oversight

U.S. Postal Service: Bold Action Needed to Continue Progress on Postal Transformation

Published by the Government Accountability Office on 2003-11-05.

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

                              United States General Accounting Office

GAO                           Testimony
                              Before the Senate Committee on
                              Governmental Affairs


For Release on Delivery
Expected at 2:00 p.m. EST
Wednesday, November 5, 2003   U.S. POSTAL SERVICE
                              Bold Action Needed to
                              Continue Progress on Postal
                              Transformation
                              Statement of David M. Walker,
                              Comptroller General of the United States




GAO-04-108T 

                                                November 5, 2003


                                                U.S. POSTAL SERVICE

                                                Bold Action Needed to Continue Progress
Highlights of GAO-04-108T, a testimony          on Postal Transformation
before the Senate Committee on
Governmental Affairs




Last year the President established             The Commission found that the Service faces a bleak fiscal outlook. The
a commission to examine the                     Service has an outdated and inflexible business model amid a rapidly
future of the U.S. Postal Service               changing postal landscape. First-Class Mail appears to be on the brink of
(the Service). Its report, issued in            long-term decline as Americans take advantage of cheaper electronic
July 2003, contained a proposed                 alternatives. Thus, universal postal service is at risk. These findings are
vision for the Service and
recommendations to ensure the
                                                similar to our past work and point to the need for fundamental reforms to
viability of postal services. GAO               minimize the risk of a significant taxpayer bailout or dramatic postal rate
was asked to discuss (1) its                    increases. The Commission made recommendations to Congress and the
perspective on the commission’s                 Service aimed at achieving such reforms, which GAO believes merit
report and (2) suggestions for next             consideration.
steps. This testimony is based on
GAO’s analysis of the                           First Class Mail Volume Growth from Fiscal Years 1984-2004
Commission’s report and prior
GAO reports and testimonies.



GAO believes that Congress should
consider the Commission’s
recommendations and enact
comprehensive postal reform
legislation that would clarify the
Service’s mission and role; enhance
governance, accountability,
oversight, and transparency;                    GAO agrees with the Commission that now is the time to modernize the
improve regulation of postal rates;             nation’s postal laws rather than waiting until a financial crisis occurs that
and make human capital reforms.                 limits congressional options. Key aspects of the Service’s existing legislative
                                                framework that need to be addressed are 1) a broadly defined mission that
GAO also recommends that the                    enables the Service to engage in unprofitable and controversial endeavors, 2)
Postmaster General develop a                    a governance structure that does not ensure governing board members who
comprehensive plan to optimize its              have the requisite knowledge and skills, 3) the need for additional
infrastructure and workforce, in                accountability, oversight, and transparency provisions; 4) a lengthy,
collaboration with its key                      burdensome rate-setting process, and 5) provisions that hinder the Service in
stakeholders, and make it publicly              rationalizing its infrastructure and workforce.
available. In addition, the
Postmaster General should provide
periodic updates to Congress and                GAO also agrees with the Commission that the Service can take steps now to
the public on the status of                     modernize and increase efficiency and effectiveness, improve its financial
implementing its transformation                 position, and rationalize its infrastructure and workforce. The Service has
initiatives and other Commission                begun to implement its Transformation Plan initiatives, cut its costs and the
recommendations that fall within                size of its workforce, and improve its efficiency. However, since the Service
the scope of its existing authority.            issued its Transformation Plan in April 2002, it has not provided adequate
Postal officials have agreed to take            transparency on its overall plans to rationalize its infrastructure and
these actions.                                  workforce; the status of initiatives included in its Transformation Plan; and
                                                how it plans to integrate the strategies, timing, and funding necessary to
www.gao.gov/cgi-bin/getrpt?GAO-04-108T.
                                                move toward becoming a high-performing organization. The Service’s vision
To view the full product, including the scope   of rightsizing its infrastructure and workforce is achievable if approached in
and methodology, click on the link above.       a comprehensive, integrated fashion, with appropriate communication and
For more information, contact Bernard L.
Ungar at (202) 512-2834 or ungarb@gao.gov.      coordination with postal stakeholders.
Chairman Collins and Members of the Committee:

I am pleased to be here today to participate in this hearing on the report of
the President’s Commission on the United States Postal Service (the
Commission).1 Recently, the U.S. Postal Service (the Service) has gained
some financial breathing room because recently enacted legislation has
reduced the Service’s payments for its pension obligations. The Service
has estimated that its net income in fiscal year 2003 will be over $4 billion,
of which about $3 billion was the result of recent legislation. However, the
Service’s long-term financial challenges remain, and, accordingly, the
Service’s long-term outlook and transformation efforts remain on our
High-Risk List. Since we placed the Service on our High-Risk List in April
2001, the Service has developed its 2002 Transformation Plan, cut various
costs, and improved its productivity. However, these incremental steps
cannot resolve the fundamental and systemic issues associated with the
Service’s current business model.

We have called for actions to address the Service’s financial situation and
long-term outlook, including overhauling its existing business model. We
previously suggested that a commission could be established to study
postal issues and make recommendations, and like you, were pleased that
the President established the Commission to propose a vision for the
future of the Service and recommendations to ensure the viability of postal
services. As we testified before the Commission, fundamental changes will
need to be made to the Service’s business model, and the legal and
regulatory framework that supports it, to provide for the Service’s long-
term financial viability. The Commission proposed far-reaching changes in
each of these areas. The vision for the Service set forth in the
Commission’s report, combined with its comprehensive recommendations,
has the potential to fundamentally affect the nature of postal services,
their cost, and how they are provided to the American people.

In my testimony today, I will discuss our perspective on the Commission’s
report and offer suggestions on steps that Congress and the Service need
to take for continued progress on postal transformation. My testimony
today is based on our analysis of the Commission’s report, discussions




1
 President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service, (Washington, D.C.: July 31,
2003).



Page 1                                                                    GAO-04-108T
            with postal stakeholders, prior GAO reports and testimonies on postal
            transformation issues, and our continuing work in this area.2


            Overall, the Commission’s report provides a valuable contribution to assist
Summary 	   Congress, the Service, the executive branch, and stakeholders in
            considering the actions needed to transform the Postal Service to a more
            high-performing, results-oriented, transparent, and accountable
            organization. The Commission found that the Postal Service’s current
            business model has not produced the desired results because it has led to
            poor financial results, difficulty in funding capital needs, lack of incentives
            for good financial performance, and lack of efficiency. The Commission
            offered constructive suggestions, some of which require legislative change,
            and some that can be implemented under the existing statutory
            framework.

            The Commission’s recommendations echo many of our prior reports and
            address concerns that we have previously raised. We agree with the
            Commission that an incremental approach to Postal Service reform will
            yield too little too late given the enterprise’s bleak fiscal outlook, the
            magnitude of its financial obligations, the likelihood of declining First-
            Class Mail volumes, and the limited potential of the Service’s legacy postal
            network. All options for statutory and discretionary change need to be on
            the table for discussion, including the Commission’s findings and
            recommendations, as well as suggestions from GAO and other
            stakeholders. Some of the Commission’s recommendations, such as those
            related to rate setting, oversight, and collective bargaining, involve
            complex and controversial issues that may require further consideration
            and refinement. Nevertheless, the time has come for Congress to enact
            comprehensive postal reform legislation that would clarify the Service’s
            mission and role; enhance governance, accountability, oversight, and
            transparency; improve regulation of postal rates; and make human capital
            reforms.

            In addition to statutory reform, we agree with the Commission that the
            Service has many opportunities to become more efficient, notably by


            2
             See U.S. General Accounting Office, U.S. Postal Service: Key Postal Transformation
            Issues, GAO-03-812T (Washington, D.C.: May 29, 2003); Major Management Challenges
            and Program Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.: Jan. 2003); and
            U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation,
            GAO-02-355 (Washington, D.C.: Feb. 28, 2002).



            Page 2                                                                   GAO-04-108T
standardizing its operations and reducing excess capacity in its network.
This vision is achievable if approached in a comprehensive, integrated
fashion, and supported by postal stakeholders. The impending retirement
of much of the Service’s workforce provides an opportunity to rightsize
the organization with minimal disruption. However, the Service has not
provided adequate transparency on its plans to rationalize its
infrastructure and workforce, as well as on the status of initiatives
included in its Transformation Plan. More constructive engagement on its
efforts to rationalize its infrastructure and workforce is needed with the
Service’s employee organizations, the mailing industry, affected
communities, and Congress. To facilitate the Service’s progress in
implementing actions under the existing system, we recommend that the
Postmaster General develop a comprehensive and integrated plan to
optimize its infrastructure and workforce, in collaboration with its key
stakeholders, and make it available to Congress and the general public. In
addition, the Postmaster General should provide periodic updates to
Congress and the public on the status of implementing its transformation
initiatives and other Commission recommendations that fall within the
scope of its existing authority. In discussing our recommendations with
postal officials, they agreed to take these actions.

We also share the Commission’s concerns about the Service’s funding of
its $92 billion in liabilities and obligations, which include about $48 billion
in unfunded retiree health benefits, about $6.5 billion for unfunded
workers’ compensation benefits, and about $5.8 billion for unfunded Civil
Service Retirement System (CSRS) pension obligations. Although recent
legislation has addressed how the Service will cover its CSRS pension
obligations over 40 years, the Service continues to make minimum
payments for the other obligations, which are currently financed on a pay-
as-you go basis. Based on known demographic trends, the Service’s share
of its retirees’ health insurance premiums is expected to continue rising
until about 2040. Under the Service’s existing accounting and rate-setting
methods, more significant and frequent rate hikes are likely to be needed
for future ratepayers to cover the costs of benefits that are being earned
by current employees. We recognize that building accrual-based measures
of retiree health costs into the current rate base may be difficult
considering the pressure to defer rate increases. However, in our view, it
would be more prudent to address the unfunded obligations in a manner
that is fair and balanced for both current and future ratepayers. The Postal
Service has provided Congress with proposals for funding retiree health
benefit obligations, which we will address in our forthcoming report in
this area.



Page 3                                                            GAO-04-108T
                       Overall, the Commission’s report provides a valuable contribution to assist
The Commission’s       Congress, the Service, the executive branch, and stakeholders in
Report Made Valuable   considering the actions needed to transform the Postal Service into a more
                       high-performing, results-oriented, and accountable organization.
Contributions          Tomorrow, we plan to hold a forum at GAO with Postmaster General Jack
                       Potter and other national leaders and experts to discuss ways in which
                       Congress and the executive branch can foster federal agencies’ and their
                       networks’ efforts to become high-performing organizations.

                       We are pleased that the Commission’s report facilitated consideration and
                       debate by presenting the issues in a way that can be understood by a
                       general audience, and we commend the Commission for the open and
                       transparent process used to engage stakeholders in developing its report.
                       We also share the report’s emphasis on a customer-oriented Postal Service
                       that can continue to meet the nation’s vital need for universal postal
                       service. Citizens and businesses depend on the Service to provide
                       affordable postal services that are essential for communications and
                       commerce on a universal basis.

                       The Commission’s report also made an important contribution by
                       addressing difficult infrastructure and human capital issues. We agree with
                       the Commission that transforming the Service will require a fundamental
                       reexamination and realignment in both of these areas, which collectively
                       account for most of the Service’s costs and are the linchpin to delivering
                       high-quality service. As the Commission noted, the nation’s
                       communications, technology, and delivery markets have seen vast changes
                       since the Postal Service was created by the Postal Reorganization Act of
                       1970. New types of electronic communications include the use of e-mail,
                       wireless technology, and electronic bill payment services. These changes
                       appear to have placed First-Class Mail volume in the early stages of what
                       may be a long-term decline.

                       In this new environment, unless the Service’s operating expenses can be
                       reduced correspondingly, with a rightsizing of both its infrastructure and
                       workforce, it is questionable whether affordable universal mail service can
                       be sustained over the long term with a self-financing public institution.
                       Further, it takes time for an organization as large and complex as the
                       Service to make fundamental changes, particularly when some of these
                       may hinge on congressional action. Fortunately, the Commission and
                       others, including the Service, have identified numerous changes, many of
                       them possible within existing law, which can reduce the Service’s



                       Page 4                                                         GAO-04-108T
                       operating costs while maintaining and enhancing the quality and value of
                       postal services.

                       With respect to human capital issues, the Commission has recognized that
                       management reform and improvements in managing the Service’s
                       employees will be vital to comprehensive postal transformation. We
                       applaud the Commission’s efforts to develop new approaches in these
                       areas. While postal stakeholders may differ over the Commission’s
                       recommendations, we share the Commission’s view that the status quo is
                       not a viable option. All options for statutory and discretionary change
                       need to be on the table for discussion. If the Service and its employee
                       unions do not believe that some of the Commission’s workforce
                       recommendations are viable, we believe that alternative solutions, or a
                       package approach, to the workforce issues raised by the Commission and
                       us in our previous work need to be explored.


                       The Commission recognized that comprehensive reform to the nation’s
The Need for           postal laws is needed so that the Service can successfully meet the
Comprehensive Postal   formidable challenges it faces and continue to provide affordable and
                       high-quality universal postal services. The Commission reported that “it is
Reform Legislation     the Commission’s emphatic view that an incremental approach to Postal
                       Service reform will yield too little too late given the enterprise’s bleak
                       fiscal outlook, the depth of current debt and unfunded obligations, the
                       downward trend in First-Class Mail volumes and the limited potential of its
                       legacy postal network that was built for a bygone era.” We agree. Our prior
                       reports and testimonies have concluded that comprehensive postal reform
                       legislation is needed and have provided information on key issues to be
                       considered.3 The Commission’s findings are generally consistent with our
                       past work, and its recommendations address postal reform issues in a
                       comprehensive manner. Now that the Commission has finished its work,
                       the time has come for Congress to act.

                       The Commission’s recommendations represent a thoughtful package that
                       would preserve the historic values of universal postal service; make
                       important statutory changes in many key areas, including governance,


                       3
                        GAO-03-812T; GAO-02-355; 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); U.S. Postal Service: Financial Outlook and Transformation Challenges,
                       GAO-01-733T (Washington, D.C.: May 15, 2001); and U.S. Postal Service: Transformation
                       Challenges Present Significant Risks, GAO-01-598T (Washington, D.C.: Apr. 4, 2001).



                       Page 5                                                                  GAO-04-108T
oversight, and human capital; and create a mechanism for making further
changes over time. In our view, the Postal Service’s current financial
breathing room gives Congress an opportunity to carefully consider postal
transformation issues and “get it right” when making fundamental
decisions about rechartering the nation’s postal system for the 21st
century.

Consistent with the need for Congress to rethink the role of the federal
government in the 21st century, now is the time to rethink and clarify the
mission and role of the Postal Service. The Commission’s report
concluded that a number of trends are driving the need for a sweeping
exploration of the Postal Service’s role and operations in the 21st century.
In this regard, we share the Commission’s concerns about the likelihood of
declining First-Class Mail volumes in both the short-term and the long-
term. First-Class Mail generates more than half of the Service’s revenue.
The revenue generated by First-Class Mail was used to cover about 69
percent of the Service’s institutional cost in fiscal year 2002. The loss of
contribution from declining First-Class Mail volume would be difficult to
recover from other classes of mail. However, the rate of growth for First-
Class Mail has been in long-term decline since the 1980s. First-Class Mail
volume has steadily declined since it peaked 2 years ago. Its volume is
estimated to have declined by 3.1 percent in fiscal year 2003 and is
projected to decline by 1.3 percent in fiscal year 2004 (see figure 1).




Page 6                                                          GAO-04-108T
Figure1: First-Class Mail Volume Growth, Fiscal Years 1984 through 2004




                                        Looking ahead, we share the Commission’s concern that electronic
                                        diversion of First-Class Mail threatens to significantly accelerate the
                                        decline in the Service’s mail volume. Although the role of the Internet has
                                        been much commented on, it can be easy to overlook the fact that the
                                        Internet is a relatively recent historical phenomenon, with use of the
                                        World Wide Web greatly increasing in the 1990s. As recently as 5 years
                                        ago, only 37 percent of U.S. households had a computer, and only 19
                                        percent of U.S. households were connected to the Internet (see figure 2).
                                        The rapid diffusion of computer and Internet technologies has led to high
                                        adoption rates among those with high levels of income and education—the
                                        same groups that send and receive a disproportionate share of First-Class
                                        Mail. Thus, the trend data point to the strong potential for further
                                        electronic diversion. Raising postal rates to offset this trend may provide
                                        an immediate boost to the Service’s revenues, but over the longer term will
                                        likely accelerate the transition of mailed communications and payments to


                                        Page 7                                                         GAO-04-108T
                                        electronic alternatives, including the Internet. A report prepared for the
                                        Commission found that growth in electronic payments is likely to be an
                                        important factor in its forecast of gradual declines in First-Class Mail
                                        volume.4


Figure 2: Percent of U.S. Households with Computers and Internet Connections




                                        Note: Data was reported for 1984, 1989, 1993, 1997, 1998, 2000, and 2001. 





                                        4
                                         Institute for the Future, Two Scenarios of Future Mail Volumes: 2003-2017, prepared for
                                        the President’s Commission on the United States Postal Service (Palo Alto, CA: May 2003).



                                        Page 8                                                                        GAO-04-108T
The Commission’s report highlighted why the status quo has not produced
satisfactory results and is ill suited for the 21st century. Key weaknesses
include:

•	   Uncertain financial future: In theory, the Postal Service is self-
     supporting through postal revenues. In practice, as the Commission
     noted, even after recent statutory changes reduced the Service’s
     unfunded liability for Civil Service Retirement System (CSRS) pension
     benefits, the Service has accumulated about $92 billion in liabilities and
     obligations over the past three decades. These liabilities and
     obligations include debt, large unfunded obligations for retiree health
     benefits obligations, and remaining unfunded pension and workers’
     compensation liabilities. Thus, current ratepayers have not fully
     covered the total costs generated to provide the postal services they
     have received. A continuation of these trends would be diametrically
     opposed to the Commission’s vision of a fiscally sound Postal Service
     that can sustain universal postal service, particularly if the Service’s
     core business of First-Class Mail continues to decline in the coming
     years.

•	   Difficulty financing capital needs: In recent years, the Service has
     found it problematic to obtain adequate financing for capital needs.
     Thus, the Service has often increasingly resorted to borrowing to
     finance its capital improvements. In fiscal year 2001, the Service was
     faced with insufficient cash flow from operations and with debt
     balances that were approaching statutory limits. Consequently, the
     Service imposed a freeze on capital expenditures for most facilities that
     continued through fiscal years 2002 and 2003. The Service was able to
     repay some of its debt in fiscal year 2003, primarily because it
     generated a positive cash flow from a reduction in its pension costs.
     However, looking forward, it may be difficult for the Service to obtain
     adequate funds to address its long-term capital needs, including
     modernizing its aging network of postal facilities, without significantly
     increasing rates or debt. The Commission’s recommendations in the
     areas of retained earnings and disposition of excess Postal Service real
     estate represent carefully considered alternatives to help provide the
     Service with sufficient revenue for both its operating and capital needs.

•	   Lack of incentives for good financial performance: The “break-even”
     mandate requires the Service’s revenues and appropriations to equal its
     total estimated costs as nearly as practicable. For many years, this
     mandate has been interpreted to mean that the Postal Service should
     break even over time. As such, the break-even mandate removes the
     profit motive, and the rate-setting structure allows the Postal Service to


Page 9                                                            GAO-04-108T
     cover rising costs by raising rates. Further, the lack of a provision for
     retained earnings also limits incentives for productivity improvement
     and cost reduction. Under the current structure, whatever cost
     reductions the Service achieves in one rate cycle are used to reset the
     estimated costs that the Service is to recover in the next rate cycle. In
     contrast, a limited retained earnings provision would enable the
     Service and its employees to benefit from whatever cost reductions are
     achieved.

•	   Lack of efficiency: The Service has improved its efficiency in recent
     years, but much more progress needs to be made. The Commission
     identified significant variation in efficiency among mail processing
     plants and called for more efficient operations through standardization.
     We agree with the Commission that the Service has significant
     opportunities to improve its efficiency through best execution
     strategies in which those who can do it best and at the best price would
     perform postal activities while the Service rightsizes its infrastructure
     and workforce. However, as we have previously reported, both legal
     and practical constraints have hindered progress in these areas.

•	   Disincentives for maximizing allocation of postal costs: Under the
     current regulatory model, all classes of mail and types of service must
     cover their attributable costs, while institutional costs (i.e., common or
     overhead costs) are allocated based on judgment informed by broad
     statutory criteria.5 In effect, the Postal Service loses pricing flexibility
     as costs are allocated to specific postal products and services, creating
     a structural disincentive for the Service to maximize cost allocation to
     various classes of mail and types of service. Understanding, measuring,
     and reporting postal costs have greatly improved over the years.
     However, the proportion of postal costs allocated by the Service has
     increased by only 9 percent since postal reorganization. Further, cost
     allocation disputes persist, as illustrated by the different methodologies
     used by the Service and the PRC for allocating mail processing costs—
     that is, the Service allocated 58 percent of postal costs in fiscal year
     2002, while the PRC allocated 62 percent. We recognize that it may be
     difficult to use the data that are currently collected by the Service to



5
 The Service proposes domestic postage rates and fees, as required in law, so that each
class of mail or type of service must cover the direct and indirect postal costs that are
attributable to that class or type of service plus a portion of its other remaining
“institutional costs” which include all “common” or “overhead” costs. The requirement that
each class of mail must cover its attributable costs has long been interpreted to apply to
groupings of mail within classes that are called subclasses.



Page 10                                                                     GAO-04-108T
                                 allocate a higher proportion of costs. Nevertheless, the Commission’s
                                 conclusion that more postal costs can and should be allocated raises
                                 the issue of whether increasing regulatory authority over cost
                                 allocation would be necessary to ensure that all costs that can be
                                 rationally attributed are properly allocated. Furthermore, improvement
                                 in the Service’s data collection could also enable greater allocation.

Postal Service Mission and   It is important for Congress to consider how best to clarify the mission
Role Need Clarification      and role of the Postal Service as part of a fundamental reexamination of
                             the role of the federal government in the 21st century. The starting point is
                             to consider the Commission’s recommendation that Congress amend the
                             nation’s postal laws “to clarify that the mission of the Postal Service is to
                             provide high-quality, essential postal services to all persons and
                             communities by the most cost-effective and efficient means possible at
                             affordable, and where appropriate, uniform rates.” This recommendation
                             is coupled with proposals to create a mechanism for change by giving
                             broad authority to a newly created Postal Regulatory Board, including
                             authority to review and issue binding decisions on certain Postal Service
                             proposals to redefine delivery frequency requirements; uniform postal
                             rates; and the Postal Service’s monopoly to deliver mail and place items in
                             mailboxes.

                             The Commission sought to clarify the nature of the Service’s universal
                             postal service mission by recommending that Postal Service activities be
                             limited to accepting, collecting, sorting, transporting, and delivering
                             letters, newspapers, magazines, advertising mail, and parcels and
                             providing other governmental services on a reimbursable basis when in
                             the public interest. The Commission recognized that the nation’s postal
                             laws did not envision the challenge of setting appropriate boundaries on
                             the Service’s commercial activities and maintaining fair competition
                             between the Service and the private sector. These issues need to be
                             addressed because the Service has repeatedly strayed from its core
                             mission. We have reported on the Service’s money-losing initiatives in
                             electronic commerce and remittance processing, among other things.6 The
                             Service’s ill-fated ventures were also questioned by some postal
                             stakeholders as unfair competition, since they were cross-subsidized by a


                             6
                              U.S. General Accounting Office, 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:
                             Postal Activities and Laws Related to Electronic Commerce, GAO/GGD-00-188
                             (Washington, D.C.: Sept. 7, 2000), U.S. Postal Service: Development and Inventory of New
                             Products, GAO/GGD-99-15 (Washington, D.C.: Nov. 24, 1998).



                             Page 11                                                                    GAO-04-108T
tax-exempt entity that is also exempt from many laws and regulations
governing the private sector. Further, such ventures have raised the
fundamental issue of why the federal government is becoming involved in
areas that are well served by the private sector. Although the current
Postmaster General has appropriately focused on the Service’s core
business of delivering the mail and sharply curtailed its nonpostal
initiatives, the Commission recommended codifying this policy. In our
view, the time has come for Congress to clarify the Service’s core mission
and ensure continuity across changes in postal management.

However, it will be important to understand the implications of generally
limiting the Postal Service to its traditional role of handling the nation’s
mail, as the Commission has recommended. In that event, the Service will
face the formidable challenge of maintaining affordable universal postal
service by growing revenues or significantly cutting its costs as its core
business of First-Class Mail declines. In order to achieve net cost savings,
the Service’s cost-cutting efforts must currently offset billions of dollars in
annual cost increases for general wage increases, cost-of-living
adjustments, and rising benefits costs, particularly in health insurance
premiums, as well as costs associated with having to deliver mail to over
1.5 million new addresses every year. Declining First-Class Mail volume
will intensify the financial squeeze by reducing the volume of highly
profitable mail. Thus, if the Service is limited to its traditional role,
maintaining the quality and affordability of postal services would likely
require dramatic improvement in the Service’s efficiency. The Service
would need to become a much leaner and more flexible organization and
rightsize its network of mail processing and distribution facilities.
Consistent with our past work and the testimony of many key
stakeholders, the Commission recognized that comprehensive reform of
the nation’s postal laws would be necessary to facilitate changes in these
areas. In the next section of this statement, we discuss the Commission’s
recommendations involving governance, transparency, accountability, rate
setting, and human capital. In our view, revisiting these areas may involve
taking substantive and political risks, but we agree with the Commission
that such risks must be taken if the Service is to remain successful in the
coming decades.

In our view, key questions related to clarifying the Service’s mission and
role include:

•	   How should universal postal service be defined, given past changes and
     future challenges?



Page 12                                                           GAO-04-108T
•	   Should the Service be allowed to compete in areas where there are
     private-sector providers? If so, in what areas and on what terms? What
     laws should be applied equally to the Service and to its competitors?
     What transparency and accountability mechanisms are needed to
     prevent unfair competition and inappropriate cross-subsidization?
     Should the Service’s competitive products and services be subject to
     antitrust and general competition-related laws? Should they be subject
     to consumer protection laws?

•	   Should the Service retain governmental authority, including its
     regulatory responsibilities and law enforcement functions?

On a related issue, the Service’s current statutory monopoly on the
delivery of letter mail and its monopoly over access to mailboxes have
historically been justified as necessary for the preservation of universal
service.7 However, questions have been raised regarding whether these
restrictions continue to be needed, and if so, to what extent and whether
the Service should be able to define their scope. A key issue is whether the
Postal Service, as a commercial competitor in the overnight and parcel
delivery markets, should have the authority to regulate the scope of
competition in these areas.8 The Commission has recommended separating
these functions so that the Postal Service cannot define and regulate the
scope of its own monopoly.

As the Commission noted, it is a fundamental premise of American justice
that parties that administer laws should not have a financial interest in the
outcome. Accordingly, the Commission recommended that an independent
entity should be responsible for reviewing the costs and benefits of the
monopoly as well as for reviewing the thicket of vague and contradictory
regulations in this area and modernizing the law to define the postal
monopoly in clear and understandable terms. The independent entity
could narrow the postal monopoly over time if and when the evidence
shows that suppression of competition is not necessary to the protection



7
For information on the Service’s monopoly on mailbox access, see U.S. General
Accounting Office, U.S. Postal Service: Information About Restrictions on Mailbox
Access, GAO/GGD-97-85 (Washington, D.C.: May 30, 1997).
8
 The Service has used its regulatory power to redefine the scope of the statutory monopoly
by suspending the monopoly for urgent letters and outbound international mail. The
Service has also defined the scope of its monopoly by issuing regulations that define a
“letter” for the purposes of enforcing the statute (39 CFR 310.1(a)) as well as regulations
specifying access to mailboxes (Domestic Mail Manual, D041 and P011.2.2).



Page 13                                                                      GAO-04-108T
                            of universal service without undue risk to the taxpayer. Narrowing or
                            eliminating the monopoly could increase consumer choice and provide
                            incentives for the Service to become more effective and efficient. For
                            example, in recent years, FedEx has expanded its role in delivering
                            residential parcels and UPS has shortened its guaranteed transit time on
                            ground shipments traveling to some of the country’s biggest metropolitan
                            areas. As Congress considers the Commission’s recommendations relating
                            to the postal monopoly, we believe that key questions include:

                            •	   Is a government monopoly needed to enable affordable universal postal
                                 service, especially if such service is provided at uniform rates? If so,
                                 what scope of monopoly is needed to accomplish its goal?

                            •	   Should the Service continue to have the power to define (and redefine)
                                 its own statutory monopoly through suspensions and regulations?

                            •	   Should a regulatory body have authority to redefine and narrow the
                                 postal monopoly and the mailbox monopoly, or should such decisions
                                 be made through the legislative process? If authority is delegated to a
                                 regulatory body, should a clear statement of congressional intent be
                                 provided to guide regulatory decisions, or should the regulator have
                                 unfettered discretion to consider options to expand or contract the
                                 Service’s monopoly? What principles should guide the process, and
                                 what key players should be involved?

                            •	   Similarly, should the regulator be able to consider opening up access to
                                 the mailbox? If so, under what circumstances? Would it be cost-
                                 effective for private delivery companies to deliver items to mailboxes if
                                 individuals could veto access and redefine mailbox access as they
                                 move from one home to another?

                            •	   Should any regulatory decisions be governed by process requirements
                                 to enable stakeholder input? Should such processes facilitate
                                 congressional review of any changes, as is the case for some other
                                 types of communications regulated by the federal government?

Protecting the Public       The Commission concluded that the Postal Service must have greater
Interest through Enhanced   flexibility to operate in a businesslike fashion, but that with this latitude
Transparency,               comes the need for enhanced transparency to enable effective
                            management and congressional and other oversight. We agree. As the
Accountability and Public   Commission noted, managerial accountability must come from the top,
Policy Oversight            with the Service governed by a strong corporate-style board that holds its
                            officers responsible for performance. The Commission concluded that
                            giving the Service greater flexibility while preserving its monopoly would

                            Page 14                                                           GAO-04-108T
                       require enhanced oversight by an independent regulatory body endowed
                       with broad authority, adequate resources, and clear direction to protect
                       the public interest and ensure that the Postal Service fulfills its duties. The
                       Commission cited reports that we have issued since September 2000
                       urging greater financial transparency and expressing concern about sharp
                       declines in the Service’s financial position that were accompanied by too
                       little explanation.9 To enable sufficient accountability, oversight, and
                       transparency, the Commission recommended changes to the Service’s
                       governance structure, the creation of a Postal Regulatory Board that
                       would have broad powers, and mechanisms to facilitate and ensure
                       greater transparency of the Service’s financial and performance results.
                       Key issues include whether the Commission’s recommendations are
                       necessary, have struck the appropriate balance between multiple
                       objectives, and would be practical to implement.

Governance Structure   The Commission found that given its importance to the country and the
                       challenges to its future, the Postal Service should meet the highest
                       standards of corporate leadership, including a strong, strategic Board of
                       Directors coupled with enhanced oversight and financial transparency.
                       Specifically, the Commission concluded that if the Postal Service is to
                       adapt successfully to a changing postal market, overcome its significant
                       financial challenges, and emerge an efficient and more businesslike
                       institution, then it must be guided by a nimble and results-oriented
                       management and corporate governance structure charged with applying
                       the best business practices of the private sector to the public-spirited
                       mission of delivering the nation’s mail. We agree. As we have reported, if
                       the Service is to successfully operate in a more competitive environment,
                       the role and structure of a private-sector board of directors may be a more
                       appropriate guide in this area.10 Having a well-qualified, independent,
                       adequately resourced, and accountable board is critical for a major federal
                       institution with annual revenues approaching $70 billion and
                       approximately 829,000 employees.




                       9
                        The Commission cited GAO-03-118; GAO-02-694T; GAO-02-355; GAO-01-733T;
                       GAO-01-598T; U.S. General Accounting Office, U.S. Postal Service Actions to Improve Its
                       Financial Reporting, GAO-03-26R (Washington, D.C.: Nov. 13, 2002); and U.S. Postal
                       Service: Enhancements Needed in Performance Planning and Reporting, GAO-00-207
                       (Washington, D.C.: Sept. 19, 2000).
                       10
                           GAO-03-812T.



                       Page 15                                                                    GAO-04-108T
Another concern is what qualification requirements would be appropriate
for the Postal Service’s governing board to ensure that it possesses the
kind of expertise necessary to oversee a major government business.
Consistent with this view, the Commission recommended that all directors
should be selected based on “business acumen and other experience
necessary to manage an enterprise of the Postal Service’s size and
significance.” The report also suggested that the board possess “significant
financial and business expertise” and that among other things, board
members have no material relationship with the Service or its management
team. However, the Commission recommended that these criteria be
incorporated into the Board’s bylaws or governance guidelines rather than
into statute.

In this area, we believe that potential issues include:

•	   Would the proposed qualification requirements be sufficient to produce
     a well-qualified board with outstanding and experienced directors, in
     part because of the flexibility inherent in the appointment process?

•	   Would the proposed board become politicized, in part because most
     directors would be subject to approval and removal by a political
     appointee, (i.e., the Secretary of the Treasury), with no Senate
     confirmation, no requirement for the board to have a bipartisan
     membership, and the possibility of removal for any reason?

•	   Would the pool of qualified candidates be unduly restricted because
     some corporations have a material relationship with the Service, while
     some retired corporate leaders would be over the proposed mandatory
     retirement age of 70 for Service board members?

•	   Would selection of members of the proposed board of directors by an
     official other than the President be consistent with the Appointments
     Clause in Article II, section 2, clause 2 of the Constitution, which
     requires that the heads of executive branch departments be appointed
     directly by the President with the advice and consent of the Senate?11




11
  In Silver v. U.S. Postal Service, 951 F.2d 1033 (9th Cir. 1991), the Court held that the
Postal Service, as an independent establishment of the executive branch, is subject to the
Appointments Clause. The Court further held that the postal governors were the head of
the Postal Service, and thus, were required to be appointed by the President and confirmed
by the Senate.



Page 16                                                                     GAO-04-108T
                            •	   We believe that these concerns merit careful consideration, as well as
                                 other concerns on which we have previously reported.12 In particular, it
                                 is debatable whether it would be appropriate for the Secretary of the
                                 Treasury to have the authority to approve most future appointments to
                                 the governing board of the Service, which fulfills vital government
                                 functions and includes nearly one-third of the federal civilian
                                 workforce. An alternative option may be to have a number of persons,
                                 including the Secretary of the Treasury, to advise the President on such
                                 appointments. Another key issue is whether these appointments should
                                 continue to be made with the advice and consent of the Senate, which
                                 is a mechanism to involve the legislative branch in matters of postal
                                 governance. However, we agree with the Commission’s conclusion that
                                 the legacy governance structure of the Service is increasingly at odds
                                 with its mission in the modern environment and that the Service’s
                                 governing structure needs to consist of members with the requisite
                                 knowledge and experience.

                            The Commission’s report made a contribution in identifying the
                            fundamental activities necessary for good corporate governance. The
                            report made a number of recommendations for the proposed board of
                            directors to more effectively discharge its duties, including refocusing the
                            board on a high-level strategic focus on cost reduction and service quality,
                            as well as minimizing the financial risk to taxpayers and restoring the
                            fiscal health of the institution as a whole. In this regard, we believe that
                            the current Board of Governors should refocus its activities along the lines
                            suggested by the Commission.

Accountability Mechanisms   We have reported that a major issue related to the Service’s mission and
                            role is whether the Service should be held more directly accountable for
                            its performance, and if so, to what extent, to whom, and with what
                            mechanisms.13 Specifically, how should the Service’s governing board be
                            held accountable? The Commission found that the Service urgently needs
                            a vigilant, broadly empowered and independent regulatory body to focus
                            on its ability to fulfill its core duties in an appropriate and effective
                            manner. The Commission recommended that the Postal Rate Commission
                            be abolished and replaced with a newly created Postal Regulatory Board
                            endowed with broad public policy responsibilities as well as broad



                            12
                             U.S. General Accounting Office, U.S. Postal Service: Issues Related to Governance of the
                            Postal Service, GAO/GGD-97-141 (Washington, D.C.: Aug. 14, 1997).
                            13
                             GAO-03-812T.



                            Page 17                                                                     GAO-04-108T
mandates and authority for accountability and oversight. The regulator
would also have authority in numerous areas including rate setting,
retained earnings, financial transparency, service standards, performance
reporting, and enforcing pay comparability, among others.

A key objective of the Commission’s recommendations was to focus the
proposed Postal Service board of directors on the business aspects of the
Postal Service while transferring public policy responsibilities from the
Service to an independent regulator with no stake in the outcome. The
recommendations also would transfer key public policy responsibilities
from Congress to the regulator. For example, the newly created regulatory
body could, over time, redefine the Service’s universal service mission and
statutory monopoly. The Commission’s accountability and oversight
provisions would make major changes to the current structure. Thus, the
Commission’s recommendations in this area raise fundamental issues. In
our view, key questions include:

•	   Who should make public policy decisions regarding the Postal Service:
     the Service, an independent regulator, or Congress?

•	   What accountability should apply to a monopoly provider of vital
     postal services that also is a major competitor in the communications
     and delivery marketplace?

•	   How should the Service be held accountable if it remains an
     independent establishment of the executive branch?

•	   To what extent should the Service be accountable to Congress and the
     executive branch without being subject to undue political control?

•	   To what extent should a regulatory body exercise accountability? For
     what purpose? With what authority?

•	   Although additional oversight of the Service appears necessary, would
     the Service have sufficient management flexibility given the fairly
     broad authority the Commission proposes be given to the regulatory
     body?

•	   How should the regulatory body be structured to preserve its
     independence from political control and minimize the risk of regulatory
     capture?




Page 18                                                         GAO-04-108T
                            •	   What statutory guidance and constraints should apply to regulatory
                                 actions, including due process and recourse to judicial and/or
                                 congressional review?

                            •	   What transparency of financial and performance results is appropriate
                                 for the Service as a federal establishment and would be necessary for
                                 oversight and accountability? What mechanisms should be established
                                 to facilitate and ensure transparency?

                            •	   Should the Service comply, either on a voluntary basis or through a
                                 statutory requirement, with major Securities and Exchange
                                 Commission (SEC) reporting requirements?

Enhancing Transparency of   The Commission noted that as a public entity, the Postal Service is wholly
Financial and Performance   owned by the American people, who, as the Service’s shareholders, are
Information                 due a regular and full accounting of the fiscal health and challenges facing
                            this vital national institution. The Commission stated that the Service has a
                            responsibility to the public to be transparent in its financial reporting. We
                            agree. Reporting requirements should ensure accountability and
                            transparency of financial and organizational reports. We have
                            recommended that the Postal Service improve its transparency,14 and to
                            the Service’s credit, it has made progress in providing greater transparency
                            on its financial results and outlook. The Service has instituted quarterly
                            financial reports, expanded the discussion of financial matters in its
                            annual report, and included more information and explanation in the
                            financial and operating statements prepared for each 4-week accounting
                            period. The Service has also upgraded its Web site to include these and
                            other reports in a readily accessible format. The Service is clearly moving
                            in the right direction. However, we agree with the Commission that more
                            progress can and should be made.

                            In an area where we have particular concern that the Service have
                            transparent, appropriate accounting, the Commission recommended that
                            the Service’s governing board work with its independent auditor to
                            determine the most appropriate accounting treatment of the Service’s
                            unfunded retiree health benefit obligations in accordance with applicable
                            accounting standards. The Commission also recommended that the board
                            consider funding a reserve account to address these obligations to the




                            14
                             GAO-02-355.



                            Page 19                                                         GAO-04-108T
extent that Postal Service finances permit. These recommendations are
similar to our previous statements, which noted that

•	   the Service’s current accounting treatment does not reflect the legal
     nature and the economic reality of its related obligation to pay for
     these costs;

•	   the Service’s treatment of retiree health benefit costs in its financial
     statements has not sufficiently recognized the magnitude, importance,
     or meaning of this obligation to decision makers or stakeholders; and

•	   because the retiree health benefit obligations are funded on a pay-as-
     you-go basis, rather than on a full accrual basis, current ratepayers are
     not paying for the full costs of the services they are receiving.

We continue to believe that the time has come for the Service to formally
reassess how it accounts for and discloses these very significant financial
obligations. In our view, given the legal nature, economic substance, and
stakeholder implication of these obligations, the Service should account
for these retiree health costs and related obligations in its financial
statements on an accrual basis. We recognize that a change to accrual
accounting could have a significant impact on rates. However, the Service
could work with the PRC and other stakeholders to determine how best to
phase in such a change to mitigate the immediate impact on ratepayers.
Regardless of whether the Service changes its accounting for retiree health
costs, we continue to believe the Service should disclose the funded status
of all of its retiree health and pension obligations.

The Commission enunciated an ambitious standard for the Service when it
stated that “As a unifying force in American commerce and society, and as
a customer-financed government endeavor, the Postal Service should be
setting the standard for financial transparency by which all other Federal
entities are judged.” [Emphasis in original.] The Commission also found
that given its important public mission and central role in the nation’s
economy, changes in the Service’s economic health should not come as a
surprise to those responsible for or impacted by its performance. In this
regard, the Commission found that while the Service often conducts
financial reporting over and above what is required by federal agencies, it
remains behind the level of disclosure offered by its corporate peers.

We believe that technical compliance with accounting and reporting
requirements should be a floor for financial transparency, not a ceiling.
Thus, we were pleased that in keeping with its theme of incorporating best


Page 20                                                            GAO-04-108T
practices, the Commission said it “strongly recommends” that the Service
voluntarily comply with major Securities and Exchange Commission
(SEC) reporting requirements. The Service has the opportunity to
proactively work with the SEC to define how it could voluntarily comply
with SEC requirements in a manner appropriate to its unique legal status.

Enhanced financial transparency is particularly important because the
Service is the hub of a $900 billion mailing industry and is a vital part of
the nation’s communications and payment network. Its recent financial
difficulties have accentuated the need for stakeholders to be well apprised
of the Service’s financial situation and to understand how future operating
results may be affected by impending events. Although the Service has
traditionally provided a range of detailed financial and operating data to
stakeholders throughout the fiscal year, its periodic financial reports did
not clearly explain changes in its financial condition, results of operations,
and its outlook, and were not always readily available to the public. Thus,
in April 2001, we recommended that the Service provide quarterly financial
reports to Congress and the public with sufficiently detailed information
for stakeholders to understand the Service’s current and projected
financial condition and how its outlook may have changed since the
previous quarter.15 In November 2002, we found that the Service’s financial
reports provided to date had provided only limited analysis and
explanations to help stakeholders understand what had changed, why it
had changed, and how these changes affected the Service’s current
financial situation and expected outlook.16 Since then, the Service has
improved its quarterly financial reports. We also discussed the SEC’s
reporting structure as a model for the Service to consider.

As the Commission recognized, the Service remains a public institution
with a monopoly on providing vital postal services to the nation, and
enhanced financial information will be essential to improve managerial
accountability and public policy oversight. In this regard, there are areas
where stakeholders have little information, such as the Service’s unmet
financial needs to maintain and modernize its infrastructure, or the true
market value of the Service’s vast real estate holdings. Therefore, progress
in enhancing the Service’s financial transparency is worthy of continued
congressional attention.



15
 GAO-01-598T.
16
 GAO-03-26R.



Page 21                                                          GAO-04-108T
In addition to the above areas, we have reported on, and continue to have
concerns about, the Service’s annual performance reporting that is
required under the Government Performance and Results Act (GPRA).17
The Service’s recently filed 5-Year Strategic Plan for Fiscal Years 2004-
2008 contained a clear mission statement and presented a useful
discussion of the prospects for mail volume, including three specific
forecasts. However, the plan represented a missed opportunity because it
failed to adequately communicate what the Service intends to accomplish
over the period covered by the plan. For example, the plan contained little
new information on the Service’s goals and strategies for network and
workforce realignment over the next 5 years. The plan continues a trend in
which the Service’s GPRA reports have provided less and less new
information to Congress, postal stakeholders, and the American people.

We also continue to be concerned that the Service does not communicate
its delivery performance for all of its major mail categories, particularly
those covered by its statutory monopoly to deliver letter mail. The
Service’s customers should have a right to know what they are getting for
their money, particularly captive customers with few or no alternatives to
using the mail. However, the Service’s public reporting is limited to on-
time delivery of First-Class Mail deposited in collection boxes18 and does
not include bulk mailing of First-Class Mail by businesses. In addition,
stakeholders and individuals have expressed concerns about the accuracy
of mail delivery, but no public information is provided for this aspect of
mail service. The Commission recognized that information about service
quality would become even more important if the Service obtains more
flexibility and incentives to cut its costs. Accordingly, the Commission
recommended that the Postal Regulatory Board be required to prepare a
comprehensive annual report assessing the Postal Service’s performance
in meeting established service standards. If such a report is to be
meaningful, the regulator may also need authority to require the Service to
collect service performance data.

Without sufficient transparency, it is difficult to hold management
accountable for results and conduct independent oversight. The Service
has the opportunity to seek out best practices and continually improve as
standards evolve and experience accumulates, and its recent track record


17
 GAO/GGD-00-207.
18
 First-Class Mail measurement is further limited to collection boxes located in 463 ZIP
Codes from which most First-Class Mail volume originates and to which it is destined.



Page 22                                                                      GAO-04-108T
                         suggests that some improvement is possible. A key issue is whether
                         statutory change is needed to enhance the level of transparency that the
                         Service must provide, particularly if it obtains greater flexibility along the
                         lines recommended by the Commission.

Rate-setting Structure   The Commission concluded that it is imperative that the Postal Service, an
                         institution with a statutory monopoly over the delivery of letter mail, have
                         clear, independent regulatory oversight that includes oversight over its
                         postal rates. The Commission found that the current statutory structure
                         produced independent review of postal rates and had the laudable goals of
                         protecting postal customers against undue discrimination while restricting
                         cross-subsidies. However, the Commission stated that the current rate-
                         setting structure should be abolished so that these goals can be
                         accomplished more efficiently and effectively, by establishing an
                         incentive-based rate-setting system. We agree that major changes are
                         needed in this area. As we have testified, improvements in the postal rate-
                         setting structure will be a fundamental component of a comprehensive
                         transformation.19 The existing statutory structure is increasingly ill suited
                         to meeting the needs of the Postal Service and the American people. Its
                         shortcomings include the following:

                         •	   Lengthy and burdensome rate-setting proceedings - The Commission
                              found that the current rate-setting structure imposes a litigious, costly,
                              and lengthy rate-setting process that can delay needed new revenues by
                              more than a year. We agree. The Service and other stakeholders report
                              spending millions of dollars in each rate case on attorneys, economists,
                              statisticians, and other postal experts who pore over many thousands
                              of pages of testimony, interrogatories, and rebuttals. The high cost of
                              participation, coupled with the increasing complexity of rate-setting
                              data and methods, make it difficult for smaller stakeholders to
                              effectively participate in the regulatory process.

                         •	   Bias toward adversarial relationships - As the Commission noted, every
                              significant change requires a major proceeding that places the Postal
                              Service in an adversarial relationship with its major customers and at a
                              distinct competitive disadvantage. Rate cases tend to pit the Service
                              and many postal stakeholders against each other, since the zero-sum
                              nature of the revenue requirement provides powerful incentives for
                              parties to attempt to shift postal costs in ways that serve their
                              immediate self-interests. The adversarial rate-setting process has


                         19
                          GAO-03-812T.



                         Page 23                                                            GAO-04-108T
     consumed the attention of all of the parties involved, increasing the
     difficulty of focusing on constructive efforts to find mutually
     acceptable approaches to difficult technical issues. During lengthy rate
     cases, rules against ex parte communications help preserve due
     process and fairness, but also make it difficult for rate-setting experts
     at the Service and the PRC to constructively discuss technical issues
     and resolve problems as they arise.

     Despite these structural impediments, rate-setting experts at the
     Service and PRC have made some progress in improving
     communications in recent years, notably during the 1999 Data Quality
     Study on the quality of data used for rate-setting purposes, as well as
     during subsequent efforts to improve data collection systems.20 We are
     pleased that the Service has convened periodic briefings with
     representatives of the PRC, the Service’s Office of the Inspector
     General, and us, in which it engaged with the parties and provided
     detailed status reports on initiatives to improve rate-setting data
     systems. We are also encouraged that the Service has started to engage
     with the PRC in planning some improvements to its rate-setting
     systems, and we commend the Service for offering public briefings to
     provide additional transparency on modifications to key data systems.
     These efforts facilitate constructive dialogue on data quality issues,
     providing opportunities for the parties to make continuous progress as
     postal operations, technology, and data systems change.

•	   Perennial disagreements - Cost allocation issues have been debated for
     many years and are frequently a key reason why postal rate cases are
     so lengthy and litigious, since their disposition can directly affect
     postal rates. The statutory structure seeks to assure all parties due
     process by enabling them to raise whatever issues they wish,
     regardless of how many times the same issues may have been
     considered in the past. The Postal Service has a special opportunity to
     repeatedly raise issues by building them into its initial proposals for
     changes to postal rates. For example, the Postal Service and PRC have
     strongly disagreed on the allocation of mail processing costs in rate
     cases dating from 1997—to the point that two sets of postal costs are
     routinely prepared, one according to the Postal Service’s preferred
     methodology and one according to the PRC’s methodology. This
     situation epitomizes the downside of enabling parties to repeatedly
     litigate the same issues in the name of due process. Although the



20
 A.T. Kearney, Data Quality Study (Alexandria, Va.: Apr. 16, 1999).



Page 24                                                               GAO-04-108T
     Commission noted that interested parties should have an opportunity
     to participate in rate-setting matters, the need to address complex cost
     allocations in each and every rate proceeding conflicts with the
     Commission’s vision of a streamlined rate-setting process that can
     swiftly resolve complaints about postage rates.

•	   Poor incentives for data quality - The current statutory model gives the
     Service opportunities to seek advantage in litigious rate-setting
     proceedings through its control over what data are collected and how
     those data are analyzed and reported. The PRC cannot compel the
     Service to collect data, or update data it has collected. The PRC also
     cannot subpoena data that the Service has collected. The 1999 Data
     Quality Study found that key postal cost data had not been updated for
     many years and were used regardless of their obsolescence. Although
     the Service has worked to address these and other deficiencies
     identified by the study, as noted above, it is fair to question why the
     regulatory process had enabled these problems to continue for so many
     years. Further, regarding the sufficiency of data in the recent
     negotiated service agreement (NSA) case, the Service provided no
     mailer-specific cost data corresponding to mailer-specific discounts,
     creating uncertainty regarding whether the discount was set
     appropriately in relation to the cost savings that the Service should be
     expected to achieve as a result of the NSA.

•	   Disputes over cost allocation - The Service is generally opposed to PRC
     proposals that would require the Service to provide more detailed
     annual information on postal costs and information on cost allocation
     methodologies used to produce that data. In support of its view, the
     Service has asserted that the current statutory structure generally
     limits the PRC to a reactive role in considering proposed rates and
     supporting information provided by the Service in rate and
     classification cases. This perspective contrasts with the Commission’s
     vision of independent regulatory oversight in which the outcome
     cannot be unduly influenced through the selective provision of
     information to the regulator. To this end, the Commission
     recommended that the Service periodically report on the allocation of
     costs in accordance with form, content, and timing requirements
     determined by the Postal Regulatory Board, the recommended
     successor to the PRC.

•	   Lack of mailer-specific data - Looking forward, a key issue is what data
     on the mailer-specific costs, volumes, and revenues of the Postal
     Service, if any, should be provided to justify mailer-specific discounts
     that result from NSAs. The Service has generally opposed providing


Page 25                                                          GAO-04-108T
     such mailer-specific data in the future as overly burdensome, unwise,
     and impractical, in part because its cost measurement systems are
     geared to providing aggregate data at the subclass level. The PRC is
     currently reviewing what cost data should be provided to justify mailer-
     specific postal rates, and key stakeholders have filed conflicting
     testimony on the issues in this area.21 Regardless of the outcome, it is
     reasonable to ask how the Service can effectively identify, prioritize,
     and negotiate mutually beneficial NSAs if little reliable data are
     available on the cost savings that the Service should realize as a result
     of the mailer-specific requirements of each NSA.

The above problems are well documented. They have been cited in
numerous independent reviews over the years, including some by us. The
parties are familiar with the status quo, and we suspect that the high
stakes involved make parties understandably reluctant to make changes,
particularly when the financial consequences are difficult to foresee. In
recent public meetings held to discuss possible changes to the rate-setting
process within existing law, the Service dismissed many of the suggestions
that were made. Moreover, the Service and other stakeholders have
reached no consensus about proposals for legislative reform. Therefore,
the Commission was advocating bold action when it concluded that the
current rate-setting process should be abolished and replaced with a more
streamlined structure that continues to impose rigorous standards on rate
setting, but does so without impeding the ability of Postal Service officials
to manage and lead.

The Commission’s report built on the legislative debate in which price cap
regulation has emerged as a leading alternative to the current statutory
model for regulating postal prices. Specifically, the Commission
recommended that the existing system of setting postal rates be abolished
and replaced with a price-cap system to regulate the rates of
noncompetitive postal products and services, coupled with providing the
Service with pricing flexibility for competitive postal products and
services, subject to a rule against cross-subsidization. The Commission’s
proposed price-cap system is intended to enhance the Service’s
management flexibility to set rates within ceilings established by the
Postal Regulatory Board, so that if the rate ceiling is appropriately
constructed, the Postal Service will feel intense pressure to rein in
spending and improve efficiency and productivity. A price-cap system


21
 See documents filed under PRC Rulemaking Docket No. RM2003-5, available at
www.prc.gov.



Page 26                                                                 GAO-04-108T
could enable the Service to implement a strategy of smaller, more frequent
changes in postal rates, as opposed to a strategy of more infrequent,
significant increases.

The Commission’s recommended price-cap system has some similarities
with price-cap systems that were offered in successive postal reform bills
introduced by Rep. John M. McHugh. These proposals were reviewed in
numerous hearings, and the extensive record surfaced many issues and
concerns. In our view, key questions include the following:

•	   Would a price-cap system provide the intended incentives for the
     Postal Service to maximize its financial performance, since the Service
     is a public institution that is not accountable to shareholders who hold
     stock and demand management accountability?

•	   Would a price cap provide incentives for the Postal Service to reduce
     the quality of service for captive customers? If so, what transparency
     and accountability mechanisms would be needed to ensure the quality
     of universal postal service?

•	   Could the Service use its flexibility to raise rates within the price cap to
     unfairly shift the burden of institutional costs away from competitive
     products and services and onto its most captive customers?

•	   Should postal rates be required to cover attributable costs? If so, at
     what level (e.g., mail class, subclass, rate category, etc.)?

•	   Could the Service generate sufficient revenues if its rates were
     constrained by a price cap? If not, under what circumstances, if any,
     should the Service be authorized to raise rates in excess of the cap?
     How can ratepayers be assured that it would not be too easy for the
     Service to obtain such increases, which would vitiate the intent of the
     price cap? What process should apply to such “exigent” rate increases?

•	   Would a price cap restrain the growth of postal wages? If so, to what
     extent and would such a result be desirable?

•	   How would a price cap system affect historic preferences that have
     been provided to certain mailers, such as mailers of nonprofit mail,
     periodicals, and library mail?




Page 27                                                             GAO-04-108T
•	   How could the Postal Service redesign the rate and classification
     system, as it did through the 1995 reclassification case, if it were
     subject to a price cap?

•	   Would adopting a price cap system be too risky, given the problems
     that have surfaced in some price-cap models adopted by other
     regulated industries? How could flexibility be built into the price-cap
     system itself to minimize risk and handle “the law of unintended
     consequences?”

•	   Should provisions of a price-cap system be specified by the legislative
     process? If so, which features should be codified in statute and which
     should be left to the regulatory process?

•	   What issues should be considered in adapting price-cap regulation from
     other industries and foreign postal systems to the unique context of
     regulating postal rates in the United States?

•	   What transition features should be required, such as a “baseline” rate
     case, in order to successfully implement a price-cap system?

•	   Should a revised and streamlined cost-of-service model be considered
     as an alternative to abolishing the current rate-setting structure and
     replacing it with a new model? If so, what statutory changes should be
     considered? Would such changes prove sufficient to remedy the
     shortcomings of the current rate-setting structure?

As the above discussion demonstrates, the need for changing the postal
rate-setting structure is clear. The current structure delays price changes
through lengthy, contentious, and burdensome proceedings and has poor
incentives for providing quality data. However, many questions remain
about what changes should be made to the rate-setting process and the
potential problems associated with those changes. Specifically, the option
of adopting a price-cap model for regulating postal rates has emerged as a
main alternative to a cost-of-service regulatory model but raises many
issues that deserve thoughtful consideration. By its very nature, such
fundamental change to the rate-setting system would necessarily entail
substantial uncertainty, risks, and the possibility for further change to deal
with unanticipated consequences. In this regard, the benefits and risks of
adopting a price-cap system need to be carefully considered and weighed
against the benefits and risks of the status quo. If the Service is to be
limited to its core mission, the flexibility inherent in a price cap system
could become a key management tool to successfully managing the
transition to a leaner, more efficient postal system.

Page 28                                                            GAO-04-108T
Rate-Setting Oversight   In our view, as long as the Service remains a federal entity protected by
                         the postal monopoly, it is appropriate that the Service’s ability to compete
                         with the private sector be balanced with oversight and legal standards to
                         ensure fair competition between the Service and private competitors. The
                         Commission sought to create such a balance by recommending enhanced
                         powers for the newly created Postal Regulatory Board, including a
                         complaint process in which rates can be reviewed against statutory limits
                         that provide for due process and resolution of the complaint within 60
                         days. Depending on the outcome, the regulator could order rate
                         adjustments to bring rates into conformity with statutory criteria. In our
                         view, clear lines of authority in this area must be established if the rate-
                         setting process is to be streamlined and speeded up. A key issue for
                         Congress to consider is whether the Commission’s recommendations have
                         struck the appropriate balance between flexibility and accountability.
                         Another issue is what due process rules should be established in order to
                         enable stakeholders to provide meaningful input and participate in rate-
                         setting matters, including the right to appeal regulatory decisions.

                         The Commission also proposed requirements for worksharing discounts
                         that are established based on the costs that the Postal Service is estimated
                         to avoid as a result of mailer worksharing activities to prepare, sort, and
                         transport the mail. Specifically, the Commission stated that a specific
                         requirement should be “that no new workshared discount for a non-
                         competitive product should exceed costs saved (including the present
                         value of projected future costs saved) and that the Postal Regulatory
                         Board should have the authority to conduct an expedited, after-the-fact
                         review upon written complaint that such a discount is excessive.” In that
                         case, the Commission said the regulator should be authorized to perform
                         an expedited, after-the-fact review upon written complaint to ensure
                         discounts do not exceed savings to the Postal Service. These
                         recommendations raise the issue of whether different standards should
                         apply for new and existing worksharing discounts.

                         By way of background, worksharing discounts did not exist when the
                         Service was created by the Postal Reorganization Act of 1970. Thus, there
                         is little statutory guidance in this area except for the mandate for the PRC
                         to consider—along with other factors—the degree of preparation of mail
                         for delivery into the postal system performed by the mailer and its effect
                         upon reducing costs to the Service. Over time, the PRC developed a
                         guideline for recommending worksharing discounts so that the estimated
                         reduction in Postal Service revenues would equal the estimated reduction
                         in its costs. The objective of this guideline is to create incentives for the
                         lowest-cost provider to perform certain postal activities, which can be

                         Page 29                                                          GAO-04-108T
either the mailer performing worksharing activities or the Service
performing additional activities when mailers do not workshare. Because
worksharing discounts have become an integral part of the rate-setting
structure, a key issue is whether statutory guidance would be appropriate
in this area; and if so, whether hard-and-fast rules for worksharing
discounts should be established in law.

Because postal rate-setting is at the heart of proposals for comprehensive
legislative reform, it is important for Members of Congress to be aware of
the many issues and questions that have been raised in this area. We
believe that some of the issues and questions that arise from the
Commission’s recommendations include the following:

•	   Should the break-even mandate continue to govern the postal rate-
     setting process, or should the Service be allowed to retain a certain
     amount of earnings?

•	   How would the proposed Postal Regulatory Board consider postal
     costing issues under the Commission’s proposals, since the
     Commission would abolish the current mechanism used to resolve
     these issues on a case-by-case basis (i.e., litigation in postal rate
     cases)? Specifically, what process should govern regulatory decisions
     regarding the measurement, allocation, and reporting of postal costs
     and revenues? Should the regulatory body also be given the authority
     to compel the Postal Service to collect data, as some have suggested?

•	   Would meaningful after-the-fact review of changes in postage rates be
     difficult to accomplish within the recommended 60-day time frame for
     considering complaints? Should stakeholders also be given the
     opportunity to obtain information through a discovery process; and if
     so, would a longer time frame be needed to consider complaints? What
     due process rules should be established for stakeholder participation in
     rate complaints and other rate-setting matters?

•	   Should the Commission’s recommendation to allow NSAs be adopted,
     and, if so, what specific criteria are appropriate in this area? Could
     NSAs create competitive harm, and, if so, what measures should be
     taken to mitigate this risk (e.g., prior review and other limitations)?




Page 30                                                           GAO-04-108T
                                 •	   If mailer-specific discounts are authorized, should data be required on
                                      the mailer-specific cost savings that the Postal Service expects to
                                      achieve? If so, how should the regulator balance its needs for such
                                      information with limitations relating to the practicality and burden of
                                      producing it?

                                 •	   Is after-the-fact rate review incompatible with the need to ensure fair
                                      competition by an organization that can leverage the revenues and
                                      infrastructure obtained through its monopoly on delivering letter mail?
                                      If not, should measures be taken to limit the potential for unfair
                                      competition, such as providing limitations on the introduction of
                                      subsidized new products and services? Should the regulator be
                                      authorized to order the discontinuance of postal products and services
                                      that consistently fail to cover their costs?

                                 •	   Would the complaint process, as the only means for stakeholders to
                                      seek to alter postal rates under the Commission’s proposals, create an
                                      incentive for numerous complaints that could become a de facto
                                      review of virtually all postal rates?

                                 •	   Even if a regulator could order changes in rates after-the-fact, would it
                                      be reluctant to exercise that authority, given the potential financial
                                      impact and disruption for the Service and the mailing community?

                                 •	   The Commission’s report did not address whether the proposed Postal
                                      Regulatory Board could be held accountable for its actions in the rate-
                                      setting area through appellate review. Should the Postal Regulatory
                                      Board’s actions be subject to appellate review, and if so, under what
                                      criteria?

                                 •	   Another potential issue is whether a transition period would be needed
                                      to successfully implement a vastly different rate-setting system similar
                                      to what the Commission has recommended. For example, would a
                                      transition period be needed to enable the proposed Postal Regulatory
                                      Board to address major unresolved cost allocation issues, as well as for
                                      the Postal Service to make improvements to its cost allocation methods
                                      and underlying data systems that collect information for costing
                                      purposes?

The Need for Progress on Rate-   The Service and the PRC continue to have long-standing disagreements on
Setting Issues under the         rate-setting issues that have added to the length, cost, and burden of
Current Structure                litigating rate cases. These issues have been a major focus of contentious
                                 rate proceedings, and, if left unresolved, will likely be re-litigated in the
                                 next rate case. As noted previously, a key unresolved issue is the


                                 Page 31                                                            GAO-04-108T
allocation of mail processing costs, which has implications for most postal
rates since the Service’s mail processing and distribution network handles
most mail. Specifically, the Service and the PRC disagree over the extent
to which mail processing costs vary with mail volume and thus can be
allocated to various mail categories, as opposed to being classified as
institutional costs (i.e., overhead costs that the Service incurs regardless
of mail volume). This disagreement has generated thousands of pages of
evidence in rate cases and disagreements over the underlying
assumptions, data, and analytic techniques. Although the arguments on
both sides are rather arcane, the resolution of this dispute could have
important practical consequences for postal rates and worksharing
discounts. The estimated savings resulting from worksharing discounts—
which is a key basis for establishing these discounts—is reduced as more
mail processing costs are classified as institutional costs, since such costs
do not vary regardless of how much mail is processed. Thus, the rates that
apply to workshared mail, which accounts for three-quarters of total mail
volume, could be affected by the resolution of this technical dispute.

In our opinion, the gap between rate cases provides a rare opportunity for
the parties to take a fresh look at the issue of mail processing volume
variability. Key postal cost dynamics have changed in recent years,
including the shift from increasing to decreasing mail volume, the prospect
for further declines in First-Class Mail volume, and the Service’s initiative
to realign its mail processing and distribution network. Such changes
create uncertainty about whether historical relationships between mail
volume and mail processing costs continue to apply, since historically mail
processing costs increased as mail volume increased and the Service
expanded its mail processing infrastructure incrementally. We urge the
parties to reconsider their reliance on formal litigation so that this issue
can be addressed before the inception of the next rate case. Progress in
this area could diminish the burden on the Service and other stakeholders
who participate in rate cases. In this regard, we note that the parties have
worked hard to reach negotiated settlements to the last rate case and
several other rate and classification proceedings since then. Given these
outcomes, it is reasonable to expect similar progress in the area of mail-
processing volume variability if the parties have the will to resolve their
differences. If the parties do not make progress, that will further indicate
the need for a new rate-making structure, as the Commission has
recommended, so that technical issues can be resolved in a more
businesslike and expeditious manner.




Page 32                                                          GAO-04-108T
Human Capital Issues   The Postal Service’s human capital—its people—is critical to providing
                       vital postal services to the American people and achieving a successful
                       postal transformation. The Commission concluded that as valuable as the
                       Postal Service is to the nation, its ability to deliver that value is only as
                       great as the capability, motivation, and satisfaction of the people who
                       make possible the daily delivery of mail to American homes and
                       businesses. We agree. Only through the efforts of its workforce are more
                       than 200 billion pieces of mail delivered, 6 days each week, to the
                       American people. Thus, we agree with the Commission’s conclusion that
                       few of the reforms outlined in its report would be possible without the
                       support and contributions of the Service’s most mission-critical asset: its
                       people. As we recently reported, an organization’s people must be at the
                       center of any transformation effort.22

                       For this reason, the Commission focused on serious, long-standing issues
                       in the human capital area that impose both statutory and practical
                       constraints on the transformation of the organization. The problems can
                       be grouped into three areas: (1) poor labor-management relations
                       characterized by poor communication, lack of trust, excessive grievances,
                       and difficulty negotiating labor contracts; (2) difficulty controlling
                       workforce costs, including issues of workforce size, flexibility, pay
                       comparability, workers’ compensation, and escalating benefits costs; and
                       (3) inadequate incentives for individual performance and the need for a
                       stronger linkage between individual and organizational goals. The
                       Commission proposed important changes in each of these areas, some of
                       which would require the commitment of the parties to address them in a
                       constructive manner, and some of which would require changes to
                       existing law. Given the central importance of the Service’s human capital,
                       all of these proposals deserve close scrutiny and a fair hearing, despite the
                       strong negative reactions that have been voiced by some stakeholders.
                       Rather than declaring such proposals to be politically off-limits, we
                       encourage Congress and the parties to approach these issues with open
                       minds to explore whether a package of changes can be made that is
                       mutually beneficial to the Service, its people, and the public. Much has
                       changed in this area over the past 30 years, and the time is right to
                       consider what statutory structure would be appropriate to enable the




                       22
                        U.S. General Accounting Office, Results-Oriented Cultures: Implementation Steps to
                       Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July
                       2, 2003).



                       Page 33                                                                GAO-04-108T
                               Postal Service to incorporate best practices and improve working
                               conditions for its employees.

Achieving Effective Labor-     We and others have reported that adversarial labor-management relations
Management Relations Will Be   have been a persistent issue for the Service and its major labor unions and
Fundamental to Making          have been a root cause of problems in improving the Service’s operational
Progress                       efficiency as well as improving its culture and the quality of work life. 23
                               Poor communications, lack of trust, an excessive number of grievances,
                               and difficulty negotiating labor contracts have been at the heart of labor-
                               management issues. Such problems have increased the difficulty in
                               constructively working on difficult issues involving the size, flexibility,
                               compensation, benefits, incentives, and culture of the workforce. We are
                               encouraged by recent progress in this area, such as reports by union
                               officials of better communications, sharp reductions in the number of
                               outstanding grievances, and labor contracts that were successfully
                               negotiated between the parties without the need for binding arbitration.
                               However, progress has been uneven and much more work remains to be
                               done. We agree with the Commission’s bottom line that Postal Service
                               management must repair its strained relationship with postal employees.

                               Historically, autocratic management, persistent confrontation and conflict,
                               and ineffective performance systems often characterized the
                               organizational culture on the workroom floor. These problems resulted in
                               an underperforming organization with major deficiencies in morale and
                               quality of work life; huge numbers of grievances with high costs for the
                               Service and its employees; and protracted, acrimonious contract
                               negotiations. In our past reports, we found that these conditions have
                               existed over many years because labor and management leadership, at
                               both the national and local levels, have often had difficulty working
                               together to find solutions to their problems. Under these circumstances, it
                               was difficult for the parties to develop and sustain the level of trust
                               necessary for maintaining a constructive working relationship and



                               23
                                 The National Academy of Public Administration, Evaluation of the United States Postal
                               Service, (Washington, D.C.: July 1, 1982); U.S. General Accounting Office, Labor-
                               Management Problems Persist on the Workroom Floor, GAO-GGD-94-201A/B,
                               (Washington, D.C.: Sept. 29, 1994); U.S. General Accounting Office, Little Progress Made in
                               Addressing Persistent Labor-Management Relations Problems, GAO/GGD-98-1
                               (Washington, D.C.: Oct. 1, 1997); United States Postal Commission On a Safe and Secure
                               Workplace, Report of the United States Postal Commission On A Safe and Secure
                               Workplace (Washington, D.C.: Aug. 31, 2000); U.S. General Accounting Office, Major
                               Performance and Accountability Challenges, GAO-03-118 (Washington, D.C.: Jan. 2003).



                               Page 34                                                                     GAO-04-108T
agreeing on major changes to maximize the Service’s efficiency and the
quality of work life.

Poor labor-management relations are incompatible with the Commission’s
vision of achieving a more positive and productive climate necessary for a
high-performing organization with a culture of excellence. Such a culture
change will require better labor-management relations in which the parties
maintain open communications, develop trust, and are willing to take risks
to achieve mutually beneficial results.

On the positive side, officials from some of the Service’s unions have told
us that they have seen improvements in labor-management relations in
recent years. They cited examples of improved communication and
collaboration at the national and local levels, including

•	   Quality of Worklife and Employee Involvement programs, in which
     union and management officials reportedly have successfully
     communicated and made progress on finding ways to improve
     efficiency and the work environment;

•	   Joint Contract Interpretation manuals, as well as training implemented
     jointly by labor and management officials, which are intended to
     prevent disputes as well as help resolve current disputes and the
     backlog of grievances; and

•	   An Ergonomic Strategic Partnership among the Occupational Safety
     and Health Administration (OSHA) and postal labor unions to improve
     workplace safety and reduce risk factors, particularly ergonomic-
     related hazards.

Reducing Grievances

As the Commission noted, employee morale is an essential element of an
incentive-based culture, but is undermined when employee-management
relations are acrimonious. We agree with the Commission that the high
number of remaining grievances and the large backlog of grievances
pending arbitration are an indication of strained relations between postal
managers and workers, to the detriment of morale, productivity, and,
ultimately, service to ratepayers. As the Commission concluded, satisfied
employees are of far more value to the nation’s postal endeavor than those
in a contentious relationship with their employer. Thus, we agree with the
Commission that it is imperative that the Service give clear direction that
settlement of problems and cooperative labor-management relations are a


Page 35                                                         GAO-04-108T
priority. Rather than allowing problems to fester on the workroom floor,
better communications and improved working relationships are needed to
resolve problems as they arise, minimizing the need to resort to the
grievance process to resolve disputes. This will require greater
accountability for both supervisors and those they supervise, as well as for
top management. We agree with the Commission that the Service must
hold managers accountable for any behavior that results in poor labor-
management relations, and we believe this principle should apply equally
to employees at all levels of the organization.

The Commission noted that encouraging progress is being made by the
Service and the National Association of Letter Carriers in resolving
grievances using a restructured and streamlined grievance process. It
recommended that such progress be used as a model, with the Service
working diligently with other unions to institute procedures aimed at
reducing the time to process grievances and the number of grievances
appealed to arbitration. Recognizing that the success of any process
depends on the collective commitment of the parties, we encourage the
Service and its unions to make continued progress in this area.

Difficulty Negotiating Labor Contracts

Since postal reorganization, the Service and its major labor unions have
often found it difficult to negotiate labor contracts without resorting to
binding arbitration. The Commission criticized the collective bargaining
process as overly lengthy and litigious, providing few incentives for the
parties to reach negotiated settlements. It made detailed statutory
recommendations to improve the process, including mandating the use of
a “mediation and arbitration” approach and specific deadlines for
completing various process steps and accelerating final resolution period.
Postal union officials have strongly opposed these recommendations,
stating that the parties have used the “mediation and arbitration” approach
in the past and have the flexibility within existing law to mutually agree on
any process for contract negotiations. Union officials have also said that
existing deadlines are already difficult to meet, in part due to scheduling
difficulties involving the availability of mediators and arbitrators. In their
view, success is dependent on “people” issues, including good working
relationships, communications, and trust, rather than on the formal
process. They also have noted that the current contracts between the
Service and three of its four major postal labor unions were negotiated
without the use of an arbitrator and asserted that these outcomes
demonstrate that progress has been made within the existing structure.
We recognize these points, but believe that, as with other human capital


Page 36                                                          GAO-04-108T
                         issues, the time has come to re-examine all aspects of a structure that was
                         developed more than 30 years ago.

Difficulty Controlling   Progress on controlling human capital costs will be critical to efforts to
Workforce Costs          achieve “best execution” to sustain affordable universal postal service and
                         to enhance the value of the mail. The Postal Service employed about
                         829,000 people at the end of fiscal year 2003, whose pay and benefits
                         accounted for more than three-quarters of the Service’s expenses. In this
                         regard, we note that a recent analysis prepared by PRC staff showed that
                         for the period between fiscal years 1998 and 2002 postal wage costs
                         increased by 3.3 percent over inflation and postal benefits costs rose 28.1
                         percent over inflation. The Commission concluded that the size of the
                         workforce largely determines its costs, observing that it will be critical for
                         management and labor to work together constructively to determine the
                         right size of the postal workforce and to ensure appropriate flexibilities in
                         its deployment. As we have previously reported, nearly half of the
                         Service’s career workforce will reach retirement eligibility by 2010,
                         creating an opportunity for the Service to gain resource flexibility through
                         the attrition of retiring employees, while also minimizing disruption to its
                         workforce.

                         We note that the Postmaster General initiated a constructive working
                         relationship between national postal management and the leadership of its
                         labor unions and management associations to deal with issues of mail
                         security after anthrax was found in the mail. Such communication and
                         partnerships cannot be legislatively mandated. However, better working
                         relationships would help the Service and its employee organizations
                         address difficult workforce size and flexibility issues in a manner that
                         would allow the Service to rightsize its workforce in the least disruptive
                         manner possible, including the ranks of both managers and their
                         employees. All issues should be on the table, including work rules that
                         constrain greater efficiency; working conditions that constrain the
                         treatment, morale, and discretionary effort of the workforce; and
                         constraints on having the most effective and efficient provider perform
                         postal activities, including limitations on outsourcing.

                         Unresolved Pay Comparability Issues

                         We agree with the Commission’s conclusion that the most thorny issue in
                         collective bargaining today is pay and benefit comparability. Although the
                         parties disagree about whether a wage and benefit premium exists and
                         about the basis for making these comparisons, the Service’s ability to
                         control costs in this area will be critical to achieving a more efficient


                         Page 37                                                           GAO-04-108T
organization. As we have previously testified, one of the limitations in the
existing collective bargaining process is that the interests of all postal
stakeholders, such as ratepayers, do not appear to have been sufficiently
considered.24 The Commission recommended that the Postal
Reorganization Act be amended to clarify the term “comparability” and
that the new Postal Regulatory Board should be authorized to determine
comparable total compensation for all Postal Service employees. These
recommendations have been strongly opposed by the Service’s major
labor unions, variously opposing them as “draconian” measures that would
“destroy” collective bargaining for postal workers. The unions have also
questioned why a regulatory body headed by three political appointees
should have the power to effectively set a cap on postal wages.

With respect to clarifying the comparability standard, one option could be
to revisit the guiding principles incorporated into the statutory wage and
comparability standard so that it would more fully reflect all stakeholder
interests and the Service’s overall financial condition and outlook. These
principles could specify that comparability includes total wage,
compensation, and benefit costs, as well as the relationship of these costs
to total costs, their impact on rates and revenues, and the Service’s overall
financial condition. Another option could be to delete pay comparability
provisions from the statute, as some postal union officials have suggested.
This option would raise the issue of what, if any, standard would remain to
guide negotiators and arbitrators in the collective bargaining process.

With respect to shifting authority over total postal compensation to a
newly created regulatory body, we note that this change would appear
contrary to the Commission’s principle that the Service needs additional
flexibility to manage its operations. A related issue is how the Service will
be able to pay competitive compensation for certain skills. We also
question why a second body—in addition to the system of third-party
arbitration—should be added to the already complex processes for
determining postal pay and benefits. Thus, it is not clear whether this
recommendation would add value to the collective bargaining process.

Another controversial Commission recommendation was that the Postal
Service pension and postretirement health benefit plans should be subject
to collective bargaining—meaning that the Service and its unions should
have the flexibility to develop new plans that are separate and apart from


24
 GAO-03-812T.



Page 38                                                          GAO-04-108T
existing federal pension and retiree health benefit plans. The Commission
recognized that such a change could have an uncertain impact on the
entire federal pension and retiree health benefit programs. Although the
Service may have the authority under existing law to withdraw from the
federal health program for its current employees under certain
circumstances, it would still be required to contribute to the health costs
of its current retirees. The Commission recommended that the Service
work with the Department of the Treasury, the Office of Personnel
Management (OPM), and other pertinent parties to determine the potential
impacts that separate funds would have. Because these recommendations
could have major effects on all federal employees, much more information
would be needed in order to determine the potential impact of statutory
changes in this area on the federal budget and employees. It is also not
clear whether, as a practical matter, expanding the scope of collective
bargaining to all postal benefits would result in cost savings for the Postal
Service. For example, where the Service has flexibility, the Service has
agreed in collective bargaining agreements to pay a higher percentage of
health insurance premiums for its employees as compared to other federal
agencies (about 85 percent vs. up to 75 percent).

Addressing Retiree Benefits Obligations

We agree with the Commission that the Service’s substantial obligations
for its retirement-related benefits need to be addressed, including benefits
for pensions and retiree health. Key issues include how to assign
responsibility and structure a mechanism for covering the costs of
providing retirement-related benefits and how the accounting standards
should be applied. In addition, concerns have been raised about how
changes in funding these obligations could impact the federal budget, as
well as postal ratepayers.

The recently enacted law (P.L. 108-18) changed the method by which the
Service funds the Civil Service Retirement System (CSRS) pension
benefits of its current and former employees to prevent a projected
overfunding from materializing, while at the same time shifting
responsibility for funding benefits attributable to military service from
taxpayers to postal ratepayers. The law also required that, beginning in
fiscal year 2006, the difference between the Service’s contributions under
the new and old funding methods—the “savings”—be held in an escrow
account until the law is changed. To facilitate consideration of which
agency—the Postal Service or the Treasury Department—should fund
military service costs, the law required the Postal Service, the Office of
Personnel Management, and the Treasury Department to each submit


Page 39                                                          GAO-04-108T
proposals to the President, Congress, and the GAO by September 30, 2003.
The law also required the Postal Service to submit a proposal to the same
recipients on how it planned to use the future “savings.” We, in turn, have
until November 30, 2003, to analyze these proposals and will provide our
reports to Congress before Thanksgiving.

The Service submitted two proposals for use of the “savings,” both of
which would affect postal rates to varying degrees.25 The first proposal
recommends that the Service be relieved of the burden of funding benefits
attributable to military service, and that the Service, in turn, would
prefund its retiree health benefits obligations for current and former
employees, which has been estimated at approximately $50 billion. This
proposal is consistent with the Commission’s recommendation that
responsibility for funding CSRS pension benefits relating to the military
service of postal retirees should be returned to the Department of the
Treasury. The second proposal is based on the premise that the Postal
Service will remain responsible for funding military service benefits as
currently required by P.L. 108-18. Under this proposal, the Service said that
it would fund its retiree health benefits obligations only for its employees
hired after fiscal year 2002 and use the remaining “savings” in priority
sequence, to repay debt; and to fund productivity and cost-saving capital
investments. This proposal appears consistent with the Commission
recommendation that the Service should consider funding a reserve
account for unfunded retiree health care obligations to the extent that its
financial condition allows.

There are a number of key questions related to the Service’s proposals that
we are considering as part of our mandated review, including

•	   What is the relationship of military service to federal civilian service
     and benefits?

•	   What have been the historical changes to the funding of CSRS benefits
     to Postal Service employees and retirees?




25
 The Service has estimated that the additional rate increase impact in fiscal year 2006,
above any inflationary increase, would be 2.0 percent under its first proposal and 0.3
percent under its second proposal.



Page 40                                                                       GAO-04-108T
•	   What correlation exists between the cost attribution and funding
     methods of the Federal Employees Retirement System (FERS) and the
     current CSRS methods applicable to USPS?

•    How have other self-supporting agencies funded CSRS benefits?

•    What are the various options for allocating military service costs?

•	   What would be the effects of the Service’s proposals on the unified
     federal budget? On ratepayers? On the Service’s overall financial
     situation and transformation efforts?

•	   What alternatives exist for funding health benefit obligations to
     existing postal retirees and employees and distributing that
     responsibility between current and future ratepayers?

•	   What issues need to be addressed regarding the Service’s accounting
     treatment of retiree benefit obligations?

•	   What are the potential consequences to the Service and postal rates
     should the Service be required to make payments, beginning in fiscal
     year 2006, into an escrow account without the authority to spend the
     escrowed funds for postal purposes?

Reforming Workers’ Compensation

Another benefit area where costs have been difficult to control is the
Service’s workers’ compensation benefits.26 The Commission found that
under the Federal Employees’ Compensation Act (FECA), the Service has
maintained a broad and effective workers’ compensation program and that
recent efforts have lowered injury rates considerably. However, the
Commission also concluded that the Service, given its unique status,
should be provided relief from FECA provisions that were creating costly
unintended consequences. The Commission recommended making the
Service’s workers’ compensation program more comparable to programs
in the private sector in order to control costs, provide adequate benefits,
and address the Service’s unfunded liability of $6.5 billion in this area. We



26
 U.S. General Accounting Office, Recent GAO Reports on the Federal Employees’
Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept. 30, 1997); Federal
Employees’ Compensation Act: Issues Associated With Changing Benefits for Older
Beneficiaries, GAO/GGD-96-138BR (Washington, D.C.: Aug. 14, 1996).



Page 41                                                                GAO-04-108T
                         believe that placing workers’ compensation benefits on a par with those in
                         the private sector merits careful consideration.

Inadequate Performance   As the Commission pointed out, a key goal of human capital reform should
Incentives               be to establish an incentive-based culture of excellence. We have reported
                         that leading organizations use their performance management systems to
                         accelerate change, achieve desired organizational results, and facilitate
                         communication throughout the year so that discussions about individual
                         and organizational performance are integrated and ongoing.27 Modern,
                         effective, and credible performance appraisal systems are a key aspect of
                         performance management. The Commission concluded that the level of
                         success achieved by the Postal Service will hinge on its ability to
                         successfully deploy and motivate a talented, capable, nimble workforce of
                         a size appropriate to the future postal needs of the nation and to give its
                         employees a personal stake in the success of the institution’s ambitious
                         goals.

                         In this regard, we have reported that the need for results-oriented pay
                         reform is one of the most pressing human capital issues facing the federal
                         government today.28 Successful implementation of results-oriented pay
                         reform, commonly referred to as “pay for performance,” requires modern,
                         reliable, effective, and as appropriate, validated performance management
                         systems. Such systems need adequate safeguards, including reasonable
                         transparency and appropriate accountability mechanisms. In fiscal year
                         1995, the Service implemented a pay-for-performance system for its
                         executives, managers, postmasters, supervisors, and other nonbargaining
                         employees. This system was discontinued in fiscal year 2002, in part
                         because of concerns that large payouts were made when the Service was
                         recording large deficits. The Service revised its merit-based pay program
                         for its executives and officers in fiscal year 2002 and revised its merit-
                         based pay program for its postmasters, managers, and supervisors in fiscal
                         year 2004.




                         27
                          U.S. General Accounting Office, Results-Oriented Cultures: Using Balanced
                         Expectations to Manage Senior Performance, GAO-02-966 (Washington, D.C.: Sept. 27,
                         2002).
                         28
                          U.S. General Accounting Office, Results-Oriented Cultures: Modern Performance
                         Management Systems Are Needed to Effectively Support Pay for Performance,
                         GAO-03-612T (Washington, D.C.: Apr. 1, 2003).



                         Page 42                                                                 GAO-04-108T
Given the concerns that led to the overhaul of the Service’s previous merit-
based pay systems, it is important that these systems be evaluated to
ensure that they are administered fairly and provide meaningful
incentives. Such incentives would require valid measures that correspond
with individual and organizational performance goals, as well as targets
that are sufficiently challenging that they are not met automatically. For
example, any productivity-based measures should result in real and
measurable savings.

In addition, as we have reported, proposed changes to the Senior
Executive Service could provide a model for better linking pay and
performance of senior executives.29 For example, the proposed Senior
Executive Service Reform Act of 2003 includes a number of important
reforms that would increase the pay cap for senior executives while also
linking their pay more closely to performance. Similar issues would appear
to apply to lifting the statutory pay cap for postal executives.

Over the years, the Service’s major labor unions have consistently opposed
extending a pay-for-performance system to craft employees. Presidential
Commissioner Norman Seabrook shared their concerns, stating that in
practice, pay for performance systems are characterized by nepotism,
favoritism, and horrible morale among the workers. Union concerns also
include tying employee compensation to results that depend in part on
external events beyond their control as well as on the quality of postal
management. It is reasonable to question whether a pay-for-performance
system could be agreed on, implemented, and successful in the face of
strong opposition of national and local union leaders. Union concerns are
understandable because past history has led some union officials to
question whether a pay-for-performance system could be successfully
implemented.

Nevertheless, as the Commission pointed out, properly designed
performance-based compensation can serve as a powerful
communications and motivational tool, helping employees understand
how they can contribute to the Service’s financial health and success—and
be rewarded for their efforts. In our view, aligning the interests of
individual workers with the specific performance goals of the Service will
be essential for the future. As the Commission concluded, the desire of the



29
 U.S. General Accounting Office, Human Capital: Building on the Current Momentum to
Address High-Risk Issues, GAO-03-637T (Washington, D.C.: Apr. 8, 2003).



Page 43                                                               GAO-04-108T
workforce to make the modernization of the nation’s postal network a
success, along with its willingness to make possible the Service’s
ambitious goals to rein in costs while improving productivity and service,
will in no small part determine the success or failure of the entire
transformation endeavor, and, ultimately, the fate of universal service at
affordable rates.

As the above discussion illustrates, human capital reform is necessary, but
many issues remain to be resolved. We believe that key questions for
Congress to consider include:

•	   What statutory changes can be made that would provide additional
     incentives for the Service, its employee organizations, and its
     employees to resolve their differences in an appropriate and
     expeditious manner, including through the grievance process and at the
     bargaining table? What opportunities exist to facilitate better
     communication, streamline lengthy processes, and minimize their cost?

•	   Should the existing statutory standards for comparability of postal
     wages and benefits be clarified to include specific performance criteria
     and factors upon which a comparison must be made, such as the
     Service’s overall financial condition and outlook?

•	   If comparability standards are retained, should they be enforced by an
     outside regulatory body or should they be considered self-enforcing
     through the collective bargaining process?

•	   What practical consequences could be expected if all postal benefits,
     including all health and retirement benefits, became subject to the
     collective bargaining process? What would be the potential effects on
     the financing of benefits for employees of both the Service and the rest
     of the federal government? Could increases in postal benefits costs also
     be expected over time, given the Service’s history of agreeing to pay a
     larger share of insurance premiums than other federal agencies pay?

•	   Should workers’ compensation benefits for Service employees be
     greater than those generally available to private sector employees?
     What opportunities exist to provide incentives to minimize workers’
     compensation costs?

•	   Should the statutory pay cap on postal executives be lifted, and, if so,
     how would executive pay be linked to performance? Would increased
     accountability apply to postal executives for individual and
     organizational results, particularly when problems arise? What


Page 44                                                           GAO-04-108T
                          disclosure of postal executive compensation—including bonuses and
                          other forms of compensation—would be appropriate to incorporate
                          best practices that have been put into place in the private sector?

                      While the Commission made a number of recommendations that require
The Postal Service    legislative changes, it also made suggestions for improving efficiency and
Needs to Maximize     service that can be implemented under the current law. These
                      recommendations centered on standardizing and streamlining the postal
Progress within Its   network, both the processing and distribution infrastructure and retail
Current Legislative   facilities, with major efficiency gains accruing from changes in the
                      processing and distribution network. The Commission commended the
Structure             Postal Service for undertaking an ambitious effort, the Network
                      Integration and Alignment project, to rationalize the processing and
                      distribution network. We agree that this project could exert meaningful
                      influence on the Service’s efficiency, but we have concerns about the lack
                      of publicly available information on the Service’s plans and related funding
                      strategies in this area. The Commission also pointed out that better postal
                      data would aid the Service’s efforts to increase efficiency. We believe that
                      the availability, accuracy, and relevance of postal data should be central to
                      any meaningful transformation effort.

                      The Commission recommended a core philosophy for an improved
                      national mail service—the concept of best execution. This concept, as
                      described by the Commission, includes employing corporate best
                      practices in all operations, as well as selecting the provider who can
                      perform the service at the highest level of quality for the lowest cost. Best
                      execution has important implications for the Postal Service because it
                      means that the Service should consider who could perform the work best,
                      postal employees or private sector providers, when considering
                      outsourcing and expanding worksharing opportunities. Some postal union
                      officials have stated that the Service can provide better execution than
                      private sector providers. While this may be true, best execution may be
                      difficult to realize under the existing environment due to

                      •   lack of incentives to perform at the highest level possible;

                      •   an outdated, inefficient infrastructure; and

                      •   insufficient data to assess the true cost of operations.




                      Page 45                                                            GAO-04-108T
                                 We have addressed the issue of lack of incentives in a previous section. In
                                 the next sections we will discuss the importance of economy and
                                 efficiency in the postal network and related data issues.


Factors That Hinder              The Commission characterized the current postal network as too costly,
Economy and Efficiency in        too inefficient, too large, and lacking standardization. It envisioned a
the Postal Network               streamlined, standardized network capable of delivering universal service
                                 in the most efficient and cost-effective manner possible. We believe this
                                 vision is achievable if approached in a comprehensive, integrated fashion,
                                 and supported by postal stakeholders. However, practical impediments
                                 may hinder the Postal Service from rightsizing its infrastructure.
                                 Historically, the Service has encountered resistance from employees,
                                 mailers, communities, and Congress when it attempted to close facilities.
                                 Proactively working with stakeholders to garner input and support for its
                                 infrastructure initiatives may address legitimate concerns and thereby
                                 alleviate some of this resistance. Another impediment has been the
                                 Service’s limited options for funding capital improvements. Earlier we
                                 discussed how retained earnings could increase the Postal Service’s
                                 funding flexibility. However, this change would require legislative action.
                                 If the Service is to achieve best execution, it should increase current
                                 efforts to address problems with its infrastructure. The Service also needs
                                 to identify its funding needs for implementing its plans in this area. For
                                 purposes of our discussion we have separated the postal infrastructure
                                 into two distinct, yet inter-related, areas: (1) the network of post offices
                                 and other retail facilities and (2) the network of mail processing and
                                 distribution facilities.

Difficulties in Optimizing the   The Commission concluded that the Service needs to constructively
Postal Retail Network            address the fact that many of the nation’s post offices are no longer
                                 necessary to the fulfill the universal service obligation. We understand that
                                 making changes to retail operations is often controversial because
                                 communities do not like to lose their local post offices and changes in this
                                 area are often perceived as a reduction in services. Unfortunately, the
                                 Postal Service has not done enough to inform the public of the many retail
                                 options currently available. Currently there are over 70,000 locations
                                 where stamps are sold, such as ATMs, grocery and other retail stores, and
                                 postal vending machines. Stamps can also be purchased via the Internet,
                                 through the mail, or from rural carriers. In addition, the Service is
                                 extending retail access to 2,500 self-service kiosks and Hallmark Gold
                                 Crown card shops. Yet, about 80 percent of all stamp revenue is still
                                 generated at the retail counter. Two Commission recommendations in this
                                 area that we concur with were: (1) the Service should dramatically

                                 Page 46                                                          GAO-04-108T
escalate its efforts to increase alternative access to postal services, and
(2) the Service should market these alternatives more aggressively.

We believe that the Service should strive to improve accessibility to postal
retail services as it implements its strategy of rationalizing its retail
network, including closing post offices. The Service’s Transformation Plan
stated that the Service would create new, low-cost retail alternatives to
extend the times and places that its services are available, including self-
service, partnerships with commercial retailers, and Internet access to
retail services. The plan said that the Service has begun a retail network
optimization process, in which redundant retail operations would be
consolidated, starting with poor-performing contract postal units, and
replaced with alternative methods of retail access. The optimization
process involves a national retail database that is to be used with a
criteria-based methodology for modeling retail optimization and
restructuring scenarios. The Service has also said it intends to expand
retail service in markets where it is underrepresented, while reducing
retail infrastructure in markets where it is overrepresented.

Under current law, the Service is not allowed to close post offices for
economic reasons alone. The Commission recommended that legal
restrictions that limit the Service’s flexibility in this area be repealed and
that the Service be allowed to close post offices that are no longer
necessary for the fulfillment of universal service. While we agree that the
Service should have the ability to align its retail network with customer
needs in order to fulfill its universal service obligation in a cost-effective,
efficient manner, we also believe that the Postal Service must assure
Congress that the alignment will be done in a fair, rational, and fact-based
manner.

In contemplating the Commission’s recommendation to repeal the post
office closing law, we have identified the following key questions:

•	   What national standards, if any, should apply to universal access to
     postal retail service?

•	   What criteria and process should be used to realign the Service’s retail
     infrastructure?




Page 47                                                            GAO-04-108T
                                 •	   Should the Service have greater freedom to reshape its retail
                                      infrastructure, or should Congress have involvement in such decisions,
                                      possibly by using a model such as the military base-closing process to
                                      close post offices that are no longer needed?

                                 •	   Should current statutory restrictions on closing post offices be
                                      retained, modified, or repealed?

                                 •    What transparency and accountability is appropriate in this area?

Difficulties in Optimizing the   The Commission found that the Service’s processing and distribution
Postal Processing and            network is plagued with problems, including lack of standardization,
Distribution Network             inefficiency, and excess capacity. The Service has approximately 500
                                 facilities dedicated to processing the mail that do not share a standard
                                 footprint for architectural design, equipment complement and layout, or
                                 mail processing procedures. The lack of standardization may be one of the
                                 contributors to variations in productivity among mail processing facilities.
                                 Smaller facilities, as measured by volume, number of employees, and
                                 physical space, tend to have higher productivity, which is a possible
                                 indication of diseconomies of scale. For example, on average, small
                                 facilities tend to handle more mail, relative to work hours expended, than
                                 large facilities (see fig. 3). Standardizing operations across facilities may
                                 minimize diseconomies of scale and should be considered as part of
                                 planning plant consolidations or closings. In addition, standardization of
                                 processing and distribution facilities is widespread in process-oriented
                                 industries where standardization is viewed as vital to increased flexibility
                                 and efficiency. It may be difficult for the Service to become a world-class
                                 organization without establishing a standard footprint throughout its
                                 processing and distribution network.




                                 Page 48                                                           GAO-04-108T
Figure 3: Productivity of Mail Processing Plants, by Facility Size, in Fiscal Year 2001




In addition to the lack of standardization, the Service’s processing and
distribution facilities may not be optimally located. To a large degree, the
processing and distribution network has evolved gradually in response to
volume growth. Figure 4 shows the location of the Service’s processing
facilities in the continental contiguous United States. Distributing mail
between these facilities utilizes thousands of transportation lanes and
results in too many partially full trucks traveling between plants. Better
utilization of trucks and lanes may save the Postal Service money and, if
properly executed, could improve service.




Page 49                                                                  GAO-04-108T
Figure 4: Location of Postal Service Mail Processing Facilities




                                          Another issue raised by the Commission related to the processing and
                                          distribution network is the assertion that the Postal Service has too many
                                          facilities, and the ones it has are not always used effectively, resulting in
                                          excess capacity throughout the network. Excess capacity can be very
                                          costly as it may require increased maintenance, facility, and labor costs.
                                          With changes in the types and volumes of mail and advances in both
                                          processing and information technology, the current network may be too
                                          large. We caution, however, that any consolidation plan should consider
                                          the effects of potential diseconomies of scale. Consolidating small
                                          facilities that may be more efficient into inefficient large facilities may not
                                          achieve the desired cost savings or service improvements. To achieve
                                          sustained cost savings, the Service will need to take a critical look at how
                                          to standardize and rightsize the processing and distribution network to
                                          maximize efficiency. As we have previously reported, any effort to
                                          rationalize the Service’s processing network must also take into


                                          Page 50                                                            GAO-04-108T
                             consideration the increased safety and security needs created by the
                             anthrax attacks and the proper extent and location of mail safety
                             equipment.30 Other considerations also include how network realignment
                             could affect the need for a mix of workforce skills and abilities, as well as
                             workforce diversity and demographics.

No Public Plan and Limited   The Commission noted the importance of the Service working with
Stakeholder Engagement on    stakeholders to successfully implement best execution strategies,
Network Rationalization      streamline the postal network, and decide the fate of unnecessary postal
Strategy                     facilities. We agree. However, to date, the Service has not made public a
                             comprehensive infrastructure rationalization plan and has had limited
                             engagement with stakeholders who may be affected. Such a plan should
                             lay out the Service’s vision and how it plans to reach it, including the
                             criteria, process, and data it uses to make its decisions. In our view, the
                             lack of this type of information will likely lead to suspicion and lack of
                             trust about the objectivity, fairness, and impartiality of Service decisions
                             and the lack of input from stakeholders could prevent the Service from
                             achieving the goal of a more efficient network. Further, we believe that it
                             is essential for the Service to engage its stakeholders in its plan
                             development process to address legitimate concerns and minimize
                             disruption, thus alleviating some of the resistance that is often
                             encountered when the Service tries to close facilities.

                             A comprehensive network integration and rationalization plan will be
                             important for Congress to have regardless of whether a commission is
                             established to consider network rationalization. One of the most important
                             deliverables in the Service’s Transformation Plan, the Network Integration
                             and Alignment (NIA) project, is a set of processes and tools used to
                             analyze the optimal number, locations, and functions of mail processing
                             and transportation facilities. The NIA strategy was to have been developed
                             by the fall of 2002. The Service did not meet this time frame, and the
                             Commission has reported that the Service hopes to begin putting the new
                             strategy into effect at the end of this year. It has already begun to close
                             some types of facilities and build others, without disclosing how these
                             activities fit into the NIA strategy.

                             To succeed in optimizing its networks, the Service must work with its key
                             stakeholders, including employee organizations, the mailing industry,
                             affected communities, and Congress. However, based on difficulties it has


                             30
                              GAO-03-812T.



                             Page 51                                                           GAO-04-108T
                             encountered in the past, the Service appears to be reluctant to divulge its
                             network optimization plans, including the timing and funding needs
                             associated with these plans, to Congress or its stakeholders. We believe
                             that the Service will face more resistance if it approaches transformation
                             in an insular, incremental fashion. For example, some union
                             representatives have acknowledged that the Postal Service needs to
                             rationalize its infrastructure, and they have committed to working with the
                             Service to achieve this goal. However, they have received limited
                             information to date concerning the Postal Service’s plans for closings and
                             consolidations. Likewise, various mailers have expressed concern that the
                             Postal Service does not adequately seek input regarding customer needs
                             when planning major changes. This concept is anathema to best practices
                             employed in private sector service industries.

                             Recognizing the difficulties the Service has experienced in rationalizing its
                             network, including closing unneeded facilities, the Commission
                             recommended that Congress establish a Postal Network Optimization
                             Commission (P-NOC), similar to the base-closing model and provisions in
                             proposed postal reform legislation introduced by Senator Carper. The
                             P-NOC would be charged with making recommendations to Congress and
                             the President relating to the consolidation and rationalization of the
                             Service’s mail processing and distribution infrastructure. Under the
                             Commission’s proposal, P-NOC recommendations would become final
                             unless Congress disapproves them in their entirety within 45 days. The
                             intent of this recommendation corresponds with our observation that a
                             base-closing model may prove necessary to address politically sensitive
                             changes to postal facilities.

                             Regardless of whether or not a P-NOC is implemented, the following three
                             key factors will be needed to guide decisions:

                             •	   principles for rationalizing infrastructure that are fact-based, clearly
                                  defined, and transparent;

                             •    players who should be involved in making the decisions; and

                             •	   processes that should govern how decisions are made and
                                  implemented.

Identify Funding Needs and   To accomplish major transformation, the Service will need to identify its
Strategies 	                 funding needs related to its major transformation initiatives and its
                             strategies for funding these initiatives. Historically, postal policy has been
                             to fund capital expenditure as much as possible through cash flow from


                             Page 52                                                             GAO-04-108T
                              operations, with shortfalls financed through debt. By law, the Postal
                              Service’s total debt cannot exceed $15 billion, and annual increases in the
                              Service’s outstanding debt cannot exceed $3 billion. In fiscal year 2001, the
                              Service was faced with insufficient cash flow from operations and with
                              debt balances that were approaching statutory limits. Consequently, the
                              Service imposed a freeze on capital expenditures for most facilities that
                              continued through fiscal years 2002 and 2003. Implementing best
                              execution strategies is difficult under these circumstances, especially
                              since the Service has not specified what its funding needs will be to
                              rationalize its infrastructure and implement other Transformation Plan
                              initiatives. More information in this area would be useful for Congress and
                              other stakeholders to understand the Service’s future financial needs. It
                              would also be useful for the Service to assess what funding it could
                              receive from continuing to identify and dispose of surplus real estate.

                              The Commission recommended that the Postal Service be encouraged to
                              include policy and goals related to the active management of its real estate
                              in future strategic plans. Disposing of surplus real estate would not only
                              save the Postal Service maintenance and repair expenses but may also
                              provide a source of funds that can be used to finance capital projects.
                              Furthermore, aggressive management of its underutilized real estate assets
                              could also facilitate local redevelopment. In addition, passage of the Postal
                              Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18)
                              provided the Postal Service with some financial relief. Outstanding debt at
                              the end of fiscal year 2004 is budgeted to be $2.6 billion to $3.1 billion,
                              down from an estimated $7.3 billion at the end of fiscal year 2003 and $11.1
                              billion at the end of fiscal year 2002. We believe the Service has a window
                              of opportunity for financing major infrastructure changes that may not last
                              long if First-Class Mail volumes continue to decline. Taking advantage of
                              this opportunity could better position the Service for the future.

Opportunities to Strengthen   As the Service has recognized, improving its information technology (IT)
Information Technology        infrastructure should be considered as part of any network rationalization
Investment Management         project. We share the view of the Commission that transformation should
                              include enhanced information systems because streamlined and integrated
                              operations will require a strong IT infrastructure. The Service has a
                              number of IT initiatives designed to enhance the efficiency of the
                              processing and distribution network that are currently at various levels of
                              deployment. Among these is the Intelligent Mail program, the Surface Air
                              Management System, and the Transportation Optimization Planning and
                              Scheduling system. While the Service’s IT initiatives may provide
                              enhanced IT capabilities, it is not clear how they will be integrated or
                              when they will be fully deployed.

                              Page 53                                                          GAO-04-108T
                               As we have previously reported, the Service has established significant
                               capabilities for managing its IT investments, but shows mixed progress in
                               managing its IT investments as a portfolio. The Service has not utilized
                               criteria that adequately address cost, benefit, schedule, and risk so that it
                               can effectively analyze, prioritize, or select its investments from a portfolio
                               perspective. Also, the Service does not regularly evaluate completed
                               projects and currently has no institutionalized processes that enable it to
                               learn from its current practices and investments and from other
                               organizations. Accordingly, the Service cannot ensure that it is selecting
                               leading-edge IT investments that will maximize returns to the organization
                               and achieve strategic change.31


Data Issues Related to         Accurate cost and performance data are the cornerstone of efficiency
Achieving Greater Efficiency   improvements and are vital if the Service is to achieve best execution. In
                               this regard, the Commission noted that the Service could use better real-
                               time information on the location of individual mail pieces and the
                               containers they travel in to improve its efficiency, such as re-routing mail
                               to less busy facilities to ensure its more rapid processing, as well as
                               adjusting for weather conditions or vehicle breakdowns. In addition, to
                               determine best execution, the Service would need to know how much
                               each process, function, and operation actually costs to perform and how
                               these functions interrelate. For example, when determining what portion
                               of overall operations may be performed cheaper by the private sector, it
                               would be necessary to know what the actual cost and quality of each
                               function is and what the effect on overall costs and quality would be if this
                               function were contracted out. Some unions, mailers, and other groups
                               have raised concerns about the information used to make outsourcing
                               decisions, as well as the accuracy of data systems used to measure
                               performance and productivity.

                               Recognizing that it will need improved cost information, the Service
                               reports that it is currently implementing an activity-based costing system
                               in over 380 mail processing facilities, which is intended to provide specific
                               data to managers to help them evaluate and reduce operational costs. In
                               addition, the Service has continued implementing the recommendations of
                               the 1999 Data Quality Study to improve key postal cost data. Data quality



                               31
                                U.S. General Accounting Office, United States Postal Service: Opportunities to
                               Strengthen IT Investment Management Capabilities, GAO-03-3 (Washington, D.C.: Oct. 15,
                               2002).



                               Page 54                                                                 GAO-04-108T
             issues continue to be of interest to the House Committee on Government
             Reform, which has asked GAO to follow up on the Service’s progress in
             this area. Others with expertise in postal data quality issues, such as the
             Postal Rate Commission and the Postal Service’s Office of Inspector
             General, may have insights on costing and performance data necessary to
             address issues that have been raised by the Commission’s proposals. Later
             this year, the Postal Rate Commission plans to host public sessions
             where staff from the Service will provide briefings on changes the Service
             has made to update data systems related to carrier costs and on recent
             changes in the Service’s accounting and reporting systems. Such
             constructive exchanges help to further mutual understanding and progress
             on data quality issues. Continued focus on improving the quality of postal
             costing and performance data would also be necessary to successfully
             implement the Commission’s proposals.


             We and the Commission agree that the Service faces an uncertain future.
Conclusion   Also, we agree that both congressional action on comprehensive postal
             reform legislation and continued actions by the Postal Service to make
             improvements under its existing authority are necessary to ensure the
             future viability of the Postal Service. The Commission’s key conclusions,
             consistent with our past work, were that the Service faces financial
             pressure due to its outmoded business model, significant financial
             obligations, operating inefficiencies, electronic diversion and mail volume
             trends, and statutory and practical constraints. The Service’s current
             business model is not sustainable in today’s competitive environment.
             Thus, we believe that now is the time to “get it right” and modernize the
             statutory framework that governs the Service.

             In addition to statutory reform, we agree with the Commission that the
             Service can and should do more within its existing authority to work
             toward “best execution” that incorporates corporate best practices and
             enables those who can perform best and for the best price to provide
             postal activities, whether that is the Service, the mailing industry,
             transportation firms, or other companies. The Service has many
             opportunities to become more efficient, such as by standardizing its
             operations and reducing excess capacity of its network. Impending
             retirement of much of the Service’s workforce also creates an opportunity
             for the Service to realign its workforce through attrition. The
             Commission’s vision of rightsizing the Service’s infrastructure and
             workforce is achievable if approached in a comprehensive, integrated
             fashion, and supported by postal stakeholders.



             Page 55                                                         GAO-04-108T
                     However, since the Service issued its Transformation Plan in April 2002, it
                     has not provided adequate transparency on its plans to rationalize its
                     infrastructure and workforce; the status of initiatives included in its
                     Transformation Plan; and how it plans to integrate the strategies, timing,
                     and funding necessary to implement its plans. In addition, the Service has
                     had limited constructive engagement with employee organizations, the
                     mailing industry, affected communities, and Congress with regard to its
                     efforts to implement its key transformation initiatives related to
                     rationalizing its infrastructure and workforce. As the Service knows from
                     the difficulties it has encountered when it has tried to make changes to its
                     facility locations in the past, these decisions can be highly controversial.
                     However, if those who are potentially affected by such decisions do not
                     have sufficient information about how they may be impacted by proposed
                     facility changes, the Service is unlikely to gain the necessary support to
                     successfully achieve a much more efficient network.


                     In view of the Service’s continuing financial, operational, and structural
Matter for           problems, as well as trends that increase the urgency of making rapid
Congressional        progress in transforming its organization, we believe that Congress should
                     consider the Commission’s recommendations as well as GAO’s reform
Consideration        suggestions and enact comprehensive postal reform legislation. Some of
                     the key areas that need to be addressed as part of comprehensive reform
                     legislation include clarifying the Service’s mission and role; enhancing
                     governance, accountability, oversight, and transparency; improving
                     regulation of postal rates; and making human capital reforms.


                     To facilitate the Service’s progress in implementing actions under the
Recommendation for   existing system, we recommend that the Postmaster General develop an
Executive Action     integrated plan to optimize its infrastructure and workforce, in
                     collaboration with its key stakeholders, and make it available to Congress
                     and the general public. In addition, the Postmaster General should provide
                     periodic reports to Congress and the public on the status of implementing
                     its transformation initiatives and other Commission recommendations that
                     fall within the scope of its existing authority. Postal officials have agreed
                     to take these actions.


                     Chairman Collins, that concludes my prepared statement. I would be
                     pleased to respond to any questions that you or the Members of the
                     Committee may have.



                     Page 56                                                          GAO-04-108T
                  For further information regarding this testimony, please call Bernard L.
Contact and       Ungar, Director, Physical Infrastructure Issues, on (202) 512-2834 or at
Acknowledgments   ungarb@gao.gov, or call Linda Calbom, Director, Financial Management
                  and Assurance, on (202) 512-8341 or at calboml@gao.gov for pension and
                  retiree health issues. Individuals making key contributions to this
                  testimony included Teresa Anderson, Gerald P. Barnes, Joshua Bartzen,
                  Alan Belkin, Amy Choi, Margaret Cigno, Keith Cunningham, William
                  Doherty, Brad Dubbs, Kathleen A. Gilhooly, Kenneth E. John, Roger Lively,
                  Scott McNulty, and Lisa Shames.




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                  Page 57                                                      GAO-04-108T
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