Order Code RL33618
CRS Report for Congress
Received through the CRS Web
Postal Reform
August 18, 2006
Nye Stevens
Specialist in American National Government
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

---

Postal Reform
Summary
Although its short-term financial position has improved, the U.S. Postal Service
(USPS) faces severe financial straits in the long term. Use of the mails is declining
as alternatives such as e-mail, facsimiles, and on-line bill paying substitute for hard-
copy letters. Yet costs — nearly 80% of which are labor — rise with the addition of
2 million addresses each year and mounting obligations for retiree health benefits.
USPS, its board of governors, the Government Accountability Office, mailers’
organizations, postal labor unions, and most recently a presidential commission have
said that the Postal Reorganization Act of 1970 no longer provides a viable business
model. The rate-setting process is cumbersome and tendentious, and prevents USPS
from responding flexibly to an increasingly competitive marketplace. Long-standing
political and statutory restrictions impede efforts to modernize the mail processing
network and close unneeded facilities.
Passage of P.L. 108-18, the Postal Civil Service Retirement System Funding
Reform Act of 2003, enabled USPS to pay off its $11.9 billion debt to the Treasury,
and to defer rate increases through 2005. However, Congress recognized that two of
its provisions must be revisited. One required USPS to set aside future pension
savings in an escrow fund, requiring a 5.4% increase in postal rates in 2006 with no
operational benefit. The other transferred the obligation to pay pension benefits for
military service from the Treasury to USPS, costing ratepayers $27 billion.
On July 31, 2003, a blue-ribbon commission appointed by President Bush issued
a report recommending changes consistent with reform legislation that has been
brewing for years, but also recommending controversial workforce changes.
Bipartisan postal reform legislation, drawing more on previous reform efforts in
Congress than on the recommendations of the President’s Commission, has passed
both houses in the 109th Congress as H.R. 22. The bills have some differences, but
the central feature of each is reform of the rate-setting process, making it more
transparent, flexible, and predictable for both monopoly and competitive products.
The House has not appointed conferees because the Bush Administration
opposes both bills. The Administration believes that reforms in the bills are too
modest and offer no new cost-cutting tools. It also adamantly opposes pension
funding relief, which would add to the budget deficit.
USPS implemented in January 2006 a $3.1 billion rate increase that it says
would not be necessary if Congress had passed legislation to relieve it of the escrow
requirement, and it has filed for another rate increase to take effect in 2007. USPS
has lately come to the conclusion that the reforms in the bills cede too much power
to a new regulatory authority and fail to give USPS authority to cut costs for fringe
benefits or facilities. USPS is also skeptical that pension funding relief will happen
and thus officially opposes the bill.
This report replaces CRS Issue Brief IB10104, and will be updated to reflect
significant legislative developments.

---

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Causes of the Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The USPS Transformation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recalculation of USPS Retirement Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The President’s Commission on the United States Postal Service . . . . . . . . . . . . 6
Should the Postal Service Compete? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Activity in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Activity in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Activity in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Elements of Postal Reform in H.R. 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Differences Between House and Senate Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Postal Reform at an Impasse? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

---

Postal Reform
Bi-partisan postal reform legislation has been introduced in the 109th Congress
in both chambers — H.R. 22 and S. 662. H.R. 22 passed the House by a 410-20 vote
on July 26, 2005. S. 662 passed the Senate by unanimous consent on February 9,
2006, re-designated as H.R. 22. A conference will be required to resolve differences,
which are not profound. Nevertheless, postal reform has been on the congressional
agenda for a decade and still faces obstacles to enactment, including opposition by
the Postal Service and the Bush Administration in its present form.
This report provides background information on the postal reform initiative,
describes the current legislation, and analyzes points of contention remaining among
postal stakeholders and with the Administration. It replaces CRS Issue Brief
IB10104.
Background
Postal Service management, its board of governors, the Government
Accountability Office (GAO), most stakeholders, and most lately a presidential
commission have concluded that the Postal Reorganization Act of 1970 no longer
provides a viable business model for a successful postal enterprise. That act had
taken postal affairs out of the direct control of either Congress or the President. It
made the U.S. Postal Service (USPS) an independent establishment of the executive
branch, directed by a postmaster general selected by, and serving at the pleasure of,
a part-time board of governors appointed by the President with the consent of the
Senate. USPS was permitted to operate using business principles, and charged with
generating enough revenues to support the costs of the service it provides by
allocating those costs among the many users of the postal system. That allocation has
been accomplished through periodic rate cases before the Postal Rate Commission
(PRC), a five-member regulatory commission that considers cost data and the
conflicting views of competitors, unions, and users of the many classes of mail in a
10-month adjudicative process leading to new rates and classifications.
The legal and regulatory framework established by the act served reasonably
well for nearly three decades. Delivery service and customer satisfaction improved,
USPS received no general appropriations after 1983, rising mail volumes covered the
costs of adding new routes and delivery points each year, and prices rose generally
in line with inflation. Postal issues came to be perceived as minor enough that postal
service committees and eventually even subcommittees disappeared from the
congressional organization chart. However, few who are familiar with postal affairs
believe that Congress can ignore the current state of the enterprise. Comptroller

---

CRS-2
General David Walker has called the institution’s current course “unsustainable.”1
In 2003, the blue-ribbon President’s Commission on the United States Postal Service
came to the same conclusion.2
USPS faced a financial crisis in 2001, when both the House and the Senate held
hearings on the deteriorating financial condition of the enterprise.3 GAO issued a
number of reports that portrayed a steadily growing sense of urgency, and placed the
transformation of the Postal Service on its list of High Risk programs. Among the
indicators of an impending crisis were the following:
! Despite desperate cost-cutting measures, a freeze on facilities, and
severe limits on productivity investments, revenues were falling
faster than expenses. USPS suffered losses of more than $2 billion
in 2001 and 2002.
! Mailers warned of an “economic death spiral,” as falling mail
volume forced price increases to cover fixed costs, and the price
increases led to further drops in volume as businesses seek more
cost-effective alternatives.
! Liabilities continued to exceed and grow faster than assets, a
condition that GAO said would mean bankruptcy if USPS were not
a government entity.
Causes of the Financial Crisis
While there are differences among the stakeholders in emphasis, the following
factors have been identified as being in part responsible for the financial crisis of
2001-2002, and the present precarious state of the enterprise:
! The economic slowdown that began in early 2001 cut into USPS
revenues from the dominant business segment, and (temporarily, as
it turned out) reduced advertising mail, which now accounts for most
mail volume. Costs continue to rise, however, since nearly 2 million
delivery points are added each year, built-in wage and cost-of-living
1 Testimony of David M. Walker in U.S. Congress, Senate Committee on Governmental
Affairs, The Postal Service in the 21st Century: the USPS Transformation Plan, hearings,
107th Cong., 2nd sess., May 13, 2002, S.Hrg. 107-551 (Washington: GPO, 2003).
2 President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service: Report of the President’s
Commission on the United States Postal Service, (Washington: GPO, July 31, 2003), pp.
125-126. The report is available at [http://www.treas.gov/offices/domestic-finance/usps/].
3 The following section is a summary of information and analysis in CRS Report RL31069,
Postal Service Financial Problems and Stakeholder Proposals, by Nye Stevens. The report
has not been maintained since 2002, but it provides a full account of the USPS financial
crisis and its causes.

---

CRS-3
increases add $2 billion per year even with declining employment
rolls, and USPS is particularly vulnerable to energy price spikes.
! The rate determination process is cumbersome and rigid, preventing
USPS from aligning its offerings with the variable needs of its
customers. Preparations for a rate case begin many months before
a filing with the Postal Rate Commission (PRC) and USPS must
estimate costs and demand nearly two years into the future. The ad-
versarial process of contesting proposed rates and classes goes on for
10 months, with exchanges of tons of paperwork and hundreds of
hours of testimony. USPS competitors are very active participants.
The emphasis is on allocating stated costs among mail classes rather
than reducing costs or encouraging demand. USPS complains that
the process gives it no opportunity to respond to competition, to vary
rates with periods of low usage, to lower rates for big mailers, or to
set prices in accordance with demand, rather than costs.
! Three rate increases in an 18-month period drove some mailers to
curtail volume in order to stay within set budgets, and made the
comparative cost of alternatives more attractive.
! Competition from other providers and other media had begun to
marginalize some of the services that USPS provides. E-mail,
facsimiles, and cell phones have become substitutes for written
correspondence. The Internet is a growing alternative for financial
billing and payment, which sustained USPS volume and revenue
growth through the 1990s. USPS is already a secondary player in
the overnight express and package delivery markets, except for the
most difficult and costly routes to service in Alaska and Hawaii.
! Labor costs of its more than 700,000 employees accounted for 79%
of USPS expenses,4 not much less than was the case decades ago.
In contrast, labor costs are 56% of United Parcel Service’s expenses,
and 42% of costs at FedEx, where only the pilots are unionized.
Lagging productivity growth (11% in 30 years), a backlog of
146,000 pending or appealed labor grievances that are pursued “on
the clock,” and binding arbitration of disputes keep labor costs high.
Costly government annual and sick leave, early retirement, and
health benefits are set in law and can only be enhanced, not
diminished, in contract negotiations.
! Facilities are not optimally located for efficient distribution, since
USPS has been unable to close existing facilities and consolidate
operations in new locations. USPS maintains that over half its
38,000 facilities do not generate enough revenues to cover their
4 Congressional Budget Office, The Effects of S. 662 on the Long-Term Financial Outlook
of the U. S. Postal Service, Sept. 1, 2005, p. 4.

---

CRS-4
costs, and complains that political considerations prevent it from
modernizing its retail and distribution system.
! The use of mail to deliver agents of bio-terror (anthrax, followed by
ricin) imposed major new mail security and operational costs on
USPS, only some of which have been met by appropriations.
The American Postal Workers Union (APWU) has been a vocal proponent of
another ascribed cause for the postal financial predicament. It blames the financial
crisis on the $12 billion in discounts that USPS gives annually to major mailers for
pre-sorting their mail. “The discounts provided to big mailers significantly exceed
the costs the Postal Service avoids by accepting pre-sorted mail. These subsidies rob
the Postal Service of billions of dollars a year,” revenue that could be recovered if the
work were brought back in-house, according to the APWU.5
The USPS Transformation Plan
When GAO placed the long-term outlook for USPS on its High Risk List in the
spring of 2001, the Senate Governmental Affairs Committee asked USPS to prepare
a comprehensive plan to address its financial, operational, and workforce challenges.
USPS responded in April 2002 with an ambitious “Transformation Plan” that had
two major thrusts. One was a concerted effort to improve operational efficiency,
freeze spending on facilities, and cut its cost base by $5 billion over the next five
years within USPS’s existing statutory authorities. This aspect of the plan has
succeeded to an impressive degree. In September 2005, USPS reported cumulative
cost reductions of $13 billion and a reduction in its career workforce of 68,000.6
The second thrust of the plan was to seek congressional approval of new
statutory authorities that would allow USPS to change its business model. The plan
suggested the need for authority to close retail post offices and processing centers,
negotiate service agreements and discounts with large mailers, revamp contract talks
with the unions to escape binding arbitration, cut back on delivery days, and most
significantly, expanded freedom to use its assets for entering related markets and
developing new products without skeptical scrutiny from the PRC. While postal
reform has been under active consideration by the last three Congresses, agreement
has not been reached on the specifics of a new law. The success at USPS in cutting
costs, with help from Congress as discussed in the next section, may have made
postal reform more difficult by lessening the sense of crisis early in the decade.
5 APWU press release, “Huge Subsidies for Mailing Industry are Real Cause of USPS
Financial Mess,” May 13, 2002. See also, testimony of William Burrus in U.S. Congress,
Senate Committee on Governmental Affairs, Preserving a Strong United States Postal
Service: Workforce Issues, hearings, 108th Cong., 2nd sess., Feb. 24, 2004, S.Hrg. 108-439
(Washington: GPO, 2004), pp. 58-63.
6 U.S. Postal Service, Strategic Transformation Plan, 2006-2010, pp. 1, 53.

---

CRS-5
Recalculation of USPS Retirement Obligation
Postal reform has become intimately bound up with controversies over the huge
retirement obligations the Postal Service has for former employees and their
spouses.7 On April 23, 2003, President Bush signed into law the Postal Civil Service
Retirement System Funding Reform Act of 2003, P.L. 108-18. The law was quickly
passed without dissent in either chamber in response to a surprise finding by the
Office of Personnel Management (OPM) that future payments under current
legislation would overfund USPS liability to the Civil Service Retirement Fund by
at least $71 billion. A principal reason is that interest earnings on past contributions
by USPS on behalf of its employees have been credited at a statutory rate of 5%,
when in fact the average rate of return on the bonds held by the trust fund has been
substantially higher.

The act authorized USPS to reduce its annual payments by $3.5 billion in
FY2003 and $2.7 billion in FY2004 and in FY2005. The savings (plus rate
increases) allowed USPS to eliminate its $11.9 billion debt to the Treasury in 2005
and keep postage rates stable until 2006. While this development (coupled with cost-
cutting successes achieved by USPS under its Transformation Plan) granted financial
breathing room, Postmaster General John Potter said that it does “not in any way
obviate the fundamental flaws in the Postal Service business model” and urged
undiminished attention to postal reform.8
The act also did not (as was recognized by its authors) permanently settle
questions about responsibility for postal retirement obligations. Three major points
remain at issue. First is the use of future savings from the retirement funding
reduction. USPS pointed out that “savings” is really a misnomer for the “potential
amount of overfunding of Civil Service Retirement System (CSRS) pension costs in
any given year had corrective action not been enacted.”9 The law requires that they
continue to be collected through postage rates and kept unused in an escrow account
until Congress decides on their use in the future. The amounts are considerable,
estimated by CBO at $43.2 billion over the 2006-2015 period.10 The rub arises from
the fact that either not collecting the funds, or using them for operational expenses,
would have the effect of reducing revenues in the unified federal budget, thus
increasing the deficit by that amount. USPS and mailers’ organizations naturally
object to the collection of funds that cannot be used. The Bush Administration
7 This subject is treated more extensively in CRS Report RL32346, Pension Issues Cloud
Postal Reform Debate, by Nye Stevens.
8 U.S. Postal Service, “USPS Retirement Determined to be Almost Fully Funded, Provides
Opportunity to Stabilize Postage Rates to 2006,” press release #02-083, Nov. 5, 2002.
9 U.S. Postal Service, Postal Service Proposal : Use of Savings For Fiscal Years After 2005,
P.L. 108-18, undated, available at [http://reform.house.gov/UploadedFiles/Postal%
20Service%20Proposal%20-%20Use%20of%20Savings%20for%20FYs%20After%2020
05.pdf].
10 See Congressional Budget Office, Cost Estimate, H.R. 22, Postal Accountability and
Enhancement Act, April 25, 2005, p. 5.

---

CRS-6
agrees that the escrow requirement has no operational value, but has said that any
change to the requirement must be made in a budget-neutral manner.
The second issue concerns a provision of P.L. 108-18 that transferred from the
Treasury to USPS the obligation to cover military retirement costs of postal
employees in the Civil Service Retirement System, a $27 billion obligation. If this
amount had not been subtracted from the USPS overpayment to the Civil Service
Retirement Fund, the overfunding would have amounted to more than $100 billion.
USPS pointed out that more than 90% of the financial obligation is the result of
military service performed before the Postal Service was created, that no other
agency has to bear these costs for its veterans, and that it conflicted with the veterans
preference requirement. The President’s Commission on the United States Postal
Service (see next section) recommended that the costs be returned to the Treasury
because they are a national obligation and none of USPS’s competitors have to pay
for retirement benefits earned while the retiree was employed by another employer.
The Administration has remained firm in opposing return of the obligation to
the Treasury (and the taxpayer), though its rationale has evolved over time. Its
original report suggested that USPS should bear the costs because the retirement
credits based on military service would have no value if the employees had not joined
USPS, and thus were a consequence of USPS hiring decisions. More lately, its
rationale has stressed the fact that all agencies bear the costs of military retirement
in their contributions to the Federal Employees Retirement System (FERS — to
which all federal employees hired since 1984 belong), without complaint, and that
the underlying principle of P.L. 108-18 was to apply FERS-like principles to USPS.
GAO, whose original report said this was a policy matter for Congress to decide,
seemed to side with USPS in an April 14, 2005 hearing, saying that costs of military
service should be borne by beneficiaries of the service, or taxpayers, rather than
postal ratepayers.
The third issue is the USPS unfunded liability for health care costs of its
retirees, estimated by CBO at $76.8 billion over the 10-year period 2006-2015.
USPS proposes that a fund be created in the Treasury to hold money for this
obligation, funded initially with a $20 billion credit from returning military
retirement obligations to the Treasury. The Administration would counter-propose
that all of the collections from retaining the escrow requirement be put into the new
fund, which would have the effect of making removal of the escrow requirement
budget neutral because postage rates would not be diminished.
The President’s Commission on the
United States Postal Service
A number of postal observers have believed for some time that political power
is so thoroughly dispersed among stakeholders that only an independent blue-ribbon
commission, rather than the legislative process, could devise a contemporary solution
to today’s postal crisis. There is a notable precedent. In 1967, President Johnson
appointed Frederick R. Kappel (the chief executive of AT&T) to chair a Commission

---

CRS-7
on Postal Organization that eventually devised the framework for the Postal
Reorganization Act of 1970.
On December 11, 2002, President Bush issued Executive Order 13278 creating
a Commission on the United States Postal Service, forestalling congressional
initiatives to create such a commission by statute. The co-chairmen of the
commission were James Johnson, former CEO of Fannie Mae, and Harry Pearce,
board chairman of Hughes Electronics. The other seven members included no one
with close ties to postal stakeholders.
The commission’s report, issued on July 31, 2003, confirmed that universal
mail service at affordable rates is at risk, and made 35 recommendations, 18 of which
would require some action by Congress.11 In many ways, the commission’s approach
is in the mainstream of postal reform discussions that have been underway among
stakeholders since the mid-1990s. For example, the commission endorsed the basic
structure of the 1970 Postal Reorganization Act, recommending that USPS “should
continue to operate as an independent establishment within the executive branch with
a unique mandate to operate as a self-sustaining commercial enterprise” and rejecting
the alternative of privatization that many other countries have adopted. While
keeping the basic government corporation model, the commission pressed in many
of its recommendations that USPS should adopt the “best practices of similarly-sized
private-sector corporations.” These included an independent corporate-style board
of directors that would perpetuate itself, greater financial transparency, expanded
outsourcing for services, aggressive real estate asset management, and use of
commercial purchasing practices. A core recommendation was that USPS should not
enter new lines of business, but adjust to a steadily declining demand for its services
by becoming smaller and more productive.
The commission’s recommendations with regard to regulatory controls were
similar to proposals under consideration by Congress for several years. The Postal
Rate Commission would be transformed into a new Postal Regulatory Board that
would have authority to refine the scope of the universal service obligation and the
postal monopoly, to establish broad parameters within which USPS could set rates
and negotiate service arrangements, to redefine pay comparability, and to assure that
competitive products are not cross-subsidized by revenues from products protected
by the monopoly.
While recommending that Congress eliminate current statutory restrictions on
closing post offices for economic reasons, the commission did not press for an
aggressive program of closing local post offices, pointing out that even some “low
activity” post offices are needed to meet the universal service obligation. It placed
much more emphasis on consolidating the 446 large processing facilities,
11 President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service: Report of the President’s
Commission on the United States Postal Service, (Washington: GPO, July 31, 2003). The
report is available at [http://www.treas.gov/offices/domestic-finance/usps/]. The 18
recommendations to Congress are discussed in CRS Report RS21640, The Legislative
Recommendations of the President’s Commission on the United States Postal Service: An
Overview, by Nye Stevens and Kevin Kosar.

---

CRS-8
recommending a Postal Network Optimization Commission to identify facilities to
be closed with a fast-track congressional approval process comparable to the defense
base closing process.
The most controversial of the commission’s recommendations were four
proposals relating to workforce compensation, a subject that recent bills in Congress
have conspicuously avoided. Referring to “persuasive testimony” that a postal
compensation premium may exist, the commission (with the one labor member
dissenting) recommended major revisions to the current practice of binding
arbitration of wage bargaining disputes, including the value of fringe benefits such
as health care and early government retirement in bargaining over compensation, a
redefinition of pay comparability to be made by the Postal Regulatory Board, and
introducing some form of pay for performance into the compensation package. The
American Postal Workers Union denounced the recommendations as “fundamentally
dishonest” and “a disaster,” and said the APWU would use every tool at its disposal
to assure that none of them becomes law.12
Should the Postal Service Compete?
USPS itself (in its Transformation Plan), its unions, and many mailers’
organizations believe that the survival of the Postal Service depends on the
institution’s ability to compete in active or developing markets, because the services
it provides under its statutory monopoly are a declining business. Another school of
thought, however, rejects the notion that USPS should compete with private sector
companies who are able to provide services within the market economy.
There are several components to the argument.13 One relates to fairness. USPS
has many advantages stemming from its governmental status. It pays no federal,
state, or local taxes on its income, sales, purchases, or property. Unlike private sector
companies, it is immune from most forms of regulation, such as zoning, land use
restrictions, motor vehicle registration, parking tickets, and antitrust. It is also able
to borrow money at the lowest possible rate because it does so through the U.S.
Treasury. Companies facing competition from USPS argue that these factors put
them at a great disadvantage (though they tend to ignore the statutory constraints and
regulation by the PRC that USPS faces).
A second argument is based on concepts of economic efficiency. Because of its
indirect subsidies such as freedom from taxation and regulation, and because its goal
is to break even rather than earn a competitive rate of return, USPS has less incentive
than private sector entities to use capital and labor resources efficiently. Subsidies
make government products and service seem artificially inexpensive, resulting in an
over-allocation of resources that could be used to produce greater benefits elsewhere
12 APWU News Service Bulletin, July 23, 2003, available at [http://www.apwu.org/news/
nsb/2003/nsb14-072303.htm].
13 The Institute for Research in the Economics of Taxation [http://www.iret.org] has a
number of publications exploring these themes.

---

CRS-9
in the economy. Economic theory maintains that such a misallocation reduces
national economic welfare below that achieved by a competitive market. When
private sector companies produce and sell a product or service, there is some benefit
to society from the taxes that result, a benefit not gained when the government
produces the same product or service.
Finally, there is substantial evidence that USPS is not a very adept competitor.
GAO has issued several reports of failed commercial ventures by USPS. In 1997, for
example, USPS had discontinued or was losing money on 15 of 19 new products,
resulting in a net loss of $85 million.14 UPS and FedEx have both established
profitable delivery networks in markets where USPS tries to compete but is now a
relatively minor player.
One policy prescription leading from this diagnosis is that USPS should stick
to its monopoly business and not seek to grow at the expense of private sector
competitors. Indeed, some would like to see the postal monopoly reduced to “the last
mile” of delivery, opening up collection, sorting, and transportation to market
competition.
Activity in the 107th Congress
Although Congress became increasingly concerned about deterioration in
USPS’s finances, legislative activity was confined to the subcommittee level until
late in the 107th Congress. The House Postal Service Subcommittee was not
reconstituted in the 107th Congress. Representative John McHugh, who had chaired
the Postal Subcommittee through six years of hearings largely devoted to postal
reform, was term-limited as chairman. In a House Government Reform Committee
hearing on April 4, 2001, Chairman Dan Burton and ranking minority member Henry
Waxman invited postal stakeholders to participate in a broad range of discussions
aimed at the development of a bi-partisan consensus bill, and these discussions
proceeded for more than a year. A bi-partisan bill (H.R. 4970) was eventually
introduced on June 20, 2002, proposing changes in the regulatory process. However,
H.R. 4970 fell victim to legislative backlogs as the 107th Congress drew to a close,
and it did not emerge from committee.
Activity in the 108th Congress
Both the House Government Reform and the Senate Governmental Affairs
Committees geared up for concentrated attention to postal issues in the 108th
Congress. Congress did act swiftly on the USPS request to change the formula for
its contributions to the Civil Service Retirement Fund. By April 23, 2003, the Postal
Civil Service Retirement System Funding Reform Act of 2003 had been enacted as
P.L. 108-18. Its proponents said that the act would provide some much-needed
14 U.S. General Accounting Office, U.S. Postal Service: Development and Inventory of New
Products, GAO Report GGD-99-15, Nov. 24, 1998, p. 4.

---

CRS-10
financial breathing room but warned that it would be a serious mistake to let that
relief forestall consideration of long-range reforms. They also recognized that
Congress would need to revisit provisions of the act that put “savings” to the Postal
Service in an escrow fund that could not be used for regular operations and
obligations, and that transferred the obligation to pay retirement benefits based on
military service from the Treasury to the Postal Service.
The Senate Governmental Affairs Committee held eight hearings on the report
of the President’s Commission on the United States Postal Service, the House
Government Reform Special Panel held three, and there was also a joint hearing of
the two bodies on March 23, 2004. Following the hearings, both committees drafted
and unanimously reported legislation on a bipartisan basis — H.R. 4341 in the House
and S. 2468 in the Senate. However, neither bill was brought to the floor in the 108th
Congress.
Activity in the 109th Congress
The fact that two similar postal reform bills in the 108th Congress had been
reported by unanimous votes in both the House and Senate Committee was a hopeful
sign to some observers that the way was clear for early passage in the 109th Congress.
Representative McHugh reintroduced the House version of postal reform legislation
with no significant modifications on the first day of the 109th Congress, for himself,
Government Reform Committee Chairman Tom Davis, Ranking Minority Member
Waxman, and Representative Danny Davis. H.R. 22 was marked up by the
Committee on Government Reform on April 13, 2005, and reported on a roll call
vote of 39-0. The House debated H.R. 22 on July 26, 2005, and passed it by a vote
of 410-20, even though OMB issued a Statement of Administration Policy on the day
of the vote threatening a veto.15 One of three rejected amendments, offered by
Representative Hensarling, would have met the Bush Administration’s demand that
the bill be “budget neutral.”
Progress of bipartisan postal reform legislation in the Senate has been much
slower. Senator Collins, with Senator Carper and Senator Voinovich, introduced
the Senate version of the postal reform bill on March 17, 2005, as S. 662, and it was
referred to the Committee on Homeland Security and Governmental Affairs. S. 662
was reported by a 15-1 vote of the Committee on June 22, 2005.16 Action on the bill
then slowed down as the Senate’s attention was devoted to the Supreme Court,
Hurricane Katrina, and budget issues, and several Senators voiced concerns about
specific provisions. Both the Postal Service and the Administration voiced opposition
to the bill. Nevertheless, on February 9, 2006, the Senate added three amendments,
substituted the language of S. 662 for the House language in H.R. 22, and passed
H.R. 22 by unanimous consent.
15 Available at [http://www.whitehouse.gov/omb/legislative/sap/109-1/hr22sap-h.pdf].
16 Senator Coburn, in dissent, objected to the budget cost of the bill and its lack of authority
to deal with health care costs of postal employees, whose benefits are greater than those of
other federal workers.

---

CRS-11
Since then, the Senate has named conferees but the House has not. Fairly
extensive “pre-conference” negotiations have been going on behind the scenes in a
search for resolution to unresolved issues among stakeholders, and with the
Administration.
Elements of Postal Reform in H.R. 22
The basic elements of H.R. 22 have been under consideration and debate for
more than a decade. The legislation was first introduced by Representative McHugh
in the 104th Congress on June 25, 1996, as H.R. 3717, and reintroduced in the 105th
Congress as H.R. 22. Today, after dozens of hearings and years of making
modifications and additions to respond to the interests and concerns of postal
stakeholders, the key reforms embodied in .R. 22 can be distilled into these elements:
! Separation of Businesses. The Postal Service remains a government
entity but would be reorganized into two separate lines of business
with separate funding and regulation principles. The traditional
monopoly products like letters, periodicals, and advertising mail
would be called “market-dominant” products. Those in which USPS
shares the market with other enterprises — such as Express Mail,
Priority Mail, and international mail — would be called
“competitive” products.
! Flexible Rate Regulation. Replacing complex rate cases based on
apportioning costs among mail classes with two separate schemes in
which market-dominant product prices rise with the consumer price
index (CPI) and competitive products are priced based on market
mechanisms — while imputing taxes to level the playing field with
competitors — subject only to after-the-fact reviews of fairness.
! Financial Incentives. USPS would no longer be subject to a break-
even mandate, but would be allowed to retain earnings and improve
compensation for top employees by raising current limits.
! Limitations on Postal Monopoly and Products. Requires USPS
to offer only postal services and for the first time defines exactly
what constitutes “postal services.” The bill also would revise the
authority of USPS to regulate competitors.
! Reform of International Mail Regulation. Clarifies the authority
of the State Department to set international policy, applying customs
laws equally to postal and private shipments.
! Strengthening of the Commission. Grants the Postal Rate
Commission subpoena power and a broader scope for regulation,
auditing, investigation of rate and service complaints, and oversight,
renaming it the “Postal Regulatory Commission.”

---

CRS-12
! Increase Transparency. H.R. 22 requires more detailed disclosure
of USPS financing and service measures, rate-setting data and
determinations, and justifications for work-sharing discounts. USPS
would be subject to Securities and Exchange Commission, and
certain Sarbanes-Oxley Act requirements.
Notably, the legislation does not include any of the workforce measures
recommended by the President’s Commission, such as major changes to collective
bargaining, pay comparability, or fringe benefits, all of which were strongly opposed
by postal unions, nor does it deal with the sensitive problem of allowing USPS to
rationalize its outdated facilities network.

The one new element common to both versions of H.R. 22 is that the bills
would provide USPS with relief from pension obligations imposed by P.L. 108-18.
They would repeal the escrow provision of P.L. 108-18 and return responsibility for
the military service cost of postal retirees to the Treasury Department, while also
requiring USPS to begin funding its enormous liability for retiree health benefits.
These provisions would relieve USPS of $27 billion in costs of military service
retirement credits, and free up at least a portion of the $73 billion that will eventually
be collected from postal customers and placed in escrow under current law.17
Differences Between House and Senate Bills
Although the House and Senate versions of H.R. 22 share a common origin in
the work carried out by the House Subcommittee on the Postal Service in the 104th
through the 106th Congress, there are differences between the two bills that matter to
some stakeholders and that will need to be resolved in conference. Following is an
explanation of the most significant of these differences.
! Single-piece parcels. The Senate version of H.R. 22 places single-
piece parcels in the market-dominant business category, while the
House bill would have USPS set prices on single-piece parcels as if
they were part of the competitive segment. The latter approach
would no doubt result in USPS charging higher prices to deliver
such parcels, and to charge sales taxes on them as well. Under the
Senate approach, the cost of providing air service to remote areas of
the United States, including Alaska, would be included in the rates
as a cost of universal service and paid for by all mailers; under the
House bill these costs would need to be recaptured in the rates
charged specifically for the service. USPS says that if parcels are
treated as a competitive product, it would have to raise prices
dramatically — perhaps as much as 40% — and could be driven
17 According to OPM, the amount to be placed in escrow is $3.3 billion in 2007, and $3.6
billion in 2008, rising eventually to $7.0 billion in 2024. For more extended discussion of
the escrow and military retirement cost issues, see CRS Report RL32346, Pension Issues
Cloud Postal Reform, by Nye Stevens.

---

CRS-13
from the market altogether.18 An argument in favor of the House
bill’s approach is that carrying single piece parcels is indeed a
competitive product, in that there are lots of options, and USPS
hardly dominates the market. Others in that market — specifically
FedEx and UPS — support the House version, while most shippers
and the Postal Service itself favor the Senate’s version.19
! Exigency. While both bills allow the Postal Service to raise the
rates charged for services in the market-dominant category as long
as they stay within the increase in the CPI, the Senate bill applies
stiffer criteria for when a larger increase might be warranted: only
under “unexpected and extraordinary circumstances.” The House
language would allow a larger increase when the Commission
determined it was “reasonable and equitable and necessary.” Large
mailers think the House standard could be too easily exceeded and
rates could rise unpredictably. USPS opposes the “hard cap” in the
Senate version, because it can foresee circumstances that would raise
its costs above the rate of inflation, such as an arbitrator’s decision
to allow a large wage increase. Postal unions believe a hard cap
could amount to a prior constraint on wage negotiations, since labor
constitutes nearly 80% of costs and would have to bear the brunt of
any rate limit.
! Unused Rate Authority. The Senate bill has a provision, not
included in the House bill, that would allow USPS to “bank,” or set
aside for possible future use, at least a part of any unused difference
between rates it sets and what it could have set if it had taken full
account of a CPI increase. This would allay a tendency to “use it or
lose it” that might promote greater-than-needed rate increases.
! Transition Period. The House bill allows for a 24-month transition
period before the new rate setting process would take effect, and the
Senate bill allows 12 months. Mailers prefer the shorter period,
though all recognize that USPS would certainly file at least one more
rate case under the current law.
! Labor Member of the Board. The House, but not the Senate bill,
would require that the first vacancy in the Board of Governors
shortly after enactment be filled by a person nominated with
“unanimous concurrence” of the five postal unions. An amendment
18 Ken Parmelee, “NRLCA Goes to Washington,” The National Rural Letter Carrier, July
2005, p. 394.
19 Jessica Brady, “House Parcel Language Would Boost Competitors to USPS,” Congress
Daily, May 15, 2006. The article quotes the Association of Priority Mail Users as saying
that there had been “an enormous amount of private lobbying” and that the House provision
“effectively accomplishes the agenda” of companies such as UPS. A UPS spokesman said
that its position was “up front” and that customers would benefit from a level playing field.

---

CRS-14
offered by Representative Pence to remove this provision failed by
a vote of 82-345 on the floor of the House.20
! Injury Compensation. The Senate bill contains provisions
revamping the way workers compensation claims for on-the-job
injuries are paid, while the House bill does not touch that subject.
The Senate bill (in Title IX) would carry out a recommendation of
the President’s Commission on the United States Postal Service that
USPS should be empowered to reduce its costs under the Federal
Employees Compensation Act.21 The bill would amend 5 U.S.C. §
8117 so that a postal employee would not be entitled to
compensation under FECA for the first three days of a temporary
disability, but would be required to use sick leave or another form of
leave. It also would require that long-term disabled workers move
to the retirement rolls at retirement age, as happens in other worker
compensation programs, rather than stay on workers compensation
benefits throughout their lives. Since the Postal Service has very
high rates of claims for on-the-job injuries, its obligations under
current law constitute a $6.5 billion unfunded liability, and changing
these provisions could save a great deal of money.22 For that same
reason, the changes are strongly opposed by postal unions, whose
members are beneficiaries of the current arrangement.
! Use of Escrow Account. The Senate bill has a different schedule
for USPS to begin paying into a Treasury account for financing
future retiree health benefits. It would devote about three-quarters of
the escrow savings to advance funding of retiree health costs, while
the House bill would devote about two-thirds. For this reason, the
CBO cost estimate for S. 662 carries a lower 10-year cost — $3.9
billion — than does the House bill, at $5.9 billion.23 The
Administration’s position is that the bill must be budget neutral,
which would preclude any use of the escrow fund for operations.
Postal Reform at an Impasse?
Although H.R. 22 has passed both the House and the Senate with few dissenting
votes and the differences between the bills are not profound, the postal community
is voicing skepticism that the legislation will be sent to the President before the end
20 Congressional Record, daily edition, vol. 151 (July 26, 2005), pp. H6538-H3541, H6547-
H6548.
21 President’s Commission on the United States Postal Service, Embracing the Future,
(Washington: GPO, 2003), p. 177.
22 Ibid., p. 133.
23 See Congressional Budget Office, Cost Estimate, H.R. 22, Postal Accountability and
Enhancement Act, April 25, 2005, p. 1; and Cost Estimate, S. 662, Postal Accountability and
Enhancement Act, July 1, 2005, p. 1.

---

CRS-15
of the 109th Congress. The Postal Service itself is no longer pressing for action,
seeing the prospect for more harm than good. Its Board of Governors sent the
Committees a letter on September 13, 2005, raising basic questions about the value
of the “reforms” in the legislation, especially if they are not accompanied by pension
funding relief at the Administration’s insistence that the bill be “budget neutral.” The
Board (which includes the Postmaster General) primarily objected to the enhanced
role given in the bill to the Postal Regulatory Commission. With the Commission
empowered to issue orders in response to complaints about any aspect of USPS
performance, and armed with subpoena power, USPS thinks it could lose basic
management authority. The Board also said that USPS could not accept a “hard” rate
cap at the CPI level without “significantly greater ability to control its infrastructure
and growing labor costs.” The American Postal Workers Union followed a week
later with a letter expressing some of the same reservations about the legislation,
fearing that a hard rate cap would eventually result in pressure to keep wage levels
down.
There have been active discussions with the Administration over the summer,
spurred by recognition that the threatened veto of the legislation as it now stands is
a potent end-of-session tool. There is increasing speculation in postal circles of a
compromise with the Administration on postal pension issues that have clouded
postal reform legislation, and drawn the threat of a presidential veto. On the escrow
provision, all of the “savings” would be set aside in a Treasury fund for the health
care expenses of retirees, thereby offsetting the budget deficit impact. On military
retirement costs, the compromise would relieve USPS of its current obligation under
P.L. 108-18 to pay retroactively for the military service credits of its employees in the
past, but it would assume responsibility for future payments to CSRS retirees,
beginning in FY2007. This would greatly reduce the financial impact on USPS, and
put CSRS and FERS retirees on an equal footing.
But the Administration would like other concessions, and has reportedly
returned to some of the recommendations it made in a “Statement of Administration
Policy”on the day of the House vote.24 One is that the bill include language
explicitly endorsing more flexible worksharing and “negotiated service agreements,”
or special discounts for large mailers who share some of the sorting work. Another
is that the final bill include the Senate’s provisions on the hard rate cap and on
changes to workers compensation benefits. And even more significantly, the
Administration is pressing for changes in the wage negotiation process, for example
including a direction to the arbitrator to consider the financial health of the Postal
Service as a factor in wage settlements. All of these provisions would likely be
opposed by postal labor unions, whose support has long been thought necessary for
postal reform.
If no agreement is reached, on September 30 USPS will issue a check to the
Treasury for $3.1 billion, proceeds from the January rate increase, that by law cannot
be used to support delivery of the mail.

24 Available at [http://www.whitehouse.gov/omb/legislative/sap/109-1/hr22sap-h.pdf].

---