Postal Reform
Order Code RL33618
Postal Reform
Updated January 3, 2007
Kevin R. Kosar
Analyst in American National Government
Government and Finance Division
Postal Reform
Summary
This report provides information on the postal reform initiative, which
culminated in the enactment of P.L. 109-435, the Postal Accountability and
Enhancement Act of 2006. The report provides background information on postal
reform, analyzes the points of contention among postal stakeholders and the
Administration, and describes both the proposed and enacted legislation. It will not
be updated.
A number of factors encouraged the movement for postal reform. Perhaps
foremost were the financial challenges of the U.S. Postal Service (USPS). 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.
Additionally, 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 provided
a viable business model. The rate-setting process was criticized for preventing
USPS from responding flexibly to an increasingly competitive marketplace. Critics
have also argued that long-standing political and statutory restrictions impeded
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, the law did impose costs. USPS
was required to set aside future pension savings in an escrow fund, requiring a 5.4%
increase in postal rates in 2006 with no operational benefit. USPS also was required
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 that recommended changes, including controversial workforce changes.
Congress eschewed the commission’s labor proposals in drafting legislation.
In the 109th Congress, the House and Senate passed separate but very similar
versions of H.R. 22. The bills proposed significant changes to the rate-making
process and the powers of the Postal Service’s regulator. The bills also proposed
improving USPS’s financial condition by transferring $27 billion in obligations
related to military service back to the U.S. Treasury and abolishing an escrow
account that cost USPS over $3 billion per year. Despite their similarities and wide
bipartisan support, the bills appeared stalled to many observers.
In the waning days of the 109th Congress, H.R. 6407, a compromise bill was
introduced. Congress approved the bill within two days, and on December 20, 2006,
President George W. Bush signed the Postal Accountability and Enhancement Act
of 2006.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Causes of the Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The USPS Transformation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Recalculation of USPS Retirement Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The President’s Commission on the United States Postal Service . . . . . . . . . . . . 7
Should the Postal Service Compete? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Activity in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Activity in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Activity in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Elements of Postal Reform in H.R. 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Differences Between the House and Senate Bills . . . . . . . . . . . . . . . . . . . . . . . . 12
Postal Reform at an Impasse? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Reform Enacted: The Postal Accountability and
Enhancement Act of 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Major Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Reconciliation of the Differences
Between the House and Senate Bills . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Postal Reform
Introduction
Bipartisan postal reform legislation was 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, 2005.1 S. 662 passed the Senate by unanimous consent on February 9, 2006, re-
designated as H.R. 22.
The bills were quite similar. They proposed significant changes to the rate-
making process and the powers of the Postal Service’s regulator. The bills also
proposed improving USPS’s financial condition by transferring $27 billion in
obligations related to military service back to the U.S. Treasury and abolishing an
escrow account that cost USPS over $3 billion per year. Despite their similarities,
the bills appeared stalled to many observers.
In the waning days of the 109th Congress, H.R. 6407, a compromise bill was
introduced. Congress approved the bill on voice votes within two days. On
December 20, 2006, President George W. Bush signed the Postal Accountability and
Enhancement Act of 2006 (P.L. 109-435) into law.
This report provides background information on the postal reform initiative,
analyzes the points of contention among postal stakeholders and the Administration,
and describes both the proposed and enacted legislation.
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
1 This report originally was authored by Nye Stevens, who has retired from CRS. Since that
time, it has been updated by Kevin R. Kosar, who may be contacted by readers with
questions on postal issues.
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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
General David Walker has called the institution’s current course “unsustainable.”2
In 2003, the blue-ribbon President’s Commission on the United States Postal Service
came to the same conclusion.3
USPS faced a financial crisis in 2001, when both the House and the Senate held
hearings on the deteriorating financial condition of the enterprise.4 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.
2 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).
3 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/].
4 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.
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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
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,5 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
5 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.
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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
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.6
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 68,000.7
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
6 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.
7 U.S. Postal Service, Strategic Transformation Plan, 2006-2010, pp. 1, 53.
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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.
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.8 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.9
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.”10 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,
8 This subject is treated more extensively in CRS Report RL32346, Pension Issues Cloud
Postal Reform Debate, by Kevin R. Kosar.
9 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.
10 U.S. Postal Service, Postal Service Proposal: Use of Savings For Fiscal Years After
2005, P.L. 108-18, undated.
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estimated by CBO at $43.2 billion over the 2006-2015 period.11 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
agreed that the escrow requirement has no operational value, but said that any change
to the requirement must be made in a budget-neutral manner.
The second issue concerned 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 was firm in opposing return of the obligation to the
Treasury (and the taxpayer), though its rationale 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. Later, its rationale 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 was 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 counter-proposed 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.
11 See Congressional Budget Office, Cost Estimate, H.R. 22, Postal Accountability and
Enhancement Act, April 25, 2005, p. 5.
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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
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.12 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
12 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 Kevin R. Kosar.
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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,
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.13
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.14 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
13 APWU News Service Bulletin, July 23, 2003, available at [http://www.apwu.org/news/
nsb/2003/nsb14-072303.htm].
14 The Institute for Research in the Economics of Taxation [http://www.iret.org] has a
number of publications exploring these themes.
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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
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.15 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 bipartisan consensus bill, and these discussions
proceeded for more than a year. A bipartisan 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.
15 U.S. General Accounting Office (now the Government Accountability Office), U.S. Postal
Service: Development and Inventory of New Products, GAO Report GGD-99-15, Nov. 24,
1998, p. 4.
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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
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.16 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
16 Available at [http://www.whitehouse.gov/omb/legislative/sap/109-1/hr22sap-h.pdf].
CRS-11
was reported by a 15-1 vote of the Committee on June 22, 2005.17 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.
Since then, the Senate has named conferees but the House has not. Fairly
extensive “pre-conference” negotiations have taken place behind the scenes in a
search for resolution to 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 H.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
17 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-12
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.”
! 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 did not include any of the workforce cost-reduction
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 the legislation 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 have provided USPS with relief from pension obligations imposed by P.L.
108-18. They would have repealed the escrow provision of P.L. 108-18 and returned
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 have relieved USPS of $27 billion
in costs of military service retirement credits and freed up at least a portion of the $73
billion that will eventually be collected from postal customers and placed in escrow
under current law.18
Differences Between the 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 Congresses, there were differences between the two bills that
mattered to some stakeholders and that will need to be resolved in conference.
Following is an explanation of the most significant of these differences.
18 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 Kevin R. Kosar.
CRS-13
! Single-piece Parcels. The Senate version of H.R. 22 placed single-
piece parcels in the market-dominant business category, while the
House bill would have had USPS set prices on single-piece parcels
as if they were part of the competitive segment. The latter approach
would have resulted in USPS charging higher prices to deliver such
parcels and charging 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 have needed to be recaptured in the rates
charged specifically for the service. USPS said 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
from the market altogether.19 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 — supported the House version, while most
shippers and the Postal Service itself favored the Senate’s version.20
! Exigency. While both bills allowed the Postal Service to raise the
rates charged for services in the market-dominant category as long
as they stayed within the increase in the CPI, the Senate bill applied
stiffer criteria for when a larger increase might be warranted: only
under “unexpected and extraordinary circumstances.” The House
language would have allowed a larger increase when the commission
determined it was “reasonable and equitable and necessary.” Large
mailers thought that the House standard could be too easily exceeded
and rates could rise unpredictably. USPS opposed the “hard cap” in
the Senate version, because it could 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
argued that 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 had a provision, not
included in the House bill, that would have allowed 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 have allayed a
19 Ken Parmelee, “NRLCA Goes to Washington,” The National Rural Letter Carrier, July
2005, p. 394.
20 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
tendency to “use it or lose it” that might promote greater-than-
needed rate increases.
! Transition Period. The House bill allowed for a 24-month
transition period before the new rate setting process would take
effect, and the Senate bill allows 12 months. Mailers preferred the
shorter period, though all recognized 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,
would have required 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
offered by Representative Pence to remove this provision failed by
a vote of 82-345 on the floor of the House.21
! Injury Compensation. The Senate bill contained provisions
revamping the way workers compensation claims for on-the-job
injuries are paid, while the House bill did not. The Senate bill (in
Title IX) would have carried 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.22 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 have required 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 have saved a great deal
of money.23 For that same reason, the changes were strongly
opposed by postal unions, whose members are beneficiaries of the
current arrangement.
! The Use of the Escrow Account. The Senate bill had a different
schedule for USPS to begin paying into a Treasury account for
financing retiree health benefits. It also would have required USPS
to establish an amortization schedule to retire or liquidate any
liability or surplus by 2045. (The House bill did not have this latter
21 Congressional Record, daily edition, vol. 151 (July 26, 2005), pp. H6538-H3541, H6547-
H6548.
22 President’s Commission on the United States Postal Service, Embracing the Future,
(Washington: GPO, 2003), p. 177.
23 Ibid., p. 133.
CRS-15
feature.) The Senate version of H.R. 22 would have devoted 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.24 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?
There were active discussions with the Administration over the summer, spurred
by the threatened veto of the legislation. Observers in the postal industry speculated
that a compromise was being developed to handle the apparent impasse over the
issue of “budget neutrality.” Reports of a compromise emerged. 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 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.
Yet, the postal community voiced skepticism that the legislation would be sent
to the President before the end of the 109th Congress. The Postal Service itself did not
press 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 thought 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.
By mid-October of 2006, many observers were surprised when reports emerged
that the quest for final legislation had broken down. Initially, one report asserted that
UPS objected to the bill when it appeared that parcels would not be included in the
24 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-16
competitive products category.25 Later reports suggested that the bill sponsors were
blind-sided by a late-in-the-game complaint by the National Association of Letter
Carriers (NALC).26 The 300,000-member union objected to the disability provisions
in S. 662, section 902.27 It also was suggested that unions were antagonized by recent
White House demands for labor cost reductions.28 Another observer proffered that
the demise of the postal reform legislation might be attributed to election year
politics, that the possibility of a significant shift in the partisan composition of one
or more of the Houses of Congress may have emboldened stakeholders who believe
they can get legislation more to their liking under the 110th Congress.29 By late
autumn, few observers voiced the opinion that reform would be enacted.
Reform Enacted: The Postal Accountability and
Enhancement Act of 2006
In the last days of the 109th Congress, a compromise postal bill (H.R. 6407) was
introduced in the House (December 7, 2006). The House and Senate passed the bill
by voice votes (December 8 and December 9, respectively). President George W.
Bush signed the Postal Accountability and Enhancement Act of 2006 (P.L. 109-435)
on December 20, 2006.
Major Provisions
The major provisions of the new postal law include the following:
! Definition of the term “Postal Service.” H.R. 6407, sec. 101,
defines this term to mean “the delivery of letters, printed matter, or
mailable packages, including acceptance, collection, sorting,
25 “Changing parcel pricing to the ‘competitive’ category rather than the ‘market dominant’
category in the reform legislation will effectively cripple the USPS. They [sic] would be
forced to increase parcel post prices to cover overhead costs. And UPS could swoop in and
capture most of the business.” Alliance of Nonprofit Mailers, Alliance Report, Sept. 29,
2006, p. 2.
26 Section 902 would encourage injured workers of retirement age to retire rather than
continue on disability leave. Under current law, an employee suffering total disability from
a workplace injury is entitled to compensation of 66% of monthly pay. S. 662 would reduce
this to 50%. On reports of NALC’s involvement, see Stephen Barr, “Fate of Post Office
Overhaul Is Up for Debate,” Washington Post, Oct. 4, 2006, p. D4; and Stephen Barr,
“Communication Breakdown Cited in Failed Postal Legislation,”Washington Post, p. D4.
27 On NALC’s view of the matter, see available at NALC, E-Activist Network newsletter,
Sept. 30, 2006 [http://www.unionvoice.org/nalc/notice-description.tcl?newsletter_id=
1576837].
28 Jessica Brady, “Senator Unsure of Postal Overhaul’s Lame Duck Prospects,”
GovExec.com, Oct. 4, 2006, available at [http://www.govexec.com/dailyfed/1006/
100406cdpm2.htm].
29 Bill McAllister, “A Postmortem on Postal Reform,” Postcomm, Oct. 6, 2006, available
at [http://www.postcom.org/public/articles/2006articles/postmortem.htm].
CRS-17
transportation, or other functions ancillary thereto.” This provision
is significant because current law does not define “postal service,”
an omission, critics have contended, which has permitted USPS to
undertake nonpostal activities. However, H.R. 6407, sec. 102,
permits USPS to “provide nonpostal services which were offered as
of January 1, 2006.”
! Repeal of the Escrow. H.R. 6407, sec. 804, would abolish the
escrow account established by P.L. 108-18, sec. 3 — “Savings
accrued to the Postal Service as a result of enactment of Public Law
108-18 and attributable to fiscal year 2006 shall be transferred to the
Postal Service Retiree Health Benefits Fund established under
section 8909a of title 5, United States Code, as added by section 803
of this Act.”
! Return of Military Obligations to the Treasury. H.R. 6407, sec.
802, would require that “In the application of section 8348(g)(2) of
title 5, United States Code, for the fiscal year 2007, the Office of
Personnel Management shall include, in addition to the amount
otherwise computed under that paragraph, the amounts that would
have been included for the fiscal years 2003 through 2006 with
respect to credit for military service of former employees of the
United States Postal Service as though the Postal Civil Service
Retirement System Funding Reform Act of 2003 (Public Law
108-18) had not been enacted, and the Secretary of the Treasury
shall make the required transfer to the Civil Service Retirement and
Disability Fund based on that amount.” This relieves USPS of a $27
billion obligation.
! Separation of Businesses. H.R 6407, Title II, would divide USPS
products into”market-dominant” and “competitive” classes. Market-
dominant products would include (1) first-class mail letters and
sealed parcels, (2) first-class mail cards, (3) periodicals, (4) standard
mail, (5) single-piece parcel post, (6) media mail, (7) bound printed
matter, (8) library mail, (9) special services, and (10) single-piece
international mail. Competitive products would include (1) priority
mail, (2) expedited mail, (3) bulk parcel post, (4) bulk international
mail, and (5) mailgrams.
! New Rate Regulation. H.R. 6407, Title II, would replace the
current rate determination system with a bifurcated system. Prices
of products in the market-dominant class prices may be increased by
USPS with the Consumer Price Index for All Urban Consumers.
Prices of products in the competitive class would be based on market
mechanisms, including “costs attributable,” defined as “the direct
and indirect postal costs attributable to such product through reliably
identified causal relationships.” H.R. 6407 would require the new
postal regulator to review the new regulatory scheme 10 years after
enactment of the law. If the new system is not achieving the law’s
CRS-18
objectives for market-dominant products, the regulator may alter or
replace the system.
! A Stronger Regulator. H.R. 6407, Title VI, would replace the
Postal Rate Commission with the Postal Regulatory Commission.
The new regulator would have subpoena power and a broader scope
for regulation, auditing, investigation of rate and service complaints,
and oversight.
! Reform of International Mail Regulation. H.R. 6407, sec. 407,
would clarify the authority of the Secretary of State to set
international postal policy, enter agreements, and would require
him/her to apply customs laws equally to private shipments and
“shipments of international mail that are competitive products.”
! New Qualifications and Lengths of Terms in Office for
Governors. H.R. 6407, sec. 501, would require that governors “be
chosen solely on the basis of their experience in the field of public
service, law or accounting or on their demonstrated ability in
managing organizations or corporations (in either the public or
private sector) of substantial size.” Of the nine governors, at least
four of the Governors would have to “be chosen solely on the basis
of their demonstrated ability in managing organizations or
corporations (in either the public or private sector) that employ at
least 50,000 employees.” Governors’ terms would be reduced from
nine to seven years.
! Increased Transparency. H.R. 6407, sec. 204, would mandate
USPS to provide more details 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.
Reconciliation of the Differences
Between the House and Senate Bills
The above-described differences between the competing House and Senate bills
were settled thus:
! Single-piece Parcels. Like the Senate version of H.R. 22, H.R.
6407 placed single-piece parcels in the market-dominant business
category.
! Exigency. While both bills allowed the Postal Service to raise the
rates charged for services in the market-dominant category as long
as they stayed within the increase in the CPI, the Senate bill applied
stiffer criteria for when a larger increase might be warranted: only
under “unexpected and extraordinary circumstances.” H.R. 6407
CRS-19
kept this provision but also would require the Postal Regulatory
Commission to allow proposed increases only after holding a public
hearing and determining that the increases are “reasonable and
equitable and necessary.”
! Unused Rate Authority. Like the Senate bill, H.R. 6407 permits
the Postal Service to “bank,” or set aside for possible future use
(within five years) 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.
! Transition Period. The House bill allowed for a 24-month
transition period before the new rate setting process would take
effect, and the Senate bill allows 12 months. H.R. 6407 would split
the difference and allow an 18 month transition period.
! Labor Member of Board. H.R. 6407 does not include this
provision.
! Injury Compensation. The Senate bill contained provisions
revamping the way workers compensation claims for on-the-job
injuries are paid, while the House bill did not. It would have required
that long-term disabled workers move to the retirement rolls at
retirement age and it would have amended 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. H.R. 6407
retains only the latter provision.
! Use of Escrow Account. H.R. 6407, Sec. 803, adopts much of the
Senate bill’s language. It includes a specific schedule for payment
into the Postal Service Retiree Health Benefits Fund from 2007
through 2016 (ranging between $5.4 and $5.8 billion per year). The
bill would require USPS to establish and amortization schedule for
any remaining unfunded obligations and retire them by 2056.