third-class would presumably bear less of the overhead burden than would be normally associated with it because of its volume. Mr. GILMAN. How would you bring about demand pricing?

Mr. STEVENS. Well, the Postal Rate Commission would have to carry it out, but right now they feel that the nine criteria that are listed in the Postal Reorganization Act do not permit demand pricing. So it would have to be a change in the criteria or some congressional endorsement of the concept that that is indeed something legitimate for the Rate Commission to take into account as they make their adjudicatory decisions.

Mr. GILMAN. If it came within the Commission, what is the average amount of time now, 17 months or 2 years? Demand gets a little bit behind schedule, doesn't it?

Mr. STEVENS. One of the reasons it takes a long time is that there are fundamental differences between the Rate Commission and the Postal Service over the principles that should be applied. Mr. GILMAN. So you are saying under demand pricing we circumvent the Commission and the Postal Service would set the rate?

Mr. STEVENS. I think a clearer and more contemporary statement of congressional policy in that and other matters would probably serve to reduce the conflict between the Commission and the Postal Service; yes, sir.

Mr. GILMAN. Well, again I'm asking you, are you suggesting that the Postal Service set the rate in demand pricing?

Mr. STEVENS. I suggest that they suggest it, yes. That they have the final authority on it, no, we have not advocated that. In other words, there should be a rate commission.

Mr. GILMAN. Let me understand this. Demand pricing would still be set by the Postal Rate Commission?

Mr. STEVENS. Yes, the rates would still be set by the Rate Commission. What we are suggesting is that demand pricing ought to be one of the criteria, a permissible criterion for the Rate Commission to use, in setting those rates.

Mr. GILMAN. Well, again, I express concern because you still have that lengthy delay from the time that demand is made, or application is made, until the price is set.

Mr. STEVENS. Yes, but that is not a process recommendation, Mr. Gilman. That won't change the time perceptively.

Mr. GILMAN. So the demand could be changed materially by the time the Postal Rate Commission gets to making a final decision. What may be a necessity at the time of the application may no longer be a necessity by the time it is made.

I want to thank the panelists. I know I have exceeded my time. Thank you, Mr. Chairman.

Chairman CLAY. Thank you.

Mr. Hayes.

Mr. HAYES. Mr. Stevens, you say that automation will reduce the size of the workforce by some 50,000 work years by 1996. Did you break that down by year and by function?

Mr. STEVENS. I believe Mr. Elmore can do that, Mr. Chairman. Mr. HAYES. For example, if you could indicate how many supervisors or letter carriers will lose their jobs in 1992 and 1993, that would be helpful.

Mr. STEVENS. Not by function-well, function within clerks and so forth.

Mr. ELMORE. Mr. Hayes, the 50,000 is actually 48,000.

Mr. HAYES. Two thousand less?

Mr. ELMORE. Yes, to round it up a little bit.

Mr. HAYES. Big deal.

Mr. ELMORE. Essentially, that extends out through 1995. The number is made up by reductions of 62,000 over that 4-year period and by additions of 14,000, leaving you a net of 48,000. A breakdown of that 62,000 shows the clerk craft is going to be hit by 44,000, the city carrier craft by 14,000, the mail handlers by 4,000. So the largest hit is going to be taken by the clerks.

Mr. HAYES. By the clerks?

Mr. ELMORE. Yes.

Mr. HAYES. You don't have any figures, though, on the supervisors or letter carriers?

Mr. ELMORE. I had letter carriers-14,000 by city carriers. Supervisors are not in that number. I'm not aware that they are planning to replace any supervisors by automation. So the supervisors are not in that number at all.

Mr. HAYES. The report also mentions more than $187 million in potential savings that were lost due to inefficient handling of automation. Can you expand upon that?

Mr. STEVENS. We drew that number from the Postal Inspection Service. It is built on a number of specific observations of theirs, but it is not one that we devised ourselves. Mr. Elmore has some of the details on that.

Mr. ELMORE. Yes, I have a breakdown of that, Mr. Hayes.

The number comes from actually 2 years' worth of Inspection Service work, where they have been doing comprehensive operational audits throughout the country of large post offices. About 44 percent of the $187 million comes from carrier office time. In other words, the inspectors took a look at how carriers are spending their time in office, and they didn't find them very productive, and they estimate if they would be more productive they could save $82 million.

The other largest number was the inefficient use of automated equipment, and that was about $36 million or 19 percent of the total. That involves not running the right mail on equipment, not clearing the jams fast enough, not having mail there when you need it those types of things. So it is a combination of management deficiencies and a need for efficiencies.

Mr. STEVENS. Some of this is because it is new, Mr. Hayes. There are shakedown periods for this new equipment, so we would expect some of that stuff to be solved as they get more used to it.

Mr. HAYES. You note that the Postal Service in fiscal year 1991 operating expenses grew by 6.9 percent primarily because of labor costs. You attributed 5.4 percent of the increase to more wages and benefits. I think this number is misleading. At the last Board of Governors meeting, the Postal Service said that 1.3 percent of that increase was due to recent White House and congressional budget cuts which required more payments for retiree COLA's and health insurance. Would it be accurate to say that labor costs actually

grew a little more than 4 percent, which was roughly equivalent to inflation?

Mr. STEVENS. You could say something like that, Mr. Hayes, but the benefits that Congress has decided the Postal Service owes to retired employees are certainly part of the compensation package, and we use that number only to show that whatever we are talking about in terms of savings from automation is not going to solve the Postal Service's financial problems, because what they are obligated to pay either from the labor contracts, from the general inflation rate, or from actions of Congress is rising at a much faster rate than whatever savings from automation are.

Mr. HAYES. But you could use that figure, you said?

Mr. STEVENS. If you didn't include what Congress has asked them to pay for pay and benefits, yes.

Mr. HAYES. In your report on route adjustments, you stated that the Postal Service did not expect to reduce delivery hours in 1991. Yet you point out that managers in the field were expected to reduce carrier hours. I would like to know if you think it worthwhile for the Postal Service to continue adjusting routes, when most of the automation is not in the field. I ask that question because many of the adjustments to routes which were made last year have been readjusted because last year's predictions were not accurate. If automation won't be fully functional until 1995, wouldn't it make more sense to slow down on route adjustments at the present time?

Mr. ELMORE. Mr. Hayes, I suppose you could debate as to how soon you should start making route adjustments to prepare for automation, but a couple of things first: First, you have got to get ready to do it; that is a given; second, you have got the delivery bar code sorters coming on line this year; there will be some 7,000 of them.

So essentially I have no problems with the Postal Service getting prepared for automation by currently adjusting the carrier routes. Of course, you know the letter carriers have some problems with that. They have an arbitration case on it. They have a problem with how the Postal Service is going about doing it.

As you know, the Postal Service is back-filling time with the use of a router. So essentially the time currently on a carrier route is more than 8 hours; it may be closer to 10 hours. But I have essentially no problem with the Postal Service currently getting ready to implement automation because they need all the time they can get. Mr. HAYES. Am I to conclude that you believe that automation is being installed at the proper locations? Your report seems to indicate that automation is being installed in some areas where volume is declining. That would not be very efficient. Do you agree with my conclusion?

Mr. STEVENS. I would say they would be lower priority areas for automation, Mr. Hayes, but ultimately basically the whole Postal Service is meant to be automated. The Postmaster General has indicated, by 1995 there would be a bar code on virtually every piece of mail, whether it is close to a rural area or an urban area.

But I would say the most active and pressed offices are probably the ones that should be first in line for automation, and I have no indication that the Postal Service considers it any other way.

Mr. HAYES. Thank you, Mr. Chairman.
Chairman CLAY. Thank you.

Mr. Horton.

Mr. HORTON. Thank you, Mr. Chairman.

I notice in the report that you have a section on: "Operating inefficiencies have impeded savings." Did you make any recommendations with regard to that? That seems to me to be a pretty serious observation.

Mr. STEVENS. That work was largely done by the Postal Inspection Service, and we didn't in this report make recommendations based on that. They have made a number of recommendations, and they have been somewhat argued and disputed within the Postal Service itself.

Early on in the automation program we did indeed find that— and we made some recommendations in this regard-we found that mail that could have been handled automatically was not being handled automatically and that the incoming procedures were not adequate to do that.

But in this case we primarily provided that information as an explanation of why the Postal Service's automation savings targets were not being met, and since it was the Inspection Service's work that we relied on we didn't make recommendations based upon it, but the Inspection Service did.

Mr. HORTON. You have some indication that there is a rather large percentage of it that is not being used efficiently. That is based on the inspector general's report.

Mr. STEVENS. The Postal Inspection Service; yes, sir.

Mr. HORTON. The Postal Inspection Service?

Mr. STEVENS. Yes, sir.

Mr. HORTON. It seems to me it would be helpful for you to review that and give us some additional information in that area?

Mr. STEVENS. As to what has happened as a result of the Postal Inspection Service's work? Yes, we could do that, Mr. Horton. [The information follows:]

The Inspection Service uses an automated system to track the status of recommendations made by its operational audits. This system classifies recommendations as open until the Inspection Service has reasonable assurance that Postal Service management has taken or plans to take action on the recommendations. The system does not track savings.

As of April 1992, three of the post offices included in GAO's review of the Inspection Service's audits during 1990 and 1991 had not addressed all the Inspection Service's recommendations:

• Washington, DC had implemented 232 of 319 recommendations, and was in the process of implementing an additional 53. Thirty-four recommendations remained outstanding.

• New York, NY had formed a task force to address the recommendations. Each recommendation was to be assigned to a specific postal manager to monitor its implementation.

• San Bernardino, CA has established an automation review team and was developing a plan to implement barcode sorter recommendations.

Mr. HORTON. When you are talking about the operating inefficiencies, what period of time are you talking about?

Mr. STEVENS. That was over a 2-year period.

Mr. ELMORE. 1990-91.

Mr. HORTON. So maybe it would be helpful if you could update that for us. Perhaps that might be a way to do it, and give us your own estimates with regard to that.

Mr. STEVENS. We did go to a dozen large mail processing facilities in the course of doing this work, and it was at a time when we already knew some of the Inspection Service's conclusions. So we didn't try to go through the quantitative, statistical methodology that normally we would, but we did confirm most of the practices that they said were there were indeed there in the places that we went.

Of course, the Postal Service recognizes this and feels that this is an early stage in automation, and any time you put in a new program like this you are going to have some shakedown periods, some people unfamiliar with the equipment, some people actively discouraging its use; I mean it is a threat to jobs there, and that is a factor in some of these institutions.

Mr. HORTON. I can understand that, and that is why I think it would be helpful for us to have your thoughts with regard to this, because it is a major area, it would seem to me, and if we have that kind of opposition, it might mean that in the future the automation process is not going to work. I mean this could pull the whole thing down, it would seem to me.

Mr. STEVENS. We are planning to keep doing the automation work, and we will certainly factor that consideration into that, Mr. Horton, and be glad to speak to you further about it.

Mr. HORTON. Did you have any analysis of the operational costs of contracting out efforts by the Postal Service?

Mr. STEVENS. Analysis of the operational cost of contracting out? Mr. HORTON. Right.

Mr. STEVENS. We haven't done that. We have visited the remote bar coding system, the pilot project up in Long Island, and in fact our staff also looked at the one in Kentucky. We know the Postal Service's assertions in this regard, that they are paying $8 to $10 an hour for work the postal employees get $27 an hour for. They benefit, but I haven't verified that; no, sir.

Mr. HORTON. Again, I'm concerned about this, because this is one of the ways we can go around the Postal Service's ability to operate, and that is what privatization is, contracting out, and the more that contracting out goes on, the less people in the Postal Service will be able to do the job that they are able to do under the statutes. So I think this is an important area that you could cover for us, to let us know what impact it has as far as the Postal Service is concerned.

Mr. STEVENS. Yes, we would be glad to look at that, Mr. Horton. In fact, we had identified that as an issue ourselves in our own planning.

Mr. HORTON. I thought you said that one of the concerns that you had was the Federal Government's hit, if you will, on the Postal Service. That is having a pretty big impact, it would seem to me. Is that the way you saw it? But every time the budget comes up, even though they are supposed to be off budget, we find that they are talking in terms of another hit on the Postal Service. Have you done an analysis of its impact?