Statement of Fredric V. Rolando
Senate Appropriations Subcommittee on
Federal Service and General Government
March 18, 2010

Thank you, Chairman Durbin, for holding this important hearing on the financial situation facing the United States Postal Service. On behalf of the 295,000 members of the National Association of Letter Carriers, I submit this statement for the subcommittee's consideration.

Overview

There is no doubt that the Postal Service faces the worst crisis since the Great Depression of the 1930s. The collapse of the housing bubble and the financial meltdown of 2008-2009 affected the most mail-intensive sectors of the economy. This occurred at a time when the impact of electronic diversion of traditional letter mail caused mail volume to stagnate after peaking in 2006. Yet the deep recession and the negative impact of the Internet on postal volumes are not the most important causes of the Postal Service's large deficits in recent years. Unfortunately, the main driver of the
USPS's current financial distress stems from a policy decision, albeit well-intentioned, adopted by the U.S. Congress in 2006 to require the Postal Service to massively prefund decades of future retiree health benefit obligations in just 10 years. This requirement has cost, and will continue to cost, the Postal Service some $5.6 billion per year until the year 2016.

That's right. This immediate crisis was initiated in 2006 when Congress, in cooperation with the Bush administration, included the prefunding requirement in the Postal Accountability and Enhancement Act (PAEA). What appeared to be affordable in 2006 is clearly unaffordable today. Over the past three years, as the economy slipped into the worst recession in 80 years, the Postal Service has had to pony up $12.4 billion to prefund future retiree health benefits - on top of some $6 billion for current retiree health benefits.

No other agency - including the United States Congress - or private company faces such a legal obligation to prefund. Indeed, such prefunding is not even required by the Financial Accounting Standards Board (FASB), which establishes accounting rules for both private and public organizations. And as an annual survey conducted by Watson Wyatt found in 2009, only about a third of Fortune 1000 companies voluntarily prefund retiree health obligations at all - and those that do have set aside much less than the Postal Service has already.ⁱ

What makes this situation worse is that the size of the prefunding payments is grossly inflated due to actuarial methods adopted by the Office of Personnel Management (OPM). These methods, which have been exposed by a series of reports by the Office of Inspector General of the USPS, not only shortchanged the Postal Service Retiree Health Benefits Fund (PSRHBF) by tens of billions of dollars when it was established in 2007, but also greatly exaggerated the USPS's future liability for retiree health benefits - which prompted the Congress to establish a completely unrealistic schedule of prefunding payments in the PAEA.

The USPS has responded with tremendous resilience to the challenges of the recession, which began in 2006 for our industry when the credit crunch hit. And my union, the NALC, has been a responsible and reliable partner in helping it react to the steep decline in mail volume. Working together at the bargaining table, we strove to negotiate flexible and fair means for adjusting all 160,000 city carrier routes to ensure eight-hour assignments, boosting efficiency and saving hundreds of millions of dollars. In fact, we adjusted every city carrier route in the country not once, not twice, but three times over the past 18 months. Using the traditional method of route evaluation would have taken more than five years to adjust every route.

In fact, the Postal Service has been so successful in cutting costs to align work hours with recession-level volumes that it would have earned a net surplus of $1.6 billion over the past four years in the absence of the onerous prefunding burden. This burden is directly responsible for the dramatic rise in the Postal Service's outstanding debt. See the chart below.

Congress Should Fix the Prefunding Policy First

Today your sub-committee is going to hear a lot about 10 and 20-year predictions about future mail volume and the mega-sized postal deficits that will occur if we do nothing. You will no doubt also be asked to embrace draconian suggestions developed by the Postal Service's consultants and perhaps other witnesses. The 200,000 men and women who deliver the mail on city carrier routes today urge you exercise great caution and to stop and consider the real cause of the immediate crisis: The unworkable and unreasonable pre-funding policy adopted in 2006.

Congress should correct the retiree health prefunding policy first -- it is the single most effective step you can take to stabilize the Postal Service's finances. We urge you to fully implement the recommendations contained in the two OIG reports on this issue.ⁱⁱ

(See the attached fact sheets prepared by the NALC's Department of Legislative and Political Affairs.)

Fact sheet: Strengthening the Postal Service: Reforming its retiree health pre-funding schedule (PDF)

Fact sheet: Save the Postal Service: Demand fairness in USPS pension and retiree health funding (PDF)

While we appreciate the efforts undertaken last year in by the Obama administration and other Senate leaders to offer limited relief from the pre-funding burden in S. 1507, that bill does not go far enough and its adoption by the Senate Committee on Homeland Security and Governmental Affairs was marred by an antiunion amendment that would permanently and unfairly tilt the interest arbitration
process in favor of postal management. NALC urges the Senate to start over with a fresh approach suggested by the USPS OIG.

Congress Should Retain Six-Day Delivery

The Postal Service is too important to the country to make rash decisions in an environment of financial distress. NALC believes it would be unwise to downsize to meet recessionary levels of demand before we know how soon and how well the economy and the postal market will recover. Specifically, we believe that eliminating Saturday collection and delivery services would be penny-wise and pound-foolish. No business has ever restored itself to health by offering slower service and turning customers away - too many businesses (including mail order merchants, online pharmacies, DVD and game rental companies and newsmagazines) rely on six-day delivery to simply leave them in the lurch. Rather than saving the Postal Service money, five-day delivery could worsen its bottom line over time as a result of further volume and revenue losses. And it would needlessly destroy 50,000 good jobs at a time of extremely high unemployment. (See the attached fact sheet on Saturday delivery prepared by the NALC's Department of Legislative and Political Affairs.)

Fact sheet: Eliminating Saturday delivery is not the answer (PDF)

Eliminating Saturday collections and delivery should be a last resort policy, not a first resort policy. It certainly should not be considered until we see the impact on demand for postal services when the economy recovers - as well as the results of the next round of postal collective bargaining. Nor should it be considered before Congress corrects the deeply flawed prefunding policy adopted in 2006. In any event, the Postal Service has not yet presented its five-day collection and delivery proposal to the PRC for review, as mandated by law. Congress and this sub-committee should await the results of that review and conduct extensive hearings to ensure it understands the full implications of eliminating Saturday delivery before debating changes to the annual appropriation legislation that mandates six-day services. The data and assumptions in the Postal Service's plan yet to be scrutinized and special attention must be given to the impact of service cutbacks on tens of millions of small businesses, including those in rural communities and economically distressed neighborhoods.

Conclusion

We know that prefunding reform may not be enough to secure the long-term viability of the USPS. We know the Postal Service's business model deserves a serious and comprehensive debate. However, NALC and the other postal unions are prepared to deal with the lingering effects of the recession and the negative impact of the internet at the negotiating table, just as we have adapted to varying business conditions for some 40 years of successful collective bargaining. And we believe that it is only in the context of financial stability that a serious and careful legislative debate can take place. That will require us to do our part at the bargaining table and for Congress to do its part on retiree health prefunding reform.

NALC is committed to preserving a strong and viable Postal Service that can meet the evolving needs of the American people and American businesses. We look forward to working with this sub-committee and the entire United States Senate to find a sensible and realistic way forward. Thank you for inviting us to submit this statement.

ⁱ See Figures 29 and 30 in "Accounting for Pensions and other Postretirement Benefits 2009, Reporting Under FAS 87 and FAS 106 Among the Fortune 1000, A Watson Wyatt Survey Report," pages 21-22.

ⁱⁱ USPS Office of Inspector General study: "The Postal Service's Share of CSRS Pension Responsibility," January 22, 2010, see http://www.uspsoig.gov/foia_files/RARC-WP-10-001.pdf; and USPS Office of Inspector General report: "Estimates of Postal Service Liability for Retiree Health Benefits (Report Number ESS-MA-09-001 (R)), July 22,2009, see http://www.uspsoig.gov/foia_files/ESS-MA-09-001R.pdf.