be charged 15 cents at the 5-cent-per-ounce rate now proposed by the Department.

Mr. LESINSKI. The point I was driving at is the fact that the intent of Congress, when it originally passed the Third-Class Mail Act, was for it to be a fill-in mail.

Mr. GILLETTE. I might add on that point, Mr. Congressman, even if it were to be called a filler, whatever costs are incurred are allocated as fairly as we can allocate them. So they are reflected to the extent of covering costs, whether it is a filler or not.

Mr. LESINSKI. Thank you.

Mr. GILLETTE. Mr. Chairman, there is one other assertion which frequently comes up-that nonprofit rates pull down the revenue in third class and I felt it would be of convenience to the committee to have the Post Office reply on this subject. I will read it briefly, and then ask your permission to put it in the record.

The CHAIRMAN. Very well.

Mr. GILLETTE. Commercial users do not pay any of the nonprofit subsidy in third class. The difference between the nonprofit rate and the commercial rate is fully reimbursed from Treasury funds under the public services reimbursement. The $189 million adjusted 1959 deficit in third class gives full effect to public service reimbursements. So no part of that amount is due to rate concessions on nonprofit mailings. When the rates on commercial mailings are increased, no part of the new revenues will be used to offset revenue deficiencies on nonprofit mailings. Revenues from the latter would automatically be increased when the rate differential between the two types widens. This increase would reflect the policy on public services adopted by the Congress for fiscal 1960.

Mr. LESINSKI. At that point, Mr. Gillette, how does the Post Office Department compute its loss on your nonprofit mail?

Mr. GILLETTE. Do you mean, sir, for purposes of public service reimbursement?

Mr. LESINSKI. Yes, sir.

Mr. GILLETTE. The Department does not actually determine it; the Congress does. Last year the Congress decided that it should be the extent of revenues foregone, or stated another way, the revenue concession or the difference in revenue between the regular rate and the lower nonprofit rate. Again the Congress reaffirmed this method of calculation in fiscal 1961.

Mr. LESINSKI. How much was paid to the Department for that purpose?

Mr. GILLETTE. In 1960, out of a total of $37.4 million, $13,262,000 was the calculated rate concession to third-class exempt mailings of nonprofit organizations.

Mr. LESINSKI. What percentage is that of the mailing?

Mr. EDEN. Of the 17 billion pieces of third class mailed in 1959, about 1.7 billion were the mailings of nonprofit organizations at thirdclass bulk rates.

The CHAIRMAN. About 10 percent.

Mr. EDEN. That is correct.

Mr. LESINSKI. What is the income for third class?

Mr. GILLETTE. Total income for third class giving effect to the 1958 rate increases will be about $500 million.

Mr. LESINSKI. Present income.

Mr. GILLETTE. Present income, not giving effect to the rate increases, is about $400 million.

Mr. LESINSKI. Ten percent of it would be $40 million. They pay about half of their way.

Mr. EDEN. Including the public service reimbursement the return from nonprofit mailings is 73 percent for circular type mail, and about 51 percent for the preferred bulk mail, books and catalogs.

Mr. LESINSKI. That would be roughly about 62 percent that they are paying.

Mr. EDEN. It is closer to the 73 percent, because the larger volume is in the circular-type mail rather than in the other type. That includes the public service reimbursement.

The CHAIRMAN. How much is that, the public service reimbursement? What would it be without the public service reimbursement? Mr. EDEN. Roughly half of the revenue on the minimum per piece mailings of nonprofit organizations is public service reimbursement. In other words, they pay a penny and a quarter and we get a penny and a quarter reimbursement through public services.

Mr. LESINSKI. In other words, the Government is paying out-ofpocket half of the cost of that mail?

Mr. EDEN. On the mailings at the minimum per piece rate.

Mr. LESINSKI. Then there should be $20 million and not $13.2 million. That is the figure I am trying to understand.

Mr. EDEN. We can check that. I think the difference results from using statistics from different years. The cost I just cited is the 1959 adjusted figure, whereas the total we mentioned a moment ago was actual for 1959.

Mr. LESINSKI. $13 million.

Mr. EDEN. The $13 million was the amount approved for fiscal 1960.

Mr. LESINSKI. According to the figures I get it should have been closer to $20 million.

Mr. EDEN. I believe you got that by taking the total revenues for 1959 and assuming that a proportionate part of that revenue would come from the nonprofit mailing, because they represented 10 percent of the total volume.

Mr. LESINSKI. That is right.

Mr. EDEN. I am not sure that assumption is entirely correct. Mr. LESINSKI. The $40 million is what I am driving at.

Mr. GILLETTE. The $13 million figure is based upon the actual cost ascertainment values in this area, and was set forth in the Appropriations Committee hearings. It was on the basis of these estimates that the decision was made. These are figures, I can assure you, Mr. Congressman, that we make up every year. They are consistent with the prior year. They simply represent a segregation of the various categories for the purpose of ascertaining these public service reimbursements.

Mr. LESINSKI. I was just checking your figures.

Mr. GILLETTE. I am very happy to have you do that, sir.

In closing, Mr. Chairman, I would like to request permission to incorporate in this testimony for reference the committee print of the survey of postal rates.

The CHAIRMAN. The request will be granted.

Mr. GILLETTE. That report was produced by the Department pursuant to section 105 of the Postal Policy Act of 1958, Public Law 85-426.

The CHAIRMAN. What is the date of the survey?

Mr. GILLETTE. It is dated April 15, 1960.

Similarly, I should like to ask permission to incorporate by reference the committee print entitled "The Impact of Postal Rate Increases." The committee print is dated May 11, 1960, which is the McKinsey & Co. study.

The CHAIRMAN. Very well, sir.

What does the McKinsey report say about the impact?

Mr. GILLETTE. The McKinsey & Co. report is the one that we have quoted at some length in my statement. I will be happy to read the letter of transmittal which will give you a summary at this time. The CHAIRMAN. Very well.

Mr. GILLETTE. This letter of transmittal from McKinsey & Co. to the Postmaster General dated March 10, reads as follows:

This is a report on our study of the probable impact-on mail patrons and on the Department of the increased rates for first-, second-, and third-class services that the Department plans to propose to the current session of Congress.

Nature of our assignment and approach employed

The major part of this study was aimed at identifying the effect that the proposed postal rates would have on patrons of the mails. In approaching this question we (1) made extensive statistical analyses of relevant published data, and (2) examined the operations of a number of mail patrons of every size and description. The latter examination included interviews with mail patrons as well as reviews of confidential financial data.

The facts derived from these investigations provide, in our opinion, a new perspective in which rate problems may be considered. That is, they make possible an evaluation of the whole question of postal rates and their significance in the light of the economics of a large number of enterprises that depend for their existence on postal services. We believe that this illumination of the problem gives an insight that previous studies and investigations have not provided.

In addition to assessing the impact of postal-rate increases on mail patrons, we also examined one major aspect of the effect that rate increases would have on the operations of the Department-namely, the impact on mail volume. Our conclusions here are based both on statistical analysis and on a knowledge of the reaction of patrons to rate increases gathered from our work with them. Conclusions

Our examinations lead us to conclude that the proposed increases will have no substantial adverse effect on either mail patrons or the Department. We find that mail patrons can adjust to the new level of rates with little difficulty, and that the new rates will not significantly depress the volume of mail.

These conslusions and the data on which they are based are stated in the body of the report that follows this letter.

Organization of this report

Our report consists of three chapters, which cover the subject in the following manner. Chapter 1 defines the objectives of the inquiry in terms of the key issues that were considered.

Chapter 2 presents our conclusions and supporting data on the ability of mail patrons to adapt to the proposed rate changes.

Chapter 3 presents our conclusions and supporting data on the effect of proposed increases on mail volume. Conclusions presented in this report and the types of data from which they are drawn have been discussed with key members of the Department so they are fully familiar with the methods we employed in making the study.

In addition-within the limits of our agreement with mail patrons to keep confidential information that they gave us we have discussed with the Department's staff members all of the specific facts with which we worked. It should be noted that the success of this study and much of its value grows out of the co

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operative assistance given us by the business firms, publishers, and governmental agencies which we interviewed in our field work. With the agreement of the Department, we were able to assure these mail patrons that their confidence would be respected and that their willingness to make available fundamental financial information on their operations would be matched by our confidential treatment of it.

We have greatly appreciated the opportunity of serving the Department on a matter of such significance.

Respectfully submitted.

(Signed) MCKINSEY & Co., INC.

The CHAIRMAN. Are there any further questions now?

Mr. GROSS. Mr. Chairman.

The CHAIRMAN. Mr. Gross.

Mr. GROSS. Mr. Gillette, does that conclude your testimony? Mr. GILLETTE. That is right, Mr. Gross. I would just like to ask the chairman's permission to incorporate in the record by reference also the committee print of the Survey of Economic Effects of ThirdClass Bulk Mail Rate Increases, by the Department of Commerce. The CHAIRMAN. That will be granted.

Mr. GILLETTE. And also the survey by the Small Business Administration.

The CHAIRMAN. Very well. That will also be approved.

Mr. GILLETTE. In view of the questions that Congressman Corbett raised yesterday about the method of calculating public service reimbursements, I request permission to put into the record a letter addressed to Mr. Charles O. Porter of this committee, dated February 26, 1960, giving a comprehensive answer to similar questions which he raised in a letter to the Postmaster General dated February 7.

The CHAIRMAN. The letter is from the Postmaster General?

Mr. GILLETTE. The letter is from me to Congressman Porter, and I think clarifies a number of points which constantly come up, and refers to some of the previous committee reports by this committee on the subject.

The CHAIRMAN. That permission will be granted.

Mr. GILLETTE. Thank you very much.

(The letter referred to follows:)

Hon. CHARLES O. PORTER

House of Representatives,
Washington, D.C.

DEAR CONGRESSMAN PORTER: The Postmaster General has requested me to answer your letter of February 17, 1960. This letter raises questions in connection with the public services provisions in the 1961 budget document, with the inference that the Department is seeking to evade the intent of Congress in this matter. I can assure you that the contrary is the case.

The Postal Policy Act of 1958 requiring the annual appropriation by the Congress of sums to cover the loss on public services was approved May 27, 1958, after the Department's appropriation for fiscal year 1959 had been passed. Nevertheless, the Department prepared estimates of these losses for 1959, interpreting the requirements of the Postal Policy Act as best it could, and submitted a request for a supplemental appropriation of $171,259,000 to the Congress in the second supplemental appropriation bill for 1959. The House Appropriations Committee denied the request since it could see no urgency which would require that an appropriation be made in a supplemental bill (H. R. 238, Mar. 20, 1959).

In the meantime, the Department had incorporated a similar request in the President's budget for 1960. This request, amounting to $172 million, was initially denied in full by the House in acting on the appropriation bill, A part of my testimony on this subject before the House Appropriations subcommittee follows (1960 hearings, p. 53 ff.):

"The following statement is designed simply to give the committee some background on this rather complicated matter, and I hope it will be helpful.

"Historically, whenever postal rate increases were considered by the Congress, opponents of such increases came before the committees of both Houses with the claim that rate increases would not be necessary if the Government would meet the cost of those postal-rate subsidies granted by the Congress in the public interest and not burden the mail patron with the cost of such subsidies. Recognizing the need to separate the cost of services performed for the public welfare from that incurred in providing mail service for individuals and business enterprises, the President, in a special message to the Congress on January 11, 1955, stated 'Certain services which are performed by the Post Office, such as those for the blind, are a part of general welfare services. The cost of such services should not be borne by users of the mails. Expenditures for them, and for services performed for the Government, should be identified and met by direct appropriation.'

"Identical bills (H.R. 5206 and S. 1033) were introduced during the 1st session of the 85th Congress by the chairmen of the House and Senate Post Office and Civil Service Committees to provide reimbursement to the Post Office Department from the general funds of the Treasury for the postal-rate subsidies extended to certain subclasses of mail carried either free of charge or at reduced rates of postage and the excess cost of transporting international mail by foreign-flag air carriers.

"Testifying before the House Post Office Committee on March 7, 1957, in support of H.R. 5206, Mr. Maurice H. Stans, who was then serving as Deputy Postmaster General, advised the committee that enactment of legislation to provide reimbursement to the Department from the Treasury of revenues forgone through rate concessions deemed by the Congress to be beneficial to the American public generally was '*** one of the few remaining actions needed to place the Department on a sound basis of accounting for the aggregate revenues and expenses of the postal service.' Mr. Stans indicated that the rate subsidies for which the Department would seek reimbursement under the act amounted to about $26.4 million based on fiscal 1956 experience, the latest figures available at that time.

"The House bill was reported on March 20, 1957. The report of the House Post Office and Civil Service Committee stated: "Through the years various laws which provided either free or reduced rates of postage to certain categories of mail users were enacted by the Congress. The loss of revenue or price concessions resulting from these services increase the postal deficit. Because the services performed under these laws are for the general welfare, and advance the programs of the Government generally, it is not believed practicable to charge any particular Government agency for them. But neither should such services or subsidies be left in postal operations and thus increase the Department's deficit ***.'

"The report of the House committee traced the development of the principle of not requiring postal patrons to pay the cost of rate concessions granted in the interest of the Nation at large by citing the so-called Kelly law of 1930 which required the Postmaster General to report, but only to report, to the Congress annually the revenues forgone owing to services performed free or at reduced rates of postage. The House committee also indicated that the Kelly Act was inadequate and obsolete in its coverage and that new legislation had become necessary. "On March 21, 1957, the Postmaster General appeared before the Senate Committee on Post Office and Civil Service to reiterate the position of the Department in regard to public service costs and to refute the allegation of the Senate committee's Citizens Advisory Council that no true deficit existed (in fiscal 1955) if all of the public service costs of the Post Office-estimated by the Advisory Council to amount to more than $392 million in fiscal 1955-were considered.

"Referring to the Citizens Advisory Council's report as inaccurate, the Postmaster General estimated that the combined costs of postal rate subsides and services performed for other Government agencies amounted to about $29 million in fiscal 1956. That figure is comparable to the earlier figure.

"On February 24, 1958, the Senate committee reported a combined postal rate increase and postal policy bill. The bill reported by the Senate Post Office and Civil Service Committee, like that of the House committee, contained a list of public services for which reimbursement was authorized but it differed from the House version in two important respects. To the list of rate concessions contained in the House bill, the Senate committee added other items of public service and a different concept of the measure of the amount of subsidy. Moreover, the bill reported by the Senate committee authorized reimbursement to the revenues of the Post Office Department for each fiscal year of an amount deemed to be attributable to public services equal to 15 percent of the total estimated expenditures of the Post Office Department thereby arbitrarily fixing a predetermined amount each year. Had this provision been enacted, the amount