Testimony 

Before the Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Thursday, April 14, 2005 U.S. POSTAL SERVICE

Despite Recent Progress, 

Postal Reform Legislation Is 

Still Needed 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-05-453T 
www.gao.gov/cgi-bin/getrpt?GAO-05-453T.

To view the full product click on the link 

above. For more information, contact 

Katherine Siggerud at (202) 512-2834 or 

siggerudk@gao.gov. 

Highlights of GAO-05-453T, a testimony 

before the Senate Committee on 

Homeland Security and Governmental 

Affairs 

April 14, 2005

U.S. POSTAL SERVICE

Despite Recent Progress, Postal Reform 

Legislation Is Still Needed 

Both the Presidential Commission 

on the U.S. Postal Service and 

GAO’s past work have reported 

that universal postal service is at 

risk and that comprehensive postal 

reform legislation is needed to 

minimize the risk of a significant 

taxpayer bailout or dramatic postal 

rate increases. In April 2001, GAO 

added the Postal Service’s (the 

Service) transformation efforts and 

long-term outlook to its High-Risk 

List. GAO has testified that 

comprehensive postal reform 

legislation is needed to clarify the 

Service’s mission and role; enhance 

governance, transparency, and 

accountability; improve regulation 

of postal rates and oversight; help 

to ensure the rationalization of the 

Service’s infrastructure and 

workforce; and make certain 

human capital reforms. 

The Service has made significant 

progress on some of its key 

challenges but postal reform 

legislation continues to be needed 

in order to facilitate a broader 

transformation effort. 

To help Congress and other 

stakeholders understand Service 

progress and the need for postal 

reform, GAO will focus on 

(1) Service progress since GAO 

put Service transformation 

efforts and long-term outlook on 

GAO’s High-Risk List, (2) why 

comprehensive postal reform 

legislation is needed, and (3) key 

areas for comprehensive postal 

reform. This testimony is based on 

an update of GAO’s statement to 

the Committee last year. 

The Postal Service has made significant progress since its transformation 

efforts and long-term outlook were added to GAO’s High-Risk List in 2001, 

including achieving record net income, repaying most debt, increasing 

productivity, and downsizing the postal workforce. However, the Service’s 

financial progress was largely due to a transitory boost provided by 2003 

pension reform legislation that reduced the Service’s pension costs in fiscal 

years 2003 through 2005, but also benefited from increased Standard Mail 

volume and revenues, and certain cost-cutting and efficiency initiatives. 

Despite this progress, comprehensive postal reform legislation is needed to 

address the continuing financial, operational, governance, and human 

capital challenges that threaten the Service’s long-term ability to provide 

high-quality, universal postal service at affordable rates. The Service’s core 

business of First-Class Mail is declining, squeezing revenues available to 

help fund universal service costs. Meanwhile, compensation and benefits 

costs are rising despite workforce downsizing. The Service’s financial 

liabilities and obligations of roughly $70 billion to $80 billion include about 

$50 billion to $60 billion in unfunded retiree health benefits. Progress is 

needed to move toward prefunding these benefits, and to increase 

productivity to offset rising costs, rationalize the Service’s infrastructure 

and workforce, and implement more market-based and performanceoriented compensation systems for all employees. However, progress is 

hindered by limited flexibility and incentives for success under current law.

 

First-Class Mail Volume Growth/Decline, Fiscal Years 1984 through 2004 

Key elements for postal reform include clarifying the Service’s mission and 

role so that the Service remains focused on universal postal service and 

competes appropriately; enhancing the Service’s flexibility to operate in a 

businesslike manner with a governance structure suitable for a $70-billion 

entity, balanced by enhanced transparency, accountability, and oversight; 

making needed human capital reforms; and moving toward prefunding 

retiree health benefits. 
Page 1 GAO-05-453T 

Chairman Collins, Senator Lieberman, and Members of the Committee: 

I am pleased to be here today to participate in this hearing on postal 

reform. Today, I will focus on (1) the Postal Service (the Service) results 

since we put its transformation efforts and long-term outlook on our HighRisk List in 2001, (2) the need for comprehensive postal reform, and (3) 

selected key areas for postal reform. This testimony is an update of our 

last statement to the Committee.1

 Our bottom line is that the Service has 

made significant progress since 2001, but its recent financial success was 

largely due to a transitory boost provided by 2003 pension reform 

legislation. Comprehensive postal reform is urgently needed because the 

Service’s fundamental transformation challenges continue to exist, thereby 

placing universal postal service at risk. Because comprehensive postal 

reform legislation has not been enacted and the Service continues to face 

formidable competition, cost and other challenges, its transformation 

efforts and long-term outlook remain on our High-Risk List. More 

specifically: 

• The Service has made significant progress since fiscal year 2001, including 

achieving record net income, repaying debt, achieving additional 

productivity increases, and downsizing the postal workforce.2

 However, 

most net income was due to a 2003 law3

 that reduced Service pension 

benefit payments for fiscal years 2003 through 2005. Starting in fiscal year 

2006, these “savings” 4 must be set aside in a dedicated escrow account. 

Under the 2003 law, the Service cannot use the funds in the escrow 

account unless Congress eliminates the escrow requirement or specifies 

by law how the escrow funds may be used. Legislative proposals would 

abolish the escrow and require the Service to begin prefunding existing 

and future Service obligations for retiree health benefits. 

• Comprehensive postal reform legislation continues to be needed to 

address the fundamental financial, operational, governance, and human 

 1

GAO, U.S. Postal Service: Key Reasons for Postal Reform, GAO-04-565T (Washington, 

D.C.: Mar. 23, 2004). 

2

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005) 

3

The Postal Civil Service Retirement System (CSRS) Funding Reform Act of 2003 (P.L. 108-

18) was enacted in response to Office of Personnel Management’s finding that the Service 

was on course to overfund its CSRS obligations. 

4

GAO, Postal Pension Funding Reform: Issues Related to the Postal Service’s Proposed 

Use of Pension Savings, GAO-04-238 (Washington, D.C.: Nov. 26, 2003). 
Page 2 GAO-05-453T 

capital challenges that continue to threaten the Service’s long-term ability 

to remain self-supporting while providing high-quality, universal postal 

service at affordable rates. The Service’s core business of First-Class Mail 

continues to decline, squeezing revenues available to pay universal service 

costs. Meanwhile, compensation and benefits costs continue to rise 

despite decreases in the number of postal employees. The Service’s 

financial liabilities and obligations of roughly $70 billion to $80 billion are 

comprised of roughly $50 billion to $60 billion in unfunded retiree health 

benefits. The current pay-as-you-go approach for these benefits will likely 

lead to more dramatic and frequent postal rate increases in the future. 

Progress is needed to move toward prefunding these benefits as well as 

increasing productivity to offset rising costs, rationalizing and 

restructuring the outmoded postal infrastructure, rightsizing the postal 

workforce, and implementing more market-based and performanceoriented compensation systems for all employees. In this regard, progress 

is hindered by the Service’s limited flexibility and incentives for success 

under current law. 

• Key areas for postal reform include clarifying the Service’s mission and 

role so that the Service remains focused on universal postal service and 

competes appropriately; enhancing the Service’s flexibility to operate in a 

businesslike manner with a governance structure suitable for a $70-billion 

entity, balanced by enhanced transparency, accountability, and oversight; 

making needed human capital reforms; and moving toward prefunding 

retiree health benefits. It is important that Congress act before the Service 

faces a crisis that could limit congressional options, particularly because it 

will take time for the Service to implement any major changes. 

In this section of my testimony, I will highlight significant progress the 

Service has made since we placed its transformation efforts and long-term 

outlook on our High-Risk List. 

The Service earned a total of $7 billion in fiscal years 2003 and 2004 

combined (see fig. 1) and expects to earn more than $1 billion in fiscal 

year 2005. However, this net income largely resulted from 2003 legislation 

that reduced Service pension benefit payments by $6.2 billion in fiscal 

years 2003 and 2004 combined and $2.8 billion in fiscal year 2005. This 

legislation has enabled the Service to keep postal rates stable since 2002 

and promise not to raise rates until 2006. Absent the 2003 legislation, the 

Service likely would already have raised postal rates to avoid deficits. Net 

income also benefited from higher revenues associated with increased 

Postal Service 

Progress 

Record Net Income 

Largely Resulted from 

Pension Legislation 
Page 3 GAO-05-453T 

volumes of Standard Mail (primarily advertising), as well as certain 

Service cost-cutting and efficiency initiatives. 

Figure 1: Postal Service Net Income, Fiscal Years 1972 through 2004 

Postal Service debt was reduced from a peak of $11.3 billion at the end of 

fiscal year 2001 to $1.8 billion at end of fiscal year 2004 (see fig. 2). Debt 

repayment, which has continued in fiscal year 2005, was primarily enabled 

by pension legislation, previously discussed in this testimony, as well as 

restraint over capital spending that further reduced the Service’s need for 

borrowing. For example, the Service imposed a temporary freeze on most 

new capital facility projects in fiscal year 2001 that has since been lifted.5

 5

Congress appropriated more than $1 billion to the Service for emergency preparedness 

funding, including $503 million in December 2004. The Service has requested $51 million in 

emergency preparedness appropriations for fiscal year 2006. 

The Postal Service Has 

Repaid Most of Its Debt 

Dollars in billions

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Source: U.S. Postal Service.

Fical years
Page 4 GAO-05-453T 

Figure 2: Postal Service Debt, Fiscal Years 1972 through 2004 

Postal Service productivity increased by 5.2 percent from fiscal years 2001 

to 2004, reaching its highest level since fiscal year 1972 (see fig. 3). 

Productivity rose as a result of many factors, notably cost containment 

resulting from large reductions in work hours enabled by automation, 

information technology and other efficiency initiatives; as well as restraint 

over capital spending. 

Postal Service Productivity 

Has Continued to Increase 

0

2

4

6

8

10

12

Dollars in billions

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Fiscal year

Source: U.S. Postal Service.
Page 5 GAO-05-453T 

Figure 3: Cumulative Productivity Growth, Fiscal Years 1972 through 2004 

The Postal Service downsized its workforce by 9.4 percent from fiscal 

years 2001 to 2004; primarily from reductions in the number of career 

postal employees (see fig. 4). This decline reduced the size of the Service’s 

career workforce to about 707,000 at the end of fiscal year 2004, which 

was its lowest level since fiscal year 1993. Workforce reductions were 

made through attrition instead of layoffs, as employees retired and were 

not replaced, notably in mail processing and administrative functions 

affected by automation and information technology. Moreover, the 

number of career letter carriers was also reduced slightly despite a 3 

percent increase in the number of delivery points, as more mail was sorted 

by automation equipment into the order of delivery. 

The Postal Service Has 

Downsized Its Workforce 

Cumulative percentage change

Fiscal years

Source: U.S. Postal Service.

0

5

10

15

20

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Page 6 GAO-05-453T 

Figure 4: Number of Postal Service Employees, Fiscal Years 1984 through 2004 

Key trends and challenges demonstrate the need for postal reform: 

Declining First-Class Mail volume: The Service’s core business of FirstClass Mail volume growth has shown a downward trend since the mid1980s and declined annually since fiscal year 2001—a first-time 

occurrence (see fig. 5). This trend is expected to continue for the 

foreseeable future, as customers continue to increase their use of 

electronic alternatives for communications and payments. 

The Need for Postal 

Reform 
Page 7 GAO-05-453T 

Figure 5: First-Class Mail Volume Growth/Decline, Fiscal Years 1984 through 2004 

Declining First-Class Mail volume poses a fundamental challenge to the 

Service’s long-term viability. First-Class Mail generates about half of the 

Service’s mail volume, more than half of its revenues, and covers more 

than two-thirds of the Service’s overhead costs (see fig. 6). About half of 

overhead costs, also referred to as institutional costs,6

 are comprised of 

the universal service costs of maintaining postal delivery and retail 

networks. Declining First-Class Mail volume is causing a loss of First-Class 

Mail revenues to cover overhead costs, which will be difficult to recover 

from other classes of mail. 

 6

Institutional costs comprise roughly 40 percent of all postal costs and are defined as costs 

that are not attributed to specific products and services. 
Page 8 GAO-05-453T 

Figure 6: Mail Volume, Revenues, and Contribution to Cover Overhead Costs, Fiscal Year 2004 

Note: Contribution data are the most recent available according to Postal Rate Commission 

methodology. 

a

Other mail includes mail such as magazines, newspapers, and parcels. Other services include postal 

services such as post office boxes, money orders, and delivery confirmation. 

Changes in the mail mix: The shift in the Service’s mail mix from FirstClass Mail to Standard Mail has resulted in shrinking revenues to cover 

overhead costs. Standard Mail volume grew to nearly match First-Class 

Mail in fiscal year 2004 (see fig. 7) and is expected to exceed First-Class 

Mail in fiscal year 2005. However, compared with First-Class Mail, the 

average piece of Standard Mail generates only about half of the revenues 

and less than 40 percent of the contribution to cover overhead costs. 

Source: U.S. Postal Service.

Other mail 

Standard Mail

First-Class Mail

Other mail and services 

Standard Mail

First-Class Mail

Other mail and services 

Standard Mail

First-Class Mail

Mail volume Postal Service revenues

Contribution to cover

overhead costs

6%

48%

46%

21%

26%

53%

12%

24%

64%
Page 9 GAO-05-453T 

Figure 7: First-Class Mail and Standard Mail Volume, Fiscal Years 1990 through 

2004 

Increased competition from private delivery companies: Private delivery 

companies dominate the market for parcels over 2 pounds and appear to 

be making inroads into the market for small parcels. Once a highly 

profitable growth product for the Service, Priority Mail volume has 

declined about 30 percent since its volume peaked in fiscal year 2000 (see 

fig. 8) as the highly competitive parcel market has turned to lower-priced 

ground shipment alternatives. Express Mail volume has also declined for 

the same reason. Adding to the competition, United Parcel Service (UPS) 

and FedEx have established national retail networks through UPS’s 

acquisition of MailBoxes Etc., now called UPS Stores, and FedEx’s 

acquisition of Kinko’s. 

Source: U.S. Postal Service.

0

20

60

80

100

120

Pieces in billions

Standard Mail

Fiscal year

First-Class Mail

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Page 10 GAO-05-453T 

Figure 8: Priority Mail Volume, Fiscal Years 1990 through 2004 

Subpar revenue growth: Postal revenue growth has slowed in recent years 

(see fig. 9) due to declining First-Class Mail volume and shifts in the mail 

mix to lower-margin products. As noted previously, the Service’s record 

net income was largely due to lower pension costs instead of rising mail 

revenues. If revenues continue to be affected by mail volume trends, that 

will lead to greater reliance on rate increases to produce needed revenues. 

Source: U.S. Postal Service.

0

200

400

600

800

1,000

1,200

1,400

Pieces in billions

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal years
Page 11 GAO-05-453T 

Figure 9: Postal Service Revenue Growth, Fiscal Years 1990 through 2004 

Note: Average postal rates increased 19.9 percent in fiscal year 1991, 10.2 percent in fiscal year 

1995, 2.8 percent in fiscal year 1999, 6.3 percent in fiscal year 2001, and 7.7 percent in fiscal year 

2002. 

Rising costs: Key Service costs continue to rise despite continued 

downsizing and cost-cutting efforts, creating upward pressure on postal 

rates. In fiscal year 2004, Service compensation and benefit costs 

increased $1.7 billion, despite a decrease of nearly 22,000 career 

employees from the prior fiscal year. This cost growth was due to (1) wage 

increases for craft employees, including cost-of-living adjustments plus 

basic pay increases; (2) rising benefits costs, including about $500 million 

in additional health benefits costs for active employees and retirees; and 

(3) additional workload to serve 1.8 million new delivery points and 

handle increased Standard Mail volume. 

Significant financial liabilities and obligations: The Service estimated it 

had roughly $70 billion to $80 billion in liabilities and obligations at the 

end of fiscal year 2004, including roughly $50 billion to $60 billion in 

unfunded retiree health benefits that were not reported on its balance 

Source: U.S. Postal Service.

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal years

Annual percentage change

Rate increase implemented in fiscal year

No rate increase in fiscal year
Page 12 GAO-05-453T 

sheet. Given the Service’s workforce demographics and health care trends, 

its payments for retiree health benefits are projected to rise throughout 

the next 3 decades (see fig. 10). The Service will have difficulty financing 

these benefit costs, particularly if unfavorable revenue and cost trends 

continue. 

Figure 10: Postal Service Health Benefits Costs, Fiscal Years 1990 through 2040 

Note: Projections are based on current law. 

Need for substantial improvements in postal productivity: Substantial 

productivity increases continue to be needed to help keep postal rates 

affordable, particularly given trends in declining First-Class Mail volume 

and rising costs. Some productivity increases may result from initiatives to 

standardize processes among mail processing plants where productivity 

varies widely. However, it is important to recognize that the current legal 

framework provides the Service with limited incentives for increasing its 

productivity. Under the Service’s break-even mandate and statutory 

monopoly to deliver letter mail, no matter how little productivity 

increases, the Service can raise rates to cover rising costs. However, as 

postal management has recognized, while raising rates may provide an 

immediate boost to postal revenues in the short run, raising rates may also 

Source: U.S. Postal Service.

Total employees

Retirees (projected)

Retirees (actual)

Fiscal year

Dollars in billions

Projections after 

2004 unavailable

Annual payments peak

at $11.2 billion in fiscal

years 2035 through 2038

0

5

10

15

20

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2038 2040

Active employees
Page 13 GAO-05-453T 

accelerate the diversion of First-Class Mail to other alternatives, thus 

exacerbating the Service’s problems in the long run. 

Uncertainties regarding postal infrastructure: The Service is using an 

“evolutionary” approach to develop a more efficient and flexible 

infrastructure but has disclosed limited information about its overall 

plans. The Service risks falling short of achieving its goals of rationalizing 

its infrastructure and workforce and removing excess capacity from its 

mail processing, distribution, and transportation networks unless it has a 

clear strategy that includes a comprehensive and integrated plan along 

with clear criteria as a basis for its decisions, measures to assess the 

impact of actions taken, and a process for informing key stakeholders, 

including the Congress. 

Postal reform is needed to address the following key areas:7

• Mission and role: Congress needs to (1) clarify the Service’s mission, 

because current law has enabled the Service to engage in unprofitable 

initiatives that are unrelated to its core mission, as well as (2) clarify the 

Service’s role in competing fairly, including its monopoly to deliver letter 

mail, its authority to regulate the scope of its own monopoly, and other 

terms of competition. 

• Governance, transparency, and accountability: Congress needs to 

(1) delineate public policy, operational, and regulatory responsibilities; 

(2) ensure managerial accountability through a strong, well-qualified 

corporate-style board that holds its officers responsible and accountable 

for achieving real results; and (3) define appropriate reporting 

mechanisms to enhance the Service’s transparency and accountability for 

financial and performance results. 

• Flexibility and oversight: Congress needs to balance (1) increased 

flexibility for the Service to operate in a businesslike manner, through 

streamlining the rate-setting process and allowing a certain amount of 

retained earnings, with (2) enhanced oversight by an independent 

regulatory body to protect postal customers against undue discrimination, 

restrict cross-subsidies, and ensure due process. In addition, the Service 

 7

U.S. Postal Service: Key Elements of Comprehensive Postal Reform, GAO-04-397T

(Washington, D.C.: Jan. 28, 2004); U.S. Postal Service: Bold Action Needed to Continue 

Progress on Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003). 

Key Areas for Postal 

Reform 
Page 14 GAO-05-453T 

needs additional flexibility and incentives to rightsize its infrastructure 

and reshape its workforce. Additional flexibility should be balanced by 

safeguards to prevent abuse as well as enhanced transparency, 

accountability, and oversight, starting with appropriate disclosure of the 

Service’s large financial liabilities and obligations. 

• Human capital reforms and pension benefit costs: Congress needs to 

consider legislative proposals that would (1) revise the Service’s current 

responsibility for pension costs related to military service, (2) move 

toward prefunding retiree health benefits, and (3) abolish the escrow 

account established in recent pension legislation. Congress also needs to 

decide whether postal workers’ compensation benefits should be on par 

with those in the private sector and to clarify related pay comparability 

standards. In any event, progress continues to be needed toward flexible, 

contemporary, performance-oriented, and market-based compensation 

systems for all Service employees, consistent with proven approaches to 

strategic human capital management. 

Chairman Collins, this concludes my prepared statement. I would be 

pleased to respond to any questions that you or the Members of the 

Committee may have. 

For further information regarding this statement, please contact Katherine 

Siggerud, Director, Physical Infrastructure Issues at (202) 512-2834 or at 

siggerudk@gao.gov. Individuals making key contributions to this

statement included Teresa Anderson, Kenneth E. John, Shirley Abel, Kevin 

Bailey, Gerald P. Barnes, Nancy Boardman, Linda Calbom, Margaret 

Cigno, Kathleen A. Gilhooly, Donna Leiss, and Laura Shumway. 

Contact and 

Acknowledgments 

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