Putting the Postal Service on the Road to Financial Health

The following is an excerpt of Gary M. Mulloy's testimony given to the Senate Government Affairs Committee hearing on postal reform last month.

My name is Gary M. Mulloy. I am chairman and CEO of ADVO Inc., the largest in-home print advertising company in the United States. We touch eight out of 10 American households weekly or monthly and are the U.S. Postal Service's largest user of Standard mail. Each year, our company pays $500 million in postage, about half our gross revenues.

I would particularly like to thank chairwoman Susan Collins and Sen. Joseph Lieberman and the entire committee for your work on Public Law 108-18, which attempted to address the postal service's CSRS funding issue. One of the key events that led to that effort was Lieberman's request for a report from the GAO. I thank the senator for his initiative and for the commitment of every member of this committee to see that the CSRS funding is corrected.

As a result of Public Law 108-18, the postal service has promised to hold rates steady until at least 2006. After three rate increases in 18 months, this respite came at a critical juncture for the postal service, our industry and the economy as it prevented another rate increase and created a window of opportunity for this committee and Congress to thoughtfully consider postal reform.

I was invited to address the array of reform proposals being considered by this committee. In response, I have submitted written testimony for the record on a variety of postal reform issues. Today, I will focus my remarks on a topic that isn't always considered exciting: accounting. If this committee and Congress would address in a comprehensive manner the issues regarding the accounting for funding of retirement and health benefits of postal employees, you will put the postal service on a truly transparent, more clearly understood financial footing so that the other reforms can succeed.

In addition, proper accounting of these benefits will allow the postal service to keep its commitment to its employees and retirees: all pension and health benefits can be paid, now and in the future, and the postal service will be able to offers its customers an extended period of rate stability that will allow all of us to take advantage of the now-recovering economy to grow volume and revenue for the postal service and improve the financial health not only of the USPS but our industry and the overall economy.

As one of the postal service's largest customers, I can confirm the GAO's death spiral prediction that increasing rates will continue to drive business, volume and revenue away. Non-competitive pricing that creates higher than necessary postal rates has led existing and potential customers elsewhere. It also has led to the creation of competitive alternatives that have drained revenue and profits from the postal service.

Some, like us, have even begun private delivery alternatives as a necessary hedge against rising postal rates, which in some cases are now nearly twice that of a private delivery system. If postal prices were established, maintained and managed in a more market-oriented, efficiently run system, private industry would use the USPS more, and both the postal service and industry would experience significant growth.

ADVO's current strategy is to double our business in the next few years. This will be done both by expanding the geographic reach of our program by going to more households and by increasing the frequency of our programs where they exist today. This expansion could bring significant additional business and revenue to the postal service.

However, we have already begun shifting a portion of our current volume to alternate delivery. In just the three markets where we currently rely on our own private carrier delivery system, we are delivering mail pieces that have more advertising, are heavier, with equal readership and response to mail and are achieving a savings of more than $6 million a year compared to the cost of using the postal service.

Unless changes are made, much of our future growth will be outside the postal service and we will continue to look to shift existing volume to other alternatives.

Now let me give you a glimpse of a different scenario. Extending the current period of rate stability beyond 2006 will allow us to be even more aggressive in our expansion plans because we would have confidence that our largest cost will be contained.

We have the latent ability to create 3 billion more mail pieces. Importantly, we would be able to plan to grow our business in partnership with the USPS. Others in our industry would respond in similar ways. Continued rate stability would benefit the mailing industry, the postal service and the economy as a whole. This is no overstatement.

The volume generated by this hiatus in rate increases, coupled with the impact of the important reforms this committee is considering, would set the postal service on a positive course for the next generation. On the other hand, frequent excessive rate increases, such as the three rate increases that occurred in the 18 months from January 2001 to June 2002, will decrease business and lead to the GAO's death spiral where higher rates cause volume declines leading to even higher rates, which drive even more business away.

Rate stability will allow the $900 billion, 9 million-employee industry to reinvest in itself and create more volume and jobs for the U.S. economy.

Stable rates coupled with comprehensive reform are not a pipe dream. This committee can lead Congress to make them a reality. Since 1971, the postal service has been required to break even by charging mailers its cost of operation. Contrary to general perceptions and media misrepresentations, the USPS has not been chronically losing money or breaking even in its operations. In fact, since it was created, the postal service has generated an operating profit, and a handsome one at that.

That's right.

Since 1971, postal revenues have been billions of dollars more than the cost of funding postal operations. Even if Congress were to force the postal service to book 100 percent of its healthcare liability for retirees today, the postal service still would have generated billions more in excess revenue through rates charged mailers in the past and still in place today.

Where has that money gone? To the Federal Treasury.

That's right. The USPS is not only NOT subsidized by the taxpayer; instead, surprisingly, it has been subsidizing the taxpayer.

Last year, this committee took the first steps to correct the retirement overpayments made by the USPS to the U.S. Treasury. This important first step was only a partial, temporary solution and included some provisions whose effects were unknown by this committee and Congress that are not in the long term best interests of the postal service, its customers or the economy. Important information has come to light since the passage of Public Law 108-18 that requires congressional action.

In implementing last year's action to correct the CSRS over-funding, the Office of Personnel Management made a very material accounting change to the existing 33 year methodology that substantially re-allocated to the postal service some of the government's responsibility for its share of the pensions earned as a result of work performed by postal employees before 1971.

The 1970 Postal Reorganization Act made the Treasury responsible for employee benefits earned while working for the old Post Office Department and it made the postal service responsible for benefits earned after it took over.

For years, the benefit obligation for retirees with employment both before and after 1971 was allocated between the postal service and the Treasury based on the number of years of service employed at each agency, allocating the same dollar amount to each year of employee service. Using that methodology, the postal service has as of today, even with last year's legislative changes, actually over-funded its CSRS liability by $81 billion.

However, that fact was masked when OPM (after discovering this overfunding thanks to Sen. Lieberman's GAO request) responded by quietly adopting a new allocation method that shifted much of the pre-1971 obligation to the postal service, to the detriment of postal customers. Instead of an $81 billion overfunding, the USPS was told that the pension obligation was still underfunded by $4.8 billion.

Interestingly, congressional language in Public Law 108-18 established a method by which the USPS could appeal the change of pre-1971 allocation to the CSRS Board of Actuaries. The USPS has filed that appeal. They make the case that the original allocation method used for 32 years was fair and was recently determined to be consistent with sound, common practice in both the public and private sectors by the Hay Group, a well-respected actuarial firm commissioned by the postal service.

The USPS has a sound and well-substantiated case. However, the three member, OPM-appointed board has not heard an appeal in its 84 years of existence. It is unclear what timeline or method will be applied to the USPS appeal. You have the opportunity to take control of the appeal outcome and codify the former methodology in legislation, acknowledge that postal customers have been grossly overcharged over the years and make the operating and financial performance of the postal service clear and transparent as a productive base from which to implement other areas of reform going forward.

In addition, part of last year's legislative fix of CSRS was a new requirement that the Postal Service pay military, Peace Corps and other government retiree benefits. This transferred $28 billion in new obligations from the federal government to ratepayers.

Singling out postal ratepayers to cover an obligation that benefits all taxpayers is unfair. The president's commission recommended removing responsibility for military pensions from postal service customers. It should be immediately acted upon by this body.

This committee can put the postal service on the road to financial health. If you:

1. Fix the problem of the allocation of benefits earned before 1971.

2. Transfer the military benefits back to Treasury.

3. Release a portion of the identified overpayments from the escrow created last year.

If you do this, the postal service will be able to:

1. Prefund health care.

2. Eliminate all the postal service's debt to the Treasury.

3. It will have funds for needed capital expenditures.

4. And it can provide three more years of rate stability to repay a part of the past unnecessary rate increases to all users of the postal service, consumers and businesses alike.

I believe that this settlement is fair to consumers, mailers, the USPS and postal workers. It removes uncertainty and offsets further volume erosion, providing time for the USPS to implement other much needed reforms that we trust Congress will enact.

Importantly, it will provide assurance to the postal service's employees and retirees that the benefits that they have earned and to which they are rightly entitled are safe and secure and will hopefully reduce some of the anxiety they feel about the prospects for postal reform. If the financial picture is secured, we will be in a position to bring MORE business, volume, and revenue to the postal service, which means more work for postal employees.

Congress and the postal service are truly at a crossroads. We all have an opportunity in this legislation to clean up the books. By eliminating the unfunded liabilities and providing for a period of rate stability, the USPS will have the volume and time it needs to transform into the businesslike model that all of us, including the president's commission, believe will allow it to continue as a viable and invaluable component of our nation's economy.

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