*Henderson Presents Testimony in Congress

U.S. Postmaster General William J. Henderson told the House Subcommittee on International Security, Proliferation and Federal Services yesterday that despite a prosperous economy, the agency faces a tough financial year ahead.

Henderson said that while the U.S. Postal Service begins the century with the best performance, planning, technology and management systems in its history — combined with low inflation, high employment and the country’s longest economic expansion — the latest revenue figures place the USPS more than $400 million short of its $100 million net income target for the year.

In addition, Henderson — who is required by law to meet with the subcommittee every year — said the agency has forecast a potential shortfall of $700 million to $800 million in total operating revenue for the year.

Henderson said the current economic environment should equal healthy mail volume revenue and income growth. However, he said, this has not been the case — despite a decline in the real price of postage over the past six years, thanks to consecutive rate increases below the rate of inflation.

The reason, he said, “is directly attributable to a weakness in demand — even though postal products today are a better value in terms of service, features and price.”

This lack of demand lies in the agency’s constrained ability to respond to historic forces that are changing communications, Henderson said.

“The constraints lie in our three-decade-old charter — the Postal Reorganization Act,” Henderson said. “And the forces are the explosive growth of competition and the revolutionary change brought about by electronic communications and the Internet.”

He said that competition includes new inroads by traditional competitors, a profusion of start-up delivery firms associated with the Internet, liberalized foreign posts that have opened offices in the United States and have purchased American subsidiaries, and the accelerating growth of electronic alternatives to the mail.

“We believe strongly that the time to implement reform is now, while the postal service is healthy, and before the forces of change create the type of calamity that precipitated reform in the 1960s,” he said

Problems also lie in the technological erosion of the agency’s First-Class mail product — exemplified by the federal government’s aggressive promotion of electronic payments to vendors and social security recipients, and of electronic filing and payments for taxpayers, Henderson said. So far this year, First-Class mail has grown only 1.4 percent. He said this keeps it on par with population growth that adds a million or more new customer delivery points to the mail network each year.

“There appears to be unanimous agreement that this trend will continue and it will accelerate,” he said. “We anticipate little change in year-end First-Class mail volume growth, continuing a decline in growth that has increased in the last decade.”

Henderson also noted that the scenario of a sustained decline in mail volume presents a huge management challenge for the postal service, requiring a major adjustment in how the agency does business. In addition, many of its costs are fixed and cannot be readily reduced, which compounds the problem.

“For example, although mail volume might decline by 5 percent, we would not be able to make similar reductions in the number of trucks or post offices, nor could we immediately adjust staffing levels,” he said. “At the same time, we expect the size of our universal delivery system to continue to grow in line with growth forecasts for the population.

“As a result, we must plan now to deal with growing cost pressures that will be exacerbated by a shrinking revenue base.”

Henderson said the USPS has adopted three strategies: cost containment, including its Breakthrough Productivity Initiative, which aims to cut about $1 billion in costs for each of the next four fiscal years; improved customer service and technological improvements to help the industry and agency grow; and the pursuit of legislative reform.

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