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limit. The only thing we will do is pay a lower interest rate on the existing debt. We will not

Chairman CLAY. You will obligate something over there that you are not authorized by law to obligate now. What do you put up for collateral?

Ms. PACE. If we could refinance our debt. If we could take-let's say we have debt of $8 billion or $10 billion to make it easy.

Chairman Clay. You entered into something with an insurance company; is that right?

Ms. Pace. We would go into the private sector and we

Chairman CLAY. It wouldn't be with the Government bonds anymore; is that right?

Ms. Pace. It wouldn't be through the Federal Financing Bank.
Chairman CLAY. Here is your privatization.
Ms. Pace. We go out and borrow directly from investors.

Chairman Clay. Here we go privatizing again, is that what you are saying to us?

Ms. Pace. No. What we are saying is instead of going to the Federal Financing Bank and borrow money and the Federal Financing Bank goes to the investor and borrows money, we will go directly to the investors and we could refinance.

The point is, we can't refinance with the way the arrangement is now, and many agencies have left the Federal Financing Bank and are doing their own financing, and so I am only illustrating that if we could change a procedure, we could pick up some money today because of lower interest rates alone. We wouldn't borrow more.

Chairman CLAY. My interpretation is you are shifting authority from this Congress to you.

Ms. PACE. No. No. The Congress still controls how much we can borrow. We will never change that. We still have a limit on us set by the Congress. What we are saying is, it is the cost of borrowing that is affected by this procedure.

Chairman Clay. Why is Treasury and OMB opposed to what you are proposing?

Mr. GRIESEMER. Congressman, I had considerable discussion with Mr. Coppie, our chief financial officer, and apparently this came about when Mr. Volker was very concerned with the different agencies going in different directions and they pinned the various agencies down in this way, and—the reason I was questioning him was, yes, now in low interest rates it would help the Postal Service, I was trying to get an understanding of what happens when the interest rates go up.

Are we still better off going out and borrowing separately, still within the $15 billion limit but going out and borrowing from someone else instead of through Treasury and explanation is that Treasury in effect marks it up, then locks in at that interest rate, and we don't have the advantage of going outside.

Chairman CLAY. You don't have the advantage.

Mr. GRIESEMER. At this time we do not have and that is what is costing us $175 million a year in this low interest rate environment.

Chairman CLAY. Why is Treasury opposed to you saving $175 million a year?

Ms. Pace. You see, it is like refinancing your mortgage.

Chairman CLAY. Not mine.

Ms. PACE. But if you had a mortgage, if you had a mortgage at 15 percent interest rate and the mortgage rates today are 8.5, you refinance it and your monthly payment is less. This is what we are talking—you haven't changed the debt at all.

Chairman CLAY. Why is Treasury opposed to you saving $175 million a year?

Ms. PACE. Because of the procedures. Now, we are asking them to look into the procedures. We are trying to determine whether we could go out into the market and borrow ourselves. We are just looking into it now.

We have contacted the Treasury and we are working with them, but I just brought that up as an explanation.

Chairman CLAY. You are working with whom on this?
Ms. PACE. Pardon?
Chairman Clay. You are working with whom on this?
Ms. PACE. The specific person in the department?
Chairman CLAY. No, no. You are working with Treasury on this?
Ms. PACE. Yes, with Treasury.

Chairman CLAY. They have turned it over to the Justice Department, haven't they?

Mr. GRIESEMER. That is a separate question, Congressman. That was a leasing question. This is a refinance—this is a different one. I know what you are talking about.

Chairman Clay. Then they have turned the leasing proposal

over.

Mr. GRIESEMER. This is not leasing. This is refinancing the existing bond debt.

Chairman CLAY. And you are saying that even the refinancing proposal, you are still discussing it with Treasury, and it hasn't been turned over to Justice?

Ms. PACE. Yes. We are trying to see if Treasury would give us the option to go out into the open market and borrow in the market.

Chairman Clay. Mr. Myers, do you have some questions you wanted to ask about this? Anybody else?

Mr. MYERS. This particular problem affects other organizations besides the Postal Service. REMC is having the same problem. Any of the agencies who do have the authority to borrow are trying to do what you are doing and I cannot explain why Treasury or OPM is specifically opposed. However, I believe their fear is that it will flood the market and cause interest rates to go up for consumers. That is the only explanation I have ever received.

Chairman CLAY. What does Ralph Nader think about that?

Mr. MYERS. Haven't asked that. I really don't care. He's probably wrong, whatever his view is.

Chairman CLAY. We have a number of questions we would like to submit to you in writing, and if you would be kind enough to answer them. Are there any other questions? If not, we want to thank you and the entire board for coming over.

Thank you.
That concludes the hearing.
[Whereupon, at 2:50 p.m., the committee was adjourned.)
Additional material received for the record follows:

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This letter is in response to a question posed by the Honorable John Myers of
Indiana, at the June 2 postal oversight hearing, to U.S. Postal Service Board of Governors
Chairman Norma Pace as to whether first-class mail rates cover any of the costs associated with
processing third-class mail.

DMA would like to emphasize that without third-class mail, the cost of a first-class stamp would have to be significantly higher. Third-class mail, by law, pays all costs that can be attributed to it, i.e., all costs that can be determined as having been caused by third-class mail. Moreover, third class contributes a very substantial amount to the payment of postal overhead costs. Thirdclass rates are lower than first-class rates in large part because third-class mailers do a significant amount of worksharing, such as presortation and barcoding. According to the March 1992 General Accounting Office report, Pricing Postal Services in a Competitive Environment, "second- and third-class mail help provide the volume necessary to sustain universal first-class mail service and keep the unit cost of delivery down. Any significant loss of volume in these two mail classes, whose combined revenues recover about $3 billion (18 percent) of the Postal Service's $16.5 billion in overhead costs, would affect the cost of postage for first-class mail. For example, if the Postal Service experienced a 50 percent volume loss of (second- and third-class mail), other mail categories – especially first-class mail – would have to absorb an additional $1.5 billion in overhead costs. If this amount were applied solely to firstclass mail, the price of a first-class stamp would have to be raised from 29 to 31 cents for the Postal Service to break even." In addition, according to the GAO, if such a volume loss were to take place, the Postal Service would have to reduce its mail processing workforce by several thousand more than its currently planned reductions. The GAO also warns that if third-class mail volume declines, "Congress may have to consider either using taxpayers' funds to cover revenue shortfalls or cutting back the Postal Service's universal mail service."

Another important point is that, according to a 1990 Postal Rate Commission study, third-class mail has a significant, positive impact on first-class mail volume because it tes inquiries, invoices, and payments. According to the study, "each piece of third-class mail generates about a fifth of a first-class letter."

If you would like further information on this or any other direct-marketing-related topic,
please do not hesitate to call me.
Sincerely,

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OVERSIGHT HEARING ON THE U.S. POSTAL

SERVICE

THURSDAY, JUNE 4, 1992

HOUSE OF REPRESENTATIVES,
COMMITTEE ON Post OFFICE AND CIVIL SERVICE,

Washington, DC. The committee met, pursuant to notice, at 10:13 a.m., in room 311, Cannon House Office Building, Hon. Frank McCloskey, presiding.

Members present: Representatives McCloskey, Hayes, and Gilman.

Mr. McCLOSKEY. Good morning. If we can begin, I would welcome the Postal Rate Commission at this time of transition. We surely look forward to their testimony, their observations, and the question and answer session will follow.

I might say I feel somewhat at a loss because I am missing the balanced budget Democratic caucus this morning. That is important material, but in deference to your schedule and the gravity of these issues, I think it is better that I be here. I would hope that before too long, other colleagues of both persuasions do come to benefit from your testimony. I expect others to be in attendance shortly.

The Postal Service is at a crossroads as it attempts to continue to provide efficient, economical service to every household and business in the country and compete with technology and other businesses for certain types of mail service.

The Postal Service, as we all know, and we look forward later today to hearing from Mike Coughlin, is currently experiencing many problems. They relate to the economy, automation, rising costs, and low employee morale.

Its financial situation, unfortunately, is increasingly precarious. At the end of April, the Postal Service advised the committee that instead of a planned $600 million surplus, the Postal Service will probably break even at the end of this fiscal year. Nineteen-ninetythree looks even bleaker, with a projected deficit of $2 billion instead of $1 billion. However, the committee has been assured that the Service is doing everything it can to reduce these projected figUres.

Everyone knows changes are imminent at the Postal Service with Marvin Runyon becoming the new Postmaster General. Mr. Runyon visited me within a day or two of his announcement. One of the first things that I did suggest to him was that he follow up with a courtesy call on Mr. Haley and other members of your Commission.

In addition to Mr. Runyon's arrival, change can come about by giving the Postal Service new ratemaking criteria. Unlike in the past, postal pricing has now become a significant factor in the Postal Service's attempt to remain a Government corporation envisioned by the Postal Reorganization Act. As I have said before, the declining mail stream, increasing competition of the Postal Service, alternative forms of delivery and the recession have proven to make life difficult at the Postal Service.

The GAO recently issued an insightful report on pricing postal services in a competitive environment. The GAO urges Congress to change the ratemaking criteria so it shall be based more on value of service or demand pricing, something which I would like to hear your ideas today, Mr. Haley and others, in some detail.

The current ratemaking criteria seems obsolete for the new challenges faced by the Postal Service. Twenty years ago when the Postal Service Reorganization Act became law, the Postal Service did not face the direct and indirect competition that exists today. Now, as GAO says, the time has come to bring the ratesetting process up to date.

Different classes of mail face different demands. The GAO believes the demand for first-class mail is inelastic, that is, not strongly based on rates as is third-class mail. First-class mail does face some forms of competition, particularly from electronic mail and fax machines, but this competition is not as strong as what exists for third-class mail. Third-class mail faces competition with telemarketing, newspapers, alternative delivery, and other forms of electronic media.

The PRC is said to oppose, and I don't quite know if that's true or not, having read some of your statements in the GAO appendix on ratemaking, demand pricing, and raises some valid concerns about some of the statements in the GAO report.

Regardless, the GAO report cannot be ignored, and it will not be ignored since I feel it is a very valuable document. Whether through the legislative process or administrative rule changes, the issue of competition to the Postal Service needs to be addressed.

As we discuss pricing restraints and ratemaking, the Postal Service must not lose sight of its mission, to provide reliable service. It appears that it is starting to decline again throughout the nation. In Indiana, I have received numerous complaints from constituents that it has taken 6-10 days for some first-class mail to be delivered, and my staff has stated 10 miles, but really, we are talking about about 1 mile here-6 days to go 1 mile. Of course, it goes through several communities in the interim.

The full committee has also received an increased amount of complaints. No matter how much ratesetting flexibility is provided to the Postal Service, it will continue to lose out to competitors unless it can provide fast, dependable service.

I know from Mr. Coughlin's statement-he will be testifying later this morning—and he says the Postal Service is improving. Mike, I just don't think it is. It is fairly bad out there now. We are getting very grave reports.

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