Mr. MCCLOSKEY. Thank you very much, Mr. Bair.

Always good to welcome Mr. Sackler. Art, proceed as you wish. Mr. SACKLER. Thank you, Mr. Chairman. It is a pleasure to be here with you this morning. The Mailers Council appreciates the opportunity to appear before you today and to discuss the report by the Joint Task Force on Postal Ratemaking.

Before we comment on the task force's report, however, the Council wants to express our great concern to you about the current state of postal finances. As you know, the numbers are hardly encouraging: income is down, costs are up, and that is compared to the diminished results of this time last year. The Service may finish with a loss instead of the $500 or more million surplus that was originally projected for this year, and for fiscal year 1993 there are projections that the Service may find itself as much as $2 billion in the red. Meanwhile, productivity is down despite the investment in automation.

These results portray a slow, damaging erosion in Postal Service finances and market share. If the $2 billion deficit is realized and calculated into the 1994 rate increase, the situation could become critical.

Certainly not all the fiscal problems are of the Postal Service's making. Recession has hurt, as you know. Competition is growingyou heard from the GAO about that. Telemarketing, for example, sales will climb from about $140 billion in 1987 to a projected $560 billion in 1995, and the implications of that for the Postal Service are substantial, to say the least. Electronic communications, significant and building. However, more chilling for the Service is the next generation and its comfort, with computers and all things electronic. The Postal Service, just as it lost personal communications to the telephone, could lose business communications to the computer.

Hard copy delivery alternatives, second and third class, continue to grow and grow fast. Alternate Postal Delivery, Inc., has grown nearly 50 percent over the last year; Publishers Express by 1000 percent. Other ventures are attracting substantial volumes of what would otherwise be mailed pieces, and some 55 percent of newspapers with circulations of 75,000 or better are involved with alternative delivery.

Other trends are also not helpful. These include restructuring in the business community as well as the near depression in advertising.

All of this comes against the backdrop of two recent rate increases that have ill-suited the Service's competitive position. This combination of poor results and adverse trends places a real squeeze on the Service, with the result that nothing could be clearer than that it must cut costs, and dramatically.

Now, it has cut some costs, as you well know. The workforce has declined nearly 41,000 since 1989, and the Service this year cut several hundred million dollars from its budget to offset some of its soft results. In this sense, the Service has the right attitude, and we commend it.

The Council would simply ask, however, if the current cost-cutting plans are enough? The Service may have to join a long list of companies that have gone through the rigorous and sometimes

painful process of conforming its size to the demands of its busi

ness.

Now, one area where there has been a commendable effort to help with competitiveness and cutting costs has been the Joint Task Force on Postal Ratemaking. The Council finds it an excellent example of the kind of constructive cooperation that can and should exist between the two postal agencies. But, as Tim noted, it is no panacea for the problems that beset USPS.

The Council believes that the ratesetting process is broke and needs fixing. There is a range of views on this matter among our members, and that plus the relatively small time since release of the report will limit the opinions we can give you on the specifics to some extent.

Nonetheless, to begin, the Council endorses the task force's comprehensive goal framework. The task force has set forth the ideal, in the Council's view, and we support it. We also support the instrumental goals which would help achieve the comprehensive goal framework.

On specifics, the Council would support measuring breakeven over 4 years based on the Service's strategic and financial plans for those years. But again as Tim noted, there may be some difficulty with respect to projections out that far. This would supply something of a missing link between the case projections and what the Service otherwise projects, and certainly in this regard the Council would endorse testimony by senior policymaking executives at the Service.

The specific proposal for a "two by four" rate cycle is one on which we have yet to take a position. Nonetheless, the Council would endorse the effects of reducing the contingency and transaction costs.

The Council also would like to comment on the task force's indexation digression. The Council's interest in indexation derives from its potential use as an additional incentive to the Service to control its costs. The Service's 1990-95 strategic plan calls for rate increases at 2 points less than inflation. Indexation permitted when postal costs increase no more than some point less than a measure of inflation should help achieve that goal.

The breakeven requirement wouldn't stand in the way of indexation, but the cost attribution requirement might be more problematic and might require a legislative change.

The Council endorses more authority for the Postal Service to govern the rates of Express Mail and parcel post in response to competitive pressures. The Council does not support an extension of that flexibility in any other class or subclass at this time.

The Council, however, is concerned about the potential misuse of the postal monopoly and would endorse, if possible, some safeguards even for Express Mail and parcel post, unless the task force's recommendation might accomplish these same goals by the proposed rate band method. However, we would be concerned if the Service were merely exhorted to try to maintain the institutional cost contributions set by the Commission. What impact might there be on users from not achieving that maintenance, either up or down?

The Council does not take a position on declining block rates and large volume discounts. However, they are a most interesting innovation that might warrant further exploration. We just haven't had the time to review them yet.

The Council does support liberalized market testing. In fact, within certain limits we would support unilateral action in this respect by the Postal Service. The task force's recommendation, however, would be a significant step forward. We find encouraging the businesslike approach to start-ups through conceding the possibility of early losses and pursuing multiyear cost coverage as a result.

On service agreements the Council cannot yet take a position. However, increasing net contribution to overhead and extending equivalent terms to all comers similarly situated may be key to obtaining a consensus in the business community.

The Council, of course, supports improved communications between the postal agencies and regrets there is a need for renewed emphasis on this point. Good, open communication should be a constant, not a subject for occasional reminders. Nonetheless, the effort is welcome because the system itself creates conditions for real tension to exist between the Service and the Commission. We would leave the specifics of how they would go about it to the Governors and the Commissioners, of course. With the exception of the ex parte rules, the Council believes comment from interested private sector parties would be helpful to both the Governors and the Commissioners.

Finally, the Council would urge some delay in the proposal to move forward with a rulemaking on the "two by four" rate case recommendation. With release of the report on June 1, 30 days is just not enough to adequately analyze it, prepare comments on it from a diverse range of members, and not only in our organization but in many of the others that are represented before you today. Thank you, Mr. Chairman, and I would be pleased to take any questions you or your colleagues might have.

[The prepared statement of Arthur B. Sackler follows:]

TESTIMONY OF ARTHUR B. SACKLER

ON BEHALF OF THE

NAILERS COUNCIL

Before the

COMMITTEE ON POST OFFICE AND CIVIL SERVICE

U.S. HOUSE OF REPRESENTATIVES

June 9, 1992

Good morning, Mr. Chairman. The Mailers Council appreciates the opportunity to appear before you today and discuss the report by the Joint Postal Service Governors, Postal Rate Commissioners Task Force on Postal Ratemaking. My name is Arthur B. Sackler and I am the Council's managing director.

The Council is a coalition of more than 50 organizations deeply concerned about postal affairs. Its member companies and trade associations, with a range of interests that includes every postal class and subclass, estimate they collectively account for a major portion of the mailstream. The organizations together employ nearly 2 million people and represent more than 21,000 companies. Council members have an enormous stake in the system for delivery of products, publications, business correspondence, payments and receipts, promotions and more. As we have testified before, the Council strongly supports a robust, healthy, and efficient Postal Service.

The Need to Further Constrain Costs.

Before we comment on the Joint Task Force report, we wish to express to you our great concern about the current state of postal finances. The numbers are not encouraging and speak for themselves: some $300 million behind planned net income through Accounting Period 8, with costs up approximately 5%. (And, of course, this is compared to last year's diminished results.) According to a recent memo from the Deputy Postmaster General, with revenues and volumes falling short of plan, the Service may finish with a loss, instead of the original projected surplus of $500-600 million in FY 1992. His projection for FY 1993 is even worse, some $1.8 2 billion in the red essentially a reflection of expenses increasing at 4-5% while volume is flat.

-

Meanwhile productivity, which looked bright a year ago, has turned negative (-2%) despite a massive infusion of automation. Volume is off about 2%, with only the relatively quite small classes of priority mail and parcel post showing any recent, real gains.

These numbers portray a disturbing situation. There is no

crisis

yet; just a slow, damaging erosion in Postal Service finances and market share. However, if a $2 billion deficit or

anything like it is realized and calculated into the 1994 rate increase, the situation could indeed become critical.