oversight

U.S. Postal Service: Challenges to Sustaining Improved Performance

Published by the Government Accountability Office on 1997-03-12.

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

                             United States General Accounting Office

GAO                          Testimony
                             Before the Subcommittee on the Postal Service,
                             House Committee on Government Reform and Oversight




For Release on Delivery
Expected at 1:00 p.m., EST
Wednesday
                             U.S. POSTAL SERVICE
March 12, 1997


                             Challenges to Sustaining
                             Improved Performance
                             Statement of Michael E. Motley
                             Acting Director, Government Business
                             Operations Issues




GAO/T-GGD-97-53
Summary

U.S. Postal Service: Challenges to Sustaining
Improved Performance

               GAO’s testimony addresses the challenges that confront Congress and the
               Postal Service as they consider how to sustain its performance and
               maintain a competitive role in providing mail service to the American
               public in the future.

               The Postal Service reported that fiscal year 1996 represented the second
               year in a row that its financial performance was profitable and operational
               performance improved. The Postal Service’s 1996 net income was
               $1.6 billion and it delivered 91 percent of overnight mail on time.
               Additionally, for fiscal year 1996, the Postal Service’s volume exceeded
               182 billion pieces of mail and generated more than $56 billion in revenue.

               While these results are encouraging, other performance data suggest that
               some areas warrant closer scrutiny. Last year’s delivery of 2-day and 3-day
               mail—at 80 and 83 percent respectively—did not score as high as
               overnight delivery. The concern among customers is that the Postal
               Service’s emphasis on overnight delivery is at the expense of 2-day and
               3-day mail. Additionally, although its mail volume continues to grow, the
               Postal Service is concerned that customers increasingly are turning to its
               competitors or alternative communications methods. In 1996, mail volume
               increased by about one-half of anticipated increase in volume. Containing
               costs is another key challenge that GAO has reported on previously. For
               example, last year’s operating expenses increased 4.7 percent compared to
               a 3.9 percent increase in operating revenues. GAO has also found several
               weaknesses in the Postal Service’s internal controls that contributed to
               increased costs. The Postal Service’s continued success in both financial
               and operational performance will depend heavily on controlling operating
               costs, strengthening internal controls, and ensuring the integrity of its
               services.

               The prospect that pending postal legislation may place the Postal Service
               in a more competitive arena with its private sector counterparts has
               prompted congressional consideration of some key reform issues. These
               issues include how proposed changes to the Private Express Statutes may
               affect universal mail service, postal revenues, and rates. Another reform
               issue is the future role of the Postal Service in an increasingly competitive,
               constantly changing communications market.

               Congressional oversight remains a key tool for improving the
               organizational performance of the Postal Service. One of the most
               important areas for oversight is labor-management relations. Despite the
               initiatives that have been established to address them, the long-standing



               Page 1                                                         GAO/T-GGD-97-53
Summary
U.S. Postal Service: Challenges to Sustaining
Improved Performance




labor-management relations problems GAO identified in 1994 remain
unresolved. The Government Performance and Results Act (GPRA)
provides an important avenue for addressing such problems. Also, the
Postal Service’s automation efforts will continue to require the attention of
both the Postal Service and Congress to ensure that increased productivity
and an adequate return on investments are realized.




Page 2                                                       GAO/T-GGD-97-53
Statement

U.S. Postal Service: Challenges to Sustaining
Improved Performance

                       Mr. Chairman and Members of the Subcommittee:

                       We are pleased to be here today to participate in the Subcommittee’s
                       oversight hearing on the U.S. Postal Service. My testimony will (1) focus
                       on the performance of the Postal Service and the need for improving
                       internal controls and protecting revenue in an organization that takes in
                       and spends billions of dollars each year and (2) highlight some of the key
                       reform and oversight issues that continue to challenge the Postal Service
                       and Congress as they consider how U.S. mail service will be provided in
                       the future. I will also provide some observations from our ongoing work
                       relating to labor-management relations at the Postal Service and other
                       areas. My testimony is based on our ongoing work and work that we
                       completed over the past year.


Improving Internal     First, I would like to discuss both the reported successes and some of the
Controls and Revenue   remaining areas of concern related to the Postal Service’s performance.
Protection Remains a   Last year, the Postal Service reported that it had achieved outstanding
                       financial and operational performance. Financially, the Postal Service had
Concern                the second most profitable year in its history. According to the Postal
                       Service’s 1996 annual report, its fiscal year 1996 net income was
                       $1.6 billion. Similarly, with regard to mail delivery service, the Postal
                       Service continued to meet or exceed its goals for on-time delivery of
                       overnight mail. Most recently, the Postmaster General announced that,
                       during 1996, the Postal Service delivered 91 percent of overnight mail on
                       time or better. Additionally, during fiscal year 1996, the Postal Service’s
                       volume exceeded 182 billion pieces of mail and generated more than
                       $56 billion in revenue.

                       While these results are encouraging, other performance data suggest that
                       some areas of concern warrant closer scrutiny. For example, last year’s
                       delivery of 2-day and 3-day mail—at 80 and 83 percent respectively—did
                       not score as high as overnight delivery. Such performance has raised a
                       concern among some customers that the Postal Service’s emphasis on
                       overnight delivery is at the expense of 2-day and 3-day mail. Additionally,
                       although its mail volume continues to grow, the Postal Service is
                       concerned that customers increasingly are turning to its competitors or
                       alternative communications methods. In 1996, mail volume increased by
                       about one-half of anticipated increase in volume.

                       Containing costs is another key challenge that we reported on previously.
                       In the area of expenditures, the Postal Service’s 1996 annual report



                       Page 3                                                       GAO/T-GGD-97-53
Statement
U.S. Postal Service: Challenges to Sustaining
Improved Performance




showed that its 1996 operating expenses increased 4.7 percent compared
to a 3.9 percent increase in operating revenues. Labor costs, which include
pay and benefits, continued to account for almost 80 percent of the Postal
Service’s operating expenses, and the Postal Service expects that its costs
for compensation and benefits will grow more than 6 percent in 1997.
Moreover, controlling costs will be critical with regard to capital
investments in 1997, as the Postal Service plans to commit $6 billion to
capital improvements. Over the next 5 years, the Service plans to devote
more than $14 billion in capital investments to technology, infrastructure
improvements, and customer service and revenue initiatives.

The Postal Service’s continued success in both operational and financial
performance will depend heavily on its ability to control operating costs,
strengthen internal controls, and ensure the integrity of its services.
However, we found several weaknesses in the Postal Service’s internal
controls that contributed to unnecessary increased costs.

We reported in October 19961 that internal controls over Express Mail
Corporate Accounts (EMCA) were weak or nonexistent, which resulted in
the potential for abuse and increasing revenue losses over the past 3 fiscal
years. Specifically, we found that some mailers obtained express mail
services using invalid EMCAs and that the Postal Service did not collect the
postage due. Consequently, in fiscal year 1995, the Postal Service lost
express mail revenue of about $800,000 primarily because it had not
verified EMCAs that were later determined to be invalid.

Since our report was issued, the Postal Service has developed plans to
address these deficiencies. The Postal Service is revising its regulations to
require an initial deposit of $250, up from $100, to open an EMCA. It also
plans to issue a memorandum requiring that district managers ensure that
employees perform the necessary express mail acceptance checks so that
the correct postage amounts can be collected. Finally, the Postal Service
plans to install terminals in mail processing plants to allow Express Mail
packages that are deposited in collection boxes or picked up at customers’
locations to be checked for valid EMCA numbers before they are accepted
into the mail system.




1
  U.S. Postal Service: Revenue Losses From Express Mail Accounts Have Grown (GAO/GGD-97-3,
Oct. 24, 1996).



Page 4                                                                       GAO/T-GGD-97-53
Statement
U.S. Postal Service: Challenges to Sustaining
Improved Performance




Similarly, we reported in June 19962 that weaknesses in the Postal
Service’s controls for accepting bulk business mail prevent it from having
reasonable assurance that all significant amounts of postage revenue due
are received when mailers claim presort/barcode discounts. We reported
that during fiscal year 1994, as much as 40 percent of required bulk mail
verifications were not performed. Bulk mail totalled almost one-half of the
Postal Service’s total revenue of $47.7 billion in fiscal year 1994. At the
same time, we found that less than 50 percent of the required follow-up
verifications to determine the accuracy of the clerk’s work were being
performed by the supervisors. In response to our recommendations, the
Postal Service is developing new and strengthening existing internal
controls to help prevent revenue losses in bulk mailings. For example, the
Postal Service plans to improve the processes used in verification of mail,
including how units are staffed, how verifications are performed, and how
results of acceptance work are reported and reviewed.

To avoid additional unwarranted costs, the Postal Service also needs to
better ensure the overall integrity of its acquisitions and services. We
concluded, in our January 1996 report3, that the Postal Service did not
follow required procedures for seven real estate or equipment purchases.
We estimated that these seven purchases resulted in the Postal Service’s
expending about $89 million on penalties, unusable, or marginally usable
property. Three of the seven purchases involved ethics violations arising
from the contracting officers’ failure to correct situations in which
individuals had financial relationships with the Postal Service and with
certain offerors. We also pointed out that the Office of Government Ethics
was reviewing the Postal Service’s ethics program and reported that all
areas of the program required improvement. The Office of Government
Ethics subsequently made a number of recommendations designed to
ensure that improvement of the Postal Service’s ethics program continues
through more consistent oversight and management support.

Since our January 1996 report, the Office of Government Ethics has
completed three reviews to follow up on its open recommendations.
Recently, the Postal Service developed guidance for avoiding conflicts of
interest and filing financial disclosure reports as well as established
procedures to ensure that the Office of Government Ethics is notified
about all conflict-of-interest violations that are referred to the Department

2
 U.S Postal Service: Stronger Mail Acceptance Controls Could Help Prevent Revenue Losses
(GAO/GGD-96-126, June 25, 1996).
3
  Postal Service: Conditions Leading to Problems in Some Major Purchases (GAO/GGD-96-59, Jan. 18,
1996).



Page 5                                                                         GAO/T-GGD-97-53
                    Statement
                    U.S. Postal Service: Challenges to Sustaining
                    Improved Performance




                    of Justice. As a result of these actions, the Office of Government Ethics
                    closed its remaining open recommendations.

                    Additionally, strengthening program oversight is essential to effective mail
                    delivery. We found that the Postal Service did not exercise adequate
                    oversight of its National Change of Address (NCOA) program.4 We reported
                    that the Postal Service took a positive step toward dealing with the
                    inefficiencies of processing misaddressed mail. However, at the same time,
                    we found that the NCOA program was operating without clear procedures
                    and sufficient oversight to ensure that the program was operating in
                    compliance with the privacy provisions of federal laws. Accordingly, we
                    recommended that the Postal Service strengthen oversight of NCOA by
                    developing and implementing written oversight procedures. In response to
                    our recommendation, the Postal Service developed written oversight
                    procedures for the NCOA program.

                    Most recently, we issued a report5 that describes how the Postal Service
                    closes post offices and provides information on the number closed since
                    1970—over 3,900 post offices. We also provided information on the
                    number of appeals and their dispositions, as well as some information
                    about the communities where post offices were closed in fiscal years 1995
                    and 1996. Generally, the Postal Service initiated the closing process after a
                    postmaster vacancy occurred through retirement, transfer or promotion,
                    or after the termination of the post office building’s lease. In each case, the
                    Postal Service proposed less costly alternative postal services to the
                    affected community, such as establishing a community post office
                    operated by a contractor or providing postal deliveries through rural
                    routes and cluster boxes.


Key Reform Issues   The second area I would like to discuss is the pending postal legislation.
                    This legislation may place the Postal Service in a more competitive arena
                    with its private sector counterparts and has raised some key reform issues
                    for consideration. One such issue relates to proposed changes to the
                    Private Express Statutes. These Statutes were set up to ensure that the
                    Postal Service has enough revenue to provide universal access to postal
                    services to the general public and that certain mail, such as First-Class,



                    4
                     U.S. Postal Service: Improved Oversight Needed to Protect Privacy of Address Changes
                    (GAO/GGD-96-119, Aug. 13, 1996).
                    5
                     U.S. Postal Service: Information on Post Office Closures, Appeals, and Affected Communities
                    (GAO/GGD-97-38BR, Mar. 11, 1997).



                    Page 6                                                                           GAO/T-GGD-97-53
Statement
U.S. Postal Service: Challenges to Sustaining
Improved Performance




will bear a uniform rate. In our September 1996 report,6 we emphasized
the importance of recognizing the Statute’s underlying purpose and
determining how changes may affect universal mail service and uniform
rates. Most important among the potential consequences is that relaxing
the Statutes could open First-Class mail services to additional competition,
thus possibly affecting postal revenues and rates and the Postal Service’s
ability to carry out its public service mandates. However, at the same time,
the American public could benefit through improved service. It will be
important to take into account the possible consequences for all
stakeholders in deciding how mail services will be provided to the
American public in the future.

Another key reform issue is the future role of the Postal Service in the
constantly changing and increasingly competitive communications market.
For example, the use of alternative communications methods such as
electronic mail, faxes, and the Internet continues to grow at phenomenal
rates in the United States and is beginning to affect the Postal Service
markets. At the same time, the Postal Service’s competitors continue to
challenge it for major shares of the communications market. According to
the Postmaster General, the Postal Service has been losing market share in
five of its six product lines. It seems reasonable to assume that these
alternative communications methods are likely to be used more and more.
In addition, international mail has become an increasingly vital market in
which the Postal Service competes. In our March 1996 report,7 we pointed
out that, although the Postal Service has more flexibility in setting
international rates, it still lost business to competitors because rates were
not competitive and delivery service was not reliable. We also identified
several issues surrounding the Postal Service’s role in the international
mail arena that remain unresolved. Chief among them is the
appropriateness of the Postal Service’s pricing practices in setting rates for
international mail services.

We also reviewed postal reform in other countries to learn about their
experiences. Recently, we issued a report8 on Canada’s efforts since 1981
to reform its postal service, the Canada Post Corporation (CPC). Although
CPC retained basic letter mail services at a uniform rate, it also reduced the



6
 Postal Service Reform: Issues Relevant to Changing Restrictions on Private Letter Delivery
(GAO/GGD-96-129A/B, Sept. 12, 1996).
7
 U.S. Postal Service: Unresolved Issues in the International Mail Market (GAO/GGD-96-51, Mar. 11,
1996).
8
 Postal Reform in Canada: Canada Post Corporation’s Universal Service and Ratemaking
(GAO/GGD-97-45BR, Mar. 5, 1997).



Page 7                                                                            GAO/T-GGD-97-53
                            Statement
                            U.S. Postal Service: Challenges to Sustaining
                            Improved Performance




                            frequency of mail delivery to some businesses, as well as in urban and
                            rural areas. CPC uses a regulatory rate-making process that includes the
                            opportunity for public comment and government approval for basic
                            domestic and international single-piece letters. However, postage rates for
                            other mail services can be approved by CPC without issuing regulations or
                            obtaining government approval. Some of the key concerns that have been
                            raised by CPC customers include CPC’s closure of rural post offices and its
                            conversion of others to private ownership. In addition, CPC’s competitors
                            have expressed concern about whether CPC is cross-subsidizing the prices
                            of its courier services with monopoly revenues. The Canadian government
                            has responded to these concerns by continuing its moratorium on post
                            office closings and directing CPC to discontinue delivery of unaddressed
                            advertising mail. The government is also considering a call for additional
                            government oversight of CPC.

                            Mr. Chairman, as you are aware, we also have a number of ongoing
                            reviews related to postal reform. For example, in concert with your focus
                            on the future role of the Postal Service, we are currently reviewing the role
                            and structure of the Postal Service’s Board of Governors in order to
                            determine its strengths and weaknesses. The Board of Governors is
                            responsible for directing and controlling the expenditures of the Postal
                            Service, reviewing its practices, participating in long-range planning, and
                            setting policies on all postal matters. In addition to obtaining the views of
                            current and former Board members, we will provide information on the
                            role and structure of Boards in other types of government-created
                            organizations. Another issue important to postal reform that we are
                            reviewing involves access to mailboxes. More specifically, we plan to
                            provide information on (1) public opinions on the issue of mailbox
                            restrictions; (2) views of the Postal Service and other major stakeholders;
                            and (3) this country’s experience with mailbox security and enforcement
                            of related laws, compared with the experiences in selected other
                            countries.


Oversight of the Postal     Congressional oversight remains a key to improving the organizational
Service Remains Important   performance of the Postal Service. One of the most important areas for
                            oversight is labor-management relations. As the Postal Service focuses on
                            the significant challenges it faces to compete in today’s communications
                            marketplace, unresolved labor-management relations disputes continue to
                            hinder efforts to improve productivity. Generally, the long-standing
                            labor-management problems we identified in 1994 still remain unresolved,




                            Page 8                                                       GAO/T-GGD-97-53
Statement
U.S. Postal Service: Challenges to Sustaining
Improved Performance




despite the initiatives that have been established to address them.9 For
example, the number of grievances requiring formal arbitration has
increased almost 76 percent, from about 51,000 in fiscal year 1993 to over
90,000 in fiscal year 1996. These difficulties continue to plague the Service
primarily because the major postal stakeholders (the Postal Service, four
major unions, and three management associations) cannot agree on
common approaches for addressing their problems. We continue to
believe that until the major postal stakeholders develop a framework
agreement that would outline common objectives and strategies, efforts to
improve labor-management relations will likely continue to be fragmented
and difficult to sustain.

The Government Performance and Results Act (GPRA) provides a
mechanism that may be useful in focusing a dialogue that could lead to a
framework agreement. GPRA provides a legislatively based mechanism for
the major stakeholders, including Congress, to jointly engage in
discussions that focus on an agency’s mission and on establishing goals,
measuring performance, and reporting on mission-related
accomplishments. GPRA can be instrumental to the Postal Service’s efforts
to better define its current and future role. As results-oriented goals are
established to achieve that role, the related discussions can also provide a
foundation for a framework agreement. Successful labor-management
relations will be critical to achieving the Postal Service’s goals. The Postal
Service and Congress will need results-oriented goals and sound
performance information to most effectively address some of the policy
issues that surround the Postal Service’s performance in a dynamic
communications market. Recognizing that the changes envisioned by GPRA
do not come quickly or easily, sustained oversight by the Postal Service
and Congress will be necessary.

Finally, several other areas will continue to require the attention of both
the Postal Service and Congress. One such area is the Postal Service’s
automation efforts. The Postal Service has spent billions of dollars to
ensure that an increase in productivity and an adequate return on planned
investments are realized. Another area is the Postal Service’s 5-year capital
investment plan for 1997-2001. It calls for investing $14.3 billion, of which
$3.6 billion is designated for technology investments. Also included is
$6.6 billion for planned infrastructure improvements such as maintaining
and improving over 35,000 postal facilities and upgrading the vehicle fleet
of more than 200,000 vehicles. In addition, customer satisfaction at both


9
 U.S. Postal Service: Labor-Management Problems Persist on the Workroom Floor
(GAO/GGD-94-201A/B, Sept. 29, 1994).



Page 9                                                                          GAO/T-GGD-97-53
Statement
U.S. Postal Service: Challenges to Sustaining
Improved Performance




the residential and business levels will continue to be a critical area as the
Postal Service strives to improve customer service in order to remain
competitive.

The Postal Service has made considerable progress in improving its
financial and operational performance. Sustaining this progress will be
dependent upon ensuring that the key issues we identified, such as
controlling costs, protecting revenues, and clarifying the role of the Postal
Service in an increasingly competitive communications market, are
effectively addressed by the Postal Service and Congress.


Mr. Chairman, this concludes my prepared statement. I have attached a list
of our Postal Service products issued since January 1996. I would be
pleased to respond to any questions you or members of the Subcommittee
may have.




Page 10                                                        GAO/T-GGD-97-53
Page 11   GAO/T-GGD-97-53
GAO Postal-Related Products Issued Since
January 1, 1996

              U.S. Postal Service: Information on Post Office Closures, Appeals, and
              Affected Communities (GAO/GGD-97-38BR, Mar. 11, 1997).

              Postal Reform in Canada: Canada Post Corporation’s Universal Service
              and Ratemaking (GAO/GGD-97-45BR, Mar. 5, 1997).

              U.S. Postal Service: Revenue Losses From Express Mail Accounts Have
              Grown (GAO/GGD-97-3, Oct. 24, 1996).

              Postal Service: Controls Over Postage Meters (GAO/GGD-96-194R, Sept. 26,
              1996).

              Inspector General: Comparison of Certain Activities of the Postal IG and
              Other IGs (GAO/AIMD-96-150, Sept. 20, 1996).

              Postal Service Reform: Issues Relevant to Changing Restrictions on
              Private Letter Delivery (GAO/GGD-96-129A/B, Sept. 12, 1996).

              U.S. Postal Service: Improved Oversight Needed to Protect Privacy of
              Address Changes (GAO/GGD-96-119, Aug. 13, 1996).

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

              U.S. Postal Service: Unresolved Issues in the International Mail Market
              (GAO/GGD-96-51, Mar. 11, 1996).

              Postal Service: Conditions Leading to Problems in Some Major Purchases
              (GAO/GGD-96-59, Jan. 18, 1996).




(240236)      Page 12                                                      GAO/T-GGD-97-53
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