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Full text of "General oversight of the U.S. Postal Service : hearing before the Subcommittee on the Postal Service of the Committee on Government Reform and Oversight, House of Representatives, One Hundred Fourth Congress, second session, March 13, 1996"

GENERAL OVERSIGHT OF THE U.S. POSTAL 

SERVICE 

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BEFORE THE 

SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE 

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 
HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 
SECOND SESSION 



MARCH 13, 1996 



Printed for the use of the Committee on Government Reform and Oversight 




U.S. GOVERNMENT PRINTING OFFICE 
40-873 CC WASHINGTON : 1997 

For sale by the U.S. Government Printing Office 

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 

ISBN 0-16-055135-8 



An-«7^ n _ q7 _ 1 



V 



GENERAL OVERSIGHT OF THE U.S. POSTAL 

SERVICE 

y 4. e 74/7; P 84/22 

Ceneral Oversight of Ue U.S. Postj... 

1.±i:jj. i-i.v...xN (jt 

before the 

SUBCOMMITTEE ON THE POSTAL SERVICE 

OF THE 

COMMITTEE ON GOVERNMENT 

REFORM AND OVERSIGHT 
HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 
SECOND SESSION 



MARCH 13, 1996 



Printed for the use of the Committee on Government Reform and Oversight 




U.S. GOVERNMENT PRINTING OFFICE 
40-873 CC WASHINGTON : 1997 

For sale by the U.S. Government Printing Office 

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 

ISBN 0-16-055135-8 



COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman 
BENJAMIN A. OILMAN, New York CARDISS COLLINS, lUinois 

DAN BURTON, Indiana HENRY A. WAXMAN, CaUfornia 

J. DENNIS HASTERT, IlUnois TOM LANTOS, California 

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia 

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York 

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York 

ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, Jr., South CaroUna 

WILLIAM H. ZELIFF, Jr., New Hampshire LOUISE McINTOSH SLAUGHTER, New 
JOHN M. McHUGH, New York York 

STEPHEN HORN, CaUfornia PAUL E. KANJORSKI, Pennsylvania 

JOHN L. MICA, Florida GARY A. CONDIT, CaUfornia 

PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota 

THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida 

DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York 

JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin 

RANDY TATE, Washington BARBARA-ROSE COLLINS, Michigan 

DICK CHRYSLER, Michigan ELEANOR HOLMES NORTON, District of 

GIL GUTKNECHT, Minnesota Columbia 

MARK E. SOUDER, Indiana JAMES P. MORAN, Virginia 

WILLIAM J. MARTINI, New Jersey GENE GREEN, Texas 

JOE SCARBOROUGH, Florida CARRIE P. MEEK, Florida 

JOHN B. SHADEGG, Arizona CHAKA FATTAH, Pennsylvania 

MICHAEL PATRICK FLANAGAN, IlUnois BILL BREWSTER, Oklahoma 

CHARLES F. BASS, New Hampshire TIM HOLDEN, Pennsylvania 

STEVEN C. LaTOURETTE, Ohio 

MARSHALL "MARK" SANFORD, South BERNARD SANDERS, Vermont 

CaroUna (Independent) 

ROBERT L. EHRLICH, Jr., Maryland 

James L. Clarke, Staff Director 

Kevin Sabo, General Counsel 

Judith McCoy, Chief Clerk 

Bud Myers, Minority Staff Director 



Subcommittee on the Postal Service 

JOHN M. McHUGH, New York, Chairman 

MARSHALL "MARK" SANFORD, South BARBARA-ROSE COLLINS, Michigan 

CaroUna MAJOR R. OWENS, New York 

BENJAMIN A. OILMAN, New York GENE GREEN, Texas 

CHRISTOPHER SHAYS, Connecticut CARRIE P. MEEK, Florida 
DAVID M. McINTOSH, Indiana 
ROBERT L. EHRLICH, Jr., Maryland 

Ex Officio 

\flLLlAM F. CLINGER, Jr., Pennsylvania CARDISS COLLINS, lUinois 

Dan Blair, Staff Director 

Jane Hatcherson, Professional Staff Member 

Robert Taub, Professional Staff Member 

Heea Fales, Professional Staff Member 

Steve Willlams, Professional Staff Member 

Jennifer Tracey, Clerk 

Denise Wilson, Minority Professional Staff Member 

KiM Williams, Minority Professional Staff Member 

(11) 



CONTENTS 



Page 

Hearing held on March 13, 1996 1 

Statement of: 

Del Junco, Tirso, M.D., Chairman, Board of Governors, U.S. Postal Serv- 
ice; and Marvin T. Runyon, Postmaster General and CEO, U.S. Postal 
Service, accompanied by Michael S. Coughlin, Deputy Postmaster Gen- 
eral; and Mary Elcano, General Counsel, U.S. Postal Service 33 

Gleiman, Hon. Edward J., chairman. Postal Rate Commission, accom- 
panied by Trey Le Blanc, vice chairman; H. Edward Quick, Jr., Com- 
missioner; and George Haley, Commissioner 92 

Motley, Michael E., Associate Director, Government Business Operations 
Issues, General Government Division, U.S. General Accounting Office, 
accompanied by James T. Campbell, Assistant Director, Government 
Business Operations Issues; Kenneth Hunter, Inspector General, U.S. 
Postal Service, and Chief Postal Inspector, Inspection Service, accom- 
panied by Kenneth Weaver, Deputy Chief Inspector for Audit; and 
Jeffrey Dupiika, Deputy Chief Inspector, Criminal Investigations Unit . 172 
Letters, statements, etc., submitted for the record by: 

Collins, Hon. Barbara Rose, a Representative in Congress from the State 
of Michigan, prepared statement of 23 

Collins, Hon. (Jardiss, a Representative in Congress from the State of 
Illinois, prepared statement of 26 

Del Junco, Tirso, M.D., Chairman, Board of Governors, U.S. Postal Serv- 
ice, questions and responses 35 

Gleiman, Hon. Edward J., chairman, Postal Rate Commission: 

Prepared statement of 101 

Questions and responses 136 

Hunter, Kenneth, Inspector General, U.S. Postal Service, and Chief Post- 
al Inspector, Inspection Service, prepared statement of 189 

Le Blanc, Trey, vice chairman. Postal Rate Commission, prepared state- 
ment of 121 

Martini, Hon. William J., a Representative in Congress from the State 
of New Jersey, prepared statement of 8 

Meek, Hon. Came P., a Representative in Congress from the State of 
Florida, prepared statement of 5 

Motley, Michael E., Associate Director, Government Business Operations 
Issues, General Government Division, U.S. General Accounting Office, 
prepared statement of 176 

Quick, H. Edward, Jr., Commissioner, Postal Rate Commission, prepared 
statement of 114 

Runyon, Marvin T., Postmaster General and CEO, U.S. Postal Service, 
questions and responses 50 

Sanford, Hon. Mark, a Representative in Congress from the State of 
South Carolina, prepared statement of 30 



(III) 



GENERAL OVERSIGHT OF THE U.S. POSTAL 

SERVICE 



WEDNESDAY, MARCH 13, 1996 

House of Representatives, 
Subcommittee on the Postal Service, 
Committee on Government Reform and Oversight, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 9:35 a.m., in room 
311, Cannon House Office Building, Hon. John M. McHugh (chair- 
man of the subcommittee) presiding. 

Present: Representatives McHugh, Sanford, Owens, and Meek. 

Ex officio present: Representative CUnger. 

Staff present: Dan Blair, staff director; Jane Hatcherson, Robert 
Taub, Heea Vazirani-Fales, and Steve Williams, professional staff 
members; Jennifer Tracey, clerk; Denise Wilson, and Kim Wil- 
liams, minority professional staff members; and Jean Gosa, minor- 
ity staff assistant. 

Mr. McHugh. Grood morning. We are waiting for the arrival of 
a number of the minority members, but we have received their 
agreement to begin the proceedings. Given the length and probable 
depth of this hearing, we wanted to start as closely on time as pos- 
sible. 

I want to thank our witnesses for joining us here today as the 
subcommittee commences its general oversight hearings for the 
U.S. Postal Service for 1996. Todays hearing is intended to provide 
the subcommittee with a general overview of the operations of the 
Postal Service. Postal Service and Rate Commission witnesses in 
the first two panels will have the opportunity to explain their cur- 
rent activities and programs, as well as discuss issues and chal- 
lenges confronting our postal system. 

The final panel will be comprised of witnesses from the Inspec- 
tion Service and the GAO. Both of these organizations play critical 
watchdog roles over postal operations, and, as such, they have com- 
prehensive knowledge of the agency's strengths and weaknesses. 
The subcommittee looks forward to both witnesses providing in- 
sights into the operational, financial, and security problems of the 
Postal Service. 

I want to extend the subcommittee's welcome to our first panel 
of witnesses: Postal Service Board of Governors, Dr. Tirso del 
Junco, and also, of course. Postmaster General Marvin Runyon. 
This is Dr. del Junco's first appearance before the subcommittee in 
his current role, and I congratulate him on his recent election as 
chairman last month. Mr. Runyon, of course, is a seasoned witness 
before this panel as well as its predecessor committee, and may the 

(1) 



record show he will be accompanied by Deputy Postmaster General 
Michael Coughlin. 

I would like to congratulate you gentlemen for the financial per- 
formance and service record achieved by the Postal Service in fiscal 
year 1995. The Postal Service, as you well know, suffered some se- 
rious setbacks in 1994, and, consequently, your success in the ensu- 
ing year appears all the more remarkable. Despite this progress, 
however, the subcommittee questions whether this positive trend 
can be sustained. 

I note Mr. Runyon's public statements these past few weeks re- 
garding what some might describe as dark clouds on the postal ho- 
rizon. I hope today we can explore the basis for these forecasts to 
determine what the Postal Service and the Congress might be able 
to do in order to avoid the realization of such predictions. 

Our second panel is made up of Chairman Ed Gleiman of the 
Postal Rate Commission. Chairman Gleiman and his fellow com- 
missioners have had a busy year. A year ago, the Commission had 
recently completed its omnibus rate case in record time, and I note 
that it was the Commission's early completion of that rate case 
that counted significantly to this year's record Postal Service finan- 
cial performance. 

On the heels of that rate case, the Commission next heard the 
Postal Service's proposed reclassification case, and this decision im- 
pacts on the Postal Service to an equal if not greater degree than 
the 1994 rate case. I note that the recommended decision in this 
case was accepted, with two adjustments, by the Board of Gov- 
ernors at last week's meeting. 

Next, the Commission must address a series of rulemaking pro- 
posals set forth by the Postal Service, and the subcommittee is 
most interested in hearing the status of those proposals and the 
timing for issuing of this rulemaking. 

Finally, the third panel is comprised of representatives of the Of- 
fice of the Postal Service Inspector General and the Greneral Ac- 
counting Office. I want to welcome Mr. Hunter in his second ap- 
pearance before the subcommittee and acknowledge for the record 
the attendance of Mr, Ken Weaver, deputy chief inspector for audit, 
and Mr. Jeff Dupilka, deputy chief inspector of criminal investiga- 
tions. 

Representing the General Accounting Office in their repeat ap- 
pearance before the subcommittee will be Mr. Mike Motley, associ- 
ate director for government business operations issues, accom- 
panied by Mr. Jim Campbell. 

As these witnesses have learned, over the past year the sub- 
committee has relied on the Inspector General's Office and the 
GAO to review a wide range of postal operations. It is imperative 
that the Inspector General's Office operate with independence, and 
the subcommittee looks forward to its review of a number of sen- 
sitive Postal Service procurement and management operations. As 
has been past practiced, the subcommittee looks forward to GAO 
to provide an invaluable watchdog role in ensuring integrity and ef- 
ficiency in the operations of the Postal Service. 

It was more than a year ago that I assumed this chair, thanks 
to the gentleman seated at my far left. Representative William 
Clinger, the chairman of the full committee, and also the leader- 



ship. At that time, I promised a thorough review of all postal oper- 
ations. Twelve hearings, nine GAO reports, numerous briefings, 
several dinners and breakfasts, and two subcommittee reports 
later, the subcommittee is now poised to begin to introduce its leg- 
islative reform efforts. 

I want to urge all members of the postal community, those here 
today and those who have been following our activities, to actively 
participate in this critical public policy debate in a constructive and 
positive manner. I believe we all share the desire to see a viable 
and fiscally solvent Postal Service well into the next century, as 
such sentiments are in the furtherance of the public interest. 

Starting from this simple premise, I believe we can build a con- 
sensus in moving forward. Should legislative reform efforts fail, 
however, I feel that the Postal Service will find itself limping into 
the 21st century. 

It is somewhat ironic that one of the successes of the 1970 Reor- 
ganization Act, that of weaning the Postal Service away from the 
subsidizations of taxpayer dollars, may be jeopardized due to the 
shortsightedness of some in this community. Failure to implement 
needed market flexibilities may relegate the Postal Service to a fu- 
ture of declining revenues. In turn, infusions of taxpayer dollars ul- 
timately would be needed in order to support a postal infrastruc- 
ture which is statutorily retarded in its ability to respond to mar- 
ket pressures. 

I ask all those here today to join me in future efforts to preserve 
a viable and fiscally responsible Postal Service. 

With that, I would like to welcome a number of distinguished 
members of the subcommittee, and particularly, as I noted earlier, 
the chairman of the full committee, the gentleman from Pennsylva- 
nia, Mr. dinger. 

Bill, any comments you might wish to make? 

Mr. Clinger. Thank you very much, Mr. Chairman. I just want- 
ed to come by as you Mck off 1996 with this first very important 
hearing, basically to commend you for the diligence and the thor- 
oughness, I think, with which you have explored the issues con- 
fronting the Postal Service and preparing to address those issues 
in legislation which will take us into the next century. 

Obviously, there are problems that face the Postal Service. I 
think that progress has been made. As you indicated, last year was 
a very good year, and I think that will be evidenced in the testi- 
mony today, but there are problems that exist. I think that this is 
really the first Congress in which this committee has had jurisdic- 
tion over this area. I just really commend you and all the members 
of the committee for the speed with which you have gotten on top 
of the issues and the concerns, and really the outreaches you have 
had to the entire community to get all the points of view that may 
be involved. 

So I think that this is a particularly auspicious hearing. It is one 
that is going to kick us off and, as you indicated, lead us toward 
developing a responsible and responsive legislative initiative to ad- 
dress these issues. 

I also want to welcome Mr. Runyon and Dr. del Junco, who have 
played very strong leadership roles in this effort and will continue 
to be very important as we move toward reform and upgrading the 



system. It is a competitive world out there, and it is obvious that 
that is impacting upon the Service, and we have to find ways in 
which to address how we maintain a viable Postal Service in an 
age of increasing competition. 

So, again, my congratulations to you and to the members of the 
committee for undertaking this very, very important mission. I 
apologize that I am going to have to leave shortly, because I have 
some other pressing things, but I did want to be here for your kick- 
off. 

Mr. McHuGH. Well, thank you very much. Let me, in turn, thank 
you, on behalf of the subcommittee, for the leadership that you 
have provided and your role as our full committee chairman, and 
for the support that you have provided us with in this effort. We 
are deeply indebted to you. 

I would also like to recognize the gentlelady from Florida, Mrs. 
Carrie Meek, for any comments she would like to make at this 
time. 

Mrs. Meek. Thank you. Chairman McHugh. 

I am pleased to be here for your kickoff of this new year and our 
new talks and hearings with the Postal Service and the industry 
itself. I am glad to see some of the same people we saw when you 
had the hearings last year. I, too, feel that your diligence in follow- 
ing up on all the issues that were revealed through the other hear- 
ings is commendable. We are continuing on this journey to try to 
discover as much as we can about the Postal Service. 

I want to say to the chairman and the members of the commit- 
tee, I will limit my comments and ask unanimous consent to sub- 
mit my opening statement for the record. I would also like to say 
that I would like to see the Postal Service really be able to become 
competitive in the marketplace. I have sat here and I have listened 
to a lot of the discourse from members of this industry, and it 
seems to me that unless we can level the playing field for them, 
it will be very hard for them to compete in the marketplace. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Hon. Carrie P. Meek follows:] 



/&?- GinHie. /^WedC, 



Opening Statement 



I thank the chairman for holding this hearing today, as we 
continue on our journey of discovery looking at the performance 
and potential of our United States Postal Service. 

I look forward to hearing the testimony from the managers 
of the postal service; the chairman of the Board of Governors, 
the Postmaster General & the Deputy Postmaster. 

I also look forward to the testimony of the Postal Services' 
Inspector General, Postal Inspectors, and that of the GAO. 

I am pleased to know that we will hear from a cross-section 
of the postal services' management, and those charged with 
some oversight responsibilities. I must note, however, that 
representatives of postal service employee groups are noticeably 
absent and I do hope that we will have an opportunity to hear 
from them at some future date. 



I further note that as the Postal Service reevaluates and 
further examines its role in the increasingly competitive 
environment that it finds itself in, I am hopeful that both labor 
and management will find a way to work together to rise to the 
many challenges it will face as it seeks to embrace its historic 
mission and its future viability. 

I am also hopeful that this committee will soon begin to 
examine ways to provide the Postal Service with some of the 
freedoms that it needs to become increasingly competitive. Mr. 
Chairman, I know that under your leadership we will. Again, I 
thank you for holding this important hearing. 



Mr. McHuGH. We thank the gentlelady and appreciate her sup- 
port and efforts over the past year, and we are looking forward to 
working with her. Her full statement, without objection, will be en- 
tered in its entirety for the record. 

I also, at this time, would offer a statement for the record as pre- 
sented by the gentleman from New Jersey, Congressman Bill Mar- 
tini. Without objection, that statement will be entered, as well. 

[The prepared statements of Hon. William J. Martini, Hon. Bar- 
bara Rose Collins, and Hon. Cardiss Collins follow:] 




statement by 

Congressman Bill Martini 

Subcommittee on Postal Service 

"General Oversight of the United States Post Office" 

March 13, 1995 



Mr. Chairman, it is my understanding that David Grossman, a 
constituent of mine, has been in contact with the subcommittee 
staff concerning security in U.S. Postal facilities. 

On March 21, 1995, in the early evening, a man walked into the 
Montclair, New Jersey Postal Substation and summarily killed two 
postal employees and two postal customers. 

Another victim, David Grossman, fortunately survived, despite two 
gunshot wounds . 

Accordingly, Mr. Grossman has become very concerned about public 
safety and security at Post Office facilities. 

Mr. Chairman, I would like to request that the documents provided 
to this Subcommittee by Mr. Grossman be included in the record of 
this hearing. 

I also urge this subcommittee to conduct hearings on the issue of 
safety and security within the U.S. Postal system. 

Mr. Grossman has indicated a willingness to testify before this 
Subcommittee. I believe the American people should hear David's 
story. 

The Montclair Postal shootings have left a permanent scare on the 
residents of Northern, New Jersey. 

It is imperative that Congress examine this issue so that we can 
prevent future tragedies like the Montclair incident. 

Mr. Chairman, I am committed to working with you on this important 
issue and I now yield back the balance of my time. 



U.S. Departmeat of Justice 



Untied States Attorney 
District of Ne.v Jersey 



Fcileim Btiiiiiin;> ■ Room y 
j7) Bnuj Siirel 
>....„«. \." /.'MV "Tin; 

April 27, 1995 



Honorable Marvin T. Runyon 

Postmaster General & Chief Executive Officer 

United States Postal Service 

475 L' Enfant Plaza, S.W. 

Washington, D.C. 20260-0001 

Dear Postmaster General Runyon: 

On March 21, 1995 a gunman murdered four people and gravely injured a 
fifth at the Montclair Post Office, Substation A, in Montclair, New Jersey. The recent tragic 
events of that day will not soon be forgotten by anyone in Montclair, the State of New 
Jersey, or our nation. The event will never be forgotten by the families and friends of the 
victims: U.S. Postal Service employees Ernest Spruill and Scott Walensky, and postal 
customers Robert Leslie, George Lomaga, and David Grossman. 

In connection with the prosecution of this case by my office, 1 have met with 
the families of these men during the last few weeks. During these meetings, family members 
liave raised very significant concerns about security at postal facilities which I agree with 
completely. I am writing at this time to urge your immediate attention to those concerns. 
On behalf of the community at large, and quite especially on behalf of the families and 
friends of the victims of the tragedy in Montclair, I urge you to install effective secunty 
measures at postal facilities immediately. 

As the chief law enforcement official in New Jersey, I am well aware of the 
many legitimate concerns that compete for priority in an organization the size of the Postal 
Service. Nevertheless we must acknowledge and respond to the following commonly known 
facts: 

* Substantial amounts of cash are available in every post 
office, in every town in New Jersey, everyday. 

* Postal employees are not armed and have no protection 
against assailants and robbers. 

* Tragically, the lure of ^sy money and lack of security 
have contributed to twenty-four murders in postal facilities 
in this country since 1986. This figure does not include 
the four men killed last month in Montclair. 



10 



On March'21, 1995, when a gunman murdered four men and gravely injured a 
fifth at the Montclalr Post Office, Substation A, there was absolutely no security system in 
place. The only security installed was a burglar alarm intended for use during hours the 
facility was closed. That alarm system did not include a "panic button" for employee use 
during working hours. 

Preconceptions and misconceptions about safety and what constitutes a "safe 
neighborhood" must be put aside. The fact is that not one of the murders that have occurred 
in postal facilities took place in any of our nation's major cities. This loss of precious life 
has occurred primarily in suburban areas. Postal employees and customers have been 
allowed to remain vulnerable, and too often they have been victimized by those who know all 
too well the deficits of any security system in place at a particular facility: the former postal 
employee. 

We cannot reasonably expect that every postal facility will be made 
impenetrable by evil. But we mrst create reasonable and adequate safeguards for employees 
and customers at each facility, including bullet proof partitions that separate window clerks 
from customer areas, and alarm systems with panic alen buttons. In addition, postal 
employees are entitled to understand how resources for security are allocated, how security 
needs are prioritized, and what factors are considered to reach decisions about appropriate 
security measures. 

Postal employees are on the front line, and I know that their input is very 
important to you. Their safety, and the safety of postal customers and the American public, 
is of the utmost importance. 

I urge you to take immediate action to address the very real need for security 
at each postal facility and to communicate to the postal community how decisions that affect 
their jobs and very lives are being made. 

Please contact me if you would like to discuss this issue. I look forward to 
your response. 

Very truly yours. 



FAITH S. HOCHBERG 
United States Attorney 

Blanche Spruill 
Cathy Ann Walensky 
Mrs. Lomaga 
Kathy Leslie 
Karin Abarbanel >^ 



11 



Dne year ago - on March 21, 1995 - two Postal Service employees and three customers 
vere shot during the armed robbery of a post office in Montclair, New Jersey. Both of 
he postal clerks and two of the customers died. I was the third customer. I was shot 
wice in the head and left for dead. After lying for more than an hour on the floor of the 
backroom of the post office, I was rescued by the Montclair Police and evacuated by 
helicopter to University Hospital in Newark. 

Trauma surgeons said that if my rescue had been delayed thirty minutes, I too would 
have died from loss of blood and obstruction of my breathing passage. 1 was in 
intensive care for two weeks and was hospitalized for a total of four weeks. 

When the murderer was sentenced to two life terms in U.S. District Court in Camden, 
New Jersey, on September 22 last year, I read a statement to the court. It began: 

Shortly before four o'clock in the afternoon of March 21st, I stepped 
into the Fairfield Street Post Office in Montclair to send a letter by 
certified mail. A few minutes later, I lay on the floor in the back room, 
unconscious, near death from two bullets fired into my head. On the 
floor beside me, four men lay dead. 

Christopher Green thought he had killed all the witnesses to his robbery 
of the Post Office, but I survived. The bullets he fired narrowly missed my 
brain, just missed vital arteries and nearly severed my spinal cord. 

After regaining consciousness, I lay on the floor for an hour, unable to 
move, struggling for each breath, feeling the blood gurgling in my 
throat. The room seemed dark and I could not raise my head, but when 
I called out and there was silence, I knew the others were dead. 

Although bullet-proof barriers had been installed at the Main Post Office in Montclair 
just weeks before the shootings, the station where the "Montclair Massacre" took place 
had no physical security other than a burglar alarm system - not even a simple silent 
alarm. The Postal Service told The Montclair Times (Feb. 23, 1995, page A4) that "no 
changes" were planned at Station A. Had there been some form of security there on 
March 21, 1 believe that Ernie Spruill, Scott Walensky, Bob Leslie, and George Lomaga 
would be alive today and I would not have been wounded. 

In a letter to Postmaster General Marvin Runyon dated April 27, 1995, Faith Hochberg, 
the U.S. Attorney for New Jersey, wrote that "When a gunman murdered four men and 
gravely injured a fifth at the Montclair Post Office, Substation A, there was absolutely 
no security system in place." 



12 



U.S. Attorney Hochberg noted that "Substantial amounts of cash are available in every 
post office, in every town in New Jersey, every day" and that "postal employees are not 
armed and have no protection against assailants and robbers." She observed that the 
"lure of easy money and lack of security" contribute to criminal attacks against post 
offices. 

She said "Postal employees and customers have been allowed to remain vulnerable..." 

The transcript of the proceedings on June 8, 1995, in which Christopher Green pleaded 
guilty to the post office shootings, includes the following questions and answers: 

The Court: Did you know that the Post Office had minimal security 
measures in place to protect employees against robberies 
and attacks? 

The defendant: Yes. 

The court: Did you know that the Post Office usually had thousands of 
dollars in cash on hand at the end of each day? 

The defendant: Yes. 



In fact. Green stole $5,100 from the post office. 

In a Congressional hearing on violence in the Postal Service held on September 15, 1992, 
Moe Biller, president of the American Postal Workers Union, said: 

The guaranteed security of all employees and the public is part of the 
trust that we have enjoyed for over 200 years. 

And in a later hearing, held in October 1993, James Christie, president of the Postal 
Police Officers, remarked: 

Violence has become an unfortunate fact of life for many Americans. 
However, most of us assume that when the routine of our lives takes us 
into federal buildings such as postal facilities, something is being done to 
provide sufficient security for us to carry out our business. Unfortunately... 
the Postal Service. ..has failed to provide security sufficient to afford 
protection for its employees and customers... 



13 



-3- 

The hearings in 1992 and 1993 were prompted by the killing of four supervisors at the 
post office in Royal Oak, Michigan in November 1991 by a former postal worker. Those 
hearings focused on internal violence committed by postal employees against other 
postal employees. 

When members of the public have been targets of criminal attack in a postal facility - 
as happened in Montclair last year - 1 believe there is even a more urgent need for 
Congress to examine the steps the Postal Service has taken - or failed to take - to 
protect postal customers from injury or death. 

In her letter to Postmaster Runyon, U.S. Attorney Hochberg said: 

...we must create reasonable and adequate safeguards for employees at 
each facility, including bullet proof partitions that separate window 
clerks from customer areas, and alarm systems with panic alert buttons. 
In addition, postal employees are entitled to understand how resources 
for security are allocated, how security needs are prioritized, and what 
factors are considered to reach decisions about appropriate security 
measures. 

According to The Star Ledger (March 24, 1995, page 18), Essex County Sheriff Armando 
Fontoura "compared post offices to banks but noted that they have few of the security 
safeguards that protect bank tellers from similar attacks." 

Postal union leaders also compared Station A and similar postal facilities to banks. 
According to Jerry Monzillo, president of the New Jersey State Postal Workers Union: 

You should treat it like a bank. For one thing, there should be bullet-proof glass. 
For another, there should be security cameras.. .It's the same as in a local bank... 
{The Montclair Times, March 23, 1995, pages Al and A14) 

Treat it like a bank. There are funds being transferred over the counter. 
(New York Post, March 23, 1995, page 5) 

Hank Rauer, president of the Midstate Area Local, said, "I want the same security as 
if I was a bank teller." {Star Ledgn, March 23, 1995, page 26) 

In the aftermath of the Montclair shootings. Postal Service officials asserted that 
Station A was in a low-risk area. John Kelly, New York metropolitan vice president of 
the Postal Service, told The Montclair Times (March 23, 1995, page A14) that "from 
what I'm told, the post office branch in Montclair was real low risk, handling less 
than $1,000 a day." 



14 



Kelly said, "When we do a security analysis at our post offices, we take three factors 
into account: (1) the amount of money taken in during the day, (2) the hours the location 
is open, and (3) whether or not it is a high-crime area." 

If a security analysis of the Main Post Office in Montclair showed the need for bullet- 
proof partitions, one must conclude that Postal Inspectors thought the facility was at a 
high risk of robbery. 

Yet Station A, where the shootings occurred, was in Watchung Plaza, a shopping center 
of some 60 stores only one mile north of the Main Post Office. How could the risk of 
robbery at Station A have been minimal while, at a Post Office just minutes away, the 
risk of robbery was deemed to be high? 

Watchung Plaza itself has seen violent crime in recent years. A liquor store was held up 
and a shot was fired at the owner, grazing his ear; a man wielding a shotgun robbed a 
florist shop; a jewelry store was robbed by two men brandishing handguns; a gas 
station was robbed. 

In March, 1994, a police substation was opened in a commuter train station at Watchung 
Plaza, some one hundred yards from Station A, in response to merchants' concerns 
about security. 

Watchung Plaza is only a few miles from Newark. In his testimony before a 
Congressional committee in September 1992, Willie Brock, president of the Federation 
of Postal Police Officers, said postal police were deployed in 28 cities where the Postal 
Inspection Service had determined there was a high probability of postal crimes being 
committed. He said Newark, New Jersey, was one of those cities. 

In a series of semi-annual and annual reports issued from 1987 through the first half of 
fiscal 1995, the Postal Inspection Service declared its commitment to deterring robberies 
and to protecting postal employees and customers. 

In 1987, the Postal Inspection Service said "...the most serious consequence of robbery is 
its potential for violence to postal employees and customers.. .we continue efforts to 
prevent employee exposure to these crimes through various prevention initiatives, such 
as employee education about what to do during a robbery, the installation of bullet- 
proof screenlines, hold-up cameras, and warning signs in high-risk offices." 

In 1990, the Service claimed "inspectors have succeeded in making postal facilities less 
vulnerable and less attractive to attackers.. ..the presence of sophisticated detection 
equipment has played an important role in maintaining this trend." 



15 



-5- 

In 1992, robberies were an "issue of concern." The Postal Inspection Service said 
"armed robberies are a concern because they present a serious threat to the safety of 
postal employees as well as postal assets. Although the number of robberies 
experienced by the Postal Service is relatively small, the number has recently 
increased." 

In 1993, the Postal Inspection Service began to express more concern: 

Armed robberies of Postal employees are of great concern to the Postal 
Inspection Service since these violent acts represent both a serious safety 
threat to postal employees and customers and a direct attack on the 
financial integrity of the Postal Service. The Postal Service has experienced 
a continual increase in the number of armed robberies over the past five 
years. In order to combat these attacks, the Postal Inspection Service 
and Postal management have initiated a multifaceted response. After 
Postal Inspectors conduct facility surveys and identify deficiencies, postal 
management initiates corrective action. This has included the installation 
of bullet-resistant screenlines in selected high-risk post office lobbies. 

By 1994, the Postal Inspection Service had placed "robberies among our highest 
organizational priorities." It said "prevention tactics are now receiving significant 
attention in an effort to deter and minimize the impact of robberies and burglaries. 
Inspectors are conducting security surveys and providing employee training to help 
prevent such incidents and minimize injuries when they do occur." 

In 1995, the report says: 

the Postal Inspection Service developed and maintains an integrated 
robbery and burglary countermeasures program designed to protect 
employees, assets, and property. Postal Inspectors perform an 
evaluation and risk analysis of conditions in a postal facility to 
determine what equipment is needed to properly secure the facility. 
Alarms and cameras are installed at facilities where value, risk, 
and prior history dictate their need. 

The Postal Inspection reports show that there were 105 robberies of post offices in fiscal 
1993, 120 in fiscal 1994, and 60 in the first half of 1995. For most years before 1993, only 
aggregate robbery statistics are provided; the totals include robberies of letter carriers 
and truck drivers as well as robberies of post offices. The annual number of robberies of 
facilities and employees increased from 126 in fiscal 1987 to 294 in fiscal 1994. 



.16 



The reports also give statistics on assaults against on-duty postal employees, but they 
do not indicate how many occurred during the commission of a robbery or how many 
resulted in death. There are no statistics given for assaults against customers in postal 
facilities. 

After the shootings in Monclair, Postmaster General Runyon claimed: 

The Postal Service is committed to doing everything it can to 
combat lawlessness. ..We want our post offices to be as safe as 
possible for our employees and customers. 
(Star ledger, March 23, 1995, page 26) 

Yet, as evidenced by the minutes of its meetings from April to November of last 
year, the Postal Service's Board of Governors seemed indifferent to the attack on 
customers and employees in Montclair. There is not a single reference to the Montclair 
shootings in the minutes of any of these meetings. 

However, Chairman Sam Winters suggested in May that a review be made of security 
procedures at Postal Service headquarters in Washington. In June, the Board approved 
a resolution extending its "deepest sympathy to the families and friends of those who 
lost their lives or sustained injuries as a result of the bombing" of the Federal Building 
in Oklahoma City. In July, Chairman Winters read a statement expressing the Board's 
shock and sadness over the murder of a postal supervisor by another postal employee 
in Industry, California. In October, the Board adopted a resolution expressing its 
sadness at the death of a journalist who had covered the Postal Service for the 
Federal Times. 

There was one expression of concern for customers' safety. The minutes of the 
September meeting state that: 

Mr. Dyhrkopp asked about plans to improve safety at postal facilities 
for postal employees and customers. Mr. Coughlin responded that an 
aggressive effort is underway to improve safety measures by 15 percent 
or better through the "Second to None" program. 

The April minutes note that Mr. Runyon "commented on initiatives to combat 
violence in the workplace." This was apparently a reference to a forum on workplace 
violence in the Postal Service that was held in April 1995. However, as reported in 
Vie Star Ledger, (April 19, 1995, page 22) the violence prevention initiatives relate to 
internal violence directed against employees, not to the kind of external violence - 
such as the robbery and shootings that occurred in Montclair - that threatens customers 
with injury and death. 



17 



The lesson of Montdair is that the Postal Inspection Service's risk evaluation 
criteria are irrelevant for assessing the risk of harm to employees and customers. 
Criminals target post offices. Criminals are mobile. There is no good reason to believe 
that a criminal who had planned to rob a post office in a "high-risk" area but was 
deterred by bullet-proof partitions would not drive his car to a post office in a 
"low-risk" area that was just a few minutes away, lacked security, and still offered 
thousands of dollars in cash. 

Postmaster General Runyon admitted last March that, "it's really very difficult to 
know where the next violent act is going to be committed" {Star Ledger, March 
23, page 26). The implication is that the risk evaluations performed by the Postal 
Inspection Service do not and cannot predict where postal customers, in the absence of 
security measures, may be exposed to violence at the hands of criminals. 

The Postal Inspection report for the first half of fiscal 1995 states that "value, risk, 
and prior history" are the factors considered by Inspectors when they decide whether to 
install alarms and cameras at a particular postal facility. For the Postal Inspection 
Service, the probability of robbery of a post office does not seem to be the most important 
criterion in conducting a security review. Rather, it is the potential financial loss - 
the "value" - that is uppermost. As the 1993 Inspection Service report puts it, robbery 
is "a direct attack on the financial integrity of the Postal Service." Yet the potential 
for violence committed against customers exists regardless of how much - or how 
little - money a criminal would seize in a post office robbery. 

A postal official from New York City called the Montdair shootings an "isolated" 
inddent. Yet only three weeks before the Montdair robbery, a postal station in 
Sayreville, New Jersey was robbed by two gunmen. In November, 1995, the North 
Center Station in Bloomfield - a short distance east of Montdair - was robbed by a man 
brandishng a semiautomatic pistol. In December, a robber hijacked a postal truck and 
driver from in front of the Brookdale Station in Bloomfield; the assailant knocked the 
driver unconscious with his gun before fleeing. Also in December, the Main Post Office 
in Plainfield, New Jersey was robbed. 

Congress has made the Postal Service responsible for the protection of customers in 
post offices. Section 224.3 of Title 39 of the Federal Code of Regulations states 'The 
Postal Inspection Service is responsible for ...protecting mail matter, postal 
facilities and other postal assets, employees and people on postal premises." 

The failure of the Postal Service to proted employees and customers in Montdair on 
March 21, 1995 should be investigated by Congress. In doing so. Congress should also 
address the broader issues of what is being done to assure the safety of customers from 
criminal assault in post offices across America - including small stations like the one in 
Watchung Plaza. 



18 



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19 




U.S. Department of Justice 

United States Attorney 
District of New Jersey 



970 Broad Srta, Room 502 
Ntwark, Sew Jersty 07102 



September 27, 1995 



David Grossman 

39 Erwin Park Road 

Montclair, New Jersey 



07042 



Re: United States v. Christopher Green 
Criminal No. 95-224 



Dear Mr. Grossman: 

On behalf of the Department of Justice, I would like to 
thank you for your assistance in the investigation and 
prosecution in United States v. Christopher Green . As is widely 
known, you began cooperating with law enforcement officials in 
the first hours after the terrible crime committed at the 
Montclair Post Office. From your hospital bed, you assisted 
investigators by responding to questions under the most trying of 
circumstances. The information you provided in the early hours 
of the investigation proved helpful to officials in their pursuit 
of your assailant. 

As your strength returned, you continued to assist 
investigators by describing what occurred during the robbery and 
shootings. This took place over the course of a number of 
meetings during and after your hospital stay. Without doubt, had 
you been called to testify at trial, you would have provided 
significant and poignant testimony to a jury. Indeed, just your 
written statement to the sentencing judge and public comments in 
court helped educate the judge on certain important issues. 



20 



Everyone who knows about vour cont-i-ihii+-i«r,<- -i.. ^.w • 
please Lei 5ree to contact S^/"^"^^"^ assistance in the future. 



Very truly yours, 

FAITH S. HOCHBERG 
United States Attorney 



By: STUART RABNER 

Executive Assistant U.S. Attorney 




Thomas J. Russo 
Chief of Police 

Mr David Grossman 
39 Erwin Park Road 
Montclair, N J. 07042 



21 

DEPARTMENT OF POLICE 

CHIEF'S OFFICE 

647 Bloomfield Avenue 
Monldair. New Jersey 07042-2887 

September 18, 1995 




Telephone: 201-744-1234 
Facsimile: 201-744-0240 



Dear Mr Grossman, 

On behalf of the Montclair Police Department, I would like to extend my sincere gratitude and 
appreciation for the assistance you gave Law Enforcement Authorities, which helped solve the 
multiple shooting incident that occurred at the Watchung Post Office branch on March 21, 1995. 

As you are aware this case will be coming to a conclusion, with the sentencing of Christopher Green, 
this coming Friday, September 22, 1995 in the Federal Court Building, Camden, New Jersey The 
success of this case was contingent on a cooperative, detailed investigation involving federal, county 
and local agencies of which pertinent information supplied by you under very trying circumstances, 
played a helpfiil part 

Even though you laid mortally wounded in a hospital bed, you were able to supply investigators with 
important details, which proved helpful in determining the direction of the investigation of this 
horrific crime It's been a long, hard pull for you, but you've made it. Believe me, we are full of 
admiration for your strength, courage and dignity, which you have displayed during this terrible 
ordeal 

With the holidays quickly approaching, I would like to take this opportunity to extend my best 
wishes to you and your family for a joyous holiday season and for continued good health and 
happiness in the ensuing years 



Very truly yours, 

Thomas J Russo 

Chief of Police 

Montclair Police Department 



TJR/rc 

cc US Attorney Faith Hochberg 

Township Manager Terence J Reidy 

Mayor and Council 



Montclair is an equal opportunity employer 



22 




Township of Montclair 

Department of Police 

647 Bloomfield Avenue 

Montclair. New Jerse\ 07424-2887 




Errol Brudner 

Lwniciianr 

Commander of the Detective Bureau 



Telephone: 201-744-1234 
Facsimile: 201-744-0919 



October 23. 1995 

Mr David Grossman 
39 Ervvin Park Road 
Montclair. New Jerse>' 07042 

Dear Mr Grossman 

Your request for this letter provided me the opportunit> to thank \ou for \our cooperation 
and assistance in solving the most heinous cnme committed in the Township of Montclair dunng 
my eighteen years expenence Despite severe personal pain and suffering, you were able to pro\ide 
Detectives from the Montclair Police Department vvitli information which proved valuable to the 
investigation From a command post set up next door to the Post Office. I dispatched, and was in 
constant contact with the Detectives who visited \ou in the hospital the mght of March 21, 1995 
and the morning of March 22, 1995 Your determination and perseverance m allowing yourself to 
be interviewed under such adverse conditions, and the information you provided, contributed to 
limiting the direction of the investigation regarding the suspect's motive 

I will forever remember the scene at the Post Office on March 21. 1995 However. I will 
also fore\er remember the strength of the victims' families on the day of scntencmg and your 
personal strength that da\-, and dunng your interviews with Montclair Detectives at the hospital 

Please feel free to contact me for any future assistance you may need in this matter, or any 
others, of a mutual concern. 



Sincerely, 

Lt. Errol Brudner 



23 



STATEMENT OF 
THE HONORABLE BARBARA-ROSE COLLINS 

BEFORE THE 

SUBCOMMITTEE ON THE POSTAL SERVICE 

OVERSIGHT HEARING ON THE POSTAL SERVICE 

WEDNESDAY, MARCH 13, 1996 

Mr. Chairman, I join you in welcoming the witnesses 
to the third oversight hearing on the U.S. Postal Service. 

During today's testimony, we will hear from our 
distinguished panel on current activities and challenges 
faced by the Postal system which include: operation, 
financial, and security problems. 

Some say, the answer to these and other challenges 
faced by the Postal system is privatization. To that, I 
suggest that we not forget the reasons why Congress 
sought to enact the Postal Reorganization Act of 1970. 
This Act was established at a time when the Postal 
Service was plagued with many of the same problems as 
today. Operational, poor management and labor relations, 
increasing costs and a sky rocketing deficit were 
prevalent. Congressional appropriations accounted for 
20% of the Postal Service's budget. 



24 



The 1970 Act was designed to improve postal service 
and delivery, and create a new postal service which could 
operate "like a business" without benefit of taxpayers 
funds. 

Yes, I know that these measures were taken over 
25 years ago. But, I believe that this act has achieved 
much of what it set out to do, and that is to oversee an 
entity whose operation effect the entire population. 

According to the Postal Service, it has found itself 
more stable, earning a record $1.8 billion profit, increasing 
its on-line delivery performance throughout the country, 
and only increasing rates after four years of stability. 

However, operating expenses are up and there are 
many unfavorable variances found in their recent budget. 
The specter of yet another rate increase looms over our 
heads. It is because of the Reorganization Act that we 
can monitor the Postal system and gage whether they are 
meeting the standards set forth by Congress in 1970. 



25 

There is still much room and need for improvement. 
I am well aware the market has changed since the 1970 
Act. However, public perception has not. The question is 
whether or not postal customers benefit from the existing 
structure. With further hard work, more improvements will 
be made and consumers will receive full benefit from the 
Postal system. The bottom line is that the public's 
mandate for an efficient, universal mail service must be 
answered. 

Mr. Chairman, I thank you for convening this most 
important hearing. I fully realize the need for careful 
consideration of this and other issues as we continue to 
look into the future of the Postal Service. 

So to that, I look forward to hearing from each of you. 

Thank you. 



26 

Statement of the Honorable Cardiss Collins 

Ranking Minority Member 

before the Subcommittee on the Postal Sen/ice 

March 13, 1996 

Mr. Chairman, members of the Subcommittee, 
distinguished panelists, I welcome today's general 
oversight hearing on the postal service and look forward to 
the testimony of our witnesses. 

It was almost a year ago this month that this 
Subcommittee first began its series of oversight hearings 
on the postal service. During those hearings we heard 
testimony regarding issues effecting the operation and 
structure of the postal system. Each of the witnesses 
present today expressed concerns regarding the financial 
viability, service and delivery, competition and labor- 
management relations of the United States Postal Service 
(USPS). 



27 

Indeed, a consistent theme relayed was the need to 
reexamine the Postal Reorganization Act of 1970 with an 
eye toward updating it and making it more relevant to the 
needs and objectives of the postal system. 

Since last year we have been witness to an overall 
improvement in the delivery of overnight first-class mail 
and the beginnings of reform yet-to-be-seen in the area of 
regulatory relief. 

We have also taken notice that the USPS currently 
employees more people now than when the Postmaster 
General took over, expenses are up, revenue is down and 
competition is no longer just "eating away at the postal 
service ~ it is literally eating its lunch! The latest assault, 
ads promoting the latest computer software designed to 
aid consumers in paying bills and conducting other 
financial transactions on-line, effectively by-passing the 
mail system. 



28 

This is just one example of the many forms of 
competition being faced by the postal service. 

And so, this hearing comes at a most opportune time. 
Specifically, I wish to learn just what programs the postal 
service has in operation that are designed to offset 
financial losses, as well as ground lost to competitive 
services. I want to know what new sources of revenue 
have been identified and just what will classification reform 
bring? 

As always, I thank you for coming and look forward to 
your statements. Thank you. 



29 



Mr. McHuGH Certainly not least, but last, as far as Members 

f^Ll ifTi ' L^"" P^?^^^J? ^° acknowledge the attendance and 
tnank all the participation from the vice chairman of the commit- 
tee the gentleman from South Carolina, Mr. Sanford 

Mr. Sanford. Thank you, Mr. Chairman. 

I would simply commend you and your staff for putting together 
and organizing these hearings. I do have an opening statement- I 
would simply like to submit it for the record. •'^ment, i 

Mr. McHuGH. Without objection. 

[The prepared statement of Hon. Mark Sanford follows] 



40-873 0-97-2 



30 



OPENING STATEMENT 

THE HONORABLE MARK SANFORD 

13 MARCH 1996 



Good Morning, Mr. Chairman. I appreciate this opportunity to 
be here at this oversight hearing of the Postal Service and to welcome our 
witnesses. 

Mr. Chairman, I want to commend you for having this important 
hearing and for your forethought in consolidating what in the past has been a 
series of hearings. I believe that this format will give our witnesses an 
opportunity to hear each other's testimony and concerns, and the 
Subcommittee will benefit from receiving answers to common problems 
faced by each of the panels represented here. Furthermore, the model for this 
Postal Service oversight hearing makes for greater efficiency, time-wise, for 
our legislative schedules. 

As we know — but it bears telling again — the Postal Service 
touches the life of each household in our country each day. Therefore, a well 
run Postal Service may not receive the kudos it deserves, but a poorly run 
Postal Service comes under the scrutiny of its millions of customers. 



31 

In an era when competition is the name of the game, customers 
have no qualms about switching from one bank to another or from one doctor 
to another, if they believe the service is not up to par. The Postal Service 
faces competition in some areas — urgent mail and parcels — however, it 
retains its monopoly in first class mail delivery. Is this a healthy situation? 
Would the Service perform better if it had real competition? Of course, there 
is a form of competition from E-mail, fax and telephone, but the real hard 
copy delivery of mail is still protected. Is the United States Postal Service in 
a position to be competitive or are antiquated laws and regulations impeding 
its ability to compete in the marketplace? These questions are not posed as a 
threat or to put the Postal Service on notice. They are asked because of stark 
reality. 

Mr. Chairman, this Subcommittee had an informative joint 
hearing with our Senate counterpart regarding the international experience of 
privatization and corporatization. These are issues which must be faced in 
our nation as the whole world becomes more competitive and where there are 
only transparent boundaries. 

Again, Mr. Chairman, I appreciate the time you have afforded me 



32 

to share some thoughts with you, and I welcome the witnesses to share their 
thoughts on the state of the United States Postal Service. 



33 

Mr. McHuGH. Well, with that, let us get down to business. As 
I said in my opening statement, the Postmaster G^eneral is a sea- 
soned witness, so he understands, under the full committee rules, 
all of the people who are presenting testimony before the sub- 
committee must swear their testimony. So if you two gentlemen 
will rise and raise your right hands. 

[Witnesses sworn.] 

Mr. McHuGH. The record will show that both witnesses re- 
sponded to the oath in the affirmative. 

Again, gentlemen, welcome. Thank you so much for being here. 
We appreciate the opportunity to meet with you, and we all look 
forward to your comments. Now, I will turn the attention of the 
subcommittee to both of you; whoever would care to begin, we will 
stand by your choice. 

Dr. DEL JUNCO. Let me start. 

Mr. McHuGH. Dr. del Junco. 

STATEMENTS OF TIRSO DEL JUNCO, M.D., CHAIRMAN, BOARD 
OF GOVERNORS, U.S. POSTAL SERVICE; AND MARVIN T. RUN- 
YON, POSTMASTER GENERAL AND CEO, U.S. POSTAL SERV- 
ICE, ACCOMPANIED BY MICHAEL S. COUGHLIN, DEPUTY 
POSTMASTER GENERAL; AND MARY ELCANO, GENERAL 
COUNSEL, U.S. POSTAL SERVICE 

Dr. DEL Junco. Thank you, Mr. Chairman. 

I am Tirso del Junco, chairman of the Postal Service's Board of 
Governors. I am from Los Angeles, CA, and have been a postal 
Governor since 1988, and was recently elected chairman by a vote 
of my fellow Governors. 

As the governing body of the U.S. Postal Service, the Board is 
comparable to a board of directors of a private corporation. The 
nine Governors are appointed by the President and confirmed by 
the U.S. Senate. The Postmaster General and the Deputy Post- 
master General also serve on the Board. 

The current Governors bring a rich mix of business, politics, and 
professional background to the work of the Board. We come to 
these positions in a spirit of public service, and we believe our work 
is important in helping to guide and manage this vast and impor- 
tant businesslike public corporation. The Board directs the exercise 
of the powers within the Postal Service. That includes reviewing its 
practices, directing and controlling expenditures, conducting long- 
range planning, and setting policy on all postal matters. 

Each Governor invests many hours each month on postal work. 
The Postal Service is a very complex organization, with a budget 
of $54 billion and more than 753,000 full-time employees. It re- 
quires systematic and sustained work to help to manage this orga- 
nization. To accomplish our mission, the Board has refocused its ef- 
forts into four key committees: the audit committee; the compensa- 
tion committee; the strategic planning committee; and the capital 
projects committee. 

I can assure you, Mr. Chairman, the Governors are thorough and 
business-like in our oversight of the Postal Service. As you are well 
aware, Mr. Chairman, the Postal Service last year had one of its 
best performances ever, with a record net income of $1.8 billion. 
Service improved to a record 87 percent for mail targeted for local, 



34 

overnight delivery, and volume climbed to a record level of 181 bil- 
lion pieces of mail. 

But like the winner of baseball's triple crown, following up such 
a sparkling performance is getting a lot tougher. As the Postmaster 
General will outline, the challenges facing the organization just 
keep getting bigger and bigger. It is gratifying to report that we 
will be able to hold off filing a general rate case in 1996. The Post- 
master General just this past week committed to the Board of Gov- 
ernors that he will keep postal rates stable through 1997 and as 
far beyond as possible. 

To serve the American mailing public, we have programs and ini- 
tiatives in place that will continue to move us forward this year 
and in the years beyond. The Governors believe postal manage- 
ment is moving in the right direction. 

The Postal Service completed a review of its operations last year 
using the Malcolm Baldrige criteria, the "gold standard", for well- 
managed, private sector firms. From it we have fashioned our qual- 
ity program called "CustomerPerfect!". It is an integrated system 
for building customer satisfaction and excellence into every process 
and procedure we have. It is hard work, but we expect it to yield 
results. 

A key goal is to move the national average score for delivery of 
overnight mail up to 90 for this very year. The Governors applaud 
management for applying these standards of business excellence. 
Indeed, it is the kind of forward thinking that we believe all gov- 
ernment should pursue. 

The Governors recently completed the work of classification re- 
form, a year-long effort to modernize and simplify mail practices. 
While the Postal Rate Commission recommendations fell somewhat 
short of our expectations, this is a very good first step. Clearly, 
more changes must follow, and this experience serves to reinforce 
the need for postal reform. 

At this time, I want to emphasize that it is not possible for the 
Postal Service to compete in toda/s changing and fast-paced world 
while hobbled by restrictions that were written into law some 25 
years ago. The Postal Service needs freedom in terms of pricing, 
products, and people; specifically, in the businesses that face com- 
petition. 

The Governors applaud, Mr. Chairman, your interest and the in- 
terest of your committee, and all the efforts that are being made 
to change the laws and make this organization vital and more busi- 
nesslike and effective for the American people. 

Indeed, the Governors are committed to working with the com- 
mittee, the Congress, the administration, postal management, and 
all the many stakeholders in the Postal Service to make postal re- 
form a reality and turn the upcoming 25th anniversary of the Post- 
al Reorganization Act into a springboard that carries this national 
institution into the 21st century. 

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

Mr. McHuGH. Thank you. Dr. del Junco. Again, we appreciate 
your being here and your comments. 

With that, we will turn our attention to the Postmaster General, 
Mr. Runyon. 

[The questions and responses of the Board of Governors follow:] 



35 



QUESTIONS FOR THE CHAIRMAN OF THE BOARD OF GOVERNORS 



1 . Chairman del Junco, as you are aware the salary of the Board of Governors has not 
changed since the Act was adopted twenty-five years ago. It remains at $10,000 annually, 
however, there have been proposals to increase this amount. There is also in the Act a 
restriction on the number of meetings the Governors may have to "not more than 42 days 
of meetings." In Fiscal Year 1995 the Governors met a total of 26 days. Do you foresee a 
reason that there should be a limitation on the number of meeting days of the Governors? 

ANSWER: The current 42-day meeting restriction has not caused any problems to-date. 
There have only been a few exceptions where the Governors needed to meet more than two 
days a month. Some examples of these are: special meetings to discuss rate case issues; 
some committee meetings; and last fall a special meeting to discuss strategic planning. The 
Govemors take their duties very seriously and spend considerable time on postal affairs 
outside the Board meetings. However, it is reasonable to assume that 42 meeting days should 
be adequate for the Governors to carry out their oversight responsibilities. 

A. Similarly, the board is supporting the Postmaster General in his effort to make 
the Postal Service more competitive and to establish a vision of where it should be 
in the next Century. In light of that, is it more difficult, in a policy sense, to establish 
and maintain a long-range plan for the Postal Service when the Board is politically 
appointed to set term limits? 

ANSWER: The fact that Governors are appointed for nine year-terms with no more than one 
Governor scheduled to leave the Board in any one year it is not a serious problem; in fact, it 
allows for a considerable amount of continuity. Quite obviously, during the times we carried 
more than one vacancy, it was a bit of a problem, but now that the Board is at full complement, 
it is no longer the case. The Board has a Strategic Planning Committee which meets in 
conjunction with the Board meetings and this demonstrates the importance the Board has 
placed on strategic planning. Also, last November the Board held a special meeting with the 
specific purpose of focusing on strategic planning in the Postal Service. The Governors have 
been involved and support the Postmaster General's efforts in the future direction of the Postal 
Service. 

2. In the Postal Service's Comprehensive Statement on page 3 you mention that last 
February you disbanded the Capital Improvement Committee. Would you describe for the 
Subcommittee some of the discussion the Board had with regards to this decision and what 
has replaced this process for consideration of Capital Projects? 

ANSWER: The decision to disband the Capital Improvement Committee was consistent with 
Board Resolution No. 93-5 that established the ad hoc committee at the March 1993, Board 
meeting. The committee was tasked with reviewing the process by which approval of projects 
progressed through the organization under the capital investment approval process. The 
committee conducted its review over nearly a two year period which culminated with a final 
report to the Board in February 1995. At the time of the report all but one of the committee's 



36 



recommendations had been implemented or were in the process of implementation. The 
above resolution called for the termination of the committee with the presentation of its report. 
It should be noted, that to further enhance the Board's oversight of the capKal investment 
process, the Board approved Resolution 95-14, on December 5, 1995, establishing a CapKal 
Projects Committee. 

3. I note that on September 11-12, 1995, the Board of Govemors (seven members being 
present) unanimously approved the FY 1996 Postal Service operating budget. How much 
of the operating budget is dedicated to the U.S. Postal Service Inspection Service? 

ANSWER: In approving the 1996 Operating Budget, the Governors went through one of the 
most comprehensive reviews of the various line items that make up the budget of the Postal 
Service. The Inspection Service is a separate line item in the budget process and represented 
$406.4 million of the nearty $57 billion projected operating costs for the year. 

A. Who presents the budget to the Board of Govemors? Is the Inspection Service budget 
included as a line item in the overall budget? 

ANSWER: The budget presentation was led by the Chief Financial Officer and the Controller 
and included several other officers where a closer look at specific line Items required their 
participatksn. The Inspection Service is a separate line item. 

B. Do you think that the Inspectksn Service is adequately funded? If you or the Board of 
Governors thought that the Inspection Service was not funded adequately, how could you 
rectify the situation? 

ANSWER: At the present time we are satisfied that the Inspection Service is adequately 
funded. The Chief Inspector also knows that he has an open door to the Board if he feels his 
budget is not adequate to effectively meet the Inspection Service's responsibilities. The 
inspection Service has been quite successful in reassessing its priorities and related resource 
needs and as a resutt, funding has not been a problem in the past. The Board was very 
encouraged to know that 25 posKions were being added to investigate workers compensation 
cases where the Postal Service continues to fund major expenses through the Department of 
Labor. 

The Inspection Service folkjws the same submission and approval process as does every 
other operatton in the Postal Service. If the Board felt that the Inspectkin Service was not 
adequately funded, and because the Inspection Service is a separate line item, I feel confident 
we would rectify that in our approval of the budget. As previously indicated, the Chief 
Inspector knows that he has direct access to the Board if necessary. However, it should also 
be noted that the Board is equally concerned about controlling costs and that all such requests 
would require sufficient support before additional funding would be approved. 

5. Chairman Gleiman, on page 7 of his prepared text, testified that he was troubled by one of 
the exceptions taken by the Board of Govemors to the Rate Commission's recommended 
decision in the reclassification case. Specifically, his testimony highlighted the Governors' 
decision to reject the Commisston's recommendation of the creation of a shell classification 



37 



for Consumer Envelope Mail (CEM). According to Chairman Gleiman, such mail costs less 
to process and should be eligible for a discount. Interestingly, he cites a Postal Service 
press release from one year ago announcing that the Service would propose in its 
reclassification case that prebarcoded reply envelopes be included in a First-Class 
automation subclass. Chairman Gleiman said that the decision to reject this 
recommendation made no sense unless the Postal Service never really intended to let the 
general public share directly in the beneHts of automated mail. 

A. Given the Service's public support for such a rate, why did the Govemors 
decide to reject this recommendation? Why was it not included in the original 
reclassification submission by the Postal Service? I understand part of the Governors' 
rationale to reject this recommendation was that such a shell classification would 
institute a two-tier price structure and "pose serious operational concerns for the Postal 
Service." Would you expand on what those concerns are. 

ANSWER: While there may be some confusion regarding the intent of the press release cited by 
Chairman Gleiman, there can be no doubt about the position taken by the Postal Service on the 
record in Docket No. MC95-1 regarding the Office of the Consumer Advocate's proposed Courtesy 
Envetope Mail (CEM) rate category and discount. The Postal Servk» presented two pieces of 
sworn rebuttal testimony outlining the extensive concerns raised by the CEM proposal. The 
decision of the Govemors vok»d the exact same concems as raised on the record by the Postal 
Servk»'s rebuttal witnesses, whch, in large measure, included the same concems raised by the 
Govemors in their deciskan on the ctosely related Publfc's Automation Rate (PAR) recommendatk)n 
in Docket No. R90-1 . There is absolutely no inconsistency between the positons taken by the 
Postal Servtee on the record, and the views stated by the Govemors in support of their deciswn to 
reject. 

The Commisston's recommended deciskjn must be based on material on the record, and cannot be 
based on material outskle the record. During Docket No. MC95-1 , the Commisston never made 
any inquiries about the March press release, and neither the press release nor any informaton 
about the press release appears in the record. It is therefore unclear why Chairman Gleiman would 
suggest that his expectatk>ns were based on an extremely terse press release issued before the 
start of the hearings, rather than on the extensive record devek>ped during hearings. 

In fact, the press release was never intended to convey the impresston that the Postal Servk:e 
vrould support a CEM proposal of the type presented by the OCA and recommended by the 
Commission. There were two separate thoughts expressed in two separate sentences of the press 
release. One thought was that reply envetopes inserted into mail being sent out at automatk>n 
rates should be required to be prebarcoded, as one of the condHons for automaton eligibility of the 
outgoing piece. For example, if a company that mails out bills with enctosed reply envetopes 
wished to qualify its bill mailing for automaton rates, it wouW be required to agree to prebarcode the 
payment envetopes being providing to its customers. The Postal SeiVfce has followed through on 
this thought, and that requirement is scheduled to take effect January 1 , 1997. 



38 



The second thought was not clearly articulated In the press release, but K relates to the possibility 
that, at some point in the future, the Postal Service may expbre optbns to allow payment of lower 
rates for prebarcoded reply mail. In fact, this exact same thought was also addressed in the 
rebuttal testimony of Postal Service witness Alexandrovich, who stated; 

If it could reliably be shown that the Postal Service faces the bss of a significant 
share of its martlet for the delivery of bill payments, and that the introduction of a 
lower rate for lower cost bill payments would potentially allow a substantial portion of 
such tosses to be avoided, the Postal Service would in all likelihood be quite 
interested in exploring options along those lines. Even in that situation, however, 
it is probable that the Postal Service vrauld maintain its preference to avoid the 
administratton and enforcement problems associated with any proposal which 
requires household mailers routinely to choose between stamps of different 
denominations for their regular letter mail transactions. If and when a sound 
business case can be made that the Postal Service needs to de-average rates for 
household mail, I believe that an approach in which payment of a reduced rate is 
handled by means other than a direct application of a discount stamp by consumers 
would be preferable to the OCA's CEM proposal, with its intrinsic administration and 
enforcement problems. 

Alexandrovich Rebuttal Testimony (USPS-RT-7) at 13-14. The most obvious way in which 
payment of a reduced rate could be handled by means other than direct application of a discount 
stamp by consumers vrould be if the envetope provider prepaid the postage. For example, a utility 
company could fumish a reply envelope with postage prepaid at the tower rate, and include the 
reduced postage charge as part of the billed amount. The savings from the lower rate could thus 
be passed on to the consumer, who otherwise would pay 32 cents (or whatever the current base 
rate for First-Class letters might be) for mail delivery of the bill payment. 

As noted in the testimony of wKness Alexandrovich, the Postal Service's preference for such a 
system relates to administration and enforcement problems inherent in a two-tier structure for 
stamps. These are the same problems which are also alluded to in the instant questton. They 
were discussed in detail in the Postal Service's two pieces of rebuttal testimony. To understand 
those problems, however, it may be worthwhile to first review the status quo. Right now, in mailing 
a bill payment, consumers know that all they need is "a stamp." Whether they use their own 
envetope or one provided by the addressee, whether the address is typed or handwritten, whether 
the payment is going across town or across the county, or whether they drop K in the comer 
mailbox or take it to the post office, they know that the 32-cent stamp is all that is required. Every 
day, millions of citizens apply a 32-cent stamp, drop their payment in the mail, and, virtthout any 
further thought, assume that it will be delivered. And the 32-cent stamp that they use for bill 
payments is the same one that they keep on hand to send birthday cards, "thank you" notes, or a 
funny newspaper clipping to a friend wrfio shares their sense of humor. It's the 32-cent stamp that 
they can buy at the post office, from a vending machine, or at their tocal grocery store. 

Under the CEM proposal, consumers would not just need "a stamp," but would have to keep an 
inventory of tvw) kinds of stamps - regular and discounted. Consignment stamp sources, such as 
grocery stores, have already shown a reluctance to cany more than one denominatton of stamps 
because it stows dowm transactions at the point of sale. So mailers would have to make more trips 



39 



to the post office, causing increased window service costs to the Postal Service. More importantly, 
however, mailers would be responsible for getting the right stamp on the right envelope. Inevitably, 
either intentionally or unintentionally, some mailers wrauld put discount stamps on letters that do not 
qualify for the discount. The result would be an increase in short-paid mail - mall with some 
postage on it, but not enough. 

An increase In short-paid mail would create a variety of problems. The Postal Service would have 
to implement new procedures, wrth associated costs, to detect and handle short-paid mail. The 
operational effects of short-paid mail are only one side of the picture, however. Consider the 
consumer wrfio puts the wrong stamp on her mortgage payment. If that shortage Is detected and 
the mall returned, it could cause the consumer to incur a late-payment charge from the mortgage 
company, perhaps amounting to hundreds of dollars. The relattonship of trust between the Postal 
Service and Hs customers could be severely affected. People are much more likely to remember 
and be influenced by one costly instance of what they perceive as a service failure than a large 
number of transactions in which they saved a few cents postage. 

Moreover, procedures to deal with short-paid mail could also harm the relationship that the Postal 
Service has with reply mail recipients. For example, a business may fumish reply envelopes to its 
customers, but the envelopes might not be prebarcoded, or otherwise might fail to confomi to 
certificatbn standards for the discount. If a CEM discount were implemented, and confused 
customers began mistakenly applying the discount stamp, the stream of payments could begin to 
Include a large share of short-paid mall. If those pieces were returned to the mailing customers, the 
business that has been expecting payments suddenly finds that some of those payments are 
delayed. A remittance system that was working well starts to appear less reliable. 

Even businesses which prebarcode their reply envelopes might have problems. For example, 
about one-third of reply envelopes have the barcode on an insert that shows through a window in 
the envelope. Strictly speaking, therefore, the barcode is not on the envetope, and the Postal 
Service is unlikely to be wnlling to certify that the blank envetope with a window is entitled to 
discounted postage. If it did, citizens might put some other address, perhaps a handwritten one, in 
the window, and still claim the discount. Yet remittance mailers have legitimate business reasons 
for distributing window insert envelopes, and would be justifiably distressed if infonned that such a 
practice was no tonger permissible. 

The one-stamp system has been In place for a long time, and the mailing publk; is quite 
accustomed to using it property. There are a number of types of letter mail that the Postal Service 
could identify as costing less to process, such as kDcal mail versus transcontinental, typed mail 
versus handwnitten, or mail deposKed at postal facilities versus collection mail. The lower cost 
characteristks of these mail pieces, by themselves, have never been found to warrant discount 
treatment. The convenience of a one-stamp system is obtained at the cost of an undeniable 
amount of rate averaging. At this time, however, the benefits of implementing a CEM discount do 
not appear to exceed the costs. 



40 



B. Chairman del Junco, please characterize for the Subcommittee the nature of 
Governor David Fineman's dissenting views regarding this issue. 

ANSWER: Govemor Fineman did not dissent from our decision to reject the recommended shell 
classification for CEM, which was unanimous. At the public meeting he stated, "I would just like to 
say that I would like to congratulate the Postmaster General and everyone who worked so hard on 
this rate classificatk>n case. I personally at the meeting voted in favor of the resolution. But I did so, 
understanding that I thought that the PRC had a point to make, with regard to the CEMs. And it's 
my understanding that , I did so because of the work that the staff is doing in its effort, to make sure 
that citizens might have a different classificatran for some citizen stamp at a later time. And I kx)k 
forward to hearing from the Postmaster General and from the staff on its wrark. I just wanted that to 
be known." 

C. The Rate Commission recommended a "shell classification" in this instance with 
the authority left to the Postal Service to fill in the rates, as it saw fit. Given this 
flexibility, why did the Governors reject this proposal? Shouldn't consumers be allowed 
to take advantage of the worksharing rate discounts available to larger mailers on mail 
pieces that are suitable for automation, as most remittance envelopes are? 

ANSWER: A "shell classificatbn" may not operate in exactly the manner suggested by this 
questbn. The Postal Service is not free to fill in the rates as it sees fit. Instead, the primary 
consequence of accepting a "shell classificatbn" is to become tocked into acceptance of the 
concept, with no specific rate attached. Any potential discount rate would still have to be litigated 
before the Commission, wrtich would recommend a discount based on its own evaluatron of the 
record deveksped in a subsequent proceeding. 

The inherent difficulty in this approach, however, is that it assumes that a concept, such as a CEM 
rate category, can be meaningfully evaluated and accepted or rejected outside the context of a 
specific discount rate. In many respects, however, the "concept" changes if one moves between, 
for example, the 2-cent discount recommended by the Commisston in Docket No. R90-1 , and the 
12-cent discount proposed by the OCA in Docket No. R94-1 . In policy temis, changes within a 
plausible range of discounts may be qualitative as well as quantitative. 

As the Governors pointed out in Docket No. R87-1, in a passage quoted from their decision on the 
most recent case, because a shell classificatkjn will always require more litigatbn before any 
partk:ular rate can be implemented, such a subsequent proceeding will also offer the opportunity to 
reevaluate the concept in a more concrete fashion. In other words, in most instances, there is little 
to be gained from implementation of the shell classificatbn. Practbal consequences must await 
further proceedings, and further proceedings may offer additional insight into the validity of the 
underlying concept, especially when viewed in the context of a specific rate recommendation. 

To respond to the second part of this question, there are valid reasons to view consumers who mail 
prebarcoded reply envebpes differently than large bulk mailers who engage in worksharing. The 
most notable difference is that consumers who mail prebarcoded reply envelopes are essentially 
the passive recipients of woricsharing done by someone else. The consumer most often is not even 
aware of whether the piece is prebarcoded or not, and certainly has no control over that situatbn. 



41 



Therefore, granting a discount to consumers in situations in which they are fortunate enough to 
deposit an envelope prebarcoded by the envetope provider creates no direct incentive mechanism 
to increase the proportion of prebarcoded reply envetapes. In contrast, the decision by a bulk 
mailer to engage in worksharing activities or not is directly affected by the presence or absence of a 
discount for that activity. Under these circumstances, consumer mailers of CEM stand in 
substantially different shoes than large bulk mailers. 

Not only is a CEM discount unlikely to generate a substantial increase in the amount of 
prebarcoding, but it would have detrimental consequences. For example, even though consumer 
m.ailers would not have to change their behavbr to qualify for a CEM discount, there would 
necessarily be a revenue loss associated with its implementatbn, and that revenue loss wrauld have 
to be made up somewrtiere. Ironically, pari of the revenue burden would quHe likely fall on the very 
same bulk mailers who provide the prebarcoded reply pieces that alkjw consumers to claim the 
discount. The higher the number of prebarcoded reply pieces that are provide by businesses to 
consumers, the greater would be the revenue lost through a CEM discount, and the greater would 
be the potential effect on the rates of the business mailers to offset those tasses. Business mailers 
have very legitimate reasons to question the togic behind a ratemaking stmcture that would impose 
new costs on those whose actions make possible the substantial benefits already being realized 
from their efforts. 

D. Chairman Gleiman points out that this mail in question, remittance pieces, is the 
most likely candidate for future electronic payment and that establishment of such a 
rate might go a long way in keeping this mail in the postal stream. Do you agree? 

ANSWER: Not necessarily. It is certainly tme that remittance mail is a likely candidate for 
electrons diversbn. Whether or not it is the "most likely" candidate need not be resolved. The crux 
of the matter is whether establishment of a CEM discount vrould have any substantial effect on 
avoiding such diversbn. 

Diversbn from the mailstream at a 32-cent rate occurs because, given the alternatives, some 
customers find that mail delivery is not worth 32 cents to them. As the scope and availability of 
attematives increase and the costs associated with the altematives drop, the portion of customers 
who no bnger find postal delivery worth 32 cents can be expected to grow. A CEM discount 
creates the potential of having those customers reevaluate the value to them of payment by mail at 
some rate less than 32 cents. There is no way to estimate how they would react to this opportunity 
without empirical research, and it is impossible to do empirical research without having at least a 
tentative alternative rate in mind. 

In Docket No. MC95-1 , the OCA proposed a 12-cent CEM discount. The OCA made no effort, 
however, to identify any mailers who claimed that while payment by mail vras not worth 32 cents to 
them, it would be worth 20 cents (32 cents minus the 12-cent discount). What if most mailers who 
have converted their bill paying practices to other modes of delivery estimate their cost per payment 
at 10 or 15 cents apiece? A 12-cent discount wrauld be a wrindfall to those consumers who pay by 
mail and intended to pay by mail anyway, but wrauld do nothing to attract back mailers who see the 
rate to beat as 10 or 15 cents. As stated eariier, this Is not a theoretbal questbn, but an empirical 
one. Without empirical research on a specific discount level, it is, at the very least, premature to 
speculate how far a CEM rate might go toward avoiding electronb diversbn. 



42 



There is another dimension which should not be ignored to the prospect of conversion by 
consumers to electronic bill payments. Consumers cannot unilaterally choose to pay a particular bill 
electronically. The entity to which they might wish to direct their electronic payment must have 
procedures in place to handle receipt of such a transactbn. For those businesses dealing with 
large numbers of consumers, procedures to handle electronic payments would presumably have to 
be in addition to those for handling payments by mail, as few (if any) companies can assume that 
absolutely all of their consumer customers vnW be both willing and able to pay electronically anytime 
in the foreseeable future. 

In choosing whether to offer electronic payment as an option to consumers, businesses are unlikely 
to be influenced by the presence or absence of a CEM discount. Such a discount offers no direct 
economic benefit to them and, in fact, if it pushes up the costs of mailing out their bills, can actually 
have a detrimental effect. Their attention is much more likely to be focused on cash ftaw concerns, 
and minimizing the total cost of their billing and collection operations. The Postal Service may best 
be able to minimize electronic diversion of bill payments by working directly with businesses to 
address their concerns and to make it as easy and as cost effective as possible for both them and 
their customers to utilize the postal system. 

6. The Newspaper Association of America has been vocal in its criticism of the governors 
decision to accept the Rate Commission's recommended decision in the classification 
case. Specifically, the NAA has focused on the recommendations rewarding standard 
class mailers who provide mail compatible with automation procedures. Do you believe 
that there will be more unaddressed third class mail because of the acceptance of the 
PRC's recommendations? 

ANSWER: Under both existing and new mailing standards, mailers are not penmitted to submit 
unaddressed mail; thus, classification reform will not result in an increase in unaddressed third-class 
mail. To the extent that the question was intended to inquire about the effect of classification 
reform on the volume of occupant/resident addressed saturatbn mail, the Postal Service projects 
an increase in volume for that categoiy since the corresponding rate for that category will decrease. 

There is, however, no evidence to suggest that the new automatran requirements that attend 
classificatbn refoirn will cause mailers to switch from mailing at automatton rates to saturation rates. 
This is because the level of density of distribution is driven by the needs of the advertiser rather 
than price of postage. For instance, if a mailer has a targeted advertisement to 20 percent of the 
addresses on a route, and decides that the new automaton rules are too onerous, it is unlikely that 
the mailer would incur the additional printing and postage to send a saturation piece to 100 percent 
of the addresses. Rather, the mailer would either decide to barcode rts mail In confomiance with 
automation categoiy standards, or mail at presort rates. 



43 



7. I understand that the Board has hired a new Secretary of the U.S. Postal Service Board of 
Governors. What are the staffing levels for the Governors? Considering you are the board 
of directors of a $54 billion industry, should the Governors have an independent staff on 
which they can turn for assistance? Some postal reform proposals would give the Board of 
Governors greater authority In ratemaking decisions and the overall governance of the 
Service. The five members of the Postal Rate Commission each have an assistant - 
should nine part-time governors have an Independent staff on which they can base their 
management decisions? 

ANSWER: The current staffing level of the Office of the Governors consists of the Board 
Secretary, Assistant Secretary (vacant), Special Assistant to the Secretary and a newly 
authorized Confidential Secretary position to be filled. With the filling of the two positions, the 
Governors feel that the office will be adequately staffed to support the Board. Additionally, 
Governors receive support and assistance from field personnel as needed. 

The Govemors have previously discussed the need for an independent staff; however, they 
have chosen to stay with modest staffing in the office to support the Governors' oversight role. 
We recognize the potential for added responsibilities with the postal reform proposals and we 
established the addKlonal committees to assist in that role, along with greater emphasis to 
management on process control. In the final analysis, because of the size and complexity of 
the Postal Service, the staff of the Board of Governors will have to rely on the existing 
research resources of the organization, otherwise the Board will need a significantly larger 
staff for that purpose. The Governors currently feel, and are very sensitive to the fact, that 
they have sufficient staff assistance to maintain their independence from postal management. 

8. In your prepared text you mentioned that one of the four committees established by the 
Board is the capital projects committee. The GAO reported to this Subcommittee in 
January regarding the conditions leading to problems in some major Postal Service 
purchases. This included high level postal officials sidestepping internal controls and 
continuing problems with ethics violations involving conflict of interest. Although the GAO 
report highlighted the Service's administrative changes taken and planned to reduce these 
problems, what is the Board doing to address these reform initiatives? 

ANSWER: When the Board established the ad hoc Capital Improvement Committee in March 
1993, it was due in part to several of the projects cited in the subject GAO report. The 
Inspection Service had conducted internal investigations on the projects mentioned in the 
report and the Board had been briefed during and following many of the investigations. This, 
along with the growing number of funding requests, caused the Governors concern over the 
process and the controls in place to prevent similar future occurrences. Since the start of the 
committee's work and continuing with the establishment of the Capital Projects Committee, 
there has been ongoing attention by the Board regarding process control. As the former 
Chairman of the Audrt Committee, I can assure you that this was a topic for discussion at 
nearly every committee meeting. I fully anticipate that this will continue to be an issue with the 
Audit Committee as well as the Capital Projects Committee. Our continued high level oversight 
should ensure that management controls are in place and are effective. 



44 



1 . Could you outline in greater detail the specifics of "Customer Perfect"? What are the 
components of this program and cost of its implementation? 

ANSWER: CustomerPerfect! is being constructed to emulate the Malcolm Baldrige management 
system model. This model has continually evolved since the inception of the award in 1987. Over 
time, K has gained renown and credibility as a national standanj for business excellence. Literally 
hundreds of thousands of organizations have requested copies of the Baldrige criteria and many of 
these organizations are using it to self-assess their own management system against the model. 

There are seven specific components of the model. They are: 

1 . Leadership (called the 'TDriver" within the Management System model) 

The following elements comprise what is called the "System": 

2. Information & Analysis 

3. Strategic Planning 

4. Human Resource Development and Management 

5. Process Management 

And the last two components address Results: 

6. Business Results 

7. Customer Focus and Satisfaction 

Within these 7 major categories there are a total of 24 subelements. CustomerPerfect! is 
addressing a subset of these at present and as we have the resources to address them, others will 
be added until all elements are addressed. 

Monies have been set aside for the development and implementation of CustomerPerfectI So far, 
our expenses for CustomerPerfectI activities amount to $2.3 million. 

2. Will the postal service ever apply for the Malcolm Baldridge National QualKy Award? 

ANSWER: No. The Postal Service does not meet the eligibility requirements to compete for the 
Baldrige Award. Only commercial, for-profit enteiprises in the Manufacturing, Service, and Small 
Business categories are eligible. The eligibility criteria excludes all govemment agencies at the 
local, state, and federal levels. 



10 



45 



3. In prepared testimony submitted to this Subcommittee, PRC Commissioner William 
LeBlanc provides suggestions for changes in the area of postal rate making. Specifically, 
he urges that the Prior Years' Losses (PYL) component of the Postal Service's revenue 
requirement be phased out. He says unexpected losses should be provided for through 
the contingency account. Please comment. 

ANSWER: There is no contingency "account." The provision for contingencies is a small 
percentage that is added to forecasts of future costs to take into account forecasting errors and 
unforeseen events wrtirch impose unexpected expenses upon postal operatrans, such as a natural 
disaster. The amount included in the last omnibus rate case for such expenses was 2.0 percent of 
total estimated costs in the test year. The amount is based on the sound business judgment of 
postal management. 

The proviston for recovery of prior years' tosses (RPYL) has been added to the Postal Servfce 
revenue requirement for a completely different purpose. It is derived from the statute's requirement 
that the Postal Service break even. Because, over time, the Postal Service has not broken even, a 
provisk>n for recovery of the cumulative net losses to enable the Postal Servk:e to break even over 
time is added to the revenue requirement. The Commissk)n has set this amount at one-ninth of 
cumulative net tosses, vA\Kh amounted to $936 millton in the last omnibus rate case. In so doing, 
the Commisston noted that "without the addiftonal revenue infuston provided by the requested 
RPYL item, the Postal Servk» will lack any means to begin a restoratton of its finances to a positive 
oonditton." PRC Op.. R94-1 , at 11-22, H 2068. 

In response to concerns expressed by the Commisston in making this recommendatton, the Board 
of Governors, in Resolutton No. 95-9 (July 10, 1995), reconfirmed its commitment to restoring the 
Postal Servtoe's equity positton, by having the Postal Servtee maintain an average annual surplus 
between rate cases equal to the amount recommended by the Commisston for the test year. So far 
in this rate cycle, the Postal Servtoe is exceeding that goal. Actually restoring the Postal Service's 
equity in this way is the best means of "phasing out" the proviston for RPYL. Eliminating the 
proviston without having restored the Postal Servk»'s equity positton would not be a sound poltoy 
deciston. By maintaining its current financial course, the Postal Servtoe will be in a positton to 
request a significantly smaller RPYL proviston in the next omnibus rate case, and thereafter fully 
restore its equity positton and eliminate the need for a proviston for recovery of prior years' tosses 
as part of the revenue requirement. 

4. Commissioner LeBlanc also believes that the PRC should have the final authority on rate 
and classification matters because the Board of Governors, with no independent and 
neutral staff to help, are not well-equipped to deliberate on PRC recommendations. Please 
comment. 

ANSWER: The suggestton that the Commisston be given final authority to establish rate and 
classificatton changes has been repeatedly made, usually by the Commisston, since 1971. The 
Board of Govemors believes strongly that amending the law to create such final authority would be 
unwnse and extremely counter-productive. What is needed is more, rather than less, flexibility in 
ratemaking, and greater freedom from ragulatton that interferes with effk:iency and the ability to act 
in accordance with sound business principles. As the courts have often recognized, rate and 
classificatton decistons have great potential to interfere vtnth postal operattons and other poltoy 



46 



objectives. Moreover, the Postal Service, not a bureaucracy disconnected from postal business 
and its customers, is in a better position to know and appreciate the Postal Service's financial 
requirements and the details of day-to-day operatbns. One of the main problems that postal 
reorganization was inrtially designed to solve, namely, that the postal system had no control over 
the various factors that influenced it, would be intensified, rather than alleviated by giving the 
Commission final ratemaking authority. 

In light of these sound reasons for not shifting final authority away from the Governors, arguing that 
the Commisskjn should be given final authority because the Board is not equipped to deal with 
Commission Recommended Decisions is not persuasive. Furthermore, the presumptbn on which 
the argument is based is wrong. The Governors are fully capable of understanding the choices 
they are asked to make in acting upon the Commisston's Recommended Decisbn. Moreover, each 
Commissbn Recommended Decisbn is accompanied by a detailed opinion by the Commission, 
often consisting of hundreds of pages of discussion, describing the evidence and giving reasons for 
the recommendations. 

The suggestbn that the Govemors are incapable of deliberating because they do not have a large 
staff to assist in the analysis is very misleading. As I testified during my appearance before the 
Subcommittee, the Govemors have the full scope of the Postal Servk»'s expertise and resources 
at their disposal to assist them in analyzing the Commissbn's opinbn and the record, if necessary. 
Any attempt to establish a parallel body of expertise in a penmanent staff would be unwise and 
unnecessary. Not only would It be difficult to match the expertise that already exists on the Postal 
Service's staff, but it vrauld be extremely wasteful. That circumstance atane is one reason why it is 
not at all uncommon in government for agency heads who must make decisbns based on 
recommendations or initial decisbns by hearings examiners or triers of fact to rely on their agencies' 
resources to assist in the decisbn-making. 

If Commissbner LeBlanc is suggesting that relying on Postal Servtee resources distorts or biases 
the Governors' decisbns, that insinuatbn is wrong. The Govemors insist upon and receive fair and 
objective assistance in analyzing Commissbn recommendations. The Govemors, furthenmore, are 
by statutory command chosen to represent the publte interest generally, and they do so 
conscientbusly. Moreover, to suggest that giving the Commissbn final authority would result in 
more reliable, unbiased decisbns is very misleading. In fact, the Commissbn has repeatedly 
insisted that K is not merely an objective trier of fact, "an umpire only calling balls and strikes." 
Rather the Commissbn has taken the approach that it is an active participant in formulating, and 
advocating outcomes in the ratemaking process. Because only one institutbn is ultimately 
delegated the responsibility for making the polby choices that are inherent in final ratemaking 
authority, I respectfully suggest that, for the reasons expressed above. Congress's original 
judgment that the Govemors of the Postal Service should make those decisbns vras, and is, the 
most appropriate resuK. 



12 



47 

Mr. RUNYON. Good morning, Mr. Chairman, and other members 
of the subcommittee. 

Mr. McHuGH. Good morning. 

Mr. RuNYON. I am pleased to join Chairman del Junco this morn- 
ing. 

As I look back on the 12 months since last year's oversight hear- 
ing, I am struck by the amount of change that has taken place on 
both sides of this table and throughout the mailing industry. A 
year ago, the Postal Service was rallying from a difficult period. We 
have turned the corner on service and laid the groundwork for 
what we hoped would be a good year financially. 

Today, we look back on fiscal 1995 as a year of achievement. 
Postal employees have taken our performance to levels higher than 
ever before. The numbers speak for themselves: Volume, 181 billion 
pieces, up almost 3 billion; overnight first-class service, an all-time 
high of 87 percent, with new records set or tied in every quarter; 
net income, $1.8 billion, more than twice the previous high. 

A year ago, I was welcoming many of you to the Postal Service. 
You expressed, at that time, a deep commitment toward the Amer- 
ican people and their Postal Service. You indicated your intention 
to embark on a journey of discovery. One that would look at the 
Postal Service's potential as well as its performance. One that 
would apply the highest standards on both the public and private 
sectors; one that would examine the total competitive environment. 
One that would embrace the historic mission and the future viabil- 
ity of this enduring American enterprise. 

Today, each of you can also look back on a year of unprecedented 
accomplishment. In the finest of postal traditions, you delivered 13 
major hearings involving more than 80 witnesses from throughout 
the postal community and around the world. The most thorough re- 
view of this Nation's postal services in a quarter century. Mr. 
Chairman, you are to be congratulated for your leadership. 

Truly, both sides of this table can look back with satisfaction. 
But when we look ahead, I think there is reason for concern. It is 
true, the Postal Service has continued to make headway. Our first 
quarter profit this year was the highest in history, at $1.2 billion. 
And service has continued to climb to 88 percent, a new record. 

But a disturbing trend has developed. The indicators don't bode 
well for the future. Our most recent figures show volume is off 638 
million pieces, and with it revenue is $251 million below budget 
forecast. Our decreasing volume is a matter of deep concern. Mail 
was off during our first quarter, traditionally our heaviest mailing 
period. And so far, it is down in the second quarter. 

For a company that has doubled its volume every 20 years, this 
is bad news indeed. While the overall communications market is 
growing by double digits, the Postal Service is growing in only one 
of its six product lines. Worst of all, we are most vulnerable in the 
core of our business, correspondence and transactions, better 
known as first-class mail. 

Some think of first-class mail as the shield of our so-called mo- 
nopoly, but that armor was cracked years ago. The revolution in 
electronic commerce and information technology has put one-fourth 
of our mail volume and revenue at risk to electronic diversion. This 
threat is not new. For years, we have seen a growing trend by busi- 



48 

ness to move hard-copy communications into the electronic mail 
stream. But we have never seen it like it is today. 

Citibank is a good example. They advertise electronic banking 
that requires "No checks, no stamps, no envelopes". What that says 
is, "No mail!" Or take Wal-Mart, which requires the companies 
they deal with to send them invoices and statements electronically 
rather than through the mail. The Treasury Department estimates 
that 55 percent of all pa5rments by the Federal Government are 
now made electronically. Their goal is to see that grow to 100 per- 
cent within the next 10 years. That's all payments, totaling more 
than $1 trillion. 

The changes are rapid and startling. A whole new breed of com- 
petition is growing. Banks, software, and phone services, even util- 
ity companies, are wooing new customers with anti-mail offers. 

I am reminded of the singing star who lamented that it took 10 
years to become an overnight sensation. In fact, great changes 
often take place just that way. They seem to stand still forever, and 
then erupt overnight. In the face of competition like that, the time 
to act is long before the turning point is reached. Afterwards it is 
too late. Last year, that day seemed far off. Today, we see its first 
light on the horizon. 

What is clear, is that the Postal Service is in a race for tomorrow 
against the toughest, most agile competition in its history. Our fu- 
ture is on the line. And we are responding. Throughout the Postal 
Service, we are putting in place the most far-reaching changes in 
our history. First, there is CustomerPerfect!. When fully imple- 
mented, CustomerPerfect! will transform the way each and every 
employee in the Postal Service goes about our business. We have 
integrated it with our administrative processes. Now we are apply- 
ing it to the mail. 

We have introduced process management in Nashville and Wash- 
ington, DC. Now we are adding 10 more sites around the country 
that will serve as launching pads for spreading these tools through- 
out our national mail system. We are confident that this will bring 
a new level of professionalism and precision to the mail system. 

We are continuing to deploy more traditional tools, as well. This 
year, more than 3,600 additional pieces of automation will go on 
line, bringing overall deployment to more than 10,000 machines, an 
investment of more than $4.6 billion. 

And we are modernizing more than just our methods and ma- 
chinery. Last week, we took a historic first step in modernizing the 
mail itself. On March 4, Chairman del Junco and the Board of Gov- 
ernors approved the first revisions in our mail classification rules 
since postal reorganization. These changes encourage mailers to in- 
vest in automation and promote a more efficient mail system for 
the Nation. They will allow us to handle more mail at less cost. 

In the months ahead, we will be approaching the Postal Rate 
Commission requesting further reforms for nonprofit mail, special 
services, parcels, and expedited services. 

We are also working to build our business. We need to bring in 
an extra $1 billion each year through new products and better serv- 
ices. We are building new postal stores at the rate of one a day, 
and testing phone cards. Pack & Send services, and Fastnet local 
parcel delivery. We are developing a separate priority mail network 



49 

to expand and improve this highly competitive service, and we are 
taking it around the world as global priority mail. 

We are also expanding our new international package consign- 
ment service to Japan and adding delivery to Great Britain and 
Canada. Through the first 4 months of this fiscal year, this service 
has delivered nearly 600,000 packages and brought in more than 
$10 million in new revenue. We are also moving forward with de- 
velopment of new financial services, electronic kiosks, and hybrid 
mail products that combine the best of electronics and hard copy. 

Our cost reduction targets are equally aggressive. I would like to 
see us improve productivity at least 2 percent every year, saving 
$1 billion annually. We are applying new types of technology to re- 
duce costs, from robotics for loading mail to a new, low-cost optical 
character reader. New computer scheduling systems will help lower 
overtime in our plants and make sure every transportation dollar 
is used effectively. Point of sale electronic will help match local of- 
fice inventories with local customer needs. 

However, technology cannot resolve all of our cost concerns. We 
must look hard at other ways to reduce unit labor costs, which 
have climbed 54 percent this decade. In some cases, that is going 
to mean contracting out some of our work to the private sector. Our 
core strength is delivering the mail. Everything else is on the table. 

Some of these changes will be controversial. But all of them are 
necessaiy. Our goal is to enter the new century with new service 
at 95 percent and rates as close to where they are now as possible. 
It will take ever3rthing we can do to do that, and even more. But 
to do less would risk everything we are and hope to be. 

To achieve our vision, we must have the ability to compete. We 
must have the freedom to run the Postal Service like a business. 
We need the ability to respond to the market at market speed and 
the flexibility to test products in the market as our competitors do. 
Finally, postal managers and employees need market-based pay 
and work practices that encourage excellence. 

We need your help to deliver our vision for America's Postal 
Service. The future is now, and this subcommittee holds the key. 
There is no time to waste. With your help, we can face the competi- 
tion on an even footing. I am confident that the men and women 
of the Postal Service can hold their own with the best the competi- 
tion has to offer. But they need your vote of confidence to do it. 
With your help, they can deliver a Postal Service that is ready for 
the global challenge of the 21st century, a Postal Service that 
serves America tomorrow, as it does today — everyone, everywhere, 
every day. 

Thank you, Mr. Chairman. 

[The questions and responses of Mr. Runyon follow:] 



50 



QUESTIONS FOR THE POSTMASTER GENERAL 



1 . In Vice Chairman of the PRC Trey LeBlanc's statement for the record, he urges that the 
Prior Years' Losses (PYL) component of the Postal Service's revenue requirement be 
phased out. He says that "unexpected losses should be provided for through the 
contingency account. PYL has been used as a slush fund and permits and contributes to 
poor financial management." As the statutory leader of the Postal Service, how do you 
respond to his allegation and suggestion? Wny shrji-id the PYL not be phased out? 

ANSWER: There is no "contingency account." The provision for contingencies is a small 
percentage that is added to forecasts of future costs to take into account forecasting errors 
and unforeseen events which impose unexpected expenses upon postal operations, such as 
a natural disaster. The amount included in the last omnibus rate case for such expenses was 
2 percent of total estimated costs in the test year. The amount is based on the business 
judgment of postal management. 

The provision for recovery of prior years' losses (RPYL) has been added to the Postal Service 
revenue requirement for a completely different purpose. It is derived from the statute's 
requirement that the Postal Service break even. Because, in the past, the Postal Service has 
not broken even, a provision for recovery of the cumulative net losses to enable the Postal 
Service to break even over time is added to the revenue requirement. The Commission has 
set this amount at one-ninth of cumulative net losses, which amounted to $936 million in the 
last omnibus rate case. In so doing, the Commission noted that "without the additional 
revenue infusion provided by the requested RPYL item, the Postal Service will lack any means 
to begin a restoration of its finances to a positive condition." PRC Op., R94-1, at 11-22, H 
2068. In response to concerns expressed by the Commission in making this recommendation, 
the Board of Governors, in Resolution No. 95-9 (July 10, 1995), reconfirmed its commitment to 
restoring the Postal Service's equity position, by having the Postal Service plan an average 
annual surplus between rate cases equal to the amount recommended by the Commission for 
the test year. So far in this rate cycle, the Postal Service is exceeding that goal. 

Actually, restoring the Postal Service's equity in this way is the best means of "phasing out" the 
provision for RPYL. Eliminating the provision without having restored the Postal Service's 
equity position would not, in our opinion, be consistent with the break-even mandate of the Act. 
By maintaining its current financial course, the Postal Service will be in a position to base its 
next omnibus rate case request on a significantly smaller RPYL pool, and thereafter fully 
restore its equity position and eliminate the need for a provision for recovery of prior years' 
losses as part of the revenue requirement. 

2. Vice Chair LeBlanc also states in arguing that no legislative change is needed, that total 
volume for all classes of mail has increased 1 1 .8 percent since 1990. How would you 
respond to his contention that cries of despair from some members of the postal 
community are unfounded. 

ANSWER: Though total volumes have been increasing, the rate of increase has slowed 
dramatically. From 1985 to 1990, volumes grew 19 percent, while from 1980 to 1985 the 
growth rate was 32 percent. However, the reason for concern on the part of postal managers 



51 



is not the volume growth over the last five years, but the growth over the next five. Thus far in 
fiscal year 1996, volume is slightly below last year's level; well below plan. Third-class volume 
is down 2.2 percent. This despite a relatively sound economy, stabilization of paper prices, 
and record service levels. Furthermore, our forecast growth for fiscal year 1997 is 
approximately 2 percent. To disregard this more recent trend would be irresponsible. 

3. Title 39 states that "The Postal Service shall have as its basic function the obligation to 
provide postal services to bind the Nation together through the personal, educational, 
literary, and business correspondence of the people." How do such things as testing 
phone cards. Pack & Send services, new financial services, and electronic kiosks meet this 
statutory mandate? 

ANSWER: Also written into law is the obligation of the Postal Service to provide universal servk:e 
at a unifonm postage rate. Implied, if not explteitly stated, that rate must be set at a level that places 
mail servk^es within the reach of ordinary citizens, whatever their statbn and wherever they happen 
to reside. At the same time, the Postal Servk:e is required under law to operate on a break-even 
basis over time. 

Roughly 65 percent of USPS operating costs are directly attributable to specific classes of mail. 
The remaining 35 percent are of an institutbnal nature. Phone cards. Pack and Send servfces, 
new financial servtoes and electronk; krasks among other revenue generating initiatives, have been 
designed to return contribution to instKutk>nal overtiead well beyond their attributable costs. To the 
extent these endeavors produce incremental revenues, they reduce the burden placed on regular 
mail classes to cover the totality of USPS operating costs. Postage rates in turn can be maintained 
at levels that are more affordable and thereby more accessible to businesses of all sizes and the 
populatbn at large. 

4. Mr. Runyon, you have recently been discussing an idea which you are calling a "Price 
Right Agenda" that would continue your efforts on market-based pricing. What is your 
long-term vision for this pricing strategy and, specifically, how do you address the concern 
of many regarding possible monopoly class subsidization of these rates? 

A. How do you respond to those that would say you have to draw revenues from 
the monopoly stream to be in a position to price your other products competitively? 

ANSWER: Simply stated, "Price Right" entails pricing the Postal Servk:e product offerings to meet 
the needs of the modem marketplace. Currently, under "Price Righf , we are reevaluating the 
pricing scheme for existing products and evaluating potential new products to determine what 
changes can be made that meet the needs of the marlietplace. We intend to enhance the tong- 
term financial stability of the Postal Service in order to require the smallest and most infrequent 
price increases practk:al. The end result of the evaluatbns may mean enhanced servces and, in 
some instances, may indteate streamlined products. The review may indrcate price reductions or 
increases for certain product offerings. 



52 



This evaluation includes not only the consideration of the cost of providing the sen/ice but pricing in 
light of the customer demand for the sen/ices. Although costs are important and we fully intend to 
price above costs, we cannot ignore the realities of the mari<etplace. Those realKies may indicate 
that the price for one product should be reduced and that the price for another product can be 
increased. In any event, "Price Right" does not entail nranopoly classes subsidizing other products 
and it is fully consistent with the cun^nt law that precludes such cross-subsidization. In fact, it 
includes pricing the products with more direct forms of competition in a manner so that, in the long 
term, these products can provide even more revenues to the Postal Service and reduce fixed or 
institutional costs burdens which are now placed on the scKalled nxjnopoly classifications. 

In summary, 'Price Right" would benefit the individual consumer by providing low, stable rates 
through the increased contributions to overhead from a variety of products. 

B. The salaries of your executives are limited by law and you have stated 
previously they are not in line with the private sector. Have you had difficulty 
attracting qualified candidates for these positions? Similarly, please explain the 
criteria used to select those executives who received the recent bonus awards? 

ANSWER: We have limited outside recruKing to certain executive positions and for some of our 
officer positions. We have been fortunate in attracting high caliber candidates. In general, they 
have accepted positions because of the challenge a position offered, not because of the 
attractiveness of the compensation. Many highly qualified candidates have withdravm from 
consideration because the offered salary was not comparable to other opttons available to them. 
We have particular difficulty recaiiting against private sector competition for executives in high 
demand fields and for high cost areas. 

The Postal Service recently provided lump sum payments of up to 12 percent for executives based 
on the organizattonal success of the Postal Service in Fiscal Year 1995. The program was a group 
incentive plan, not unlike many gainsharing programs found in the private sector. The maximum 
award was 12 percent based on the Postal Service achieving net income of $1.8 billion. To receive 
the maximum award, organizational units needed to achieve both their financial and service goals. 
Financial performance was measured by net operating income - revenue minus expenses against 
a pre-established goal. Service was measured by performance of the Extemal First-Class 
Measurement System against a pre established goal. All organizational unrts achieved their 
financial goals, and only seven perfonnance clusters fell short of their service goals. If an 
organizational unit failed to achieve its service goal, the award was cut in half to 6 percent. 
A small percentage of executives had their awards reduced even further - some down to 
nothing - if they individually failed to contribute to the performance of their organizatbnal unit. 

5. The GAO Report on Conditions Leading to Problems in some Major Purchases, published 
in January 1996, outlines the additional costs incurred by the USPS as a result of postal 
officials not following procurement policies. In addition, ethics violations resulted in some 
of these problem purchases due '1o employees circumventing internal controls to speed up 
the purchasing process." These problems raise questions regarding your desire for more 
flexibility to address an impeding lack of revenues when at the same time the instrtution 
has lost millions unnecessarily through poor decisions: 



53 



A. There are those that will argue that procurement and contracting are good 
examples of an area In which the Postal Service has had tremendous freedom to 
operate over the years. Further, acting under these flexibilities, the Postal Service 
has lost large sums of money through poor decisions in procurement regulations, 
employee selection, ethics matters or any number of reasons. Considering these 
examples, some are asking why the Subcommittee would consider granting more 
financial freedoms to this instKution. How would you respond to these concerns? 

ANSWER: Based on the purchases outlined in the January 1996 GAO report, we can 
understand the concems of the Subcommittee. As the GAO report revealed, the problem 
purchases represented a small percentage of the total purchases and occurred over several 
years. The time frame for the seven purchases cited in the referenced GAO report range from 
August of 1986 to March of 1993. The judgment errors cited in these purchases did not occur 
because of any fundamental defect in Postal Purchasing policy, rather the process was 
compromised because a few officials chose to deviate from policies and procedures. 

If the Postal Service discovers any future errors in judgment or flaws in its existing Purchasing 
policies and procedures, we will move quickly to correct and take measures to prevent 
recurrence. We have and will continue to review and improve our Purchasing policies and 
procedures so that the Postal Service can provide the American public wrth competitive, value- 
added mailing services. A few recent examples of our continuous improvements include; 

• Consolidated authority and responsibility for alt Postal Service purchasing with the Vice 
President, Purchasing and r^aterials. 

• Implemented contracting officer qualification standards. 

• Enhanced Purchasing and Materials training programs, as well as training for those outside 
of purchasing who are involved in the purchasing process. 

• Renewed emphasis on ethical awareness requiring mandatory yearly training for our 
contracting personnel, and general training for all Postal employees. 

• Established Vice Presidential review and approval procedures for high dollar purchases, 
and are in the process of implementing systems that will help monitor and assess the 
performance of the Purchasing organization. 

B. How can you assure the Subcommittee that, if the Service is granted more 
freedom and authority, wasteful decisions such as these won't become common 
place? 

ANSWER: From these examples, it is evident the Postal Service is taking appropriate 
measures to ensure that mistakes of the past are not repeated and our employees are 
prepared to make sound business decisions. Further, the processes followed on the 
purchases in question were much more typical of federal government procurement than 
commercial purchases. We have all seen that agencies following the federal acquisition 
regulations are, also, not immune from purchasing errors, some of which result from the 
complexity of the process. 



54 



We are now proceeding to implement more commercial purchasing processes which we believe 
will result in greater efficiency and more positive business results for the Postal Service. We 
believe that is what Congress and the public expect from us in purchasing and other areas of 
our operation. Due to the facts surrounding the audit and recent initiatives, the Subcommittee 
should feel confident that we have the corporate experience necessary to responsibly handle 
additional financial freedom while reducing the risk of these types of problems. 

6. The Census Bureau announced that it would conduct a "fundamentally different" census in 
the year 2000. The plan is to use newer technologies, better address lists, etc. The 
Census Bureau had predicted that during the 1990 census, 70 percent of the household 
would retum the forms, but only 63 percent did. The Bureau spent $2.6 billion for the 1990 
Census and predicts that if they use the same methods, the cost would rise to $4.8 billion. 
The new plan would cost about $3.9 billion. 

A. What preparations is the Postal Service making in conjunction with the Census 
Bureau for Census 2000? What are your projections on cost to the Census 
Bureau? 

ANSWER: One of the keys to conducting a cost efficient and effective Census is the accuracy of 
the mailing list used by the Census Bureau. In the past. Census has purchased mailing lists and 
acquired updating activities from a variety of sources. What's different for Census 2000 is the 
Postal Service is providing to Census addresses for the 128 million deliveries servk^d by the Postal 
Sen/ice systemwide. The infonnation will also contain additional data to assure that the Census 
materials can travel at the lowest possible postage rate eliminating the need for Census to 
purchase addresses from a variety of different sources. Through a unique partnership agreement, 
access to Postal Service maintained addresses has no direct cost to the Census Bureau. The only 
postal cost that the Bureau of the Census will incur will be postage for those items that it mails. 

B. Would the modified Census Bureau plan of perhaps using the telephone or the 
Intemet for receiving information from the public effect Postal Service business and 
revenues? 

ANSWER: The only impact on postal business and revenues would be toss of postage revenue 
for any items not mailed as a result of the Bureau of the Census using the telephone or the Intemet 
to gather infonnation. 

7. The Postal Service has expressed interest in developing an electronic postmark. 
Traditional methods of business are being replaced by a paperless society but the law of 
contracts and commerce is still based on a paper system. With the widespread use of 
electronic technology, business practices have changed and there is a need to 
authenticate the origin of a "letter" and to secure the transaction sent electronically. It is 
apparent that business laws will change as well. For example, the Statue of Frauds and 
the Uniform Commercial Code require a writing for certain types of contracts which, 
additionally, must be signed. Until now, there has been no judicial decision regarding 
whether electronic communication satisfies the writing and signing requirements. 



55 



A. At what stage in research and development is the "electronic postmark?" 

ANSWER: As of May 1 , 1996, we have a prototype of a beta-test with pilot customers paying 
for a postmark within a proprietary network environment. 

We are currently building a limited-scale (but capable of expanding for full service) production 
system. We will incorporate into this system all the components which our testing and 
customer interviews have shown to be needed by customers. This system could be ready for 
incremental customer use within six months, but we will only offer incremental services if 
customer demand warrants doing so. 

B. Would there need to be redefinition of terms for the Postal Service to become 
the sole user of the electronic postmark? For instance, "What is a letter?" 

ANSWER: The Postal Service will not become the sole provider of time and date stamps. In 
addrtion, the U.S. Postal Service will license others to use the USPS Electronic Postmark. The 
Postal Service will service mark its own name for its service, but otherwise we anticipate that 
no redefinition of terms will be required. 

C. Will the postmarks be used to verify the date and time of sending the electronic 
mail or would it also verify the sender (like a signature, as required in some 
contracts)? If the postmark is only to authenticate the date of sending, is that 
limiting the scope and possible application of the technology which you are 
developing? 

ANSWER: The U.S. Postal Service Electronic Postmark will verify the date and time of 'receiving' 
the electronic mail at a Postal (or Postal authorized) site. In the near future, we anticipate offering 
this servce in connection with a public-private key pair (dual asymmetric in^eversible algorithm) 
implementation that will altow the sender to be verified. In some cases, the customer may simply 
be seeking a postmark but has no need for extensive security protections. We envision offering 
this as a stand-ak>ng product as well. In these cases, customers will know that they are buying only 
the postmarking and nothing else. 

i. It is apparent that for an electronic message to survive a challenge to its 
authenticity, the message must not be altered after dispatch. Will the postmark be 
capable of securing the message? 

ANSWER: Yes. 

ii. Would the electronic postmark ensure privacy and confidentiality? 

ANSWER: An electronic postmark can be combined wHh encryption to safeguard and protect 
against invasion of privacy and confidentiality. Our current prototype system does not include that 
feature, although we intend to add It. 

D. Has the European Union or other countries made efforts to develop an 
electronic postmark, and what is their experience? 

ANSWER: We are not aware of any such efforts. 



56 



8. As requested by Vice Chairman Sanford, please provide for ttie record the percentage of 
fixed costs versus variable costs for the U.S. Postal Service, and how you define those 
terms. How would you respond to the rate commission Chairman's statement that 
virtually all "attributable" costs are volume variable costs? 

ANSWER: The Postal Service identifies costs as attributable, specific-fixed, or institutional. 
Mail volume is the foundation for determining attributable costs. Attributable costs are identified 
by classes, subclasses and special sen/ices through careful examination of how costs are 
incurred in individual postal operations. These costs are attributable if it is determined to vary 
with changes in volume (volume-variable) Costs that arise solely from providing a single class 
or service are classified as specific-fixed and are attributed fully to the affected class or 
service. Costs that are neither volume-variable nor specific-fixed are not attributable. These 
costs are classified as institutional. Thus, institutional costs are a residual consisting of the 
difference between total accrued costs and total attributable costs. 

FY 1995 COSTS AND PERCENTAGE 







AttrtbutaMe Costs 






Total 
Accrued Costs 


Total 


Total 
Volume- 
Variable 


Specific 
Fixed 


Institutional 


$52,739,089 


$33,689,356 


$33,533,114 


$156,242 


$19,049,733 


100.0% 


63.9% 


63.6% 


0.3% 


36.1% 



9. As agreed in the hearing, please detail the instances, if any, where proprietary 

information of the Postal Service was made public in the course of a ratemaking case? 
Chairman Gleiman testified that business or other proprietary data becomes stale very 
fast and that data claimed as proprietary by the Postal Service Is in many cases two or 
three years old. Is this assertion true? How long should such data remain proprietary? 
Do claims of proprietary incorporate an assumption that disclosure would result in 
competitive harm? In addition, please provide further feedback on the idea of 
establishing a "third party arbitrator" to address what data is of proprietary nature within 
the ratemaking process? 

ANSWER: To support its rates and classification proposals under the Commission's rules, 
the Postal Service is required to make public, without any protective conditions, detailed 
information about its costs, revenues, volumes, market shares, business plans, and other 
information that no rational business would release publicly. The Postal Service is, therefore, 
at a competitive disadvantage ab initio even before controversies arise about specific data 
sought in the discovery period of a rate proceeding. It is important to put the matter in this 
perspective before focusing on the very few instances in a rate case that a party seeks 
information which the Postal Service seeks to protect from public disclosure due to the 



57 



commercial sensitivity of the infomiation. The general legal standard does not impose the 
impossible requirement that a party claiming privilege prove that release of the data will result 
in harm; only that such harm is possible, given the nature of the information at issue. 

When the Postal Service seeks to protect sensitive information, a number of interests may be 
at stake. With regard to services that are highly competitive, such as parcel services, the 
Postal Service seeks to protect its own competitive interests by not being compelled to release 
data that would provide a competitor with an advantage that could result in harm to the Postal 
Service. An example of such information might be Express Mail volumes between two specific 
cities. This information would be valuable to a competitor, while having no specific relevance 
to ratemaking. 

The Postal Service also seeks to protect information provided by its customers. A simple 
example is information provided on mailing statements, which most mailers view as 
commercially sensitive. Customers also provide sensitive business information in the form of 
Postal Service-sponsored survey responses. This information can be so sensitive that, in 
order to collect reliable data, the contractors conducting the survey must promise not to 
provide disaggregated data to the Postal Service, let alone to the mailers' competKors, other 
intervenors in rate cases, etc. If confidentiality were not assured, the Postal Service and the 
ratemaking process would not be able to benefit from surveys conducted to determine current 
mailing practices, including volumes, and responses to changes in postal services and puces. 
Mailers should not have to fear that their own competrtors will obtain detailed information about 
their business, their mailing practices, and their potential business plans, if the Postal Service 
is asked to provide such information during the course of a rate case. 

10. During the recent reclassification case, rt came to light through USPS data that parcels 
mailed third-class are often charged rates that are, on average, below cost; 600 million 
pieces are below costs, and another 200 million fourth-class parcels that barely cover 
their cost. As agreed in the hearing, please respond to the concerns that we have heard 
from others that with this kind of activity, how-given additional flexibility-would you 
ensure that your product recovered its attributable cost? 

A. Ms. Elcano responded to this question in the hearing by noting that at the end of 
a three-year cycle, the Postal Service can get below cost because costs go up 
during a three-year cycle. However, the Rate Commission Chairman pointed out 
that currently we're at the very beginning of that three- or four-year cycle. The costs 
on those third-class parcels that are currently below rate were raised, according to 
Mr. Gleiman, just last year in the R94 case. While he stated that the evidence was 
not available in that case that they were below cost, the evidence became available 
in the reclassification case. How do you respond? 

ANSWER: Under the cun-ent classificatran schedule, third-class bulk mail is limited to mail 
weighing less than one pound. Both parcels and flats are in the same bulk third-class categories. 
The costs of bulk third-class flats and parcels are averaged together as the basis for a single set of 
rates that are paid by both flats and parcels. In the recent classificatkjn refomi case there were 
some data on the record that showed that at each ounce increment, an average third-class bulk 
parcel costs more to process than an average third-class bulk flat. 



58 



Proposals were made on the record of the case (by United Parcel Service) that the Commission 
should de-average rates for parcels and flats. The associations representing the mailers of third- 
class parcels (most of whom also mail third-class flats) asked the Commission to adopt UPS's 
proposal, and provided evidence tending to show that some parcels may be less or no more 
expensive to handle than some flats and that distinctbns among parcels may be more relevant 
than the general distinction between all parcels and all flats. They took the positkin that no change 
should be made until further studies were done. The Postal Service agreed. Contrary to the 
statement in the question, there was no evidence as to how many third-class parcels are higher- 
than-average costs, how many are average, and how many are below average. This lacuna was 
one basis for the Commission's agreement to defer recommending any changes. The Postal 
Service is currently considering the appropriate action to take on this matter. 

If the Commission believed that a legal deficiency prevented having third-class flats and 
parcels pay the same rates, it could have relied upon the proposals and evidence presented 
on the record before it to recommend different rates. It declined do so, however. On balance, 
that was the most appropriate course of action in that case. The establishment of rate 
differentials, if that ultimately proves warranted and feasible, can be considered as part of a 
subsequent parcel reform case. In the meantime, however, the rates that the Commission 
recommended and the Postal Service adopted for non-letter size Standard Mail are designed 
to be, on average, compensatory. 

Fourth-class parcels were not at issue in the reclassification case. Rates designed to cover 
costs were recommended by the Commission in Docket No. R94-1 . There is no reason to 
believe that these rates are inadequate for this time in the rate cycle. Nevertheless, it is useful 
to keep in mind Ms. Elcano's general observation about the effect of rising cost levels, over 
time, on cost coverages generally. This circumstance results from the somewhat artificial 
nature of rate decisions that, perhaps necessarily, are based upon estimates for a fixed period 
of time. In fact, the cumbersome mechanism for making rate changes contributes to this 
situation. If the ratemaking process were easier, and if the Postal Service had more flexibility 
to adjust rates, rates and costs could be more easily kept in line. 

Regarding such additional flexibility, the Postal Service agrees that any scheme that might be 
adopted should include some procedure to ensure that rates adopted cover their attributable 
costs and make an appropriate contribution to institutional costs. 

1 1 . Current Postal Service regulations, specifically 39 CFR 952.5, do not require the Postal 
Service to identify specific conduct or specific rules allegedly violated when the Service 
files administrative complaints for mail fraud and other violations. Other enforcement 
agencies, such as the Federal Trade Commission, require administrative complaints to 
give defendants notice of the misconduct charged or the specific rules allegedly violated. 
For example, FTC regulations require that a complaint include a "clear and concise 
factual statement sufficient to inform each respondent with reasonable definiteness of 
the type of practices alleged to be-in violation of the law." Further, those regulations 
require the FTC to cite the specific sections of laws, rules and regulations involved in 
each allegation. Shouldn't the Postal Service operate under similar rules of specificity 
when filing an administrative complaint against a defendant mailer? 



59 



ANSWER: The Postal Service's administrative authority to challenge alleged false 
representations or lotteries is codified under a single statute, 39 U.S.C. Section 3005. That statute 
contains a general prohibition against obtaining money or property through the mail by means of 
false representations, or conducting a lottery through the mail. The only other specific statute that 
can apply in Section 3005 cases is 39 U.S.C. Section 3001. That section declares "nonmailable" 
certain types of material, including solicitatbns in the guise of invoices and mailings which 
deceptively appear to come from a government entity. When subsections of Section 3001 are at 
issue in a 3005 case, those subsectbns are cited in the administrative complaint. 

The Federal Trade Commissbn (FTC) enforces not only the broad deceptive trade practices 
statute, 15 U.S.C. Section 45, but an extensive range of trade regulations issued pursuant to that 
statute, codified in Title 16 of the Code of Federal Regulatbns (CFR). For example, the FTC 
enforces specific, detailed rules governing telemariieting sales, 900-numbertelemari(eting, funeral 
industry practices, and advertising for specific products as varied as cigarettes, extension ladders, 
retail foods, and many others. Therefore, the FTC is in a position, in appropriate cases, to cite to 
specific sections of the CFR in its pleadings when alleging that those sections are being violated. 

With respect to the specificity of complaints, 39 CFR Section 952.5 requires the General Counsel to 
state "the facts in a manner sufficient to enable the person named therein to make answer thereto." 
Pursuant to this rule, a typical complaint filed by the General Counsel: 

• identifies the parties responsible for the alleged false representation scheme or lottery; 

• identifies and attaches a copy of any printed solicitations at issue, or describes the oral 
representations typically made by the Respondent(s); 

• alleges that by means of such solicitatbns or other materials the Respondent(s) represent 
partbular facts, "directly or indirectly, in substance and effect, whether by affirmative 
statements, omission or implicatbns"; 

• alleges that the above-described representatbns are materially false; and 

• requests that the Postal Sendee Judicial Officer issue an appropriate false representation 
order and/or cease and desist order against the respondent(s). 

The General Counsel is not required to state precisely which words, phrases or images in a 
solicitatbn are responsible for each alleged false representation. The pleadings must be sufficient 
to give the respondent{s) notice of what solbrtatbns are at issue, and what false representations 
are alleged. The Postal Service Judicial Officer has explained the legal reasoning for this as 
follows: 



10 



60 



In false representation proceedings, the impression conveyed by the total 
advertisement is at issue: 

Advertisements as a whole may be completely misleading although every 
sentence separately considered is literally true. This may be because things 
are omitted that should be said, or because advertisements are composed 
or purposefully printed in such a vray as to mislead." [citing Donaldson v. 
Read Magazine . 333 U.S. 178, 188 (1948).] 

Thus, while portions of an advertisement may be more explicit than others with 
respect to certain alleged representations, the whole advertisement is placed in 
issue under the Donaldson standard. Accordingly, the complaint need not 
identify particular language which is likely to mislead. Indeed, it may not be 
possible to do so where it is the total impression of the advertisement that 
creates the representation. 

Delta Enterprises et al .. P.S. docket Nos. 14/72-14/75 (Judicial Officer Decision July 3, 1984). 

This level of specificKy is consistent with the notice pleading required under Rule 8(a) of the 
federal Rules of Civil Procedure: 

(a) Claims for Relief. A pleading which sets forth a claim for relief, whether an 
original claim, counter-claim, cross-claim, or third-party claim, shall contain (1) a 
short and plain statement of the grounds upon which the court's jurisdiction 
depends. . ., (2) a short and plain statement of the claim showing that the 
pleader is entitled to relief, and (3) a demand for judgment for the relief the 
pleader seeks. . . . 

With regard to the requirements for civil complaints, the Supreme Court has stated: 

[Tlhe federal Rules of Civil Procedure do not require a claimant to set out in 
detail the facts upon which he bases his claim. To the contrary, all the Rules 
require Is 'a short and plain statement of the claim' that will give the defendant 
fair notice of what the plaintiffs claim is and the grounds upon which it rests. 

Leathemian v. Tarrant County Narcotics Intelligence and Coordination unit , 507 U.S. 163, 167 
(1993), guoting . Conlev v. Gibson . 355 U.S. 41, 78 (1957). 

The Federal Trade Commission routinely proceeds against false advertising in district court 
rather than administrative proceedings, and in those cases is required only to file the "notice 
pleading" set out in Rule 8. Thus, as a practical matter the pleading standard for the FTC in 
many cases is the same as that for the USPS. 

In addition, the content of Postal Service complaints substantially complies vtnth the Rules 
goveming complaints filed administratively by the FTC. The FTC Rules of Practice, 16 CFR 
Section 3.1 1(b)(2), require "A clear and concise factual statement sufficient to inform each 
respondent with reasonable definiteness of the type of acts or practices alleged to be in 
violation of the law." We do not read this prerequisite to mean that specific violative language 



61 



of solicitations or advertisements must always be included in FTC complaints. A complaint 
could inform the respondent of the "type of acts or practices alleged to be in violation of the 
law" in precisely the way that the Postal Service does in its complaints. 

Moreover, there can be valid strategic reasons to draft complaints with a broad reference to an 
entire solicitation or advertisement. If every administrative complaint were required to list the 
specific words that allegedly conveyed a false representation, a respondent could make small 
or insignificant changes to his or her solicitations, removing the complained-of words, and then 
claim that s/he was no longer engaging in the complained-of activKy. 

12. Decisions rendered by Administrative Law Judges are subject to limited judicial review 
based upon the hearing record. Please provide the subcommittee a detailed statement 
of the Postal Service's rules and practices relating to the creation of a hearing record 
before an Administrative Law Judge. To what extent are these practices consistent with 
other enforcement agencies, such as the Federal Trade Commission? Are these 
practices more or less restrictive than other agencies' rules of practice? 

ANSWER: The Postal Service's mies are contained in Part 952 of Title 39, Code of Federal 
Regulations, which sets out the Rules of Procedure in administrative proceedings under 39 U.S.C. 
Sectbn 3005. These proceedings are conducted at the first level by an Administrative Law Judge 
and on appeal within the agency by the Postal Service Judicial Officer. The rules provide for the 
filing of an administrative complaint by the General Counsel, an answer within 1 5 days by the 
respondent(s), discovery (sometimes limrted to requests for productbn of documents and requests 
for admissions, but sometimes also including depositions), an evidentiary hearing, the filing by both 
sides of proposed findings of fact and conclusions of law, and an initial decision by an 
Administrative Law Judge. Either side may file exceptions to the initial decision with the Judicial 
Officer. If such exceptions are filed, the Judicial Officer provides an opportunity for reply to the 
exception, and ultimately issues the Postal Service decision. A party may move for reconsideration 
of the Postal Service decision. The record created by this entire process is available to the District 
Court on appeal. 

The Federal Trade Commission Rules of Procedure provide for the filing of a complaint by the 
Commission; an answer within 30 days by the respondent (or a motion for a more definite 
statement within 10 days); a statement by complaint counsel setting forth the theory of the case, the 
issues to be tried, and wrtiat complaint counsel expects their evidence to prove; a similar statement 
with 10 days by respondent; within 10 more days a scheduling conference; within 14 days after that 
a scheduling order; optbnal motbns by either side for summary decision; discovery (including 
depositions, interrogatories, requests for documents and requests for admissions); subpoenas 
requiring the testimony of persons or the productbn of documents in discovery; subpoenas 
requiring the testimony of persons at the hearing; an evidentiary hearing before an Administrative 
Law Judge or by the Commissbn or a member of the Commission; filing of proposed findings and 
conclusbns by each side; an initial decision within 30 days of the filing of the proposed findings; an 
appeal of the initial decision to the Commission wnth 30 days for reply and 7 days for rebuttal; the 
Commissbn's decision on appeal; and motions for reconsideration of the Commissbn's decision 
within 20 days. Commission decisions are appealed directly to the U.S. Court of Appeals. 



12 



4Q-873 0-97-3 



62 



It is drfficuK to say whidi agency's rules are more "restrictive." Clearly, the Postal Service rules are 
more streamlined, providing fewer pre-hearing procedures, less comprehensive discovery, and 
shorter time periods for filing many documents. Sources at the FTC have infomied us that they are 
in the process of reviewing their rules of practice to detennine whether some of those mies should 
be revised. Thus, any comparison of the agencies' rules might best occur after FTC has 
determined whether to revise its rules. 

13. Postal inspectors enjoy sovereign immunity from suits by individuals alleging violation of 
their civil and constitutional rights. Please provide the Subcommittee a memorandum 
setting out the views of the Postal Service regarding what civil remedies, if any, exist for 
individuals who allege violations of their rights by postal inspectors. Please include the 
scope of such immunity as it protects individual postal inspectors and the Postal Service 
itself. 

ANSWER: On November 18, 1988, the President signed into law the Federal Emptoyees Liability 
Refonm and Tort Compensation Act of 1988, Pub. L. No. 100-694, 102 Stat. 4563 (1988) (codified 
in part in various subsections of 28 U.S.C. §§ 2671 ; 2674; 2679). The "Westfall Act, " as H has 
come to be known, amended the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b); 2671-2680 
(1988). Its purpose was to protect Federal employees (including postal inspectors) from personal 
liability for common law torts committed within the scope of their employment. Congress intended 
to remedy the crisis created by Supreme Court cases from Bivens v. Six Unknown Named Agents 
of the Federal Bureau of Narcotics . 403 U.S. 388 (1971) through Westfall v. Enwin , 484 U.S. 292 
(1988), when the Court concluded that absolute immunity was only available to federal officials 
whose conduct was sufficiently discretionary that the threat of personal damages suits could 
reasonably be expected to adversely affect the conduct of public administration. While the Court 
decided that "discretion" was an essential element of the absolute immunity defense, it provided 
little guidance as to the degree of discretion required and concluded Ks opinton with the observation 
that "Congress is in the best position to provide [such] guidance". 

The Westfall Act replaced the Federal common law of absolute official immunity by making the 
Federal Tort Claims Act the exclusive remedy for persons injured by Federal employees' torts. The 
exclusive remedy provision §5, 28 U.S.C. § 2679(b) (1), and the certificatbn and substitution 
provision, §6, 28 U.S.C. § 2679 (d) provide that Federal empbyees shall have absolute immunity 
from suits brought under state law, and that the United States shall be substituted for the employee 
at the eariiest stages of the case. However, it should be noted that the immunity only applies to 
suits against Federal officials arising under state law. Congress expressly provided that the Act 
would not apply to suits against Federal officials for violations of the United States Constitution, nor 
does the Act apply to surts for damages arising from a Federal official's violation of a Federal 
statute. 

The defense of qualified immunity can be asserted when a plaintiff alleges that inspectors 
violated a known constitutional or statutory right and seeks to hold the inspector personally 
liable. The defense of qualified immunity is the product of a series of Supreme Court 
decisions. It seeks to strike a balance between compensating those who have been injured by 
official conduct and protecting government's ability to perform its traditional functions. The 
immunrty acts to protect the public at large, not to benefit individual inspectors. The focus then 
is not only on the applicable law, but on the applicable law relative to the situation or 
circumstances in which the defendant acted, viewed from the perspective of a "reasonable " 



63 



official placed in the shoes of the defendant. The inquiry becomes whether a reasonable 
official in the same circumstances and possessed of the same information as the defendant 
should have known that his conduct would violate the asserted right. 

In summary, postal inspectors have the same immunity as other Federal law enforcement 
officers. Congress has enacted the Federal Tort Claims and Westfall Acts to immunize 
Federal employees from suits arising under state law and within the scope of their 
employment. Constitutional and Federal statutory claims are addressed by the Federal courts 
which, on a continuing basis, interpret the defense of qualified immunity. The process thus 
provides a reference for inspectors to guide their conduct and ensures that remedies exist for 
citizens who allege the misuse of government authority. 

14. The Postal Service is generally required to use U.S. flag carriers to deliver its 
international mail overseas and to pay them in accordance wrth rates set by the 
Department of Transportation. For domestic mail delivery, however, the Postal Service 
can set its own rates it pays air carriers. What is the status of negotiations between the 
Postal Service and the Department of Transportation regarding legislative initiatives 
which would allow the Postal Service to negotiate directly with U.S. airiines for the 
carriage of international mail? 

ANSWER: Postal officials have met with representatives of the Department of Transportation 
(DOT) on several occasions regarding their draft legislation to deregulate the intemational air 
transportation of mail. The Postal Service remains opposed to the draft legislation, principally the 
provision that would require the Postal Service to give absolute preference in the award of contracts 
to U.S. Flag Camers. On March 21 , the Postal Service met with all of its suppliers of domestic and 
intemational air transportation of mail to discuss a variety of service issues, including the 
intemational deregulation of mail. Although camers were reluctant to state their company's firm 
position in an open forum, infomial discussions with them during breaks revealed a positbn of 
opposition and concern. 

The Postal Service is not subject to the provisions of the "Fly America Act"; however, it has 
voluntarily complied with the spirit of the provision for many years. This is since the current 
regulated rate-making environment, as administered by DOT, has provided the Postal Service with 
some measure of protection against monopolistic pricing and anti-competitive practices of U.S. Flag 
Camers in martlets where there is not adequate competition among U.S. Flag Carriers. 

The Department of Transportation desires to discontinue its rate-making responsibilities through 
deregulation, and the Postal Service wishes to obtain the necessary legislative authority to 
competitively contract for this service. To this extent, DOT and the Postal Service are in 
agreement, however, the Postal Service would like to see the requirement for U.S. flag preference 
deleted from the DOT draft. 

We believe that a properly worded deregulation act would be in the best interest of the Postal 
Service and the airtines as well. It would allow the Postal Service to clearly specify in a 
competitive solicitation its requirements for service in specific markets, and would provide the 
airtines the opportunity to offer a price reflecting each carrier's unique capabilities and 
efficiencies. For all the excellent reasons Congress decided to deregulate the domestic air 



14 



64 



transportation of mail, those same reasons are equally applicable, it not more so, to the 
intemational air transportation of mail. As previously mentioned, the Postal Service is In a 
fiercely competitive market with intemational mail, and we are continuing to lose market share 
at an increasing rate. 

If we are to compete effectively, we need the necessary tools that are now available to our 
competitors, including many foreign postal administrations. To elaborate on this last point. 
Royal Mail, United Kingdom's postal administration, like several other foreign postal 
administrations, has established offices in New York. They are seeking what is now our 
outbound business from the United States to London. Because Royal Mail has been granted 
complete authority by its government to contract for this service as it sees fit, they issue 
competitive solicitations for which all carriers, including U.S. Flag Carriers, are invited to submit 
proposals. Under the current legislation, the Postal Service is prohibited from issuing a similar 
solicitation to the same carriers for the same service. While U.S. carriers may offer Royal Mail 
market-based rates, the Postal Service must use the services of a U.S. Flag Carrier at rates 
established by DOT, based on antiquated costs formulas arrived at in a 1978 rate case. 
Further, the U.S. carrier may actually transport the product on a foreign carrier's flight which 
has a DOT approved code share agreement with the U.S. carrier. (A code share agreement is 
one in which the foreign carrier's flight is assigned a flight number and airline code of the U.S. 
carrier, and is treated the same as any other U.S. flight). In addition, the rates established by 
DOT are geographically based, i.e., the same for all of Europe, and are not based on the 
unique conditions in the USA-London market, as most certainly will be the case with proposals 
received by Royal Mail. This is an unfair advantage, and ultimately, will be a major contributor 
to the continued erosion of the Postal Service's international business. 

To this end, the Postal Service is working through the auspices of the Air Transport 
Association to set-up a series of meetings with the U.S. Flag International Air Carriers to 
determine if there is a compromise position both the airlines and the Postal Service could 
agree to regarding the U.S. flag preference issue. We have advised DOT of this process, and 
they have indicated their willingness to consider modifying their draft language with any 
suggested changes with which both the airlines and the Postal Service agree. If our efforts 
with the U.S. airlines are unsuccessful, we will attempt to reach a compromise with DOT. 
Failing that, the Postal Service will be faced with the difficult task of obtaining its own 
legislation or losing its remaining intemational business. 

15. You have testified that this year more than 3,600 additional pieces of automation will go 
on-line. Will this bring you to the target where you had intended to be at this time? 

ANSWER: The original target set by the first Corporate Automation Plan in 1 990 was that all 
letter mail automation equipment would be fully deployed and in operation by the end of fiscal 
year 1995. Beginning in fiscal year 1992, a thorough corporate review of automation was 
undertaken, resulting in an approximately two-year delay in the program, with full 
deployment/operation scheduled for the end of 1 997. 

We are on schedule for that goal since the resumption of the automation roll-out. Roughly 
3,600 pieces of automation equipment are scheduled for deployment this fiscal year; in 
agreement with the schedules in our DARs and contracts. 



15 



65 



16. How many postal stores do you have at the moment and how many do you intend to 
build in total? What service do these stores provide? Some private companies have 
criticized the Postal Service for providing these services in direct competition with private 
industry. For instance, the Postal Service's "pack and send" program competes directly 
with franchised packing services and other small business. Is the provision of this 
service consistent with the Postal Service mission? In what way? 

ANSWER: There are 259 facilities in operation with open merchandising for customers to serve 
themselves. We are opening an average of 15 postal stores per month. 

Package shipping is a core function of our business. As with all core functrans, we focus on the 
needs of customers who choose us for service, including those customers who would like help in 
preparing their packages for mailing. 

We recognize that a wide variety of other firms offer alternatives to virtually all of the servK^s that 
we provide, and we appreciate the complementary role that private retailers play in package 
mailing, including offering a range of service providers for customers who want options. However, 
customers who choose to come to a post office for service should have fundamental mailing 
conveniences available to them, too. Conveniences such as package preparation services are 
intended to make Postal Service customers' lives a little easier and to make our mailing services 
more useful and viable. This is fully consistent with our basic mission. 

17. In Mr. Runyon's prepared testimony, he notes that the Postal Service is expanding many 
international services, such as package consignment and Global Priority mail. The GAO 
reported to me in March in its evaluation of international mail that some jService 
competitors have said that the Postal Service benefits unfairly from its status as a federal 
entity and its exclusive access to foreign postal administrations as the sole U.S. 
representatives to the Universal Postal Union. For example, it has been alleged that the 
Postal Service underprices some international postal services. Given such concerns, 
why shouldn't Congress authorize and require the Postal Rate Commission to oversee 
international postal rates? 

ANSWER: The Postal Reorganization Act gave the USPS a degree of flexibility in the 
international area, subject to the requirement that prices be set to cover costs, make a contribution 
to overhead, and avoid any question of cross subsidy of domestic monopoly services. We take that 
responsibility seriously. 

The intemational area is highly competitive. Competitors include domestic companies such as 
Federal Express and UPS, foreign companies such as TNT Mailfast (a company jointly owned by 
TNT Ltd^of Australia and the postal administrations of Canada, France, Gemriany, the Netheriands, 
and Sweden), SAS and KLM airiines, and the postal administrations of the United Kingdom, the 
Netheriands, Belgium, and Denmari^. They have all the flexibility necessary. If we are to maintain a 
viable USPS presence, we must have the ability of our competitors to respond to maricet changes. 
To subject our intemational services to an unnecessarily cumbersome process would disadvantage 



66 



the Postal Service and equally Importantly, place the competitors who made the charges in the 
GAO report at a distinct advantage. As the Court of Appeals for the Third Circuit said in upholding 
the Postal Service's flexibility to negotiate customized services and prices with it customers, 

In enacting the [Postal Reorganizatbn Act], Congress repeatedly explained the 
fundamental reason for the dramatic changes mandated by the Act; it wanted the 
Postal Service to operate less like a bureaucratic agency and more like a business. 
The relevant committee reports repeat this principle again and again. See, e.g ., H.R. 
No. 1104, 91st Cong., 2d Sess. (1970), reprinted in 1970 U.S.C.C.A.N. 3649, 3600 
('The Postal Service is a public service but there is no reason why rt cannot be 
conducted in a businesslike way and every reason why it should be.") 

While Congress hoped to achieve efficiency in postal operations by enacting the 
PRA, it also sought innovation. As the House Report noted, the Act "envisions a 
national postal service that is forever searching for new martlets and new ways by 
which the communications needs of the American people can be served." H.R. No. 
1104, 91st Cong., 2d Sess., reprinted in 1970 U.S.C.C.A.N. at 3668-69. 

UPS Wortdwide Forwarding, Inc. v. U.S. Postal Sen/fce . 66 F.3d 621, 638 (3d Cir. 1995)(footnotes 
omitted). 

In keeping with this direction, the Postal Sen/ice last year created an intematk>nal business unit to 
better manage and promote its international business. This new unit, with new, customer-driven 
products such as Intematiorial Package Consignment servk:e and Gtobal Priority Mail, will more 
effectively meet the international mailing needs of the American public. Indeed, we expect the IBU 
to help American businesses to "go gtabal," with all the benefits of greater exports and increasing 
trade. 

It should be noted that the controls exercised over services protected by the Private Express 
Statutes are more that adequate to assure that intematbnal servbes are not supported by 
protected services. In fact, the Postal Service believes there is a need to simplify controls in the 
latter area. 

18. According to the Service's new Comprehensive Statement to Congress, the recent 

collective bargaining efforts with the American Postal Workers Union resulted in about 90 
tentative agreements being reached during negotiations and that these were adopted 
and made part of the new agreement. This seems to be quite an extensive number of 
agreements; is it? What are the types of issues that you and the APWU were able to 
reach agreement on? 

ANSWER: Yes, 90 agreements is an extensive number. However, the majority of the 
agreements are essentially cosmetic in nature. By the end of negotiations, management had 
submitted 18 main table and 12 craft table proposals, and the union had submitted 81 main table 
and 67 craft table proposals. The agreements which were cosmetic, involved language changes 
made necessary by the change from a contract covering two unbns to a contract covering the 
American Postal Workers alone. However, a number of the agreements revised long existing 
language and processes that were confusing and cumbersome. 



67 



We readied agreement on several provisions that improved our grievance/arbitration procedures. 
With the recognition that the parties need to take more responsibility for their actrans and decisions, 
and that we needed a stmcture that encourages problem solving at the level where a problem 
arises, we agreed to explore altematlve dispute resolution procedures to streamline the process, 
facilitate resolution at the lowest possible steps and avoid constant repetition of the same 
complaints. 

We expanded our local Implementatbn period, a time for the local parties to discuss 22 specific 
items affecting the local parties. The expansion of the implementation period provides flexibility in 
scheduling, thereby allowing district labor relations offices to devote appropriate time and attentbn 
to the process. 

We also reached agreement on application of seniority provisions which eliminates the confusion 
caused by different seniority provisions in each of the four crafts represented by the American 
Postal Workers Unions. 

In our clerk craft article we were able to agree on an in-depth question and answer document that 
addressed more than 170 most frequently asked questions. 

19. The new comprehensive statement declares that "due to the limit imposed on Executive 
Schedule I salaries by the Postal Reorganization Act, pay and benefits for Postal Service 
officers and some key executives fail to meet private sector comparability standards." 
Please explain this statement. 

ANSWER: The cun-ent Executive Schedule I limit is an annual salary of $148,400. There are a 
variety of sources of private sector salary data that show this amount to be a fraction of the total 
compensation provided to private sector officers and executives. Typical private sector 
compensation for chief executive officers includes base salaries, cash incentives, and stock optk^n 
arrangements that provide well over a million dollars a year. 

The $148,400 limit compresses not only the top officers' pay, but that of our key executives' as well. 
For example, our 15 Large District Managers of Customer Servk:es supervise 6,000 to 10,000 
empbyees in the daily delivery to about two millbn locations, and generate about a billion dollars of 
revenue per year. A private sector company would pay these positions $160,000 to $200,000 a 
year in base salary, and an additional $40,000 in cash incentives, not to mention lucrative stock 
optbn plans. By comparison, our large District Managers average $105,000 a year, have received 
cash incentives of up to $12,000 only recently, and have no stock options. 

Comparability data indicates that if we paid at the martlet average, at>out 125 of our 690 officer and 
executive posKions would have annual base salaries over the $148,400 ceiling. 



18 



68 



1. You indicate the Postal Service is growing in only one of its six product lines. What are 
those six, and which one is growing? 

ANSWER: The six businesses we are refening to are: (1) Correspondence and Transactions; (2) 
Publicatbns; (3) Advertising Mail; (4) Expedited Services; (5) Basic Package Delivery Services; and, 
(6) International Services. 

Advertising Mail, as a share of the total advertising market, has been Increasing, due to the 
effectiveness of the service in reaching targeted customer segments and generating responses for 
those establishments choosing the mail as their advertising channel. 

2. You paint a dreary picture for the future of your First-Class mail business. If it is truly 
threatened, shouldn't you move to reduce prices for First-Class mail to meet the 
competition head on and perhaps improve your bottom line by making room for some of 
your more robust product lines such as advertising mail? 

ANSWER: First-Class Mail is indeed truly threatened by altemative forms of communication, such 
as facsimile, e-mail, electronic data interchange, and electronic bill payment services. However, 
price is only one dimension of customer need. Focusing on price alone is a mistake. The value of 
our First-Class Mail service to our customers comes from a combination of affordability, timely 
delivery, consistency, ease of use, and accuracy. Furthennore, since different customer segments 
use the mail for different reasons, not only do their interpretations of the common values differ, they 
may also have other unique needs we must address if we are to compete effectively. 

Traditionally, many people have assumed that mail is an undifferentiated commodity service. 
However, the future market environment of the Postal Service indicates that we must manage a 
portfolio of very large and complex business segments. Each of those segments have different 
levels of importance, and varying degrees of threats and opportunities, and we will have to manage 
accordingly. The Postal Service is just beginning to design, position, price, and promote its 
products and services according to customer needs in competitive markets. Along wflth the threats, 
there are opportunities, if we are not constrained from responding to the threats and allowed the 
flexibility to meet customer needs. 

3. The Postal Service provides mail collection, transportation, processing and delivery 
services. Your statement says everything except delivery is "on the table" for contracting 
out to reduce costs. The postal service has committed a multibillion dollar investment in 
automation mail processing equipment. How does such an investment square with plans 
to contract out your mail processing activities? 

ANSWER: The Postal Service is committed to doing all it can to hold down costs and postage 
rates. Our customers deserve and expect postal management to aggressively pursue cost 
containment opportunities, and we take that responsibility very seriously. The Postal Sen/ice has 
invested a good deal in our automation program and it has paid off very well. Were it not for 
automation, postal costs and. thus, postage rates, would be substantially higher than they are 
today. We remain committed to automation and feel that we can continue to capture the savings it 
provides while, at the same time, look for savings through outsourcing. 



19 



69 



4. Expenses are up and revenue is down. Specifically, in what areas have expenses 
increased over the past two years? What programs and initiatives have you put in place 
to reduce these expenses? Where are you losing revenue? 

ANSWER: With respect to revenue loss, we have not lost revenue over the past two years. 
Total operating revenue has increased 10.0 percent or $4.9 billion dollars from fiscal year 1994 
to fiscal year 1995. 

Total expenses, including interest, grew 4.5 percent from fiscal year 1994 to fiscal year 1995. 
The largest growth in expenses has been in salaries and benefits. This growth amounts to 
$2.3 billion or 5.9 percent. Contractual and consultation pay increases account for $1 .5 billion 
or 3.9 percent of this increase. Of the $1 .5 billion, $800 million relates to an adjustment in 
1 994 which lowered our long-term liability estimate for workers' compensation and 
consequently lowered our fiscal year 1994 expense by this amount. The rest, $800 million or 
2.0 percent, is caused by the increased usage of employee workhours. Offsetting this 
increase is a decrease in non-personnel and interest expense cost of $101 million. 

A 1.3 percent increase in volume and a 1.5 percent increase in possible deliveries was the 
cause for the employee workhour increase. These two items constitute the majority of our 
workload. 

In order to reduce future growth in workhours, several productivity programs have been 
implemented. These include additional automation equipment such as Delivery Bar Code 
Sorters and Customer Service Bar Code Sorters. Other programs include Integrated Mail 
Handling System, Flat Mail Sorter and the Remote Bar Coding System. 

5. To what do you attribute the fact that we now have more postal employees than when you 
took over as Postmaster General? How is automation impacting the increase in postal 
employees. 

ANSWER: From the time that I was appointed Postmaster General until now, we have had a 
significant increase in both mail volume and in the delivery points that we must service. 
Delivery workload growth associated with the increase in delivery points has required an 
increase of over 14,000 letter carriers. Workload related to mail volume increases has 
accounted for about 35,000 additional positions. In order to take full advantage of our 
automation equipment, we have set up Remote Encoding Sites. These srtes place barcodes 
on mail that cannot be processed through our optical character readers. The work at these 
sites, which was previously contracted out, is now done by postal employees, most of whom 
are non-career employees. This has added an additional 20,000 employees. Also, the 
increasing amount of automation equipment has required an additional 2,100 maintenance 
positions during this period. Our increased emphasis on sen/ice for our customers and the 
marketing of our products added another 5,400 window clerk positions. We continue to 
emphasize our rehabilitation program in an effort to remove previously injured employees from 
the workers' compensation rolls and return them to the rolls of the Postal Service in productive 
positions. This has accounted for more than 1 ,800 employees. 



20 



70 



Concerning the impact of automation on employment, current estimates indicate that through 
1995, automation enabled the Postal Service to avoid labor costs in directly affected 
operations totaling about $6.5 billion. These expenses would have been incurred without 
automation, relying only on manual and mechanized operations. On an average annual basis, 
a cost avoidance of this magnitude translates into over 18,000 workyears. That is, 18,000 
additional worl^years each year would have been required to process the volumes of mail 
handled during the last six years. Further, even including non-direct labor in the estimate, total 
avoided costs were over $3 billion through 1995, or about 10,000 workyears that the Postal 
Service did not need. Over the longer term, automation is anticipated to help us avoid over 
$15 billion in costs through 2005, as we complete deployment over the next several years and 
continue to reap the benefits. 

6. In an effort reduce union labor costs, you plan to contract out certain operations to the 
private sector. How much money will you save and how many employees will be affected? 
Exactly which operations and or services are under consideration or slated to be 
contracted out? 

ANSWER: The Postal Service is obligated to do all it can to hold down costs. In order to keep 
postage rates stable, we must explore every opportunity that can produce cost savings. We have 
no predetermined plans for outsourcing; rather, we will carefully examine individual opportunities in 
order to ensure that the best interests of our customers and employees are served. In the months 
to come, we expect to examine a number of different outsourcing possibilities. Each will be 
scrutinized ctosely in order to ensure that all relevant factors are considered before final decisions 
are made. 

7. You have indicated your intent to hold the price of First-Class mail to 32 cents till the year 
2000. If this is not a publicity stunt, just how do you-in the face of rising expenses and 
revenue being down realistically-expect to maintain the price of a First-Class stamp at 32 
cents? 

ANSWER: Though we have experienced a slowing of revenue growrth, we have initiated a 
number of strategic initiatives intended to improve revenue growth and control costs. 

• We are moving fonward with CustomerPerfectUny, a process improvement strategy that will 
make the Postal Service more responsive to customer needs by better aligning our internal 
operations and measurement systems with customer expectations. 

• Classification reform is underway. In addition to generating additional volumes, new 
incentives for customers to make mail more automatable will allow the Postal Service to 
handle larger volumes at lower costs. 

• Our leadership team recently endorsed a number of specific cost containment and revenue 
generation initiatives that will produce a third consecutive fiscal year with positive net 
income in fiscal year 1997. 

• I have challenged postal leadership to develop a comprehensive strategy to improve 
contribution through increased revenue, productivity improvements and overhead 
reductions. 



21 



71 



These efforts represent steps taken thus far to insure continued financial success through the 
year 2000. As the markets in which we compete change, we will continue to develop 
strategies that capitalize on emergent opportunities, and to look for new ways to improve the 
efficiency of our operations. 

8. Please provide for the record a description and amount of total monies expended on postal 
initiatives begun and abandoned since you took over as Postmaster General. Please 
provide for the record a description and amount of total monies expended on postal 
initiatives in operation or scheduled to begin operation since you took over as Postmaster 
General? 

ANSWER: There has been only one initiative. Neighborhood Mail, that I started and 
subsequently decided not to pursue. We spent well under $300,000 on the project, primarily 
to study the feasibility of the concept. 

The following table provides the requested information on the major initiatives started since I 
came on board: 



POSTAL SERVICE INITIATIVES STARTED SINCE 1992 | 


Initiative 


Description 


Spending Since 
Project Start 
($ in millions) 


Associate Office 
Infrastructure 


An R&D project to develop an information 
technology infrastructure for smaller postal 
facilities in support of retail, delivery and 
administrative processes. 


$1.0 


Corporate Call 
Management 


An R&D project designed to use learning 
centers to aid in the identification of 
successful practices, as well as required 
system and software needed to establish a 
national service center network to process 
customer telephone inquiries. 


$7.6 


Credit/Debit Card 
Acceptance 


A program to install a credit/debit card 
acceptance and processing system in post 
offices nationwide. 


$16.6 


CustomerPerfect! 


A structured process for developing and 
implementing new ways of managing the 
Postal Service that are driven by and 
focused on the needs of customers. 


$2.3 


Fastnet 


A multi-city pilot to test next-day delivery of 
4th class parcels originating and designating 
within a local area. 


$11.6 



22 



72 



International 
Business Unit 


A vice president-level unit established to 
provide a single point of focus and 
responsibility for developing and managing 
strategic business plans for service 
improvement and new product development 
in the international mail market. 


$9.8 


Pack and Send 


A value-added service that allows customers 
to bring items to selected post offices and 
have them packaged and mailed. 


$1.9 


Phone Card 


A joint project with American Express to 
market a stored value long distance 
telephone card. 


$0.5 


Priority Mail 
Redesign 


Funding for ten pilot sites to test benefrts of 
providing expedited processing to the Priority 
mailstream in dedicated facilities. 


$4.2 


Technology 
Applications 


A vice president-level unit established to 
evaluate the integration of technology based 
products and services to meet diverse 
customer needs. Currently more than two 
dozen applications are being explored, such 
as electronic commerce services (electronic 
postmark); kiosks that connect government 
agencies to their customers; and new 
products development (e.g. hybrid mail, reply 
card scanning). 


$41.6 


Track and Trace 


A project to develop a system to track the 
progress and location of accountable mail 
pieces from origin to destination; to provide 
tracking information and proof of delivery to 
customers and to give operations personnel 
real-time processing and distribution 
information to manage mail flow. 


$5.0 



73 



9. Under what conditions would you \\ke to see "Courtesy Envelope Mail? 

ANSWER: This question, in effect, was addressed by Postal Service witness Alexandrovich in 
Docket No. MC05-1 . who stated the following in his rebuttal testinrrany regarding the OCA's CEM 
proposal: 

If it could reliably be shown that the Postal Service faces the bss of a significant 
share of its market for the delivery of bill paynrients, and that the introductbn of a 
tower rate for kjwer cost bill payments would potentially altow a substantial portion of 
such tosses to be avoided, the Postal Service would in all likelihood be qurte 
interested in exptoring opttons atong those lines. Even in that situatton, however, it 
is probable that the Postal Service would maintain its preference to avoid the 
administratton and enforcement problems associated wrth any proposal which 
requires household mailers routinely to choose between stamps of different 
denominations for their regular letter mail transactions. If and when a sound 
business case can be made that the Postal Service needs to deaverage rates for 
household mail, I believe that an approach in whtoh payment of a reduced rate is 
handled by means other than a direct application of a discount stamp by consumers 
wrauld be preferable to the OCA's CEM proposal, with Ks intrinsto administration and 
enforcement problems. 

Alexandrovtoh Rebuttal Testimony (USPS-RT-7) at 13-14. As demonstrated by witness 
Alexandrovich, no such sound business case has yet been presented before the Commisston. 

10. Please explain benefits consumers will reap from the mail classification restructuring? 

ANSWER: First of all, classificatton reform is designed to make our service offerings nrare 
competitive, parttoularty in those areas where we expect to face the nnost intense competitive 
pressures in the future. If we are successful in achieving this goal, mail volume growth should be 
enhanced, and the addittonal revenues will altow us to postpone future rate increases for all users, 
including consumers. 

Also, a tonger-term consumer benefit was included in the recent Classification Reform proposal, 
and it will be implemented on January 1 , 1997. Consumers often utilize enctosed reply envelopes 
or cards to pay bills, but not all of these reply pieces are prebarcoded by the bill mailer to allow the 
lowest cost processing and delivery. Under Classificatton Refomi, First-Class mailers who enclose 
reply pieces in their automatton rate bill mailings must properly prebarcode these pieces. This will 
reduce costs for the consumer mailstream, which should mitigate future rate increases for 
consumers. 



24 



74 



1 1 . Please provide a listing of the numbers and location of casual and temporary employees? Is 
this an increase or decrease since January 1995? If increase, why? 



ANSWER: 



NON-CAREER EMPLOYEES 
(by location) 

as of April 1996 
REMOTE ENCODING SITES 



Non-Bargaining Temporary 


1 


Transitional 


18.951 


TOTAL 


18,952 


MAIL PROCESSING PLANTS 




Casual 


16,577 


Non-Bargaining Temporary 


2 


Transitional 


10,362 


TOTAL 


26,941 


HEADQUARTERS/AREA/DISTRICT OFFICES 




Casual 


483 


Non-Bargaining Temporary 


26 


Transitional 


244 


TOTAL 


753 


POST OFFICES 




Casual 


9,152 


Non-Bargaining Temporary 


558 


Rural Subs/RCA/RCR/Aux 


51,106 


PM Relief/Leave Replacement 


12,770 


Transitional 


6,945 


TOTAL 


80.531 


GRAND TOTAL 


i27.tn 



NON-CAREER EMPLOYEES 
(by category) 

Casual 26,212 

Non-Bargaining Temporary 587 

Rural Subs/RCA/RCR/Aux 51,106 

PM Relief/Leave Replacement 12,770 

Transitional - Non-REC Sites 17,551 

Transitional - REC Sites 18.951 

Total 127 177 



75 



Total non-career employees increased between January 1995 and April 1996 by 4,339. Non- 
career employees in Mail Processing Plants, Headquarters/Area/District Offices, and Post 
Offices reduced while Remote Encoding Sites increased. Remote Encoding Sites place 
barcodes on mail that cannot be processed through our optical character readers. The work at 
these sites, which was previously contracted out, is now done by postal employees, most of 
whom are non-career employees. As more sites are created, more employees will be required. 
These sites are a part of the automation plan to increase productivity. 

12. Please provide for this committee copies of "On Site Sun/eys" prepared by the Diversity 
Department for 1994 and 1995. Please provide for this committee the reporl prepared by the 
Postal Service Legal department (Thomas Pigford in Tennessee) at the request of David 
Bakke, Southeast Area Vice President of Operations, whteh reviewed the "On Site Sun/ey" 
report prepared by the Diversity Department on the Mississippi postal facility in 1995. Include 
all exhibits referred to in the report and copies of the correspondence refen^ed to as the 
"Mississippi Burning Letters." 

ANSWER: In accordance with previous action taken in response to requests for the release of 
these documents under the Freedom of Infonmafton Act, the Postal Servce respectfully declines to 
provide them for the following reasons: 

(1) these reports are internal agency documents that are predecisional and deliberative; 

(2) they are communications between Postal Sen/ice attorney and postal management and thus 
are protected by attomey-dient privilege; 

(3) they may relate to pending or prospective litigation and thus are protected by attorney work 
product privilege; and 

(4) release of these documents would violate the privacy interests of individuals involved and 
referred to in them. 

13. The Postal Service has undertaken a major advertising campaign with regard to "Priority 
Mail." Provide the actual dollar amounts spent and allocated for this particular campaign. 
Provide the exact dollar amount spent and allocated for the 1 996 U.S. Olympte sponsorship. 
Provide the exact dollar amount spent and allocated for the entire postal sen/ice advertising 
budget. Provide 1 995 and 1 996 figures. Provide the exact dollar amount spent and allocated 
for advertising with ethnic minority businesses-1994, 1995, and 1996 figures. 



26 



76 



ANSWER: 

• The allocation for the Priority Mall campaign is $31 million for Fiscal Year '96. To date $29.9 
millbn has actually been committed to production and media expenses. 

• The U.S. Postal Sen/ice is not a sponsor of the 1996 U.S. Olympics. 

• ■ The Postal Service's corporate advertising budget for Fiscal Year '95 w/as $95 million, the 

budget for Fiscal Year '96 is $143 millbn. 

• During FY '94, the Postal Service allocated and spent $2.6 million in ethnic mariceting. During 
FY '95, the Postal Service allocated and spent $1 .6 million in ethnic mari^eting (predominantly 
Hispanic). In FY '96 the Postal Service has allocated $10 millbn towards Ethnic Marketing 
through the Corporate Advertising budget. Year-to-date we have spent $3.2 million. 



27 



77 

Mr. McHUGH. Thank you, General Runyon. 

Let me just ask a couple of quick questions, and then we will go 
to the other subcommittee members, and then come back. 

Taking, General Runyon, the last part of your testimony first, be- 
cause it is obviously a topic that this subcommittee has been in- 
volved with, and that you have repeatedly discussed and ex- 
plored — the issue of flexibility. During last year's oversight hear- 
ings there was some discussion before this subcommittee, particu- 
larly from Chairman Gleiman, that there may already exist a rath- 
er wide range of flexibility options that, for whatever reason, had 
not been exercised. 

Last April, you filed with the PRO, a rulemaking regarding some 
procedural reforms in seven areas. I wonder if you could update the 
subcommittee as to what kinds of things you thought you could do 
within that context, administratively, and where the rulemaking 
may stand right now. 

Mr. Runyon. On those seven reforms, the PRC made some rec- 
ommendations on market tests, provisional new services, minor 
changes in mail classification cases, and multiyear financial test 
periods. However, there were some problems in what we received. 
We felt they were incremental reforms and really didn't go as far 
as we needed to go. They still require a lot of detailed data from 
us. And the maximum limits on duration of some of the things that 
we asked for — we asked for 60 days and got 90; we asked for 90 
and got 120. 

There were three things they didn't recommend on that were 
really very important to us. One was rate bans for competitive 
services; another was negotiated service agreements, that's volume 
discounts with people; and limited scope rate cases, where we go 
in for a rate change on one particular item without opening up the 
whole thing. 

So that's about where we stand on those seven now. 

Mr. McHuGH. When you say they didn't rule on those three, they 
are still outstanding? They are still under consideration, or they 
were rejected? 

Mr. Runyon. It is my understanding that they are still outstand- 
ing; yes, sir. 

Mr. McHuGH. OK. You mentioned CustomerPerfect!, and you 
talked about how that is your future administrative approach. How 
is that working with respect to its implementation amongst the 
work force? Has there been cooperation on the implementation of 
that? 

Mr. Runyon. Well, first, our CustomerPerfect! system is based 
on the Baldrige principles. There are 27 criteria, and we're trying 
to put all those criteria in. We are working that down through the 
management, and we're getting into the work force now. Part of 
that is some training programs, and we've had some reticence on 
the part of some of our unions to participate in those training pro- 
grams. So I don't think it is working as well as it should be. 

Mr. McHuGH. Well, as an extension of that, last year we had a 
lot of discussion, including talks v/ith the union leadership when 
they appeared before the subcommittee, regarding your proposal 
for a labor-management summit. The unions, or at least three of 



78 

them, I believe, declined your invitation because of the status of 
contract negotiations. 

It is a year later. We talked 12 months ago about you reissuing 
that invitation. Where does that stand? 

Mr. RUNYON. We have reissued that invitation. We have had ac- 
ceptances from two of the three. The American Postal Workers 
Union and the Letter Carriers Union have now accepted and will 
come to that meeting. We would expect that the Mailhandlers 
would come, although they are still in arbitration, but we rather 
think that they will. We haven't received assurance of that. We're 
getting a person to facilitate those meetings for us, and we're in the 
process of setting a date and will have those meetings with all 
seven, hopefully, very shortly. 

Mr. McHuGH. Would it be reasonable to assume that your imple- 
mentation of the Baldrige principles, your CustomerPerfect! pro- 
gram would be a topic of discussion in those meetings? 

Mr. RuNYON. It certainly should be; yes, sir. Because that's the 
way we intend to manage the organization, and we need to work 
with our unions and associations to have buy-in on the way we are 
managing the business. 

Mr. McHuGH. Well, we do have a number, obviously, of other 
Members. As is the custom, we will rotate between sides. So I 
would yield to the gentlelady from Florida, Mrs. Meek. 

Mrs. Meek. Thank you, Mr. Chairman. 

Mr. Runyon, it's good to see you again. You said in your overall 
comments that the overall communications market is going by dou- 
ble digits while the Postal Service is not a comparable kind of 
growth. Which of the six product lines that you mentioned in your 
testimony is not doing well? You mentioned that, of the six lines, 
I think, you mentioned that one of them isn't doing as well. 

Mr. Runyon. Well, actually, five are not doing well; one is doing 
well. The one that is doing well is the advertising segment of our 
market. It's doing well. Our correspondence and transactions, 
which is first-class mail, is down. Our expedited mail, which is ex- 
press and priority mail, is down. Our packages are down. Our 
international is down. And our publications are down. So we have 
five out of the six that actually we are losing market share, and 
only one, in advertising mail, are we actually gaining share. 

Mrs. Meek. Well, are you examining that? Are you looking into 
how you can make up for that loss? 

Mr. Runyon. Yes, we certainly are. For example, in inter- 
national, we have reorganized our international organization, to- 
tally. We have added people into that organization. We are getting 
very proactive in going after international business. There, though, 
we do have our hands tied somewhat in that the cost of air trans- 
portation for international is a lot more than our competition has 
to pay. 

The cost of our payment to airlines — which, you know, all inter- 
national mail, if it's going to be on a timely basis, goes by air — is 
determined by the Department of Transportation. They would rath- 
er not do it. As a matter of fact, the Secretary of Transportation 
has requested that they be taken out of that business. That has to 
happen legislatively, and we would like to see that happen. It 
would help us be more competitive. 



79 

But we are coming out with new products like worldwide priority 
mail and other things of that nature, to become more competitive, 
and I think we're going to see that turn around some. The product 
that we have for Japan now, in a joint operation with L.L. Bean, 
where people from Japan can order from L.L. Bean and we can 
ship that to Japan in 5 days, and clear through customs in that pe- 
riod of time, is a good service. We're now going to be looking at put- 
ting that in Canada and in Great Britain soon, and we're going to 
be looking to other countries to do that, too. 

So that's a good business for us, and I think it will help us in 
the international area. 

Mrs. Meek. If I may go a little bit further, General Runyon, is 
my assumption correct that you are having more than, what I say, 
your share of problems with the work force and the unions? If so, 
why? And if so, what steps have you taken to bridge that gap with 
the workers? 

Mr. Runyon. Our grievances over the past 3 years have contin- 
ued to increase. We are continuing to try to work with our unions. 
We signed an agreement with one of our unions that we would 
work together jointly and try to resolve these problems, but they 
haven't been resolved. We have asked for this meeting with all four 
of our unions and three organizations, which was delayed, as the 
chairman indicated, for some time, because we were in negotiations 
with the unions on the contract, at the end of the 4-year period. 

That is now settled with three of our unions; one is still not set- 
tled. But we do expect that meeting to take place fairly soon, and 
we want to go to work on that and work on the kinds of problems 
that GAO said we should be working on. And we're going to do just 
that. 

Mrs. Meek. Thank you. 

Mr. Runyon. You're welcome. 

Mr. McHuGH. The gentleman from South Carolina, Mr. Sanford. 

Mr. Sanford. One more question for me, Mr. Chairman. 

Mr. Runyon, if you were to break down the — I know it varies by 
different product lines — but, roughly, fixed costs versus variable 
costs, with your business, have you looked much at that? Would 
you have a rough ballpark? 

Mr. Runyon. I'm sorry. The sound system — I'm having a little 
problem. 

Mr. Sanford. I'm sorry. Fixed costs versus variable costs for the 
Postal Service. 

Mr. Runyon. You mean what percent is one and the other? 

Mr. Sanford. Yes. Rough. Ballpark. 

Mr. Runyon. Mike, I'd have to ask you to answer that. 

We don't use normal accounting principles in the Postal Service, 
and it's not what I'm used to having. 

Mr. Sanford. Right. 

Mr. COUGHLIN. I'm going to speculate a little here, because there 
are some terms of art within the ratemaking process, such as 
"fixed" and "variable" and "long-run variable", those types of 
things. My recollection is, between attributable and institutional, it 
runs about 65/35; 65 attributable to classes of mail, 35 to institu- 
tional costs, or overhead, is another phrase for it. 



80 

In terms of the direct versus indirect, it's a different kind of a 
ratio, but I just, frankly, don't remember it. And I would be reluc- 
tant to give you a number off the top of my head. It would be better 
if we provided it to you. 

Mr. Sanford. That would seem to make sense to me, in ballpark 
terms, 65/35. I might have even guessed it to be a little bit lower. 
It would seem that a lot of the fixed costs are paid for. A building 
is there, a piece of equipment is there, given, I guess, the way the 
accounting structure works with the post office. 

Mr. COUGHLIN. Congressman, if I could. 

Mr. Sanford. Sure. Yes. 

Mr. COUGHLIN. I want to be careful about that number. The 65/ 
35 is not really fixed versus variable. That's attributable. These are 
costs that are attributable to a specific class of mail and those that 
aren't; 35 is the institutional or overhead costs. And there are dif- 
ferences between fixed and variable, and this institutional and at- 
tributable. 

Mr. Sanford. What I'm getting at, though, is, if it were 65, be- 
cause — fixed versus variable — the ratio falls below the 50 percent 
mark, fall-off in volume really wouldn't affect you that much. 
Therefore, the concerns you had, in terms of volume, I was just 
wondering, if much of your cost factor is variable, a decrease in vol- 
ume isn't going to affect business that much. Why is this as bad 
as — I mean, you were very concerned about the 638 million fewer 
pieces of mail, but if most of your cost is variable, it shouldn't real- 
ly matter that much. 

Mr. RUNYON. Well, most of our cost is not variable. 

Mr. Sanford. OK. So the 65 percent number is probably not 
right. 

Mr. COUGHLIN. That's true. You have to remember, when volume 
falls off, we still have 200,000-some— actually, almost 300,000 de- 
livery routes, between city and rural, they get paid for 8 hours a 
day whether thej^ve got 10 pieces per delivery or 2 pieces per deliv- 
ery. We've got roughly 40,000 retail units out there that operate 
every day, without regard to the volume of mail — in the short 
run — without regard to the volume of mail that goes through them. 
And there are other costs like that. 

So when volume begins to stabilize or fall off for us, it does take 
us a considerable amount of time to adjust the system. There are 
some short-term things we can do, but we have a real problem with 
that. 

Mr. Sanford. What could be done, from a reform orientation, 
that would make the Postal Service more secure against competi- 
tive threats by making more of the costs variable? For instance, 
you mentioned route carriers, whether they deliver 1 piece of mail 
or 100 pieces of mail, are paid the same price. Are there things 
that could be done that, again, would make your costs more vari- 
able and therefore insulate you from that competition? 

Mr. COUGHLIN. A lot of that requires work through the collective 
bargaining process, under the current statute. That's where most 
of that kind of work would have to be worked out and ironed out. 

Mr. Sanford. Thank you, sir.I21Mr. McHugh. Let me foUowup, 
in a way, with what Congressman Sanford was suggesting. Have 
you had an opportunity to look at this loss of market share, to the 



81 

extent that — how much of it is being lost to other hard mail com- 
petitors — theoretically, something you could get back — versus how 
much is being lost to electronic transmission, which, at least in the 
current structure, is something that's going to be lost forever? 

Mr. RUNYON. Well, in the first-class mail, a lot of that is to e- 
mail, fax, and we're thinking the Web is going to come in and get 
some of that, too. So that's quite a large portion of that. Things like 
priority mail, we're looking at how we redesign that, and we are 
in the process of redesigning priority mail, to make us more com- 
petitive. 

We have to have a good, solid, 2-day delivery capability, at a 
high 90's percentage rate, in order to be competitive. We're not 
competitive without that. So we're changing our system to make 
that more competitive. So that's one of the things that we can do 
there. 

In the international area, we need one change, in the way we set 
rates, but then, outside of that, we just need to go do our business 
and get in the international mail, and go at it hammer and tong. 
What's happening now, we have people from overseas — there are 
four posts now that are in this country, that are taking our mail 
and delivering it overseas at about one-third to one-fourth the price 
that it costs us. 

So we're not competitive there, but that can be overcome through 
legislation. And, as I say, the Secretary of Transportation would 
like to see that happen. So those are some things that we're looking 
at and we know that we can do. 

Mr. McHuGH. Well, let's focus on international mail for the mo- 
ment. I think, if I were to play devil's advocate, or if I wanted to 
bring forward a number of people who may or may not be in this 
room, but I think we could get to them pretty quickly, they would 
say, if there is an area where you have a pretty good amount of 
flexibility right now, it's in the area of international mail. You don't 
have to go to the PRC, for example. 

Mr. RuNYON. Right. 

Mr. McHuGH. And yet, by your own admission, you're being 
beaten competitively by others. 

Mr. RuNYON. Right. 

Mr. McHuGH. How do you reconcile that statement with your 
competitive position? 

Mr. RuNYON. We were not paying attention to the international 
mail. It's $1.2 billion a year, which is small in comparison to the 
total amount that we do, and we didn't pay good attention to it. We 
are now, and we're going to see that increase from $1.2 billion to 
$3 billion by the year 2t)00. So we're going after the business, using 
all the business principles and practices that we know how to do. 

We're going to turn it around. We don't need anything, legisla- 
tively to turn that around. We just need to go do it. 

Mr. McHuGH. Flexibility. I spent the weekend reading testi- 
mony, including Chairman Gleiman's. The chairman took exception 
to the Board of Governors' rejection of two of the recommendations 
it made in the recent reclassification case. 

The one on which he really focused was the refusal to accept 
their recommendation on CEM, courtesy envelope mail. And the ar- 
gument, I think, that he was advancing, particularly, was that here 



82 

is something that, in prior advertisements taken out by the Postal 
Service, you promised you were going to give your customers. And 
here, in this reclassification case, they were giving you a shell, pro- 
viding you with what I think you would say is a pretty significant 
amount of flexibility to fill that shell yourselves, and yet you 
wouldn't do it. 

I think that's a pretty fair description of his concern. Can you ex- 
plain to us why you didn't accept that particular recommendation 
on CEM? And how would you respond to the observation that this 
is a chance to exercise flexibility, provide greater options to your 
customers, and you failed to accept it? 

Mr. RUNYON. Well, one of the things that is overlooked in that 
is that it does have bar codes on the envelopes, that's true, but our 
discounts are not only for bar codes but they are for the fact that 
we have to receive a certain amount of mail and we have to have 
it delivered at a certain location. 

Now, with that mail, it's dropped in boxes everywhere. It's mixed 
with all other mails. It has to be sorted out of that. It is not the 
way that we want that sort of mail delivered to us. We still have 
work to do to that. When we have discounts, there's a lot more 
work done than would be for that piece of mail, because it's han- 
dled just like any other single piece of mail, and therefore it doesn't 
get the discount. 

Mr. McHuGH. Also, in Chairman Gleiman's testimony, he re- 
counts his discussion with myself and other members of the sub- 
committee last year as to his feeling, at that time, that he didn't 
believe the PRC needed subpoena power to get data from the Post- 
al Service, in various cases before the PRC. He has changed his 
opinion and this year suggests that perhaps that's something we 
should consider. In fact, he asks us to consider it. 

How would you respond to that? 

Mr. RuNYON. I think his former opinion was the right one. We 
supply all sorts of information. We've recently been working with 
the Postal Rate Commission to set up a means that we can do this 
over computers and not have to do it the way we've done it before, 
so it can move faster. 

We think that we supply all the information that is really re- 
quired. There is some question, I think, in the Commission's mind, 
about the amount of proprietary information that we would rather 
not give them. And we do have proprietary information that should 
remain that way if we're going to remain competitive. We can't be 
competitive and tell all of our competitors everything about our 
business. 

So I would hate to see a subpoena power given to someone who 
could come in and get every bit of information that we've got and 
make it known to the world. It would cut our feet out from under 
us, from an operating standpoint. 

Mr. McHuGH. To your knowledge, has that ever happened? Has 
there ever been an instance, that you are aware of, where, in the 
course of a ratemaking case, proprietary information of the Postal 
Service was made public? 

Mr. RuNYON. I've not asked that question, and it has not been 
pointed out to me that it has happened. 



83 

Mr. McHuGH. That's because we just thought of it. But it's not 
a bad one. We ought to look into that. 

Mr. RUNYON. Yes, I will do that. 

Mr. McHuGH. Which does folio wup — and we are also, for the 
record — and this is nothing you are unaware of — we are working 
with the GAO, the PRC, the USPS, this subcommittee, a number 
of other organizations in trying to develop a new structure for sup- 
plying these data in a way that could hopefully expedite whatever 
kinds of reviews and rate cases are afoot. But until that is success- 
ful, let me just pose a possibility to you. 

When we had the heads of several other international posts be- 
fore us, Canada, New Zealand, Sweden, and Great Britain, Canada 
informed us that they supply data to a central ministry, all data, 
and that central ministry has the responsibility of keeping the 
score on what is proprietary and what isn't. It's kind of a third- 
party arbitrator of those issues. 

What kind of possibility would exist to create a structure where- 
by you would provide data to some organization, some body, some 
authority that would be required, under law, to keep proprietary 
information secret but would also be able to review a request and 
kind of judge, apart from your direct interest and the PRC, as to 
what is proprietary in nature and what is not? 

I understand you like the way it is now, but how much of a prob- 
lem would that kind of alternate structure provide you? 

Mr. RuNYON. I've not thought of that before, but my immediate 
response would be that I'd have to know who the people were on 
that committee or commission and what their background and ex- 
perience were in business, to really understand the nature of pro- 
prietary information, before it would be, to me, acceptable, I think. 

Mr. McHuGH. Well, there again, it's a recent thought, and maybe 
we should explore that a little bit further. 

Sixty Minutes did a piece on mail fraud in forwarding addresses. 
You and I discussed your decision not to participate at that time 
in the show, and I don't question that. I understand the concerns 
that you had. Would you like to share with the subcommittee any 
thoughts at this time as to what you plan or hope to be able to do 
in regard to that situation? Obviously, it's a troubling one. 

Mr. RuNYON. I watched that program to find out, you know, 
what they were going to say. It's interesting to note that the people 
they targeted for that they got from a list somewhere. They picked 
affluent people. The woman that appeared there was a doctor, and 
they had gotten her name from somewhere. Then they filed a 
change of address for her only ahd not for the family, so that it 
would be not noticed as much or as quickly. She did notice it fairly 
quickly, and she is to be commended for that. 

But a lot of people have said, "Well, you know, you're just going 
to have to do something about sending a notice to the people at 
their new address so that they will know if somebody has done 
that." Well, they won't know if somebody has done that, because 
they are not at the new address. So that won't work. 

We have 42 million people that move every year, and they turn 
in changes of address. Now, the changes of address they turn in, 
I think about 85 percent of them do it 2 days before they move, so 
it's difficult to contact those people at the old address. 



84 

But I think that the whole bottom Une thing of this is that the 
way this scam works is that it's people that are not moving, and 
they send a change of address in on them, because they are not 
moving. They don't bother the people who are moving, so those peo- 
ple don't enter into this equation. 

I think that we're looking, right now, at three or four different 
ways to handle that. And what we're looking at is how do we go 
back to the people at their old address and send them a notice that 
says, "You just told us you moved; is this right?" If they haven't 
moved, they will get that notice, and they will come to us and say, 
"No, we haven't moved", at which time we can move in on that. 

So that's the way we're looking at it. We're looking at what is 
the best way to get that back to them. Some people have suggested 
that maybe the carrier should do that. Maybe we should send a let- 
ter from our change of address central location, or maybe it should 
come from our headquarters. But we're looking at that, and we ex- 
pect to resolve that very shortly. 

Mr. McHuGH. Speaking of television, I understand we read in 
the New York Post that, during the broadcast of the "Final Four", 
you're going to have an advertising campaign involving a profes- 
sional biking team out of San Francisco. We get a lot of input about 
the activities of the Postal Service from citizens, but I think the 
one that we hear most about is whenever you have an advertising 
campaign. There were headlines about your $90-million campaign 
just recently. 

People are hard-pressed to understand how, particularly in the 
area of letter mail monopoly, it's necessary for you to expend 
money on those kinds of activities that they see, ultimately, either 
leading to an increase in the price of a stamp or not allowing you 
to sustain the current price for a longer period. 

For the record, how would you respond to those kinds of con- 
cerns, and why do you think it's necessary to spend that kind of 
money on advertising? 

Mr. RUNYON. I will speak to the cycling thing first. On the cy- 
cling thing, that advertising is aimed at international markets. 
And cycling is one of the largest international sports, so it's going 
to get a lot of coverage. We expect that, for the advertising money 
that we're spending, we're going to recover at least $6 million in 
philatelic sales through that advertising. 

So we mainly advertise to increase our sales. That's what adver- 
tising is all about. Everybody advertises who is in business, and we 
are in business. We have a competitive product, and we have com- 
petitors who advertise. Our percent of advertising to sales is about 
.11 percent. FedEx is .49, or nearly five times as much as ours. 
UPS is .37. We're competitors, and we have to advertise. AT&T is 
.95 percent, and IBM is .48. Those are some numbers. And we are 
at .11, which is very low. 

But we do have to advertise to make sure people know that we 
have products to sell to them. Everybody doesn't know when we 
have a product that's changed, or a product that has been upgraded 
and we want them to understand what the upgrade is and what 
it's all about. So we spend money to make money, just like anybody 
in business does. 



85 

And, by the way, a lot of those people complain because we're 
using taxpayer dollars, and we're not using taxpayer dollars at all, 
in anything, because we don't get any. 

Mr. McHuGH. I've heard rumors to that effect. 

There was recently an election out on the West Coast, in Oregon, 
where a senate race was conducted strictly by mail. Where is your 
vote-by-mail campaign right now? Are you actively pursuing that? 

Mr. RuNYON. We are not actively pursuing that at the present 
time. We did point out that that was a way to do it. That result 
in Oregon turned out fairly high on the amount of votes that they 
got in. We're not trying to get into that. It is a use for the mail, 
if people want to use it, and that's really all we were trying to 
point out with our advertising. 

Mr. McHuGH. The GAO, in its comments, talks about the admin- 
istrative failure of the Postal Service to integrate system-wide what 
otherwise are fairly isolated instances of success, to take some kind 
of good process that may be occurring in one postal area, one post 
office, and bring that success throughout the entire system, where 
it would be applicable. I also believe the IG has commented upon 
that as a shortcoming. 

Are you attempting to address that situation, to integrate the 
things you do well in certain isolated cases throughout? If so, how 
are you going to go about that? 

Mr. RuNYON. Yes, sir, we are. That's part of our 
CustomerPerfect! management system that we're putting in place. 
What we're trying to do is to set it up so that all of our processes, 
when we get the best process, that will go nationwide. That's what 
our CustomerPerfect! plan is all about. We recognize that as a very 
good criticism of what we have done, and we're trying to correct 
that. 

Mr. McHuGH. You're looking at outsourcing. You're looking at 
new ways to try to keep down your costs. Where are you on those 
kinds of efforts? How are you approaching that kind of problem at 
the moment? 

Mr. RuNYON. Well, we're looking right now to put together all of 
the various candidates for such actions, and we will be deciding on 
what those would be fairly soon. We're looking at priority mail 
right now and looking at changing that from operating throughout 
the mail system to operating in 52 locations. We're going to start 
off with 10 locations along the East Coast, from Florida to the 
Northeast, and determine how best to handle that. 

Of course, this gets involved with people like airlines and the 
train system and other transportation systems, what is the best 
way to do it. Because we do have to move it in 2 days, and we don't 
always get performance from the people that we're using at the 
present time. We have 25,000 flights a day that we put mail on, 
and they don't always get where they are going at the right time. 
So we're looking at how to overcome that, too. 

We're looking at all of the things, as I said before, that we do, 
because we're not proficient at all of the things we do. Our business 
is mail, and we're better at delivering mail than, we think, anybody 
else is. But there are other items that we do that other people 
could probably do better than we do. 



86 

Mr. McHuGH. Let me return, very briefly, to the question of 
data, as it relates to the recent reclassification case. 

Mr. RUNYON. Of what? 

Mr. McHUGH. Data. 

Mr. RuNYON. Data. 

Mr. McHuGH. We have been told — and it's probably a question 
appropriate for Chairman Gleiman, as well — that, during the re- 
cent reclassification, it came to light, through data that you sup- 
plied, that parcels mailed third-class are often charged rates that 
are, on average, below cost; 600 million pieces are below cost, and 
another 200 million fourth-class parcels that barely cover their 
cost. 

How would you respond to the concerns that we have heard from 
others that, with this kind of activity, how, given additional flexi- 
bility, would you ensure that your product recovered its attrib- 
utable cost? Because they say, on average, at least in this area, ap- 
parently they were not. 

Mr. RuNYON. I would like to ask Mike Coughlin to help me an- 
swer that question. 

Mr. McHUGH. Sure. 

Mr. Coughlin. Mary. 

Mr. RuNYON. Mary. OK. Mary Elcano is our general counsel. 

Mr. McHuGH. Mary, I don't want you to take this personally, but 
I've been told that, if you're going to officially respond, you should 
rise and be sworn. 

[Witness sworn.] 

Ms. Elcano. I'm not going to be able to give you a lot of informa- 
tion about your specific question on recovering the attributable 
costs. 

Mr. McHUGH. Is that because I swore you in? Would you have 
told me if I hadn't? 

Ms. Elcano. No, sir, it's not. [Laughter.] 

If I were sitting back there, I'd have the same response. 

Mr. McHuGH. OK. 

Ms. Elcano. That happens, from time to time, between rate 
cases. If the rates are, in an omnibus case, changed in year 1, over 
the 3-year period of time, specific costs and rates sometimes don't 
match. That's why overall there's a break-even concept. 

We can supply for the record something more specific about your 
more discrete question. We do have a parcel reform case underway 
to address different classification issues concerning parcels, and 
rates issues are involved. We hope to file that case later this year. 
So that would be addressed; and that would be more akin to my 
point. During the course of a 3-year break-even period for a rate 
case, that result is not unusual. 

Mr. McHuGH. OK. Well, we would appreciate that. Obviously, 
those kinds of questions go to the very heart of the argument about 
flexibility and data and the monopoly, and how do you keep it all 
separate? And how do you allow the Postal Service to compete 
while still treating those who are out there competing already, in 
the private sector, treating them fairly, as well. Obviously, we're 
going to have to address those kinds of concerns. 

So you will submit something in writing? 

Ms. Elcano. On that specific question, yes. 



87 

Mr. McHuGH. Yes. 

Ms. Elcano. If I could, while I'm here, on the data question. 

Mr. McHuGH. Sure. 

Ms. Elcano. On the data question, it's an interesting area that 
we're interested in working on with the Commission. If we were to 
wheel in here the amount of data that we filed in the 1994 rate 
case, I think it would stack up over 20 feet high. So there are data 
being given in rate cases. We are supplying data on revenue, vol- 
umes, costs, pricing, and rate design, both prospective and current 
data. 

The question is, how do we narrow the issues, and how can we 
supply the data that are necessary? I think the Federal district 
courts provide an interesting model. I would just suggest we think 
about it in the course of our discussion on data, concerning what's 
relevant and how to narrow issues. The courts' whole approach has 
been to narrow discovery, to narrow questions, to narrow disputes 
within a case. 

The rules of the Commission have not been revised to address 
some of those things. I think the Federal district court process, ob- 
viously deals with very complicated questions in rate matters and 
business decisions, and security transactions. If they can narrow 
questions, narrow issues, and resolve data questions, I think that 
might be a model for the rate process. 

Mr. McHuGH. Well, we're willing to go anywhere for any help we 
can get, so I appreciate your comments. As I said, we will supply 
a written question. 

I just want to throw one last thing out. We have heard, and we 
have certainly discussed internally, the problem that I first encoun- 
tered when I was in the State legislature. In the State of New 
York, the legislature sets the tuition for the State University of 
New York, and it always became a political goal and objective not 
to raise tuition. 

What we found oftentimes happened was that we would forestall 
a tuition increase, not for the right reasons; not because there 
wasn't a justification, not because we probably needed the money, 
but rather because of the politics. And we'd do it for 1 year, and 
then the next, and then the next. And what would ultimately hap- 
pen is that we'd end up hitting students in usually May or June 
with a 30 percent tuition increase effective September, and there- 
fore providing them no time to plan for it and no real opportunity 
to find the money. 

We always heard a lot from students who said, 'Tou know, I 
would rather have a reasonable annual or semiannual tuition in- 
crease that I could plan for and that I knew was going to be there 
than to go through these feast and famine kinds of situations 
whereby we're bowled over at the last minute by a terrible in- 
crease." 

I'm not accusing you of this, but I wonder if perhaps there isn't 
a similarity between that tuition rate and your first-class mail 
postage. And I've heard from some Postal Service customers that 
the thing that worries them most is the inability to plan, that, as 
business people, it is very important — I know you understand this. 
General Runyon — to be able to predict and to have a business plan 
you can adhere to. 



88 

What do you think about adopting a strategy that would at least 
provide for a certain amount of increase that would be predictable, 
based on a CPI or something of that nature, year after year? Per- 
haps you could have the option to implement it or not, but if you 
didn't implement it, you couldn't come back and get it, so your 
business partners, your customers, could plan on that. 

Just to throw that out. 

Mr. RUNYON. I think that's a long question, and I would like to 
kind of address all of it, but if you were saying that if we were al- 
lowed to set rates, and the CPI was the limit to which we could 
move them, I think that would be a good idea. 

Now, to take the school situation in mind, our plan is not to lose 
money. If you don't lose money, you don't have any deficit to over- 
come and a need to raise rates. And if in 1995 we didn't lose 
money, if in 1996 we don't lose money, if in 1997 we don't lose 
money, we won't need increased rates for 1998. So our plan is to 
not lose money. So we don't have any big shortfall to make up, if 
we're not losing money. 

Right now, what we're doing is not only not losing money but 
we're paying $936 million back. We have to make at least $936 mil- 
lion to take care of the losses that we've had in the past. So if we 
don't have a loss, we have no reason for a rate increase. We're not 
trying to buildup something for somebody else to have to take care 
of later on. That's not what we're talking about. What we're talking 
about is breaking even every year or making money, so that we 
don't have a reason for the rate increase. 

Now, in the business we're in, it is just not good business for us 
to continue to raise rates. The more our rates go up, the less our 
volume will be. And when our volume starts down because competi- 
tors can come in and do a better job than we do, at a lower price, 
they are going to get the business. And then rates will start to go 
up the minute our volume starts really dropping because of price. 

We saw that happen just recently. The 10.3 percent increase 
didn't really cause a lot of volume to drop, but it, coupled with the 
price of paper, which went up about 100 percent, did cause some 
drop-off of our volumes, and we're seeing that now. We have to 
watch that. 

But I do agree with you that we should take — if we've got to have 
a rate increase, we ought to do it every year. I would have no prob- 
lem with that. But that makes it rather difficult, under the present 
rules of how we deal with the Rate Commission, because that 
means you're going to have to prepare for a rate increase you don't 
know is even going to take place until it happens. So we need to 
shorten that process, if we were going to do that. 

I thoroughly agree with you that we should have small, regular 
increases, if there are going to be any. But the best of all worlds 
is to not have any and be more competitive, and increase our mar- 
ket share. And the more we increase our market share, the more 
our revenues are going to increase. And if we can increase our rev- 
enues, then we won't have to have the rate increases. 

Mr. McHuGH. Well, I sure don't disagree with that as a business 
objective. Of course, it might be argued that, as much as you plan, 
there's nothing that will prevent you from experiencing a loss if 
something goes wrong. 



89 

Mr. RUNYON. Oh, absolutely. 

Mr. McHuGH. And you have the right to, in a future rate in- 
crease, go back for prior years' losses, which some people have a 
real problem with, as I know you understand. The model I was en- 
visioning is that prior year losses and business plans gone awry 
would be your problem, and take it out of hide, don't go to rates. 
It's a model we're thinking about. 

I would like to gratefully acknowledge the presence of the gen- 
tleman from New York, Major Owens. Are there are any questions 
or comments you would like to make at this time, because we're 
about ready to wrap up with this panel. 

Mr. Owens. Just two quick comments, and they run along the 
lines of remarks that I made before. 

In your high-tech, state-of-the-art operation, which is high-tech, 
state-of-the-art in many respects, do you have a training program 
which is also so well done that it's uniform from one city to an- 
other, from one station to another? In other words, do you have a 
videotape or a computerized program which has the basics on it, 
so that any new employee coming in, who's going to be delivering 
mail, would be able to get the basics, and you won't leave that up 
to whether or not he can get an oral briefing? 

Do you have it on tape so that you know he's going to get a basic 
which says, "This is a piece of franked mail. The signature of the 
Congressman is like a stamp", so they know that that is what it 
is? When you state, "John Jones or Current Resident", then you 
leave it there at that building, that apartment, because if John 
Jones is no longer there, then "Current Resident" means the cur- 
rent resident. So that we have no confusion among casuals or tem- 
poraries or anybody else about basics like that, out there on the 
route, delivering mail. 

Do you have that kind of training program which is that stand- 
ardized, and you know you're going to get that same kind of basic 
from one place to another, uniformly? 

Mr. RuNYON. We do have training programs. 

Mr. Owens. Is it on videotape? 

Mr. RuNYON. I can't answer that question. I will supply that to 
you for the record, but I really don't know. 

Mr. Owens. Do you have any training programs on videotape, 
anywhere? 

Mr. RUNYON. Oh, yes. We have a lot of training programs on vid- 
eotape, but I can't answer whether that specific one is on video- 
tape. We have a lot of training programs that we do centrally. We 
send them to Norman, OK. The people who — these are not casuals, 
but people who are mechanics and do electronic work, and so forth. 

Mr. Owens. I'm talking about the basic guy delivering mail on 
the route. 

Mr. RuNYON. Yes, sir, I understand that. And I really can't an- 
swer that question, but I will supply the answer for the record. 

Mr. Owens. The other question is, do you have some kind of sys- 
tem where, by this time, it shows the kind of automatic volume of 
mail at a given postal location, branch, whatever it is, the volume 
of mail sort of automatically dictates the staffing pattern, so that 
it's not a matter of tradition or habit or politics? 



90 

But if you have a station like the one that constituents have 
asked me to visit in my district, where there's a large number of 
people from the Caribbean, and they are always sending packages 
home, and on Saturday the lines form and they stretch out into the 
streets, and people get upset, and the clerks get upset. And the 
people have already told me, "We want you to come and let you 
see, there are not enough clerks there." They have taken the side 
of the clerks. "There are not enough people there. They just can't 
do the job. They need help." 

Is there some system by which the volume and what's going on 
dictates the staffing patterns, so that we don't have to go in and 
negotiate something that really is a management problem? 

Mr. RUNYON. We expect the management at that location to solve 
the problems that they have. Now, if they have a problem of heav- 
ier workload on Saturday than any other day, then they should 
take steps to facilitate that work being done, which might mean 
they would have to have more people on Saturday than any other 
day. I think that would be an exception, but, in that particular case 
you're talking about, it just might be that that should be what's 
done. 

I would be glad to look at that particular case that you're talking 
about and get back to you. 

Mr. Owens. As a Congressman, is there something I can see 
which says, when I'm talking to supervisors or managers above the 
level of that particular station, that, according to this, you ought 
to have a certain number of people here; according to this, this 
branch ought to be relieved of the responsibility of trying to do all 
this work with so few people? 

Mr. RuNYON. We do have standards that we set for various oper- 
ations. And, yes, we have that. 

Mr. Owens. I can get a copy. 

Mr. RUNYON. Excuse me? 

Mr. Owens. I can get a copy of the manning tables and that sort 
of stuff? 

Mr. RuNYON. I will be glad to give you what we have on that. 
Yes, sir. 

Mr. Owens. Thank you. No further questions. 

Mr. McHuGH. We thank the gentleman. 

Before we go, let me just ask the new chairman, last year, when 
your predecessor appeared before us, we discussed the role of the 
Board of Governors, and I think it's fair to say that it was his opin- 
ion that you were becoming a more active board. Certainly, from 
my experience, that's been true. 

I don't want to guess as to what your vision for the board may 
be for the future, but the question last year to your predecessor, 
Mr. Winters, was, had the time arrived when the board might con- 
sider expanding its independent professional staff. 

Your review of the recent reclassification case and the rejection 
of two points suggests that you are indeed becoming more active. 
Have you had a chance, in your relatively new role, to think about 
the staffing situation, or do you think you're still adequately served 
by what you have? 



91 

Dr. DEL JUNCO. First of all, let me say that we did expand our 
staff last year, adding an assistant to our secretary, who handles 
the day-to-day functions of the office of the board. 

Let me also say that, when you talk about reclassifications, these 
are very complex issues, very technical issues, with great impor- 
tance to many areas, and there is no way the board could staff to 
be able to deal with that. We have to look to the resources that the 
organization puts in place, from counsel, and business develop- 
ment, and so on, and also it would be just impossible for the board 
itself to hire a staff to be able to really drive this whole process. 

This would become, in my opinion, a micromanagement oper- 
ation, and that is not our role. Our role is a role of oversight. This 
is why we have now appointed these four committees that I ex- 
pressed in my opening remarks, the audit, the capital, the com- 
pensation committee, and the strategic planning, which tries to 
look ahead as to where we are going and how we're going to deal 
with the present problems the U.S. Postal Service has. 

I am very confident, having been on this board for 8 years, that 
you do have a board that is a lot more proactive, that takes its 
oversight functions very seriously. At the same time, I have to say 
that the Postmaster General and the senior staff have been ex- 
tremely open and cooperative. We do not always agree. There have 
been differences of opinion, but there have been very, very exten- 
sive discussions on most of the items you have discussed here this 
morning. 

We are proposing right now to add an additional person to our 
staff that can help our secretary. But everything that we do is 
aimed at the role of oversight. We have been told by your prede- 
cessor, some 4 or 5 years ago, of your concern of the board becom- 
ing involved in micromanagement. As a result of that, a whole 
bunch of committees were eliminated. 

We have learned that we need committees if we are going to 
have proper oversight. We have learned that we can exercise the 
oversight without becoming involved in micromanagement, and 
that is the direction that the Board is taking right now. 

Our biggest problem, since I'm speaking, is addressing this issue 
of the competitive and noncompetitive areas. We are out there in 
the marketplace with our hands tied behind us, in express mail, in 
all of these new initiatives. Right now, our government has entered 
into a contract with Federal Express that we have not even been 
able to compete on that contract. 

I mean, our pricing structure is one — and you talk about flexibil- 
ity, I think flexibility, in this ca«e, has to be defined. As I define 
it, it's giving the U.S. Postal Service the ability to go out and com- 
pete in the marketplace with the price. I don't mind a retrospective 
review of what has been done. Perhaps the answer to this whole 
situation is to treat the noncompetitive areas different from the 
competitive areas. 

But as long as we are being restricted in our ability to compete 
in the marketplace, it doesn't matter how extensive and how active 
and how specific we come with our new initiatives in these dif- 
ferent markets, eventually, we are going to be put out of business. 
And this has been the case with express mail and others, which are 
shrinking because of our inability to compete. 



92 

I believe, certainly, Mr. Chairman, that this is a very, very major 
concern of the entire board. 

Mr. McHUGH. Well, we thank you for your comments. 

Gentlemen, thank you both for being here this morning. This 
completes the requirement of our subcommittee to conduct this 
oversight hearing, but it certainly doesn't complete our efforts and 
our intent to go forward with trying to do what we can to reform 
the system. In that regard, we are looking forward to continuing 
to work with you, hopefully to the advancement and betterment of 
all. 

So thank you again for being here. 

Mr. RUNYON. Thank you very much. 

Dr. DEL JUNCO. Thank you very much. 

Mr. McHuGH. Our next witness, as previously announced, is the 
chairman of the Postal Rate Commission, the Hon. Edward J. 
Gleiman. Why don't we swear you in now. 

[Witness sworn.] 

Mr. McHuGH. The record will show that Chairman Gleiman re- 
sponded in the affirmative. 

We welcome you, sir, for round two. As I mentioned in my open- 
ing statement, it has truly been a remarkable year for you and for 
the entire Commission. 

I know I speak on behalf of the entire subcommittee when we 
commend you for the enormous amount of work that you have put 
forward, and we thank you for not just those efforts but for the ef- 
fort of your being here today. We look forward to your testimony. 

With that, I would turn the microphone and our attention over 
to you, sir. 

STATEMENT OF HON. EDWARD J. GLEIMAN, CHAIRMAN, POST- 
AL RATE COMMISSION, ACCOMPANIED BY TREY LE BLANC, 
VICE CHAIRMAN; H. EDWARD QUICK, JR., COMMISSIONER; 
AND GEORGE HALEY, COMMISSIONER 

Mr. Gleiman. Thank you, Chairman McHugh and members of 
the subcommittee. 

I appreciate your inviting me here to testify today. As I sat here 
earlier this morning, I got the feeling that perhaps this would be 
my last opportunity to testify, with all the talk about legislative re- 
form in the postal area. But whatever happens, I will endeavor to 
give it my best shot, both here and at the Rate Commission. 

I would ask that my prepared statement and those of my col- 
leagues. Commissioners Quick and LeBlanc, be included in the 
record of this hearing. And I would also like to point out that I am 
accompanied by my colleagues. Vice Chairman LeBlanc, Commis- 
sioner Haley, and Commissioner Quick. 

Commissioner Quick's statement, I would note, addresses some 
of the questions and exchanges that you had earlier this morning 
with the Postmaster General about the postal monopoly and oper- 
ations of the Postal Service in a market economy, and also address- 
es the possibility of some abuses with the indexing of rates, or a 
capped rate approach, as it's known in the public utility setting. 

Before I get to my testimony — I'm sorry that Mr. Sanford is not 
here — perhaps, to flesh out the record, I can offer you the answers 
to the questions that he asked the Postal Service. The terminology 



93 

that is used is "attributable" and "institutional" cost. Virtually all 
attributable costs are volume variable costs. On an overall basis, 
after the R94 rate case, 65.09 percent of costs were attributable 
and virtually all volume variable, and 34.91 percent were institu- 
tional. 

We can break that down a little bit further, looking at process- 
ing, collection, and purchased transportation costs, where we have 
86.84 percent being attributable and only 13.16 percent being insti- 
tutional overhead. And then, flipping over to the remaining costs, 
you look at the street delivery cost, and it's somewhat of a mirror 
image. There you only have 35 and a fraction percent, 35.16 per- 
cent of the costs in that area, which are $9. 1 billion, being attrib- 
utable, and 64.84 percent, or $5.9 billion of the $9.1 billion, being 
overhead. 

Also, before I get into my summary of my statement, I wanted 
to address a couple of issues. I'm looking around to see if the Postal 
Service staff people are here. I wish the Postmaster General had 
stayed. 

Let me mention that, with respect to third-class parcels — and I 
don't know whether you will ask me a question about them or 
not — the question you asked was answered somewhat along the 
lines of, "Well, you know, at the end of a 3-year cycle, you can get 
below cost because costs go up during a 3-year cycle." 

The point is, right now, that we're at the very beginning of that 
3-year cycle, or 4-year cycle, or however many years' cycle there's 
going to be. The rates on those third-class parcels that are cur- 
rently below costs were raised just last year in the R94 case. The 
evidence was not available in that case that they were below cost. 
It did become available in the reclassification case. So I think the 
response that you got from Postal Service counsel may be a little 
bit off target. 

And with respect to the 20 feet of data in R94, I've seen a lot 
of that data. I've read almost all of that data, and I don't think it 
stacks up anywhere near 20 feet. But whether it stacks up 20 feet 
or not, let me say, in reference to the suggestion that the district 
courts are narrowing discovery and don't require nearly as much 
in the way of discovery and data, the district court cases are gen- 
erally not de novo cases. They are looking at a record of evidence 
that has been established by an administrative proceeding or some- 
where else. 

I think that it is a somewhat apples and oranges comparison to 
say that an administrative proceeding that involves $55 billion or 
$60 billion, however much it's going to be in the future, can be 
compared to a case that, in many instances, is going to have far 
fewer ramifications, financially, than does a Postal Service case. 

Someone told me once, "Don't stick your neck out unless it's a 
moral imperative." I'm getting the distinct impression that it may 
be a moral imperative to stick one's neck out at this point. 

Since we last met, the Postal Rate Commission has been very 
busy. Last June, we issued our reconsideration decision in the R94 
omnibus rate case, and the decision was adopted by the Governors. 
As you know, we've considered and recently completed action on 
the major reclassification case. Docket No. MC95-1. We've also 
made some significant progress, at least I think it's significant 



40-873 0-97-4 



94 

progress, in the rulemaking Docket No. RM95-4, that is intended 
to further streamhne procedures at the Rate Commission. And I'll 
have more to say about that in a few minutes. 

Also, since last December 19, we have been considering the Post- 
al Service's request for expedited consideration of an experimental 
case involving bar coded first-class mail and priority mail small 
parcels. Our longstanding and rarely tested rules provide for 150 
days to consider such cases. As best I was able to determine, this 
case is only the second time in 15 years that the Postal Service has 
asked us to use those rules. 

When the case was filed — and it was filed on the eve of the 
Christmas and New Year's holidays, very conveniently — the Postal 
Service requested that we complete action in 120 days. Well, I'm 
pleased to report to you today — and you may have noticed what I 
did when the PMG got up — that today, on day 85, we issued our 
recommended decision in Docket No. MC96-1, that experimental 
case, and we approved the Postal Service's proposal. 

It can be done quickly, and it can be done expeditiously, when 
the Postal Service sends a narrow, well-thought-out case that does 
not impinge on the due process rights of many other parties, which 
was the case in point in MC96-1. 

Last year we also modernized the Commission's computer system 
with a view toward facilitating data transmission and eventually 
electronic filing. I recently wrote the Postmaster General asking for 
his assistance to further simplify and perhaps speed up our pro- 
ceedings by ensuring that all data filed by the Postal Service is 
presented in a standard format. 

And, Mr. Chairman, in conjunction with our computer upgrade, 
later this morning — well, perhaps 10 minutes ago, I think, actu- 
ally — the PRC unveiled its new home page on the World Wide Web. 
Those wishing to will be able to access the testimony that we sub- 
mitted today, along with the decision in the experimental case, at 
our new address on the World Wide Web, www.prc.gov. 

Mr. Chairman, as a result of your initiative, we are working with 
the subcommittee and the Postal Service and the General Account- 
ing Office to study how information and data needs of the rate-set- 
ting process can be better served. I want to thank you for moving 
forcefully to address the concerns I expressed about this matter 
when I appeared here last year. 

We have also, on several occasions during the past year, provided 
some technical assistance to the General Accounting Office, most 
recently in connection with its study on international mail, re- 
leased earlier this week, and its work concerning the private ex- 
press statutes. And in the midst of all this, we have also disposed 
of an unusually large number of small post office closing appeals. 

And we have initiated another rulemaking, a proceeding to 
amend our rules of practice to provide that a post office appeal is 
timely filed if it was postmarked before the 30-day limit. Our exist- 
ing rules require that the appeal be received by the Commission 
within the 30-day limit. The Postal Service has filed comments op- 
posing this change, arguing that the Commission does not have the 
statutory authority to make such a change in its rules. 

Mr. Chairman, I know you are familiar with this type of issue 
where practice under existing law sometimes appears inconsiderate 



95 

of overall equity and fairness. We are doing what we can to ensure 
a degree of fairness. For example, we issued an order just yester- 
day waiving our current rules and rejecting a post office motion to 
dismiss an appeal which was mailed 3 days before the 30-day time 
limit, but which took 9 days to make its way through the mail sys- 
tem to our offices. 

We are holding our rulemaking in abeyance while there is fur- 
ther consideration of the legislation here on Capitol Hill, but ulti- 
mately we may need legislative relief in this area. 

I am also pleased to report that we have accomplished all of the 
above despite the fact that we have fewer staff today than when 
I appeared here last March, and our budget, when adjusted for a 
one-time purchase of computer equipment, has grown not even by 
one penny. 

Now, turning to the mail classification reform case, MC95— 1 was 
a huge effort, not just for the Commission, but for the Postal Serv- 
ice and the many interested and affected parties. We're very 
pleased that the Governors, with two exceptions, accepted our rec- 
ommended decision in the reclassification case. 

One of the exceptions, the bulk parcel issue, is a very technical 
matter. We believe the position taken by the Gk)vernors is erro- 
neous based on a misreading of past decisions. I'm providing a copy 
of a letter today that we have sent to the Governors concerning this 
matter. 

The second exception, involving courtesy envelope mail, or CEM, 
troubles me deeply, and I'll touch on that in a few minutes, but 
first I'd like to give an overview of our decision. This was the first 
comprehensive look at mail classification since the 1970 enactment 
of the Postal Reorganization Act. The Postal Service and 71 parties 
advanced numerous classification theories, often competing or con- 
flicting, to justify the mail classification change they proposed. 

The case was completed in 10 months, as contemplated by law, 
plus 3 snow days. The Commission held 35 days of public hearings. 
The evidentiary record comprises more than 17,000 pages, but it 
doesn't stack up to 20 feet in this case either. Now, I know there 
are some who will say that the process is too long and too com- 
plicated, but I would ask you to consider that the mail affected by 
this case generates 80 percent of the Postal Service revenues, al- 
most $44 billion. 

A change in rates of a few tenths of 1 cent means millions, 
maybe even tens of millions, of dollars to a major mailer. And I 
suspect this is why many large mailers supported our rec- 
ommended decision, even though it was not all that they had hoped 
for or pressed for when they were before the Commission. 

Even changes that do not involve large amounts of postage, such 
as changes in mail eligibility requirements, like minimum piece re- 
quirements, having to have 500 or 200 pieces to mail at a discount 
rate, or requiring changes of address twice a year, can have a pro- 
found effect on mailers whose livelihood depends on access to the 
postal system. 

The stakes are extremely high. It is critical that affected parties 
be permitted to participate in a meaningful manner, and, frankly, 
that requires that we take some time and a great deal of care. As 
one of our lawyers told me recently, "Oh, sure, we can speed up the 



96 

process. It's just a matter of whose due process rights you want to 
take away." 

In the way of comparison, let me offer some indication of just 
how complex not only handling a reclassification case is but imple- 
menting a reclassification. I read in one of the trade journals, on 
Monday, that the Postal Service has announced it's going to hold 
4,000 meetings across the Nation and have 40 sessions at the up- 
coming national postal forum, to familiarize mailers with what 
they need to do to comply with the provisions of reclassification. 

Well, you know, if you assume that each one of those meetings 
takes half a day, that adds up to about 11 months' worth of meet- 
ings that will take place across this Nation. That's a month more 
than we took to get the case out, and we had to do a lot of analysis 
up front. 

In our decision, the Commission recommended renaming and re- 
grouping the existing mail classes, as the Postal Service requested. 
We endorsed the Postal Service goal of promoting automation by 
restructuring classifications and rates to reward work share mail- 
ers. We largely adopted the changes in mailing rules and proce- 
dures proposed by the Postal Service in the form of a new domestic 
mail classification schedule. 

Probably the most controversial aspect of the Postal Service's 
proposal pertained to second-class mail. The Service's proposal 
would have meant an average increase of 17 percent for more than 
11,000 small volume periodicals, to effect an average decrease of 14 
percent in rates for some 800 densely circulated publications. 

We rejected the Postal Service's subclass proposal for magazines 
and newspapers. We could find no basis, economic or otherwise, for 
drawing such an arbitrary line between large and small publica- 
tions. We did, however, recognize additional work sharing dis- 
counts. 

Finally, we endorsed the Postal Service proposal for a new, en- 
hanced carrier route subclass in standard mail, and we've been 
harshly and understandably criticized by some for doing so. We 
wish we could please everyone, but, of course, we cannot. We have 
a law to follow, and we have to apply the facts presented in our 
proceedings consistent with that law. 

I mentioned the Governors' rejection of the CEM recommenda- 
tion. This is why their action troubles me so. First, what is CEM? 
CEM, as recommended by the Commission, is a shell classification 
with no rate assigned, limited to preprinted reply envelopes pro- 
vided to consumers by, for example, credit card or utility compa- 
nies. 

This mail, although generally deposited one piece at a time by 
householders, can be sorted by automated equipment because it 
displays both a preprinted bar code and a facing identification 
mark or FIM. It also is frequently picked up at the post office by 
the addressee, avoiding the need for and cost related to delivery. 
Thus, like any other automation-compatible mail, it costs less for 
the Postal Service to handle. 

The Governors' decision complains that the CEM recommenda- 
tion was not based on a recommendation proposed by the Postal 
Service in this proceeding. And they are right. But the Commis- 
sion's Office of the Consumer Advocate did propose the classifica- 



97 

tion. It also proposed a fairly deep discount. We accepted the classi- 
fication proposal but not the discount. And CEM is important be- 
cause it has the potential to touch each and every person in this 
country who pays a bill by mail and because it is supported by the 
record evidence in this case. 

Over the years, the Governors have repeatedly said that they 
would address CEM or its first cousin, PAR, the public automation 
rate. As a matter of fact, exactly 1 year ago today, the Postal Serv- 
ice issues its press release No. 23, entitled, "Customers Get a First 
Look at the Reclassification case." If you will permit me, I'd like 
to read one short paragraph from that release, and I quote: 

The Postal Service will also propose that reply envelopes included in the first- 
class automation subclass be properly bar coded. The Postal Service plans to ask 
the Postal Rate Commission, at a later date, for a lower rate based on the lower 
cost of automating this mail. These savings would be passed on to the consumer. 

Mr. Chairman, I guess I just have enough faith left in the Fed- 
eral Government and the Postal Service that, when they tell me 
they are going to do something, I believe them. Maybe I shouldn't. 

We recommended a shell classification. We left it to the Postal 
Service to fill the shell as they saw fit, as they have repeatedly said 
they would. And what did the Governors do? With great gusto and 
a number of, at very best, specious arguments about operational 
problems, problems that simply do not exist when you have a shell, 
they ground that shell into dust, and they threw away the frame- 
work that they, the Postal Service, needed to do what they told the 
public they were going to do a year ago today, in Press Release No. 
23, what the Governors committed to doing, both in their R87 and 
R90 decisions. 

Now, in recent weeks, the Postmaster General has been talking 
about threats to first-class mail volume from technologies, for ex- 
ample, the potential growth in electronic billpaying. Ajid he men- 
tioned his concern about lost transaction mail in his statement this 
morning. This is CEM mail. This is the very mail that would have 
benefited by those savings that were, according to Press Release 
No. 23, going to be passed on to the consumers. And perhaps fulfill- 
ing the commitment would help keep some of that mail in the sys- 
tem. 

I hope that the current lone dissenting voice among the Gov- 
ernors on this CEM issue, that of Governor David Fineman, is 
enough to ensure that individual mailers will soon, or perhaps at 
some point, in any event, get the benefits directly that were prom- 
ised to them a year ago. 

But even if this should come to pass, I still will not understand 
why the Governors took the action they did in rejecting the shell. 
Their action makes absolutely no sense at all. While I am some- 
what reluctant to suggest it, I think the Governors may have been 
misled by postal management, somewhat, on both the CEM and 
bulk parcel matters. 

Moving on, last year when I appeared before the subcommittee, 
I suggested, partly in response to the PMG's call for more flexibil- 
ity, that the Postal Service reexamine the recommendations of the 
1992 task force. Shortly after that, I met with the Postmaster Gen- 
eral, then Chairman Winters, and other members of the Board's 
Strategic Planning Committee, and urged them to pursue this 



98 

course of action. So I was pleased when, shortly thereafter, the 
Postal Service petitioned us to streamline the rules. 

Last October, the Commission published proposed rules to imple- 
ment a majority, but not all, of the procedural initiatives proposed 
by the Postal Service. The Commission explained that it was pro- 
ceeding in this limited fashion for several reasons. 

First, it was mindful of the current workload imposed on all 
those involved in the reclassification case. Second, there were po- 
tential legal impediments to implementing at least some of the pro- 
posals. And, finally, the four initiatives for which proposed rules 
were published appeared to hold the greatest promise for proce- 
dural reform in the near term. Frankly, we thought this was the 
most expeditious way to proceed. We would tackle the seemingly 
less controversial proposals first. 

Well, as I'm sure you have learned during this past year, there 
is nothing involving the Postal Service that is noncontroversial. In 
the 17 sets of comments submitted in response to the proposed 
rules, the Commission was criticized for both what it proposed and 
what it did not propose. One party went so far as to assert that 
the Commission's failure to address immediately the negotiated 
service agreement or contract rate proposal was, "a disservice to 
the American public." 

Well, the Commission has been accused of a lot of things over the 
years, somehow I doubt that individuals and small business mail- 
ers feel that they are disserved because the Commission chose to 
allow time for carefully evaluating the legal and economic ramifica- 
tions of this particular proposal, a proposal that would allow large 
volume mailers to cut deals directly with the Postmaster General 
for special and undoubtedly lower rates. 

On the other side of the spectrum, commenters raised important 
concerns about the proposals that we thought were less controver- 
sial. For example, one of them said, "If the Commission were to 
adopt its proposed rules, it would be faced with making decisions 
on a one-sided record submitted by the Postal Service. Opposing 
parties would have no valid opportunity to make an alternative 
case." 

So, Mr. Chairman, we're continuing to consider the issues raised 
in the rulemaking, and we will be able to give them our full atten- 
tion, at least for the next month or so, since we have completed 
work on the experimental case and the reclassification case. And 
judging from what the PMG said, we may have a small hiatus be- 
fore we get our next reclassification piece. 

Last year when I was here I also expressed some concerns about 
information and data used by the Postal Service to support re- 
quests filed with the Commission. During our recent reclassifica- 
tion reform case, the Service did provide a number of cost studies, 
which I'm happy to say were at least up to the standards of earlier 
Postal Service studies. However, I do want to bring to the commit- 
tee's attention several potential problems with the data and infor- 
mation the Commission and parties normally use to evaluate the 
Postal Service proposals. 

The first concern is with the timeliness of regular Postal Service 
data reports. The Postal Service does not always submit this infor- 
mation in a timely manner, and this can pose a significant dif- 



99 

ficulty to parties and the Commission. For example, the very basic 
CRA, or cost and revenue analysis report, for 1994 was not filed 
until late in May 1995, almost 2 months after the reclassification 
case was filed. In contrast, the 1993 version of that report was filed 
in March 1994. 

The 2-month delay in the filing of the CRA, in connection with 
the consideration of a reclassification case, is unconscionable, espe- 
cially when the Postal Service complains almost constantly about 
how long the process takes. 

And let me note, Mr. Chairman, that apparently we're not the 
only people who get reports late. If I counted right on my fingers 
this morning, we're 5y2 months past the end of fiscal year 1995, 
and unless you've got a copy hidden away somewhere up there, I 
don't think any of us have seen the annual report for fiscal year 
1995. This may be the latest in its 25-year history that the Postal 
Service has ever issued an annual report. 

The second issue I want to raise is the Postal Service's increasing 
tendency to withhold information or data it claims has some com- 
mercial value. Many private businesses appear before the Commis- 
sion and voluntarily disclose what is clearly proprietary informa- 
tion. It seems to me that the Service should avoid withholding in- 
formation as proprietary unless it is clearly evident that the disclo- 
sure would be likely to have a significantly harmful impact. 

I mentioned two specific cases in my prepared statement, one 
dealing with CEM-related data and another dealing with a study 
of the competitive threats in the delivery of publications. So I won't 
go into those right now. But let me just say that I accept, here and 
now, without having to check the pedigree of the people who might 
wind up on any oversight commission, your offer that we have 
some type of an arbitration panel that could decide on the propri- 
etary nature of data and whether it should be made available to 
the Commission and perhaps disclosed to the public. 

I was taught in school that we have a nation of laws and not 
men. And if that is a good idea and it is put into law, it does not 
matter who the men are, or women. I don't need to check their 
pedigrees. 

Finally, Mr. Chairman, we continue to encounter problems when 
the Postal Service chooses, for whatever reasons, simply to not do 
a study or provide data enabling us or others to better understand 
its operations as they relate to rates and reclassification. And this 
happens frequently. 

One instance, during the course of both the R94 and MC95 cases, 
involved questions about studies that would look into the relation- 
ship between cost and weight. These studies have been promised 
for many years and not done. All of these problems affect the abil- 
ity of parties to participate. They increase the cost of litigation at 
the Rate Commission, and they lengthen the process. 

Partly because of these difficulties, I am reversing the position 
that I took last year. And the PMG may think that my position last 
year was correct, but I know when I've made a mistake, and I 
made one. Subpoena authority wouldn't be a panacea, but I think 
it would help. And I respectfully request, if and when the commit- 
tee proceeds to consider postal reform legislation, that it give this 
issue some thought. 



100 

The Commission believes that there are many, many other legis- 
lative changes that would benefit the rate-setting process. As a 
general principle, I would note that the more flexibility a govern- 
ment monopoly has, it would seem to me that the more data they 
should be required to collect and maintain, and the closer scrutiny 
that should be given to all of that data. 

But that is not the subject of this hearing, and we look forward 
to sharing our thoughts with you in the future and, of course, offer- 
ing our services and assistance to the subcommittee as it proceeds. 

That completes my statement, and I would be happy to answer 
any questions that you may have. 

[Note. — The report entitled, "Review of Vendor and Contractor 
Payments" may be found in subcommittee files.] 

[The prepared statements of Mr. Gleiman, Mr. LeBlanc, and Mr. 
Quick follow:] 



101 



Testimony of 

The Honorable Edward J. Gleiman, Chairman 

Postal Rate Commission 

Chairman McHugh, Ranking Member Collins, and Members of the Subcommittee, 

Thank you for inviting me to testify. I am accompanied by my colleagues 
Vice Chairman W. H. "Trey" LeBlanc, Commissioner George W. Haley, and 
Commissioner H. Edward Quick, Jr. 

I have much to report. Since last we met. the Postal Rate Commission has been 
very, very busy. Last June, after a request from the Postal Service Governors, we issued 
our Opinion and Further Recommended Decision in Docket No. R94-1, the most recent 
omnibus rate case. That decision was adopted by the Governors. We have considered 
and completed a major mail classification reform case. Docket No. MC95- 1 . Since 
December 19, 1995, we have been considering the Postal Service's request for expedited 
consideration of an experimental case involving First Class and Priority small parcels. 
And, we have made significant progress in Docket No. RM95-4, a rulemaking proceeding 
intended to provide fiirther streamlined procedures for certain types of cases. I will have 
more to say on that in a few minutes. 

We have modernized the Commission's computer systems, with a view toward 
facilitating data transmission and, eventually, electronic filing. I want publicly to thank 
the Postal Service for its technical assistance in this regard. Recently I wrote the 
Postmaster General asking his assistance to simplify further our proceedings by ensuring 
that all data filed by the Postal Service is presented in a standard format. Also, in its 
reclassification decision, the Commission announced its intention to launch a rulemaking 
proceeding to reexamine its "computer evidence" rules. 

As a result of your initiative, Mr. Chairman, we are working with the 
Subcommittee, the Postal Service, and the General Accounting Office (GAO) to study 
how the information and data needs of the ratesetting process can be better served. I 



102 



thank you for moving forcefully to address the concerns I expressed about this when I 
appeared here last year. We have also, on several occasions, provided technical 
assistance to the GAO, most recently in connection with its study on international mail, 
released this week, and its work concerning the Private Express Statutes. 

Despite this progress, we continue to be concerned about the expense and effort 
required of parties who participate in major rate and classification cases. Now that the 
classification case is completed, we hope to open discussions with various parties to 
explore methods to reduce the effort and expense required to participate in rate and 
classification proceedings. 

In the midst of all of this, we have disposed of an unusually large number of small 
post office appeals. We also, in February 1995, initiated a rulemaking proceeding to 
amend our rules of practice to provide that a post office appeal is timely if the appeal was 
postmarked before the 30-day time limit. Our existing rule requires the appeal to be 
received by the Commission within the 30-day time limit. On March 30, 1995, the Postal 
Service filed comments opposing the proposed change, arguing that the Commission does 
not have the statutory authority to make such a change in its rules. We have held this 
proceeding in abeyance while related legislation is being considered in the House, but a 
statutory change is probably desirable. Mr. Chairman, I know the Subcommittee is 
familiar with this type of issue, where practice under existing law sometimes appears 
inconsiderate of overall equity and fairness. 

We have accomplished the above despite the fact we have fewer staff today then 
when I appeared here last March; and, our budget, when adjusted for the one-time 
purchase of computer equipment, has not grown by even one penny. 



103 



The mail classification reform case, MC95-1, was a huge effort, not just for the 
Commission, but for the Postal Service and the many interested and affected parties. The 
case affects 89 percent of all mail volume. Most rates for this mail will change because 
of the restructuring of the mail classification schedule. 

We were very pleased the Governors, with two exceptions, accepted our 
recommended decision in the reclassification case. One of the exceptions, the "bulk 
parcel" issue, is a very technical matter, and we disagree with the position taken by the 
Governors. 

The second exception, involving Courtesy Envelope Mail (CEM) deeply troubles 
me, and I will touch on that in a few minutes. First, an overview of the decision. 

The case was completed in the ten months contemplated by the law (plus three 
snow days). More than 70 parties participated, and the Commission held 35 days of 
public hearings. The transcript comprises more than 17,000 pages. Now, I know there 
are some who say this process is too long and too complicated. But, please consider that 
the mail affected by this case generates 80 percent of postal revenues — that is 
$43.7 BILLION. A change in rates of a few tenths of one cent means millions, maybe 
even tens of millions, of dollars to a major mailer. Even changes that do not involve large 
amounts of postage, such as changes in mail eligibility requirements, can have a profound 
effect on mailers whose livelihood depends on access to the postal system. The stakes are 
extremely high. It is critical that affected parties be permitted to participate in a 
meaningful maimer, and, frankly, that requires some time and great care. As one of our 
lawyers recently said to me, "sure, we can speed up this process. It's just a matter of 
whose due process rights you want to take away!" 



104 



This was the first comprehensive look at mail classification since the 1970 
enactment of the Postal Reorganization Act. The Postal Service and the parties advanced 
numerous classification theories, often competing or conflicting, to justify mail 
classification changes they proposed. In the end, the Commission's Opinion sets forth 
clear guidance for applying the statutory classification and ratesetting criteria (39 U.S.C. 
3622, 3623). It recognizes that the function of mail classification is to create groupings of 
maiiybr the purpose of ratemaking. Under the Postal Reorganization Act, and judicial 
and Commission precedents applying it, postal ratemaking involves two fiindamental 
steps: (I) the attribution of direct and indirect costs required by 39 U.S.C. 3622(b), and 
(2) the assignment of institutional, or overhead, costs in accordance with the noncost 
criteria set forth in the statute. The attributable costs comprise 65 percent (more than 
$36 billion) and the overhead costs about 35 percent (about $20 billion) of total costs. 

The Commission recommended the renaming and regrouping of existing mail 
classes as the Postal Service requested. Express Mail will become Expedited. First-Class 
Mail will be unchanged, but existing third and fourth class will be combined into a new 
Standard Mail class. Existing second class is renamed Periodicals class. 

The Commission endorsed the Postal Service goal of promoting automation by 
restructuring classifications and rates to reward "workshare" mailers. These mailers 
prepare mail for processing on automated equipment and mail that otherwise bypasses 
postal operations, thereby reducing postal costs. Many of these mailers will see rate 
reductions which reflect their worksharing activities. 

The Recommended Decision encourages automation-compatible mail. 



105 



The Commission largely adopted the changes in mailing niles and procedures 
proposed by the Postal Service in the form of a new Domestic Mail Classification 
Schedule, thereby permitting the Service to go forward with the 123 Federal Register 
pages of implementation rules it had developed in consultation with its customers. 

Probably the most controversial aspect of the Postal Service's proposal pertained 
to second-class mail — mostly magazines and newspapers. The Postal Service proposed 
dividing the existing second-class regular subclass into two new subclasses with, 
essentially, one for large publications and another for small. Opponents of this proposal 
argued that it would lead to an unfair allocation of postal overhead costs, thereby harming 
many for the benefit of a relative few. The Postal Service's proposal would have meant 
an average 1 7 percent postage increase for more than 1 1,000 small volume periodicals to 
effect an average decrease of 14 percent in rates for some 800 densely-circulated 
publications. 

The Commission rejected the Postal Service's subclass proposal for magazines and 
newspapers. It could find no basis, economic or otherwise, for drawing such an arbitrary 
line between large and small publications. It did, however, recommend rates that reflect 
the worksharing activities of publication mailers. Large, highly-presorted publications 
(the roughly 800 identified by the Postal Service) will experience an average rate 
decrease of 3.7 percent, not 14 percent. The average increase for others will be 
3.5 percent. Improved Postal Service cost studies in this area could lead to further rate 
refinements. 

The Commission endorsed a Postal Service proposal for a new Enhanced Carrier 
Route subclass in Standard Mail and has been harshly, but understandably, criticized by 
some competitors of the Postal Service for this action. While we wish we could please 



106 



everyone, we, of course, cannot. We have a law to follow and apply to the facts 
presented in our proceedings. As the Commission's decision explains, the evidence 
clearly supported dividing carrier route and noncarrier route mail into separate subclasses. 
The concern of competitors (primarily large daily newspapers) is understandable because 
the new subclass results in lower rates for mailers who compete with them for advertising 
dollars. 

I mentioned the Governors' rejection of the CEM recommendation. This is why 
their action troubles me. 

First, what is CEM? CEM, as recommended by the Commission, is limited to 
preprinted reply envelopes provided to consumers by entities expecting or hoping for 
remittance mail (for example, credit card or utility companies sending bills, catalog 
companies distributing mail order forms, or charitable organizations seeking donations). 
This mail, although generally deposited one piece at a time by householders, can be 
sorted directly by automated equipment because it displays both a preprinted barcode and 
a Facing Identification Mark (FIM). Also, it is frequently picked up at the post office, 
avoiding the need for delivery. Thus, it costs less to process and should be eligible for a 
discount. 

The Governors' decision complains that the CEM recommendation was not based 
on a recommendation "proposed by the Postal Service in this proceeding." This is true. 
But, the Commission's Office of Consumer Advocate proposed this classification, and the 
Commission thought the evidence demonstrated the need for it. CEM is important 
because it has the potential to touch each and every person in this country who pays a bill 
by mail. 



107 



Exactly one year ago today, the U.S. Postal Service issued its Press Release 
No. 23, entitled "Customers Get First Look At Reclassification Case." Let me read you a 
short paragraph from the third page of that release: 

The Postal Service will also propose that reply envelopes included in 
the First-Class automation subclass be properly barcoded. The Postal 
Service plans to ask the Postal Rate Commission at a later date for a lower 
rate based on the lower costs of automating this mail. These savings would 
be passed on to the consumer. 

Mr. Chairman, when the Postal Service makes such a public commitment, should 
not the public be able to take the Service at its word? Apparently not. 

One of the Postal Service mottoes is "We Deliver for You." The Commission's 
decision gave the Service the opportunity to live up to that motto. We recommended a 
"shell classification" and left it to the Postal Service to fill the shell, as it saw fit — as one 
year ago it publicly said it would. 

And, what did the Postal Service Governors do? With great gusto and a number 
of, at best, specious arguments about operational problems — problems that simply do not 
exist by virtue of establishing a shell classification, they groimd the shell to dust. They 
threw out the framework needed to do what the Postal Service told the public, in its Press 
Release No. 23, it was committed to doing. 

In recent weeks Postmaster General Runyon has been talking about threats to 
First Class mail volumes from technologies — -for example, the potential growth in 
electronic bill paying by individuals. This mail is CEM or courtesy envelope mail. This 



108 



is the ver>' mail that would have been the beneficiary of those savings that were, 
according to Press Release No. 23, going to be passed on to the consumer. Perhaps 
fulfilling the commitment made in Press Release No. 23 would help keep in the system 
the very mail about which the Postmaster General is worried. 

I hope that the lone dissenting voice among the Governors on this CEM issue, that 
of Governor David Fineman, is enough to ensure that individual mailers will soon get the 
benefits promised a year ago. But even if this should come to pass, I still will not 
understand why the Governors took the action they did in rejecting the CEM shell. Their 
action makes no sense at all, unless they never really intended to let the general public 
share directly in the benefits of automated mail. 

Last year, when I appeared before the Subcommittee, I suggested, partly in 
response to the Postmaster General's call for more flexibility in setting rates and 
introducing products, that the Postal Ser\'ice reexamine the recommendations of the 1992 
Joint Task Force on Postal Ratemaking. Shortly after that, I met with the Postmaster 
General, then Chairman Winters, and other Governors and urged this course of action. 
So, I was pleased when the Postal Service, shortly after our meeting, petitioned the 
Commission for rules based on the Task Force's recommendations. The Commission 
promptly initiated a rulemaking proceeding (Docket No. RM95-4). and has had two 
rounds of comments on various aspects of the Postal Service's proposal. The initial 
invitation for comments on the Postal Service's proposals drew diverse comments fi-om 
21 parties. 



109 



In response to these comments, last October the Commission published proposed 
rules to implement a majority, but not all, of the Postal Service's procedural initiatives.' 
The Commission explained it was proceeding in this limited fashion for several reasons. 
First, it was mindflil of the current workload imposed on all those involved in Docket 
No. MC95-1 and mail classification reform generally. Second, there were potential legal 
impediments to implementing at least some of the rules held in abeyance. And, finally, 
the four initiatives for which proposed rules were published appeared "to hold the greatest 
promise for procedural reform in the near term." The Commission promised, however, 
that it would "endeavor to pursue the remaining initiatives, which appear to present 
somewhat greater challenges under the Postal Reorganization Act as currently interpreted, 
in subsequent proceedings." Frankly, we thought this was the most expeditious way to 
proceed. We would tackle the seemingly less controversial proposals first. 

Well, when it comes to the Postal Service, as I am sure the Subcommittee has 
learned, very little is noncontroversial. In the 17 sets of comments submitted, the 
Commission was criticized both for what it proposed and what it did not propose. One 
party went so far as to assert that the Commission's failure to address immediately the 
negotiated service agreements or "contract rates" proposal was "a disservice to the 
American public." While the Commission has been accused of many things over the 
years, somehow, I doubt individual and small business mailers feel disserved because the 
Commission chose to allow time for carefiiUy evaluating the legal and economic 



On October 27, 1995, the Commission published proposed rules for conducting proceedings on 
Postal Service requests for market tests of new services, temporary establishment of provisional 
services, and minor changes in mail classification, all in 120 days or less. Rules that would 
allow proposed new services to break even financially over a multi-year period were also 
included. Other rules proposed by the Postal Service concerning "limited scope" rate cases, rate 
bands, and negotiated service agreements, were held in abeyance. 
^ 60 Fed. Reg. 54981 (October 27, 1995) 
^ Ibid. 



no 



ramifications of rules which could permit a few large volume mailers to cut deals directly 
with the Postmaster General for special, undoubtedly lower, rates. 

Seriously, the commenters raised important concerns about the proposals we 

viewed as less controversial. For example: 

"If the Commission were to adopt its proposed rules, it would be 
faced with making its decisions on a one-sided record submitted by 
the Postal Service. Opposing parties would have no valid 
opportunity to make an alternate case. The result would be a Postal 
Rate Commission that could not possibly fiilfill it statutory 
responsibilities." And, 

"Thus, any financial losses stemming fi-om ill-advised or underpriced 
'new' or 'provisional' services under rules such as those proposed in 
the Notice would shift from the users of these 'new' and 
'competitive' services to monopoly mailers. This would constitute a 
cross-subsidy of such services by First Class mail, and, as such, 
would contravene the intent of Congress." 

Even the Postal Service has expressed dissatisfaction with the Commission's 
version of the proposed rules, although for a ver>' different reason than the above-quoted 
commenters. It wants even more flexibility than the proposed rules would allow. 

So, we are continuing to consider the issues raised by this rulemaking and will be 
able to give them even more attention when the experimental small parcel case is 
completed, particularly now that the initial phase of the classification reform effort is in 
hand. 



When I was here last year, I also expressed some concerns with the information 
and data used by the Postal Service to support requests filed with the Commission. 
During the recent classification reform case, the Postal Service provided a number of cost 
studies which, I am happy to say, were at least up to the standards of earlier Postal 



10 



Ill 



Service cost studies. However, I do want to bring to the Committee's attention two 
potential problems with the data and information the Commission and the parties 
normally use to evaluate Postal Service proposals. 

The first concern is with the timeliness of regular Postal Service data reports. The 
Commission rules, developed in conjunction with the Postal Service, provide for the 
regular submission of basic cost and volume data. It has been my experience that the 
Postal Service does not always submit this information in a timely manner, and this can 
pose significant difficulties to parties and the Commission when a case is proceeding. As 
an example, the basic Cost and Revenue Analysis report for 1994 was not filed until May 
22, 1995, almost two months after the Postal Service classification reform request was 
submitted to the Commission. In contrast, the 1993 version of that report was filed in 
March 1994. Since parties must file their direct case within four months, a two month 
delay poses a serious hardship. 

The other issue I want to raise is the Postal Service's increasing tendency to 
withhold information or data it claims has some commercial value. Many private 
businesses appear before the Commission and voluntarily disclose what is clearly 
proprietary information. The Postal Service is not a private enterprise, although it is 
expected to operate in a businesslike fashion. It seems to me that the Service should 
avoid withholding information as proprietary unless it is clearly evident that disclosure 
would be likely to have a significant harmful impact. 

Early in the classification case, the Postal Service was asked to provide 
information on its customers' reaction to a reduced rate for courtesy reply mail. Initially, 
the Postal Service resisted providing any information. Then, when pressed, the Postal 
Service provided a relevant study with certain portions redacted. When the Commission 



112 



insisted that the Service explain why this information was withheld as proprietary, it 
became clear that there was little or no likelihood that this information would have 
harmed any Postal Ser\ice business interests. 

Unfortunately, the process for obtaining data not willingly provided by the Service 
can extend for months. Thus, by interposing meritless objections, the Postal Service 
withheld information sufficiently to reduce its value to participants in the case. A similar 
controversy delayed participant access to a report highly relevant to Postal Service claims 
that alternative delivery of second-class publications was an economic threat. As I noted 
when we issued our decision on January 26: "[t]he record evidence indicated that there 
was no real competitive threat in this area — a conclusion supported by a summary of a 
Postal Service study which became available through discovery. Interestingly, the Postal 
Service witness in this area was not apprised of the existence of the study while preparing 
his expert testimony." 

I recognize that there may be some proprietary business information which the 
Postal Service might need to withhold. But as long as the Postal Service remains the 
nation's provider of monopoly mail service, it should be willing to operate in the sunshine 
and allow the American people to understand both its successes and its failures. 

Partly because of these difficulties, I am reversing a position 1 took last year. You 
may recall, I was asked whether I thought the Commission should have statutory 
authority to subpoena Postal Service records and documents. I said I was not ready to ask 
for that power. Now I am, and as the Subcommittee proceeds to consider postal reform 
legislation, I urge you to give the Commission that authority. 



12 



113 



The Commission believes there are other legislative changes which could benefit 
the ratesetting process. But that is not the subject of this hearing. We look forward to 
sharing our thoughts on this in the future, and. of course, we offer our services and 
assistance to the Subcommittee as it proceeds. 



13 



114 

Testimony of the 

Honorable H. Edward Quick, Jr. 

Commissioner 

Postal Rate Commission 

Trilogy Of Woes Demands A Reality Check 

Mr. Chairman, Members of the Subcommittee: 

I suggest a reality check as you looic at the USPS and its future course. For 
more than a year in his speeches and public statements the following refrain has been 
heard from the Postmaster General (PMG): "... We are hamstrung by laws, rules, and 
red tape. ..Our problems fall into three areas: people, prices, and products. " 
(8/2/95) 

The hundreds of thousands of hard-working postal employees are the heart and 
sinews of the organization; getting the best from them is the task of managers, the job 
of the PMG and his subordinates. My knowledge of this area is limited, but 1 have 
observed a disjunction between reality and wish in the other two areas of the PMG's 
trilogy of woes. 



P RIC ES 



"... We need to free the price-setting process... " (2/23/95) 
"...Our price-setting process is out of sync with the speed and direction 
of future business. It takes too long. It costs too much. It 's too 
inflexible. We can 't offer volume discounts or create contract service 
arrangements with our domestic customers, steps our competitors can 
take. " (8/2/95) 



115 

"... We are trying to compete with one hand tied behind our back, in the 

worst of all worlds - tough private sector competition and burdensome 

government regulation. " (2/28/96) 

All of these statements by the PMG are based, I believe, on the mistaken 
assumption that the United States Postal Service (USPS) is an organization which 
should be allowed to operate as if it were a business, like any other business, in a free 
market. It isn't, and, 1 believe if it is to so operate, it should be freed of the 
"burdensome government regulation" of the Private Express and mailbox access 
statutes. In other words, if it is to have the "hand tied behind its back " loosened, it 
should be freed also from its monopoly base so it can compete as a business in a free 
market. I don't advocate ihis, but I think the logic is clear. 

As long as the USPS has a monopoly — and many patrons have no alternative 
to using its services ~ "freeing the rate-setting process " can only mean that captive 
customers are at risk of having their rates increased in order to reduce the rates of 
customers who have the opportunity to use other means of communication. The 
continued existence of the Private Express and mail box access statutes, in the interest 
of fairness and justice, dictates an independent forum, mechanism, or process to 
allow review and modification of all postal price changes. 

Businesses that can offer "volume discounts or create contract service 
arrangements " don't have to worry about shifting the burden of the costs of such to 



116 



captive customers: they operate in a free market, their customers have other choices, 
and they can fail. The USPS can't. 

Ordinary businesses must set their prices to recover both direct and overhead 
costs. USPS often attempts to set prices on service categories it deems competitive 
so these categories contribute little to overhead, or common costs, while it seeks to 
recover an ever-increasing percentage of its overhead costs from monopoly 
categories. Competing businesses have no such opportunity. Advantage. USPS! 

The notion that the USPS should be given the freedom to adjust rates without 
review if those rates do not exceed the rate of inflation is seen by some as a way to 
provide more flexibility in rate-setting. This is a particularly insidious idea, fraught 
with potential for abuse of captive mailers. It's conceivable, under a common variant 
of this proposal, that the First Class stamp could be increased a penny every year for 
the foreseeable future without any review. A billion dollars a year could be added to 
postal revenue, each year overhead costs could be reduced for non-First Class mail, 
and individuals, small and large businesses, and other free-market based competitors, 
would have no appeal and no recourse. 
PRODUCTS 

"... We need to free our products of bureaucratic restrictions and 

make them modern and customer oriented. " (2/23/95) 



117 

"We spend months revealing proprietary business information, 
only to have our competitors take our idea and run with it. You can bring 
a child into the world faster than we can price a new product and bring it 
to market." (3/8/95) 
Making the services (a.k.a. products) of the USPS "more modern and customer 
oriented" is a worthy goal, but the problem in achieving it is not "bureaucratic 
restrictions. " The just completed reclassification case which will be implemented in 
July proves the procedures for changing services can work in a timely manner with 
safeguards for all affected users. The generally favorable acceptance of the decision 
testifies to the basic soundness of the process. The frame-work doesn't need to be 
changed, it needs to be used by postal managers willing to give time and effort to the 
details of managing. 

Speed in developing new services is also desirable, but the existing procedures 
aren't the problem. The problem is that the managers of the USPS cannot get things 
done more quickly. Take the experimental case delivered today: it was approved by 
the Board of Governors on May 2, 1995; the Postal Rate Commission received it on 
December 19, 1995; and, it was returned for action to the USPS on March 13, 1996. 
Of the ten months since approval by the Board of Governors, seven were 
mysteriously taken up at USPS. We have taken less than three months to review it, 
and give interested parties the chance to comment. The USPS, if this relatively 



118 



simple matter is an indicator, can't act fast. That's a management problem, not a 
"bureaucratic restrictions " matter. 

As for revealing "proprietary business information, " and having a competitor 
"take our idea and run with it, " I'm completely baffled. I don't know of one service 
"idea " that has been stolen from USPS. On February 2, the project manager for the 
new products group in the USPS Marketing Department - the person responsible for 
the identification and pursuit of new business opportunities - could not cite any 
specific business opportunities that the Postal Service lost because they were unable 
to take advantage of the opportunities in the last two years. 

New products and price changes can be made faster than a human baby, but it 
requires knowledgeable, agile, and committed postal managers. We're ready to do 
our part, as evidenced by the experimental rate case delivered today and MC-95: the 
omnibus rate case that was concluded in less than nine months and resulted in an 
additional $400 million in revenue to postal coffers because of our expeditious action. 
(That extra revenue allowed the USPS to claim credit for their best year ever for 
revenue in FY 95.) 
BUSINESS AND/OR PUBT IC SERVICE 

"...I'm running the Postal Service as a business. " (11/17/95) 



119 

"... We face the demands of a private sector company, yet we are 

hamstrung by federal restrictions that put a stranglehold on our programs. " 

(6/28/95) 

"...America 's advertising dollar is now almost evenly split among 

television, newspapers and direct mail. Direct mail is gaining market share. 

It 's our fastest growing business. " (J J/J 7/95) 

The PMG wants to have his cake and eat it; he wants the authority to act as a 
business in a free market while retaining the monopoly foundation of the USPS and 
avoiding the hazards of a private business. Many of the largest users of the USPS 
agree with him; they support his notions of freedom to price and develop new 
products because they anticipate "volume discounts" and "service contracts." They 
are concerned primarily with their costs, not with the fairness of pricing postal 
services. They want a competitive advantage, and will use the USPS monopoly to 
gain it. 

The crux of the PMG's attempt to have it both ways is found in his pride in the 
fact that expenditures for advertising dollars are "almost evenly split among 
television, newspapers, and direct mail. " He crows that direct mail is "our fastest 
growing business. " He doesn't say that he has a step up on his competitors, 
particularly newspapers, because the Private Express and letter box statutes protect 
him from a truly free market. Newspapers, television networks and stations. 



120 

telemarketers, and others have no monopolies to rely on. They can fail; the USPS 

can't. 

The PMG attempts to obfuscate the reality of his situation: ignore the 
monopoly base and proclaim, "I'm running the Postal Service as a business." But it's 
like no other business, and, if he is " hamstrung by federal restrictions. " he also has 
many advantages because of the ''restrictions" he laments. 

Rather than pursue quixotic goals of making the USPS something it isn't, and 
rather than chortling about the demise of Publisher's Express - "We ran them out of 
business by improving service and keeping costs low! " (2/20/96) [and because of the 
mailbox access statute] - postal managers should concentrate on their core services. 
They should take a basically sound structure for pricing and developing products, and 

make it work. 

Their success in these areas, and even more in the "people" area that I have not 
addressed, will determine the future of the USPS. 



121 



PREPARED TESTIMONY 

OF 

COMMISSIONER WILLIAM H. LEBLANC ID 

POSTAL RATE COMMISSION 

BEFORE THE 

HOUSE COMMITTEE ON POST OFFICE AND CIVIL SERVICE 

March 13, 1996 

1 Mr. Chairman, Members of the Committee: 

2 I appreciate the opportunity to provide these remarks for the 

3 record. 

4 This is not an ordinary oversight hearing. The consensus is that 

5 sometime this session legislation may be introduced to make changes to 

6 title 39 which governs the operation of the United States Postal Service 

7 and the Postal Rate Commission. Some changes may be needed and I 

8 will suggest several relating to the rate setting process that you may not 

9 have considered. Before I do so, I would like to make a general 

10 statement regarding the United States mails. 

11 Twenty five years ago, after lengthy deUberation, the Congress 

12 passed the Postal Reorganization Act. The purpose of that legislation 

13 was to rescue the Post Office fi-om the chaos of the late sixties, to ensure 

14 that the American people had universal mail service that reflected the 

15 costs of various classes of mail, and to put the new Postal Service on a 

16 business-like basis. 



122 



1 If one were to believe the cries of despair from some members of 

2 the postal community, one wovild think that the Posted Service is on the 

3 brink of disaster. It is not. Since 1990, total volume for all classes of 

4 mail has increased 11.8 percent. The attached chart shows increases by 

5 class. 

6 Like all organizations as large and complex as the Postal Service, 

7 change is necessary, but most of this change can be accomplished under 

8 the current statute. 

9 Despite what is said about the Postal Service today, few pieces of 

10 legislation have been more successful in achieving their objectives than 

11 has been the Postal Reorganization Act. Today, the United States has a 

12 most sophisticated maU system which achieves the goals of dependable, 

13 universal mail deUvery at exceptionally reasonable rates. Recently, there 

14 has been a comparison of the Postal Service with the mail services of 

15 other coimtries. It has been interesting. Though I have some doubts 

16 about how useful these comparisons are to your concerns. It is a bit like 

17 comparing a chihuahua with a great dane. These foreign services are 

18 truly boutique postal services in contrast to the U.S. Postal Service. For 

19 the most part, they are no more efficient in providing their services than 



123 



1 is the U.S. Postal Service. The U.S. Postal Service has by far the highest 

2 productivity of any Postal Service in the industriaUzed world. 

3 We have come to this happy state of affairs over the past two 

4 decades because of the constant interaction between the mailing 

5 community, the Postal Service and the Postal Rate Commission 

6 operating under a process established by the Congress. In 1970, no one 

7 would have known what the Postal Service would look like today. I 

8 suspect most who crafted this legislation would be pleased at what has 

9 resulted. 

10 I hope that you would keep this in mind during yovu: deliberations. 

11 I would also remind you of Senator Stevens' remarks at the conclusion of 

12 the recent hearings on foreign postal services. Senator Stevens noted 

13 that he was not inclined to fix that which was not broken. 

14 I do have several suggestions for change in the area of postal rate 

15 making. 

16 First, I would urge that the Prior Years' Losses (PYL) component 

17 of the Postal Service's revenue requirement be phased out. Unexpected 

18 losses should be provided for through the contingency account. PYL has 

19 been used as a slush fund and permits and contributes to poor financial 

20 management. 



124 

4 

1 Second, I believe that the Postal Rate Commission should have 

2 final authority on rate and classification matters. The Postal Governors, 

3 with no independent and neutral staff to assist them, are not well 

4 equipped for deliberating on the recommendations of the Rate 

5 Commission, and are not well served by postal management in those 

6 deUberations. Under the present system, postal management gets "two 

7 bites of the apple" in presenting its views on rate and classification 

8 matters: once in Utigating its case before the Commission, then again in 

9 briefing the Governors prior to their decision. In my opinion, this is a 

10 flawed and biased process. In addition, it only serves to delay the final 

1 1 implementation of rate and mail classification changes. Final decision 

12 authority for the Commission wiU improve the process and allow changes 

13 to be made more expeditiously. If the Postal Service or interveners 

14 disagree with Commission decisions, they may then resort to the covirts 

15 as they can today. This is the common practice in other regulated 

16 elements of the economy. 

17 Lastly, I have serious concerns about our imderstanding of Postal 

18 Service costs, and these concerns go well beyond any that relate to the 

19 overall costing systems. We are told regularly that the postal markets 

20 are becoming more and more competitive. As this occurs, as it has in 



125 



1 other industries, knowledge concerning costs becomes more and more 

2 important. Yet there are key areas where the cost information we have 

3 is somewhere between limited and nonexistent. For example, in the 

4 recent classification case the Postal Service was unable to quantify the 

5 costs associated with processing small parcels as opposed to processing 

6 less expensive flat-shaped pieces. Similarly, we know very little about 

7 the extent to which the per-piece cost of processing large mailings might 

8 be lower than the cost of medium or small mailings. 

9 Doing good studies along these lines takes time and effort. Doing 

10 without them, however, will be even more costly. It wUl handicap the 

11 Postal Service competitively and will prevent it from encouraging broad 

12 usage of many of the capabilities it has. There needs to be a way to get 

13 these studies done. We simply cannot depend on the unsupported data. 

14 To address such complex issues outside the adversarial context of a 

15 rate case, I suggest that the Congress establish a small joint studies and 

16 analysis group comprised of staff elements fi-om the Postal Service and 

17 the Postal Rate Commission to study this and other questions as 

18 determined by the Postal Service, the Postal Governors, and the Postal 

19 Rate Commission. 



AO-873 0-97-5 



126 



6 



1 I say again that you should remember in your considerations that 

2 you are dealing with a healthy and most remarkable Postal System. If 

3 you do nothing, it could remain that way. 

4 Thank you. 



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128 

Mr. McHuGH. We thank you very much, Chairman Gleiman. Let 
me just say, in response to your final comment about the existence 
of many other legislative changes, we would certainly welcome the 
opportunity to review those, specifically, with you, and probably 
sooner rather than later because of our intent to proceed on this 
issue in an omnibus fashion sometime in early summer. 

Mr. Gleiman. Mr. Chairman. 

Mr. McHuGH. Yes. 

Mr. Gleiman. I'll leave with you my wish list. 

Mr. McHuGH. Terrific. 

Mr. Gleiman. And if you want, we will provide legislative lan- 
guage in the near future. 

Mr. McHuGH. Well, we'll take the ideas first and worry about 
the language later. That's very helpful, and I do appreciate that. 

Mr. Gleiman. We may have more. 

Mr. McHuGH. Thank you. 

Let's return for a moment to CEM. 

Mr. Gleiman. Yes, sir. 

Mr. McHuGH. First of all, you heard my question to the Post- 
master General as to his opinion on why the Gk)vernors rejected the 
offer. You heard his response. Would you like to respond to his re- 
sponse, as a matter of fairness? 

Mr. Gleiman. I don't want to personalize this any more than per- 
haps I already have, but, plain and simple, the PMG is wrong. Yes, 
CEM pieces get deposited one at a time or, in the case of those of 
us who have lots of bills, more than one at a time. And there is 
some clear evidence that there are costs avoided. The Postal Serv- 
ice knows this, and we know it. As I indicated, this mail also 
avoids other costs that the Postal Service would otherwise incur, if 
you and I just paid our bills by putting them in a plain business 
envelope and putting a 32-cent stamp on it, that is delivery cost. 

But more importantly, sir, I didn't make the commitment in 
Press Release No. 23, and I was not on the Board of Governors 
when the R87 and R90 cases were handed down. I did not make 
the statements that are on the public record, three cases running. 
They made those statements. If they don't want to stand by their 
commitment, that's OK with me, but they ought to tell the Amer- 
ican public, they ought to tell us, and they ought to tell you. 

Mr. McHuGH. I appreciate your interest in not personalizing it. 
I certainly don't want to do that either. But I think it's important 
that we try to flesh this out as much as we can, because I think 
it does raise an important point about flexibility and opportunities 
and opportunities hoped for. 

You say that you believe the analysis that the PMG proffered is 
wrong. Do you think there was an underlying reason that we per- 
haps have not heard as to why they may have rejected that, some- 
thing that would be known to you but not to me? 

Mr. Gleiman. Well, flrst, just let me repeat, as I said in my 
statement, that the arguments that were made in the Governors' 
decision, that talk about operational problems, are specious. There 
are no operational problems, because there's no operations. You 
can't have operational problems if you don't have an operation. 

But I guess my answer to your question would be that — well, 
maybe I ought to make reference to that. One fellow in the mailing 



129 

community, who doesn't always agree with the Postal Rate Com- 
mission, told me, when he found out that they had rejected CEM, 
he said to me, "Do you ever really expect that the Postal Service 
and the Board of Governors will accept something that the Rate 
Commission has done, flat out?" 

Perhaps he was right. Perhaps they just needed to search around 
for something to reject for the sake of rejecting it. I don't know. But 
what they did makes no sense. 

Mr. McHuGH. Well, let's pursue that. One of the reasons they 
said was that the recommendation that you made was not part of 
their submission, that it came from your consumer advocate. Is 
there anything in your procedural rules or the law which oversees 
you that precludes you from using an idea that comes fresh to a 
case, either from your consumer advocate or from some outside 
source? 

Mr. Gleiman. Well, I've read the law a couple of times and I've 
read our procedures, and the answer is simply no. As a matter of 
fact, if you look back over the years, you will find that, on a num- 
ber of occasions, proposals have been made by parties, OCA and 
other parties, that have been incorporated into Commission rec- 
ommendations. And some of them — I can't give you a rundown, but 
some of them I'm sure have been accepted by the Governors over 
the years. 

Mr. McHuGH. OK. Let's move from that. Data is obviously a very 
big concern, and it's covered in your testimony. When you were 
making your presentation a bit earlier, you talked about the figures 
on the third-class parcels that I mentioned. 

Mr. Gleiman. Yes, sir. 

Mr. McHuGH. And you said, as I understood it, that the data in 
that respect, under the R94 case, did not become available until the 
reclassification case. What happened there? 

Mr. Gleiman. Well, you may recall that the R94 case was a Post- 
al Service proposal for an across-the-board increase of 10.3 percent, 
which we did not accept, flat out. We raised second-, third- and 
fourth-class rates a bit higher, on the order of 14 percent, and the 
average first-class rate only went up about 9 percent. But there 
was general agreement within the third-class community in the 
R94 case. As a consequence, during the litigation of that case, there 
was a great deal of information that was not thoroughly examined. 

Mr. McHuGH. Was it available? 

Mr. Gleiman. Well, it may have been. It may have been in the 
underlying information, but it was not evident from looking at the 
case. Now, you're dealing with a whole bunch of issues. The Com- 
mission tries to analyze all the data. One of the beauties of the 
process that we have now is that the other parties engage in dis- 
covery, and in doing so they uncover data. There was little, if any, 
discovery in the third-class area in R94 because of the agreement 
that had been reached between the Postal Service and the third- 
class mailing community before that case was filed. 

So, assuming the data was there, it didn't bubble to the top. 
However, when this case came up, the reclassification case came 
up, there was some examination of the Postal Service data in this 
area, and it was made quite clear that the Postal Service's data 



130 

showed that, on average, the 600 milHon third-class parcels were 
not covering their cost. 

The problem we had, at least some of the commissioners had in 
this case, was that, while we knew that there was below-cost cov- 
erage on third-class parcels on average, we did not have enough in- 
formation to know which types of those 600 million parcels were 
below cost and which were above cost. So, on a split decision, we 
chose not to try to surcharge or increase the price on those parcels. 

But my point, when I responded to you earlier, was in response 
to Postal Service counsel. This is not a situation where, over a 3- 
or a 4-year period, the margin above cost has been eroded because 
costs have been increasing during that period. This is a situation 
where these rates are fresh rates; there haven't been cost in- 
creases. 

We were in the test year. The test year for the R94 case was fis- 
cal year 1995. We were in the test year, and, theoretically, you 
couldn't have cost erosion in the test year. Two or 3 years down the 
line, we would have increased cost and erosion of that margin that 
is built in. 

Mr. McHuGH. In terms of trying to look at the entire rate-setting 
process, what does that example you just described tell us? Are we 
not getting good data? Do we not have the opportunity to examine 
that data, or we in a lag here that just can't be caught? 

Mr. Gleiman. We're getting data. We need a process that per- 
mits parties other than the Postal Service and parties other than 
those who have an interest in keeping those rates below cost to ex- 
amine that data on the public record. We need a process, and we 
have a process that provides for that. 

I mentioned in my testimony that sometimes the Postal Service 
doesn't do studies. Well, here's a perfect exam^ple. If the Postal 
Service knew — and it must have, because it was their data — that 
there were below-cost parcels in third class, they could have done 
a study. They are the people who have the data. They could have 
done a study and presented to the Commission and to the partici- 
pants in the case some indication of which type of parcels in third 
class were below and which were above cost. They did not do that 
study. 

One assumes, when we get parcel reclassification, that they will 
produce such a study. If they do not produce such a study, I think 
that they are going to have serious problems with the commis- 
sioners and probably with intervenors in parcel reclassification. 

When people talk about short-circuiting the process and that 
there's too much paper and too much data and too much informa- 
tion required, well, if you want to operate out of your hip pocket, 
then that's absolutely right; there's too much. But if you want a 
sound system that looks at cost and makes sure that people who 
are using the system are paying their cost and making a contribu- 
tion to overhead, then you have to have a process that allows dis- 
covery and that requires the Postal Service to come up with the 
data. 

Mr. McHuGH. Which gets us to the issue of what is proprietary 
and what is not. Do you have an estimate on the universe of data — 
if you had every possible piece of data that would be relevant, com- 
pared to what you are getting now and what is being withheld — 



131 

how much do you get? Do you get 80 percent of it and they with- 
hold 20, or do they withhold 10 that's proprietary? Any idea at all? 

Mr. Gleiman. I can't give you a percentage. The only time you 
know that they are withholding data is when you ask for it or 
when someone else asks for it, and they say no. That happened in 
a couple of instances in this case. It also happened in R94 with re- 
spect to international mail data. My guess is that, in the overall 
scheme of things, it's a small percentage, but because it's a small 
percentage does not mean that it's not a critical bit of information. 

Quite frankly, what concerns me perhaps more than the experi- 
ence that we've had at the Rate Commission over the last 2 years 
while I've been there is what might happen in the future. Postal 
officials, from the Postmaster General on down, have now taken 
the position that everything they do is in the competitive arena. 

My guess is that it won't be long before it's not only international 
mail and questions about threats of competitive carriage of publica- 
tions, and what have you, but sooner or later they will use the ar- 
gument that everything is competitive on the table to withhold 
whatever they want to withhold. 

I think we've got to draw the line. We've got to figure out where 
the line should be drawn, and we've got to draw the line before 
they creep over to the point where the Postal Service has got more, 
if you will, classified data than the Defense Department. 

By the way, we are a government agency, just like the Postal 
Service. And I find it offensive that they assert against us Freedom 
of Information grounds for withholding information, grounds that, 
under the law, are permissive, not required, and are permissive 
with respect to the general public and not other government agen- 
cies or the Congress. 

Mr. McHuGH. You heard me ask the PMG about his possible 
knowledge of any time where there had been an exposure of propri- 
etary information as a part of this process. He could not recall. Can 
you recall, either in your powerful days as a staff" member on the 
Hill or your equally powerful days now, where that may have oc- 
curred? 

Mr. Gleiman. I wish I had all the power that everybody thinks 
I have or had. Perhaps, then again, maybe I don't wish for that 
much power. I don't recall any sensitive business information get- 
ting out into the public unless — unless — ^you take an example, in 
the reclassification case, where the OCA requested a study or re- 
quested any studies that had been done in the CEM area, and the 
Postal Service said, "Oh, yes, there's been a study done," and they 
clamped the lid on a whole study, a whole 30-page study. 

Much to their chagrin, I jumped in, and ultimately they coughed 
up 29 V2 pages of the 30-page study. Well, if their original assertion 
was right that this was proprietary information, sensitive business 
information, well, then, I guess you could say that 29V2 pages of 
confidential business information got disclosed. But I think, if you 
looked at it, you would probably conclude that it shouldn't have 
been so characterized at the outset. 

So my answer is, I'm not aware of any sensitive information that 
has been disclosed. 

Mr. McHuGH. You mention in your testimony that any number 
of intervenors have voluntarily provided you with information that. 



132 

in your judgment, was unquestionably proprietary in nature. Any 
problems? Have you ever been taken to task by them for having 
disclosed any proprietary information they may have provided you? 

Mr. Gleiman. Not that I'm aware of. And just let me add that 
the issue is not the disclosure of what someone claims as propri- 
etary data. The issue is whether the disclosure of the data is going 
to result in competitive harm to the entity who provided the data. 

Business data is interesting data. It becomes stale very fast. You 
can look at the case law under the Freedom of Information Act, 
and you will see where it has been determined that over time data 
loses its business sensitivity. The Postal Service is talking about 
data that's 2 and 3 years old, in most cases. That data, in most 
cases, wouldn't result in competitive harm in any event. But the 
key is not that they think it's sensitive; the key is whether there's 
going to be competitive harm. 

Mr. McHuGH. What are the rules that govern you? If I represent 
Private Co. X, and I come to you during the process of a rate case 
and make some sort of submission, and I provide you, as an at- 
tempt to bolster my assertion, what I claim is proprietary informa- 
tion — let's assume that it unquestionably is — what is the status of 
that information? Does the USPS then have access to it because it 
is now part of the proceeding? And, conversely, if the Postal Service 
provides it, would their competitors, by course, have access to that 
data? 

Mr. Gleiman. There have been numerous arrangements over the 
years. In the two cases that I'm aware of and I suspect before, 
where data that's considered to be sensitive, confidential, what 
have you, has been provided by a party to the Rate Commission, 
under seal, with agreements that opposing parties can look at it for 
certain purposes and that the data can't be shared beyond a certain 
point. To the best of my knowledge, those arrangements have 
worked reasonably well. 

We usually wind up getting into a little bit of a discussion about 
the particulars of the seal agreement, if you will, but there are ar- 
rangements that can be made, and they have been made, and they 
have worked well. 

Mr. McHuGH. I appreciated your comments about what I will 
call the "Canada model", some repository of all data that would 
make a third-party judgment as to what was proprietary and what 
wasn't. But to return to your discussion of the subpoena power, 
how would you envision that be implemented? Would you also have 
subpoena power over intervenors? 

Mr. Gleiman. I think I would envision it as subpoena authority 
with respect to — administrative subpoena authority with respect to 
the Postal Service, which is a government agency, and not private 
entities. I would also like to think that the mere threat of the sub- 
poena might be enough, in most cases, to break loose information 
that was otherwise being withheld. 

I'm a pragmatist, and I know that a subpoena is not a panacea. 
I've seen it over the years. I've seen administrative agencies, I've 
seen the GAO and how it uses its subpoena authority, or doesn't, 
and it's complicated, it's time-consuming. It's doesn't solve all the 
problems, but I think it helps, because you have a little bit of a 
hammer in your back pocket. 



133 

Mr. McHUGH. You mentioned in your testimony, and the PMG 
referred to it in his, about your joint efforts to standardize submis- 
sion of data and also, as I understand it, to do it electronically in- 
stead of mailing it. 

Mr. Gleiman. Yes, sir. Well, I think we could probably move 
back and forth between the Postal Service electronically. I think we 
could put more material on our bulletin board and our Web page, 
now that we have one, so that intervenors and others could gain 
access to it. But there are really some rather simple changes that 
could be made if we could get the Postal Service and the parties, 
the usual parties, to agree. 

For example, there are a lot of interrogatories that are submitted 
by one party to another, and these wind up being pages and pages 
of typed questions. Wouldn't it be nice, wouldn't it be simple if 
someone could just require that the interrogatories be transmitted 
on a diskette? Wouldn't it be so much easier, rather than having 
to retype all those questions and then your answers afterward, if 
you could simply pop a diskette in, have all that pretyped question 
there, and then just fill in your answer and send a diskette back? 
It would save time. It would save money. Just little things. 

Mr. McHuGH. How is that joint effort proceeding? Are you mak- 
ing progress, the two of you, meaning the PRC and the USPS? 

Mr. Gleiman. Well, the Postal Service has been very helpful in 
working with us to upgrade our computer systems, and I think that 
they are amenable to greater standardization of the data that they 
submit. It's a question of what type of spreadsheet you use, and the 
like, in many cases. And we received some very thoughtful letters, 
one from counsel for DMA that comes to mind, that made a couple 
of other suggestions about how we could cut down on costs and the 
paper flowing back and forth. 

Now that we've had a chance to catch our breath, after the 
reclass case and the issuance of the experimental case today, we 
hope to turn our attention more to that, along with the RM95-4 
rulemaking. 

Mr. McHuGH. Let's talk about that rulemaking for a moment. 
You have, as I understand it, ruled or defined on four of the seven; 
is that correct? 

Mr. Gleiman. Four of the seven is correct, sir. 

Mr. McHuGH. And three yet to be disposed of; yes? 

Mr. Gleiman. Three which are much more difficult. There may 
be bigger legal issues, tougher legal issues yet to be addressed. Not 
disposed of, addressed. None of the issues have been disposed of 
yet. Let me make sure that we're all clear on this. 

We put out a set of proposed rules with four of the seven propos- 
als that were submitted following my meeting with the board's 
Strategic Planning Committee. And we have gotten comments back 
in. The comments came in shortly after the 1st of the year. We 
have to deal with those comments. 

As I indicated in my prepared remarks, the comments are from 
one end of the spectrum to the other. I mean, we did everything 
wrong, we did nothing right, and everything in between that. So 
we have to sort out the comments, and when you're in a rule- 
making, you have to respond to the comments on the record. So we 
will be doing that as we proceed in the next few weeks. 



134 

Mr. McHuGH. I don't want anyone to get the impression that I'm 
impatient or I think you haven't done it quickly enough. That's not 
the intent of this question. It's simply to try to understand the 
timeframe. When do you expect that to be completed? 

Mr. Gleiman. I would certainly hope that we can get final rules 
out by the end of April. 

Mr. McHUGH. End of April? 

Mr. Gleiman. Yes. I will tell you that, as I said in my testimony, 
not everybody is going to be happy, and perhaps everybody will be 
unhappy. I don't know. But we'll have rules out there. Certainly, 
it's in our interest to get them out before the next phase of reclassi- 
fication hits the beach. 

Mr. McHuGH. Yes. I understand. Our last panel will be com- 
prised, in part, of representatives from the GAO, and they have 
discussed previously — in fact, last November, they repeated the 
suggestion that Congress re-examine the 1970 Reorganization Act 
to look at and, as I understand their intent, to have us clarify the 
extent that demand pricing should be considered in postal rate- 
making. I am aware that the Postal Service and your Commission 
have had somewhat differing views regarding the weight that 
should be assigned to those demand factors. 

Using that narrower issue as a basis, but really taking into con- 
text all of the criteria set out in the 1970 Act, working on 26 years 
later, more than a quarter of a century, how important or how nec- 
essary do you think it is to have Congress revisit that very core 
issue of the 1970 Act, or do you think all of the criteria set out 
works still pretty well? 

Mr. Gleiman. I would never suggest to Congress that they 
shouldn't examine something, being the child of the Congress my- 
self. On the other hand, I think the criteria are reasonable as they 
stand. I guess, if one were going back to square one and redrafting, 
you might list them differently and split them out differently, since 
one of the criteria is a mandatory criteria and the other ones are — 
"cover cost and make a reasonable contribution" is mandatory, 
whereas the others provide the Commission some degree of lati- 
tude. 

So you might redraft the statute a bit, but, substantively, I think 
it covers the waterfront. And I think that the case law and the ad- 
ministrative law in the intervening period have buttressed and ex- 
plained further what those criteria are all about. 

Mr, McHuGH. Thank you. We are some 2^2 hours into this hear- 
ing. The good news is, I'm the only one left. The bad news is, I 
could probably continue. But we have yet another panel to hear 
from. 

Mr. Gleiman. I understand, and I'm not offended. I just hope it 
wasn't anything I did that drove all the other Members out of the 
room or kept them from coming. 

Mr. McHuGH. We're all intimidated by your tremendous knowl- 
edge. I have to be here because of the gavel. 

Mr. Gleiman. I've got to remember not to drink coffee with caf- 
feine on the mornings of the hearings. 

If I could just make one final comment. 

Mr. McHuGH. Certainly. 



135 

Mr. Gleiman. Last year I used a term — I characterized the gov- 
ernment as — the Postal Service as potentially a $55-billion govern- 
ment monopoly gorilla that could do great harm, without even in- 
tending to do so, to friend and foe alike. And I think there's some 
evidence during this past year that my remarks were a tad pre- 
scient, maybe, when you think of neighborhood mail and some of 
the other things the Postal Service has looked at. 

But I am deeply troubled by this constant discussion of market 
share and that the Postal Service is losing market share. Save the 
last couple of quarters, where the Postal Service has seen some vol- 
umes go flat — and by the way, we've been saying for a couple of 
years that the volume trends were not healthy — ^but save this past 
quarter, there has been volume growth. 

There's a question in my mind: Should a government agency be 
out there looking to increase market share vis-a-vis the private sec- 
tor? I guess I listened to the State of the Union Address and I 
heard the President talk about the end of the era of big govern- 
ment. I've read some of what the Speaker has written and said 
over the years about the footprint of big government. And I just 
scratch my head sometimes. 

I feel like the world is being stood on its head when the Postal 
Service, a government agency, makes believe it's a private business 
and says, "Get the government regulators off of my back so that I 
can compete." I thought we were all about trying to get the govern- 
ment off of the back of business so that it could do its job. When 
I hear this incessant talk about market share and the need to re- 
gain market share, I just scratch my head in wonderment about 
what this is all about. 

Thank you for letting me ramble for a moment. 

Mr. McHuGH. That's what we're here for. I appreciate your com- 
ments. We just heard the bells ring, which means this is as sen- 
sible a time as any to take a short break. Before I recess the sub- 
committee, let me again thank you, Chairman Gleiman, for your ef- 
forts to be here. We will take, with a large measure of gratitude, 
your legislative wish list and look at it very carefully, and look for- 
ward to working with you. 

You may have been prescient on one issue about the Postal Serv- 
ice. I don't know how prescient you were about your prediction this 
may be your last appearance. I don't know about that. But cer- 
tainly we hope to work with you very carefully as we proceed, be- 
cause this is a very important exercise and one in which, obviously, 
you and the PRC play an invaluable and a critical role. We recog- 
nize that and appreciate the work you do. 

Mr. Gleiman. Thank you. It's not that I don't want to come back. 
I do appreciate the time and energy you have spent trying to un- 
derstand this very complicated area. Thank you, sir. 

Mr. McHuGH. Thank you. Thank you all. 

[The questions and responses of Mr. Gleiman follow:] 



136 



Responses of Edward J. Gleiman, Chairman 

Postal Rate Commission 

to the Questions Submitted by the 

Subcommittee on the Postal Service 

Committee on Government Reform and Oversight 

U.S. House of Representatives 

May 8, 1996 

1 . The Postmaster General has repeatedly discussed the need for a more 
market-based pricing system and, indeed, you saw evidence of it during the 
reclassification case. As the regulator for postal prices, do you feel it is possible to 
provide more market oriented rates to certain classes of mail while protecting the 
consumers of the monopoly classes from any additional financial burden that may 
be a by-product of such an effort? 

Response 

Market-based pricing is generally taken to mean that the sensitivity of 
demand to changes in price is recognized in setting rates. More particularly, 
products which are highly sensitive to changes in price are given low markups 
over cost and products which are less price sensitive are given higher markups. 
Setting rates in this way is often viewed as an appropriate way for a regulated firm 
to respond to competition. 

Placing emphasis on demand is supported by economists who emphasize 
the importance of what is called allocative efficiency. However, these same 
economists also emphasize notions of technical efficiency which means, simply, 
that rates are designed to encourage the lowest cost provider to do the work. In a 
key piece of testimony in the reclassification case, the Postal Service's principal 
theory witness indicated that the concept of allocative efficiency should play a role 
that is secondary to that of technical efficiency. 

Many of the rate-setting factors prescribed in the Postal Reorganization Act 
are related to concepts of demand. Accordingly, in line with the Act and with 
much of the economic testimony presented before the Commission, demand is 
given substantial attention in rate setting. This is true now and it has been true in 
every rate case since Reorganization. At the same time, attention is also given to 
interests in technical efficiency. For example, it would not be in the national 
interest to have mailers spending 6 cents to perform a fianction that the Postal 
Service could do for 4 cents. 



137 



It is true, as your question suggests, that decreases in rates for some of the 
more competitive subclasses would cause increases in the rates for the monopoly 
subclasses. This is because no evidence has been presented in any case, and in fact 
there is evidence to the contrary, that the rates for any subclass could be reduced 
without requiring increases for other subclasses. 

Nevertheless, classification changes have been made recently to allow more 
reliance on market factors in setting rates, and further changes are possible. 
Specifically in the reclassification case, bulk third-class mail that is sorted to the 
carrier route was separated from the rest of third-class mail and put into a new 
subclass (Enhanced Carrier Route). This was done primarily because of its lower 
costs and its higher sensitivity to price. Separating the old subclass into two new 
ones permits the Commission to consider the disparate price elasticities between 
the two when setting rates. 

Since the Commission makes decisions based on the record presented by 
the Postal Service and intervening parties, it is difficult to predict what fiirther 
changes might be made. It is clear, however, that postal markets are not well 
defined. And, it is also clear there is a great deal that we do not know about 
competition and about which categories of mail are the most vulnerable to 
diversion to other carriers and other means. The Commission made observations 
relating to these issues in the reclassification case. 

Regardless of the emphasis placed on market factors, an essential element 
in protecting monopoly classes is independent oversight acting on adequate 
information. Such oversight can ensure that questions of cross-subsidization are 
addressed and that issues relating to fairness and equity are considered. The 
amendment set forth in Attachment I would require annual reporting by the Postal 
Service of pertinent information, and a biennial oversight report to the Congress by 
the Postal Rate Commission. The information required to be reported would 
facilitate both the ratesetting process and effective oversight to determine whether 
the Postal Service is complying with the mandates of the Postal Reorganization 
Act, including the mandate "that each class of mail or type of mail service bear the 
direct and indirect postal costs attributable to [it]." 39 U.S.C. § 3622(b)(3). 

As discussed in response to question 5, to fully protect consumers of 
monopoly services, it is also necessary to ensure that nontraditional Postal Service 
commercial ventures, for example sales of T-shirts, mugs, and phone cards, or 
services such as electronic postmarks or Global eMail, cover their costs. The 
amendment set forth in Attachment I addresses this by requiring the Postal Service 
to report revenues and costs associated with international mail products and 



138 



services, and other products and services which are not subject to the ratesetting 
procedures of the Postal Reorganization Act. 

2. What are your top three concerns when you hear the Postmaster General 
talk about wanting more freedom with products and prices and how would you 
recommend they be addressed? 

Response 

Assuming the universal service requirement and the statutory monopoly to 
support that requirement continue, "more freedom" to introduce products and set 
prices raises these three concerns: due process, fairness, and equity. 

It is difficult to predict specific instances which might arise from a general 
grant of "more freedom." The preliminary question is "freedom to do what?" 
Currently, only the Postal Service can initiate rate adjustments, and it can propose 
any changes it desires knowing that the Commission will consider its requests with 
the utmost expedition consistent with procedural fairness. 

Over the years, the Postal Service has made some proposals which were 
shown to be based on seriously flawed cost or volume estimates. Similarly, the 
Postal Service has made some proposals which would have had serious negative 
impact on important sectors of the mailing public. If the Postal Service wants the 
freedom to implement below cost rates or to act without allowing the public a 
reasonable opportunity to understand both the positive and negative results likely 
to flow from new products and prices, that would be a source of serious concern. 

Since I have served as Chairman, the Postal Service has never offered a 
specific instance of how the lack of "freedom" has prevented it from offering 
whatever products or prices were in the public interest. I find it difficult to 
recommend a solution for a problem which does not appear to exist. 

Philosophically, I do not find it surprising that the Postal Service would like 
more pricing freedom. Firms struggling to increase their profits and improve their 
market position are interested in frill quivers, and pricing represents a powerftil 
arrow. There are, however, fiindamental differences between the Postal Service 
and profit-oriented firms. 

Consider a firm that is typical of all those in the economic and business 
literature. This firm is a profit seeker and produces three products. A, B, and C. 
Under normal circumstances, this firm would price each of these products at a 



139 



price that maximizes its profits. This means that it cannot increase or decrease the 
price of product A and succeed in maicing more profit than it is now. Such a firm 
can use stockholder money (including profits) to launch as many new products as 
it wishes. It can also lose as much money as its fate requires. But it cannot make 
any more money from products A, B, and C to make up for any losses. This is the 
case because it is already making as much profit as is possible from each of the 
three products. Also, this firm cannot, because of a desire to increase market 
share, sacrifice profit on product C and make it up by increasing the profit on 
product A. Further, needless to say, losses can extract heavy tolls on the personal 
wealth and job prospects of key managers. For all these reasons, the firm engages 
in very carefiil analysis prior to product changes or rate changes. 

The postal situation is quite different from the one just described. First, the 
Postal Service is protected from much of the compethion faced by the firm just 
described. Second, according to the information used by the Postal Service and 
Commission in rate proceedings, current Postal Service rates are well below the 
profit maximizing level for each of its products. This means that the Postal 
Service can increase rates to make up for losses in other areas and that it can lower 
the rates for one product and make up for it with increased rates for another. Also, 
there is no incentive for the Postal Service to keep all rates above costs and it can 
sacrifice revenue on selected products for the purpose of gaining market share. 
Third, the Postal Service is required by law to break even, so no losses are incurred 
by any residual claimant in the event of money-losing rate adjustments. Further, 
the Postal Service's authority to break even is not affected by the quality of any 
analysis it might do prior to making a change. 

Because of these fundamental differences, independent rate review is 
necessary and thorough analysis is required before changes are made, even if this 
means "'less freedom" rather than "more freedom." 

3. Chairman Gleiman, you are aware that it is sometimes argued that the 
Commission is not made up of individuals trained in the economic theories relating 
to rate-setting. Do you feel this on-the-job training for Commissioners has in any 
way been restrictive to the PRC's efforts or lengthened rate cases? 

Response 

No, and I do not understand the reference to "on-the-job training." 
Commissioners are appointed by the President, by and with the advice and consent 
of the Senate, and, by law, "shall be chosen on the basis of their professional 
qualifications." 39 U.S.C. § 3601. The responsibilities of Commissioners are not 



140 



limited to applying "economic theories relating to rate-setting." Among other 
things, the responsibilities include making recommended decisions on rate and 
classification matters "in accordance with the policies of [the Postal 
Reorganization Act]" and which are "fair and equitable." 39 U.S.C. §§ 3622(b), 
3623(c). Those policies involve numerous matters in addition to "economic 
theories." See e.g., 39 U.S.C. §§ 101, 403, 404(b). 3622, 3623, and 3662. 

Having Commissioners with varied backgrounds is not unique to the Postal 
Rate Commission. A recent survey of State and Federal utility commissioners, 
reported in the April 29, 1996, issue of the National Association of Regulatory 
Utility Commissioners (NURAC) Bulletin reveals the following commissioner 
backgrounds: 



Background 


Number 


Attorneys 


121 


Accountants 


15 


Economists 


14 


Engineers 


23 


Business 


37 


Miscellaneous 


114 


Unknown 


69 



Total 393 

The Commissioners with whom I have served have been well-qualified to 
meet their statutory responsibilities. To the extent specialized economic, 
statistical, legal, or other expertise is required, the Commission employs 
permanent and temporary professional staff 

4. Please update us on the status of the vacancy created by the expiration of 
the term of Commissioner Schley? Have you had discussions with the 
Administration about filling this position and was there any time during your 
consideration of the reclassification case that this vacancy might have had an 
impact on the outcome? 

Response 

The vacancy remains and 1 have no current information on efforts, if any, to 
fill it. Last fall I had several conversations with officials in the White House 
Personnel Office concerning the potential vacancy, but have had no further 
discussions since Commissioner Schley's term expired. 



141 



I have said in the past that "five heads are better than four," and the advice 
and counsel of a fifth Commissioner would be welcome. So far, however, the 
vacancy has not hindered the Commission in the performance of its functions. In 
my view, it had no effect on the final outcome of the recent reclassification case 
(although, as the Commission's Recommended Decision indicates, the four 
Commissioners did split 2-2 on one issue in that case). 

5. Mr. Gleiman, you have heard Mr. Runyon say that he would like to keep 
rates stable to the year 2000 and that it will take $12.4 billion in new revenues and 
savings to get there. Based on your findings from the information provided to you 
in the last rate cases, what are his chances? What recommendations can you offer 
that would assist him with this goal? 

Response 

Achieving the Postmaster General's goal of rate stability until the year 2000 
will be extremely difficult unless the Service is willing to suffer deterioration of its 
financial position by running large losses. The rate of growth of postal revenue 
(independent of rate increases) appears to be slowing. This is evidenced 
particularly in First-Class volume growth which was 1.0 percent in FY 1995 and 
0.6 percent so far this year. This is well below its average annual 2.7 percent 
growth over the years 1970 through 1995. Moreover, third-class bulk rate regular 
volume growth also appears to be slowing although not as dramatically. Thus, to 
meet Mr. Runyon 's revenue growth targets, it appears that the Service will have to 
develop significant amounts of revenue from other mail classes and from new 
products. 

I believe it will be very difficult for the Service to increase revenue 
sufficiently from these sources to make up for the diminished revenue growth in 
First-CIass Mail (including Priority) and third-class bulk rate regular which 
together account for 83 percent of total postal revenue. 

Cost control can also help the Postmaster General achieve extended rate 
stability. Unfortunately, the situation here looks as bleak as it does with revenue. 
Total factor productivity dropped 0.4 percent in FY 1994, 1.5 percent in FY 1995, 
and this year it is negative 2.5 percent for the first quarter. 

As discussed in my response to Question 1, to the extent the Postal Service 
seeks to increase revenues by entering into nontraditional commercial ventures, it 
is imperative that some mechanism be established to ensure that those ventures 
cover their costs and are not subsidized by revenues from monopoly services. 



142 



6. In the Commission's submission to the Office of Management and Budget 
under the Inspector General Act, you note that in fiscal year 1995, the Commission 
reviewed the recommendations from a broad personnel audit, evaluated personnel 
actions previously taken, and made additional changes. Please provide more 
specific and detailed information on the results of the personnel audh as well as 
what changes were made in: personnel assignments, classification actions, 
organization of work, performance evaluation, and management processes. 

Response 

Personnel Audit 

On June 9, 1992, the Commission contracted with an independent 
consultant to perform job audits, classify positions, and write new position 
descriptions for the support staff. During the course of this work, the Commission 
asked the consultant for a report on his preliminary findings regarding the duties 
being performed in the various offices. 

The consultant reported that in his opinion much of the work performed by 
attorneys was not legal in nature. Since the attorneys were performing duties 
similar to those of analysts in the Office of Technical Analysis and Planning 
(TAP), the consultant recommended that the attorneys be reclassified as analysts 
with the title of decision writer and reassigned to TAP. 

The Commission announced the start of a reorganization on October 13, 
1992. The Commission adopted the consultant's recommendation that the Office 
of the General Counsel be abolished and that the Office of the Consumer Advocate 
(OCA) be reduced in size. A new office of Legal Adviser was established with 
fewer employees. During the period of reorganization, the Commission 
considered appropriate actions to deal with the question of excess positions which 
were encumbered. Reduction-in-force was one of the options considered; 
however, it was not implemented. Instead, employees who had their positions 
retitled, abolished, or reclassified to lower levels were reassigned with saved grade 
and pay indefinitely. The reorganization was effective on February 4, 1994. 

Personnel Assignments/Classification Actions 

These actions led directly to a number of personnel complaints and lawsuits 
from affected employees. The Commission was defended by attorneys fi-om the 
Postal Service and the Justice Department. By March, 1995, all of the suits were 
settled. As a result of the settlements, one individual left the Commission; the 



143 



others were all reassigned. There have been no subsequent legal actions taken 
against the Commission by its employees. 

In addition to the reassignments made pursuant to legal settlements, in 
1994-199.5 the Commission made the following personnel changes: 

— the acting director of the Office of Consumer Advocate became the 
permanent director of the office; 

— an OCA staff attorney was made Deputy Director of OCA; 

— based on increases in responsibilities and merit, three professional 
employees were promoted; 

— following the retirement of the head of the Docket section, two parallel 
positions were created in dockets, which were filled by tvvo PRC clerical 
employees; 

— following a competitive bidding process, a special assistant to one of the 
Commissioners was appointed to a career position in the OCA; 

— two vacancies among the Commissioners" special assistants or secretaries 
were filled; 

— two summer interns were hired to provide help during 1 995 summer 
vacations; 

— four career employees resigned from the Commission; 

— one individual was detailed to the Commission from the Bureau of the 
Census for statistical research; and 

— twelve individuals served the Commission at some point during 1994- 
1995 as contract employees, helping in areas of either economic or legal 
expertise. 

Organization of Work 

The tapping of contract employees to augment the Commission's 
permanent staff allowed the Commission to produce the Docket No. R94-1 and 
Docket No. MC95-1 decisions without hiring permanent individuals who would be 



underemployed during periods between cases. This necessitated some changes in 
the organization of the workload, requiring senior staff to devote more time to 
oversight and management responsibilities. 

Performance Evaluation/Management Processes 

Because of the unsettling nature of personnel complaints and lawsuits, 
particularly in an agency as small as the Commission, the Commission 
implemented more formal management tools in 1995 than had previously existed. 
These tools included: 

—weekly staff meetings for supervisory staff; 

—bi-weekly reports by all staffers to be submitted to supervisors; 

—six-month written performance reviews and personal conferences for all 
employees with their supervisors; 

—written annual performance evaluations and personal conferences for all 
employees, accompanied by the annual rating; 

-necessary updates and rewrites of job descriptions; and 

—reviews of personnel statistics, such as leave; personal 
interviews with the Chief Administrative Officer; and 
commencement of an awards and incentive program. 

6.A. This same submission stated that the Commission determined there would 
be no benefit from conducting an audit of its financial operations in fiscal year 
1995. Given the problems identified by audits in fiscal years 1994 and 1993 with 
the Commission's vendor and contract payment procedures, the Commission's 
management controls for complying with the Prompt Payment Act and the Federal 
Managers' Financial Integrity Act, and the Commission's Imprest Fund, do you 
plan on conducting any audits of your operations this fiscal year? 

Response 

The Commission has arranged for the Department of the Treasury, 
Financial Management Service group to conduct an audit for FY 1 996. As for 
"problems identified by audits in fiscal years 1994 and 1993," the results of those 
audits are enclosed for your review. I note the "problems" were relatively minor. 



145 



Imprest Fund Audit 

The three audit recommendations for the Cr-imission's imprest fund were 
adopted: the fund was reduced from $1,500 to $1,C 3; a lock was secured for the 
cash box that is kept in the Commission's safe; and ne person is now ftiUy 
accountable for the funds, with access provided to two others. 

Vendor and Contract Payments Audit 

The Department of Treasury Project Team that conducted that audit found 
that the "PRC . . . has many good management controls'" and that the "PRC meets 
the GAO management controls standards and generally complies with the CORE 
Financial System Requirements concerning payments as far as its manual system 
is concerned. The risk rating for the PRC payment process is low." 

According to Commission employees who participated in the audit, the key 
concern of the auditors seemed to be the Commission's archaic, outdated manual 
system, which is necessitated by the Postal Service's reflisal to allow the 
Commission direct electronic access to the PRC accounts with the Postal Service. 
Perhaps the Commission could establish its own automated system, but such a 
duplication of effort does not seem justified. So, the Commission system will by 
necessity have to remain manual until the Postal Service allows the Commission 
direct electronic access. The areas identified by the Project Team for improvement 
(set forth on page 5 of the audit report) have all been addressed. 

6.B. Beginning this October, will the Commission agree to provide the 
Subcommittee a copy of the federal entity submission that it submits to OMB as 
required under the Inspector General Act? If not, why not? 

Response 

The Commission will be more than happy to submit the reports required by 
the Inspector General Act of 1978 to the Subcommittee. 

7. In your oral statement, you said yw were pleased that in the past year the 
Commission had accomplished a wide rage of administrative duties with fewer 
Commission staff than in March 1995. Please provide the number of staff the 
Commission had as of January 3, 1995 and the number of staff as of March 13, 
1996. Also provide the number of all contract employees and consultants retained 
by the Commission during this time frame. Please include a description of work 



10 



146 



performed by such contract employees and consultants and compensation provided 
under such agreements. 

Response 

Attachment V sets forth detailed information concerning the Commission's 
use of consultants during fiscal years 1995 and 1996. As discussed by our staffs, 
the names of the consultants have been omitted. This information will be made 
available to the Subcommittee separately. The use of consultants has been an 
extremely cost-effective way to augment the expertise of Commission staff when 
that is necessary to meet workload peaks. The reduction in career and full-time 
employees resulted from the resignation of four individuals and the departure of 
Commissioner Schley, his secretary, and his special assistant upon the expiration 
of his term. The information requested on staff levels follows: 

FMPI.OYRES ON JANUARY 3. 1995 

Career and Full-Time Employees: 5 1 
Intermittent Employees 

(clerical, including students) : 04 

TOTAL 55 



EMPLOYEES ON MARCH 13. 1996 

Career and Full-Time Employees: 44 
Intermittent Employees 

(clerical, including students) : Q5 

TOTAL 49 

8. You mentioned in your prepared statement that the Commission has 
launched a rulemaking to reexamine "computer evidence" rules. Would you 
please describe the nature and extent of this rulemaking. What impact will this 
rulemaking have on the PRC, mailers, and the Postal Service? 

Response 

The Commission has special rules applicable to evidence generated by 
studies which use computers to analyze large data bases. During the last rate case 
(Docket No. R94-1 ) and the recent classification reform case (Docket 
No. MC95-1 ), concerns developed over whether these rules were well suited to 



11 



147 



market research studies which used computers for entering and categorizing raw 
response data. Because of the complex technical nature of large market research 
studies, the Commission determined to initiate a rulemaking so that potential new 
regulations could be thoroughly critiqued. New rules which accommodate the 
need for providing market research respondents with necessary assurances of 
confidentiality will benefit mailers, the Postal Service and the Commission by 
making it easier to present market research studies in Commission proceedings. 

9. In his statement for the Record, Vice Chairman LeBlanc suggests that the 
Commission have final authority in decisions affecting rate and classification 
matters. Do you share Vice Chairman LeBlanc's sentiments on this matter? Vice 
Chairman LeBlanc also said that the current postal structure is healthy and if the 
(Subcommittee) does "nothing, it could remain that way." Do you share these 
sentiments? 

Response 

1 agree with Vice Chairman LeBlanc that the Commission should have final 
decision authority in the rate and classification process. And, I suggest that 
authority should also extend to complaint and nationwide service change 
proceedings. 

I also agree with my colleague that the current rate and classification 
structure (i.e., having an independent regulatory commission) is healthy. Of 
course there is always room for improvement, and I have made some suggestions 
in response to other questions. 

Attachment II sets forth legislative language which would give final 
decision-making authority to the Commission. 

10. On page 1 1 of your prepared text, you note that potential problems exist 
with regards to the data and information the Commission and the parties to the 
ratemaking procedures normally use to evaluate Postal Service proposals. The 
first concern you noted is with the timeliness of regular Postal Service data reports. 
You noted that the basic Cost and Revenue Analysis report for 1994 was not filed 
until May 1995. What impact does this tardy filing have? What is contained in 
that report? Was it relevant to the 1994 rate case? Was this information contained 
in any previous filing before the Commission? 



12 



148 



Response 

Rate and classification filings with the Commission typically rely on an 
historic base year (or period) and a ftiture test year. The Postal Service projects 
costs and revenues from the base to the test year. 

The Cost and Revenue Analysis report (CRA) is a basic document that 
reports costs, volumes and other data by disaggregated categories. It is particularly 
valuable in a proceeding for verifying that the Postal Service's projections for 
interim years are reasonably accurate. Discrepancies are noted by the parties and 
form the basis of discovery and proposals to make alterations in the Service's 
proposals. Delay in receiving the CRA puts the parties (who have only a short 
time to respond to the Service's filing) at a significant disadvantage and may 
preclude them from meaningfiilly participating on issues which are affected by 
interim year cost and revenues. 

Although some of the data contained in the most recent CRA was in the 
1994 revenue, pieces, and weight report filed with the Commission on 
December 8, 1994, the information in the CRA was very relevant to the Docket 
No. MC95-1 proceeding. Also, cost data by subclass, which was crucial, were not 
previously available. 

There is another concern besides timeliness. The Postal Service furnishes 
the CRA using its own costing methodology while rates are set using the 
Commission's costing methodology. Consequently, the parties and the 
Commission must spend significant effort converting the Postal Service provided 
CRA data from one methodology to the other. The Postal Service could greatly 
assist the Commission and the parties by routinely submitting the CRA using the 
Commission's methodology. It has done this on occasion in past classification 
cases when it suited the Service's purposes. 

1 1 . During the conduct of the hearing you stated you are now in favor of 
granting the Commission subpoena authority. Please describe how you envision 
this authority operating, including any requisite enforcement mechanism. Would 
the grant of such authority extend to the Commission's request for information 
from the Postal Service, as well as intervenors? 

Response 

I do not envision any extraordinary subpena authority for the Commission. 
Rather, such statutory authority could be modeled after similar provisions 



13 



149 



applicable to other independent agencies. Such a provision would empower the 
Chairman, any Commissioner designated by the Chairman, and any administrative 
law judge appointed by the Commission to issue subpenas in connection with 
Commission proceedings, special studies, inquiries, or reports. Subpenas would be 
enforceable in district courts. The subpena authority should definitely extend to 
information and data maintained by the Postal Service. Draft legislative language 
providing subpena authority is attached (Attachment III). 

I am aware of the concerns expressed by the Service about the need to 
prevent competitive harm which could result from the disclosure of proprietary 
information. In response to Chairman McHugh's questions at the March 13 
hearing, neither the Postmaster General nor I could recall an instance where the 
disclosure of Postal Service information by the Postal Rate Commission has 
caused such harm. However, the Chairman's suggestion that perhaps a third party 
could mediate disputes between the Service and the Commission over whether 
disclosure would be appropriate intrigued me. 

The proposed amendment set forth in Attachment IV addresses both the 
Postal Service concerns and the Chairman's suggestion. With respect to 
information provided to the Commission pursuant to a subpena or otherwise in 
connection with the Commission's work, the Service could insist that the 
information not be publicly disclosed. If the Commission disagreed with the 
Service's view, the Attorney General would make the final determination as to 
whether disclosure of the information was appropriate. The amendment also 
ensures the Service would control responses to Freedom of Information Act 
requests for Postal Service information in the custody of the Commission and 
codifies the judicially approved procedure for such instances set forth in 
McGehee v. C.I.A., 697 F.2d 1095 (D.C.Cir. 1983). 

Finally, the amendment requires that information subject to discovery in 
any Administrative Procedure Act hearing before the Commission, e.g., rate and 
classification proceedings, would be governed by Commission regulations 
modeled after the policies and procedures applicable to discovery in the United 
States district courts. 

I fliUy expect that procedure described above would be used rarely, if at all. 
The Commission and the Postal Service should strive to resolve differences 
without the need for third-party intervention. 

12. You stated that neither the statute nor Commission rules of practice prohibit 
the Commission from incorporating in its recommended decision 



14 



150 



recommendations not contained in the original Postal Service submission. Please 
provide the Subcommittee with a report detailing instances where proposals made 
by parties, the Office of Consumer Advocate, or others have been incorporated in 
Commission recommended decisions although not contained in the original Postal 
Service submission. 

Response 

The Postal Reorganization Act requires the Commission to base its 
recommended decisions on the record made by the Postal Service and other 
participants in Commission proceedings. The record consists of the evidence 
presented by the parties, together with their proposals and other arguments 
regarding what outcome the evidence supports. It is not uncommon for the 
Commission to conclude that the record evidence in a proceeding better supports 
the position of a party who opposes a proposal contained in the Postal Service's 
original submission and argues for a different resuh in the case. 

For example, in the recent reclassification proceeding, the Postal Service 
proposed that regular rate second-class publications be divided into two separate 
subclasses; one new subclass would have featured rates that do not vary with the 
proportion of editorial content in the publication. In response to evidence and 
arguments submitted by American Business Press, McGraw-Hill, National 
Newspaper Association, and the Commission's Office of the Consumer Advocate, 
the Commission concluded that record evidence better supported retention of the 
current subclass structure and rates that reflect the editorial content in publications. 

In the same proceeding, the Postal Service proposed a reconfiguration of 
rates for what had been third-class bulk regular rate mail that would have de- 
emphasized, or in some cases eliminated, the rate differential between letter- 
shaped pieces and flat-shaped pieces. In response to testimony sponsored by 
Newspaper Association of America, the Association of Alternate Postal Systems, 
and Val-Pak Direct Marketing Systems, together with argument on brief by the 
Office of Consumer Advocate, the Commission concluded that the Postal 
Service's rate proposal represented a retreat from cost-based rates, and therefore 
recommended rates that retained the pre-existing letter/flat difference in rate 
design. 



15 



151 



Additional Questions 

1 . What is the cost to participate in major rate and classification cases? What 
are your plans to reduce the effort and expense required to participate in such 
classification proceedings? 

Response 

A mailer's cost to participate in a major rate or classification case will vary 
depending on the number of issues it is concerned about and the resources it 
devotes to those issues. Participants may sponsor extensive testimony or only 
focused legal argument. No reliable data exists which quantifies an average 
expenditure. 

Nonetheless, the Commission is well aware of the fact that mailers expend 
significant resources (both time and money) in Commission cases, and the 
Commission has continuously adjusted its procedures to make participation 
simpler and less costly. For example, in our most recent case (MC96-2) the 
Commission has proposed a voluntary, alternative means for the electronic 
distribution of documents which may meaningfully reduce the cost and time 
involved in filing and serving legal pleadings and introducing evidence. One 
aspect of this alternative procedure provides for the Commission sending e-mail 
copies for participants unequipped to send e-mail themselves. 

This alternative system is currently only being tested, but the Commission 
has received many favorable comments from participants about this initiative, and 
we are very hopeful that a workable system will emerge that will save all 
participants substantial time and money. See e.g., letter of April 25, 1996, to the 
Honorable Edward J. Gleiman from Gene A. Del Polito (Attachment VI). 

2. The mail classification reform case, MC95-1 was just recently completed. 
What is the bottom line effect on the postal consumers? 

Response 

Actual implementation of the new classification and rate changes has not 
yet occurred. Thus, a definitive, empirical answer is not possible. Classification 
reform was intended to lead to rates which better reflect costs, to encourage 
mailers to provide automation compatible mail which can be processed more 
cheaply, and, generally, to increase efficiency and produce savings. 



16 



152 



To the extent the new classifications and rates achieve the above goals most 
postal consumers will benefit through rates which are more fair, and often will be 
lower than they otherwise would have been. 

It is clear that classification reform will benefit mailers who "workshare" 
since they will receive discounts which generally reflect the value of their efforts. 
These are typically large business mailers. The Commission had hoped that 
individual mailers could share in the savings resulting from automation through 
implementation of a Courtesy Envelope Mail (CEM) rate, but that proposal was 
rejected by the Postal Service Governors. 

3. What are the two greatest problems facing the Postal Service? 

Response 

The apparent slowing of the rate of volume growth about which 
management can probably do little, and the inability to increase total factor 
productivity on which management ought to be able to have considerable impact. 

4. In a speech delivered last year to the National Association of Postmasters of 
the United States, the PMG made a comment to the fact that the Postal Service ran 
the Publishers Express company out of business. How appropriate do you feel it is 
for a Federal Government entity to have as its goal to run private sector companies 
out of business? 

Response 

The proper role for the United States Postal Service in the American 
economy is a policy matter which can best be resolved by Congress. As it stands 
today, the Postal Reorganization Act indicates that the Postal Service should not 
act as an aggressive competitor in private markets. For example, 39 U.S.C. 
§ 3622(b)(4) directs the Commission to consider "enterprises in the private sector 
of the economy engaged in the delivery of mail matter other than letters" when 
recommending rates. 

My personal opinion is that the current concern for protecting private 
enterprise is sound policy. The Postal Service has a large government-protected 
monopoly market which provides it with tremendous financial resources. I am a 
firm believer in the importance of the Postal Service's role to bind the Nation 
together through the correspondence of the people, but I do not believe that it is 



17 



153 



necessary to destroy or threaten sectors of our private enterprise system in order to 
maintain mail services. 

When the Postal Service provides high levels of reliable and timely service 
at reasonable (cost based) rates, entrepreneurs may find there is little profit in 
competing with the Postal Service for the carriage of mail matter which is not 
subject to the monopoly. The Postal Service can properly have a goal of providing 
reliable service at reasonable rates. But to the extent that private enterprise can 
provide more reliable and more efficient delivery of mail not subject to the 
monopoly, the mailing public of the Nation as a whole benefits, and such 
businesses should be allowed to exist. 

5. In your statement, you mention the "courtesy envelope proposal" which if 
implemented would offer individual mailers a discount. What are your views as to 
why this proposal has been put on hold by the Postal Service? 

Response 

I cannot think of any legitimate reason for the Postal Service not to pursue 
the CEM recommendation. 



18 



154 



ATTACHMENT I 

1 SEC. PERIODIC FILING; BIENNIAL REPORT. 

2 (a) Filing of Information and Data Required — Subchapter V of 

3 chapter 36 of title 39, United States Code, is amended by adding at the end thereof 

4 the following new section; 

5 "§3686. Periodic filing of Postal Service information and data 

6 "(a) The Postal Service shall file with the Postal Rate Commission, not later 

7 than March 1 of each year, information and data for the most recently completed 

8 fiscal year which shall set forth — 

9 "( 1 ) the costs of the Postal Service, including attributable costs by class, 

10 subclass, and rate category of mail and type of mail service, presented in 

1 1 accordance with the costing methodology employed by the Commission in the 

12 most recent applicable decision under section 3622; 

13 "(2) the revenues of the Postal Service by class, subclass, and rate category 

14 of mail and type of mail service; 

15 "(3) the mail volumes of the Postal Service by class, subclass, and rate 

16 category of mail and type of mail service; 

17 "(4) measures of the speed and reliability of postal service including — 

18 "(A) the service standards applicable to each class and subclass of 

19 mail and type of postal service, 

20 "(B) the actual level of service (described in terms of speed of 

21 delivery and reliability) provided to each class and subclass of mail and 

22 type of postal service, and 

23 "(C) the degree of customer satisfaction with the service provided to 

24 each class and subclass of mail and type of postal service; 

25 "(5) the name and location of any retail postal facility (including any 

26 station, branch, community post office, or nonpersonnel rural unit) suspended, 

27 closed, or consolidated; 



1 



155 



ATTACHN4ENT I 

1 "(6) the revenues and costs associated with— 

2 "(A) any product or service provided pursuant to section 407 of this 

3 title, and 

4 "(B) any other product or service for which a rate or fee is not 

5 established pursuant to a decision under section 3622; and 

6 "(7) such other information and data as the Commission, by regulation, 

7 shall prescribe. 

8 "(b) The Commission shall promulgate regulations prescribing the form and 

9 detail of the information and data required under this section. Such regulations 

10 shall give due consideration to avoiding unnecessary or unwarranted 

1 1 administrative effort and expense.". 

12 (b) BlENfNiAL Report — Subchapter V of chapter 36 of title 39, United 

13 States Code, is further amended by adding at the end thereof the following new 

14 section: 

15 "§ Section 3687. Biennial report 

16 "Not later than June 30 of each even-numbered year, the Commission shall 

1 7 submit a report on the state of the Postal Service to the President, the Congress, 

18 and the Board of Governors. The report shall contain information relating to — 

19 "(1) the extent to which the actions, policies, and procedures of the Postal 

20 Service further the policies of and comply with the requirements of sections 101, 

21 403, 404(b), and chapter 36 of this title; 

22 "(2) an analysis of the efficiency of postal operations, generally, 

23 including — 

24 "(A) measures of productivity and efficiency; 

25 "(B) the speed and reliability of service provided for the various 

26 classes and subclasses of mail and types of mail service, and 

27 "(C) efforts to control costs; 



156 



ATTACHMENT I 

1 "(3) trends in postal operations such as mail volume, costs, revenues, and 

2 employment; 

3 "(4) the effect of external factors such as technological advancement and 

4 competition upon the Postal Service; 

5 "(5) the extent, if any, to which the revenues for any postal product or 

6 service do not exceed the attributable costs of such product or service; and 

7 "(6) the adequacy of information and data used to produce the report 

8 required under section 2402(e) of this title.". 

9 (c) CONFORf/lING Amendment — The table of sections for subchapter V of 

10 chapter 36 of title 39, United States Code, is amended by adding at the end thereof 

1 1 the following new items: 

1 2 "3686. Periodic filing of Postal Service information and data. 

13 "3687. Biennial report.". 



157 



ATTACHMENT II 

1 SEC. COMMISSION DECISIONS FINAL. 

2 (a) In General — The first sentence of section 3621 of title 39, United 

3 States Code, is amended to read as follows: "The Postal Rate Commission shall 

4 establish rates of postage and fees for postal services in accordance with the 

5 provisions of this chapter. 

6 (b) Decisions Under Section 3622— Section 3622 of title 39, United 

7 States Code, as amended by section 2, is fiirther amended — 

8 (1) in subsection (a)(1) by striking out "submit a recommended" and 

9 inserting in lieu thereof "render a"; and 

10 (2) in subsection (b) by striking out "make a recommended" and inserting in 

11 lieu thereof "render a". 

12 (c) Decisions Under Section 3623 — Section 3623 of title 39, United 

13 States Code, is amended by striking out subsections (a) and (b) and inserting in 

14 lieu thereof the following: 

15 "(a) From time to time the Postal Service may request the Postal Rate 

16 Commission to render a decision on changes in the mail classification schedule if 

17 the Postal Service determines such changes would be in the public interest and in 

1 8 accordance with the policies of this title. The Postal Service may submit such 

19 suggestions for changes as it deems suitable. 

20 "(b) In the absence of a Postal Service request under subsection (a), the 

21 Commission may initiate a proceeding and render a decision on changes in the 

22 mail classification schedule if it determines such changes would be in the public 

23 interest and in accordance with the policies of this title.". 

24 (d) Decisions Under Section 3661 — Section 3661 of title 39, United 

25 States Code, is amended — 

26 (1) in subsection (b) by striking out "an advisory opinion" and inserting in 

27 lieu thereof "a decision"; and 



40-973 0-97-6 



158 



ATTACHMENT II 



1 (2) in subsection (c) by striking out "opinion" eacii time it appears and 

2 inserting in lieu thereof "decision". 

3 (e) Decisions Under Section 3662 — Section 3662 of title 39, United 

4 States Code, is amended — 

5 (1) by striking out "rates" and inserting in lieu thereof "rates or fees"; and 

6 (2) by striking out "recommended decision which shall be acted upon in 

7 accordance with the provisions of section 3625 of this title and" and inserting in 

8 lieu thereof "decision which shall be". 

9 (0 Effective Date of Decisions — Section 3624 of title 39, United 

10 States Code, is amended by adding at the end thereof the following new 

1 1 subsection: 

12 "(e)(1) The Board shall prescribe the date or dates on which the new rates, 

13 fees, mail classification schedule, or changes in such schedule shall become 

14 effective. 

1 5 "(2) The effective date for any new rate, fee, mail classification schedule, 

16 or change in such schedule prescribed under paragraph (1) shall not be later than 

17 the last day of the 12-month period which begins on the day the decision 

18 establishing such rate, fee, mail classification schedule, or change is transmitted to 

19 the Board under section 3624(d) of this title.". 

20 (g) Conforming Changes — 

21 (1) The heading for section 3624 of title 39, United States Code, is 

22 amended by striking out "Recommended decisions" and inserting in lieu thereof 

23 "Decisions". 

24 (2) Section 3624(a) of title 39, United States Code, is amended by striking 

25 out "recommend" and inserting in lieu thereof "render". 

26 (3) Section 3624(d) of title 39, United States Code, is amended by striking 

27 out "recommended" each place it appears. 



159 



ATTACHMENT II 

1 (4) Title 39, United States Code, is amended by striking out section 3625. 

2 (5) The matter describing section 3624 and section 3625 in the table of 

3 sections for subchapter II of chapter 36 of title 39, United States Code, is amended 

4 to read as follows: 

5 "3624. Decisions of Commission. 

6 "3625. Repealed.". 

7 (6)(A) The first sentence of section 3628 of title 39, United States Code, is 

8 amended — 

9 (i) by striking out "decision of the Governors to approve, allow 

1 under protest, or modify the recommended"; and 

1 1 (ii) by inserting "under section 3624 of this title" immediately after 

12 "Postal Rate Commission". 

13 (B) The second sentence of section 3628 of title 39, United States Code, is 

14 amended by striking out "and the Governors". 

15 (7)(A) Section 3641(a) of title 39, United States Code, is amended by 

16 striking out "recommended". 

17 (B) Section 3641(d) of title 39, United States Code, is amended by striking 

1 8 out "recommended". 

19 (C) Section 3641(e) of title 39, United States Code, is amended by striking 

20 out "recommended" each place it appears. 



160 



ATTACHMENT III 

1 SEC. _ POWERS OF THE COMMISSION. 

2 (a) Oaths; Subpenas — Section 3604 of title 39, United States Code, is 

3 amended by adding at tiie end thereof the following: 

4 "(f) (1) Any Commissioner of the Commission, any administrative law 

5 judge appointed by the Commission under section 3105 of title 5, and any 

6 employee of the Commission designated by the Commission may administer 

7 oaths, examine witnesses, take depositions, and receive evidence. 

8 "(2) The Chairman of the Commission, any Commissioner designated by 

9 the Chairman, and any administrative law judge appointed by the Commission 

10 under section 3105 of title 5, may with respect to any proceeding, special study, 

1 1 inquiry, or report under this chapter or under section 404(b) of this title — 

12 "(A) issue subpenas requiring the attendance and presentation of 

13 testimony of any individual, and the production of documentary or other 

14 evidence, from any place in the United States, any territory or possession of 

15 the United States, the Commonwealth of Puerto Rico, or the District of 

16 Columbia; and 

17 '"(B) order the taking of depositions and responses to written 

18 interrogatories. 

19 "(3) In the case of contumacy or failure to obey a subpena issued under 

20 this subsection, upon application by the Commission, the United States district 

21 court for the district in which the person to whom the subpena is addressed resides 

22 or is served may issue an order requiring such person to appear at any designated 

23 place to testify or produce documentary or other evidence. Any failure to obey the 

24 order of the court may be punished by the court as a contempt thereof". 

25 (b) Special Studies; Inquiries — Section 3604 of title 39, United States 

26 Code, as amended by subsection (a), is further amended by adding at the end 

27 thereof the following: 



161 



ATTACHMENT III 



1 "(g) The Commission sliall conduct such special studies and inquiries as 

2 duly authorized committees of the Congress may from time to time request.'". 



162 



ATTACHMENT IV 

1 SEC. . PROPRIETARY AND OTHER INFORMATION 

2 (a) Proprietary and Other Information — Subchapter V of chapter 36 

3 of title 39, United States Code, is further amended by adding at the end thereof the 

4 following new section; 

5 "§3686. Proprietary and other information 

6 "(a)(1) If the Postal Service determines that any document or other matter it 

7 provides to the Commission pursuant to a subpena issued under section 3604, or 

8 otherwise, contains information which is — 

9 "(A) described in section 410(c) of this title, and 

10 "(B) exempt from public disclosure under section 552(b) of title 5, 

1 1 "the Service shall, at the time such document or other matter is provided to the 

12 Commission, notify the Commission, in writing, of its determination and the 

13 reasons therefor, and of its intention to control the public release of such 

14 information. 

15 "(2)(A) If the Commission determines that the public disclosure of 

1 6 information subject to notice under paragraph ( 1 ) — 

1 7 "(i) is in the public interest, and 

1 8 "(ii) will not result in the likelihood of substantial competitive injury 

19 to the Postal Service, 

20 "it shall provide its determination, and the reasons therefor, to the Postal 

21 Service and the Attorney General. 

22 "(B) If the Attorney General finds that a determination under 

23 subparagraph (A) is not appropriate, the Attorney General, not later than 20 

24 days after receiving such determination, shall notify, in writing, the 

25 Commission and the Postal Service as to that finding, and the Commission 

26 shall not publicly disclose the information subject to that finding. 



163 



ATTACHMENT IV 



1 "(b) If the Commission receives a request under section 552 of title 5 for 

2 information for which the Postal Service has given notice under subsection (a), the 

3 Commission shall, not later than 7 days after receiving such request — 

4 "(1) transmit the documents or other matter containing such information to 

5 the Postal Service together with the request for information; and 

6 "(2) notify, in writing, the requester of the actions taken under paragraph 

7 (1). 

8 For purposes of applying section 552(a)(6) of title 5, a request subject to this 

9 subsection shall be deemed to be received by the Postal Service on the day the 

10 Postal Service receives the documents or other matter transmitted pursuant to 

1 1 paragraph ( 1 ) of this subsection. 

12 "(c)(1) The provisions of subsections (a) and (b) shall not apply with 

13 respect to any document or other matter which is subject to discovery in any 

14 proceeding under this chapter conducted in accordance with section 556 and 557 

15 of title 5. 

16 "(2) The Commission shall prescribe regulations governing the disclosure 

17 of documents or other matter described in paragraph (1) which, to the extent 

18 practicable, reflect the policies and procedures applicable to discovery in the 

19 United States district courts.". 

20 (b) Conforming Amendment — The table of sections for subchapter V of 

21 chapter 36 of title 39, United States Code, is amended by adding at the end thereof 

22 the following new item: 

23 "3686. Proprietary and other information.". 



164 



ATTACHMENT V 

POSTAL RATE COMMISSION CONSULTANTS 
FY 1995 

1. Accountant-CPA 

Work: Reviewed the actual test year results for FY 1 994 and compared 
with the data projected by USPS Witness Ward in his R94-1 testimony. 
Analyzed both favorable and unfavorable variances and ascertain their 
causes. Evaluated the results and implications for the future. 

Compensation: $16,870 

2. Economist, Ph.D. 

Work: Reviewed testimony of USPS witnesses to identify economic and 
econometric issues and to make recommendations about how to solve them. 

Compensation: $10,535 

3. Mathematician, Ph.D., Specialist in Operations Research 

Work: Prepared analyses and written reports on third class destination 
entry cost savings and discounts; the allocation of attributable delivery costs 
to USPS proposed subclasses; the third class parcel shaped mail costing 
issues raised by OCA, NAA, and USPS; and the question of the appropriate 
costing methodology for worksharing discounts addressed by numerous 
parties in response to a Commission's Notice of Inquiry. 

Compensation: $26,516 

4. Attorney 

Work: Prepared decisions in small post office appeals and reviewed the 
Domestic Mail Classification Schedule for possible adjustments. 

Compensation: $19,146 



165 



ATTACHMENT V 

5. Economist, Ph.D. 

Work: Prepared and presented testimony in MC95-1 for the OCA on the 
proper pricing of postal services and the general theory of pricing as it 
applies to the markups associated with the various classes of mail. 

Compensation: $12,953 

6. Attorney 

Work: Prepared a policy memorandum based on analysis of the legislative 
history of the Postal Reorganization Act and outlined initial and reply briefs 
for the OCA. 

Compensation: $5,033 

7. Transportation Engineering, M.S. 

Work: Prepared Markov processes used for parametric analysis of 
testimony of USPS Witness Marc A. Smith and prepared testimony 
containing OCA proposals for First-Class Mail categories. 

Compensation: $7,709 

8. Ph.D. 

Work: Prepared and presented testimony concerning the history of 
domestic mail classification in the U.S. from the colonial era through 
passage of the Postal Reorganization Act of 1970. 

Compensation: 39,546 

9. Attorney 

Work: Researched classification of utilities and other entities subject to 
Federal and state regulations. Prepared analyses for review by the 
Commission and for use in Docket No. MC95-1. Also reviewed testimony 
and relevant literature on the history of postal classifications and the 
interpretation of 39 U.S.C. § 3623 for use in Docket No. MC95-1. Drafted 
portions of briefing papers and opinion analyses. 

Compensation: $22,785 



166 



ATTACHMENT V 

10. Attorney 

Work: Prepared part of the OCA brief. 
Compensation: $15,591 

1 1 . Bureau of the Census, Statistician 

Work: Reviewed testimony, interrogatories, and other documents related 
to issues in proceedings before the Commission in order to identify major 
statistical issues and prepared written summaries of the major findings of 
reviews. 

Compensation: $15,000 

FY 1996 

1. Attorney 

Work: Prepared part of the Initial Brief of the OCA. 
Compensation: $4,533 

2. Attorney 

Work: See work from FY 1995 which carried over into FY 1996. 
Compensation: $13,083 

3. Economist, Ph.D. 

Work: Identified cause of revenue/price problems in First-Class Mail 
forecasts presented by USPS witnesses and prepared drafts of volume 
forecasting section of the Decision. 

Compensation: $17,098 



167 



ATTACHMENT V 

4. Attorney 

Work: Analyzed issues in MC95-1, consulted on legal matters, and 
prepared decisions in small post office closing appeals. 

Compensation: $27,788 

5. Mathematician, Ph.D. 

Work: See work from FY 1995 which carried over into FY 1996. 
Compensation: $40,681 

6. Kenan Systems, computer and network specialists 

Work: Maintained computer operations, including network, internet. 
Home Page, and installation and repair of equipment. 

Compensation: $44,024 

7. Bureau of the Census, Statistician 

Work: Reviewed testimony, interrogatories, and other documents related 
to issues in proceedings before the Commission in order to identify major 
statistical issues and prepared written summaries of the major findings of 
reviews. 

Compensation: $15,000 



168 



ATTACHMENT VI 




April 25, 1996 







The Honorable Edward J. Gleiit 

Chairman 

Postal Rate Commission 

1333 H Street, NW, Suite 300 

Washington, DC 20268-0001 



Dear Mr. Chairman: 

As you know, 1 have long been an advocate of increasing general access to 
the business of the Postal Rate Commission through the use of electronic 
technology. The Office of the Consumer Advocate's use of a dial-up 
bulletin board system was an good first step, although few of those who 
participate in rates and classification proceedings did much to advance the 
use of this communications alternative by providing the Commission with 
electronic documents. 



The purpose of this letter, though, is to congratulate you for your 
leadership in taking public access to all Commission proceedings a giant 
step further through the development of a permanent site on the World Wide 
Web. In a word, the site is "GREAT!" I've accessed it often, and have 
found it very user-friendly and loaded with information that previously was 
rather cumbersome to obtain. 




I am especially pleased with the depth and breadth of information you have 
authorized to be placed on this site. It makes doing business with and 
understanding the business of the Commission much easier. I also find it 
interesting that the Commission apparently does not have the fear of puulic 
accessibility that seems to mark the Postal Service's management of its own 
Web site. I've come to discover that when I need information on any piece 
of rates and classification business, the place to look is www. pre. gov- -not 
www.usps.gov. That's a real shame, in my view, but at least someone in the 
postal community understands what public access should be all about. Now, 
if we only could get those who do business before the Commission to provide 
their communications in a form that might further this effort to provide 
wider public access. 



Del Polito 
President 



AMMA Postal Newsline (202) 347-0799 



169 



POSTAL RATE COMMISSION 
Washington. DC 20268-0001 



Office of itie Secretary 



April 12, 1993 



Ms. Nina N. Schwartz 
Postal Inspector 
P.O. Box 3200 
Merrifield, VA 22116-3200 

Dear Ms. Schwartz: 

Thank you for your letter suiimiarizing your review of the audit of 
our imprest fund. We appreciated your visit and the comments you 
made and moved quickly to implement your recommendations. 

Thus, even before receiving your report the office reduced the 
amount of the fund from $1500 to $1000. Additionally, although 
nothing had ever been taken from the cash box in which the money 
is stored, we obtained a key for it so the box can now be locked. 
Your final recommendation was that individual accountability be 
stressed. That has been accomplished. In that connection it has 
been determined that the alternate imprest fund custodian will 
hve access to the box only when the custodian is absent from the 
office, whether on vacation or extended illness. On those 
occasions an accounting will be made before the custodian leaves. 

Sincerely, 



Uisok^ i^ 




Charles L. Clapp 

Chief Administrative^ Officer 




170 



^Mt» 'o«r». 



OFFICE OF THE INSPECTOR IN CHARGE 

Washington, DC 20066-60M 

April 1, 1993 



Mr. Charles L. Clapp 

Chief Administrative Officer and Secretary 

Postal Rate Commission 

1333 H Street, N.W., Suite 300 

Washington, DC 20268-0001 

RE: Audit of Imprest Fund, Postal Rate Commission 
Case No. 004-1106062-AD( 1) 

Dear Mr. Clapp: 

An audit of the S1500.00 Imprest Fund maintained at your office by 
Barbara DeMatte, Administrative Assistant, was conducted on March 17, 
1993. The objectives of the audit were to determine whether cash and 
cash items are reconcilable to the authorized fund amount; purchases 
are adequately supported and documented; adequate internal controls 
exist; and limitations on the use of the funds are met. 

The audit objectives are accomplished by: 

A. Reconciling cash and cash items to the authorized Imprest 
Fund amount; 

B. Examining purchases and supporting documentation to ensure 
their accuracy and adherence to fund use limitations; 

C. Evaluating internal control procedures; 

D. Discussing audit discrepancies with management to improve 
financial control through implementation of recommendations. 

The audit disclosed that the imprest fund was stored in an unlocked 
box kept inside a file cabinet that remained opened throughout the 
day. Since the Administrative Office appeared to be a highly 
trafficked area, it was recommended that a lockable box be obtained 
and secured inside a locked desk drawer during the day. 

It was noted that both the custodian and Alternate Custodian routinely 
accessed the fund. It was recommended that individual accountability 
be established and maintained. (Handbook F-19, 812) 



171 



Based on a review of Forms 1129, Cashier Reimbursement Voucher and/or 

Accountability Report submitted during Fiscal Year 1993, it was 

recommended that the amount of the $1,500.00 fund be reduced to 
SI, 000. 00. 

These recommendations were discussed with Imprest Fund Custodian 
Barbara DeMatte, Alternate Maryanne Warne, and Assistant 
Administrative Officer Cyril J. Pittack on March 17, 1993. 

Sincerely, 



Nina N. Schwartz 
Postal Inspector 
P. 0. Box 3200 
Merrifield, VA 22116-3200 



172 

Mr. McHuGH. With that, we will stand in recess while I run over 
and vote. And with the patience of Mr. Motley and Mr. Hunter, I 
will return as soon as my tired old legs will carry me, and I appre- 
ciate your patience. So we will stand in recess for 15 minutes. 

[Recess. 1 

Mr. McHuGH. If we could come back to order. 

Thank you all for your patience, particularly to the gentlemen at 
the head table who are comprising our third and final panel. I'm 
going to introduce everyone in the order in which we're going to 
ask you to speak. So it does not relate to any order in which you're 
seated. 

First, we have Michael Motley, who is Associate Director of Gov- 
ernment Business Operations Issues for the U.S. General Account- 
ing Office. He is accompanied by James Campbell, who is Assistant 
Director of Government Business Operations Issues, also for GAO. 
The second half of our last panel is headed by Mr. Kenneth Hun- 
ter, who is the Inspector General of the U.S. Postal Service, also 
the Chief Postal Inspector of the Inspection Service. He is accom- 
panied by Kenneth Weaver, Deputy Chief Inspector for Audit, and 
also Jeffrey Dupilka, Deputy Chief Inspector of the Criminal Inves- 
tigations Unit. 

So, gentlemen, thank you all for being here. As I am sure you 
have witnessed through the first two panels, it is the rule of this 
committee that all those submitted testimony must be sworn, so if 
you would please rise. 

[Witnesses sworn.] 

Mr. McHuGH. The record will show that all five of the panel 
members responded to the oath in the affirmative. 

So without any further ado, welcome. Thank you for being here. 
Thank you for your patience. It has been already a relatively long 
day. We are looking forward to your comments and your testimony. 

Mr. Motley, the floor is yours, sir. 

STATEMENTS OF MICHAEL E. MOTLEY, ASSOCLVTE DIRECTOR, 
GOVERNMENT BUSINESS OPERATIONS ISSUES, GENERAL 
GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OF- 
FICE, ACCOMPANIED BY JAMES T. CAMPBELL, ASSISTANT 
DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES; 
KENNETH HUNTER, INSPECTOR GENERAL, U.S. POSTAL 
SERVICE, AND CHIEF POSTAL INSPECTOR, INSPECTION 
SERVICE, ACCOMPANIED BY KENNETH WEAVER, DEPUTY 
CHIEF INSPECTOR FOR AUDIT; AND JEFFREY DUPILKA, 
DEPUTY CHIEF INSPECTOR, CRIMINAL INVESTIGATIONS 
UNIT 

Mr. Motley. Thank you, Mr. Chairman. It's a pleasure for us to 
be here today. 

First, I would like to introduce, as you already introduced, Mr. 
Campbell, who is resident over at the Postal Office in L'Enfant 
Plaza and is in charge of most of our Postal Operations work. 

My testimony will address three major challenges facing the 
Postal Service: improving labor-management relations, setting com- 
petitive rates and providing competitive services, and controlling 
operating costs. First, I would like to talk about labor-management 
relations. 



173 

In September 1994, we reported that labor-management relations 
problems persisted on the factory floor of postal facilities. These 
employees' working conditions, including pay and fringe benefits, 
are determined through collective bargaining. 

In recent years, the parties have had difficulties in reaching 
agreement at the bargaining table and have had to rely on arbitra- 
tion to settle disputes, reducing the number of grievances elevated 
beyond local union and management levels to higher levels, and 
working cooperatively to resolve critical employee morale and 
teamwork issues. The effects of these problems include poor quality 
of work life for many postal employees and higher mail processing 
and delivery costs for the Postal Service. 

In November 1994, collective bargaining agreements with the 
Postal Service's four major unions expired, and negotiations of all 
contracts but one, the National Rural Letter Carriers Association 
contract, ended in impasse, resulting in a need for arbitration. The 
NALC and the APWU have historically gone into negotiations to- 
gether, but, for the first time since 1970, they negotiated sepa- 
rately. Arbitrators have now made awards in both those cases. The 
Mail Handlers Union and the Postal Service are still in arbitration, 
and the award is expected in April. 

Another indicator of deteriorating labor-management relations is 
that, in just 3 years, from fiscal year 1993 to 1995, the number of 
grievances filed and referred to higher management levels for reso- 
lution increased by 31 percent, or about 21,000 cases. 

We believe that improving employee attitudes, morale, and team- 
work are critical to better mail delivery performance and customer 
satisfaction. However, some of the Service's efforts to make such 
improvements have been hindered by poor labor-management rela- 
tions. 

For example, to identify employee concerns and identify potential 
management actions and improve the quality of work life, the Post- 
al Service administered an annual employee opinion survey to over 
800,000 employees. In 1995, when the survey was to be done for 
the 4th year in a row, APWU and NALC, representing over 
500,000 employees, asked their members not to respond to the sur- 
vey. 

There seem to be some differences of opinion between the union 
and the Postal Service as to why that happened. But union officials 
said that the survey results were inappropriately used against 
them in the 1994 negotiations. However, the Service responded 
that it did not introduce the survey results as a basis for negotia- 
tion, but it used our 1994 report on the Service's labor-manage- 
ment relations in those negotiations. 

Although some employees did participate in the 1995 survey, the 
limited results in some areas invalidated the national results to the 
extent that the Service has abandoned the survey completely. 

Finally, the Postal Service has recently initiated a top-down, cor- 
porate-wide initiative called "CustomerPerfect!", which you heard 
the Postmaster General talk about quite frequently this morning. 
This is intended to improve service quality and customer satisfac- 
tion. However, the Postal Service has not gained the support of the 
labor unions, and they are not participating in this overall Service 
effort. 



174 

As was also indicated in the testimony this morning, there have 
been some indications that some of the unions have failed to par- 
ticipate in some of the training that comes under the auspices of 
the CustomerPerfect! initiative. We have reported, in December 
1995, that the success of this initiative is in doubt without the in- 
volvement of those labor unions. 

I was encouraged to hear the Postmaster General's comments 
this morning when you asked the question, Mr. Chairman, regard- 
ing his actions on the GAO report. While a date has not been set 
yet for a summit, we look forward to action being taken on our rec- 
ommendations, and we appreciate you, Mr. Chairman, continuing 
to pursue those recommendations that we put forth. 

Turning to constraints in setting postal rates and providing com- 
petitive service, we have previously reported that the Postal Serv- 
ice is constrained both by the criteria in the 1970 act specifying 
how the Service must allocate costs and set postage rates and the 
length of the typically 10-month process of changing rates. We can 
appreciate some of the concerns expressed by Chairman Gleiman 
this morning regarding this area. However, these constraints have 
the effect of reducing the Service's flexibility in responding to 
change in the marketplace. 

We said that legislative change to the 1970 act's ratemaking pro- 
visions will be necessary if the Service is to be more competitive. 
However, even with reform, the Service could still find competing 
with private firms difficult unless other improvements in price as 
well as service quality are made. 

The importance of service quality is exemplified in the inter- 
national mail market. Our report on international mail delivery, 
which we issued this week, explains how the Postal Service, pri- 
vately owned firms, and other postal administrations compete with 
one another in the fast-growing international delivery service mar- 
ket. In contrast to the process for setting domestic postage rates, 
the Postal Service has greater flexibility in setting international 
rates. 

Interestingly, the international market research data we re- 
viewed showed that total international revenue for all carriers, in- 
cluding the Postal Service, grew at a rate of 12 percent annually, 
from 1987 to 1992, but the Service's international revenue growth 
was only one-half that rate, at 6 percent. The Service lost business 
to competitors because of its less competitive rates, less reliable de- 
livery service, and lack of what we call "value-added" services, such 
as warehousing inventory and customer clearances. 

I would like to note here that the Postal Service's continued via- 
bility as a full-service provider in the current competitive environ- 
ment also depends on controlling the cost of operations. The Serv- 
ice is having difficulty in reducing labor costs as well as strength- 
ening internal operating controls to avoid waste and abuse. Labor 
costs remain a major portion, 82 percent, of the Postal Service's op- 
erating costs, despite its 1992 downsizing. 

To meet increased mail volume and make improvements during 
a downturn in customer satisfaction in 1994, the Service hired ad- 
ditional employees. As a result, Postal Service employment in- 
creased from its downsize level of about 782,000 employees in April 



175 

1993, to about 855,000 employees in November 1995, a growth of 
9.5 percent. 

One major cost-saving initiative undertaken by the Postal Serv- 
ice was an attempt to take advantage of emerging technology and 
improve operational efficiencies by implementing a long-term, $5- 
billion automation program. This program included use of optical 
character readers and bar codes to automatically sort and process 
mail, which was to reduce mail employees' work hours, labor work 
hours. However, work hours have increased, and savings produced 
from automation have been offset by increases in labor costs. 

Later, in September 1995, we reported that performing remote 
bar coding in-house would cost more than if it were to be performed 
under contract. This is primarily due to the fact that contract em- 
ployee costs were lower than the Postal Service's employees' wages 
and fringe benefits. 

We estimated that with a ratio of 70 percent transitional employ- 
ees and 30 percent career, as required under the Service union 
agreement, the cost differential between Postal Service and con- 
tractor bar coding would be more than 14 percent, or $86 million, 
and could ultimately increase if all bar coding was performed by 
career employees. This increase could amount up to $267 million 
annually, thus resulting in the Postal Service incurring greater 
labor costs in this aspect of the automation initiative. 

Internal operating controls are another critical element in avoid- 
ing unwarranted costs. For example, in January 1996, we reported 
that the Service officials did not follow procedures for seven real es- 
tate or equipment purchases in order to meet what they, in some 
instances, believed to be the need to expedite the procurement 
process. 

In some cases, the Service failed to resolve conflict-of-interest sit- 
uations. Overall, we estimated that in these seven purchases the 
Service expended about $89 million on penalties or unusable and 
marginally used property, portions of which could be recovered if 
the properties were leased or sold. 

Another example of internal control weaknesses that we plan to 
report on in the future involves the Postal Service controls over dis- 
counted bulk business mail, which constitutes almost one-half of its 
total revenue generation. However, the system has internal control 
weaknesses that increase the risk that the Service is losing signifi- 
cant revenue in discounted bulk mail. 

For example, while the Service has annually received billions of 
pieces of bar coded mail and the volume is expected to increase in 
the future, especially after the rate reclassification goes into effect 
this July, acceptance clerks at mail processing plants do not have 
adequate automated equipment to verify the readability of mailer- 
applied bar codes. 

Mr. Chairman, this concludes my prepared statement. 

[The prepared statement of Mr. Motley follows:] 



176 



Statement of Michael E. Motley 

Associate Director, Government Business Operations Issues 

General Government Division 

US. POSTAL SERVTCR: CHAI.LKNGES IN IMPRnVTNG PERFORMANCE 

.AND MEETING COMPETITION 

SUMMARY STATEMENT BY MICHAEL E. MOTLEY. .\SSOCIATE DIRECTOR 

GOVERNMENT BUSINESS OPER.\TIONS ISSUES 

GENERAL GOVERNMENT DI\TSION 



GAG'S testimony addresses three major areas that continue to challenge the Postal 
Service in providing prompt, reliable, and efficient mail services, and thus hinder it from 
becoming more competitive in the marketplace. These include (1) improving labor- 
management relations. (2) setting competitive rates and providing competitive service, 
and (3) controlling operating costs. 

The Postal Service continues to have labor-management relations problems similar to 
some of those GAO reported on in 1994. Three of the four unions involved in the last 
round of negotiations were unable to reach agreements at the bargaining table and had to 
rely on arbitration to settle their disputes. In addition, the number of employee 
grievances filed and referred beyond the local management and union levels has increased 
by 31 percent since 1993. Although other attempts to address employee concerns and 
improve teamwork are underway, difficulties persist, and not all parties have made 
commitments to new initiatives. The Postal Service and employee organizations have yet 
to meet to address GAO's recommendation that they develop and sign a long-term 
framework agreement outlining ov^erall objectives and approaches for improving both the 
processing and delivery functions of postal operations. 

The Postal Service has lost market share to competitors in some areas where it once 
essentially controlled the market, such as the Express Mail market. It continues to 
experience problems in competing because of limited flexibility in changing rates and 
other factors such as less reliable service and not providing certain "value added" services 
that are provided by competitors. Even in the international mail area, where the Postal 
Service has greater flexibility in pricing, its rate of revenue growth is well below that of 
its competitors. 

The Postal Service's continued viability as a full-service provider in the current 
competitive environment depends on, among other factors, its abUitv' to control costs. 
Labor costs remain the major portion of the Service's operating costs, and it has had 
limited success in controlling labor cost growth. From April 1993 to November 1995, 
postal employment grew by 9.5 percent. The Service has efforts to constrain labor costs 
through a long-term $5 billion automation program. However, much of the savings 
produced from automation have been offset by increases in labor costs. Also, its remote 
barcoding functions are now being performed in-house, which will cost more than in the 
past, when this function was done under contract. In addition, internal control 
weaknesses in the Service's system for the acceptance of bulk mail as well as some of the 
Service's purchasing practices have added to its costs. 



177 



Dear Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to participate in the Subcommittee's oversight hearings on the 
U.S. Postal Service. My testimony will address three major challenges facing the Postal 
Service: ( 1) improving labor-management relations, (2) setting competitive rates and 
providing competitive services, and [3) controlling operating costs. These issues are not new 
and the Postal Service is pursuing numerous efforts to provide more prompt, reliable, and 
efficient mail services as mandated by the Postal Reorganization Act of 1970. My testimony 
is based on work we have completed over the past several years or have underway. 

LABOR-MANAGEMENT RELATIONS REMAIN A PROBLEM 

In September 1994 , we reported that labor-management relation problems persisted on the 
factory floor of postal facilities. These problems existed between Postal Service management 
and its four unions representing postal clerks, city carriers, rural carriers, and mail handlers. 
These employees' working conditions, including pay and fringe benefits, are determmed 
through collective bargaining. In recent years, the parties have had difficulties in 
(I) reaching agreement at the bargaining table and have had to rely on arbitration to settle 
disputes, (2) reducing the number of grievances elevated beyond local union and 
management levels to higher levels, and (3) working cooperatively to resolve critical 
employee morale and teamwork issues. The effects of these problems include poor quality 
of worklife for many postal employees and higher mail processing and delivery costs for the 
Postal Service. 

In November 1994. collective bargaining agreements with the Service's four major unions 
expired, and negotiations of all contracts but one — the National Rural Letter Carriers 
Association contract — ended in impasse, resulting in a need for arbitration. The impasse for 



U.S. POSTAL SERVICE: Labor-Management Problems Persist on the Workroom Floor 
(GAO/GGD-94-201A and 201B (Vols. 1 & 2). Sept. 29, 1994). 



178 



the Postal Service and the National Association of Letters Carriers (NALC) resulted because 
they could not agree on any of the 80 economic and noneconomic issues at the bargaining 
table. Although the American Postal Workers union (APWU) reached agreement on about 
90 noneconomic issues, they did not agree on economic matters and some related work rule 
issues. The NALC and the APWU have historically gone into negotiations together but, for 
the first time since 1970. they negotiated separately. Arbitrators have now made awards in 
these cases. The Mail Handlers Union and the Service are still in arbitration, and the details 
will not be made public until April 1996. when an award is anticipated. 

An indicator of deteriorating labor-management relations is that in just 3 years--from fiscal 
years 1993 to 1995--the number of grievances filed and referred to higher management levels 
for resolution increased by 31 percent. In fiscal year 1993, about 51,800 grievances dealing 
with disagreements or complaints related to wages, hours, and/or other conditions of 
employment could not be settled at the local level and had to be elevated to higher levels for 
resolution. In 1994, the number had grown to about 65,200 and rose to about 73,300 in 
fiscal year 1995. This was an increase of over 21,000 grievances between 1993 and 1995. 

Improving employee attitudes, morale, and teamwork are critical to better mail-delivery 
performance and customer satisfaction; and Service efforts to make such improvements have 
been hindered by poor labor-management relations. For example, to identify employee 
concerns and identify potential management actions, and improve the quality of work life, 
the Postal Service administered an annual Employee Opinion Survey to over 800,000 
employees. In 1995, when the survey was to be done for the fourth year in a row, APWU 
and NALC, representing over 500,000 employees, asked their members to not respond to the 
survey. Union officials said that the survey results were inappropriately used against them in 
the 1994 negotiations. The Service responded that it did not introduce the survey results as a 
basis for negotiations, but had used our September 1994 report on the Service's labor- 
management relations in those negotiations. Although some employees did participate in the 
1995 survey, the limited results in some areas invalidated the national results to the extent 



179 



that the Service has abandoned the survey completely. Because the Service still needs to 
hear the "voice of the employee", it has contracted with an outside firm to do telephone 
interviews with a sample of employees at each organizational level. 

Finally, the Postal Service has recently initiated a top-down, corporate-wide initiative called 
CustomerPerfect\, to improve service quality and customer satisfaction. However, the Postal 
Service has not gained the support of the labor unions and they are not participating in this 
overall Service effort. Further, the NALC has asked their members not to attend training, 
sponsored by the Postal Service as part of its CiisiomerPerfect! initiative, geared to build 
teamwork and team leader skills. We have reported^ that the success of this initiative is in 
doubt without the involvement and commitment of labor union leaders. 

Recommendations for a Framework 
Agreement Have Not Been Implemented 

The Postal Service has attempted to overcome the difficulties in labor-management relations. 
The Service agreed with the recommendation in our September 1994 report that the 
Postmaster General, along with the heads of the four unions and three management 
associations, which represent general managers, postmasters, and supervisors, develop and 
sign a long-term framework agreement that outlines overall objectives and approaches for 
improving employee working conditions. The Postmaster General made an offer that the 
Service, all four unions, and the three management associations convene a summit and 
discuss a proposed framework agreement. While the associations agreed, three of the four 
unions did not agree to attend a meeting at that time because they believed it would have 
interfered with impending contract negotiations. In our September 1994 report, we 
recommended that, if the parties could not reach a framework agreement within 2 years from 
the date of our report. Congress may want to reexamine any aspects of the employee and 



- U.S. POSTAL SERVICE: New Focus on Improving Service Quality and Customer 
Satisfaction (GAO/GGD-96-30, Dec. 20, 1995). 



180 



management relationships that constitute barriers to reaching such an agreement. 

CONSTRAINTS IN SETTING POSTAGE RATES 
AND PROVIDING COMPETITIVE SERVICES 

In the early 1970s, the Postal Service had essentially 100 percent of the Express Mail 
market; by 1995, its share dropped to about 13 percent. The Postal Service has also 
experienced a similar decline in its share of the multibillion dollar parcel post market. 
Unlike its competitors, who can select the markets they serve and set prices accordmg to the 
demand for and cost of the services provided, the Postal Service, by statute, is required to 
provide universal service to all communities. The Service is also constrained by law in 
allocating costs among its various services and setting prices on the basis of market 
conditions. Noncompetitive postage rates, as well as less reliable services, have contributed 
to the Service's reduced market share. Even in the international markets where the Service 
has greater flexibility to set its rates, its volume growth has been considerably less than that 
of its competitors because the Service has not provided competitive prices and services. 

Postal Rate Process and other 
Factors Constrain Rate Setting 

We previously reported that the Postal Service is constrained both by ( 1 ) the criteria in the 
1970 Act specifying how the Service must allocate costs and set postage rates, and (2) the 
length of the typically lO-month process of changing rates. These constraints have the effect 
of reducing the Service's flexibility in responding to changes in the marketplace. We said 
that legislative changes to the 1970 Act's ratemaking provisions will be necessary if the 
Service is to be more competitive. 



■^ U.S. POST.AL SERVICE: Pricing Postal Services in a Competitive Environment 
(GAO/GGD-92-49, Mar. 25, 1992: U.S. POSTAL SERVICE: Postal Rate making in Need of 
Chang e (GAO/GGD-96-8, Nov. 15, 1995). 



181 



Price and .Service Quality are Factors 
Which Hinder Competitiveness 

Although we belie\e postal ratemaking is in need of reform and hinders the Service's 
competitiveness, even with reform the Service could still find competing with private firms 
difficult unless other improvements in price as well as service quality are made. The 
importance of service quality is exemplified in the international mail market. Our report 
on international mail delivery, which we issued this week, explains how the Postal Service, 
privately-owned firms, and other postal administrations compete with one another in a fast- 
growing international delivery service market. 

In contrast to the process for setting domestic postage rates, the Postal Service has greater 
flexibility in setting international rates. Interestingly, the international-market research data 
we reviewed showed that total international revenue for all carriers, including the Postal 
Service, grew at the rate of 12 percent annually from 1987 to 1992, but the Service's 
international revenue growth rate was only one-half that rate, at 6 percent. The Service lost 
business to competitors because of its less competitive rates, less reliable delivery service, 
and lack of "value-added" services (such as warehousing, inventory, and customs clearance). 

In the domestic markets, the Service faces similar difficulties. For example, the General 
Services Administration provides for the federal government's delivery of overnight letter 
mail under a contract with Federal Express awarded in 1990. Although the Service does not 
provide a service directly comparable to Federal Express, its Express Mail (overnight) service 
is similar in many respects, and has a minimum rate of $1075. In 1995 it had an on-time 



* \J.S. POSTAL SERVICE: Unresolved Issues in the International Mail Market (GAO/GGD- 



96-51, Mar. II, 1996), 

This $10.75 rate could be lower if the Service could justify volume discounts for the 
General Services Administration and other large customers. However, the Postal Rate 
Commission has said that a volume discount not based on a cost savings to the Postal 



182 



delivery rate of about 95 percent. However. Federal Express provides overnight delivery of 
letters under the contract for only S3. 75, with a monthly on-time delivery rate in 1995 
rangmg from 96 percent to 98 percent (this excludes the months of partial government 
shutdown in November and December). 

INABILITY TO CONTROL COSTS AFFECTS 
POSTAL PRICES AND COMPETITIVENESS 

The Postal Service's continued viability as a full-service provider in the current competitive 
environment also depends on controlling the cost of operations. The Service is having 
difficulty in reducing labor costs, as well as strengthening internal operating controls to avoid 
waste and abuse. Labor costs remain a major portion — 82 percent — of the Postal Service's 
operating costs despite its 1992 downsizing efforts. To meet increased mail volume and 
make improvements during a downturn in customer satisfaction in 1994, the Service hired 
additional employees. As a result. Postal Service employment increased from its downsized 
level of about 782,000 employees in April 1993 to about 855,000 employees in November 
1995--a growth of 9.5 percent over that 31 month period. 

One major cost savings initiative undertaken by the Postal Service was an attempt to take 
advantage of emerging technology and improve operational efficiencies by implementing a 
long-term $5 billion automation program. This program included use of optical character 
readers and barcodes to automatically sort and process mail, which was to reduce mail 
employees' labor work hours. However, work hours have increased and savings produced 
from automation have been offset by increases in labor costs. 



Service would be contrary to the 1970 Act. In the 1990 rate case, the Service requested 
approval to offer volume discounts. However, the Postal Rate Commission disapproved the 
request because it did not believe the Service had provided data to demonstrated that cost 
savings could be realized from large customers. 



183 



As pan of this automation initiative, in November 1993. the Postal Service agreed with 
APWU that remote barcoding, which had been done by contractors, would be done by postal 
employees. This would be performed by a mix of Postal Service employees, both 
transitional and career. In February 1995, we reported that the Service was not able to 
barcode as many letters as expected using its optical character readers, and no major 
breakthrough or significant technological advances are expected in the near future. As a 
result, the Postal Service was relying on the more expensive remote barcoding function, 
diminishing much of the anticipated dollar and labor savings. 

Later, in September 1995. we reported that performing remote barcoding in-house would 
cost more than if it were performed under a contract. This is primarily due to the fact that 
contract employee costs were lower than the Postal Service's employees wages and fringe 
benefits. We estimated that, at the ratio of 70 percent transitional and 30 percent career 
workforce required by the Service-union agreement, the cost differential between Postal 
Service and contractor barcoding would be about 14 percent or $86 million (not adjusted for 
inflation) to process 23 billion letters annually. Funhermore. an issue still unresolved is 
whether the Postal Service and unions will decide to have transitional employees receive 
benefits similar to career employees. If this were to take place, we estimated that the cost 
difference would be even higher at 28 percent, or about SI 74 million annually. As such, if 
all barcoding was performed by career employees, we estimated that in-house barcoding 
costs would exceed contracting costs by 44 percent, or S267 million annually — thus, resulting 
in the Postal Service incurring greater labor costs in this aspect of the automation initiative. 

Internal operating controls are another critical element in avoiding unwarranted costs. For 
example, in January 1996 , we reported that Service officials did not follow required 



POSTAL SERVICE: Performing Remote Barcoding In-House Costs More Than 
Contracting Out (GAO/GGD-95-143, Sept. 13, 1995). 

POSTAL SERVICE: Conditions Leading to Problems in Some Major 
Purchases (GAO/GGD-96-59. Jan. 18, 1996). 



184 



procedures for seven real estate or equipment purchases in order to meet what they, m some 
mstances, believed to be the need to expedite the procurement process. In some cases, the 
Service failed to resolve conflict-of-interest situations identified— both real and apparent. For 
example, contrary to the advice of the Postal Service's legal department, the contracting 
officer failed to resolve a conflict of interest on the part of an individual who helped evaluate 
the contract proposals and at the same time had a job offer pending from the successful 
offeror. As a result of the conflict of interest, the award was set aside by the courts and a 
replacement contract was awarded to one of the unsuccessful offerors. The Service paid SIO 
million to the original wining offeror to settle its claim under the contract, which was then 
set aside. Also, the new contract cost $8 million more annually than the old contract. 
Overall, we estimated that in these seven purchases, the Service expended about $89 million 
on penalties or unusable and marginally used property, portions of which could be recovered 
if the properties were leased or sold. 

Another example of internal control weaknesses that we plan to report on in the future 
involves the Postal Service's controls over discounted bulk business mail. This is a 
significant portion of the Service's business — almost one-half of its total revenue of S47.7 
billion is from such bulk mail. The Service has a system designed to verify postage due on 
bulk mail which enabled it to avoid losing revenues of SI 68 million in fiscal year 1994. 
However, the system has internal control weaknesses that increase the risk that the Service is 
losing significant revenue on discounted bulk mail. For example, while the Service has 
annually received billions of pieces of barcoded mail-and the volume is expected to increase 
in future years— acceptance clerks at mail processing plants do not have adequate automated 
equipment to verify the readability of mailer-applied barcodes. Also, these clerks have not 
always done required verifications because of the urgency to accept and deliver mail. 



185 



Mr. Chairman, this concludes my prepared statement. I have appended a hst of our Postal 
Service products issued since January 1995. I would be happy to respond to any questions. 



186 

Mr. McHuGH. Thank you very much, Mr. Motley. 

With that, we turn to Mr. Hunter. Welcome, sir. We look forward 
to your comments. 

Mr. Hunter. Thank you, Mr. Chairman. 

Jeff, Ken, and I are pleased to be here to share with you the ac- 
tivities and the accomplishments of the Inspection Service. We 
have submitted written testimony for entry into the record, and I 
will endeavor to be brief, in view of the fact that I'm the clean-up 
hitter. 

As you know, as the Inspector General, we report to you twice 
a year in a more detailed report than even the written testimony 
that was submitted. We also submit audit reports to management 
and the results of our criminal investigations to U.S. attorneys for 
prosecution. We believe that, in a Postal Service that is focused on 
results, we play an important role. 

Now, in the past, we audited for strict compliance with rules and 
regulations, and we also looked for waste, fraud, and abuse. We 
still do both of those very aggressively, but we also help to improve 
systems to prevent waste, fraud, and abuse and ensure efficient, ef- 
fective service. In fact, our customers are telling the Inspection 
Service that they believe we have made substantial progress in our 
efforts to refocus our work to better serve them. 

Our efforts are also more balanced, focusing not only on audit 
findings and criminal proceedings, but on identifying the root cause 
of problems and recommending innovative solutions. 

Our audit and investigative efforts can be catalogued in the four 
broad areas that we use in our semiannual report, and they are: 
audit of Postal Service programs and projects, protecting Postal 
Service revenue and assets, safeguarding postal employees and the 
work environment, and preserving the integrity of the postal sys- 
tem. I would like to address our accomplishments, briefly, in each 
of these areas. 

First, auditing. We fulfill these responsibilities by examining and 
evaluating the adequacy and the effectiveness of the Postal Serv- 
ice's system of internal controls and quality of performance. Our 
written testimony provides quite a bit of detail in this area, but I 
would like to highlight four of the national performance audits, 
which were: the delivery point sequence program audit, the exter- 
nal first-class mail audit, the airport mail center performance 
audit, and the missent and missorted mail audit. 

In addition, we conducted financial installation audits that iden- 
tified over $10-million in revenue deficiencies. And our work in the 
area of contract audits resulted in postal management recovering 
or avoiding $70 million in contract costs. 

The second category of our work is protecting the Postal Service 
revenue and assets. We have named this the Revenue and Asset 
Protection Program, or RAPP, for short. These investigations com- 
bine our audit and criminal investigative skills to more effectively 
investigate things such as fraudulent workers compensation, em- 
bezzlements and falsifications, procurement and expenditure activi- 
ties, and a variety of postage revenue protection efforts. 

In fact, the Inspection Service has established a revenue protec- 
tion task force that crosses all key functions of the Postal Service 



187 

and includes vendors and customers, to focus on the areas of vul- 
nerability. 

This area of protecting revenue and assets has resulted in the 
following during the last fiscal year: In the area of workers com- 
pensation, we identified a total cost avoidance for the Postal Serv- 
ice of $57 million, and we believe this year we will achieve even 
a higher savings. RAPP investigations also identified approxi- 
mately $48 million in revenue deficiencies and resulted in the ar- 
rest of 416 employees for a variety of offenses. Fraud against the 
Postal Service investigations resulted in another 117 arrests. And 
our financial investigations resulted in the arrest of 260 employees 
and contractors for embezzlement. 

The third area of work is safeguarding postal employees and the 
work environment. As you will recall, workplace violence against 
postal employees was a major topic of the July 25, 1995, oversight 
hearing of the Inspection Service by this subcommittee. In response 
to concerns raised by you, the Inspection Service accepted the as- 
signment to review a variety of conditions and issues in southern 
California. 

A multidisciplinary task force interviewed almost 800 employees 
and examined areas ranging from security concerns, working condi- 
tions, labor-management relations, to sexual harassment, hiring 
practices, and allegations of fraud, waste, and abuse. The review 
reaffirmed that craft employees and supervisors agree on the need 
to deal more effectively with poor performance while recognizing 
good performance, to improve union and management relations, to 
improve communications and respect, and to reduce the adversarial 
relationship. 

Safeguarding postal employees is our top priority, and all as- 
saults and threats to postal employees are taken seriously, and 
criminal charges are initiated when possible. Any instances of em- 
ployee misconduct are reported to postal management for appro- 
priate disciplinary action. Assaults on postal employees resulted in 
491 arrests in 1995. We spent over 158,000 investigative hours in 
this area last year. 

As you are aware, the Inspection Service provided the sub- 
committee staff with recommendations for legislation that would 
create a statute to address Federal employees and amend a statute 
to address assault of contract employees. We feel the enactment of 
such legislation would help increase the safety of employees and 
contract employees. 

Finally, the fourth area of our work is preserving the integrity 
of the postal system itself Our criminal investigations target viola- 
tions of statutes that are intended to protect postal customers, the 
Postal Service, and its employees from those who would com- 
promise the integrity of the mail system. Criminal misuse of the 
mail ranges from theft and mistreatment of the mail to mailings 
of bombs and narcotics. Postal inspectors respond to such crimes 
not only to enforce the law but to reinforce customer faith in and 
satisfaction with the mail system. 

Results in this area during the last fiscal year included over 
1,500 arrests for mail fraud. Investigations of mail bombs and ex- 
plosive devices placed in mail receptacles resulted in another 119 
arrests. The interdiction of controlled substances that were being 



188 

sent through the mails resulted in almost another 1,900 arrests. 
Our investigations of obscenity and child pornography resulted in 
142 arrests. And investigations of mail theft by nonemployees and 
contractors led to 4,565 arrests. 

We are using our audit and our investigative skills to work joint- 
ly with postal managers and customers to achieve creative solu- 
tions to existing problems and the challenges of the increasingly 
competitive environment that we find ourselves in today. 

At our last hearing we outlined for you the efforts that we have 
made with the credit card industry and the success in substantially 
reducing the losses they were suffering from credit cards stolen 
from the mails and used fraudulently. We are now doing the same 
thing in the rebate industry, and we are planning a similar initia- 
tive for the fulfillment industry, people who use the mails for ful- 
fillment of orders to customers for products. 

In summary, we look forward to working with postal manage- 
ment, postal customers, and you to not only maintain but improve 
the Postal Service's position as one of the world's most reliable and 
least expensive communications delivery businesses. 

Thank you again for this opportunity to address the subcommit- 
tee, and we would be pleased to respond to any questions you have. 

[Note. — The Report of the Executive Council on Integrity and Ef- 
ficiency, may be found in subcommittee files.] 

[The prepared statement of Mr. Hunter follows:] 



189 



TESTIMONY OF KENNETH J. HUNTER 
CHIEF POSTAL INSPECTOR/INSPECTOR GENERAL 

BEFORE THE POSTAL SERVICE SUBCOMMITTEE 

HOUSE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT 

MARCH 13, 1996 

INTRODUCTION 

Chairman McHugh and members of the Postal Service Subcommittee: 
I am Kenneth J. Kunter, Inspector General and Chief Postal Inspector for the U.S. 
Postal Service. I am accompanied by Deputy Chief Inspectors Kenneth C. Weaver 
and Jeffrey J. DuPilka. We appreciate this opportunity to update you on the 
activities and accomplishments of the Postal Inspection Service. 

Having investigated crimes against the Postal Service, its employees, and our 
customers for more than 200 years, the Postal Inspection Service is one of the 
oldest investigative agencies of the United States Government. The magnitude of 
our responsibilities is proportional to the size of the Postal Service. In the Postal 
Fiscal Year 1995, the Postal Service delivered over 180 billion pieces of mail, 
employed over 750,000 career employees in more than 39,000 postal facilities, and 
generated revenue of about 54 billion dollars. 

To meet our responsibilities, we employ 2234 postal inspectors, 1407 Postal Police 
Officers, and 878 professional, technical, and support employees. The Postal 
Inspection Service consists of 29 field divisions, reporting to National 
Headquarters. Administrative support for the field divisions is provided by five 
Operations Support Groups. We have five forensic laboratories with highly trained 
personnel and state-of-the-art technology strategically located to support field 
investigations. These laboratories support field investigations through their expert 
analysis of evidence and subsequent courtroom testimony. 

Postal inspectors conduct audit and criminal investigations, serve warrants and 
subpoenas, make arrests, and present evidence in criminal, administrative, and 
civil actions relating to the Postal Service and the U. S. Mail. Nationwide, postal 
inspectors work cooperatively with other Inspectors General; the Department of 
Justice; and other federal, state and local law enforcement agencies on joint 
efforts. 

Uniformed Postal Police Officers (PPOs) provide security for employees, 
customers, mail, and postal assets at select postal facilities around the nation. 
PPOs also escort high-value shipments, including registered mail and postal 
remittances in certain locations. 



40-873 0-97-7 



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Our professional, technical and support employees play a vital role in supporting 
the functions of the Postal Inspection Service. They perform a wide variety of tasks 
including: providing management information systems; forensic evaluation of 
evidence; development, procurement and deployment of electronic security and 
surveillance equipment; vi^riting, editing and publishing reports, manuals and other 
publications; direct contact witTi the puDlic; and administrative support functions. 

As Inspector General we submit a report to Congress twice a year. Our reports 
detail now much money audits have recovered or put to better use and the results 
of our criminal investigations. We also send the audit reports to postal 
management and forward investigations for criminal prosecution to the U. S. 
Attorney. 

In a Postal Service focused on results, we play an important role. In the past, we 
audited for strict compliance with rules and regulations. Now we also help 
managers evaluate their management control systems. In the past we looked for 
"waste, fraud, and abuse." Now we also help improve systems to prevent waste, 
fraud and abuse, and ensure efficient, effective service. 

The U. S. Postal Inspection Service strives to: 

° Be innovative, question existing procedures and suggest improvements. 

" Maximize the positive impact of our audits, investigations and other 
reviews and ensure their objectivity. 

° Use our investigations and reviews to increase government integrity and 
recommend improved systems to prevent fraud, waste and abuse. 

Our customers tell us that we have made substantial progress in our efforts to 
refocus our work to better satisfy customer needs. Our project goals are now more 
oriented toward meeting customer needs, increasing customer satisfaction and 
adding value to the services provided by the U. S. Postal Service. Our efforts also 
are more balanced, focusing not only on audit findings and criminal proceedings, 
but also on identifying the root cause of problems and recommending innovative 
solutions, and participating in joint efforts with our internal and external customers 
to make improvements. 

Our goals support the goals of the U. S. Postal Service: reinforcing our 
commitment to employees, increasing customer satisfaction and safeguarding the 
assets of the Postal Service. Our efforts are tailored around the new 
CustomerPerfect! approach of the Postal Service, listening to the voices of the 
customer, businesses and employees. Our audit and investigative efforts support 
these goals in four broad areas designed to: 

° Audit Postal Service programs and projects. 

° Protect Postal Service revenue and assets. 

° Safeguard postal employees and the work environment. 

" Preserve the integrity of the postal system. 



191 



AUDITING POSTAL SERVICE PROGRAMS AND PROJECTS 

Postal inspectors audit financial transactions, internal controls, and processes of 
major programs and projects of thie Postal Service. Inspectors select audit topics 
and sites based on risk assessment, through) sampling techniques or at the request 
of postal management. Audit results are reported to appropriate postal officials. 
Our internal audits comply with audit standards published by the Comptroller 
General of the United States, the American Institute of Certified Public 
Accountants and the Institute of Internal Auditors. 

PERFORIWANCE AUDITS 

The primary purpose of conducting performance audits is to assist the U.S. Postal 
Service in accomplishing its goals and objectives (its effectiveness) with the 
minimum resources necessary (its efficiency). Although safeguarding assets and 
determining compliance with government regulations is part of every audit, 
performance audits go beyond the standard compliance audit, seeking ways to 
perform an operation more efficiently and effectively. 

Postal inspectors conducting performance audits assess risks associated with 
postal operations, programs and systems to determine their impact on corporate 
success. Areas juaged to be high-risk operations are audited to determine the 
reliability and integrity of management information systems, the effectiveness of 
operations and programs in accomplishing established goals and objectives and 
whether resources are used economically and efficiently. 

Following are briefs of significant audits reported to postal management during the 
past six months. 

National Audit of the Delivery Point Sequence (DPS) Program 

Our review concluded that the DPS Program is beginning to realize delivery 
operations benefits as a result of the Postal Service's automation effort. 
I\^anag|ement has initiated a Savings Tracking System (STS) to focus attention on 
capturing delivery unit savings available through DPS. The audit disclosed that 
opportunities for capturing more DPS savings exist through increased 
conformance with national DPS policies and procedures, enhancements to the 
STS and better coordination between Processing & Distribution Centers (P&DCs) 
and delivery units. Management agreed with the majority of our recommendations, 
which included taking action to improve system discipline and delivery operations 
to capture more automation savings. 

National Audit of the External First-Class (EXFC) Measurement System 

Our audit concluded that EXFC testing conducted by the accounting firm of 
Price-Waterhouse provided a fair representation of quarterly First-CTass Mail 
service for the 96 cities and associated three-digit ZIP Code areas. Management 
agreed with our recommendations and has taken action to improve collection box 
testing, test induction and destinating test volumes. 



192 



National Audit of the Address IVIanagement System (AlVIS) 

Postal inspectors conducted an audit of AMS at 31 district offices and reviewed 
contingency plans, back-up site adequacy and AMS data base security at the San 
Mateo and Minneapolis Information Service Centers. Management has taken 
action to implement our recommendations to strengthen internal controls, which 
included developing a national standardized process to facilitate the flow of work; 
and updating and testing the contingency and disaster plan. 

National Audit of Airport Mail Centers (AMCs) 

An audit of operations at 10 AMCs concluded that improvements in ramp 
operations and in the Performance Measurement ana Mail Handling Performance 
fvlanagement Programs will ultimately result in better service and lower cost to the 
PostalService. Management agreed with our recommendations and initiated 
action to provide more oversight and training in the areas identified for 
improvement. 

National Audit of International Mail Operations 

A joint task force of postal inspectors and postal managers reviewed international 
mail flowing through the Miami International Airport, Airport Mail Center (AMC), 
and Processing and Distribution Center in Miami. The objective of the review was 
to assist management in improving international service to the Caribbean and 
Latin American countries, the audit identified four key areas that accounted for 
over 50 percent of the dispatch errors to these countries. We also found that a 
major U. S. air carrier responsible for transporting 60 percent of the mail to these 
countries was not giving the Postal Service the proper level of service. 

National Audit of Missent and Missorted Mail 

The audit disclosed that management at all levels of the organization had begun to 
consider the negative impact missent mail had on service performance. Effective 
processes were in place at each audited location to identify missent mail within 
each delivery service area; however, we found there are opportunities to improve 
the missent identification and correction processes between P&DCs and our 
large-volume customers. Management agreed with all of our findings and has 
implemented corrective action. 

DEVELOPMENTAL AUDITS 

The Developmental Audit Program is based on phased activities that occur using 
several system developmentaflife cycle methodologies. The audit process 
includes steps for project initiation, requirements, design, testing, acceptance and 
implementation. Once a developmental project is identified, a level of priority for 
audit attention is established. Developmental audits are performed on new 
products and services and, information-based systems, as well as automation, 
technology and business process reengineering projects. 

The goals of a developmental audit are to reasonably assure postal management 
that system costs are justified in relation to anticipated benefits; needed security 
and internal controls are incorporated; adequate documentation for maintenance 
procedures is contained in the system; procedural requirements exist for backup 
and recovery of data; and documentation is available for future audits. 



193 



Audit attention is provided over several reporting periods because of the length 
and complexity of new or redesigned developmental projects. Presently, over 30 
projects are receiving varying levels of audit attention. Many of the projects involve 
automation equipment or mail redesign. Recently, postal inspectors completed an 
audit of four parcel sorter machines and performed a comparison of throughput, 
capacity, level of staffing and maintenance requirements. The audit concluded that 
the existing Small Parcel Bundle Sorter is appropriate for processing centers with 
high volumes of mail and the space to accommodate and other equipment options 
are suitable for lower mail. volume operations with limited space. 

FINANCIAL AUDITS 

Our financial audit programs are designed to provide postal management and the 
Board of Governors witn an independent examination and evaluation of the Postal 
Service's financial activities. We accomplish our objective by reviewing financial 
transactions, verifying account balances and assets and examining and evaluating 
the adequacy and effectiveness of Postal Service accounting and management 
control systems. 

In planning our audits, we assess the risk to the financial systems and plan our 
work accordingly. We use the fiscal year results of our financial audits to express 
an opinion on wnether the Postal Service's National Consolidated Trial Balance 
was fairly stated for the year. We coordinate our financial audit work with external 
auditors engaged by the Board of Governors in the annual certification of the 
Postal Service's Financial Statements. 

The scope of our financial audit work includes financial opinion audits, financial 
installation audits, capital investment audits and contract audits. 

FINANCIAL OPINION AUDITS 

Our Financial Opinion Audit Program goals seek to ensure the accuracy and 
integrity of postal accounting systems and procedures and that electronic data 
processing controls comply with management policies. To accomplish these goals, 
we evaluate internal controls, assess risks, test financial transactions and 
inventory capital assets at the three Postal Service Information Service Centers. 

Audit attention also is provided at selected field sites in support of the program. 
Postal inspectors evaluate property inventory records, construction-in-progress 
projects, vehicle maintenance facility inventories, rail and highway payments and 
imprest fund payments. Payroll controls at non-revenue generating facilities, which 
are not subject to audit unaer the Financial Installation Audit Program, are also 
reviewed. We observe the U.S. Postal Service's Cost and Revenue Analysis 
System test procedures to determine that data is collected as schedulecf by 
knowledgeable technicians. 



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-6- 

FINANCIAL INSTALLATION AUDITS 

Financial Installation Audits were designed to support our Opinion Audit Program. 
Postal inspectors audit 200 field installations annually, selected by a random 
sampling of offices nationwide and stratified according to projected annual 
revenue. $10.3 million in revenue deficiencies were identified during these audits 
in 1995. Offices selected for review in FY 1996 represent approximately 19 
percent of the total U.S. Postal Service projected revenue. 

Postal Inspectors test and evaluate internal controls to determine if systems and 
procedures are in place and working. We verify assets and ensure proper 
safeguards are maintained to protect the Postal Service from fraud, waste and 
abuse. The reliability of accounting and reporting procedures are also evaluated. 
Postal management uses the results of our audits to initiate corrective actions. 

CAPITAL INVESTMENT AUDITS 

In Fiscal Year 1995, we began a 'critical process review' of our Capital Investment 
Audit Program to optimize the value of the audit services we provide postal 
management and the Board of Governors. The current program includes after-cost 
studies on capital investment facility projects approved by the Board of Governors 
in excess of $10 million. Postal inspectors conduct reviews 18 months after a new 
facility has been occupied and compare costs and conditions before work begins 
with costs and conditions after the work is completed. 

The current program also includes auditing documentation in support of each 
facility project prior to Board of Governor approval. We evaluate the process used 
to develop the Decision Analysis Report, recommend improvements and verify the 
support for the operational assumptions, costs and benefits presented in the 
report. Our objectives are to determine whether management followed proper 
postal policies and procedures, developed reasonable alternatives and used 
accurate and complete data to support projected costs and savings. 

To gain an appreciation for the methodology and procedures used by private 
corporations to audit facility projects, the review task force completed a 
benchmarking effort, contacting more than 40 companies. To ensure customer 
focus and initiate a partnership with postal management, the task force also 
interviewed 67 selected postal managers and staff involved in facility projects at 
Postal Service Headquarters and field units. Interviews addressed policies, 
procedures, laws ana regulations for new construction, leasing, building 
purchases and repair and alteration projects. Managers and staff shared their 
group goals and objectives, program administration and procedures, and provided 
information on current and future projects. 

As a result of the 'critical process review,' the task force has completed the 
following tasks: 

° New goals and objectives for the Capital Investment Audit Program, 

consistent with our Inspector General responsibilities and the goals of the 
Postal Service. 



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" A risk model and sampling methodology to focus audit attention on areas 
that represent the greatest possible risk to Postal Service revenue and 
assets. 

" New procedures and report format, to ensure reports are submitted in a 
timely manner and in accordance with generally accepted government 
auditing standards. 

CONTRACT AUDITS 

Postal inspectors provide independent audit attention to costs associated with 
Postal Service procurements of transportation, equipment, supplies, services and 
facilities. These procurements amount to over $5 billion annually and represent 
considerable opportunity for fraud, waste and abuse. 

We perform audits of contract price proposals, cost reimbursement contracts, time 
and material contracts, progress payments and contract claims. The majority of 
our audit work in this area is performed on a request basis to assist postal 
procurement officials and legal staff in negotiating, awarding, administering or 
settling contracts. We also conduct self-initiated audits based on judgment 
selection procedures and information obtained through our Postal Crime Hotline. 

Postal inspectors also review contract administration practices on a request basis 
and as part of our self-initiated audit program. The reviews ensure there are 
effective internal controls and procedures in place to manage Postal Service 
contract-related programs. 

In FY 1995 postal inspectors reported the results of 101 pre-award, post-award, 
contract claim and procurement activity audits to assist postal management in 
negotiating contracts and evaluating procurement operations. In FY 1995, postal 
management used the results of these or prior audits to recover or avoid $69.2 
million in contract costs. 

PROTECTING POSTAL SERVICE REVENUE AND ASSETS 

Revenue and Asset Protection Program (RAPP) investigations combine audit and 
criminal investigative skills to more effectively investigate fraudulent workers' 
compensation, employee embezzlements and falsifications, procurement and 
expenditure activities, counterfeit postage, unauthorized use of postage meters 
and meter impressions, and reviews of mailing practices ~ all of which pose the 
potential for revenue loss. 

System breakdowns, internal control deficiencies or revenue deficiencies 
identified during the course of RAPP investigations are reported to postal 
management for corrective action and collection of revenue. Similarly, criminal 
violations found during RAPP investigations are reported to the appropriate 
federal, state or local prosecutor. Civil remedies have also proven to be effective 
collecting revenue and penalties. In a recent settlement of a civil fraud case 
against a mid-west mail presorting corporation, the corporation agreed to pay 
double damages regarding a scheme that defrauded the Postal Service oi over 
$310,000. 



196 



-8- 

Based in part on the success of the Meter Initiative, the Inspection Service has 
undertaken a similar initiative to focus on other areas of revenue protection. 
Working in conjunction with the Marketing Systems, Finance, and Engineering 
Departments, as well as the mailing industry, the Inspection Service has 
established a Revenue Protection Task Force and has targeted 5 areas of 
vulnerability for investigative attention. In addition. Postal Service management 
has initiatives in progress to strengthen these systems. 

The Revenue Protection Task Force has provided investigative attention to five 
areas. They include: 

" Official Mail Accounting System (OMAS) 

" Presort 

° Plant Verified Drop Shipment (PVDS) 

" Second Class Mailings 

° Nonprofit Mailings 

We have initiated a total of 43 investigations resulting in documented revenue 
losses to the Postal Service of $1 1 .6 million. Had these schemes remained 
undetected, we estimate the losses would now total $14.6 million. Further, we 
have completed 114 audits/reviews with a documented loss of $63.5 million. 
Marketing Systems has sponsored a number of joint initiatives with mailing 
industry representatives to assist in preventive efforts. The efforts of this 
partnership, are beginning to bear fruit. 

EXPENDITURE INVESTIGATIONS 

Expenditure investigations are conducted on a request basis or are self-initiated 
based on customer tips or from information obtained through our Postal Crime 
Hotline. The investigations include reviews of procurement or expenditure 
activities and false claims against the Postal Service. The Postal Inspection 
Service also uses two civil statutes to recover losses sustained by the Postal 
Service as a result of false claims, and to discourage others from filing false claims 
or statements against it. 

An expenditure investigation was conducted at the William F. Bolger Management 
Academy, Potomac, MD. Postal inspectors reported the results of their review of 
all major identifiable programs, processes and systems of control at the Bolger 
Management Academy to determine if practices and procedures complied with 
postal policies and regulations. Our review disclosed a lack of management 
oversight and weak or non-existent internal controls in several areas, exposing 
Postal Service revenue and assets to risk. Management agreed with our 
recommendations and began corrective action, which included increased 
management oversight of expenditures in the areas of training, travel, salaries and 
construction projects.^ 



197 

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EMPLOYEE EMBEZZLEMENTS 

Employee embezzlements may include clerks who steal money from casti drawers 
to sophisticated kiting schemes involving postal money orders and falsified 
financial records. 

Postal inspectors attempt to identify employee embezzlements in the early stages, 
before they are able to profit significantly from their crimes, and the victimization of 
the Postal Service is therefore minimized. Investigation into such crimes includes 
minimizing future losses by reporting to postal management any deficiencies found 
in systems or procedures so that corrective action may be taken. In 1995 
Inspection Service investigations resulted in the arrest of 260 employees and 
contractors for embezzlement. 

Another important element of our work in this area is the recovery of stolen funds 
from the responsible party. When an employee is covered under the Civil Service 
Retirement System (CSRS), the Postal Service may recover part or all of the lost 
funds through offsets taken against the employee's retirement fund; however, 
when an employee is coverecTunder the Federal Employee Retirement System 
(FERS), the Postal Service is unable to recover stolen funds through such offsets. 
Legislative action is needed to change the law so that debts owed the government 
by federal employees under FERS are subject to the same provisions as those 
covered under CSRS. Postal inspectors have prepared a legislative proposal that 
would allow the Postal Service to collect debts from former employees by offsetting 
amounts against their FERS fund. 

CONTRACT POST OFFICE EMBEZZLEMENTS 

The Postal Service has contracted with private individuals and corporations to 
operate contract post offices in many areas across the country. The arrangement 
benefits contractors, who view it as a way to increase customer traffic to their 
stores; and customers, who may purchase postage stamps and money orders or 
conduct other postal business while they purchase merchandise offered by the 
contractor's regular business. 

As with other embezzlements, postal inspectors seek to minimize losses by 
recovering stolen funds from the contract employer of the contractor's bonding 
company. Investigative reports by inspectors provide a basis for the contracting 
officer to terminate a contract when an embezzlement is discovered. 

WORKERS' COMPENSATION FRAUD 

Under the RAPP umbrella are our investigations into fraud against the Worker's 
Compensation Program. These investigations save the Postal Service millions of 
dollars each year in what would have been lifetime costs for the support of 
employees making false disability claims. Fraud detection and elimination is but 
one part of workers' compensation cost control. A joint task force of the Postal 
Service's Human Resources office and the Inspection Service identified many 
other areas, and Human Resources is pursuing these and achieving significant 
cost avoidances. We are working with Human Resources on proposals to do even 
more in this area. 



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The Inspection Service and the Inspector General of the U.S. Department of Labor 
conducted a joint review of the administration of the Federal Employee's 
Compensation Program. Significant program improvements were noted in both the 
Postal Service and the Department of Labor as a result of their efforts over the past 
three years. 

The payment of compensation and medical benefits to employees who have 
sustained injuries while on duty continues to be a growing expense to the Postal 
Service. The Postal Service is responsible for funding all payments to postal 
employees receiving workers' compensation benefits. The administration of the 
Federal Employees Compensation Act (FECA) is handled by the Office of Workers' 
Compensation Programs (OWCP) of the Department of Labor (DOL). While FECA 
covers all federal agencies, the Postal Service represents about 25 percent of all 
FECA payments. The Postal Service has a vested interest in the program because 
it has accrued at least a $4.7 billion future liability in workers' compensation claims 
since the Postal Service reorganization in 1971. In addition, the Postal Service 
paid approximately $27.7 million in continuation-of-pay benefits in 1995 and 
incurred workers' compensation cash outlays totaling approximately $501.1 million 
for the year. 

The Postal Service fully supports the intended purpose of the workers' 
compensation, but a small percentage of postal employees and medical providers 
abuse the system, causing the Postal Service to incur millions of dollars each year 
in fraudulent claims and enforcement costs. 

In an attempt to minimize the Postal Service's exposure to workers' compensation 
program fraud, waste and abuse. Postmaster General f\/larvin Runyon recently 
approved a request for the Postal Inspection Service to fund an additional 25 
postal inspectors to investigate workers' compensation program fraud and related 
matters. Additionally, 14 contractor fraud analyst positions were funded by the 
Postal Service to provide postal inspectors with additional investigative assistance 
and support for the workers' compensation program. 

DOL regulations require individuals receiving workers' compensation benefits to 
report outside income; their benefit payments are then reduced accordinqly. Postal 
inspectors continue to uncover incidents of unreported outside income. R)r 
example, a former distribution clerk from Washingtonville, NY, was arrested on 
charges stemming from his failure to report as required that he was self-employed; 
the former employee owned and operated a mobile food unit while claiming to be 
totally disabled. The man received over $200,000 in workers' compensation 
benerits before postal inspectors arrested him. This investigation resulted in a cost 
avoidance savings to the Postal Service of about $400,000. 

In many cases, the type of unreported work being performed requires the same 
body movements that were restricted by the employees' physician. For example, at 
Linden, NJ, a former mail processor was arrested for making false statements 
regarding his claim for workers' compensation benefits after postal inspectors 
discovered he was selling real estate while claiming to be totally disabled with 
'constant and severe pain.' The employee had resisted any rehabilitation efforts by 
the Postal Service and the Department of Labor. The former employee was 
sentenced to one year in prison. Estimated savings to the Postal Service on this 
case are $486,000. 



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The workers' compensation program is also subject to fraud and abuse by 
individuals outside the government. The vast majority of medical providers used by 
postal employees injured on the job have the best interests of their patients at 
heart; however, a few seek to take advantage of the program for their own 
enrichment. The submission of false bills, collusion with claimants to extend 
benefits and falsified claim documents are examples of cases investigated by 
postal inspectors. While the number of such cases remains fairly low, their 
potential monetary impact can be considerable due to the number of employees 
who may be affected by a single provider. 

When job-related injuries preclude the performance of normal work functions, 

Postal employees receive a monthly FECA payment while not working for the 
ostal Service. This wage-loss compensation is paid by the Postal Service through 
DOL in accordance with FECA. The projected monthly savings of the monthly 
FECA payment through age 70 is the amount referred to as cost avoidance. 
Workers' compensation fraud investigations conducted by postal inspectors last 
year resulted in a total cost avoidance of $57 million. The Inspection Service 
remains on target to achieve, for the third consecutive year, cost-avoidance 
savings exceeding $50 million. Our legislative proposal to allow for the Postal 
Service to collect debts from former employees by offsetting amounts against their 
FERS fund, previously discussed under the Employee Embezzlement section, 
would also aid our Workers' Compensation cases. 

Following is a synopsis of RAPP efforts in 1995: 

* RAPP investigations identified approximately $48 million in revenue 
deficiencies and resulted in the arrest of 416 employees for various 
offenses. 

" Fraud against the Postal Service resulted in 1 17 arrests. 

° Workers' compensation abuse resulted in disciplinary action against 
321 employees, the arrest of 33 and the removal of 216 employees from 
the Postal Service. 

° Financial investigations resulted in the arrest of 260 employees and 
contractors for embezzlement. 

SAFEGUARDING POSTAL EMPLOYEES AND THE WORK ENVIRONMENT 

Workplace violence continues to be an issue of concern for the Postal Service. 
Workplace violence against postal employees was a major topic of the July 25, 
1995 oversight hearing of the Postal Inspection Service by this Subcommittee. In 
response to concerns raised by the Chairman and by ivlembers of Congress 
representing Southern California, the Inspection Service agreed to review a variety 
of conditions and issues, including those related to the fear of violence in certain 
Southern California postal facilities. A multi-disciplinary task force interviewed 
over 800 employees and examined areas ranging from security concerns, working 



200 



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conditions, and labor/management relations to sexual harassment, hiring 

practices, and fraud, waste, and abuse allegations. The review reaffirmed that 
craft employees and supervisors agree on the need to: deal more effectively with 
poor performance while recognizing good performance; improve union and 
management relations; improve communications and respect; and reduce the 
adversarial relationship. 

The Postal Inspection Service promotes aggressive programs to ensure the safety 
of postal employees. The programs focus on reducing assaults on employees, 
eliminating drug sales in the workplace and preventing postal crimes. 
Safeguarding postal employees is our top priority; all assaults and threats to postal 
employees are taken seriously, and criminal charges are initiated when possible. 
Any instances of employee misconduct are reported to postal management for 
appropriate disciplinary action. 

Assaults on employees during FY 1995 resulted in 491 arrests, and narcotics 
involvement by employees led to 108 arrests. Postal Inspection Service crime 
prevention efforts last fiscal year included: 

° 158,000 investigative hours 

" 2,712 employee presentations 

" 1 ,384 post office security surveys. 

The Postal Inspection Service's Security Force, is integral to the security program 
established for the U.S. Postal Service. Postal Police Officers (PPOs) provide 
security at postal facilities where risk, vulnerability and history demonstrates a 
need for their presence. 

As you are aware, the Postal Inspection Service provided the subcommittee staff 
with recommendations for legislation that would create a statute to address 
stalking Federal employees and amend a statute to address assault of postal 
contract employees, we feel the enactment of such legislation would help 
increase the safety of employees by enabling us to address problems at a much 
earlier stage. 

PRESERVING THE INTEGRITY OF THE POSTAL SYSTEM 

The U.S. Postal Service is the world's largest postal system. Our customers rightly 
take for granted that a letter correctly addressed and mailed will be properly 
delivered. Today's Postal Service is in the communications business, competing 
with other companies and technologies for the opportunity to deliver America's 
messages. Its future success depends on its ability to become more businesslike 
and competitive. The U.S. Postal Inspection Service adds value to postal services 
in a variety of ways, including ensuring the security of items entrusted to the U.S. 
Mail. 

Our criminal investigations target violations of statutes intended to protect postal 
customers, the Postal Service and its employees from those who would 
compromise the integrity of the mail system. Criminal misuse of the mail ranges 
from theft and mistreatment to the mailinq of bombs and narcotics. Postal 
inspectors respond to such crimes not only to enforce the law, but to reinforce 
customer faith in and satisfaction with the mail system. 



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Criminal investigations by postal inspectors during FY 1995 resulted in the 
following: 

° Mail fraud investigations resulted in 1 ,538 arrests. 

° Investigations of mail bombs and explosive devices placed in mail 
receptacles resulted in 1 19 arrests. 

" Interdictions of controlled substances in the mail resulted in 1 ,887 
arrests. 

" Interdictions of obscenity and child pornography in the mail resulted in 
142 arrests. 

" Mail theft by non-employees and contractors led to 4,565 arrests. 

" Mail theft or mistreatment of mail by employees resulted in 607 arrests 
and the removal of 1,116 individuals from Postal Service employment; 
1 ,491 employees also were disciplined. 

" A total of 297 employees were disciplined for miscellaneous crimes, 
including sabotage of equipment and theft of postal property. Of these, 
59 employees were arrested and 179 were removed from Postal Service 
employment. 

" The investigation of miscellaneous external crimes, which may include 
counterfeit and contraband postage, money order offenses and 
vandalism, resulted in 536 arrests by postal inspectors. 

Postal inspectors protect consumers from false or fraudulent mailings through civil 
statutes related to misrepresentations in mail order marketing. Inspectors may ask 
operators to sign an informal Voluntary Discontinuance in less severe instances; 
they may obtain a Consent Agreement in which an operator agrees to modify or 
discontinue a promotion; or may obtain a False Representation Order or Cease 
and Desist Order, requiring that mail addressed to an identified scheme be 
returned to the sender, that money be returned to consumers or that the operator 
stop engaging in the scheme. If more immediate measures are needed, inspectors 
seek a Temporary Restraining Order or Preliminary Injunction to detain mail. 

The Inspection Service considers a number of factors in deciding whether to seek 
relief under the false representation and lottery statute. First, and most important, 
is the content of promotional materials. Inspectors normally make test or demand 
purchases of products or services that consumers will receive if they respond to a 
promotion ("fulfillment"). In some cases, those samples are obtained from 
complaining consumers. In most lottery cases, fulfillment is not required because 
the solicitation constitutes a lottery on its face. 

Evidence is also gathered regarding the identity of the persons or entities 
responsible for a scheme, or whether there is scientific evidence which 
substantiates any medical or scientific claims made in an advertisement. Except 
in serious cases where criminal intent to defraud is apparent, a case will be 
forwarded to the Postal Service Law Department for action if the fulfillment is not 
what is advertised, will not perform as advertised, or the representations in the 
solicitation are otherwise not substantiated. 



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Often inspectors become aware of a scheme because a large number of 
consumers complain about it. If a scheme is generating a large number of 
complaints, there is a large volume of rnai! 'asponding to -he scheme, or the dollar 
loss to the public is significant, those fac'rro a\i-<o ■•'jV:\ i'-''' ^r •^ ;e the decision 
whether to devote resources to it. 

When they have evidence of a false or fraudulent scheme inspectors must decide 
whether to present the matter to the United States Attorney for consideration of 
prosecution under the criminal mail fraud statutes, or (o present it to the Law 
Department for civil action or both. Many factors affect this decision, including 
whether a target's intent to defraud can be demonstrated. 

Most statutes authorizing the government to seek injunctive relief require a 
different showing than that of probable cause. One exception, in addition to 
Section 3007, is 18 USC Section 1345, which has been interpreted to require that 
the government show probable cause to believe that a person is engaging in a 
violation of 18 USC Section 1341 (mail fraud) in order to obtain a preliminary order 
enjoining that conduct or activity. 

Standards of proof required of various agencies in statutes authorizing injunctive 
relief vary, but most statutes require a "proper showing" to support injunctive 
relief, or do not specify what showing is required. It is not clear which of these 
statutes has the highest standard of proof because the standards are usually not 
clearly defined. It is clear that a "strong prima facie case" as required in 
Securities and Exchange Commission (SEC) cases is a higher burden than 
probable cause. However, we interpret the National Labor Relations Board 
"reasonable cause" standard as the same or lesser burden than probable cause. 

As an initial matter, our research reveals that few other federal statutes are directly 
comparable to Section 3007, which authorizes the court to order the Postal Service 
to detain the defendant's incoming mail pending a full administrative hearing on a 
complaint filed under Section 3005. 

Section 3007 has a very limited purpose: to preserve the status quo between 
consumers and the defendant until the administrative process determines whether 
the defendant's incoming mail, containing consumer remittances, will be returned 
to sender pursuant to Section 3005(a)(1). Unlike most injunctive actions, court 
decisions under Section 3007 do "not affect or determine any fact at issue in the 
statutory proceedings," i.e. in the administrative court. Thus, once a district court 
issues (or refuses to issue) a preliminary injunction, it has no further authority. The 
jurisdiction for making a decision about the permanent fate of the defendant s mail 
lies with the Postal Service and the courts to which Postal Service decisions are 
appealed. The standard of proof governing the permanent relief available under 
Section 3005 is the "preponderance of the evidence" standard. 

In contrast, the court issuing most injunctions sought by the SEC, FTC, CFTC, 
FERC, and IRS is the same court which ultimately will decide whether to issue a 
permanent injunction against the challenged activity. Thus, the standard of proof 
set out in the injunction statutes applies to the permanent relief, not just the 
preliminary relief. It follows that a higher statutory burden for injunctive relief 
would apply in those actions than in status quo statutes like Section 3007. 



203 



-15- 

A lower standard of proof in Section 3007 actions is also appropriate because the 

relief requested, detention of mail containing consumer remittances and 
responses, is so limited. The remedies available to other agencies seeking 
injunctive relief are far more onerous. 

In addition, the higher standards of proof required of other agencies are matched 
by greater investigative authority. Every other agency may issue civil investigative 
demands or investigative subpoenas, and has the authority to subpoena 
witnesses. The Postal Service has neither investigative subpoenas authority nor 
the authority to subpoena witnesses to testify at hearings. 

Finally, a lower standard of proof is reasonable in light of the potential harm to 
consumers whose remittances are sent in response to a false representation 
scheme. The Postal Service has no authority to order a promoter to make 
restitution to consumers, even if a mail-return and false representation order are 
ultimately issued. Thus, the maintenance of the status quo between consumers 
and the promoter may be the only opportunity that the government has to ensure 
that consumers do not lose their money if the promotion is based upon 
misrepresentations. 

During FY 1995, postal inspectors initiated the following action: 

" 2,983 promotions were voluntarily discontinued 

" 209 administrative action requests filed 

" 168 complaints filed with administrative law judges 

" 88 Consent Agreements filed 

" 13 Temporary Restraining Orders filed 

* 117 False Representation Orders filed 

•" 105 orders to withhold mail issued. 

Forfeiture is a powerful law enforcement tool. It deprives criminals of the use of 
their ill-gotten gains and serves the tenet that "crime does not pay." Durinq FY 
1995, inspectors conducted 405 seizures of property with a total appraisea value of 
over $16 million and secured 353 forfeitures. 

Fines ordered as a result of Postal Inspection Service investigations resulted in 
$26.7 million in assessments and voluntary and court-ordered restitution of over $1 
billion. 

The Postal Inspection Service was one of the first agencies to recognize the 
potential for recouping losses through the Program Fraud Civil Remedies Act 
(PFCRA). In FY 1995, postal inspectors referred 58 cases to Postal Service 
attorneys for administrative action through this authority, including individuals or 
companies who attempted to defraud the Postal Service. Successful PFCRA 
actions have included contract fraud, employee embezzlements or other schemes 
to knowingly deprive the Postal Service of revenue. 



204 



-16- 

Postal inspectors at division offices are designated as Public Information Officers. 

Their responsibilities include alerting postal employees, consumers and business 
to current crimes by circulating media releases ana hosting prevention 
presentations before various groups. During FY 1995, PIOs made 874 television 
and radio appearances, provided 752 print media interviews and sent out 321 
news releases. 

While promoting the efficiency and integrity of Postal Service programs as an 
important part of our Inspector General mandate, we are in the forefront of the IG 
community as a leader in effecting the cultural cfiange necessary to move our 
agency forward. We are using our audit and investigative skills to work jointly with 
postal managers and customers to achieve creative solutions to existing problems 
and the chaMenges of an increasingly competitive environment. 

We are striving for excellence in our Inspection Service goals of improving Postal 
Service performance, improving public confidence in the use of the mail, ensuring 
the safety of employees, mcreasing revenue and reducing costs. This partnership 
will strengthen the Postal Service and help enable the organization to move 
forward as a viable competitor in the marketplace of the future. 

We look forward to working with postal management, postal customers and 
Congress to not only maintain, but improve, the Postal Service's position as one of 
the world's most reliable and least expensive communications delivery 
businesses. Thank you for the opportunity to address the subcommittee. We 
would be pleased to respond to any questions you may have. 



205 

Mr. McHUGH. Thank you, Mr. Hunter. I appreciate that. 

Mr. Motley, let's begin with you. It's been about a year and a half 
since you issued your labor-management report about the problems 
of bad relations on the workroom floor. You mentioned it here 
again today. Page 3 of your statement reminds us that Congress 
may want to re-examine aspects of the employee-management rela- 
tionships that continue to be barriers to developing long-term 
agreements, and on and on and on. 

First of all, I'm curious, do you have a list or a recommendation 
as to which part of those problems are simply contentious issues 
in terms of negotiations and which are an area for a legislative 
remedy? I would assume that many Members of the House, at 
least, would be concerned about going in and disrupting what 
would normally be considered collective bargaining. If two parties 
can't agree to a process and an agreement that helps the institu- 
tion, that's unfortunate, but that's the way negotiations go some- 
times. 

We would, obviously, be interested where, in your opinion, there 
is need for legislation to force agreements where they should be 
reached. Are you able to tell us where the difference might lie? 

Mr. Motley. I think the difference is difficult to define in many 
regards, Mr. Chairman, but let me say this, that a good number 
of the issues that were raised in that 1994 report are ones that the 
Postal Service could probably begin to initiate from a management 
perspective and attempt to work with the unions. 

There are a few issues that are addressed in that report that fall 
into the 1997 legislative perspective, such as the ones that you re- 
ferred to a little bit earlier, the collective bargaining issues and 
also the right to strike. With regard to collective bargaining, there 
might be some other options that may or may not be more palat- 
able. We haven't pursued them entirely at this point. They deal 
with an approach of final offer arbitration, which is a little bit dif- 
ferent than the procedure that exists now. 

You have probably heard discussions from the unions as well as 
the Postal Service regarding the idea of the right to strike. There 
is a lot of contention there as to, if they receive the right to strike, 
should there be a right to have replacement workers. 

So I think the real role that this subcommittee can play is in 
looking at those things from a legislative perspective, but also in 
keeping a very strong monitoring role over the actions that the 
Postal Service either could take or already has taken. 

My sense is that a lot of the initiatives that would be related to 
the recommendations we addressed, there has not been much ac- 
tion by the Postal Service to initiate something there. And I think 
continued efforts on this subcommittee's part to hold the Postal 
Service accountable to those recommendations is probably the best 
approach. 

Mr. McHuGH. So, in those areas you mentioned last, we're talk- 
ing about administrative will rather than legislative authority. 

Mr. Motley. That's correct, Mr. Chairman. Mr. Campbell would 
like to add something. 

Mr. Campbell. Well, I may not add a lot to what Mike has said, 
but I would point in our statement at page 2, to an example of 
what happens where the so-called noneconomic and economic is- 



206 

sues get entangled, and all of the issues then go to arbitration. In 
fact, nothing gets settled at the table. That happened in the case 
of the Postal Service and NALC or city letter carrier negotiations 
in 1994. 

So anything that could be done through legislative change or in 
some other way to encourage the parties to come to agreement at 
the table could address a number of both economic and non- 
economic issues. Our reports dealt more with the work floor issues, 
the noneconomic, or the quality of work life, issues. 

Mr. McHuGH. Which continues to be a problem. 

Mr. Campbell. Yes, sir. 

Mr. McHUGH. You may have heard me ask the Postmaster Gen- 
eral about one of the comments in your testimony with respect to 
the apparent inability of the Service to integrate system-wide those 
things it may be doing well in isolated locations. His comment — I 
hope I accurately recall it — was that their current Customer- 
Perfect! program was intended to address that. 

I would be interested if you would care to speculate on whether 
or not you think that can happen in the current environment. But, 
even apart from that, were you able, in making that observation, 
to identify what failing there might exist? Is there something in the 
system that could be corrected, absent a total CustomerPerfect! ini- 
tiative, that could help them to integrate what they do well? 

Mr. Motley. I will have Mr. Campbell respond to that, Mr. 
Chairman. 

Mr. Campbell. We did report, in December of last year, the lack 
of sharing of what we call "best practices" that are implemented at 
various places in the Service, the problem of not sharing those, in 
many cases, even within a district or within the local office. By the 
way, that problem had also been reported by the Inspection Service 
sometime earlier. 

One of the more promising initiatives that we saw in the course 
of our review was electronic dissemination of these ideas in the 
form of an electronic bulletin board. I don't know the exact status 
of that, but with an organization the size of the Postal Service, it 
would seem that there needs to be some method of that sort where 
employees and managers throughout the Service would have easy 
access to what really is working. 

But then, of course, management, or the leadership of the Postal 
Service needs to identify those. They could do some showcasing 
where there is something that really works. I've seen that at other 
organizations where they will bring in these practices and dem- 
onstrate them, and it's called "showcasing". I'm not sure they have 
done that, but they are working on it and it is a part of their 
CustomerPerfect! initiative. 

Mr. McHuGH. The information is certainly important. You can't 
act on what you're doing well if you don't have the information that 
identifies that. But don't you have to integrate it? Is part of this 
problem related to your observations on lack of a training program 
at the management level, or are they separate? 

Mr. Campbell. There's training needed and training underway 
in the area of teamwork, and this is where the management team 
and work team, at the operating level, are working together to get 
the job done. In that context of trusting one another, sharing infor- 



207 

mation, it seems to me that, if there is a good practice, there's a 
greater opportunity that that practice will be shared, if they have 
that teamwork. And they are trained in that regard. 

If I'm answering your question, I see a relationship in that re- 
gard, working in a team, not only at the unit level, but at higher 
levels, so the information does flow. It's sharing information, not 
holding back. 

Mr. McHuGH. Yes. And then, ultimately, you have to have an at- 
mosphere on the workroom floor for the worker. 

Mr. Campbell. Of trast. 

Mr. McHuGH. Yes. Which goes to training, as well. 

Mr. Campbell. Yes. 

Mr. McHUGH. How you get management to be able to convey 
that more effectively. 

Mr. Motley. I might just add to that, Mr. Chairman, that one 
of the things that we addressed in the 1994 report and we were 
quite high on last year was the leadership team. This is comprised 
of executives at the Postal Service level, management associations, 
and the unions. One of the things that we said in that report is 
that concept needed to work itself down through the organization. 
And I believe some of those things Jim is sort of alluding to in that 
teamwork type of effort and communication, we haven't seen that 
taking place in most of the locations. 

Mr. McHuGH. Any speculation as to why you haven't seen it tak- 
ing place? 

Mr. Motley. I think part of it has to do with the labor-manage- 
ment relations problems. As inferred in our testimony here, one of 
the unions, in particular, has pulled out of the teamwork effort. 
And I'm not exactly sure of all the reasons behind that, but I think 
it's some of those reasons that we need to pursue so that there can 
be a better synergism among these groups. 

Mr. McHuGH. From your understanding of CustomerPerfect!, 
what would your — and I guess you mentioned that in your testi- 
mony, but I'd like to have it spoken to on the record, apart from 
that— CustomerPerfect! doesn't work perfectly well if it isn't a team 
approach. Is that a fair assessment? 

Mr. Motley. I would suggest that's true, Mr. Chairman. Again, 
in our 1994 report, we had a relatively large section that talked 
about all the initiatives that the Postal Service had underway. And 
the failure of some of those initiatives was directly attributable to 
the groups not being able to work together. I believe this is why 
we set this up, in the very beginning of this report, how important 
it is for the Postal Service to coordinate and get the cooperation of 
the unions and management associations. 

I believe in Mr. Runyon's discussion this morning he indicated 
that they are working at the highest levels right now, and that 
they are just getting down to the workers. I think the real proof 
in the pudding of this initiative will be at that level. 

Mr. McHuGH. I agree. Well, obviously, a lot of things come back 
to this. And I don't pretend to sit here and have the answers to 
it. Obviously, there are real challenges involved. But I think, if 
we're going to have any kind of success, it's certainly something 
that has to be dealt with honestly and, hopefully, effectively. 



208 

You may have heard me ask Chairman Gleiman about your com- 
ments as to the 70 demand-pricing criteria. Would you have any- 
thing to say in response to his comments? 

Mr. Motley. I might just add, Mr. Chairman, that the Postal 
Rate Commission had an opportunity to comment on that report, 
and we attempted to address the comments they provided us in the 
report that we issued not too long ago. I would suggest to you that 
we weren't attempting to limit the ratemaking process in any par- 
ticular way. 

We felt as though the review that was needed was one of consid- 
eration as to what degree some of the factors that were considered 
in the ratemaking process should be put. And that's one of the rea- 
sons that we had, in that particular report and the earlier one in 
1992, that Congress may want to look at these things to see what 
level of either demand pricing or other factors should be consid- 
ered. 

We said in those reports, as well, that the criteria appeared to 
us to be conflicting in some areas, and we felt as though that was 
a concern. I think it's fairly well laid out in the reports themselves. 
I can understand some of the comments that Mr. Gleiman had, but 
I think our report makes it quite clear what we were attempting 
to do. 

Mr. McHuGH. OK. Thank you. 

You may have heard testimony today, and certainly not with any 
pride on behalf of the Postmaster General, that the Federal Gov- 
ernment takes its overnight, its expedited mail services under a 
contract with one of their major competitors. I was interested in 
reading observations put out by GAO that, in your estimation, even 
if it had greater commercial freedom, the Postal Service may be un- 
able to compete successfully because of some of the constraints they 
are under. Could you expand on that for purposes of the record? 

Mr. Motley. Yes, Mr. Chairman. When we looked at, specifi- 
cally, the international mail area, and we made the statement 
there that the revenue growth had been significantly less than its 
competitors, really what we were seeing there was the quality of 
service issue. And there were some pricing issues, as well. Maybe 
Mr. Campbell can add to some of those in a minute. 

But we were looking at a quality of service issue. Competitors 
were offering things that the Postal Service was not offering. I 
mentioned in the statement some things like warehousing or 
preclearance at the customs locations. As Mr. Runyon indicated, 
they are starting to address some of those concerns now. 

I think, from the domestic perspective, what we have — and I 
think that it goes back to maybe your earlier issue about volume 
discounting or the report that we issued that talked about demand 
pricing as well as volume discounting — the Postal Rate Commission 
has basically said that the Postal Service can provide volume dis- 
counts if it's able to demonstrate that there is a savings in address- 
ing that volume discount provided by a large customer. 

In the 1990 rate case, I believe it was, the Postal Service asked 
to get a volume discount. However, the conclusion of the Postal 
Rate Commission is that sufficient data was not provided by the 
Postal Service to demonstrate that there was going to be a cost sav- 
ings. 



209 

In the example that we have in our testimony, it's maybe not 
geared to some of the service issues, because we can't suggest that 
the contractor that currently has the GSA contract and the Postal 
Service overnight delivery are identical; however, they are very 
similar in many respects. But when you see a cost differential of 
$3.70 versus $10.75, you say, "Could the Postal Service do it for 
$3.75?" And I believe that's really what they need to demonstrate. 

Mr. McHuGH. Mr. Campbell. 

Mr. Campbell. I think Mike's last point was the thing I was 
going to add, that that price differential, $10.75 versus $3.70 or 
$3.75, is quite a difference, that they would have to, presumably, 
make up through, I suppose, volume discounting. That seems to be 
quite a challenge to bring the price to that competitive level. 

But there are other aspects of that at least I found interesting. 
The contractor, Federal Express, is doing desk-to-desk delivery, na- 
tionwide, about 98 percent of the time, on time. And the Postal 
Service is running about 95 percent. So the Service would have to 
compete on the basis of both price and delivery service, and I would 
see a challenge on both of those. 

Even with the flexibility of offering customer-designed packages, 
which is what's involved there, we don't know whether or not they 
can do that. They have never had, really, the opportunity. But I 
think it would be interesting to see. 

Mr. McHuGH. A real challenge. Increase delivery efficiency and 
cut the price by two-thirds. 

Mr. Campbell. Yes, sir. 

Mr. McHuGH. Well, before we leave you, international mail, you 
had your report earlier this week that you referred to. 

Mr. Motley. Yes, sir. 

Mr. McHuGH. And you cited several policy issues that we on the 
subcommittee should reexamine when we consider our reform pro- 
posals. I'd like to have you state a couple of those for the record, 
because I think that's an important thing to have out there. 

Mr. Motley. Mr. Chairman, I'd like to have Mr. Campbell add 
a few comments regarding that. 

I think some of the things that we have to look at, and I believe 
Mr. Runyon brought them up during his testimony, are the Depart- 
ment of Transportation issues related to control over the prices for 
air carriers, American flag air carriers. He indicated that the Sec- 
retary of Transportation would like to relinquish that responsibil- 
ity, and I understand that there are some things in the works to, 
in fact, do that. 

I think some of the flexibility that's currently provided, in some 
ways, it will be a test for the Postal Service to see whether or not 
they are able to compete, much like Mr. Runyon is projecting that 
they will, because it just goes back to the previous discussion that 
we had. If they are able to improve those services, and they have 
made numerous initiatives over the last couple years to improve 
those international mail services, then it might show that they will 
be able to compete. 

I wouldn't directly correlate it to the domestic market, but it will 
be interesting to see how the Postal Service goes along. 

Mr. Campbell. In terms of legislative changes that might deal 
with the issues in that report, our very fundamental message is 



210 

that, in effect, the whole ball of wax needs to be looked at together; 
that is, the price regulation, the monopoly, and all these things, we 
would think need to be addressed together. We, in that report, 
elected not to go into any particular recommendations for change 
as affects just the international mail service. 

I think that's all I would be able to add to that. 

Mr. McHUGH. OK. Well, I thank you. 

Mr. Hunter, you heard in Mr. Motley's testimony his reference 
to problems currently being encountered and losses through the 
bulk business mail, and the revenue losses there. What can you do 
to help us more fully understand what that situation is and you 
might be doing to correct that? 

Mr. Hunter. It is one of our high priorities, as you know, as we 
set priorities and tackle them. Obviously, protection of the employ- 
ees was first, but immediately thereafter is both the protection of 
the customers, the credit card initiative, and this whole revenue 
protection initiative, the oldest part being the meter part which is 
now about 3 years old, and then, of course, the rest that followed 
on from that. 

We spent a significant amount of time briefing your subcommit- 
tee staff on the things that are being done there. There's no ques- 
tion that we feel that there's an exposure there that needs to be 
reduced, that it is too easy to cheat the Postal Service on revenue 
today. 

So instead of taking the traditional approach of simply auditing 
and investigating and presenting cases to the U.S. attorney, we 
have aggressively included not only all the appropriate functions 
from within the Postal Service but the vendors of the related equip- 
ment, whether it's multiline optical characters readers or the meter 
companies, and the customer, because the customer ultimately suf- 
fers. If one of their competitors doesn't pay postage and they do, 
they will lose business to the competitor who then has the advan- 
tage. 

We've identified that a number of things need to be done, which 
could be summarized, as follows: one is, important system changes 
need to be made in the equipment that produces the postage or the 
information, in the case of multiline optical character readers. Sys- 
tem changes need to be made by the Postal Service. It accepts so 
much mail, so fast, every day, that needs to be less manual and 
more automated. So a series of system changes that involve proce- 
dures, that involve hardware, that involve training, that's an im- 
portant aspect of it. 

We're not where we want to be yet, but I am pleased that the 
involved parts of the Postal Service and the industry are very fo- 
cused on it and are working in that direction, from encrypted meter 
indicia, to digital meters, to software protection on the MLOCRs 
that are available commercially, to developing systems to automate 
a lot of the necessary review of the acceptance of mail. 

Mr. McHUGH. Mr. Motley, you heard that. Feel better? 

Mr. Motley. Does that make me feel better? Well, I think it does 
help a fair amount, Mr. Chairman, to know that these things are 
being looked at by the Inspection Service and that there are some 
improvements. However, some of the concerns that we have — I'll 
give you an example. 



211 

When bulk mail is accepted — our future report that, hopefully, 
will be out not too long from now, will lay out, in some regard, 
some of the equipment that is not even available yet for acceptance 
clerks to use in evaluating whether or not bar codes are readable. 

In some regards, how they have been making that determination 
is holding the letter piece up and eyeballing the bar code. And if 
it's "akilter", you know, they know that it won't be able to be read 
by the automated equipment. But if it's off, let's say, from — I don't 
know what the tolerances are — it might not be able to be read by 
the automated equipment. 

Until they get the new equipment, which isn't scheduled to come 
to them until May, they won't be able to assure themselves, from 
an automated perspective, whether or not some of these bar codes 
will actually go through the automated equipment. This is where 
the Postal Ser\'ice ends up incurring additional expenses when they 
have previously given the mailer the discount for the mail. 

There are, I believe, 260 pieces of this automated equipment, and 
it's equipment that will be portable, so it could move around from 
one location to the other. It's called "automated bar code evalua- 
tor", or "ABE", for short. But this equipment won't be available till 
May. Keep in mind that the rate reclassification will take place ef- 
fective in July, which I think everyone anticipates it will signifi- 
cantly increase the amount of bulk mail business coming into these 
centers. 

So in addition to the things that Chief Hunter has spoken about 
here, I think it's important that these systems get out there quick- 
ly, that they get tested, and that they are monitored by the Postal 
Service. I think management attention — in many instances, let's 
say, the Postal Inspection Service has brought these problems to 
the attention of the Postal Service, and I don't believe the kind of 
management attention that's warranted for such a large portion of 
the revenue generation in that area has been brought to bear at 
this point. 

Mr. McHuGH. Mr. Hunter, any other response to that? 

Mr. Hunter. I would agree that improvements are needed. In 
terms of the improvements, the piece of equipment mentioned is 
but one piece of what is needed. I mean, there are a number of 
other things that they are working with, like artificial intelligence 
systems that will literally direct the acceptance clerk to do things 
based upon information the system has. We are going to perform 
a national audit of bulk mail acceptance this year, because we 
want to further quantify the areas that require improvement. 

Mr. McHuGH. In government, we always like to append a price 
tag to everj^hing, particularly how much we're losing through 
fraud and abuse and such. Is there an estimate as to what the 
Postal Service believes is being kept from its treasury through 
fraud a year, $1 billion, $2 billion, half a billion? 

Mr. Hunter. No one knows how to quantify that at this point. 
There are estimates. In fact, the Finance Department did a fairly 
sophisticated estimate at one point, with regard to what the losses 
could be just in the meter area, which is one way to accept postage. 
There's also the permit and the stamps, of course. Their estimate 
ranged from zero to about $170 million. 



212 

I personally feel — and it's strictly me, personally, from our expe- 
rience — that the exposure could be $100 million in the meter area 
and $100 million in the permit area. And I don't know what it is 
in the counterfeit stamp area, because we haven't had enough sig- 
nificant cases there, but I think that's a threat also. 

Mr. McHUGH. I'll bet you it's not zero. 

Mr. Motley, have you ever see any figures? Does that sound rea- 
sonable? 

Mr. Motley. It would be difficult for me to suggest, Mr. Chair- 
man, what a reasonable number might be. Mr. Campbell may want 
to respond. 

Mr. Campbell. I would just add that one of the recommendations 
we have in the report that will be going over to the Postal Service 
within the next 2 weeks, we expect, is that the Postal Service try 
to get a handle on the amount of losses that are occurring as a re- 
sult of the bulk mail acceptance, just in that one area. 

We think the Service needs that, and they don't have it. They 
don't have any even reasonable estimate of how much mail is com- 
ing through that has a shortage of postage paid. 

Mr. McHuGH. Well, Chief Hunter, you heard it first here. 

Well, you mentioned you're going to do an audit this year; you 
plan to do a national audit this year on bulk mail. What other na- 
tional audits do you foresee in the near future? 

Mr. Hunter. Well, we also have one planned in the metered 
area, when you're speaking of revenue protection. Besides that, 
there are other ways, of course, that the Postal Service can achieve 
significant savings, and it has to do with productivity. So, in doing 
our risk analysis of what are the areas that should have the high- 
est priority, we're directing a lot to that area, also. 

For example, with the automation, it's important to not only as- 
certain that the equipment works as designed, but are the benefits 
being realized for which it was designed. So we will be focusing, 
for example, on the city delivery area, because a prior audit of the 
delivery sequencing disclosed that although productivity gains are 
being made in the office, they are being lost on the street. So we 
will be focusing on that, as an example. 

We will also be taking a look at allied labor. As was indicated 
by GAO, the number of employees has increased, and it increases 
for a number of reasons. I mean, new deliveries, 1 million new de- 
liveries a year, new homes and things, requires a lot more carriers. 
And volume drives it up, too. 

But the Postal Service and the Inspection Service are concerned 
about the growth in what's called "allied labor", labor that is in- 
volved with the transport of mail between machines and a number 
of things like that. It's kind of a miscellaneous category. So we will 
be performing a national audit in that area. 

We have a number of other national audits. We have provided 
you with our audit plan for this year that's based on that risk anal- 
ysis. The remote bar coding system is another example of an area 
we're going to take a look at nationally, as well as the international 
mail. And another one that we're going to do is to audit the follow- 
up on the audits, because we've changed our audit program to not 
only identify things that are not in compliance, the 700-plus find- 
ings we had last year, but the best practices. 



213 

So we're going to audit the followup on the audits. When we 
made recommendations for improvement, were they adopted, and 
then sustained? Another thing that has been done in that regard 
that I would Hke to mention is that the Postmaster General now 
has asked to be briefed at the time audits are initiated and then 
personally briefed on the results. That's helping a lot with the visi- 
bility, also. 

So we meet with him on the average of once every 2 weeks to 
share the results, and he is very process and production oriented 
because of his background and his training. That's helping to gain 
visibility for best practices being adopted elsewhere, because he's 
very good at asking why until he gets an answer that's acceptable. 

Mr. McHuGH. Your working with the PMG in that fashion leads 
to an area that we discussed last year and, quite honestly, it is a 
topic that has been brought to the subcommittee's attention at var- 
ious times over the past 12 months, and that is the structural sta- 
tus of your office vis-a-vis the Postal Service itself. 

As you may recall, we talked about your legal positioning, in that 
you are not technically apart, either in your audit or your inspec- 
tion service, from the Postal Service. And the question is, does that 
somehow inhibit your independence? Does it somehow cast a ques- 
tion as to perhaps your being too close to management to critique 
them and to oversee them fairly. 

I recall very clearly your response at that time. You didn't be- 
lieve that that was, in fact, the case. Chairman Gleiman changed 
his mind about subpoena power in the last 12 months. Have you 
had any additional thoughts about that legal structure in which 
you find yourselves? Do you think it inhibits you now? 

Mr. Hunter. No, I don't. I understand the concern. I was 
amused, because, if the objects of our audits were asked if they felt 
we were independent, they would probably reply, "We feel they are 
too independent." We are not the subject of any effort on the part 
of the Postmaster General, or anyone else within the Postal Serv- 
ice, to not audit things or change our findings. 

One of the things the Postmaster General did shortly after he be- 
came Postmaster General, because of some concerns he had similar 
to what you've raised, he hired two outside experts to take a look 
at that whole issue, two people that are very respected, former IGs. 
I would also add that, besides reporting to the Postmaster General, 
as you know, we report to the Board of Governors, which relies 
upon us heavily for independent assessment of things that they ap- 
prove or are interested, whether it's expenditures or other concerns 
they have, and also to you, as we recently demonstrated with your 
request to take a look at the situation in southern California, plus 
some broader concerns that existed. 

So we have three entities that we report to, that we strive very 
hard to serve well, and it's not a problem for us. 

Mr. McHuGH. First of all, just for the record, I certainly wasn't — 
and you didn't say I was — but I want to make it clear that it's not 
my intention to question anyone's integrity or the effort with which 
they pursue their assigned duties. 

You brought up southern California. As you know, that's a very 
troubling situation to all of us, and I commend you here today for 
the effort that you and your department put forward, a lot of work, 



214 

a lot of effort. Unfortunately, we haven't been able to utilize the 
tools that you gave us as yet to remedy that situation. You may 
not agree with that. If you don't, I would be happy to hear it. 
That's not your shortcoming. 

But it was my understanding, by way of example, that as you 
were attempting to interview certain employees, you were identi- 
fied as part of the problem, not a potential part of the solution; 
that some were saying, amongst the employees, that this Service 
is nothing more than an extension of the PMG, and if we talk to 
them, it will ultimately end up to the knowledge of our supervisors, 
to our detriment. 

Would that not be a situation that could be rectified if there were 
some kind of wall of separation constructed? 

Mr. Hunter. I don't think so, in this case. First, in direct re- 
sponse to that, GAO encountered the same problem when looking 
at a situation that they looked at in 1994. And, of course, as you 
know, we've both come to the same conclusions regarding the 
change that needs to take place in the relationships for the Postal 
Service to be successful. 

We, of course, were accused of just what you mentioned, as were 
they, in terms of the source of information that they relied upon. 
The feeling by the organizations involved is that, if you want to 
know how employees feel, it's their responsibility to tell whomever 
the inquirer is how they feel. So they have the same reaction, in 
the remarks to their report, as we encountered. 

Now, the second point is that, in spite of that official stand of 
employee organizations, when we went out to interview the em- 
ployees, as you know, in 19 of the 20 offices, or actually 21 of the 
22, the employees cooperated. Again, it was voluntary, but, as you 
know, hundreds of them said, 'Tes, I would like to be interviewed. 
I would like to say how I feel." 

And, of course, their feelings were similar to what GAO found 
using a different source, using the employee opinion survey data, 
and we, in effect, did the same thing in person. They said, "Hey, 
we would like to see more positive labor-management relations. We 
would like to see less of this adversarial relationship. We would 
like to have some shared goals." I mean, they are all very dedicated 
to providing service to the customer. They would like some of this 
interference out of the way. 

So we were able to do it, in spite of some of those feelings. An 
independent organization, GAO, encountered some of the same 
feelings, even though they are independent. What needs to be tack- 
led are the root causes, the thing you're driving at, in terms of, how 
do we solve this relationship problem? I think you're trying to do 
the right thing in terms of bringing pressure to bear on the parties 
to get together to work it out. 

This can only be worked out by the parties. The imposition of so- 
lutions has not worked. Thousands of grievances have been decided 
by a third party, and yet the number of grievances continues to go 
up. Imposed solutions that are on a win-or-lose basis won't lead to 
the kind of relationship that's necessary to be successful. 

Mr. McHuGH. Mr. Motley, is that your recollection of your 1994 
experience; were you viewed in that way? 



215 

Mr. Motley. I think what Mr. Hunter may be referring to, and 
my recollection, more of the 'Tou're part of the management orga- 
nization" type concept came in responses to our draft report that 
was sent out to the unions as well as management associations, 
some of which provided written comments and characterized that 
kind of thinking in those written comments. 

Maybe some of the other things that you were alluding to weren't 
quite there. But I think that's where we encountered much of that 
kind of response. Unions perceived that we were part of the Postal 
Service organization and a management organization, when, in 
fact, that wasn't the case at all. But I believe that's a position that 
many of those organizations have continued to take over the years 
in representing their membership. 

I believe it's those kinds of barriers, particularly, Mr. Chairman, 
that need to be addressed in some regard. I think there's a signifi- 
cant amount of distrust among and between those organizations. 
Maybe the summit that the PMG has recently called for could help 
to alleviate some of those concerns. 

Mr. McHuGH. Well, we would hope. 

Chief Hunter, you mentioned that safety of the employees is your 
top priority or among your top priorities. For the record, why don't 
you tell us what you and the Postal Service, in general, are doing 
to enhance that. Obviously, violence in the postal workplace and in 
post offices continues to be a concern of us all. What can we look 
forward to happening differently, if anything? 

Mr. Hunter. Well, you've identified one category of concern, in 
terms of violence in the workplace among employees. As was out- 
lined in July, there are a number of things that the Postal Service 
and the Inspection Service are doing. No. 1, we investigate every 
assault and every credible threat, and we apply some very onerous 
and detailed requirements on those investigations in order to not 
only investigate the specific incident but to determine whether or 
not it may be one step in a series of incidents that could become 
more violent. 

The Postal Service, with regard to workplace violence, has been 
doing a number of other things with the organizations and on its 
own, from the National Committee on Workplace Behavior; the na- 
tional forums it's held; the pre-employment screening changes; 
more employee training and stand-up talks; the 85 mental health 
professionals that they retain, one per district; the EAP program, 
which is probably the most robust anywhere, the up to 12 free 
counselings with an outside agency, at no expense to the employee, 
for any reason, just in an effort to reduce stress in the workplace; 
the EAP hotline; the Inspection Service hotline; the kinds of things 
that we do. 

But I would also hasten to add that employee-on-employee vio- 
lence isn't the source of all the threats against employees, that non- 
employee assaults on employees is also a very important area that 
we work in, as well as the reduction of hazardous materials in the 
mail. Robberies clearly are an example of an area of often non- 
employee violence on employees, and we've made some significant 
progress there, too. In fact, it's very related to the prior subject. 

Working with one of the major employee organizations in south- 
ern California, we've driven down robbery significantly in the L.A. 



216 

area, which did have almost half of the robberies in the Postal 
Service last year, almost half of the 282 robberies. By working per- 
sonally and officially with the organization, myself meeting with 
their president and about 100 to 200 of his stewards each year, and 
combining the ideas of the carriers and the inspectors and postal 
managers, there was a significant reduction. 

So a lot is going on in that area. That's also a demonstration that 
there can be common goals that people agree upon that make 
progress, even though they belong to organizations that would 
seem to be in opposition. I could cite examples where the opposite 
is the case, too, of course. 

Mr. McHUGH. When you deal with prevention, you're into a situ- 
ation of judgment, do we turn our post offices into police stations? 
But clearly there are instances where the potential for violence is 
significant enough to warrant the posting of police personnel on a 
regular basis. Are there set criteria as to where you place those of- 
ficers? How do you make that judgment? 

Mr. Hunter. We have criteria, in terms of where we assign post- 
al police officers on a permanent basis, and in a moment I will ask 
Jeff to outline those. But we also assign either postal police officers 
or, if they are not in the vicinity, we contract for security in ad hoc 
situations. In other words, we may become aware of a particular 
threat, at a particular time, at a particular location, that we be- 
lieve requires some enhanced security. 

An example could be that someone is obviously targeting one of 
our employees, and there is a threat of violence. Until they can be 
apprehended or the necessary steps can be taken to have them in- 
stitutionalized or incarcerated, we will add additional security. So 
it happens both on an ad hoc basis, frequently, or on a permanent 
basis. 

Now, in terms of the kinds of things we look at permanently, 
that's one of Jeffs responsibilities, and I will ask him to respond. 

Mr. DUPILKA. We conduct facility surveys to determine deploy- 
ment of postal police officers that involve a number of factors. Pri- 
mary would be the employees in the station or the facility; hours 
of operation; mail volume on hand; the risk attendant in the direct 
area surrounding the facility; the type of facility that we've built, 
in terms of security, what we can put into a different area; what 
we've done as far as the perimeter, what surrounds it, geographi- 
cally, as well as the environs around it; and what we can build in 
as far as hardware. 

As you see in some of our newer facilities in different parts of 
the country, if we build new buildings, we do things that other cor- 
porations that build facilities in this country do, as far as building 
security into the building: access controls, gates, lighting, fencing, 
and those types of things. 

Mr. McHuGH. In my recollection of Willie Sutton, who robbed 
banks because that's where the money was, I would assume the po- 
tential for robbery at any postal facility is directly relevant to the 
amount of cash on hand. Even the smallest of rural post offices has 
cash on hand. 7-Eleven has the sign that says "No more than $50", 
and other facilities have a wall safe where you deposit that cannot 
be opened. Have we ever considered that kind of action to lessen 
the incentive and to keep the Willie Suttons at bay? 



217 

Mr. DUPILKA. In terms of robbery prevention, that's exactly what 
we're doing. The Postal Service has done some wonderful things as 
far as their cash management, getting the amount of money that's 
in an office out, and securing the amount of cash that's in an office, 
when it's in there, in a security container that's not generally ac- 
cessible except to certain employees. 

We're also using more credit card acceptance across the Nation. 
We're going to be the largest acceptor of credit cards, nationwide, 
when we're fully deployed in that area, which will remove a lot of 
the cash from the offices, because people will be able to pay with 
credit cards and not have to bring cash and other negotiables into 
the post office. 

So we're doing some very innovative things there, Postal Service- 
wide, to keep the money out. 

Mr. McHuGH. Just a suggestion, maybe we ought to do a little 
PR-ing of that fact. I mean, it's kind of useless if someone comes 
in to rob the place, inflicts harm, and then later finds out that 
you've done all these things and there's no cash, but the harm has 
been done. A la 7-Elevens, when you walk in there, you know the 
clerk has no more than $50, because they make very clear that sit- 
uation. Maybe we need to do the same. 

Mr. DuPiLKA. I think that a good example would be, over the 
weekend, we saw in the Post that even though there is very little 
money available actually in banks that you can get at, and the high 
likelihood of getting caught is there, that people are still robbing 
more banks than they ever had in the past. It's just indicative of 
some of the things that are going on in this country, in terms of 
violence and robbery. 

Mr. McHuGH. Well, no argument there. Obviously, you're always 
going to have an element who don't make rational decisions as to 
who they will rob. It's so shocking. 

Mr. DupiLKA. We fall into that trap. We try to overlay a rational 
thought process on essentially an irrational act. 

Mr. McHuGH. Precisely. That's why it's good to get congressional 
input. 

Let me thank all of you gentlemen for your testimony today, as 
well as Chairman Gleiman and Chairman del Junco and the Post- 
master General, for being here today and helping us, not just meet 
our legislative requirement of oversight, but to add to the discus- 
sion and to, most of all, provide us information that we know will 
be very useful to us as we continue the process of reforming and 
reexamining the Postal Service. 

We look forward, as we do with the other panel members, to con- 
tinue to work with all of you so that whatever end product we 
produce, it is as effective as it can possibly be. 

I would also state for the record that we would like to reserve 
the prerogative of submitting some written questions to all of the 
panel members, all three panels, on behalf of not just the Chair but 
other subcommittee members. We would appreciate, if we do exer- 
cise that prerogative, your cooperation in responding at your earli- 
est convenience. 



218 

So with that, thank you all, every one, and we will adjourn the 

subcommittee for today. 
[Whereupon, at 1:30 p.m., the subcommittee was adjourned.] 
[The questions and responses of GAO and the Inspector General 

follow:] 



219 



flAO RESPONSES TO QUESTIONS OF APRIL 9. 1996. 

FROM THE CHAIRMAN. SUBCOMMITTEE ON THE POSTAL SERVICE. 

HOUSE COMMITTEE ON REFORM AND OVERSIGHT. RELATING 

TO MARCH 13. 1996. HEARING 



QUESTION 1 

In your testimony, you stated that there are internal control weaknesses in the 
Postal Service's system for the acceptance of bulk mail as well as the fact that 
some of the Service's purchasing practices have added to its costs. What are some 
of the control weaknesses and the purchasing practices that are adding to high 
costs? 

GAO RESPONSE 

Bulk Mail Acceptance 

We identified a number of control weaknesses in the Postal Service's bulk mail 
acceptance program. Required verifications and supervisory reviews of mail 
preparation/postage due on huge volumes of discounted mailings submitted by 
customers were often not done. Even when verifications were done and mailings 
were rejected, the Service did not have adequate controls to ensure that the 
mailings were not later resubmitted and accepted into the mail stream without the 
errors having been corrected or additional postage paid. Acceptance clerks were 
not given the tools they needed to adequately determine whether the increasing 
volumes of mailer-applied barcodes met Postal Service technical standards. 
Consequently, the potential existed for bulk mail with discounted postage rates to 
be accepted for processing and delivery with barcodes that could not be read by the 
Service's automated sorters. 

AU of these situations may have resulted in lost revenue to the Service because the 
Service would have, in effect, "paid" customers to do work (sorting, barcoding, and 
transporting of mail) that the Service had to do itself. However, the Postal Service 
did not know how much revenue was being lost by accepting improperly prepared 
mailings. The Postal Inspection Service has, for several years, identified bulk mail 
acceptance as a high risk for potential revenue losses. Overall, the dollar amount of 
the discounts on such mail is estimated by the Service to be about $8 billion 
annually. 

Service executives have recognized the vulnerability of the system to revenue losses 
and have started taking some steps to minimize the effects of known control 
weaknesses. For example, while bulk mail acceptance is primarily a marketing 
department responsibility in the Postal Service, a unit was recently established by 
the Chief Financial Officer/Senior Vice President to help ensure all revenue due is 

Page 1 



220 



collected. The unit was allocated $10 million, with the expectation that it will 
collect an additional $100 million in postage revenue. 

Our draft report detailing our findings and recommendations is currently with the 
Postmaster General for official comment, and we expect to issue the report in final 
form to the Subcommittee in June 1996. 

Purchasing 

Our report' on selected Postal Service purchases identified several practices that 
contributed to higher costs for the Postal Service and its customers. In these 
purchases, there were two recurring themes-internal management controls were 
sidestepped and standards of ethics were violated. For example, internal control 
breakdowns in the review and approval process for acquiring a building in St. Louis, 
MO, resulted in the Postal Service paying a real estate development firm $12.5 
million for a building that the firm had acquired earlier the same day for $4 million. 
Service officials, pressured by an impending deadline and unsubstantiated belief 
that other parties were interested in the property, misrepresented details of the 
acquisition to the Board of Governors and failed to get proper approval from the 
Service's Capital Investment Committee before making the purchase. 

An example of ethics problems occurred in a 1993 purchase involving barcode 
sorting equipment. The contracting officer fcdled to correct an apparent conflict-of- 
interest situation involving an individual who was a technical consultant to both the 
Postal Service and the wirming offerer. The dispute was submitted to an arbitration 
panel, which awarded $22.2 million in damages to an unsuccessful offeror. In 
general, Postal Service officials circumvented internal controls to speed up the 
purchasing process and failed to adequately deal with known or potential ethics 
violations. 



' Postal Service: Conditions Leading to Problems in Some Ms^jor Piurchases 
(GAO/GGD-96-59, January 18, 1996). 

Page 2 



221 



QUESTION 2 

To what do you attribute the soaring increase in employee grievances? (up 20,000 in 
three years). 

GAP RESPONSE 

Postal Service officials do not know the causes of the increased grievances since 
fiscal year 1993." They said that the Postal Service and the unions have started a 
series of meetings, facilitated by the Federal Mediation and Conciliation Service, to 
determine why the number of grievances has increased and to find ways to reduce 
the high grievance rate. 

Although we have not determined the causes of the increased grievances, the rise in 
the grievance rate may be due in part to the contentious 1994 contract negotiations^ 
and deteriorating labor relations at the national level. Some academic research has 
shown that in companies where labor-management relations is highly adversEu-ial (as 
is the case at the Postal Service), grievance rates tend to rise before the start of 
contract negotiations.'' 

While the recent, contentious contract negotiations may explain in part the increase 
in grievances, other factors may have also contributed. Overall, relations between 
the Postal Service and the American Postal Workers Union and the National 
Association of Letter Carriers at the national level may have worsened since 1994 
when we issued our report. It appears that conflict between the Service and the 
unions has intensified over issues such as wage and fringe benefits for transitional 
employees doing remote encoding, the collection and use of employee opinions 
regarding their working conditions, and training of employees as part of a new 
Postal Service quaUty improvement initiative. 



^In fiscal year 1993, the grievance rate was 9 grievances per 100 employees. In 
fiscal year 1995, the rate had increased to 11 grievances per 100 employees. 



^In November 1994, collective bargaining agreements with the Postal Service's four 
major unions expired, and negotiations of all contracts but one ended in impasse, 
resulting in a need for interest arbitration. 

■"See, for example, Nancy R. Mower, "The Labor-Management Relationship and Its 
Effects on Quality of Work Life," M.S. thesis (Cambridge: Massachusetts Institute 
of Technology, 1982). 

Page 3 



40-873 - 97 - 



222 



QU Eg T I ON 3 

Were unions ever contacted or encouraged to participate in the development and 
subsequent implementation of "CustomerPerfect!" initiative embarked upon by the 
Postal Service? 

GAP RESPONSE 

The Service's Vice President for Labor Relations said that the national union 
presidents were briefed on CustomerPerfect! as part of the Service's initial efforts 
to promote and elicit support for the initiative. The response from the union 
presidents varied. For example, the President of the American Postal Workers 
Union, along with other union officials, attended a briefing provided by the Vice 
President for Quality, whereas the President of the National Association of Letter 
Carriers did not respond to the invitation to hear the briefing. Of the four m^or 
unions, the President of the Rural Letter Carriers Association has demonstrated the 
greatest interest in and support for the initiative, according to the Vice President for 
Labor Relations. 

We have not reviewed implementation progress of the CustomerPerfect! initiative to 
assess the extent to which the unions are participating at the various organizational 
levels. At the time of our December 1995 report on the Service's quality 
improvement efforts^, it did not have the commitment of labor uiuon leaders to 
implementing this initiative. We believe that their commitment is necessary to most 
effectively implement the irutiative. 

QUESTION 4 

hi the international market, the Postal Service had a clear window to come out on 
top and offer competitive rates. It clearly did not move in a timely fashion. They 
claim they want to be competitive and yet when they have the opportunity as they 
had in this instance, they fail to deliver. Can you elaborate on the reasons for the 
lost market share? What has the postal Service done to improve the quality of its 
international services? Is it too late? 

GAP RESPONSE 

Although the Postal Service's overall volume of international mail pieces has grown 
in recent years, the Service has lost some market share in the international mail 
market because of several reasons. The Postal Service reportedly did not provide 
certain value-added services offered by its competitors, such as warehousing. 



° U.S. Postal Service: New Focus on Improving Service Quality and Customer 
Satisfaction . GAO/GGD-96-30, December 20, 1995. 

Page 4 



223 



inventory, and customs clearance for its letter mail service. For example, the Postal 
Service required customers to sort and bag their bulk mailings by country of 
destination and to transport the mailings to an international airport to qualify for 
the best prices. In contrast, the Service's international competitors were willing to 
pick up unstamped business mail at the customer's location, do some sorting, and 
transport the mail to the appropriate place overseas. Using its overseas facilities, 
the competitor would then sort, stamp, and give the mail to the local postal 
authority for delivery to ultimate destinations. 

The Postal Service also had not matched the competitors' reliability and speed of 
service, especially in the express market, partly because the Service did not have 
end-to-end control of delivery. According to the Postal Service, it is required to use 
scheduled U.S. commercial air flights to transport mail overseas. A combination of 
treaty arrangements and national postal monopolies compel the Postal Service, for 
the most part, to rely on foreign postal administrations for in-country express 
delivery. In contrast, some private carriers, use their own aircraft and ground 
transportation and thus have better control over schedules. For example. Federal 
Express said that it has experienced growth in its international express market 
because it adjusted its flight schedules for faster express service. 

Postal Service officials also attributed the market share loss to the need to price 
according to "inequitable" terminal dues^ systems. Postal Service officials said that 
its international treaties required substantial international rate increases in the 1980s 
that hurt its competitive position. For example, the Postal Service increased its 
international postage rates in 1981 by an average of 39 percent for all its services. 
Postal Service officials said this increase was necessary largely because the 
Universal Postal Union Congress' increased the terminal dues by 267 percent during 
its 1979 meeting. 

In 1995, the Postal Service announced plans to compete "aggressively" for 
international mail delivery. The Service said that its expects to double its 1995 
international mail revenues by the end of the decade. According to a seruor Postal 
Service official, the Service expects to be "a leading provider of efficient, high value, 
reliable and seciu^e, full-service international communication and package delivery 
services" to "meet the needs of U.S. citizens and businesses on a worldwide basis." 



^Terminal dues are the payments made between national postal admiiustrations to 
cover the costs of handling and delivering incoming international letter mail, printed 
matter, and small packets. 

'The Universal Postal Union is an intergovernmental organization comprised of 
postal administrations of 189 countries. Its Congress meets every 5 years to 
reevaluate and revise, among other things, the terminal dues system. 

Page 5 



224 



The Service has taken steps to work with postal administrations in other countries 
to improve international mail delivery services including the foUowing. 

• In January 1994, the Postal Service, in cooperation with postal administration of 
20 other countries, implemented an external system to measure on-time mail 
delivery between the United States and major industrialized countries. The 
system, administered by Price Waterhouse, measures letter mail delivery times 
from deposit to delivery. 

• The Service Upgrading Task Force, created in 1994 and consisting of 
representatives from the United States, Canada, and eight major European 
countries, is tasked with identifying problems and implementing solutions to 
improve delivery time between countries represented in the task force. 

• The Postal Service and other postal administrations recently began using 
electronic data interchange to facilitate the movement of international mail and 
to collect data on mail flows. According to Postal Service officials, the Service 
now has production system exchanging tracking data on express mail service 
with 24 other postal admirustrations and is testing electronic data interchange 
covering other mail types in a program involving 17 other postal administrations 
which represent about half of all international mail volume. 

We do not believe that it is too late for the Service to increase its international mail 
volumes and enhance its position in the international mail markets. However, based 
on the data we gathered in our review, it will be extremely difficult for the Service 
to become the provider of choice for the most profitable international service, e.g., 
express letter and package delivery, because other firms are already well 
entrenched in this market and are continuously expanding and perfecting their 
international services. 

QUESTION 5 

What c£in our subcommittee or Congress do to encourage the postal service and the 
unions to address the problems reported by GAO? Are current working conditions 
a factor that explains, at least in part, the reported instance of violence in some 
postal service facilities? How do these conditions affect the Service's efficiency and 
its service to customers? 



Page 6 



225 



GAP RESPONSE 

In our September 1994 report on labor-management relations,* we recommended 
that postal management, the four major unions, and the three management 
associations develop a long-term agreement on approaches to remedy the 
adversarial labor-management climate. It might help if the Subcommittee 
periodically requests reports from the parties on their progress in developing and 
implementing a framework agreement. If they cannot reach a framework agreement 
within a reasonable period of time, Congress may want determine if a legislation 
iiutiative may be appropriate to encourage and facilitate a more cooperative 
approach by Service management and the unions to resolving the problems 
identified in our report. 

Our review of the Service's labor-management relations did not address the causes 
of work place violence at postal facilities. However, the review did show that 
labor-management problems persist on the work room floor of postal facihties. In 
the Service's processing and delivery facihties, many employees reported that they 
worked in an atmosphere of intimidation and tension that was characterized by the 
use of (1) formal disciplinary processes to correct employee problems, (2) grievance 
processing to obtain relief from disciplinary actions, and (3) arbitration to resolve 
the ensuing conflict. We concluded that the problems have not been adequately 
dealt with over many years because labor and management leadership have been 
unable to work together to find solutions to employee problems. 

A number of academic studies, and our analyses of employee opinion survey 
results, EXFC, and CSI survey results indicated that a relationship exists between 
employees' attitudes, labor climate, and service performance. We reported that 
poor postal labor-management relations limits the Service's abOity to improve 
employee commitment to customer satisfaction, organizational productivity, and 
service quality. More recently, we reported^ that labor-management relations 
problems contributed to low service delivery scores in Chicago, the Washington, 
D.C. metropoUtan area, and other big cities in 1994 and early 1995. 



^ U.S. Postal Service: Labor-Management Problems Persist on the Workroom Floor 
(GAO/GGD-94-201 A/B, Sept. 29, 1994). 

^ D.C. Area Mail Dehverv Service: Resolving Labor-Relations and Operations 
Problems Kev to Service Improvement (GAO/GGD-95-77, Feb. 23, 1995). 



Page 7 



226 



QUESTIONS FOR THE INSPECTOR GENERAL 

1. In previous correspondence to me you have stated that the blending 
of the inspector's audit expertise with the criminal investigative expertise 
has resulted in greater successes for the Inspector General as you more 
closely align the Inspector General's goals with those of the Postal 
Service. You stated that these efforts will be highlighted in the 
President's Council on Integrity and Efficiency Annual Report which will 
teature some ot your projects conducted by rnulti-dlsclplinary teams. 
Please provide a copy of the Council's report, and highlight the relevant 
sections that discuss the efforts you cite. 

We provided only a few examples of the success we have had with 
multi-disciplinary teams. The men and women of the Inspection Service are 
committed to resolving problems associated with fraud, waste and abuse within 
and involving the U. S. Postal Service. For an agency as large as the Postal 
Service to succeed, we must perform our role as watchdog and consultant within 
the organization. The Postal Inspection Service has many tools available to rid the 
organization of fraud, waste, and abuse, such as: 

° False Claims Act 

° Recommendations to Management 

*" Program Fraud Civil Remedies Act 

° Arrest and Prosecution 

* Forfeiture 

° Civil Prosecution 

" Administrative Action 

The creation of the Revenue and Asset Protection Program (RAPP) has allowed us 
to focus on a central theme - Problem Resolution. The tools described above 
allow us to address problems through a total effort, not only from a criminal or an 
audit view. Following are additional examples of where our agency has used 
multi-disciplinary groups: 

" Revenue Protection Task Force 

° IVleter Initiative - Meter Audits, Criminal 

Investigations 
° OfficiaiMail Accounting System Investigations 
° Remail Investigations 

The workperformed by individuals on these initiatives is both audit and criminal in 
nature. The blend of experience complements our overall Investigative and audit 
initiatives. A copy of the draft report of the Executive Council on Integrity and 
Efficiency is enclosed as ATTACHMENT A. Examples of our efforts are 
highlighted on pages 91-94. 

2. Why did the Postal Service end up paying $50 million to the Postal 
Buddy Corporation as a settlement? 



227 



As a result of the termination of the agreement with Postal Buddy Corporation 
(PBC) for the installation of self service kiosks in postal lobbies, PBC submitted a 
claim to the USPS for $1 .3 billion. The USPS General Counsel's office reviewed 
the claim, requested the Inspection Service conduct an audit of the claim, and 
brought in expert legal counsel for an independent evaluation of USPS exposure in 
the case. Based on the results of these analyses, the General Counsel's office 
entered into a settlement with PBC for $50 million. The audit of the claim revealed 
PBC had incurred $27 million in costs which had not been recovered, and legal 
advice Indicated PBC was entitled to a reasonable profit on those costs plus 
interest until the date of final settlement. These factors were considered when the 
$50 million settlement was reached. 

The General Counsel's office also considered the risk and cost involved in 
successfully supporting its case in court before final settlement. The opinion of 
the USPS General Counsel's office was that the risk and cost of potentially lengthy 
litigation could be more costly than the $50 million settlement. This decision was 
made by the proper office, General Counsel, and is outside the realm of expertise 
of the Inspection Service. 

a. What measures do you and the Postal Service have in place to 
prevent this from happening in the future? 

The USPS has taken steps to help prevent similar situations from surfacing in the 
future. Postal Service management has consolidated its procurement operations 
under the Vice President - Purchasing. All national procurements are now 
assigned to an appropriate group of specialists within Purchasing. This will 
ensure qualified, trained contracting officers are involved in all national 
procurements and consistent interpretation of policies and procedures is effected. 

Also, we are currently participating in a group assembled to evaluate the current 
project justification and procurement processes of the Postal Service. Along with 
executives from Finance, Purchasing, General Counsel, and the Office of the 
Board of Governors, we are evaluating the current procedures for major project 
approval and procurement and the level of oversight needed and provided. This 
group will identify opportunities for improvement and recommend process 
modifications to increase controls. Naturally, we will continue to selectively audit 
purchasing activity in the Postal Service. 

3. To what extent have you completed any developmental audits of the 
Postal Service's electronic commerce initiatives? 

Developmental audits have been assigned to two of the Postal Service's electronic 
commerce initiatives. Electronic Commerce Services (ECS) and Advanced Hybrid 
Mailing Service (AHMS). Each audit has just been recently assigned and provided 
limitecf audit attention. Both of the electronic commerce initiatives are new and 
are just now proceeding into the design and testing phases. 



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a. What are some of the challenges facing the Postal Service as it 
begins to further develop such things as electronic postmarlcs and E-mail 
technologies? 

Our developmental audit work has just recently begun so our technical knowledge 
of electronic postmarks and E-mail technologies is just now being developed. 
Technical concerns include: system security; system and data integrity; potential 
for system to accommodate rapid growth; and emerging new methods to 
electronically attach the cryptographic algorithms that encode and protect 
electronic postmarks and E-mail technologies. Additional concerns include postal 
liability in the event of system compromise and how the existing law governing 
electronic commerce activity will apply. 

4. What are the major unaddressed challenges facing the Postal 
Service in the area of revenue protection? Is the Postal Service where 
they should be in the area of meter/revenue protection? 

We feel the most pressing challenges faced by the Postal Service are being 
addressed, with our assistance. First among these is the collection of the proper 
revenue for the services provided. We see a need for the Postal Service to train 
bulk mail acceptance clerks so that correct postage rates are charged, 
complicated regulations are understood and can be explained to customers, and 
that acceptance procedures are uniform nationwide. Further, the Postal Service 
needs to ensure that it benefits from the worksharing discounts it offers and can 
verify that discounts being taken by customers are proper. 

When the Inspection Service undertook the Revenue Protection Task Force three 
years ago, our focus was two-fold. First, we were to investigate instances where 
the USPS was being cheated of revenue and then we were to identify any system 
weaknesses which we could bring to the attention of postal management for 
corrective action. Since that time, we have formed an active partnership with key 
postal managers in formulating corrective action. 

It is important to remember that, in order to be responsive to customers, the USPS 
accepts business mail at large and small postal facilities throughout the country. 
Accordingly, acceptance and verification functions are highly decentralized and 
performed by thousands of clerks. These clerks face large volumes of mail, 
limited acceptance time, a highly automated mail stream and a very complex rate 
and discount structure. The key challenges, therefore, relate to current etforts to 
refine and upgrade the acceptance system. 

Postal management has recognized this need and has several initiatives 
underway, many in which we are assisting. They are outlined below: 

TRAINING 

Given the decentralization discussed above and ongoing changes in regulations 
and personnel, training is an ongoing challenge. 



229 



RISK ASSESSMENT 

The Office of Business Mail Acceptance has contracted with an outside consultant 
to study various types of business mailers and determine the most common 
sources of error. The results will be used to develop a risk assessment model 
enabling clerks to focus their attention on problem mailers. 

DATA INTEGRITY 

incident to our investigation of presort fraud, we have identified instances where 
mailers have manipulated computerized data to either understate postage owed or 
inflate workshare discounts. Inspectors have worked with postal management as 
well as MLOCR (Multi-line Optical Character Readers) manufacturers to provide us 
with secure access to raw machine data before it can be subject to manipulation. 
We are also working on standardizing machine output reports to reduce the 
learning curve for acceptance personnel. 

ACCEPTANCE EQUIPMENT 

In order to verify an automated mail stream, the Postal Service must provide its 
acceptance clerks with more sophisticated verification tools. Several such tools 
are being deployed or under development as follows: 

1) Automation Barcode Evaluator (ABE) - These are small, stand-alone 
machines currently being deployed at the 250 largest acceptance units 
around the country. They contain computerized barcode reading 
capability and allow the clerks to check automated mail for barcode 
readability and accuracy. This tool should make the clerks more 
efficient and effective in dealing with barcoded mail. 

2) Real Time Acceptance System (RTAS) - This system is a computerized 
acceptance process whereby clerks are provided software that prompts 
them step-by-step through the acceptance process. It will contain 
several elements to assist the clerks includmg mailer history, statistical 
sampling methods, postal rates and regulations and will compile the 
data during verification. This system is scheduled for a pilot test in the 
Houston Post Office in the near future. 

3) Permit System Update - Postal management is currently in the process 
of updating a permit system to make it more interactive with mailers' 
computerized systems. This will enable the acceptance clerks to 
download computerized data in advance of the mail being received for 
verification. It will help the clerks in planning their workload, preparing 
for sampling and doing additional electronically-based verification. 
This is a long term process which is expected to be concluded in a year 
and a half to two years. 



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DETECTION 

Another project underway involves the use of database comparisons. 
Comparing ODIS (Origin-Destination Information System) test results, which 
sample live mail, to postage payment databases for metered or permit mail, postal 
clerks will be able to verify that proper postage has been collected. This process, 
now in its early stages, and others like it, will be of immense assistance to the 
Inspection Service in identifying individuals or firms defrauding the Postal Service. 

In addition to acceptance and verification systems, we have identified two other 
areas of vulnerability which pose challenges to the Postal Service in terms of 
system improvement. 

OFFICIAL MAIL ACCOUNTING SYSTEM (OMAS) - Prior audits and investigations 
nave disclosed that otticiai man (man trom other government agencies) has not 
been fully accounted for in the postal system. This mail has been reported by 
acceptance clerks through the 85 districts for ultimate consolidation to National 
Headquarters. We have found that this manual process frequently breaks downs 
and full accounting is not realized at year end. In order to address this problem, 
postal management is taking steps to computerize this process which we feel will 
nave a beneficial effect. They plan on testing a debit card system that is 
scheduled to begin in FY 97 wherein the OMAS mailings are accounted for at point 
of sale through a bank card system and the data is rolled up automatically and 
accounted for at National Headquarters. Again, we feel this is a significant 
improvement and we will monitor the implementation. 

PLANT VERIFIED DROP SHIPMENT (PVDS) - We have identified an area of 
vumeraDiiity m tnis (KVUb) system wnerein mail is verified at point of origin and 
drop shipped to distant destination cities prior to entering the postal system. 
Under this arrangement, the mailer can take advantage of transportation 
discounts. We have found this system has a potential to be manipulated in that 
mail could be added to the shipment after the verification process. While we have 
not found significant cases to date, we are concerned with the vulnerability of this 
system and nave voiced our concerns to postal management. They have studied 
the system and, through the Office of Revenue Assurance, Department of Finance, 
have recently issued a report. 

POSTAGE METERS 

Uoncerning postage meter revenue protection, the Postal Service has achieved 
some notable advances toward increased accountability and security. Recent 
changes in postal regulations will permit the Postal Service to more closely monitor 
the use of postage meters through a centralized licensing system and metered 
postage accounting and to decertify postage meter models found to be vulnerable 
to tampering and abuse. The introduction of encrypted postage devices will give 
inspectors tne ability to more effectively monitor metered mail and detect 
counterfeits while greatly reducing the risk of postage meter tampering and 
malfunction. 



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a. How many postal inspectors are thoroughly experienced in 
Identifying presort computer fraud? What are the average years of 
experience for those inspectors with experience in this area? 

While "presort computer fraud" may be a relatively new area of interest to our 
service, inspectors nave always been required to learn the modus operandi of the 
criminals they pursue and have been accustomed to educating themselves in all of 
civil and criminal violations of the postal laws. Certainly, frauds against the Postal 
Service are no exception. Because of the emphasis bemg placed on revenue 
protection, experienced inspectors have been selected for placement on the teams 
with revenue protection assignments. The level of experience varies but 
inspectors assigned to revenue protection investigations average more than 10 
years on the job experience. Further, all inspectors working these assignments 
are receiving specialized training in detecting and prosecutmg these frauds. 

b. How many presort companies, inserting letter shops, and mass 
mailing companies exist in the United States? 

There are several thousand firms in the United States involved in the mail 
preparation industry, including printers, presort bureaus, "letter shops", and mass 
mailers. The largest 28 businesses account for approximately 16% of the annual 
revenue earned by these firms. 

5. You mentioned in your testimony the Bolger Academy audits which 
disclosed a complete lack of management oversight and nonexistent 
internal controls. You mentioned tnat the Postal Service has begun 
corrective action, but how much longer will it be until management of this 
complex is improved? 

a. Mr. Hunter, the Inspection Service brought to managements' 
attention the problems at the Bolger Academy from 1988 to 1991. I realize 
this matter predates your tenure, but could you delve into that type of 
Investigation and give the Subcommittee an idea if what occurred there 
with the renovations and the travel expenses are common problems within 

fiostal management? What programs do you have in place that assists 
he Postal Service in correcting these problems either through education 
or by catching them initially? 

The 1988 through 1991 investigation into activities at the Bolger Academy 
identified the improper use of the food services and maintenance contracts for 
service outside the scope of those contracts. The manager of the Academy at the 
time circumvented internal controls and directed contractors to perform work at 
the facility not called for under the contract. This included using contract 
employees to perform clerical services in Academy offices and to perform a variety 
of construction type services. These are not common problems in the USPS and 
management disregard for internal controls is not often revealed as a cause. 
However, our routine audits of travel vouchers and our contract audits are 
designed to ensure compliance with regulations. As part of our oversight of 
contracts at the Academy since that time, we identified the need to conduct an 
in-depth evaluation and investigation of all Academy activities. 



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Our report of 1995 recommended several steps management needed to take to 
increase financial controls at the Academy, improve accountability of repairs and 
construction projects and improve management of training functions. Postal 
management accepted our recommendations and took the the following action: 

" Assigned an employee specifically responsible for 

purcnasing, budgeting and accounting at the Academy, 
and provided framing from Headquarters Finance. 

" All repair and alteration projects and use of ARA 

contracts to be overseen by Facilities Management and 
Services Coordinator. 

"* Training responsibility assigned to Headquarters. 

We believe postal management has taken the correct action on the many 
recommendations put forward by the Inspection Service audit team reviewing 
internal controls at the Academy. We also believe those actions will improve 
management and accountability. We will provide follow-up audit attention to 
ensure the increased controls are effective, particularly concerning abuses of 
travel expenses and renovation expenses. 

Also, we have made significant changes to the focus of our Capital Investment 
Audit Program (Facilities Audits) to mclude routine audits of the 12 Facility 
Service Offices (FSO) of the Postal Service. The FSO at Columbia, MD, 
responsible for facility repair, alteration, and improvements at the Bolger 
Academy, will be included in these reviews. 

In addition, the USPS has increased its emphasis on ethics training and requires 
all managers to routinely receive refresher training. These steps will contribute to 
strengthening controls at the Bolger Management Academy. 

6. On March 21, 1995, a gunman (a former postal employee) murdered 
two postal employees, two postal customers, and wounded severely 
another postal customer at the Fairfield Street Post Office in Montcfair, 
New Jersey Substation A. This is a brutal example of what can happen 
even at small post offices which may not be in high crime area, simply 
because of inadequate security and the possibility of an accumulation of 
cash throughout the course of daily business which can be an easy target 
for someone with criminal intent, ft appears that alarms are provided in 
facilities which activate when there is unauthorized entry after the facility 
is closed. What measures are available in postal facilities for the security 
of postal patrons during business hours. 

The robbery at Montclair was clearly facilitated by the fact that the perpetrator, as 
a former postal employee, was familiar to the employees at that office. In that 
respect, and others, it is not typical of other robberies, and does not provide many 
useful lessons concerning security measures which help prevent robberies. 



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The Inspection Service believes the best way to provide for the security of postal 
patrons during business hours is to make the post office as unattractive a robbery 
target as possible. In larger post offices, the presence of uniformed postal police 
officers, security cameras and alarms discourage would-be robbers. In high crime 
areas, bullet resistant screen lines "harden" targets, while increased remittance 
pick-ups, in some cases by armored car, help reduce the likelihood of robbery. 

Unfortunately, the tragedy at Montclair demonstrates that this kind of violence can 
occur, without the slightest provocation, in cities and towns where it is least 
expected. 

a. Is there more electronic or mechanical security at some facilities 
than in others? 

Yes, there is more electronic and mechanical security at some facilities than in 
others. 

The electronic and mechanical security devices are above our baseline security 
requirements as outlined in the Postal Service's publication, Building and Site 
Security (RE-5). The RE-5 addresses the physical security requirements for 
facilities as they are constructed. A site survey, security survey, and risk analysis 
by an inspector are required prior to implementing additional security hardware. 

The Inspection Service also has national burglary countermeasures and robbery 
countermeasures programs in place. The burglary countermeasures program 
defines equipment requirements based on overnight accountability. Crimes 
committed in the area are also taken into consideration. The robbery 
countermeasures program is designed to ensure the adequacy of existing 
equipment and provide new equipment based on a threat assessment of the area. 
IVlodifications are currently being made to further enhance the robbery 
countermeasures program. 

b. What is the criterion to have postal police assigned to post 
offices? Where are they generally located? 

In 1971, the Postal Service created the Security Force, armed uniformed security 
officers, to upgrade security at major post offices. The Security Force is generally 
assigned to postal facilities located in major urban areas. Today there are 
approximately 1 ,400 postal police officers (PPOs) in approximately 55 postal work 
sites. 

The Security Force is responsible for protecting persons and property of the U. 8. 
Postal Service by enforcing Federal laws and postal regulations on Postal Service 
controlled property. 



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The Inspection Service uses a security force assessment survey to aid in the 
decision to establish or maintain PPOs at a postal facility. This assessment takes 
into consideration numerous factors that include facility location, facility type, 
facility operations, facility complement, local police coverage, local crime 
statistics, physical security, fencing and lighting. 

c. Some have suggested that post offices have the same security 
safeguards as are provided in banl<s (i.e., bullet proof glass, security 
cameras, detection equipment, alarms etc.), for the protection of 
customers, employees, and for the financial integrity of the postal service. 
How do you respond to that suggestion? 

We already use most of the same safeguards as the banks. However, location and 
facility design are our first considerations in reducing the risk of crime. Based on 
a risk analysis of the facility, we implement security procedures as well as 
hardware to reduce risk of robberies and burglaries. Other security procedures 
inspectors might suggest include recommendations that cash be removed from the 
window clerks drawers several times during the day, that money be counted out of 
public view, that funds be remitted on an early dispatch, and/or that the last 
remittance be held over night for a morning or daylight dispatch. The security 
hardware which is installed in our facilities ranges from alarm and CCTV (Closed 
Circuit Television) systems to bullet resistant screenlines. The level of security 
increases based on risk. 

The USPS has a requirement and responsibility to provide postal services to the 
public. Sometimes this requires the placement of a postal facility in an area banks 
or similar businesses might avoid. We attempt to provide the security necessary 
to meet the risks identified in the area to allow postal employees to conduct 
business with the public as safely as possible. 

It may be helpful to compare postal robberies to robberies of financial institutions. 
According to figures releasecTin a copyrighted article in The American Banker 
(4/26/96), in FY 95 there were 5,500 bank robberies nati6nwTae"arnorig~TT;B5T 
FDIC insured financial institutions. During the same period, the Postal Service 
suffered 120 facility robberies among its nearly 40,000 post offices. 

d. The Postal Inspection Service has risk evaluation criteria, or 
security analysis, whicn takes into account (1) the amount of money 
transacted at the facility each day, (2) the hours the facility is open, and 
(3) when it is located in a high crime area. Can this be a foolproof analysis 
wnen robbers are mobile, ruthless and determined to obtain easy money - 

- low or high digits? 

Unfortunately, there is no such thing as a foolproof risk analysis. Decisions about 
the type of security measures to put in place can only be made with regard to the 
perceived risk. 



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In addition to the three criteria mentioned above, the inspection Service makes site 
visits to view general conditions of the neighborhood and the environmental layout 
or design of the facility. They also review the security measures and devices used 
at nearby businesses, incluaing banks. The inspector will contact security 
managers of the chain stores in the neighborhood to determine what protective 
measures are instituted at their stores. The inspectors evaluate the office's 
performance in implementing established security procedures within the facility 
and determine if those procedures are adequate. 

Installing security hardware such as alarm systems, CCTV systems and even bullet 
resistant screenlmes are effective preventive measures but will not ensure a crime 
will not occur at the facility. 

The greatest influence in reducing the crime risk is a combination of good facility 
design, adequate operating procedures, active employee involvement, and proper 
security equipment. 

e. What further evaluation has been made at the Montclair, New 
Jersey facility and its environs? Would that area be considered a high 
crime area? 

Station A, Montclair, NJ has moved to a new location and been renamed Memorial 
Station. Based on the crime statistics for a period of three years, the new facility 
would not be considered in a high crime area, however, an alarm system and 
CCTV system have been installed. 

7. Recently there has been a great deal of publicity dealing with the 
change of address scams. Could you give us a recap as to your 
evaluation of the issue? What did the Postal Inspection Service do when 
it first heard of the scam? Did you suggest any precautions? Have those 
suggestions been implemented and with what results? 

Althouah exact figures are not available for past years, our experience with 
fraudulent changes of address, submitted to the Postal Service or to financial 
institutions, tells us that they have become an increasingly serious problem. Most 
of the fraudulent changes of address, apart from those filed as harassment by 
former spouses or business partners, are beina filed by criminal gang members 
intent on stealing credit cards, checks and/or financial information. 

The rise in fraudulent changes of address is part of the continuing problem of 
credit card theft and fraud. Another aspect, being addressed by the Inspection 
Service, is theft from concentration points in the mail distribution network. These 
thefts occur from Postal Service vehicles, carriers, airline mail containers, 
apartment house mailboxes and postal relay boxes. 



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Beginning in August of 1992, inspectors began meeting with security 
representatives of financial institutions, airlines, credit card issuers, and credit 
card manufacturers to discuss the problem of credit card theft and how to prevent 
it. The working group arrived at many sound prevention suggestions, but none 
more significant than "card activation." Under this approach, the credit card is 
virtually useless until received by the true cardholder and activated by calling a toll 
free number and reciting a prearranged code. 

Card activation has helped reduce fraud losses by over 50% since its inception. 
The Inspection Service continues to help facilitate working group meetings every 
four months to discuss solutions to the security problems confronting the industry. 

Predictably, the success of card activation in deterring theft from the mail has not 
entirely solved the problem of credit card fraud. Apart from credit card theft, 
financial institutions report an increase in the theft of personal financial 
information. This information, in the form of checking account and credit card 
account information, enables criminals to plunder existing accounts, open new 
accounts and take advantage of a variety of other financial services. 

To help the industry combat this problem, inspectors have investigated credit card 
fraud stemming from the theft of information from rental car companies, auto 
dealerships, retail stores, hospitals and other sources. 

Criminals can also use a fraudulent change of address to divert the mail containing 
this information. A change of address form may be submitted to the Postal 
Service, or directly to the financial institution. The theft of personal financial 
information is often referred to as "identity fraud," and it is definitely a growing 
problem. 

Durina the first months of 1996 we canvassed our field divisions to determine 
exactly how many fraudulent changes of address were under investigation. At that 
time, divisions reported 265 open cases where approximately 4,048 fraudulent 
changes of address had been filed. Of those, nearly 2,909 were filed directly with 
financial institutions and another 1,139 were filed with the Postal Service. 
Inspectors work closely with the security departments of the victim institutions to 
combat these individual fraud cases. 

To help financial institutions prevent these frauds, the Inspection Service industry 
working group has assembled two helpful industry guides. One guide is to be 
used to train employees to detect fraud in credit card applications submitted by the 
"identity fraud" perpetrators. The other guide will help prevent the theft of 
financial statements being processed by presort mailers working for the 
institutions. 

Concerning postal policy on the filing of changes of address, the Inspection 
Service has been working with address management at Postal Service 
Headquarters to amend postal regulations. In June of 1994, inspectors 
recommended that change of address procedures be changed so that a 
verification letter v;ould be sent to the original address, alerting the customer to the 
effective date of the change, before forwarding the mail. The Postal Service did 
not adopt this recommendation at that time. 



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In November, 1995, the Postal Service announced that an address confirmation 
letter would be sent to the old address, or, if the change of address was effective 
immediately, to the new address. This procedure was not intended to ferret out 
fraudulent changes of address, but rather to verify the accuracy of the original 
change order. Because most changes of address are effective immediately, or 
within two or three days, the address confirmation letter would be forwarded in the 
majority of cases to the new address. 

On April 2, 1996, the Postmaster General announced that, along with the address 
confirmation letter, a verification letter would be sent to the original address. The 
verification to the old address does not list the new address (for privacy reasons), 
but does give the effective date and a toll free telephone number to call if the order 
is fraudulent. We believe this verification letter will eliminate much of the problem 
of fraudulent changes of address submitted to the Postal Service. 

a. Please provide a summary and detailed history of the Inspection 
Service's involvement and interactions with the physician highlighted in 
the "60 Minutes" television story on this matter. In addition, please 
provide a summary and detailed history of the Inspection Service's 
investigation of the specific New York City mail drop that was highlighted 
in the "60 Minutes" television story on this matter. 

Dr. Zupanc first called our service on November 14, 1995, to report that she had 
detected a fraudulent change of address filed on her behalf. An inspector 
returned her call the following day and learned that a change of address had been 
filed for Dr. Zupanc on August 30, 1995, forwarding her mail to 2022 Church 
Avenue, #147, Brooklyn, New York 1 1226. 

She was understandably concerned because she was aware that persons using 
the Brooklyn return address had attempted to have funds withdrawn from her bank 
and had already received personal financial information through the mail. 

On the same day, postal inspectors took steps to stop any further forwarding of 
Dr. Zupanc's mail to Brooklyn and entered her complaint in the Inspection Service 
Mail Theft Reporting System (MTRS). A copy of the complaint was forwarded on 
November 16, 1995 to the New York Division Inspection Service office. 

On December 8, 1995, the inspector taking Dr. Zupanc's complaint spoke with the 
New York Division inspector investigating Nigerian gang activity in Brooklyn. We 
believe the Nigerian criminal gangs to be responsible for using the Churcn Avenue 
address in Brooklyn, which is a commercial mail receiving agency, to receive 
other's mail. 

In mid-December, Dr. Zupanc contacted the New York Division inspector to 
confirm her previous complaint. She also informed the inspector assigned this 
matter that her pension fund managers had been contacted by someone using her 
name in an unsuccessful attempt to withdraw funds. She was not aware of any 
personal financial loss. 



238 



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Inspectors contacted one of her credit card companies and arranged to have a 
credit card issued in her name and forwarded to the mail receiving agency in 
Brooklyn. The inspector's intent was to deliver the credit card as bait to identify 
and arrest individuals using the box to fraudulently obtain Dr. Zupanc's mail. 

Unfortunately, before the "controlled delivery" could be effected television crews 
visited the Church Avenue address and tipped the employees at the mail receiving 
agency that Box #147 was being used illegally. At that point, the inspectors 
stopped the flow of all mail addressed to Dr. lupanc to that box number. 

Shortly thereafter, inspectors in New York learned that another credit card issuer 
was about to issue another card in Dr. Zupanc's name, but to an address in 
Jamaica, New York. Inspectors intervened and attempted a second controlled 
delivery to the addressed in Jamaica, but again they were told a news crew had 
been at the same address only two days earlier. A woman who had been renting 
living quarters at the Jamaica address to an unidentified male was unable to 
identify her renter other than to say he was an "African." A later attempt to deliver 
the same letter was also unsuccessful. 

Inspectors have made no arrests in connection with the unsuccessful effort to 
defraud Dr. Zupanc and her bank or credit card issuers. The operators of the mail 
receiving agency in Brooklyn were reminded of postal regulations requiring that 
individuals submitting applications to receive mail through the agency must furnish 
two forms of personal identification, one of which must include a photograph. 
Failure to follow postal regulations may result in withholding of delivery of all mail 
for the address. 

8. It has been reported that there are about 4,000 changes of address 
scam cases. How are you handling these cases and what is your success 
in apprehending the criminals? 

In January of 1996, field divisions were canvassed to determine the scope of this 
problem. Our field divisions identified 265 active mail theft cases under 
mvestigation where 4,048 fraudulent changes of address had been filed (2,909 
with financial institutions and 1,139 with the Postal Service). 

We cannot give exact arrest figures for fraudulent changes of address because 
these complaints, which result in theft of mail or credit card fraud, are not recorded 
separately. They are recorded as any other mail theft complaint. During FY 95 we 
recorded 4,565 arrests and 4,254 convictions for all external mail theft offenses. 

9. Have the perpetrators of these crimes used the fraudulently received 
credit cards to obtain stamps and other postal services? What kind of 
verification is used for customers when they use credit cards at a postal 
facility? 

The Inspection Service does not collect statistics on the number of fraudulent 
purchases of postage or postal products made with stolen or fraudulently obtained 
credit cards. 



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Beginning in May 1995, postal clerks were authorized to accept credit and debit 
cards for postage and postal products (except for bulk mailings, CODs, and postal 
money orders) at all non-contract retail outlets. Credit card purchases must be 
authorized by swiping the credit card through a magnetic card reader which 
displays the approvalof the transaction by giving an authorization code number. 

The Postal Service has instructed its window clerks to "swipe" all credit card 
purchases and to take the extra step of entering the last four digTTs of the card. 
These last four digits often appear in the hologram on the face of the credit card. If 
the card has been altered or re-embossed, the clerk should notice the alteration 
when reading the last four digits. Also, if the magnetic stripe on the card has been 
re-encoded, entering the last four digits should reveal this fraud. 

10. I know that you are familiar with concerns about the failure of the 
Postal Service to address the pay discrepancy for postal inspectors with 
other federal law enforcement officers. Why has the Postal Service failed 
to address this pay discrepancy, particularly for senior journeymen 
inspectors? 

In an effort to address the reported discrepancy between the salaries of senior field 
inspectors and other senior federal law enforcement officers, the Postal Service 
contracted with the Hay Group, an independent consultant on compensation and 
benefits. 

The Hay Group is conducting a thorough study of the duties, responsibilities and 
compensation of inspectors in supervisory and managerial positions. The Hay 
Group will compare the results of their study with the duties, responsibilities and 
compensation of other federal law enforcement officers. If a discrepancy is found, 
we expect that the Hay Group will be asked to look further at non-supervisory 
inspectors and federal agents. We understand the results of the Hay Group s 
initial study will not be presented to the Postal Service before July of this year. 

a. To what extent has the Postal Service rejected your 
recommendations to rectify this problem with postal inspectors' pay? If 
postal inspectors are series 1811 criminal investigators, why are they not 
paid the same as all other 1811s in the federal government? 

The Inspection Service's internal Pay Task Force evaluation and recommendations 
were set aside without action by the Postal Service in favor of an independent 
review. For this purpose, the Postal Service contracted with the Hay Group, an 
private compensation and benefits consultant. 

The comparison of total compensation received by postal inspectors and other 
181 1 series federal officers, over the course of their careers, is not a simple issue. 
The Postal Service initially addressed salary discrepancies created by Pub. L. 
101-509 in 1990, and adjusted inspector salaries with an across the board increase 
of 13.5% (law enforcement premium) and locality pay adjustments in various parts 
of the country. 



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At that point, compensation and benefits for entry level inspectors were generally 
considered very competitive, if not the the highest in federal law enforcement. It is 
not until the latter part of the typical inspector's career that a discrepancy in pay 
appears, compared to other 181 1 series federal officers. 

Since 1990, of course, other salary increases for 181 1 series officers, not 
necessarily matched by the Postal Service, have re-opened the issue of pay 
comparability. We are confident these issues will be resolved following the report 
of the Hay Group. 

11. In February 1996, the Postal Service submitted a report to the 
Government Reform and Oversight Committee concerning an internal 
computer matching program that will be conducted solely under the 
control and direction of the Postal Inspection Service. Accordina to the 
report (and the March 11, 1996, Federal Register notice), the matching 
program compares employee data with vendor data for the purpose of 
identifying instances where employees have attempted to corrupt the 
postal procurement process and defraud the Postal Service. Thus the 
matching results may be used to take specific action against records' 
subjects. What has been the result of the matching program to date? If 
it has not started, when do you expect it to begin? How often is the 
matching effort conducted? How many employees have had actions 
taken against them as a result of problems identified in the matching 
effort? 

The computer matching program described in our report to the Government 
Reform and Oversight Committee was announced in the Federal Register, in 
compliance with the Computer Matching Protection Act requirement for public 
notice. The period of public notice, and invitation for comment, ended April 20, 
1996. 

The computer match has not yet been conducted. Since the initial matching 
request was filed, several key personnel involved in the project have transferred 
from the St. Louis Division. We do not expect this project to be properly staffed 
until late this year. Once the match is conducted, any "hits" would have to be 
verified and investigated further. This process will undoubtedly take several 
months to complete. 

A similar match was conducted several years earlier, but on a much reduced 
scale. While we did find a number of matches, none led to criminal or civil 
prosecution, nor any administrative action. However, it is important to note that 
mspectors find negative results useful in judging the adequacy of the internal 
controls in place over postal procurement. 

12. How is your budget prepared and what is the process for finally 
receiving funding? Who, if anyone or any entity, has the power to cut 
your budget and on what basis? Do you generally receive full funding of 
your budget? 



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The budgetary process is the same for the IG/Chief Inspector as it is for all officers 
within the Postal Service. There are three different budgets; personnel, 
nonpersonnel, and a capital budget. 

The personnel budget is funded at "full complement"; that is, sufficient funding to 
support 100% of our authorized complement. The authorized complement is 
approved by the Postmaster General. Any funding for personnel costs that are not 
used must remain unspent. The nonpersonnel budget funds all other activities 
including travel, relocations, supplies, ammunition, office leases and 
communications. The capital budget funds all purchase of equipment, vehicles, 
etc. that exceed $2,000 in cost. 

A budget request is submitted by the Inspection Service to Finance. This budget, 
with the budget from all the other USPS officers, is evaluated by various 
committees of postal executives based on activities to be undertaken and their 
benefit to the organization. The Senior Vice President Finance, based on the 
recommendations of the committees, can and does cut/reduce the nonpersonnel 
and capital budget requests, as he does throughout the organization. Personnel 
costs are funded to support our authorized complement. The Inspection Service 

generally receives full funding for its budget. At no time has our budget request 
een reduced from one year to the next. 

13. What percent of the Inspection Service's time is spent on 
investigating labor management issues? Waste, fraud and abuse within 
the Postal Service? iVIatters relating to the security of the mail? 
Fraudulent schemes? 

Inspection Service workhours for all audit and criminal investigations in FY 95 are 
listed below. 

Labor/management issues may be addressed under Performance Audit (PA) 
subjects or durinq assault and threat investigations (EGA). Waste, fraud, and 
abuse within the Postal Service would be investigated under the Revenue Asset 
Protection Program (RAPP). Security of the mail would be investigated under 
Prevention and Security (PvS). Fraud schemes occurring through the mail 
impacting consumers, Dusinesses and government entities would be investigated 
under mail fraud (F). 

Subject Workhours FY 95 % of Total 

4.0 
9.1 

18.4 
2.2 
3.4 

15.1 

4.2 

14.3 

1.9 



Performance Audit 


PA 


153,458 


Other Audit Activity 


AF.AC 


346,197 


Revenue and Asset 






Protection 


RAPP 


693,858 


Prevention/Security 


PVS 


83,238 


Other Prevention 


PVC 


129,053 


Fraud 


F 


570,898 


External Crimes 






(Assaults) 


EGA 


158,847 


External Crimes 






(Mail Theft) 


ECMT 


541,815 


External Crimes 






(Robbery) 


EGR 


71,839 



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Subject Workhours FY 95 % of Total 

uther hC (Burglary 

+ Misc.) EC 64,619 

Internal Crimes 

(Mail Theft) iCMT 510,078 

Other IC 

(Narcotics + Misc.) IC 63,038 

Prohibited Mailings PM 381,983 

Totals: 3.768,921 99.5% 

14. In your Semiannual Report for FY 1995, Volume I you reported 9,057 
calls from postal employees and the general public on the Postal Crime 
Hotline. What is the count for this reporting period? How many have 
been followed up? Are the 4,000 change ofaddress cases included in 
this number? 

We have received a total of 14,620 calls on the Postal Crimes Hotline 
(1-800-654-8896) for FY 96 through April 24th. Of these, 313 were referred to field 
divisions and 224 were followed up with some investigation in the field. The vast 
majority of the complaints concerned unsatisfactory consumer transactions. 
These complainants were furnished a Mall Fraud Questionnaire and directions as 
to whom the completed questionnaire should be directed. 

Very few of the fraudulent change of address complaints are received through the 
hotlme. Most are received and acted upon at the local level where they are 
reported to inspectors by local post offices, banks, credit card Issuers and other 
customers. 

15. The Inspection Service reported in a previous semiannual report (FY 
1995 Volume 1) that at the request of the Inspector General, DOD the 
Postal Inspection Service was asked to investigate procedures at airport 
mail centers (AMC) and military bases to account for military mail 
dispatches. It was found that duplicate payments were made to air 
carriers, not intentionally but because there was a transfer of operation 
from New York Postal Data Center to the St. Louis Information Service 
Center and the implementation of automated billings at airport mail 
centers. Also, some military bases were adding rebilled mail to billing 
forms thereby creating duplicate payments. The Postal Inspection 
Service recommended that management establish controls at the airport 
mail centers, create missing document reports to identify facilities 
improperly accounting for military mail dispatches and issue clearer 
instructions to exchange offices and military bases on proper rebilling 
information of airline transportation at transfer points. Have they been 
fully implemented and what amount of savings had DOD realized by the 
tighter controls? 

In the Semiannual Report, we reported possible duplicate payments of $900,000. 
Postal management undertook a detailed review of all billing records, and with the 
Military Mail Agency determined duplicate billing of approximately $480,000 which 
has been returned to the military. Management has changed their policy to 



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require all mail carried on behalf of the military to be documented in the same 
manner as International Mail. This has been coordinated with the military. This 
will allow the issuance of missing document reports as recommended in the 
finding. 

As to how much on a continuing basis the military will save, we cannot say. 
However, the bulk of the duplicate payments found during our audit related to an 
internal processing problem, which has been corrected. 

a. Can there be further streamlining to prevent overpayment for 
military mall? 

The change in billing documentation, as described above, should eliminate any 
duplicate payments caused by failure on the part of the military or airlines to 
properly rebill shipments from the original plan. 

b. What can you further report regarding the Investigation of the 
International Surface Air Lift which you disclosed was not operating as 
designed to ensure that all revenue Is being collected? 

The International Surface Airlift audit cited in the Semiannual Report was 
conducted at one acceptance point in the Northern New Jersey area. As a result 
of that audit, a National Audit has been commissioned, which is in the reporting 
process. We have identified internal control weaknesses which have been 
discussed with management and are being corrected. We have found that as 
mailings are entered, trust funds maintained for our customers are not always 
reduced in a timely manner to reflect the mailing. We will be including the final 
information in our September 30, 1996 Semiannual Report. 

16. You also reported revenue deficiency In the Official Mall Accounting 
System - the centralized billing system that allows government agencies to 
receive postal services without prepaying postage. Has this system been 
improved? What would you think of the proposal that government 
agencies have one main mailing facility where all agencies would pool 
their mail for forwarding to the Postal Service (and saving by utilizing bulk 
mailing)? 

OMAS revenue deficiencies identified in the audit report were due to failure to 
reconcile the old method of collecting revenue. Management has taken action on 
several of the recommendations for enhancing internal controls in OMAS. The 
proposal to use an accounting card to collect postage is being considered by a 
task group, on which the Inspection Service is represented. We continue to 
monitor management's completion of all recommendations. 

Your suggestion to have one government mailing facility for agencies to pool their 
mail woufd create additional workload for both the Postal Service and our OMAS 
customers. OMAS is entered throughout the country, depending on where the 
federal government's business is being conducted. Our goal is to move OMAS to 
a payment system closely resembling tnat of commercial customers. This system 
would strengthen our internal controls and be easier for our customers as well. 



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ADDENDUM QUESTIONS 

1. Investigations into fraud of all types: workers' compensation, mail 
fraud, etc. are up. What do you attribute this to? 

Our investigative workhours of fraudulent claims made against the Workers' 
Compensation program are increasing because this project Is directly linked to our 
revenue protection goals and those ofthe Postal Service. The costs to the Postal 
Service for supporting the Federal Employee Compensation Act (FECA) amounted 
to $501.1 million in FY 95. While the Postal Service supports the Intended purpose 
of the program, fraud and abuse in the program, by employees or medical 
providers, will not be tolerated. 

Inspectors' investigations and prosecutions of fraudulent claims have resulted in 
long term cost avoidance (through the cessation of benefits) of approximately $57 
milMon during this FY. Because of the success of our efforts to curb fraud and 
abuse in this program, the Postmaster General authorized the hiring of an 
additional twenty-five inspectors to be assigned to Workers' Compensation fraud 
investigations. 

Mail fraud investigative resources, however, are not Increasing, as reflected in the 
workhour figures below. The recent decrease In resources applied Is attributable 
to the fact that some of the resources formerly devoted to mail fraud Investigations 
have been directed to revenue protection matters. 

Mail fraud Investigative workhours for FY 95 show a decline over the previous 
years. This decline Is attributable to the transfer of Frauds Against the Postal 
Service (FPS) and Frauds Against The Workers' Compensation Program (FWC) 
workhours from mall fraud to the Revenue Asset Protection Program (RAPP). 
Traditional consumer protection activities of Inspectors, however, including 
vigorous enforcement of the mall fraud and false representation statistics, will be 
maintained. 

Mail Fraud Workhours 



1995 


570,898 


1994 


764,077 


1993 


723,239 


1992 


692,671 


1991 


621,592 



2. What are your latest figures on workplace violence? If on the 
Increase, what do you consider to be the major factor? 

From October 1, 1995 to March 31, 1996, the Inspection Service opened 459 
assault cases and 320 threat cases. These cases represent serious Incidents 
(those in which criminal charges could be brought^ These figures represent a 
decrease, compared to the same period last year (SPLY). Over the past four years, 
the number of assault cases has risen approximately 10%, while there has been an 
insignificant variation In threat statistics. See the attached chart for current 
statistics. ATTACHMENT B. 



245 



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3. What do you think of the PMG's commitment to preventing acts of 
violence in the wortcplace? 

Postmaster General Runyon has made a very strong commitment to the prevention 
of workplace violence. During his tenure as Postmaster General, we have seen 

the Employee Assistance Program (EAP) revamped. The EAP is now a respected 
and important part of the Postal Service program to reduce workplace violence. It 
regularly provides information and programs of interest to all postal employees, as 
well as access to confidential psychological counseling, allowing employees an 
opportunity to constructively deal with their personal problems. 

In addition, a position in the Employee Relations Office at Postal Service 
Headquarters has been designated to deal with workplace behavior programs. As 
a result, 47,407 supervisors nave been trained in workplace violence awareness. 
Guidelines for the development of threat assessment teams in the Postal Service's 
85 districts are being developed, as are crisis management plans. The Postal 
Service is also exploring the possible use of dispute resolution processes and 
training for supervisors on proper and compassionate ways of handling employee 
terminations. 

Mr. Runyon has been supportive of Inspection Service efforts to increase the safety 
of postal employees in the workplace. The Inspection Service recently completed 
training of security control officers at over 400 of the Postal Service's largest 
facilities. We are currently working on the training program for the next size level 
of offices. Active and knowledgeable security control officers will increase the 
effectiveness of security operations in postal facilities as well as the effectiveness 
of the Inspection Service. 

Other changes in Postal Service procedures which have had a positive irnpact on 
preventing workplace violence which have been put into effect since Mr. Runyon 
became Postmaster General are a tightening of hiring procedures, including 
background checks; and the initiative of a pre-employment interview process. 

4. How do you feel Postal Employees view the Postal Inspection Service? 
How well do postal employees cooperate with the Postal Inspection 
Service? If they are not willing to cooperate, what makes the so reluctant? 

Overall, based on the level of cooperation inspectors receive in their audit, 
administrative, criminal investigations and on my personal visits with employee 
groups, I believe postal employees view the Postal Inspection Service in a positive 
light. 

The Inspection Service has made a concerted effort, through the general media 
and through articles in employee publications and in personal presentations to 
employee and supervisor gatherings, to explain what we are doing to protect 
employees on the job, to improve workplace security and to better protect the 



246 



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mails and postal assets. Our objectives in these areas impact directly on the 
interests of employees. We welcome employee suggestions and feedback 
through our Postal Crimes Hotline. 

We also have offered a standing reward for information about any fraudulent claim, 
including underpayment of postage. Employees can be paid up to half the amount 
of any funds recovered. A separate $50,000 reward was announced over a year 
aao by the Postmaster General for information leading to the arrest and conviction 
ofanyone involved in the alteration, tampering, counterfeiting or fraudulent use of 
a postage meter. 

In general, I think employee cooperation with the Inspection Service is good. 
Naturally, there are always a few exceptions who might be reluctant to cooperate, 
and there are some areas of our investigations where some employees resent our 
efforts. Our goal is to be viewed as fair, impartial and professional by all 
employees. 



247 




Executive Council on Integrity and Efficiency 



TO: 
FROM: 



MEMORANDUM 



ECIE Members 



Thomas D. Blair 
ECIE Vice ChairAia 



DATE: March 28, 1996 




SUBJECT: ECIE Annual Progress Report to the President for FY 1995 



ITie subject draft report, which will follow the President's Council on Integrity and 
Efficiency section in the final report, is attached for your review. Please review the 
applicable narrative and statistical portions of the report, as well as the membership, address, 
and hotline information for your organization. Please submit comments, corrections, as well 
as negative replies to me by Thursday, April 11, 1996. As in past years, the report will be 
coordinated with and approved by officials in the Office of Management and Budget before 
issuance. 

I can be reached at the Office of Inspector General, Smithsonian Institution, MRC 
905, Washington, D.C. 20560. My telephone numbers are (202)287-3326 and (202)287- 
3017 (facsimile). 



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BOSTON PUBLIC LIBRARY 



3 9999 06351 778 1 



ISBN 0-16-055135-8 



9 7801 60"551 352 



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