Laying Out the Reality of the United States Postal Service

Panel I

Megan J. Brennan, Postmaster General and Chief Executive Officer, U.S. Postal Service     Testimony

• The Postal Service is working with a business model that is not sustainable
• The PAEA did not establish a business model with sufficient flexibility to enable us to effectively respond to these unanticipated precipitous volume declines.
• Mail volume decline has made doing business difficult
• We've tried to adjust to a changing marketplace
• During the last decade, we have responded aggressively to the challenges that confronted us.
• We have rationalized our operations in response to the sharp decline in mail volume, increased workforce flexibility, and established a more affordable wage system.
• These efforts have resulted in costs savings of approximately $15 billion annually.
• We are proud of our achievements in significantly growing our package business, and implementing innovations that have enhanced the value of the mail to better serve our customers.
• Despite these achievements, our efforts have not been enough — and cannot be enough— to restore the Postal Service to financial health, absent legislation. Our debt is at an unsustainable level.
• We have maintained adequate liquidity in order to continue achieving our primary mission of providing universal postal services only by defaulting on our legally mandated retiree health benefits (RHB) payments, and by deferring needed capital investments.
• We will still be subject to very sizable prefunding payments going forward, on top of our other operating expenses and a need to begin increasing capital expenses on items such as new delivery vehicles.
• We recognize that meaningful postal reform will impact our many constituents in different ways.
• We have been working over the last year with key stakeholders, including our labor unions and a cross-section of the mailing industry, to discuss the business model issues that confront us, and to identify potential key reforms about which there is broad consensus that would make the Postal Service sustainable.
• In formulating our proposal, we had numerous discussions with stakeholders to understand their interests and concerns and to explain ours.
• Based upon these discussions, we propose a set of focused provisions, which, if enacted into law by Congress, would make substantial progress towards restoring the Postal Service to financial health.
• We need legislation now. We've been working with our employees and business stake holders
• The provisions we are recommending, and which are described below, reflect the adoption of many private sector best practices while maintaining our public responsibilities.
• Our proposal would: (1) Require Medicare integration for postal retiree health plans; (2) Continue our exigent price increase for market-dominant products; (3) Calculate all retirement benefit liabilities using postal-specific salary growth and demographic assumptions; and (4) Provide some additional product flexibility.
• This proposal, along with other management initiatives, will achieve approximately $27 billion in savings through 2020
• The continuation of the exigent price surcharge is critical to the Postal Service’s financial health. When it expires, which is anticipated to take place in early April of this year, the prices of market-dominant products will decline, which will have an adverse impact on our future operating revenue and liquidity.
• Expiration of the surcharge would reduce our revenue and net income by approximately $2 billion per year going forward, which is an irrational outcome considering the Postal Service’s financial condition.
• We expect total mail volumes to continue to decline, particularly in First-Class Mail, due to the existence of electronic alternatives.
• The price cap that is currently imposed on market-dominant products and services is clearly not producing the desired financial results despite the best efforts of the Postal Service to reduce costs.
• In fact, the current price cap simply will not work since mail volumes have rapidly declined, while the costs necessary to maintain our network are largely fixed or are growing.
• Its replacement with a regulatory structure that enables us to effectively respond to the challenges and opportunities presented by a dynamic marketplace.
• Investments in our infrastructure are needed to meet our universal service obligation and to fully and efficiently capitalize on business opportunities in the growing package delivery market.
• We've tried to address our competitive services pricing, but our market-dominant price freedom is more restrictive.
• There are many in the industry that support making the exigent increase permanent.

The Honorable Robert G. Taub, Acting Chairman, Postal Regulatory Commission        Testimony

• The Postal Service has a next deficit of $56.8 billion. This has impacted on the Postal Service's liquidity.
• The Postal Service still faces significant financial obstacles for the future.
• Increases in revenues and subsequent higher liquidity are almost entirely due to the temporary Market Dominant product exigent surcharge.
• The additional revenue from Competitive products is not sufficient to offset the future revenue loss resulting from the termination of the exigent surcharge.
• The Postal Service is expected to collect all of the allowable additional revenue, $4.6 billion, from the exigent surcharge by April 2016, when it would then be removed.
• At that point, in order to maintain the operating net income it is currently achieving, the Postal Service will have to make up the loss of that revenue, which is approximately $2.1 billion annually.
• With the growing liability of retiree health benefits, the inability to borrow for needed capital investments, and the continued loss of high margin First-Class Mail revenues, the important task of improving the financial condition of the Postal Service is daunting.
• The Committee’s invitation letter requested that the Commission’s testimony also address “the impact of legislative and regulatory burdens placed on the USPS, including the Universal Service Obligation (USO), rate caps and requirements, and limits to new business.”
• Congress’ consideration of whether to allow the Postal Service to provide nonpostal services is in many ways linked to another matter that the Committee asked that this testimony address – the USO. Indeed, as it deliberates on this important issue, Congress will need to balance the existing expectations of a wholly government run postal administration chartered to provide universal mail service to all Americans with potential new nonpostal activities. And it will need to carefully resolve the question of how they relate to the obligation of universal service.
• Unlike other countries, the Commission concluded that the USO in the United States is largely undefined and instead is comprised of a broad set of policy statements with only a few legislative proscriptions. Aside from the annual appropriations mandate for the past 33 years to provide 6 days of delivery, Congress has rarely established rigid, numerical standards of minimally acceptable service for any of the attributes identified by the Commission.
• Rather, through its history, the Postal Service has been expected to use its flexibility to meet the needs and expectations of the Nation while balancing the delivery of service against budgetary constraints.
• The cost of providing universal service in the U.S. is estimated by the Commission to be more than $4 billion annually
• Aside from the financial pressure of generating sufficient funds to remain solvent, the Postal Service must also worry about how to fund this $4 billion in universal service obligations.
• In balancing all of these interests when assessing the current state of the Postal Service, policymakers should look at the fundamental issue of the USO and decide exactly what we as a Nation need from the Postal Service and – most importantly – how those expectations are to be funded.
• Senator Carper’s bill requires an assessment of the USO like the one completed in 2008, and I concur that further exploration of this fundamental question is warranted.
• The fundamental problem as outlined in the Commission’s testimony today is that the Postal Service cannot currently generate sufficient funds to cover its mandated expenses and also invest in critically deferred capital needs, such as new delivery vehicles and package sortation equipment.
• The Commission has made recommendations on modifying the retiree health benefits funding and the computation of the liabilities for both retiree health benefits and pensions.
• The Commission will be reviewing the impact of PAEA in its 2017 review of the law.

Lori Rectanus, Director, Physical Infrastructure, U.S. Government Accountability Office     Testimony

• The U.S. Postal Service’s (USPS) financial condition continues to deteriorate as a result of trends including:
• Declining mail volume: First-Class Mail—USPS’s most profitable product— continues to decline in volume as communications and payments migrate to electronic alternatives. USPS expects this decline to continue for the foreseeable future.
• Growing expenses: Key USPS expenses continue to grow, such as salary increases and work hours due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS’s expenses.
• USPS’s financial condition makes it unlikely it will be able to fully make its required retiree health and pension payments in the near future.
• USPS’s required payments will be restructured in fiscal year 2017, with estimated payments totaling $11.3 billion— $4.6 billion more than what USPS paid in fiscal year 2015.
• USPS’s ability to make these required payments will be further challenged due to: (1) Expiration of a temporary rate surcharge: This surcharge on most postal rates effective January 2014, which has generated $3.6 billion in additional annual revenues through September 2015, is expected to expire April 2016. (2) No new major cost savings initiatives are planned.
• Large unfunded liabilities for postal retiree health and pension benefits—which were $78.9 billion at the end of fiscal year 2015—may ultimately place taxpayers, USPS employees, retirees, and their beneficiaries, and USPS itself at risk.
• If the USPS ultimately does not adequately fund these benefits, and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay.
• Tension between USPS’s dual roles as an independent establishment of the executive branch required to provide universal delivery service and as a self-financing entity operating in a businesslike manner is problemmatic.
• It would be a mistake to rely solely on rate increases as the solution to the Postal Service's problems. It also needs to look at restructuring to address needs and contain costs.

David C. Williams, Inspector General, U.S. Postal Service       Testimony

• There are two sharply opposing views of the reality facing the Postal Service, and judgments are difficult to make when viewing ongoing financial data through the distorted lens of prefunding expenses. The first view is that the financial situation is dire and that the Postal Service’s mission is antiquated.
• The Postal Service is losing more than $5 billion every year and has exhausted its $15 billion borrowing limit.
• First-Class Mail volume, which has always supported the network, is in decline and will never return.
• The Postal Service owes nearly $100 billion in unfunded liabilities for retiree benefits and workers’ compensation.
• Technological advances are paradoxically creating new societal needs that the Postal Service’s extensive network is uniquely positioned to fulfill regarding 1) e-commerce, 2) e-government, and 3) coming smart infrastructure services.
• The $15 billion Treasury debt is entirely due to required payments for distant and vacillating future retiree health obligations. It is very difficult to decide what is actually needed to stabilize the infrastructure when prefunding activities are commingled with actual ongoing financial operating data. The arbitrary $5 billion prefunding payments show up as annual losses in financial statements even if no cash is spent.
• Legislative efforts to provide relief for the Postal Service have failed for the last 6 years, but recent legislative proposals offer some needed solutions.
• Replacing the arbitrary retiree health prefunding schedule with actuarially based payments will make prefunding retiree health payments more affordable for the Postal Service and improve the transparency of financial reporting.
• Proposed Medicare changes for postal retirees will likely eliminate much of the remaining unfunded retiree health care liabilities.
• Another useful proposal is to permit the Postal Service to explore offering modernized services in response to changing citizen needs and to enable private sector strategies. Collaboration between the Postal Service and private sector partners has worked well — a good deal for citizens and a great deal for American businesses.
• Finally, a more flexible, responsive pricing regime is needed to help ensure the Postal Service’s financial stability at a time of rapid change.

James E. Millstein, Former Chief Restructuring Officer at the U.S. Department of the Treasury and Founder and Chief Executive Officer, Millstein & Co.     Testimony

• I am here today because the Postal Service is in trouble, requiring both an operational and financial restructuring to restore its ability to meet its obligations in the ordinary course of business and to deal with the challenges of a very rapidly changing market for its products and services.
• While it may have been debatable whether the Postal Service had monopoly power in any of its product markets in 2006, the extent and diversity of products and services that compete with First Class and Standard Mail in 2016 put into serious question whether the Postal Service has any monopoly power at all.
• The entire premise of current regulation needs to be seriously rethought, as the regulatory constraints on its product pricing and operational flexibility may be slowly but surely choking the Postal Service to death. Therefore, a question for further but urgent study is whether the regulatory structure created under the PAEA has outgrown its utility and should be replaced with a more flexible system.
• Unfortunately, there is no “silver bullet” that will fix the USPS. I believe that a staged approach is the most reasonable path towards viability.
• There is an immediate need to stabilize the business and shore up its liquidity, and a long-term need to allow the USPS to become a sustainable business capable of meeting the challenges of the new marketplace in which it operates.
• The first order of business to fix the USPS should be to avoid the expiration of the existing exigent rate increase in April 2016 and making that rate increase permanent so as to allow the Postal Service’s revenues to cover its operating costs.
• This initial reform should be followed by a repeal of the inflation-capped pricing mechanic in favor of a more flexible pricing system to ensure that the USPS can price its products so as to generate enough revenue to cover its costs.
• To normalize the USPS’s balance sheet, Congress must acknowledge that the prefunding of the USPS retiree health care liability as mandated by PAEA imposed a financial burden on the Postal Service that it simply could not meet.
• Congress should permit the Postal Service to use actuarial assumptions for the calculation of its benefit funding and pre-funding obligations in a way consistent with the practices employed in the private sector.
• Congress should permit the USPS to fully integrate both current and future employee health care benefits with Medicare immediately.
• Congress should require that the Postal Service perform a de novo review of its service offerings unbridled by its historical mandates and existing regulatory constraints to develop a business plan that allows it to generate sufficient cash flow over the long term to meet its Universal Service Obligation without the need for taxpayer subsidies. Developing such a business plan is an essential first step in executing the restructuring required to ensure its long-term viability.
• The Postal Service should also look to optimize its existing national footprint and focus on profitable business lines to support its national network.
• Congress must face the reality that the Universal Service Obligation imposes costs on the USPS that it cannot fully recover under the current regulation of its pricing and product offerings.
• In order to compete in the modern marketplace in which it operates, the USPS must be allowed to have pricing flexibility and to develop new lines of business to deal with the panoply of competitors it faces both in its so-called Market-Dominant Products and in its Competitive Products.
• In developing a long-term business plan, the USPS may consider privatization as a possible alternative. The privatization model has been successfully employed in many countries including Germany, Japan, and Italy.
• A successful operational and financial restructuring could pave the way to a privatization transaction that could give the USPS access to public debt and equity markets, following the precedent set by Poste Italiane and Japan Post.

Panel II

Fredric V. Rolando, President, National Association of Letter Carriers      Testimony

• I would like to briefly share our views on the over-arching theme of this hearing – the “reality of the Postal Service.” It is not 2008-2009 anymore when the Great Recession and the mandate to pre-fund the retiree health fund sent mail volume plummeting, crushed the Postal Service’s finances, and raised doubts in the minds of some about the long-term viability of the Postal Service.
• Over the past nine years, postal employees have made huge sacrifices to help the Postal Service to become more efficient and to “right-size” in response to the fall in mail volume. Postal employment has been slashed by more than 200,000 jobs since 2006. Meanwhile, postal productivity has increased dramatically and postal labor costs have been sharply reduced through very difficult rounds of collective bargaining.
• Thanks to these efforts and to the recovery from the Great Recession, the Postal Service has been returned to operational profitability in recent years. The USPS earned operating profits of $1.4 billion in FY 2014 and $1.2 billion in FY 2015.
• The most significant burden is the legislative mandate included in the Postal Accountability and Enhancement Act of 2006 (PAEA) that requires the Postal Service to massively prefund future retiree health premiums -- decades in advance.
• The damage this policy has inflicted goes far beyond the adverse financial effects.
• Reforms to the Federal Employees Health Benefit Program (FEHBP) as it relates to postal employees and Medicare coverage would all but eliminate the unfunded liability for future retiree health. Maximizing enrollment in Medicare Parts A and B and giving FEHBP plans covering eligible postal retirees access to low-cost prescription drugs made available by the Medicare Part D law would increase total Medicare spending by less than two-tenths of one percent and virtually eliminate the Postal Service’s unfunded liability – something no other public or private sector company has achieved.
• No private company in America would invest 100 percent of their pension and post-retirement health funds in such a conservative way, especially during a period when Treasuries are yielding 2-4% returns. When your investment time horizon stretches out over decades, best practice in the private sector is to invest in a well-diversified portfolio of private sector stocks, corporate bonds and real estate, as well as government bonds.
• Such a portfolio is provided by the Thrift Savings Plan’s (TSP) Lifecylce 2040 Fund.
• If the Postal Service’s FERS and CSRS accounts could have been invested the 2040 Fund between 2007 and 2014, their combined balance would be $32 billion greater today – enough to cover the total combined unfunded liability of $23 billion in 2014. Had the PSRHBF been invested in the TSP’s 2040 Fund, it would have doubled its annual returns.
• The final legislative/regulatory burden we would like to address is the overly restrictive Consumer Price Index (CPI)-based price cap introduced by the PAEA to regulate postage rates charged for Market Dominant products (most letters, magazines and catalogues).
• The PAEA might have worked better but for two factors. First, the Postal Service decided not to exercise its option to hold one last old-fashioned rate case in 2007 to ensure rates covered all the relevant costs (including the massive cost of prefunding retiree health) before the new CPI price index was initiated.
• That turned out to be a huge mistake--it should have done the rate case, and asked the PRC to delay implementing the results until after the recession.
• The overall Consumer Price Index (All items) has no real meaning as it relates to the costs of the postal industry.
• We believe that the PRC is the appropriate venue for deciding the future regulation of postage rates. In the meantime, we hope Congress will soon pass a bill that will make the exigent increase permanent and virtually eliminate the cost of prefunding in the coming months.
• Ee support: (1) The use of postal-specific assumptions in valuations of the Postal Service’s pension plans with any surpluses returned to the Postal Service over time; (2) Reform of the Federal Employees Health Benefits Program as it relates to coverage of postal employees and postal annuitants to dramatically reduce the cost of retiree health benefits by integrating with Medicare (to which the Postal Service and its employees have paid $29 billion in payroll taxes), and direct the PSRHBF to be invested in index funds comprised of private sector stocks and bonds as well as government bonds; (3) A freeze on postage rates until January 2018 while keeping the 4.3% exigent rate increase in effect until then (instead of letting it expire); and (4) Allowing the Postal Service to deliver beer, wine and spirits and to provide non-postal products in limited circumstances.

John “Chip” Hutcheson III, President, National Newspaper Association       Testimony

• Community newspapers have already been harmed by slower mail.
• Rural America needs the mail.
• We need urgent action from this committee to avoid further harm.
• No legislation will be perfect, nor will any act we take this year forever repair the Postal Service. But the iPOST bill, S. 2051, with its mandate to integrate Medicare coverage for USPS retirees, provides a viable foundation for this committee to move forward quickly to do what must be done right now.
• Because of its financial woes, USPS has slowed down the mail, and that has created the problems.
• The service cuts have trimmed the fat, a lot of the muscle and are now aiming for the aorta. We greatly fear the impact of the next round of mail processing plant closings, having seen how badly the previous rounds have damaged our businesses and communities.
• This bill would permit USPS to keep the “exigency” money that it began to collect two years ago when it enacted a postage increase that was approximately triple the rate of inflation. Without legislation, USPS will lower postage rates and “roll back” the increase, under orders of the US Court of Appeals and the Postal Regulatory Commission. Would our members like to have a postage reduction? Absolutely.Some postage money back into our pockets would be very welcome.
• But we recognize that the exigency money was principally responsible for USPS’s positive net earnings in 2015. Although its package business is growing, that business does not produce the positive contribution to the system that first-class mail once did.
• Because of costs growing faster than inflation, our own Periodicals mail class—which is supposed to operate at break-even—cannot produce a positive contribution and in fact struggles to get back to a point where we can cover our costs.
• Yet if there are service cuts and more of our mail goes away as a result, the problems of the Postal Service deepen and we are faced with spiraling reductions of service, greater financial losses to the economy and USPS, and an increasingly desperate situation where USPS is going to need a taxpayer bailout to cover the costs of existing obligations to its retired workforce.
• Our board of directors voted last fall to support legislation that permits the Postal Service to keep this $1 billion in its rate base, so long as further service cuts can be avoided.
• Let me be clear: NNA’s support for suspending the mandate to roll back postage rates in April is contingent upon the Postal Service’s commitment to enact no further systematic service cuts and to live within its means without more exigency increases.

Kathy Collins, General Manager, Rothschild Mill, Domtar Paper Company      Testimony

• In addition to the market realities facing the U.S. Postal Service, the declining financial condition of the agency is highly linked to statutory financial obligations and growth limitations imposed on it by Congress.   
• Given the realities of its financial obligations and the constraints imposed upon it, the Postal Service cannot succeed without the help of Congress to pass comprehensive postal reform legislation that not only alleviates unreasonable financial burdens, but preserves and attracts customers, as well as convinces former customers to return.
• We support postal reform that considers the following: (1) Aligns labor costs, benefits, and future obligations with market competition. The handcuffs and unreasonable burdens of the current statutory requirements must be changed, as these obligations are the largest contributor to USPS financial losses. (2) Postal facilities must adjust with the evolving realities of communications and business transactions, while ensuring the service needs of postal customers are met. Our neighbors to the north at Canada Post have made many successful changes that the USPS might also benefit from. (3) Rate stability and predictability are bedrock requirements for business to stay with mail. Congress and USPS must recognize that raising prices while reducing service is not a successful strategy to address declining demand. Mail must be cost competitive for business to continue to use it. Future rate setting should include checks and balances that provide price predictability for mailers and cost-control incentives for USPS. (4) Reliable service is essential if mail is to compete with other communication options. Prompt and timely delivery must be maintained for mail to deliver its key value proposition. Service standards changes should realistically weigh cost savings against customer expectations or mail will become increasingly less relevant. (5) The Postal Service should leverage its unique infrastructure and have the flexibility to innovate and develop new revenue sources. There is value in increasing the revenue yield of traditional products and customers as well as diversifying into other business opportunities.

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Senator Ron Johnson, Chairman of the Committee on Homeland Security and Governmental Affairs.

• We still don't have an accurate and complete picture of the USPS' financial standing.
• We don't yet have sufficient stakeholder support for a direction forward.
• There is much more work that needs to be done before this bill can be passed.

Senator Heidi Heitkamp

• Spoke at length with the PMG about concerns over the degradation of rural mail service.

Senator Tammy Baldwin

• Fully a third of the communication pape produced in Wisconsin are delivered by the Postal Service.
• There should be consistency in postal rates and services.
• The effect of the exigency surcharge has not produced the consistency which is needed.

Senator Claire McCaskill

• Again articulated her concern over the disparities that exist between private sector and postal delivery of packages.
• We're not collecting penalty payments when UPS and Fedex fail to meet volume minimums.