U.S. POSTAL SERVICE 

Postal Reform Law 

Provides Opportunities to 

Address Postal Challenges 

Statement of Katherine Siggerud, Director 

Physical Infrastructure Issues 

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Federal Financial 

Management, Government Information, Federal Services, 

and International Security, Committee on Homeland 

Security and Governmental Affairs, U.S. Senate 

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Thursday, April 19, 2007 

GAO-07-685T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-07-685T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Katherine 

Siggerud at (202) 512-2834 or 

siggerudk@gao.gov. 

Highlights of GAO-07-685T, a testimony 

for the Subcommittee on Federal Financial

Management, Government Information,

Federal Services, and International

Security, Senate Committee on Homeland

Security and Governmental Affairs

April 19, 2007

U.S. POSTAL SERVICE

Postal Reform Law Provides 

Opportunities to Address Postal 

Challenges 

Key actions by both the Service and Congress have led GAO to remove the 

Service’s transformation efforts and long-term outlook from its high-risk list 

in January 2007. Specifically, the Service developed a Transformation Plan 

and achieved billions in cost-savings, improved productivity, downsized its 

workforce, and improved its financial reporting. Congress enacted a law in 

2003 that reduced the Service’s annual pension expenses, which enabled it to 

achieve record net incomes, repay debt, and delay rate increases until 

January 2006. Finally, as illustrated in the table, the postal reform law 

enacted in December 2006 provides tools and mechanisms that can be used 

to address key challenges facing the Service as it moves into a new 

regulatory and increasingly competitive environment. 

The two key factors that will affect the Service’s financial condition for this 

fiscal year are the new reform law and new postal rates that go into effect in 

May. The reform law increases the costs of funding retiree health benefits 

but provides opportunities to offset some of these cost pressures through 

efficiency gains and eliminating certain pension payments. For the rest of 

the year, Service officials do not expect significant changes from its 

projected expenses and revenues. Other factors, such as costs for fuel or 

labor resolutions varying from plan, could affect the Service’s projected 

outcome for this fiscal year. 

Postal Reform Law Provides Opportunities to Address Challenges 

Challenges facing the Service Opportunities to address challenges 

Generating sufficient revenues to cover costs 

as the mail mix is changing. 

Provides price-setting flexibility and allows the 

Service to retain earnings. 

Controlling costs, particularly for compensation 

and long-term health benefits, and improving 

productivity. 

Encourages the Service to reduce costs and 

operate more efficiently in areas such as 

realigning its network and workforce. 

Maintaining affordable, reliable service and 

establishing reliable mechanisms to measure 

and report service performance. 

Establishes service standards and monitoring 

by the new Postal Regulatory Commission 

(PRC). 

Providing useful and reliable financial data to 

assess performance. 

Establishes new reporting, accounting, and 

ratemaking data requirements. 

Managing its workforce to respond to 

operational changes. 

Requires a plan with the Service’s vision for 

realigning its infrastructure and workforce, and 

the resulting impacts on its workforce. 

Source: GAO. 

Congress’s continued oversight of the Service’s transformation is critical at 

this time of significant changes for the Service, PRC, and mailing industry. 

Also, key to a successful transformation is innovative leadership by the 

Postmaster General and the PRC Chairman and their ability to work 

effectively with stakeholders to realize new opportunities provided under 

the postal reform law. GAO has identified key issues and areas for oversight 

related to implementing the reform law and new rate-setting structure, as 

well as other challenges to ensure the Service remains financially sound. 

When GAO originally placed the 

U.S. Postal Service’s (the Service) 

transformation efforts and longterm outlook on its high-risk list in 

early 2001, it was to focus urgent 

attention on the Service’s 

deteriorating financial situation. 

Aggressive action was needed, 

particularly in cutting costs, 

improving productivity, and 

enhancing financial transparency. 

GAO testified several times since 

2001 that comprehensive postal 

reform legislation was needed to 

address the Service’s unsustainable 

business model, which assumed 

that increasing mail volume would 

cover rising costs and mitigate rate 

increases. This outdated model 

limited its flexibility and incentives 

needed to realize sufficient cost 

savings to offset rising costs, 

declining First-Class Mail volumes, 

unfunded obligations, and an 

expanding delivery network. This 

limitation threatened the Service’s 

ability to achieve its mission of 

providing affordable, high-quality 

universal postal services on a selffinancing basis. 

This testimony will focus on (1) 

why GAO recently removed the 

Service’s transformation efforts 

and outlook from GAO’s high-risk 

list, (2) the Service’s financial 

condition in fiscal year 2007, (3) the 

opportunities and challenges facing 

the Service, and (4) major issues 

and areas for congressional 

oversight. This testimony is based 

on GAO’s past work, review of the 

postal reform law, and updated 

information on the Service’s 

financial condition. 
Page 1 GAO-07-685T 

Chairman Carper and Members of the Subcommittee: 

I am pleased to be here today to participate in this oversight hearing for 

the U.S. Postal Service (the Service). To begin, I want to acknowledge 

Congress’s efforts in passing comprehensive postal reform legislation.1

 The 

Postal Accountability and Enhancement Act (the act) provides tools and 

mechanisms that can be used to establish an efficient, flexible, fair, 

transparent, and financially sound Postal Service—a Service that can more 

effectively operate in an increasingly competitive environment not 

anticipated under the Postal Reorganization Act of 1970. Effective 

collaboration among the Service, the newly established Postal Regulatory 

Commission (PRC), mailers, and employee organizations can help to 

facilitate the successful implementation of the act by achieving a greater 

understanding of each other’s changing needs and operations, and how 

they correspond to the American public’s need for the continued provision 

of affordable, high-quality postal services.2

 My remarks today will focus on 

(1) why we recently removed the Service’s transformation efforts and 

outlook from GAO’s high-risk list, (2) the Service’s financial condition in 

fiscal year 2007, (3) the opportunities and challenges facing the Service, 

and (4) major issues and areas for continued congressional oversight. 

In summary: 

When we originally placed the Service’s transformation efforts and longterm outlook on our high-risk list in early 2001, we stated that a structural 

transformation would be needed to address the growing financial, 

operational, and human capital challenges that threatened its mission to 

provide affordable, high-quality universal postal services on a selffinancing basis.3

 This designation would help raise the urgency of taking 

actions to address these challenges before the situation escalated into a 

crisis where the options for action could be more limited. Since that time, 

key actions by both the Service and Congress have improved the Service’s 

financial, operational, and human capital condition and outlook. 

Specifically, the Service’s management issued a Transformation Plan in 

 1

Pub. L. No. 109-435: The Postal Accountability and Enhancement Act, enacted Dec. 20, 

2006. 

2

The act renames the Postal Rate Commission as the Postal Regulatory Commission. We 

will use the abbreviation PRC to represent both. 

3

GAO, U.S. Postal Service: Transformation Challenges Present Significant Risks, 

GAO-01-598T (Washington, D.C.: Apr. 4, 2001). 
Page 2 GAO-07-685T 

2002 that outlined steps to guide it in addressing its challenges and has 

demonstrated a commitment to implementing the Plan by cutting costs, 

improving productivity, downsizing its workforce, and improving its 

financial reporting. Further, a statute enacted in 2003 reduced the 

Service’s annual pension expenses, which allowed the Service to achieve 

record net income, repay debt, and delay rate increases until January 

2006.4

 Comprehensive postal reform legislation was enacted in December 

2006 that among other factors, provides: 

• a framework for modernizing the Service’s rate-setting process; 

• an opportunity to preserve affordable universal service by reassessing the 

future needs of postal customers and taking actions to increase value and 

efficiencies throughout the postal network—fundamental principles of 

functioning in a competitive environment; 

• recognition of the Service’s long-term financial obligations by prefunding 

retiree health benefit obligations, which will result in short-term cost 

increases for the Service, but over the long-term this action improves the 

fairness and balance of cost burdens for current and future ratepayers; 

• for a transfer of the obligation to fund civil service pension payments 

attributable to past military service from postal ratepayers to taxpayers;5

and 

• enhanced transparency and accountability by requiring that the Service 

collect, track, and report financial and service performance information, 

including the creation and reporting of modern service standards. 

Based on these actions, we determined that sufficient progress has been 

made to warrant the removal of the Service from our high-risk list in 

January 2007. We recognize, however, that the Service continues to face 

challenges to maintain its viability as it implements significant changes 

under the new law and will further discuss these challenges below. 

The Service’s financial condition for the current fiscal year has been 

affected by the act, which, along with the ensuing rate increase, will 

 4

Pub. L. No. 108-18: Postal Civil Service Retirement System Funding Reform Act of 2003. 

5

Pub. L. No. 108-18 shifted the responsibility for funding benefits attributable to military 

service from taxpayers to postal ratepayers. 
Page 3 GAO-07-685T 

continue to affect its near- and long-term financial outlook. Specifically, 

changes to either projected or actual Postal Service payments that result 

from this act include: 

• accelerating funding of the Service’s retiree health benefit obligations, 

• expensing funds previously set aside in escrow (transferring them to the 

Treasury) and eliminating future escrow payments, 

• transferring funding for selected military service benefits back to the 

Treasury, and 

• eliminating certain annual Civil Service Retirement System (CSRS) 

pension funding requirements. 

Since the law was enacted, the Service has updated its expense 

projections for fiscal year 2007. To date, those expenses not directly 

impacted by the 2006 Act and its total revenues have tracked closely to 

budgeted estimates. For the remainder of the fiscal year, Service officials 

do not expect significant changes from projected expenses, and still 

expect to meet revenue targets—even though the rate decision approved 

by the PRC was different than what the Service requested.6

 These officials 

did acknowledge, however, that other factors could have a favorable or 

unfavorable impact on the Service’s projected net loss for the year, such as 

the effect of rate increases on mail volumes, changes in fuel prices, and 

resolution of certain labor agreements. The Service is planning to borrow 

$1.8 billion this year, which will push its total outstanding debt to almost 

$4 billion to meet short-term cash flow needs that come at year end. 

As the Service transitions to its new statutory framework in an 

increasingly competitive environment, it will continue to face financial, 

operational, and human capital challenges. Table 1 illustrates how the 

legislation provides opportunities to address some of these challenges. 

 6

Higher postal rates for most mail classes will be implemented on May 14, 2007, including 

an increase in the price of a First-Class stamp from 39 to 41 cents. Rates for Periodicals 

(e.g., magazines, newspapers, etc.), however, will not increase until July 15, 2007, due to 

the need for more time to prepare for implementation by the Service and Periodical 

mailers. A detailed explanation of the recent rate developments are covered later in the 

testimony. 
Page 4 GAO-07-685T 

Table 1: Reform Legislation Provides Opportunities to Address Continuing Challenges 

Challenges facing the Service Opportunities to address challenges 

Generating sufficient revenues to cover costs as the mail mix is 

changing. 

Provides price-setting flexibility and allows the Service to retain 

earnings. 

Controlling costs, particularly for compensation and long-term 

health benefits, and improving productivity. 

Encourages the Service to reduce costs and operate more 

efficiently in areas such as realigning its network and workforce. 

Maintaining affordable, reliable service and establishing reliable 

mechanisms to measure and report service performance. 

Requires the Service to establish service standards in consultation 

with the new Postal Regulatory Commission, which will annually 

report on the Service’s performance against these standards. 

Providing useful and reliable financial data to assess performance 

to management, regulators, and oversight bodies. 

Establishes new reporting, accounting, and ratemaking data 

requirements. 

Managing its workforce to respond to operational needs. Requires a plan to describe the Service’s vision for realigning its 

infrastructure and workforce, including the impacts of facility 

changes on its workforce and whether the Service has sufficient 

flexibility to make needed workforce changes. 

Source: GAO. 

Continued oversight will be necessary to help ensure the Service’s future 

financial condition remains sound and that the intent of the act is followed 

throughout implementation. In particular, we have identified major issues 

considered significant by various postal stakeholders, as well as areas for 

continued oversight including: 

• the effect of the upcoming rate increases and statutory changes on the 

Postal Service’s financial condition; 

• the impact of the Service’s decision on whether or not to submit a rate 

filing later this year under the old rate structure; 

• actions by the PRC to establish a new price-setting and regulatory 

framework; 

• the Service’s ability to operate under an inflationary price cap while some 

of its cost segments are increasing above the rate of inflation; 

• actions by the Service, in consultation with the PRC, to establish modern 

service standards, and the Postal Service’s plan for meeting those 

standards; 

• the Service’s ability to provide high-quality delivery service as it takes 

actions to reduce costs and realign its infrastructure and workforce; and 
Page 5 GAO-07-685T 

• the PRC’s development of appropriate accounting and reporting 

requirements aimed at enhancing transparency and accountability of the 

Service’s internal data and performance results. 

The successful transformation of the Postal Service will require innovative 

leadership by the Postmaster General and the Chairman of the PRC, and 

their ability to work effectively with their employees, the mailing industry, 

and the general public. We are encouraged by the Service’s ongoing efforts 

to facilitate workgroups with participants from the mailing industry that 

will make recommendations regarding new service standards and 

measures. It will be important for all postal stakeholders to take full 

advantage of the unique opportunities that are currently available by 

providing input and working together, particularly as challenges and 

uncertainties will continue to threaten the Service’s financial condition 

and outlook. 

Several actions—both by the Service and the Congress—led us to remove 

the Service’s transformation efforts and long-term outlook from our highrisk list. In 2001, we made this designation because the Service’s financial 

outlook had deteriorated significantly. The Service had a projected deficit 

of $2 billion to $3 billion, severe cash flow pressures, debt approaching the 

statutory borrowing limit, cost growth outpacing revenue increases, and 

limited productivity gains. Other challenges the Service faced included 

liabilities that exceeded assets by $3 billion at the end of fiscal year 2002 

major liabilities and obligations estimated at close to $100 billion, a 

restructuring of the workforce due to impending retirements and 

operational changes, and long-standing labor-management relations 

problems. We raised concerns that the Service had no comprehensive plan 

to address its financial, operational, or human capital challenges, including 

its plans for reducing debt, and it did not have adequate financial reporting 

and transparency that would allow the public to understand changes in its 

financial situation. Thus, we recommended that the Service develop a 

comprehensive plan, in conjunction with other stakeholders, which would 

identify the actions needed to address its challenges and provide publicly 

available quarterly financial reports with sufficient information to 

understand the Service’s current and projected financial condition. As the 

Service’s financial difficulties continued in 2002, we concluded that the 

need for a comprehensive transformation of the Service was more urgent 

than ever and called for Congress to act on comprehensive postal reform 

legislation. The Service’s basic business model, which assumed that rising 

mail volume would cover rising costs and mitigate rate increases, was 

Recent Actions 

Warranted the Postal 

Service’s Removal 

from Our High-Risk 

List 
Page 6 GAO-07-685T 

outmoded as First-Class Mail volumes stagnated or deteriorated in an 

increasingly competitive environment. 

Since 2001, the Service’s financial condition has improved and it has 

reported positive net incomes for each of the last 4 years (see fig. 1). 

Figure 1: Recent Postal Service Net Incomes 

The Service has made significant progress in addressing some of the 

challenges that led to its high-risk designation. For example, the Service’s 

management developed a Transformation Plan and has demonstrated a 

commitment to implementing this plan. Since our designation in 2001, the 

Service has: 

• Reduced workhours and improved productivity: The Service has reported 

productivity gains in each year. According to the Service, its productivity 

increased by a cumulative 8.3 percent over that period, which generated 

$5.4 billion in cost savings. The Service reported eliminating over 170 

0

1

2

-2

-1

3

4

5

2001 2002 2003 2004 2005 2006

Dollars in billions

Source: Postal Service Annual Reports.

Fiscal year
Page 7 GAO-07-685T 

million workhours over this period, with a 4.5 million workhour reduction 

in fiscal year 2006. 

• Downsized its workforce: The Service has made progress in addressing 

some of the human capital challenges associated with its vast workforce, 

by managing retirements, downsizing, and expanding the use of 

automation. At the end of fiscal year 2006, the Service reported that it had 

696,138 career employees, the lowest count since fiscal year 1993. Attrition 

and automation have allowed the Service to downsize its workforce by 

more than 95,000, or about 10 percent, since fiscal year 2001. 

• Enhanced the reporting of its financial condition and outlook: The Service 

responded to recommendations we made regarding the lack of sufficient 

and timely periodic information on its financial condition and outlook that 

is publicly available between publications of its audited year-end financial 

statements by enhancing its financial reporting and providing regular 

updates to the financial statements on its Web site.7

 The Service instituted 

quarterly financial reports, expanded the discussion of financial matters in 

its annual report, and upgraded its Web site to include these and other 

reports in readily accessible file formats. 

The 2003 pension act provided another key reason for why we removed 

the high-risk designation.8 Much of the Service’s recent financial 

improvement was due to the change from this law that reduced the 

Service’s annual pension expenses. Between fiscal years 2003 and 2005, 

the Service had a total of $9 billion in decreased pension expenses when 

compared to the annual expenses that would have been paid without the 

statutory change. This change enabled the Service to significantly cut its 

costs, achieve record net incomes, repay over $11 billion of outstanding 

debt, and delay rate increases until January 2006. 

The Service’s improved financial performance and condition during this 

time was also aided by increased revenue generated from growing 

 7

GAO-01-598T; GAO, U.S. Postal Service: Deteriorating Financial Outlook Increases Need 

for Transformation, GAO-02-355 (Washington, D.C.: Feb. 28, 2002); U.S. Postal Service: 

Accounting for Postretirement Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 2002); 

U.S. Postal Service Actions to Improve Its Financial Reporting, GAO-03-26R (Washington, 

D.C.: Nov. 13, 2002). 

8

The Postal Service Civil Service Retirement System Funding Reform Act of 2003 (Pub. L. 

No. 108-18) was enacted in response to the Office of Personnel Management’s analysis, 

performed at our request, which concluded that the Service was on course to overfund its 

pension payments. 
Page 8 GAO-07-685T 

volumes of Standard Mail (primarily advertising) and rate increases in 

June 2002 and January 2006. Standard Mail volumes grew by almost 14 

percent from fiscal year 2001 to 2006, and Standard Mail revenues, when 

adjusted for inflation, increased by over 11 percent during the same time 

period. In June 2002, the Service implemented a rate increase (the price of 

a First-Class stamp increased from 34 cents to 37 cents) to offset rising 

costs. In January 2006, the Service implemented another rate increase (the 

price of a First-Class stamp increased from 37 cents to 39 cents) to 

generate the additional revenue needed to set aside $3.0 billion in an 

escrow account in fiscal year 2006 as required by the 2003 pension law. 

Revenues in fiscal year 2006 increased by about 4 percent from the 

previous year due largely to the January 2006 rate increase. 

The passage of the recent postal reform legislation was another reason 

why we removed this high-risk designation. Although noticeable 

improvements were being made to the Service’s financial, operational, and 

human capital challenges, we had continued to advocate the need for 

comprehensive postal reform legislation.9

 After years of thorough 

discussion, Congress passed a comprehensive postal reform law in late 

December 2006 that provides tools and mechanisms that can be used to 

establish an efficient, flexible, fair, transparent, and financially sound 

Postal Service. Later in this statement, I will discuss how some specific 

tools and mechanisms can be used to address the continuing challenges 

facing the Service. 

The Service’s financial condition for fiscal year 2007 has been affected by 

the reform act, which, along with the May change in postal rates, will 

continue to affect its near- and long-term financial outlook. The Service 

will benefit financially from an increase in postal rates in May averaging 

7.6 percent. Key steps in the rate process are provided in appendix I. The 

Service is estimating that it will gain an additional $2.2 billion in net 

income in fiscal year 2007 as a result of the new rates. The recent rate 

case, in addition to generating additional revenues, took significant strides 

 9

GAO, U.S. Postal Service: Bold Action Needed to Continue Progress on Postal 

Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003); Need for Comprehensive 

Postal Reform, GAO-04-455R (Washington, D.C.: Feb. 6, 2004); U.S. Postal Service: Key 

Elements of Comprehensive Postal Reform, GAO-04-397T (Washington, D.C.: Jan. 28, 

2004); U.S. Postal Service: Key Reasons for Postal Reform, GAO-04-565T (Washington, 

D.C.: Mar. 23, 2004); U.S. Postal Service: Despite Recent Progress, Postal Reform 

Legislation Is Still Needed, GAO-05-453T (Washington, D.C.: Apr. 14, 2005). 

The Postal Service’s 

Current Financial 

Condition 
Page 9 GAO-07-685T 

in aligning postal rates with the respective mail handling costs. Some rate 

increases are particularly large—i.e., some catalog rates may increase by 

20 to 40 percent. The new rates structure is aimed at providing the 

necessary incentives to encourage efficient mailing practices (e.g., shape, 

weight, handling, preparation, and transportation) and thereby encourage 

smaller rate increases and steady mail volumes in the longer run. 

At the beginning of fiscal year 2007 (before the enactment of the reform 

law), the Service expected to earn $1.7 billion in net income, which 

reflected the additional revenue the Service estimated it would receive 

from the May increase in postal rates. The Service, however, planned to 

increase its outstanding debt of $2.1 billion at the end of fiscal year 2006 

by an additional $1.2 billion in fiscal year 2007 in order to help fund the 

expected $3.3 billion escrow requirement for 2007. 

Since enactment of the reform law, the Service has updated its expense 

projections. While the Service’s total expenses for fiscal year 2007 have 

been affected by passage of the act, those expenses not directly related to 

the act and total revenues have tracked closely to plan. The Service 

currently is estimating an overall fiscal year 2007 net loss of $5.2 billion, 

largely due to changes in either projected or actual Postal Service 

payments as a result from the act including: 

• Accelerating funding of the Service’s retiree health benefit obligations: 

Beginning this fiscal year, the Postal Service must make the first of 10 

annual payments into a newly created Postal Service Retiree Health 

Benefits Fund (PSRHBF) to help fund the Service’s significant unfunded 

retiree health obligations. The 2007 payment of $5.4 billion is due to be 

paid by September 30. The Service has accrued half of this expense— $2.7 

billion—during the first 6 months of the fiscal year and will accrue $1.35 

billion in each of the remaining 2 quarters. 

• One-time expensing of funds previously set aside in escrow and 

eliminating future escrow payments: The act requires the Service to 

transfer the $3.0 billion it escrowed in fiscal year 2006 to the PSRHBF, 

which the Service recognized as a one-time expense in the first quarter of 

fiscal year 2007.10 The reform act also eliminated future escrow payments 

required under the 2003 pension law, including the $3.3 billion payment 

scheduled for fiscal year 2007. 

 10The Postal Civil Service Retirement System Funding Reform Act of 2003 required the 

Postal Service to escrow the reduction in its civil service pension expenses that resulted 

from changes to how the Service funded these pensions. 
Page 10 GAO-07-685T 

• Transferring funding for selected military service benefits back to the 

Treasury: The act significantly reduced the Service’s civil service pension 

obligations by transferring responsibility for funding civilian pension 

benefits attributable to the military service of the Service’s retirees back to 

the Treasury Department, where it had been prior to enactment of the 

2003 pension law. The reform act requires that any overfunding 

attributable to the military benefits as of September 30, 2006, be 

transferred to the PSRHBF by June 30, 2007.11

• Eliminating certain annual Civil Service Retirement System (CSRS) 

pension funding requirements: The act eliminated the requirement that the 

Service fund the annual normal cost of its civil service employees and the 

amortization of the unfunded pension obligation that existed prior to 

transferring the military service obligations to the Treasury Department.12

The Service estimates that it will save $1.5 billion in fiscal year 2007 from 

eliminating the annual pension funding requirements and amortization 

payments. 

The result of these payments is a net increase in retirement-related 

expenses of $3.9 billion,13 which is $600 million higher than the expected 

$3.3 billion escrow payment for 2007 that was eliminated. Thus, the 

Service is planning to borrow $600 million more than initially budgeted to 

cover this shortfall. This increase is anticipated to result in the Service’s 

borrowing $1.8 billion in fiscal year 2007, which would bring its total 

outstanding debt to $3.9 billion by the end of the fiscal year. 

The Service has identified other factors and uncertainties that, depending 

on how results vary from budgeted estimates, could have a favorable or 

unfavorable impact on the Service’s projected net loss for fiscal year 2007. 

For example, volumes and revenues may be affected by a continued 

slowdown in the U.S. economy or unanticipated consequences of the 

recent rate decision. The Service has anticipated economic growth to pick 

up in the third and fourth quarters of this year, but a slowdown may 

depress volume growth below projected levels for the rest of the year. 

 11The Office of Personnel Management has preliminarily estimated the overfunding to be 

more than $16 billion. 

12The reform act delays resumption of payments from the Postal Service to liquidate any 

pension underfunding until September 30, 2018. 

13The $3.9 billion net increase in retirement-related expenses is comprised of the $5.4 

billion retiree health payment due to the PSRHBF by September 30, 2007, and the $1.5 

billion reduction in the Service’s pension expenses through fiscal year end. 
Page 11 GAO-07-685T 

Furthermore, the unusual nature of the rate case creates uncertainties for 

the Service that may affect its financial results. These uncertainties 

include how the Service and its customers will respond to the: 

• limited implementation times—the 2-month implementation period (the 

Postal Service Board of Governors decision on March 19, 2007, stated that 

most new rates would become effective on May 14, 2007) leaves little time 

for the Service to educate the public and business mailers on the new rate 

changes and to allow mailers sufficient time to adjust their mailing 

practices and operations accordingly; 

• delayed implementation times—how mailers and the Service will be 

affected by the delay in implementing new Periodical rates until mid-July; 

• magnitude of certain restructured rates, particularly for those specific 

types of mail that will experience rather significant increases, and the 

related impact on volumes and revenues; and 

• unfamiliarity with restructured rates—the prices for many popular 

products, such as certain types of First-Class Mail, will experience 

significant shifts based on the shape of the mail. For example, figure 2 

shows how the cost of First-Class Mail will differ based on its shape. 
Page 12 GAO-07-685T 

Figure 2: Cost of First-Class Mail Will Differ Based on Shape of Mail under New Rate System 

Moreover, the Service’s expense projections may be susceptible to rising 

fuel prices due to the Service’s vulnerability in this area or that the 

outstanding contract negotiations for two of its major labor unions would 

vary from projected levels. Although the extent to which these factors and 

uncertainties will affect the Service’s financial condition for fiscal year 

2007 is not known, they may affect its subsequent financial outlook. For 

example, if the Service finds that its financial performance and condition 

is weakening—either through revenue shortfalls or expense increases—it 

may decide to file another rate increase later this year. 

The new postal reform law provides new opportunities to address 

challenges facing the Service as it continues its transformation in a more 

competitive environment with a variety of electronic alternatives for 

communications and payments. Specifically, it provides tools and 

mechanisms to address the challenges of generating sufficient revenues, 

controlling costs, maintaining service, providing reliable performance 

information, and managing its workforce. Effectively using these tools will 

Postal Reform Law 

Provides 

Opportunities to 

Address Challenges 

Letter to be mailed Mailing options for First-Class

Mail weighing 1 ounce or less

Difference in price is due

primarily to how mail is handled

Single sheet of paper

(8-1/2” x 11”)

Placed unfolded in larger “flat-sized”

envelope (e.g., 9” x 12” manila envelope)

Folded and placed in

letter-sized envelope

41¢

80¢

Automated equipment typically

sorts this mail into the order it

is to be delivered.

Letter carriers manually sort 

flat-sized mail into the order

it is to be delivered, a more

 costly procedure.

Source: GAO.
Page 13 GAO-07-685T 

be key to successfully implementing the act and addressing these 

challenges. 

The Service continues to face challenges in generating sufficient revenues 

as First-Class Mail volume continues to decline and the mail mix changes. 

First-Class Mail, historically the class of mail with the largest volumes and 

revenues, saw volume shrink by almost 6 percent from fiscal year 2001 to 

2006. The trends for First-Class Mail and Standard Mail, which currently 

combine for about 95 percent of mail volumes and 80 percent of revenues, 

experienced a historical shift in fiscal year 2005. For the first time, 

Standard Mail volumes exceeded those for First-Class Mail (see fig. 3). 

Figure 3: Standard Mail Volumes Are Outpacing Those for First-Class Mail 

Note: First-Class Mail volume does not include Priority Mail. 

This shift has major revenue implications because: 

Generating Sufficient 

Revenue as First-Class 

Mail Volume Is Declining 

and Mail Mix Is Changing 

Mail pieces in billions

Source: Postal Service Annual Reports.

Fiscal year

Standard Mail

First-Class Mail

50

0

60

70

80

90

100

110

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Page 14 GAO-07-685T 

• First-Class Mail generates the most revenue and is used to finance most of 

the Service’s institutional (overhead) costs (see fig. 4). 

• Standard Mail generates less revenue per piece compared to First-Class 

Mail and it takes about two pieces of Standard Mail to make the same 

contribution to the Service’s overhead costs as one piece of First-Class 

Mail. 

• Standard Mail is a more price-sensitive product compared to First-Class 

Mail because it competes with other advertising media. Also, because 

advertising, including Standard Mail, tends to be affected by economic 

cycles to a greater extent than First-Class Mail, a larger portion of the 

Service’s mail volumes is more susceptible to economic fluctuations. 

Figure 4: Mail Volume, Revenues, and Contribution to Cover Overhead Costs, Fiscal Year 2006 

a

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

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

The act provides tools and mechanisms that can help address these 

revenue challenges by promoting revenue generation and retention of 

revenues. The act established flexible pricing mechanisms for the Service’s 

6%

46% 48%

22%

27%

51%

8%

27%

65%

Source: Postal Service.

Other mail and servicesa

Standard Mail

First-Class Mail

Other mail and servicesa

Standard Mail

First-Class Mail

Other maila

First-Class Mail

Standard Mail

Mail volume Revenues Contribution to cover overhead cost
Page 15 GAO-07-685T 

competitive and market-dominant products.14 For example, it allows the 

Service to raise rates for its market-dominant products, such as First-Class 

Mail letters, Standard Mail, and Periodicals, up to a defined price cap; 

exceed the price cap should extraordinary or exceptional circumstances 

arise; and use any unused rate authority within 5 years. For its competitive 

products, such as Priority Mail or Expedited Mail, the Service may raise 

rates as it sees fit, as long as each competitive products covers its costs 

and competitive products as a whole cover their attributable costs and 

make a contribution to overhead. 

The act also allows for the Service to retain any earnings, which may 

promote increased financial stability. First, to the extent the Service can 

generate net income to retain earnings, this could enhance its ability to 

weather economic downturns. For example, a slow economic cycle or 

sudden increase in fuel prices might not necessitate an immediate rate 

increase if sufficient retained earnings exist to cover related shortfalls. 

Furthermore, to the extent the Service can retain earnings as liquid assets, 

it may reduce the Service’s reliance on borrowing to offset cash shortfalls. 

The Service has stated that it will take out debt to cover cash shortfalls in 

fiscal year 2007 and projects that this increase will result in $3.9 billion of 

outstanding debt at the end of the year (see fig. 5). Controlling debt will be 

important because the Service needs to operate within its statutorily set 

borrowing limits ($3 billion in new debt each year, and $15 billion in total 

debt outstanding). Reducing debt was one of the key factors we cited in 

removing the Service’s high-risk designation. 

 14Sections 201 and 202 lists which products are market-dominant and competitive. 
Page 16 GAO-07-685T 

Figure 5: The Service Projects Nearly $4 Billion in Outstanding Debt at the End of 

Fiscal Year 2007 

Uncertainties related to the recent rate decision and reform law may 

impact the extent to which the Service is able to address its revenue 

related challenges. The uncertainties include: 

• How will mailers and volume respond to the new rate decision’s pricing 

signals? 

• What types of innovative pricing methods will be allowed? 

• How will the Service set rates under the new price cap system, and how 

will mailers respond to this additional flexibility? How will the Service and 

mailers be able to modify their information systems to accommodate more 

frequent rate increases? 

• How will customer behavior change as prices change under the new 

system? To what extent will customers desire for mail be affected by 

privacy concerns, environmental concerns, preference for electronic 

0

2

4

6

8

10

12

2007

(projected)

2000 2001 2002 2003 2004 2005 2006

Dollars in billions

Source: GAO analysis of Postal Service data.

Fiscal year

9.3

11.3 11.1

7.3

1.8

2.1

0.0

3.9
Page 17 GAO-07-685T 

alternatives, or efforts to establish Do Not Mail lists?15

• How will the Service be able to enhance the value of its market-dominant 

and competitive products (e.g., predictable and consistent service, 

tracking and tracing capabilities, etc.)? 

• What will the Service do with any retained earnings (e.g., improve its 

capital program, save to weather downturns in the economy)? 

The Service faces multiple cost pressures in the near- and long-term 

associated with the required multi-billion dollar payments into the 

PSRHBF, dealing with key cost categories experiencing above-inflation 

growth while operating under an inflationary-based price cap, and other 

costs associated with providing universal postal services to a growing 

network—one now expanding by about 2 million new addresses each year. 

While the reform act takes actions that increase current costs by 

improving the balance of retiree health benefit cost burdens between 

current and future ratepayers, it also eliminates other payments and 

provides opportunities to offset some of these costs pressures through 

efficiency gains that could restrain future rate increases. It will be crucial 

for the Service, however, to take advantage of this opportunity and 

achieve sustainable, realizable cost reductions and productivity 

improvements throughout its networks. 

Personnel expenses (which include wages, employee and retiree benefits, 

and workers’ compensation) have consistently accounted for nearly 80 

percent of annual operating expenses, even though the Service has 

downsized its workforce by over 95,000 employees since fiscal year 2001. 

The Service’s personnel expenses have grown at rates exceeding inflation 

since fiscal year 2003 and are expected to continue dominating the 

Service’s financial condition. In particular, growth in retiree health benefit 

costs have, on average over the last 5 years, exceeded inflation by almost 

13 percent each year. This growth is expected to continue due to (1) rising 

premiums, growth in the number of covered retirees and survivors, and 

increases in the Service’s share of the premiums; and (2) the Service will 

continue paying the employer’s share of the health insurance premiums of 

its retirees along with the required payments ranging from $5.4 billion to 

 15As part of the reform act, GAO is required to issue a report on the activities of the Postal 

Service to promote recycling and other opportunities for improvement in this area. 

Controlling Costs and 

Improving Productivity 
Page 18 GAO-07-685T 

$5.8 billion into the PSRHBF in each of the following 9 years. While we 

recognize the cost pressures that will be placed on the Service as it begins 

prefunding its retiree health benefits obligations, we continue to believe 

that such action is appropriate to improve the fairness and balance of cost 

burdens for current and future ratepayers. Furthermore, beginning in 

fiscal year 2017, the Service might enjoy a significant reduction in its 

retiree health costs if its obligations are fully funded. 

In addition to these personnel expenses, the Service has also experienced 

growth in its transportation costs that exceeded the rate of inflation in 

fiscal years 2005 and 2006. Transportation costs represent the second 

largest cost category behind compensation and benefits. These costs grew 

by about 11 percent from fiscal year 2005 to 2006, largely due to rising fuel 

costs. In a February 2007 report, we stated that the Service is vulnerable to 

fuel price fluctuations and will be challenged to control fuel costs due to 

its expanding delivery network and inability to use surcharges.16

The Service has made some progress in containing cost growth, and 

pledged to cut another $5 billion of costs out of its system between fiscal 

years 2006 and 2010 through productivity increases and operational 

improvements. The Service has reported productivity increases for the last 

7 years, but the reported increase in fiscal year 2006 was its smallest 

during this period. The Service has recently had trouble absorbing gains in 

mail volumes while achieving targeted workhour reductions. Although the 

Service has reduced its workhours in 6 of the last 7 years, in fiscal year 

2006, its goal was to reduce workhours by 42 million, but the Service 

reported a decrease of only 5 million workhours. 

While both the recent rate decision and reform act seek to improve 

efficiencies in the postal networks, these developments will pose 

challenges to the Service. In terms of the rate case, the Service will be 

challenged to modify its mail processing and transportation networks to 

respond to changes in mailer behaviors (e.g., in the quantity and types of 

mail sent and how mail is prepared) to minimize their rates. Furthermore, 

the reform act provides an opportunity to address the Service’s cost 

challenges because it requires the Service to develop a plan that, among 

other things, includes a strategy for how the Service intends to rationalize 

 16GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices Requires Improved 

Tracking and Monitoring of Consumption Information, GAO-07-244 (Washington, D.C.: 

Feb. 16, 2007). 
Page 19 GAO-07-685T 

the postal facilities network and remove excess processing capacity and 

space from the network, as well as identifying the costs savings and other 

benefits associated with network rationalization alternatives discussed in 

the plan. This plan provides an opportunity to address some concerns we 

have raised in previous work, in which we stated that it was not clear how 

the Service intended to realign its processing and distribution network and 

workforce, and that its strategy lacked sufficient transparency and 

accountability, excluded stakeholder input, and lacked performance 

measures for results.17 We are currently conducting ongoing work on the 

Service’s progress in this area over the past 2 years and will be issuing a 

report this summer with updated findings. 

Taking advantage of the opportunities available will have a direct impact 

on the Service’s ability to operate under an inflationary-based rate cap, 

achieve positive results, and limit the growth in its debt. If the Service is 

unable to achieve significant cost savings, it may have to take other 

actions such as borrow an increasing amount each year to make year-end 

property and equipment purchases and fund its retiree health obligations. 

The following uncertainties may have a significant impact on the Service’s 

ability to achieve real cost savings and productivity in the future: 

• How will operating under a rate cap provide an incentive to control costs? 

• How will the Service operate under a rate cap, if certain key costs 

continue to increase at levels above inflation (e.g., health benefit costs)? 

• How will the new rate designs/structure lead to efficiency improvements 

throughout the mail stream? 

• Will the Service’s implementation of its network realignment result in 

greater cost savings and improved efficiency? 

• Will the Service achieve its expected return on investment and operational 

performance when it deploys the next phase of automated flat sorting 

equipment? 

 17GAO, U.S. Postal Service: The Service’s Strategy for Realigning Its Mail Processing 

Infrastructure Lacks Clarity, Criteria, and Accountability, GAO-05-261 (Washington, 

D.C.: Apr. 8, 2004). 
Page 20 GAO-07-685T 

• How will the Service’s financial situation be impacted when the 10-year 

scheduled payments into the PSRHBF are completed? 

• Will the balance of the PSRHBF—which is a function of the PSRHBF’s 

investment returns and the growth in the Service’s retiree health 

obligations—be sufficient to cover the Service’s retiree health obligation 

by the end of fiscal year 2016? 

The Service will be challenged to continue carrying out its mission of 

providing high-quality delivery and retail services to the American people. 

Maintaining these services while establishing reliable mechanisms for 

measuring and reporting performance will be critical to the Service’s 

ability to effectively function in a competitive market and meet the needs 

of various postal stakeholders, including: 

• The Service—so that it can effectively manage its nationwide service and 

respond to changes and/or problems in its network. 

• The Service’s customers (who may choose other alternatives to the 

mail)—so that they are aware of the Service’s expected performance, can 

tailor their operations to those expectations, and understand the Service’s 

actual performance against those targets. 

• Oversight bodies—so that they are aware of the Service’s ability to carry 

out its mission while effectively balancing costs, service needs, and the 

rate cap; can hold the Service accountable for its performance; and 

understand service performance (whether reported problems are 

widespread or service is getting better or worse). 

The Service’s delivery performance standards and results have been a 

long-standing concern for mailers and Congress.18 We found inadequate 

information is collected and available to both the Service and others to 

understand and address delivery service issues. Specifically, the Service 

does not measure and report its delivery performance for most types of 

mail (representative measures of delivery performance cover less than 

one-fifth of mail volume and do not include key types of mail such as 

Standard Mail, bulk First-Class Mail, Periodicals, and most Package 

Services), certain performance standards are outdated; and that progress 

 18GAO, U.S. Postal Service: Delivery Performance Standards, Measurement, and 

Reporting Need Improvement, GAO-06-733 (Washington, D.C.: July 27, 2006). 

Maintaining, Measuring, 

and Reporting Service 
Page 21 GAO-07-685T 

has been hindered by a lack of management commitment and 

collaboration by the Service and mailers. Based on these findings, we 

recommended the Service take actions to modernize its delivery service 

standards, develop a complete set of delivery service measures, more 

effectively collaborate with mailers, and improve transparency by publicly 

disclosing delivery performance information. 

The Service has recently reported positive delivery results for the limited 

segment of mail for which the Service does track performance. It has 

reported on-time delivery performance improved in the first quarter of 

fiscal year 2007 for some single-piece First-Class Mail.19 However, issues 

such as late deliveries have been reported in places such as Chicago, Los 

Angeles, and El Paso; and for different types of mail such as Standard Mail 

and Periodicals. Figure 6 shows that delivery performance in Chicago for 

this type of mail was worse than the national average at the end of the first 

quarter for this fiscal year. 

 19The External First-Class Measurement System (EXFC) measures delivery performance 

for single-piece First-Class Mail deposited in collection boxes in selected areas of the 

country. EXFC is not a systemwide measurement of all First-Class Mail performance. 
Page 22 GAO-07-685T 

Figure 6: Delivery Performance in Chicago Was Below the National Average for 

Some Single-Piece First-Class Mail at the end of First Quarter, Fiscal Year 2007 

The reform act provides an opportunity for the Service to address this 

challenge by establishing requirements for maintaining, measuring, and 

reporting on service performance. Specifically, the act identified four key 

objectives for modern service standards: 

• enhance the value of postal services to both senders and recipients; 

• preserve regular and effective access to postal services in all communities, 

including those in rural areas or where post offices are not self-sustaining; 

• reasonably assure Postal Service customers delivery reliability, speed, and 

frequency consistent with reasonable rates and best business practices; 

and 

• provide a system of objective external performance measurements for 

each market-dominant product as a basis for measurement of Postal 

Service performance. 

70

0

75

80

85

90

95

100

1 day 2 days 3 days

Percentage of on-time delivery

Source: GAO analysis of Postal Service delivery information.

Delivery standard

Chicago

Nation

89

95

81

91

71

86
Page 23 GAO-07-685T 

The act also required the Service to implement modern delivery 

performance standards, set goals for meeting these standards, and 

annually report on its delivery speed and reliability for each marketdominant product. Key steps specified in the act include that within 12 

months of enactment (by December 2007) the Service must issue modern 

service standards, and within 6 months of issuing service standards the 

Service must, in consultation with the PRC, develop and submit to 

Congress a plan for meeting those standards. Furthermore, within 90 days 

after the end of each fiscal year the Service must report to PRC on the 

quality of service for each market-dominant product in terms of speed of 

delivery and reliability, as well as the degree of customer satisfaction with 

the service provided.20

These requirements provide opportunities to resolve long-standing 

deficiencies in this area. As the Service transitions to the new law, the 

following uncertainties may impact its ability to address challenges in 

maintaining, measuring, and reporting service performance in the future: 

• How will the Service implement representative measures of delivery speed 

and reliability within the timeframes of the reform act, while taking cost 

and technological limitations into account? 

• How much transparency will be provided to the PRC, Congress, mailers, 

and the American people, including the frequency, detail, and methods of 

reporting? 

Another challenge facing the Service is to provide reliable data to 

management, regulators, and oversight entities to assess financial 

performance. Accurate and timely data on Service costs, revenues, and 

mail volumes helps provide appropriate transparency and accountability 

for all postal stakeholders to have a comprehensive understanding of the 

Service’s financial condition and outlook and how postal rates are aligned 

with costs. Earlier I discussed the past issues we have raised related to the 

Service’s financial reporting and the improvements that the Service has 

 20The act further stipulates that the PRC must provide an opportunity for public comment 

on the report and must, within 90 days of receiving the annual service data from the Postal 

Service, make a written determination of compliance as to whether any service standards 

were not met. If PRC finds noncompliance, it is required to order the Service to take such 

action as PRC considers appropriate to achieve compliance. PRC also can fine the Service 

in cases of deliberate noncompliance. 

Financial Performance 

Reporting 
Page 24 GAO-07-685T 

recently made. We have also reported on the long-standing issues of 

ratemaking data quality that continue to persist.21

The act establishes new reporting and accounting requirements that 

should help to address this challenge. The major change is the 

establishment of, and authority provided, to the new PRC to help enhance 

the collection and reporting of information on postal rates and financial 

performance (see table 2). 

Table 2: Selected PRC Responsibilities for Financial Transparency, Oversight, and Accountability 

Subject PRC Responsibilities 

Oversight of market-dominant products • Prescribes by regulation the form and content of annual Service reports that analyze 

costs, revenues, and rates, using methods that PRC must prescribe, and in sufficient 

detail to demonstrate compliance with applicable requirements. Specify which reported 

information shall be made public. Initiate proceedings as necessary to improve the 

quality, completeness, or accuracy of this information. 

• Annually determine whether rates are in compliance, after providing an opportunity for 

public comments on the Service’s annual reports. 

• If rates are not in compliance, order the Service to take appropriate action to come into 

compliance and remedy the effects of noncompliance, such as ordering rates to be 

adjusted to lawful levels. 

• Consider any complaints that rates are not in compliance, which stakeholders may file at 

any time during the year. 

Oversight of competitive products • Establish regulations that ensure that each competitive product covers its attributable 

costs, prohibits the cross-subsidization of competitive products by market-dominant 

products, and ensures that competitive products collectively cover what PRC determines 

to be an appropriate share of the Service’s institutional costs (overhead costs). 

• Consider any complaints that stakeholders may file at any time during the year. If 

noncompliance is found, PRC must order the Service to take appropriate action to come 

into compliance and remedy the effects of any noncompliance, such as requiring the 

Service to make up for revenue shortfalls in competitive products. 

 21GAO, U.S. Postal Service: Improving Ratemaking Data Quality through Postal Service 

Actions and Postal Reform Legislation, GAO-05-820 (Washington, D.C.: July 28, 2005). 
Page 25 GAO-07-685T 

Subject PRC Responsibilities 

Financial reporting • Receive annual, quarterly, and other periodic reports from the Service that contain 

information required by the Securities and Exchange Commission (SEC) for registrantsa

The annual report must also include information on the Service’s pension and postretirement health obligations. Receive reports on the Service’s compliance with rules 

prescribed by the SEC for registrants in implementing section 404 of the Sarbanes-Oxley 

Act of 2002. Initiate proceedings as necessary to improve the quality, completeness, or 

accuracy of this information. 

• Establish the accounting principles and practices that the Service must follow. 

• In establishing the Service’s accounting principles and practices, consider 

recommendations of the Department of the Treasury, including how to value assets and 

liabilities associated with providing competitive products, among other factors. 

Source: Pub.L. No. 109-435. 

a

The Postal Service is deemed the “registrant” by the reform act, however the Service is not a 

registrant for the purposes of submitting reports to the SEC. 

Service officials have acknowledged the importance of financial reporting, 

but stated that there are cost implications associated with these 

improvements. The Service has recognized that it will incur costs in 

complying with the Securities and Exchange Commission’s (SEC) internal 

control reporting rules and by changes needed to provide separate 

information for competitive and market-dominant products. We have 

reported that significant costs have been associated with complying with 

the SEC’s implementing regulations for section 404 of the Sarbanes-Oxley 

Act, but have also reported that costs are expected to decline in 

subsequent years given the first-year investment in documenting internal 

controls.22

As the Service transitions to these new reporting and accounting 

requirements, its ability to address future challenges in this area will be 

impacted by uncertainties including: 

• How will the PRC use its discretion to define and implement the new 

statutory structure? 

• What criteria will PRC use for evaluating the quality, completeness, and 

accuracy of ratemaking data, including the underlying accounting data and 

 

 22GAO, Internal Control: Analysis of Joint Study on Estimating the Costs and Benefits of 

Rendering Opinions on Internal Control over Financial Reporting in the Federal 

Environment, GAO-06-255R (Washington, D.C.: Sept. 6, 2006); Sarbanes-Oxley Act: 

Consideration of Key Principles Needed in Addressing Implementation for Smaller 

Public Companies, GAO-06-361 (Washington, D.C.: Apr. 13, 2006). 
Page 26 GAO-07-685T 

additional data used to attribute costs and revenues to specific types of 

mail? 

• How will PRC balance the need for high-quality ratemaking data with the 

time and expense involved in obtaining the data? 

• How will PRC structure any proceedings to improve the quality of 

ratemaking data and enable the Service and others to participate in such 

proceedings? What proceedings might PRC initiate to address data quality 

deficiencies and issues that PRC has raised in its recent decision on the 

rate case? 

• How will the Service be impacted by the costs associated with complying 

with the SEC rules for implementing section 404 of the Sarbanes-Oxley 

Act, as well as for the requirement of separate information for competitive 

and market-dominant products? 

The Service will be challenged to manage its workforce as it transitions to 

operating in a new postal environment. The Service is one of the nation’s 

largest employers, with almost 800,000 full and part-time workers. 

Personnel-related costs, which include compensation and benefits, are the 

Service’s major cost category and are expected to increase due to the 

reform legislation requirements to begin prefunding retirement health 

benefit costs. We have reported on the human capital challenges facing the 

Service, but have found the Service has made progress in addressing some 

of these challenges by managing retirements, downsizing, and expanding 

the use of automation.23

Provisions in the reform act related to workforce management can build 

on these successes. As part of the Postal Service Plan mandated by the act, 

the Service must describe its long-term vision for realigning its workforce 

and how it intends to implement that vision. This plan is to include a 

discussion of what impact any facility changes may have on the postal 

workforce and whether the Postal Service has sufficient flexibility to make 

needed workforce changes. 

The Service, however, faces human capital challenges that will continue to 

impact its financial condition and outlook: 

 23GAO-04-108T and GAO-05-453T. 

Managing Its Workforce 
Page 27 GAO-07-685T 

• Outstanding labor agreements: Labor agreements with the Service’s four 

major unions expired late in calendar year 2006. In January 2007, the 

Service reached agreements with two of these unions, including semiannual cost-of-living adjustments (COLA) and scheduled salary increases. 

Labor agreements, however, remain outstanding for the other two unions 

that cover over 42 percent of its career employees. 

• Workforce realignment: As the Service continues to make significant 

changes to its operations (i.e., rationalize its facilities, increase 

automation, improve retail access, and streamline its transportation 

network), it will be challenged to realign its workforce based on these 

changes. This challenge may become more significant as mailers alter their 

behavior in response to the new rate structure. These actions will require a 

different mix in the number, skills, and deployment of its employees, and 

may involve repositioning, retraining, outsourcing, and/or reducing the 

workforce. 

• Retirements: The Service expects a significant portion of its career 

workforce—over 113,000 employees—to retire within the next 5 years. In 

particular, it expects nearly half of its executives to retire during this time. 

The Service’s decisions regarding these retirements (that is, whether or 

not to fill these positions, and if so, when, with whom, and where) may 

have significant financial and operational effects. 

The following uncertainties will affect the Service’s ability to address 

workforce-related challenges in the future: 

• How will the Service be able to respond to operational changes? How will 

the Service balance the varying needs of diverse customers when 

realigning its delivery and processing networks? 

• How will employees and employee organizations be affected and informed 

of network changes and how will the Service monitor the workplace 

environment? 

• How will the resolutions to the outstanding labor agreements affect the 

Service’s financial condition? 

• How will the Service take advantage of flexibilities, including allowing 

more casual workers to deal with peak operating periods? 
Page 28 GAO-07-685T 

The Postal Service, the PRC, and mailers face a challenging environment 

with significant changes to make in the coming months related to 

implementing the recent rate decision and the new postal reform law. We 

have identified several major issues considered significant by various 

postal stakeholders, as well as areas related to implementation of the law 

that will warrant continued oversight. Specifically, focusing attention on 

these issues during this important transition period will help to ensure that 

the new statutory and regulatory requirements are carried out according 

to the intent of the reform act and that the Service’s future financial 

condition is sound. These key issues and areas for continued oversight 

include: 

• the effect of the upcoming rate increases and statutory changes on the 

Postal Service’s financial condition; 

• the decision by the Service whether or not to submit a rate filing under the 

old rate structure; 

• actions by the PRC to establish a new price-setting and regulatory 

framework; 

• the Service’s ability to operate under an inflationary price cap while some 

of its cost segments are increasing above the rate of inflation; 

• actions by the Service, in consultation with the PRC, to establish modern 

service standards and performance measures, and the Postal Service’s 

plan for meeting those standards; 

• the Service’s ability to maintain high-quality delivery service as it takes 

actions to reduce costs and realign its infrastructure and workforce; and 

• the PRC’s development of appropriate accounting and reporting 

requirements aimed at enhancing transparency and accountability of the 

Service’s internal data and performance results. 

One of the most important decisions for monitoring in the short term is 

whether or not the Service decides to file another rate increase before the 

new rate structure takes effect. The trade-offs involved in the Service’s 

decision on whether to file under the new or old systems include weighing 

the respective costs, benefits, and possible unintended consequences of 

the Service’s need for new rates along with the time and resources 

required by the Service, the PRC, and the mailing industry to proceed 

under either the new or old systems. For example, the Service may benefit 

from filing under the old system because it would allow the Service to 

Key Issues and Areas 

for Continued 

Oversight 
Page 29 GAO-07-685T 

further align costs with prices prior to moving into price-cap restrictions. 

Under the old rules, the Service would have to satisfy the “break-even” 

requirements that postal revenues will equal as nearly as practicable its 

total estimated costs. Under the new rules, the Service would have to 

ensure that rate increases for its market-dominant products do not exceed 

a cap based on the growth in the Consumer Price Index. Filing under the 

old system, however, could put additional strain on mailers and the PRC. 

In particular, the PRC would be reviewing the Service’s rate submission 

while transitioning to its new roles and responsibilities under the 

legislation—establishing a new organization structure, a new regulatory 

framework with new rules and reporting requirements, which must 

include time for public input, and a multitude of additional requirements. 

Recognizing these challenges, the Chairman of the PRC has suggested 

(and asked for public comments on) that rather than expending resources 

on extending the application of the old system, the PRC would work with 

the Service and mailers to implement the new regulatory systems even 

sooner than the 18 months allotted by the new law. This action could 

allow the Service to implement new rates sooner under the new regulatory 

system depending upon when the PRC completes its work and the Service 

chooses to file new rates. The Service’s decision will not only impact its 

financial performance and condition, but also the mailing industry and the 

focus of the PRC. 

Another key provision of the law that warrants close oversight is the 

requirement for the Service to develop modern service standards. We are 

encouraged by the Service’s actions to date to establish a workgroup that 

includes participants from the mailing industry to review and provide 

recommendations on service standards and measures. This workgroup is 

expected to complete their work in September of this year, and the Service 

is to make its decisions on the new service standards by December 20, 

2007. The Service then has 6 months to provide Congress with a plan on 

how it intends to meet these standards, as well as its strategy for 

realigning and removing excess capacity from the postal network. We 

believe this plan is a particularly important opportunity to increase 

transparency in these areas, particularly given the changes to the Service’s 

plans for network realignment and the limited information available to the 

public. We will be reporting this summer on the status and results of the 

Service’s efforts to realign its mail processing network. 

Finally, the PRC’s role in developing reporting requirements is critical to 

enhancing the Service’s transparency regarding its performance results. 

Congress was particularly mindful in crafting the reform act to ensure that 
Page 30 GAO-07-685T 

the provisions for additional pricing flexibility were balanced with 

increased transparency, oversight, and accountability. The new law 

provides the regulator with increased authority to establish reporting rules 

and monitor the Service’s compliance with service standards on an annual 

basis. 

The successful transformation of the Postal Service will depend heavily 

upon innovative leadership by the Postmaster General and the Chairman 

of the PRC, and their ability to work effectively with their employees, 

employee organizations, the mailing industry, Congress, and the general 

public. It will be important for all postal stakeholders to take full 

advantage of the unique opportunities that are currently available by 

providing input and working together, particularly as challenges and 

uncertainties will continue to threaten the Service’s financial condition 

and outlook. 

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

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

Subcommittee may have. 

For further information regarding this statement, please contact Katherine 

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

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

statement included Teresa Anderson, Joshua Bartzen, Kenneth John, John 

Stradling, Jeanette Franzel, Shirley Abel, Scott McNulty, and Kathy 

Gilhooly. 

Contact and 

Acknowledgments 
Page 31 GAO-07-685T 

Date Description 

Rate increase, 

on-average 

First-Class 

stamp ratea

5/3/06 Postal Service submits proposal to Postal Rate Commission (PRC)b

• Requests rate increases effective May 2007. 

• Proposes Forever StampC

• Establishes pricing structure based on mail weights and shapes: 

• Revises old structure which was primarily weight-based. 

• Recognizes that different mail shapes have different processing costs. 

• Gives mailers an opportunity to minimize their rates by altering shape of mail. 

8.1 percent 42 cents 

2/26/07 PRC issues recommended decision on Service’s proposal 

• Issued after detailed administrative proceeding involving mailers, employee 

organizations, consumer representatives and competitors. 

• Recommends revisions to many of the rates and rate designs submitted by the 

Service: 

• Increases rates substantially for some types of mail. 

• Revised rates are intended to more accurately reflect costs and send proper 

pricing signals. 

• Approves Forever Stamp. 

• Concurs with shape-based pricing structure and, according to the PRC, the 

change in rates will still meet the Service’s revenue needs. 

• Anticipated that this would have been the last rate case initiated prior to 

implementation of the new rate structure established under the reform legislation 

and explained that its recommended rates are intended to provide a sound 

foundation for the future. 

7.6 percent 41 cents 

3/19/07 Postal Service’s Board of Governors issues decision to implement PRCrecommended rates 

• Implements most rates effective May 14, 2007. 

• Asks PRC to reconsider some rates, most notably those for flat-sized Standard 

Mail, which is generally advertising and direct mail solicitations (this could lead to 

further changes in these rates). 

• Delays rate implementation for Periodicals for over 2 months, citing reactions of 

magazine mailers and the publishing industry’s need to update software. 

• Begins sale of Forever Stamp starting April 12; stamp will be valid for postage 

starting May 14. 

7.6 percent 41 cents 

Source: U.S. Postal Service and Postal Regulatory Commission documents. 

a

First-Class stamp prices cover letters weighing up to 1 ounce that are sent via First-Class Mail. 

b

The name of the Postal Rate Commission was changed to the Postal Regulatory Commission due to 

provisions of the Postal Reform and Enhancement Act. 

c

The Forever Stamp will sell at the First-Class one-ounce letter rate, and will continue to be worth the 

price of a First-Class one-ounce letter even if that price changes. 

Appendix I: Summary of Recent Rate 

Developments 

(542112) 
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