1 KENTUCKY PRESS ASSOCIATION Postal Regulatory Update Mark Acton Vice-Chairman, Postal Regulatory Commission January 21, 2011

Word of Thanks  David Thompson, Executive Director Kentucky Press Association 2

Summary of Discussion  United States Postal Service (USPS) and Postal Regulatory Commission (PRC)  USPS Plan Envisioning America’s Future Postal Service  Significant Recent PRC Activity Change in Frequency of Delivery: 6 to 5 days (limited discussion)  Elimination of Saturday delivery Exigent Rate Case 3

Summary of Discussion  PRC Reports on USPS Workforce Legacy Costs PRC Review of Postal Service Retiree Health Benefit Fund Liability PRC Pension Cost Special Study 4

U.S. Postal Service  Self-supporting government enterprise Linchpin of $1 trillion mailing industry Workforce of 600,000 Only delivery service that reaches every address in the nation  150 million residences, businesses and post office boxes  Annual revenue more than $67 B USPS relies on the sale of postage, products and services to fund operations no taxpayer funding  Delivers nearly 40% of the world’s mail  Retail network of 32,000 locations  usps.com the most frequently visited federal government website  If a private company, would rank 29th in Fortune 500 5

Postal Regulatory Commission  Executive Branch agency charged by the President and Congress to provide independent federal regulatory oversight for the USPS 5 Commissioners, each appointed to a 6-year term by the President and confirmed by the Senate  Agency Chairman designated by President  No more than 3 members of the Commission may be from the same political party 6

Postal Regulatory Commission  Mission: Ensure the transparency and accountability of the Postal Service and foster a vital and effective universal mail system Develop and maintain regulations for a modern system of rate regulation  Consumer Price Index (CPI) cap Consult with the Postal Service on delivery service standards and performance measures Prevent cross-subsidization & other anticompetitive postal practices Promote transparency & accountability, & adjudicate complaints Consult with the State Department concerning international postal policies 7

USPS Plan: Envisioning America’s Future Postal Service  March 2, Postal Service unveils plan:  Concerted Government Affairs/Public Relations Initiative  USPS projects mail volume will continue to shrink: 177 B pieces (2009) to 150 B (2020)  Competition (UPS and FedEx)  Economic recession  Electronic diversion 8

USPS: “Envisioning America’s Future Postal Service”  Loss of $8.5 billion in 2010  No action -- cumulative shortfall of $238 billion by 2020  As much as $123 billion in savings during that same time period through aggressive cost cutting and increased productivity Even so, “Estimated $115 billion shortfall will remain” (USPS) 9

USPS: “Envisioning America’s Future Postal Service”  What is the USPS Action Plan? Regulatory and legislative relief highlights:  Adjust delivery days to “better reflect current mail volumes and customer habits”  Exigent rate case  Restructure RHB payments and address overpayments to CSRS fund 10

Change in Delivery Frequency: 6 to 5 days  March 30, 2010: USPS filed request with the Commission for an Advisory Opinion for the elimination of Saturday delivery  “A change in frequency, not a change in service” Discontinue Saturday residential and business delivery/collections No mail pick-up from blue collection boxes Post Offices usually open on Saturday remain open 11

Change in Delivery Frequency: 6 to 5 days  PRC is “watchdog agency” protecting USPS’s Universal Service Obligation to Nation One of the most significant changes the Postal Service has ever presented to the Commission 12

Change in Delivery Frequency: 6 to 5 days  Public, on-the-record PRC hearings and proceedings analyzing and cross- examining USPS proposal and supporting evidence During the process, mail users and interested members of the public offer supporting or opposing views, both informally and as part of more formal, technical presentations 13

Change in Delivery Frequency: 6 to 5 days  Witnesses for the record regarding impact on rural newspaper delivery Max Heath, Postal Committee Chairman of the National Newspaper Association  an engaged and informed participant in the postal regulatory process Al Cross, UK professor & Executive Director of the Institute for Rural Journalism and Community Life 14

Change in Delivery Frequency: 6 to 5 days  The Commission conducted 7 field hearings: Dallas, Sacramento, Chicago, Memphis, Las Vegas, Rapid City and Buffalo  Field hearings transcripts: Posted at  Solicited public comments via our website Response was exceptional – over 12,000 letters and s  Advisory Opinion is nearing completion No statutory deadline The exigent rate case took priority 15

Exigent Rate Case  On July 6, 2010 the Postal Service filed with the PRC a request for an exigent rate adjustment Pierce the rate cap 5.6% average increase New rates were to have been implemented in January,

Exigent Rate Case  USPS proposal must: (39 USC 3622(d)(1)(E)) Describe the “extraordinary or exceptional” exigent circumstances and show why they necessitate the increase, Show that the proposed rates are reasonable and equitable, and Describe circumstances under which the increases could be rescinded or reduced 17

Exigent Rate Case  PRC established a docket to provide for public comment and has conducted hearings on the record Interested parties were encouraged to participate in building the record and suggesting relevant questions to the PRC for the USPS to answer during the course of these hearings  Commission issued its decision September 30, 2010 several days ahead of its October 4 statutory deadline. 18

USPS Proposed Rates Would Not Remedy “Exigent” Circumstances  After a careful review and in a unanimous and bipartisan vote, the Commission found that the Postal Service failed to meet the legal requirements for an exception to the rate cap Commission found USPS fiscal difficulties a function of an unsustainable business model, not the national economic recession The Commission’s decision affirmed the fundamental importance of the statutory price cap in protecting postal consumers and promoting Postal Service efficiency 19

USPS Workforce Legacy Costs PRC Reports  PRC Review of USPS Retiree Health Benefit Fund Liability  PRC Special Study (SS2010-1) USPS Civil Service Retirement System (CSRS) Pension Funding 20

PRC Review of USPS Retiree Health Benefit Fund Liability  The need to restructure retiree health benefit prefunding requirement is by far the most important aspect of USPS Action Plan – Joe Corbett, USPS CFO, in testimony before the PRC regarding exigent rate request  Request on June 15, 2009 by Chairman Stephen F. Lynch, Subcommittee on Federal Workforce, Postal Service and the District of Columbia, Committee on Oversight and Government Reform, U.S. House of Representatives: Consultant was Mercer Health and Benefits LLC PRC presented its report to the Subcommittee July 30, 2009  OPM:$5.5 billion (present annual USPS expense)  PRC:$3.4 billion ($2.1 billion annual savings) Annual Payments to Achieve 73% Funded Status 21

PRC Special Study (SS2010-1) USPS CSRS Pension Funding  39 USC 802(c): The Commission, upon request of USPS, procures service of an actuary qualified to evaluate pension obligations to conduct a review in accordance with generally accepted actuarial practices and principles and provide a report to the Commission containing the results of the review Per USPS request of February 23, 2010, PRC established Docket SS to conduct a review of the Civil Service Retirement System (CSRS) pension liability of USPS 22

PRC Special Study (SS2010-1) USPS CSRS Pension Funding PRC selected the Segal Company, a certified actuarial firm, to conduct the study PRC reviewed Segal’s report and on June 30, 2010 submitted our findings to USPS, Congress and OPM  Overpayment to CSRS Funds $50-55 billion  PRC endorsed adoption of a more modern, fair and equitable accounting methodology as promoted by Financial Accounting Standards Board 23

PRC Special Study (SS2010-1) USPS CSRS Pension Funding  Necessary follow-up Office of Personnel Management (OPM) responsible for calculating the Postal Service’s CSRS pension liability  OPM emphasizes that their methodology is lawful and the need for Congress to direct another approach Legislation proposed fall 2010  Would have required OPM to recalculate CSRS fund payments, but provides no relief from annual REHB payments mandated by PAEA  New Congress... new bill? 24

Chairman’s Letter, Annual Compliance Determination  The Commission looks forward to participating actively with the public and Congress in the exploration of the Postal Service’s retiree healthcare benefit funding, pension funding, strategies to reduce costs and improve customer service, and opportunities to expand products and services. 25

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