For an electronic version of this report, please go to our website at: 

http://www.treas.gov/offices/domestic-finance/usps/index.html
President’s Commission on the United States Postal Service

1120 Vermont Avenue, suite 971

Washington, DC 20005

July 31, 2003

The President

The White House

1600 Pennsylvania Avenue, NW

Washington, DC 20500-0001

Dear Mr. President:

It is our honor to submit to you the final report of the President’s Commission on the United States Postal

Service. Much has changed since the nation last revisited its mail system in 1970, most notably the rise of

the Internet as a faster and more affordable communications alternative. We appreciate the opportunity to

work with the Postal Service and the entire postal community to strengthen this vital institution at a pivotal

moment in its history.

In appointing this Commission, you recognized that the Postal Service faces significant challenges to its fiscal

health due largely to an outdated and inflexible business model amid a rapidly changing postal landscape.

Having explored in detail the many challenges and opportunities before the Postal Service, the Commission

wholeheartedly shares your concerns. However, we are decidedly optimistic about the future of this unique

and venerable American institution.

We believe that the Postal Service has an extraordinary opportunity to usher in an exciting new era of greater

efficiency and rising value to the mailing public. As a result, while the sustainability of the Postal Service’s

current business model is in serious doubt, with bold leadership today, the future of universal postal service

can most certainly be secured.

Our recommendations aim to tailor the Postal Service to the modern mail needs of the country and focus the

institution on “best execution” in all aspects of its operations. It is our hope that a revitalized 21st century

Postal Service—one that makes best use of every resource it has and takes full advantage of private-sector

partnerships and new technologies—can serve as a prime example of how to enhance the quality and costeffectiveness of operations throughout the Federal government.

Finally, Mr. President, we are not only proud of this report for the scope and ambition of its recommendations, but also for the process that produced it. Numerous public meetings were held across the country.

The Commission heard and read statements from hundreds of postal employees, customers, partners, and

experts. At every turn, we encouraged and received an open and frank exchange of ideas and opinions. This

report was substantially enriched for this broad participation. If the widespread public commitment to

making this a constructive process is any indication, then the future of the Postal Service and the mail will

indeed be bright.

Sincerely,

James A. Johnson Harry J. Pearce

Co-Chair Co-Chair

Attachment

Embracing the Future

Making the Tough Choices to Preserve Universal Mail Service

Report of the President’s Commission on the United States Postal Service

The President’s Commission on the United States Postal Service

Co-Chairs

James A. Johnson

Harry J. Pearce

Members

Dionel E. Aviles

Don V. Cogman

Carolyn L. Gallagher

Richard C. Levin

Norman I. Seabrook

The Honorable Robert S. Walker

Joseph R. Wright

Executive Director

Dennis C. Shea

Table of Contents

Foreword ......................................................................................................................... iii

Executive Summary .......................................................................................................... vii

Chapter 1: Adapting to a New World:

Universal Mail Service at Risk ......................................................................... 1

Chapter 2: Delivering the Mail:

The Constant Mission of an Evolving Institution ......................................... 15

Chapter 3: Building a World-Class Business:

Best Execution, Corporate Leadership at the Postal Service.......................... 35

Chapter 4: Protecting the Public Interest:

Enhanced Accountability and Public-Policy Oversight ................................. 53

Chapter 5: Pushing the Envelope:

Designing a Smaller, Stronger, New Postal Network ..................................... 75

Chapter 6: Aligning People with Progress:

Building a 21st Century Postal Service Workforce....................................... 107

Chapter 7: Creating the Digital Postal Network:

Linking Customers, Carriers, and Correspondence to the

Future of the Mail ........................................................................................ 143

Conclusion ...................................................................................................................... 159

Appendices

A - Executive Order ..................................................................................... 161

B - The Work of the Commission: Structure and Process.......................... 163

C - Commission Recommendations ............................................................ 171

D - Additional Statement............................................................................. 179

Acknowledgments ........................................................................................................... 181

iii

Foreword

The Commission is honored to have been asked by President George W. Bush to gather

the opinions of postal experts, customers, partners, competitors, and employees and

craft a vision “to ensure the efficient operation of the United States Postal Service while

minimizing the financial exposure of the American taxpayers.” While the challenges

before the Postal Service are substantial, so are the abundant opportunities that exist

today to enhance both the value of the mail and the institution that delivers it. If the

nation embraces an ambitious modernization, then the Commission is very confident

that the Postal Service can continue its 225-year tradition of innovation and adaptation

to remain a valued and relevant enterprise to the nation it exists to serve.

In making these recommendations, however, the Commission wishes to note that,

particularly in today’s technology-driven world, the future has a way of surprising us all.

In 1968, the last Presidential Commission on the U.S. Postal Service made important

strides in the delivery of the nation’s mail. While it urged greater use of technology to

automate the largely manual processes of the Postal Service at the time, that Commission could not have foreseen the coming Internet revolution and its dramatic impact on

traditional mail volumes, which so profoundly make the case for ambitious new reforms

today.

Similar breakthroughs certainly could change the fundamentals underlying the assumptions made in this report. For this reason, the Commission did not set out to define a

Postal Service for the new millennium. Rather, it set a more modest 15-20 year horizon.

Additionally, many of the recommendations included in this report aim to build more

flexibility into the Postal Service, so key aspects of the institution—from the scope of

the postal monopoly to the size of the postal network itself—are not set in stone, but

rather are managed in a dynamic way that is more capable of succesfully adapting to

change in a timely fashion.

The long-term fate of the Postal Service and hard copy correspondence in the Information Age is impossible to see clearly from today’s vantage point. Projecting future mail

volumes is an inexact science at best, particularly in the modern context where technologies change rapidly. The Commission believes, however, that Internet use is likely to

divert increasingly larger portions of the mail stream to the electronic format. The chart
iv

below illustrates the unprecedented near- and mid-term threat posed by technology

to the Postal Service’s bottom line under one possible scenario:

These projections reflect independent analysis performed for the Commission. They

incorporate the projected savings anticipated by the Postal Service’s own reforms

already underway. This forecast also assumes that postage rates will continue to

adjust with inflation, as they have for the past 30 years. Even with these revenuepositive factors, the 15-year outlook for the Postal Service remains grim and makes a

powerful case for a far more ambitious overhaul of the nation’s postal system.

The specific numbers cited above are, of course, speculative. But the trends they

foresee are sobering and credible: The traditional mail stream will likely continue to

migrate to cheaper Internet-based alternatives. Largely as a result, the Postal Service

will increasingly find it difficult to meet its “break-even” mandate (i.e. charging just

enough for postage and other services to cover expenses). And, even if postage rates

continue to adjust for inflation, the Postal Service, over the next 15 years, is likely to

run substantial deficits. Equally discouraging, these obligations would pile on top of

the Postal Service’s $92 billion in current debt and other unfunded obligations.

A Costly Status Quo: Projected Mail Volumes & Fiscal Health

(in millions)

Year 2002 2003 2007 2012 2017

Mail Volume 202,822 202,200 208,900 201,500 181,700

Operating Revenue $66,463 $68,868 $75,000 $81,000 $83,000

Operating Expenses $67,139 $64,368 $74,000 $85,500 $91,500

Net Income (Loss) ($676) $4,500 $1,000 ($4,500) ($8,500)

Cumulative Net

Income (Loss) ($6,036) ($1,536) $4,250 ($6,700) ($47,500)

Source: Mail volume and financial projections are based on the “Gradual Displacement Scenario,”

contained in “Two Scenarios for Future Mail Volumes, 2003-2017,” Greg Schmid, Institute

for the Future, May 2003 (prepared for the Commission). Assumptions reflected in the

projections include the following: operating revenues are based on rates adjusted annually at

CPI (2.5%); labor-related costs are increased annually by 3.5%; non-labor costs are increased

annually by 2%; and operating expenses have been adjusted to reflect volume variances.
v

Without significant modernization, the Postal Service will have three choices: dramatically roll back service, seek a rate increase of unprecedented scale, or fall even

further into debt, potentially requiring a significant taxpayer bailout. Clearly, the

public interest is better served by a strategy that aims instead to root out the substantial inefficiencies and other unnecessary costs apparent throughout the institution

today in order to produce a far more efficient and capable 21st century Postal Service.

Toward this end, it is the Commission’s emphatic view that an incremental approach

to Postal Service reform will yield too little too late given the enterprise’s bleak fiscal

outlook, the depth of current debt and unfunded obligations, the downward trend in

First-Class Mail volumes and the limited potential of its legacy postal network that

was built for a bygone era.

The American people deserve the most capable and efficient Postal Service that

modern techniques and “best execution” strategies can make possible. With strong

management and employee performance, sound partnerships and sophisticated

technologies, the Commission is confident that the Postal Service can dramatically

reduce its costs and stabilize its bottom line. The Commission also firmly believes

that e-mail, despite its significant inroads, does not spell the end of the traditional

mail system—at least on the horizon of our report. Thus, the biggest threat today is

being too timid in the area of postal modernization and gambling with the future of

affordable, universal mail service, in the process.

Already, important progress has been made by Congress and by the Postal Service

itself. This report aims to accelerate and elevate the pace and direction of these

changes. In doing so, it is the Commission’s hope that these recommendations can

ensure a strong future for universal postal service and, perhaps by doing so, encourage

other Federal agencies to refocus on their core value, rethink how they do business,

and reshape public service in the process.

vii

Executive Summary

Universal postal service remains vital to the nation and its economy at the dawn of

the 21st century. Unfortunately, the institution that delivers it is in significant

jeopardy. Buffeted by the mounting costs of an inefficient delivery network and the

popularity of electronic mail, the Postal Service has more than $90 billion in debts

and unfunded obligations and an unstable financial outlook. Absent fundamental

reforms, the risk of a significant taxpayer bailout or dramatic postage rate increases

looms large.

As a result, the nation must make a defining choice about the future of its Postal

Service: It can prepare to pay—either on tax day or at the post office—for increasingly dated and costly mail service. Or, it can permit an ambitious modernization

that embraces proven business strategies, private-sector partnerships and new technologies to rein in costs aggressively and improve service.

To continue the nation’s commitment to affordable universal postal service, President

Bush last year formed the President’s Commission on the U.S. Postal Service “to

ensure the efficient operation of the United States Postal Service while minimizing

the financial exposure of the American taxpayers.” It is no small task considering the

size and unique nature of the institution. The Postal Service is a $67-billion organization, the 11th largest U.S. enterprise by revenue, the second biggest employer in the

nation, and the hub of a thriving domestic mailing industry. It also has a rare charter

for a Federal institution—to operate like a business, financing its operations through

“break-even” sales rather than Congressional appropriations.

The laws governing the Postal Service have not been substantially revised in more

than 30 years. These rules were written well before the Internet offered a cheaper,

faster form of correspondence and far in advance of the Information Revolution’s

profound leaps in technology-driven opportunities to reduce costs. Now is the time

to revisit these rules and modernize the Postal Service to not only preserve its future,

but also to enhance its service to all Americans.
viii

Universal Postal Service Is at Risk

First-Class Mail volumes appear to be on the brink of long-term decline as more

Americans take advantage of cheaper electronic alternatives. The rates of growth for

First-Class Mail and Standard Mail, that together generate more than 75% of all

postal revenues, have been in long-term decline since the 1980s. Electronic diversion

threatens to accelerate this trend significantly. Unless Postal Service expenses can be

similarly reduced, it is questionable whether affordable universal mail service via a

self-financing public institution is sustainable.

With its debt reaching destabilizing levels and its traditional revenue streams in

retreat, the Postal Service’s transformational efforts and long-term outlook were

placed on the U.S. General Accounting Office’s “high-risk list” in 2001. At the

request of Congress, the Postal Service began developing its Transformation Plan to

adapt to the future. Since the Plan’s release in April of 2002, the Postal Service has

reduced its workforce by more than 40,000 career positions and will deliver $2.5

billion in annual cost savings by September 30, 2003. However, even with this

substantial progress, it is quite possible that the Postal Service will experience significant (and rapidly ballooning) deficits within just a few years’ time, even if stamp

prices continue to rise with inflation. This prospect points to the urgent need for a

far more sweeping set of reforms.

Even if the Postal Service were not in financial jeopardy, however, the inefficiency of

its operations and legacy network today causes billions of dollars in unnecessary costs

that should be eliminated rather than passed on to ratepayers. Far more emphasis

must be placed on restoring fiscal stability not by ratcheting up rates or scaling back

service, but by aggressively rooting out inefficiencies throughout the Postal Service.

Unfortunately, a cumbersome regulatory and rate-setting model, the entrenched cost

of an aging infrastructure, inflexible work arrangements, and other significant

obstacles clutter the path to a fundamental overhaul

of the Postal Service. As a result, the institution

urgently requires broader flexibility to adjust to

increasingly dynamic markets and to pursue new

strategies to bring revenues and expenditures into

balance without sacrificing quality of service and the

ability to meet the nation’s evolving postal needs. In

short, the Postal Service needs a new business model

for the modern world and the changing postal needs

of the nation.

Source: USPS.
ix

The Postal Service Should Remain a Public Institution

The Commission believes that the Postal Service should remain an independent

entity within the executive branch of the Federal government with a unique charter

to operate as a self-sustaining commercial enterprise. Some have suggested that for

the Postal Service to best act like a business, perhaps it should become a business. The

Commission believes an abrupt privatization of the Postal Service is far too risky and

would unnecessarily destabilize universal mail service.

The Postal Service delivers more than 200 billion pieces of mail per year across the

vast geographic expanse of the United States. Privatization of a commercial entity the

size of the Postal Service could seriously disrupt both mail service and the private

postal marketplace. It is highly unlikely that the private sector, acting alone, could

provide the universal mail services we have come to expect from the Postal Service.

For the Postal Service itself, privatization would likely involve a decade or more of

wrenching organizational changes that could undercut the stability and continuity

that are the hallmark of public postal service. Thus, the Commission believes that

the preferred strategy is a more evolutionary approach, under which the Postal Service

is maintained as a public entity, but refocused and reorganized to

enhance its efficiency and adaptability in the face of an uncertain,

and ultimately more competitive, future.

Source: USPS.
x

Postal Monopoly Should be Clarified and Narrowed

Over Time

Once the conclusion has been reached that the Postal Service should remain a public

institution, an urgent need arises to modernize and clarify the mechanism that

finances its operations—the postal monopoly.

A great deal of confusion exists today, even at the Postal Service, about the true extent

of its scope. This confusion is understandable considering much of the nation’s

postal monopoly law dates back to 17th century England and is virtually untranslatable in the modern environment.

The Commission recommends that an independent Postal Regulatory Board be

established to provide broad public-policy oversight of the Postal Service. Among its

tasks should be translating the monopoly’s musty definition into straightforward,

modern language that reflects the postal monopoly as the nation relies on it today.

Specifically, the Commission proposes that the boundary lines be clearly and narrowly drawn by weight and by price (to permit private express carriers to handle mail

of less than 12 ounces, so long as they charge at least six times the price of a FirstClass stamp).

While a postal monopoly remains essential to the reliable, affordable provision of

universal postal service today, the Commission acknowledges that this may not

always be the case. As such, it recommends authorizing the independent Postal

Regulatory Board to periodically review the scope of the monopoly with an eye

toward narrowing it over time, so long as a greater reliance on a thriving private

postal marketplace can occur without sacrificing universal, affordable access to

essential postal services.
xi

The Postal Service Should Focus on its Core Value: Universal

Mail Service

Delivering high-quality service in an era of stagnant mail volumes will require the Postal

Service to recognize that as demand for its services contracts, so, too, should the institution. To do so without sacrificing essential services, however, will require the Postal

Service to focus on its core value: the reliable, affordable delivery of the mail to every

American home and business.

While the Postal Service in recent years has explored an array of new revenue streams far

afield of what most Americans consider “postal services,” the Commission recommends

that the Postal Service be restricted to products and services related to the delivery of

letters, newspapers, magazines, advertising mail, and parcels. More broadly, the Commission recommends that the mission of the Postal Service be “to provide high-quality,

essential postal services to all persons and communities by the most cost-effective and

efficient means possible at affordable and, where appropriate, uniform rates.” This

definition focuses the organization on universal service. It makes cost-effectiveness an

explicit obligation. It asserts that affordable rates do not come at the expense of service,

and it opens the door to greater involvement of the private sector in the delivery of the

nation’s mail.

The Commission strongly endorses the basic features of universal mail service today—

affordable rates, six-day delivery, and convenient community access to retail postal

services. However, in such a rapidly changing mail environment, the Commission

cautions against building rigidities into the system. Instead it proposes that a mechanism be put in place to permit some flexibility over the scope of the universal service

obligation in the future. This can be achieved by authorizing the independent Postal

Regulatory Board to periodically review the universal service obligation as the nation’s

reliance on its mail system continues to evolve.
xii

The Postal Service Should be Guided by Best Business Leaders,

Practices

If the Postal Service were a private endeavor, it would rank eleventh on the Fortune 500

list of the largest corporations in the United States based on revenues. It is the second

largest employer of Americans today. Through its vast national delivery network, it

connects virtually every American home and business. Given its importance to the

country and its businesslike mandate, the Postal Service should have the best corporate

leadership available today and an unwavering commitment to best execution in every

aspect of its operations.

Both the Postal Service and its customers would benefit greatly from the creation of a

strong, independent, and experienced Board of Directors of a stature that truly reflects

the size and significance of the Postal Service’s work. This Board would apply the best

practices of the business world and would attract members with the talent and skills

necessary to transform the Postal Service into a world-class service business. The Board’s

overriding mission would be guiding the Postal Service to a standard of excellence that

consistently rivals the private sector in both productivity and quality of service. The

Board also would be responsible for holding management accountable for performance

and for ensuring that Congress and the American people are fully informed of the

institution’s fiscal health.

To ensure that the Board is most capable of fulfilling its duties, the Commission recommends a new structure and scope of responsibilities, modeled after the most successful

corporate boards in America (detailed in Chapter 3). This would help ensure that the

Board operates in the most efficient and productive manner possible, is safely distanced

from undue political influence and has the depth and diversity of skills necessary to

guide the Postal Service to a higher level of operations and a more stable long-term fiscal

outlook.
xiii

The Postal Service Requires Broader, Constructive Oversight

The Commission proposes transforming the narrowly focused Postal Rate Commission

(“PRC”) into an independent Postal Regulatory Board with broad authority to safeguard the public interest without micromanaging day-to-day postal operations.

Rather than a sole focus on rate-setting and mail classifications, the Postal Regulatory

Board would be tasked with broad public-policy oversight, including: ensuring financial

transparency; guarding against the cross-subsidization of competitive products; reviewing the scope of the postal monopoly; limiting the prices charged for non-competitive

products; overseeing the scope of the universal service obligation; reviewing worksharing

and other discounts; reviewing changes to service standards that may have a substantial

and negative national impact; and ensuring the Postal Service meets its statutory

obligation to compensate its employees at a level comparable to (but not exceeding) the

private sector.

The Commission envisions a Postal Regulatory Board that is an independent establishment of the executive branch of the U.S. government and is composed of three individuals of significant stature, appointed by the President of the United States and

confirmed by the Senate.

Once assembled, the Postal Regulatory Board should move quickly to improve the ratesetting process for both postal customers and managers. The current process is far too

cumbersome and time-consuming, with rate changes taking as long as 18 months, an

impossible situation for an institution charged with the responsibility of acting in a

businesslike manner.

As an alternative to the current process, the Commission proposes the establishment of

a rate-ceiling mechanism that would allow prices for non-competitive products to be

adjusted upward within strict limits, subject to an after-the-fact review by the Postal

Regulatory Board. Specifically, the Commission proposes setting the ceilings below

inflation, thereby restricting revenue growth

to motivate the Postal Service to pursue a far

higher standard of efficiency.

A well-designed rate ceiling could produce a

Postal Service much more aligned with the

interests of ratepayers, who would prefer that

the Postal Service aggressively tackle unnecessary costs before asking them to pay more for

stamps. However, designing this mechanism

is an intricate undertaking. Fortunately,

recent legislation signed into law by President

Bush strongly discourages the Postal Service

from increasing rates before 2006, providing

ample time for the Postal Regulatory Board

to fine-tune a workable rate-ceiling mechanism.

 

Five Months

Pricing Cycle

Preparation

Rate Case Litigation

Ten Months

Implementation

Governors’ Consideration

Three

 Months

 UNITED STATES UNITED STATES

POSTAL SERVICE S E RV I C E

Source: USPS.
xiv

The Nation Should Overhaul Its 1950s Era Postal Network

Few dispute the fact that the postal network as it exists today is far too sprawling and

cumbersome for the nation’s needs. Fortunately, through the strategic deployment of

new technologies, partnerships with the private sector and appropriate cost-reduction

strategies, the Postal Service has significant opportunities to grow smaller and stronger—upholding and advancing the nation’s commitment to universal service without

overburdening ratepayers. Achieving this vision will take flexibility on the part of all

who have an interest in the Postal Service’s success — customers and employees, partners and politicians.

The Postal Service deserves praise for its recent efforts to create a sound analytical basis

for redesigning the postal network. Accelerating these efforts, as the Commission

recommends, involves permitting a whole-scale realignment with full public participation but also free from undue external intervention.

Toward that end, the Commission envisions an independent process, much like that

governing military base closures in the 1990s, for consolidating and closing back-end

processing and distribution facilities. Additionally, the Postal Service should carefully

study and contemplate end-to-end standardization of the postal network to reduce the

uneven nature of many postal processes and facilities that combine to create wide

variances in productivity levels among facilities, adding up to billions of dollars in

unnecessary costs.

The Commission has also examined the Postal Service’s network of 38,000 post offices.

In the Commission’s view, “low-activity” post offices that continue to be necessary for

the fulfillment of the Postal Service’s universal service obligation should not be closed,

even if they operate at a substantial economic loss. In circumstances where universal

service is protected, the Postal Service should have the flexibility to dispose of “lowactivity” post offices with appropriate community involvement.

In addition, the Commission strongly recommends that the private sector become more

involved in the delivery of the nation’s mail. Most Americans are unaware of the extent

to which private companies already play key roles throughout the postal network—

handling, for example, most long-haul air transport and performing certain processing,

distribution, and shipping functions. The Postal Service is also a global pioneer in

innovative worksharing partnerships with some of its most active customers. Where

additional partnerships advance service and reduce costs, the Postal Service should

embrace them and recognize their ultimate value to the customers it serves.

This report also identifies a number of additional areas where the adoption of innovative

private-sector strategies could likely deliver significant additional savings, particularly in

the areas of procurement reform and more active management of the Postal Service’s

substantial real estate portfolio. In virtually every aspect of its operations today, the

Postal Service has ample opportunities to adopt innovative approaches, learn from the

successes of the business world, and deliver significant cost savings to the American

people. As a public institution, the Postal Service is duty-bound to aggressively pursue

them all.
xv

Encouraging a Culture of Excellence in the Postal Workforce

Few of the reforms outlined in this report are possible without the support and contributions of the Postal Service’s most mission-critical asset: its workforce.

The Postal Service employs approximately 843,000 people, making it the second largest

workforce in the U.S. Its jobs are highly coveted. As of July 2001, the Postal Service

had a backlog of some 400,000 job applicants and virtually no turnover. Contributing

to the Postal Service’s ability to recruit and retain employees is the special status within

the Federal government of postal workers, who enjoy the right to collectively bargain.

The Postal Service is also required by statute to compensate employees at a level comparable to the private sector. In addition, postal employees have among the most attractive

benefits packages in the nation.

The Commission strongly supports the right of postal workers to collectively bargain

and to be compensated at a level comparable to that of the private sector. For an

institution tasked with operating like a business, both of these tools are essential to maintaining a world-class workforce capable of

delivering the 21st century Postal Service

envisioned by this report.

Critical to this effort, however, is the ability of

management and labor to work constructively

together to determine the right size of the

postal workforce and to ensure appropriate

flexibilities in its deployment. Both are

significant issues. More than $3 out of every

$4 in Postal Service revenues go to cover the

costs of current and retired postal employees.

Of the approximately $92 billion in debt and

unfunded obligations the Postal Service is

struggling with today, more than $48 billion is

due to the costs of retiree health benefits alone.

Far more than individual benefits, the size of the workforce determines the costs of the

workforce. Therefore, getting the right size workforce is the critical issue when it comes

to controlling the costs of the workforce and upholding the Postal Service’s ability to

compensate its employees in a manner competitive with the private sector. Fortunately,

there is a significant attrition opportunity, with some 47% of current career employees

eligible for regular retirement by 2010 that can help guide the rightsizing of the

workforce in the least disruptive manner possible.

Source: USPS.
xvi

Beyond the size of the workforce, the ability to deploy workers in the most efficient

manner possible and create a culture of excellence are essential. Achieving a more

positive and productive climate will require a number of steps.

First, Postal Service management must repair its strained relationship with employees,

manifested in the high number of grievances filed and appealed and the frequency of

contract negotiations proceeding to protracted arbitration.

Second, management and employee unions must have a more constructive collective

bargaining mechanism to work together to bring expenses and revenues into alignment

(detailed in Chapter 6). This includes being able to negotiate wages and benefits. It

also entails authorizing the Postal Regulatory Board to develop a fair and impartial

mechanism for ensuring total compensation is comparable to the private sector, but

does not exceed that generous standard.

Third, the Postal Service must build an incentive-based culture that encourages excellence by developing a pay-for-performance program that rewards all employees for

contributing to the success of Postal Service reform.
xvii

Information Technology Can Deliver the Future of Mail Today

While many of the challenges before the Postal Service are technological in nature, these

same technologies also present substantial opportunities to deliver the nation’s mail more

efficiently and in a way that markedly increases its value.

By placing a unique barcode on every piece of mail and investing in technologies

throughout the postal network that can put that information to use to enhance customer service and reduce costs, the Postal Service can begin building a truly digital

network that links postal facilities, vehicles, partners and employees not only to each

other, but also via the Internet to customers and to the mail itself.

By applying the sophistication of the electronic world to the physical mail, the Postal

Service can develop a new postal proposition for the 21st century, known as Intelligent

Mail, and make its advantages available to all customers. Intelligent Mail could allow

the Postal Service to permit mail-tracking and other in-demand services via a robust

website that ultimately becomes the equivalent of an always open, full service post

office. Intelligent mail also can significantly improve mail security through enhanced

traceability, and could lead to substantial savings through sophisticated, real-time

logistics management. Adopting this system will lead to the development of “personalized” stamps that digitally embed basic information (such as the sender, the class of

mail, and the destination) to enable a highly automated and efficient journey. This

advance also could allow customers to design their own stamps, perhaps adding a family

photo or small business logo.

While the technology needed to make this vision a reality will require significant

investment, the Commission is confident that the resulting efficiency and revenue gains,

as well as service improvements, will deliver the necessary returns to the Postal Service

and its customers, if successfully executed.

A next generation barcode (wavy lines) encodes data in a color

field that includes postage value, date, and serial number (shown

underneath as text), and is spread throughout the color field.

Source: Escher Group
xviii

The Postal Service Customer Experience Will Advance

Significantly

The reforms included in this report aim not only to stabilize the Postal Service, but to

revolutionize its customer service. While how the Postal Service conducts its business

will change dramatically (and for the better), from the customer’s perspective, service

will be significantly enhanced. From mail tracking to personalized stamps to more

consistently cost-efficient and high-quality operations, the focus on customer service is

apparent throughout this report.

While an independent survey performed for the Commission found that most Americans are generally happy with their postal service, complaints typically revolved around

actually visiting a post office. To address the issue of inconvenient hours and waiting in

line, the Commission recommends expanding and accelerating efforts already underway

at the Postal Service to bring a wider array of services to customers in convenient

locations throughout their community–from grocery stores, to pharmacies, to cash

machines, and even into homes and businesses via a more robust and user friendly

Postal Service website.

This revolution in retail access would allow postal customers to avoid the greatest

inconvenience of a post office–having to make a special trip there. These alternative

venues would feature expanded hours of

service, including around the clock access at

sophisticated self-service kiosks that can

perform all the most popular functions of a

post office. This enhanced customer convenience is also a plus for the Postal Service’s

bottom line, since these more convenient

customer points of access are generally more

cost-effective than service delivered at the post

office itself.

Source: USPS.
xix

Conclusion

The Postal Service must be freed from unnecessary and outdated statutory constraints.

In turn, by cutting costs and better managing its assets, by increasing organizational

effectiveness and streamlining production and distribution facilities, by shaping more

effective private sector partnerships, by offering greater financial transparency, and by

rightsizing and rewarding the workforce for superior performance, the Postal Service can

enhance the value of the mail in the modern context and deliver a capable, sophisticated

and leading-edge 21st century national postal endeavor.

Ensuring a bright future for universal postal service will require bold choices and broad

national support. With it, the Postal Service can deliver the mail as never before and

offer an example to other Federal institutions about reducing costs while enhancing

their service to the nation.

Chapter 1: Adapting to a New World:

Universal Mail Service at Risk

Introduction

For more than 225 years, the national post office has bound the country together and

advanced commerce by enabling the exchange of goods, ideas and information.

From the humble beginnings of 30 post offices spread across the American colonies,

today’s Postal Service has roughly $67 billion in annual revenues,1

 making it the 11th

largest enterprise by revenue2 in the nation and the hub of a thriving domestic

mailing industry.

Without question, the Postal Service has made an extraordinary contribution to the

economic health and unity of the nation. But tough choices are required now in

order to overcome significant challenges to the institution’s continued ability to

ensure universal mail service at affordable rates. Like some private-sector delivery

services, the Postal Service today is suffering from weak mail volumes and rising labor

and infrastructure-related costs. In the third quarter of 2003, the Postal Service had a

revenue shortfall of nearly half of a billion dollars.3

 In addition to these pressures,

significant debt loads, network inefficiencies and rigid statutes governing the

institution’s management are preventing the Postal Service from adequately adapting

to the fundamental market and technology changes underway, placing at risk its

ability to deliver the nation’s mail at affordable rates.

While many of these trends are exacerbated by a weak economy and other cyclical

factors, the most significant threat is not. To the contrary, it appears that the nation

is at the beginning of a long-term decline in First-Class Mail volumes as more and

more Americans take greater advantage of cheaper electronic communications

alternatives. In this new environment, unless Postal Service

operating expenses can be reduced correspondingly, it is

questionable whether affordable universal mail service via a

self-financing public institution is sustainable.

Fortunately, the Commission and many others, including the

Postal Service itself, have identified dozens of organizational

and policy changes which can ensure continued high-quality

and efficient delivery of the nation’s mail at affordable rates.

Taken together, they will produce nothing short of a fundamental transformation of the United States Postal Service.

Source: USPS.
2

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Postal Service Has Begun the Reform Process

The Bush Administration, the United States Congress, and the Postal Service are to

be commended for recognizing the need for and beginning the process of fundamental change. In its 2002 Transformation Plan, the Postal Service calls for the evolution

of the institution into a “Commercial Government Enterprise,” a more agile government entity that maintains its universal service duties, but also enjoys greater flexibility to operate in a more businesslike manner. This Plan was produced at the request

of the United States Senate, which grew concerned about the Postal Service’s longterm ability to fulfill its universal service obligation in the wake of a report by the

U.S. General Accounting Office (“GAO”) placing the Postal Service on its “high-risk

list.”4

 GAO’s April 2001 report was, in turn, developed as a result of extensive

hearings in the U.S. House of Representatives on the need for postal modernization.

The Transformation Plan recognizes that revisiting the core elements

of the institution—from the postal monopoly, to governance and

regulatory structures, to workforce and infrastructure costs—is

essential to the Postal Service’s continued ability to deliver universal

postal service. The Plan also appropriately identifies the core institutional challenge: “a modern, self-sufficient postal system...requires

new flexibility to adjust networks and services to modern conditions

and to minimize entrenched governmental rules and expectations

that carry with them costs and inefficiencies.”

Since the Transformantion Plan’s release in April of 2002, the Postal

Service’s substantial workforce has been reduced by more than

40,000 career positions. By the end of September 2003, the Postal

Service expects to have captured $2.5 billion of the $5 billion in

annual cost savings it aims to attain by 2006. Despite this laudable

progress, overall growth in operating expenses outpaced growth in operating revenues

in fiscal years 2000 to 2002.5

 So while these efforts are a critical down payment on

the enhanced productivity and fiscal discipline necessary, the Postal Service requires

reform on a far grander scale.

The Transformation Plan appropriately

identifies the core institutional challenge

facing the Postal Service: “a modern, selfsufficient postal system...requires new

flexibility to adjust networks and services

to modern conditions and to minimize

entrenched governmental rules and

expectations that carry with them costs

and inefficiencies.”

Spotlight
3

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Presidential Commission Tasked with Accelerating the

Transformation

In recent years, Congress has debated several proposals to make a modern, selfsufficient Postal Service a reality. But given the inevitable political pressures surrounding an agency with such a strong local presence and large employee base, no

comprehensive legislation reforming the Postal Service’s business model has been

enacted since 1970. To overcome these hurdles and restore the Postal Service to a

solid, stable footing, President Bush appointed this Commission to craft a vision “to

ensure the efficient operation of the United States Postal Service while minimizing

the financial exposure of the American taxpayers.”6

The Executive Order’s comprehensive mandate instructs the Commission to explore

the key questions that will determine the Postal Service’s role in the 21st century,

including:

• What flexibility should the Postal Service have to change prices, control costs,

and adjust service in response to financial, competitive or market pressures?

• Do rigidities in cost or service limit the efficiency of the postal system?

• How can universal mail delivery at affordable rates be sustained over the long

term in a way that will allow the Postal Service to cover its significant liabilities

with minimum exposure to the American taxpayer?

• Do postal monopoly restrictions continue to advance the public interest today

or do they now permit the Postal Service to compete unfairly with the private

sector?

• And, what is the most appropriate governance and oversight structure for the

Postal Service?
4

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Liabilities and Obligations (in Millions)

2001 2002 May 16, 2003

Debt to U.S. Treasury $11,315 $11,115 $7,275

CSRS Deferred Pension Liability $32,023 $32,231 $5,824

Other Liabilities (e.g., workers’

compensation, accrued leave) $18,079 $18,671 $19,934

Total Liabilities per USPS

Financial Statements $61,417 $62,017 $33,988

Obligation for Retiree Health

Care Benefits Est. $46,400 Est. $48,000 Est. $48,800

Minimum Payments on NonCancelable Operating Leases $9,383 $9,604 Est. $9,750

Total Liabilities and Other

Obligations Est. $117,200 Est. $119,621 Est. $92,538

The Case for Change

A number of trends are driving the need for such a sweeping exploration of the Postal

Service’s role and operations in the 21st century. Chief among them is the fact that

the rising cost of operating the Postal Service is on a collision course with declining

mail volumes. The rates of growth for First-Class Mail and Standard Mail, the twin

engines of Postal Service cash flow that together generate more than 75% of all postal

revenues,7

 have been in long-term decline since the 1980s.8 Looking ahead, electronic diversion of First-Class Mail threatens to accelerate this decline significantly.

At the same time, a cumbersome regulatory and rate-setting model, the entrenched

cost of an aging infrastructure and inflexible work arrangements make difficult the

ambitious overhaul of the Postal Service that is needed today.

There are three ways the Postal Service can adapt to declining mail volumes: by 1)

aggressively reducing costs, 2) expanding revenues, or 3) undertaking a combination

of both strategies. While some potential exists to increase revenues, particularly in

the area of Intelligent Mail (see Chapter 7), a significant portion of the Postal

Service’s fiscal stabilization must come from reduced costs through the modernization

of every element of its operations, service delivery and asset management. This

reality is magnified by the Postal Service’s sizable debts and ongoing obligations.

Despite numerous rate increases and efforts to reduce costs through attrition-led

downsizing and investment in automation, the expense of the Postal Service’s legacy

networks and large employee base are expected to outpace the growth in its operating

revenue. This trend threatens to increase the debt load being carried by the Postal

Service and provides no cushion to address a retiree health benefit obligation of

approximately $48 billion, an unfunded

workers’ compensation liability of

approximately $6.5 billion, an unfunded pension liability of $5.8 billion,

and more than $7 billion owed the U.S.

Treasury. Each of these factors presents

an enormous challenge to the Postal

Service. Together, they add up to a

pressing need for an ambitious modernization (see Exhibit 1-1).

Source: Debt to Treasury, CSRS Deferred Pension Liability and Other Liabilities

obtained from USPS annual and quarterly reports. Obligation for Retiree Health Care

Benefits derived from Congressional Budget Office letter to the Honorable Jim Nussle,

dated January 27, 2003. Minimum Payments on Non-Cancelable Operating Leases

obtained or derived from USPS Annual Reports.

Exhibit 1-1.
5

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Gradual Displacement of Mail Volume (billions)

2002 2007 2012 2017

First Class 102.4 98.7 90.5 81.0

Priority 1.0 1.1 1.2 1.3

Periodicals 9.7 9.5 9.1 8.7

Standard Mail 87.2 97.1 98.2 88.1

Package Service 1.1 1.1 1.1 1.2

International 0.9 0.9 0.9 0.9

Other government 0.5 0.5 0.5 0.5

Total 202.8 208.9 201.5 181.7

Source: “Two Scenarios of Future Mail Volumes, 2003-2017,” Greg Schmid, Institute

for the Future, May 2003 (prepared for the Commission).

While it is true that the Postal Service anticipates ending Fiscal Year 2003 with a

significant surplus, this outcome is primarily the result of the most recent rate

increase and the effect of legislation, passed in April 2003, lowering the Postal

Service’s annual pension contribution to the Civil Service Retirement System.

Neither of these developments, however, is adequate to address the long-term outlook

of the Postal Service. According to independent, in-depth financial analyses performed for the Commission, even factoring in these developments, the Postal Service

is projected to run significant deficits within five years, adding to its already destabilizing debt load. Fundamental change is the only option that will deliver a highquality, financially stable Postal Service.

While the Postal Service is not in crisis today, it is under extraordinary pressure to

perform at a higher level. Rapidly changing economic, business and technological

realities are rendering its legacy business model and structure counterproductive to

the Postal Service’s ability to perform its most vital function: ensuring the universal

availability of reliable, affordable postal services. The institution today needs broader

flexibility to adjust to increasingly dynamic

markets and to pursue new strategies to

bring revenues and expenditures into

balance without sacrificing quality of

service and the ability to meet the nation’s

evolving postal needs. In short, the Postal

Service needs a new business model for the

modern world and the changing postal

needs of the nation.

Exhibit 1-2.
6

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

B B

B

B

B

54.3 53.8

52.4

50.9

49.3

1998 1999 2000 2001 2002

45

50

55

Billions of Pieces

First-Class Single Piece Letters UNITED STATES NITED STATES

POSTAL SERVICE S E RV I C E

Source: USPS.

Challenge #1: Electronic Diversion of Mail Changes Everything

In 2002, the volume of First-Class Mail (single-piece letters and bulk mail)—which

accounts for more than half of all Postal Service revenues—declined for the first time

in more than a quarter century.9

 The next most lucrative category of mail—Standard

Mail—has experienced only anemic revenue growth in recent years.10 Detailed

projections produced for this Commission indicate that these trends likely mark the

beginning of a permanent shift of key correspondence to electronic format.

This trend alters the most basic assumptions of the Postal Service business model. It

poses a significant financial risk to ratepayers and taxpayers alike, should the Postal

Service prove unable to adapt to a sustained period of declining or stagnant mail

volumes. While the Commission, of course, cannot predict the pace or scope of this

decline, any discussion of the future of the Postal Service must take into account its

potential implications.

Electronic substitution is the primary reason longterm First-Class Mail volumes are threatened. The

initial rise of the Internet, e-mail, instant messaging and other communications trends siphoned

away a large share of personal, one-to-one correspondence. As a result, First-Class single-piece

letters began to decline a full five years ago—

dropping steadily from 54.3 billion pieces in 1998

to 49.3 billion in 2002 (Exhibit 1-3).

Exhibit 1-3.
7

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Personal Letters a Smaller Portion of the Mail

Mix

In the digital era, mail use is changing dramatically. Unlike 30

years ago, letter correspondence is no longer the most affordable way

to keep in touch with friends and loved ones. From the popularity

of cell phone plans with “free evening and weekend minutes” to the

explosion in e-mail and instant messaging, personal correspondence

now is a relative rarity for many Americans at times other than

major holidays. Indeed, mail emanating from households accounts

for only 22% of overall volume,18 and this household-generated mail

is overwhelmingly aimed at businesses, the government and

non-profit organizations. In other words, individual Americans

primarily rely on the Postal Service to deliver their bills, taxes and

charitable giving.

As individual households rely more and more on the Internet for a

wider array of their communications, the nation’s Postal Service—

by default—is becoming primarily a medium for the transmission of

business correspondence. All tallied, bill presentment and payment,

commercial correspondence and advertising combine to generate

93% of total U.S. First-Class Mail volume today.19

As Americans become increasingly comfortable doing more complex correspondence

on-line, the subcategory of First-Class Mail now most vulnerable to erosion is bill

payment. Businesses have a strong incentive to encourage this trend: processing a

digital payment over the Internet costs between one-third and one-half less than a

check sent through the mail.11

Customers are drawn to the convenience of on-line bill payment. With many

Americans growing more comfortable performing secure financial transactions online, over the last five years, businesses and consumers have steadily transitioned to

electronic payments. Today, 1 in 4 consumers pay at least some bills on-line. Interestingly, consumers are more reluctant when it comes to electronic bill presentment,

with nearly half of those queried stating firmly that they are “not at all” comfortable

with receiving electronic bill statements.12

Nevertheless, over the next eight years, as much as 20% of bill payment and some

presentment could occur electronically rather than through the mail.13 This poses a

significant threat to Postal Service revenue since more than half of all First-Class Mail

is composed of communications from businesses and other organizations to households, primarily the invoices and payments now shifting on-line.14

Financial institutions, telecommunications services and credit card companies

are aggressively seeking to accelerate this

trend. Rather than charging for the

convenience of on-line bill paying, as they

did a few years ago, banks now offer

incentives to customers who pay bills

through their website—everything from

cash to Caribbean cruise raffles.15 These

marketing campaigns, along with the

technology’s cost savings and convenience, are combining to make paying

bills on-line the fastest-growing use of the

Internet today, eclipsing catching up on

the news, looking up movie times and

downloading music in terms of its robust

rate of growth.16 However, there are

some signs that this trend may now be

maturing. In fact, a recent poll indicates

that 42% of Americans remain flatly

uninterested in paying their bills on-line

over the next five years, underscoring the

continued need for a strong, reliable

national postal system.17
8

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

While electronic correspondence undoubtedly enhances convenience and offers new

cost-saving options for individual consumers and businesses alike, its rising popularity calls basic assumptions underlying the Postal Service’s current business model into

question and, with it, the Postal Service’s continued ability to meet the nation’s postal

needs while minimizing the cost to ratepayers and the risk to taxpayers.

For these reasons, the GAO notes that the Postal Service’s financial challenges “are not a cyclical phenomenon that will fade as the economy recovers.”20 The risk posed by electronic substitution over the long term is

undeniable. The Postal Service could lose a major fraction of financial

transactions, correspondence and heavy advertising pieces. It would be

foolhardy to bet the future of the Postal Service on a slow introduction of

electronic alternatives. Instead, the Postal Service must adapt both its size

and way of doing business to the nation’s changing postal habits and to take

advantage of the significant opportunities that exist today to improve

productivity, enhance service and dramatically reduce the excessive costs and inefficiencies throughout the postal network.

Challenge #2: Postal Law Predates the Internet

As apparent as the electronic diversion trend may be in the daily communications

habits of most Americans, it is nowhere reflected in the current legislation governing

the operations of the Postal Service. Why? Because the laws on the books have not

been substantially changed since before the Internet—the most powerful global

communications tool ever invented—existed.

With electronic diversion and other trends likely to alter permanently the ways the

nation communicates, the commercial environment for the Postal Service in the next

several decades will likely be radically different from that premised in the Postal

Reorganization Act of 1970 (“the 1970 Act”). Further complicating matters, with

the benefit of three decades of hindsight, it is also clear that this legislation includes

obvious flaws that ill serve the nation and its mail service today.

The 1970 Act, for example, assumes perpetuation of a voluminous and archaic postal

monopoly law that dates back to 1845 and is all but inscrutable in the modern

context. As a result, there exists no clear boundary between the end of the postal

monopoly and the beginning of the competitive postal marketplace.

While the 1970 Act charged the Postal Service with operating in an independent,

businesslike manner, it created a Board of Governors almost entirely made up of

political appointees and with no requirement that they have the level of business

acumen a private corporation with $67 billion in revenues would insist upon to

ensure proper oversight and accountability.

The General Accounting Office

notes that the Postal Service’s

financial challenges “are not a

cyclical phenomenon that will fade

as the economy recovers.”

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9

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

The 1970 Act granted the Postal Service broad authority to engage in more entrepreneurial activities. With the advent of the Internet and the blurring of the lines of

what constitutes “mail,” this led to some dubious new business ventures for the Postal

Service that most Americans would consider far afield of its basic function—delivering the mail to everyone. These efforts had a potentially market-distorting effect,

since the Postal Service entered into competitive markets with the backing of its

monopoly and its access to borrowed funds through the U.S. Treasury.

The 1970 Act also created an independent postal regulatory entity, but narrowly

focused it on oversight of ratemaking and classifications through a process that

embodies the worst of public-sector pacing and bureaucracy. This process, taking as

many as 18 months to navigate, has hampered the Postal Service’s ability to adjust its

revenues to changing market circumstances in a timely manner and to engage in

innovative partnerships with customers that could help control costs and stabilize

mail volumes.

While the 1970 Act appropriately upholds the nation’s commitment to universal

service, it created no mechanism for an external review and refinement of the various

components of that obligation. As the postal needs of the nation change, this

omission leaves unanswered many important questions, chief among them: Does the

universal service obligation require that the Postal Service itself carry out the core

postal services expected by every American and business? Or does it merely ensure

that essential postal services are available to everyone, perhaps in partnership with the

private sector?

Constructively answering these questions and freeing the Postal Service from the

most severe public-sector requirements hindering its business operations are essential

to the continued health of the institution and quality of its service to the nation.

Challenge #3: Entrenched Inefficiency and Resistance to Modernization

As the Postal Service struggles under a dated law, it faces rising pressure to answer

successfully a fundamental question: How can it maintain high-quality universal

postal services when its primary revenue streams are in retreat? The

solution clearly lies with focusing the Postal Service on its core value to

the nation—delivering the mail—and recognizing that, as demand for

that service contracts, perhaps the Postal Service should contract, as

well. By any account, that is a tall order, requiring significant cultural,

organizational, regulatory and philosophical change.

As the Postal Service struggles under a

dated law, it faces rising pressure to

successfully answer a fundamental question: how can it maintain high-quality

universal postal services when its primary

revenue streams are in retreat?

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10

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

While opportunities for significant cost reductions through automation,

standardization, procurement reform and a host of other initiatives are relatively obvious, there is intense pressure whenever the sensitive issues of closing

a post office, consolidating distribution centers, or reducing the size of the

workforce are raised. The result, too often, is stalemate. In the past decade

alone, Congress has debated the entire gamut of postal issues, such as pricing

flexibility, binding arbitration with labor, revisiting the Postal Service’s monopoly, and altering the number of post offices across the country. Yet despite

the need for fundamental change, no comprehensive reform legislation has

been enacted in the past three decades.

If current economic and market trends continue and the Postal Service does not reach

higher levels of efficiency, it will be unable to meet its “break-even” mandate, potentially shifting substantial obligations to the taxpayer. Making up these potential

losses by increasing revenue from other categories of mail is highly unlikely. As a

result, stabilizing the Postal Service’s financial situation requires significant cost

reductions. Fortunately, in this arena, the Postal Service has ample opportunity—if

given the appropriate flexibility and support.

With the rapid growth of the nation’s postal needs over the last century, the Postal

Service has developed a vast network of local offices, processing and distribution

facilities, Bulk Mail Centers, and related transportation systems. This network

includes some 300,000 collection boxes, almost 38,000 retail postal outlets, 446 mail

processing facilities (Exhibit 5.1), along with one of the world’s largest transportation

networks, featuring some 215,000 vehicles and more than $5 billion in annual

contracts for highway, air, rail and water transport.

Few, if any, believe that if the Postal Service were established today, such a sprawling

logistics network would be necessary to deliver the nation’s mail. The GAO has noted

that the number and location of postal facilities is based on “operating strategies that

are now outdated, as the [Postal] Service has moved from a manually oriented

processing and delivery environment to a highly automated environment.”21 The

facilities it does have are not designed or put to use in the most efficient manner. As

a result, productivity varies from facility to facility, due to either lack of use or lack of

efficient processes (Exhibits 1-4, 1-5, and 1-6). With significant liabilities and a

bleak outlook for its traditional core revenue stream, the Postal Service can ill afford

its legacy network.

Despite the need for fundamental

change, no comprehensive reform

legislation has been enacted in the

past three decades.

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11

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

<1000 Number of Facilities

Total Pieces Handled per Man-hour

6

7

5

4

3

2

1

0

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 >10000

Total Pieces Handled per Man-hour (Flat Sorting) 

FY 2000

<

Number of Facilities

Total Pieces Handled per Man-hour

60

70

50

40

30

20

10

0

5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 >15000

Total Pieces Handled per Man-hour (Bar Code Sorting)

FY 2000

Source: Postal Rate Commission.

Source: Postal Rate Commission.

Productivity Varies Greatly by Facility

Exhibit 1-4.

Exhibit 1-5.

Productivity varies

from facility to facility,

due to either lack of use

or lack of efficient

processes.

Spotlight
12

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

<1000

Number of Facilities

Total Pieces Handled per Man-hour

60

70

50

40

30

20

10

0

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 >15000

Total Pieces Handled per Man-hour (Optical Reader Operations)

FY 2000

Source: Postal Rate Commission.

Fortunately, the Postal Service recognizes the hindrances posed by its legacy network

and has undertaken an important network rationalization effort (see chapter 5) to

bring its processing and distribution system into the 21st century. The Commission

applauds this effort. It is the Commission’s view that, with aggressive business

strategies, much of the Postal Service’s legacy network could be retired. Many

facilities could be consolidated or closed. Those that remain could be standardized,

modernized and given a common footprint. Opportunities also abound to engage

the private sector more fully in the delivery of universal service. But many of these

critical advances cannot occur unless interested parties from Congress to customers,

private-sector partners to postal competitors, recognize the opportunity and the

necessity to realign and redeploy the nation’s Postal Service with the most sophisticated technology, the most experienced and capable leadership, the most skilled

workforce, and the most aggressive productivity and cost-saving strategies it can

muster. Without these efficiencies, even if rates remain “affordable,” ratepayers aren’t

getting what they deserve: the most capable, efficient, high-quality network at the

lowest cost.

If the public interest lies with achieving an ambitious, nationwide public service at

reasonable cost, rather than merely perpetuating the status quo means of delivering

that service, then the Postal Service must have the nation’s support in aggressively

adopting private-sector productivity and cost-saving strategies and applying them to

the public mission of delivering the mail.

Exhibit 1-6.
13

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

Conclusion: Toward A New Business Model

The Postal Service faces a defining moment: It can continue to carry out its universal

service obligation via a costly and outmoded infrastructure, at extraordinary and

perhaps unsustainable expense, or it can embrace new technologies, partners and

private-sector strategies to ensure a bright future for the nation’s mail. Without a

new approach, universal service is in peril. But by making the tough choices and

embracing new strategies, ample opportunities exist for the Postal Service to enhance

its service to the nation and simultaneously reduce the cost of that service.

It is evident to this Commission that the nation and its postal needs have been

fundamentally transformed. What is not yet clear is the Postal Service’s place in this

new environment. How the institution is permitted to address the formidable and

diverse challenges before it will determine its future role and the fate of its most

valuable contribution to the nation—uniting the American people and economy

through the mail.

A successful modernization, however, must begin more fundamentally. As an

essential starting point to the successful realignment of such a vast and vital national

network, the Postal Service must clearly identify its forward-looking purpose and core

value to the nation. It must carefully weigh the transforming technological and

economic changes that have swept the globe in the 30 years since it was last overhauled and answer three critical questions: Who are we? What do we do? And, how

can we do it better?
14

Chapter 1 Adapting to a New World: Universal Mail Service at Risk

1. United States Postal Service, Annual Report 2002, p. 22.

2. Fortune.com, July 6, 2003, <http://www.fortune.com/fortune/fortune500/company/top500/0,17354,,00.html>.

3. United States Postal Service, Third Quarter Report 2003, On-line Posting, <http://www.usps.com/financials/_pdf/2003Q3.pdf>.

4. United States General Accounting Office, “U.S. Postal Service: Transformation Challenges Present Significant Risks,” GAO-01-598T,

Apr. 4, 2001, p. 2.

5. United States General Accounting Office, “Major Management Challenges and Program Risks: U.S. Postal Service,” GAO-03-118, Jan.

2003, p. 6-7.

6. “President’s Commission on the United States Postal Service,” Executive Order 13278, Federal Register, Dec. 13, 2002, Vol. 67, No.

240.

7. United States Postal Service, “Briefing for the President’s Commission on the United States Postal Service,” Jan. 8, 2003, p. 12.

8. GAO-03-118, p. 5.

9. GAO-03-118, p. 6.

10. Annual Report, p. 52.

11. Schmid, Gregory C., Director, Future of Global Mail Program, Institute for the Future, Testimony Before President’s Commission on the

United States Postal Service, Mar. 18, 2003, p. 2.

12. Ibid., p. 4.

13. Ibid., p. 5.

14. United States Postal Service, “Briefing for the President’s Commission on the United States Postal Service,” p. 18.

15. Bayot, Jennifer, “Banks Offer Sweeteners To Paying Bills Online,” The New York Times, Apr. 21, 2003, C1.

16. Ibid.

17. Peter D. Hart Research Associates, Inc., Study #7006, May 2003.

18. United States Postal Service, “Briefing for the President’s Commission on the United States Postal Service,” p. 18.

19. Ibid.

20. GAO-03-118, p. 5.

21. Ibid., p. 15.

Endnotes
Chapter 2: Delivering the Mail:

The Constant Mission of an Evolving Institution

Introduction

While many assume that the mission of the national post office

has remained static throughout history, this is far from the case.

The institution was founded in the 18th century as an inter-city

post office to post office pouch service. In the second half of the

19th century, it assumed the functions of a big city “penny post,”

as well. In the early 20th century, national postal service reached

out to the vast rural areas where most Americans still lived and

worked. Most recently, in 1970, the national post office was

relaunched as a more efficient, businesslike service. Throughout

its 225 years, the core mission of the Postal Service and its

predecessors has undergone significant changes at pivotal moments. Yet, the national post office has remained a vital and

valuable institution precisely because of these timely adaptations.

Today, the Postal Service once more must evolve alongside the changing postal needs of

the country. But whereas the challenge in the past has largely been to keep pace with

the nation’s expanding need to exchange goods and information, the challenge before the

institution today is to advance its core modern purpose—delivering high-quality

universal postal service to the nation—in an era when demand for traditional postal

services may well be contracting.

Continuing to keep the country, its economy and its people connected through the mail will be a challenge in this modern environment. However, if the Postal Service has a clear legal framework, the

capacity to innovate, and the charge to make greater use of privatesector partnerships, then the institution could well clear the hurdles

currently in its path and rise to a new standard of excellence. Its

success, however, requires a sharply focused institution with a clearly

defined purpose.

Source: USPS.

Meeting Modern-Day Mail

Needs

The Postal Service should have a

focused, clear mission that reflects the

modern-day mail needs of the country.

That mission should be “to provide highquality, essential postal services to all

persons and communities by the most

cost-effective and efficient means possible

at affordable and, where appropriate,

uniform rates.”
16

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

The Commission recommends that the mission of the Postal Service be “to provide

high-quality, essential postal services to all persons and communities by the most

cost-effective and efficient means possible at affordable and, where appropriate,

uniform rates.” This definition focuses the organization on its core value—delivering

high-quality universal postal service at affordable rates; it makes efficiency and costeffectiveness explicit obligations the Postal Service owes its customers; it emphasizes

that affordable rates must not come at the expense of service quality; and it further

opens the door—appropriately—to greater involvement of the private sector in the

delivery of the nation’s mail.

By modernizing postal laws that have not been revisited in more than 30 years, by

enhancing universal service through more flexible delivery standards, by clarifying the

postal monopoly and potentially narrowing it over time, and by advancing the

businesslike perspective and operations of the Postal Service, we may well change the

institution dramatically. Yet, with a newly focused mission, the Postal Service’s

primary function—ensuring universal service—will be preserved and advanced.

“As we look to the past, a very proud

past, I think that...[the] hundreds of

thousands of people in the Post Office

Department can look to a better

future...” President Nixon’s Remarks,

August 12, 1970 (signing of the

Postal Reorganization Act).

Source: National Archives.
17

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

After 30 Years, Postal Laws Must be Modernized

As mentioned above, legislation creating the Postal Service has not been updated

since 1970. At that time, the Postal Service was not self-supporting. Like other

government agencies, it was dependent on Congressional appropriations. The

institution also was plagued by complaints about the reliability and quality of its

service as well as the often politicized nature of its operations. In response, the 1970

Act delineated a broad mission “to bind the nation together through the personal,

educational, literary, and business correspondence of the people.” The 1970 Act also

separated the nation’s politics from its postal service and instructed the Postal Service

to operate in a more businesslike manner: improving customer service, being more

entrepreneurial, and operating without the benefit of taxpayer subsidies.

The 1970 Act defined the purpose of the Postal Service as:

• binding the nation together through the personal, educational, literary, and

business correspondence of the people;

• providing prompt, reliable, and efficient services to all persons in all communities;

• charging fair and reasonable rates and fees; and

• showing no undue or unreasonable preference to any user.

While these remain appropriate guiding principles for the institution today, a focused

mission of delivering the mail to everyone in the most cost-effective and efficient

manner possible highlights the fiscal discipline and strong business orientation the

Postal Service needs today to ensure the future of universal service at

affordable rates. As many corporations have learned, an important element

of success is staying focused on your core business.

Source: USPS.
18

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Should the Postal Service be Privatized?

Given how dramatically the postal environment has changed in the past 30 years,

some have suggested that perhaps the Postal Service can best act like a business, if it is

permitted to become a business. While privatization has been a reform strategy

adopted by some leading postal systems around the globe, the Commission believes

that such a precipitous step for the Postal Service would unnecessarily jeopardize

universal service at affordable prices. The Postal Service handles more than 200

billion pieces of mail per year. It delivers over 40% of the world’s mail, across the

vast geographic expanse of the United States.1

 The nation’s mail remains essential to

the American people and economy. It is highly unlikely that the private sector, acting

alone, could provide the universal mail services we have come to expect from the

Postal Service. All of these factors merit a “first-do-no-harm” approach.

In the judgment of the Commission, privatization of the Postal Service would today

pose a substantial risk of doing great harm. Privatization of a commercial entity the

size of the Postal Service could seriously disrupt the highly successful private delivery

service markets. For the Postal Service itself, privatization could imply a decade or

more of wrenching organizational changes. Most importantly, while the end result of

privatization could be a dynamic and efficient private postal sector, the privatization

process could undercut the stability and continuity that are the hallmark of a public

service. Given the essential nature of universal postal service for the foreseeable

future, the Commission believes that the least risky strategy is a more evolutionary

approach. The Postal Service should be maintained as a public entity, but refocused

and reorganized to enhance its efficiency and adaptability in the face of an uncertain,

and ultimately more competitive, future.

That certainly is the feedback the Commission has received from consumers in its

survey of their perspectives on the Postal Service. More than two-thirds of respondents indicate they are generally satisfied with the service and value

they receive from the Postal Service. A full 73% believe postal

operations should either remain as is or be improved through only

minor changes. They support the notion of a self-financing

institution, but flatly oppose near-term privatization. Interestingly

enough, the survey results suggest that a majority would rather pay

more for postage than see the nation go into debt to maintain

universal postal service.2

The Postal Service: A SelfSustaining Commercial Enterprise

The Postal Service should continue as an

independent establishment within the executive

branch with a unique charter to operate as a

self-sustaining commercial enterprise. However,

it should take full advantage of the flexibility

afforded it under this construct to aggressively

adopt best business practices throughout the

organization to maximize the quality of

universal service and minimize the cost and

risk to ratepayers and taxpayers.
19

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Works extremely well as it is now

Some minor changes

Some major changes

Total overhaul

Not sure

30%

43%

16%

6% 5%

Source: Black & Veatch (Hart Research and American Viewpoint) consumer survey conducted for the Commission.

Exhibit 2-1.

A full 73% believe postal operations should either remain as is or be improved through only

minor changes.

These strong customer opinions support the Commission’s conclusion that the Postal

Service needs to improve the way it does business, but not fundamentally alter its

mission or structure in the near term.
20

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Exhibit 2-2.

67%

24%

(9%)

Strongly

(13%)

Strongly

(53%)

Not Sure Favor Oppose

A firm majority (67%) oppose privatization

Should the Postal Service be

Privatized?

Source: Black & Veatch (Hart Research and American Viewpoint) consumer survey conducted for the Commission.
21

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Postal Monopoly Should be a Bridge to a Competitive Marketplace

While a postal monopoly will likely be necessary for many years, the Commission

strongly recommends new mechanisms that will permit incremental steps toward the

ultimate desired destination: a thriving, competitive postal marketplace capable of

delivering stable, high-quality, affordable and universal postal service. This conclusion is consistent with regulatory reforms adopted in other sectors of the U.S.

economy over the past quarter century, where government-sanctioned monopoly

markets have been opened up to private-sector competition. Those examples demonstrate that rarely is it in the public interest for a monopoly to be a permanent construct. Rather, monopolies are most beneficial when they serve as a bridge—albeit,

often a long one—to the rise of a healthy, competitive, and reliable marketplace.

We see strong evidence that the practical impact of the postal monopoly is diminishing in the United States. Today, a vibrant U.S. private-sector postal industry is

extending its reach and service capabilities. At the same time, new technologies are

shifting transmission of large amounts of national correspondence from the postal

monopoly to competitive telecommunications carriers. Indeed, even the Postal

Service is facilitating more private-sector involvement—for example, by offering

discounts to high-volume mailers that do the processing and transportation of their

own mail. In the United States, the private sector is far more involved in the mail

delivery stream than in most other industrialized countries.

This report could accelerate these trends. In doing so, it asks the nation to answer a

fundamental question: Should the country’s mail forever be delivered by the government? While this report does not pursue privatization as a near-term goal nor seek to

have the private sector replace the government in performing vital government

functions, it does aim to pave the way for introduction of best business practices

throughout the Postal Service. As a result of the aggressive strategies we propose, it is

our hope that Postal Service customers will increasingly reap the benefits of a more

businesslike institution.
22

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Postal Monopoly Law Predates Light Bulbs,

Let Alone E-mail

Many of the provisions of the current postal monopoly law

date back to the postal laws of 17th-Century England and

have remained virtually unchanged, often offering no point

of reference to the modern world and producing a dense

thicket of vague and contradictory regulations.3

Put another way, the nation’s postal monopoly law predates

not only the computer, e-mail and the fax machine, but also

the radio, the telephone and the electric light bulb. America’s

postal monopoly law was crafted at the dawn of the Industrial Revolution to serve the social and commercial needs of

an America that overwhelmingly lived on the farm, worked

in the family business, and traveled by stagecoach. Several

years into the nation’s Information Revolution, it is clear

that these archaic laws should be clarified and modernized.

Archaic Postal Monopoly Law Needs Clarity, Modernity

Once the conclusion is reached that the public interest is best served by the continuation of the Postal Service monopoly in the near-term, an urgent need arises to revisit

and recast the country’s arcane postal monopoly law. The lack of a straightforward

and circumscribed definition of the postal monopoly was a common complaint heard

by the Commission. Legislation governing the postal monopoly has gone largely

unchanged for more than a century. As a result, regulatory interpretations of the

monopoly have grown increasingly muddled.

In light of this confusion, the nation would be best

served by a modern, straightforward definition that

reflects the postal monopoly as the nation knows it

and relies on it today. The Commission feels that

this issue would best be addressed by placing the

postal monopoly’s forward-looking oversight and

scope in the hands of an independent Postal

Regulatory Board (whose structure and responsibilities are explained in chapter 4).

With the on-line world blurring the meaning of

“correspondence,” the Commission proposes

clarifying that the postal monopoly applies only to

hard-copy communications. The Commission also

strongly recommends that a bright line be drawn

between the postal monopoly and the competitive

mail market. In its Transformation Plan, the Postal

Service itself acknowledges the absence of a clear

border, noting that “there is no precise line that

distinguishes protected volumes from unprotected

volumes.”

The basic uncertainty in the scope of the postal monopoly derives from the way it is

defined. In the nineteenth century, the postal monopoly was declared to include the

carriage of “letters,” but not other types of postal items.4

 While this standard may

have been clear enough in simpler times when there were only a few types of mail, it
23

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

is extremely difficult to apply to the variety of items posted today. In some other

industrialized countries, postal reform laws have abandoned efforts to define the

postal monopoly by the content of what is transmitted and have instead extended the

monopoly to all envelopes falling within certain weight and price limits.5

 The

Commission recommends a similar approach, defining the postal monopoly to cover:

Any hard copy communication that is to be conveyed and delivered to a

specific address in the United States indicated by the sender, provided its

weight is less than 12 ounces and the delivery price is less than the basic

stamp price times six.

The weight limit in the proposed definition is 12 ounces. Under this approach, the

Postal Service would have a monopoly over the carriage of all envelopes weighing less

than 12 ounces; that is, private carriers would not be permitted to carry envelopes

weighing less than 12 ounces unless they charge more than the price limit described

below. While the precise level of a weight limit is necessarily somewhat arbitrary, the

Commission believes that 12 ounces is a simple and convenient standard that includes virtually all of what people ordinarily think of as “letters” reserved for the

Postal Service. Twelve ounces is slightly less than the weight limit adopted in the

European Union in 1997 (350 grams or 12.5 ounces) but considerably more than the

EU-wide weight limit placed in effect earlier this year (100 grams or 3.5 ounces).6

On the other hand, a 12-ounce limit will allow competition for items now carried by

Priority Mail, mostly very large envelopes and small parcels. The Commission doubts

that most people today think of such items as “letters” within the postal monopoly.

The price limit in the proposed definition is six times the price of a First-Class stamp.

The purpose of the price limit is to reserve for the Postal Service the carriage of lettersized envelopes by ordinary postal services while allowing private carriage by more

rapid or value-added services. In 1979, the Postal Service initiated the practice of

using a price limit on the postal monopoly to allow private carriage of urgent letters.7

This concept has been copied in postal reform legislation around the

world and is now almost invariably expressed as a simple multiple of the

basic stamp price. By linking the price limit to the First-Class stamp,

price protection of the postal monopoly will be maintained even if stamp

prices increase. The price limit proposed by the Commission is the same

as that proposed in the recent postal modernization bill developed by the

House of Representatives. It is more protective of the Postal Service than

the price limit adopted in the European Union (set at five times the

stamp price in 1997 and reduced to three times the stamp price in 2003).

The recast postal monopoly should retain traditional statutory exceptions

for carriage of a letter enclosed with cargo, a letter carried by its owner, a

Source: USPS.
24

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

letter carried by special messenger, and a letter carried free of charge. In addition, the

statute should continue the major regulatory exceptions to the postal monopoly

recognized today. These include exceptions for the carriage of newspapers, checks

and other financial instruments, advertisements included with merchandise, intrauniversity mail, and carriage to or from a post office. Specific details of the rule and

the task of fashioning new exceptions should be left to the discretion of the Postal

Regulatory Board.

Defining the Postal Monopoly in Clear and Understandable

Terms

Astute readers will note this report’s reference to codifying the postal monopoly “as the

nation knows it today.” This caveat is necessary because the reality of the postal

monopoly is far from that envisioned more than a century ago. The nation’s postal

monopoly statute, last revised substantially in 1872, was originally crafted to cover

only letters. Today, it is generally believed to cover all First-Class Mail and Standard Mail (mostly advertising)—in other words, virtually all letters and documents

of both a personal and business nature.

Over time, exceptions to the monopoly were created by “suspensions” issued by the

Postal Service, such as intra-university mail and “urgent” mail (i.e. private express

delivery).8 While these suspensions serve the nation’s modern mail needs, some

question whether the Postal Service has the authority to define and alter the scope of

its own monopoly.

This leads the Commission to two conclusions: (1) the postal monopoly should be

defined in clear and understandable terms; and (2) the monopolist (i.e. the Postal

Service) should not regulate the scope of its own monopoly. Thus, the Commission

recommends that this responsibility should reside with an independent Postal

Regulatory Board (more fully described in chapter 4).
25

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Toward a More Efficient and Performance-Oriented Monopoly

The Commission readily acknowledges that a monopoly is often an inherently

inefficient device with a natural propensity for stagnation and mediocrity. By

recommending a wide array of aggressive strategies to improve the efficiency and

business practices of the Postal Service, this report aims to make the U.S. postal

monopoly far more performance-oriented. To encourage those results, the Commission recommends several mechanisms that will impose on the Postal Service the same

bottom-line risks and rewards that motivate private-sector companies and their

employees.

These mechanisms include the adoption of an incentive-based compensation

program that rewards all employees who contribute to the improved performance of the Postal Service, from mail carriers and postal clerks to the most

senior executives (discussed in detail in Chapter 6). The second noteworthy

mechanism is rate ceilings (discussed in detail in Chapter 4), which eliminate

any notion that rising costs can simply be funded by rising rates. Instead,

this mechanism caps the growth in revenues the Postal Service can expect

from ratepayers at a level below inflation. It is our hope that through the use

of these tools, an institution that once could be lulled by the luxury of

monopoly revenues can be transformed into a more businesslike institution

that aggressively roots out the inefficiencies and excessive costs

that exist throughout the nation’s postal network.

The postal monopoly as it exists today has a second element as

well: Only the Postal Service is permitted to have access to the

nation’s mailboxes. A recent survey conducted for the Commission is consistent with a 1997 GAO study that concluded that

the vast majority of adults oppose allowing just anyone to put

mail into their mailboxes.9

 However, the Commission notes that

the GAO survey also indicated that the level of opposition

reduces by half when access is limited to familiar delivery

brands.10 This mixed message appears to indicate that the status

quo blanket mailbox monopoly may be overriding the individual

preferences of a sizeable minority of Postal Service customers.

Therefore, at an appropriate time in the future, the new Postal

Regulatory Board may wish to take a closer look at the mailbox

monopoly with the aim of easing its boundaries to permit greater

individual consumer choice. If customers want to give certain carriers access to their

mailbox, the Commission feels the Postal Regulatory Board should bless that practice, so long as it occurs with the customer’s consent.

The Mailbox Monopoly: Current

Law

“Whoever knowingly and willfully deposits any

mailable matter such as statements of accounts,

circulars, sale bills, or other like matter, on

which no postage has been paid, in any letter

box established, approved, or accepted by the

Postal Service for the receipt or delivery of mail

matter on any mail route with intent to avoid

payment of lawful postage thereon, shall for

each such offense be fined under this title” (18

U.S.C. § 1725).

Source: USPS.
26

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Regulating Access to the

Mailbox

The Postal Regulatory Board should be

authorized to permit mailbox access by

private carriers in future regulations, so

long as it does not impair universal service

or open homeowners’ mailboxes against

their will.

As this monopoly asset is slowly opened to private businesses, the Commission also

encourages the Postal Regulatory Board and the Postal Service to contemplate any

revenue opportunities that may be associated with this step. Without access to

mailboxes, private carriers must deliver to a customer’s doorstep or office, hindering

the efficiency of their routes. As such, mailbox access could have significant worth

that might make it in the public interest for the Postal Service to levy a fee on private

carriers that desire this more efficient means of doing business. As it reconsiders the

postal monopoly “as the nation knows it,” it is only appropriate for the Postal

Regulatory Board and the Postal Service to explore all possibilities for

maximizing the public benefit in the process.

That point made, however, the Commission firmly believes that

individual customers should have the final say over access to their

mailbox, and that such access should be granted only with their

express consent and only if it in no way jeopardizes universal service.

The solution could be as simple as authorizing private carriers to

produce and distribute stickers that their customers can place on their

mailboxes to indicate their consent on a per carrier basis. But the

idea merits thoughtful exploration in the spirit of enhancing customer

service and consumer choice.

Revolutionizing the Delivery of Universal Postal Service

Snowmobile mail delivery in Alaska.

Source: USPS.

Mail delivery in the Grand Canyon.

Deep in the heart of the Grand Canyon lies the nation’s most remote

active mail route. Nestled a treacherous 8 miles down from the

canyon’s south rim, the 515-member Havasupai Indian Reservation is

inaccessible by land vehicle or helicopter. Yet five days a week, the

Postal Service makes the grueling three-to-five hour journey, each

voyager carrying on average 200 pounds of mail, food, and more.11

How is this possible? The Postal Service connects the Havasupai tribe

to the world via its last active mule train. While the vast majority of

the nation is far more accessible than the Havasupai, the “above and

beyond” nature of this delivery route offers a powerful demonstration

of just how seriously the Postal Service and, through it, the nation

takes its commitment to universal mail service.

Throughout this report, the point is made that the Postal Service

must be far more aggressive in enhancing its performance and reducing its costs. Yet with each recommendation, the same caveat is made:

First and foremost the nation’s commitment to affordable universal

postal service must be upheld. From the office buildings of Manhattan to the bush country of Alaska, the near daily appearance of the

Postal Service at virtually every U.S. home and business remains

essential to American commerce and society. As a result, the Commission strongly endorses not only universal service as a principle but
27

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

as the guiding mission of the Postal Service, reflected in the proposed charge “to provide

high-quality essential postal services to all persons and communities by the most costeffective and efficient means possible.” The Commission further strongly endorses the

basic features of universal service—affordable rates, frequent delivery, and convenient

community access to retail postal services.

Where the Commission sees ample room for improvement, however, is in how universal

service is delivered to the nation. In this regard, the Commission recommends that the

Postal Service be instructed to:

• focus on core products and services;

• continue six-day delivery;

• maintain uniform rates...with review;

• dramatically enhance retail access to postal services; and

• involve the private sector more in universal postal service.

Is E-mail a Postal Service?

The world has greatly benefited from the revolution in correspondence precipitated by

the rapid rise of electronic mail. Nevertheless, a Postal Service governed by a law

written before the Internet as we know it even existed has led to some...confusion.

The 1970 Act may be read to provide broad authority to the Postal Service to be

entrepreneurial in pursuing its self-financing mandate. However, the online revolution dramatically blurred the lines of what constitutes a “postal service,” producing

some dubious forays.

Many Americans have no idea that their Postal Service:

—Sells Postal Service-branded electronic bill presentment and payment services;

—Explored offering Internet-based tax services and money transfers;

—Offers certified electronic mail and on-line greeting cards;

—Contemplated offering e-mail and other data transmission services.

These ventures have produced largely disappointing results. Also of concern, each of

these markets is served by private companies who do not have the backing of the U.S.

government and a national postal monopoly. These efforts also have drained time and

resources that could have been spent improving traditional postal services. For this

reason, the Commission recommends focusing the Postal Service on traditional mail,

leaving electronic products and services to a well-served and innovative private

marketplace.
28

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Focus on Core Postal Products and Services

The 1970 Act may be read to provide broad authority for the Postal Service to pursue

an undefined array of new revenue streams—regardless of whether or not they are

related to traditional postal markets or their potential market-distorting affects.

The Commission recommends focusing the Postal Service more exclusively on what the

country and its economy rely on it most to do—provide products and services directly

relating to the delivery of letters, newspapers, magazines, advertising mail, and parcels

on a universal basis. Under this approach, the institution’s time and resources can be

focused on the quality of its most vital services and how they can be delivered most

efficiently, rather than diverting limited resources to new product development and

marketing, which may or may not be within the core

mission of the Postal Service.

Achieving this focus will require clarifying the broad

authority granted in the 1970 Act, which permits the

Postal Service to “provide, establish, change or abolish

special non-postal or similar services (emphasis added).”

To enhance customer convenience, however, the Postal

Service should be permitted to provide additional governmental services (such as passports) when in the public

interest and when the Postal Service is able to recover the

full costs of providing such services.

Continue Six-Day Delivery

The Commission firmly recommends continuing the Postal Service’s current Monday

through Saturday delivery regimen. While the Postal Service could save as much as $1.9

billion (less than 3% of its annual budget) by reducing its delivery schedule by one day a

week,12 its value to the nation’s economy would suffer. Beyond the universal reach of

the nation’s postal network, the regularity of pick-up and delivery is an essential element

of its worth in the current climate. Elimination of Saturday delivery, for example, could

make the mail less attractive to business mailers and advertisers who depend upon

reaching their target audience on that day. In addition, given the volume of mail the

nation sends each day, scaling back to a five-day delivery regimen could create difficult

logistics, mail flow, and storage problems.

Sticking to the Core Mission

The 1970 Act should be revised to specifically instruct

the Postal Service to offer only products and services

directly related to the delivery of letters, newspapers,

magazines, advertising mail, and parcels. Other

governmental services offered for the customers’

convenience should be permitted, so long as the full

cost of providing them is recovered.
29

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

While the Commission firmly rejects the idea of reducing the

frequency of universal postal delivery in circumstances substantially similar to today, it would be imprudent to be arbitrarily

inflexible on this point. Postal Service leaders have indicated that

the rising popularity and sophistication of e-mail correspondence

may ultimately lead to a reduction in the demand for mail services

and may allow for the relaxation of the six-day delivery requirement.13 If that day does arrive, the Commission believes that the

Postal Service should have flexibility to adapt with the changing

postal needs of the nation.

Maintain Uniform Rates...With Review

Currently, there are three categories of mail that are required to

have uniform rates: (1) First-Class Mail weighing less than 13

ounces; (2) Media Mail (including books, compact discs, cassettes

and videos); and, (3) library rate mail shipped primarily to or

from a library. The Commission proposes to maintain this list,

but to create a mechanism for its independent and periodic review.

Dramatically Enhance Retail Access to Postal Services

Beyond universal service at the mailbox, every individual and

business has the right to ready access to retail postal products and

services. The Commission strongly recommends accelerating

efforts underway to expand access to retail postal services at

venues other than the post office. These efforts focus on bringing

more services to the customer—at banks, grocery stores, ATM

machines, and other convenient locations across the country.

This recommendation is one example of the opportunities

available to the Postal Service to control costs and enhance

customer convenience by delivering core postal services in innovative ways. (Specific strategies are discussed in Chapter 5.)

Maintain Six-Day Delivery

The Postal Service should retain its six-day

delivery regimen, with its existing flexibility

for exceptional circumstances. The Postal

Regulatory Board should also have the

authority to refine future delivery frequency

requirements as changing circumstances may

warrant.

Uphold Uniform Rates

The Postal Regulatory Board (see Chapter 4)

should have the authority to periodically

review the list of postal services for which

uniform rates are required by law. The

Board should have the authority to refine

the list as appropriate and necessary to

advance this important aspect of affordable

universal service.

Bring Postal Services to the

Consumer

The Postal Service should more aggressively

pursue private-sector retail partnerships that

can dramatically enhance access to the most

popular postal services at more convenient

times and locations for customers in communities across the country.
30

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Involve the Private Sector More in Universal Postal Service

Where private sector companies can perform aspects of the nation’s postal service better

and at less cost, the Postal Service best serves the nation by involving them in the

provision of universal postal service. The Commission recommends that the Postal

Service have maximum flexibility in delivering universal service by the most costeffective, quality means available to it, including outsourcing a particular function to the

private sector.

The Commission notes that this evolution already is underway at

the Postal Service, through its many retail postal partnerships and

role as the global pioneer in worksharing. The Commission

supports these efforts and encourages the Postal Service to

aggressively expand its efforts in this area. (Proposed strategies

are discussed in detail in Chapter 5).

Who Moved My Mail?

The national postal network is an interwoven fabric of public and private endeavors. For more than two centuries, public and private postal ventures have led a

relatively symbiotic existence, each driving the growth and development of the other

to the benefit of the nation. From the days of Mark Twain, when enterprising

individuals grabbed satchels of business correspondence and hopped on riverboats to

conduct the first “express mail” to today’s state-of-the-art global networks, private

carriers have contributed significantly to the diversity and sophistication of the

nation’s shipping services. Many don’t understand the lengths to which the private

sector already is involved in the delivery of their mail. For example, the Postal

Service does not own airplanes. Instead, it outsources air transport of the nation’s

correspondence. In addition to its logistical integration, the public-private postal

network also together forms a powerful economic force.

Seek Out the Lowest-Cost,

Most Effective Provider

The Postal Service should aggressively expand the

number and diversity of its private-sector partnerships.

Where private companies can advance affordable,

universal postal service at an equivalent or better price

and service level than the Postal Service, the organization should select the option that least burdens

ratepayers.

Source: USPS.
31

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Universal Postal Service in the 21st Century

The Mission Components

“To provide highquality, essential

postal services to all

persons and communities by the most

cost-effective and

efficient means

possible at affordable and, where

appropriate,

uniform rates.”

Product Coverage: Products and services must be directly

related to the delivery of letters, newspapers, magazines,

advertising mail, and parcels. Other government services (e.g.

passports) are permitted, so long as the Postal Service can

recover the full cost of providing those services.

Delivery Frequency: The Postal Service should retain its sixday delivery regimen, with its existing flexibility for exceptional circumstances. The Postal Regulatory Board should

also have the authority to refine future delivery frequency

requirements as changing circumstances may warrant.

Uniform Rates: The Postal Service should continue uniform

rates for First-Class Mail, Media Mail and library package

mail; however, the Postal Regulatory Board should have

authority to refine the list, as appropriate.

Retail Access: The Postal Service should aggressively step up

efforts to deliver more convenient low-cost access to retail

postal services.

Private-Sector Partners: The Postal Service should outsource functions that can be performed better and at lower

cost by the private sector.

Conclusion

The Postal Service sorely lacks a clearly defined mission and bright-line boundaries

around the scope of its postal monopoly. An explicit definition of the Postal Service’s

mission and universal service obligation—set in the modern context of new technological and competitive realities—is necessary to focusing the institution on its essential

forward-looking contributions to the nation.

By clearly defining the Postal Service’s mission, its universal service duties, and the scope

of the postal monopoly and by freeing the institution to fulfill its core obligations in

innovative ways, the Postal Service will be able to elevate its service to the nation. At the

same time, a sharp focus on traditional postal products and services and an aggressive

strategy to pursue more in-depth partnerships with the private sector will help ensure

the Postal Service’s future viability. So long as this evolution not only protects, but

advances universal postal service, it will be a positive transformation for ratepayers and

taxpayers alike.

Exhibit 2-3.
32

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

With the establishment of a clear vision of the modern role and relevance of the Postal

Service, responsibility for its success will rest in the hands of those who would shepherd

this important evolution of a vital national institution, making it even more important

to establish a governance structure that aligns the Postal Service’s resources with its

forward-looking duty and purpose.

Chapter 2 Recommendations*

B-1 Basic Structure. The Postal Service should continue to operate as an independent

establishment within the executive branch with a unique mandate to operate as a

self-sustaining commercial enterprise.

B-2 Mission. The 1970 Act should be amended to clarify that the mission of the Postal

Service is to provide high-quality, essential postal services to all persons and communities by the most cost-effective and efficient means possible at affordable and, where

appropriate, uniform rates. In doing so, the activities of the Postal Service should be

limited to: 1) accepting, collecting, sorting, transporting, and delivering letters,

newspapers, magazines, advertising mail, and parcels; and 2) providing other

governmental services when in the public interest and where the Postal Service is

able to recover the appropriately allocated costs of providing such services.

B-3 Monopoly. The Postal Service should maintain its current mail monopoly, and also

retain its sole access to customer mailboxes. However, the 1970 Act should be

amended to: 1) authorize the Postal Regulatory Board (see chapter 4) to clarify and

periodically review the scope of the mail monopoly; and 2) clarify that the Postal

Service does not have the authority to alter the scope of the mail monopoly or to

determine the extent of access to customer mailboxes.

* See Appendix C for a complete list of Commission recommendations.
33

Chapter 2 Delivering the Mail: The Constant Mission of an Evolving Institution

Endnotes

1. United States Postal Service, Transformation Plan, Apr. 2002, p. i.

2. Peter D. Hart Research Associates, Inc., Study #7006, May 2003, p. 4.

3. Campbell Jr., James I., Testimony Before President’s Commission on the United States Postal Service,

Feb. 20, 2003, p. 18.

4. Ibid., p. 19.

5. Transformation Plan, Appendix H, p. 3.

6. European Union, Bulletin EU 12-1996; European Parliament UK Office, On-line Posting, Dec 15,

2000, <http://europarl.org.uk/news/textonly/txitems/december15.htm>; Campbell Jr., James I.,

Testimony Before President’s Commission on the United States Postal Service, p. 22.

7. 39 CFR § 320.6.

8. 39 CFR Part 320.

9. United States General Accounting Office, “U.S. Postal Service: Information About Restrictions on

Mailbox Access,” GAO/GGD-97-85, May 1997, p. 16.

10. Ibid.

11. United States Postal Service, Latest Facts Update, On-line Posting, Mar. 13, 2002,

<http://www.usps.com/news/facts/lfu_031302.htm>.

12. Cohen, Robert H., Director, Office of Rates, Analysis and Planning, Postal Rate Commission,

Testimony Before President’s Commission on the United States Postal Service, Feb. 20, 2003, p. 7.

Mr. Cohen’s testimony reflects his own views and not necessarily those of the Postal Rate Commission.

13. Potter, John E., Postmaster General, United States Postal Service, Testimony Before President’s

Commission on the United States Postal Service, May 29, 2003, p. 5.
Chapter 3: Building a World-Class Business:

Best Execution, Corporate Leadership

at the Postal Service

Introduction

If the Postal Service were a private endeavor, it would rank eleventh on the Fortune

500 list of the largest corporations in the United States based on revenue (Exhibit 3-

1). It is the second largest employer of Americans today, behind only Wal-Mart

(Exhibit 6-2).

Exhibit 3-1.

Fortune Top 20 Companies in 2003

Rank Company 2002 Revenues ($ millions)

1 Wal-Mart Stores 246,525.0

2 General Motors 186,763.0

3 Exxon Mobil 182,466.0

4 Ford Motor 163,630.0

5 General Electric 131,698.0

6 Citigroup 100,789.0

7 ChevronTexaco 92,043.0

8 Intl. Business Machines 83,132.0

9 American Intl. Group 67,722.8

10 Verizon Communications 67,625.0

12 Altria Group 62,182.0

13 ConocoPhillips 58,394.0

14 Home Depot 58,247.0

15 Hewlett-Packard 56,588.0

16 Boeing 54,069.0

17 Fannie Mae 52,901.1

18 Merck 51,790.3

19 Kroger 51,759.5

20 Cardinal Health 51,135.7

Source: Fortune Magazine, April 14, 2003.

11 United States Postal Service 66,500.0
36

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Through its vast national delivery network, the Postal Service connects virtually every

American home and business and is responsible for carrying out one of the most

essential services the nation provides to its citizens. Given its importance to the

country and the challenges to its future, the Postal Service should meet the highest

standard of corporate leadership and should have a powerful, defining commitment

to best execution in every aspect of its operations.

 If the Postal Service is to adapt successfully to a changing postal market, overcome its

significant fiscal challenges, and emerge an efficient and more businesslike institution, then it must be guided by a nimble and results-oriented management and

corporate governance structure charged with applying the best business

practices of the private sector to the public-spirited mission of delivering the

nation’s mail.

Toward that end, the Commission envisions a strong, independent, and

experienced Board of Directors that reflects the size, scope, and significance of

the Postal Service’s work. While the proposed structure grants senior executives more latitude in their management of the day-to-day endeavors of the

institution (within the context of a focused Postal Service mission), by

establishing a truly effective Board, management will be held accountable for

performance.

By extracting itself from the micromanagement of postal operations, a corporate-style

Board could fully dedicate itself, like its private-sector peers, to the big picture and to

critical fiduciary responsibilities. In this capacity, the Board could focus its attention

and experience on mission-critical oversight, exploring key issues like: strategies to

increase productivity and reduce costs; holding management accountable for achieving stated performance and service quality goals; leading risk management efforts—

particularly with regard to restoring the Service’s fiscal health; and, ensuring strategies

are developed to address future challenges and opportunities.

Of course, a private corporate governance structure has one more check and balance:

the intense public scrutiny demanded by shareholders and oversight by the Securities

and Exchange Commission (SEC). To ensure that a management structure with

greater latitude has appropriate oversight, the Commission strongly recommends that

the Postal Service voluntarily comply with applicable SEC financial reporting requirements for public corporations and that the existing Postal Rate Commission be

transformed into an independent Postal Regulatory Board with broad oversight

authority (both proposals are discussed in detail in Chapter 4).

This combination of empowered, accountable managers; a strong, strategic Board of

Directors; and enhanced oversight and financial transparency has the greatest capacity to deliver to the American people a healthy and efficient Postal Service that

consistently operates at a high standard of excellence and delivers service quality,

productivity and performance on a par with the nation’s leading corporations.

The Commission strongly

recommends that the Postal

Service voluntarily comply

with applicable SEC financial

reporting requirements for

public corporations.

Spotlight
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Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Good Corporate Governance Starts at the Top

The first essential ingredient of a strong corporate governance structure is a welldesigned Board with outstanding and experienced directors of the highest integrity.

Given the institution’s size and importance to the nation, the Board of Directors of

the Postal Service should be one of the most capable and experienced Boards in the

world.

Taking the Board to this level of excellence is about far more than the Postal Service

attaining its rightful status. As is the case with corporate entities, the expectations,

capabilities, and achievements of the Board in no small part determine the goals,

strategies, and successes (or failures) of the institution it governs. Simply put, a

world-class, business-oriented Postal Service requires a world-class, business-oriented

Board.

Through a Board structured to ensure independence, attract the most qualified

candidates, and discharge the same core responsibilities vested in leading privatesector boards, the Postal Service can bring substantial private-sector experience and

capabilities to its leadership and, through it, the institution as a whole.

It Is Time to Revisit the Governance Structure

Like the Postal Service’s mission, its governance structure has not been substantially

revised in more than 30 years. The structure established by the 1970 Act was appropriately responsive to the times. While many of the principles guiding the 1970

Act—ensuring the institution is self-financing, depoliticizing the Postal Service—

remain important today, the legacy governance structure is increasingly at odds with

the Service’s mission in the modern environment.

This structure consists of a Board of Governors with broad authority over the day-today operations of the Postal Service. While the 1970 Act vests ultimate mail rate and

classification determinations with the Board of Governors, it strives to check this

authority by requiring the Board to seek recommendations from the Postal Rate

Commission that require lengthy public processes. This cumbersome procedure

sometimes lasts up to 18 months and flatly undercuts Postal Service efforts to be

more businesslike and responsive to changing economic conditions and mail trends.
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Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

A Corporate-Style Board of Directors

Postal Service leadership would be enhanced by the

establishment of a corporate-style Board of Directors.

Under such an approach, the Board would replace

micromanagement of the day-to-day operations of the

Postal Service with a high-level strategic focus on cost

reduction and service quality, as well as minimizing

the financial risk to taxpayers and restoring the fiscal

health of the institution as a whole.

For these reasons, the Commission strongly recommends that the design, composition, and responsibilities of the Board be changed. At its heart, the legacy structure

in place today is a distinctly public-sector leadership hierarchy and web of authorities, producing results that—intended or not—too often slow down needed adaptations and overemphasize micromanagement of day-to-day postal operations.

The new fiscal realities of the Postal Service require aggressive leadership that identifies and pursues new strategies to control costs and boost productivity and efficiency

in what many analysts believe will be an era of declining First-Class Mail volumes.

Overcoming these challenges to ensure that universal service can continue without

imposing an excessive new burden on ratepayers or taxpayers will require the focus

and commitment of the nation’s leading business minds, something the

Commission’s recommended structure would make possible.

Core Responsibilities of A Corporate-Style Board of Directors

Both the Postal Service and its customers would benefit greatly from a corporate-style

Board of Directors. This Board would reflect the best practices of the business world

and would attract members with the talent and skills necessary to transform it into a

leading-edge institution. Under this approach, the Board would be less engaged in

the Postal Service’s day-to-day business and more focused on actively monitoring the

overall effectiveness of management policies and decisions.

In terms of the specific challenges facing the Postal Service today, this broad vision

translates into a laser-like focus on two pivotal areas: cost reduction/quality of service

and financial viability/protection of taxpayer interests.

Cost Reduction and Quality of Service

The Board would be responsible for ensuring best

execution throughout the Postal Service’s operations. Its

overriding mission would be the transformation of the

Postal Service into an enterprise that consistently rivals

the private sector in terms of the key benchmarks of cost

reduction and quality of service. To achieve this ambitious goal, the Board would limit its involvement in the
39

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

daily management of the Postal Service in order to devote its attention to ensuring

management remains on track in meeting its cost reduction and quality of service

targets and other established business goals (such as human resource development

and management).

Financial Viability and Protection of the Taxpayer

The Board would also be responsible for ensuring that Congress and the American

people are advised promptly of any significant adverse financial developments (such

as expanding liabilities or lack of capacity to borrow sums adequate to cover shortfalls) that might make rate increases or taxpayer subsidies necessary to sustain postal

services. These warnings should be accompanied by an adequate level of explanation,

so all interested parties understand the trends that threaten the Service’s ability to

perform its vital functions. Specifically, the Board should continually monitor the

Postal Service’s pension and health care obligations and its ability to repay its debt.

Here, especially, ratepayers should have a fundamental “right to know.”

Applying Corporate Best Practices to the Postal Service

In order to pursue these two guiding priorities most effectively, the Commission

recommends sweeping changes to the Board’s structure, as well as to the scope of

both its general responsibilities and specific duties, in order to apply the high standards and practices of the world’s most successful companies to this unique public

venture. With its vast reach, large employee base, and service-oriented nature, the

Postal Service can benefit greatly from a strong institution-wide commitment to

corporate best practices. In the post-Enron world, this business discipline has rightly

garnered a great deal of attention. The following recommendations reflect the

Commission’s attempt to apply corporate best practices to this unique public institution.
40

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

General Board Responsibilities

In a prominent survey of best-practice standards for Boards of Directors, seven key

areas were identified as either vital to success or worthy of greater effort to ensure

future success.1

 The Commission recommends that the Postal Service’s Board of

Directors assume the same general responsibilities as leading private-sector boards:

• Determining the institution’s vision and mission (within the boundaries set by

statute and the Postal Regulatory Board) to guide and set the pace of operations and future development;

• Considering the legitimate interests of customers, partners, and other interested parties who have the capacity to affect the Postal Service’s attainment of

its objectives;

• Reviewing and evaluating present and future opportunities, threats, and risks

in the external environment;

• Determining corporate and financial strategic direction and identifying

resources, contingency plans, and the means to support them;

• Communicating senior management’s successes and failures to them, and

ensuring appropriate rewards, sanctions, and training are provided;

• Ensuring that internal control procedures provide valid and reliable information for monitoring operations and performance; and

• Ensuring that the Postal Service’s organizational structure and capability are

appropriate for implementing its chosen strategies.

Specific Board Duties

The following tasks were identified by the Commission as essential to the successful

direction of the Postal Service. Some are already part of the Board of Governors’

scope of work. Others steer the Board away from micromanagement. Still other

duties are newly assigned and are consistent with the duties of a corporate board.
41

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

The specific tasks identified by the Commission as appropriate to the forwardlooking efforts of a modern, corporate-styled Postal Service Board of Directors are as

follows:

• Hiring, monitoring, compensating and, when necessary, replacing the Postmaster General;

• Ensuring that an adequate succession plan is in place at all times for top

management positions;

• Approving an annual report on the Postal Service’s financial viability;

• Approving rate adjustments within the limits imposed by the new Postal

Regulatory Board (see Chapter 4) and, if necessary, requesting that the regulatory board increase these limits;

• Ensuring Postal Service compliance with informational requests of the Postal

Regulatory Board;

• Approving new products and services within the core mission;

• Approving the disposition of post offices (while ensuring that “low-activity”

post offices are maintained if necessary to universal service);

• Approving the Postal Service’s recommendations to the Postal Network Optimization Commission (see Chapter 5);

• Approving policies and procedures on the management of Postal Service real

estate holdings;

• Approving Postal Service annual budgets and required strategic plans;

• Approving capital projects of a truly substantial nature;

• Approving risk management plans;

• Hiring, monitoring, compensating, and replacing, when necessary, internal

auditors and an independent public accounting firm;

• Setting compensation and evaluating Postal Service executives and officers

against clearly defined benchmarks; and

• Evaluating Board performance and nominating new members, as necessary.

With a firm commitment to emulate the best practices of the

world’s leading corporations, the Postal Service can become what

it should be today: the model for applying the best practices of the

private sector to the public-spirited mission of a government

agency.

Applying the Best Practices of

Leading Corporate Boards

With the Postal Service’s vast infrastructure,

large employee base, and service orientation,

the Board of Directors could maximize its

impact on the institution by applying the best

practices of leading boards to its leadership of

the Postal Service.
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Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Board Structure, Make-Up and Governance

To ensure the Board is capable of fulfilling its general responsibilities and specific

duties, the Commission recommends a new structure, modeled after the most

successful corporate boards in America. This design would ensure the Board operates

in the most efficient and productive manner possible, is more removed from undue

political influence, and has the depth and diversity of skills necessary to guide the

Postal Service to a higher level of operations and a stronger long-term outlook.

Composition

More and more, corporate boards in America are placing a premium on independence. It has become quite common, in fact, for the Chief Executive Officer (in the

case of the Postal Service, the Postmaster General) to be the only management

representative on the Board. Generally, leading Boards feature a substantial majority

comprised of outside, independent directors, who lack family, business and other

material relationships to the institution or its senior managers.

The Commission recommends that the Board be comprised of 12 individuals–eight

independent members, three Presidential appointees, and the Postmaster General

(who is selected by the other 11 members). Consistent with corporate best practices,

this composition is small enough to allow each member to participate fully, yet large

enough to ensure that the varied expertise of its membership can combine to deliver

the necessary breadth of experience and skills.

As mentioned earlier, this model would be a significant shift away from the politically

charged nature of the Board nomination process today. Currently, all nine Governors

who serve (with the Postmaster General and the Deputy Postmaster General) on the

11-member Board of Governors are appointed by the President and confirmed by the

United States Senate. Under this model, the Commission proposes that a supermajority be independent, one of the most essential ingredients of a successful Board.
43

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

RECOMMENDED COMPOSITION OF NEW BOARD OF DIRECTORS

8 Independent Members 3 Appointed Members Postmaster General

• Initially selected by

appointed members,

then by majority Board

vote

• Selection dependent

upon concurrence of the

Secretary of the Treasury

• Can only be removed by

the Secretary of the

Treasury

• Can serve on any

committee

• Appointed by the President

• Select initial independent

members

• Can only be removed by the

President

• Can serve on any committee

• Selected by the other 11

members

• Can be removed by

majority vote of the other

11 members for any

reason

• Cannot be a member of

the Compensation, Audit

and Finance, or Nominating and Corporate Governance committees

• Cannot serve as Chair

Appointments and Nominations

As Exhibit 3-2 indicates, the Commission recommends that the President appoint

three members of the Board. Initially, these three appointees would select the first

eight independent Board members whose selection would be dependent on the

concurrence of the Secretary of the Treasury. Thereafter, independent members

would be selected by the Board as a whole, based on recommendations made by a

newly created Nominating and Corporate Governance Committee (discussed below)

and with the concurrence of the Secretary of the Treasury.

In developing this proposal, the Commission has been mindful of the fact that the

Constitution strictly regulates the appointment of officials exercising significant

governmental power under the laws of the United States. The proposed appointment

process, including the requirement of ultimate concurrence by the President or the

Secretary of the Treasury, is intended to achieve a Postal Service Board of Directors

that enjoys the maximum level of political independence consistent with the Constitution. The Commission feels strongly that an independent, depoliticized Board is

crucial to the future success of the Postal Service.

Like the board of a public corporation, the essential responsibility of the new corporate-style Postal Service Board will be to manage as efficiently as possible the assets

entrusted to it by the owners of the enterprise – in this case, the American people.

Exhibit 3-2.
44

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Under the Commission’s proposal, the Postal Regulatory Board (see chapter 4) will

assume responsibility for defining and refining most of the critical governmental

policies associated with the postal system including the extent of the postal monopoly, limits on rates for non-competitive products, the particulars of the universal

service obligation, the scope of the Postal Service’s charter, and the comparability of

wages with the private sector. It should be noted, however, that today top officials of

the Postal Service also perform several other secondary but distinctly governmental

functions—such as law enforcement, adjudication of mailability issues, and oversight

of Postal Service operations through the inspector general’s office. In order to achieve

the independent Board envisioned by the Commission, it may be necessary to adjust

the manner in which the offices and tasks of these officials are legally defined. The

Commission therefore recommends a careful review of the appropriate provisions of

the 1970 Act in order to ensure the objective sought: a new independent, corporatestyle Board that can, without any trace of constitutional doubt, provide the Postal

Service the highest standard of managerial leadership.

Qualifications

The Commission recommends a structure that ultimately delivers a well-rounded

Board with a diversity of backgrounds and skills that can have a positive impact on

the Postal Service. Members should have significant financial and business expertise

and experience managing major corporate enterprises and other large organizations.

While certain criteria should disqualify a Board candidate (such as equity ownership

or employment with a competitor, a significant user, or major supplier of the Postal

Service), selection criteria should remain sufficiently flexible and dynamic as to

ensure that each new member enhances the overall complement of Board skills.

With regard to appointing independent Board members, a new Nominating and

Corporate Governance Committee would have significant responsibility (see p. 47).

Attributes the committee should consider include: unquestioned integrity, expertise

relating to Board activities (corporate governance, corporate finance, performance

management, audit and accounting), and experience specifically relevant to the Postal

Service (management of a labor-intensive service business, automated processing and

distribution systems, vehicle fleet management, network integration and facility

consolidation, real estate management, and technology applications).

To give the committee adequate flexibility, the Commission recommends that these

criteria be incorporated in the Board’s bylaws or governance guidelines, rather than

into statute. This approach would grant the Board adequate flexibility should

changes to its qualifications criteria prove necessary over time.
45

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Board Member Independence

The Commission recommends that no individual (other than the Postmaster General) should qualify as a Board member if he or she has a material relationship to the

Postal Service or its management team, whether directly or as a partner, shareholder

or officer of a related entity. Specifically, the Commission recommends that the

following persons should not qualify as a member of the Board:

• Officers or employees of the Postal Service (other than the Postmaster General);

• Officers, employees, or affiliates of the Postal Service’s independent public

accounting firm;

• Officers, employees, or affiliates of substantial suppliers of the Postal Service

(for example, a supplier who derives more than 2% or $1 million of gross

revenue from the Postal Service, whichever is greater);

• Officers, employees, or affiliates of a company that depends on the Postal

Service to distribute a substantial portion of its products or to carry out a

significant amount of its business; and

• Immediate family members of any person who would not qualify as a Board

member.

Selection and Role of the Chair

The Commission recommends that the Chair be selected by the entire Board and

have responsibility to:

• Provide Board leadership;

• Convene and chair Board meetings;

• Establish Board meeting agendas;

• Ensure Board members receive sufficient information to carry out their duties;

• Facilitate the contribution of all Board members; and

• Serve as the primary link between management and the Board.

Term Limits

The current nine-year terms are far too long, particularly as many corporate boards

restructure to achieve shorter terms and allow for a more dynamic Board composition

that is responsive to the changing needs of the venture. A careful balance must be
46

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

struck between terms that are so long that members lose interest and terms that are

so short they restrict members’ ability to learn the business and offer meaningful

oversight. For Presidential nominees, the potential difficulty of the appointment

process is a further burden for consideration. Given these factors, the Commission

recommends three-year terms for all Presidential appointees and independent Board

members, subject to the staggering mechanism described below. The Commission

further recommends that the Board of Directors establish a maximum number of

terms that a Board member may serve and that members be required to retire at age

70.

Staggered Terms

In order to mitigate potential conflicts of interest in the nomination process, the

Commission recommends that the terms of independent Board members should be

divided and staggered into three classes. Initially, two members should be appointed

to one-year terms; three members should be appointed to two-year terms; and the

remaining three members to a full three-year term.

Removal of Board Members

The Commission recommends that the Board continue to have authority to remove

the Postmaster General for any reason. The Commission also recommends that the

President have the authority to remove any Presidentially-appointed Board member

and that the Secretary of the Treasury have the authority to remove any independent

Board member. These powers are intended to mirror most corporate models, which

permit shareholders to vote on the removal of Board members for any reason. In the

past, Board members could only be removed “for cause,” a term of art that narrowly

covers only the most severe conflicts of interest and criminal behavior. Somewhat

broader latitude is granted in this design in order to ensure a corrective mechanism

exists, should this largely self-perpetuating Board begin building a tradition of

mediocrity rather than excellence.
47

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Committee Structure and Procedures

The Board should continue to utilize a committee structure that enables individual

members to fulfill clearly defined responsibilities that are more efficiently and effectively

carried out by a component group rather than the Board as a whole. Today, the Board

has three standing committees: Audit and Finance, Capital Projects, and Strategic

Planning. The Commission recommends that the Board eliminate the Capital Projects

committee and have the Board as a whole approve only the most substantial capital

investments. The current $10 million threshold for Board consideration of capital

projects is far too low.

The Commission also recommends the elimination of the Strategic Planning committee

and instead suggests that the entire Board address issues, such as the Postal Service’s

product and service offerings, that have traditionally fallen within this committee’s

purview. In addition, the Commission recommends that the Board establish two new

standing committees as it assumes a more corporate fiduciary role:

• Nominating and Corporate Governance Committee: Because the Commission

recommends that the Board be largely self-perpetuating, selecting 8 of its 11

members, a Nominating and Corporate Governance committee is necessary. This

committee should have primary responsibility for ensuring the Board includes at

all times a healthy mix of leaders and skill sets that combine to form one of the

world’s most capable and experienced Boards. The Postmaster General should

not be permitted to serve on this committee, which also should be charged with

on-going evaluation of the Board’s performance and needs and ensuring all Board

members receive the information and training necessary to fulfill their duties.

• Compensation Committee: One of the most important roles of a corporate

board is to ensure that management performance is aligned with clearly defined

institutional objectives. One of the most powerful tools at the Board’s disposal is

compensation. Because the Commission recommends that the Postal Service

have greater flexibility over the compensation of its senior executives (for example,

pay-for-performance incentives), this committee is necessary to develop expertise

in this area, including tools for evaluating executive performance. It will assume

responsibilities relating to executive compensation that are currently discharged

by the Strategic Planning committee. To avoid a conflict of interest, the Postmaster General should not be allowed to serve on the Compensation committee or

vote on its recommendations. This committee should be free to determine the

factors contributing to executive compensation decisions and have complete

authority to set compensation levels to attract and retain the very best managers.

(Specific recommendations relating to this authority are discussed in detail in

Chapter 6.)
48

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

While the Board would have the authority to create additional committees, this configuration anticipates that work relating to postal rates, new products and services, facility

closures, and real estate management would continue to be handled by the pre-existing

committees or the Board as a whole. The Audit and Finance committee would also

continue to play an increasingly vital role in ensuring the Postal Service’s fiscal health,

risk management, and financial transparency.

As is the case under current practice, each committee would operate under a charter

adopted by the full Board. These charters should outline the purpose, authority and

duties of each committee. They should also be available to the public and posted on the

Postal Service’s website.

Initially, the Board as a whole should select the members and chair of the Nominating

and Corporate Governance committee. Once in place, that committee should be

responsible for recommending the chairs of the other committees for approval by the

Board.

Meetings

The Commission believes that the current monthly meeting schedule of the Board of

Governors is excessive and invites micromanagement rather than high-level oversight

and governance. For these reasons, the Commission recommends that the Board

convene six regular meetings each year. In addition to the regular meetings, the Board

should have the flexibility to call additional meetings when deemed necessary by the

Chair or by established process.

Compensation

In order to attract the caliber of candidates equal in capability and stature to those

serving on comparable corporate boards, the Commission recommends that compensation be made competitive with that of Board members of large publicly traded companies.
49

Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Setting High Standards

The Postal Service should be guided by an independent,

self-perpetuating Board of Directors with significant

financial and business expertise. Board members should

have no material relationship to the Postal Service. Terms

should be staggered. Regular meetings should take place six

times per year. Standing committees for audit and finance,

executive compensation and nomination/corporate governance should exist. Compensation of Board members

should be comparable to that of similarly sized, publicly

traded companies. Standard quorum and majority rules

decision-making processes should apply, with the following

exception: a decision to request rate increases that exceed the

rate ceilings imposed by the Postal Regulatory Board should

require a super-majority. Board members also should

follow general corporate guidelines limiting service on other

Boards to reasonable levels and should adhere to the highest

ethical standards.

Voting Procedures

Under current law, most Board decisions require a simple majority, with six members

present for quorum (proxies are not allowed). However, there are exceptions. For

example, an absolute majority of Governors is required to appoint or remove the

Postmaster General. With regard to rate-setting, the following exceptions also apply:

• Approval, allowance under protest, or rejection of a PRC recommended rate or

classification decision: The Board may act on a majority vote of the Governors

present, but five of the six members required for quorum must be Governors; and

• Modification of a PRC recommended rate or classification decision: The Board may

act only on the unanimous written vote of all Governors.

The Commission recommends that similar voting rules continue, until the Postal

Regulatory Board has established the new rate ceiling mechanism (discussed in detail in

Chapter 4). Once the new mechanism is in place, rates can be adjusted within the

limitations set by the Postal Regulatory Board on a majority vote of those Board members present (with quorum). However, a super-majority should be required to request

that the Postal Regulatory Board consider approving rates in excess of the established

limits.

Limitations on Outside Activities and Ethics

Currently, Board members may hold any other office

or employment not inconsistent or in conflict with

their Postal Service duties, responsibilities, and

powers. In order to ensure an adequate level of

commitment, the Commission recommends Board

members be subject to the limitations on outside

activities generally applied to directors of corporate

boards. Consistent with corporate best practices,

Board members should promptly inform the Chairman if an actual or potential conflict of interest

occurs and should resign if a significant conflict

cannot be resolved. Additionally, if a Board

member’s position or responsibilities substantially

change from the time of his or her appointment, a

letter of resignation should be automatically submitted to be acted on by the full Board.
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Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Conclusion

Given the challenges before the Postal Service and the essential role this large and

complex institution plays at the center of American commerce and society, the Postal

Service both needs and deserves one of the most capable boards in America. Such a

Board could provide the Postal Service leadership with a wealth of sophisticated skills

and experience that, appropriately applied, can reinvigorate this vital 225-year-old

institution.

Supported by a governance structure that emphasizes corporate best practices, ensures a

truly independent spirit, seeks out only the most qualified candidates, and focuses the

Board on oversight, management accountability and “big-ticket items,” such as cost

reduction, quality of service and restored fiscal health, this Board would be capable of

driving the changes most needed at the Postal Service today. These advances include:

greater efficiency, more strategic focus, strong financial leadership, greater accountability

and transparency, service and capabilities on a par with leading private-sector entities

and, overall, a more businesslike approach to the delivery of the nation’s mail.

In partnership with a newly empowered Postal Service leadership, this Board would

shape and define the fundamental change needed at the Postal Service. However, if the

Board and postal managers are to be granted more responsibility and latitude to “steer a

ship” that has monopoly powers, then appropriate oversight and accountability mechanisms must be in place, not to impede the journey, but to ensure it is appropriately

undertaken.

Chapter 3 Recommendations*

B-4. Financial Transparency. The Postal Service should voluntarily comply with

applicable Securities and Exchange Commission reporting requirements. In addition, the Postal Service should periodically report on the allocation of costs among

mail products and services in accordance with form, content, and timing requirements determined by the Postal Regulatory Board.

C-1. Governance. In order to establish a governance structure that exemplifies the best

practices of similarly-sized private sector corporations, the current Postal Service

Board of Governors should be transformed into a corporate-style Board of Directors

with broad authority to oversee Postal Service operations. Further, the Board of

Directors should consist of three Directors appointed by the President, the Postmaster

General, and eight independent Directors initially selected by the three Presidentially-appointed Directors with the concurrence of the Secretary of the Treasury.

Thereafter, the eight independent Directors would be selected by the full Board of

Directors with the concurrence of the Secretary of the Treasury. All Directors should

be selected based on business acumen and other experience necessary to manage an

enterprise of the Postal Service’s size and significance. Terms for all Directors should

be three years with a mandatory retirement age of 70.

* See Appendix C for a complete list of Commission recommendations.
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Chapter 3 Building a World-Class Business: Best Execution, Corporate Leadership at the Postal Service

Endnotes

1. The Conference Board, “Determining Board Effectiveness: A Handbook for Directors and Officers,”

Special Report 99-1, Nov. 4, 1998, p. 13.

Chapter 4: Protecting the Public Interest:

Enhanced Accountability and

Public-Policy Oversight

Introduction

For the Postal Service to operate in a more businesslike fashion, its managers must

have greater flexibility to manage and innovate. With this latitude, however, comes

the need for enhanced managerial accountability and public-policy oversight. Managerial accountability comes from a corporate-style Board of Directors tasked with

holding Postal Service officers responsible for performance. Public-policy oversight

must come from an independent regulator endowed with broad authority, adequate

resources, and clear direction to protect the public interest and ensure the Postal

Service fulfills its duties appropriately and continues to meet the evolving postal

needs of the country.

Toward this end, the Commission recommends transforming the Postal Rate Commission (“PRC”) into a new Postal Regulatory Board with broad authority to set the

public-policy parameters within which the Postal Service is allowed to operate.

Rather than a narrow focus on rate setting and mail classifications, this new regulatory entity would:

• Ensure the financial transparency of the Postal Service;

• Establish rate ceilings for Postal Service non-competitive products and preapprove rate increases that exceed the rate ceilings;

• Ensure the Postal Service remains focused on traditional products and services;

• Ensure that competitive products are not cross-subsidized by revenues from

non-competitive products;

• Guarantee that the Postal Service is meeting its universal service obligation and

refine, as necessary, the specific elements of that obligation;

• Review proposed changes to service standards when such changes are expected

to have a substantial and negative national impact;

• Review the postal monopoly for its public benefit and, if circumstances

warrant, narrow it over time;

• Review worksharing discounts, negotiated service agreements, and other noncompetitive rates for undue or unreasonable discrimination; and

• Ensure that the Postal Service upholds its statutory obligation to compensate

its employees at a level comparable to the private sector.

It is imperative that the Postal Service (in part, a monopoly) have clear, independent

regulatory oversight. Placing the oversight function in a strong, independent Postal

Regulatory Board will allow greater operational latitude to Postal Service managers,

while assuring the nation that the quality, reliability and affordability of the nation’s

postal services will continue. As such, an improved regulatory structure can deliver

both dividends and disciplines to the Postal Service of tomorrow.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Transform the Postal Rate Commission

Like the Postal Service, the current regulatory framework was established by the 1970

Act with the creation of the independent, five-member Postal Rate Commission.

The PRC’s current narrow regulatory oversight of the Postal Service has a very

uneven impact. At one extreme, the Postal Service’s competitive products are

burdened by ratemaking procedures far in excess of anything required of private

competitors or current best practices in regulated industries. At the other, the quality

of services entrusted to the Postal Service on a monopoly basis largely escapes

scrutiny altogether.

A key feature of the present rate process is the fact that new domestic rates and

classifications are subject to lengthy review by the PRC prior to taking effect. The

PRC must give all interested parties a chance to challenge the Postal Service on the

need for the change. This administrative procedure, involving dozens of participants,

can become extremely costly, time consuming and litigious. This makes it very

difficult for the Postal Service to operate in a businesslike fashion—for example, by

offering discounted products to leading customers or adjusting to unanticipated

changes in costs. Every significant change demands a major administrative proceeding. This unfortunate construct places the Postal Service in an adversarial relationship with its major customers and at a distinct competitive disadvantage.

The Commission believes that independent regulation of the Postal Service must

continue but that a major revamping of the regulatory review process is in order. In

light of lessons learned under the current regime and the changing nature of postal

markets, the Commission believes that the laudable goals of the current regime can

be achieved more efficiently and effectively. Protecting postal customers against

undue discrimination can be continued while minimizing the regulatory costs

imposed on the Postal Service. Restrictions against cross-subsidy from non-competitive to competitive products can be maintained and enhanced without hamstringing

the ability of the Postal Service to participate in competitive markets.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

In addition, the scope of regulatory review should be extended.

The Postal Service should not be able to pass on the costs of

substantial inefficiencies to mailers captured by the postal

monopoly, and the quality of services provided in monopoly

markets should be held to a strict accounting. As suggested in

Chapter 2, the mission of the Postal Service should be clarified

and subject to outside review. Viewed against the backdrop of

the Postal Service’s challenges today, enhanced regulatory oversight—appropriately structured—will not be an added burden

but will aid in the renewal of the Postal Service.

A Postal Regulatory Board Founded on PublicPolicy Oversight

The Postal Service’s need for oversight today is as broad as the

PRC’s authority is narrow. The Postal Service urgently needs a

vigilant, broadly empowered and independent Postal Regulatory Board to focus on its

ability to fulfill its core duties in an appropriate and effective manner. Given the

significant responsibilities vested in this regulatory body, the Commission envisions

three individuals of significant stature, appointed by the President of the United

States for five-year terms and subject to Senate confirmation. The Commission

believes that the Postal Regulatory Board members should have backgrounds in areas

relevant to the regulation of large, complex business entities and that they should be

selected solely on the basis of demonstrated expertise and professional standing. In

selecting new members, care should be taken to ensure the broadest possible representation of skills among Board members. Additionally, no more than two of the

members should belong to the same political party.

It is imperative that the Postal Regulatory Board be a truly independent institution.

Like the PRC, the Postal Regulatory Board should be an independent establishment

within the executive branch of the Federal government. Unlike the PRC, its budget—while supported by ratepayers—should be subject to Office of Management

and Budget review but not Postal Service approval.

What are Non-Competitive

Products?

The Commission believes that the term

“non-competitive products” should

include products covered by the postal

monopoly as well as products over which

the Postal Service has a market-dominant

position. The Commission suggests that

the following products should fall within

the “non-competitive” category: FirstClass Mail, Periodical Mail, Standard

Mail, media mail, library mail, and

bound printed matter. The Postal

Regulatory Board should review and

refine this list over time, as circumstances

warrant.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Narrow authority:

1. Rates: Issues recommended decisions

on mail rates and classifications, and fees

for postal services.

2. Service Standards: Reviews changes in

postal services that will generally affect

service on a nationwide or substantially

nationwide basis and offers advisory

opinions.

Broad public-policy oversight regarding:

1. Rates: Engages in after-the-fact reviews

of rate increases for non-competitive

products and services.

2. Cross-subsidy: Ensures that revenues

from non-competitive products are not

cross-subsidizing competitive products.

3. Postal Monopoly: Clarifies and refines

the scope of the monopoly.

4. Cost Allocation: Ensures that the Postal

Service is appropriately allocating its costs

across its competitive and non-competitive

products and services.

5. Transparency: Ensures financial

transparency, and obtains information from

the Postal Service, if need be, through the

use of subpoena power.

6. Products and Services: Monitors the

types of products and services offered to

ensure that the Postal Service does not

exceed its core mission.

7. Universal Service: Issues standards

defining the scope of this obligation.

8. Service Standards: Reviews proposed

changes to service standards that may have a

substantial and negative national impact

and issues binding opinions under certain

circumstances.

9. Compensation: Ensures that Postal

Service employees receive total compensation comparable to the private sector.

10. Retained Earnings: Ensures that

retained earnings are accumulated at an

appropriate level, and consistent with the

public interest.

Exhibit 4-1.

Comparison of the Postal Rate Commission to the Postal Regulatory Board

Postal Rate Commission (PRC) Postal Regulatory Board (PRB)

Independence An independent establishment of the Executive Branch.

Budget Approval Budget subject to Postal Service approval. Budget subject to Office of Management

and Budget review.

Composition Five Commissioners, including one Three members, including one Chairman,

Chairman, only three of whom may be of only two of whom may be of the same

the same political party. political party.

Appointment Appointed by the President and confirmed by the Senate.

Qualifications Members chosen based on their Members chosen solely on

professional qualifications. the basis of their technical qualifications

and professional experience.

Terms Six years. Five years.

Authority
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Streamline the Rate-Setting Process

Once the Postal Regulatory Board is in place, it should move quickly to improve the

rate-setting process, allowing greater flexibility to Postal Service managers while

imposing firm price and spending discipline on the institution, so that rate increases

are the last line of defense against rising costs rather than the first.

Unfortunately, the current rate-setting process achieves precisely the opposite effect.

It is simultaneously inflexible and undisciplined. Today, when the Board of Governors anticipates that rising costs will exceed revenues, it proposes a new schedule of

rates and classes and asks the PRC for a formal opinion. It can take as many as 18

months before the Postal Service sees the revenues it needs. What takes so long? The

Postal Service is required to prove (and opponents spend millions of dollars seeking

to disprove) that the proposed rates are “fair and equitable.” In the course of public

hearings, it is not uncommon for the PRC to hear from dozens of witnesses and sift

through tens of thousands of pages of supporting documents. Even after the PRC

has submitted its formal opinion, the Postal Service remains tightly constricted. The

Board of Governors can accept, reject, implement under protest, seek reconsideration

or challenge in court the PRC’s recommendations. What management cannot do is

rapidly adjust rates to changing circumstances, based on its expert opinion of the

needs of the operation. What the PRC cannot do is tell the Postal Service that the

Reforming the Rate-Setting Process

Postal Rate Commission Postal Regulatory Board

A Lengthy, Litigious Process A More Streamlined Process

Responsible for responding to Board of Governors requests for

rate increases, or changes in the classification of mail.

• Bases its judgment on a host of statutory requirements.

• Required to hold a hearing to include representatives of the

Postal Service and the mailing public.

• Required to transmit its recommended decision to the Board

of Governors within 10 months, which under certain

circumstances, may be extended.

• The Board of Governors may approve, allow under protest,

reject or modify a PRC recommended decision.

• Board allowance under protest may lead to judicial review or

return to PRC for reconsideration.

• Board rejection of a PRC recommended decision leads to a

resubmission of the Board’s request.

• Board modification of a PRC recommended decision can

only take place under certain circumstances and requires

unanimous Board approval.

• May hold hearings based on complaints; issues either

recommended decisions or public reports based on hearing.

Responsible for establishing incentive-based rate-setting

methodology.

• Establish baseline rates and rate ceilings for non-competitive

products and services (below which the Postal Service is largely

free to set rates as it wishes).

• Upon written complaint, would conduct after-the-fact review

of rate increases for non-competitive products and services.

Would require adjustments if rate increases are found to be

inconsistent with established rate ceilings.

• Review, in advance, rate requests for non-competitive products

and services that exceed established rate ceilings and rate

requests for new products and services.

• Ensure that rates for competitive products and services are not

cross-subsidized by revenues generated by non-competitive

products and services. Would be authorized to take appropriate

remedial action.

• Make all final determinations within 60 days.

Exhibit 4-2.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

overall level of rates is too high. If the current rate-making process teaches us anything, it is how not to motivate a large government entity to act in a more nimble,

businesslike, and disciplined fashion.

As Exhibit 4-2 illustrates, the Commission firmly believes that the current ratesetting process should be abolished and replaced with a more streamlined structure

that continues to impose rigorous standards on rate setting, but does so without

impeding the ability of Postal Service officials to manage and lead. In addition, this

new process should proactively encourage the Postal Service to improve productivity

and efficiency and not rely solely on rate increases to secure its fiscal health.

A Powerful New Tool to Encourage Productivity, Cost Savings

While increases in postage rates over the past 30 years have been kept more or less

within the bounds of inflation, it is important to keep this achievement in perspective. During this same period, the prices of many other goods and services have

fallen dramatically in real terms. And, compared to earlier times, the pace of postage

rate increases has accelerated dramatically. Since 1970, there have been 12 increases

in the price of a First-Class stamp. In the last 30 years, rate increases have become

the first cure for the fiscal woes of the Postal Service, not the last.

Not surprisingly, inefficiencies and excessive costs—often structural in origin—are

apparent throughout the Postal Service. This begs an important question: If the

Postal Service can deliver “affordable rates” without rooting out what many believe to

be billions of dollars in inefficiencies and unnecessary costs, is the Postal Service

providing the best service it can to the nation? Clearly, the answer is “no.” But in a

public-sector monopoly environment, with none of the flexibilities or bottom-line

disciplines of private-sector competition, the question becomes how can the institution be sufficiently enabled and motivated to rise to a higher standard of service?

Addressing this challenge head-on is implicit in the Commission’s proposed mission

for the Postal Service “to provide high-quality, essential postal services by the most

cost-effective and efficient means possible at affordable and, where appropriate,

uniform rates.”

One of the most important tools to press the institution in this more businesslike

direction is the adoption of an incentive-based regulation called “rate ceilings.”

Appropriately designed, this new mechanism would greatly assist Postal Service

management in its drive toward controlling costs and realizing new efficiencies.

Successfully deployed, it also could deliver a wide array of corporate-style flexibilities

and results:

• Simplicity: Instead of a litigious, costly and lengthy ratemaking process that

can delay needed new revenues by more than a year, adjustments would be at

the discretion of the Board of Directors, so long as rates remain under the

ceiling. If additional revenues are needed, prices could only be increased with

the prior approval of the Postal Regulatory Board.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

• Certainty: Of almost equal concern to frequent mailers as the cost of postal

services is the predictability of prices. Rate ceilings would permit mailers to

factor rate increases into their business plans with greater predictability. They

also would benefit Postal Service managers by giving the Postal Service a ceiling

under which management knows they need to control costs.

• Timeliness: Rather than having to estimate two or three years out what the

revenue needs of the Postal Service will be, managers will be able to adjust rates

and make other operational decisions based on the realities of the current

climate.

• Alignment: By building in appropriate incentives, such as the ability to retain

earnings that result from keeping costs beneath set limits and allowing the

Postal Service to use those earnings, in part, to finance incentive-based compensation (see Chapter 6), the motivations of Postal Service managers will be

more closely aligned with the interest of customers who value controlling costs

over higher postage rates.

For these reasons, the Commission recommends that the existing rate-setting procedures be replaced with an incentive-based process.

Incentive-Based Regulation: How It Could Work at the Postal Service

Rate ceilings are not merely a tool to deliver greater management flexibility. They are

a powerful incentive for achieving what is largely lacking at the Postal Service today:

the alignment of the interests of postal managers and employees with the interests of

ratepayers. Specifically, rate ceilings allow prices to be adjusted upward within limits

established by a regulator based on an “escalator” that incorporates factors for both

inflation and productivity.

The organization will benefit from enhanced flexibility to adjust rates, so long as it

does not exceed the ceilings established by the Postal Regulatory Board. This efficient approach would end the days of lengthy and litigious ratemaking proceedings

and free the Postal Service to adapt to changing economic circumstances in a more

businesslike timeframe. But if the rate ceiling is appropriately constructed, the

Postal Service will also feel intense pressure to rein in spending and improve efficiency and productivity.

It should be noted that some doubt exists as to whether a public-sector institution

(without, for example, employee stock options) can successfully use these tools.

Leading experts, however, believe that a combination of negative incentives (such as

holding managers accountable for performance) and positive incentives (such as

performance bonuses) can take full advantage of this innovative mechanism to the

ultimate benefit of ratepayers.1
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Incentive-based regulatory schemes are designed to allow prices to be adjusted

regularly and modestly upward within strict limits typically set below the rate of

inflation to encourage aggressive cost reduction and productivity efforts. The specific

mechanism, established by a regulator, is built around two levers: (1) the inflation

factor allows rates to increase within limits to reflect rising costs, while (2) the productivity factor exerts downward pressure on rates, creating the “incentive” to reduce

costs.

Such a construct forces an organization to prioritize productivity and cost savings.

For the Postal Service, it abruptly ends the temptation to seek rate increases every

time expenses increase. A well-designed rate ceiling can mimic the bottom-line

pressures facing private companies and produce a 21st century Postal Service much

more aligned with the interests of ratepayers.

Building the right rate-ceiling design is an intricate endeavor that the Commission

recommends assigning to the Postal Regulatory Board. However, the Commission

does have some thoughts on how such a mechanism could work:

Selecting an appropriate inflator. Numerous indexes have been suggested, most

notably the Gross Domestic Product Implicit Price Deflator (“GDP-PI”), which

focuses solely on the domestic economy; the Gross National Product Implicit Price

Deflator (“GNP-PI”), which incorporates foreign investment flows; the Consumer

Price Index (“CPI”), which focuses on consumer prices rather than prices of investment goods; and, because of the labor-intensive nature of the Postal Service, the

Employment Cost Index (“ECI”), developed by the Bureau of Labor Statistics. Some

economists suggest a hybrid approach—perhaps 80% ECI and 20% GDP-PI—

would best suit the unique nature of the Postal Service.2

Selecting an appropriate productivity factor. As an offset to the inflator, the

productivity factor is the pressure placed on inflation-adjusted prices to encourage

Postal Service managers to reach a target performance level. It has been suggested by

one economist that the Bureau of Labor Statistics’ private non-farm business total

factor productivity could be a useful target for the Postal Service.3

Application of the escalator. Once identified, inflation and productivity factors

combine to produce an “escalator,” the adjusted formula for rate ceilings to which the

organization must adhere in the pricing of non-competitive products. The regulator

must then determine how to apply the mechanism to the products offered. It is not

likely that one rate ceiling for all Postal Service products and services would be

appropriate. To accommodate varying costs and other concerns, regulators typically

rely on “baskets” and “bands.” Baskets are broad groups of products and services

subject to their own price cap. At the Postal Service, this mechanism could help

guard against cross-subsidization (i.e. shifting costs among “baskets”). “Bands” work

similarly, but within a given basket. With regard to the Postal Service, one economist
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

suggests three baskets–single-piece First-Class Mail, periodicals,

and other mail (excluding international)–with additional bands

within each basket to limit price increases for specific products

and services. That economist also recommended that prices of all

products and services be required to cover incremental costs as a

means of protecting against cross-subsidization, making more

important the Postal Service’s cost-allocation efforts.4

Setting Rates. Implementation of the new incentive-based ratesetting process provides the opportunity to discard the current

system involving a time-consuming and expensive comprehensive rate case every two to three years. In its place, there will be

an initial rate case used to set rates and rate ceilings for products

and services. The Commission envisions that the process for this

initial rate case would be similar to the current rate-setting

process, but with one significant difference: It would be limited to the establishment

of rates and rate ceilings for non-competitive products and services. The Postal

Regulatory Board would not determine prices for competitive products; it would only

ensure that the initial prices set by the Postal Service are not being cross-subsidized by

revenues generated by non-competitive products.

The true benefits of the new process would become apparent after this initial rate

case has been completed. Once the rate-ceiling regime is in place, the Postal Service

would be free to change rates without prior review by the Postal Regulatory Board, as

long as rates remain within established rate ceilings and other limits established by

the Postal Regulatory Board.

The Commission recognizes, however, that questions may arise as to whether the

Postal Service’s rates for non-competitive products are, in fact, within established rate

ceilings or whether rates for competitive products and services are covering the cost of

providing the product or service. As a consequence, the Commission recommends

that the Postal Regulatory Board be authorized to conduct expedited after-the-fact

reviews of rate changes when a written complaint is filed. If the Postal Regulatory

Board determines that the rate of a non-competitive product or service is not within

an established rate ceiling or the rate of a competitive product or service is being

cross-subsidized, it would be authorized to require the Postal Service to adjust the

rate. Only Postal Service requests for rates in excess of established rate ceilings (for

example, in the case of a precipitous decline in mail volumes), as well as rates for new

products and services, should be subject to a similar expedited advance review.

Procedures established by the Postal Regulatory Board should ensure that all affected

parties have an opportunity to participate through written submissions. As envisioned by the Commission, the process should be limited to the review of written

submissions and should be completed in no more than 60 days.

Simplify the Rate-Setting Process

Replacing the existing rate-setting process with

an incentive-based regulatory system will

dramatically simplify the rate-setting process

and allow the Postal Service to react in a

timelier manner to changes in the mailing

industry. The Commission therefore recommends that the current rate-setting process be

repealed, and that the Postal Regulatory Board

be authorized to design a new incentive-based

regulatory scheme for Postal Service rates.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

The proper development of this rate mechanism is an intricate and sensitive undertaking. Fortunately, the Postal Service has a window of opportunity to implement

this important change. Recent legislation signed into law by President Bush to

reduce the Postal Service’s pension liability (discussed in detail in Chapter 6) also

includes a passage strongly discouraging a rate increase before 2006.5

 This provides

ample time for the Postal Regulatory Board to develop and fine-tune a workable rate

ceiling mechanism. The Commission recommends that the Postal Regulatory Board,

over the next two years, undertake an extensive process to design the most appropriate, workable and beneficial mechanism. While the Commission believes the Postal

Regulatory Board should have broad latitude in doing so, it should generally strive to

develop a mechanism that promotes: reduced costs and increased efficiency, rate

predictability and stability, reasonable pricing flexibility, adequate revenues and a

reduced administrative burden for the rate-setting process.

Defining the Appropriate Scope of Postal Service Operations

Beyond designing and implementing an unobtrusive rate ceiling that both ensures

affordable rates and places greater institutional emphasis on cost controls and productivity gains, other essential roles of the Postal Regulatory Board are defining the scope

of the postal monopoly, refining the appropriate components of the universal service

obligation, and establishing the bright-line boundaries between the postal monopoly

and competitive markets.

In discharging these responsibilities, the Postal Regulatory Board would factor in

changing market circumstances, hear the concerns of interested parties, weigh the

arguments of the Postal Service, and make a final determination consistent with the

more focused mission of the institution.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Upholding Universal Service

The Commission believes the Postal Regulatory Board is the most appropriate body

to charge with regularly reviewing the components of universal service to ensure they

meet the modern mail needs of a nation whose correspondence habits are changing

dramatically. In Chapter 2, the Commission expressed its support for all aspects of

the universal service obligation, but tasked the Postal Regulatory Board with refining

key aspects of universal service as circumstances require and/or permit. These

important decisions should rest with an independent entity charged with providing

thoughtful, careful review and an outcome that best serves the public interest. For

example, the Commission endorses maintaining the current list of products and

services that are required to be offered at uniform rates, but empowering the Postal

Regulatory Board to revise the list as appropriate in the future. These steps will

ensure that the universal service obligation is a dynamic responsibility, one capable of

changing as the country’s postal needs evolve and remaining in step with the

country’s mail needs.

Service Standards

The 1970 Act currently requires the Postal Service to seek non-binding advisory

opinions from the PRC whenever a “change in the nature of postal services . . . will

generally affect service on a nationwide or substantially nationwide basis.” Before

such a change may take effect, the Postal Service must first submit a proposal to the

PRC for the purpose of obtaining an advisory opinion. In the years following the

enactment of the 1970 Act, Federal courts interpreted this language in a manner that

limited the necessity for the Postal Service to seek such advisory opinions to instances

where three factors coexist: 1) the change must have a meaningful, quantitative

impact on service; 2) the change must be in the “nature” of the postal service being

altered; and 3) the change must affect service on a nationwide or substantially

nationwide basis.6

 In one instance, a Court determined that the advisory opinion

requirement did not apply to the consolidation of district offices because there was

little evidence that consolidation would affect the nature of postal service;7

 in another, a Court concluded that a policy denying door-to-door delivery service to

certain residents of Harris County, Texas, also did not require an advisory opinion

because there was no nationwide impact.8

 As a consequence, the Postal Service has

referred proposed changes to the PRC for advisory opinions only four times since

July 1, 1971.9

Source: USPS.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Regardless of how often the advisory opinion requirement has been invoked, its

practical impact is negligible. As one Court explained, Congress’s intent was for the

advisory opinion requirement to be a safeguard applicable only in situations where

Postal Service management contemplated significant changes.10 The question for this

Commission is whether a new approach is necessary.

The Commission is reluctant to recommend that the Postal Service continue to have

unlimited ability to change service standards. Given the economic pressures facing

the Postal Service, the temptation for management at some future time to turn first to

lower service standards as a means of reducing costs, rather than as a last resort, might

prove irresistible. The balance lies with creating a clearer standard for when the Postal

Service must turn to the new Postal Regulatory Board for advice, and in making such

advice binding on the Postal Service when it will have a substantial and negative

impact on national service standards. The Commission recommends the following

approach:

When the Postal Service determines that there should be a change in the

nature of postal services which will negatively affect service on a nationwide or substantially nationwide basis, it shall first submit a proposal,

within a reasonable time prior to the effective date of such proposal, to

the Postal Regulatory Board requesting an opinion on the change.

Proposals for opinions must be accompanied by an analysis of the impact

of the proposed change indicating the percentage impact on: 1) aggregate

volume for each class and subclass of mail affected by the proposed

change; or 2) delivery points. Requests for opinions must be made by the

Postal Service whenever a proposed change will result in a negative

impact on more than 10% of aggregate volume at the class or sub-class

level, or on more than 10% of delivery points. If the proposed change

will impact more than 25% of aggregate mail volume for a class or

subclass of mail or 25% of delivery points, the opinion of the Postal

Regulatory Board shall be binding on the Postal Service; otherwise, the

opinion is advisory.

The Commission believes that such an approach provides the Postal Service with an

appropriate amount of latitude to manage postal operations, while setting a clear

standard for when it must seek external input. It also makes clear that the Postal

Service may not independently lower service standards on a nationwide basis if doing

so is determined by the Postal Regulatory Board not to be in the public interest. In

addition, the Commission recommends that the Postal Regulatory Board be required

to prepare a comprehensive annual report assessing the Postal Service’s performance

in meeting established service standards.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Oversight of Postal Monopoly

The Commission also recommends that the Postal Regulatory Board be tasked with

clarifying and administering the scope of the postal monopoly. Given the Postal

Service’s status both as a monopoly and a competitor, administrative authority over

the monopoly should reside outside the institution. It is inappropriate for a commercial organization to decide the scope of a law that restrains its competitors. To the

contrary, it is a fundamental premise of American justice that the law should be

administered by persons without a financial interest in the outcome.

The Commission also believes that there must be a reasoned and impartial administrative procedure for reviewing and updating the scope of the postal monopoly. The

Postal Service has itself adopted a number of administrative exceptions to the postal

monopoly.11 This process of continual review of the costs and benefits of the postal

monopoly is important, but is best carried out by an independent entity. The Postal

Regulatory Board should therefore be vested with authority to modernize the law by

narrowing the postal monopoly if and when the evidence shows that suppression of

competition is not necessary to the protection of universal service without undue risk

to the taxpayer.

Settling the “Boundary Wars”

To ensure that the Postal Service adheres to its core mission —

delivery of letters, newspapers, magazines, advertising mail, and

parcels—the Commission further recommends that the Postal

Regulatory Board be authorized to monitor services and products

offered by the Postal Service and to hear complaints from those

who believe the institution has exceeded its authority and entered

markets outside its core mission.

This opens up a complex web of questions commonly referred to as

the “boundary wars.” Most would agree that every American

should be able to send a letter or parcel to every other American at

reasonable cost through the local post office. But should the Postal

Service provide on-line bill payment? Or is that a service for which

consumers should turn to a private vendor? By setting clear boundaries, the Postal

Regulatory Board can deliver greater clarity and certainty for those who may find

themselves in competition with the Postal Service.

Source: USPS.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Financial Transparency

The Commission believes that the Postal Service has a responsibility to the public to

be transparent in its financial reporting. Given its important public mission and

central role in the nation’s economy, changes in Postal Service economic health

should not come as a surprise to those responsible for or impacted by its performance.

By engaging in more businesslike financial reporting and more aggressively allocating

costs by product and service, the Postal Service will gain essential insight into all

aspects of its operations. Equally important, as a prominent public institution, all

Americans will have a better understanding of the financial challenges and opportunities facing their Postal Service.

Voluntarily Comply with Applicable SEC Reporting Requirements

As a public entity, the Postal Service is wholly owned by the American people. They

are the shareholders of the Postal Service, and they are due a regular and full accounting of the fiscal health and/or challenges facing this vital national institution.

Unfortunately, the Postal Service today is far from this goal. Since September 2000,

GAO has issued numerous reports urging greater financial transparency and expressing mounting concern that fiscal pressures were putting at risk the Postal Service’s

ability to fulfill its mission.12 The apparent catalyst for concern was the period from

November 2000 through February 2001, during which Postal Service estimates of

operating results for FY2001 started at a $480 million loss, and ended up, just three

months later, as an estimated loss of $2 billion to $3 billion, with too little explanation for the sharp decline.13

As a unifying force in American commerce and society, and as a customer-financed

government endeavor, the Postal Service should be setting the standard for financial

transparency by which all other Federal entities are judged. While the Postal Service

does, in many respects, conduct financial reporting over and above what is required

today of Federal agencies, it remains behind the level of disclosure offered by its

corporate peers. The Commission strongly recommends that the Postal Service be

required to close the gap by voluntarily complying with applicable provisions of the

major SEC reporting requirements (quarterly (10-Q), annual (10-K), and “significant event” (SK-8) reports).
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Improve Cost-Allocation Safeguards Against Cross-Subsidization

Where the Postal Service participates in markets also served by private industry, effective

oversight is essential to ensure that monopoly revenues are not manipulated to the

benefit of the Postal Service’s competitive offerings. For this reason, the Commission

recommends that the Postal Service periodically report on the allocation of costs among

all products and services in accordance with form, content and timing requirements

determined by the Postal Regulatory Board.

While the Postal Service should become more businesslike, it remains a

government entity. Private carriers have no U.S. Treasury to borrow

from at favorable rates, no monopoly markets to reliably generate more

than 75% of operating revenues and no government exemption from

most taxes and laws imposed on private enterprises. Given that

distinction and the Postal Service’s presence in contested markets, it has

a special duty to ensure it does not wield its monopoly and government

privileges unfairly against companies that have no such advantages. To

guard appropriately against cross-subsidization, the Commission

recommends that the Postal Service significantly improve its cost-allocation system.

Beyond addressing the legitimate concerns of private carriers, aggressive reforms in this

area would greatly support the shift to a more streamlined ratemaking process. This

approach would also enhance public confidence that postage rates reflect actual processing costs and do not unfairly shift burdens among the various classes of mail and, thus,

categories of customers.

Included in the Postal Service’s break-even requirement today is a specific mandate that

each class of mail essentially pay for itself—covering both its direct and indirect costs

and an appropriate percentage of overall institutional costs (costs that are not attributed

to any one category of mail). This requirement has resulted in a two-tiered costallocation process whereby direct and indirect attributable costs are tallied for each

category of mail and institutional costs are divided among the various categories based

on eight determining factors. Historic preferences for certain categories of mail, such as

periodicals and non-profit correspondence, are also provided. The system is not without controversy, due primarily to the fact that more than 40% of costs fall into this

general category of institutional costs. Testimony on this topic was contradictory.

While the Postal Service claims that significant improvements are not feasible, one

leading private-sector carrier noted it had a procedure for achieving 100% cost allocation.14 The Commission feels that the appropriate target for the Postal Service lies

somewhere in between. While the Commission hesitates to prescribe a percentage,

there is a strong consensus that an attribution level of less than 60% is far too low, and

would not be considered acceptable in similar private-sector ventures.

The Commission strongly encourages the Board to make this issue a top priority in

order to ensure the system is fair, adequately protects the postal market from the

distorting effects of cross-subsidization, and ensures the Postal Service has real insight

into the success and failure of its various products and services. The Commission also

believes that existing preferences for favorable rates for the mailing of periodicals and

non-profit correspondence should be maintained.

Private carriers have no U.S. Treasury to

borrow from at favorable rates, no

monopoly markets to reliably generate

more than 75% of operating revenues

and no government exemption from most

taxes and laws imposed on private

enterprises.

Spotlight
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Procedures

In its recommendations, the Commission has vested much authority in the Postal

Regulatory Board. In order to exercise these authorities, the Postal Regulatory Board

should also be authorized to establish appropriate procedures. In carrying out its

regulatory functions, such as reviewing the scope of the Postal Service’s universal service

obligation and monopoly, the Postal Regulatory Board should employ an appropriate

regulatory-style process that ensures input from those affected by its determinations.

When reviewing complaints, such as whether the Postal Service has entered a market

outside the scope of its mission, the Postal Regulatory Board should employ a process

similar to that recommended for conducting complaint-based reviews of postal rates:

the procedures should be limited to the review of written submissions and should be

completed promptly, perhaps in as few as 60 days.

Postal Service Viability and Risk to the Taxpayer

In addition to SEC-like reporting, the Commission recommends that the Board of

Directors be required to submit annually a detailed report to the Postal Regulatory

Board on the financial viability of the institution, providing both significant financial

insights as well as adequate explanation of related trends. The report should adhere to

the “no surprises” rule, ensuring that any major changes to the fiscal health of the

institution are widely understood in advance, so appropriate responses can be anticipated and generated. The

Commission further recommends that this report be

made available to the public.

Debt Ceiling

The Commission recommends continuing the current

debt ceiling of $15 billion, so the Postal Service continues

to have ample latitude to cushion itself in down-cycle

years and cope with the volatility and uncertainty created

by electronic diversion. The Commission also recommends repealing the sub-limits on annual borrowing for

capital and operating needs within the existing $3 billion

annual limit on borrowing.

Source: USPS un-audited FY 2003 Third Quarter Report on

Financial Condition and Results. As of May 16, 2003, the Postal

Service had outstanding debt of $7.275 billion; the Postal Service

can borrow an additional $7.725 billion before reaching its

statutory borrowing cap.

7.275

7.725

16

14

12

10

8

6

4

2

0

billions of dollars

Current and Available Postal Service Borrowing

Exhibit 4-3.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Regulator Should Have Subpoena Power

For the Postal Regulatory Board to ensure financial transparency and make fully informed determinations on issues ranging from rate ceilings to cross-subsidies, it must

have access to the most reliable and current information possible. For this reason, the

Commission recommends that the Postal Regulatory Board have the authority to

request accurate and complete financial information from the Postal Service, including

through the use of subpoena powers, if necessary, to obtain a thorough and reliable

snapshot of Postal Service operations.

Ensuring Pay Comparability

The Postal Service is required by law to provide compensation to its employees comparable to that offered by the private sector. As discussed in detail in Chapter 6, the

Commission received a great deal of testimony claiming the existence of a compensation

premium. Rather than take a firm position in this debate, the Commission recommends that the Postal Regulatory Board be tasked with making an impartial determination as to whether there exists a compensation premium over the private sector. If the

Postal Regulatory Board determines that a premium exists, then it should be authorized

to take immediate binding and corrective action for prospective new hires, once the

comparability analysis is complete. The Postal Regulatory Board

also should establish a reasonable timeline for corrective action

for existing employees, which management and the postal unions

would be required to achieve over time in their collective bargaining and arbitration proceedings. On the other hand, if the

Postal Regulatory Board determines there is not a compensation

premium, then it should say so and effectively end the debate.

Upholding Compensation

Comparability

The Postal Regulatory Board should be responsible for determining that the Postal Service is

in compliance with statutory provisions requiring comparable pay to the private sector. The

Regulatory Board should identify an appropriate point of comparison, and—if a premium

exists—take reasonable corrective action (see

Chapter 6).
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Conclusion

For the Postal Service to operate in a more businesslike fashion, its managers must have

greater freedom and accountability for the daily operations and management of the

institution. For that to happen in an appropriate way, the Postal Service needs a strong,

independent Postal Regulatory Board with broad authority over matters ranging from

appropriate ceilings on rates, to the scope of the postal monopoly, to the level of detail

required in rigorous new financial reporting requirements. In doing so, this entity will

play an important role in ensuring the financial viability of the Postal Service, protecting

the health of the nation’s public-private postal network, and preserving the quality and

sustainability of the services upon which the American people and the U.S. economy

rely.

Once an independent regulatory entity is in place, Postal Service managers must have

broader latitude to modernize a vast and outdated postal network to produce substantial

gains in service quality and costs. Maximizing the benefits of this endeavor will require

a fundamental transformation of how the Postal Service does business: elevating the

performance of the nation’s postal network, taking full advantage of new partnerships

and aggressively pursuing leading-edge cost-savings and productivity strategies. If

pursued in tandem and as part of a comprehensive effort, such an endeavor could

utterly transform the value, service and operations of the Postal Service to the benefit of

its customers and the U.S. economy as a whole. Its time has come.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Chapter 4 Recommendations*

B-3. Monopoly. The Postal Service should maintain its current mail monopoly, and

also retain its sole access to customer mailboxes. However, the 1970 Act should be

amended to: 1) authorize the Postal Regulatory Board to clarify and periodically

review the scope of the mail monopoly; and 2) clarify that the Postal Service does

not have the authority to alter the scope of the mail monopoly or to determine the

extent of access to customer mailboxes.

B-4. Financial Transparency. The Postal Service should voluntarily comply with

applicable Securities and Exchange Commission reporting requirements. In

addition, the Postal Service should periodically report on the allocation of costs

among mail products and services in accordance with form, content, and timing

requirements determined by the Postal Regulatory Board.

C-2. Management Flexibility. The Board of Directors and senior Postal Service

management should be given greater flexibility to manage without the limitations

imposed by statutory constraints. More specifically: 1) Postal Service management

should be given the flexibility to take advantage of corporate best practices; 2) the

Postal Service should be allowed to set rates within limits established by a new

Postal Regulatory Board without obtaining prior approval; 3) the sub-limits placed

on annual borrowing for capital and operating needs within the existing $3 billion

annual limit on borrowing should be repealed; and 4) the Postal Service should be

allowed to retain earnings subject to limits established by the Postal Regulatory

Board.

C-3. Accountability and Public-Policy Oversight. In order to ensure that a Postal

Service management with greater latitude has appropriate oversight, the Postal

Rate Commission should be transformed into a new Postal Regulatory Board with

the responsibility to protect the public interest and promote public confidence in the

fairness and transparency of postal operations. The new Postal Regulatory Board

should have authority to: review and refine the scope of the Postal Service’s universal service obligation; clarify and refine the scope of the postal monopoly; regulate

rates for non-competitive products and services; establish limits on the accumulation of retained earnings by the Postal Service; ensure financial transparency;

obtain information from the Postal Service, if need be, through the use of new

subpoena power; and review and act on complaints filed by those who believe the

Postal Service has exceeded its authority. The new Postal Regulatory Board should

be comprised of three members who are appointed by the President and confirmed

by the Senate, and no more than two should be members of the same political

party. Members of the Postal Regulatory Board should be selected solely on the

basis of their demonstrated experience and professional standing.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

C-4. Rate-Setting Procedures. The existing rate-setting process should be replaced

with an incentive-based rate-setting methodology in which the Postal Regulatory

Board: 1) establishes baseline rates and rate ceilings for non-competitive

products and services; 2) reviews, in advance, rate requests for non-competitive

products and services that exceed established rate ceilings; and 3) ensures that

rates for competitive products and services are not cross-subsidized by revenues

generated by non-competitive products and services. The Postal Regulatory

Board, upon written complaint, should be authorized to conduct after-the-fact

reviews of rate increases for non-competitive products and services, and, if

necessary, to require adjustments to these rates when they are inconsistent with

established rate ceilings. The Postal Regulatory Board should also be authorized

to review, upon written complaint, whether a rate for a competitive product or

service is being cross-subsidized by revenue generated by non-competitive

products or services and to take appropriate remedial action. In conducting

after-the-fact reviews, the Postal Regulatory Board should ensure that affected

parties have an opportunity to participate, but should also ensure that the

timeframe for the review is dramatically reduced from that permitted under the

existing rate-setting process. Participation by interested parties should be limited

to written submissions, and all procedures should require a final determination

within 60 days.

* See Appendix C for a complete list of Commission recommendations.
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Chapter 4 Protecting the Public Interest: Enhanced Accountability and Public-Policy Oversight

Endnotes

1. Reisner, Robert A.F., Global Insight, “Price Caps and the U.S. Postal Service: Prospects, Perils and the Public

Interest,” 2003.

2. Christensen, Dr. Laurits R., Chairman, Laurits R. Christensen Associates, Inc., Hearing Before the Subcommittee on

the Postal Service of the Committee on Government Reform and Oversight, House of Representatives, One

Hundred Fifth Congress, First Session on H.R. 22 to Reform the Postal Laws of the United States, Apr. 16, 1997, p.

250.

3. Ibid., p. 251.

4. Ibid., p. 253.

5. P.L. 108-18 (April 23, 2003), at section 3.

6. Buchanan v. United States Postal Service, 508 F.2d 259, 262-263 (Cir. 5, 1975).

7. Buchanan, 267.

8. Bradley v. United States Postal Service, 554 F.2d 186, 187 (Cir. 5, 1977).

9. United States Postal Service, Transformation Plan, Apr. 2002, Appendix N, p. 10.

10. Buchanan, 263.

11. 39 CFR Part 310.

12. For example, “U.S. Postal Service: Enhancements Needed in Performance Planning and Reporting,” GGD-00-207,

Sep. 19, 2000; “U.S. Postal Service: Transformation Challenges Present Significant Risks,” GAO-01-598T, Apr. 4,

2001; “U.S. Postal Service: Financial Outlook and Transformation Challenges,” GAO-01-733T, May 15, 2001;

“U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation,” GAO-02-355, Feb.

2002; “U.S. Postal Service: Moving Forward on Financial and Transformation Challenges,” GAO-02-694T, May 13,

2002; “U.S. Postal Service Actions to Improve its Financial Reporting,” GAO-03-26R, Nov. 13, 2002; and “Major

Management Challenges and Program Risks: U.S. Postal Service,” GAO-03-118, Jan. 2003.

13. GAO-03-26R, p. 1.

14. Holsen, James, Vice President, Industrial Engineering, United Parcel Service, Response to Questions Following

Testimony Before President’s Commission on the United States Postal Service, May 28, 2003.

Chapter 5: Pushing the Envelope:

Designing a Smaller, Stronger,

New Postal Network

Introduction

The proper configuration of a 21st century postal network is at the heart of a successful transformation of the Postal Service. The network of processing and distribution

facilities combined with technology is where the vision of a high-performing modern

institution capable of continuing its enduring mission of delivering the mail to

everyone at affordable rates meets the sobering reality of the Postal Service’s significant fiscal challenges. With revenues stagnant and the number of delivery points

increasing each year, the Postal Service today is asked to do what many in the private

sector have been asked to do: bring down costs while elevating service. If truly freed

to operate in a businesslike manner, the Postal Service has a real opportunity to

succeed in this make-or-break endeavor.

In facing its fiscal dilemma, the Postal Service can “push the envelope” in one of two

ways. It can aggressively explore new products and services in pursuit of new revenue

streams, something it has done with dubious success in the past. Or, it can push the

envelope of innovation, daring to acknowledge that the postal network as it exists

today is far too sprawling and cumbersome for the nation’s needs and that through

the strategic deployment of new technologies, partnerships with the private sector

and appropriate cost-reduction strategies, it can grow smaller and stronger—keeping

the Postal Service’s commitment to universal service without overburdening

ratepayers.

Stagnant mail volumes place intense pressure on the Postal Service to eliminate costs

and inefficiencies and modernize systems and processes throughout its network. Yet

even if a changing fiscal outlook did not demand these changes, it is important to

note that ratepayers deserve them nonetheless. Regardless of the economic climate,

the nation is due the most cost-effective, efficient, high-quality Postal Service that

strong leadership, innovative technology, pioneering partnerships, and a capable,

dedicated workforce can provide.

Fortunately, given its process orientation, the Postal Service is well-positioned to gain

substantial savings from new efficiency and productivity gains, if it is free to engage

in true corporate-style realignment. In the Commission’s view, many of the Postal

Service’s challenges can be overcome with tools and strategies readily available today.

The defining challenge, however, remains significant—the willingness of all interested parties (employees, customers, partners, regulators and members of Congress)

to support a strategic realignment that will dramatically alter not what the Postal

Service does, but how it provides its vital services to the nation.

The Postal Service deserves praise for developing and testing its network rationalization initiative, which strives to create a sound analytical basis for redesigning the
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Source: USPS.

postal network. The strategy acknowledges the need to

control high fixed infrastructure costs, which have little

room to fluctuate with changes in mail volumes and

revenues. It also aims to reduce costs, consolidate plants,

improve consistency of service and standardize processes—

all providing a strong start to efforts to rein in costs while

improving overall efficiency and service.

Accelerating these efforts, as the Commission recommends, involves permitting this realignment to proceed

free from undue external intervention. This will be a

significant challenge. The Postal Service employs hundreds of thousands of Americans in communities across

the country. Its facilities, trucks, and letter carriers are—to

most people—the most visible and familiar face of the Federal government in their

daily lives. Changes to the numbers of people and facilities that comprise the Postal

Service affect the makeup of virtually every community. This process must be viewed

and supported as advancing the nation’s Postal Service, rather than undercutting it.

Toward that end, the Commission envisions a comprehensive postal network realignment that is facilitated by an independent process, much like that governing military

base closures in the mid-1990s, for consolidating and closing processing and other

back-end postal facilities; asking communities to play a more prominent role in the

disposition of post offices that are unnecessary for the fulfillment of universal service;

promoting greater use of private partnerships to ease the Postal Service’s fixed infrastructure burden; and pursuing end-to-end standardization of the postal network to

reduce the uneven nature of many postal processes that combine to add billions of

dollars in unnecessary costs into the system each year.

At the same time, to ensure service is enhanced, the Commission recommends

revolutionizing retail access—bringing a wider range of postal services to consumers

in grocery stores, pharmacies, and other convenient locations. The Commission also

endorses a more aggressive approach to outsourcing that allows many postal functions to be provided by private-sector companies that demonstrate an ability to

provide a higher quality service at less cost. The Commission also has specific

recommendations for management of the Postal Service’s substantial real estate assets,

and the appropriate funding of the Postal Inspection Service and the Office of the

Inspector General.

Given the opportunities to perform the nation’s postal business better, the Postal

Service—despite its challenges today—can have a bright future and continue to play

a central role in American commerce and society. But it will take flexibility on the

part of all who have an interest in the Postal Service’s success—customers and

employees, partners and politicians. The institution must be permitted to take full

advantage of the many efficiency opportunities it should have today by virtue of its

unique businesslike mandate and the strong national desire to see its vital service to

the country continue at affordable prices and minimal expense to taxpayers. The

Postal Service has ample opportunity today to successfully achieve these goals.

Whether it is permitted to do so is largely a question for those who rely on, work in,

and govern its operations.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Rightsizing is Reshaping Corporate America, Too

You’re a large national enterprise with a bottom line that’s seen better days. While

robust growth and strong revenue streams once easily financed vast operations, new

fiscal realities have changed the picture dramatically. As a result, your entity’s

success hinges on wringing inefficiencies, redundancies and other excess costs out of

the system.

Sound like the Postal Service? Well, yes. But it also is the story of many leading

private companies. Just ask the executives at Cisco Systems. It was not long ago

that the Internet giant was growing rapidly through an aggressive strategy of

acquisition and new hires. Today, the Fortune 100 company is sharply focused on

tackling duplication and waste. It is consolidating and downsizing its organization and standardizing technologies to boost productivity and rein in costs. In no

small part as a result of these aggressive measures, Cisco’s net income rose 35%

during the fiscal third quarter of 2003.2

Rather than having myriad teams working on overlapping and sometimes competing projects, the company now stresses both standardization and versatility. For

example, it now uses a single chip to power two of its most popular products when

it once used different chips. This and other changes allowed Cisco to keep larger

quantities of fewer parts and save $23 million annually.3

As a similar process-oriented institution, the Postal Service’s opportunities to

benefit from greater standardization and a sharp focus on doing business in new,

better and cheaper ways are significant. While they require a substantial overhaul

of the legacy network, this ambitious reform is in step with current trends among

leading U.S. corporations. Those that want to not only stick around but succeed

tomorrow are focusing hard today on doing their work better and at lower cost.

Rightsizing the Nation’s Postal Network

There are two basic elements to the successful realignment of the nation’s postal

network: structure and strategies. Rightsizing addresses the structural component—

identifying and configuring the ideal physical network of facilities for the most costeffective and quality delivery of the nation’s mail in the modern environment.

Few dispute that the legacy postal network relied on today is not what would be built

from scratch if the Postal Service were created in the 21st century. Without question,

the Postal Service has far more facilities than it needs and those facilities it does

require often are not used in the most efficient manner. It should be noted that these

infrastructure modernization challenges are common throughout the Federal government today. According to the GAO, the physical infrastructure of most Federal

agencies is “based on the

business model and technological environment of the

1950s. Many of the assets

are no longer effectively

aligned with, or responsive

to, agencies’ changing

missions and are therefore no

longer needed.”1 While a

statement on Federal infrastructure generally, it is an

apt description of the postal

network today.

Corporate America, too, is

feeling the pressure to take a

close look at its processes,

assets and strategies to ensure

an optimization that minimizes costs and inefficiencies. Unfortunately, while

the Postal Service has many
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

of the same opportunities as leading corporations to find new efficiencies, it also faces

unique political and statutory hurdles. In reality, the Postal Service does not have the

latitude to manage its infrastructure based on the needs of the postal network.

Instead, the network remains largely unchanged and increasingly inefficient due to

the inertia that results from restrictive statutory requirements as well as political

resistance to closing or consolidating postal facilities.

The Postal Service must be freed from these debilitating political restraints that ill

serve all who rely on the institution. It should be free to pursue its network rationalization initiative to modernize the design of the nation’s postal network; it should be

encouraged to work with local communities to determine the fate of low-activity post

offices that are no longer necessary to the fulfillment of universal service; and it

should be encouraged to fundamentally enhance all Americans’ access to the most

popular retail postal services—all in pursuit of greater efficiency, greater customer

convenience and service, and a 21st century Postal Service that delivers like never

before.

Rationalizing the Network

Many leading companies are consolidating facilities, often doing the same amount of

work, simply at fewer locations, thanks to the advances of new technology, standardization and other innovative strategies in boosting corporate efficiency and productivity. The Commission fully supports the Postal Service’s ambitious efforts to realize

similarly positive results for the delivery of the nation’s mail.

The Postal Service’s network rationalization initiative is

the most tangible and important deliverable of its 2002

Transformation Plan. This effort addresses the backend distribution, processing, and bulk mail centers

dispersed across the country today. While not the

front-line retail post offices most familiar to the American people, the efficiency of these facilities’ operations is

essential to the quality of postal service that all

Americans receive.

Source: USPS.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Overview of Logistics Network

Facility Type Number of

Facilities

Processing and Distribution Plant 290

Air Mail Center 90

Bulk Mail Center 21

Remote Encoding Center 20

Priority Mail Processing Center 11

International Service Center 7

Independent Mail Transfer Center 7

Total 446

Through extensive and sophisticated analysis, the Postal Service is developing a

network design based on distribution concepts that allow it to simplify and standardize mail flows in order to enhance the efficiency of every aspect of postal operations.

This approach shifts the focus from the performance of a particular product line or

geographic area to that of the entire logistics network. In other words, rather than

focusing solely on the efficiency of each step of the mail process, this strategy also

maximizes the efficiency with which all the pieces fit together. By streamlining the

distribution network, the Postal Service can pave the way for the potential consolidation of sorting facilities and the elimination of other excess costs. The ultimate

deliverable of this data-driven endeavor is a robust yet flexible logistics network that

reduces costs, increases operational effectiveness and

improves consistency of service.

The network rationalization initiative is at the heart of

the Postal Service’s efforts to take $15 billion in cumulative costs out of the institution over a five-year period.

So far, the initiative has successfully designed a model

that mirrors the size, scope and purpose of the challenge

at hand. Now, the analysts are feeding the model with

ideas from postal experts and the mailing industry, as

well as various “what if” scenarios. These efforts

ultimately will identify a “network consolidation

point,” a distribution concept that results in a more

standardized and simplified mail processing environment and greater opportunities for transportation

consolidation. This operational testing phase is expected to continue through the end of the year, at which time the Postal Service

hopes to begin putting the new strategy to work for the nation.

Exhibit 5-1.

Source: USPS.

Source: USPS.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Postal Network Optimization Commission (P-NOC)

To ensure an independent and strategic realignment of the Postal Service’s processing, distribution and bulk mail centers, the Commission recommends the following process be authorized through legislation to occur in two rounds, with the option for the Postal Service to ask

Congress for future rounds should further alignment be required:

Criteria for Decision-Making: The Postal Service should make public the criteria it

proposes to use in recommending the closure and realignment of facilities and should invite

public comment. In addition, the information used in decision-making should be certified as

accurate and complete by the Postal Service.

Commission Formation: The President should appoint eight commissioners with the advice

and consent of the Senate, and designate a Chairman. The House Speaker, the Senate

Majority Leader, the Senate Minority Leader, and the House Minority Leader should each

recommend one member to the President. One member also should be selected by unions to

represent bargaining-unit employees.

Public Hearings: After receiving the Postal Service’s recommendations, the Commission

should have four months to issue a final recommendation. During this time, it should be

required to conduct open meetings on the Postal Service’s proposal, receiving testimony from

those who would be affected, including postal employees and customers, as well as community

and government leaders.

Presidential Approval: Within 15 days, the President can accept the Commission’s recommendations or reject them in whole or in part. If rejected, the President should return the list

to the Commission with an explanation, and the Commission should be asked to send a

revised list.

Congressional Approval: Once the President approves the plan, it should be sent to Congress

with the stipulation that the plan is final unless Congress passes a joint resolution disapproving the plan in its entirety within 45 days.

Implementation: The Postal Service should begin closures and consolidations within 12

months.

Transition Assistance: Assistance should be provided through the appropriate Federal

agencies, including assisting communities in determining how they can best develop the

surplus property and training grants to provide the workforce with new skills.

To do that, Postal Service leadership will need the latitude to proceed. This will be a

challenge. The centers that may be consolidated or closed employ a significant

number of Americans. Understandably, political leaders become concerned when

general plans to consolidate or close unneeded facilities become specific and involve

people, jobs and facilities in the communities they represent. In addressing these

concerns appropriately, the Commission feels there are lessons to be learned from the

realignment and closures of military bases in the mid-1990s,4

 when the end of the

Cold War altered in

significant ways the

size, structure and

deployment strategies

of the nation’s armed

forces.

A widely respected

independent process

was put in place. The

Commission recommends a similar entity

be established not

only for the purpose of

closing and consolidating unneeded

processing, bulk-mail

and distribution

facilities, but also to

ensure an appropriate

process in which the

legitimate concerns of

local communities

and all interested

parties are heard and,

once decisions are

made, the needs of

affected communities

and individuals are

adequately addressed.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

With mail volumes stagnant, with opportunities to outsource and provide better

service at less cost (see “Leveraging the Private Sector,” p. 84), and with less fixed

infrastructure to maintain, the Postal Service has significant opportunities to rein in

the costs of its logistics network. To do so, however, it must be adequately shielded

from external pressure to maintain an expensive and inefficient status quo. The

process proposed above allows for broad public participation and input, but it also

ensures that the unfair burden placed on all ratepayers today by an inefficient and

outdated network can be significantly lifted.

The Commission wishes to emphasize, however, that the procedure it proposes

should not be used as an excuse for delay. The Postal Service must continue its

network rationalization effort without interruption and aggressively pursue opportunities to reduce costs throughout its processing and distribution system.

Allowing Communities to Determine the Fate of Low-Activity Post Offices

While a substantial portion of the savings and streamlining of the nation’s postal

network will occur on the back-end logistics side of postal operations, the Postal

Service today also needs to constructively address the fact that many of the nation’s

post offices are no longer necessary to the fulfillment of its universal service obligation, given with the proliferation of alternate retail access points in grocery stores,

drug stores, ATMs and other more convenient locales in communities across the

country.

The Postal Service’s ability to tackle this issue head on is strictly limited by Congress,

which regularly includes language in annual appropriations bills forbidding the

closure or consolidation of rural post offices.5

 This protective approach to local post

offices has been a mainstay of postal legislation going

back to the 1970 Act, which flatly orders that “no

small post office shall be closed solely for operating at

a deficit.” The intent, quite clearly, is a good one—to

protect universal access to postal services. This aim is

reinforced in the 1970 Act, which also includes

language making plain the “specific intent of the

Congress that effective postal services be insured to

residents of both urban and rural communities.”

Fortunately, the Postal Service has a unique opportunity to address both the intent of Congress to uphold

universal access to postal services and the legitimate

concerns of a self-financing institution to rein in

unnecessary expenses. The first opportunity—a

dramatic expansion of the availability of the most common postal services (from

stamp purchases, to Express Mail, to parcels) in grocery stores, pharmacies, banks,

and other convenient locations—has profound positive implications for the convenience and accessibility of postal services to all Americans. (These efforts are discussed in detail in the next section, “Freeing Postal Service From the Post Office.”)

Source: USPS.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Maximize the Potential of “Low-Activity”

Post Offices

“Low-activity” post offices that continue to be necessary for

the fulfillment of the Postal Service’s universal service

obligation should not be closed, even if they operate at a

substantial economic loss. In circumstances where universal

service is protected, the Postal Service must have the

flexibility to dispose of “low-activity” post offices with

appropriate local community involvement. Existing

statutes limiting the Postal Service’s flexibility with respect

to the disposition of post offices should be repealed and

similar provisions in annual appropriations should be

avoided.

As postal services become more available at alternative venues, the Postal Service will

be in a position to assess whether maintaining a particular “low-activity” post office is

necessary for the fulfillment of the Postal Service’s universal service obligation in the

geographic area served by that facility. If the answer is in the affirmative, then the

“low-activity” post office should remain open and continue to serve its community,

even if it is operating at a significant economic loss. If, on the other hand, the Postal

Service determines that a post office is no longer

necessary for the fulfillment of its universal service

obligation (presumably because postal services are

adequately available at other convenient locations),

then the Postal Service should have the flexibility to

dispose of that facility as it sees fit, including through

the facility’s sale.

The Postal Service may find there is no adequate

market demand for the purchase of a “low-activity”

post office. Under these circumstances, the Commission encourages the Postal Service to work with

state and local governments, as well as not-for-profit

organizations, to determine the means of disposition

most beneficial to the local community. Such disposition could include transfer to a state or local government or not-for-profit organization, with or without

reimbursement, as best serves the public interest.

Particularly at a time of significant budget crunches, access to surplus Postal Service

infrastructure could be very beneficial to local and state governments. This approach

would reflect the local nature of the postal network and ensure these facilities continue to serve the communities in which they have been a valued presence. (Further

discussion of best management of the Postal Service’s substantial real estate portfolio

is found in the section on “New Efficiencies,” p. 94.)

Freeing Postal Service From the Post Office: Revolutionizing Retail Access

The approach outlined above for addressing “low-activity” post offices would not be

possible today, if it were not for the exciting revolution underway in how the nation

receives its postal services. In recent years, the Postal Service has taken significant

steps in expanding retail access.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Location of Stamp Share of Sales Cost to Postal Service

Purchase per Dollar

Post Office counters 80% $0.07

Supermarkets, drug stores

and other large retailers 7% $0.016

ATMs 1% $0.016

Today, Americans can perform basic Postal Service activities at 5,000 grocery stores,

Wal-Mart stores, and banks. They can buy stamps at some 17,000 ATM locations,

approximately 20,000 consignment locations (typically, grocery stores), through the

mail, and over the Internet. Also, the Postal Service has developed next generation

self-service kiosks, called Automated Postal Centers, which provide about 80 percent

of postal products and services, including First-Class Mail, Priority Mail, Express

Mail, Parcel Post, Delivery Confirmation, Certified return receipt, and international

postage. The Service plans to begin deployment of 2,500 of these kiosks in communities across the country in 2004. These alternatives offer an equivalent standard of

service as a post office at substantially less cost. They also enhance customer service

by eliminating the greatest inconvenience of a post office—having to make a special

trip there.

Source: USPS.

This new approach offers a win-win proposition to the Postal Service and its customers—far more convenient, often 24x7, access to basic postal services at significantly

less cost to ratepayers. It does so by questioning one of the most basic assumptions of

how postal services have traditionally been delivered, asking if customers should have

to go to a post office to get these services. The answer in many communities today is

“no.” In fact, the day may not be too far off when the answer is also “no” for an even

more far-reaching question: Do most Americans ever have to set foot in a post office

again? Special trips and afternoon lines all could become as thing of the past.

In pursuit of enhanced customer service and convenience, as well as substantially

reduced overhead costs, the Commission recommends that the Postal Service dramatically escalate its efforts to forge partnerships to expand access to postal products

and services beyond traditional post offices and bring these services to customers–at

home, at work, and where they shop. Specifically, the Postal Service should aggressively explore new partnerships with grocery stores, pharmacies, banks, convenience

Exhibit 5-2.

The Cost to the Postal Service of Selling Stamps
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Set Annual Targets for Bringing

Postal Services to Consumers

The Postal Service should aggressively expand

and market retail access to postal services in

venues other than post offices to enhance

convenience for customers and dramatically

reduce facilities and overhead costs. The Postal

Service should set clear annual targets for this

expansion and make it a management priority

to meet these goals.

stores, and small businesses to sell stamps and other postal products at their facilities

and to place automated postal centers in convenient locations. To speed these

endeavors, the Commission believes that the Postal Service

should set clear annual targets for moving a greater percentage of

postal transactions out of the post office to less expensive and

more accessible retail outlets and should make achieving these

targets a management priority.

By making Americans more aware of convenient alternatives, a

collateral benefit is easing the burden on post offices by diverting

many simple tasks. Postal surveys indicate, for example, that

about one in three people visiting a post office make the trip

solely to buy stamps.6

 The Postal Service should be more

aggressive with its marketing to help people understand the

growing number of alternatives available and just how many

different postal services are covered by these options.

Leveraging the Private Sector

With a process in place to appropriately identify and realize a streamlined, effective

structure for the nation’s postal network, the next step is to identify strategies to allow

for its successful deployment. Here, the private sector can and should play a much

more prominent role. Most Americans are relatively unaware of the fact that private

carriers already play key roles throughout the postal network in ensuring universal

mail delivery and access to postal services. FedEx and other private air carriers, for

example, are responsible for almost all of the long-haul air transport of the nation’s

correspondence. The Postal Service also is the global pioneer in worksharing—

offering discounts to high-volume mailers who do a portion of the processing,

distribution, and shipping themselves, in order to ease the demand for the Postal

Service to grow its own infrastructure.

Far more can be done with the private sector today to improve

the nation’s mail service, reduce costs, and gain new efficiencies.

All of it can and should be done according to a core philosophy:

Those who can do it best and for the best price should have the

job, regardless of whether the “best execution” provider is the

Postal Service and its existing workforce or a private-sector

company. This greater integration of the public and private

postal networks will add value to both. It also holds the possibility of allowing the Postal Service to focus on its true core competency: delivery of the mail, the first and last mile reach that

makes the Postal Service unique.

Source: FedEx.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Growth in Workshared Mail Volume

Fiscal Years 1972 to 2002

Worksharing: Involving Customers as Partners

The U.S. Postal Service is an international pioneer in the field of worksharing

arrangements that offer mailers discounts in exchange for performing more of their

own mail preparation, including presorting, bar coding, standardization, and dropshipping. These efforts substantially ease the burden on the Postal Service’s infrastructure, and represent a trail-blazing strategy in which mail processing in the U.S.

has been opened up to the private sector in a way not imagined in foreign posts.

In 2002, worksharing discounts totaled $15.2 billion.7

 According to one estimate,

the Postal Service would have to employ an additional 187,000 people to perform the

tasks being handled by its worksharing partners.8

 As a result, worksharing is an

attractive concept both for the Postal Service and for mailers because it enables the

Postal Service to employ fewer people, reduce expenses, and control the costs ultimately passed on to ratepayers.

Source: GAO (GAO-03-812T).

Pieces in billions

Workshared mail

Fiscal year

Non-workshared mail

Note: Most Standard Mail and Periodicals volumes were counted as workshared

beginning in fiscal year 1971 because the Service required presorting of this mail by Zip Code and

such worksharing was recognized in its postal rates. Worksharing rates for First-Class Mail were

introduced in fiscal year 1977.

250

200

150

100

1972

19741976

1978

1980

1982

19841986

1988

1990

1992

1994

1996

1998

2000

2002

50

0

Exhibit 5-3.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Worksharing: Get the Customer

More Involved

Worksharing discounts are a valuable strategy

for controlling the fixed infrastructure costs of

the Postal Service and should be more aggressively pursued. To assist that effort, Congress

should eliminate the time-consuming

ratemaking process governing the approval of a

work-sharing discount for a non-competitive

product. In its place, the new Postal Regulatory

Board should be authorized to perform an

expedited, after-the-fact review, upon written

complaint, to ensure discounts do not exceed

savings to the Postal Service.

Because it is mutually beneficial to the Postal Service and its customers, the Commission recommends that the Postal Service continue to explore opportunities to develop

additional workshared products, particularly as new technologies are developed, that

reflect lowest combined public-private sector costs. The Commission also recommends that the Postal Service work closely with smaller mailers to develop ways for

them to participate in these mutually beneficial arrangements.

The Postal Service needs greater flexibility to pursue these

partnerships. This will require transitioning from the cumbersome ratemaking process imposed on the discounts today. The

Commission believes such a move could occur while enhancing

oversight by specifically requiring that no new worksharing

discount for a non-competitive product should exceed costs

saved (including the present value of projected future costs

saved) and that the Postal Regulatory Board should have the

authority to conduct an expedited, after-the-fact review upon

written complaint that such a discount is excessive. This

approach would ensure costs and other burdens are not shifted

onto postal employees or ratepayers generally, while producing

breathing room for the Postal Service in avoided infrastructure

costs. This alignment of costs with discounts can become even

more precise when combined with the cost-allocation recommendations of the previous chapter.

Passing the Envelope: Outsourcing What Others Can Do Better, at

Lower Cost

For the Postal Service to make the most productive use of its assets and focus on the

delivery of mail, it should be not only free but encouraged to outsource functions

that the private sector can do better and more cost-effectively.

Already today the Postal Service outsources several key functions of the nation’s postal

network, including its long-distance air transportation and most of its technology

research and development.9

 The Postal Service is correct in its assessment that many

other functions could be outsourced successfully, as well. In fact, this is a positive

trend being encouraged throughout the Federal government today. A recent update

to the President’s Management Agenda encourages public-private competition for

tasks currently performed by Federal employees that are readily available in the

commercial marketplace, where the private sector can perform them cheaper or

better.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Seek Out the “Best Execution”

Provider

The Postal Service should focus on its core

competency—delivering the mail. Where

private companies can deliver portions of the

nation’s postal service or specific related functions better and at lower cost, those tasks should

be outsourced.

In pursuing this strategy, the Commission believes that decisions regarding which

functions to outsource are best left to Postal Service management. In doing so, the

Commission suggests that the Board of Directors be especially mindful of decisions

requiring expenditures for automation technology. The Postal Service increasingly

relies on automation to improve efficiency and reduce costs; in many cases, new

technologies used by the Postal Service have resulted from partnerships with the

private sector.10 In that respect, the Commission acknowledges the steps taken by the

Postal Service to automate its system for processing single-piece letter mail and

welcomes the progress made in the automation of the processing of flats and packages. The Commission, in fact, recommends that the Postal Service continue the

development of an effective merging system that is responsive to customer needs and

culminates in one bundle of mixed letters and flats for each delivery point.

However, the Commission also believes there needs to be a balance between continued capital investment in technology and appropriate outsourcing of parts of the

processing network. When faced with future decisions relating to the investment in

new automation technology, the Board of Directors should consider whether the

Postal Service is contemplating the purchase of the appropriate amount of a new

technology, and whether the technology relates to a function that can be performed

better and at less cost by the private sector. The Postal Service should be encouraged

to continue this type of collaboration with the goal of balancing its desire to be at the

forefront of mail piece processing technology with the need to contain costs.

The Commission also encourages the Postal Service to consider contracting out

several “big-ticket” functions that go beyond the institution’s core competency.

These include: real-estate management, vehicle maintenance, management of

information technology systems, and other services incidental to the delivery of mail.

Outsourcing peripheral but important functions would ensure these significant areas

are managed by dedicated teams of experts who could apply their experience to the

successful management of these assets and functions.

By hiring experienced professionals in these areas, who are wholly focused on a

particular operation, the Postal Service is free to focus on its own

core competency—delivering the mail. This outsourcing of noncore functions, particularly real estate asset management, is also a

popular trend among corporations today because it permits them

to focus on doing what they do best while leaving the rest to

outside experts. In at least the case of transportation, costs are

rising disproportionately faster than the overall cost of the postal

network. Thus, applying focused expertise on these areas could

deliver substantial value. The Commission believes that

outsourcing these functions to experts in these fields wholly

dedicated to their successful and effective management could

potentially save the Postal Service hundreds of millions of dollars

annually.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Leverage the Postal Service’s

Core Strength

The Postal Service should explore new partnerships with the private sector that leverage its first

and last mile capabilities and connect them

with private sector efforts to deliver new

consumer propositions to the U.S. postal and

shipping market.

Focusing on the First and the Last Mile: New Private-Sector Partnerships

The real strength and unique value of the Postal Service is its daily connection to

virtually every American. No other service delivers to as many addresses as the Postal

Service–approximately 140 million homes, businesses, and post office boxes. The

Commission recommends that the Postal Service continue to explore opportunities

to leverage its “first” and “last” mile reach through the development of mutually

beneficial partnerships with the private sector.

Partnerships that leverage the first and last mile are still in their

relative infancy. But the Postal Service should pursue wherever

possible opportunities to leverage its extensive delivery network

while benefiting from the complementary strengths of the

private sector. One example of successful public-private cooperation is Airborne@home, a residential delivery service of

Airborne Express whereby Airborne picks up large volumes of

parcels from shippers and dropships them to the local post office

closest to the recipient. The Postal Service then delivers the

parcels the “last mile.”11 Where the Postal Service can work with

private companies to deliver innovative new consumer propositions that leverage its first- and last-mile reach, it should fully explore

these opportunities.

Pumping Up the Volume: Negotiated Service Agreements

With more personal correspondence taking place online, a greater percentage of

Postal Service volume is generated by businesses, oftentimes communicating with

their customers.12 Whether it is marketing or billing, Americans continue to indicate

their strong preference that these communications take place through the mail.13 For

this reason, substantial opportunities exist to maintain and even grow this category of

mail, particularly if the Postal Service continues to be a global pioneer in innovative

partnerships with other postal companies and its most active customers.

Perhaps the most promising new area for exploration is Negotiated Service Agreements (“NSAs”). The Postal Rate Commission recently approved the first such

agreement with Capital One Services, the single largest producer of First-Class Mail

today.14 Under the agreement, Capital One will be eligible for volume discounts if its

annual First-Class bulk mail volume exceeds 1.225 billion pieces. The agreement

offers discounts ranging from three to six cents per piece of mail, increasing as

Capital One’s mail volumes increase.15

Source: Airborne Express.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

NSAs Must be Available to

Similarly Situated Customers

The Postal Service should be permitted to enter

into NSAs with individual customers based on

general criteria established by the Postal

Regulatory Board. Rather than requiring a

protracted rate proceeding, the Postal Regulatory

Board should be authorized to conduct an

expedited, after-the-fact review of a specific

agreement, if a written complaint is made

challenging its compliance with the Postal

Regulatory Board’s established criteria. Once

terms are agreed upon, they must also be made

available to similarly situated customers.

In addition to the stability and possible growth of this mail stream, the agreement

permits the Postal Service to avoid the costs of returning undeliverable Capital One

solicitations—for a three-year savings in excess of $40 million. To assure that other

mailers are not disadvantaged by these terms, the PRC imposed a three-year cap of

$40.6 million on the discount, which equals 95% of the Postal Service’s savings over

that same period. In approving the agreement, the PRC stated that it would be

premature to adopt rules governing NSAs generally. It did stipulate, however, that

once an agreement is approved, comparable terms must be made available to similarly situated customers, a decision this Commission supports.16

While this landmark agreement certainly is a positive step, the cumbersome eightmonth process required for its approval is a cause for concern. Perhaps it was

justifiable to proceed carefully for the first agreement. However, the fact that every

NSA will be subject to this same ratemaking proceeding before it can commence is a

hurdle that many potential private partners—used to the faster pace of corporate

transactions—will deem too high. Such a lengthy regulatory review process runs

contrary to the speed and decisiveness of successful private sector endeavors. As a

result, those who could be valuable partners and stabilizing forces on mail volumes

may not be willing to submit to such a time-consuming and tedious process. This

cumbersome approach also undercuts the spirit of the agreement: The Postal Service

is offering to be more responsive to the needs of its highest volume mailers to

stabilize and possibly grow mail volumes. Yet, under the status

quo procedures, its ability to respond to customer needs could

take close to a year to commence.

NSAs could benefit the Postal Service by fostering overall cost

efficiency and revenue growth. As such, the Commission believes

these agreements are entirely appropriate given the Postal

Service’s businesslike mandate. However, the current process for

evaluating these agreements discourages their use by delaying and

increasing the cost of negotiating customer-specific rates. Thus,

the Commission recommends that the Postal Service be given

greater flexibility to enter into these agreements in a more timely

fashion, so long as it abides by general criteria established by the

new Postal Regulatory Board. Rather than “presuming guilt” and

putting off the benefits of the partnership to both parties, the

Postal Regulator should have the authority to conduct an expedited, after-the-fact review of an agreement, if a written complaint is filed.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Think Big: Redesign the Entire

Mail System

The Postal Service should study the problem of

mail processing within the broader goal of

redesigning the entire mail system, using the

most sophisticated technologies available. As a

part of this process, the Postal Service should

examine every legacy system and reassess its

modern-day value and necessity. Given the

ambition of this planning effort, the Postal

Service should begin immediately.

Rethinking the Entire Mail Processing System

With the process begun by the Postal Service’s own network rationalization initiative

and the aggressive expansion of the Postal Service’s private-sector partnerships, a far

broader universe of possibilities opens up to the Postal Service in terms of the performance levels the institution is capable of achieving. To take maximum advantage of

these opportunities, the Postal Service must look far beyond how best to get the most

out of its existing infrastructure, and begin to contemplate all the different ways it can

harness the possibilities of new technologies and leading-edge corporate strategies to

maximize productivity and capacity in order to propel the Postal Service to a higher

standard of excellence.

Given the aging nature of the Postal Service network and the fact that it was designed

for a different era, such a fundamental redesign should begin with a fresh and

thorough examination of every legacy system within the mail processing chain to

reassess its forward-looking value, purpose, and necessity. This review would be just

the beginning of a wide-ranging examination of the total overhaul of the mail

processing endeavor with an eye toward redesigning it as a single

integrated system. In conducting this study, the Postal Service

should employ a rigorous and disciplined methodology that

incorporates data and statistical analysis to measure and improve

operational performance by identifying and eliminating inefficiencies at every stage of postal processing, including: mail

preparation, rationalization of the processing network, introduction of new automation to the delivery function and other key

areas where small variations in how tasks are performed combine

to create costly impediments to productivity and efficiency.

Such a system also should integrate quality control mechanisms,

enabling deep, real-time visibility into performance, maintenance

requirements, and productivity levels throughout the mail

processing system.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

<1000

Number of Facilities

Total Pieces Handled per Man-hour

60

70

50

40

30

20

10

0

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 >15000

Total Pieces Handled per Man-hour (Optical Reader Operations)

FY 2000

Standardize Facilities, Tasks to

Produce Substantial Savings

 Any overhaul of mail processing systems should

seek to establish a standard footprint for every

processing facility and an identical level of

technology and machinery. This would allow

for seamless shifting of personnel to manage

mail flow more efficiently and the elimination

of costly and obsolete postal facilities.

Building a Common Postal Service Footprint

Many leading corporations, particularly those with process-oriented operations, are

seeking to reduce friction in their operations in order to enhance productivity and

efficiency. The ability for a line worker to move from a plant in Dallas, Texas, to a

plant in Dearborn, Michigan, for example, is highly valued as companies seek to

make basic tasks, facility design, and operations nearly identical throughout their

operations.

The Postal Service should strive for a similar standardization of

its facilities as a part of any redesign of the mail processing chain.

The facilities of the Postal Service today are far too different in

architecture and machinery to allow an integrated and flexible

system. From facility to facility, the differences run from general

floor plan design, to the type and age of the machines used, and

even to new technologies installed. The Commission believes the

mark of a good mail system is the ability to place employees at

any facility and have them start work immediately without

retraining. Building a common facility footprint is essential to

attaining such a high degree of efficiency.

This graph demonstrates the widely varying productivity rates of the Postal Service’s Optical Character

Recognition (OCR) technology, indicating different productivity rates on various types of machines

across Postal Service facilities.

Productivity Varies Widely by Facility

Exhibit 5-4.

 Source: Postal Rate Commission.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

19th Century Envelope Manufacturing Machines

Crucial to the everyday conduct of business and daily life for most Americans was the ready-made envelope, an

innovation that helped make possible the inexpensive and reliable delivery of mail to every part of the country.

Between 1840 and 1900, the manufacture of envelopes was a catalyst for continued commercial expansion and

diversification.

Changing the Shape of the Mail

While many opportunities exist to standardize virtually every aspect of the postal

network, one of the most controversial measures revolves around “outliers”—mail of

unique size and shape that requires manual handling to process. Individual Americans may have encountered this issue upon realizing their oddly sized holiday cards

required additional postage. For the most part, however, this is hallowed ground for

large mailers, particularly advertisers, who argue that their creative efforts to catch the

eyes of consumers (and, thus, the value of advertising through the mail) would be

reined in significantly if the Postal Service were to require that all mail be the same

size.

Exhibit 5-5.

Source: National Postal Museum.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Non-Standard Mail Should Cover

All Costs

In consultation with its customers, the Postal

Service should develop uniform design requirements that deliver processing efficiencies and

savings to ratepayers generally. Mailers wishing

to continue sending odd-size letters should be

permitted to do so, but the premium rates

charged should cover all related costs.

Source: Envelope Manufacturers Association.

On the other side of the fence, size standardization can produce substantial savings,

allowing near total automation of letter handling. As a result, it is an attribute of

some foreign posts, such as Post Denmark.17 The Commission views skeptically the

costs associated with accommodating non-standard sized mail, particularly the

burden imposed on all ratepayers by the fact that current premium pricing is widely

believed to fall short of the true cost of accommodating much of this mail. As a

result, the Commission recommends “outliers” either come back into the fold or pay

the full price of their unique journey.

Involving Interested Parties in the Future of the Mail

Modernizing the nation’s mail system will require overcoming another series of

potential obstacles—the often parochial concerns of postal customers, partners, and

employees. Employees, understandably, are worried about new productivity and

performance targets and what greater automation means for their jobs. The business

community, as noted above, has concerns about the potential effect on how they

reach out to customers through the mail. Finally, members of Congress, while

generally supportive of postal modernization, worry about the impact on employment and facilities in their districts. The Commission firmly believes that an ambitious standardization initiative should be viewed from the exact opposite point of

view: By squeezing billions of dollars in inefficiencies out of the legacy network, the

Postal Service is in a much better position to compensate its employees well and build

state-of-the-art facilities to advance service quality and efficiency for all Americans.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Public Support Is Essential

The Postal Service should work closely with its

customers, employees, partners, and Congress to

structure an integrated 21st century mail

processing system that advances the Postal

Service’s efficiency, productivity and service to

the nation.

Historically, collaboration among postal employees, customers and private-sector

partners has been uneven, particularly when affected parties are

asked to do business in new ways. Hopefully, that can change

through the broad recognition of the ultimate value of the

endeavor to everyone. Success in end-to-end standardization

would generate significant cost savings to the Postal Service and

allow postal operations to advance to a level of performance and

productivity not thought possible until very recently. By asking

relatively small sacrifices of all parties that work for and rely on

the Postal Service, the institution can be made far stronger for

the country as a whole.

New Efficiencies

In addition to the substantial savings and productivity gains that can be secured by a

strategic realignment and modernization of the nation’s postal network and a greater

range and number of partnerships with the private sector, additional initiatives can

further enhance the institution’s efficiency and cost savings. These efforts include:

reforming the Postal Service’s procurement rules to more closely mirror corporate best

practices, strategically managing the Postal Service’s vast real estate holdings, and

revisiting how law enforcement and key oversight functions are financed within the

Postal Service.

Procurement Reform

Companies in the private sector have been able to lower costs

substantially through sophisticated breakthroughs in materials

purchasing techniques in recent years. While the Postal Service has

adopted some private-sector best practices pertaining to procurement, potentially hundreds of millions of dollars can be gained by a

more aggressive approach. The Postal Service spent nearly $12.4

billion in 2002, purchasing everything from supplies and equipment,

to rent and fuel, to construction and mail transport services. It owes

ratepayers one of the most efficient and sophisticated procurement

efforts in the country today.

The Postal Service spent nearly $12.4

billion in 2002, purchasing everything from

supplies and equipment, to rent and fuel, to

construction and mail transport services. It

owes ratepayers one of the most efficient and

sophisticated procurement efforts in the

country today.

Spotlight
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Get More Bang for the Buck

through Procurement Reform

The Postal Service should revise its purchasing

regulations to take full advantage of the

flexibility given to it under current law. The

Commission also encourages Congress to support

these efforts in acknowledgement of the substantial savings they will produce for all ratepayers.

Flexing Their Buying Power

With nearly $12.4 billion in purchases last year, the

Postal Service and its customers would benefit

greatly if the Service joined the purchasing revolution sweeping leading corporate enterprises today.

Leading the trend is Wal-Mart. Last year, the

company created its own internal Global Procurement Division, which is stripping away costs so

successfully (saving 25% on zippers alone) that the

division is expected to be a key earnings driver for

Wal-Mart over the next five years.18 Retail chain

Kroger also cut costs by $306 million last year

through procurement reform.19

When the U.S. economy faltered, procurement

reform was among the first places corporate leaders

looked to root out excess costs. The Postal Service

could potentially achieve similar savings, if it

aggressively followed the example of its private-sector

retail counterparts.

Getting there, however, means overcoming significant

barriers that are simply unparalleled in the private sector.

The 1970 Act appropriately grants the Postal Service

latitude to conduct its procurement with fewer substantial

regulations and statutes than those governing Federal

purchasing generally. However, the Postal Service has

consistently elected not to take advantage of the flexibility.

Official explanations revolve around claims of intense public

pressure to abide by the more rigorous and costly standards

imposed on other Federal agencies. It is the view of this

Commission that it is inappropriate to apply regulations and

statutes aimed at traditional agencies to a Federal entity

required to finance its own multi-billion-dollar operations.

The Commission therefore recommends that the Postal

Service take full advantage of the flexibility it is granted

under current law and that Congress strongly support its

aggressive procurement reforms in acknowledgement of its

substantial benefits to all ratepayers.

The importance of this support will only grow as more vital

postal functions become candidates for outsourcing. The

ability to select the most capable contractor, with an attractive cost and a high quality of service, should be the paramount concern of all parties. The Commission is encouraged to note that the Postal

Service is currently working to revise its purchasing regulations to maximize the

flexibility provided to it under current law and to reflect commercial best practices.

The Commission strongly supports these efforts and urges

Congress to do the same.
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Postal Service Facilities

Inventory

Total owned facilities 8,313

Total leased facilities 26,319

Total GSA/other government facilities 431

Total facilities 35,063

Total owned interior square feet 222,068,232

Total leased interior square feet 102,039,015

Total GSA/other government interior square feet 4,067,574

Total interior square feet 328,174,821

Total owned land in square feet 900,302,842

Rent Paid (in millions)

Annual Rent paid to lessors $ 841.1

Income Received - FY 2002 (in millions)

Leasing to private tenants $ 9.2

Leasing to government tenants $ 31.2

Sale of excess property $ 25.5

Rent from developmental property $ 20.7

Total $ 86.6

Best Management of the Postal Service’s Significant Real Estate Assets

The Postal Service is one of the largest property owners and renters in the Federal

government today.20 It pays more than $840 million per year in rent. It owns more

than 222 million square feet of office, warehouse and other internal space and more

than 900 million square feet of land. Its more than 35,000 facilities range in size

from less than 100 square feet to more than 1 million square feet; in age, from more

than 100 years old to brand new; in location, from inner cities to remote rural areas;

and, in function, from highly automated processing facilities to one-person retail

outposts (Exhibit 5-6).

While the Postal Service’s substantial real estate portfolio has a current book value of

approximately $15 billion, its current market value is believed to be a multiple of that

figure.21 Needless to say, effectively managing this portfolio is a major undertaking

with significant implications for the Postal Service’s ability to fulfill its mission of

delivering universal service at affordable rates.

Exhibit 5-6.

Source: USPS Comprehensive Statement of Postal Services, FY 2002.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Determine the Best Use for

Surplus Post Offices

Where there is inadequate market demand for

an excess post office, the Postal Service should be

encouraged to transfer the facility—with or

without reimbursement, as best serves the public

interest—to state and local governments, as well

as not-for-profit organizations.

Like most Federal entities with a strong community presence throughout the country, the Postal Service has a real estate portfolio that includes not only leading-edge

facilities, but a growing number of older properties, often in a state of severe disrepair. In fact, the Postal Service reports that, as of October 2002, it had 115 facilities

or land parcels that were vacant or underutilized.22 These facilities have little, if any,

value to the modern-day delivery of the nation’s mail.

The Postal Service’s challenges with real property are not unique.

In January 2003, GAO placed the Federal government’s real

estate holdings on its “high-risk” list and reported that restoring

and repairing deteriorating Federal buildings will cost tens of

billions of dollars.23

As indicated earlier in this chapter, the Commission strongly

believes that local communities should be given every opportunity to assume local ownership and control of excess properties,

whether through their purchase or donation. This would ensure

these facilities, even if deemed excess for postal purposes, continue to play a vital role in the communities they served for many years.

Currently, the Postal Service is permitted to “trade” excess real property with other

Federal entities, through the U.S. government’s purchasing and property management agency, the General Services Administration (“GSA”). Under this mechanism,

the Postal Service notifies GSA when a property becomes surplus. While funds are

not exchanged in these “transactions,” when the Postal Service goes property hunting, it can acquire the unneeded facilities of other Federal agencies using the “credits”

it received for its own donations to the surplus property pool.

Just as the Postal Service has taken advantage of its authority to transfer surplus

property to other Federal agencies, it should now do the same with state, county, and

local governments, as well as local not-for-profit organizations. The transactions

should be encouraged when such a transfer can deliver a net public benefit.

Beyond the important issue of managing an aging real estate portfolio and retaining

the community value of these facilities long after their value to the Postal Service has

subsided, effective management of the institution’s real estate portfolio remains a

daunting task. Many other factors are due substantial consideration—for example,
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

How Much Is It All Worth?

The Postal Service should set as a priority

obtaining an accurate current market value for

its real estate assets and doing a detailed analysis

of the appropriate balance between real estate it

should own and properties it should lease. The

Board also should be encouraged to include

objectives relating to the active management of

Postal Service real estate in future strategic

plans, and should be authorized to outsource

management of Postal Service real estate, if such

an approach is most capable of maximizing the

benefits and minimizing the costs of the

institution’s substantial real estate holdings.

the appropriate balance of leased versus owned property. With the Postal Service’s

preferred borrowing costs through the U.S. Treasury and the fact that its real estate

holdings are exempt from property taxes, the benefits of property ownership are often

greater than standard analyses indicate. These and other complex, high-stakes

decisions regarding the maintenance, rehabilitation, disposition

and acquisition of properties in local real estate markets across

the country all combine to make management of the Postal

Service’s real estate portfolio a possible candidate for the

Commission’s recommendations to outsource critical support

functions to expert, outside professionals who are 100% focused

on that vital task.

Regardless of how the portfolio is managed, however, the

Commission is encouraged to note that the Postal Service has

recognized that effective real estate management is a prerequisite

to operating a large, successful enterprise. As the single biggest

asset category at the Postal Service, the Commission encourages

the Board of Directors to take a more active role in ensuring its

effective, strategic management in support of the institution’s

mission and goals. As an essential first step, the Commission

recommends that the Postal Service obtain an independent

appraisal of the current market value of its major real estate

holdings.

Appropriate Financing of Security, Oversight Functions

As the Postal Service engages in an end-to-end effort to reduce costs and improve

efficiency and productivity, no aspect of the institution’s operations should be above

scrutiny. In reviewing the security and oversight functions of the Postal Service, the

Commission has two recommendations consistent with the overall goal of this report

to ensure the continued delivery of high-quality universal service at affordable rates.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

‘The Silent Service’

U.S. Postal Inspectors are a colorful part of the nation’s

law enforcement history. From trailing 19th century

outlaw William Bonney (aka “Billy the Kid”) to playing

a key role in the joint task force that brought Ted

Kaczynski (aka the “Unabomber”) to justice, Postal

Inspectors have long embodied the best of American law

enforcement. Long before the FBI’s “10 Most Wanted

List,” Inspectors tacked up posters of prominent mail

robbers in post offices across the country with the famous

phrase “wanted dead or alive.”

Postal Inspectors’ tenacity is well-known to criminals. In

the late 1960s, a country store that also housed the

community post office was robbed. When local police

arrived, they noticed a chalk line separating the commercial and postal areas of the store. It was drawn by

the robbers who left a note: “Inspectors, we did not cross

this line.” True to their word, not a single item of post

office equipment was disturbed. Today, the Inspection

Service makes about 12,000 arrests each year, including

hundreds charged with exploiting children and 1,500

suspected drug traffickers and money launderers.25

Taxpayers, Not Ratepayers, Should Finance Law

Enforcement

The United States Postal Inspection Service performs

an essential role safeguarding the nation’s mail and

ensuring the postal system is not used for illegal

purposes. In combating everything from drug

trafficking to child pornography to credit card fraud,

the Postal Inspection Service has a broad and important law enforcement function. It is the Commission’s

view that the fact that these crimes are committed

through the mail should not make them the financial

responsibility of ratepayers. The cost of most law

enforcement functions are shared by all taxpayers.

The vital law enforcement work of the Postal Inspection Service should be no different.

As one of the nation’s oldest law enforcement entities,

the Postal Inspection Service has provided safety,

security and integrity to the mail system for more than

two centuries. Since its establishment by Benjamin

Franklin, Postal Inspectors have played a vital role in

conducting investigations on fraud, waste, and abuse

relating to the nation’s postal services. The Postal

Inspection Service enforces more than 200 Federal

laws, ranging in purpose from protecting employees

against workplace violence to cracking down on drug trafficking to exposing workers’

compensation fraud to tracking down the culprits who steal people’s mail.24
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Who Should Bear The Cost?

The Commission recognizes that the Postal Inspection

Service plays a vital law enforcement function. Only

those activities of the Postal Inspection Service that

directly support the safety and security of the nation’s

mail and postal systems should be assumed by the

ratepayers. The cost of law enforcement operations that

track broader crimes committed through the mail

should be borne by taxpayers, generally.

Source: USPS FY 2000

Annual Report.

In addition, the Postal Inspection Service has a

number of investigatory responsibilities.

Externally, they are responsible for looking

into possibly fraudulent activity relating to

mailings, postage, and meters; fraud against

consumers, business, and government; crime

prevention and security; mail theft; prohibited

mailings (child exploitation, bombs and

drugs); robberies and burglaries; assaults and

threats; money orders, financial instruments,

and postal property crimes. Within the Postal

Service, they also are charged with rooting out embezzlers of postal cash and money

orders; workers’ compensation fraud; health care fraud; drugs in the workplace; and

mail theft.26

While the Postal Inspection Service used to provide an audit function, with the

transfer of that responsibility to the Office of the

Inspector General (discussed below), the Postal Inspection Service today is overwhelmingly a law enforcement

entity. It employs some 3,875 professionals, including

approximately 1,900 postal inspectors, who enjoy full

Federal law enforcement authority, including the right

to carry firearms, make arrests, execute search warrants

and serve subpoenas.27 The Postal Inspection Service

also employs some 1,400 uniformed guards and 800

professional and technical employees.28 Its annual

budget is approximately $464 million.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Taking a Closer Look at the

Office of Inspector General

The Board of Directors should look closely

at the appropriateness of the OIG’s size and

funding levels in comparison to other

Federal agencies.

Taking a Closer Look at the Office of the Inspector General

In 1996, with an amendment to the Inspector General Act, Congress transferred the

auditing and related investigative duties of the Postal Inspection Service to a newly

created Office of the Inspector General (OIG). The Inspector General is currently

appointed by the Board of Governors for a term of seven years. The Office has

increased dramatically in size since its inception, growing from 223 employees in

1998 to 722 employees in 2002. Today, its annual budget is approximately $111

million.

According to a 2002 GAO report, the Postal Service’s OIG has the

5th largest budget of all inspectors general operating in the Federal

Government, behind that of the Department of Health and Human

Services, the Department of Defense, the Department of the

Treasury’s OIG for Tax Administration, and the Department of

Housing and Urban Development.29 The Postal Service’s Office of

Inspector General enjoys a budget larger than that of the inspector

general for the Department of Agriculture, with its $77 billion

annual budget and $100 billion loan and loan guarantee portfolio.

Within this context of other leading Federal agencies, the Commission encourages the Board of Directors to carefully review the size and funding levels

of the Postal Service’s OIG, particularly in light of its explosive growth in recent

years.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Conclusion

The realignment and modernization of the Postal Service’s network represents the single

greatest opportunity the institution has today to take its service to the nation to a higher

standard of excellence. Fortunately, the Postal Service has an extraordinary array of

options in this arena, if it is supported in its efforts to take full advantage of them.

If the Postal Service is willing to reduce its size to reflect declining mail volumes, and do

so strategically, it can emerge from this realignment a stronger institution and a better

day-to-day servant of the nation’s modern postal needs. By 1) utilizing the rightsizing

and standardization strategies being deployed throughout corporate America; 2) pursuing its network rationalization initiative; 3) exploring new private-sector partnerships to

do business better, stabilize and even grow key mail volumes and ease demands on its

infrastructure; and 4) effectively managing its substantial real estate portfolio and

procurement efforts, the Postal Service can craft an ambitious overhaul that truly has the

potential to transform not only its operations, but the delivery of the nation’s mail.

The Commission’s recommendations in this regard aim to ensure this evolution takes

place the right way: free from undue political interference, with maximum community

involvement and with the end goal of high-quality universal service at affordable rates

propelling every effort.

With this strategy in place, the support of the Postal Service’s many constituencies will

in no small part determine its success or failure. But among this group, one set will be

absolutely pivotal to the success of the Postal Service’s modernization and realignment—

the men and women who make the daily delivery of the mail to virtually every American home and business possible—the more than 840,000 employees of the U.S. Postal

Service (Exhibit 6-1).
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Chapter 5 Recommendations*

B-5. Processing Facilities. A Postal Network Optimization Commission (P-NOC),

modeled in part after the Defense Base Closure and Realignment Commission, should

be created to make recommendations relating to the consolidation and rationalization

of the Postal Service mail processing and distribution infrastructure. The P-NOC

should be comprised of eight members appointed by the President with advice and

consent of the Senate. Recommendations of the P-NOC, once submitted to Congress

by the President, should become final, unless Congress disapproves them in their

entirety within 45 days.

B-6. Post Offices. Efforts already underway by the Postal Service to expand access to retail

postal services at venues other than post offices, such as banks, grocery stores and other

convenient locations should be supported. When the Postal Service determines that a

“low-activity” post office is no longer necessary for the fulfillment of its universal

service obligation, the Postal Service should make every effort to maximize the proceeds

from the sale of that facility. If the Postal Service determines that there is no adequate

market demand for the purchase of a “low-activity” post office, the Postal Service

should be encouraged to work with state and local governments, as well as not-forprofit organizations, to determine the means of disposition most beneficial to the local

community. Such disposition could include transfer to a state or local government or

not-for-profit organization, with or without reimbursement, as best serves the public

interest. Existing statutes limiting the Postal Service’s flexibility with regard to the

closing and disposition of post offices should be repealed and similar provisions in

annual appropriation acts should be avoided.

B-7. Real Estate Asset Management. The Postal Service should be encouraged to include

policy goals and objectives relating to the active management of Postal Service real

estate in future strategic plans. As a first step, the Postal Service should obtain an

independent appraisal of the current market values of its major real estate holdings.

Further, the Postal Service should use its current statutory flexibility to dispose of real

estate assets to strengthen its long-term financial position and provide benefits to the

public in the form of moderated rate increases and improved products and services.

P-1. Maximizing the Use of the Private Sector. Those Postal Service functions that can

be performed better and at lower cost by the private sector should be outsourced to the

private sector.

P-2. Utilizing the Postal Service’s Core Strength: “The First Mile” and “The Last

Mile.” The Postal Service should continue to explore opportunities to utilize its core

strengths in the “first” and “last” mile of the mail delivery stream through the development of mutually beneficial partnerships with the private sector.

P-3. Expanding Retail Access to Postal Products and Services. The Postal Service

should develop additional private-sector partnerships to better serve the consumer and

expand access to postal products and services beyond the traditional post office.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

P-4. Worksharing Discounts for Non-Competitive Products. The Postal Service

should continue to look for opportunities to offer discounts for additional workshared

products and to expand opportunities for small mailers to participate in them,

particularly as new technologies are developed, that reflect lowest combined publicprivate sector costs. The new Postal Regulatory Board should be required to conduct

an expedited, after-the-fact review of a new worksharing discount upon written

complaint by a party that the discount exceeds the costs avoided by the Postal Service.

A discount that exceeds the costs avoided by the Postal Service should not be permitted. In addition, the Postal Service should ensure that the expected savings from

worksharing discounts are actually captured in the form of reduced costs.

P-5. Negotiated Service Agreements for Non-Competitive Products. The Postal

Service should be given greater flexibility to enter into negotiated service agreements

for non-competitive products. Specifically, the Postal Service should be allowed to

enter into agreements based on general criteria established by the new Postal Regulatory Board. The Postal Regulatory Board should conduct expedited, after-the-fact

reviews of such agreements when a written complaint is filed.

P-6 Procurement Reform. There is a significant opportunity to improve the Postal

Service’s “bottom-line” through revision of its procurement regulations and the

adoption of commercial best practices. Therefore, the Postal Service should revise its

purchasing regulations to maximize the flexibility given to it under current law and

to reflect commercial best practices. Congress should strongly support Postal Service

procurement reform in acknowledgement of its substantial benefit to all ratepayers.

T-1. Automation Technology. The Postal Service should balance capital expenditures

on new automation technology with consideration of outsourcing elements of the

processing network. The Postal Service should neither acquire excess capacity that

would only be used during peak periods nor undertake functions that the private

sector could perform more effectively and at less cost than the Postal Service itself.

Nonetheless, the Commission acknowledges the steps the Postal Service has taken to

automate its system for processing single-piece letter mail and welcomes the progress

made in the automation of the processing of flats and packages. The Postal Service

should continue to develop an effective merging system that is responsive to customer

needs and culminates in one bundle of mixed letters and flats for each delivery point.

T-2. Processing Standardization. The Postal Service should study the problem of mail

processing with the possible goal of redesign of the whole mail system, using the latest

in 21st century technology systems. The Postal Service should examine every one of its

“legacy systems” and question its purpose and whether it is needed. In addition, the

mail processing redesign should include a standard or common footprint for each

processing facility, with an identical level of technology and machinery in each.

This would allow easy shifting of personnel to manage the mail flow more efficiently.

This redesign study should be viewed as complementary to the Postal Service’s current

network rationalization initiative.

*See Appendix C for a complete list of Commission recommendations.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

Endnotes

1. United States General Accounting Office, “Federal Real Property: Executive and Legislative Actions

Needed to Address Long-Standing and Complex Problems,” GAO-03-839T, June 5, 2003, p. 1.

2. Thurm, Scott, “After the Boom: A Go-Go Giant of Internet Age, Cisco Is Learning to Go Slow,”

The Wall Street Journal, May 7, 2003, A1.

3. Ibid.

4. P.L. 101-510, The Defense Base Closure and Realignment Act of 1990.

5. For example, P.L. 107-67, Treasury and General Government Appropriations Act for 2002, 115 Stat.

514, 525-5266. Nov. 12, 2001.

6. United States Postal Service, Transformation Plan, Apr. 2002, p. 13.

7. Bizzotto, Anita, Chief Marketing Officer and Senior Vice President, United States Postal Service,

Testimony Before President’s Commission on the United States Postal Service, Apr. 4, 2003, p. 3.

8. Cohen, Robert, Director, Office of Rates, Analysis and Planning, Postal Rate Commission, Testimony Before President’s Commission on the United States Postal Service, Feb. 20, 2003, p. 21-22.

Mr. Cohen’s testimony reflects his own views and not necessarily those of the Postal Rate Commission.

9. Donahoe, Patrick R., Chief Operating Officer, United States Postal Service, Testimony Before

President’s Commission on the United States Postal Service, Apr. 4, 2003, p. 1-2; Otto, Robert,

Chief Technology Officer and Vice President for Information Technology, United States Postal

Service, Testimony Before President’s Commission on the United States Postal Service,

Mar. 18, 2003.

10. Otto, Robert, Testimony Before President’s Commission on the United States Postal Service,

Mar. 18, 2003, p. 2-3.

11. Corrado, Richard, Senior Vice President of Marketing, Airborne Express, Testimony Before

President’s Commission on the United States Postal Service, Apr. 4, 2003.

12. United States Postal Service, “Briefing for the President’s Commission on the United States Postal

Service,” Jan. 8, 2003, p. 18-19.

13. Schmid, Gregory C., Director, Future of Global Mail Program, Institute for the Future, Testimony

Before President’s Commission on the United States Postal Service, Mar. 18, 2003, p. 3-4.

14. Postal Rate Commission, “Postal Rate Commission Approves Unprecedented Customized Pricing

Agreement Between Postal Service And Nation’s Largest First-Class Mailer,” On-line Posting,

May 15, 2003, <http://www.prc.gov/>.

15. Postal Rate Commission, Docket No. MC 2002-2, Opinion and Recommended Decisions,

May 15, 2003.

16. Ibid.

17. Lockheed Martin Distribution Technologies, “European Implementation of Mail Product Standardization,” Additional Comments to President’s Commission on the United States Postal Service.

18. Thau, Barbara, “Sphere of Influence,” Home Furnishings Newspaper, Mar. 3, 2003, p. 10; “Wal-Mart

by the Numbers,” Retail Merchandiser, July 1, 2002, p. 11.

19. Weir, Tom, “Wal-Mart’s the 1: All Traditional Operators Now Trail the World’s Largest Retailer on

PG’s Annual List of the Country’s 50 Biggest Supermarket Chains,” Progressive Grocer, May 1, 2003,

p. 35.

20. United States General Accounting Office, “Federal Real Property: Executive and Legislative Actions

Needed to Address Long-Standing and Complex Problems,” GAO-03-839T, June 5, 2003, p. 2.

21. Watson, Winthrop, Managing Director, JP Morgan Chase, Response to Questions Following

Testimony Before President’s Commission on the United States Postal Service, May 28, 2003.
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Chapter 5 Pushing the Envelope: Designing a Smaller, Stronger, New Postal Network

22. Walker, David M., Comptroller General of the United States, United States General Accounting

Office, Testimony Before President’s Commission on the United States Postal Service, May 29, 2003,

p. 15.

23. United States General Accounting Office, “High Risk Series: Federal Real Property,” GAO-03-122,

Jan. 2003.

24. United States Postal Inspection Service, Annual Report of Investigations, 2002.

25. United States, Postal Inspection Service, “Because the Mail Matters,” On-line Posting, Publication

162, Apr. 2003, <http://www.usps.com/cpim/ftp/pubs/pub162.pdf>.

26. Annual Report of Investigations.

27. Ibid.; United States General Accounting Office, “Major Management Challenges and Program

Risks,” GAO-03-118, Jan. 2003, p. 13.

28. Annual Report of Investigations.

29. United States General Accounting Office, “Inspectors General: Office Consolidation and Related

Issues,” GAO-02-575, Aug. 2002, p. 68.
Chapter 6: Aligning People with Progress:

Building a 21st Century

Postal Service Workforce

Introduction

No matter how well-laid the plans for modernizing the nation’s postal

network, for these efforts to succeed in elevating postal operations to a

new standard of excellence, they must more effectively utilize the Postal

Service’s most valuable assets—its employees. The ambitious plans laid

out in this report provide the basis for sweeping changes in the way that

the Postal Service meets its mission and pursues additional “breakthrough” improvements in productivity.

These changes will have a profound impact on the Postal Service as an

institution. The level of success achieved by the Postal Service will hinge

on its ability to successfully deploy and motivate a talented, capable,

nimble workforce of a size appropriate to the future postal needs of the

nation and to give its employees a personal stake in the success of the institution’s

ambitious goals.

The new Board of Directors and Postal Service management must assume responsibility for building and maintaining a world-class workforce in terms of service

standards and efficiencies. Essential to this process is the ability of management and

labor to work constructively together to determine the right size of the postal

workforce and to ensure appropriate flexibilities in its deployment. This is the

critical issue when it comes to controlling the future costs and capabilities of the

workforce. Far more than individual benefits, the size of the workforce determines

the costs of the workforce.

Source: USPS.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

Background

The last major overhaul of the Postal Service in 1970 was caused, in part, by the

demands of postal workers for adequate pay and the needs of management to have

the cooperation of employees as the Postal Service embarked on a significant modernization to meet the country’s changing postal needs. Today, the Postal Service again

must significantly overhaul its operations to reflect changes in technology as well as

shifts in how the nation uses the mail. Once more, successful adaptation hinges on

the cooperation and support of the workforce that makes the regular, reliable and

universal delivery of the nation’s mail possible.

The challenge today, however, is far more complex. Postal workers enjoy special

status within the Federal workforce. They are granted the right to negotiate wages,

hours, and workplace conditions through collective bargaining. The 1970 Act was

debated and enacted against the dramatic backdrop of the first major strike of Federal

workers in U.S. history, involving approximately 152,000 postal employees in 671

locations. The strike was particularly paralyzing to business in New York City, the

country’s financial center. The strike was over shortly after it began, and in 1971, the

U.S. government signed the first comprehensive Federal labor contract ever achieved

through collective bargaining. The ongoing right to collective bargaining (absent the

option to strike) was a key outcome, in addition to language in the 1970 Act requiring the Postal Service to offer compensation to employees that is comparable to the

private sector.1
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

Career Non-Career Totals

American Postal Workers Union (APWU) 307,000 23,000 330,000

National Association of Letter Carriers (NALC) 231,000 5,000 236,000

National Rural Letter Carriers’ Association (NRLCA) 61,000 56,000 117,000

National Postal Mail Handlers Union (NPMHU) 58,000 5,000 63,000

 subtotal 657,000 89,000 746,000

Non-Bargaining 81,000 13,000 94,000

subtotal 738,000 102,000 840,000

Other Bargaining 3,000 3,000

Total 741,000 102,000 843,000

Information as of February 2003

Thirty years later, the overall result has been positive for the workforce. Postal clerks

and city letter carriers, for example, have an average annual wage of more than

$42,500. Postal workers also enjoy the job security and ample benefits packages that

make Federal employment attractive. According to the Postal

Service, average annual total compensation, including both

wages and benefits, for postal clerks and for city letter carriers is

nearly $60,000.

Given this “best of both worlds” package, it is entirely understandable why so many would be attracted to Postal Service

employment. As of July 2001, the Postal Service had a backlog

of some 400,000 job applicants and virtually no turnover.2

 In

2002, less than 1.5% of bargaining unit employees resigned

before they retired, a “quit rate” that is lower than the rate for

most private firms in America.

Source: USPS.

Exhibit 6-1.

Source: USPS.

Postal Service Employee

Representation: Major Unions
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The Postal Service Pays More than 76% of its Revenues to Employees

The Postal Service employs approximately 843,000 people in both career and noncareer positions (Exhibit 6-1), making its workforce more than twice the size of the

United Parcel Service and more than four times the size of FedEx. All tallied, the

Postal Service’s workforce as of 2002 was second in size only to Wal-Mart in the

United States and was the fourth largest civilian workforce in the world (Exhibit 6-2).

Approximately, one out of every three civilian employees of the U.S. government

works for the Postal Service.3

 Given these facts, it comes as little surprise that more

than $3 out of every $4 earned by the institution in Fiscal Year 2002—some $51.5

billion of $66.5 billion—went to pay the wages and benefits of its employees.4

Unlike their private-sector counterparts, however, total compensation costs are largely

outside management’s control. Benefits are effectively set by statute. Costs for retiree

health care and pension plans are skyrocketing for all employers, and the Postal

Service has unfunded obligations for retiree health benefits of approximately $48

billion.5

 Yet retiree health care and pension benefits are effectively “off the table” of

collective bargaining.

Postal Service Size, by Number of Employees

Among the Global 500 Among US Companies

Rank Company Employees as of 2002 Rank Company Employees as of 2002

1 Wal-Mart Stores 1,300,000 1 Wal-Mart Stores 1,300,000

2 China National Petroleum 1,146,194 2 US Postal Service 854,376

3 Sinopec 917,000 3 McDonald’s 413,000

4 US Postal Service 854,376 4 United Parcel Service 360,000

5 Agricultural Bank of China 490,999 5 Ford Motor 350,321

6 Siemens 426,000 6 General Motors 350,000

7 McDonald’s 413,000 7 Intl. Business Machines 315,889

8 Ind. & Comm. Bank of China 405,000 8 General Electric 315,000

9 Carrefour 396,662 9 Target 306,000

10 Compass Group 392,352 10 Home Depot 300,000

11 China Telecomm 365,778 11 Kroger 289,000

12 DaimlerChrysler 365,571 12 Sears Roebuck 289,000

13 United Parcel Service 360,000 13 Tyco International 267,000

14 Ford Motor 350,321 14 Citigroup 252,500

15 General Motors 350,000 15 Verizon Communications 229,497

Exhibit 6-2.

Source: Number of employees rankings by Fortune Magazine, April 14, 2003.
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In addition, rigid work rules make it difficult to redeploy employees to new functions

aligned with a changing network. To meet the needs of an optimized and efficient

new postal network, substantial realignments of the workforce are necessary. Some

employee crafts, such as last-mile mail carriers, should continue to grow with the

nation. Other positions, most notably in processing and in middle management, are

likely to decline as the Postal Service pursues new partnerships with the private sector

and achieves greater productivity gains.

Most parties generally acknowledge the imperative to rightsize the Postal Service

around the forward-looking needs and design of the nation’s postal network. Fortunately, there is a potentially significant attrition opportunity on the horizon, with

some 47% of current career employees eligible for regular retirement by 2010 (Exhibit 6-3). Already, the Postal Service has begun capitalizing on this opportunity to

reduce its size. This trend could accelerate now that the Office of Personnel Management has granted the Postal Service permission to offer voluntary early retirement to

large numbers of its bargaining-unit employees. The Postal Service must take full

advantage of this attrition opportunity and exercise maximum discipline in its hiring

practices in order to realign its workforce with minimal displacement of current

workers.

USPS Attrition Opportunities:

Postal Service Employees Eligible for Retirement by 2010

Current Number 2006 2010 2010 Cumulative

Employee Type of Career

Employees # Eligible % # Eligible % # Eligible %

APWU 307,000 90,000 29.3% 60,000 19.5% 150,000 48.9%

NALC 231,000 52,000 22.5% 39,000 16.9% 91,000 39.4%

NRLCA 61,000 18,000 29.5% 14,000 23.0% 32,000 52.5%

NPMHU 58,000 16,000 27.6% 10,000 17.2% 26,000 44.8%

Non-Bargaining 81,000 29,000 35.8% 19,000 23.5% 48,000 59.3%

Total 738,000 205,000 27.8% 142,000 19.2% 347,000 47.0%

Exhibit 6-3.

Source: USPS.
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Improve, Rather than Overhaul, Tools Available to Manage Workforce

The Commission firmly believes that postal workers should continue to have access

to collective bargaining and total compensation comparable to, but not exceeding,

the private sector. Both are consistent with an enterprise that operates in a businesslike fashion and is charged with being self-financing. However, the Commission

proposes several reforms aimed at achieving the following goals: delivering muchneeded clarity to the definition of “comparability;” adjusting the collective bargaining

model to encourage more timely resolution and greater fiscal restraint; reforming a

broken system for dealing with employee-management disputes; and granting the

Postal Service latitude to deal with the mounting costs of its workforce in innovative

ways that neither add to the burden on ratepayers nor sacrifice the Postal Service’s

commitment to compensating its employees at a level comparable to that of the

private sector.

First and foremost, Postal Service management must repair its strained relationship

with its employees, most prominently evidenced by the unusually high number of

workforce grievances filed and appealed and the relatively frequent occurrence of

contract negotiations being settled through protracted arbitration.

Second, management and employee unions must have a constructive mechanism to

work together to bring expenses and revenues of the Postal Service into alignment.

This includes allowing management greater flexibility in the deployment of the

workforce as the nation’s postal network is realigned and redesigned over time. It also

entails establishing an impartial mechanism for resolving deeply divisive debates

about the possible existence of a total compensation premium for postal workers.

Third, the Commission believes that successful management of the workforce

requires far more than fixing problems and controlling costs. Building an incentivebased culture up and down the ranks is key to elevating the Postal Service to a new

standard of performance. To align personal and institutional goals, the Commission

recommends the development of an objective, understandable pay-for-performance

program that grants all employees, not just management, a meaningful stake in the

success of the Postal Service.

Simply put, the Postal Service cannot deliver the service the nation needs and deserves if its managers and employees are not working together effectively. As such,

the Postal Service must be given an array of tools to manage its workforce constructively in a period of fundamental change.
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Toward More Constructive Collective Bargaining

As mentioned previously, postal workers enjoy a special status within the Federal

government in light of their right to negotiate compensation and other basic working

rights and conditions through collective bargaining. The Commission favors retaining this important tradition, but recommends several constructive reforms aimed at

strengthening this vital process to improve the often adversarial relationship between

management and employees.

In making its recommendations, however, the Commission wishes to clearly note

that its collective bargaining proposals are prospective. They would not affect existing

negotiated agreements. Nor would they impact the status of current Postal Service

retirees. The Commission endorses the collective bargaining process. Its recommendations simply aim to make possible in the future a more effective and constructive

engagement between Postal Service management and the men and women who

handle, process, and deliver the nation’s mail.

The unique status of the Postal Service—a government entity required to act in a

businesslike manner—is readily apparent in the design of its collective bargaining

process. On the one hand, if the Postal Service were a standard Federal agency, its

wages and benefits would not be subject to negotiation. On the other hand, if it

were a private corporation, it would operate under a collective bargaining model that

would arm each side with the ultimate “big stick”—for employees, the right to strike;

for the Postal Service, the right to lockout workers without a contract.

Given the essential nature of the service provided by postal workers, Congress

expressly forbade these traditional bargaining weapons in the 1970 Act. Instead, the

existing collective bargaining provisions provide two avenues for the parties to use in

reaching an agreement—they can jointly agree on alternative negotiation procedures

before an existing agreement expires, or follow the procedures outlined in statute.

The statutory process allows a minimum of 225 days of negotiation, fact finding and

arbitration. In recent years, the parties have consistently agreed to forego that process

in favor of alternative procedures. The alternative process used by the parties typically involves a three-person arbitration board consisting of one arbitrator selected by

management, one selected by the union, and a third “neutral” arbitrator selected by

the other two. Because the parties often agree to go directly to arbitration, the factfinding process is rarely used. One seasoned participant aptly likened this segment of

the process to a “dead letter.”6

Under the alternative process generally used by the parties, the arbitration board is

not limited to selecting a proposal submitted by one of the parties. Instead, the

board has the freedom to fashion a compromise or to come up with a wholly new,

binding approach. Further, because the alternative procedures generally do not

include strict time requirements, the length of the proceedings are often extended far

beyond the timeframes contemplated in the 1970 Act’s collective bargaining provisions. In fact, the last three proceedings took between 13 months and 17 months to

conclude.
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Not only has the current process resulted in lengthy proceedings, the Postal Service

also lags behind the private sector in its ability to negotiate contract settlements

without resorting to arbitration. With respect to the Postal Service’s largest union,

nearly 1 in 3 contract agreements have required arbitration.7

 However, the testimonies of numerous collective bargaining experts persuasively make the case that the

fault lies not with the parties, but with a process ill-suited to the unique context of

the Postal Service.

At the heart of the problem is the inherently circular nature of the current collective

bargaining model. Parties enter into negotiations, identify issues that can be agreed

upon, and then work toward each other on the issues that divide them. At a certain

point, absent the “big sticks,” parties sometimes conclude they have nothing to lose

by going to arbitration. At that point, both sides revert to their

original position and prepare to begin their arguments all over

again for the arbitrators. In short, the current system provides

few incentives for the parties to reach a negotiated settlement.

Instead, it appears to leave difficult decisions to arbitrators,

rather than the parties who have to live with the arbitrators’

decisions.

At a time when the Postal Service needs to significantly control

costs and realign its workforce, a process that fosters management-employee discord and deters timely and reasonable

compromises is especially counterproductive. It produces a

“chilling effect” not only on the collective bargaining process,

but also on the relationship between management and employees, and ultimately the

service both are capable of delivering to customers.

The solution initially advocated by the Postal Service in its Transformation Plan

would grant the Postal Service and its employees the same right to strike and to

lockout, respectively, enjoyed by their private-sector counterparts. While adding the

risk of such extreme actions into the mix certainly could stimulate dispute resolutions, the Postal Service has since, appropriately, reconsidered this recommendation

recognizing its high price. Without question, a strike of potentially

hundreds of thousands of postal workers would be unprecedented in

scope and devastating in its impact on the economy. The nation

simply cannot accept such a risk.

The Commission recommends a more constructive, middle-ground

approach. In fact, in the primary weakness of the current model—its

drawn-out pacing, litigious nature and multiple redundancies—lie the

core ingredients of a better approach called “mediation and arbitration.” “Med-arb,” as it is known, is far better suited to ensure each

stage of the labor-management dialogue builds on the progress to date,

rather than permitting the parties to retrench to the hard-line positions

from which they began their negotiations.

“Med-arb,” as it is known, is far better

suited to ensure each stage of the labormanagement dialogue builds on the

progress to date, rather than permitting

the parties to retrench to the hard-line

positions from which they began their

negotiations.

Source: USPS.

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Under a med-arb approach, the rarely used “fact-finding” phase would be replaced

with an intensive and mandatory mediation stage that the Commission proposes to

begin immediately after a contract expires without a new agreement in place. In this

phase, a respected and experienced mediator—jointly selected by the parties from a

list provided by the Director of the Federal Mediation and Conciliation Service

(“FMCS”)—works with the parties to navigate any stalemates and forge an agreement, if possible. If not, the list of outstanding issues is narrowed, so the arbitration

can focus on the key differences rather than reopen every debate. Also to keep the

process advancing toward resolution, the Commission proposes that this mandatory

mediation phase last no more than 30 days.

A New, Time-Sensitive Approach to Arbitration

If the process moves to arbitration, once again the progress to date is maintained.

This is due to a core med-arb requirement—that the mediator serve on the arbitration

panel, along with two other neutral arbitrators (each of whom would be selected by

one of the parties from a list provided by the Director of FMCS). By carrying over

the mediator, the progress gained in the negotiation and mediation phases is not lost,

as it often is under the current model. All parties are focused solely on the outstanding issues identified in the mediation phase. The arbitrators also are aware of what

tentative concessions both sides have offered in seeking to reach agreement. Therefore, there is little opportunity for either side to revert to original bargaining positions, open up old debates and force the entire process to start from scratch.

To further strengthen the momentum toward resolution, the Commission proposes

that the arbitration stage last no more than 60 days and be broken up into several

distinct phases. For the first 40 days, both sides should present their arguments to

the arbitration panel and continue negotiating with each other. At the end of that

period, each side should be required to produce two good-faith offers, share them

with the other side, and try once more to negotiate a resolution.

If there still is no agreement, then the Commission proposes to escalate the stakes,

asking each side to produce one “last best final offer” (“LBFO”). To

further nudge the parties together, the Commission proposes that the

arbitration panel be required to select one of the two packages and be

permitted to fashion its own award only if both packages fail to honor

the comparability standard set by the Postal Regulatory Board (discussed in the next section). The LBFO strategy is a technique used in

negotiations with essential employees, such as police officers and

firefighters, in numerous states.8

 It places extraordinary pressure on

both sides to produce a reasonable, workable compromise that incorporates the core interests of both parties. It also places a high risk on

insisting on one-sided demands (i.e. the likelihood the arbitrators will

simply select the other negotiating party’s package).

The LBFO strategy is a technique used

in negotiations with essential employees,

such as police officers and firefighters, in

numerous states. It places extraordinary

pressure on both sides to produce a

reasonable, workable compromise that

incorporates the core interests of both

parties.

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The Commission proposes that the arbitration panel have only three days to settle on

a tentative award. At that time, the Commission proposes a 10-day period, which

offers the two parties one last chance to fashion their own final agreement. This

reflects a central theme of the new model crafted by this Commission: At every stage,

parties have the opportunity to forge their own agreement and preempt the arbitrators’ award. The resulting cycle—repeatedly going back to the negotiating table with

a more refined set of choices and pressed on by a strict timeline and the prospect of

an LBFO award—keeps the pressure on the parties that have to live with the final

outcome of the process to take care of business themselves and do so in a timely and

mutually agreeable manner, rather than a lengthy and confrontational one.

Making the Collective Bargaining Process Work Better

The 1970 Act should be amended to transition the Postal Service to a three-stage “mediationarbitration” approach to collective bargaining that encourages both management and unions to

work together toward reasonable, timely and good-faith resolutions.

Stage 1: Negotiated Settlement (90 days)

The current requirement that parties begin negotiations 90 days prior to the expiration of an

existing agreement should be retained.

Stage 2: Mandatory Mediation (30 days)

In the absence of an agreement at the end of a contract period, parties move immediately to a 30-

day mandatory mediation. This stage would replace the current fact-finding period. At this stage,

parties can either forge a final resolution or narrow the range of issues to be addressed in arbitration.

Stage 3: Interest Arbitration (60 days)

If an impasse persists, a 60-day arbitration is conducted by a three-person panel of neutral

arbitrators selected from a list provided by the Federal Mediation and Conciliation Service. To

avoid “starting from scratch,” one arbitrator is the mediator. This stage would proceed as follows:

Hearing: Immediately after mediation, parties have 40 days to present arguments.

Last Best Final Offer: After the hearings, each party must submit two final offer packages. The

parties then have seven days to continue negotiations. If an impasse remains, each party would

submit a final offer, and the panel would have three days to select one or the other as its tentative

award. Arbitrators cannot fashion their own award (unless both final offers fail to honor the

Postal Regulatory Board’s comparability standard).

Final Negotiations: Following the tentative award, parties would have a 10-day period to

negotiate a substitute agreement that would preempt the panel’s award.

Final Award: If no substitute settlement is reached, the panel’s tentative award becomes final.
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Comparability Must Cover Total Compensation

The most thorny issue in collective bargaining today is pay and benefit comparability.

As mentioned earlier, Postal Service workers currently enjoy the best of both the

public- and private-sector worlds—salaries akin to those offered by leading corporations, plus the substantial job security and benefits associated with Federal

employment.

This notion of matching private-sector compensation is clearly endorsed in

the 1970 Act, which directs compensation for Postal Service employees and

officers to be “comparable to the rates and types of compensation paid in the

private sector of the economy of the United States.” Yet the statute contradicts itself by excluding pensions from collective bargaining and effectively

taking retiree health benefits off the table, as well, by requiring that they be

maintained at the generous levels in place when the 1970 Act became law.

By demanding pay comparability yet effectively excluding sizable pension

and health benefits from collective bargaining, the 1970 Act forces negotiators and

arbitrators alike to focus almost exclusively on wages. The consequence has been a

heated 30-year debate over the meaning of pay comparability, one that regularly

antagonizes the collective bargaining process.

It is the Commission’s view that the benefits of comparability are undermined for all parties when significant segments

of total compensation are rendered non-negotiable. For

bargaining-unit employees, this places disproportionate

downward pressure on wages, rather than across wages and

benefits. For ratepayers, it is unfair to ask that they finance

postal compensation above the generous provisions of the

law (i.e. comparability to the private sector).

Source: USPS.

It is the Commission’s view that the

benefits of comparability are

undermined for all parties when

significant segments of total

compensation are rendered nonnegotiable.

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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

Compensation Premium Debate Requires Independent Resolution

While the Commission strongly supports total compensation comparability, it

recommends that this commitment be appropriately and clearly measured by an

independent entity—the Postal Regulatory Board—and used as a ceiling in collective

bargaining. While the clear intent of the comparability standard is to ensure wages

do not lag behind the private sector, expert witnesses made the case to the Commission that a premium may exist today.9 Appearing to support these claims is the low

turnover rate and the fact that new hires, on average, receive a 28.4% pay increase

when they join the Postal Service.10

In the arena of benefits, the contrast is even more pronounced. While health care

benefits are part of the collective bargaining process, employees have access to the full

range of generous plans available to Federal employees. They also contribute only

slightly more than half (16.5% of the total premium) of what private-sector workers

contribute (about 31.5% of the total premium)11 and of what other Federal workers

pay (about 28% of the total premium) for health care coverage.

Retirement benefits are even more generous, rising with inflation (a rare provision

among private plans). The Postal Service, like the Federal government overall,

permits employees to retire as early as age 55 (under the Civil Service Retirement

System, CSRS) and as early as age 57 (under the Federal Employee Retirement

System, FERS) with a full pension. And, while fewer private companies today offer

retiree health care benefits (and many more are shifting a greater percentage of the

costs to recipients),12 these benefits remain a mainstay at the Postal Service.

In sum, these benefits accounted for just under $20 billion of the $51.5 billion the

Postal Service spent on its employees in Fiscal Year 2002—almost $1 out of every $3

the Postal Service spent in that fiscal year.13 A lack of negotiating authority with

respect to these costs would be intolerable to most private-sector companies. They

should be brought within the collective bargaining process at the business-oriented

Postal Service, as well.

While the Commission received persuasive testimony supporting

the existence of a compensation premium (and notes that a

number of respected neutral arbitrators have acknowledged it),14

the Commission also received information challenging the

existence of such a premium.15 As a result, the Commission

believes it is inappropriate for itself, Congress or any interested

party to settle this debate. Rather, the overriding public interest

lies with entrusting this determination to an independent entity,

the Postal Regulatory Board, to fairly settle the issue.

An Unambiguous Definition

The 1970 Act should be amended to include an

unambiguous definition of “comparable pay”

that clearly defines compensation as all wages

and benefits. Specifically, the legislation should

be amended to make clear that comparability

should be achieved on a total compensation

basis, including all fringe benefits.
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To assist the Postal Regulatory Board, the Commission recommends clarifying the

meaning of the term “comparability” by revising 39 U.S.C. § 101(c). The Commission suggests a definition substantially similar to the following:

As an employer, the Postal Service shall achieve and maintain compensation for its officers and employees comparable to the total rates and

types of compensation paid in the private sector of the economy of the

United States. The term “total rates and types of compensation” shall

include wages, holidays, leave, insurance, pensions, medical and hospital

benefits, the continuity and stability of employment and all other

benefits received.

This change would clarify that the Postal Service’s commitment

to pay comparability with the private sector applies to an

employee’s total compensation package.

In addition, the Commission recommends that the 1970 Act be

amended to authorize the Postal Regulatory Board to determine

the appropriate sector(s) in the private workforce to be used in

calculating comparable compensation and to clarify the factors to

be considered by the Board in making this calculation.

As envisioned by the Commission, 39 U.S.C. § 1003(a) would

be revised to read as follows:

It shall be the policy of the Postal Service to maintain total

compensation and benefits for all officers and employees on

a standard of comparability to the total compensation and

benefits paid for comparable levels of work in the private sector of the

economy as determined by the Postal Regulatory Board. Factors to be

considered by the Postal Regulatory Board should include the economic

history of the employer, present financial health and ability to pay, as well

as anticipated future growth, productivity, and total labor costs.

In making the determination of whether a compensation premium exists, the Postal

Regulatory Board should be authorized to consult with the Secretary of Labor, the

Secretary of the Treasury, the Director of the Office of Personnel Management, the

Comptroller General of the United States, and other individuals and organizations

that the Postal Regulatory Board deems necessary.

Defining the Appropriate PrivateSector Comparison

The 1970 Act should be further revised to direct

the Postal Regulatory Board to define the

appropriate private-sector comparison for

employee compensation, factoring in the

similarities between the Postal Service’s financial

health and ability to pay, anticipated future

growth, productivity and total labor costs and

that of the other business(es) and/or sector(s),

with which it is deemed comparable.
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The Commission believes that all individual components of total compensation

should be subject to the collective bargaining process, as is the case in the private

sector. This approach could require granting the Postal Service and its unions the

flexibility to develop new plans separate and apart from existing Federal pension and

health care programs. The Commission, however, is concerned about the potential

impact of such a step on other Federal employees. Therefore, it recommends that the

Postal Service work with the Department of the Treasury, the Office of Personnel

Management, and others to determine the impact that creating separate Postal

Service pension and health care plans would have on existing Federal systems and

workers.

As a first step, the Commission recommends: (1) authorizing the Postal Service to

negotiate FERS eligibility requirements and employee contributions; (2) authorizing

the Postal Service to negotiate the eligibility and retiree contributions under the postretirement health care component of the Federal Employee Health Benefit

Program for future Postal Service retirees; and (3) repealing language in the

1970 Act that effectively freezes fringe benefits at levels in place when the

Postal Reorganization Act became law on July 1, 1971.

By excluding significant benefits from the collective bargaining process, the

1970 Act denies negotiators and arbitrators alike the ability to factor the

entire wage/benefit package into the agreement. By amending the 1970

Act to include a broader range of benefits in the collective bargaining

process, negotiators and arbitrators will be better able to ensure privatesector comparability across most wage and benefits components.

Addressing the Protected Status of Represented Employees in the

Comparability Analysis

The Commission’s proposed definition of comparability includes the phrase “continuity and stability of employment” as a benefit to be considered in the computation

of comparable total compensation. This language refers to protection against layoff,

a benefit currently enjoyed by more than 580,000 Postal Service employees (Exhibit

6-4). Layoff protection is not guaranteed by the 1970 Act, but instead is negotiated

by the Postal Service and its major unions as part of the collective bargaining process.

The “no layoffs or reduction in force” provisions (Article 6) in the current collective

bargaining agreements date back almost 25 years and have been included in successive agreements. For three of the Postal Service unions, layoff protection covers all

career employees who have been part of the Postal Service workforce on a full-time

basis for at least six years. For the fourth union, layoff protection extends to every

career employee regardless of his or her term of service.

By amending the 1970 Act to

include a broader range of benefits

in the collective bargaining process,

negotiators and arbitrators will be

better able to ensure private-sector

comparability across most wage and

benefits components.

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The Commission believes that existing protections against layoff will not impair the

ability of the Postal Service to “rightsize” its workforce in the near term. The Commission also believes it is critical for Postal Service management to ensure that future

collective bargaining agreements provide the necessary flexibility to manage the size

and deployment of the Postal Service workforce.

The Commission, however, was divided on the appropriateness of no-layoff provisions in future agreements between the Postal Service and its represented workforce.

In light of the potential of declining mail volumes, a majority of commissioners (6)

believe that future Postal Service managers should have the flexibility to make

necessary adjustments in the size of the workforce without the constraints imposed

by these provisions. These commissioners note that protection against layoff is a

benefit not available to other Federal employees, who are subject to Federal reduction-in-force requirements in the event there is no longer any work for them to

perform. They also note that layoff protection is rare in the private sector today, as

companies demand the flexibility to rightsize their workforces as market conditions

warrant.

A majority of commissioners would therefore recommend that the 1970 Act be

amended to require that future Postal Service employees (i.e., employees hired by the

Postal Service after a change in the law) be covered by the same reduction-in-force

rules as other Federal employees and to specify that this requirement may not be

varied through the collective bargaining process. Under this approach, Postal Service

workers hired before the change in the law could continue to enjoy layoff protection

negotiated on their behalf through the collective bargaining process.

Career Union Employees Protected by No-Layoff Guarantees

Total Members Protected Unprotected % Protected

APWU (Clerks) 304,334 293,797 10,537 96%

NPMU (Mail Handlers) 57,621 54,133 3,488 94%

NALC (City Carriers) 230,171 175,329 54,842 76%

NRLCA (Rural Carriers) 60,718 60,718 0 100%

Total 652,844 583,977 68,867 89%

Exhibit 6-4.

Information as of February 2003
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A minority of commissioners (3) believe that a statutory prohibition against the

negotiation of no-layoff provisions protecting future Postal Service workers would

undermine the authority of the new Board of Directors and would unnecessarily

intrude into the collective bargaining process. The minority notes that Postal Service

management has the ability today, and will continue to have the ability, to seek the

removal of these provisions in future negotiations with the major Postal Service

unions.

The minority also believes that job security is a legitimate subject of collective

bargaining. In their view, specific circumstances may arise in which offering job

security or no-layoff arrangements would demonstrably be in the best interests of the

Postal Service. In addition, the minority notes that taking layoff protection off the

negotiating table through an overriding statutory prohibition is inconsistent with the

Commission’s approach to governance and its desire to expand the range of issues

subject to collective bargaining between the Postal Service and its represented

workforce.

Comparability Analysis Should Bind Labor Negotiations

Finally, the Commission believes that the 1970 Act should be amended to establish

that the comparability standard determined by the Postal Regulatory Board creates a

ceiling over the negotiation and arbitration process. This limitation should be

imposed immediately on the compensation of employees hired after the comparability

analysis is completed, and gradually for existing employees, in the event that the

Postal Regulatory Board determines a total compensation premium exists. Specifically, the Commission suggests that 39 U.S.C. § 1207(c)(2) be revised to read:

The arbitration board shall give the parties a full and fair hearing,

including an opportunity to present evidence in support of their claims,

and an opportunity to present their case in person, by counsel, or by other

representative as they may elect. For existing employees, the arbitration

board must consider the Postal Regulatory Board’s calculation of the total

compensation premium and consider the Postal Regulatory Board’s

deadline for eliminating the total compensation premium. For new

employees, the arbitration board must apply the Postal Regulatory Board’s

calculation of total compensation as a cap on total compensation.

Decisions of the arbitration board shall be conclusive and binding upon

the parties. The arbitration board shall render its decision within 60

days after its appointment.
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In effect, this recommendation would create a two-tiered system aimed at applying

the discipline of a comparability standard to the collective bargaining process without

unduly disrupting the relationship between management and current employees. For

new workers hired after the comparability determination is made, its findings will

immediately serve as a ceiling on total compensation. However, for existing employees, if the Postal Regulatory Board determines a compensation premium exists, then

it will calculate the extent of the premium and set a reasonable timeframe for the

Postal Service and unions to eliminate the disparity.

Because it is not the Commission’s intent to lower the real wages of existing employees, this timeframe should be long enough to permit achieving comparability over a

period of years. However, to keep the process advancing, arbitrators should be

required to consider the extent to which each proposal advances comparability in

determining their award. In addition, the Postal Regulatory Board should be tasked

with periodically reviewing both its initial determination and the Postal Service’s

progress in eliminating any premium. Beyond that, how the Postal Service and the

unions meet this goal within the Postal Regulatory Board’s timeframe shall remain

flexible and be determined within the context of the collective bargaining process.

One inherent flaw in the current process, as it applies to the Postal Service, is the

common knowledge among all parties that ratepayers can be asked to make up any

deficit. This is hardly the case in the private sector, where management ultimately

could plead for the parties’ mutual interest in the enterprise’s financial viability.

Having the Postal Regulatory Board’s comparability standard limit total compensation seeks to replicate this private-sector discipline.

Addressing Significant Retiree Benefit Obligations

Nearly half a million Americans today are retired postal workers. As a result, pension

and retiree health benefits alone comprise $6 billion of the annual $12 billion the

Postal Service pays out in fringe benefits.16 As pension and health care costs skyrocket

for all employers, the Postal Service is not alone in its need to manage this large

liability effectively. Postal Service employees, too, have a stake in this effort. Particularly given the fact that more than 45% of the Postal Service’s career workforce is

within a decade of the minimum retirement age (Exhibit 6-3), involving these

benefits in the collective bargaining process will ensure that the health care needs of

future postal retirees are adequately addressed as the Postal Service works to control

and manage this large category of expense.
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Postal Service Owes the Public Complete Transparency

The Postal Service must also address the substantial benefits obligations its legacy

systems have already accrued. In this arena, the Postal Service has a “good news, bad

news” situation. The good news is that recently enacted legislation reduced the Postal

Service’s unfunded liability for CSRS pension benefits (those covering employees

hired before 1984) from $32.3 billion to $5.8 billion.17 The bad

news, however, is that the Postal Service today continues to have

an unfunded retiree health benefit obligation of about $48

billion.18

The difference in the fate of the two benefit funds is due to the

fact that the pension obligation is funded as benefits are earned

and recovered through rates, while the retiree health care obligation is funded on a “pay-as-you-go” basis that focuses on obligations due today rather than the larger figure of obligations earned

by and owed to employees today. The Commission wishes to

make clear that the Postal Service’s independent auditor has

indicated that such an approach is in compliance with current

applicable accounting standards governing the reporting of

retiree health care costs. Putting aside these standards, however,

the Commission believes that the Postal Service should strive for

complete transparency. As a result, it strongly encourages the

new Board of Directors to revisit this issue in terms of the

public’s “right to know” the fiscal health of its public institutions and to formally

acknowledge the full extent of this sizable obligation in its financial statements. The

Commission further suggests that, if the financial condition of the Postal Service

improves, the Board of Directors consider funding a reserve account to begin paying

down this obligation, so future ratepayers are not forced to pay for postal services

delivered to the nation today.

Accounting for Unfunded Retiree

Health Care Obligations

The new Board of Directors should work with

the Postal Service’s independent auditor to

determine the most appropriate accounting

treatment of the Postal Service’s unfunded retiree

health benefit obligation in accordance with

applicable accounting standards. In making this

determination, the Board of Directors should

consider the Postal Service’s role as a valued

public institution. The Commission also

recommends that the Board consider funding a

reserve account to address these obligations to

the extent that Postal Service finances permit.
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Taxpayers, Not Ratepayers, Should Finance Military Pensions

With regard to the CSRS pension fund surplus, President Bush in April signed into

law the Postal Civil Service Retirement System Funding Reform Act (Public Law

108-18), which lowered the Postal Service’s annual contribution to fund its remaining liability. Because the old statutory funding formula required higher payments

that would have eventually resulted in the Postal Service overfunding its CSRS

obligations, the new formula will translate into about $3 billion in available revenues

in 2003, which are being used to pay down a sizable portion of the Postal Service’s

debt owed to the Department of the Treasury.

This legislation was a positive step. However, included in the law permitting the

Postal Service to adjust its pension contributions was language requiring the Postal

Service to fund the CSRS retirement benefits of its employees that were earned while

serving in the U.S. military. The cumulative cost to the Postal Service of funding the

military service component of its CSRS retirees’ pension payments has been estimated

by the GAO to be $27.9 billion.19

As explained by the Office of Personnel Management (“OPM”) during Congressional

hearings on this legislation, it has been standard practice for all Federal agencies to

cover the total actual pension costs of their retirees under FERS since its inception in

1984. OPM noted that contributions made by Federal agencies for their retirees

under CSRS have always been handled differently, with many agency contributions

(such as those made by the Postal Service) being calculated based on legislative

mandates that are not linked to actual costs. OPM viewed the bill that was later

enacted as P.L. 108-18 as an opportunity to make future Postal Service CSRS contributions incorporate all retirement liabilities associated with

Postal Service retirees, as well as all payments and earnings. In

OPM’s view, this approach simply made Postal Service contributions for CSRS costs consistent with those it makes for costs

under FERS.

The Commission understands the OPM position, but does not

agree with the application of this approach to the Postal Service.

While the approach may be standard practice for all Federal

agencies under FERS, the Commission notes that P.L. 108-18

only applies this standard to the Postal Service. No other Federal

agency is required to pay such costs for its retirees under CSRS.

In the Commission’s view, it is inappropriate to require the

Postal Service, as a self-financing entity that is charged with

Financing Military Pension

Benefits: Whose Responsibility?

The portion of CSRS retirement benefits

accrued by postal workers through service in the

U.S. military should be financed by taxpayers,

not ratepayers. Congress should return responsibility for these benefits to the Department of the

Treasury which, until recently, paid these

obligations through appropriations.
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operating as business, to fund costs that would not be borne by any private-sector

corporation (costs associated with benefits earned while the retiree was employed by

another employer). In addition, requiring Federal agencies financed through Congressional appropriations to cover the military retirement benefits of its employees

still ultimately taps resources from the same appropriate revenue source—taxpayers.

Requiring a self-financing Federal entity to follow suit is wholly different. It asks

those who use the nation’s postal system to subsidize the U.S. military every time

they use the mail.

The Commission recommends repeal of this requirement. Fortunately, by directing

the Postal Service, the Department of the Treasury, and OPM to submit proposals

regarding the funding of military benefits of postal employees, P.L. 108-18 provides

the basis for Congress to revisit the issue.

The Commission supports returning responsibility for this portion of retiree benefits

to the Department of the Treasury, where it resided before the recent legislation, and

where this liability can be financed through funds generated by taxpayers.

Building an Incentive-Based Culture of Excellence

With a stronger collective bargaining process in place that permits the Postal Service

to address the entire compensation equation, it is equally important that Postal

Service management acknowledge that employee morale is vital to the success of any

service-oriented enterprise. This is especially true at such a defining moment for the

Postal Service, when substantial productivity gains and significant realignment of the

workforce are needed to ensure the institution’s continued ability to fulfill its mission

of universal service at affordable rates.

To address employee job satisfaction and motivate the workforce behind broad

institutional goals, the Postal Service has some significant repair work to do in order

to strengthen the management-employee relationship. Central to this effort is

substantially reducing the backlog of employee grievances pending arbitration and

getting at the root cause of the unusually high volume of complaints. After the repair

work is done, the Postal Service needs to build a well-designed incentive compensation program that goes beyond the upper ranks of management and makes all

employees meaningful participants in the Postal Service’s success.
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Last but not least, in light of its businesslike orientation, the Postal Service should be

permitted to offer attractive and competitive salaries that can assist in recruiting and

retaining top-level business leadership that is necessary to guide the Postal Service to

a higher standard of excellence and value to the nation.

Reducing Grievances

Employee morale is an essential element of an incentive-based culture. It is undermined when employee-management relations are acrimonious. Unfortunately, the

high number of “second step” grievances and the large backlog of grievances pending

arbitration at the Postal Service today clearly indicate that the relationship between

Postal Service management and workers is strained—to the detriment of employee

morale, productivity and, ultimately, service to ratepayers. As cost containment and

employee efficiency become pivotal to profitability, numerous service industries have

worked with their unions to make dispute resolution more efficient and less contentious. The time has come to make this same progress in the Postal Service grievance

process.

There is much ground to be gained. In 2002, 184,329 grievances filed by members

of the Postal Service’s four major unions reached a “second step” appeal, and 106,834

were pending arbitration (Exhibit 6-4). Clearly something is wrong when a unionized workforce of 746,000 employees generates more than 184,000 “second step”

grievances in a year’s time.

By comparison, with a workforce of nearly 102,000 employees, American Airlines

launched a major Alternative Dispute Resolution initiative when its backlog of

employee complaints reached a mere 800.20 The Commission is confident in its

assessment that not only does the current grievance dispute resolution process at the

Postal Service lag behind the best practices of the business world; it likely brings up

the rear.

While the Postal Service has separate dispute resolution agreements with each of its

four major unions, the process starts generally with an employee, possibly accompanied by a union steward, discussing the dispute with the supervisor.21 If a successful
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process were in place, most grievances would be resolved at this stage, by the primary

parties. More often than not, however, the grievance escalates through numerous

time-consuming steps, ultimately ending with arbitration. Here, the adversarial

relationship is quite apparent in both the significant number of grievances appealed

and the significant backlog of complaints awaiting arbitration. In Fiscal Year 2002,

115,065 grievances advanced to “second step” appeal and 89,784 were “pending

arbitration” at just one union, the American Postal Workers Union, adding up to two

grievances for every three of their represented employees (Exhibit 6-5).

APWU (American Postal Workers Union)

Fiscal Year 2nd Step Grievance Appeal Pending Arbitration

FY1999 137,504 91,561

FY2000 116,247 65,035

FY2001 134,178 78,209

FY2002 115,065 89,784

FY2003* 56,839 83,745

NALC (National Association of Letter Carriers)

Fiscal Year 2nd Step Grievance Appeal Pending Arbitration

FY1999 46,372 17,734

FY2000 51,037 19,350

FY2001 48,659 15,513

FY2002 29,164 9,906

FY2003* 16,500 8,846

NPMHU (National Postal Mail Handlers Union)

Fiscal Year 2nd Step Grievance Appeal Pending Arbitration

FY1999 28,281 4,729

FY2000 30,109 5,528

FY2001 31,607 6,135

FY2002 33,533 7,122

FY2003* 17,288 7,602

NRLCA (National Rural Letter Carriers’ Association)

Fiscal Year 2nd Step Grievance Appeal Pending Arbitration

FY1999 2,483 44

FY2000 3,412 56

FY2001 3,504 73

FY2002 6,567 22

FY2003* 2,855 155

A Strained Relationship: “Second Step” Appeals and

Pending Arbitration

Exhibit 6-5.

*Data through April 7, 2003

Source: ADR Associates, LLC, Report to Commission (June 2003).
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The Commission notes the encouraging progress being made by the National

Association of Letter Carriers. The union and the Postal Service recently completed

the first totally restructured and streamlined grievance procedures for any postal

union in 23 years. After only one year, its pilot phase resulted in 78% of grievances

being resolved locally and a 65% decline in appeals. And, as of July 2003, the

backlog of pending grievances was down 74% since 1998. The Commission believes

that Postal Service managers should work aggressively to establish similar productive

agreements and relationships with the other employee unions.

By resolving more disputes at the local level, reducing the number of steps involved

before a case goes to arbitration and establishing a common understanding between

the Postal Service and the union with regard to key contract provisions, the NALC

process aims both to resolve individual grievances quickly and locally and also to

foster awareness among all parties of what, precisely, the work rules and other

contract stipulations are in order to prevent future disputes.

Given the success of these reforms, the Commission believes that a concerted effort

to establish similar agreements with the other major postal unions should be a

primary objective. The Commission suggests that the Postal Service establish pilot

programs with the following attributes:

• Mandatory mediation at the local level;

• Use of neutral third parties as mediators; and

• Jointly developed training for both union and management representatives.

For such programs to be successful, it is imperative that the Postal Service give clear

direction that settlement of problems and cooperative labor-management relations

are a priority. Additionally, it must hold managers accountable

for behavior that results in poor labor-management relations.

Any long-term reform of the dispute resolution process will

require cooperation between the Postal Service and its unions. It

will take time and effort, but the results, both in financial terms

and in employee morale, will pay huge dividends to the institution and its ability to serve the nation. Satisfied employees are of

far more value to the nation’s postal endeavor than those in a

contentious relationship with their employers. Addressing an

unworkable grievance system and the climate that has created it

is the first necessary step to establishing an incentive-based

culture of excellence.

A Model Approach to

Grievance Reform

Using the recent progress between the Postal

Service and the NALC as a model, the Postal

Service should work diligently with its other

employee unions to institute similar procedures

aimed at reducing both the time needed to

process grievances and the number of grievances

appealed to arbitration.
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Pay-for-Performance Incentives

Performance-based compensation programs, designed correctly, are a valuable tool for

aligning the goals of employees with an institution’s mission-critical performance

targets. With its large employee base, as well as its service and business orientations,

the Postal Service is ideally positioned to reap the benefits of a well-designed and

well-executed incentive compensation program. Toward that end, the Commission

recommends that the Postal Service undertake a careful study of performance-based

compensation, for both management and represented employees, and that it work

with the unions and management associations to design and implement a pay-forperformance initiative that is meaningful to employees and capable of taking the

Postal Service to a higher level of operational efficiency, productivity and quality.

While the Postal Service has attempted to implement performance-based compensation programs in the past, these efforts have often run into challenges. Two years

ago, the Economic Value Added Variable Pay Program and related Merit Pay Program

were terminated amid political criticism. On the merits, the six-year effort appears to

have been effective in focusing management on preventing workplace injuries,

increasing productivity, improving on-time delivery and even reducing by 5%

compensation costs as a percentage of Postal Service operating expenses. The effort

eliminated cost-of-living and other standard pay increases for its top 83,000 employees, requiring instead that each manager earn any pay increase through performance.

While the program was attacked for handing out more than $1 billion to Postal

Service managers, it is worth noting that canceling automatic pay increases saved $2.4

billion.

The initiative’s shortcoming? It failed to involve the workforce as a whole. In

fairness to the Postal Service, however, the notion of variable pay based on performance is frequently opposed by some union leaders. Earlier this year, the Postal

Service began the National Performance Assessment, which relies on a balanced

scorecard approach that links objective measures such as customer service, employee

productivity and business productivity with compensation. While the focus again is

on top managers, the Postal Service has plans to expand the program in 2004. The

Commission urges union leadership to reconsider such initiatives and their ability to

enhance the compensation of the represented workforce.
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In a large organization in need of significant realignment, productivity gains and

high-quality service, performance-based compensation can offer meaningful incentives to align the interests of workers with the specific performance goals of the

institution as a whole. The Commission believes that developing and properly

designing such a plan can serve as a powerful communications and motivational tool,

helping employees understand how they can contribute to the organization’s financial

health and success—and be rewarded for their effort.

In crafting its program, the Commission recommends that the Postal Service emphasize the following “best practice” features: 1) effective alignment of strategic priorities

with desired employee behavior; 2) a simple plan design; 3) clear communication of

the plan to employees; 4) a credible and reliable measurement process; 5) proper

integration of the plan with workplace processes and systems; and 6) reasonable

assurances that the plan will pay for itself through improved productivity.22

The Commission also encourages the Postal Service and its unions to think broadly

in terms of incentives. For example, employees represented by the National Rural

Letter Carriers’ Association today enjoy a very effective non-monetary incentive—an

evaluated route process in which rural carriers are compensated for completing a set

route, no matter how quickly and efficiently they get the job done.23 This approach

benefits both parties. It limits overtime costs to the Postal Service (the root cause of

many carrier-related grievances), and it rewards productive workers, compensating

them equally for performing their route in five hours, for example, as they would

have been paid for eight hours of work. In other words, if they beat the “evaluated

time” for their route, they are not penalized financially for doing so. The Postal

Service should consider similar approaches with employees

represented by its other unions.

If the Postal Service is to have the businesslike capacity to nimbly

adapt to change, then the entire postal workforce should be

eligible for some form of incentive compensation that gives them

an additional financial stake in the success of the enterprise. The

use of incentive compensation has proven a very effective tool in

aligning workers with an institution’s productivity, efficiency and

service goals. With respect to the Postal Service, a positive,

constructive, motivating compensation structure is critical to

building a less confrontational and more cooperative employeemanagement culture, one that consistently strives for excellence.

In short, by giving every employee a personal stake in the success

of the Postal Service, that success becomes far more attainable.

Develop a Meaningful Pay-forPerformance System

The Postal Service should carefully study and

design a pay-for-performance compensation

program that provides meaningful incentives to

employees—both management and labor—to

personally advance the productivity, efficiency

and service quality goals of the Postal Service.

The plan should be simply constructed, clearly

communicated and able to self-finance through

the delivery of significant efficiency and productivity gains.
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Executive Compensation

While the 1970 Act calls for pay comparability for both managers and represented

employees, it also includes a salary cap. As a consequence, executive compensation is

nowhere near that of corporate leaders running comparably large enterprises. While it is

not feasible that Postal Service executive compensation rival its private-sector counterparts, it is the Commission’s view that top

managers’ pay should move significantly in

that direction, with the caveat that it be

closely tied to key performance measures for

the Postal Service overall.

As a consequence, the Commission recommends repeal of the Federal salary cap as it

applies to the Postal Service (currently

$171,900) and that the Board of Directors

be authorized to establish rates of pay for top

Postal Service officers and employees that are

competitive with the private sector. Many

Federal entities requiring a capable, experienced CEO and other top officers to ensure

the quality and continuity of operations

already have such authority. These entities

include the Tennessee Valley Authority, the

Federal Reserve Board, the Public Company

Accounting Oversight Board and the Federal

Home Loan Banks.24

Without such a move, the result is a compression of salaries at the top, leaving little

financial incentive for top employees to take

on new levels of responsibility or to perform

at “break-through” levels. This cap also presents a significant recruiting and retention

challenge for the top leadership posts.

When compared to wages paid for similar private-sector positions, and even other selffinancing government enterprises, the Postal Service simply cannot compete in attracting and retaining key managers who are capable of lifting the enterprise to new levels of

performance and service. The cap should be lifted and the Board should have the discretion to set compensation to attract and retain qualified individuals in key leadership posts.

Officer Position

Base Salary (Dollars in Thousands)

Private Sector Gov't Sponsored Enterprise

Postal Service

1,200

960

CEO COO CFO CMO

720

400

240

0

Impact of Statutory Salary Cap 

on Top Postal Positions

Exhibit 6-6.

Source: USPS Transformation Plan.
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As noted in Chapter 3, the Commission believes that executive

pay must be tied directly to performance, and has recommended

that the new Board establish a Compensation Committee that

would develop a compensation system that delivers that result.

Finding Private-Sector Efficiencies

In addition to improving its unique collective bargaining process

and building a more constructive management-employee climate, the Postal Service has a number of opportunities today to control labor costs and

gain new efficiencies from its workforce through greater application of standard business

practices. By making slight but meaningful adjustments in the Federal Employees’

Compensation Act (FECA) to reflect the Postal Service’s unique businesslike and selffinancing role, the Postal Service can advance its goal of a leaner, more productive and

less costly workforce, and emerge a stronger and more stable organization fully capable

of continuing to play a vital role at the center of U.S. commerce and society.

Rein in Workers’ Compensation Liabilities

The 1970 Act requires Postal Service employees—like all Federal employees—to be

covered by FECA, which authorizes the Federal workers’ compensation program.

Under FECA, the Postal Service has maintained a broad and effective workers’ compensation program and recent efforts have lowered injury rates considerably. Since Fiscal

Year 2000, the Postal Service has linked management compensation to improved worker

safety. During this period, the Postal Service has seen annual improvements in safety, as

measured by the Occupational Safety and Health Administration’s Injury Illness

Frequency Rates. The Postal Service has also recently initiated an Ergonomic Strategic

Partnership with OSHA, the American Postal Workers Union, and the National Postal

Mail Handlers Union to reduce the number of musculoskeletal disorders, which account

for more than 40% of workplace injuries and illnesses. The Commission applauds these

efforts at making the Postal Service a safer workplace and urges the Postal Service to

continue to make worker safety a top priority.

Unfortunately, the application of FECA to the Postal Service has led to some costly and

unintended consequences, most notably a $6.5 billion unfunded liability.25 Unlike most

workers’ compensation plans governing the private sector, FECA imposes no waiting

period before benefits begin. Employees with dependents are eligible for 75% of their

pay, rather than the standard 66 2/3%. There is also no maximum dollar cap on FECA

payments. As a result, particularly when employees are receiving the 75% benefit, they

often do not opt to retire, staying permanently on the more generous workers’ compensation rolls. Exhibit 6-7 illustrates the difference in take-home pay for an employee

receiving a CSRS-based pension benefit versus the samde employee receiving workers’

compensation benefits.

Attracting and Retaining

Top Talent

The Postal Service should be granted a Title 5

salary-cap exemption, permitting it to compensate top employees at a level that is competitive

with the private sector. Total compensation,

however, should be tied to performance and left

to the discretion of the Board.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

The Commission believes that the Postal Service, given its unique businesslike charter,

should be provided relief from those provisions of FECA that are creating costly unintended consequences. Specifically, the Commission recommends that the Postal Service

be permitted to:

• Impose a three-day waiting period before benefits begin;

• Limit benefits to two-thirds of an employee’s pay; and

• Transition workers’ compensation recipients to the appropriate retirement

program when they become eligible for retirement.

Similar measures are fairly standard practice in the private sector.

They are aimed at controlling costs while providing adequate

coverage to employees. Given the Postal Service’s current $6.5

billion unfunded workers’ compensation liability and its businesslike, break-even mandate, taking actions similar to those that

would be taken in the private sector seems appropriate.

Projected: Comparison of FECA Workers’ Compensation

Benefits and EAS-13 Employee Post-Tax “Take-Home” Pay

Year CSRS Retirement Net Pay Workers’ Compensation (75% of pre-

(56% of High 3+ taxable) injury salary plus COLAs - non-taxable)

2003 $21,949 $37,847

2004 $22,547 $38,982

2005 $23,162 $40,152

2006 $23,796 $41,356

2007 $24,449 $42,597

2008 $25,112 $43,875

2009 $25,814 $45,191

2010 $26,528 $46,547

2011 $27,263 $47,943

2012 $28,020 $49,381

Total $248,640 $433,871

Exhibit 6-7.

Source: USPS Transformation Plan.

Reforming Workers’

Compensation

Consistent with its self-financing mandate, the

Postal Service should be permitted to provide

workers’ compensation benefits on a par with

the private sector, most notably by limiting its

FECA benefits to 66 2/3% of salary, imposing a

three-day waiting period, and requiring

beneficiaries to transition to the appropriate

retirement program when they qualify for

retirement.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

Management Ranks Need to be Thinned, Too

Today, the Postal Service management follows a “command-and-control” approach

with significant policy and operational decisions made at Headquarters, under the

offices of the Postmaster General and the Chief Operating Officer. These decisions

are then disseminated throughout the managerial hierarchy, including Area Vice

Presidents, District Managers, Managers of Post Office Operations, and Postmasters

(Exhibit 6-8).

While the Postal Service’s management structure is generally sound, there is always

room for substantial improvement in an organization of the Postal Service’s size and

nationwide reach. It is critical, for example, that communication of strategy and

goals not get lost along the way from senior managers to represented employees. The

Postal Service must also continually focus on removing layers of managerial bureauExhibit 6-8.

Organizational Chart: Senior Postal Service Management.

Source: USPS Transformation Plan.
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cracy with an eye toward simplicity and downward delegation. Removing layers of

management and resting authority in lower level managers will free senior executives to focus on higher level strategy and goal-setting.

The Commission believes that the Postal Service’s network rationalization effort,

already underway, provides a unique opportunity for the Postal Service to examine

and realign its management structure at the same time it is working to realign its

physical infrastructure and represented workforce. The Commission encourages

the Postal Service to use this opportunity to examine every management position

and managerial layer to determine how it fits into the larger organization and

whether it aids in the fulfillment of the Postal Service’s overall mission. As part of

the effort, the Postal Service should conduct a review of the entire management

structure, size, and cost to determine whether each component necessary and

consistent with the best practices of the private sector and to require managers to

justify their functions and the size of their respective staffs.

The Postal Service, for example, recently announced the consolidation of the

administrative functions in five of its 85 districts, thereby reducing the total

number of districts to 80.26 Is further consolidation possible? Does every district

need to be headed by a single executive? Does the Postal Service have the appropriate number of areas and districts? These are the questions that Postal Service

management must continually ask itself as it seeks to remove bureaucratic redundancies.

The Commission also believes that the Postal Service would benefit from greater

consistency and standardization throughout its management ranks. To optimize

efficiency, promote transparency, and improve communication across the organization, it is important that each managerial role be clearly articulated and standardized. While flexibility is important to foster a healthy work environment, it is vital

that functions and roles be identical regardless of geography. Much like represented employees moving between plants, a Manager of Post Office Operations in

Boston, for instance, should be able to replace seamlessly a Manager of Post Office

Operations in San Francisco.

Finally, as with its workforce in general, the Postal Service will see large numbers

of its managerial employees become eligible for retirement within the next few

years–fully 55% of officers and executives will be eligible in 2006 compared with

26% in 2002. While this provides an opportunity for the Postal Service to

simplify its management structure and remove redundant positions and unnecessary layers, it also presents the risk that the Postal Service may lose key personnel.

The Commission believes the development of a succession plan for key management positions throughout the organization must be an ongoing priority of the

Board of Directors.
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Conclusion

As valuable as the Postal Service is to the nation, its ability to deliver that value is only as

great as the capability, motivation and satisfaction of the people who make the daily

delivery of the mail to virtually every American home and business possible. Their

desire to make the modernization of the nation’s postal network a success, along with

their willingness to make possible the Postal Service’s ambitious goals to rein in costs

while improving productivity and service, will in no small part determine the success or

failure of the entire transformation endeavor and, ultimately, the fate of universal service

at affordable rates.

A new collective bargaining process that brings management and employees together

and places a premium on constructive and timely resolutions, more businesslike flexibility that permits the Postal Service to address mounting benefits liabilities, and a new

commitment to making all employees vested in the enterprise—all these steps can help

bring under control the extraordinary costs of the Postal Service’s national

employee base. This result can be achieved without turning to ratepayers or

sacrificing the Postal Service’s commitment to compensating its employees comparably

to the private sector.

If the Postal Service proves capable of focusing its mission and purpose, its workforce

must be no larger than necessary and committed to facing the realities of declining mail

volumes and revenues. In this area, its strategy must be two-fold: minimizing the risk to

taxpayers and ratepayers, and realigning the workforce to the realities of a leaner Postal

Service without sacrificing service. A lean, motivated and strategically deployed

workforce is essential to this equation.

Equally important is the potential of technology, even amid such a challenging transition, to propel the Postal Service to a new standard of excellence.
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Chapter 6 Recommendations*

W–1. Developing an Appropriately-Sized Workforce. As the Postal Service works to

meet the challenges of the 21st century, it must develop a world-class workforce

appropriate to fulfilling its universal service obligation. Fortunately, the Postal

Service will soon be presented with a unique attrition opportunity with some 47%

of current career employees eligible for retirement by 2010. The Postal Service is

urged to take full advantage of this attrition opportunity and to exercise maximum

discipline in its hiring practices in order to rightsize and realign its workforce with

minimal displacement.

W–2. Collective Bargaining: Process Improvements. The collective bargaining

process should be retained. However, the collective bargaining process should be

improved to create additional incentives for the parties to reach negotiated settlements, and, when the parties fail to reach a negotiated settlement, to ensure that

arbitration awards are made within a reasonable period of time. In particular,

the collective bargaining process should be as follows:

• Basic process. A negotiation process, beginning 90 days prior to the expiration of an existing agreement, followed by a 30-day mandatory mediation

process and, if mediation fails, an immediate 60-day interest arbitration

process.

• Mandatory mediation and “Med-Arb.” The 30-day mandatory mediation

process would be conducted by a mediator who would become a member of the

arbitration panel should mediation fail. The purpose of the mediation process

would be to either reach a negotiated settlement or to narrow the range of issues

to be submitted to interest arbitration.

• Interest arbitration. The 60-day interest arbitration process would be

conducted by a three-person arbitration panel comprised of three neutral

arbitrators, one having served as the mediator. The interest arbitration process

would incorporate the Last Best Final Offer mechanism and a 10-day period

during which the parties would have a final opportunity to reach a negotiated

settlement prior to the arbitration panel’s final award.

W–3. Collective Bargaining: New Subjects. The Postal Service’s pension and postretirement health care plans should be subject to collective bargaining – meaning

that the Postal Service and its unions should have the flexibility to develop new

plans that are separate and apart from existing Federal pension and retiree health

care plans. However, because of concern about the uncertain impact such a change

would have on the Federal system as a whole and on other Federal employees in
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

particular, the Postal Service should work with the Department of the Treasury,

the Office of Personnel Management, and any other persons or entities deemed

necessary to determine the impact separate Postal Service pension and retiree

health care programs would have on the existing Federal systems. As a first step:

• The Postal Service should be authorized to negotiate Federal Employee Retirement System eligibility requirements and employee contributions;

• The Postal Service should be authorized to negotiate the eligibility and retiree

contribution requirements for the post-retirement health care component of the

Federal Employee Health Benefit Program, specifically for future Postal Service

retirees; and

• The current statutory requirement that “[n]o variation, addition, or substitution with respect to fringe benefits shall result in a program of fringe benefits

which on the whole is less favorable to the officers and employees than fringe

benefits in effect on [July 1, 1971]” should be repealed.

W–4. Pay Comparability. The 1970 Act should be amended to clarify the meaning of

the term comparability, and the new Postal Regulatory Board should be authorized to determine comparable total compensation for all Postal Service employees.

In determining comparable total compensation, the Postal Regulatory Board

should be authorized to determine the appropriate sector(s) of the private-sector

workforce to be used as the basis of comparison. The comparability determination

of the Postal Regulatory Board should be enforced as a cap on the total compensation of new employees. In addition, if the Postal Regulatory Board determines

that a total compensation premium exists for current employees, it should be

authorized to determine the appropriate period of time during which the premium must be eliminated, and to review periodically its initial determination

and the Postal Service’s progress in eliminating the premium.

W–5. Pay-for-Performance. Performance-based compensation programs are effective

tools that, when designed correctly, can be used to align the goals of management

and labor and result in improved efficiency and service quality. The Postal

Service should undertake a careful study of performance-based compensation

programs for both management and represented employees, and it should work

with the unions and management associations to design and implement a performance-based compensation program that is meaningful to Postal Service employees

and assists the Postal Service in meeting its productivity and service quality goals.

W–6. Grievances. The current dispute resolution process must be revised if the Postal

Service is to operate in accordance with the best practices of private-sector companies with highly unionized workforces. As a first step, the Postal Service should

work diligently with its unions to implement best practice grievance procedures,

including those recently implemented by the Postal Service and the National

Association of Letter Carriers.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

W–7. Workers’ Compensation Claims. The Postal Service should be provided relief

from the requirements of the Federal Employees’ Compensation Act as follows:

• The Postal Service should not be required to pay benefits until after the expiration of a three-day waiting period;

• The Postal Service should be allowed to limit benefits to 2/3 of the maximum

weekly rate; and

• The Postal Service should be allowed to transition individuals receiving workers’

compensation to the Postal Service’s retirement plan at such time as the employee

would have become eligible for retirement notwithstanding the injury giving rise

to the workers’ compensation benefits.

W–8. Executive Compensation. The current statutory salary cap should be repealed.

Further, the Postal Service should be authorized to establish rates of pay for officers

and employees at levels competitive with the private sector. Performance should be

considered as a key component of senior executive pay.

W–9. Management Structure. The Postal Service should restructure its management

to eliminate redundant positions and geographical divisions and to standardize

and clarify job functions. The Postal Service should conduct a review of the entire

management structure, size, and cost to determine whether each component is

necessary and consistent with the best practices of the private sector, and it should

require managers to justify their functions and the size of their staffs.

W–10. Accounting for Retiree Health Care Obligations. The Postal Service should

review its current policy relating to the accounting treatment of retiree health care

benefits, and work with its independent auditor to determine the most appropriate

treatment of such costs in accordance with applicable accounting standards and in

consideration of the Postal Service’s need for complete transparency in the reporting

of future liabilities. The Postal Service should consider funding a reserve account

for unfunded retiree health care obligations to the extent that the its financial

condition allows.

W–11. Funding Military Service. Responsibility for funding Civil Service Retirement

System pension benefits relating to the military service of Postal Service retirees

should be returned to the Department of the Treasury.

* See Appendix C for a complete list of Commission recommendations.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

Endnotes

1. United States Postal Service, “History of the United States Postal Service 1775-1993,” On-line

Posting, July 7, 2003, <http://www.usps.com/ history/history/his3.htm>.

2. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing

With Economic Issues,” Before the Interest Arbitration Panel in the Matter of United States Postal

Service and American Postal Workers Union, AFL-CIO, Dec. 18, 2001, p. 3.

3. United States Office of Personnel Management, “Federal Civilian Workforce Statistics: Employment and Trends as of March 2002,” June 2002, p. 6.

4. United States Postal Service, Annual Report 2002, p. 51.

5. Anderson, Barry B., Congressional Budget Office, Letter to the Honorable Jim Nussle regarding

the proposal to reduce payments by the Postal Service to the Civil Service Retirement System,

On-line Posting, Jan. 27, 2003, endnote 7, <http://www.cbo.gov/

showdoc.cfm?index=4033&sequence=0>.

6. Dufek, Robert A., Counsel, United States Postal Service, Testimony Before President’s Commission on the United States Postal Service, Apr. 29, 2003, p. 5.

7. LeRoy, Michael H., Professor, Institute of Labor and Industrial Relations, and College of Law,

University of Chicago at Urbana-Champaign, “Analysis of the U.S. Postal Service’s Current

Collective Bargaining Model and Possible Alternatives,” May 10, 2003, p. 6.

8. Ibid., p. 2.

9. Wachter, Michael L., Professor, University of Pennsylvania Law School, Testimony Before

President’s Commission on the United States Postal Service, Apr. 29, 2003, p. 4; Walker, David

M., Comptroller General, United States General Accounting Office, Testimony Before President’s

Commission on the United States Postal Service, May 29, 2003, p. 16-17.

10. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing

With Economic Issues,” p. 8.

11. Rand, Thomas O.S., Consultant, Aon Consulting, Testimony Before President’s Commission on

the United States Postal Service, May 28, 2003, p. 5.

12. The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health

Benefits 2001 Annual Survey, p. 144.

13. Rand, Thomas O.S., Testimony Before President’s Commission on the United States Postal

Service, p. 1.

14. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing

With Economic Issues,” p. 8-9.

15. Sauber, James, Research Director, and O’Hara, Amy, Research Economist, National Association

of Letter Carriers, “Postal Service Benefit Costs: A Response to the Testimony of Thomas Rand to

the President’s Commission on the United States Postal Service by the National Association of

Letter Carriers.”

16. Dufek, Robert A., Testimony Before President’s Commission on the United States Postal Service,

p. 7.

17. United States Postal Service, FY2003 Third Quarter Report: Financial Conditions and Results,

On-line Posting, < http://www.usps.com/ financials/pdf/2003Q3.pdf>.

18. Anderson, Barry B., Letter to the Honorable Jim Nussle regarding the proposal to reduce

payments by the Postal Service to the Civil Service Retirement System, endnote 7.

19. United States General Accounting Office, “Review of OPM Analysis of USPS CSRS Costs,”

GAO-03-448R, Jan. 31, 2003, p. 28.

20. Roscoe, Jerry P., ADR Associates, LLC., “Analysis of United States Postal Service Grievance

Procedures,” June 26, 2003, p. 23.
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Chapter 6 Aligning People with Progress: Building a 21st Century Postal Service Workforce

21. Agreement between United States Postal Service and American Postal Workers Union AFL-CIO,

2000-2003, Article 15, p. 90-109; Agreement between United States Postal Service and the

National Postal Mail Handlers Union, A Division of the Laborers’ International Union of North

America AFL-CIO, 2000-2004, Article 15, p. 68-84; Agreement between the United States Postal

Service and National Rural Letter Carriers’ Association, 2000-2004, Article 15, p. 65-74;

Agreement between United States Postal Service and National Association of Letter Carriers AFLCIO, 2001-2006, Article 15, p. 66-78.

22. Watson Wyatt Worldwide, “Compensation and Incentive System Design Study,” June 6, 2003, p.

9-10.

23. Baffa, Gus, President, National Rural Letter Carriers Association, Testimony Before President’s

Commission on the United States Postal Service, Apr. 29, 2003, p. 2.

24. Powelson, Richard, “TVA managers get $7.4 million in bonus pay,” Knox News, On-line Posting,

Mar. 22, 2003, < http://www. knoxnews.com/cr/cda/articleprint/1,1250,KNS_ 347_

1830925,00.html>; “Federal Reserve Board – 20 Highest Paid Employees,” American Banker

Online, June 26, 2002, <http://www. americanbanker.com/rankings.html?rankingchart=/

Compensation/ 082702FRB.htm>; Blackwell, Rob, “What the Regulators Make,” American

Banker Online, Aug. 27, 2002, <http://www. americanbanker.com/ article.html?id=

20020826Y37K2B5D&from=WashRegulator.html>; Gordon, Mary, “SEC picks Fed official to

oversee accountants,” The Register-Guard, On-line Posting, Apr. 16, 2003, <http://

registerguard.com/ news/ 2003/04/16/d14.bz.accounting.0416.html>; 2002 Financial Report,

Federal Home Loan Banks, Mar. 28, 2003, p. 142.

25. Annual Report, Notes to the Financial Statements, Note 3, p. 44.

26. United States Postal Service, “5 districts to consolidate: Springfield, MA; Akron, OH; Lancaster,

PA; Long Beach, CA; San Jose, CA,” uspsnewsbreak p.m., July 11, 2003.
Chapter 7: Creating the Digital Postal Network:

Linking Customers, Carriers, and

Correspondence to the Future of the Mail

Introduction

Although a more efficient and capable physical network and workforce will be critical

for the Postal Service in the years ahead, these steps will not suffice to ensure the future

of traditional mail services. The future of the mail will depend upon the ability of the

Postal Service to develop a new fusion of traditional services and advanced information

technologies, “a digital postal network.” Successfully realized, a digital postal network

will enhance the value of the mail as a 21st century communications

mode and improve virtually every aspect of the nation’s postal service,

from efficiency and security to the range and quality of customer

choices.

Technology can therefore give back some of what it takes away.

While many of the challenges before the Postal Service are technological in nature, the net financial risks posed by technology can be

significantly ameliorated if the Postal Service is able to take advantage

of the opportunities that technology offers. Although the Commission

firmly believes that the Postal Service should remain focused on

delivery of physical mail, it also believes that the Postal Service should take full advantage of the Internet and other technological advances to perfect value-added services

that will better serve the needs of its customers.

A central feature of the digital postal network of the future will be

“Intelligent Mail.” Each piece of Intelligent Mail will carry a

unique, machine-readable barcode (or other indicia) that will

identify, at a minimum, the sender, the destination, and the class

of mail. If successfully deployed, Intelligent Mail will allow the

real-time tracking of individual mail pieces.

Ultimately, Intelligent Mail can serve a far broader purpose,

functioning as the foundation of a truly digital network that links

postal facilities, vehicles, partners and employees not only to each

other, but also via the Internet to customers and to the individual

mail pieces themselves. Through the deployment of a “universal

language,” Intelligent Mail may also allow dynamic real-time

routing and other sophisticated applications.

Source: USPS.

Ultimately, Intelligent Mail can serve a

far broader purpose, functioning as the

foundation of a truly digital network that

links postal facilities, vehicles, partners

and employees not only to each other, but

also via the Internet to customers and to

the individual mail pieces themselves.

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Deploying such a system will require significant investment and a strategic focus that

must be sustained over time. But if successfully executed, the Postal Service will reap

the rewards of its most significant opportunity today to increase the value and security

of the mail while reducing costs and improving overall performance.

How ‘Smart’ Can Hard Copy Get?

...A customer checks what was delivered to her mailbox from her computer at work.

...A letter and a mail processing machine collaborate to correct an inaccurate address.

...Midway through its cross-country journey, a piece of mail “learns” that the recipient

is on vacation and the mail piece is re-routed to a different vacation address.

...Parents send announcements of a child’s birth featuring stamps with the baby’s

picture.

...The routes of postal workers and vehicles are organized without a single phone

call—and reorganized in real-time when a vehicle breaks down.

...Whether a birthday card or a mission-critical business document, every sender and

recipient of mail can check where the correspondence they care about is on its journey.

The technology to make possible each of these capabilities exists today. Experts predict

that within five years, all kinds of everyday physical objects will grow “smarter,”

capable of communicating key information about their whereabouts and disposition

via wireless networks.1 The Postal Service could lead this trend and deliver advances

from security to efficiency to customer service that increase the value and, thus, the

viability of the mail as a modern communications medium.
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Background

The postal business has always been one of information transportation. As such,

throughout history, it has been challenged to adapt to new technologies, from the

telegraph, to the telephone, to the fax machine, to the rise of private overnight delivery

services and, now, the Internet. However, no prior advance has offered so much opportunity to improve the value of the mail, to root out excess capacity and costs and—

increasingly important—to enhance the security of the nation’s postal system.

The Postal Service is well aware that technology presents many opportunities. Beginning in the 1980’s, the Service began automating what was, at the time, an almost

entirely manual and mechanized postal undertaking. Given that the Postal Service

spends more than 75 cents of every dollar it earns on personnel-related costs, automation continues to hold significant cost-saving potential.

Technology that enhances coordination among the workforce also can play a key role.

However, fundamental gaps exist in the infrastructure available in the field today, most

notably the fact that most mail carriers have no means of communicating with one

another or with their local post offices while out on their routes.

Customers, too, feel the lack of a leading edge in information services. While some

advanced capabilities are available on a limited basis, such as mail tracking, they tend to

be either focused exclusively on larger mailers or they are costly and rudimentary.

Current barcode technology is limited in its reach and is not completely standardized,

inhibiting the efficiency gains of a uniform approach. Current on-line postage printing

options are cumbersome, expensive, and confusing to many individual users. True mail

tracking is only available to larger mailers. So even where progress is occurring, too

often the full benefits do not reach smaller businesses and individual customers. Making this truth even more troublesome is the fact that many of these same

services are standard for all customers of private postal carriers, placing the

Postal Service significantly behind the curve of not only technology

adoption, but also of consumer expectations.

Much of this can be attributed to a rather piecemeal approach the Postal

Service has taken in the past to the acquisition and deployment of technology. Over the years, the Postal Service has incorporated technology

While some advanced capabilities are

available on a limited basis, such as

mail tracking, they tend to be either

focused exclusively on larger mailers

or they are costly and rudimentary.

Without a sustained focus, the Postal

Service will not keep pace with

emerging customer requirements.

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into its processes as it becomes available and affordable. However,

these steps often lacked an over-arching strategy designed to maximize the benefits of these investments and enable rapid response to

shifting market demands, mail volumes, and other current events.

To begin addressing these issues in a more coordinated fashion, the

Postal Service recently established the Mailing Technology Strategy

Council to rationalize the Postal Service’s approach to its technology

acquisitions and deployment.

Intelligent Mail: Thinking Outside the Envelope

Traditional mail has little chance of competing directly with e-mail

and its virtually free and instantaneous delivery. Rather than take a

stand for traditional mail, the Postal Service should apply new

technologies to make it smarter.

What are the advantages of physical mail? The nation is comfortable and familiar with it. Unlike e-mail, the internal contents of

each piece can be readily categorized (i.e. bills, advertising, and personal letters are easy

to differentiate). Because of its physical nature, it can be conveniently moved around.

For example, magazines can go into the living room and mortgage bills can go to a

home office for payment, then be transferred to a tax file. Why do people like e-mail?

It’s free. It’s fast. It’s versatile. And, it is the mirror opposite of the physical mail

stream: Large documents, photographs, bills, and correspondence all can fly back and

forth without a single piece of paper changing hands.

Physical mail and e-mail each has its own separate and distinct value. However, by not

viewing them as an “either/or” choice, but by applying the sophistication of the electronic world to the physical mail, the Postal Service can develop a new postal proposition for the 21st century. Once it does, it should work aggressively to make its advantages readily available to all customers.

Intelligent Mail, at its heart, is a powerful hybrid, applying leading-edge information

technology to the delivery of paper correspondence. Mail has long carried information

inside, but by encoding basic information outside the envelope, a whole new range of

Source: USPS.
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services can be made available to make mail a more attractive and valuable option to

consumers. By thinking “outside the envelope,” the Postal Service will be able to:

• Enhance the services it makes available to consumers;

• Improve mail security by enhancing traceability;

• Transform its website into a valued destination far more convenient to customers

(and less costly to the Postal Service) than a post office visit; and

• Potentially save billions of dollars annually through enhanced logistics

management.

Information such as sender identification, geographic origin, and mail class can be

applied at the initial stage of the mail process and can be encoded by “smart” stamp

vending machines or postage meters at the time of purchase. Then, once specific

outgoing mail pieces enter the postal network, additional data (chiefly the destination

and the date of processing the “postmark”) could be added to the barcode by smart

processing technology, making Intelligent Mail not only feasible, but highly unobtrusive, even for individual customers.

Intelligent Mail’s Security Applications Should be Aggressively Pursued

The information-rich barcode that is the foundation of Intelligent Mail also has the

potential to improve significantly the security of the nation’s mail stream, particularly if

the Postal Service fully explores whether it is feasible to require every piece of mail to

include sender identification, in order to better assure its traceability in the event of foul

play. The events of September 11, 2001, and the subsequent anthrax attacks that

exploited the nation’s mail system have raised significant concerns relating to the

vulnerability of the nation’s relatively open postal network. In the weeks following the

attacks, delivery of the mail slowed substantially, affecting all aspects of American life—

from commerce to Congress. In addition to the many steps already taken by the Postal

Service, the Commission believes that sender identification on all mail could further

enhance the security and speed of the nation’s mail service.

Requiring all mail to identify its sender would likely have a negligible impact on most

users of the Postal Service who readily identify themselves when they send mail and

would consider such a requirement a relatively modest concession to ensure their safety
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and that of the men and women who deliver the nation’s mail. The greatest inconvenience, most certainly, would be to those who use the mail system for unlawful purposes, since such a move would hand law enforcement a powerful new tool to identify

and prevent such abuse.

The Commission recommends that the Postal Service, in coordination with the Department of Homeland Security, study the development of sender-identification requirements for all mail. Issues of privacy should, of course, be noted and balanced with the

value of enhanced safety. As a part of the study, the Postal Service should additionally

explore the potential of technology to transition stamp purchasing equipment (e.g.

vending machines, cash machines, self-service kiosks, post office counter sales, the Postal

Service website, and postage meters) from the provision of general stamps to “personalized stamps” that automatically embed sender identification.

All Customers Should Be Able To Track Their Mail

Of course, the barcodes that can easily contain basic sender identification also have

numerous commercial applications, as well, pointing to the possibility of new revenue

streams for the Postal Service and an enhanced ability to meet and even exceed rising

customer expectations.

One of the most telling conclusions reached by the independent customer survey

performed for the Commission was the fact that the top demand was not cheaper

stamps or shorter lines at the post office, but the ability to know where specific mail

items are in their journey.2

Tracking is a standard

service delivered by

private carriers. While

the Postal Service does

currently offer some

tracking services, it lags

far behind consumer

expectations and the

capabilities of technology. Currently, for

example, the Postal

Service will estimate, but

not guarantee, a delivery

date for any type of

mail.

Track Shipments - Detailed Results

Tracking number: XXXXXXXXX Delivered to: Recipient

Signed for by: J. Waite Delivery location: Pawtuckett RI

Ship date: Jun 24 Service type: First-Class letter

Delivery date: Jun 25

Time: 10:00 am

Jun 24, 2015 10:00 am Accepted at Origin Brockton, MA

4:30 pm In-Processing Boston, MA

7:00 pm Originating Processing Boston, MA

Completed

Jun 25, 2015 1:00 am Destination Processing Providence, RI

Begun

4:00 am Sorted to local Post Office Providence, RI

11:00 am Delivered and Signed by Pawtuckett, RI

J. Waite

 UNITED STATES NITED STATES

POSTAL SERVICE S E RV I C E

Exhibit 7–1. – What the Future Could Look Like
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Should individual customers require more

complete information about their mail, tracking is available only at a very rudimentary level

and only when customers pay for premium

services, such as Priority Mail. As a result, if

customers want to track a standard letter, rather

than paying the current 37-cent price of a FirstClass stamp, they must pay more than 10 times

that amount to send the letter via Priority Mail,

and they must pay an additional 45 cents for

delivery confirmation. Even then, customers

are notified only when the letter is placed in a

recipient’s mailbox. There is no option to track

its journey.

More conventional tracking services are

available to a limited class of large users through systems designed for commercial

vendors. The Postal Service, however, considers these systems too expensive for broader

use. The Commission believes that mail tracking is essential to enhancing the modernday value of the mail. It also believes that, by embracing intelligent mail and smarter

postal processing technologies, mail tracking can be made feasible for all postal customers. The Commission thus recommends that the Postal Service deploy mail tracking

technology in a timely and comprehensive manner, making it available to all users at an

affordable price. If it deems such an approach infeasible, then the Postal Service should

be directed to explore partnerships with private postal carriers for developing tracking

services and an “intelligent” postal environment.

Source: USPS.

Automated Package Processing System
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Toward a 21st Century Postal Network

Once individual mail pieces are made intelligent and

communicative, they require a means of conveying their

information to relevant machines, information systems

and people. This is why the creation of one overarching

Postal Service technology acquisition and deployment

strategy is so essential. By settling on a standard barcode,

by adopting smart technologies that allow this code to

convey its information throughout the postal network,

and by securely linking these communications to customers via the Internet, the Postal Service can build a truly

digital 21st century network with many attractive new

features and others we are only beginning to imagine.

Speaking the Same Language

The first step in building a robust, interconnected and information-rich network is to

adopt one official “language” that all the related pieces, machines and people can

“speak.” To accomplish this task, the Commission recommends that the Postal Service

continue to study the development of a single universal barcode designed for all mail

pieces. This code could contain, at a minimum, sender identification, class of service,

meter ID (i.e. where the stamp was printed) and delivery destination

(added to the barcode during initial processing by the Postal Service).

The Commission also recommends that the Postal Service study

upgrading its stamp vending and printing equipment to make possible a national requirement that all postage carry this universal

barcode—laying the groundwork for a truly intelligent mail system

that can fulfill the many security, efficiency, and commercial functions

described in this chapter.

Such a requirement would render each piece of mail unique and able

to communicate basic information about itself. Increasing the

intelligence of each mail piece and adopting a universal barcode will

enable many capabilities beyond mail tracking. Encouraging private

partners to adopt the same system, for example, could create seamless

public-private partnerships, enabling a far more efficient “hand off”

Source: USPS.

Delivery Bar Code Sorter

Source: USPS.

Automated Flat Sorting Machine
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of mail from worksharing partners to the Postal Service. Also, the more widely Intelligent Mail is capable of communicating its information to other elements of the postal

network, the less likely it is to get lost or wind up at an outdated address—no small

matter considering such mail costs the Postal Service $2 billion a year to try and resolve.3

In addition to making each mail piece unique, the Commission recommends the Postal

Service accelerate its efforts at marking and ensuring an information-based link between

individual mail pieces and the containers they move in—whether a tray, palette, or

transport vehicle. Allowing a “smart” container to know what it is carrying further

allows for the real-time pinpointing of individual mail pieces, despite the extraordinary

volumes the Postal Service handles on a daily basis. The intelligent container will also

make a dynamic network possible.

Encouraging “Dialogue:” Dynamic Mail Routing

Once mail and postal processes are communicating effectively with one another, the

potential to produce significant efficiency gains is extraordinary. Regional ebbs and

flows in mail volume can be adjusted by re-routing mail to less busy facilities to ensure

its more rapid processing. Weather conditions or vehicle

breakdowns can be adjusted for in real time to keep the mail

moving.

Beyond improvements to the physical networks (discussed in

Chapter 5), a robust information technology network can link

these fixed facilities with the vast mobile transportation network

of the Postal Service, producing efficiency not merely on a

facility-by-facility basis but throughout the postal network.

Source: USPS.
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In its Transformation Plan, the Postal Service outlined strategies to achieve this result

through its Surface Air Management System (SAMS), which would provide transportation assignments to specific surface and air mail routes. SAMS also would make possible

the allocation of capacity by various mail classes and the on-line tracking of manifests.

The Commission commends the Postal Service for this effort and urges the rapid

deployment of SAMS.

However, the Commission believes that the Postal Service should be more aggressive in

this area, building for itself one of the most sophisticated and capable public-private

transportation networks in the world. To even begin in this direction, every vehicle must

be linked to the real-time insights of the Postal Service logistics nerve center. Beyond

Intelligent Mail and smart processing technologies, this will require investments in

global positioning systems (GPS) and the universal provision of onboard computing

capabilities.

Here again, the Postal Service is significantly behind delivery companies who regularly

read a package’s barcode from hand-held devices that immediately communicate to their

networks the item’s successful delivery. In contrast, the vast majority of letter carriers

and local post offices have no capacity to communicate in real time. While the Postal

Service has distributed a device to some letter carriers that allows them to monitor the

consistency of delivery time, the information collected is not processed until the end of

the workday, so there is no real-time opportunity to adjust to weather, mechanical, or

other unique challenges facing the mail delivery in that location on that day.

A much enhanced local communications ability, with integrated GPS and Intelligent

Mail functionalities, would allow, for example, efficient re-routing of delivery vehicles to

compensate for peaks in demand, traffic or

weather conditions, and vehicle breakdowns.

For example, management would know if a

carrier had completed delivery on his or her

route and could be redirected to provide assistance on a route where the carrier’s vehicle had

broken down. The Commission recommends

that the Postal Service put in place a system

capable of tracking every vehicle on its route and

allowing each to communicate in real time with

appropriate fixed facilities.

Leading the Nation Toward Energy

Independence

As a long-time innovator in transportation technology, the

Postal Service already has a fleet of more than 30,000

alternative fuel vehicles. In addition, the Postal Service is

examining new technologies such as hybrid electric vehicles,

which if proven cost effective in use, may also be introduced.

The Commission applauds these efforts and strongly encourages the Postal Service to continue this tradition of innovation

by introducing hydrogen fuel cell vehicles and hybrids into its

fleet. By using environmentally-friendly and fuel-efficient

vehicles, the Postal Service can continue and expand its efforts

to help the nation create a transportation network that stresses

energy independence and environmental progress.
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Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

Connecting It All to the Consumer: The 24x7 In-Home Post Office

By integrating Intelligent Mail, sender identification, global positioning, and other

readily available technologies and allowing real-time communication between postal

transportation vehicles, local post offices, robust Internet systems, and the mail itself,

the Postal Service would be capable of providing unprecedented information to consumers. With this capability will come profound pressure to truly place an always open,

full-service post office in every American home and business via the Internet. Without

question, the Postal Service should rise to the occasion, enhancing both the simplicity

and the sophistication of its website to the point where it is virtually interchangeable

with a local post office.

Specifically, the Commission recommends that the Postal Service expand the array of

postal products and services available on its website (www.usps.com). That would

include, for example, all Postal Service forms, registered mail, certified mail, and return

receipts. In addition, a number of new postal services should be made available, such as

real-time mail tracking. Other relatively new features should be made more userfriendly.

Current PC postage systems, for example, remain inconvenient and confusing to the

individual user. These processes should be replaced by a more straightforward approach

that is so convenient and inexpensive that anyone can buy stamps on-line.

Users, of course, should be able to print out “personalized” stamps, encoded with their

sender identification information and other basic information, aimed at enhancing

security, improving the efficiency of the postal network, and permitting mail tracking.

The website, however, can also allow a far wider array of customer-pleasing “personalized” stamp services. For example, individuals could have the option to print a stamp

with a family photo or a small business could print stamps with the company logo. This

is a prime example of adding to the value of both personal and business correspondence.

Personalized stamps will enable commercial mailers to use their mail pieces

as advertising media and will enable individual customers to tailor their own

stamps as they please.

“Personalized” stamps should be easily printable on standard commercial

paper, directly on envelopes, or on adhesive labels. This may require some

minor advances in technology, both in personal and business printers, as

well as Postal Service and contractor barcode readers. The Commission is

confident, however, that the market would respond to such a shift in the

nation’s mail system. The Commission also believes that the Postal Service

should charge a premium for personalized stamp services.

A “Personalized” Stamp

Source: .
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Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

The Commission recognizes that not all Americans have ready access to the Internet and

a printer and others will be uncomfortable making this transition. Therefore, in

addition to the website, stamp vending and printing machines—whether at a post

office, a self-service kiosk, or in a contract facility—should be similarly equipped, so

purchasing a personalized stamp is as convenient as purchasing a general stamp today

(and, eventually, far more so with the planned expansion of retail points of access).

The Need for Expert, Strategic Guidance

Without question, the Postal Service faces significant risk if it does not embrace the

opportunities of information technology. However, given the substantial size of the

investments contemplated and the rapidly changing nature of information technology,

in addition to the risk of doing nothing,

there also exists a sizable risk of doing the

wrong “something.” This could, for

example, include investing billions of

dollars in systems that are not compatible,

that quickly are rendered obsolete, or

simply are not best suited to the unique

operations of the Postal Service.

Making technology work for the Postal

Service by deploying it in an integrated and

nimble fashion so it can adapt quickly to

changes in those demands is no small

order. Because of the size and complexity

of the network envisioned, the Commission believes that the Postal Service must

evaluate, acquire, and deploy technology in

a far more structured and coordinated

fashion. Developing this strategy and

ensuring its successful execution will

require the efforts of a team of experts

devoted to the success of this vital endeavor. Already, the Postal Service has

created the Mail Technology Strategy

Council to provide candid, independent

assessments of technology trends. With

representatives from leading organizations

Missile Mail: Ready, Aim...Fire?

The Postal Service has a colorful and often proud history of not

shying away from leading-edge innovation. It embraced railroads,

automobiles, and airplanes in their infancy, seeing their vast forward-looking potential to speed the delivery of the nation’s mail. In

its bold ambition, however, it has occasionally overshot the mark.

The day? June 8, 1959. The location? At sea, aboard a surfaced

Navy submarine. The event? As explained by the postal official on

hand, “before man reaches the moon, mail will be delivered within

hours from New York to California, to Britain, to India or Australia

by guided missiles.” With those lofty words, the U.S.S. Barbero fired

away, launching a guided missile carrying 3,000 letters from its crew

at the Naval Auxiliary

Air Station in

Mayport, Florida. It

was perhaps the

briefest experiment in

postal innovation, but

it also exemplifies the

pioneering spirit of the

Postal Service in

seeking new ways to

speed the delivery of

mail.4

Source: USPS.
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Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

in the mailing industry, including senior officials from the Postal Service, industry, and

academia, the Council explores key technology issues, particularly Intelligent Mail.

The Commission believes the Council should be expanded as an independent body,

reporting directly to the Postmaster General, and should be empowered to provide more

than just trend assessments. The Council should include postal engineers, scientists,

employees and major mailers and should meet on a regular basis. It should have the

power to monitor technologies for their effects on the mail system and for their return

on investment. The Council should produce an annual report assessing advances in

technology. Most importantly, it should be the key advisory body for establishing a

coherent Postal Service technology strategy.

As is apparent in the recommendations of this chapter, information technology investments can only achieve their full potential and value if implemented together, in an

integrated fashion, as part of one seamless technology strategy, and as a key incorporated

element of the Postal Service’s overall business plan.

In performing its duties, the Commission suggests that the Council include in its

deliberations two key lines of questioning. First, what should the Postal Service be

doing? Is it burdening itself by taking on tasks that are not self-supporting and are nonessential? Is it missing out on revenue opportunities by conceding promising areas?

Does it have untapped assets that could be released through specific technologies?

Second, how should the Postal Service do its work? Are existing technologies being

applied as efficiently as possible? Is there a coherent plan for the acquisition of new

technologies? Can costs be cut through integration of currently distinct systems? In

what areas would the Postal Service be best-served by outsourcing technological systems,

or pursuing development of mailing industry advancements in cooperation with privatesector entities?

Because a technology strategy is only effective until a new development renders it

obsolete, two key elements of its ongoing success are vigilance for the next big shift in

capability or market demand and the technological wisdom to respond to it appropriately. This vigilance requires the hard science of exploring what new capabilities are

available and when their potential savings justify the acquisition cost, as well as the

softer science of what customers want from the Postal Service. To aid this latter effort,

the Commission suggests that the Council should not only develop its own ideas for

improving the mail system, but accept them from all sources, including the individual

Postal Service customer.
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Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

Conclusion

Technologies exist today that have the ability to capture information through highspeed scanning, to store and forward the data through high-capacity computers, and to

present the information to interested parties through the Postal Service website. This

would allow for the creation of a national digital postal network that links the physical

network of the Postal Service with customers, partners and the correspondence itself.

The potential efficiency gains and value-added benefits of such a system are great. As

such, creation of this network should be aggressively and strategically pursued. While

the technology necessary to make this vision a reality will likely require significant

investment, the Commission is confident that the resulting efficiency and revenue gains,

as well as service improvements, will offer a substantial return on investment to the

Postal Service and its customers.

While the Commission commends the Postal Service’s technology-related work to date,

it urges a far more ambitious and strategic effort in the future. This will require unifying good ideas and efforts into one coherent, integrated strategy, capable of delivering

both near-term gains in efficiency and productivity as well as the enduring flexibility

necessary to adapt to an ever-changing technological environment. Also, of key importance, the Postal Service’s technology investments should continue in the proudest

tradition of the enterprise, ensuring that the benefits made possible by these advances

are accessible to all postal customers.

Despite the challenges posed by electronic diversion of mail volumes, the Postal Service’s

future success lies not in resisting technological change, but in embracing it. With a proactive, strategic and visionary approach, it has every opportunity today to enhance the

value of the mail in the modern context and to deliver to the nation a capable, sophisticated and leading-edge 21st century Postal Service.
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Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

Chapter 7 Recommendations*

T–3. Intelligent Mail. The ability of the Postal Service to track individual pieces of mail

can improve internal efficiency and satisfy postal customers that mail is delivered to the

right location and on time. Technology to achieve this goal exists today and is now

being used by some of the competitors of the Postal Service. The Postal Service should

work to put mail tracking technology in place on a timely and more comprehensive

basis, so that it is available to all users, large and small, at an affordable price.

T–4. The Transportation Network. The Postal Service should integrate its facility

automation efforts with its transportation network by using Intelligent Mail technology, GPS, and onboard computer technology. The Postal Service should put in place a

cost-effective system capable of tracking every vehicle on its route and allowing each

vehicle to communicate in real time, either by voice or electronic communication, with

appropriate fixed facilities.

T–5. Improved Postal Service Website (www.usps.com) and Personalized Stamps.

Postal services available at post offices should also be generally available on the Postal

Service website and at Postal Service kiosks and contract stations at reasonable prices

for all postal customers, from the individual to the large mailer. The Postal Service

should develop and produce “personalized” stamps and make them available through

appropriate sources, beginning with the Postal Service website. These stamps should be

offered to postal customers at a reasonable premium.

T–6. Security. The events of 9/11 and the Postal Service anthrax incidents have increased

the need to ensure security in the mail system. A more secure system could be built

using sender identified mail. The Postal Service, in coordination with the Department of Homeland Security, should explore the use of sender identification for every

piece of mail, commercial and retail.

T–7. Evaluation, Acquisition and Deployment of Technology. The Postal Service

recently created the new Mailing Technology Strategy Council to provide assessments of

technology trends. The Council should be strengthened to be an independent advisory

body empowered to do more than provide assessments. The Council should not only

originate ideas for improving the mail system, but should accept them from all sources,

including the individual Postal Service user. It should study, evaluate and recommend

to the Postmaster General technologies that could be used to upgrade the mail system.

Postal Service management should provide an annual report to the Board of Directors

on the work of the Mailing Technology Strategy Council.

* See Appendix C for a complete list of Commission recommendations.
Chapter 7 Creating the Digital Postal Network: Linking Customers, Carriers, and Correspondence to the Future of the Mail

158

Endnotes

1. Benjamin, Maynard H., President, Envelope Manufacturers Association, “Trends in Intelligent Mail,” Document Submitted to the

Technology Subcommittee, President’s Commission on the United States Postal Service.

2. Peter D. Hart Research Associates, Inc., Study #7006, May 2003. p. 3.

3. Pitney Bowes, “The Power of Intelligent Mail,” Document Submitted to President’s Commission on the United States Postal Service,

p. 9.

4. United States Postal Service, “History of the Postal Service,” On-line Posting, <http://www.usps.com/history/his2_75.htm#MISSILE>.
159

Conclusion

From the aging and increasingly outmoded nature of the postal network to the rising

diversion of correspondence to electronic alternatives, the Postal Service faces significant

challenges today. However, these challenges present their own solutions, as well as

significant new opportunities for the Postal Service. By modernizing an outmoded

postal network and combating technology’s threats with its many opportunities, the

Postal Service can ensure not only its own continued viability, but its relevance and

value to the nation in the 21st century.

Coupled with the efforts already underway at the Postal Service, it is the Commission’s

view that the reforms proposed in this report can address the financial and technological

challenges at hand and produce a stronger and more capable Postal Service. However,

one significant challenge remains: The willingness of all parties—from customers to

Congress, postal workers to private-sector partners—to support a fundamental overhaul

of a vital American institution.

Some changes will be easy to embrace. Customers, for example, will see their postal

service enhanced. The public benefit of billions of dollars in annual efficiency savings is

self-evident. The vast expansion of retail access to postal services will be a great convenience. Private-sector companies also will see more opportunities to engage in partnerships with the Postal Service in the delivery of the nation’s mail.

Other changes, however, will require extraordinary commitment to the ultimate public

benefits of Postal Service modernization. Members of Congress, for example, will be

asked to permit the rationalization of a 1950s-era postal network, including the closure

of surplus postal facilities in the communities they represent. Postal employees, too, will

plainly see one ultimate outcome of an ambitious modernization: A Postal Service that

over time requires far fewer postal workers to deliver the nation’s mail.

Rather than undermine the case for reform, it is the Commission’s hope that these

legitimate concerns will help guide its successful and constructive execution. The

Commission, for example, took great pains to ensure a key leadership role for Congress

in the postal facilities realignment process and to suggest a process giving local communities the opportunity to help determine the disposition of “low-activity” post offices.
160

The Commission is equally aware of the central role that postal employees will play in

the success or failure of this modernization effort. In recent years, the nation has been

keenly reminded of the extraordinary service these men and women deliver to the

nation every day. For this reason, this report focuses significant attention on ensuring

Postal Service employees receive compensation comparable to the private sector, creating

a more positive workplace climate, ensuring that the Postal Service workforce has the

best tools with which to do its job, and establishing financial incentives for contributing

to the efficiency, productivity, and service of the institution. Given the significant

attrition opportunity on the horizon, the Commission also wishes to note that it is

hopeful that the rightsizing of the Postal Service workforce can occur over time through

a voluntary process.

Only with the leadership of Congress, the day-to-day commitment of postal employees,

and the support of customers and partners can Postal Service modernization succeed.

As a result, the fate of the Postal Service will not ultimately be determined by external,

insurmountable threats, but by the actions, support, and commitment of the American

people, their representatives in Congress, and the men and women of the Postal Service.

Having devoted nearly eight months to studying the extent of the Postal Service’s fiscal

dilemma and the trends shaping its future, the Commission urges speed and conviction

in support of Postal Service modernization. Without question, an aggressive approach is

needed to limit the mounting financial exposure of American taxpayers. But, more

importantly, these reforms are essential to upholding the nation’s commitment to

affordable and universal postal services.

Yes, the nation’s mailing habits are changing significantly. Many individuals and

businesses depend on the nation’s mail system far less today. Others continue to rely on

the Postal Service to handle their correspondence in just the same way they have for

decades. What the long-term future of correspondence ultimately will be in the Information Age is anyone’s guess. Far more certain, however, is the continued importance

of affordable universal postal service today and for the foreseeable future. Its value

remains unequivocal, and its continued provision endures as a defining commitment of

this country to each of its citizens.

It has been this Commission’s honor to help shape the future of the mail and the vital

American institution that for more than 225 years has ensured its delivery. We are

indebted to the members of Congress, Postal Service leaders and employees, customers,

partners, and numerous experts whose ideas and assistance have helped inform this

report, and through it, we hope, a bright future for the Postal Service as it continues to

serve our country.
161

Appendix A: Executive Order 13278

Presidential Documents

76671

Federal Register 

Vol. 67, No. 240

Friday, December 13, 2002

Title 3— 

The President

Executive Order 13278 of December 11, 2002

President’s Commission on the United States Postal Service 

By the authority vested in me as President by the Constitution and the 

laws of the United States of America, and to ensure the efficient operation 

of the United States Postal Service while minimizing the financial exposure 

of the American taxpayers, it is hereby ordered as follows: 

Section 1. Establishment. There is established the President’s Commission 

on the United States Postal Service (Commission). 

Sec. 2. Membership. Commission shall be composed of nine members appointed by the President. The President shall designate two members of 

the Commission to serve as Co-Chairs. 

Sec. 3. Mission. (a) The mission of the Commission shall be to examine 

the state of the United States Postal Service, and to prepare and submit 

to the President a report articulating a proposed vision for the future of 

the United States Postal Service and recommending the legislative and administrative reforms needed to ensure the viability of postal services. 

(b) In fulfilling its mission, the Commission shall consider the following 

issues and such other issues relating to the Postal Service as the Commission 

determines appropriate:

(i) the role of the Postal Service in the 21st century and beyond;

(ii) the flexibility that the Postal Service should have to change prices, 

control costs, and adjust service in response to financial, competitive, 

or market pressures;

(iii) the rigidities in cost or service that limit the efficiency of the 

postal system;

(iv) the ability of the Postal Service, over the long term, to maintain 

universal mail delivery at affordable rates and cover its unfunded liabilities 

with minimum exposure to the American taxpayers;

(v) the extent to which postal monopoly restrictions continue to advance 

the public interest under evolving market conditions, and the extent to 

which the Postal Service competes with private sector services; and

(vi) the most appropriate governance and oversight structure for the 

Postal Service. 

Sec. 4. Administration. (a) The Department of the Treasury or any organizational entity subject to the direction of the Secretary of the Treasury shall, 

to the extent permitted by law, provide administrative support and funding 

for the Commission. The Commission is established within the Department 

of the Treasury for administrative purposes only. 

(b) Members of the Commission shall serve without any compensation 

for their work on the Commission. Members appointed from among private 

citizens of the United States, however, while engaged in the work of the 

Commission, may be allowed travel expenses, including per diem in lieu 

of subsistence, as authorized by law for persons serving intermittently in 

Government service (5 U.S.C. 5701–5707), to the extent funds are available. 

(c) The Commission shall have a staff headed by an Executive Director. 

(d) The Commission, with the concurrence of the Secretary of the Treasury, 

may establish subcommittees, consisting of Commission members, as appropriate, to aid in its work.
Appendix A Executive Order 13278

162

76672 Federal Register / Vol. 67, No. 240 / Friday, December 13, 2002 / Presidential Documents 

(e) Consistent with such guidance as the President or, on the President’s

behalf, the Secretary of the Treasury, may provide, the Commission shall 

exchange information with and obtain advice from Members of Congress; 

Federal, State, local, and tribal officials; commercial, nonprofit, and residential users of the United States Postal Service; and others, as appropriate, 

including through public hearings. 

(f) Insofar as the Federal Advisory Committee Act, as amended, may 

apply to the Commission, any functions of the President under that Act, 

except for those in section 6 of that Act, shall be performed by the Secretary 

of the Treasury, in accordance with the guidelines that have been issued 

by the Administrator of General Services. 

(g) Nothing in this order shall be construed to impair or otherwise affect 

the functions of the Director of the Office of Management and Budget relating 

to budget, administrative, or legislative proposals. 

Sec. 5. Report. The Commission shall submit its report, consistent with 

its mission set forth in section 3 of this order, to the President, through 

the Secretary of the Treasury, not later than July 31, 2003. 

Sec. 6. General Provisions. (a) This order is intended only to improve the 

internal management of the Federal Government and it is not intended 

to, and does not create, any right or benefit, substantive or procedural, 

enforceable at law or in equity by a party against the United States, its 

departments, agencies, instrumentalities or entities, its officers or employees, 

or any other person. 

(b) The Commission shall terminate 30 days after submitting its report 

[FR Doc. 02–31624

Filed 12–12–02; 8:45 am] 

Billing code 3195–01–P

and in no event later than August 30, 2003.

THE WHITE HOUSE, 

December 11, 2002. 

W
163

Appendix B. The Work of the Commission:

Structure and Process

On December 11, 2002, President Bush established the President’s Commission on the

United States Postal Service through Executive Order 13278. President Bush designated

James A. Johnson, Vice-Chair of Perseus, L.L.C., and Harry J. Pearce, Chairman of

Hughes Electronics Corporation, as the Commission’s Co-Chairs. President Bush also

appointed the following individuals as Commission members:

• Dionel E. Aviles, President, Aviles Engineering Corporation

• Don V. Cogman, Chairman, CC Investments

• Carolyn L. Gallagher, former President and Chief Executive Officer, Texwood

Furniture

• Richard C. Levin, President, Yale University

• Norman I. Seabrook, President, New York City Correction Officers’ Benevolent

Association

• Robert S. Walker, Chairman and Chief Executive Officer, Wexler & Walker

Public Policy Associates

• Joseph R. Wright, President and Chief Executive Officer, PanAmSat

In addition, Dennis Shea was appointed as the Commission’s Executive Director.

The Commission has operated as an advisory committee governed by the Federal

Advisory Committee Act (“FACA”) and its implementing regulations. Roger Kodat,

Deputy Assistant Secretary of Treasury for Government Financial Policy, served as the

Commission’s “Designated Federal Official” to ensure compliance with FACA.

The Commission Website

The Commission is grateful for the assistance provided by the Department of the

Treasury in establishing and managing an official Commission website. The website,

located at http:/www.treas.gov/offices/domestic-finance/usps, has been an invaluable

tool in enabling the Commission to communicate with the public and in helping the

public remain informed about, and participate in, the Commission’s activities.
Appendix B The Work of the Commission: Structure and Process

164

Public Meetings

During the course of its work, the Commission held nine public meetings, all of which

were noticed in the Federal Register as required by FACA. Six of these meetings were

convened in Washington, DC, on January 8, February 20, May 28, May 29, July 16,

and July 23. The remaining three “field” meetings were conducted outside the nation’s

capital in Austin, Texas (March 18), Los Angeles, California (April 4), and Chicago,

Illinois (April 29).

More than 70 invited witnesses testified at the nine Commission meetings. These

witnesses advocated a broad array of reform measures and represented the diverse

elements of the postal community. Through witness testimony, the Commission heard

from representatives of the major postal employee unions, the postal management

associations, consumer advocacy organizations, organizations representing senior

citizens, the direct mailing community, the advertising industry, the express delivery and

parcel industry, the magazine and newspaper industry, academia, the greeting card

industry, retailers of approved postal services, the mail pre-sort and consolidation

industry, technology suppliers to the Postal Service, the postal automation industry, and

the envelope manufacturing industry.

The Commission was grateful to receive the testimony of S. David Fineman, Chairman

of the Postal Service’s Board of Governors; Postmaster General John E. Potter; Deputy

Postmaster General John M. Nolan; and numerous members of the Postal Service’s

senior management team. The Commission was also fortunate to receive the testimony

of other Federal officials, including David M. Walker, the Comptroller General of the

United States, and George Omas, the Chairman of the Postal Rate Commission.

In addition to those witnesses who were invited to testify, the Commission requested

and heard statements from members of the public at the field meetings in Austin,

Chicago, and Los Angeles and at the meeting in Washington, DC on May 29.

Following each public meeting, Commission staff promptly posted the prepared testimony of all witnesses invited to testify at the meeting on the Commission’s website.

The certified minutes of each meeting were also posted on the website.
Appendix B The Work of the Commission: Structure and Process

165

Subcommittees

At its first meeting on January 8, the Commission established the following four

subcommittees to assist in reviewing all aspects of the Postal Service’s operations: 1) the

Business Model Subcommittee (Richard Levin, Chair); 2) the Technology Challenges

and Opportunities Subcommittee (Robert Walker, Chair); 3) the Private-Sector Partnership Subcommittee (Joseph Wright, Chair); and 4) the Workforce Subcommittee

(Carolyn Gallagher, Chair). The work of each subcommittee has played a vital role in

assisting the Commission in preparing this report.

Over the past several months, the Business Model Subcommittee has studied the Postal

Service’s universal service obligation, the postal monopoly, the current rate regulation

system, the issue of pricing flexibility, the corporate governance of the Postal Service,

and the “commercial government enterprise” business model proposed in the Postal

Service’s Transformation Plan. The Technology Challenges and Opportunities Subcommittee has assessed the impact of new technologies on the Postal Service’s business model,

reviewed the Postal Service’s own technology initiatives and their effect on productivity,

and studied whether there are ways to make the mail more valuable to consumers

through technological innovation. The Private-Sector Partnership Subcommittee has

analyzed the current role of the private sector in the mail delivery system through

outsourcing, worksharing and other business arrangements, identified appropriate

opportunities for the Postal Service to enter into partnerships with the private sector,

and studied the involvement of the Postal Service in “non-postal” activities. The

Workforce Subcommittee has assessed the Postal Service’s current collective bargaining

process, reviewed issues relating to employee pay and productivity, studied the application of the Federal Employees’ Compensation Act to the Postal Service, and assessed the

status of the Postal Service’s pension and unfunded retiree health care liabilities.

Each subcommittee held multiple meetings by conference call. Commission staff

prepared materials for each of these telephonic meetings and responded to informational

and other requests by subcommittee members. In addition, two of the subcommittees

requested that outside parties prepare papers on specific issues of interest. Once received by the subcommittees, these materials were promptly posted on the Commission

website for public review.

The chair of each subcommittee reported preliminary findings to the full Commission

at the following Commission meetings: 1) Business Model (February 20, Washington,

DC); 2) Technology Challenges and Opportunities (March 18, Austin, Texas); 3)

Private-Sector Partnership (April 4, Los Angeles, California); and 4) Workforce (April

29, Chicago, Illinois).
Appendix B The Work of the Commission: Structure and Process

166

Subcommittee and Co-Chair Recommendations

At the meeting in Washington, DC on July 16, the Business Model Subcommittee and

Private-Sector Partnership Subcommittee submitted their final recommendations to the

Commission, all of which were formally adopted. At the July 16 meeting, the CoChairs also submitted a set of recommendations to the Commission. These recommendations were adopted by the Commission as well.

The Technology Challenges and Opportunities Subcommittee and the Workforce

Subcommittee submitted their final recommendations to the Commission at the

meeting in Washington, DC on July 23. These recommendations were adopted in their

entirety at this meeting.

All Subcommittee and Co-Chair recommendations adopted by the Commission are

reflected throughout this report and compiled in Appendix C.
Appendix B The Work of the Commission: Structure and Process

167

The Public-Comment, Rebuttal, and Final-Comment Processes

From the start, the Commission has been committed to ensuring that every affected and

interested party has had an opportunity to share its views and concerns. To facilitate

public interaction, the Commission established a formal public-comment process at its

first meeting on January 8. At the meeting, the Commission announced three methods

by which the public could submit statements for consideration and review on the

subjects outlined in Executive Order 13278. The deadline for submission of these

public comments was February 12, 2003. This information was published in the

Federal Register and posted on the Commission’s website.

Pursuant to this public-comment process, the Commission received statements from

more than 330 parties, including 98 organizations representing every segment of the

postal community. These statements were very helpful in framing many of the issues

studied by the Commission. With a few exceptions, all statements received by the

Commission pursuant to the public-comment process were posted on the Commission’s

website for public review.

At its meeting on February 8th, the Commission established a second process (the

“rebuttal process”) to give interested parties an opportunity to respond to the assertions

and recommendations made by other parties during the public-comment process. The

deadline for the submission of rebuttal comments was March 13, 2003. This information was published in the Federal Register and posted on the Commission website.

The Commission received more than 30 rebuttal comments from individuals, organizations, and government officials. All rebuttal comments were promptly posted on the

Commission’s website.

In addition, through the publication of a notice in the Federal Register, the Commission

established a process for the acceptance of final comments. The deadline for the

submission of final comments was Tuesday, July 8, 2003. The Commission subsequently received more than 80 comments from both individuals and organizations. All

final comments were promptly posted on the Commission’s website.
Appendix B The Work of the Commission: Structure and Process

168

The Retention of Outside Consultants

During the course of its deliberations, the Commission has sought out specialized

assistance and retained the following outside consultants:

• Global Insight, for a study on the costs associated with the non-standardization of

mail entry standards, postal processes and operations;

• Global Insight, for an analysis of the past and current use of price caps in the

telecommunications industry and other regulated industries and an assessment of

their effectiveness in providing rate predictability and improving productivity;

• AT&T Government Solutions, Inc., for an analysis of the Postal Service’s current

logistics network and the development of a network optimization model;

• Black & Veatch (Hart Research and American Viewpoint), for a telephonic survey of

consumer attitudes about the Postal Service, including its products and services

and various proposals to reform the business model and operations of the Postal

Service;

• ADR Associates, L.L.C., for an analysis of the grievance processes and procedures

utilized by the Postal Service and the four major postal unions;

• Unisys (Watson Wyatt), for an evaluation of alternative compensation incentive

systems engaging all levels of the Postal Service workforce;

• Unisys (Watson Wyatt), for an analysis of the management structure of the Postal

Service and a comparison to the “best practices” of the private sector;

• Greg Schmid, Ph.D., Director, Global Mail Project, Institute for the Future, for the

development of future mail volume projections; and

• Professor Michael LeRoy, Institute of Labor and Industrial Relations and College of

Law, University of Illinois at Urbana-Champaign, for an analysis of the collective

bargaining model currently utilized by the Postal Service and its employee unions

and an assessment of possible alternative models.

The Commission is grateful for the valuable help provided by its outside consultants.

Once the Commission received the final work product of each of these consultants, the

work product was promptly posted on the Commission’s website for public review.
Appendix B The Work of the Commission: Structure and Process

169

Private Meetings and Transparency

In addition to participation in the public meetings of the full Commission, individual

Commissioners have occasionally met privately with representatives of organizations

with an interest in its work. These meetings by individual Commissioners have served

an important fact-gathering function and are fully consistent with the requirements of

FACA.

Throughout this process, the Commission has been committed to conducting its

business in a fair, impartial, and transparent manner. Consistent with this goal, the

Commission has posted on the Commission website notices of all private meetings

between individual Commissioners and interested parties. These notices indicate the

name of the Commissioner involved in the meeting, the name and organizational

affiliation of the interested party, the location and date of the meeting, and a brief

meeting summary.

More than 50 of these meeting notices have been posted on the Commission website

under the link “Commissioner Contacts with Interested Parties.”
Appendix B The Work of the Commission: Structure and Process

170

Survey of Postal Facilities

During the course of our work, individual Commissioners have visited numerous postal

facilities, including facilities devoted to fulfilling the Postal Service’s processing, distribution, and retail functions. The facility visits have allowed Commission members to view

Postal Service activities and equipment first-hand, including how letter carriers merge

different mail streams and prepare the mail for carrier-route delivery, operating differences between rural and city-based post offices, and the automation equipment used for

sorting the mail. Postal facilities visited by members of the Commission include the

Processing and Distribution Facility in Merrifield, Virginia; the Great Falls, Virginia

Post Office; the McLean, Virginia Post Office; the Central Park Station Post Office in

Austin, Texas; the Phoenix Processing and Distribution Center; the Morgan Processing

and Distribution Center in New York, New York; the Los Angeles Processing and

Distribution Center; and the Bulk Mail Processing Center in Houston, Texas.

The Commission is grateful for all the assistance given by the Postal Service in arranging

and participating in these facility tours.
171

APPENDIX C: Commission Recommendations

Reference Recommendation Responsibility

Congress.

Recommendations of the Commission Co-Chairs

C-1. Governance. In order to establish a governance structure that exemplifies the best practices

of similarly-sized private sector-corporations, the current Postal Service Board of Governors

should be transformed into a corporate-style Board of Directors with broad authority to

oversee Postal Service operations. Further, the Board of Directors should consist of three

Directors appointed by the President, the Postmaster General, and eight independent

Directors initially selected by the three Presidentially-appointed Directors with the concurrence of the Secretary of the Treasury. Thereafter, the eight independent Directors would be

selected by the full Board of Directors with the concurrence of the Secretary of the Treasury.

All Directors should be selected based on business acumen and other experience necessary to

manage an enterprise of the Postal Service’s size and significance. Terms for all Directors

should be three years with a mandatory retirement age of 70.

C-2. Management Flexibility. The Board of Directors and senior Postal Service management

should be given greater flexibility to manage without the limitations imposed by statutory

constraints. More specifically: 1) Postal Service management should be given the flexibility

to take advantage of corporate best practices; 2) the Postal Service should be allowed to set

rates within limits established by a new Postal Regulatory Board without obtaining prior

approval; 3) the sub-limits placed on annual borrowing for capital and operating needs

within the existing $3 billion annual limit on borrowing should be repealed; and 4) the

Postal Service should be allowed to retain earnings subject to limits established by the Postal

Regulatory Board.

C-3. Accountability and Public-Policy Oversight. In order to ensure that a Postal Service

management with greater latitude has appropriate oversight, the Postal Rate Commission

should be transformed into a new Postal Regulatory Board with the responsibility to protect

the public interest and promote public confidence in the fairness and transparency of postal

operations. The new Postal Regulatory Board should have authority to: review and refine

the scope of the Postal Service’s universal service obligation; clarify and refine the scope of the

postal monopoly; regulate rates for non-competitive products and services; establish limits on

the accumulation of retained earnings by the Postal Service; ensure financial transparency;

obtain information from the Postal Service, if need be, through the use of new subpoena

power; and review and act on complaints filed by those who believe the Postal Service has

exceeded its authority. The new Postal Regulatory Board should be comprised of three

members who are appointed by the President and confirmed by the Senate, and no more

than two should be members of the same political party. Members of the Postal Regulatory

Board should be selected solely on the basis of their demonstrated experience and professional

standing.

Congress.

Congress.
Appendix C Commission Recommendations

172

C-4. Rate-setting Procedures. The existing rate-setting process should be replaced with an

incentive-based rate-setting methodology in which the Postal Regulatory Board: 1)

establishes baseline rates and rate ceilings for non-competitive products and services; 2)

reviews, in advance, rate requests for non-competitive products and services that exceed

established rate ceilings; and 3) ensures that rates for competitive products and services are

not cross-subsidized by revenues generated by non-competitive products and services. The

Postal Regulatory Board, upon written complaint, should be authorized to conduct afterthe-fact reviews of rate increases for non-competitive products and services, and, if

necessary, to require adjustments to these rates when they are inconsistent with established

rate ceilings. The Postal Regulatory Board should also be authorized to review, upon

written complaint, whether a rate for a competitive product or service is being crosssubsidized by revenue generated by non-competitive products or services and to take

appropriate remedial action. In conducting after-the-fact reviews, the Postal Regulatory

Board should ensure that affected parties have an opportunity to participate, but should

also ensure that the timeframe for the review is dramatically reduced from that permitted

under the existing rate-setting process. Participation by interested parties should be

limited to written submissions, and all procedures should require a final determination

within 60 days.

Recommendations of the Business Model Subcommittee

B-1. Basic Structure. The Postal Service should continue to operate as an independent

establishment within the executive branch with a unique mandate to operate as a selfsustaining commercial enterprise.

B-2. Mission. The 1970 Act should be amended to clarify that the mission of the Postal

Service is to provide high-quality, essential postal services to all persons and communities

by the most cost-effective and efficient means possible at affordable and, where appropriate, uniform rates. In doing so, the activities of the Postal Service should be limited to: 1)

accepting, collecting, sorting, transporting, and delivering letters, newspapers, magazines,

advertising mail, and parcels; and 2) providing other governmental services when in the

public interest and where the Postal Service is able to recover the appropriately allocated

costs of providing such services.

B-3. Monopoly. The Postal Service should maintain its current mail monopoly, and also

retain its sole access to customer mailboxes. However, the 1970 Act should be amended

to: 1) authorize the Postal Regulatory Board to clarify and periodically review the scope of

the mail monopoly; and 2) clarify that the Postal Service does not have the authority to

alter the scope of the mail monopoly or to determine the extent of access to customer

mailboxes.

B-4. Financial Tsransparency. The Postal Service should voluntarily comply with applicable Securities and Exchange Commission reporting requirements. In addition, the

Postal Service should periodically report on the allocation of costs among mail products

and services in accordance with form, content, and timing requirements determined by

the Postal Regulatory Board.

Congress.

No action

required.

Congress.

Congress.

Postal Service.
Appendix C Commission Recommendations

173

B-5. Processing Facilities. A Postal Network Optimization Commission (P-NOC), modeled in

part after the Defense Base Closure and Realignment Commission, should be created to

make recommendations relating to the consolidation and rationalization of the Postal

Service mail processing and distribution infrastructure. The P-NOC should be comprised of

eight members appointed by the President with advice and consent of the Senate. Recommendations of the P-NOC, once submitted to Congress by the President, should become

final, unless Congress disapproves them in their entirety within 45 days.

B-6. Post Offices. Efforts already underway by the Postal Service to expand access to retail postal

services at venues other than post offices, such as banks, grocery stores, and other convenient

locations should be supported. When the Postal Service determines that a “low-activity” post

office is no longer necessary for the fulfillment of its universal service obligation, the Postal

Service should make every effort to maximize the proceeds from the sale of that facility. If

the Postal Service determines that there is no adequate market demand for the purchase of a

“low-activity” post office, the Postal Service should be encouraged to work with state and

local governments, as well as not-for-profit organizations, to determine the means of disposition most beneficial to the local community. Such disposition could include transfer to a

state or local government or not-for-profit organization, with or without reimbursement, as

best serves the public interest. Existing statutes limiting the Postal Service’s flexibility with

regard to the closing and disposition of post offices should be repealed and similar provisions

in annual appropriation acts should be avoided.

B-7. Real Estate Asset Management. The Postal Service should be encouraged to include policy

goals and objectives relating to the active management of Postal Service real estate in future

strategic plans. As a first step, the Postal Service should obtain an independent appraisal of

the current market values of its major real estate holdings. Further, the Postal Service should

use its current statutory flexibility to dispose of real estate assets to strengthen its long-term

financial position and provide benefits to the public in the form of moderated rate increases

and improved products and services.

Recommendations of the Private-Sector Partnership Subcommittee

P-1. Maximizing the Use of the Private Sector. Those Postal Service functions that can be

performed better and at lower cost by the private sector should be outsourced to the private

sector.

P-2. Utilizing the Postal Service’s Core Strength: “The First Mile” and “The Last Mile.”

The Postal Service should continue to explore opportunities to utilize its core strengths in the

“first” and “last” mile of the mail delivery stream through the development of mutually

beneficial partnerships with the private sector.

P-3. Expanding Retail Access to Postal Products and Services. The Postal Service should

develop additional private-sector partnerships to better serve the consumer and expand access

to postal products and services beyond the traditional post office.

Congress.

Postal Service

and Congress.

Postal Service.

Postal Service.

Postal Service.

Postal Service.
Appendix C Commission Recommendations

174

P-4. Worksharing Discounts for Non-Competitive Products. The Postal Service should

continue to look for opportunities to offer discounts for additional workshared products

and to expand opportunities for small mailers to participate in them, particularly as new

technologies are developed, that reflect lowest combined public-private sector costs. The

new Postal Regulatory Board should be required to conduct an expedited, after-the-fact

review of a new worksharing discount upon written complaint by a party that the

discount exceeds the costs avoided by the Postal Service. A discount that exceeds the costs

avoided by the Postal Service should not be permitted. In addition, the Postal Service

should ensure that the expected savings from worksharing discounts are actually captured

in the form of reduced costs.

P-5. Negotiated Service Agreements for Non-Competitive Products. The Postal Service

should be given greater flexibility to enter into negotiated service agreements for noncompetitive products. Specifically, the Postal Service should be allowed to enter into

agreements based on general criteria established by the new Postal Regulatory Board. The

Postal Regulatory Board should conduct expedited, after-the-fact reviews of such agreements when a written complaint is filed.

P-6. Procurement Reform. There is a significant opportunity to improve the Postal Service’s

“bottom-line” through revision of its procurement regulations and the adoption of

commercial best practices. Therefore, the Postal Service should revise its purchasing

regulations to maximize the flexibility given to it under current law and to reflect

commercial best practices. Congress should strongly support Postal Service procurement

reform in acknowledgement of its substantial benefit to all ratepayers.

Recommendations of the Technology Challenges and Opportunities Subcommittee

T-1. Automation Technology. The Postal Service should balance capital expenditures on

new automation technology with consideration of outsourcing elements of the processing

network. The Postal Service should neither acquire excess capacity that would only be

used during peak periods nor undertake functions that the private sector could perform

more effectively and at less cost than the Postal Service itself. Nonetheless, the Commission acknowledges the steps the Postal Service has taken to automate its system for

processing single-piece letter mail and welcomes the progress made in the automation of

the processing of flats and packages. The Postal Service should continue to develop an

effective merging system that is responsive to customer needs and culminates in one bundle

of mixed letters and flats for each delivery point.

T-2. Processing Standardization. The Postal Service should study the problem of mail

processing with the possible goal of redesign of the whole mail system, using the latest in

21st century technology systems. The Postal Service should examine every one of its “legacy

systems” and question its purpose and whether it is needed. In addition, the mail

processing redesign should include a standard or common footprint for each processing

facility, with an identical level of technology and machinery in each. This would allow

easy shifting of personnel to manage the mail flow more efficiently. This redesign study

should be viewed as complementary to the Postal Service’s current network rationalization

initiative.

Congress.

Congress and

Postal Service.

Postal Service

and Congress.

Postal Service.

Postal Service.
Appendix C Commission Recommendations

175

T-3. Intelligent Mail. The ability of the Postal Service to track individual pieces of mail can

improve internal efficiency and satisfy postal customers that mail is delivered to the right

location and on time. The technology to achieve this goal exists today and is now being used

by some of the competitors of the Postal Service. The Postal Service should work to put mail

tracking technology in place on a timely and more comprehensive basis, so that it is available

to all users, large and small, at an affordable price.

T-4. The Transportation Network. The Postal Service should integrate its facility automation

efforts with its transportation network by using Intelligent Mail technology, GPS, and

onboard computer technology. The Postal Service should also put in place a cost-effective

system capable of tracking every vehicle on its route and allowing each vehicle to communicate in real time, either by voice or electronic communication, with appropriate fixed

facilities.

T-5. Improved Postal Service Website (www.usps.com) and Personalized Stamps. Postal

services available at post offices should also be generally available on the Postal Service

website and at Postal Service kiosks and contract stations at reasonable prices for all postal

customers, from the individual to the large mailer. The Postal Service should develop and

produce “personalized” stamps and make them available through appropriate sources,

beginning with the Postal Service website. These stamps should be offered to postal customers

at a reasonable premium.

T-6. Security. The events of 9/11 and the Postal Service anthrax incidents have increased the

need to ensure security in the mail system. A more secure system could be built using sender

identified mail. The Postal Service, in coordination with the Department of Homeland

Security, should explore the use of sender identification for every piece of mail, commercial

and retail.

T-7. Evaluation, Acquisition and Deployment of Technology. The Postal Service recently

created the new Mailing Technology Strategy Council to provide assessments on technology

trends. The Council should be strengthened to be an independent advisory body empowered

to do more than provide assessments. The Council should not only originate ideas for

improving the mail system, but should accept them from all sources, including the individual

Postal Service user. It should study, evaluate and recommend to the Postmaster General

technologies that could be used to upgrade the mail system. Postal Service management

should provide an annual report to the new Board of Directors on the work of the Mailing

Technology Strategy Council.

Recommendations of the Workforce Subcommittee

W-1. Developing an Appropriately-Sized Workforce. As the Postal Service works to meet the

challenges of the 21st century, it must develop a world-class workforce appropriate to fulfilling its universal service obligation. Fortunately, the Postal Service will soon be presented

with a unique attrition opportunity with some 47% of current career employees eligible for

retirement by 2010. The Postal Service is urged to take full advantage of this attrition

opportunity and to exercise maximum discipline in its hiring practices in order to rightsize

and realign its workforce with minimal displacement.

Postal Service.

Postal Service.

Postal Service.

Postal Service.

Postal Service.

Postal Service.
Appendix C Commission Recommendations

176

W-2. Collective Bargaining: Process Improvements. The collective bargaining process

should be retained. However, the collective bargaining process should be improved to

create additional incentives for the parties to reach negotiated settlements, and, when the

parties fail to reach a negotiated settlement, to ensure that arbitration awards are made

within a reasonable period of time. In particular, the collective bargaining process

should be as follows:

• Basic process. A negotiation process, beginning 90 days prior to the expiration of

an existing agreement, followed by a 30-day mandatory mediation process and, if

mediation fails, an immediate 60-day interest arbitration process.

• Mandatory mediation and “Med-Arb.” The 30-day mandatory mediation

process would be conducted by a mediator who would become a member of the

arbitration panel should mediation fail. The purpose of the mediation process

would be to either reach a negotiated settlement or to narrow the range of issues to

be submitted to interest arbitration.

• Interest arbitration. The 60-day interest arbitration process would be conducted

by a three-person arbitration panel comprised of three neutral arbitrators, one

having served as the mediator. The interest arbitration process would incorporate

the Last Best Final Offer mechanism and a 10-day period during which the parties

would have a final opportunity to reach a negotiated settlement prior to the

arbitration panel’s final award.

W-3. Collective Bargaining: New Subjects. The Postal Service’s pension and post-retirement health care plans should be subject to collective bargaining – meaning that the

Postal Service and its unions should have the flexibility to develop new plans that are

separate and apart from existing Federal pension and retiree health care plans. However, because of concern about the uncertain impact such a change would have on the

Federal system as a whole and on other Federal employees in particular, the Postal

Service should work with the Department of the Treasury, the Office of Personnel

Management, and any other persons or entities deemed necessary to determine the

impact separate Postal Service pension and retiree health care programs would have on

the existing Federal systems. As a first step:

• The Postal Service should be authorized to negotiate Federal Employee Retirement

System eligibility requirements and employee contributions;

• The Postal Service should be authorized to negotiate the eligibility and retiree

contribution requirements for the post-retirement health care component of the

Federal Employee Health Benefit Program, specifically for future Postal Service

retirees; and

• The current statutory requirement that “[n]o variation, addition, or substitution

with respect to fringe benefits shall result in a program of fringe benefits which on

the whole is less favorable to the officers and employees than fringe benefits in effect

on [July 1, 1971]” should be repealed.

Congress.

Congress.
Appendix C Commission Recommendations

177

W-4. Pay Comparability. The 1970 Act should be amended to clarify the meaning of the term

comparability, and the new Postal Regulatory Board should be authorized to determine

comparable total compensation for all Postal Service employees. In determining comparable

total compensation, the Postal Regulatory Board should be authorized to determine the

appropriate sector(s) of the private-sector workforce to be used as the basis of comparison.

The comparability determination of the Postal Regulatory Board should be enforced as a cap

on the total compensation of new employees. In addition, if the Postal Regulatory Board

determines that a total compensation premium exists for current employees, it should be

authorized to determine the appropriate period of time during which the premium must be

eliminated, and to review periodically its initial determination and the Postal Service’s

progress in eliminating the premium.

W-5. Pay-for-Performance. Performance-based compensation programs are effective tools that,

when designed correctly, can be used to align the goals of management and labor and result

in improved efficiency and service quality. The Postal Service should undertake a careful

study of performance-based compensation programs for both management and represented

employees, and it should work with the unions and management associations to design and

implement a performance-based compensation program that is meaningful to Postal Service

employees and assists the Postal Service in meeting its productivity and service quality goals.

W-6. Grievances. The current dispute resolution process must be revised if the Postal Service is

to operate in accordance with the best practices of private-sector companies with highly

unionized workforces. As a first step, the Postal Service should work diligently with its

unions to implement best practice grievance procedures, including those recently implemented by the Postal Service and the National Association of Letter Carriers.

W-7. Workers’ Compensation Claims. The Postal Service should be provided relief from the

requirements of the Federal Employees’ Compensation Act as follows:

• The Postal Service should not be required to pay benefits until after the expiration of a

three-day waiting period;

• The Postal Service should be allowed to limit benefits to 2/3 of the maximum weekly

rate; and

• The Postal Service should be allowed to transition individuals receiving workers’

compensation to the Postal Service’s retirement plan at such time as the employee would

have become eligible for retirement notwithstanding the injury giving rise to the

workers’ compensation benefits.

W-8. Executive Compensation. The current statutory salary cap should be repealed. Further,

the Postal Service should be authorized to establish rates of pay for officers and

employees at levels competitive with the private sector. Performance should be considered

as a key component of senior executive pay.

Congress.

Postal Service.

Congress.

Postal Service.

Congress and

Postal Service.
Appendix C Commission Recommendations

178

W-9. Management Structure. The Postal Service should restructure its management to

eliminate redundant positions and geographical divisions and to standardize and

clarify job functions. The Postal Service should conduct a review of the entire management structure, size, and cost to determine whether each component is necessary and

consistent with the best practices of the private sector, and it should require managers to

justify their functions and the size of their staffs.

W–10. Accounting for Retiree Health Care Obligations. The Postal Service should review

its current policy relating to the accounting treatment of retiree health care benefits, and

work with its independent auditor to determine the most appropriate treatment of such

costs in accordance with applicable accounting standards and in consideration of the

Postal Service’s need for complete transparency in the reporting of future liabilities. The

Postal Service should consider funding a reserve account for unfunded retiree health

care obligations to the extent that its financial condition allows.

W–11. Funding Military Service. Responsibility for funding Civil Service Retirement

System pension benefits relating to the military service of Postal Service retirees should

be returned to the Department of the Treasury.

Postal Service.

Congress.

Postal Service.
179

Appendix D: Additional Statement by

Commissioner Seabrook

July 30, 2003

President’s Commission on the United States Postal Service

1120 Vermont Avenue, N.W.

Suite 971

Washington, DC 20005

Dear Commissioners:

I have reviewed the final recommendations to the Commission from the Workforce Subcommittee. I agree with

recommendations 1, 6, 8, 9, 10 and 11. I disagree with recommendations 2, 3, 4, 5 and 7 for the following reasons:

I dissent from recommendation number 2 because it places artificial constraints on the bargaining process. Management and labor should be free to conduct arms-length bargaining and reach a decision through that process and the

existing arbitration process. Cutting the time of the arbitration process to 180 days at the most is a worthwhile

objective but is not the answer to the existing arbitration problem. The arbitration process takes too long because

management often takes an unreasonable position. Adequate funding of the Postal Service as well as recognition of

the financial and other interests of the employees is a better approach. Expediting an unfair process is not the answer.

I dissent from recommendation number 3 for the following reasons: Adding Postal Service pension and the postretirement healthcare plan to the collective bargaining process puts these benefits at greater risk than is the case for

other federal employees. The benefits of federal employees in the existing structure grow out of a long history of

federal budgetary considerations and legislative initiatives. While the benefits could certainly be improved, this

recommendation does not have benefit improvement as an objective. Placing pension and retiree health benefits into

a collective bargaining process and then constraining that process by pressuring for settlements within “180 days”

creates an environment that may be potentially harmful to active and retired postal workers. I prefer that the benefits

for postal workers be considered in the same way as other federal employees.

I dissent from recommendation number 4 because the operationalization of the concept is problematic. Pay comparability is a concept best applied when public employees’ salaries and benefits are not subject to collective bargaining.

In a collective bargaining process, pay comparability inevitably enters any determination of salaries and benefits.

However the dynamic of the bargaining process where management and labor meet on an equal footing and struggle

through to a determination is quite different from an administrative process where “personnel types” organize groups

of people into boxes of comparable worth and impose their view of a worker’s value. The former is an equitable

approach. The latter is quintessential bureaucracy.

I dissent from recommendation number 5 for the following reasons: Pay for performance is a disguised way in which

management can attack the strength of a union by dividing its members. “Pay for performance” as a concept seems

unassailable because who could argue that people who perform better should be paid more? In practice, however,
Appendix D Additional Statement by Commissioner Seabrook

180

such systems are characterized by nepotism, favoritism and horrible morale among the workers. I challenge the

subcommittee to demonstrate a successful pay for performance system in any large strongly unionized public organization. Personnel evaluations, performance evaluations, employee rating systems, etc., all have some value but only as

an integral part of an employee management system that includes a strong labor component, which in the final

analysis balances the outcome in favor of objective performance.

I dissent from recommendation number 7 because it implies that workers’ compensation abuse is so rampant that a

tested and respected system needs to be totally revamped to ameliorate the abuses. If one honestly believes that a

worker has been injured and that the work-related injury must be subjected to an equitable process, these recommendations are troublesome. Only when read in the context of widespread abuse do these recommendations become

logical. If the subcommittee assumes that there are abuses, the individual abuses should be dealt with in a detailed

and aggressive way. However, encumbering an already difficult process by adding reduction in benefit payments and

expedited retirements is unfair to the bulk of postal workers who are injured on the job.

In closing, I believe that recommendations 2, 3, 4, 5 & 7 require additional work by the subcommittee. Each of the

recommendations focuses on an issue that we thought needed examination. However, the approach to the solution in

my view is counterproductive and biased against the worker. The efficiencies enjoyed will be at the expense of the

effectiveness of the employee and, therefore, the effectiveness of the organization. Under the circumstances, these

issues should be left the way they are instead of changed by the recommendations brought by the subcommittee.

Thank you,

Commissioner Norman Seabrook
181

Acknowledgments

The President’s Commission on the United States Postal Service would have been unable to complete its work without the active help and support of the Postal Service itself. The Co-Chairs would

like to thank S. David Fineman, the Chairman of the USPS Board of Governors; Postmaster

General of the United States John E. Potter; Deputy Postmaster General John M. Nolan; USPS

Chief Financial Officer Richard J. Strasser; USPS Treasurer Robert J. Pedersen; and the many

members of the Postal Service management team who shared their insights with the Commission

over the past several months. Much of this report is an affirmation of the efforts already underway

to transform the Postal Service into a modern 21st century institution.

The Co-Chairs also wish to thank Margaret Spellings, Assistant to the President for Domestic

Policy, and Peter R. Fisher, Under Secretary of the Treasury for Domestic Finance, for their encouragement and guidance during the course of this project.

The Co-Chairs want to express deep appreciation for the thoughtful, intelligent and effective work

of the Commission’s Executive Director Dennis Shea. Dennis truly did an outstanding job.

The Co-Chairs and the Executive Director extend a special thanks to Commission staff member

Randall Lewis whose contribution to this project has been nothing short of indispensable. They also

extend their thanks to Jana Sinclair White, whose tireless efforts were crucial to the completion of

the report, and to James Cox for his valuable assistance throughout the past several months. In

addition, Commission staff members Bridgette Kilkenny, Paul Revesz, Ryan Cunningham, Stephen

Passman, Jennifer Streaks, and Ryland Sumner made important contributions.

Thanks are due to Brian C. Roseboro, Roger Kodat, Michael Scott, and Betsy Holahan of the

Department of the Treasury, as well as Elizabeth Dougherty of the White House Domestic Policy

Council, for the steadfast support they gave to the Commission and its staff. Commission consultants James I. Campbell, Jr., Robert Reisner, Carl Moravitz, and Robert Heiler also made valuable

contributions to key aspects of the report.

Finally, the Co-Chairs and the Executive Director wish to acknowledge and thank Christine

Hagstrom for bringing her considerable writing talent to bear on behalf of this project.

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