oversight

Major Management Challenges and Program Risks: U.S. Postal Service

Published by the Government Accountability Office on 2003-01-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Performance and Accountability Series




January 2003
               Major Management
               Challenges and
               Program Risks
               U.S. Postal Service




GAO-03-118
               a
A Glance at the U.S. Postal Service
The U.S. Postal Service is an independent establishment of the executive branch.
It is the federal government’s largest civilian employer and had revenues of about
$67 billion in fiscal year 2002. The Service’s overall mission is to
●       bind the nation together through correspondence of the people;
●       provide access to postal services in all communities;
●       offer prompt, reliable postal services at reasonable rates;
●       be self-supporting from postal operations; and
●       break even financially.


The U.S. Postal Service’s Budgetary and Staff Resources


Budgetary Resources a, b                                             Staff Resources b
Dollars in billions                                                  FTEs in thousands

80                                                71                 900              851       848
                                                                            837                          831          826
                   65       65        66
          62
60                                                                   675


40                                                                   450


20                                                                   225


    0                                                                   0
         1998    1999      2000      2001         2002                      1998     1999      2000      2001         2002
         Fiscal year                                                        Fiscal year
Source: Budget of the United States Government.

a Budgetary resources include new budget authority (BA) and unobligated balances of previous BA. The Postal Service
    receives minimal budgetary resources from the federal government and funds its operations primarily from postal revenues.
b Budget and staff resources are actuals for FY 1998-2001. FY 2002 are estimates from the FY 2003 budget, which
    are the latest publicly available figures on a consistent basis as of January 2003. Actuals for FY 2002 will be
    contained in the President’s FY 2004 budget to be released in February 2003.




This Series
This report is part of a special GAO series, first issued in 1999 and updated in
2001, entitled the Performance and Accountability Series: Major Management
Challenges and Program Risks. The 2003 Performance and Accountability Series
contains separate reports covering each cabinet department, most major
independent agencies, and the U.S. Postal Service. The series also includes a
governmentwide perspective on transforming the way the government does
business in order to meet 21st century challenges and address long-term fiscal
needs. The companion 2003 High-Risk Series: An Update identifies areas at high risk
due to either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency, or
effectiveness. A list of all of the reports in this series is included at the end of
this report.
                                                    January 2003


                                                    PERFORMANCE AND ACCOUNTABILITY SERIES

                                                    U.S. Postal Service
Highlights of GAO-03-118, a report to
Congress included as part of GAO’s
Performance and Accountability Series




In the 2001 Performance and                         The Service has made progress in addressing its challenges and has
Accountability report on the U.S.                   developed a Transformation Plan (the Plan) that contains steps to guide it in
Postal Service (the Service), GAO                   the future. Challenges remain, however, and leadership and sustained
identified financial, operational,                  attention by the Service will be critical to carrying out its transformation.
and human capital challenges
threatening the Service’s ability to
carry out its mission. Since then,                  •   Implement the Transformation Plan and determine business
these challenges have continued                         model for the 21st century. The Service is struggling to fulfill its
and its financial difficulties have                     mission of providing affordable, high-quality, universal service while
increased, resulting in GAO’s                           remaining self-supporting. The figure shows that despite multiple rate
placing the Service’s                                   increases, net income has decreased. The Service’s business model is at
transformation efforts and long-                        risk as mail volumes decline and competition and alternatives increase.
term outlook on its high-risk list.
The information in this report is                   The Service’s Net Income from Fiscal Years 1990-2003
intended to help focus attention
and facilitate progress in
addressing the key challenges
facing the Service. This report is
part of a special series on
governmentwide and agency-
specific issues.



GAO believes the Service should:

•    Work with Congress, the
     Presidential Commission, and
     stakeholders to implement the
                                                    •   Control costs and improve productivity under the Service’s
     Plan and report on progress
     and financial impact of actions                    existing authority. The Service’s ability to control costs and improve
     taken to support the Plan;                         productivity is key to improving its financial situation. The Service
•    Develop strategies to realign                      historically has had difficulty in achieving cost savings related to two
     its infrastructure and                             costly areas—its workforce and its expansive physical infrastructure.
     workforce, to support its
     business model;                                •   Address unresolved financial issues. The Service’s cash flow from
•    Continue efforts to cut costs,                     operations has not been sufficient to fund needed capital expenditures
     improve productivity, and                          and reduce debt pressures. Furthermore, its liabilities continue to
     address long-term financial                        exceed its assets, and postretirement health obligations are increasing.
     issues such as its debt and
     retirement-related obligations;
                                                    •   Develop strategies to address human capital issues. Progress is
•    Improve transparency and
     timeliness of financial and                        needed in realigning the Service’s workforce planning and performance
     performance information.                           systems with its business model. Cooperation between labor and
                                                        management will be critical to achieving transformation goals.
www.gao.gov/cgi-bin/getrpt?GAO-03-118
                                                    •   Provide complete and reliable financial and performance
To view the full report, click on the link above.
For more information, contact Bernard L.                information in a timely and transparent manner. The Service has
Ungar at (202) 512-2834 or ungarb@gao.gov.              not provided sufficient public information to explain its changing
                                                        financial condition, outlook, and progress toward meeting its goals.
Contents



Transmittal Letter                                                                                                1


Major Performance                                                                                                 2

and Accountability
Challenges

GAO Contacts                                                                                                      33


Related GAO Products                                                                                              34


Performance and                                                                                                   37

Accountability and
High-Risk Series




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                       Page i                                                      GAO-03-118 U.S. Postal Service
A
United States General Accounting Office
Washington, D.C. 20548
                                                                                           Comptroller General
                                                                                           of the United States




           January 2003                                                                                             Transm
                                                                                                                         taie
                                                                                                                          L lter




           The President of the Senate
           The Speaker of the House of Representatives

           This report addresses the major management challenges and program risks facing the U.S. Postal
           Service (the Service) as it works to carry out its mission. The report discusses the actions that the
           Service has taken and that are under way to address the challenges GAO identified in its Performance
           and Accountability Series 2 years ago, along with major events that have occurred that significantly
           influence the environment in which the Service carries out its mission. Also, the report summarizes
           the challenges that remain, new ones that have emerged, and further actions that we believe are
           needed.

           This analysis should help the new Congress and the administration carry out their responsibilities and
           improve government for the benefit of the American people. For additional information about this
           report, please contact Bernard L. Ungar, Director, Physical Infrastructure Issues, at
           (202) 512-2834 or at ungarb@gao.gov.




           David M. Walker
           Comptroller General
           of the United States




                                     Page 1                                            GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges

              As the federal government’s largest civilian employer, with a nationwide
              network that delivers more than 200 billion pieces of mail each year, the
              Postal Service is a vital part of the nation’s communications network and
              the hub of a $900 billion mailing industry. Over the past 2 years, the Service
              has experienced growing financial difficulties and has struggled to fulfill its
              primary mission of providing universal postal service at reasonable rates
              while remaining self-supporting from postal revenues. The Service
              continues to operate in an environment of growing financial, operational,
              and human capital challenges, as well as uncertainty about its future role.
              The events of September 11th and the subsequent use of the mail to
              transmit anthrax have introduced new issues related to mail safety and
              security that also must be addressed. These challenges require urgent
              attention to ensure that the Service will be able to fulfill its mission in the
              21st century.

              In April 2001, we placed the Service’s transformation efforts and long-term
              outlook on our high-risk list and recommended that it develop a
              comprehensive plan to determine the actions needed to address its
              financial, operational, and human capital challenges. This high-risk
              designation resulted in the development of the Service’s Transformation
              Plan (the Plan)—a document that contains steps to guide the Service in
              carrying out its future mission. The implementation of this plan is a new
              challenge facing the Service, and thus we added it to our current list of its
              major challenges. This challenge replaces two of the major challenges we
              identified 2 years ago, because they are key parts of the Plan: the Service’s
              ability to remain self-supporting while providing affordable, high-quality,
              universal service; and the need to address legal and regulatory issues.
              Three challenges that we previously identified still remain today: 1)
              controlling costs and improving productivity under the Service’s existing
              authority, 2) developing strategies to address human capital issues, and 3)
              providing complete and reliable financial and performance information in a
              timely and transparent manner. Additionally, in response to the Service’s
              deteriorated financial condition, we added a new challenge—addressing
              unresolved financial issues. The Service’s cash flows from operations have
              not been sufficient to fund needed capital expenditures and significantly
              reduce debt pressures; its workers’ compensation liability and
              postretirement health benefit obligations are large and increasing; and its
              liabilities exceed its assets. These underlying factors driving the Service’s
              financial condition cannot be ignored.




              Page 2                                              GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




These key areas must be addressed because the Service is at a very
important crossroads. Its current business model, which relies on
increasing mail volumes to mitigate postal rate increases and cover the
Service’s costs, is at risk in today’s environment of greater competition and
communication alternatives. In fiscal years 2001 and 2002, despite multiple
rate increases and significant cost-cutting efforts, the Service still incurred
deficits of $1.7 billion and $676 million, respectively, as its volumes
declined by the most significant amount since postal reorganization
occurred over 30 years ago. Furthermore, uncertainties such as the effects
of a slowing economy, the pace of diversion to electronic alternatives, and
new measures taken to enhance the safety and security of the mail have
affected postal finances during this time and may continue to do so in the
future.

Opportunities exist, however, that may help the Service address these
major management challenges and effectively carry out its transformation.
For example, the results of a recent financial analysis may lead to a
reduction in the Service’s pension liability and related annual payments if
Congress takes legislative action in this area. This action could lead to
further improvements in the Service’s financial condition and outlook
beyond the $600 million net income that was budgeted for fiscal year 2003.



Page 3                                              GAO-03-118 U.S. Postal Service
                         Major Performance and Accountability
                         Challenges




                         The additional “breathing room” could allow the Service to address other
                         financial challenges, such as its outstanding debt, substantial
                         postretirement health obligations, and current capital freeze. The Service
                         also faces a large number of upcoming retirements, which provide an
                         opportunity to realign its workforce and infrastructure to meet its future
                         operational needs. The Service will need to develop and effectively
                         implement strategies to address these five challenges in order to carry out
                         its mission in the 21st century. Although various postal reform proposals
                         addressing the Service’s future role and responsibilities have recently been
                         debated in Congress, no consensus has been reached among postal
                         stakeholders on what the future of the Service should be. The President
                         recently established a commission to make recommendations regarding
                         the future of the Postal Service. Committed leadership and sustained
                         attention in addressing these challenges will be important to achieve the
                         results necessary for us to reassess our inclusion of the Postal Service’s
                         transformation efforts and long-term outlook on our high-risk list.



Implement                The key issues involved in implementing the Plan and determining a new
                         business model are as follows:
Transformation Plan
and Determine            • Ability to carry out mission is at risk;
Business Model for the   • Mail volumes have declined, and multiple rate increases have been
21st Century               implemented;

                         • Growth in operating expenses has outpaced growth in operating
                           revenues;

                         • No consensus has been reached on the Service’s future role and mission;

                         • More public information is needed on transformation progress.

                         The Service has struggled to fulfill its core function of providing affordable,
                         high-quality, universal service while at the same time remaining self-
                         supporting. Decreasing mail volumes, along with total expenses that are
                         greater than total revenues, have led to the third consecutive year of
                         deficits despite multiple rate increases during this period. Figure 1 shows
                         that net income has decreased in 6 of the past 8 fiscal years.




                         Page 4                                              GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




Figure 1: Net Income Has Been Declining, Even Though Rates Have Been Increasing




These financial difficulties are not a cyclical phenomenon that will fade as
the economy recovers. The Service’s business model, which is based on the
premise that increases in mail volumes will cover rising costs and mitigate
rate increases, is at risk because of growing competition from private
companies, foreign postal operators, and technological alternatives, such
as cell phones and the Internet. Total mail volume declined by 2.5 percent
over the past 2 fiscal years. Further, Figure 2 shows that growth in First-
Class Mail and Standard Mail has been, on average, declining since the
1980s. Declines in volume growth for these two mail classes are
particularly important because the Service relies on them for
approximately three-fourths of its annual revenue.




Page 5                                              GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




Figure 2: Growth in First-Class Mail and Standard Mail Volumes Has Been Declining




In addition to this slowing growth rate, the changing composition of the
mail also affects the Service’s revenue. First-Class Mail volume declined in
fiscal year 2002 for the first time in over 25 years, which is particularly
important because the revenue generated from First-Class Mail is used to
cover a significant portion of the Service’s overhead costs. In addition, the
weight per mail piece—which is a key factor in determining the rate
charged and the revenue earned—across most major mail categories is
down. The Service’s reliance on rate increases to generate additional
revenues is unlikely to reverse the change in composition or promote the
volume growth that is needed to sustain financial viability. As volume
growth in the major mail categories has declined and mail composition has
changed, growth in the Service’s operating revenue also has declined.
Figure 3 shows that over the past 3 fiscal years, on average, operating
revenue growth has dropped below that of operating expenses growth.




Page 6                                               GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




Figure 3: Operating Expense Growth Has Outpaced Operating Revenue Growth




Although the results of a new analysis by the Office of Personnel
Management (OPM) could significantly reduce the Service’s annual Civil
Service Retirement System (CSRS) pension payments, the Postmaster
General (PMG) recently stated that this does not resolve the fundamental
flaws in the Service’s business model. We agree, and believe that the
Service must address its key long-term challenges for a successful
transformation to a new business model. These challenges include
revisiting the Service’s mission and determining the definition of universal
postal service; devising operational strategies to address infrastructure and
human capital matters; identifying actions needed to enhance mail safety
and security; addressing issues of future governance and ratemaking
structures; and determining proper accountability mechanisms and needed
legislative changes. Addressing these challenges requires consensus among
various stakeholders, which has been very difficult to achieve, in part,
because numerous stakeholders have divergent needs and concerns. Since
1996, postal reform legislation has been considered many times in
Congress; however, none of these reform proposals has been passed. As we




Page 7                                             GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




noted in February 2002, a commission may be needed to address
unresolved issues related to the Service’s transformation to a new business
model and to develop a comprehensive proposal for consideration by the
Congress. On December 11, 2002, the President established a nine-member
Commission on the United States Postal Service to prepare and submit a
report on a proposed vision for the future of the Postal Service and
recommend the legislative and administrative reforms needed to ensure the
viability of postal services. The Commission is expected to submit its
report to the President by July 31, 2003.

In response to our April 2001 recommendation to address its unresolved
financial, operational, and human capital challenges, the Service released
its Transformation Plan in April 2002. In the Plan, the Service outlined the
steps, both current and long-term, it deemed necessary to guide it in
carrying out its mission in the future. Specifically, the Plan presented
actions to deal with transformation issues (1) in the short term, under its
current authority and through moderate regulatory and legislative reforms,
and (2) in the longer term, through fundamental structural transformation.
To achieve its fundamental structural transformation, the Service proposed
moving toward a Commercial Government Enterprise business model. This
model differs slightly from its current model, and would allow flexible
pricing and retained earnings. Table 1 provides a more complete
comparison between the Service’s proposed Commercial Government
Enterprise model and its current business model.




Page 8                                            GAO-03-118 U.S. Postal Service
                                          Major Performance and Accountability
                                          Challenges




Table 1: Comparison between the Service’s Current Model and Its Proposed Future Model

Key areas                          Current model                                     Commercial Government Enterprise model
Mission/Public policy              Provide affordable universal service              Provide affordable universal service
Universal service obligation       All addresses, 6 days/week                        Negotiated with regulator
Ownership                          U.S. government                                   U.S. government
Corporate governance               Board of Governors                                Board of Governors refocused on fiduciary
                                                                                     duties
Regulation                         Postal Rate Commission                            Postal Rate Commission
Monopoly                           Letter and mailbox monopoly                       Letter and mailbox monopoly
Product development                As the Service finds appropriate and in the       Market-based -- cost/benefit model
                                   public interest
Pricing                            Rate setting includes public hearings and         Flexibility within broad parameters, complaint-
                                   divided authority between the Postal Rate         based review
                                   Commission and the Board of Governors.
Human capital                      Collective bargaining, third-party arbitration,   Collective bargaining, Railroad Labor Act
                                   federal salary cap, and pay comparability         model, some private-sector laws, no salary
                                                                                     cap
Financial requirement              Break-even mandate                                Reasonable net income; retained earnings
Ability to invest                  Through U.S. Treasury                             Business alliances
Access to capital                  $15 billion debt ceiling                          Legislated debt ceiling; retained earnings
Earnings                           Break-even mandate                                Retained earnings to support Universal
                                                                                     Service Obligation and capital and business
                                                                                     continuity; dividends possible
Taxes                              None                                              Determined through legislation
Security                           Postal Inspection Service                         Postal Inspection Service
                                          Source: Postal Service and GAO.


                                          We have reported that the development of the Transformation Plan was a
                                          good first step in raising key postal reform issues.1 Since the Plan was
                                          issued, the Postmaster General has highlighted the progress made in
                                          implementing initiatives set forth in the Plan, including significant cost
                                          savings achievements; improvements in service performance; efforts to
                                          improve the ratemaking process with targeted pricing initiatives;
                                          enhancements to existing products with the implementation of a new
                                          service, Confirm, that enables senders to monitor the status of their



                                          1
                                           U.S. General Accounting Office, U.S. Postal Service: Moving Forward on Financial and
                                          Transformation Challenges, GAO-02-694T (Washington, D.C.: May 13, 2002).




                                          Page 9                                                       GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




mailings; and efficiency improvements to the Service’s automated
processing of flat mail, such as magazines and catalogs.

However, we feel that additional steps are needed to ensure effective
implementation of the Plan. Specifically, periodic public information about
the status of actions taken to implement the Plan should be provided to
Congress and other postal stakeholders, including postal employees and
customers. Little information has been made publicly available on the
status of these actions. Postal officials told us that they have established
accountability mechanisms, such as detailed project plans with strategies
and time frames for implementing them; however, these documents are
used for internal management purposes only and are not available to the
public. Providing periodic public information on the status of actions taken
to implement the Plan, including priorities, time frames, progress, and
estimated financial impact, would be useful for congressional oversight
purposes and for giving stakeholders, whose business plans may be
impacted by the Service’s planned actions, information on the Service’s
efforts. An example of such useful information is the “progress report”
provided by the Service and the Mailing Industry Task Force,2 which
provides periodic updates on the implementation status of the Task Force’s
recommendations to increase the effectiveness of the mail.

Further, effective leadership and sustained attention from the Service’s
Board of Governors and the PMG will be key to ensuring the successful
implementation of its Plan. The role of the Board of Governors in the
Service’s transformation includes such major areas as: 1) providing
strategic advice to management; 2) assisting in managing risk, including
risk that is related to attempts to maximize current value at the expense of
mortgaging the future; and 3) holding management accountable for results.
In addition, the Service will need to work with Congress, the Presidential
Commission on the Postal Service, and other stakeholders to implement
legislative and operational changes.




2
 The Mailing Industry Task Force is a committee that includes Service management and
various industry representatives. This Task Force assesses the current role and value of mail
in business and consumer communication, evaluates the competitive environment affecting
the postal industry’s future, and identifies opportunities for future growth.




Page 10                                                      GAO-03-118 U.S. Postal Service
                       Major Performance and Accountability
                       Challenges




Control Costs and      Key issues in controlling costs and improving productivity include the
                       following:
Improve Productivity
under the Service’s    • Difficulty in achieving cost savings and sustaining productivity gains;
Existing Authority     • High infrastructure and workforce costs;

                       • Unknown costs related to safety and security;

                       • Capital freeze that may increase future costs.

                       The ability to control costs and sustain productivity gains is a key challenge
                       to improving the Service’s financial situation. The Service made progress in
                       cutting costs and improving productivity in fiscal years 2001 and 2002, and
                       costs for both years were below budgeted amounts. Despite these short-
                       term reduction efforts, the Service continues to face significant challenges
                       in sustaining long-term cost savings and productivity gains, particularly in
                       the workforce and infrastructure areas, where costs are difficult to cut.
                       Further, the Service will be challenged to deal with unknown costs related
                       to enhancing mail safety and security. Although the Service’s Plan includes
                       long-term strategies that could greatly impact its future operational
                       structure, a continuing emphasis on finding operating efficiencies within
                       the current structure is a more immediate priority in order to mitigate
                       postal rate increases.

                       The Service has made progress in the past 2 fiscal years in controlling the
                       growth in costs and improving productivity. Although total costs increased
                       by $2.8 billion in fiscal year 2001, those costs declined by about $400
                       million in fiscal year 2002. The Service reduced its staff by about 11,500
                       employees in fiscal year 2001 and by about 23,000 in fiscal year 2002. These
                       results were due in part to a reduced workload from lower-than-planned
                       mail volumes over the 2-year period, which resulted in significant work-
                       hour reductions. The Service increased its productivity by 1.3 percent in
                       fiscal year 2001 and 1.1 percent in fiscal year 2002 from actions including
                       the deployment of automation and other operational and administrative
                       efficiencies. Productivity is the relationship between the Service’s
                       outputs—mail processing and delivery to an expanding network—and the
                       resources expended in producing these outputs. The Service also
                       postponed a number of program expenditures and froze some capital
                       spending during this time to control expenses and improve its cash
                       position. The above actions helped offset cost increases for health care



                       Page 11                                            GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




benefits, cost-of-living adjustments, safety and security, fuel,
transportation, unemployment compensation, and workers compensation,
as well as continued expansion of its infrastructure and delivery network.

The Service plans to continue efforts to cut costs and increase productivity
in fiscal year 2003. Its budget calls for a $1 billion cost reduction that
includes a decrease of 12,000 employees by attrition, deployment of
automation equipment, and reduction in work hours. Further progress in
this area may face impediments, including the following:

• Historically, the Service has had difficulty in sustaining cost savings and
  productivity improvements, and numerous reports by us and by the
  Postal Service’s Inspector General have noted inefficiencies in the
  postal system and difficulties challenging the Service in realizing
  opportunities for savings over the long term.

• The Service has controlled the growth of its expenses over the past year
  in areas such as reducing overtime and staff costs through attrition, as
  mail volumes have declined. However, the Service will be challenged to
  continue controlling and reducing its expenses if mail volumes increase.

• Despite heavy investments in automation over the past decade, postal
  employee–related costs continue to account for over three-quarters of
  total operating expenses. The Service reported that growth in salaries
  and benefits has been driven by wage inflation, not by growth in work
  hours. The Service’s workforce included over 854,000 employees as of
  the end of fiscal year 2002, of whom 753,000 were career employees (see
  table 2).




Page 12                                            GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




Table 2: The Service’s Workforce Composition in Fiscal Year 2002

Career employees
Clerks                                                                                    256,656
City delivery carriers                                                                    233,639
Mail handlers                                                                                 59,259
Rural delivery carriers—full-time                                                             60,817
Building and equipment maintenance personnel                                                  42,275
Supervisors/managers                                                                          37,829
Postmasters/installation heads                                                                25,771
Professional/administrative/ technical personnel                                               9,661
Motor vehicle operators                                                                        9,092
Headquarters-related                                                                           5,560
Vehicle maintenance personnel                                                                  5,513
Inspection Service (field)                                                                     3,875
Area offices and nurses                                                                        2,280
Inspector General                                                                               722
Total career employees                                                                    752,949
Non-career employeesa                                                                     101,427
Total employees                                                                           854,376
Source: Postal Service.
a
 Noncareer employees include casuals, nonbargaining temporaries, rural substitutes, evening
relief/leave replacements, and transitional employees.


• Some of the Service’s employee-related costs, including those related to
  postretirement health benefits and workers’ compensation, are
  expected to continue increasing for the foreseeable future. The Service
  reported that its health benefit cost rose by 10 percent in fiscal year 2002
  and is forecasted to rise 14 percent in fiscal year 2003. Workers’
  compensation expenses increased by over $500 million to $1.5 billion in
  fiscal year 2002 and are expected to increase approximately 5 percent in
  fiscal year 2003.

• The Service has high costs related to its nationwide infrastructure and
  transportation network, which delivers 6 days a week and to over
  139 million addresses nationwide. This network grows by approximately
  1.7 million new addresses annually. These costs are difficult to cut when
  volumes decrease, as carriers must service every delivery unit even if
  they have fewer letters to deliver. Furthermore, the Service faces legal
  requirements and practical constraints that affect the size of its



Page 13                                                          GAO-03-118 U.S. Postal Service
                                           Major Performance and Accountability
                                           Challenges




                                              infrastructure network, including a prohibition on closing small post
                                              offices solely for operating at a deficit. Figure 4 shows the various
                                              components of this network.



Figure 4: Overview of the Service’s Infrastructure and Transportation Network in Fiscal Year 2002




                                           • The Service faces significant investment decisions and operating costs
                                             related to its efforts to improve the safety and security of the mail as a
                                             result of the terrorist events and subsequent use of the mail to transmit
                                             anthrax. The Service’s Emergency Preparedness Plan has projected
                                             costs for prevention, detection, and protection measures to total almost
                                             $800 million in fiscal year 2003, and the Service has submitted a fiscal
                                             year 2004 appropriations request to Congress of $350 million for
                                             emergency preparedness costs. We recently raised concerns about
                                             whether the Service had conducted sufficient testing prior to making
                                             additional investments for security-related equipment in this area.3
                                             Further, we are concerned that the Service has not specified costs
                                             related to operating, maintaining, and replacing any of this new
                                             equipment.

                                           • In fiscal year 2002, the Service continued its freeze on capital spending
                                             primarily for new facilities, and capital outlays amounted to $1.2 billion
                                             less than those in fiscal year 2001. Freezing capital spending may have
                                             detrimental financial and operational effects on the Service. These

                                           3
                                            U.S. General Accounting Office, Diffuse Security Threats: USPS Air Filtration Systems
                                           Need More Testing and Cost Benefit Analysis before Implementation, GAO-02-838
                                           (Washington, D.C.: Aug. 22, 2002).




                                           Page 14                                                   GAO-03-118 U.S. Postal Service
Major Performance and Accountability
Challenges




   delays may result in higher future capital costs, operational delays,
   deteriorating infrastructure, deferred maintenance costs and efficiency
   gains, and difficulty in meeting growth demands for providing universal
   service.

• The Service may also incur costs associated with the implementation of
  its Transformation Plan, but it has not specified its expected costs or
  projected revenue increases for implementing various actions included
  in the Plan.

The Service must continue exploring ways to control costs and improve
productivity, particularly in connection with the Service’s nationwide
infrastructure and transportation network and the workforce that supports
it. The Service’s nationwide network has developed piecemeal over time
and may not represent the most effective strategy to support current postal
operations. For example, the locations of some postal facilities may have
been based on operating strategies that are now outdated, as the Service
has moved from a manually oriented processing and delivery environment
to a highly automated environment. Further, mailers are now performing
more mail preparation and processing functions that may bypass some of
the Service’s processing steps. Also, alternatives are available that may be
more cost-effective for the Service and may increase customer
convenience and accessibility. For example, stamp purchases account for
about 450 million transactions in post offices each year. As Figure 5 shows,
it costs less for the Service to sell stamps at ATMs and through other retail
alternatives such as supermarkets, drugstores, and other large retail
vendors than it does at post office counters.




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Figure 5: Cost per $1 to the Postal Service for Sale of Stamps at Different Points of Service




                                            As part of its Transformation Plan, the Service has started to lay the
                                            groundwork for addressing possible inefficiencies in its current operating
                                            network. First, the Service is developing proposals for implementing its
                                            Network Integration Alignment program to align mail-processing
                                            infrastructure with its logistics and operational strategies. On the retail
                                            side, the Service has also ended its self-imposed moratorium on post office
                                            closings, and is examining alternative methods to provide retail services in




                                            Page 16                                             GAO-03-118 U.S. Postal Service
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                     a more cost-effective and customer-friendly manner.4 The Service has
                     recently launched a national advertising campaign to promote the purchase
                     of stamps at ATMs and other alternatives, such as grocery stores. The
                     Service is also pursuing other retail alternatives, such as partnering with
                     commercial retail outlets to sell postal products and services.

                     These actions represent a good starting point to address possible
                     inefficiencies in its current operating network. The Service’s ability to
                     control costs and improve productivity will help restrain postal rate
                     increases and improve its overall financial position. Looking to the future,
                     as the Service determines its business model and incorporates measures to
                     enhance security and safety, it will be challenged to realign its
                     infrastructure and workforce to support the new business model.



Address Unresolved   Key issues concerning unresolved financial issues include the following:

Financial Issues     • Insufficient cash flow has increased pressure to borrow;

                     • Outstanding debt remains high;

                     • Workers’ compensation liability and postretirement health obligations
                       are increasing;

                     • Difficulties remain in generating sufficient revenues to cover funding
                       needs.

                     The Service’s unresolved financial issues may have significant long-term
                     impacts on its financial condition and outlook. The Service’s cash flows
                     from operations have not been sufficient to fund needed capital
                     expenditures and significantly reduce debt pressures; its workers’
                     compensation liability and postretirement health benefit obligations are
                     large and increasing; and its liabilities exceed its assets. Furthermore, we
                     recently reported that the Service should reassess the accounting
                     treatment of its pension and postretirement health obligations, in part



                     4
                      Lifting the moratorium on closing post offices, the Postmaster General stated that the
                     Service would restart the process of closing those post offices that have been “suspended”
                     or effectively closed. He stated that alternative services were provided for postal customers
                     in these communities (that is, contract stations, community post offices, and so forth).




                     Page 17                                                      GAO-03-118 U.S. Postal Service
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                         because of these financial challenges.5 Considering the Service’s current
                         difficulties in generating sufficient revenue and net income, concerns
                         remain about how its obligations and liabilities will be funded under the
                         current rate process. The recent discovery that the Service may be
                         overfunding its pension liability may provide an opportunity for the Service
                         to address financial challenges, such as its outstanding debt and
                         postretirement health obligations. The Service will need to take a
                         leadership role and examine how best to address these issues, both under
                         its current authority and within the context of a new business model.



Insufficient Cash from   Over the past 2 years, the Service has had insufficient cash flow from
Operations to Finance    operations to cover needed capital expenditures. This decreasing cash
                         position has also increased pressure on borrowing as the Service has
Capital Expenditures     approached its statutory debt limit of $15 billion. During fiscal years 2001
Necessitates Borrowing   and 2002, the Service froze part of its capital program to improve its cash
                         position and limit borrowing. Specifically, in fiscal year 2001, the Service
                         froze $1 billion in construction and renovation on more than 800 postal
                         projects. However, a slowing economy led to a $1.68 billion net loss for
                         fiscal year 2001, and a decreased cash position necessitated a $2 billion
                         increase in borrowing. As seen in figure 6 below, this increase in
                         outstanding debt put the Service within $4 billion of its statutory debt limit.




                         5
                          U.S. General Accounting Office, U.S. Postal Service: Accounting for Postretirement
                         Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 2002).




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Figure 6: The Service’s Outstanding Debt Has Been Approaching Its Statutory Debt Limit




                                         In fiscal year 2002, the Service continued its freeze on capital spending
                                         primarily for new facilities, and capital outlays were $1.2 billion less than
                                         those in fiscal year 2001. This reduction in capital expenditures, combined
                                         with additional revenues from a mid-year rate increase and cost-cutting
                                         efforts, improved its cash flows from operations and allowed the Service to
                                         reduce debt by $200 million. This was the first debt reduction in the past 6
                                         years. Despite these improvements, the Service incurred a $676 million net
                                         loss for the fiscal year. The Service is also planning on continuing its capital
                                         freeze on new facilities in fiscal year 2003 and budgeting an $800 million
                                         debt reduction. While freezing capital expenses has helped to keep the
                                         Service’s borrowing below planned levels in the short term, this action is
                                         not a viable long-term solution. As we stated earlier, these delays may
                                         result in higher future capital costs, operational delays, deteriorating
                                         infrastructure, deferred maintenance costs and efficiency gains, and
                                         difficulty in meeting growth demands for providing universal service.




                                         Page 19                                              GAO-03-118 U.S. Postal Service
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Liabilities and Obligations                As of the end of fiscal year 2002, the Service’s liabilities (as reported in the
                                           Service’s annual financial statement) and obligations were estimated at
                                           approximately $117 billion. Table 3 lists some of the major expenses paid in
                                           fiscal year 2002 and the remaining liability and obligation balances for key
                                           financial categories as of the end of fiscal year 2002.



Table 3: Selected Service Expenses, Liabilities, and Obligations in Fiscal Year 2002


                                                                                    In billions of dollars
                                                  Selected expenses in fiscal                Remaining liability        Remaining obligation
                                                                  year 2002                balance as of 9/30/02        balance as of 9/30/02
Retirement-related                                                             $9.1                          $32.2                             n/a
Retiree health insurance premiums                                               1.0                            n/a                          $45.0a
Subtotal, retirement-related                                                   10.1                           32.2                           45.0
                               b
Compensation and benefits                                                      41.5                            2.0                             n/a
Workers’ compensation                                                           1.5                            6.7                             n/a
Outstanding debt                                                               0.3 c                          11.1                             n/a
Accumulated leave                                                               n/a                            2.1                             n/a
Leases                                                                          0.8                            n/a                            9.6 d
Payables and accrued expenses                                                   n/a                            2.2                             n/a
                                                                                    e                               f
Other                                                                        12.9                             5.7                              n/a
Total                                                                        $67.2                           $62.0                          $54.6
                                           Source: Postal Service.
                                           n/a -- not applicable.
                                           a
                                            The Service’s 2002 Annual Report estimated that its postretirement health benefits obligation ranged
                                           from $40 billion to $50 billion. Therefore, we used the midpoint of the range for an estimate of the
                                           Service’s postretirement health obligation.
                                           b
                                               Excludes retirement and workers’ compensation expenses, which have been listed separately.
                                           c
                                               Interest expense paid for the Service’s borrowing.
                                           d
                                               Future minimum lease payments for all noncancelable operating leases.
                                           e
                                               Includes transportation; emergency preparedness, net; and other expenses.
                                           f
                                           Includes estimated prepaid postage; prepaid box rentals and permit and metered mail; outstanding
                                           postal money orders; and other liabilities.


                                           The Service’s total liabilities exceeded its total assets by $3.0 billion at
                                           fiscal year’s end 2002. Under the Service’s current break-even business
                                           model, ratepayers are responsible for these liabilities. However, despite
                                           multiple rate increases, revenues have been insufficient to fund both
                                           operating expenses and expenses related to these liabilities, which



                                           Page 20                                                              GAO-03-118 U.S. Postal Service
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continue to exceed total assets. As Figure 7 shows, this imbalance has been
growing since fiscal year 1999.



Figure 7: The Imbalance between the Service’s Assets and Liabilities Has Been
Increasing




This imbalance could change in fiscal year 2003 if Congress takes
legislative action based upon recent OPM analysis of the Service’s CSRS
pension liability.6 OPM’s analysis showed that the Service would overfund
its pension liability if the current statutory funding mechanism remains
unchanged. Consequently, OPM proposed legislative action that would
change this mechanism and reduce the Service’s annual pension payments
to OPM. Figure 8 compares the estimated future payments under current

6
 As part of a separate review, we asked OPM to estimate how much of the underfunded
CSRS pension liability is attributable to the Service and to estimate the Service’s
postretirement health obligations.




Page 21                                                  GAO-03-118 U.S. Postal Service
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                                         law with the estimated future payments under the OPM legislative proposal
                                         provided in November 2002. However, if legislation is enacted that differs
                                         from this proposal, the Service’s estimated future payments could change.



Figure 8: Estimated Annual Payments Related to Current and Proposed Pension Liability




                                         The potential for reduced future payments in this area offers opportunities
                                         to address some of the Service’s major financial challenges. The Service
                                         has stated that it would use available cash from these reductions in the
                                         future payments to further reduce debt in 2003 from $800 million to more
                                         than $3 billion. Another consideration would be to fund the Service’s
                                         significant obligation for retiree health benefits, which ranges from $40
                                         billion to $50 billion according to the Service’s 2002 Annual Report. The
                                         annual payments for these retiree health benefits are currently calculated
                                         on a pay-as-you-go basis and have been increasing at an average rate of 15
                                         percent over the past 2 years. Furthermore, uncertainties remain about the
                                         future direction of mail volumes and revenues, and thus, any available cash
                                         may have to be used to cover operating and capital expenditures.




                                         Page 22                                          GAO-03-118 U.S. Postal Service
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Difficulty in Generating      Under the Service’s current business model, sufficient revenues have not
Sufficient Revenue and        been generated to cover all of its funding needs and obligations (see Figure
                              9). This has resulted in an accumulated deficit of $6.0 billion as of the end
Funding the Service’s Needs
                              of fiscal year 2002, which represents the amount by which cumulative
                              expenses have exceeded cumulative revenues since the Service’s inception.



                              Figure 9: Needs for Funds Outweigh Sources of Funds




                              Opportunities may exist under the current rate-setting process to generate
                              additional revenues. Over the past year, the Service has explored options
                              within the current rate-setting process to generate more volume and



                              Page 23                                               GAO-03-118 U.S. Postal Service
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revenues, such as the use of Negotiated Service Agreements (NSAs). NSAs,
which are sometimes referred to as “contract rates,” provide an agreement
between the Service and its customers that the customers would perform
specific activities to their mailings (for example, improved address quality
or mail preparation enhancements), and that these mailings would exceed
a preset volume threshold. In exchange, the Service would provide
discount rates and/or predetermined services. The Service hopes that such
agreements would result in additional volume and revenue. Although an
NSA was recently submitted for approval, it is too early to tell whether
additional net revenues would result. Further, some mailers are concerned
about whether NSAs would ensure fair and equitable pricing among postal
customers, particularly among smaller mailers. Although much discussion
remains for these and other ratemaking alternatives, joint mailing industry–
Service efforts, such as the postal summits, provide an opportunity to
explore improvements to the ratemaking process that can be mutually
beneficial. Actions in this area need to be further explored; without them,
the Service is likely to experience difficulty in generating sufficient
revenues to cover its increasing funding needs and to carry out its mission
of providing universal service at reasonable rates.

Further, changes in the accounting treatment for future obligations,
including those for retiree health benefits, may impact the Service’s funding
needs. We recently reported that the Service should consider the potential
accounting ramifications of its unique statutory obligations and reassess
how best to account for and disclose them.7 Such fundamental funding
issues raise many questions, including:

• How will the Service’s obligations be paid—from increased rates,
  volume growth, or other revenue sources, such as federal
  appropriations?

• Who will pay these obligations—current ratepayers, future ratepayers,
  or taxpayers?

• When will these obligations be paid—now, later, or incrementally over
  time?




7
GAO-02-916R.




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Develop Strategies to       Key issues for developing such strategies are as follows:

Address Human               • Workforce planning needs to support transformation;
Capital Issues
                            • Pay comparability and performance-based pay issues are unresolved;

                            • Labor-management cooperation is needed to support transformation.

                            The Service has the second largest civilian workforce in the nation, with
                            over 854,000 employees, and its personnel-related costs make up over
                            three-quarters of its total annual operating expenses. Consequently, the
                            Service faces major human capital challenges, including (1) planning for
                            the appropriate workforce, (2) addressing unresolved pay and
                            compensation issues, and (3) enhancing labor-management relations. The
                            Service faces major transitions in each of these areas, as it is increasingly
                            affected by a large number of upcoming retirements and by rising costs
                            associated with these retirements that are difficult to control. The
                            strategies developed to address these issues will have significant financial
                            and operational impacts in the future. The Service will be challenged to
                            align its human capital strategies with its transformational goals. It will
                            need to work together with its major unions and management associations
                            to find common ground to achieve progress in addressing these long-
                            standing issues.



Workforce Planning Needs    Current Service workforce planning generally focuses on the short term—
to Support Transformation   up to 3 years—and supports operations in the current environment.
                            However, the Transformation Plan is outlining changes to the postal
                            operating environment, and the Service needs to align its workforce to
                            correspond with these changes. For example, under its current authority,
                            the Service has already taken actions to increase its operational efficiency
                            by examining alternatives to traditional postal facilities, increasing its use
                            of automation and information technology, consolidating operating shifts,
                            and offering new products and services. These actions require a different
                            mix in the number, skills, and deployment of its employees, and they may
                            involve repositioning, retraining, outsourcing, and reducing the workforce.

                            Developing strategies to determine the appropriate workforce to support
                            the Service’s operations structure will be challenging. The Service has an
                            opportunity, however, with its large number of impending retirements to
                            gain resource flexibility to aid realignment. As shown in figure 10, the



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                                          Service has projected that from fiscal year 2003 through fiscal year 2010, 75
                                          percent of its executives, 51 percent of its managers/supervisors/
                                          postmasters, and 38 percent of its carriers, clerks, and other bargaining
                                          employees will reach eligibility for regular retirement.



Figure 10: A Large Percentage of the Service’s Workforce Will Soon Be Retirement-Eligible




                                          Note: Percentages may not add due to rounding.


                                          The decisions regarding these retirements (that is, whether or not to fill
                                          these slots, and if so, when, with whom, and where) may have significant
                                          financial and operational impacts. For example, we have reported that the
                                          Service faces potentially serious succession problems in its managerial
                                          ranks.8 As of late 2001, the Service’s Senior Vice President for Human


                                          8
                                           U.S. General Accounting Office, U.S. Postal Service: Deteriorating Financial Outlook
                                          Increases Need for Transformation, GAO-02-355 (Washington, D.C.: Feb. 28, 2002).




                                          Page 26                                                    GAO-03-118 U.S. Postal Service
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                            Resources estimated that the Service had qualified staff to replace about
                            three-quarters of its current leadership positions, and some of these
                            replacement staff members were themselves approaching retirement
                            eligibility. The Service will be challenged to ensure that it has a sufficient
                            number of managers with the competencies to lead its workforce.

                            As part of its long-term planning, the Service will be challenged to realign
                            its workforce to support its new business model. Specifically, legislative or
                            regulatory changes that would address restrictions on closing or
                            consolidating postal facilities, change the universal service obligation, or
                            modify the postal monopoly provision could also affect the appropriate
                            number, skills, and deployment of the postal workforce. Regardless of the
                            time frame, the Service needs mechanisms and milestones, along with the
                            flexibility to align its workforce with its goals. These mechanisms and
                            milestones would provide the measures to assess progress and make
                            necessary adjustments to effectively implement changes to its large
                            workforce and vast operations network.



Resolve Pay Comparability   A significant portion of the Service’s personnel-related expenses is used for
and Performance-Based Pay   employee salaries and benefits. Properly aligning these pay systems with
                            the Service’s transformation goals would contribute to the Service’s ability
Issues
                            to attract, motivate, and retain high-performing employees and help focus
                            the workforce’s efforts toward achieving organization goals. The Service
                            will be challenged to develop strategies that align these systems to its goals
                            because of long-standing issues, including (1) developing performance-
                            based pay systems for all employees, and (2) other pay issues, including
                            disagreements related to private-sector pay comparability and statutory
                            pay caps for selected positions, which may hinder recruitment and
                            retention for these positions.

                            Recent events in the Service’s performance-based pay system have brought
                            needed attention to this area. The Service initiated a performance-based
                            pay system for its executives, managers, postmasters, supervisors, and
                            other nonbargaining employees in fiscal year 1995 that was intended to
                            align rewards with measured results. Concerns were raised among some
                            postal stakeholders about the effectiveness of the incentives in this system,
                            and the Service recently announced that it discontinued this system in
                            fiscal year 2002 and is in the process of revising it. As the Service develops
                            strategies to enhance its performance-based compensation system, some
                            key factors to consider include (1) the basis on which payments are made,
                            and (2) whether the incentives provided in the system would actually



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                           reduce costs and support organizational goals. Furthermore, the Service’s
                           performance-based pay system covered only certain segments of the
                           Service’s workforce; namely, postal management. The Service’s bargaining
                           unit employees (union), who make up most of its workforce, have generally
                           opposed performance-based compensation systems.

                           Other pay issues also challenge the Service, some of which are statutorily
                           set. First, the Service is required by law to maintain employee
                           compensation and benefits on a standard comparable to the compensation
                           and benefits paid for comparable levels of work in the private sector. The
                           Service and its major employee unions, however, have often disagreed with
                           the way in which the comparability standard should be applied and have
                           frequently relied on third-party arbitration to settle compensation-related
                           disputes. Studies have been completed that support both sides of the
                           argument, and disagreements continue as to the appropriate level of
                           compensation and benefits (pension, retiree health, and so forth) for postal
                           employees. Furthermore, other statutorily set pay-related issues are also
                           challenging the Service, such as the salary cap on postal executive salaries.
                           Postal officials believe that this cap constrains its ability to provide
                           compensation that is comparable to that in the private sector for selected
                           managerial, executive, and officer-level positions, thus making it more
                           difficult for the Service to retain and recruit key talent. In today’s
                           environment of increased competition and uncertain financial conditions,
                           the Service will be challenged to develop strategies to enhance its
                           performance-based system so that employee performance is effectively
                           aligned with organizational goals.



Labor-Management           As we have often reported, the Service has long-standing adversarial labor-
Cooperation Is Needed to   management relations. In human capital areas, including workforce
                           deployment, work rules, and pay comparability, disagreements between the
Support Transformation
                           two sides have existed for quite some time and, in many cases, were
                           resolved by third-party arbitration. Disagreements between these groups
                           can have major financial, operational, and human capital implications,
                           because personnel-related costs represent the largest single element of the
                           Service’s annual expenses, and they are the primary determinant of prices
                           and the key factor in the Service’s overall financial viability. The Service
                           will also be challenged to develop strategies to improve this relationship
                           and to effectively plan and carry out the changes needed to implement the
                           Transformation Plan.




                           Page 28                                            GAO-03-118 U.S. Postal Service
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Recent actions between the Service and its unions have shown that these
parties can work together and achieve positive results. Following the
terrorist attacks, the Service worked closely with its unions and
management associations to develop strategies to protect the mail,
customers, and postal employees. The Service and some of its unions also
worked together to implement the first negotiated rate settlement in fiscal
year 2002, which expedited the rate process and generated additional
revenues that enabled the Service to address financial difficulties caused
by the terrorist events and the slowing economy. More recently, the Service
and the leaders of its largest union, the American Postal Workers Union
(APWU), proposed a 2-year extension of the current negotiated contract.

Furthermore, movement toward transformation provides an opportunity
for the Service and unions to make continued progress that can be
beneficial to both parties. With the Service’s leadership, these groups will
need to address other issues that will also impact transformation,
including: (1) developing a new business model; (2) determining processes
to make operational changes, including changes to its infrastructure (such
as facility closings) to support the new model; (3) realigning and
restructuring the workforce—particularly in light of the large number of
impending retirements—through prevailing collective bargaining
agreements and other available means; and (4) reaching agreement on and
improving the collective bargaining process. The Service and the National
Association of Letter Carriers announced in September 2002 the formation
of a joint task force to address transformation issues. Also, the Service and
the APWU announced that they will establish a joint task force to explore
methods of repositioning the workforce, with the goals of minimizing
employee dislocation, maximizing customer service, and maintaining
efficient operations. Although disagreements still exist between the Service
and these groups, including concerns about some aspects of the
Transformation Plan, we believe that these parties have taken steps in the
right direction and need to continue communication and cooperation.




Page 29                                            GAO-03-118 U.S. Postal Service
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Provide Complete and      Key issues to address in providing financial and performance information
                          include the following:
Reliable Financial and
Performance               • Greater transparency is needed in quarterly financial information;
Information in a Timely   • Accounting and disclosure of long-term obligations and liabilities need
and Transparent             reassessment;
Manner
                          • Performance information could be improved.

                          Given the vital role of the nation’s postal system and the importance of its
                          financial viability, it is imperative that the Service, its stakeholders, and the
                          public have adequate information available to them to understand the
                          Service’s changing financial situation and assess its progress toward
                          meeting its performance goals and future plans. The Service has made
                          some improvements in its financial information since 2001; however, we
                          continue to have concerns about the transparency of its financial and
                          performance information. Although the Service has traditionally provided
                          detailed financial data to stakeholders throughout the fiscal year, its
                          periodic financial reports have not clearly explained changes in its financial
                          condition and outlook or results of operations, and they have not always
                          been readily available to the public. Further, we believe that the Service
                          should reassess its accounting treatment and disclosure of some of its long-
                          term obligations, including its pension and postretirement health
                          obligations. The Service has also made mixed progress in implementing our
                          recommendations relating to improved reporting on its new products and
                          services and enhanced performance plans and reports. Improved
                          transparency is necessary to reflect economic reality and to enhance
                          accountability and decisionmaking for the Service.



Greater Transparency Is   Despite the fact that the Service publicly releases periodic financial
Needed in Quarterly       information, significant changes in its financial outlook over the past 2
                          years were not evident from this information and came as a surprise to
Financial Information     many stakeholders. We have raised concerns and made recommendations
                          regarding the lack of transparent, timely, and readily accessible periodic
                          information necessary to explain changes in the Service’s financial
                          situation and expected outlook. In response to our recommendations, the
                          Service committed to providing quarterly financial statements similar to
                          those provided by publicly traded enterprises, and posting them to its Web
                          site. However, we recently reviewed the Service’s quarterly financial



                          Page 30                                              GAO-03-118 U.S. Postal Service
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                            reports and reported that they provided only limited analysis and
                            explanation to help stakeholders understand what had changed, why it had
                            changed, and how the changes affected its financial condition, operating
                            results, and expected outlook.9 Additionally, the quarterly reports were
                            neither consistent in their format and content nor readily available to the
                            public. Consistency in the format and content, as well as availability of
                            recent and past reports, is necessary for stakeholders to assess the
                            Service’s performance over time. Since the issuance of our report, the
                            Service released a first-quarter report for fiscal year 2003 that was an
                            improvement over its previous quarterly reports because it contained more
                            information.



Accounting and Disclosure   The magnitude of the Service’s annual revenues and the importance of its
of Long-Term Obligations    financial situation to the mailing industry, its ongoing transformation
                            efforts, and both Congress’s and the public’s calls for more information and
and Liabilities Need
                            additional transparency regarding financial reporting matters in general
Reassessment                have focused attention on the Service’s reporting of some of its major long-
                            term obligations and liabilities. We recently reported that because of these
                            factors and the potential effects on current and future ratepayers, the
                            Service should reassess the accounting treatment of its pension and
                            postretirement health obligations.10 Further, we also reported that the
                            Service should disclose its estimated postretirement health obligations in
                            its financial statements. We believe that decisionmakers’ ability to fully
                            consider the impact of these obligations is hindered by the current lack of
                            recognition and disclosure. Accounting and reporting should reflect
                            economic reality to provide stakeholders with a clear understanding of the
                            Service’s true financial condition, so that decisions can be made about
                            what funds will be needed and how to address these liabilities and
                            obligations in the future.



Performance Information     Over the past 2 years, we have reported concerns about the quality and
Could Be Improved           transparency of the Service’s performance information—information that
                            is critical for effective management, as well as for communication with
                            customers, Congress, and other stakeholders. For example, we reported


                            9
                             U.S. General Accounting Office, U.S. Postal Service Actions to Improve Its Financial
                            Reporting, GAO-03-26R (Washington, D.C.: Nov. 13, 2002).
                            10
                                 GAO-02-916R.




                            Page 31                                                    GAO-03-118 U.S. Postal Service
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concerns that the Service did not include important net income and
delivery scores in its preliminary fiscal year 2002 performance plan.11 We
continue to have concerns in this area. The Service’s fiscal year 2003
Performance Plan included targets for all four quarters only for one service
category—First-Class overnight mail. In addition, as we reported in our
January 2001 report on the Service’s major management challenges, a
number of issues have been raised relating to the reliability and credibility
of the data the Service uses for ratemaking.12 The Service’s progress in this
area continues to be a concern for congressional oversight.

Furthermore, we have also raised concerns that the Service’s information
related to its e-commerce and other new products and services was not
complete, accurate, and consistent. We recommended that the Service
provide Congress and the Postal Rate Commission (PRC) with an annual
report that includes information on revenues and expenses for all its new
products and services. The Service issued its first report in May 2002;
however, the report provided information only on selected new products
and services. We are concerned that without complete and consistent
information, the Service will not be able to assess its progress toward
meeting overall performance goals, and Congress, the PRC, and other
interested parties will not have sufficient information for oversight
purposes.




11
 U.S. General Accounting Office, U.S. Postal Service: Financial Outlook and
Transformation Challenges, GAO-01-733T (Washington, D.C.: May 15, 2001).
12
 U.S. General Accounting Office, Major Management Challenges and Program Risks: U.S.
Postal Service, GAO-01-262 (Washington, D.C.: Jan. 2001).




Page 32                                                   GAO-03-118 U.S. Postal Service
GAO Contacts




               Subjects covered in this report                Contact person
               Implementing the Transformation Plan and       Bernard L. Ungar, Director
               determining a business model for the 21st      Physical Infrastructure Issues
               century                                        (202) 512-2834
                                                              ungarb@gao.gov
               Financial condition and outlook

               Human capital issues

               Transparency and timeliness of financial and
               performance
               information
               Unresolved long-term financial issues          Linda Calbom, Director
                                                              Financial Management and Assurance
               Retirement-related obligations                 (202) 512-8341
                                                              calboml@gao.gov
               Outstanding debt
               Mail safety and security                       Keith A. Rhodes, Chief Technologist
                                                              Applied Research and Methods
                                                              (202) 512-6412
                                                              rhodesk@gao.gov




               Page 33                                                    GAO-03-118 U.S. Postal Service
Related GAO Products



Transformation                U.S. Postal Service: Moving Forward on Financial and Transformation
                              Challenges. GAO-02-694T. Washington, D.C.: May 13, 2002.

                              U.S. Postal Service: Deteriorating Financial Outlook Increases Need for
                              Transformation. GAO-02-355. Washington, D.C.: Feb. 28, 2002.

                              U.S. Postal Service: Financial Outlook and Transformation Challenges.
                              GAO-01-733T. Washington, D.C.: May 15, 2001.

                              U.S. Postal Service: Transformation Challenges Present Significant
                              Risks. GAO-01-598T. Washington, D.C.: Apr. 4, 2001.

                              U.S. Postal Service: Sustained Attention to Challenges Remains Critical.
                              GAO/T-GGD-00-206. Washington, D.C.: Sept. 19, 2000.



Cost Cutting, Productivity,   Contract Management: Postal Service’s National Office Supply Contract
Security, and Financial       Has Not Been Effectively Implemented. GAO-03-230. Washingon, D.C.:
                              Jan. 17, 2003.
Issues
                              U.S. Postal Service: More Consistent Implementation of Policies and
                              Procedures for Cash Security Needed. GAO-03-267. Washington, D.C.: Nov.
                              15, 2002.

                              United States Postal Service: Opportunities to Strengthen IT Investment
                              Management Capabilities. GAO-03-3. Washington, D.C.: Oct. 15, 2002.

                              Diffuse Security Threats: USPS Air Filtration Systems Need More Testing
                              and Cost Benefit Analysis before Implementation. GAO-02-838.
                              Washington, D.C.: Aug. 22, 2002.

                              Diffuse Security Threats: Technologies for Mail Sanitization Exist, but
                              Challenges Remain. GAO-02-365. Washington, D.C.: Apr. 23, 2002.

                              Highlights of GAO’s Conference on Options to Enhance Mail Safety and
                              Postal Operations. GAO-02-315SP. Washington, D.C.: Dec. 20, 2001.

                              Breast Cancer Research Stamp: Millions Raised for Research, but Better
                              Cost Recovery Criteria Needed. GAO/GGD-00-80. Washington, D.C.: Apr.
                              28, 2000.




                              Page 34                                         GAO-03-118 U.S. Postal Service
                            Related GAO Products




                            U.S. Postal Service: Changes Made to Improve Acceptance Controls for
                            Business Mail. GAO/GGD-00-31. Washington, D.C.: Nov. 9, 1999.

                            U.S. Postal Service: Stronger Mail Acceptance Controls Could Help
                            Prevent Revenue Losses. GAO/GGD-96-126. Washington, D.C.: June 25,
                            1996.



Human Capital               U.S. Postal Service: Diversity in District Management-Level Positions.
                            GAO/GGD-00-142. Washington, D.C.: June 30, 2000.

                            U.S. Postal Service: Diversity in the Postal Career Executive Service.
                            GAO/GGD-00-76. Washington, D.C.: Mar. 30, 2000.

                            Equal Employment Opportunity: The Postal Service Needs to Better
                            Ensure the Quality of EEO Complaint Data. GAO/GGD-99-167.
                            Washington, D.C.: Sept. 28, 1999.

                            U.S. Postal Service: Diversity in High-Level EAS Positions.
                            GAO/GGD-99-26. Washington, D.C.: Feb. 26, 1999.

                            U.S. Postal Service: Little Progress Made in Addressing Persistent Labor-
                            Management Problems. GAO/GGD-98-1. Washington, D.C.: Oct. 1, 1997.

                            U.S. Postal Service: Labor-Management Problems Persist on the
                            Workroom Floor. GAO/GGD-94-201A/B. Washington, D.C.: Sept. 29, 1994.



Financial and Performance   Postal Service Employee Workers’ Compensation Claims Not Always
Transparency                Processed Timely, but Problems Hamper Complete Measurement.
                            GAO-03-158R. Washington, D.C.: Dec. 20, 2002.

                            U.S. Postal Service: Actions to Improve Its Financial Reporting.
                            GAO-03-26R. Washington, D.C.: Nov. 13, 2002.

                            U.S. Postal Service: Accounting for Postretirement Benefits.
                            GAO-02-916R. Washington, D.C.: Sept. 12, 2002.

                            United States Postal Service: Information on Retirement Plans.
                            GAO-02-170. Washington, D.C.: Dec. 31, 2001.




                            Page 35                                           GAO-03-118 U.S. Postal Service
Related GAO Products




U.S. Postal Service: Update on E-Commerce Activities and Privacy
Protections. GAO-02-79. Washington, D.C.: Dec. 21, 2001.

U.S. Postal Service: Enhancements Needed in Performance Planning and
Reporting. GAO/GGD-00-207. Washington, D.C.: Sept. 19, 2000.

U.S. Postal Service: Postal Activities and Laws Related to Electronic
Commerce. GAO/GGD-00-188. Washington, D.C.: Sept. 7, 2000.

U.S. Postal Service: Challenges to Sustaining Performance Improvements
Remain Formidable on the Brink of the 21st Century. GAO/T-GGD-00-2.
Washington, D.C.: Oct. 21, 1999.

The Results Act: Observations on the Postal Service’s Preliminary
Performance Plan for Fiscal Year 2000. GAO/GGD-99-72R. Washington,
D.C.: Apr. 30, 1999.

U.S. Postal Service: Development and Inventory of New Products.
GAO/GGD-99-15. Washington, D.C.: Nov. 24, 1998.

Financial Reporting: Accounting for the Postal Service’s Postretirement
Health Care Costs. GAO/AFMD-92-32. Washington, D.C.: May 20, 1992.




Page 36                                          GAO-03-118 U.S. Postal Service
Performance and Accountability and High-
Risk Series

              Major Management Challenges and Program Risks: A Governmentwide
              Perspective. GAO-03-95.

              Major Management Challenges and Program Risks: Department of
              Agriculture. GAO-03-96.

              Major Management Challenges and Program Risks: Department of
              Commerce. GAO-03-97.

              Major Management Challenges and Program Risks: Department of
              Defense. GAO-03-98.

              Major Management Challenges and Program Risks: Department of
              Education. GAO-03-99.

              Major Management Challenges and Program Risks: Department of
              Energy. GAO-03-100.

              Major Management Challenges and Program Risks: Department of
              Health and Human Services. GAO-03-101.

              Major Management Challenges and Program Risks: Department of
              Homeland Security. GAO-03-102.

              Major Management Challenges and Program Risks: Department of
              Housing and Urban Development. GAO-03-103.

              Major Management Challenges and Program Risks: Department of the
              Interior. GAO-03-104.

              Major Management Challenges and Program Risks: Department of
              Justice. GAO-03-105.

              Major Management Challenges and Program Risks: Department of
              Labor. GAO-03-106.

              Major Management Challenges and Program Risks: Department of State.
              GAO-03-107.

              Major Management Challenges and Program Risks: Department of
              Transportation. GAO-03-108.




              Page 37                                     GAO-03-118 U.S. Postal Service
Performance and Accountability and High-
Risk Series




Major Management Challenges and Program Risks: Department of the
Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of
Veterans Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for
International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental
Protection Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency
Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National
Aeronautics and Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel
Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118.

High-Risk Series: An Update. GAO-03-119.

High-Risk Series: Strategic Human Capital Management. GAO-03-120.

High-Risk Series: Protecting Information Systems Supporting the
Federal Government and the Nation’s Critical Infrastructures. GAO-03-
121.

High-Risk Series: Federal Real Property. GAO-03-122.




Page 38                                       GAO-03-118 U.S. Postal Service
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