TESTIMONY OF
JOHN E. POTTER
POSTMASTER GENERAL/CEO
UNITED STATES POSTAL SERVICE
BEFORE THE
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
NOVEMBER 5, 2003

Chairman Collins and members of the Committee, I welcome this opportunity to meet with you
today to discuss the important issue of postal, legislative reform. This is a subject that is critical
to the continued, long-term ability of the United States Postal Service to provide affordable,
universal mail service to every individual, home and business in America.

In particular, I look forward to discussing some of the recommendations of the President’s
Commission on the United States Postal Service.

As Postmaster General, I am grateful for the Commission’s efforts. I am pleased by the
Commission’s acknowledgement that the Postal Service’s Transformation Plan is making
substantial progress in adapting to an uncertain future. Since assuming the role of Postmaster
General, I have made the Plan the central focus of the Postal Service.

And I am particularly satisfied that so many of the Commission’s recommendations are consistent with
strategies that we are already pursuing as a part of our transformation efforts. Clearly, the Postal
Service’s Transformation Plan is taking us in the right direction. And I appreciate the support and
guidance of this Committee as the Postal Service worked to create the Plan.

While the Transformation Plan became our organizational vision in 2002, the ongoing process of
transformation began long before then through our breakthrough productivity initiative. The year
2000 marked the first of a record four straight years of increases in total factor productivity. We
have reduced our career employee complement by 70,000 from its peak level in 1999. We have
delivered $5 billion in cost savings since 2000. We have established pay-for-performance
systems for managers and executives. We have brought service and customer satisfaction to
historic performance levels. We are aggressively managing the business. This will not change.

In addition to the Transformation Plan strategies that have contributed to these successes, the
recent legislation adjusting the Postal Service’s payments to the Civil Service Retirement System
helped us to achieve a welcome and needed level of financial stability.

Without the correction provided by this legislation, the Office of Personnel Management found
that the Postal Service could have overpaid its obligation by $105 billion, costs that would
otherwise have been borne by every user of the mail through the price of postage. We are
particularly grateful for the understanding and cooperation of the Chairman and this Committee
for your prompt action in addressing this problem.

By immediately reducing costs related to funding the Civil Service Retirement System, this
legislation will allow us to hold rates steady until 2006. This legislation has contributed to our
ability to reduce outstanding debt by more than one third – from $11.1 billion to $7.3 billion – in
fiscal year 2003. We will continue to take advantage of the new CSRS payment schedule to
reduce debt even more this fiscal year.

Yet, the same legislation presents very definite challenges.

First, the legislation shifted the responsibility of funding CSRS retirement benefits earned by
postal employees while they served in the military from the Treasury to the Postal Service. The
General Accounting Office estimates that this transferred an obligation of more than $27 billion
from taxpayers to postal ratepayers. Of this amount, $17 billion represents retroactive payments
of funds (including imputed retroactive interest) already provided to annuitants by the Treasury
between 1971 and 2002. Except for the Postal Service, in all other cases, these costs continue
to be paid through general appropriations. The Postal Service does not receive general
appropriations: our operations are funded by the revenue generated by the sale of postal
products and services. These military retirement costs have no connection to the operation of the
Postal Service or to the services rendered to our customers now and in the future. In fact, more
than 90 percent of that financial obligation is the result of military service performed before the
Postal Service was created. It includes service in World War II, Korea and Vietnam.

The President’s Commission recommends that military service costs not be borne by the Postal
Service. We agree with the Commission on this issue, as we indicated in the report which we
provided in compliance with your requirement in the reform legislation. We look forward to
working with the Committee as you continue your consideration of this issue.

That legislation also asked the Postal Service for its proposals regarding the use of the “savings”
resulting from the act, beginning in 2006. Those “savings” would be placed in an escrow account
pending Congressional authorization about how they would be used.

I would like to take a moment to explain these “savings.” They represent the difference between
the Postal Service’s new CSRS payment schedule and the old. They represent an adjustment of
payments, costs we will not have to pay in the future. But simply because we will not be liable for
these costs in the future, does not mean that there will be a reserve of actual cash waiting to be
diverted to other purposes. Rather than building cash, the “savings” are used to fund normal
inflationary cost increases such as COLA’s and general pay adjustments required by collective
bargaining agreements, increased health care benefit expenses for employees and annuitants,
and growth in non-personnel expenses for fuel, utilities and materials.

For the period from 2003 through 2005, there are actual funds available – savings – to use for
other purposes. This is because the postage rates now in effect were computed based on our
former, higher CSRS payment schedule. A percentage of the price of every postage stamp has
been earmarked for those payments. And, as the law requires, today’s savings are being used to
reduce debt in 2003 and 2004 and to hold postage rates steady through 2005.

But by 2006 inflationary cost increases will have whittled away the financial benefit of lower
CSRS payments; even without the escrow requirement, we expect that we will have to raise rates
in 2006. With the escrow requirement, postage rates will have to rise even more than is
necessary to reflect inflation – some have suggested that the increase would be in the double
digits. This is because the new rates would have to generate the revenue to cover what is being
called the “savings,” the difference between the old and new CSRS funding schedule.

And, with a continuing, future escrow-funding requirement, we would have to continually increase
rates frequently simply to fund the escrow account. And, as I mentioned, this “hands off” fund
could be spent by the Postal Service only with Congressional authorization. Thus without further
legislation, the benefits enjoyed by every mail user in the nation – business, nonprofit and
consumer – would evaporate as soon as 2006 through the higher rates required to fund the
escrow account. This would put postal customers back where they started from before the
legislation was enacted – reinstating the very over-funding the legislation was designed to
correct.

We propose that the escrow account be eliminated.

We have also offered two alternative proposals if – and only if – the escrow requirement stands.

First, if the $27 billion CSRS military funding requirement is transferred back to the Treasury, the
Postal Service would have fully funded and, in fact, over-funded its CSRS payment obligation by
$10 billion. We would then be in a financial position to pre-fund retiree health benefit obligations
on a current basis for all employees and retirees.

Our second proposal is based on the CSRS military funding requirement remaining an obligation
of the Postal Service. If that is the case, the Postal Service proposes that the funds placed in the
escrow account be used to begin pre-funding postretirement health benefit costs for newly-hired
Postal Service employees.

We have provided our comments on these issues to Congress, the Administration and the
General Accounting Office. GAO is reviewing our proposals and will provide a written evaluation
to Congress by November 29. Congress will then have 180 days to revisit the issue of the
escrow account.

In the near term, the CSRS legislation has resulted in a welcome period of financial stability.
Within that context, we have the opportunity and the obligation to develop the right solutions to
the challenges facing the nation’s mail system so that every family and every business in America
continues to enjoy – and benefit from – affordable, universal mail service.

Many – in the Postal Service, the mailing community, and in Congress – have long recognized
that the basic business model which guides the operation of America’s mail system is becoming
increasingly disconnected from today’s reality. It is outdated and inflexible. The Postal
Reorganization Act that created today’s Postal Service in 1970 was predicated on the assumption
– valid for most of the last 33 years – that continually growing mail volume would result in
continually increasing revenue. That revenue, in turn, would be sufficient to cover the costs of an
expanding service network. This is no longer the case.

We are pleased that the President’s Commission has reached a similar conclusion. The facts
speak for themselves.

Including our preliminary estimate for fiscal year 2003, mail volume has declined in each of the
last three fiscal years, dropping close to six billion pieces from its peak. During the same threeyear
period, the number of addresses we serve increased by 5.2 million.

This combination of factors – declining mail volume contrasted with the costs of a still-growing
service network – resulted in a net loss in two of the last three years. Cumulatively, those losses
amounted to $2.3 billion.

While our financial results for Fiscal Year 2003 were positive, with an unaudited net income of
approximately $3.9 billion, this reflects the impact of legislation that reduced the Postal Service’s
obligation to the Civil Service Retirement System.

Of course, a number of external factors contributed to mail volume losses since 2001. These
included the 9/11 terrorist attacks, the use of the mail for bioterrorism and, most significantly, the
effects of a difficult economy.

Profound structural changes are also at work. These include the increasing use of electronic
communications for transactions that, in the past, had almost universally taken place through the
mail. The robust growth of private-sector delivery services – from packages to time-sensitive
communications – has also altered the competitive landscape. We do not expect that these
factors will necessarily result in absolute mail volume loss in the foreseeable future. But they will,
at the very least, contribute to a diminished rate of mail volume growth as our delivery
infrastructure – and its associated costs – continues to expand. This will place extreme pressure
on our bottom line. Significantly, volume trends indicate that First-Class Mail, which provides the
greatest contribution to supporting system overhead, may continue its decline.

To that end, President Bush, in December 2002, created a Commission to examine the Postal
Service and to prepare a report defining a proposed vision for its future and recommending
legislative and administrative reforms needed to ensure the vitality of postal services for the
American people.

I thank the Administration for its willingness to take on this critical public policy challenge sooner
rather than later. In particular, I would like to recognize the efforts of Peter Fisher, former Under
Secretary of the Treasury for Domestic Finance, for his role in implementing the President’s
mandate. His guidance resulted in a Commission that took the time to understand the scope and
complexity of the Postal Service, recognize its critical role to the nation, and hear from
representatives of every group with an interest in the future of the nation’s mail service.

Co-Chairs James Johnson and Harry Pearce – and all of the Commissioners – are to be
commended for their focus and dedication to this task. They understand the forces that are
threatening the ability of the Postal Service to succeed in a new century – one with
communications options unheard of just a few years ago. They understand the need to define a
new business model to protect the ability of the government to provide this vital service without
undue expense to taxpayers or to postal ratepayers. Most importantly, they understand the need
to act before there is a crisis that imposes hardship on the public.

To some observers, a recognition that the Postal Service has been on a path of continuous
improvement, can lead to the conclusion that no significant change is necessary. The need for
change may not become apparent to everyday mail users until the inflexibilities of our dated
business model begin to affect service and the price of postage. We cannot afford to let this
happen.

In many areas, we accept the Commission’s recommendations, particularly where its report calls
for continuing the efforts initiated through our Transformation Plan. We will continue to move
forward on them.

We will continue the pursuit of strategic partnerships with the private sector where they help us
enhance efficiency, reduce costs or improve service. Areas under review include mail
transportation, retail operations, delivery service, and many other activities that support our core
business.

We will continue to work with the mailing industry to encourage and support the expansion of
worksharing where it makes sense. This provides mailers with strong financial benefits
encouraging the use of mail and contributes to more efficient operations for the Postal Service.

We will continue more innovative approaches to how we buy products and services. Our
transition to master buying agreements in key areas has saved $200 million in fiscal year 2003
alone. We will pursue every opportunity to benefit by similar agreements in as wide a range of
buying activities as possible. Within the scope of existing legislation, we will also revise our
purchasing regulations to reflect corporate best practices that can improve our operating and
administrative practices and ensure that we receive maximum value with every purchase.

We accept the Commission’s view that the Postal Service should enhance its financial reporting.
While the Commission notes that, in many respects, our reporting often exceeds what is required
of Federal agencies, the Commission recommends that our reporting match the level of
disclosure offered by our corporate peers. Accordingly, we will continue to transition our financial
reporting to satisfy standard Securities and Exchange Commission requirements, where those
requirements make sense when applied to a non-publicly traded, non-stockholder owned
company.

We agree with the Commission that electronic technology offers a way to increase the value of
the mail at every step – from acceptance to delivery – for the sender, the recipient and the Postal
Service. Our Intelligent Mail initiative and its “One Code” vision will be instrumental in achieving
many of the advances – both in processing efficiency and providing information for mail users –
envisioned by the Commission. We must give appropriate attention, however, to the concerns of
our customers, including those regarding privacy protection, which may be raised by the
recommendation that every mailpiece bear a unique identifier.

The Postal Service shares broad agreement on many of the critical, structural issues treated in
the Commission’s report.

The report recognizes that the Postal Service requires additional flexibility if it is to take
advantage of corporate best practices that are necessary for long term success in serving the
nation. In short, management needs the flexibility to manage.

We agree with the Commission that the establishment of a rate-ceiling or price cap offers some
additional pricing flexibility not provided by our present cumbersome, time-consuming, litigious
pricing regime. Over the last few years, we have seen a growing consensus, within the mailing
community and through previous postal legislative reform efforts, for a pricing structure that will
increase rate predictability for customers and provide management with additional flexibility to
respond to market needs.

A properly constructed price cap proposal can accomplish both of these goals. But we caution
that such a cap must be carefully constructed so that it succeeds in driving maximum operational
efficiency, but does not undermine the legitimate financial needs of the organization.

We agree that there should be separate processes for pricing non-competitive and competitive
products and services. However, we believe that more work needs to be done to ensure that the
definitions of non-competitive and competitive products carefully reflect marketplace reality.

The Postal Service and the Commission agree the Postal Service should have the opportunity to
retain earnings – as requested in our Transformation Plan. This would provide a revenue stream
that could finance capital expenditures and “smooth out” business cycle impacts on overall
financial performance. Yet there must be safeguards so that severely limiting price caps do not
serve as an artificial barrier to achieving retained earnings, and that retained earnings are
sufficient to achieve their purpose.

We agree with the Commission that the letter and mailbox monopolies are essential to support a
universal service mandate. The Commission’s report would give a Postal Regulatory Board the
authority to examine and modify these monopolies from time to time. We believe any
modification must be in the public interest, must not undermine the Postal Service’s ability to
maintain universal service, and must protect the security and privacy of what is placed in the
mailbox.

We agree with the Commission, generally, in its description of the Postal Service’s core mission:
offering products and services directly related to the delivery of letters, newspapers, magazines,
advertising mail and parcels. But we do have concerns about the Commission’s recommendation
that the Postal Service be limited by statute to only those activities. We are facing an uncertain
future. The Commission’s own projections call for a mail volume decline of five percent by 2017,
and, for that same year, a Postal Service deficit of $8.5 billion. We strongly believe that it is
necessary for the Postal Service to have the flexibility to pursue appropriate new revenue
streams to protect our ability to provide universal service.

We agree with the Commission that the Postal Service must have the ability to alter its retail and
processing networks to meet changing customer needs, provide increased access and achieve
greater operational efficiency. Yet the proposed Postal Network Optimization Commission could
take away the Postal Service’s existing authority to better integrate and align its network.

While the new process offers many attractive features, including providing for valuable input from
affected stakeholders, including Congress, it should not exclude the Postal Service from the
decision-making process. Clearly, the expertise gained from day-to-day operation of the Postal
Service’s network should play a substantive role in any decisions to change that network,
including any decisions to consolidate or close processing facilities. Despite the rationale for its
establishment, we believe that the proposed network optimization process may lead to office-byoffice
or facility-by-facility decisions, rather than focusing on the efficient operation of the network
as a whole.

We agree with the Commission that the Postal Service, its employees and the unions that
represent them would benefit by a more efficient collective-bargaining process. We also agree
that addition of a mandatory mediation step – if negotiations have not resulted in a new
agreement – could help forge a final resolution or limit the issues that must be addressed if
interest arbitration becomes necessary.

We agree with the Commission that collective-bargaining should include the ability of the parties
to negotiate for benefits as well as wages. Because it is not our intention to reduce the benefits
already enjoyed by current and retired Postal Service employees, benefit negotiations would
affect only eligible employees entering the Postal Service following the conclusion of negotiations.

In short, on many key issues, the Postal Service and the Commission have a basic level of
agreement. This is an encouraging beginning. At the same time, as I have pointed out, many of
the challenges are in the details.

As an example, in the area of governance, the Commission recommends significant changes to
our governing board. The Governors of the Postal Service are today appointed by the President
with the advice and consent of the Senate. The law requires that no more than five may belong
to the same political party. This has allowed the Postal Service to enjoy bipartisan oversight for
the last three decades.

We are concerned that the Commission’s proposed new Board of Directors could change this.
The President would appoint three Board members. They, in turn, would select the first eight
independent Board members, with the concurrence of the Secretary of the Treasury. After that,
independent members would be selected by the Board as a whole, with the concurrence of the
Secretary of the Treasury. There would be no limits on the political affiliation of Board members,
and only the President or the Secretary of the Treasury could remove them. This could result in a
highly-partisan Board. Moreover, the Senate’s current statutory role of “advice and consent” in
connection with Board appointees would be eliminated.

Despite the areas in which we have questions or concerns with the Commission’s
recommendations, the Postal Service fully understands and accepts that with an increased level
of management flexibility comes an increased level of oversight. This provides the necessary
balance to protect the public interest.

The Commission proposes that this oversight be largely provided by a new Postal Regulatory
Board, with discretionary policy authority in a wide range of areas, to replace the current Postal
Rate Commission, which has a more limited mandate.

We understand the rationale for the discretion the Presidential Commission has defined for the
Postal Regulatory Board. Yet regulators are normally required to operate within limits and
guidelines. Regulated private companies and their shareholders have legal protections against
arbitrary action by the regulator that the Postal Service cannot have as a government institution.

At the least, there should be standards drawing a clear line between what is appropriately a
managerial function within the oversight of the Governors or Directors, what is a regulatory
function committed to the regulator, and what is a public policy function reserved to the nation’s
lawmakers.

For instance, the Postal Regulatory Board can revisit the vital national issues of the postal
monopoly and universal service. From the perspective of the Postal Service, these are clearly
issues of broad public policy. They are not regulatory issues. Without defined limits or
guidelines, the regulator could conceivably limit the monopoly in such a way as to jeopardize
universal service or even redefine the scope of the nation’s mail service itself.

Similarly, the Commission’s recommendations would remove the determination of how much
money is needed to run the nation’s postal system from the operators – those with the day-to-day
responsibility of running the postal system – and transfer it to the Postal Regulatory Board. This
would occur through the new rate-setting mechanisms recommended by the Commission. At the
very least, those provisions should recognize that the Postal Service is a labor-intensive industry
which operates as part of our economy’s service sector.

The powers of the proposed Postal Regulatory Board could also affect the outcome of the
collective-bargaining process. The Postal Service has been, and continues to be, a strong
supporter of collective bargaining. This process of give and take assures that the interests of our
employees – and the unions that represent them – are considered within the larger picture of the
Postal Service’s financial situation and the needs of our customers. But by determining the range
within which wages may be negotiated, the Postal Regulatory Board could impede the ability of
the parties to successfully negotiate agreements.

Since the advent of collective bargaining in the Postal Service in 1971, there have been voices
from all sides on whether postal wages were or were not comparable with private-sector wages,
as required by current law. The Postal Regulatory Board would be charged with making a
“comparability” determination that would presumably end that argument.

But the issue of comparability is dynamic and depends on economic factors and job skill
requirements that can change with time and circumstances. A wage comparability determination
made by an independent Postal Regulatory Board may inform periodic contract negotiations, but
it is important to permit the Postal Service and its unions to engage in direct negotiations which
balance the needs of all parties without requiring strict adherence to the results of any specific
comparability determination.

Speaking to you today, I am reminded of the efforts in the late 1960s to define a new and better
model for the postal system in the United States. At a hearing not unlike this one, one of my
predecessors, Postmaster General Larry O’Brien was asked by Representative Tom Steed,
Chairman of the House Appropriations Subcommittee:

General, would this be a fair summary: that at the present time, as manager of
the Post Office Department, you have no control over your work load, you have
no control over the rates of revenue that you are able to bring in, you have no
control over the pay rates of the employees that you employ, you have very little
control over the conditions of the service of these employees, you have virtually
no control, by the nature of it, of the physical facilities that you are forced to use,
and you have only a limited control at best over the transportation facilities that
you are compelled to use . . . This is a staggering amount of “no control” in terms
of the duties you have to perform.

Postmaster General O’Brien agreed.

And, in reviewing the details of some of the Commission’s recommendations, particularly those
related to the Postal Regulatory Board, I feel somewhat like Larry O’Brien did. In return for some
basic elements of rate-setting flexibility, the Postal Service is asked to cede a staggering amount
of control in areas that – for both government and the private sector – are traditionally at the core
of the decisions and responsibilities of management.

The mail is today – and will remain for many years to come – a critical element of our nation’s
infrastructure. We believe there is a proper balance between increased flexibility for the Postal
Service and an effective level of independent oversight. In achieving that balance, we have the
opportunity to create a legacy of customer-responsive service that serves everyone in our nation
equally – and equally well.

I am encouraged by the interest this Committee has demonstrated by holding a series of hearings
to explore the recommendations of the President’s Commission on the Postal Service. The
Commission has added a new voice to the important conversation about the future of America’s
mail system. It is not a conversation that can be limited to the Postal Service and its industry
partners. It is a conversation that will result in broad public policy decisions that will affect every
family, every business and every community in the nation. For that reason, the decisions that
are made must be in the public interest and they must reflect the will of the Congress and the
Administration.

Mr. Chairman, I have been asked for my vision of the Postal Service. We need a Postal Service
that is incented to improve service and productivity. We need a Postal Service that is given the
flexibility to reduce costs. We need a Postal Service that has the ability to implement rates that
are responsive to the market and that will mitigate large rate increases that have become
counterproductive. We need a Postal Service that has the ability to work with and treat
customers as individuals with individual needs. We need a Postal Service where our products,
services and systems are available to those we serve where they are located, not just where
there are Post Offices. Finally – and importantly – we need to retain a motivated and informed
workforce to provide universal service to every home and business in the nation.

I look forward to working with this Committee and with the Congress to identify the business
model that will enable the Postal Service to serve everyone in America, today and far into the
future.

I pledge to provide the cooperation, the resources and the support that will enable us to do that.
We cannot afford to do otherwise.

Thank you. I will be happy to answer any questions you may have.

# # # #