U.S. POSTAL SERVICE

Sustained Attention to

Challenges Remains

Critical

Statement of Bernard L. Ungar

Director, Government Business Operations Issues

General Government Division

United States General Accounting Office

GAO Testimony

Before the Subcommittee on

The Postal Service

Committee on Government Reform

House of Representatives

For Release on Delivery

Expected at

1:00 p.m. EDT

on Tuesday

September 19, 2000

GAO/T-GGD-00-206

Summary

U.S. Postal Service: Sustained Attention to

Challenges Remains Critical

Page 1 GAO/T-GGD-00-206

The Postal Service faces an uncertain future. Although the Service has

slightly improved its overnight First-Class Mail delivery performance this

year, improved productivity, and implemented cost-cutting measures, it

has encountered increasing financial difficulties as mail volumes have

grown more slowly than expected and as postal costs have been difficult

to restrain. The Service has reported that it faces significant threats from

electronic substitution and is planning for declining mail volumes,

especially in First-Class Mail, in the coming years. Although it is difficult to

predict the timing and magnitude of further mail volume diversion and

potential financial consequences, the Service states that it is working to

address this challenge by aggressive cost-cutting to achieve breakthrough

productivity and by new revenue generation.

A key oversight issue for the Service, Congress, and the American people

is whether the Service is heading for financial shortfalls that could, in the

long run, hinder its ability to carry out its mission of providing affordable,

universal postal services that bind the nation together. Key questions

facing the Service in the long term include the following:

• Can the Postal Service maintain and, where necessary, improve on the

quality of mail delivery service?

• Can the Service continue to provide affordable postal rates?

• Can the Service remain self-supporting through postal revenues?

• Can the Service continue in the long term to provide the current level and

scope of universal postal service?

Several continuing challenges facing the Service include improving

productivity, controlling costs, enhancing revenues, and improving labormanagement relations. Long-term increases in productivity will be

essential for the Service’s future success. The Service recently reported to

us that its productivity for fiscal year 2000 through mid-August had

increased 2.2 percent. Although this would be the largest increase since

1993, it would translate into a cumulative increase of only 1.5 percent over

the past decade. Questions for continued oversight include how and when

the Service expects to achieve breakthrough productivity. Another issue is

whether the Service, unions, and management associations will be able to

find common ground to address long-standing problems in the workplace

that may impede the Service’s ability to improve its productivity.

GAO also has continued concern about the quality and transparency of the

Service’s performance information. GAO’s recent reports contain specific

recommendations for further improvements in this area.
Statement

U.S. Postal Service: Sustained Attention to

Challenges Remains Critical

Page 2 GAO/T-GGD-00-206

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 (the Service). In my

testimony, I shall briefly discuss the Service’s overall performance during

the past year as well as the challenges that persist as mail volume growth

continues to slow and competition from the private sector increases. The

Service provided us with updated performance information that is

included in this statement. Also, I will discuss work that we have

completed over the past year and provide information on our ongoing

work. A list of our reports and testimonies related to postal matters issued

since October 1999 is included in the attachment to this statement.

The Service has slightly improved its overnight First-Class Mail delivery

performance this year, improved productivity, and implemented costcutting measures. However, the Service has encountered increasing

financial difficulties as mail volumes have grown more slowly than

expected and as postal costs have been difficult to restrain.

Moreover, the Service faces an uncertain future, in view of its expectation

that mail volumes will decline in the coming years. A key oversight issue

for the Service, Congress, and the American people is whether the Service

is heading for financial shortfalls that could, in the long run, hinder its

ability to carry out its mission of providing affordable, universal postal

services that bind the nation together. Key questions facing the Service in

the long term include the following:

• Can the Service maintain and, where necessary, improve on the quality of

mail delivery service?

• Can the Service continue to provide affordable postal rates?

• Can the Service remain self-supporting through postal revenues?

• Can the Service continue in the long term to provide the current level and

scope of universal postal service?

The Service’s recently approved 5-Year Strategic Plan for Fiscal Years 2001

through 2005 stated that the changes in competition challenge the

Service’s traditional mission and raise questions about its public service

obligations that do not have easy answers. The Postmaster General

recently said that the Service is at a crossroads with regard to its ability to

continue to provide affordable universal service. Earlier this month, the

Chairman of the Postal Rate Commission (PRC) also raised the possibility

that the nature of universal postal service, specifically delivery to every

address 6 days each week, may need to be reconsidered at some point if

The Service’s

Performance and

Future Challenges
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 3 GAO/T-GGD-00-206

competition leads to large declines in the Service’s mail volume. Other

stakeholders have also raised concerns about the potential effect of

competition on universal postal service. In my testimony, I will provide an

update on the Service’s recent accomplishments, key trends affecting the

Service, and how the Service plans to respond to the formidable challenges

it is facing.

Over the past fiscal year, the Service has slightly improved its overnight

First-Class Mail delivery service performance. In its fiscal year 2000

performance plan, the Service established targets of 93 percent on-time

delivery of overnight First-Class Mail. The Service reported that it

delivered about 94 percent of overnight First-Class Mail on time in the first

3 quarters of fiscal year 2000. If this performance were sustained for the

fourth quarter, it would represent a record level of annual performance

since the Service began its current measures in the early 1990s. The

Service also established a target of on-time delivery for 2/3-day First-Class

Mail—which accounts for more than half of First-Class Mail volume—of at

least 87 percent, with at least 1-percent improvement over the previous

fiscal year. For the first 3 quarters of fiscal year 2000, the Service reported

that on-time performance for 2/3-day First-Class Mail was about 85

percent, compared with about 86 percent for all 4 quarters of fiscal year

1999.

In addition, the Service recently reported that 92 percent of residential

customers surveyed by the Gallup Organization rated its overall service as

excellent, very good, or good, including 29 percent who rated their overall

service as excellent, 42 percent as very good, and 21 percent as good.

We testified last year before this Subcommittee that the Service may be

nearing the end of an era as it faces growing challenges from competition,

notably from private delivery companies and electronic communications

alternatives such as the Internet. The Service and some stakeholders agree

that growth in the Service’s core business of delivering First-Class Mail has

already been affected by the rapid growth of the Internet, electronic

communications, and electronic commerce. Service officials expect that

competition will lead to declines in First-Class Mail volume in the next

decade and a consequent loss of revenues.

The Service achieved its best ever financial and service performance over

the past 5 years. However, according to the Postmaster General, the

Service has encountered increasing difficulties in meeting this year’s goal

of $100 million in net income. The Service recognizes that it faces

challenges from a dynamic and versatile marketplace, changing customer

The Service’s Delivery

Performance and Customer

Satisfaction

The Service Faces an

Uncertain Future
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 4 GAO/T-GGD-00-206

demands, and more alternative delivery options that provide greater

choices for customers.

As an example of trends that have affected the Service’s mail volumes, at

the federal level, government agencies are mandated to move as quickly as

possible to reduce paperwork and to adopt electronic billing and payment.

Of the 880 million Social Security checks, tax refunds, and other payments

sent by the Department of the Treasury in fiscal year 1999, 68 percent were

sent electronically rather than mailed. According to the Service, this

resulted in $180 million in lost First-Class Mail revenue. Further, according

to a postal operations survey conducted by the American Bankers

Association, the banking industry reduced its mail volume in 1999 by

almost 18 percent compared with its 1996 level.

In fiscal year 2000, the Service’s total mail volume has grown by 2.7

percent through accounting period 12 (August 11, 2000) compared to the

same period in fiscal year 1999, which has been less than the 3.8 percent

called for in the Service’s Integrated Financial Plan for fiscal year 2000.

This difference has contributed to a shortfall in the Service’s revenues

compared with what it had originally budgeted for, and thus made it more

difficult for the Service to achieve its target of $100 million in net income

for fiscal year 2000. Earlier this month, the Deputy Postmaster General

testified before Congress that it is unprecedented for mail volume to grow

at such a slow rate given the strong growth in the general economy, which

has been associated with faster mail volume growth in the past.

As figure 1 shows, for fiscal year 2000 through accounting period 12, the

Service’s mail volume growth rate had not reached its projected growth

rate for fiscal year 20001

—which ended on September 8, 2000—for its

major mail categories:

• First-Class Mail volume increased at a 1.3- percent rate in fiscal year 2000

through accounting period 12, compared with the same period in fiscal

year 1999. The Service had projected a 2.5 percent growth rate for FirstClass Mail in its Integrated Financial Plan for Fiscal Year 2000.

• Standard A (primarily advertising) mail volume increased by 4.9 percent

during this period, which was somewhat less than the 5.7 percent rate

projected for the full year.

1

The dates that Service fiscal years end vary by year and conform to the Service’s 13-period accounting

year. Accounting period 12 ended on Aug. 11, 2000, and accounting period 13 ended on Sept. 8, 2000.
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 5 GAO/T-GGD-00-206

• Priority mail volume increased by 3.1 percent during fiscal year 2000

through accounting period 12. The Service’s plan had projected a 4.1

percent increase for fiscal year 2000.

Source: Postal Service Financial and Operating Statements, fiscal year 2000 through accounting

period 12 (August 11, 2000), and Fiscal Year 2000 Integrated Financial Plan.

To put these results into context, First-Class Mail, Standard A mail, and

Priority mail accounted for the vast majority of the Service’s total mail

volume, total revenues, and total contribution to pay for institutional costs

(see figures 2 and 3).

Figure 1: Fiscal Year 2000 Mail Volume

Growth Rate Has Been Less Than

Projected
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 6 GAO/T-GGD-00-206

Note 1: International mail revenue includes foreign postal transaction revenue.

Note 2: Percentages may not add to 100 due to rounding.

a

Other includes Express Mail, periodicals, international mail, Standard mail (B), U.S. Postal Service

mail, free mail for the blind and handicapped, and mailgrams.

Source: Service’s 1999 Annual Report.

Figure 2: Composition of Service Mail Volume and Corresponding Revenues, Fiscal Year 1999
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 7 GAO/T-GGD-00-206

Note: Percentages may not add to 100 due to rounding.

a

Other includes Express Mail, periodicals, international mail, standard mail (B), U.S. Postal Service

mail, free mail for the blind and handicapped, and mailgrams.

Source: Service documents, fiscal year 1999.

Looking ahead, the Service’s 5-Year Strategic Plan for Fiscal Years 2001

through 2005 stated that the substitution effect from new technology on

the Service’s mail volume is expected to have a significant impact on

contribution (or margin). The Strategic Plan reported that the expected

declines are likely to be in the categories of mail that the Service handles

most efficiently—First-Class bills and payments.

The Strategic Plan stated that for the first time, the Service has adopted a

planning assumption that the long-term close relationship between the

growth of the economy and mail volume will change in the future, leading

to declining mail volumes for First-Class Mail and eventually even

Standard A mail. The Service’s assumption for its baseline scenario is

based on its expectation of “moderate diversion” of First-Class Mail to

substitutes such as Electronic Bill Presentment and Payment and e-mail.

The baseline scenario presented in the Service’s Strategic Plan is

somewhat more pessimistic than the baseline scenario that the Service

reported to us last year and that was included in our testimony before your

Subcommittee. The current baseline scenario calls for total mail volume

to increase less, start to decline 1 year sooner, and to decline to a greater

extent than last year’s baseline scenario.

Figure 3: Net Contribution to Overhead,

Fiscal Year 1999
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 8 GAO/T-GGD-00-206

However, the Service is also considering the possibility that mail volume

may decline even sooner and faster than it does in its revised baseline

scenario. The Strategic Plan reported that most external experts suggest a

“rapid diversion scenario” where diversion would occur more rapidly, and

also impact Standard A mail volumes as interactive Internet advertising

reduces traditional targeted advertising mail and catalogs.

The Strategic Plan noted that, like many organizations, the Service was

unable to predict the speed at which the Internet has changed the

American economy. The Strategic Plan stated that there is broad

agreement that the Service will face significant threats from electronic

substitution, and that mail volumes, especially in First-Class Mail, are

likely to decline in the near future. However, as the plan recognized, there

is considerable uncertainty about the timing and rate of diversion, as well

as whether the Service can or should do anything about it.

Although it is difficult to predict the timing and magnitude of further mail

volume diversion and potential financial consequence, the Service has

begun to plan how it would address a range of such scenarios. The

Service’s Acting Chief Financial Officer told us that because of the

uncertainty concerning future mail volume trends, the Service considers it

prudent to develop a range of scenarios and do contingency planning for

them. He told us that it takes time for an organization as large and as

complex as the Service to plan and prepare for the major operational

changes that would likely be necessary in the event of substantial declines

in the Service’s mail volume. He also noted that the Vice-Chairman of the

Service’s Board of Governors said earlier this month that because the

Service does not know how fast or how much the Internet will change the

Service’s business model, the stakes are high and the Service cannot wait

to be certain before it acts.

The Service’s basic strategy is a combination of aggressive cost-cutting and

new revenue generation. The Service’s Strategic Plan stated that the

Service expects that if electronic diversion does not shift into high gear,

leading to more rapid volume decline, then it can sustain its viability over

the next 5 years by dramatically cutting costs and seeking new revenue

sources within the current regulatory structure. However, the Strategic

Plan noted that if postal markets change over the next 5 years faster than

currently anticipated, postal management and stakeholders will need to

address a number of issues, including

• the definition of universal postal service,

• the potential realignment of service standards, and

The Implications of Mail

Volume Trends for the

Service
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 9 GAO/T-GGD-00-206

• the configuration of current operations and infrastructure.

The Strategic Plan warned that historic increases in productivity and

aggressive management of the size of the Service workforce already are

anticipated. Therefore, according to the Strategic Plan, if the volume

decline is as drastic as some experts have forecast, especially in critical

mail categories currently carrying the burden of contribution to

institutional overhead, postal rates are likely to increase dramatically for

the remaining mail volume. Further, other categories of mail would also

be affected. Although the Strategic Plan noted that any prediction of the

impact of mail volume 5 years in advance is almost certain to be flawed,

the Service anticipates the need for a “structural transformation” that is to

include, among other things, achieving “breakthrough productivity.”

The Service reported to us that the increase in its overall productivity for

fiscal year 2000 through accounting period 12, as measured by Total Factor

Productivity (TFP), was 2.2 percent.2 If this increase were sustained for

the full fiscal year, it would represent the fifth-largest annual increase in

postal productivity since 1970, and the largest increase since fiscal year

1993. Nonetheless, since postal productivity declined in 5 of the last 6

fiscal years (from 1994 through 1999), a 2.2 percent productivity increase

in fiscal year 2000 would translate into a cumulative productivity increase

of only 1.5 percent from fiscal year 1990 to fiscal year 2000. Further, postal

productivity would thereby increase by only 12.2 percent since 1970–

despite the vast changes in postal automation and postal operations that

have occurred in the past 3 decades.

In addition, a 2.2-percent increase in postal productivity would be less than

the 3.1-percent increase that was incorporated into the Service’s

Performance Plan for Fiscal Year 2000. The Service told us on September

7, 2000, that “Because of the Postal Service’s financial and operational

success in FY 1999, the actual productivity improvement estimated to be

required to achieve its FY 2000 net income plan of $100 million was revised

to 2.1 percent.” However, it is unclear whether such a productivity

improvement would be sufficient for the Service to meet its net income

goal. As reported in the press, the Postmaster General said at the end of

August that the Service could record a deficit up to $300 million for fiscal

year 2000.

2

TFP measures the changes in the relationship between the Service’s outputs and resources expended

in producing those outputs. The Service’s main outputs are mail volumes and servicing an expanding

delivery network. By tracking outputs and resource usage, TFP provides a measure of historical

performance.

Recent Productivity

Changes and the Challenge

of Achieving Breakthrough

Productivity
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 10 GAO/T-GGD-00-206

As the Service and key stakeholders have recognized, long-term increases

in its productivity will be essential to its future success. For example, the

Mailers Council, a coalition of mailers and mailing associations, reported

this March that increasing competition, operating and cost management

constraints—some imposed by outside entities—as well as the

consequences of management decisions, have influenced a decline in the

Service’s productivity in past years.3

The report stated that: “As a result of

these factors, at a time when every competing technology is becoming less

expensive, the cost of using the nation’s mail system is becoming more

expensive. To ensure the Service’s survival, therefore, the Mailers Council

believes postal management must focus its considerable skills and

resources on those factors it can control, and thereby generate needed

productivity gains.” The report noted the need for the Service to reduce its

costs and become more efficient to achieve productivity gains.

As we testified last year, the Service’s ability to maintain financial viability

by controlling costs, improving productivity, and enhancing revenues

presents a continuing challenge. We have reported that the Service’s

continued success will depend heavily on its ability to control operating

costs, and that the Service has recognized that it needs aggressive cost

management to avoid unwarranted costs. The Service has made some

progress this year in controlling costs through reducing the number of

workhours. For fiscal year 2000 through accounting period 12, the Service

reported it had reduced the total number of workhours compared to the

same period in fiscal year 1999 while, at the same time, increasing the

number of delivery points in the postal network.

In his March 20, 2000, speech at the National Postal Forum, the Postmaster

General said that the Service intends to reduce expenses by at least $4

billion by 2004. He estimated that about $700 million a year would come

from “breakthrough productivity” in the mail processing system, while

about $100 million annually would come from overhead reductions, about

$100 million annually from reducing transportation costs, and about $100

million annually from more efficient paperwork and purchasing. However,

on August 11, 2000, the Service told the PRC that: “The amounts from the

PMG’s speech represented an aggressive challenge to the organization

rather than a blueprint for specific cost savings.” The Service said that it

expected to achieve only $744 million in cost savings in the “test year” (i.e.,

the year after the proposed rate increase would go into effect), largely

because it expected to achieve only $466 million of the called-for $700

million in cost savings in mail processing and other operations. The

3 Postal Service Productivity: Real Improvements Needed Now, Mailers Council, Mar. 8, 2000.

The Challenge of

Maintaining Financial

Viability
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 11 GAO/T-GGD-00-206

Service said that it “recognizes the difficulty in achieving the aggressive

cost reductions in fiscal year 2001, the first year of the Breakthrough

Productivity Initiative.” Given this response, questions for continued

oversight include the following:

• What does the Service consider to be breakthrough productivity?

• How does the Service expect to achieve breakthrough productivity?

• When does the Service expect to achieve breakthrough productivity?

We continue to believe that the Service and its major postal labor unions

and management associations need to focus on common approaches for

addressing persistent labor-management relations problems, thereby

improving the Service’s work environment and helping it maintain its

competitive position. The August 2000 Report of the Postal Service

Commission On A Safe and Secure Workplace noted that “A sea change in

attitudes of all of the parties—and an environment of trust—will be

required to slash the number of grievances and reshape compensation

systems. This will require a sustained effort.” The report said that in order

to eliminate sources of friction, postal management, unions, and

management associations must work together.

Further, the report noted that the Service had an enormous backlog of

more than 126,000 grievances, and that more than 6,300 grievances were

arbitrated in fiscal year 1999. By way of comparison, in the entire

automobile industry, with about 400,000 bargaining employees, only 11

grievances reached arbitration in 1998, according to the report. Several

federal agencies contacted by the Commission also reported only a few

arbitrations a year. Further, the report said that the Service has

procedures similar to some other organizations that do not have such

unusually large numbers of complaints. The report said that the annual

cost of postal grievances was recently estimated at $217 million, with a

small industry of more than 300 aribtrators handling postal cases. At the

same time, the report recognized that many grievances in the backlog are

related issues grieved separately, such as 40,000 grievances filed by the

American Postal Workers Union in a dispute over wash-up time in the New

York district.

The Service reported to us that, as of the end of fiscal year 1999, out of

about 708,000 bargaining unit employees, about 114,000 grievances were

awaiting arbitration at the regional level, up slightly from 112,000 a year

ago. However, the Service also reported that about 97,000 grievances had

Continuing Disagreements

in Labor-Management

Relations
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 12 GAO/T-GGD-00-206

been appealed to step 34, down from about 112,000 a year ago. In addition,

the Service’s General Counsel told us that the Service’s Resolving

Employee Disputes, Reaching Equitable Solutions Swiftly (REDRESS)

program had helped to reduce the number of Equal Employment

Opportunity (EEO) complaints, reversing the past trend toward more EEO

complaints.

Although any progress in this area is encouraging, we are concerned that

continuing disagreements in labor-management relations may impede

efforts to achieve improvements in postal productivity. As some

stakeholders have noted, keeping the Service financially viable while

maintaining the level and scope of universal postal service is expected to

become increasingly difficult. A recognition that similar survival issues

were at stake helped lead to major improvements in labor-management

relations in the auto industry. Thus, a key question for oversight is

whether the Service, its labor unions, and its management associations

share the same sense of urgency in improving labor-management relations

and finding common ground to address long-standing problems in the

workplace.

In another key area for congressional oversight, we believe that complete

and reliable performance data will be essential for the Service, Congress,

and stakeholders to monitor the Service’s progress towards meeting its

goals. The Service has recognized the need for more accurate and

complete information on postal performance. In its Strategic Plan, the

Service stated that it will invest in a new “Information Infrastructure” to

achieve three goals: streamline interaction with customers; provide more

timely, accurate, and relevant information to effectively manage

operations and reduce costs, improve service performance and sustain

quality; and provide more timely, accurate, and relevant information to

allocate costs and improve productivity. The Service said that it plans to

spend about $2 billion on various information systems over the next 5

years and to develop an “Information Platform” to help it manage its

resources more effectively and efficiently.

While we encourage the Service to continue its efforts to improve its

performance information, we remain concerned about the quality and

transparency of the Service’s performance information. We have reported

on, and are continuing to monitor, opportunities for improvement in the

Service’s performance information. Specifically:

4

Step 3 grievances are grievances that have been appealed by the unions to the area level because they

could not be resolved at the plant or district levels.

The Need for Complete and

Reliable Information on

Postal Performance
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 13 GAO/T-GGD-00-206

• In our testimony last year before this Subcommittee, we highlighted the

need for the Service to take action to address long-standing issues related

to the quality of data used in ratemaking and recommended that the

Postmaster General report to congressional oversight subcommittees on

the actions taken and planned in this area.5

The Service pledged to

periodically report on progress in implementing the recommendations of a

study that was initiated by your Subcommittee on the quality of data used

by the Service in setting rates. In its latest report to your Subcommittee in

July 2000, the Service documented actions taken and planned to improve

the quality of rate-setting data. The report also contained much useful

information on the status of each of the outstanding recommendations as

well as the resources devoted to improving data quality.

• Our recent report on the Service’s e-commerce initiatives found

deficiencies in the financial information the Service provided for the ecommerce activities that raised concerns about the accuracy and

completeness of the financial reporting for e-commerce activities.6

We do

not believe the e-commerce financial data that the Service provided was

sufficiently complete and reliable to be used to assess its progress toward

meeting its overall financial performance expectation, which is that

revenues generated by e-commerce products and services in the aggregate

are to cover the Service’s direct and indirect costs as well as make a

contribution to overhead. The Service agreed with our recommendation

that it provide complete and accurate information on costs and revenues

for the financial data on e-commerce initiatives and said it is instituting a

standard financial reporting procedure in this area. Actions the Service has

reported taking are important and need to be effectively implemented.

• On November 6, 1998, the Service reported to your Subcommittee that:

“We recognize the need to provide our customers with specific measures

of delivery performance for all our products and services.” The Service

said it intended to use a phased approach to develop measures as soon as

possible for products such as Periodicals. However, the Service’s 5-Year

Strategic Plan for fiscal years 2001 through 2005, which was approved by

the Board last month, stated that “Currently, an internal system is used to

measure delivery within requested windows for only a small portion of

Standard A and Periodicals mail. The need to build a better indicator is

clearly necessary if we are to satisfy the need of our advertising and

5

U.S. Postal Service: Challenges to Sustaining Performance Improvements Remain Formidable on the

Brink of the 21st Century (GAO/T-GGD-00-2, Oct. 21, 1999).

6

U.S. Postal Service: Postal Activities and Laws Related to Electronic Commerce (GAO/GGD-00-188,

Sept. 7, 2000).
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 14 GAO/T-GGD-00-206

periodical customers in the future . . . . Over the next several years,

technology will enable the USPS to develop service performance

measurement systems for all major categories of mail and for any new

services introduced to the market.” Thus, the Service has recognized the

need for improvement in its performance measures for mail delivery but

this task will remain incomplete for some time to come. As we reported in

January 1999, it will be important for the Service to develop resultsoriented measures for its critical functions and program areas, as intended

by the Government Performance and Results Act of 1993 (GPRA).7

In addition, we are releasing today our report that discusses the Service’s

fiscal year 1999 performance report and the fiscal year 2001 preliminary

performance plan that are required under GPRA. In our report we

identified some positive aspects, however, we are concerned that the

Service’s performance plans and performance reports may not have been

as useful to Congress, postal managers, and others as they could have

been. As we reported, we believe that in preparing future performance

plans and performance reports, the Service needs to focus more acutely on

providing and presenting information that is clear and understandable.

Accordingly, we made recommendations for improvements so that

interested parties would be able to more easily determine how well the

Service is improving performance and achieving its goals, as intended by

GPRA.

Although we recognize that this was the first year that the Service

published a performance report, we have some concerns regarding the

way information was presented. For example, we believe it was

misleading for the Service’s fiscal year 1999 performance report to

highlight that the Service exceeded its targets for overnight and 2/3 day ontime deliveries, particularly when there was not an accompanying

acknowledgement that less than a full year’s performance was used in

making that determination. The Service’s fiscal year 1999 performance

plan established 93 and 87 percent targets for on-time delivery for

overnight and 2/3 day First-Class Mail, respectively; and portrayed these as

annual targets. When all 4 quarters of fiscal year 1999 performance data

were aggregated, the Service met, but did not exceed, its goal of 93 percent

on-time delivery of overnight First-Class Mail. It also delivered 86 percent

of the 2/3-day First-Class Mail on time—1 percentage point less than the

established target of 87 percent. The Service’s performance for all 4

quarters of fiscal year 1999 either met, or came close to meeting the

established targets. Therefore, we question why the Service chose to

7 Major Management Challenges and Program Risks: U.S. Postal Service (GAO/OCG-99-21, Jan. 1999).
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 15 GAO/T-GGD-00-206

highlight information that did not include performance for the full fiscal

year, including its performance during its heaviest volume period—the

holiday mailing season.

We also assessed the Service’s fiscal year 2001 preliminary performance

plan. Some of the positive aspects of this plan included additional

performance indicators and targets for selected subgoals, such as targets

for (1) overall customer satisfaction (residential and business); (2)

resolving employee complaints (Resolving Employee Disputes, Reaching

Equitable Solutions Swiftly--REDRESS); and (3) the Voice of the Employee

survey—which is the vehicle used by the Service to improve its

understanding of employee issues and concerns. However, several

subgoals, indicators, and targets that were included in the Service’s fiscal

year 2000 performance plan were dropped from the fiscal year 2001

preliminary performance plan. Dropped subgoals included (1) keeping

price increases at or below the rate of inflation, (2) controlling costs by

achieving productivity gains, and (3) restoring equity. The preliminary

performance plan did not fully explain why these three subgoals,

indicators, and targets were dropped. In May 2000, the Board of Governors

stated that it had decided to restore Total Factor Productivity as a

national-level results indicator. However, if the Service does not set a goal

concerning price increases, it will be more difficult to hold the Service

accountable for its performance in this area.

Our report makes recommendations to the Postmaster General regarding

specific opportunities for improvement concerning both the Service’s

fiscal year 2001 preliminary performance plan and its fiscal year 1999

performance report. In commenting on our draft report, the Service

generally agreed with the facts and said it planned to implement the

report’s recommendations.

I would now like to provide you with a brief summary of work we have

completed on other postal issues since the fall of 1999. This work resulted

in reports and/or testimony on (1) the Service’s electronic commerce

activities, (2) diversity in the Service, (3) the Breast Cancer Research

Semipostal Stamp, (4) acceptance controls for business mail, and (5) the

Department of State’s implementation of its international postal

responsibilities. In addition, we have ongoing work related to supervisory

pay differentials.

Our Work Related to

Other Postal Issues
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 16 GAO/T-GGD-00-206

On September 7, 2000, we testified8and issued a report9on the Service’s

electronic commerce initiatives. We reported that the Service is in the

early stages of implementing an electronic commerce (e-commerce)

program. It has taken steps this year to develop and implement ecommerce activities, including developing a definition of its e-commerce

initiatives, identifying e-commerce and related initiatives, and establishing

a process for approving these initiatives. The Service identified seven ecommerce initiatives involving products and services meant to facilitate

the movement of messages, merchandise, and money in ways that require

the use of the Internet and generate revenues for the Service. The Service

also outlined overall e-commerce goals and strategies and developed some

performance targets for its e-commerce initiatives. However, we identified

three problem areas relating to the Service’s management of its ecommerce area:

• inconsistencies in identifying e-commerce and related initiatives and in

reporting the status of these activities that made it difficult for us to ensure

we had a complete and accurate picture of the Service’s e-commerce

activities;

• inconsistencies in following the required process for reviewing and

approving its e-commerce initiatives, which raised questions as to whether

the initiatives were appropriately planned and reviewed; and

• deficiencies in the financial information the Service provided for the ecommerce activities that raised concerns about the accuracy and

completeness of the financial reporting for e-commerce activities.

To help ensure more effective management and oversight of the Service’s

e-commerce activities, we recommended that the Postmaster General (1)

take appropriate actions to help ensure that e-commerce and related

initiatives are appropriately identified and maintain accurate and complete

information related to the status of these initiatives; (2) follow processes

and controls that have been established for developing and approving ecommerce initiatives; and (3) provide complete and accurate information

on costs and revenues for the financial data on e-commerce initiatives.

The Service endorsed our recommendations and reported that it is taking

action to implement them.

8

U.S. Postal Service: Electronic Commerce Activities and Legal Matters (GAO/T-GGD-00-195, Sept. 7,

2000).

9

GAO/GGD-00-188.

Electronic Commerce
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 17 GAO/T-GGD-00-206

In the legal area, the Service provided its views on how various laws and

regulations apply to its e-commerce activities. The Service said that its

unique status as an independent establishment of the executive branch

gives it broad legal authority and discretion to offer e-commerce products

and services in ways that the Service finds appropriate to its assigned

functions and in the public interest. The Service, some competitors, and

others have conflicting views on the extent of the Service’s legal authority

to offer e-commerce products and services and under what circumstances

it should offer such services.

During the past year, we issued two reports to Congressman Chaka Fattah,

the Subcommittee’s Ranking Minority Member, concerning employee

diversity and Equal Employment Opportunity (EEO) issues. Specifically,

we issued a report in March 2000, on the representation of women and

minorities in the Postal Career Executive Service (PCES),10 and in June

2000, a report on diversity in district management-level positions.11

In our March 2000 report, we provided information on the representation

of women and minorities in PCES, which includes officers and executives.

Among other things, we determined that at the end of fiscal year 1999,

women and minorities represented about 35 percent of the PCES

executive workforce compared to their representation of about 58 percent

in the Service’s overall workforce. We also found that women and

minority representation among the Service’s PCES executive workforce

was about 35 percent compared with about 32 percent in the federal

government’s career Senior Executive Service (SES), excluding the

Department of Defense (DOD).

The Service reported that it had various efforts under way or planned that

related to increasing diversity among its PCES executives. For example, in

November 1998, the Service required that its PCES merit performance

evaluation process address diversity-related activities in individual

executive performance objectives and that executives be accountable for

the accomplishment of those objectives. The Service also reported that it

had developed management training programs to help employees better

manage their careers, and had established a diversity oversight group to

oversee corporate diversity initiatives.

10 U.S. Postal Service: Diversity in the Postal Career Executive Service (GAO/GGD-00-76, Mar. 30,

2000).

11 U.S. Postal Service: Diversity in District Management-Level Positions (GAO/GGD-00-142, June 30,

2000).

Diversity
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 18 GAO/T-GGD-00-206

Our June 2000 report focused on diversity among 83 postal districts

located throughout the United States.12 More specifically, it provided

information on the representation of women and minorities (in the

Service’s districts) in levels 16 through 26 of the Service’s Executive and

Administrative Schedule (EAS).13 The report also provided more detailed

information on the representation of women and minorities in EAS levels

16 through 26 for the Chicago, IL, and Akron, OH, postal districts;

initiatives implemented to promote diversity; and lessons identified by

district officials that related to increasing diversity in those two districts.

At the end of fiscal year 1999, women and minorities in the Service’s

districts represented a district average of about 49 percent of the EAS 16

through 26 workforce compared with their average representation of about

56 percent across all district workforces (excluding EAS levels 16 through

26). Women and minority representation in EAS levels 16 through 26 in the

Service’s 83 districts ranged from a low of about 22 percent in the

Middlesex-Central district office to a high of 95 percent in the Los Angeles

district office. Concerning the representation of women and minorities in

the Chicago and Akron district offices, at the end of fiscal year 1999, in

Chicago, women and minorities represented about 93 percent of the EAS

16 through 26 workforce compared with their overall workforce

representation of 92 percent. In Akron, for this period, women and

minorities represented about 41 percent of the district’s EAS 16 through 26

workforce compared with their overall workforce representation of about

46 percent.

Both districts implemented several diversity-related initiatives, such as

various training programs, including national programs to increase the

representation of women and minorities in EAS levels 16 through 26. In

addition, to improve other aspects of diversity, both districts were using

REDRESS (Resolve Employment Disputes, Reach Equitable Solutions

Swiftly), a national alternative dispute resolution program, to facilitate

discussion between managers and employees on individual EEO complaint

issues. Locally, Chicago and Akron officials had also developed their own

individual initiatives and had identified several lessons related to

increasing diversity in their districts’ EAS 16 through 26 workforces, which

included (1) management must demonstrate its commitment to diversity;

12 The Service has 85 districts. We did not include two district offices—San Juan and Honolulu—in our

report because they were missing significant amounts of data on sex and /or race/ethnic origin.

13 The EAS workforce consists primarily of employees in EAS levels 11 through 26 positions. EAS

management-level positions generally start at EAS 16 and include such positions as postmaster,

manager of customer services, and manager of postal operations.
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 19 GAO/T-GGD-00-206

(2) training and career development programs must be made available to

provide opportunities for women and minorities to ascend to supervisory

and management-level positions; and (3) an environment that encourages

communications and cultural appreciation between management and

employees must be established.

Regarding the alleged EEO concerns at the Youngstown, OH, postal site,

although the number of EEO complaints had increased between fiscal

years 1997 and 1999, it was not clear whether the complaints stemmed

from alleged discrimination, lack of communications, or

labor/management problems. District records showed that the number of

EEO complaints in Youngstown increased in fiscal year 1999. However, as

of May 2000, 51 of the 57 complaints filed were closed. Of these, one

resulted in a finding of discrimination. According to some district and

union officials, EEO complaints in Youngstown were based little, if at all,

on discrimination, but rather on poor communications among managers,

supervisors, and employees or poor labor/management relations.

In our June 2000 report, we recommended that the Service reassess the

EEO situation in Youngstown to determine what the issues were with

respect to the workplace environment, such as discrimination,

communications, or labor/management relations; and what additional

actions need to be taken. The Service concurred with our

recommendations and told us that they intended to implement them.

In April 2000, we reported on the Service’s Breast Cancer Research

Semipostal (BCRS) stamp.14 We also participated in a hearing on the BCRS

of the Senate Subcommittee on International Security, Proliferation, and

Federal Services, Committee on Governmental Affairs, in May 2000.15 The

Stamp Out Breast Cancer Act of 1997 directed the Postal Service to

establish a special stamp—known as a semipostal—to raise money for

breast cancer research. The BCRS was to be available for sale through

July 28, 2000—2 years from the date it was issued. The BCRS was the first

stamp ever issued by the Service to raise money for nonpostal purposes.

The BCRS costs 40 cents, and is valid for the 33-cent First-Class postage

rate, leaving 7 cents as surcharge revenue. The act provided that the

Service was to deduct from the surcharge revenue the reasonable costs it

incurred in carrying out the act, including those attributable to the

14 Breast Cancer Research Stamp: Millions Raised for Research, but Better Cost Recovery Criteria

Needed (GAO/GGD-00-80, Apr. 28, 2000).

15 Breast Cancer Research Stamp: Millions Raised for Research, but Better Cost Recovery Criteria

Needed (GAO/T-GGD-00-137, May 25, 2000).

Breast Cancer Research

Stamp
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 20 GAO/T-GGD-00-206

printing, sale, and distribution of the BCRS, as determined under

regulations it shall prescribe. The Service was to remit the remaining net

proceeds from the surcharge revenue to the National Institutes of Health

(NIH) and DOD for breast cancer research. Seventy percent of the net

proceeds were to go to NIH, with the remaining 30 percent to go to DOD’s

medical research program.

In reviewing the BCRS, we concluded that it has been an effective fundraiser. It has raised millions of dollars and, at the same time, has been

convenient and voluntary. In addition, the public and most of the key

stakeholders we spoke with believed it appropriate to use seimpostals

issued by the Service to raise funds for special, nonpostal purposes.

Throughout our review, however, we were concerned that the Service had

not formalized its criteria for determining what costs would be recouped

from the surcharge revenue generated by the BCRS. Additionally, we were

concerned that the Service was not consistently applying its informal

criteria for making such determinations to all costs being tracked. We

recommended that the Postmaster General promptly issue regulations that

clearly state the Service’s criteria for determining which costs are to be

recouped from the BCRS surcharge revenue and ensure that the criteria

are consistently applied to all costs. In response to that recommendation,

the Service recently issued regulations formalizing its criteria for making

the required reasonable cost determinations associated with the BCRS.

In July 2000, Congress expressed its satisfaction with the BCRS by sending

legislation to the President to extend the BCRS sales period for 2 years and

grant the Service the authority to issue semipostals. The President signed

that legislation into law on July 28, 2000 (Public Law No. 106-253). As of

July 28, 2000, the Service reported that the BCRS had raised about $15

million for breast cancer research.

In November 1999, we reported on Service changes to improve acceptance

controls for business mail.16 We did this work to determine whether the

Service had made changes we recommended in 1996 and whether those

changes were working.17

16 U.S. Postal Service: Changes Made to Improve Acceptance Controls for Business Mail (GAO/GGD-00-

31, Nov. 9, 1999).

17 U.S. Postal Service: Stronger Mail Acceptance Controls Could Help Prevent Revenue Losses

(GAO/GGD-96-126, June 25, 1996).

Acceptance Controls for

Business Mail
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 21 GAO/T-GGD-00-206

The Service discounts postage rates to customers who barcode and

presort their business mail before submitting it in bulk quantities to the

Service for acceptance processing. The discounted postage rates

compensate customers for performing work that otherwise would have to

be done by the Service and recognize the Service’s lower cost of

processing such mail on automated equipment.

We reported in June 1996 that the Service did not have adequate controls

over the acceptance of business mail. The Service could not ensure that

customers had properly prepared their business mail and were therefore

eligible to receive the discounted postage rates. As a result, the Service

did not have reasonable assurance that all significant amounts of revenue

due from bulk business mailings were correctly identified and received.

Our follow-up review found that the Service had made changes to its

controls over the acceptance of business mail that were generally in line

with the recommendations we made in 1996 and that should help prevent

revenue losses. For example, the Service (1) developed and implemented

a risk-based approach for verifying the eligibility of high-risk customers to

receive discounted postage rates and (2) made changes to its presort

verification, supervisory review, and documentation requirements to help

provide more assurance that these functions are performed.

Notwithstanding these actions, however, we could not determine whether

all of the changes were working servicewide because data needed to make

such a determination were not available. Further, we found evidence that

supervisory reviews of revised business mail acceptance procedures were

not always performed at the locations we visited. The Inspection Service

also found that required verifications were performed properly at some

locations but not at others, and that business mail acceptance-unit

employees needed additional training at some locations but not at others.

We concluded that there was sufficient evidence that the Service still did

not have assurance that supervisory reviews of required mail verifications

are performed. In addition, we stated that the Service had not fully

addressed our recommendation that it develop information for evaluating

the adequacy of its business mail acceptance controls.

We recommended that the Postmaster General direct Service officials to

develop and implement approaches for providing reasonable assurance

that (1) required supervisory reviews of presort verifications are done and

(2) business mail acceptance controls are working as intended to prevent

improperly prepared mailings from entering the mail stream at reduced

postage rates and to minimize the rework required by the Service to
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 22 GAO/T-GGD-00-206

correctly process and deliver such mail. In response to our

recommendations, the Service told us that it has implemented a servicewide reporting requirement each accounting period on the number of

supervisory reviews of presort verifications conducted and developed a

number of tools and acceptance control procedures that will allow the

Service to help mailers achieve a consistently high level of presort

accuracy for their mailings.

While we are encouraged by the Service’s ongoing efforts to improve its

controls over business mail acceptance, we remain concerned by

continuing problems. For example, the Postal Service’s Office of the

Inspector General (OIG) recently conducted an audit to determine the

validity of mailers’ concerns about the identification, adjudication, and

collection of revenue deficiencies. Among other things, OIG reported that

mail acceptance personnel were not fully knowledgeable of overly

complex rate standards, and that the Service lacked a comprehensive

management information system for the revenue assurance process,

reliable revenue deficiency data, and thresholds for assessing deficiencies.

We believe that postal management must, for the foreseeable future,

remain vigilant in monitoring and maintaining the controls over all facets

of business mail acceptance. As we noted in our November 1999 report, in

fiscal year 1998, business mail accounted for 49 percent of the Service’s

$58 billion in total mail revenue and 66 percent of the nearly 200 billion

mail pieces handled by the Service. Accurately determining and collecting

postage for business mail are critical to the overall financial health of the

Service.

In January 2000, we reported on the Department of State’s implementation

of its international postal responsibilities.18 Public Law 105-277, enacted

October 21, 1998, amended 39 U.S.C. 407 to give the Department of State

primary responsibility for the formulation, coordination, and oversight of

policy regarding United States’ participation in the Universal Postal Union

(UPU). The UPU is a specialized agency of the United Nations that

governs international postal service. The major changes resulting from the

1998 act that related to the UPU included (1) transferring primary

responsibility for U.S. policy regarding the UPU from the Service to the

Department of State and (2) requiring the Department of State and the

Service to consult with private providers and users of international postal

services, the general public, and such federal agencies and other persons

18 Postal Issues: The Department of State’s Implementation of Its International Postal Responsibilities

(GAO/GGD-00-40, Jan. 31, 2000).

The Department of State’s

International Postal

Responsibilities
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 23 GAO/T-GGD-00-206

that each considers appropriate in carrying out its respective international

postal responsibilities.

In our report, and in subsequent testimony before the Subcommittee,19

we

noted that the Department of State had made progress in implementing its

UPU responsibilities by taking steps to consult with the Service, other

federal agencies, postal users, private providers of international postal

services, and the general public. We also recognized the progress made by

State in its first year of responsibility for UPU matters and identified

opportunities for the Department to improve its process for developing

U.S. policy on these matters and the institutional continuity and expertise

of its staff working in this area. We identified some shortcomings relating

to the timing and notification for public meetings, and the distribution of

documents discussed at these meetings, that may have limited the

opportunities for stakeholders to provide meaningful input. We also found

that State’s policy development process on UPU matters resulted in little

public record of agency or stakeholder positions, which could make it

difficult for Congress and others to fully understand the basis for U.S.

policy positions. Further, staff turnover made it more difficult for State to

develop the institutional continuity and expertise to fulfill its leadership

responsibilities.

We made recommendations to State that addressed these areas. The

Department of State has since reported that it has taken a number of

specific actions to address the procedural shortcomings we identified. We

agree that the Department of State has improved the timeliness and

accessibility of information it provides and its efforts to solicit input from

interested stakeholders.

Next, Mr. Chairman, I would like to discuss our ongoing Postal Service

work on supervisory pay differentials. At your request, Mr. Chairman, we

have begun a review of the complaints, primarily from postmasters, that

many of the employees they supervise earn more than they do. Our

primary objective is to determine whether any employees earn more than

their postmasters do and, if so, why (e.g., overtime, shift differential, etc.).

As you know, current Service policy calls for certain postmasters and

other postal supervisors to be paid at a higher salary rate than they might

otherwise be entitled to if they supervise two or more full-time equivalent

craft employees. Because the supervisory pay policy is relevant to the

broader concerns addressed in Congresswoman Morella’s Bill (H.R. 3842,

19 Postal Issues: The Department of State’s International Postal Responsibilities (GAO/T-GGD-00-63,

Mar. 9, 2000).

Supervisory Pay

Differentials
Statement

U.S. Postal Service: Sustained Attention to Challenges Remains Critical

Page 24 GAO/T-GGD-00-206

the “Postmasters Fairness and Rights Act),” we agreed with your office to

limit our initial review to postmasters and analyze the pay for other postal

supervisors in a subsequent review. Due to the Service payroll system's

complexity, size, and lack of documentation, our analysis of postmaster

pay has taken longer than anticipated. We have been working with the

Service's payroll system officials and expect to resolve these problems

shortly and begin our analysis of postmaster pay.

Mr. Chairman, this concludes my prepared statement. I have included a

list of our Postal Service products issued since October 1999 in the

attachment. I would be pleased to respond to any questions you or the

Members of the Subcommittee may have.

Contact and Acknowledgments

For further information regarding this testimony, please contact Bernard L.

Ungar, Director of Government Business Operations, on (202) 512-8387.

Individuals making key contributions to this testimony included Teresa L.

Anderson, Kenneth E. John, Charles F. Wicker, and Hazel J. Bailey.
Attachment

GAO Postal-Related Products Issued During

Fiscal Year 2000

Page 25 GAO/T-GGD-00-206

U.S. Postal Service: Enhancements Needed In Performance Planning and

Reporting (GAO/GGD-00-207, Sept. 19, 2000).

U.S. Postal Service: Electronic Commerce Activities and Legal Matters

(GAO/T-GGD-00-195, Sept. 7, 2000).

U.S. Postal Service: Postal Activities and Laws Related to Electronic

Commerce (GAO/GGD-00-188, Sept. 7, 2000).

U.S. Postal Service: Diversity in District Management-Level Positions

(GAO/GGD-00-142, June 30, 2000).

Breast Cancer Research Stamp: Millions Raised for Research, but Better

Cost Recovery Criteria Needed (GAO/T-GGD-00-137, May 25, 2000).

Breast Cancer Research Stamp: Millions Raised, but Better Cost Recovery

Criteria Needed (GAO/GGD-00-80, Apr. 28, 2000).

U.S. Postal Service: Diversity in the Postal Career Executive Service

(GAO/GGD-00-76, Mar. 30, 2000).

Postal Issues: The Department of State’s International Postal

Responsibilities (GAO/T-GGD-00-63, Mar. 9, 2000).

Postal Issues: The Department of State’s Implementation of Its

International Postal Responsibilities (GAO/GGD-00-40, Jan. 31, 2000).

U.S. Postal Service: Changes Made to Improve Acceptance Controls for

Business Mail (GAO/GGD-00-31, Nov. 9, 1999).
Page 26 GAO/T-GGD-00-206
Page 27 GAO/T-GGD-00-206
Viewing GAO Reports on the Internet

For information on how to access GAO reports on the INTERNET,

send e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

Reporting Fraud, Waste, and Abuse in Federal Programs

To contact GAO's Fraud Hotline use:

Web site: http://www.gao.gov/fraudnet/fraudnet.htm

E-Mail: fraudnet@gao.gov

Telephone: 1-800-424-5454 (automated answering system)

(240431)