increase our current cost because we will have more interest costs.

I think it will make it very difficult for the Postal Service to return to financial health, perhaps even impossible for the Postal Service to return to financial health. We have laid out a plan, a very aggressive action plan that we are taking to reduce costs, while maintaining service. We have asked for your assistance in two areas. One to help us restructure our retiree health care payment and one to give us the flexibility to go to five day delivery, which we believe will help us match our resources to our -- changing demand for our products. With those two changes, we are firmly in belief that the Postal Service will return to financial health and be viable for the future.

REP. LYNCH: I understand the prospects of H.R. 22 and again, you know, I have great respect for both of the sponsors, both Mr. Davis who is here and Mr. McHugh, who is not. And I -- I regard them very, very highly on this as well as other matters. We are going to have to look at that.

In the out years, I have already expressed -- about 2017 about having you know, $75 billion in unfunded liability. That is problematic. But let's go forward and I'm open to it, I'm just not completely convinced at this point. So --

MS. GALLAGHER: And we are happy to share an observation --

(Cross talk)

MS. GALLAGHER: -- because we don't believe that will happen. And we are happy share that.

REP. LYNCH: Yeah. The other concern I have with respect to the going to the five-day delivery is that you're in a competitive world out there. If you're saying now we are going to have a two day market for your competitors, people are going to rely less on the post office.

I think there is a downside as well as an upside. I think, you know, I think there is a certain -- there is a certain loss of market share when you become a five-day delivery post office instead of a seven-day delivery post office. And I recognize that might be the reality of the situation that may be what we have to do.

It's not my first option though. And I frankly think that, you know, we've got -- we've got some other things we got to look at. And that might involve looking at some of these areas that have high density placement for our post offices. I'm not talking about our rural areas, but, you know, we have some of our big cities in America who have you know, a post office in every high-rise.

They kept the volume -- or they had the volume at one time to justify all those. But we may have to look at some of those things. And I'd like to look at the least disruptive measures to reduce costs than simply leaping to five-day delivery. But you're right, I think time is growing short. We have to fish or cut bait, and you know, we are going to be limited in our options with the passage of time. So I certainly agree with you that we are at a critical point here.

Let me again, obviously, we've gone to a second round of questioning. I yield five minutes to the gentleman from Utah, Mr. Chaffetz for five minutes.

REP. CHAFFETZ: Thank you, Mr. Chairman. I appreciate it.

And Governor, I guess I'm still mystified and perhaps we will have to clarify this later, but I recognize the series of indicators along the way of the remarkable progress that has been made within the Postal Service.

But to try to categorize, as one of those goals, the financial health, I -- that was the quote that I wrote down -- financial health while it may be better, I don't think it is healthy. And I think it's very difficult when you have a reduction in overtime, when you have the good men and women, the rank and file, the person who is out there delivering the mail, fronting the bulk of what has to happen in order to make these adjustments to see somebody at the very top take a bonus.

That in my opinion, it gets strikingly close, if not over the line, of just trying to run around the basic compensation package in trying to say, we are going to subvert this because we think it's too low. We are going to give performance bonus and that's how we are going to get them.

You can make a case I think to say that the overall compensation for somebody who is running the second largest -- second largest employer in the United States of America, 260 some odd thousand dollars is too low. I think that is anther discussion that perhaps we have to have.

But I worry that that bonus is so striking and so offensive to a lot of people that I would hope and encourage you to revisit that because at the end of the day, it is in the red. And we are going to have to make some much more dramatic challenges. And we are asking people to potentially take, go back to five day service as opposed to six, and yet we are handing out bonuses. It just doesn't add up. And that's my concern.

My question to you, Governor, and then I -- actually I do have one for Mr. Blair if we can get to it.

The relocation assistance policy is something I've seen some reports on that seems to be troubling. The huge massive dollars and numbers of homes that are going to through this process. We -- what kind of trajectory -- what kind of numbers are behind this? And what is your sense of where this program is?

MS. GALLAGHER: Well, first of all, we were -- the board of governors was concerned when we heard the same stories that you did. Management is reviewing the policy. We will look at it, the board will look at it. When he has completed that review or they have completed that review.

REP. CHAFFETZ: When do you think we will have that back?

MS. GALLAGHER: I know they are in consultation with the management associations. And I'm not sure how long that process is. But I -- you know, we don't just buy these homes, we also sell --

REP. CHAFFETZ: Do you know how much money the government or the Postal Service put in? I mean there was a real cost to this was it not, it wasn't something operated in the black.

MS. GALLAGHER: Congressman, I actually don't know.

(Cross talk)

REP. CHAFFETZ: I guess I would ask that at some point the report be given back to us specific to that program, how much it costs to actually execute on that program. And in the essence of time, Mr. Blair, I do have just a quick question. It's more of a clarification.

My understanding -- I thought I heard and maybe I'm wrong here. I thought heard Mr. Potter talk about a $3.5 billion savings by going to a five-day week. You had talked about $2 billion savings. What is the actual number? Maybe, I just heard something wrong here, so my apologies.

MR. BLAIR: Well, our projections of the commission will be that there will be a $2 billion savings. I believe the service's projections did not take into account any volume declines that would result from reducing one day a week delivery. Ours projected a 2 percent volume decline. So that's how we determined our cost savings.

REP. CHAFFETZ: Okay, so I did hear Mr. Potter correctly at 3.5. But you're saying that you think it will actually be closer to a $2 billion.

MR. BLAIR: We project it at $2 billion. The service did acknowledge that there would be volume reductions. It just didn't factor them in.

REP. CHAFFETZ: Just didn't factor --

MR. BLAIR: Because they didn't know what they would be at that point.

REP. CHAFFETZ: Is there any sort of blended analysis like for instance, you know, we've talked -- there were some discussions about, maybe limiting service in some of the days in the summer when, you know, its in the middle of July and there is not much mail delivered as opposed to say, the end of December when you have huge surges in the amount of mail that has to be dealt with?

MR. BLAIR: I think that that's a good point. That's a question I wanted to raise as well is that -- before -- I would strongly recommend that Congress before granting -- should it grant the Postal Service that ability to reduce one day a week delivery that it asks the service for a more detailed plan over on what this exactly looks like.

We heard today from the postmaster general that it would likely be Saturday, but I've heard other days being countered, like possibly Tuesday, which is -- Tuesday or Wednesday -- I think a more concrete plan -- is this going to be nationwide or is it going to be just select -- for selected areas in the country or even selected zip codes?

I'm under the impression it would be nationwide. But again, I don't want to presume anything. There are just a lot of unanswered questions. And given that reduction of this scope has such an impact on the brand of the U.S. Postal Service, I would hope that Congress would ask the service for a more detailed plan along these lines.

I think one missing question is what's going to be the impact on volumes? What's going to be the impact on major mailers? We would hope the Postal Service could produce for us what would be seen as a -- what their best estimate would be on the reduction in volume and the impact on mailers.

REP. CHAFFETZ: Thank you, and Mr. Chairman I hope this is something we continue to explore that we look at the difference between urban areas and rural areas, that we look at potentially a sliding scale, where there are times -- certain times of the year. And as you said, to look at the reduction in volumes as well because obviously that will play a major impact. The number between $2 billion and $3.5 billion is a big enough number that it meets that threshold. Usually $1 billion is just a rounding here in this body. But you know, it means that threshold. So let's dive into it. And thank you Mr. Chairman.

REP. LYNCH: Thank you. The chair recognizes the gentleman from Illinois, Mr. Davis for five minutes.

MR. DAVIS: Thank you very much, Mr. Chairman.

Mr. Blair, let me ask you. Let's assume that we do all of the things that Mr. Potter talked about earlier in terms of streamlining, staff reduction. But let's also assume that we do not pass H. R. 22. How long do you think it would be before we would be back talking about another rate increase?

MR. BLAIR: Well, the Postal Service just -- the commission last week, gave its approval of the Postal Service's request for an inflation based adjustment. Those rates are going to come into effect in May, provide annual -- from what we understand it, probably about $1.5 billion in additional revenue.

The other option open to them at this point -- would be an exigency rate case, in which the Postal Service will propose to go above the inflation based cap based on extraordinary and exceptional circumstances.

That proposal lies in the hand of the Postal Service. Whether or not that would generate the sufficient revenues to offset the potential cash flow problem -- that is a good question. I think you would be -- but I think that this committee we will be back -- we would be convened back before this committee before that would happen because postal finances will continue to go south.

REP. DAVIS: You think is there ever any danger that we could price ourselves out of the market?

MR. BLAIR: I think in some market places, you definitely could. And I think that was the intention behind the Postal Act of 2006, is that keeping generally within the class or generally inflation based rates would be a good thing that would add to the predictability and stability for mailers to stay in the system.

REP. DAVIS: Ms. Gallagher, let me ask you. One of the criticisms that I've heard of the Postal Service in relationship to its efforts to grow volume has been sort of an internal isolation relative to the community of ideas that the Postal Service sort of does it's thinking internally. And that external entities that come with ideas that -- (inaudible) -- are not received too well or viewed too positively.

How open do you think the Postal Service is to listening to other marketing experts and individuals who think they've got ideas, you know, as the elected officials everybody would come to us with everything and sometimes these things can get better, sometimes they don't, sometimes they get looked at, sometimes they give it short shrift that, you know -- how open is the board of governors in relationship -- and the Postal Service -- to looking at these kind of options and ideas that people come with.

MS. GALLAGHER: Congressman Davis and I don't think we can afford not to listen to any options, given the situation that we're in, and I think the Postal Service has a long history of communicating with the stakeholders, all our stakeholders. And the board is of course very open to hearing ideas.

In fact, we're having a lunch with mailers -- the mailing community next week. So we're very open in hearing ideas and it's certainly -- given the situation we're in, any ideas would be helpful.

REP. DAVIS: Well, let me just -- I don't envy the position that you're in actuality because I do realize that there are no simple solutions to very complex problems and very complex issues.

And I do appreciate the efforts that the Postal Service is making. I appreciate the leadership that Mr. Potter has been providing and the efforts of the board of governors, and I thank you very much.

And I yield back, Mr. Chairman.

REP. LYNCH: Thank you.

Let me ask -- I want to go over the area of housing relocation within the Postal Service. There was a story, a few weeks back, I think it was CNN ran a story about the excessive costs that were being incurred by the Postal Service for relocating their employees.

And there were some homes there that -- they were excessive -- well the employees were excessively reimbursed for relocation expenses. And I know I have some information that the post office provided to the committee.

It indicated that the relocation program costs, at the United States Postal Service in 2007, was $72 million for the relocation and then the expenditures specific to homeowners were ($)34 million, so it was a total of $106 million in 2007.

And then, similarly, in 2008 it was $71 million for the relocation program in 2008, for the reimbursement to the homeowners of ($)108 million. So these are sizable programs, and Ms. Gallagher, I know you mentioned that there's a board of governors' review going on here.

Has the inspector general for either the post office or the Postal Regulatory Commission, have they been invited in or asked to conduct an investigation yet?

MS. GALLAGHER: Mr. Chairman, the board is not reviewing the policy, management is reviewing the policy.

REP. LYNCH: Just management?

MS. GALLAGHER: Yes, the board is waiting to see how the policy is revised. We have full confidence in Mr. Potter that he will address it appropriately. I do think, I mean, the fact that we have a relocation assistance policy is standard among federal agencies and certainly the private sector.

We do have a policy that you hire the best person for every job and so that's going to require moving people around. And with 650,000 employees, sometimes those are going to be big numbers.

So we have confidence in Mr. Potter who is reviewing the policy that he is going to -- that he and his team will show the board a policy that is appropriate.

REP. LYNCH: You know, well, you know there are lot of opportunities and sometimes the differentiation between employees when you're talking about a pool of 650,000 people, sometimes, you know, there -- all things being equal, they can be very similar, very talented employees at the post office.

And so I'm just concerned about this -- it's a pretty large expense over $100 million. I am aware that management is considering adopting a new rule where they don't reimburse for a house over $1 million, which leads me to believe the policy before allowed them to go above $1 million.

And I'm not sure how much above, and even though CNN has pointed out some, I would call them egregious examples. I want to know is this the rule or what have we here. I have a bulk number of, you know, ($)100 (million) or $71 million for housing relocation in '07, and then a little bit more than that in '08.

I really need the numbers. I need the break down on home by home, what region they will move from and to. I need all that information. Could you make sure that's available for the committee?

MS. GALLAGHER: We will certainly supply that. The policy that we're reviewing is looking at taking it down to ($)800,000 and not ($)1 million.

REP. LYNCH: Okay.

MS. GALLAGHER: So -- but management is reviewing it, and we'll get you that information for the record.

REP. LYNCH: Okay. That would be great. And I do intend to ask, we have the inspector general who is coming up and I'll ask him about that as well. I'm told that we're about to have votes on the floor, but why don't we swap out -- I want to thank you both for your willingness to come before the committee and to testify. You've been very help and we thank you for your testimony. We wish you a good day.

MS. GALLAGHER: Thank you.

REP. LYNCH: And why don't we -- if we have the next panel please take their seats that would be great.

Excuse me -- hello, Mr. Williams and Mr. Herr, we appreciate you appearing before the committee.

It is the committee policy that all witnesses are sworn in. Could I ask you to please rise and raise your right hands?

(The witnesses were sworn.)

REP. LYNCH: Let the record show that the witnesses answered in the affirmative.

Welcome gentlemen. Mr. David Williams, inspector general of the Office of the Inspector General for United States Postal Service was sworn in as the second independent inspector general for the United States Postal Service in August of 2003. Mr. Williams has served as IG for five federal agencies.

He was first appointed by President George H. W. Bush to serve as IG for the U.S. Nuclear Regulatory Commission from 1989 to 1996. President William Clinton next appointed, Mr. Williams, inspector general for the Social Security Administration from 1996 to 1998, and then as inspector general for the Department of the Treasury in 1998.

Mr. Phillip Herr is director of physical infrastructure issues, United States Government Accountability Office. He is the director of physical infrastructure team at the Government Accountability Office. And since joining GAO in 1989, Mr. Herr has managed reviews of a board range of domestic and international programs. His current portfolio focuses on programs at the Department of Transportation and the U.S. Postal Service.

Welcome gentlemen, and the committee invites opening statements.

Mr. Williams.

MR. WILLIAMS: Thank you, Mr. Chairman, and Mr. Chaffetz, and Mr. Davis. The Postal Service's current financial condition is fragile, and the future is uncertain.

The Postal Service lost $2.8 billion in 2008 and may lose $6 billion this year. Yet these losses should be placed in context. Without payments to pre-fund retiree health benefits, the Postal Service would have earned $2.8 billion in 2008, and its anticipated net loss for 2009 would have been $1 billion.

Mail volume has declined for the last eight quarters, and the rate of the decline is accelerating. Single-piece first class mail volume continues to give way to the Internet as expected.

New declines in business and advertising mail are closely connected to the condition of the hardest hit sectors in this historic economic crisis. The Postal Service must make eight more annual payments averaging $5.6 billion each to pre-fund retiree health benefits.

The Postal Service's annual borrowing of $3 billion may not be enough to cover the gap between revenue declines and cost cutting measures. This could cause the Postal Service to run short of cash to pay all of its bills.

As a near-term strategy, the Postal Service is chasing revenue declines with cost cuts to limit losses. For example, even before the recent volume losses, the Postal Service had reduced its workforce through attrition by more than 134,000 career employees since 1999.

This year, the Postal Service has set a challenge of reducing the equivalent of 48,000 full-time employees. The Postal Service has streamlined its network operations, closing airport centers, annexes, and remote encoding centers.

It is increasing its effort to consolidate processing facilities. However, if staff reductions are not coordinated with facility reductions, the Postal Service runs the risk of having protracted anemic staffing within an oversized network.

Working with city and rural carriers, the Postal Service has started restructuring the delivery routes to reflect declining mail volume. The Postal Service has reduced authorized staffing at headquarters and at area and district administrative offices.

And through a new "rapid negotiation" program, the Postal Service plans to work with its contractors to cut $1 billion from its existing contracts. But cost reductions must be done carefully.

One concern is that the Postal Service may cut costs so rapidly and broadly that it will be difficult to monitor the changes and guard against unintended consequences.

Aggressive cost reduction in the short-term could adversely affect service, productivity, and the Postal Service's ability to offer innovative products, and paradoxically reduce its profits in the long term.

Even if the Postal Service achieves its desired cuts, there will still be a gap between costs and revenues of as much as $6 billion if the current estimates hold.

Actions beyond the Postal Service's authority may be needed. The Postal Service has requested limited pre-funding relief. I support its requests. And moreover, in this current economic climate, it may be appropriate to skip the mandated pre-funding payment for one year or to restructure the payments.

The large prepayments of more than $5 billion a year are greater than the Postal Service's annual net income in its very best years. The Postal Service is forced to borrow to meet this aggressive payment schedule.

And borrowing today to set aside money for a debt that will not be due until the future is an unusual practice. Removing the annual $3 billion debt limit should be considered.

The current limit of $3 billion per year may encourage unnecessary borrowing to retain cash as a hedge against future needs. Beyond the current crisis, the larger issue that must be explored from an elevated vantage point is the unfolding information revolution.

New social dynamics and technological innovations such as the Internet are bringing great changes to the use of shipping and mailing services. Other sectors such as newspapers, and periodicals, and telecommunications are also being transformed.

Close monitoring and in-depth analysis are needed to ensure that the essential roles of these industries are fulfilled and that the needs of all Americans, including those in rural and poor urban areas, continue to be met.

The Postal Service, along with its stakeholders, must focus strategically on its future to discover viable options and find its place with other information age industries. Change, however beneficial, is disruptive, and my office is very cognizant of the fact that more than 700,000 families directly depend on the Postal Service for their livelihoods.

However, these families are at risk of becoming the first casualties if the Postal Service is unable to adapt rapidly to this new and changing environment.

Thank you, sir.

REP. LYNCH: Thank you.

Mr. Herr.

MR. HERR: Thank you Chairman Lynch, Ranking Member Chaffetz, and Congressman Davis.

I am pleased to be here today to participate in this oversight hearing on the financial condition of the U.S. Postal Service. As requested, my statement addresses Postal Service's financial condition and outlook and options to help it remain financially viable in the short and long term.

First, regarding the Postal Service's financial condition. Updated projections for this fiscal year, suggest the magnitude of the challenges ahead. Mail volume could decline by 22 billion pieces, a record 11 percent over Fiscal Year 2008.

While much of this decline is related to the housing market downturn, the credit crisis, and lower retail sales, mail volume is expected to decrease for the foreseeable future as businesses, nonprofits, and governments, and households, continue to move to electronic alternatives.

It's net loss is projected to be $6.4 billion if it cuts almost ($)6 billion in costs, which would be unprecedented. Further it faces a cash shortage of about $1.5 billion.

Mr. Chairman, turning now to short and long-term options. No single action will assure the Postal Service's short and long-term financial liability. The service has high overhead costs that cannot be changed quickly including six-day delivery and retail services of 37,000 facilities.

Compensation and benefits for almost 650,000 career employees and about 100,000 non-career employees generate close to 80 percent of its costs. Several options have been discussed to assist the Postal Service through its short-term difficulties, some of which have required congressional action.

The Postal Service has proposed that Congress give it an immediate financial relief by reducing payments to the Postal Service retiree health benefits fund by an estimated $25 billion over the next eight years.

This would decrease the available balance in the fund by approximately $32 billion including interest charges in 2017. Another option would be for Congress to provide the Postal Service with two- year relief for its fund payments totaling $4.3 billion, which would provide immediate financial relief and have much less long-term impact on the fund.

We believe this option is preferable. This would allow Congress to revisit the Postal Service's financial condition in two years, while assessing actions taken in the interim to improve its financial viability.

In other words, this approach would keep pressure on the Postal Service to make needed changes. However, it's not clear that either of these options will be sufficient to present a -- prevent a cash shortfall from developing this year or next.

Looking to the longer term, progress will be needed in many areas to reverse the growing gap between Postal Service revenues and expenses. In January 2009, the Postal Service asked Congress to eliminate the longstanding statutory provision mandating six-day delivery.

In doing so, it provided little information on where it would reduce delivery frequency and the potential impact on costs, mail volumes, revenues, mailers, and the public. Stakeholder input could be provided to an advisory opinion from the Postal Regulatory Commission.

Major changes in universal service should also be done in close consultation with and approval from congressional stakeholders. Controlling wage and benefit costs will also be critical.

One option will be for the service and its unions to agree on changes during upcoming negotiations in 2010 and 2011. The Postal Service has alternatives to provide lower cost retail services at places other than traditional post offices such as selling stamps at supermarkets, drugstores, by telephone, and over the Internet.

In the mail processing area, the Postal Services closed most of its airport mail centers in recent years, but only one of over 400 major mail processing facilities. Closing facilities will be controversial but it's necessary to streamline costs. Options also exist to reduce postal transportation and delivery costs.

In closing, Mr. Chairman, accelerating declines in mail volume mean that the Postal Service could run out of cash this fiscal year. Thus short-term relief is urgently needed as well as comprehensive action to maintain the Service's financial viability.

This concludes my prepared statement. I would be pleased to answer any questions you or the members have. Thank you.

REP. LYNCH: Thank you very much both of you.

As you may have heard, we've got a couple of votes, just two votes on the floor. I expect we should be back here in about 25 minutes. Again I apologize to all of you. Thank you.

(Recess)

(Sounds gavel)

REP. LYNCH: Again I apologize for the slight delay there and for being called there for votes. That's the nature of the beast, I guess.

And again thank you for your testimony Mr. Williams and Mr. Herr.

Let me ask, you touched on early -- earlier on, Mr. Williams, an issue that we've been discussing with the previous panels regarding the request in H.R. 22 for relief from the current contribution plan into the trust.

And I'm interested in this idea that you have proposed about -- instead of going with the eight-year plan as had been envisioned by Mr. Potter and others looking at a two-year window, and then I believe reassessing at that point.

Could you expand on that a little bit? I think it has some value. I haven't heard the other argument about why we shouldn't do that, but if you could.

MR. WILLIAMS: Actually, we're fortunate enough to have GAO and that was their proposal that either stop or pause after the two years. So I'm going to ask Mr. Herr to --

REP. LYNCH: Mr. Williams, you did mention it though, right?

MR. WILLIAMS: We did not.

REP. LYNCH: No, you did not. Okay. Mr. Herr. I'm sorry.

MR. WILLIAMS: That's fine. No problem.

REP. LYNCH: All right.

(Cross talk)

REP. LYNCH: I gave you great credit then. I'm sorry.

(Laughter)

MR. HERR: That's okay. It's -- the reason that we think that it's important to do the two years is one, we recognize that immediate financial relief is warranted. We think given the financial situation the Postal Service is in, the amount that would be covered would be ($)2 billion and ($)2.3 billion next year.

So we think that would help them overcome the short -- the cash shortfall that they are anticipating for this year. But we also think over the longer term it's important to ensure the sustainability of the fund to ensure that those retirees and their families are covered.

REP. LYNCH: Okay.

MR. HERR: When you have that -- have some certainty that that benefit will be there for them. The thought behind the two-year idea that we're sympathetic to is that it provides also the Congress with the opportunity to come back, take a look at this in two years to see whether or not the Postal Service has made the kind of changes that are needed to help it become -- you know, took really thinking about it's business model and becoming more financially sustainable.

So that keeps your option open to come back, see whether or not he'd want to do this again, to provide two more or you go out for the additional aid, it doesn't forego that. It just simply gives you more options in terms of policy.

REP. LYNCH: Okay, well, I'm going to go back and forth a couple of times with that idea, back to the performance, and see where we come out here. Now, let me jump to another issue, which is the housing relocations.

Mr. Williams, you know, we did have a couple of stories in the press. I know one by CNN about somewhat exorbitant prices being paid for relocation of Postal Service employees, a fairly large amount. It looked like over ($)100 million in 2007-2008 for relocation purposes and for employee reimbursements, I guess. Have you looked at this issue in particular?

MR. WILLIAMS: We have just received -- actually, when CNN first broke the story. We began -- Senator Grassley called us and we worked out a request for an audit of the area, and we've commenced the audit and then Senator Collins joined the request and expanded on its parameters.

So we've just begun looking at that specific issue.

We intend -- and we are very pleased to work with your staff as well and have at least -- had discussions about it. We're trying to look at the instant case, and we're trying to find other cases like it, and then we are trying to look at best practices employed by others.

And we hope to, in a timely fashion, provide light on it in time for this look that Chairman Gallagher referred to, and hopes that we can effect its outcome and make sure that we've informed the debate on both sides and log enough information to be present also to policymakers.

REP. LYNCH: Okay. I just wanted -- if it helps, we would make a formal request to join with Senator Grassley and Collins as a House entity interested in that issue. So whatever requires -- whatever is required of us to get involved and included in that loop on information, the committee would greatly appreciate it.

At this point, I'd like to yield to my colleague, Mr. Chaffetz of Utah, for five minutes.

REP. CHAFFETZ: Thank you, Mr. Chairman. I too had questions about the relocation assistance policy. So it's good to know that you were moving forward on that.

Mr. Williams, can you give us any insight or confirmation that there is indeed investigation regarding Mr. Potter specifically, as it relates to this possible sweetheart deal that he got from Countrywide.

MR. WILLIAMS: There is a very broad based investigation going on involving Countrywide being conducted by the United States Attorney's Office. It's in early stages and we are cooperating because of the incident that you explored and reported on earlier.

Now, we've done as much work as we can until records begin to arrive in response to a subpoena that was issued by the Department of Justice, they are mostly concerned with instances where there was a clear quid pro quo in there. But there are going to be -- and there are other loans including the one that you've brought up and discussed with the postmaster general that also need to be examined and light needs to be shed on those. So --

REP. CHAFFETZ: Is that something you'll specifically be looking into? I --

MR. WILLIAMS: We are. It's under the direction of the larger investigation.

REP. CHAFFETZ: Okay.

MR. WILLIAMS: And that also is going to dictate a bit of the pace of it, but knowing of your interest, of course, we are going to make you aware of that.

REP. CHAFFETZ: Thank you. I appreciate that. My understanding is and I wondered if you are aware of the two postal employees in Elkridge that were recently arrested for stealing more than $600,000 in stamps and selling them on eBay.

Do you have any reason to believe that this a widespread problem? And do you have any other light on this specific instance?

MR. WILLIAMS: That's a very large instance. There are -- there has been other instances of both the theft and diversion of postages. Postage and cash, of course, are commonly dealt with and they can also be concealed. They can be moved from machine to machine, and it's -- the Postal Service has a very good policy of how to keep track of that and close out timely.

But policies aren't always followed. And in this instance, that's precisely what happened. It's been a long time since those have been audited. When they were audited, we confirmed that the losses were quite large.

REP. CHAFFETZ: You know, there are mechanisms, I guess, being put in place to deal with it so that it doesn't happen even on a small scale.

MR. WILLIAMS: They are trying -- they're doing their best to assure that the policies that are in place for accountability and rapid closeouts are being confirmed with.

REP. CHAFFETZ: Okay. Thank you.

Mr. Herr, this idea of two years versus eight years. I just want to -- would that give them sufficient time in order to maybe develop a more long-term plan?

MR. HERR: I think that would be one of the benefits you could see. I think -- as I mentioned in my oral statement, we think that what that would also -- would allow Congress to keep an eye on how things are evolving in terms of the financial situation.

One thing I like to point out about the -- how the payments are structured over the eight years, they start off at ($)2 billion, but then by 2016, they actually go up to ($)4.2 billion.

So a much of the relief is frontloaded if you will, so that two- year period would allow Congress to look for a plan, look for what some of the options would be going forward. We outlined some of those in my testimony as well.

REP. CHAFFETZ: Very good, last thing, Mr. Chairman. Again, going back to the president's commission that was executed a couple of years ago, this idea of a postal network optimization committee to look at the closing of facilities, is that something you've taken an opinion on, or you want to state opinion on.

MR. HERR: There is something, I think in the past that's come up previously. I think part of it would be a question of how something like that were to be -- would be structured. Obviously, closing postal facilities anywhere is an issue that is difficult for the service I think partly because of interest from a number of different parties. So it may be important to provide --

REP. CHAFFETZ: Is there anything formally underway at all?

MR. HERR: Not that I'm aware of, no, sir.

REP. CHAFFETZ: All right.

MR. WILLIAMS: There is a --

REP. CHAFFETZ: Go ahead, please.

MR. WILLIAMS: Yeah. There is a great deal of activity with regard to examining the possible combinations and reduction of this oversized network that we have. So -- but it's not a national effort. There is a deal happening at the local level, and then there is the -- the job of the national effort is to make sure that the big highways that the mail move on and so forth are not disrupted by local positions.

But there's been a lot of closures already, there've been 60 airmail centers, 52 annexes, 10 remote encoding centers. There've been 10 of these successful local efforts, there are 16 on the horizon now and deeper into the process. There are the beginnings of as many as 40 more.

That's another way of engaging in this without a direct type of effort, but that that type of effort does have mailing.

REP. CHAFFETZ: All right, thank you Mr. Chairman.

REP. LYNCH: Thank you.

Mr. Williams, I don't know if you were here for the testimony of Postmaster General Potter and of Ms. Gallagher, who was formally on the compensation committee. In looking at the framework that the compensation committee uses to determine the CEO salary here for the postmaster general, there seem to be a couple of balancing statutes.

One is a statute that, I believe in 2006, requires the salary to, sort of, be pegged to the vice president's salary, 120 percent of that as a maximum. And then there is another part of the statute, I believe, it might have been PAEA that says the salaries to the degree possible should be comparable to private sector.

Those seem to be, at least in this case, at odds. In terms of the process they used in arriving at this salary, and then applying the bonus and the whole package, did the compensation committee operate within the frame of the -- I think the legitimate framework?

I know they had the same struggle in terms of the testimony of Ms. Gallagher. She said they sort of struggled with the two statutes, and you know, perhaps it's Congress' fault for entering into an area of considerable ambiguity in the statute trying to get people to follow two directions that are necessarily are not going in the same direction. But your own opinion of the job, they did?

MR. WILLIAMS: Some clarity with regard to the two references and the two directions would be useful. I know that what we tried to do is when we became aware that deferred compensation had been paid. We tried to work with both your staff and then we also worked on the Senate side to try to draw together all of the legal references and assure that there was a legal basis for both the bonuses, and then for the usage of deferred compensation which I was not familiar with.

We worked with OPM as well, and they're telling us that this situation that occurred here was the one for which their opinions had been formulated that if a salary does -- that if a salary and a bonus goes over the cap, whatever that cap is, that it may be paid in deferred payments. And then we asked them, had it ever been done because we -- in my knowledge we had driven off the map at that point.

They said 23 departments had done it, and there were 81 individuals that had been given deferred payments for this. There does seem to be a legal basis for both of those. For the bonuses, and you gave some of the citations, they are a bit fragmented and there are a number of them.

And then for the deferred payment, we rely upon Title V in OPM. Actually, GAO has done some legal opinions with regard to abuses of deferred compensation and that does not appear as what happened here.

REP. LYNCH: Let me just, sort of, refine my question a little bit then. The deferred compensation aspect of this, you have a current year cap and it seems to me that they exceeded that cap by putting the money into the next year, or not necessarily the next year, but future years.

It looked to me as someone who, you know, worked for 20 years for a fixed wage per hour, it seemed to be a way of getting around the cap by putting the money in other years, which I thought at least at first blush contravened the intent of Congress in putting in an yearly cap.

Am I wrong on this or how usual is this? Is it a function of -- Mr. Potter, using his example, has been an employee for 31 years. And so obviously, over those years and these are his latest years, you know, going into year 31, obviously he has built up some value in his pension fund.

And I guess what I'm asking is it a function of that, that he is in the latter years of a long, long length of service in the post office, and now is, you know, what he is got there, the corpus of his retirement is compounding rapidly now because he is at the end of his career, is that it or was there a conscious decision by the compensation committee to inject something that could contribute -- contribution into something that actually exceeded this statutory cap.

MR. WILLIAMS: The deferred payments were not a result of the accrual and increasing in value of his pension as far as we could determine. It looked as though that they've arrived at his salary and they did use consultants to do that as Chairman Gallagher said.

And then they have the two bonuses, the one for the PFP and then the one for the contract that Governor Gallagher was describing. Those went over the cap and so it defaulted to this OPM decision and process for when that happens and that is to pay it in the next year for which you are eligible and have not reached the cap.

So in most instances what that means is after retirement and then in all likelihood that's what's going to occur with regard to the postmaster general. So it was the bonus.

REP. LYNCH: Now, it's a windfall then?

MR. WILLIAMS: I'm sorry, sir.

REP. LYNCH: It was a windfall.

MR. WILLIAMS: I'm not sure if that's precisely the word, I would have used. They knew that they'd gone over the cap and --

REP. LYNCH: Okay.

MR. WILLIAMS: -- and then they defaulted to the direction of OPM and that was the applicable --

REP. LYNCH: All right, I'm sure I've exceeded my time limit. Why don't I yield to -- you okay?

Well, let me ask you what would you suggest as a remedy? We can't have this situation where you have a cap. I mean, do you think it would be worthwhile for Congress to consider clarification to the statute?

And then you know, cap everything, plug these holes and address that whole, you know, year-to-year deferment situation or --

MR. WILLIAMS: I have not -- because my jurisdiction starts and ends with the postal boundary, I have not found out what caused the OPM to develop this system of deferred payments?

That would be a good thing to learn and to discover. We have some idea that we -- I'd like to have a much better understanding of that. And it certainly isn't -- the only reason that we are having this committee examine this is because it was disclosed by the Postal Service. Apparently, it's happened in 81 instances in 23 departments. This is a very large issue and I don't understand why it was created.

(Cross talk)

MR. WILLIAMS: Okay. It could have some merit, but I just don't know of its origin.

REP. LYNCH: All right, that's a fair answer and if you are the inspector general and you don't know then we all have a problem. And I'm sure you are being very diligent on the issue, maybe it's something the committee needs to look at separately and apart from this one instance that might be clouded, you know, because we keep referring to Mr. Potter.

Maybe it's better to look at it as a sort of a statutory issue, take the personal politics out of it. Mr. Potter indicated that he thought the only way back to viability is really through mail volume, increasing mail volume.

Technology does not support that trend, however. With the use of emails and folks, you know, paying their bills online is becoming, you know, as the computer savvy generation gets a little bit older, you know, it's usually old folks like me that use it, you know, that uses a -- the mail for paying their bills.

And so I don't see that situation getting any better. Do you think the facts out there and the trends support Mr. Potter's assumption that things can get better on that end and that we can balance, you know, we can get this system back into viability on volume?

MR. WILLIAMS: I'm not sure all the mail is going to come back when the good times return. I do believe that the end of this crisis is going to come, and that some of the mail will return. I think a better option are the ones that that Mr. Davis and Ms. Norton were talking about, a new model and a new plan.

There are a lot of options for viability out there for us. I think it's going to be a very different type of Postal Service when we come out of this. Actually, shipping probably has a brighter future and certain kinds of mail are going to become very important.

And we can probably migrate into things such as saturation or neighborhood mail in a way that we have not in the past, very -- as I imagine in the future very powerful sort of first-mile or last-mile alliances with the competition would have all kinds of benefits.

That would be financially rewarding. And then at the same time, it would allow a single large truck to go through a neighborhood instead of all of these trucks bumping into one another and moving through every neighbor -- through all these crowded neighborhoods from UPS and FedEx and no longer DHL, but the Postal Service.

I think coming together would be a very green solution and a very -- and it would be financially very viable too. I think we can incentivize the employees in a better way and we can deploy them against the operational model and more flexible agile fashion.

I like what we are doing with seamless acceptance and the intelligent mail barcode that's going to allow all kinds of benefits for the customers and for our internal operations. The Postal Service has gotten much better in the last few years on using information and gathering information to build -- (inaudible) -- and the sort of a national treasury with regard to the development and understanding of operations that helped us immensely tighten the efficiency of the operations.

I'm pretty hopeful, maybe not in this -- maybe not for the same reason, but we have a lot of options. The other thing I loved about Congressman Davis' comment is we do need to listen more, our customers are very, very wise. And sometimes I think we are very guilty of not having listened to them, and the people that make the equipment are -- they are as smart as can be. They live by their wits, and I think a lot of times we turn them away, with wonderful ideas.

REP. LYNCH: Okay.

Mr. Herr, in your testimony you suggested that beyond the Postal Service's aggressive plan here that they say is urgently needed for viability. You suggest that that may not indeed be enough, what they've got on the table right now. What action do you think is needed here, if that is not enough?

MR. HERR: Well, at this point they're looking to take $5.9 billion out in costs and as I mentioned earlier that would be unprecedented. And so they are -- they've made good progress on it so far this year, but to make sure that that happens without any additional shocks that could come, say from a fuel increase or something like that.

So as we mentioned in this that they need to be sure to think about that looking at the retail facilities if there is opportunities to do that. And we specifically mentioned facilities in urban areas rather than small rural post offices. We think that maybe an area -- places that have multiple options.

Other things were for the unions to find ways to -- there have been some real efforts to reduce costs for delivery services and that's been a real breakthrough agreement that they had with one of their unions on that. So there are ways there to look forward to. And I think, more broadly, because 80 percent of their costs are compensation benefits they need to take a look at what options are there -- that's certainly the largest cost center.

REP. LYNCH: And given the transportation costs associated with post office, we've got a real break here since, certainly in the past eight months the price of fuels has been somewhat of a stimulus. We've dodged that bullet while we're facing some others. I'm not sure if the gentleman from Illinois has any questions.

The chair recognizes the gentleman from Illinois, Mr. Davis for five minutes.

REP. DAVIS: Thank you very much Mr. Chairman.

Mr. Williams and Mr. Herr, it's good to see you both. Mr. Herr, let me ask you the Postal Service is required to pre-fund 80 percent of its future liability for retiree health benefits by 2016. Do you know of any company in the country that is required or chooses to pre- fund on such an accelerated schedule?

MR. HERR: Oh, I'm not familiar with the companies, but I do know in the federal government other agencies including GAO pre-fund retiree health care benefits. And my understanding from talking with our financial experts at GAO is that this is something -- the Postal Service was behind in terms of these -- making these payments. And so in a sense, this represents an effort to catch up. And that's why the -- number one, their number of employees is large and for that reason the size of the payment is large as well, sir.

REP. DAVIS: Also on the H.R. 22 the Postal Service would still be pre-funding on the order of some $2 billion a year by 2016, a little more than 4 percent of the unfunded liability per year. Although, most private companies do not pre-fund it all, do you know any percentage of companies or what percentage of companies in the private sector that might fund at that level?

MR. HERR: I'm not aware of that. We do not look specifically at the private sector. We took a hard look at the numbers the Postal Service had provided to us.

REP. DAVIS: Thank you very much. Mr. Williams, let me ask you. We obviously looked into all of the cost savings possibilities that we can possibly find, hope to find, look to find if there is anything to find. When you look at the Postal Service's utilization of fuel, do you have any comments that you could make relative to what their utilization seem to be?

MR. WILLIAMS: We've recommended to them in the past that they engage in the purchase of futures of fuel and of course that definitely faded into the background when the price of gasoline spiked. As it lowers again, it might be tempting to reconsider the purchase of that. I think if the network is right sized there will be fewer places to drive between and among and that's going to result in some conservation.

The possibilities for alternative fuel and its very exciting and I'd love to get more involved in it and I believe, we're going to be meeting with Congressman Serrano in exploring some of those possibilities. Those are -- those will be great solutions if the technology is mature enough but we have -- we've taken a false step in the past with ethanol.

We bought ethanol 1,300 trucks and we don't use ethanol fuel, and I mean use regular gasoline because of the availability. So it does pay to look before we leap, but there is some exciting possibilities out there and --

REP. DAVIS: And we've all been excited and delighted recently at least in the last three, four months, but we never quite know what might happen in the future and just as we've experienced some price reductions it's also possible that we might be in a situation again, where the prices escalate and I mean that is a possibility.

MR. WILLIAMS: I agree.

REP. DAVIS: Thank you very much. I have no further questions, Mr. Chairman.

REP. LYNCH: Thank you. I want to thank both of you for your great testimony here. I thank you for helping the committee with this work, we'll continue to work on a couple of these issues outside of the committee, but -- outside of hearing, but we really appreciate your willingness to come here and testify today. You're free to go and have a good day.

MR. WILLIAMS: Thanks, Mr. Chairman.

REP. LYNCH: I would like to invite the next panel up just to get you seated.

Welcome gentleman. Mr. Goff, Mr. Mapa, and Mr. Keating, I appreciate your willingness to come before the committee to help us with this work. It's the committee policy that all witnesses are sworn in so I'd like to ask you to please rise and raise your right hand.

(The witnesses were sworn.)

Let the record reflect that the witnesses have answered in the affirmative. Mr. Dale Goff is the president of the National Association of Postmasters of the United States. Dale Goff is in his 39th year with the U.S. Postal Service, who has begun as a postal assistant in New Orleans.

He has been a member of the National Association of Postmasters for 29 years. His NAPUS positions have included state president, national vice-president, national president among others. He was also a postmaster of the year in 1994.

Mr. Charles Mapa is president of the National League of Postmasters of the United States. Charles Mapa is a postal and military veteran with 35 years of service. Mr. Mapa has been a member of the National League of Postmasters for 24 years. He has also served as the California branch vice-president, executive vice- president and president. Mr. Mapa was elected national president in 2006 and reelected in 2008.

Mr. Ted Keating, president -- is president of the National Association of Postal Supervisors. Mr. Keating worked for the United States Postal Service for 40 years following four years with the Air Force. Mr. Keating began his membership of the National Association of Postal Supervisors as a member of the North Eastern Branch 498. Now for 15 years, Mr. Mapa -- I'm sorry, Mr. Keating served on the Massachusetts state executive board including nine years in which he held the position of secretary treasure.

Mr. Keating was elected to the position of executive vice- president of the National Association of Postal Supervisors in August 1998. Mr. Keating retired from the U.S. Postal Service in October 2004, and has assumed the presidency of the association in December of 2004. Welcome gentlemen and Mr. Goff, if you could, we welcome your opening statement.

MR. GOFF: Mr. Chairman, my name is Dale Goff. I am president of the 40,000 member National Association of Postmasters of the United States, NAPUS. I am also a postmaster of Covington, Louisiana. I represent the managers-in-charge of the 27,000 independent post offices in this nation. These post offices serve urban, suburban, and rural communities.

Some of these post offices support a network of postal stations, community postal units and contracted postal stations. Other offices are so small that they define the community, employ just the postmaster, and have limited hours of operation. For customers living in isolated towns the post office is their lifeline to the outside world.

During this past summer, a New England postmaster illustrated this point at a PRC hearing on the universal service obligation. The postmaster serves a remote offshore town and is the commercial hub of the island. The post office is the town's pharmacy, since mail order drug companies are the primary means of dispensing medications, and the town's bank, since postal money orders are used for commerce.

The picture being painted today is not very pretty. Mail volume is crashing and so is its associated revenue. Service cuts and work hour reductions are deep and wide. Residential and business customers feel the squeeze as postmasters are being directed to cut window hours, close on Saturdays, consolidate delivery routes, defer necessary repairs, and restrict access to mail supplies.

Service and safety are being compromised. These actions are the result of factors that are beyond the control of the agency. The economic contraction has swallowed up mail volume and revenue. My fear is that too short a financial lifeline is fool's gold. As frontline managers, postmasters are highly qualified to offer input with regard to the financial instability of the Postal Service and long-term strategies for streamlining its operations.

First and foremost, it is crucial that the committee report favorably H.R. 22, bipartisan legislation to provide the Postal Service and its customers a temporary financial lifeline. This measure permits the Postal Service to accelerate the effective date of using the Postal Retirees Health Benefit Trust Fund to pay current retiree premiums. It amortizes the remaining fund liability to a more attainable period of time. This proposal is neither a bailout, nor does it cost U.S. taxpayers a dime. H.R. 22 is fair, responsible and helps protect a universal Postal Service.

It is imperative to note that the crisis plaguing the Postal Service is beyond its control and a fiscal climate exists that Congress did not envision when the Postal Reform law was enacted. Now, the tools with which Congress equipped the Postal Service and the associated fiscal requirements are problematic. Postmasters are troubled by budget analysis, which theorizes that temporary postal relief would undermine efficient business practices and aggressive cost-cutting.

Mr. Chairman, extinction of universal Postal Service would be the product without passage of postal relief legislation. In the absence of such legislation, postal doomsday falls on Wednesday, September 30, 2009. On that date, the Postal Service will no longer be able to reform its constitutional duties on behalf of our country. Eight percent of this nation's gross domestic product is tied to the Postal Service, so failing to respond to this crisis is not an option.

The administration can help to alleviate this crisis. The Office of Personnel Management has the authority to more accurately recompute the 2002 estimate of the USPS projected overpayment into the Civil Service Retirement Trust Fund. The calculation made by the previous administration was significantly understated, the overpayments.

The Postal Service can help itself. Clearly, the immense postal bureaucracy contributes to inefficiencies and costs. In 2003, NAPUS testified before the Presidents' Commission on the U.S. Postal Service about the necessity to de-layer the bureaucracy. Last Friday, the Postal Services took a step in the right direction, but fell short of this mark.

Fortuitously, last week, I glanced through the manuscript of a 1951 hearing before the House Post Office and Civil Service Committee. The hearing records -- record relates that the Hoover Report on government reorganization provided for the decentralization of the Postal Service into 15 regions, enabling closer supervision of the more than 40,000 post offices.

Mr. Chairman, today, we have 13,000 fewer offices than in 1951, yet the Postal Service finances about six times as many districts as proposed in the Hoover Report.

REP. LYNCH: Mr. Goff, you've exceeded the time limit. What I'm going to do is this. I am going to let you finish your statement when I come back, okay. I know you got a few more pages there, I'm reading along with you, but I've got a vote on the floor and I cannot miss it, okay.

MR. GOFF: Yes, sir.

REP. LYNCH: Yeah, I've got two or three votes and these are the last votes for the day, so we'll be able to finish up when I come back, okay. Thank you, and again I apologize.

(Recess)

Again my apologies for the delay. Mr. Goff, if I could, if you could just sum up that would great and then we'll continue with the testimony.

MR. GOFF: I'll be glad to, Mr. Chairman.

REP. LYNCH: Thank you, sir.

MR. GOFF: You know the recommendation that was made back in 1951 said instead of saving money and bringing about more efficient operations, the cost or money for the post office and the amount of bureaucracy that would be there that we would have little districts out there, where we'd have just all different types of postmaster generals. You know what we're asking for, Mr. Chairman, is that the future of the Postal Service is in the hands of this committee and H.R. 22 is the only means, right now, for the salvation that we could get.

And Mr. Chairman, I do apologize. I'm from the South so I talk a little slow.

REP. LYNCH: You talk just fine.

MR. GOFF: Thank you.

REP. LYNCH: Thank you, sir.

Mr. Mapa.

MR. MAPA: Chairman Lynch, Ranking Member Chaffetz, members of the subcommittee, good afternoon, wherever you are. With your permission, I would like to briefly summarize my testimony and ask that my full statement be accepted and entered into the record.

REP. LYNCH: Without objection.

MR. MAPA: My name is Charlie Mapa, and I'm president of the National League of Postmasters and we've been representing postmasters since the late 1800s and I'm pleased appear here before you today. Thank you for inviting all of us to testify.

Before summarizing my statement, I would like to congratulate Chairman Lynch on being named chairman of this subcommittee. It is comforting to the league that -- to know that the chair comes with a very strong postal background.

In my written testimony, I addressed three topics. Number one, the overall state of the Postal Service and the need to allow the Postal Service to refinance its obligation to fund our retirees' health benefits as H.R. 22 would do. Number two, the importance of small post offices to rural America and the miniscule amount of money that closing substantial numbers of them would save. Number three, the manner in which the Postal Service has controlled costs over the last several years, the diminishing returns of that approach, and the means to better increase efficiency and reduce costs.

Clearly, the nation is in extremely troubled times. The economy is at its lowest point since the Great Depression. The Postal Service is in trouble and needs relief, H.R. 22 would give some relief. The consequences of not acting are disastrous. There are 8.4 million postal-related jobs and more than $1 trillion in revenue attributed to the mailing industry that, I believe, is even larger than the auto industry.

If the mailing sector were to crash it would shake the American economy to the core, and given its fragile condition, it could bring the entire economy to a standstill. That must be avoided at all costs. Let me also emphasize that relief must exist beyond two years. Anything else would create a system that will appear to be on the edge of disaster held together by spit, glue, and rubber band. That is exactly the image that will drive mailers to aggressively seek alternatives to the Postal Service, electronic and otherwise that will result in the loss of volumes that otherwise should not have been lost and otherwise would not have been lost.

H.R. 22 will save the Postal Service and it'll do so without spending a dime of the taxpayers' money. My written testimony goes into much greater detail about how H.R. 22 works. In terms of small post offices, when one comes to the world of postal and public policy concerns one often assumes that many small offices could be closed resulting in little harm and significant savings.

Usually, that point of view is predicated upon a misunderstanding of the role of the small post office in rural America and a mistaken belief that the cost of maintaining these post offices is as much greater than it actually is. My testimony shows that small post offices are vital for the continued existence of rural America. And that they truly bind rural America together. When a small rural post office closes in a rural community often the community ends up becoming a ghost town.

Mr. Chairman, closing small post offices saves no significant money. If one were to close the smallest 10,000 post offices, more than one-third of all post offices in the country, the savings to the Postal Service would be minimal, less than 1 percent of the Postal Service's budget. The bottom line is that if the Postal Service wants to close a small rural post office and the community doesn't care so be it.

But if the postal Service wants to close a small rural post office and the community does care because it doesn't want to disappear then the Postal Service shouldn't close that office. Finally, my testimony looks at the way the Postal Services reduced cost over the last decade and argue that a better way to gain efficiency is to flatten the management structure and eliminate unnecessary bureaucracy.

One way, the Postal Service saved cost is by reducing carrier and clerk hours and shifting these hours under the postmaster for the postmaster to work instead of the clerk or carrier. Today, many postmasters are working 60 and 70 hours a week, some even more.

Mr. Chairman, massive burnout is close. The disaster is looming on the horizon and I would be remiss in my duties if I did not make that perfectly clear. Finally, instead of becoming more efficient, we are becoming more and more bureaucratic, more telecons, more forms, more reports, it needs to stop. One way is to eliminate management layers. Postal Service recently cut the number of districts down to 74, it needs to do more and reduce these down to something more like 40.

The idea is not that cost savings come from the positions cut, but from the streamlining and removal of layers of management, making decisions easier and cheaper to make, and easier and cheaper to implement. The thing to do in these challenging times is to flatten the bureaucracy and trust that postmasters will rise to meet the challenge. We would do that if the Postal Service would let us.

Thank you for considering our views.

REP. LYNCH: Thank you.

Mr. Keating.

MR. KEATING: Good afternoon, Chairman Lynch, its comforting to NAPS, as Charlie indicated that the -- my Boston accent will not be a problem for this committee.

REP. LYNCH: No, you'll not need a translator with me.

(Laughter)

MR. KEATING: The Postal Service continues to suffer from the steady erosion of mail volume. Last month, USPS reported that eighth consecutive quarter of lower mail volume, volume loss -- more than 15 percent from where it was this time last year. Even greater losses are predicted through the remainder of this year. The last time mail volume fell by as much was in 1937, in the midst of the Depression.

The Postal Service has not been passive in response to the worsening financial condition. Over the past year, as mail volume has continued to steady decline, the Postal Service has initiated aggressive cost-cutting actions that have reduced the financial loss. The Postal Service has cut 50 million work hours, stopped the construction of new post offices and facilities, instituted a nationwide hiring freeze, consolidated mail processing operations, and reduced hours in many post offices.

Last Friday, it announced the closure of six of its 80 districts. The elimination of more than 1,400 mail processing supervisory and management positions at nearly 400 facilities around the country and the offering of another early retirement opportunity to nearly 150,000 postal employees.

These actions are expected to save the Postal Service more than $100 million annually. More job cuts are likely to come as downsizing continues, operations are streamlined, and processing and delivery networks are made more efficient.

Indeed, much more remains to be done to restore the financial health of the Postal Service. Congress needs to do its part, Mr. Chairman, we urge the committee to move ahead and promptly report out H.R. 22. Even when H.R. 22 passes, however, we'll not be out of the swamp, additional steps will be necessary. Let me take a moment to comment on these additional steps the Postal Service should take.

First and foremost, the Postal Service needs to rethink its organizational structure and reorganize itself. It's nationwide management framework, currently built around 10 geographic areas is far too large and bureaucratic and costly to be allowed to continue. The Postal Service should return to an organizational structure based on five geographic regions.

It is time that the Postal Service applies the same cost-cutting scrutiny to the members of its executive ranks as it is applying to middle and lower-management. Let me repeat that. It is time the Postal Service apply the same cost-cutting scrutiny to its executive ranks as it applies to middle and lower-management.

Second, the Postal Service should promptly withdraw out from the practice of buying homes of its employees, ostensibly in support of relocation needs.

This policy has caused the Postal Service to rack up significant losses. The downsides of this policy are now becoming more and more evident, as the Postal Service faces an inventory of homes it must continue to pay to maintain until it can sell them.

Third, the Postal Service should stop tolerating the practice of detailing supervisors and managers to positions that don't officially exist in the organizational structure. Currently, there are hundreds of supervisors detailed to these ad hoc positions, created at the discretion of district managers to address issues that personally concern them.

It is unfortunate, Mr. Chairman, that I need to raise an internal management matter like this to your attention. It is only one of the numerous problems that NAPS and the postmaster organizations have raised with the Postal Service. Like so many of the recommendations, they have been ignored by top USPS management.

In conclusion, Mr. Chairman, the Postal Service faces grave challenges brought about by the deep recession and aggravated further by continuing electronic diversion. These challenges, however, are not unconquerable.

Through the initiatives I've touched upon, including the swift passage of H.R. 22, the finances of the Postal Service could eventually be stabilized. The postal supervisors look forward to working with you and the Congress to make sure that happens.

Thank you for the consideration of my testimony. I look forward for continuing the dialogue with you as time allows.

REP. LYNCH: Thank you. Let me begin by asking, you know, each of you in terms of the proposal by the post office presently to reduce delivery days from six to five. It seems from your own testimony that there is more that can be gained from getting rid of some of the bureaucracy here and perhaps even consolidating some of the post offices and areas other than the rural areas.

I understand the situation where the post office is the only game in town. You know it's -- as Mr. Goff indicated in New England you've got post offices that operate as a pharmacy, a bank and in a lot of small towns, you know, the post office and the health center and, you know, a gas station. And I think that's pretty much your hub of some of these towns.

But in areas where you have a high density of post offices, have we leapt over that -- that phase instead and are looking to, you know, cut a delivery day already. Are we dealing too quickly in this suggested solution or should we be dropping back to look at some of these ways of reducing costs?

MR. GOFF: Mr. Chairman, I know that the six to five day delivery thing, I can say as an organization, as the president of NAPUS that I am totally against reducing down to five-day delivery, and I say that for several reasons. Coming from one of the largest cities in the operational side of this just think of the holidays that we have now. The 10 or 12 that we have during the year that day after the holiday we're constantly making up for the day that we just missed.

So if we had a savings on that one day of reducing down to five days my idea is that we're going to just play holiday every time after that fifth day that we're going to catch up. So if there is a savings on that one day we're going to lose it on that following day.

Now, as far as the amount that would be saved from that, I'm not sure if the figures are all fully accurate, that we've heard three or four different figures today on just what that savings would be.

But from an operational side, how do we keep the mail flowing, we flow it now? You know, are the retailer areas still going to work? Are the clerks still going to work to process mail? So, you know, I'm not sure that the big savings is there.

And when you talk about the consolidation of the postal network or the stores that we have out there, I think there's some room that we can do it as far as stations within the big cities, that's the big urban areas. As you said, the rural areas, that cannot be done, that's the lifeline of those communities.

But I would think that we could look at some type of area there where we could take a station in downtown New York City and maybe put some consolidation there. You know, as you had said earlier, do we need to have one in every high-rise building? I don't think we do, because the volume is not there anymore.

You know, I still say that even though -- and you heard Mr. Mapa say that -- that we went done to 74 districts, there's still a lot of room.

Mr. Chairman, we have 50 states. We could go with 50 districts. Or better yet, we could eliminate all of the districts and just stay with our areas we have out there.

As Mr. Davis said this morning about the communication age that we are in now, and believe me, there's postmasters sitting in this room right now that will tell you that nobody, big brother is there, big brother watches us on the computer all the time. They know everything that we're doing. So I think that we can still streamline that way.

And it's incumbent upon us, whether it's management, or unions, or the upper executives in the Postal Service that we have to work together to change this structure.

REP. LYNCH: My time has just about expired. I would like to give five minutes to the ranking member, Mr. Chaffetz.

REP. CHAFFETZ: Thank you, Mr. Chairman.

I would like to further explore this idea of the -- of five-day delivery, like to the get the other gentleman's inputs on that.

Is there some sort of sliding scale or may be it's not for every single week, but, you know what, 10 days a year, is somewhere in between this you find acceptable?

MR. MAPA: Five-day delivery is -- it sounds good on the outset, but then if you examine it like Mr. Goff has done, he's there in the post office on a Tuesday after three days off, the mail accumulates, you are delivering Saturday, Sunday, and Monday mail and that holiday mail.

So if we're going to take a day -- take another delivery day out of the week then that means you are going to every week be delivering three days of mail on, let's say, a Monday.

And it's a real challenge. Your carriers have got to carry a lot more mail. You've got lot more mail to put in the box, because you have up times that you are punished for if you don't make it in time for that. So that's one aspect that we have to examine.

The other aspect is, even though they say that 85 percent of Americans don't care if we deliver mail to them on Saturday, what about the 15 percent that do? Who are those 15 percent? Are those the businesses out there that actually pay a lot of money into the postal system to help keep us going?

I don't think we need to be cavalier when we decide that we want to -- when we say we want to go to a five-day delivery. I think there are lot of aspects that we really have to examine. But if you always dump on that --

REP. CHAFFETZ: But if you have any other -- if you have other suggestions, if -- I mean I don't think anybody necessarily wants to do this. The question is what are we going to have to do, and what's most palatable, what's not so.

MR. : I think --

REP. CHAFFETZ: -- in its place, I guess the challenge to all three of you is, in its place what other options are there to come up with literally a couple of billion dollars?

MR. MAPA: A couple of billions dollars that I -- you know, before we came here today we did not sit down and compare notes about what kind of testimony we would do. But I saw all in three of our testimonies we called to attention the immense bureaucracy in the Postal Service and the need to reduce that.

I know that Ted would love to have his supervisors be able to supervise.

Dale and I would love to have our postmasters to be able to run their post offices. We are responsible people. We've been trained to manage.

If you gave us half the chance, I think the Postal Service would be surprised. But we are so into micromanaging that every breath, I just think it's unhealthy the way we do things in the Postal Service and --

REP. CHAFFETZ: Thank you. I want to give a little time to Mr. Keating.

MR. MAPA: Sure.

MR. KEATING: I too have previously testified against the five- day delivery. I think that it would -- the beginning of the end of the Postal Service as we know is as a service to the American people. And I think that the layers of management are one thing, but there's a lot of -- you know, the Postal Service came to us last year, the three organizations and probably the unions too, and asked for givebacks because of the financial situation.

And we thought about it, and in the end we eventually said no, because we see daily the waste that goes on in the Postal Service. We give them ideas of how they can save money and they totally ignore it. So until we see the postal headquarters addressing some of the issues that we have given to them, you know, we're not going to be thinking about giving givebacks to the Postal Service.

There are lot of things we can do, internally still, to get the Postal Service back in shape. And I believe we can do that.

REP. CHAFFETZ: Mr. Goff.

MR. GOFF: I agree with Mr. Keating. That was my thought when you asked him that question. You know, there are so many things that we have brought forward, and just to be told, no, that we are not going to do that.

You know, we heard several times today that you are consulting with the management associations on some issues, and we -- and I think you saw me a couple of times just go like that, and I'm going I don't remember talking about that. Maybe they are going to consult with us in the future on it.

But these -- there's some issues that we have brought forward, the details that are out there, the money we spend on people per diem staying in hotels as they work on the details somewhere. And in some of these districts -- and I can speak back for home that, you know, you may have 15, 20, 30, 50 people working on details, there's cost involved it. We've got other areas we can tighten up with.

REP. CHAFFETZ: I guess one of the challenges that I would ask you all, long term and short term as well to work towards, and to think about, that I would be particularly interested in seeing is the idea of consolidating distribution facilities, post offices.

I think there is a distinct difference between a rural post office, which could be the centre of town. I could think of several in my district. I have a very urban component. I have a very rural component.

I think of Oak City. Oak City in my district is a very, very small town, but post office is the center of town. It's where people gather. They do a lot more than just pick up the mail. I think it's a very different equation than how you deal with maybe an urban center or downtown where there may be post offices that are literally two or three blocks apart from each other.

How to tackle that issue I think is something that needs to be addressed long term. And my time is out now, the light is red, but may be we can explore this more in the future. But thank you both -- thank you all three of you for being here.

Thanks Mr. Chairman.

REP. LYNCH: Thank you.

Also I would like to point out that we are going through a process right now, about how to deal with the instability in the Postal Service right now.

Now, we do have your testimony. Some of these talks of solutions are loosely developed, and others are more detailed, such as H.R. 22. But we would want to hear from you. I think it's very important that the postmasters, folks that are on the frontlines and trying to manage this system, have an opportunity to contribute to the solution. I think that's a very important piece here.

So just as the chair of the committee, and I'm sure I speak for the other members on both sides, we welcome your input. You know I think you've pointed out some things that we haven't heard from the other panels and, you know, I think they are well founded.

But let me ask you, Mr. Goff, you also have mentioned in your testimony about the possible projected overpayment by the United States Postal Service into the Civil Service Retirement Trust Fund. And the fact that OPM could go back and more accurately calculate that, that's something that interests me because this H.R. 22 issue, and how we solve that or provide some relief to that funding requirement is a very important piece here. Everybody has talked about that.

And if we don't have accurate numbers in terms of what is required in the first place, we need to have a solid base that we're operating from. I need that number to be to be as hard as possible, the number that we need, and the amount of relief, obviously, that is required.

So could you, you know, just expand on that a little bit, amplify that point?

MR. GOFF: Just as we have been talking, we are trying to look at ways that we can go back in and help the Postal Service just as you were saying too.

We feel under the previous administration that when we got to the situation taken care of, it's that the figure they came about, you know, it was one that was okay for everybody, yes, we were overpaying. But we still feel after looking at it for a while now that the overpayment, we're still overpaying into that fund.

REP. LYNCH: Yeah.

MR. GOFF: And I think that needs to be looked at. It's just another area that we think that we can go in and find some additional fund that the Postal Service would have.

REP. LYNCH: Okay. So, you know, I have asked my staff -- committee staff to send a letter to the John Berry, who is the new director of OPM, asked him to give me a good hard number, a look at these numbers again. And obviously in this environment we can't have the Postal Service overpaying.

And then we got to figure out a way to provide some relief there that doesn't put the whole health benefit system in jeopardy. So we are trying to find a way forward here on that point, you know, much as H R 22 has suggested. But I want to have -- you know, you sort of -- you need to have the right numbers to work from, before you throw a projection out there.

Otherwise we are -- you know, we are acting on bad information. We can't have that, because there is so much at risk here. But just so you know, I understand what you said, and we're going to try to get a better number on that going forward. Let's see.

Okay. We appreciate you coming before us. We appreciate the testimony that you've rendered here. This is an ongoing process. So we want you to be involved here. We think you have a lot that you can contribute in your years of service and your perspective, and you are welcome partners in this. I just want you to know that.

And, you know, your insight has been very valuable to the committee. Thank you very much.

We have the final panel. Welcome gentlemen.

It is the committee policy that all witnesses are sworn in. May I ask you rise please, and raise your right hand?

(The witnesses were sworn.)

Let the record show that the witnesses have responded in the affirmative.

I will give a brief introduction and then we will have your testimony.

Mr. William Burrus, president of the American Postal Workers Union, AFL-CIO represents the largest single bargaining unit in the United States which consists of more than 330,000 clerk, maintenance and motor vehicle employees working in 38,000 facilities in the United States Postal Service.

And Mr. William Young, who is president of the National Association of Letter Carriers. He is the 17th president of that association. Its 300,000-member union represents city letter carriers employed in the United States Postal Service.

Mr. John Hegarty, is with -- is president of the National Postal Mail Handlers Union, and Mr. Hegarty was sworn into office as National Postal Mail Handlers Union president effective July 1, 2002.

For the 10 years prior to becoming the national president Mr. Hegarty served as president of Local 301 in New England, the second largest local union affiliated with the Mail Handlers Union.

Mr. Don Cantriel, is president of the National Rural Letter Carriers Association. He began his postal career in Bland, Missouri where he was a member of the National Rural Letter Carriers Association. And Mr. Cantriel has served at all levels of the association, beginning with the president of his local unit.

Welcome gentlemen. And if I could I would invite Mr. Burrus for his opening statement.

MR. BURRUS: Okay. Good morning.

Mr. Chairman and members of the subcommittee, thank you for convening this hearing on the financial stability of the United States Postal Service, and for providing me the opportunity to testify on behalf of the dedicated employees that our union represents.

I commend the committee through your leadership, Mr. Chairman, for convening today's hearing on this critical topic at a pivotal time in the history of the United States Postal Service.

Mr. Chairman I will summarize my remarks, but I ask that the complete written testimony be admitted into the record.

It's been a long day, and I will try to be as brief as I can.

The nation and the world are experiencing a financial collapse that is unparalleled in modern history, and the Postal Service, like most institutions in our society, has been adversely affected. Mail volume has declined, leading to deficits that threaten the very foundation of the Postal Service.

The Postal Service can take steps on its own to respond to the crisis, but Congress must also play its part. The most important thing that Congress can do is to pass H.R. 22, which will provide temporary relief from the crippling obligation to pre-fund future retiree healthcare costs. Absent this relief, it is unlikely the Postal Service can survive in its present form.

Over the past 10 years, as the mailing industry engaged in debate over postal reform, the overriding focus was the impact of e-mail, the Internet, and the cost burden associated with serving an additional 1.8 million delivery addresses each year.

With all the emphasis on a new form of communications, there was no focus on the real driving factor of hard-copy communications, the economy. And as the country slid toward the recession that now engulfs us, no attention was paid to declining mail volume due to economic stagnation.

Advocates of postal reform ignored the burden that pre-funding retiree healthcare liabilities would pose on a service that would soon suffer double-digit volume reductions as a result of the nation's economic decline.

Postal community identified the wrong threats and was totally unprepared for the challenges we now face. E-mails, the Internet and other forms of instant communication are viewed as direct challenges to hard-copy communications. But we have known about them for years. And looking backward is of little value when we need a vision for the future.

The numbers speak for themselves. Annual deficits are expected far into the future, yet the only solutions postal management has offered are reductions in work hours, consolidation of facilities and five-day delivery. It is expected at some point management will suggest modifications to employees' wages and benefits in order to stem the tide of red ink. But I deferred -- I defer to that time any public comment on that possibility.

I would like to inform Congress that of the groups representing postal employees, the crafts represented by the APW have been reduced disproportionally. A 110,000 employees over a 10-year period.

We would expect that reductions and other sacrifices will be shared equally among the entire postal community. But no business can exist for long with a strategy based on cost reduction alone. Eventually, it will become impossible to maintain an acceptable level of service, and there will be nothing left to cut.

However, there are steps management can initiate to address the issue of financial stability. They could begin with a fundamental shift in the relationship between the Postal Service and commercial mailers.

And I quote an observation by Joy Leong, a contributor to the newsletter Mailing Systems Technology, and I quote, "Mailers are customers of the Postal Service, not shareholders. Printers, mail fulfillment services and other vendors are contractors of the Postal Service, not shareholders."

In recent years these lines have been blurred, and major mailers have assumed the role of shareholders. They have formed organizations that have been granted unfettered access to the inter-working of the Postal Service and to the decision-making process.

One umbrella organization has even been afforded office space in postal headquarters. This cozy relationship between postal executives and major business mailers is unhealthy and counterproductive.

One of the byproducts of this relationship is the preservation of workshare discounts that benefit the mailers at the expense of Postal Service stability. I have repeatedly shared with the members of Congress the views of my union on excessive workshare discounts and their corrosive affect on postal finances.

Because over time, workshare discounts have morphed into a disgraceful policy that rewards large mailers with rate reductions so extreme as to be absurd.

Let me make this one point Mr. Chairman. After investing $20 billion in automation designed to affix bar codes on handwritten and other non-bar-coded mail, the Postal Service has converted a $0.01 per piece cost into what amounts to a $10.5 bonus to worksharers.

This practice, policy and rate making process is detrimental to the health of he United States Postal Service.

But I've sung this song before Mr. Chairman. Throughout the debate on postal reforms I've said the postal management has chosen a path that would lead to insolvency.

And let me close with this Mr. Chairman. The USPS' current predicament is the result of a flawed business strategy, and a lack of vision of how hard-copy communication can be relevant into the future.

Management has failed to find a meaningful role for the world's best delivery force, a system that reaches every American home six days per week, has a network of 40,000 facilities, enjoys stellar name recognition, and boasts a dedicated workforce.

Until the Postal Service finds a way to morph that proud tradition and workforce into a meaningful role far into the future of the nation's communications efforts, even with H R 22 the Postal Service would not belong to the future.

Thank you, Mr. Chairman.

REP. LYNCH: Thank you for the Mr. Burrus.

President Young.

MR. YOUNG: Good afternoon Chairman Lynch and ranking member Chaffetz.

My written submission describes in some detail how and why we've come to this critical point in history of this extraordinary institution that provides background on the retiree health issue, its funding, and it outlines specific recommendations primarily among members of H.R. 22.

I'm pleased to note that nine of the 11 members of the subcommittee are now co-sponsors. You've joined the 208 other co- sponsors in the House of Representatives. That's very encouraging to all of us here.

When the American public react with outrage and disgust at the travesty of AIG, and when they fume about bailouts for banks, brokers and insurance companies that often reward wheeler dealers who got us into this unprecedented financial mess, you listen, and you act. And you should.

But I hope the innocent victims of this greed, the corruption and the incompetence of Wall Street don't get lost in the midst of all this anger. And believe me, my members were angry too. The financial lead of this country aided and abetted by misguided deregulation have trashed our economy. And the historic recession we face threatens the jobs and well being of 700,000 postal families across the country.

Nothing we did, nothing the Postal Service did, and nothing the postal industry did caused this crisis. So we hope that Congress will listen and act to help us overcome it. I want you to know that all of us are doing everything that we can do. The post master general outlined that in his testimony. I won't repeat it here.

I suggest to you that letter carries know little something about helping out in a crisis, about steadiness when there is panic in the air, about sharing and about sacrifice.

When anthrax appeared in the mail stream, the chances of public panic were significant. Letter carriers didn't panic. They continued to do their jobs in a very frightening environment. There was no public panic and eventually things returned to normalcy.

When Katrina devastated the Gulf Coast many letter carriers lost their homes and all of their possessions. It was not until letter carriers appeared on the streets of New Orleans that the public panic began to subside and that normalcy returned.

When officials from the homeland security department needed a way to distribute vaccinations in our country, if it came under a biological attack, the nation's letter carriers stepped up their plate and volunteered to make those distributions under the city readiness initiative.

Every year we volunteer our services. We conduct the nation's largest food drive on the second Saturday of May. We replenish all the local food banks across the America, delivering over 70 million pounds of food.

We do these things because we accept our role in society. We are the men and woman trusted by America to deliver their mail.

We come to you now because the Postal Service is in trouble and we need your help. We contend that before you consider any drastic and counterproductive measures such as the move to five-day delivery, or redefining universal service, Congress can and should take several other steps to strengthen the Postal Service starting with the passage of H.R. 22.

I outline those other things, by the way, in my testimony. I won't bore you with it here this afternoon.

With all due respect to Chairman Gallagher, and Postmaster General Potter, this is not the time to undercut public and mailer respect for and reliance on the Postal Service by reducing postal services drastically and counterproductively to five days a week.

The nation's mailers have diverse needs and business is conducted six days a week in America. In general, they want six-day delivery, need six-day delivery, and expect six-day delivery. If the Postal Service doesn't provide it someone else will demand the right to do it, and that will only add to the woes of the Postal Service.

Now, we're here not to ask for a bailout. We're simply asking to use money that we've already put aside, our own money -- the Postal Service's own money to get us through this crisis.

I'm not going to get into a debate with you all about scoring rules which we all know can mean what we want them to mean when it suits our political purposes. But I'm confident that the same American public that is quite sure something is very wrong about bailing out AIG believes very strongly that something is right about the Postal Service.

They may not appreciate AIG traders screwing up with multimillion dollar bonuses using taxpayer hard-earned dollars, but they do appreciate their letter carrier earning his middleclass salary, paying her taxes, raising their children in the community, and faithfully delivering their mail each day.

And they will thank you for helping the Postal Service to use its own rainy day fund to do that with a binding obligation to restore that rainy day fund when this crisis has passed. Not a bailout, not a subsidy, not a loan, our own money.

How do you score that? I'll have to tell you how I scored. I scored a homerun for everyone, for Postal Service, postal employees, mailers, postal customers, and all by the way, the Congress of the United States.

Before I conclude I would like to address one further last issue. Earlier today, Chairman Lynch, you said that you're concern about H.R. 22 was -- it would leave a $75 billion unfunded liability in 2016 for future retiree health benefits.

First, I share your concern. These benefits are my members' benefits. And I would never support legislation that would endanger their payment. Second, you should note, sir, that the ($)75 billion estimate is highly uncertain, if not suspect. It assumes that retiree premiums -- retiree health benefit premiums will increase 7 percent a year forever.

If there's anybody in this country that can survive that I'd like to know who it is, seven percent a year, every single year, forever.

I'm going to submit a report from Watson Wyatt that shows that Medicare and Medicaid don't even believe that. Their lot more realistic long-term trend rate is 5 percent annually. That ought to be instructed for you all.

Third, I'd like you to know, sir, that under H.R. 22, the balance in the retiree health fund will continue to grow from $32 billion today to $71.5 billion in 2016.

Do you know how much the typical private sector company has pre- funded for its employees today? Zero. Do you know how much the Treasury, the Commerce, the Labor Departments are pre-funded? Zero. Do you know how much the Congress of the United States has pre-funded for you and your employees? Zero.

So please let's not kill the Postal Service out of an understandable yet tenuous concern about unfunded liabilities in 2016. The reality is we need to re-examine the whole issue. I'm delighted to hear these. You said that you were going to look into that, sir.

The current funding schedule was set by the prior administration to meet short-term budget scoring rules.

It wasn't set on the basis of any sound public policy or any sound accounting principles. In fact -- and this is the part I think you would be most interested in, sir. In fact, a fair accounting of the Postal Service --

REP. LYNCH: You really got to wrap up, sir.

MR. YOUNG: This is it.

REP. LYNCH: No, I appreciate that you've been here all day, and I'm cutting you some slack, but I get you --

MR. YOUNG: Could I finish one sentence?

REP. LYNCH: Please do.

MR. YOUNG: Thank you.

REP. LYNCH: Yeah. Please go right ahead.

MR. YOUNG: In fact a fair accounting of the Postal Service's surplus and civil service retirement fund, which the OPM calculated and the PAEA allocated to the retiree health benefit fund would most likely offset any unfunded liability. Zero.

Thank you, sir.

REP. LYNCH: No, I thank you.

President Hegarty.

MR. HEGARTY: Good afternoon and thank you Chairman Lynch, Ranking member Chaffetz.

I appreciate the opportunity to testify, and I'd ask that my entire written testimony be submitted for the record.

REP. LYNCH: Without objection.

MR. HEGARTY: As with your predecessor, it's an honor to have someone who is chair of this subcommittee who has such a rich background in labor and postal issues, Mr. Chairman.

I wish to focus my comments today on what Congress and the executive branch can do, as well as what we the Mail Handlers Union are doing to help the Postal Service through its current financial crisis. The first step is to simply enact H.R. 22.

How often does Congress see a bill that would rectify a multibillion dollar debt situation, keep a vital function of government alive, yet cost the taxpayer not one cent. That's what H.R. 22 does.

How often are the Postal Service, the mailers, the unions, the management associations, and the $900 billion industry associated with the mail, all on the same page? This is it and it has bipartisan support.

Aside from not costing the public a penny, H.R. 22 has the added benefit of continuing to increase the amount of money in the trust fund for future retirees' health care, and it does not reduce any health care benefits.

Furthermore, it gives the Postal Service some flexibility for the foreseeable future. And I fully support keeping the trust fund healthy. All of us at this table are in an agreement. There is one aspect of this process, however, that I would like to address, the imposition of the CBO scoring on this bill.

If CBO's score is an obstacle, then Congress needs to take a close look at the problem created by the rules under which CBO operates. The scoring issue may be singular to the Postal Service. It's a quasi-governmental agency which receives no federal appropriation for its operation.

It's off budget for some purposes and on-budget for others. Why should an intergovernmental transfer of U.S. Postal Service funds that in the long term will not change the finances of the Treasury by $0.1 and will not change the Postal Service's total obligation or the total amount of the Retiree Health Care Benefit Fund be construed as adding to the deficit?

Why should a fix that does not cause the taxpayers or the users of the Postal Service one penny be scored? While it may make some sense in an academic, accounting ledger world, it does not make commonsense in the real world. If legislation similar to H.R. 22 is not passed, the Postal Service may not be able to meet all of its financial obligations as soon as September 30th of this year.

And that inaction would add to a much bigger debt. The debt incurred by American society if we allow the Postal Service and the $900 billion industry which depends on it to fail.

I obviously think Congress should figure out a way to pass H.R. 22. It is in the words of President Obama's Reinvestment Act, temporary, targeted, and job saving. It is similar to the stimulus aid sent to the states to prevent layoffs and cuts in services. And I hope the subcommittee will look closely at this issue.

I'm often asked what are we, the Mail Handlers Union doing to help the Postal Service cut costs. There is a complex story to be told here.

First, during the past 10 years thousands of mail handler jobs and more than 100,000 total postal jobs have been eliminated, mostly through attrition while the mail continues to be processed and delivered professionally and on time. That is why postal-employee productivity is at an all-time high.

We have also aggressively pursued labor management programs to reduce overhead. Let me give you just a few examples. The Ergonomic Risk Reduction Process has succeeded in reducing repetitive motion injuries by as much as 35 percent. Because of the forceful backing of the postmaster general and his headquarters staff, plant managers have embraced this effort.

It has been estimated that the Ergonomic Risk Reduction Process saves on average 20 injuries per facility per year where the process is used. About a five-fold return on the dollar.

These reductions account for approximately $77.8 million in cost avoidance. Then there is a Voluntary Protection Program, which is driven by employees and is OSHA-related.

t looks at the cause of a specific, often traumatic injury and seeks to prevent a reoccurrence. There are measurable differences in the injury rates in facilities that use this program versus those that do not.

Starting in 1999, the Postal Service and our union developed a Joint Contract Interpretation Manual to encourage union and management representatives at all levels to resolve and reach consistent results on pending issues.

It has saved many millions of dollars and added a level of predictability and responsibility to our craft. The parties also have a quality of working life program, which provides opportunities for mail handlers and supervisors working together to identify and resolve work problems in the workplace. The Postal Service reports that the savings are substantial, in the millions of dollars.

Finally, as a former labor leader, Mr. Chairman, you know how complicated a give and take process collective bargaining can be. Yet in our current contract, which was negotiated in 2006, ratified by our members and expires in 2011, we are reducing by 1 percent each year the amount the Postal Service pays toward our health care.

The other unions and management associations are also onboard with these reductions. The Postal Service's cost eventually will be reduced by more than $250 million per year when all unions and postal employees are taken into account. And in these five years alone the Postal Service is saving over $800 million just from this one contract provision.

So in my view, the unions have stepped up to the plate. We ask the Congress do the same by passing H.R. 22.

Thank you for your time and attention.

I'll be happy to answer any questions you may have.

REP. LYNCH: Thank you, sir.

President Cantriel.

MR. CANTRIEL: Thank you, Chairman Lynch, members of the subcommittee.

I would like to extend my thanks to the committee for scheduling a hearing on restoring the financial stability to the Postal Service. I would ask that my full testimony be submitted for the record. I'll give --

REP. LYNCH: Without objection.

MR. CANTRIEL: -- brief summary of my statement.

Mr. Chairman, as the NRLCA's national president it's in our members' best interest to work toward the creation of a financially stable Postal Service. Toward this end our union has been working together with the Postal Service to establish revenue generating programs along with ways to reduce cost for the Postal Service.

One revenue generating program we use is called Rural Reach. To date the rural carrier craft has generated $26 million for the Postal Service and we fully expect by the end of the first full year of existence to exceed $30 million in revenue for the Postal Service.

Our union is the only union that complained that actual employee wages, what our employees take home in his or her paycheck every two weeks is in large measure based on mail volume. Every year rural routes are evaluated and rural carrier salaries are established based on the work performed each day during the evaluation.

Mail volume is a critical factor in the salary setting process. During boom times for the Postal Service, rural carriers can see an increase in the route evaluations. Until recently route evaluations generally went up due to the increased mail volume and then expanding customer base.

Unfortunately, our last two mail counts resulted in significant reduction in rural route evaluation impacting tens of thousands of rural letter carriers and causing their salaries to be lower.

Last year, in a two-week mail count, rural routes served by our members lost anywhere from two to 12 hours of pay each week. Each evaluated hour is worth more than $1,500 per year.

So you can see how declining mail volume dramatically affects the men and women we represent. This year the NRLCA had a four-week mail count during the last two weeks in February, the first two weeks in March. Official results of mostly recently completed mail count are not available. We're once again expecting rural route evaluations to go down, not up.

The point I'm making is quite simple. Our people are hurting. They are making less money or in some cases opting to work an additional day to make the same amount of money. It is pretty simple, reduction in rural route evaluations translate into direct savings to the Postal Service.

If mail volume has declined, chances are very good that the Postal Service will be paying our members less because there will be less mail delivered and collected each day. Never let it be said that rural carriers are not doing their part to help the company.

We've been doing it for decades with our evaluated compensation system. If the business falters, labor costs --- at least rural letter carrier labor costs --- are adjusted downward. Every Postal employee we represent knows in the pocketbook what it means for the company to be challenged by declining mail volume.

The Postal Service can save literally hundreds of millions of dollars if routes are evaluated when mail volume is low. But this annual adjustment mechanism does not stop with salaries. Most rural letter carriers still provide their own delivery vehicles for which they are paid an equipment maintenance allowance.

EMA is adjusted quarterly by measuring fluctuations in the CPI-W Transportation Index. In other words, EMA payments to rural carriers go down when costs --- including the cost of fuel --- go down. These regular adjustments have recently resulted in significant cost savings for the Postal Service as gasoline and automobile prices have dropped sharply.

Our union, like the other postal unions during the last contract negotiations cycle lost some ground on health benefit costs, and now pay a larger percentage of health insurance premiums. Our members now pay more while the employer contribution to Federal Employee Health Benefit premiums as a percentage of total cost is lower.

As health care cost for businesses and corporations continue to rise, our union members will pay an additional 4 percent of the Federal Employees Health Benefit Programs over the life of the current collective bargaining agreement. It's another example of how our bargaining unit has provided additional savings to the Postal Service.

The most important piece of legislation Congress should enact is H.R. 22, introduced by Representatives John McHugh and Danny Davis. The Postal Service is saddled with an ambitious payment schedule to pre-fund its retirees' health benefits.

This is an obligation no other corporation or government agency is required to pre-fund. The last administration required this provision to be included for one simple purpose, to make the PAEA budget neutral.

There are several other savings opportunities that the Postal Service would have based on the actions of Congress, including helping them with the Medicare Part D, recalculation, looking at the way that the first retirement system is set up and the payment that's made for military retirees.

Mr. Chairman, members of the subcommittee, thank you for allowing me to testify before you today. I'd be happy to answer any additional questions you may have.

REP. LYNCH: Thank you. Thank you, all. I appreciate your testimony.

Let me ask, there has been a menu of options that the postmaster general laid out and reinforced by the board of governors, Ms. Gallagher. They talked about a voluntary separation program, voluntary retirement program, to my knowledge at least the way to describe it, it was not incentivized in any manner.

I can't remember the last time they did an incentivized retirement program, might have been 1982, I think when my mom retired, that's the last one I remember.

But there hasn't been a great groundswell of, you know, they're not beating the door down to get out of there. I question the efficacy of a program like that when the economy is so weak.

I actually think people are going to go into retirement when they see their, you know, the 401(k), and their savings -- their investments rather cut in half. What are your thoughts on this effort to get 150,000 postal employees to take an early retirement?

MR. BURRUS: Speaking for the members of the American Postal Workers Union, they are not fools. They are not going to relinquish their job paying excess of $50,000 a year to the uncertainty of a bad economic situation. It's an act of desperation.

They are not going to have many takers, I predict. Our union maintains that our collective bargaining room requires an incentive. We will resolve that through the grievance arbitration process.

But it's similar to the threat of five-day delivery, it's a diversion. There is no intent, there is no desire, and they are certainly over Congress' congressional dead body that they will get a five-day delivery.

Mentioning those things sucks all the oxygen out of the discussion. Well, we are collectively fighting as hard as we can to get H.R. 22 passed. We really don't need the sideshows.

So I'm very critical with them even bringing these things up. They are not the answer to the USPS problem. There are some long-term solutions, but the initial hurdle is the avoidance of that $5 billion plus obligation they have to the future retiree health benefits.

REP. LYNCH: Understood. That's loud and clear.

Mr. Young, on the early retirement piece here if I'm missing something.

MR. YOUNG: Excuse me. I couldn't hear you, sir.

REP. LYNCH: On the early retirement piece here, do you think that's going to be successful the way they got it framed right now?

MR. YOUNG: No, sir, I don't. In the last early retirement that was just offered to my members, less than 3,000 of them took it. It's the uncertainty.

You said it exactly right. When people lost all their retirement savings, when the stock market plunged, they don't know what they're facing, what the future is going to look like, and there is a lot of people there out there that are scared.

REP. LYNCH: Yeah.

MR. YOUNG: I just -- I want to get back to this idea of these things that Potter and Gallagher brought to you this morning. And I just want to question in a general way, Mr. Lynch, whether it make sense to try to make these kinds of decisions when the Postal Service is at the bottom.

This would be like restructuring the Postal Service during the Great Depression. Nobody that I talked to in this country believes we're going to be mired forever in the current economic state that we are. At least we all pray to god we're not. So I think it makes a lot more sense to look at this when normalcy returns.

REP. LYNCH: Yes.

MR. YOUNG: Can I just make one thing? A lot of people are starting to believe now that all the sudden the Internet, these other alternatives jumped into this.

During the last six years the Postal Service made all the right moves to protect themselves from that. And as one of the earlier speakers or one of the panels testified, we'd actually made $2.8 million last year if it hadn't been for this future retiree health benefit payment.

So I think the real key is what you said. Let's find out what that real number is. What is the real number? What is that obligation? And then let's go from there in trying to decide how we make this the best Postal Service with the funds that we have available.

REP. LYNCH: Okay.

Mr. Hegarty.

MR. HEGARTY: Well, on the voluntary early retirement I have a couple of concerns and something for the committee to consider too is employees hired since 1984 under the Federal Employees Retirement System, if they take an early retirement they lose the ability to contribute through savings plan, they lose the matching contributions, they don't qualify for social security right away, they really can't live on it.

A typical voluntary early retirement offer in the last round for an employee hired in mid 1984 is $900 a month. So I don't know any postal employee, as President Burrus said, would go from a good paying middle-class job could live on $900 a month.

For the civil service retirement employees, the picture is a little bit better for them. They were all hired in 1983 or before. Some of them are approaching normal retirement age. But I'd love to see incentives. I just don't know where the money would come from for that.

And in the last time they did an incentive was 1992. And they lost so many employees in so many wrong places they had to hire to replace a lot of the employees that they -- took the voluntary retirement.

REP. LYNCH: All right.

I know I'm over my time, but I'm going to ask Mr. Cantriel -- President Cantriel, could also hit that same question.

MR. CANTRIEL: Yeah. Because we are the last mile delivery, this is the first time we've ever been offered the voluntary early retirement. And like the NALC, we had 606 carriers who took advantage of voluntary early retirement.

And the comments that I heard throughout the country was, if I'm going to have to work, I just as well work for the Postal Service, because I cannot live on what I would be getting from my retirement without some sort of an incentive to do it.

REP. LYNCH: Yeah.

MR. CANTRIEL: That was a general feeling from ours. I don't expect a large portion of our membership to take advantage of it this time, and in the positions other than the declining mail volume which may result in the loss of some routes. If one of our people retires someone has to replace them, because we are that last mile, similar to the NALC. Someone is going to have to actually deliver that mail.

REP. LYNCH: Yeah. Thank you.

Mr. Chaffetz for five minutes.

REP. CHAFFETZ: Thank you, Mr. Chairman. And thanks to those of you that have been here since 9:30 in the morning. The chairman flipped me a note and said don't worry we're half way there, so --

(Laughter)

Just kidding.

We've heard various testimony, and the course has been fairly united on the idea that -- support of H.R. 22. I personally support H.R. 22 now that I've been able to dive in and look at it.

And obviously I think it has the members in the support broad -- in a broad way -- bipartisan way and hopefully we can get to that sooner, rather than later.

We need revenues to go up, we need expenses to go down to get to that magical point. We have to deal with the fact the realities of where things are today. So I guess I'd like to leave with a sense of what are the top three things we can do to affect either revenues going up and/or expenses going down.

H.R. 22 plays a critical role and gets us a long way towards that direction. Taking maybe 30 seconds each knowing that you always take a minute --

(Laughter)

Maybe you could -- we could start with President Cantriel there. And give me a sense of what you would add to that. We need big things that are going to make differences. What are the kind of numbers two and three on that list that you would add?

MR. CANTRIEL: I guess I will have to piggyback a little bit on what you heard from the managers. We see so many levels out there. And I'm going to use my postmaster I just talked to within the last week when he told me what my evaluation was.

He said I'm so tired of filling out a report verifying that I've filled out the reports that had to be reported, and not given the opportunity to run my office. One of his comments was, I know less about running my office now than I did 15 years ago when I got the position.

So I think there has to be some streamlining in middle management, and put some responsibility back on those postmasters to make those decisions. I think Charlie and Dale both said it very well.

They are very capable of making the decisions that need to be made there. There they don't need three levels of middle management to tell them what they need to do. I think we're top heavy in a lot of areas.

I don't see that we need 80 or 74 districts. I don't think we need 10 areas to tell us our members how to deliver the mail.

We've got too many people that are not actually handling the mail, telling people that are handling the mail what they need to do and how they need to do it.

REP. CHAFFETZ: Thank you.

Mr. Hegarty, President Hegarty.

MR. HEGARTY: Thank you.

The first thing I think we need to do is continue the revenue generation that the unions are participating in. The carriers and rural carriers have done it for a number of years. We just started last year.

Talking to vendors, people we do business with that don't use the U.S. mail. We now have the opportunity to fill out a form or go on the computer and a professional Postal Service sales associate will call on that business and explain to them the benefits of the mail, how they can get better service, how they can save money.

So that's just taking off from my crafts prospective. But as I said the letter carriers in the rurals have been doing it for quite a while.

One thing I would caution that you should do is not go to five- day delivery. And that would be in the top three for me. One of the reasons we've talked about, driving people to our competitors. The other thing I think that would do is drive people to the Internet. Because the first time their bank statement doesn't come on time, or the first time their credit card bill go late they're going to say, the heck with this, I can go online do all that stuff and save myself some postage, so --

REP. CHAFFETZ: Thank you.

President Young.

MR. YOUNG: Yes, I'm just going to give you a list. First and foremost restore the economy.

REP. CHAFFETZ: Okay.

MR. YOUNG: When that's done the Postal Services --

REP. CHAFFETZ: You can give me till Thursday.

MR. YOUNG: Yeah, all right.

(Laughter)

Sir, I was just going to say you're from Utah; you can do that by Thursday.

REP. CHAFFETZ: Oh, yeah, you thought --

MR. YOUNG: Second, the Medicare subsidy Part B -- Part D, that was designed for companies to provide a drug benefit equal to Medicare. We do, and just with the stroke of a pen the previous president said we're not going to give it you, not withstanding the fact. That's about ($)8 billion right there. ($)8 billion is what I'm told the number is there.

Management re-structuring would be number three. And here is number four for you. We are still paying for FERS employees for the time they spent in military service. In the Postal Reorganization Act that we just passed in 2006 we took care of the CSRS employees, their previous military service, that was ($)17 billion. That was the cost of that.

We are still asking mailers and the people that pay postage to pay for the time that anybody who is a FERS employee after 1984, anytime they spent in the military. That would be significant as well.

REP. CHAFFETZ: Thank you. Great, I appreciate it. Thank you.

MR. BURRUS: Number one is H.R. 22. Number two is restoring the economy. Number three to infinity is similar to jumping off a five- storied building and flapping your arms. It doesn't cushion to fall but it gives you something to do all the way down.

REP. CHAFFETZ: Thank you. Thank you, Mr. Chairman. Thank you all.

REP. LYNCH: Thank you.

Let me ask the -- one of the other legs of the stool that Post Master General Potter had thrown out there was consolidation of some of these post offices. They've already gone with six facilities, six area facilities, which I guess are widely for administrative purposes.

But there is a sense that there could be some consolidation of -- more of the urban post offices, and while that might not necessarily affect the number of people out there in terms of your workers, it make -- we may gain some efficiencies by, you know, discontinuing the leases that we have out there or closing down some facilities that are -- that are obsolete or are not being utilized to a full extent. What are your thoughts on that idea about closing those facilities?

MR. BURRUS: In general, we oppose consolidations. We support efficiencies of the Postal Service, and prove to the community that a consolidation is the interest of saving the Postal Service money while providing the same level of service to the citizens of that community. Then we stand aside and will support such an effort.

But what we see in the current plan is deny the single user, my grandmother, my cousin, the student in college to deny them the level of service they provide for the major mailers. Major mailers follow the post service and it is actually benefiting them because it reduces the number of drop points where they take the mail to.

So consolidation saves money for your major printers and major mailers. But it's creating a true tier United States Postal Service. One system for the major mailers, a totally different system for the person that drops the letter in the collecting box at the end of the corner. That's the danger of this consolidation plan. It's not just the efficiency. It's separating post service into -- one post service for the haves, another post service for the have-nots, and we oppose that.

REP. LYNCH: Okay.

Mr. Young.

MR. YOUNG: I think it's worth the look, but I caution and I think you know this. I know you do, sir, because you got background. But it's going to be real heavy on all of you. Every time we try to close any facility in your areas you're going to hear from all of the people that live in that areas, the millions of reasons as to why it happen -- shouldn't happen.

I'd just make this one remark, and you just take it for what it's worth. I believe this is the right number, if it's not, I apologize, but it's close. Long Island has 80 post masters. And ask yourself the question, do you think that's necessary. It's not that big of an island.

REP. LYNCH: Right. President Hegarty.

MR. HEGARTY: Well, again if it make sense, if it's going to save the Postal Service money, but the key is if it's not going go hurt service then we are not opposed to it provided its done in accordance with our collective bargaining agreement, and the Postal Services' own hand book of manual.

They have a handbook called the Handbook PO-408. It governs their area mail processing surveys, where they are supposed to do a survey. And under the PAEA they have to have community input, stakeholder input and hold the public hearing.

One quick example, they are doing an AMP study right now in my home facility of Springfield, Massachusetts. And they want to truck all of the cancellation mail, the letters that come in and need to be run on the cancellation machine down to Hartford, Connecticut to be cancelled and then truck them back up to Springfield to be delivered.

I know you are familiar with the state of Massachusetts, Springfield, the Hartford is about 35 miles. It's down I-91. They would be going down there in rush-hour traffic, all kinds of weather.

It doesn't make a lot of sense to me. So those are the types of consolidations that we're opposed to.

REP. LYNCH: Okay.

Now Mr. Cantriel, I know that you represent the rural carriers. So you're probably outside of, you know, the possibility of consolidation in many cases, but your thoughts.

MR. CANTRIEL: Well, we do have some in urban areas, but, yeah, I do deal mostly with the rural areas and there is a real identity problem there. They do not like losing that. There are solutions that can be there, there is things that can be done to look at to make sure that the communities are provided the same service that they have.

In my area there is three or four small offices that in one post office three or four clerks could provide the same amount of hours at the window and do the same amount of service without having a manager there all day long and still provide the service that we need in those rural communities.

I don't look much toward closing a lot of those down because of the identity for that community and what goes on there. So it is little more difficult for me to jump onboard of closing down very many offices.

REP. LYNCH: Okay. Thank you.

All right, I don't think we have anymore questions. But I do have a comment. And that is that the Postal Service is one of the most respected government institutions in this country because of what the people you represent everyday do in our communities.

Whether they are rural communities, you know, folks have a great deal of respect for their local letter carrier in the cities as well as the suburbs. Their local clerk is a very familiar face around town.

But it's really that reputation of reliability, you know, of great service is largely due to the people that you represent. So we thank you for that.

And just as I spoke earlier what the supervisors and postmasters, that we have an open process here on how to proceed. I do want to caution that time is wasted. And we don't have a lot of options here -- we don't have a lot of time. Let me put it that way.

So we're going to have to decide on a course of action and we're going to have to get to it. Sounds like H.R. 22 and some iteration will be part of that approach in that response. But we would like to do more than just that. And we would welcome your input, your ideas.

You see it at a ground level. And you've seen it for a good while. And so we would be enriched by having your input in this whole process. We welcome it. I thank you for your testimony here. And you have a good day.

END.

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