ers. Other Governors will add their own dimensions to this relationship.

We, as Governors, have identified a group of six concerns for special attention this year. These include, first, the continuing implementation of the quality process, which is designed to infuse an awareness of quality into all areas of postal operations and services. We have requested frequent reports on this continuing activity.

Second, we will continue to focus our attention on cost containment. Original plans were for a reduction of $4.5 billion in costs by 1995, with the objective of preventing a significant rate increase. Even greater cost savings and productivity enhancements will be required to achieve that goal.

Third, we will continue to search for ways to reduce capital outlays without compromising service or crippling essential projects. Fourth, we continue to be concerned that the current ratemaking process simply does not allow the Postal Service to respond to competition, both direct and indirect. The ratemaking process hampers our ability to foster the growth of our basic business with customers who use the mail for billing, remittances, advertising, magazines, newspapers, merchandise, and the like.

It also limits our efforts to compete successfully in markets such as overnight letters and parcels, where we face direct competition. Business and volumes need to grow in basic services and competitive areas alike, if we are to achieve the economies necessary to preserve rate stability.

We have just received the final report of the joint task force we set up with the Postal Rate Commission to review the issues involved in ratemaking. In its report, the task force has recommended the adoption of a 4-year rate cycle, the establishment of flexible rate "bands" for Express Mail, and other competitive classes of service, a mechanism for conducting market tests of innovative services, expedited classification proceedings for new service categories, and a procedure for entering into specialized service agree

ments.

We were pleased to see that the members of the task force shared a preview of their conclusions with this committee on May 12 of this year. We look forward to considering, and acting upon, these and other innovative suggestions.

A fifth essential project will be a careful and thorough review of our projected revenue and cost position over the next 2 years to determine the need for future rate changes. We are aware that the recession has adversely affected our volumes, revenues, and productivity, but we need to investigate the concern that fundamental structural changes are altering our long-term growth rate.

Finally, and most importantly, all of us desire to improve our level of communication with Congress and the administration. We believe that sharing our knowledge and concerns with all of you will enhance our mutual understanding of postal problems and activities, and enable all of us to do a better job.

An example will help to illustrate our concern regarding this last point. As you are aware, the Postal Service is being forced to absorb $9.1 billion in budget hits under successive Omnibus Budget Reconciliation Acts, or OBRA's. These OBRA's effectively scrapped

the original intent that retirement benefits for employees of the former Post Office Department should be the responsibility of the U.S. Government, and sent the Postal Service, and postal ratepayers, the bill for that change in policy.

The financial impact of this liability is sufficient, through fiscal year 1995, to raise the first-class rate by 1 cent, with proportional increases for other classes of mail. Measured another way, the $2.14 billion hit contained in OBRA 1990 alone is almost twice the annual savings we are currently obtaining from our automation programs.

Apparently not content with this continuing drain on postal finances, OMB revived in the 1993 budget a proposal to charge the Postal Service an additional $945 million in "residual amounts" on these liabilities through fiscal year 1995. We believe-and I am glad to say that this committee has agreed-that this proposal cannot be justified within the letter or intent of OBRA 1990, which was intended to close the book on this matter.

We thank you for joining us in the opposition to this proposal, and we ask your assistance in defeating further unjustified financial demands of this type.

Mr. Chairman, this concludes my prepared statement. At this time, we would be glad to respond to your questions, myself, and of course my fellow Governors.

[The prepared statement of Norma Pace follows:]

PREPARED Statement of NoRMA PACE, CHAIRMAN, Board of Governors, U.S.

POSTAL SERVICE

Mr. Chairman, I am Norma Pace, Chairman of the Board of Governors of the U.S. Postal Service. My fellow Governors and I appreciate this opportunity to discuss the problems and opportunities-which confront the Postal Service, and how we as Governors plan to assist postal management at this important time.

We have recently completed what is our most important task as Governors—the selection of a new Postmaster General. As we expected, this task was not a quick or easy process, but we believe that we have succeeded in obtaining the right person for the job.

Marvin Runyon, who in 1 month will officially join us as Postmaster General, is an executive who has already proved his mettle in the automobile and utility industries. His record indicates that even the most serious problems which may face an organization bring with them the opportunity for success. His four-part prescription for that success, as he explained 2 weeks ago at the National Postal Forum, includes

Customer focus,

• Quality,

• Setting priorities, and

• Employee participation and empowerment.

We look forward to assisting him to apply that prescription to the problems facing the Postal Service.

In providing that assistance, our role as Governors will be to focus those significant issues which affect the status of the Postal Service as a first-class world organization. These include the quality and cost of postal services, the challenge presented by growing competition from the private sector, human resource management objectives, and of course the goals enunciate' in the Postal Reorganization Act. In setting the policies which guide management, the public interest must always be our primary consideration.

To this task, each of us will bring a unique perspective, based upon our varied experience and skills. Collectively, we provide an invaluable "outside" view for postal management. I myself, as an example, have been an economic forecaster and strategic planner for many years. Consequently, these areas will be of special interest to me in our dealings with postal managers, employees, and customers. Other Governors will add their own dimensions to this relationship.

We, as Governors, have identified a group of six concerns for special attention this year. These include, first, the continuing implementation of the Quality Process, which is designed to infuse an awareness of quality into all areas of postal operations and service. We have requested frequent reports on this continuing activity. Second, we will continue to focus our attention on cost containment. Original plans were for a reduction of $4.5 billion in costs by 1995, with the objective of preventing a significant rate increase. Even greater cost savings and productivity enhancements will be required to achieve that goal.

Third, we will continue to search for ways to reduce capital outlays without compromising service or crippling essential projects.

Fourth, we will continue to be concerned that the current ratemaking process simply does not allow the Postal Service to respond to competition, both direct and indirect. The ratemaking process hampers our ability to foster the growth of our basic business with customers who use the mail for billing, remittances, advertising, magazines, newspapers, merchandise, and the like. It also limits our efforts to compete successfully in markets such as overnight letters and parcels, where we face direct competition. Business and volumes need to grow in basic services and competitive areas alike, if we are to achieve the economies necessary to preserve rate stability.

We have just received the final report of the joint task force we set up with the Postal Rate Commission to review the issues involved in ratemaking. In its report, the task force has recommended the adoption of a 4-year rate cycle, the establishment of a flexible rate "bands" for Express Mail and other competitive classes of service, a mechanism for conducting market tests of innovative services, expedited classification proceedings for new service categories, and a procedure for entering into specialized service agreements. We were pleased to see that the members of the task force shared a preview of their conclusions with this committee on May 12 of this year. We look forward to considering, and acting upon, these and other innovative suggestions.

A fifth essential project will be a careful and thorough review of our projected revenue and cost position over the next 2 years to determine the need for future rate changes. We are aware that the recession has adversely affected our volumes, revenues, and productivity, but we need to investigate the concern that fundamental structural changes are altering our growth rate.

Finally, and most importantly, all of us desire to improve our level of communication with Congress and the administration. We believe that sharing our knowledge and concerns with all of you will enhance our mutual understanding of postal problems and activities, and enable all of us to do a better job.

An example will help to illustrate our concern regarding this last point. As you are aware, the Postal Service is being forced to absorb $9.1 billion in budget "hits" under successive Omnibus Budget Reconciliation Acts, or OBRA's. These OBRA's effectively scrapped the original intent that retirement benefits for employees of the former Post Office Department should be the responsibility of the U.S. Government, and sent the Postal Service (and postal ratepayers) the bill for that change in policy. The financial impact of this liability is sufficient, through fiscal year 1995, to raise the first-class rate by 1 cent, with proportional increases for the other classes of mail. Measured another way, the $2.14 billion "hit" contained in OBRA 1990 alone is almost twice the annual savings we are currently obtaining from our automation programs.

Apparently not content with this continuing drain on postal finances, OMB revived in the 1993 Budget a proposal to charge the Postal Service an additional $945 million in "residual amounts" on these liabilities through fiscal year 1995. We believe and I am glad to say that this committee has agreed-that this proposal cannot be justified within the letter or the intent of OBRA 1990, which was intended to close the book on this matter. We thank you for joining us in the opposition to this proposal, and we ask your assistance in defeating further unjustified financial demands of this type.

That concludes my prepared statement, Mr. Chairman. At this time we would be glad to respond to your questions.

Chairman CLAY. Thank you. A GAO report found that automation has not produced the anticipated savings. Do you have any specific plans?

MS. PACE. We have a few responses to that, Chairman Clay. The first is that our automation program is still not a completed fact. We are still installing machinery, and of course you can get an

uneven impact while you are in the process. Also, getting the full benefits of automation at the early stages of installation of automation is not always possible. As a matter of fact, frequently you don't achieve those benefits right away.

But we do have these objectives and these goals. We have achieved significant savings. We have this year to date, automation helped reduce our work hours about 12.2 million, but the net reduction only comes out to 10 million, because we have had other increases which have absorbed some of the gain.

So we believe that we are on track. We are monitoring it, and when the full program is in place, I fully anticipate that we will be achieving our objectives.

Chairman CLAY. When productivity declined last year, and apparently it is still declining

Ms. PACE. Yes.

Chairman CLAY [continuing]. Have you taken any action to end this skid?

Ms. PACE. Yes, we are taking action. But let me explain that our productivity is calculated by putting volume in the numerator on top and dividing by the factors such as man-hours and capital that contribute to that productivity. When volume goes down, you can't get the factors of man-hours and capital to go down as fast as your volume. So it is a very natural that, in the period of reduced volume, you would see productivity go down.

But that doesn't excuse the negative performance. What has to be done then is, action must be taken to get your work hours down to where they justify the current volumes. And in order to do that, without risking service, we simply have to do that very, very carefully and very, very thoughtfully. So it takes time to effect these changes.

Now, when the cycle reverses, if this recovery begins to accelerate, we will see our volumes pick up and we should see a corresponding improvement in our productivity, particularly if we have taken the proper actions in adjusting our work hours for the appropriate volumes. So we fully anticipate that improved volumes should improve the productivity.

Chairman CLAY. Assuming the volume doesn't pick up, and assuming that you are going to have fewer employees in the next coming months, are you saying that this would increase your productivity with fewer employees being divided into

Ms. PACE. Well, if the volume doesn't pick up, Chairman Clay, then we simply do not need all those employees. If we were to make the judgment

Chairman ČLAY. That is the question I am getting to.

Ms. PACE. That the volume is not going to grow, we would simply have to shrink back the labor force to the size that would support the volume. So when you are in the middle of what we call a cycle, which means a down and an up, you fully anticipate that the upturn will take care of what you have lost in the downturn.

But as I explained in my statement, we are not quite sure as we look at our volumes whether we simply have what we call a cycle, down and up, or whether some of the recovery is also being affected by the fact that advertisers are now taking a hard look at how they spend their money, and may not be advertising as much as

they did in the past; that we do have competition in terms of alternative delivery, and we have to factor that in, and that may be affecting our long-term growth rate. So we must constantly keep that under study.

But the answer if the volumes don't go up, is simply to bring the organization back to the size that justifies the expected volume. Chairman CLAY. But a successful automation program would mean that you would need fewer employees anyhow; is that correct?

Ms. PACE. Yes. The purpose of automation is to permit you to handle an increased volume of activity without necessarily adding more people. That is basically what you do it for to begin with. You don't start out by saying, you know, I am going to automate and lose all these people. In the process, that happens, because you do have attrition, you have people leaving, and so it isn't necessary then to replace those people.

But even as you begin to study the effects of your automation, you may find that you don't need people here and you may need people there. It is a very, very involved process. I don't think there is a simple answer. And in almost every case, I have seen in the private sector where the promise was made that, if we make this investment in automation, we are going to reduce, our workforce complement by a certain amount, that there has been disappointment because it simply doesn't happen that rapidly.

So it does take time to adjust the processes to the new procedures. And I think we just need to have time to work that out.

Chairman CLAY. When the Postal Service presented its plan for automation to this committee, they assured us that attrition would take care of the employees that would no longer be needed. Is that still the case?

Ms. PACE. Well, we would like to think that if the volume supports that kind of conclusion, it would be a correct one. But I am not sure that we can say that now. If our volumes don't come back aggressively, I think we would have to say that layoffs will be an option that we must have. And we are at that point where we are considering that matter very carefully.

Chairman CLAY. So you have done some study in this area?

Ms. PACE. We are doing that now. We are looking at various ways to meet what we think would be the labor force complement that we will need in the future. This would include not simply layoffs, but we might have early retirement programs that we would offer. And so this is this combination might be some way to get our labor force complement to where we want it for the volumes that we project.

Chairman CLAY. Do you have any projected figures as to how many people might be affected?

MS. PACE. Well, there are only about 150,000 people in the labor force, in our labor force that would lend themselves to layoffs. So it isn't the layoffs would affect everybody in the organization, but only about 150,000, and I couldn't tell you at this point how many would be affected.

Chairman CLAY. Well, have you made any plans for the employees during a transitional period, the ones who are affected by automation?