Full Text: Postal Service Testimony On Dispute With Aarp At Finance Panel Hearing On Aarp.

Testimony of

June 20, 1995

Good morning. Thank you for asking us to testify today. My name is Jeff Zelkowitz. I'm a Senior Counsel in the Postal Service Law Department. My duties include providing advice to officials responsible for deciding mail classification appeals and related matters, including the use of nonprofit mail rates. First, I'd like to give you a quick overview or history of special bulk third-class mailing rates.

Eligibility for the nonprofit rates, including the types of organizations authorized to use them and what may be mailed, is established by statute. Third-class nonprofit rates, as we know them, originated in 1951, when Congress created an exemption from a general rate increase for "matter mailed in bulk" by eight generic types of nonprofit organizations. Included in this number were such broad categories as "religious, educational," and "philanthropic" organizations as well as groups described as "scientific," "agricultural," "labor," "veterans," and "fraternal." In order to mail at the special rates, organizations had to meet two requirements. They had to be nonprofit AND they had to meet the requirements of one of the eight categories.

In response to the explosive growth of the nonprofit sector in the 1960s, the Postal Service decided that it was necessary to adopt detailed definitions of qualified nonprofit organizations. This was accomplished in 1973. These definitions attempted to correlate the postal meaning of terms such as "educational" and "philanthropic" with those used by other agencies, most notably the I.R.S.

While postal officials focused their attention on the eligibility of organizations to mail at the nonprofit rates, a different set of enforcement problems arose concerning the material those organizations were mailing. In simple terms, some nonprofit organizations had decided to push the literal terms of the preferred rate statute to the limit by "mailing in bulk" the advertising matter of for-profit companies. In this they were assisted by commercial direct mail promoters who had discerned the competitive advantage offered by nonprofit postage rates.

The Postal Service responded to this development by revising its regulations in 1975 to limit the use of the special rates to an organization's "own" matter, and to forbid nonprofit groups to "delegate or lend" their permits, or to mail matter "in behalf of or produced for" an ineligible organization. These regulations, which are commonly called the cooperative mailing rule, have been challenged and upheld in federal courts.

Eligibility issues remained controversial during succeeding years as concern regarding the federal deficit stimulated closer inspection of the nonprofit mailing subsidy. That inspection focused on what groups are eligible for the subsidy, and what those groups are mailing.

More currently, enforcement activity by the Postal Inspection Service during the late 1980s focused on a variety of cooperative mailing ventures between nonprofit mailers and commercial firms. Typically, these ventures promoted the sale of "affinity" credit cards, group insurance, vacation travel plans, and other goods or services not typically associated with charitable activities.

Congress took action to address these concerns in the fall of 1990. As part of the Postal Service Appropriations Act for 1991, signed into law on November 5, 1990, Congress enacted significant changes affecting nonprofit rate mail. Before these provisions were enacted, there were no content-based restrictions on what might be sent at the special rates. That is, the only test was the cooperative mail rule which concerned whether the mail was that of the nonprofit party. However, for the first time, the 1990 legislation added restrictions on content. Thus, nonprofit third-class rates shall not apply to mail which, in the words of the statute, "advertises, promotes, offers, or, for a fee or consideration, recommends, describes, or announces the availability of:

"A. Credit, debit or charge cards, or similar financial instruments provided through or with an ineligible party;

"B. Insurance policies unless the policy is designed for and primarily promoted to members, donors, supporters, or beneficiaries of the eligible nonprofit organization, and it provides coverage not generally otherwise commercially available;

"C. Travel arrangements unless they contribute substantially to one or more of the eligible mailer's qualifying purposes (aside from fund-raising and cultivating new members, donors, or supporters) and they are designed for and primarily promoted to the organization's members, donors, supporters or beneficiaries."

These restrictions are sometimes referred to as the TIF restrictions. The restrictions on insurance solicitations are pertinent to our subsequent dealings with AARP.

The 1990 legislation was not Congress' final action in the area of content-based restrictions on nonprofit mail. In 1993 and 1994, as part of broader reforms concerning preferred rates, Congress enacted additional restrictions on nonprofit third-class mail by establishing restrictions on other types of advertising as well as on certain products. Regulations implementing these provisions were published on May 6, 1995, and will become effective on October 1, 1995.

It is difficult to estimate the precise number of organizations now authorized to mail at the nonprofit third-class rates. It is estimated that at least 400,000 total authorizations have been issued by the Postal Service. However, because organizations must obtain an authorization at each post office where they mail, some organizations have multiple permits. Accordingly, as a rough guess, the number of organizations authorized to mail at the nonprofit rates is 300,000.

The nonprofit third-class rates have been and will remain lower than the regular third-class rates, although this gap is closing due to the changes enacted by Congress in the 1993 legislation. It is difficult to provide a single precise number to convey the relationship between the nonprofit and regular rates, since both vary due to mail preparation and other factors. However, as an approximate figure, the regular bulk third-class rates are nearly double the analogous nonprofit third-class rates.

As I mentioned, a dispute developed between the Postal Service and AARP after enactment of the TIF restrictions in 1990 concerning the scope of the restrictions against insurance solicitations, particularly group health insurance solicitations. Specifically, the dispute concerned the interpretation of the exception for policies that would be considered "not generally otherwise commercially available."

The law was declared effective 90 days from the date of enactment or February 3, 1991. On September 13, 1991, and June 25, 1992, the Postal Service published standards in the Federal Register to implement the statutory restrictions. AARP provided extensive comments during the rulemakings implementing the TIF restrictions. However, the Postal Service did not adopt the interpretations it proposed.

Additionally, in early 1992, AARP sent a draft agreement to the chief Postal Service mail classification official proposing a resolution to the dispute. Under this proposal, AARP proposed that AARP and the Postal Service jointly seek a statutory amendment eliminating the exception to the prohibition against mailing insurance solicitations at the nonprofit rates. This amendment would be effective January 1, 1993. Under AARP's proposal, it would stop mailing group health insurance solicitations as of January 1, 1993. In return, the Postal Service was supposed to agree not to pursue any back postage claims, which we refer to as postage deficiencies, on group health insurance mailings made before January 1, 1993, even if it was determined that the mailings violated the 1990 statute.

In a written response, the Postal Service refused to enter the proposed agreement. We explained that the Postal Service did not have the authority to permit an organization to make mailings at a rate which violated statutory provisions. With respect to the proposed statutory amendment, our letter stated that that was a matter within the discretion of Congress.

In August, 1992, approximately two months after the Postal Service concluded its second rulemaking, AARP wrote again to the Postal Service. AARP advised that it did not agree with the rules. It also advised that, while not waiving its rights to take legal action to challenge the rules, it would begin to mail its group health insurance solicitations at the regular rates.

A short time later that year, postal inspectors reviewed AARP's mailing practices. They found that AARP had started mailing the group health insurance solicitations at the regular rates. They also found that, prior to that change in August 1992, these types of mailings had been sent at the nonprofit rates. As a result of these findings, postage deficiency assessments were issued against AARP.

By statute, AARP had two levels of administrative appeals concerning these assessments, and it began the appeals process. In the meantime, however, it initiated settlement discussions with the Postal Service but no agreement was reached. In August, 1993, AARP filed suit against the Postal Service, challenging the validity of the regulations implementing the insurance restrictions in the 1990 legislation. Settlement discussions were initiated in this proceeding, and these discussions also involved the postage deficiency assessments, which were still the subject of administrative appeals and not part of the lawsuit. Eventually, the parties reached a settlement, under which AARP dropped its challenge to the Postal Service regulations and settled the postage deficiency assessments. This effectively ended the dispute between the parties. Thank you. I would be happy to answer any questions which you may have.