GAO-04-455R Postal Reform 

United States General Accounting Office 

Washington, DC 20548 

Comptroller General

of the United States

February 6, 2004 

The Honorable Susan M. Collins 

Chairman, Committee on 

 Governmental Affairs 

United States Senate 

Subject: Need for Comprehensive Postal Reform 

Dear Chairman Collins: 

 

This letter responds to your request for our views on the need for postal reform and 

is based upon our prior testimonies related to this issue.1

 In summary, we believe that 

comprehensive postal reform is urgently needed. The ability of the Service to remain 

financially viable is at risk because its current business model—which relies on mail 

volume growth to cover the costs of its expanding delivery network—is not well 

aligned with 21st century realities. Since we placed the Postal Service’s 

transformation efforts and financial outlook on our High-Risk List in April 2001, I 

have testified on several occasions about the governance, financial, operational, and 

human capital challenges that threaten the Service’s ability to carry out its mission. If 

not effectively addressed in a timely manner, these challenges serve to threaten the 

Service’s ability to remain self-supporting while providing affordable, high-quality, 

and universal postal services to all Americans. 

The following key trends serve to reinforce our view that enactment of postal reform 

legislation is needed: 

• Declining mail volume: Total mail volume declined in fiscal year 2003 for the 

third year in a row—a historical first for the Service, which has depended on 

rising mail volume to help cover rising costs and mitigate rate increases. FirstClass Mail volume declined by a record 3.2 percent in fiscal year 2003 and is 

projected to decline annually for the foreseeable future. Some of this decline is 

due to technology advances (e.g. E-mail, digital phones, faxes, and electronic bill 

payments) that are likely to increase in the future. This trend is particularly 

significant because First-Class Mail covers more than two-thirds of the Service’s 

institutional costs. 

 

1

 See U.S. General Accounting Office, U.S. Postal Service: Bold Action Needed to Continue Progress 

on Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003); and U.S. Postal Service: 

Key Elements of Comprehensive Postal Reform, GAO-04-397T (Washington, D.C.: Jan.28, 2004). 
GAO-04-455R Postal Reform Page 2 

• Changes in the mail mix: The Service’s mail mix is changing with declining 

volume for high-margin products, such as First-Class Mail, and increasing volume 

of lower-margin products, such as some types of Standard Mail. These changes 

reduce revenues available to cover the Service’s institutional costs. 

• Increased competition from private delivery companies: Private delivery 

companies dominate the market for parcels greater than 2 pounds and appear to 

be making inroads into the market for small parcels. Priority Mail volume fell 13.9 

percent in fiscal year 2003 and over the last 3 years has declined nearly 30 

percent. Once a highly profitable growth product for the Service, Priority Mail 

volume is declining as the highly competitive parcel market turns to lower-priced 

ground shipment alternatives. Express Mail volume is declining for the same 

reason. In addition, United Parcel Service (UPS) and FedEx have established 

national retail networks through UPS’s acquisition of MailBoxes Etc., now called 

UPS Stores, and FedEx’s recent acquisition of Kinko’s. 

• Subpar revenue growth: The Service’s revenues are budgeted for zero growth in 

fiscal year 2004, which would be the first year since postal reorganization that 

postal revenues have failed to increase. However, as the Service has recognized, 

even the zero-growth target will be challenging. In the absence of revenue growth 

generated by increasing volume, the Service must rely more heavily on rate 

increases to cover rising costs and help finance capital investment needs. 

• Declining capital investment: The Service’s capital cash outlays declined from 

$3.3 billion in fiscal year 2000 to $1.3 billion in fiscal year 2003, which was the 

lowest level since fiscal year 1986, and far below the level of the late 1990s, when 

the Service spent more than $3 billion annually. Capital cash outlays are budgeted 

to increase to $2.4 billion in fiscal year 2004, but this level may not be sufficient to 

enable the Service to fully fund its capital investment needs. In the longer term, it 

is unclear what the Service’s needs will be to maintain and modernize its physical 

infrastructure, as well as how these needs will be funded. 

• Renewed difficulties in substantially improving postal productivity: The 

Service’s productivity increased by 1.8 percent in fiscal year 2003 but is estimated 

to increase by only 0.4 percent in fiscal year 2004. In the absence of mail volume 

growth, substantial productivity increases will be required to help cover cost 

increases generated by rising wages and benefit costs and to mitigate rate 

increases. 

• Significant financial liabilities and obligations: Despite the passage of 

legislation that reduced the Service’s pension obligations, the Service has about 

$88 billion to $98 billion in liabilities and obligations that include $47 billion to $57 

billion in unfunded retiree health benefits. Under the current pay-as-you-go 

system, the Service may have difficulty financing its retiree health benefits 

obligation in the future if mail volume trends continue to impact revenues while 

costs in this area continue to rise. The Service has recently proposed two options 

to Congress, so the Service could prefund this obligation to the extent that it is 

financially able. 
 GAO-04-455R Postal Reform

 

Page 3 

• Uncertain funding for emergency preparedness: The Service requested $350 

million for emergency preparedness for fiscal year 2004, which it did not receive, 

and $779 million for fiscal year 2005. If the money is not appropriated, funding for 

this purpose may have to be built into postal rates. 

• Challenges to achieve sufficient cost cutting: The Service achieved additional 

cost cutting to compensate for below-budget revenues in fiscal year 2003. Despite 

this progress, in the longer term it is unclear whether continued cost-cutting 

efforts can offset declines in First-Class Mail volume without impacting the quality 

of service. 

Although we have discussed numerous actions that the Postal Service can take within 

its existing authority to improve its overall efficiency and effectiveness, we do not 

believe that incremental steps toward postal transformation can resolve the 

fundamental and systemic issues associated with the Service’s current business 

model. To avoid the risk of a significant taxpayer bailout or dramatic postal rate 

increases, we believe that Congress should enact comprehensive postal reform 

legislation that includes the Service’s overall statutory framework, resolution of 

issues regarding the Service’s pension and retiree health benefits obligations, and 

whether there is a continued need for an escrow account. 

The key areas of the Service’s statutory framework that need to be addressed include: 

• clarifying the Service’s mission and role by defining the scope of universal 

service and the postal monopoly and by clarifying the role of the Service in regard 

to competition and its regulatory functions; 

• enhancing governance, transparency, and accountability by delineating public 

policy, operational, and regulatory responsibilities; by ensuring managerial 

accountability through a strong, well-qualified corporate-style board that holds its 

officers responsible and accountable for achieving real results; and by defining 

appropriate reporting mechanisms to enhance the Service’s transparency and 

accountability for financial and performance results; 

• improving flexibilities and oversight by balancing increased flexibility for the 

Service— through streamlining the rate-setting process and allowing a certain 

amount of retained earnings—with appropriate oversight by an independent 

regulatory body to protect postal customers against undue discrimination, to 

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

additional flexibility to rationalize its infrastructure and reshape its workforce. 

Any such additional flexibility should be accompanied by appropriate safeguards 

to prevent abuse along with enhanced transparency and accountability 

mechanisms; and 

• making needed human capital reforms such as (1) determining the Service’s 

responsibility for pension costs related to military service, funding retiree health 

benefits, and determining what action to take on the escrow account established 

in recent pension legislation; (2) deciding whether postal workers’ compensation 
GAO-04-455R Postal Reform Page 4 

benefits should be on par with those in the private sector; and (3) clarifying pay 

comparability standards. 

We believe that Congress now has a rare opportunity to assure the Service’s longterm financial viability through comprehensive postal reform legislation that 

addresses the Service’s key structural and systemic deficiencies, its unfunded 

obligations, including its retiree health benefits obligation, and the escrow 

requirement. Key legislative and administrative actions in connection with 

transforming the Postal Service can also serve as positive examples for other key 

government transformation efforts. 

_ _ _ _ _ 

As agreed with your office, unless you publicly announce the contents of this report 

earlier, we plan no further distribution until 30 days from the date of this letter. At 

that time, we will provide copies to interested congressional committees. We will also 

make copies available to others on request. In addition, the report will be available at 

no charge on the GAO Web site at http://www.gao.gov. 

For additional information about this report, please contact Mark L. Goldstein, 

Director, Physical Infrastructure Issues at (202) 512-2834 or at goldsteinm@gao.gov. 

Please contact me if I can be of any further assistance to help make comprehensive 

postal reform a reality. 

Sincerely yours, 

David M. Walker 

Comptroller General 

 of the United States 

(543095) 
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