United States General Accounting Office 

GAO Testimony 

Before the Senate Committee on 

Governmental Affairs 

For Release on Delivery 

Expected at 2:00 p.m. EST 

Wednesday, November 5, 2003 U.S. POSTAL SERVICE 

Bold Action Needed to 

Continue Progress on Postal 

Transformation 

Statement of David M. Walker, 

Comptroller General of the United States 

GAO-04-108T 

Highlights of GAO-04-108T, a testimony 

before the Senate Committee on 

Governmental Affairs 

Last year the President established 

a commission to examine the 

future of the U.S. Postal Service 

(the Service). Its report, issued in 

July 2003, contained a proposed 

vision for the Service and 

recommendations to ensure the 

viability of postal services. GAO 

was asked to discuss (1) its 

perspective on the commission’s 

report and (2) suggestions for next 

steps. This testimony is based on 

GAO’s analysis of the 

Commission’s report and prior 

GAO reports and testimonies. 

GAO believes that Congress should 

consider the Commission’s 

recommendations and enact 

comprehensive postal reform 

legislation that would clarify the 

Service’s mission and role; enhance 

governance, accountability, 

oversight, and transparency; 

improve regulation of postal rates; 

and make human capital reforms. 

GAO also recommends that the 

Postmaster General develop a 

comprehensive plan to optimize its 

infrastructure and workforce, in 

collaboration with its key 

stakeholders, and make it publicly 

available. In addition, the 

Postmaster General should provide 

periodic updates to Congress and 

the public on the status of 

implementing its transformation 

initiatives and other Commission 

recommendations that fall within 

the scope of its existing authority. 

Postal officials have agreed to take 

these actions. 

www.gao.gov/cgi-bin/getrpt?GAO-04-108T. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Bernard L. 

Ungar at (202) 512-2834 or ungarb@gao.gov. 

November 5, 2003 

U.S. POSTAL SERVICE 

Bold Action Needed to Continue Progress 

on Postal Transformation 

The Commission found that the Service faces a bleak fiscal outlook. The 

Service has an outdated and inflexible business model amid a rapidly 

changing postal landscape. First-Class Mail appears to be on the brink of 

long-term decline as Americans take advantage of cheaper electronic 

alternatives. Thus, universal postal service is at risk. These findings are 

similar to our past work and point to the need for fundamental reforms to 

minimize the risk of a significant taxpayer bailout or dramatic postal rate 

increases. The Commission made recommendations to Congress and the 

Service aimed at achieving such reforms, which GAO believes merit 

consideration. 

First Class Mail Volume Growth from Fiscal Years 1984-2004 

GAO agrees with the Commission that now is the time to modernize the 

nation’s postal laws rather than waiting until a financial crisis occurs that 

limits congressional options. Key aspects of the Service’s existing legislative 

framework that need to be addressed are 1) a broadly defined mission that 

enables the Service to engage in unprofitable and controversial endeavors, 2) 

a governance structure that does not ensure governing board members who 

have the requisite knowledge and skills, 3) the need for additional 

accountability, oversight, and transparency provisions; 4) a lengthy, 

burdensome rate-setting process, and 5) provisions that hinder the Service in 

rationalizing its infrastructure and workforce. 

GAO also agrees with the Commission that the Service can take steps now to 

modernize and increase efficiency and effectiveness, improve its financial 

position, and rationalize its infrastructure and workforce. The Service has 

begun to implement its Transformation Plan initiatives, cut its costs and the 

size of its workforce, and improve its efficiency. However, since the Service 

issued its Transformation Plan in April 2002, it has not provided adequate 

transparency on its overall plans to rationalize its infrastructure and 

workforce; the status of initiatives included in its Transformation Plan; and 

how it plans to integrate the strategies, timing, and funding necessary to 

move toward becoming a high-performing organization. The Service’s vision 

of rightsizing its infrastructure and workforce is achievable if approached in 

a comprehensive, integrated fashion, with appropriate communication and 

coordination with postal stakeholders. 
Chairman Collins and Members of the Committee: 

I am pleased to be here today to participate in this hearing on the report of 

the President’s Commission on the United States Postal Service (the 

Commission).1

 Recently, the U.S. Postal Service (the Service) has gained 

some financial breathing room because recently enacted legislation has 

reduced the Service’s payments for its pension obligations. The Service 

has estimated that its net income in fiscal year 2003 will be over $4 billion, 

of which about $3 billion was the result of recent legislation. However, the 

Service’s long-term financial challenges remain, and, accordingly, the 

Service’s long-term outlook and transformation efforts remain on our 

High-Risk List. Since we placed the Service on our High-Risk List in April 

2001, the Service has developed its 2002 Transformation Plan, cut various 

costs, and improved its productivity. However, these incremental steps 

cannot resolve the fundamental and systemic issues associated with the 

Service’s current business model. 

We have called for actions to address the Service’s financial situation and 

long-term outlook, including overhauling its existing business model. We 

previously suggested that a commission could be established to study 

postal issues and make recommendations, and like you, were pleased that 

the President established the Commission to propose a vision for the 

future of the Service and recommendations to ensure the viability of postal 

services. As we testified before the Commission, fundamental changes will 

need to be made to the Service’s business model, and the legal and 

regulatory framework that supports it, to provide for the Service’s longterm financial viability. The Commission proposed far-reaching changes in 

each of these areas. The vision for the Service set forth in the 

Commission’s report, combined with its comprehensive recommendations, 

has the potential to fundamentally affect the nature of postal services, 

their cost, and how they are provided to the American people. 

In my testimony today, I will discuss our perspective on the Commission’s 

report and offer suggestions on steps that Congress and the Service need 

to take for continued progress on postal transformation. My testimony 

today is based on our analysis of the Commission’s report, discussions 

1

President’s Commission on the United States Postal Service, Embracing the Future: 

Making the Tough Choices to Preserve Universal Mail Service, (Washington, D.C.: July 31, 

2003). 

Page 1 GAO-04-108T 
with postal stakeholders, prior GAO reports and testimonies on postal 

transformation issues, and our continuing work in this area.2 

Summary 	 Overall, the Commission’s report provides a valuable contribution to assist 

Congress, the Service, the executive branch, and stakeholders in 

considering the actions needed to transform the Postal Service to a more 

high-performing, results-oriented, transparent, and accountable 

organization. The Commission found that the Postal Service’s current 

business model has not produced the desired results because it has led to 

poor financial results, difficulty in funding capital needs, lack of incentives 

for good financial performance, and lack of efficiency. The Commission 

offered constructive suggestions, some of which require legislative change, 

and some that can be implemented under the existing statutory 

framework. 

The Commission’s recommendations echo many of our prior reports and 

address concerns that we have previously raised. We agree with the 

Commission that an incremental approach to Postal Service reform will 

yield too little too late given the enterprise’s bleak fiscal outlook, the 

magnitude of its financial obligations, the likelihood of declining FirstClass Mail volumes, and the limited potential of the Service’s legacy postal 

network. All options for statutory and discretionary change need to be on 

the table for discussion, including the Commission’s findings and 

recommendations, as well as suggestions from GAO and other 

stakeholders. Some of the Commission’s recommendations, such as those 

related to rate setting, oversight, and collective bargaining, involve 

complex and controversial issues that may require further consideration 

and refinement. Nevertheless, the time has come for Congress to enact 

comprehensive postal reform legislation that would clarify the Service’s 

mission and role; enhance governance, accountability, oversight, and 

transparency; improve regulation of postal rates; and make human capital 

reforms. 

In addition to statutory reform, we agree with the Commission that the 

Service has many opportunities to become more efficient, notably by 

2

See U.S. General Accounting Office, U.S. Postal Service: Key Postal Transformation 

Issues, GAO-03-812T (Washington, D.C.: May 29, 2003); Major Management Challenges 

and Program Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.: Jan. 2003); and 

U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation, 

GAO-02-355 (Washington, D.C.: Feb. 28, 2002). 

Page 2 GAO-04-108T 
standardizing its operations and reducing excess capacity in its network. 

This vision is achievable if approached in a comprehensive, integrated 

fashion, and supported by postal stakeholders. The impending retirement 

of much of the Service’s workforce provides an opportunity to rightsize 

the organization with minimal disruption. However, the Service has not 

provided adequate transparency on its plans to rationalize its 

infrastructure and workforce, as well as on the status of initiatives 

included in its Transformation Plan. More constructive engagement on its 

efforts to rationalize its infrastructure and workforce is needed with the 

Service’s employee organizations, the mailing industry, affected 

communities, and Congress. To facilitate the Service’s progress in 

implementing actions under the existing system, we recommend that the 

Postmaster General develop a comprehensive and integrated plan to 

optimize its infrastructure and workforce, in collaboration with its key 

stakeholders, and make it available to Congress and the general public. In 

addition, the Postmaster General should provide periodic updates to 

Congress and the public on the status of implementing its transformation 

initiatives and other Commission recommendations that fall within the 

scope of its existing authority. In discussing our recommendations with 

postal officials, they agreed to take these actions. 

We also share the Commission’s concerns about the Service’s funding of 

its $92 billion in liabilities and obligations, which include about $48 billion 

in unfunded retiree health benefits, about $6.5 billion for unfunded 

workers’ compensation benefits, and about $5.8 billion for unfunded Civil 

Service Retirement System (CSRS) pension obligations. Although recent 

legislation has addressed how the Service will cover its CSRS pension 

obligations over 40 years, the Service continues to make minimum 

payments for the other obligations, which are currently financed on a payas-you go basis. Based on known demographic trends, the Service’s share 

of its retirees’ health insurance premiums is expected to continue rising 

until about 2040. Under the Service’s existing accounting and rate-setting 

methods, more significant and frequent rate hikes are likely to be needed 

for future ratepayers to cover the costs of benefits that are being earned 

by current employees. We recognize that building accrual-based measures 

of retiree health costs into the current rate base may be difficult 

considering the pressure to defer rate increases. However, in our view, it 

would be more prudent to address the unfunded obligations in a manner 

that is fair and balanced for both current and future ratepayers. The Postal 

Service has provided Congress with proposals for funding retiree health 

benefit obligations, which we will address in our forthcoming report in 

this area. 

Page 3 GAO-04-108T 
The Commission’s 

Report Made Valuable 

Contributions 

Overall, the Commission’s report provides a valuable contribution to assist 

Congress, the Service, the executive branch, and stakeholders in 

considering the actions needed to transform the Postal Service into a more 

high-performing, results-oriented, and accountable organization. 

Tomorrow, we plan to hold a forum at GAO with Postmaster General Jack 

Potter and other national leaders and experts to discuss ways in which 

Congress and the executive branch can foster federal agencies’ and their 

networks’ efforts to become high-performing organizations. 

We are pleased that the Commission’s report facilitated consideration and 

debate by presenting the issues in a way that can be understood by a 

general audience, and we commend the Commission for the open and 

transparent process used to engage stakeholders in developing its report. 

We also share the report’s emphasis on a customer-oriented Postal Service 

that can continue to meet the nation’s vital need for universal postal 

service. Citizens and businesses depend on the Service to provide 

affordable postal services that are essential for communications and 

commerce on a universal basis. 

The Commission’s report also made an important contribution by 

addressing difficult infrastructure and human capital issues. We agree with 

the Commission that transforming the Service will require a fundamental 

reexamination and realignment in both of these areas, which collectively 

account for most of the Service’s costs and are the linchpin to delivering 

high-quality service. As the Commission noted, the nation’s 

communications, technology, and delivery markets have seen vast changes 

since the Postal Service was created by the Postal Reorganization Act of 

1970. New types of electronic communications include the use of e-mail, 

wireless technology, and electronic bill payment services. These changes 

appear to have placed First-Class Mail volume in the early stages of what 

may be a long-term decline. 

In this new environment, unless the Service’s operating expenses can be 

reduced correspondingly, with a rightsizing of both its infrastructure and 

workforce, it is questionable whether affordable universal mail service can 

be sustained over the long term with a self-financing public institution. 

Further, it takes time for an organization as large and complex as the 

Service to make fundamental changes, particularly when some of these 

may hinge on congressional action. Fortunately, the Commission and 

others, including the Service, have identified numerous changes, many of 

them possible within existing law, which can reduce the Service’s 

Page 4 GAO-04-108T 
The Need for 

Comprehensive Postal 

Reform Legislation 

operating costs while maintaining and enhancing the quality and value of 

postal services. 

With respect to human capital issues, the Commission has recognized that 

management reform and improvements in managing the Service’s 

employees will be vital to comprehensive postal transformation. We 

applaud the Commission’s efforts to develop new approaches in these 

areas. While postal stakeholders may differ over the Commission’s 

recommendations, we share the Commission’s view that the status quo is 

not a viable option. All options for statutory and discretionary change 

need to be on the table for discussion. If the Service and its employee 

unions do not believe that some of the Commission’s workforce 

recommendations are viable, we believe that alternative solutions, or a 

package approach, to the workforce issues raised by the Commission and 

us in our previous work need to be explored. 

The Commission recognized that comprehensive reform to the nation’s 

postal laws is needed so that the Service can successfully meet the 

formidable challenges it faces and continue to provide affordable and 

high-quality universal postal services. The Commission reported that “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.” We agree. Our prior 

reports and testimonies have concluded that comprehensive postal reform 

legislation is needed and have provided information on key issues to be 

considered.3

 The Commission’s findings are generally consistent with our 

past work, and its recommendations address postal reform issues in a 

comprehensive manner. Now that the Commission has finished its work, 

the time has come for Congress to act. 

The Commission’s recommendations represent a thoughtful package that 

would preserve the historic values of universal postal service; make 

important statutory changes in many key areas, including governance, 

3

GAO-03-812T; GAO-02-355; U.S. General Accounting Office, U.S. Postal Service: Moving 

Forward on Financial and Transformation Challenges, GAO-02-694T (Washington, D.C.: 

May 13, 2002); U.S. Postal Service: Financial Outlook and Transformation Challenges, 

GAO-01-733T (Washington, D.C.: May 15, 2001); and U.S. Postal Service: Transformation 

Challenges Present Significant Risks, GAO-01-598T (Washington, D.C.: Apr. 4, 2001). 

Page 5 GAO-04-108T 
oversight, and human capital; and create a mechanism for making further 

changes over time. In our view, the Postal Service’s current financial 

breathing room gives Congress an opportunity to carefully consider postal 

transformation issues and “get it right” when making fundamental 

decisions about rechartering the nation’s postal system for the 21st 

century. 

Consistent with the need for Congress to rethink the role of the federal 

government in the 21st century, now is the time to rethink and clarify the 

mission and role of the Postal Service. The Commission’s report 

concluded that a number of trends are driving the need for a sweeping 

exploration of the Postal Service’s role and operations in the 21st century. 

In this regard, we share the Commission’s concerns about the likelihood of 

declining First-Class Mail volumes in both the short-term and the longterm. First-Class Mail generates more than half of the Service’s revenue. 

The revenue generated by First-Class Mail was used to cover about 69 

percent of the Service’s institutional cost in fiscal year 2002. The loss of 

contribution from declining First-Class Mail volume would be difficult to 

recover from other classes of mail. However, the rate of growth for FirstClass Mail has been in long-term decline since the 1980s. First-Class Mail 

volume has steadily declined since it peaked 2 years ago. Its volume is 

estimated to have declined by 3.1 percent in fiscal year 2003 and is 

projected to decline by 1.3 percent in fiscal year 2004 (see figure 1). 

Page 6 GAO-04-108T 
Figure1: First-Class Mail Volume Growth, Fiscal Years 1984 through 2004 

Looking ahead, we share the Commission’s concern that electronic 

diversion of First-Class Mail threatens to significantly accelerate the 

decline in the Service’s mail volume. Although the role of the Internet has 

been much commented on, it can be easy to overlook the fact that the 

Internet is a relatively recent historical phenomenon, with use of the 

World Wide Web greatly increasing in the 1990s. As recently as 5 years 

ago, only 37 percent of U.S. households had a computer, and only 19 

percent of U.S. households were connected to the Internet (see figure 2). 

The rapid diffusion of computer and Internet technologies has led to high 

adoption rates among those with high levels of income and education—the 

same groups that send and receive a disproportionate share of First-Class 

Mail. Thus, the trend data point to the strong potential for further 

electronic diversion. Raising postal rates to offset this trend may provide 

an immediate boost to the Service’s revenues, but over the longer term will 

likely accelerate the transition of mailed communications and payments to 

Page 7 GAO-04-108T 
electronic alternatives, including the Internet. A report prepared for the 

Commission found that growth in electronic payments is likely to be an 

important factor in its forecast of gradual declines in First-Class Mail 4
 volume. 

Figure 2: Percent of U.S. Households with Computers and Internet Connections 

Note: Data was reported for 1984, 1989, 1993, 1997, 1998, 2000, and 2001. 


4

Institute for the Future, Two Scenarios of Future Mail Volumes: 2003-2017, prepared for 

the President’s Commission on the United States Postal Service (Palo Alto, CA: May 2003). 

Page 8 GAO-04-108T 
The Commission’s report highlighted why the status quo has not produced 

satisfactory results and is ill suited for the 21st century. Key weaknesses 

include: 

• 	 Uncertain financial future: In theory, the Postal Service is selfsupporting through postal revenues. In practice, as the Commission 

noted, even after recent statutory changes reduced the Service’s 

unfunded liability for Civil Service Retirement System (CSRS) pension 

benefits, the Service has accumulated about $92 billion in liabilities and 

obligations over the past three decades. These liabilities and 

obligations include debt, large unfunded obligations for retiree health 

benefits obligations, and remaining unfunded pension and workers’ 

compensation liabilities. Thus, current ratepayers have not fully 

covered the total costs generated to provide the postal services they 

have received. A continuation of these trends would be diametrically 

opposed to the Commission’s vision of a fiscally sound Postal Service 

that can sustain universal postal service, particularly if the Service’s 

core business of First-Class Mail continues to decline in the coming 

years. 

• 	 Difficulty financing capital needs: In recent years, the Service has 

found it problematic to obtain adequate financing for capital needs. 

Thus, the Service has often increasingly resorted to borrowing to 

finance its capital improvements. In fiscal year 2001, the Service was 

faced with insufficient cash flow from operations and with debt 

balances that were approaching statutory limits. Consequently, the 

Service imposed a freeze on capital expenditures for most facilities that 

continued through fiscal years 2002 and 2003. The Service was able to 

repay some of its debt in fiscal year 2003, primarily because it 

generated a positive cash flow from a reduction in its pension costs. 

However, looking forward, it may be difficult for the Service to obtain 

adequate funds to address its long-term capital needs, including 

modernizing its aging network of postal facilities, without significantly 

increasing rates or debt. The Commission’s recommendations in the 

areas of retained earnings and disposition of excess Postal Service real 

estate represent carefully considered alternatives to help provide the 

Service with sufficient revenue for both its operating and capital needs. 

• 	 Lack of incentives for good financial performance: The “break-even” 

mandate requires the Service’s revenues and appropriations to equal its 

total estimated costs as nearly as practicable. For many years, this 

mandate has been interpreted to mean that the Postal Service should 

break even over time. As such, the break-even mandate removes the 

profit motive, and the rate-setting structure allows the Postal Service to 

Page 9 GAO-04-108T 
cover rising costs by raising rates. Further, the lack of a provision for 

retained earnings also limits incentives for productivity improvement 

and cost reduction. Under the current structure, whatever cost 

reductions the Service achieves in one rate cycle are used to reset the 

estimated costs that the Service is to recover in the next rate cycle. In 

contrast, a limited retained earnings provision would enable the 

Service and its employees to benefit from whatever cost reductions are 

achieved. 

• 	 Lack of efficiency: The Service has improved its efficiency in recent 

years, but much more progress needs to be made. The Commission 

identified significant variation in efficiency among mail processing 

plants and called for more efficient operations through standardization. 

We agree with the Commission that the Service has significant 

opportunities to improve its efficiency through best execution 

strategies in which those who can do it best and at the best price would 

perform postal activities while the Service rightsizes its infrastructure 

and workforce. However, as we have previously reported, both legal 

and practical constraints have hindered progress in these areas. 

• 	 Disincentives for maximizing allocation of postal costs: Under the 

current regulatory model, all classes of mail and types of service must 

cover their attributable costs, while institutional costs (i.e., common or 

overhead costs) are allocated based on judgment informed by broad 

statutory criteria.5

 In effect, the Postal Service loses pricing flexibility 

as costs are allocated to specific postal products and services, creating 

a structural disincentive for the Service to maximize cost allocation to 

various classes of mail and types of service. Understanding, measuring, 

and reporting postal costs have greatly improved over the years. 

However, the proportion of postal costs allocated by the Service has 

increased by only 9 percent since postal reorganization. Further, cost 

allocation disputes persist, as illustrated by the different methodologies 

used by the Service and the PRC for allocating mail processing costs— 

that is, the Service allocated 58 percent of postal costs in fiscal year 

2002, while the PRC allocated 62 percent. We recognize that it may be 

difficult to use the data that are currently collected by the Service to 

5

The Service proposes domestic postage rates and fees, as required in law, so that each 

class of mail or type of service must cover the direct and indirect postal costs that are 

attributable to that class or type of service plus a portion of its other remaining 

“institutional costs” which include all “common” or “overhead” costs. The requirement that 

each class of mail must cover its attributable costs has long been interpreted to apply to 

groupings of mail within classes that are called subclasses. 

Page 10 GAO-04-108T 
allocate a higher proportion of costs. Nevertheless, the Commission’s 

conclusion that more postal costs can and should be allocated raises 

the issue of whether increasing regulatory authority over cost 

allocation would be necessary to ensure that all costs that can be 

rationally attributed are properly allocated. Furthermore, improvement 

in the Service’s data collection could also enable greater allocation. 

Postal Service Mission and 

Role Need Clarification 

It is important for Congress to consider how best to clarify the mission 

and role of the Postal Service as part of a fundamental reexamination of 

the role of the federal government in the 21st century. The starting point is 

to consider the Commission’s recommendation that Congress amend the 

nation’s postal laws “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.” This recommendation 

is coupled with proposals to create a mechanism for change by giving 

broad authority to a newly created Postal Regulatory Board, including 

authority to review and issue binding decisions on certain Postal Service 

proposals to redefine delivery frequency requirements; uniform postal 

rates; and the Postal Service’s monopoly to deliver mail and place items in 

mailboxes. 

The Commission sought to clarify the nature of the Service’s universal 

postal service mission by recommending that Postal Service activities be 

limited to accepting, collecting, sorting, transporting, and delivering 

letters, newspapers, magazines, advertising mail, and parcels and 

providing other governmental services on a reimbursable basis when in 

the public interest. The Commission recognized that the nation’s postal 

laws did not envision the challenge of setting appropriate boundaries on 

the Service’s commercial activities and maintaining fair competition 

between the Service and the private sector. These issues need to be 

addressed because the Service has repeatedly strayed from its core 

mission. We have reported on the Service’s money-losing initiatives in 

electronic commerce and remittance processing, among other things.6

 The 

Service’s ill-fated ventures were also questioned by some postal 

stakeholders as unfair competition, since they were cross-subsidized by a 

6

U.S. General Accounting Office, U.S. Postal Service: Update on E-Commerce Activities 

and Privacy Protections, GAO-02-79 (Washington, D.C.: Dec. 21, 2001); U.S. Postal Service: 

Postal Activities and Laws Related to Electronic Commerce, GAO/GGD-00-188 

(Washington, D.C.: Sept. 7, 2000), U.S. Postal Service: Development and Inventory of New 

Products, GAO/GGD-99-15 (Washington, D.C.: Nov. 24, 1998). 

Page 11 GAO-04-108T 
tax-exempt entity that is also exempt from many laws and regulations 

governing the private sector. Further, such ventures have raised the 

fundamental issue of why the federal government is becoming involved in 

areas that are well served by the private sector. Although the current 

Postmaster General has appropriately focused on the Service’s core 

business of delivering the mail and sharply curtailed its nonpostal 

initiatives, the Commission recommended codifying this policy. In our 

view, the time has come for Congress to clarify the Service’s core mission 

and ensure continuity across changes in postal management. 

However, it will be important to understand the implications of generally 

limiting the Postal Service to its traditional role of handling the nation’s 

mail, as the Commission has recommended. In that event, the Service will 

face the formidable challenge of maintaining affordable universal postal 

service by growing revenues or significantly cutting its costs as its core 

business of First-Class Mail declines. In order to achieve net cost savings, 

the Service’s cost-cutting efforts must currently offset billions of dollars in 

annual cost increases for general wage increases, cost-of-living 

adjustments, and rising benefits costs, particularly in health insurance 

premiums, as well as costs associated with having to deliver mail to over 

1.5 million new addresses every year. Declining First-Class Mail volume 

will intensify the financial squeeze by reducing the volume of highly 

profitable mail. Thus, if the Service is limited to its traditional role, 

maintaining the quality and affordability of postal services would likely 

require dramatic improvement in the Service’s efficiency. The Service 

would need to become a much leaner and more flexible organization and 

rightsize its network of mail processing and distribution facilities. 

Consistent with our past work and the testimony of many key 

stakeholders, the Commission recognized that comprehensive reform of 

the nation’s postal laws would be necessary to facilitate changes in these 

areas. In the next section of this statement, we discuss the Commission’s 

recommendations involving governance, transparency, accountability, rate 

setting, and human capital. In our view, revisiting these areas may involve 

taking substantive and political risks, but we agree with the Commission 

that such risks must be taken if the Service is to remain successful in the 

coming decades. 

In our view, key questions related to clarifying the Service’s mission and 

role include: 

• 	 How should universal postal service be defined, given past changes and 

future challenges? 

Page 12 GAO-04-108T 
• 	 Should the Service be allowed to compete in areas where there are 

private-sector providers? If so, in what areas and on what terms? What 

laws should be applied equally to the Service and to its competitors? 

What transparency and accountability mechanisms are needed to 

prevent unfair competition and inappropriate cross-subsidization? 

Should the Service’s competitive products and services be subject to 

antitrust and general competition-related laws? Should they be subject 

to consumer protection laws? 

• 	 Should the Service retain governmental authority, including its 

regulatory responsibilities and law enforcement functions? 

On a related issue, the Service’s current statutory monopoly on the 

delivery of letter mail and its monopoly over access to mailboxes have 

historically been justified as necessary for the preservation of universal 

service.7

 However, questions have been raised regarding whether these 

restrictions continue to be needed, and if so, to what extent and whether 

the Service should be able to define their scope. A key issue is whether the 

Postal Service, as a commercial competitor in the overnight and parcel 

delivery markets, should have the authority to regulate the scope of 

competition in these areas.8

 The Commission has recommended separating 

these functions so that the Postal Service cannot define and regulate the 

scope of its own monopoly. 

As the Commission noted, it is a fundamental premise of American justice 

that parties that administer laws should not have a financial interest in the 

outcome. Accordingly, the Commission recommended that an independent 

entity should be responsible for reviewing the costs and benefits of the 

monopoly as well as for reviewing the thicket of vague and contradictory 

regulations in this area and modernizing the law to define the postal 

monopoly in clear and understandable terms. The independent entity 

could narrow the postal monopoly over time if and when the evidence 

shows that suppression of competition is not necessary to the protection 

7

For information on the Service’s monopoly on mailbox access, see U.S. General 

Accounting Office, U.S. Postal Service: Information About Restrictions on Mailbox 

Access, GAO/GGD-97-85 (Washington, D.C.: May 30, 1997). 

8

The Service has used its regulatory power to redefine the scope of the statutory monopoly 

by suspending the monopoly for urgent letters and outbound international mail. The 

Service has also defined the scope of its monopoly by issuing regulations that define a 

“letter” for the purposes of enforcing the statute (39 CFR 310.1(a)) as well as regulations 

specifying access to mailboxes (Domestic Mail Manual, D041 and P011.2.2). 

Page 13 GAO-04-108T 
of universal service without undue risk to the taxpayer. Narrowing or 

eliminating the monopoly could increase consumer choice and provide 

incentives for the Service to become more effective and efficient. For 

example, in recent years, FedEx has expanded its role in delivering 

residential parcels and UPS has shortened its guaranteed transit time on 

ground shipments traveling to some of the country’s biggest metropolitan 

areas. As Congress considers the Commission’s recommendations relating 

to the postal monopoly, we believe that key questions include: 

• 	 Is a government monopoly needed to enable affordable universal postal 

service, especially if such service is provided at uniform rates? If so, 

what scope of monopoly is needed to accomplish its goal? 

• 	 Should the Service continue to have the power to define (and redefine) 

its own statutory monopoly through suspensions and regulations? 

• 	 Should a regulatory body have authority to redefine and narrow the 

postal monopoly and the mailbox monopoly, or should such decisions 

be made through the legislative process? If authority is delegated to a 

regulatory body, should a clear statement of congressional intent be 

provided to guide regulatory decisions, or should the regulator have 

unfettered discretion to consider options to expand or contract the 

Service’s monopoly? What principles should guide the process, and 

what key players should be involved? 

• 	 Similarly, should the regulator be able to consider opening up access to 

the mailbox? If so, under what circumstances? Would it be costeffective for private delivery companies to deliver items to mailboxes if 

individuals could veto access and redefine mailbox access as they 

move from one home to another? 

• 	 Should any regulatory decisions be governed by process requirements 

to enable stakeholder input? Should such processes facilitate 

congressional review of any changes, as is the case for some other 

types of communications regulated by the federal government? 

Protecting the Public 

Interest through Enhanced 

Transparency, 

Accountability and Public 

Policy Oversight 

The Commission concluded that the Postal Service must have greater 

flexibility to operate in a businesslike fashion, but that with this latitude 

comes the need for enhanced transparency to enable effective 

management and congressional and other oversight. We agree. As the 

Commission noted, managerial accountability must come from the top, 

with the Service governed by a strong corporate-style board that holds its 

officers responsible for performance. The Commission concluded that 

giving the Service greater flexibility while preserving its monopoly would 

Page 14 GAO-04-108T 
Governance Structure 

require enhanced oversight by an independent regulatory body endowed 

with broad authority, adequate resources, and clear direction to protect 

the public interest and ensure that the Postal Service fulfills its duties. The 

Commission cited reports that we have issued since September 2000 

urging greater financial transparency and expressing concern about sharp 

declines in the Service’s financial position that were accompanied by too 

little explanation.9

 To enable sufficient accountability, oversight, and 

transparency, the Commission recommended changes to the Service’s 

governance structure, the creation of a Postal Regulatory Board that 

would have broad powers, and mechanisms to facilitate and ensure 

greater transparency of the Service’s financial and performance results. 

Key issues include whether the Commission’s recommendations are 

necessary, have struck the appropriate balance between multiple 

objectives, and would be practical to implement. 

The Commission found that given its importance to the country and the 

challenges to its future, the Postal Service should meet the highest 

standards of corporate leadership, including a strong, strategic Board of 

Directors coupled with enhanced oversight and financial transparency. 

Specifically, the Commission concluded that if the Postal Service is to 

adapt successfully to a changing postal market, overcome its significant 

financial 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. We agree. As we have reported, if 

the Service is to successfully operate in a more competitive environment, 

the role and structure of a private-sector board of directors may be a more 

appropriate guide in this area.10 Having a well-qualified, independent, 

adequately resourced, and accountable board is critical for a major federal 

institution with annual revenues approaching $70 billion and 

approximately 829,000 employees. 

9

The Commission cited GAO-03-118; GAO-02-694T; GAO-02-355; GAO-01-733T; 

GAO-01-598T; U.S. General Accounting Office, U.S. Postal Service Actions to Improve Its 

Financial Reporting, GAO-03-26R (Washington, D.C.: Nov. 13, 2002); and U.S. Postal 

Service: Enhancements Needed in Performance Planning and Reporting, GAO-00-207 

(Washington, D.C.: Sept. 19, 2000). 

10

GAO-03-812T. 

Page 15 GAO-04-108T 
Another concern is what qualification requirements would be appropriate 

for the Postal Service’s governing board to ensure that it possesses the 

kind of expertise necessary to oversee a major government business. 

Consistent with this view, the Commission recommended that 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.” The report also suggested that the board possess “significant 

financial and business expertise” and that among other things, board 

members have no material relationship with the Service or its management 

team. However, the Commission recommended that these criteria be 

incorporated into the Board’s bylaws or governance guidelines rather than 

into statute. 

In this area, we believe that potential issues include: 

• 	 Would the proposed qualification requirements be sufficient to produce 

a well-qualified board with outstanding and experienced directors, in 

part because of the flexibility inherent in the appointment process? 

• 	 Would the proposed board become politicized, in part because most 

directors would be subject to approval and removal by a political 

appointee, (i.e., the Secretary of the Treasury), with no Senate 

confirmation, no requirement for the board to have a bipartisan 

membership, and the possibility of removal for any reason? 

• 	 Would the pool of qualified candidates be unduly restricted because 

some corporations have a material relationship with the Service, while 

some retired corporate leaders would be over the proposed mandatory 

retirement age of 70 for Service board members? 

• 	 Would selection of members of the proposed board of directors by an 

official other than the President be consistent with the Appointments 

Clause in Article II, section 2, clause 2 of the Constitution, which 

requires that the heads of executive branch departments be appointed 

directly by the President with the advice and consent of the Senate?11 

11In Silver v. U.S. Postal Service, 951 F.2d 1033 (9th Cir. 1991), the Court held that the 

Postal Service, as an independent establishment of the executive branch, is subject to the 

Appointments Clause. The Court further held that the postal governors were the head of 

the Postal Service, and thus, were required to be appointed by the President and confirmed 

by the Senate. 

Page 16 GAO-04-108T 
Accountability Mechanisms 

• 	 We believe that these concerns merit careful consideration, as well as 

other concerns on which we have previously reported.12 In particular, it 

is debatable whether it would be appropriate for the Secretary of the 

Treasury to have the authority to approve most future appointments to 

the governing board of the Service, which fulfills vital government 

functions and includes nearly one-third of the federal civilian 

workforce. An alternative option may be to have a number of persons, 

including the Secretary of the Treasury, to advise the President on such 

appointments. Another key issue is whether these appointments should 

continue to be made with the advice and consent of the Senate, which 

is a mechanism to involve the legislative branch in matters of postal 

governance. However, we agree with the Commission’s conclusion that 

the legacy governance structure of the Service is increasingly at odds 

with its mission in the modern environment and that the Service’s 

governing structure needs to consist of members with the requisite 

knowledge and experience. 

The Commission’s report made a contribution in identifying the 

fundamental activities necessary for good corporate governance. The 

report made a number of recommendations for the proposed board of 

directors to more effectively discharge its duties, including refocusing the 

board on 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. In this regard, we believe that 

the current Board of Governors should refocus its activities along the lines 

suggested by the Commission. 

We have reported that a major issue related to the Service’s mission and 

role is whether the Service should be held more directly accountable for 

its performance, and if so, to what extent, to whom, and with what 

mechanisms.

13 Specifically, how should the Service’s governing board be 

held accountable? The Commission found that the Service urgently needs 

a vigilant, broadly empowered and independent regulatory body to focus 

on its ability to fulfill its core duties in an appropriate and effective 

manner. The Commission recommended that the Postal Rate Commission 

be abolished and replaced with a newly created Postal Regulatory Board 

endowed with broad public policy responsibilities as well as broad 

12U.S. General Accounting Office, U.S. Postal Service: Issues Related to Governance of the 

Postal Service, GAO/GGD-97-141 (Washington, D.C.: Aug. 14, 1997). 

13

GAO-03-812T. 

Page 17 GAO-04-108T 
mandates and authority for accountability and oversight. The regulator 

would also have authority in numerous areas including rate setting, 

retained earnings, financial transparency, service standards, performance 

reporting, and enforcing pay comparability, among others. 

A key objective of the Commission’s recommendations was to focus the 

proposed Postal Service board of directors on the business aspects of the 

Postal Service while transferring public policy responsibilities from the 

Service to an independent regulator with no stake in the outcome. The 

recommendations also would transfer key public policy responsibilities 

from Congress to the regulator. For example, the newly created regulatory 

body could, over time, redefine the Service’s universal service mission and 

statutory monopoly. The Commission’s accountability and oversight 

provisions would make major changes to the current structure. Thus, the 

Commission’s recommendations in this area raise fundamental issues. In 

our view, key questions include: 

• 	 Who should make public policy decisions regarding the Postal Service: 

the Service, an independent regulator, or Congress? 

• 	 What accountability should apply to a monopoly provider of vital 

postal services that also is a major competitor in the communications 

and delivery marketplace? 

• 	 How should the Service be held accountable if it remains an 

independent establishment of the executive branch? 

• 	 To what extent should the Service be accountable to Congress and the 

executive branch without being subject to undue political control? 

• 	 To what extent should a regulatory body exercise accountability? For 

what purpose? With what authority? 

• 	 Although additional oversight of the Service appears necessary, would 

the Service have sufficient management flexibility given the fairly 

broad authority the Commission proposes be given to the regulatory 

body? 

• 	 How should the regulatory body be structured to preserve its 

independence from political control and minimize the risk of regulatory 

capture? 

Page 18 GAO-04-108T 
Enhancing Transparency of 

Financial and Performance 

Information 

• 	 What statutory guidance and constraints should apply to regulatory 

actions, including due process and recourse to judicial and/or 

congressional review? 

• 	 What transparency of financial and performance results is appropriate 

for the Service as a federal establishment and would be necessary for 

oversight and accountability? What mechanisms should be established 

to facilitate and ensure transparency? 

• 	 Should the Service comply, either on a voluntary basis or through a 

statutory requirement, with major Securities and Exchange 

Commission (SEC) reporting requirements? 

The Commission noted that as a public entity, the Postal Service is wholly 

owned by the American people, who, as the Service’s shareholders, are 

due a regular and full accounting of the fiscal health and challenges facing 

this vital national institution. The Commission stated that the Service has a 

responsibility to the public to be transparent in its financial reporting. We 

agree. Reporting requirements should ensure accountability and 

transparency of financial and organizational reports. We have 

recommended that the Postal Service improve its transparency,14 and to 

the Service’s credit, it has made progress in providing greater transparency 

on its financial results and outlook. The Service has instituted quarterly 

financial reports, expanded the discussion of financial matters in its 

annual report, and included more information and explanation in the 

financial and operating statements prepared for each 4-week accounting 

period. The Service has also upgraded its Web site to include these and 

other reports in a readily accessible format. The Service is clearly moving 

in the right direction. However, we agree with the Commission that more 

progress can and should be made. 

In an area where we have particular concern that the Service have 

transparent, appropriate accounting, the Commission recommended that 

the Service’s governing board work with its independent auditor to 

determine the most appropriate accounting treatment of the Service’s 

unfunded retiree health benefit obligations in accordance with applicable 

accounting standards. The Commission also recommended that the board 

consider funding a reserve account to address these obligations to the 

14

GAO-02-355. 

Page 19 GAO-04-108T 
extent that Postal Service finances permit. These recommendations are 

similar to our previous statements, which noted that 

• 	 the Service’s current accounting treatment does not reflect the legal 

nature and the economic reality of its related obligation to pay for 

these costs; 

• 	 the Service’s treatment of retiree health benefit costs in its financial 

statements has not sufficiently recognized the magnitude, importance, 

or meaning of this obligation to decision makers or stakeholders; and 

• 	 because the retiree health benefit obligations are funded on a pay-asyou-go basis, rather than on a full accrual basis, current ratepayers are 

not paying for the full costs of the services they are receiving. 

We continue to believe that the time has come for the Service to formally 

reassess how it accounts for and discloses these very significant financial 

obligations. In our view, given the legal nature, economic substance, and 

stakeholder implication of these obligations, the Service should account 

for these retiree health costs and related obligations in its financial 

statements on an accrual basis. We recognize that a change to accrual 

accounting could have a significant impact on rates. However, the Service 

could work with the PRC and other stakeholders to determine how best to 

phase in such a change to mitigate the immediate impact on ratepayers. 

Regardless of whether the Service changes its accounting for retiree health 

costs, we continue to believe the Service should disclose the funded status 

of all of its retiree health and pension obligations. 

The Commission enunciated an ambitious standard for the Service when it 

stated that “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.” [Emphasis in original.] The Commission also found 

that given its important public mission and central role in the nation’s 

economy, changes in the Service’s economic health should not come as a 

surprise to those responsible for or impacted by its performance. In this 

regard, the Commission found that while the Service often conducts 

financial reporting over and above what is required by federal agencies, it 

remains behind the level of disclosure offered by its corporate peers. 

We believe that technical compliance with accounting and reporting 

requirements should be a floor for financial transparency, not a ceiling. 

Thus, we were pleased that in keeping with its theme of incorporating best 

Page 20 GAO-04-108T 
practices, the Commission said it “strongly recommends” that the Service 

voluntarily comply with major Securities and Exchange Commission 

(SEC) reporting requirements. The Service has the opportunity to 

proactively work with the SEC to define how it could voluntarily comply 

with SEC requirements in a manner appropriate to its unique legal status. 

Enhanced financial transparency is particularly important because the 

Service is the hub of a $900 billion mailing industry and is a vital part of 

the nation’s communications and payment network. Its recent financial 

difficulties have accentuated the need for stakeholders to be well apprised 

of the Service’s financial situation and to understand how future operating 

results may be affected by impending events. Although the Service has 

traditionally provided a range of detailed financial and operating data to 

stakeholders throughout the fiscal year, its periodic financial reports did 

not clearly explain changes in its financial condition, results of operations, 

and its outlook, and were not always readily available to the public. Thus, 

in April 2001, we recommended that the Service provide quarterly financial 

reports to Congress and the public with sufficiently detailed information 

for stakeholders to understand the Service’s current and projected 

financial condition and how its outlook may have changed since the 

previous quarter.15 In November 2002, we found that the Service’s financial 

reports provided to date had provided only limited analysis and 

explanations to help stakeholders understand what had changed, why it 

had changed, and how these changes affected the Service’s current 

financial situation and expected outlook.16 Since then, the Service has 

improved its quarterly financial reports. We also discussed the SEC’s 

reporting structure as a model for the Service to consider. 

As the Commission recognized, the Service remains a public institution 

with a monopoly on providing vital postal services to the nation, and 

enhanced financial information will be essential to improve managerial 

accountability and public policy oversight. In this regard, there are areas 

where stakeholders have little information, such as the Service’s unmet 

financial needs to maintain and modernize its infrastructure, or the true 

market value of the Service’s vast real estate holdings. Therefore, progress 

in enhancing the Service’s financial transparency is worthy of continued 

congressional attention. 

15

GAO-01-598T. 

16

GAO-03-26R. 

Page 21 GAO-04-108T 
In addition to the above areas, we have reported on, and continue to have 

concerns about, the Service’s annual performance reporting that is 

required under the Government Performance and Results Act (GPRA).17 

The Service’s recently filed 5-Year Strategic Plan for Fiscal Years 2004-

2008 contained a clear mission statement and presented a useful 

discussion of the prospects for mail volume, including three specific 

forecasts. However, the plan represented a missed opportunity because it 

failed to adequately communicate what the Service intends to accomplish 

over the period covered by the plan. For example, the plan contained little 

new information on the Service’s goals and strategies for network and 

workforce realignment over the next 5 years. The plan continues a trend in 

which the Service’s GPRA reports have provided less and less new 

information to Congress, postal stakeholders, and the American people. 

We also continue to be concerned that the Service does not communicate 

its delivery performance for all of its major mail categories, particularly 

those covered by its statutory monopoly to deliver letter mail. The 

Service’s customers should have a right to know what they are getting for 

their money, particularly captive customers with few or no alternatives to 

using the mail. However, the Service’s public reporting is limited to ontime delivery of First-Class Mail deposited in collection boxes18 and does 

not include bulk mailing of First-Class Mail by businesses. In addition, 

stakeholders and individuals have expressed concerns about the accuracy 

of mail delivery, but no public information is provided for this aspect of 

mail service. The Commission recognized that information about service 

quality would become even more important if the Service obtains more 

flexibility and incentives to cut its costs. Accordingly, the Commission 

recommended that the Postal Regulatory Board be required to prepare a 

comprehensive annual report assessing the Postal Service’s performance 

in meeting established service standards. If such a report is to be 

meaningful, the regulator may also need authority to require the Service to 

collect service performance data. 

Without sufficient transparency, it is difficult to hold management 

accountable for results and conduct independent oversight. The Service 

has the opportunity to seek out best practices and continually improve as 

standards evolve and experience accumulates, and its recent track record 

17

GAO/GGD-00-207. 

18First-Class Mail measurement is further limited to collection boxes located in 463 ZIP 

Codes from which most First-Class Mail volume originates and to which it is destined. 

Page 22 GAO-04-108T 
Rate-setting Structure 

suggests that some improvement is possible. A key issue is whether 

statutory change is needed to enhance the level of transparency that the 

Service must provide, particularly if it obtains greater flexibility along the 

lines recommended by the Commission. 

The Commission concluded that it is imperative that the Postal Service, an 

institution with a statutory monopoly over the delivery of letter mail, have 

clear, independent regulatory oversight that includes oversight over its 

postal rates. The Commission found that the current statutory structure 

produced independent review of postal rates and had the laudable goals of 

protecting postal customers against undue discrimination while restricting 

cross-subsidies. However, the Commission stated that the current ratesetting structure should be abolished so that these goals can be 

accomplished more efficiently and effectively, by establishing an 

incentive-based rate-setting system. We agree that major changes are 

needed in this area. As we have testified, improvements in the postal ratesetting structure will be a fundamental component of a comprehensive 

transformation.19 The existing statutory structure is increasingly ill suited 

to meeting the needs of the Postal Service and the American people. Its 

shortcomings include the following: 

• 	 Lengthy and burdensome rate-setting proceedings - The Commission 

found that the current rate-setting structure imposes a litigious, costly, 

and lengthy rate-setting process that can delay needed new revenues by 

more than a year. We agree. The Service and other stakeholders report 

spending millions of dollars in each rate case on attorneys, economists, 

statisticians, and other postal experts who pore over many thousands 

of pages of testimony, interrogatories, and rebuttals. The high cost of 

participation, coupled with the increasing complexity of rate-setting 

data and methods, make it difficult for smaller stakeholders to 

effectively participate in the regulatory process. 

• 	 Bias toward adversarial relationships - As the Commission noted, every 

significant change requires a major proceeding that places the Postal 

Service in an adversarial relationship with its major customers and at a 

distinct competitive disadvantage. Rate cases tend to pit the Service 

and many postal stakeholders against each other, since the zero-sum 

nature of the revenue requirement provides powerful incentives for 

parties to attempt to shift postal costs in ways that serve their 

immediate self-interests. The adversarial rate-setting process has 

19GAO-03-812T. 

Page 23 GAO-04-108T 
consumed the attention of all of the parties involved, increasing the 

difficulty of focusing on constructive efforts to find mutually 

acceptable approaches to difficult technical issues. During lengthy rate 

cases, rules against ex parte communications help preserve due 

process and fairness, but also make it difficult for rate-setting experts 

at the Service and the PRC to constructively discuss technical issues 

and resolve problems as they arise. 

Despite these structural impediments, rate-setting experts at the 

Service and PRC have made some progress in improving 

communications in recent years, notably during the 1999 Data Quality 

Study on the quality of data used for rate-setting purposes, as well as 

during subsequent efforts to improve data collection systems.20 We are 

pleased that the Service has convened periodic briefings with 

representatives of the PRC, the Service’s Office of the Inspector 

General, and us, in which it engaged with the parties and provided 

detailed status reports on initiatives to improve rate-setting data 

systems. We are also encouraged that the Service has started to engage 

with the PRC in planning some improvements to its rate-setting 

systems, and we commend the Service for offering public briefings to 

provide additional transparency on modifications to key data systems. 

These efforts facilitate constructive dialogue on data quality issues, 

providing opportunities for the parties to make continuous progress as 

postal operations, technology, and data systems change. 

• 	 Perennial disagreements - Cost allocation issues have been debated for 

many years and are frequently a key reason why postal rate cases are 

so lengthy and litigious, since their disposition can directly affect 

postal rates. The statutory structure seeks to assure all parties due 

process by enabling them to raise whatever issues they wish, 

regardless of how many times the same issues may have been 

considered in the past. The Postal Service has a special opportunity to 

repeatedly raise issues by building them into its initial proposals for 

changes to postal rates. For example, the Postal Service and PRC have 

strongly disagreed on the allocation of mail processing costs in rate 

cases dating from 1997—to the point that two sets of postal costs are 

routinely prepared, one according to the Postal Service’s preferred 

methodology and one according to the PRC’s methodology. This 

situation epitomizes the downside of enabling parties to repeatedly 

litigate the same issues in the name of due process. Although the 

20A.T. Kearney, Data Quality Study (Alexandria, Va.: Apr. 16, 1999). 

Page 24 GAO-04-108T 
Commission noted that interested parties should have an opportunity 

to participate in rate-setting matters, the need to address complex cost 

allocations in each and every rate proceeding conflicts with the 

Commission’s vision of a streamlined rate-setting process that can 

swiftly resolve complaints about postage rates. 

• 	 Poor incentives for data quality - The current statutory model gives the 

Service opportunities to seek advantage in litigious rate-setting 

proceedings through its control over what data are collected and how 

those data are analyzed and reported. The PRC cannot compel the 

Service to collect data, or update data it has collected. The PRC also 

cannot subpoena data that the Service has collected. The 1999 Data 

Quality Study found that key postal cost data had not been updated for 

many years and were used regardless of their obsolescence. Although 

the Service has worked to address these and other deficiencies 

identified by the study, as noted above, it is fair to question why the 

regulatory process had enabled these problems to continue for so many 

years. Further, regarding the sufficiency of data in the recent 

negotiated service agreement (NSA) case, the Service provided no 

mailer-specific cost data corresponding to mailer-specific discounts, 

creating uncertainty regarding whether the discount was set 

appropriately in relation to the cost savings that the Service should be 

expected to achieve as a result of the NSA. 

• 	 Disputes over cost allocation - The Service is generally opposed to PRC 

proposals that would require the Service to provide more detailed 

annual information on postal costs and information on cost allocation 

methodologies used to produce that data. In support of its view, the 

Service has asserted that the current statutory structure generally 

limits the PRC to a reactive role in considering proposed rates and 

supporting information provided by the Service in rate and 

classification cases. This perspective contrasts with the Commission’s 

vision of independent regulatory oversight in which the outcome 

cannot be unduly influenced through the selective provision of 

information to the regulator. To this end, the Commission 

recommended that the Service periodically report on the allocation of 

costs in accordance with form, content, and timing requirements 

determined by the Postal Regulatory Board, the recommended 

successor to the PRC. 

• 	 Lack of mailer-specific data - Looking forward, a key issue is what data 

on the mailer-specific costs, volumes, and revenues of the Postal 

Service, if any, should be provided to justify mailer-specific discounts 

that result from NSAs. The Service has generally opposed providing 

Page 25 GAO-04-108T 
such mailer-specific data in the future as overly burdensome, unwise, 

and impractical, in part because its cost measurement systems are 

geared to providing aggregate data at the subclass level. The PRC is 

currently reviewing what cost data should be provided to justify mailerspecific postal rates, and key stakeholders have filed conflicting 

testimony on the issues in this area.21 Regardless of the outcome, it is 

reasonable to ask how the Service can effectively identify, prioritize, 

and negotiate mutually beneficial NSAs if little reliable data are 

available on the cost savings that the Service should realize as a result 

of the mailer-specific requirements of each NSA. 

The above problems are well documented. They have been cited in 

numerous independent reviews over the years, including some by us. The 

parties are familiar with the status quo, and we suspect that the high 

stakes involved make parties understandably reluctant to make changes, 

particularly when the financial consequences are difficult to foresee. In 

recent public meetings held to discuss possible changes to the rate-setting 

process within existing law, the Service dismissed many of the suggestions 

that were made. Moreover, the Service and other stakeholders have 

reached no consensus about proposals for legislative reform. Therefore, 

the Commission was advocating bold action when it concluded that the 

current rate-setting 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. 

The Commission’s report built on the legislative debate in which price cap 

regulation has emerged as a leading alternative to the current statutory 

model for regulating postal prices. Specifically, the Commission 

recommended that the existing system of setting postal rates be abolished 

and replaced with a price-cap system to regulate the rates of 

noncompetitive postal products and services, coupled with providing the 

Service with pricing flexibility for competitive postal products and 

services, subject to a rule against cross-subsidization. The Commission’s 

proposed price-cap system is intended to enhance the Service’s 

management flexibility to set rates within ceilings established by the 

Postal Regulatory Board, so that if the rate ceiling is appropriately 

constructed, the Postal Service will feel intense pressure to rein in 

spending and improve efficiency and productivity. A price-cap system 

21See documents filed under PRC Rulemaking Docket No. RM2003-5, available at 

www.prc.gov. 

Page 26 GAO-04-108T 
could enable the Service to implement a strategy of smaller, more frequent 

changes in postal rates, as opposed to a strategy of more infrequent, 

significant increases. 

The Commission’s recommended price-cap system has some similarities 

with price-cap systems that were offered in successive postal reform bills 

introduced by Rep. John M. McHugh. These proposals were reviewed in 

numerous hearings, and the extensive record surfaced many issues and 

concerns. In our view, key questions include the following: 

• 	 Would a price-cap system provide the intended incentives for the 

Postal Service to maximize its financial performance, since the Service 

is a public institution that is not accountable to shareholders who hold 

stock and demand management accountability? 

• 	 Would a price cap provide incentives for the Postal Service to reduce 

the quality of service for captive customers? If so, what transparency 

and accountability mechanisms would be needed to ensure the quality 

of universal postal service? 

• 	 Could the Service use its flexibility to raise rates within the price cap to 

unfairly shift the burden of institutional costs away from competitive 

products and services and onto its most captive customers? 

• 	 Should postal rates be required to cover attributable costs? If so, at 

what level (e.g., mail class, subclass, rate category, etc.)? 

• 	 Could the Service generate sufficient revenues if its rates were 

constrained by a price cap? If not, under what circumstances, if any, 

should the Service be authorized to raise rates in excess of the cap? 

How can ratepayers be assured that it would not be too easy for the 

Service to obtain such increases, which would vitiate the intent of the 

price cap? What process should apply to such “exigent” rate increases? 

• 	 Would a price cap restrain the growth of postal wages? If so, to what 

extent and would such a result be desirable? 

• 	 How would a price cap system affect historic preferences that have 

been provided to certain mailers, such as mailers of nonprofit mail, 

periodicals, and library mail? 

Page 27 GAO-04-108T 
• 	 How could the Postal Service redesign the rate and classification 

system, as it did through the 1995 reclassification case, if it were 

subject to a price cap? 

• 	 Would adopting a price cap system be too risky, given the problems 

that have surfaced in some price-cap models adopted by other 

regulated industries? How could flexibility be built into the price-cap 

system itself to minimize risk and handle “the law of unintended 

consequences?” 

• 	 Should provisions of a price-cap system be specified by the legislative 

process? If so, which features should be codified in statute and which 

should be left to the regulatory process? 

• 	 What issues should be considered in adapting price-cap regulation from 

other industries and foreign postal systems to the unique context of 

regulating postal rates in the United States? 

• 	 What transition features should be required, such as a “baseline” rate 

case, in order to successfully implement a price-cap system? 

• 	 Should a revised and streamlined cost-of-service model be considered 

as an alternative to abolishing the current rate-setting structure and 

replacing it with a new model? If so, what statutory changes should be 

considered? Would such changes prove sufficient to remedy the 

shortcomings of the current rate-setting structure? 

As the above discussion demonstrates, the need for changing the postal 

rate-setting structure is clear. The current structure delays price changes 

through lengthy, contentious, and burdensome proceedings and has poor 

incentives for providing quality data. However, many questions remain 

about what changes should be made to the rate-setting process and the 

potential problems associated with those changes. Specifically, the option 

of adopting a price-cap model for regulating postal rates has emerged as a 

main alternative to a cost-of-service regulatory model but raises many 

issues that deserve thoughtful consideration. By its very nature, such 

fundamental change to the rate-setting system would necessarily entail 

substantial uncertainty, risks, and the possibility for further change to deal 

with unanticipated consequences. In this regard, the benefits and risks of 

adopting a price-cap system need to be carefully considered and weighed 

against the benefits and risks of the status quo. If the Service is to be 

limited to its core mission, the flexibility inherent in a price cap system 

could become a key management tool to successfully managing the 

transition to a leaner, more efficient postal system. 

Page 28 GAO-04-108T 
Rate-Setting Oversight In our view, as long as the Service remains a federal entity protected by 

the postal monopoly, it is appropriate that the Service’s ability to compete 

with the private sector be balanced with oversight and legal standards to 

ensure fair competition between the Service and private competitors. The 

Commission sought to create such a balance by recommending enhanced 

powers for the newly created Postal Regulatory Board, including a 

complaint process in which rates can be reviewed against statutory limits 

that provide for due process and resolution of the complaint within 60 

days. Depending on the outcome, the regulator could order rate 

adjustments to bring rates into conformity with statutory criteria. In our 

view, clear lines of authority in this area must be established if the ratesetting process is to be streamlined and speeded up. A key issue for 

Congress to consider is whether the Commission’s recommendations have 

struck the appropriate balance between flexibility and accountability. 

Another issue is what due process rules should be established in order to 

enable stakeholders to provide meaningful input and participate in ratesetting matters, including the right to appeal regulatory decisions. 

The Commission also proposed requirements for worksharing discounts 

that are established based on the costs that the Postal Service is estimated 

to avoid as a result of mailer worksharing activities to prepare, sort, and 

transport the mail. Specifically, the Commission stated that a specific 

requirement should be “that no new workshared discount for a noncompetitive 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.” In that 

case, the Commission said the regulator 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. These 

recommendations raise the issue of whether different standards should 

apply for new and existing worksharing discounts. 

By way of background, worksharing discounts did not exist when the 

Service was created by the Postal Reorganization Act of 1970. Thus, there 

is little statutory guidance in this area except for the mandate for the PRC 

to consider—along with other factors—the degree of preparation of mail 

for delivery into the postal system performed by the mailer and its effect 

upon reducing costs to the Service. Over time, the PRC developed a 

guideline for recommending worksharing discounts so that the estimated 

reduction in Postal Service revenues would equal the estimated reduction 

in its costs. The objective of this guideline is to create incentives for the 

lowest-cost provider to perform certain postal activities, which can be 

Page 29 GAO-04-108T 
either the mailer performing worksharing activities or the Service 

performing additional activities when mailers do not workshare. Because 

worksharing discounts have become an integral part of the rate-setting 

structure, a key issue is whether statutory guidance would be appropriate 

in this area; and if so, whether hard-and-fast rules for worksharing 

discounts should be established in law. 

Because postal rate-setting is at the heart of proposals for comprehensive 

legislative reform, it is important for Members of Congress to be aware of 

the many issues and questions that have been raised in this area. We 

believe that some of the issues and questions that arise from the 

Commission’s recommendations include the following: 

• 	 Should the break-even mandate continue to govern the postal ratesetting process, or should the Service be allowed to retain a certain 

amount of earnings? 

• 	 How would the proposed Postal Regulatory Board consider postal 

costing issues under the Commission’s proposals, since the 

Commission would abolish the current mechanism used to resolve 

these issues on a case-by-case basis (i.e., litigation in postal rate 

cases)? Specifically, what process should govern regulatory decisions 

regarding the measurement, allocation, and reporting of postal costs 

and revenues? Should the regulatory body also be given the authority 

to compel the Postal Service to collect data, as some have suggested? 

• 	 Would meaningful after-the-fact review of changes in postage rates be 

difficult to accomplish within the recommended 60-day time frame for 

considering complaints? Should stakeholders also be given the 

opportunity to obtain information through a discovery process; and if 

so, would a longer time frame be needed to consider complaints? What 

due process rules should be established for stakeholder participation in 

rate complaints and other rate-setting matters? 

• 	 Should the Commission’s recommendation to allow NSAs be adopted, 

and, if so, what specific criteria are appropriate in this area? Could 

NSAs create competitive harm, and, if so, what measures should be 

taken to mitigate this risk (e.g., prior review and other limitations)? 

Page 30 GAO-04-108T 
The Need for Progress on RateSetting Issues under the 

Current Structure 

• 	 If mailer-specific discounts are authorized, should data be required on 

the mailer-specific cost savings that the Postal Service expects to 

achieve? If so, how should the regulator balance its needs for such 

information with limitations relating to the practicality and burden of 

producing it? 

• 	 Is after-the-fact rate review incompatible with the need to ensure fair 

competition by an organization that can leverage the revenues and 

infrastructure obtained through its monopoly on delivering letter mail? 

If not, should measures be taken to limit the potential for unfair 

competition, such as providing limitations on the introduction of 

subsidized new products and services? Should the regulator be 

authorized to order the discontinuance of postal products and services 

that consistently fail to cover their costs? 

• 	 Would the complaint process, as the only means for stakeholders to 

seek to alter postal rates under the Commission’s proposals, create an 

incentive for numerous complaints that could become a de facto 

review of virtually all postal rates? 

• 	 Even if a regulator could order changes in rates after-the-fact, would it 

be reluctant to exercise that authority, given the potential financial 

impact and disruption for the Service and the mailing community? 

• 	 The Commission’s report did not address whether the proposed Postal 

Regulatory Board could be held accountable for its actions in the ratesetting area through appellate review. Should the Postal Regulatory 

Board’s actions be subject to appellate review, and if so, under what 

criteria? 

• 	 Another potential issue is whether a transition period would be needed 

to successfully implement a vastly different rate-setting system similar 

to what the Commission has recommended. For example, would a 

transition period be needed to enable the proposed Postal Regulatory 

Board to address major unresolved cost allocation issues, as well as for 

the Postal Service to make improvements to its cost allocation methods 

and underlying data systems that collect information for costing 

purposes? 

The Service and the PRC continue to have long-standing disagreements on 

rate-setting issues that have added to the length, cost, and burden of 

litigating rate cases. These issues have been a major focus of contentious 

rate proceedings, and, if left unresolved, will likely be re-litigated in the 

next rate case. As noted previously, a key unresolved issue is the 

Page 31 GAO-04-108T 
allocation of mail processing costs, which has implications for most postal 

rates since the Service’s mail processing and distribution network handles 

most mail. Specifically, the Service and the PRC disagree over the extent 

to which mail processing costs vary with mail volume and thus can be 

allocated to various mail categories, as opposed to being classified as 

institutional costs (i.e., overhead costs that the Service incurs regardless 

of mail volume). This disagreement has generated thousands of pages of 

evidence in rate cases and disagreements over the underlying 

assumptions, data, and analytic techniques. Although the arguments on 

both sides are rather arcane, the resolution of this dispute could have 

important practical consequences for postal rates and worksharing 

discounts. The estimated savings resulting from worksharing discounts— 

which is a key basis for establishing these discounts—is reduced as more 

mail processing costs are classified as institutional costs, since such costs 

do not vary regardless of how much mail is processed. Thus, the rates that 

apply to workshared mail, which accounts for three-quarters of total mail 

volume, could be affected by the resolution of this technical dispute. 

In our opinion, the gap between rate cases provides a rare opportunity for 

the parties to take a fresh look at the issue of mail processing volume 

variability. Key postal cost dynamics have changed in recent years, 

including the shift from increasing to decreasing mail volume, the prospect 

for further declines in First-Class Mail volume, and the Service’s initiative 

to realign its mail processing and distribution network. Such changes 

create uncertainty about whether historical relationships between mail 

volume and mail processing costs continue to apply, since historically mail 

processing costs increased as mail volume increased and the Service 

expanded its mail processing infrastructure incrementally. We urge the 

parties to reconsider their reliance on formal litigation so that this issue 

can be addressed before the inception of the next rate case. Progress in 

this area could diminish the burden on the Service and other stakeholders 

who participate in rate cases. In this regard, we note that the parties have 

worked hard to reach negotiated settlements to the last rate case and 

several other rate and classification proceedings since then. Given these 

outcomes, it is reasonable to expect similar progress in the area of mailprocessing volume variability if the parties have the will to resolve their 

differences. If the parties do not make progress, that will further indicate 

the need for a new rate-making structure, as the Commission has 

recommended, so that technical issues can be resolved in a more 

businesslike and expeditious manner. 

Page 32 GAO-04-108T 
Human Capital Issues The Postal Service’s human capital—its people—is critical to providing 

vital postal services to the American people and achieving a successful 

postal transformation. The Commission concluded that 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 possible the daily delivery of mail to American homes and 

businesses. We agree. Only through the efforts of its workforce are more 

than 200 billion pieces of mail delivered, 6 days each week, to the 

American people. Thus, we agree with the Commission’s conclusion that 

few of the reforms outlined in its report would be possible without the 

support and contributions of the Service’s most mission-critical asset: its 

people. As we recently reported, an organization’s people must be at the 

center of any transformation effort.22 

For this reason, the Commission focused on serious, long-standing issues 

in the human capital area that impose both statutory and practical 

constraints on the transformation of the organization. The problems can 

be grouped into three areas: (1) poor labor-management relations 

characterized by poor communication, lack of trust, excessive grievances, 

and difficulty negotiating labor contracts; (2) difficulty controlling 

workforce costs, including issues of workforce size, flexibility, pay 

comparability, workers’ compensation, and escalating benefits costs; and 

(3) inadequate incentives for individual performance and the need for a 

stronger linkage between individual and organizational goals. The 

Commission proposed important changes in each of these areas, some of 

which would require the commitment of the parties to address them in a 

constructive manner, and some of which would require changes to 

existing law. Given the central importance of the Service’s human capital, 

all of these proposals deserve close scrutiny and a fair hearing, despite the 

strong negative reactions that have been voiced by some stakeholders. 

Rather than declaring such proposals to be politically off-limits, we 

encourage Congress and the parties to approach these issues with open 

minds to explore whether a package of changes can be made that is 

mutually beneficial to the Service, its people, and the public. Much has 

changed in this area over the past 30 years, and the time is right to 

consider what statutory structure would be appropriate to enable the 

22U.S. General Accounting Office, Results-Oriented Cultures: Implementation Steps to 

Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 

2, 2003). 

Page 33 GAO-04-108T 
Achieving Effective LaborManagement Relations Will Be 

Fundamental to Making 

Progress 

Postal Service to incorporate best practices and improve working 

conditions for its employees. 

We and others have reported that adversarial labor-management relations 

have been a persistent issue for the Service and its major labor unions and 

have been a root cause of problems in improving the Service’s operational 

efficiency as well as improving its culture and the quality of work life. 23 

Poor communications, lack of trust, an excessive number of grievances, 

and difficulty negotiating labor contracts have been at the heart of labormanagement issues. Such problems have increased the difficulty in 

constructively working on difficult issues involving the size, flexibility, 

compensation, benefits, incentives, and culture of the workforce. We are 

encouraged by recent progress in this area, such as reports by union 

officials of better communications, sharp reductions in the number of 

outstanding grievances, and labor contracts that were successfully 

negotiated between the parties without the need for binding arbitration. 

However, progress has been uneven and much more work remains to be 

done. We agree with the Commission’s bottom line that Postal Service 

management must repair its strained relationship with postal employees. 

Historically, autocratic management, persistent confrontation and conflict, 

and ineffective performance systems often characterized the 

organizational culture on the workroom floor. These problems resulted in 

an underperforming organization with major deficiencies in morale and 

quality of work life; huge numbers of grievances with high costs for the 

Service and its employees; and protracted, acrimonious contract 

negotiations. In our past reports, we found that these conditions have 

existed over many years because labor and management leadership, at 

both the national and local levels, have often had difficulty working 

together to find solutions to their problems. Under these circumstances, it 

was difficult for the parties to develop and sustain the level of trust 

necessary for maintaining a constructive working relationship and 

23The National Academy of Public Administration, Evaluation of the United States Postal 

Service, (Washington, D.C.: July 1, 1982); U.S. General Accounting Office, LaborManagement Problems Persist on the Workroom Floor, GAO-GGD-94-201A/B, 

(Washington, D.C.: Sept. 29, 1994); U.S. General Accounting Office, Little Progress Made in 

Addressing Persistent Labor-Management Relations Problems, GAO/GGD-98-1 

(Washington, D.C.: Oct. 1, 1997); United States Postal Commission On a Safe and Secure 

Workplace, Report of the United States Postal Commission On A Safe and Secure 

Workplace (Washington, D.C.: Aug. 31, 2000); U.S. General Accounting Office, Major 

Performance and Accountability Challenges, GAO-03-118 (Washington, D.C.: Jan. 2003). 

Page 34 GAO-04-108T 
agreeing on major changes to maximize the Service’s efficiency and the 

quality of work life. 

Poor labor-management relations are incompatible with the Commission’s 

vision of achieving a more positive and productive climate necessary for a 

high-performing organization with a culture of excellence. Such a culture 

change will require better labor-management relations in which the parties 

maintain open communications, develop trust, and are willing to take risks 

to achieve mutually beneficial results. 

On the positive side, officials from some of the Service’s unions have told 

us that they have seen improvements in labor-management relations in 

recent years. They cited examples of improved communication and 

collaboration at the national and local levels, including 

• 	 Quality of Worklife and Employee Involvement programs, in which 

union and management officials reportedly have successfully 

communicated and made progress on finding ways to improve 

efficiency and the work environment; 

• 	 Joint Contract Interpretation manuals, as well as training implemented 

jointly by labor and management officials, which are intended to 

prevent disputes as well as help resolve current disputes and the 

backlog of grievances; and 

• 	 An Ergonomic Strategic Partnership among the Occupational Safety 

and Health Administration (OSHA) and postal labor unions to improve 

workplace safety and reduce risk factors, particularly ergonomicrelated hazards. 

Reducing Grievances 

As the Commission noted, employee morale is an essential element of an 

incentive-based culture, but is undermined when employee-management 

relations are acrimonious. We agree with the Commission that the high 

number of remaining grievances and the large backlog of grievances 

pending arbitration are an indication of strained relations between postal 

managers and workers, to the detriment of morale, productivity, and, 

ultimately, service to ratepayers. As the Commission concluded, satisfied 

employees are of far more value to the nation’s postal endeavor than those 

in a contentious relationship with their employer. Thus, we agree with the 

Commission that it is imperative that the Service give clear direction that 

settlement of problems and cooperative labor-management relations are a 

Page 35 GAO-04-108T 
priority. Rather than allowing problems to fester on the workroom floor, 

better communications and improved working relationships are needed to 

resolve problems as they arise, minimizing the need to resort to the 

grievance process to resolve disputes. This will require greater 

accountability for both supervisors and those they supervise, as well as for 

top management. We agree with the Commission that the Service must 

hold managers accountable for any behavior that results in poor labormanagement relations, and we believe this principle should apply equally 

to employees at all levels of the organization. 

The Commission noted that encouraging progress is being made by the 

Service and the National Association of Letter Carriers in resolving 

grievances using a restructured and streamlined grievance process. It 

recommended that such progress be used as a model, with the Service 

working diligently with other unions to institute procedures aimed at 

reducing the time to process grievances and the number of grievances 

appealed to arbitration. Recognizing that the success of any process 

depends on the collective commitment of the parties, we encourage the 

Service and its unions to make continued progress in this area. 

Difficulty Negotiating Labor Contracts 

Since postal reorganization, the Service and its major labor unions have 

often found it difficult to negotiate labor contracts without resorting to 

binding arbitration. The Commission criticized the collective bargaining 

process as overly lengthy and litigious, providing few incentives for the 

parties to reach negotiated settlements. It made detailed statutory 

recommendations to improve the process, including mandating the use of 

a “mediation and arbitration” approach and specific deadlines for 

completing various process steps and accelerating final resolution period. 

Postal union officials have strongly opposed these recommendations, 

stating that the parties have used the “mediation and arbitration” approach 

in the past and have the flexibility within existing law to mutually agree on 

any process for contract negotiations. Union officials have also said that 

existing deadlines are already difficult to meet, in part due to scheduling 

difficulties involving the availability of mediators and arbitrators. In their 

view, success is dependent on “people” issues, including good working 

relationships, communications, and trust, rather than on the formal 

process. They also have noted that the current contracts between the 

Service and three of its four major postal labor unions were negotiated 

without the use of an arbitrator and asserted that these outcomes 

demonstrate that progress has been made within the existing structure. 

We recognize these points, but believe that, as with other human capital 

Page 36 GAO-04-108T 
Difficulty Controlling 

Workforce Costs 

issues, the time has come to re-examine all aspects of a structure that was 

developed more than 30 years ago. 

Progress on controlling human capital costs will be critical to efforts to 

achieve “best execution” to sustain affordable universal postal service and 

to enhance the value of the mail. The Postal Service employed about 

829,000 people at the end of fiscal year 2003, whose pay and benefits 

accounted for more than three-quarters of the Service’s expenses. In this 

regard, we note that a recent analysis prepared by PRC staff showed that 

for the period between fiscal years 1998 and 2002 postal wage costs 

increased by 3.3 percent over inflation and postal benefits costs rose 28.1 

percent over inflation. The Commission concluded that the size of the 

workforce largely determines its costs, observing that it will be critical for 

management and labor to work together constructively to determine the 

right size of the postal workforce and to ensure appropriate flexibilities in 

its deployment. As we have previously reported, nearly half of the 

Service’s career workforce will reach retirement eligibility by 2010, 

creating an opportunity for the Service to gain resource flexibility through 

the attrition of retiring employees, while also minimizing disruption to its 

workforce. 

We note that the Postmaster General initiated a constructive working 

relationship between national postal management and the leadership of its 

labor unions and management associations to deal with issues of mail 

security after anthrax was found in the mail. Such communication and 

partnerships cannot be legislatively mandated. However, better working 

relationships would help the Service and its employee organizations 

address difficult workforce size and flexibility issues in a manner that 

would allow the Service to rightsize its workforce in the least disruptive 

manner possible, including the ranks of both managers and their 

employees. All issues should be on the table, including work rules that 

constrain greater efficiency; working conditions that constrain the 

treatment, morale, and discretionary effort of the workforce; and 

constraints on having the most effective and efficient provider perform 

postal activities, including limitations on outsourcing. 

Unresolved Pay Comparability Issues 

We agree with the Commission’s conclusion that the most thorny issue in 

collective bargaining today is pay and benefit comparability. Although the 

parties disagree about whether a wage and benefit premium exists and 

about the basis for making these comparisons, the Service’s ability to 

control costs in this area will be critical to achieving a more efficient 

Page 37 GAO-04-108T 
organization. As we have previously testified, one of the limitations in the 

existing collective bargaining process is that the interests of all postal 

stakeholders, such as ratepayers, do not appear to have been sufficiently 

considered.24 The Commission recommended that the Postal 

Reorganization Act be amended to clarify the term “comparability” and 

that the new Postal Regulatory Board should be authorized to determine 

comparable total compensation for all Postal Service employees. These 

recommendations have been strongly opposed by the Service’s major 

labor unions, variously opposing them as “draconian” measures that would 

“destroy” collective bargaining for postal workers. The unions have also 

questioned why a regulatory body headed by three political appointees 

should have the power to effectively set a cap on postal wages. 

With respect to clarifying the comparability standard, one option could be 

to revisit the guiding principles incorporated into the statutory wage and 

comparability standard so that it would more fully reflect all stakeholder 

interests and the Service’s overall financial condition and outlook. These 

principles could specify that comparability includes total wage, 

compensation, and benefit costs, as well as the relationship of these costs 

to total costs, their impact on rates and revenues, and the Service’s overall 

financial condition. Another option could be to delete pay comparability 

provisions from the statute, as some postal union officials have suggested. 

This option would raise the issue of what, if any, standard would remain to 

guide negotiators and arbitrators in the collective bargaining process. 

With respect to shifting authority over total postal compensation to a 

newly created regulatory body, we note that this change would appear 

contrary to the Commission’s principle that the Service needs additional 

flexibility to manage its operations. A related issue is how the Service will 

be able to pay competitive compensation for certain skills. We also 

question why a second body—in addition to the system of third-party 

arbitration—should be added to the already complex processes for 

determining postal pay and benefits. Thus, it is not clear whether this 

recommendation would add value to the collective bargaining process. 

Another controversial Commission recommendation was that the Postal 

Service pension and postretirement health benefit plans should be subject 

to collective bargaining—meaning that the Service and its unions should 

have the flexibility to develop new plans that are separate and apart from 

24GAO-03-812T. 

Page 38 GAO-04-108T 
existing federal pension and retiree health benefit plans. The Commission 

recognized that such a change could have an uncertain impact on the 

entire federal pension and retiree health benefit programs. Although the 

Service may have the authority under existing law to withdraw from the 

federal health program for its current employees under certain 

circumstances, it would still be required to contribute to the health costs 

of its current retirees. The Commission recommended that the Service 

work with the Department of the Treasury, the Office of Personnel 

Management (OPM), and other pertinent parties to determine the potential 

impacts that separate funds would have. Because these recommendations 

could have major effects on all federal employees, much more information 

would be needed in order to determine the potential impact of statutory 

changes in this area on the federal budget and employees. It is also not 

clear whether, as a practical matter, expanding the scope of collective 

bargaining to all postal benefits would result in cost savings for the Postal 

Service. For example, where the Service has flexibility, the Service has 

agreed in collective bargaining agreements to pay a higher percentage of 

health insurance premiums for its employees as compared to other federal 

agencies (about 85 percent vs. up to 75 percent). 

Addressing Retiree Benefits Obligations 

We agree with the Commission that the Service’s substantial obligations 

for its retirement-related benefits need to be addressed, including benefits 

for pensions and retiree health. Key issues include how to assign 

responsibility and structure a mechanism for covering the costs of 

providing retirement-related benefits and how the accounting standards 

should be applied. In addition, concerns have been raised about how 

changes in funding these obligations could impact the federal budget, as 

well as postal ratepayers. 

The recently enacted law (P.L. 108-18) changed the method by which the 

Service funds the Civil Service Retirement System (CSRS) pension 

benefits of its current and former employees to prevent a projected 

overfunding from materializing, while at the same time shifting 

responsibility for funding benefits attributable to military service from 

taxpayers to postal ratepayers. The law also required that, beginning in 

fiscal year 2006, the difference between the Service’s contributions under 

the new and old funding methods—the “savings”—be held in an escrow 

account until the law is changed. To facilitate consideration of which 

agency—the Postal Service or the Treasury Department—should fund 

military service costs, the law required the Postal Service, the Office of 

Personnel Management, and the Treasury Department to each submit 

Page 39 GAO-04-108T 
proposals to the President, Congress, and the GAO by September 30, 2003. 

The law also required the Postal Service to submit a proposal to the same 

recipients on how it planned to use the future “savings.” We, in turn, have 

until November 30, 2003, to analyze these proposals and will provide our 

reports to Congress before Thanksgiving. 

The Service submitted two proposals for use of the “savings,” both of 

which would affect postal rates to varying degrees.25 The first proposal 

recommends that the Service be relieved of the burden of funding benefits 

attributable to military service, and that the Service, in turn, would 

prefund its retiree health benefits obligations for current and former 

employees, which has been estimated at approximately $50 billion. This 

proposal is consistent with the Commission’s recommendation that 

responsibility for funding CSRS pension benefits relating to the military 

service of postal retirees should be returned to the Department of the 

Treasury. The second proposal is based on the premise that the Postal 

Service will remain responsible for funding military service benefits as 

currently required by P.L. 108-18. Under this proposal, the Service said that 

it would fund its retiree health benefits obligations only for its employees 

hired after fiscal year 2002 and use the remaining “savings” in priority 

sequence, to repay debt; and to fund productivity and cost-saving capital 

investments. This proposal appears consistent with the Commission 

recommendation that the Service should consider funding a reserve 

account for unfunded retiree health care obligations to the extent that its 

financial condition allows. 

There are a number of key questions related to the Service’s proposals that 

we are considering as part of our mandated review, including 

• 	 What is the relationship of military service to federal civilian service 

and benefits? 

• 	 What have been the historical changes to the funding of CSRS benefits 

to Postal Service employees and retirees? 

25The Service has estimated that the additional rate increase impact in fiscal year 2006, 

above any inflationary increase, would be 2.0 percent under its first proposal and 0.3 

percent under its second proposal. 

Page 40 GAO-04-108T 
• 	 What correlation exists between the cost attribution and funding 

methods of the Federal Employees Retirement System (FERS) and the 

current CSRS methods applicable to USPS? 

• How have other self-supporting agencies funded CSRS benefits? 

• What are the various options for allocating military service costs? 

• 	 What would be the effects of the Service’s proposals on the unified 

federal budget? On ratepayers? On the Service’s overall financial 

situation and transformation efforts? 

• 	 What alternatives exist for funding health benefit obligations to 

existing postal retirees and employees and distributing that 

responsibility between current and future ratepayers? 

• 	 What issues need to be addressed regarding the Service’s accounting 

treatment of retiree benefit obligations? 

• 	 What are the potential consequences to the Service and postal rates 

should the Service be required to make payments, beginning in fiscal 

year 2006, into an escrow account without the authority to spend the 

escrowed funds for postal purposes? 

Reforming Workers’ Compensation 

Another benefit area where costs have been difficult to control is the 

Service’s workers’ compensation benefits.26 The Commission found that 

under the Federal Employees’ Compensation Act (FECA), the Service has 

maintained a broad and effective workers’ compensation program and that 

recent efforts have lowered injury rates considerably. However, the 

Commission also concluded that the Service, given its unique status, 

should be provided relief from FECA provisions that were creating costly 

unintended consequences. The Commission recommended making the 

Service’s workers’ compensation program more comparable to programs 

in the private sector in order to control costs, provide adequate benefits, 

and address the Service’s unfunded liability of $6.5 billion in this area. We 

26U.S. General Accounting Office, Recent GAO Reports on the Federal Employees’ 

Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept. 30, 1997); Federal 

Employees’ Compensation Act: Issues Associated With Changing Benefits for Older 

Beneficiaries, GAO/GGD-96-138BR (Washington, D.C.: Aug. 14, 1996). 

Page 41 GAO-04-108T 
Inadequate Performance 

Incentives 

believe that placing workers’ compensation benefits on a par with those in 

the private sector merits careful consideration. 

As the Commission pointed out, a key goal of human capital reform should 

be to establish an incentive-based culture of excellence. We have reported 

that leading organizations use their performance management systems to 

accelerate change, achieve desired organizational results, and facilitate 

communication throughout the year so that discussions about individual 

and organizational performance are integrated and ongoing.27 Modern, 

effective, and credible performance appraisal systems are a key aspect of 

performance management. The Commission concluded that 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. 

In this regard, we have reported that the need for results-oriented pay 

reform is one of the most pressing human capital issues facing the federal 

government today.28 Successful implementation of results-oriented pay 

reform, commonly referred to as “pay for performance,” requires modern, 

reliable, effective, and as appropriate, validated performance management 

systems. Such systems need adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms. In fiscal year 

1995, the Service implemented a pay-for-performance system for its 

executives, managers, postmasters, supervisors, and other nonbargaining 

employees. This system was discontinued in fiscal year 2002, in part 

because of concerns that large payouts were made when the Service was 

recording large deficits. The Service revised its merit-based pay program 

for its executives and officers in fiscal year 2002 and revised its meritbased pay program for its postmasters, managers, and supervisors in fiscal 

year 2004. 

27U.S. General Accounting Office, Results-Oriented Cultures: Using Balanced 

Expectations to Manage Senior Performance, GAO-02-966 (Washington, D.C.: Sept. 27, 

2002). 

28U.S. General Accounting Office, Results-Oriented Cultures: Modern Performance 

Management Systems Are Needed to Effectively Support Pay for Performance, 

GAO-03-612T (Washington, D.C.: Apr. 1, 2003). 

Page 42 GAO-04-108T 
Given the concerns that led to the overhaul of the Service’s previous meritbased pay systems, it is important that these systems be evaluated to 

ensure that they are administered fairly and provide meaningful 

incentives. Such incentives would require valid measures that correspond 

with individual and organizational performance goals, as well as targets 

that are sufficiently challenging that they are not met automatically. For 

example, any productivity-based measures should result in real and 

measurable savings. 

In addition, as we have reported, proposed changes to the Senior 

Executive Service could provide a model for better linking pay and 

performance of senior executives.29 For example, the proposed Senior 

Executive Service Reform Act of 2003 includes a number of important 

reforms that would increase the pay cap for senior executives while also 

linking their pay more closely to performance. Similar issues would appear 

to apply to lifting the statutory pay cap for postal executives. 

Over the years, the Service’s major labor unions have consistently opposed 

extending a pay-for-performance system to craft employees. Presidential 

Commissioner Norman Seabrook shared their concerns, stating that in 

practice, pay for performance systems are characterized by nepotism, 

favoritism, and horrible morale among the workers. Union concerns also 

include tying employee compensation to results that depend in part on 

external events beyond their control as well as on the quality of postal 

management. It is reasonable to question whether a pay-for-performance 

system could be agreed on, implemented, and successful in the face of 

strong opposition of national and local union leaders. Union concerns are 

understandable because past history has led some union officials to 

question whether a pay-for-performance system could be successfully 

implemented. 

Nevertheless, as the Commission pointed out, properly designed 

performance-based compensation can serve as a powerful 

communications and motivational tool, helping employees understand 

how they can contribute to the Service’s financial health and success—and 

be rewarded for their efforts. In our view, aligning the interests of 

individual workers with the specific performance goals of the Service will 

be essential for the future. As the Commission concluded, the desire of the 

29U.S. General Accounting Office, Human Capital: Building on the Current Momentum to 

Address High-Risk Issues, GAO-03-637T (Washington, D.C.: Apr. 8, 2003). 

Page 43 GAO-04-108T 
workforce to make the modernization of the nation’s postal network a 

success, along with its willingness to make possible the 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. 

As the above discussion illustrates, human capital reform is necessary, but 

many issues remain to be resolved. We believe that key questions for 

Congress to consider include: 

• 	 What statutory changes can be made that would provide additional 

incentives for the Service, its employee organizations, and its 

employees to resolve their differences in an appropriate and 

expeditious manner, including through the grievance process and at the 

bargaining table? What opportunities exist to facilitate better 

communication, streamline lengthy processes, and minimize their cost? 

• 	 Should the existing statutory standards for comparability of postal 

wages and benefits be clarified to include specific performance criteria 

and factors upon which a comparison must be made, such as the 

Service’s overall financial condition and outlook? 

• 	 If comparability standards are retained, should they be enforced by an 

outside regulatory body or should they be considered self-enforcing 

through the collective bargaining process? 

• 	 What practical consequences could be expected if all postal benefits, 

including all health and retirement benefits, became subject to the 

collective bargaining process? What would be the potential effects on 

the financing of benefits for employees of both the Service and the rest 

of the federal government? Could increases in postal benefits costs also 

be expected over time, given the Service’s history of agreeing to pay a 

larger share of insurance premiums than other federal agencies pay? 

• 	 Should workers’ compensation benefits for Service employees be 

greater than those generally available to private sector employees? 

What opportunities exist to provide incentives to minimize workers’ 

compensation costs? 

• 	 Should the statutory pay cap on postal executives be lifted, and, if so, 

how would executive pay be linked to performance? Would increased 

accountability apply to postal executives for individual and 

organizational results, particularly when problems arise? What 

Page 44 GAO-04-108T 
The Postal Service 

Needs to Maximize 

Progress within Its 

Current Legislative 

Structure 

disclosure of postal executive compensation—including bonuses and 

other forms of compensation—would be appropriate to incorporate 

best practices that have been put into place in the private sector? 

While the Commission made a number of recommendations that require 

legislative changes, it also made suggestions for improving efficiency and 

service that can be implemented under the current law. These 

recommendations centered on standardizing and streamlining the postal 

network, both the processing and distribution infrastructure and retail 

facilities, with major efficiency gains accruing from changes in the 

processing and distribution network. The Commission commended the 

Postal Service for undertaking an ambitious effort, the Network 

Integration and Alignment project, to rationalize the processing and 

distribution network. We agree that this project could exert meaningful 

influence on the Service’s efficiency, but we have concerns about the lack 

of publicly available information on the Service’s plans and related funding 

strategies in this area. The Commission also pointed out that better postal 

data would aid the Service’s efforts to increase efficiency. We believe that 

the availability, accuracy, and relevance of postal data should be central to 

any meaningful transformation effort. 

The Commission recommended a core philosophy for an improved 

national mail service—the concept of best execution. This concept, as 

described by the Commission, includes employing corporate best 

practices in all operations, as well as selecting the provider who can 

perform the service at the highest level of quality for the lowest cost. Best 

execution has important implications for the Postal Service because it 

means that the Service should consider who could perform the work best, 

postal employees or private sector providers, when considering 

outsourcing and expanding worksharing opportunities. Some postal union 

officials have stated that the Service can provide better execution than 

private sector providers. While this may be true, best execution may be 

difficult to realize under the existing environment due to 

• lack of incentives to perform at the highest level possible; 

• an outdated, inefficient infrastructure; and 

• insufficient data to assess the true cost of operations. 

Page 45 GAO-04-108T 
We have addressed the issue of lack of incentives in a previous section. In 

the next sections we will discuss the importance of economy and 

efficiency in the postal network and related data issues. 

Factors That Hinder 

Economy and Efficiency in 

the Postal Network 

Difficulties in Optimizing the 

Postal Retail Network 

The Commission characterized the current postal network as too costly, 

too inefficient, too large, and lacking standardization. It envisioned a 

streamlined, standardized network capable of delivering universal service 

in the most efficient and cost-effective manner possible. We believe this 

vision is achievable if approached in a comprehensive, integrated fashion, 

and supported by postal stakeholders. However, practical impediments 

may hinder the Postal Service from rightsizing its infrastructure. 

Historically, the Service has encountered resistance from employees, 

mailers, communities, and Congress when it attempted to close facilities. 

Proactively working with stakeholders to garner input and support for its 

infrastructure initiatives may address legitimate concerns and thereby 

alleviate some of this resistance. Another impediment has been the 

Service’s limited options for funding capital improvements. Earlier we 

discussed how retained earnings could increase the Postal Service’s 

funding flexibility. However, this change would require legislative action. 

If the Service is to achieve best execution, it should increase current 

efforts to address problems with its infrastructure. The Service also needs 

to identify its funding needs for implementing its plans in this area. For 

purposes of our discussion we have separated the postal infrastructure 

into two distinct, yet inter-related, areas: (1) the network of post offices 

and other retail facilities and (2) the network of mail processing and 

distribution facilities. 

The Commission concluded that the Service needs to constructively 

address the fact that many of the nation’s post offices are no longer 

necessary to the fulfill the universal service obligation. We understand that 

making changes to retail operations is often controversial because 

communities do not like to lose their local post offices and changes in this 

area are often perceived as a reduction in services. Unfortunately, the 

Postal Service has not done enough to inform the public of the many retail 

options currently available. Currently there are over 70,000 locations 

where stamps are sold, such as ATMs, grocery and other retail stores, and 

postal vending machines. Stamps can also be purchased via the Internet, 

through the mail, or from rural carriers. In addition, the Service is 

extending retail access to 2,500 self-service kiosks and Hallmark Gold 

Crown card shops. Yet, about 80 percent of all stamp revenue is still 

generated at the retail counter. Two Commission recommendations in this 

area that we concur with were: (1) the Service should dramatically 

Page 46 GAO-04-108T 
escalate its efforts to increase alternative access to postal services, and 

(2) the Service should market these alternatives more aggressively. 

We believe that the Service should strive to improve accessibility to postal 

retail services as it implements its strategy of rationalizing its retail 

network, including closing post offices. The Service’s Transformation Plan 

stated that the Service would create new, low-cost retail alternatives to 

extend the times and places that its services are available, including selfservice, partnerships with commercial retailers, and Internet access to 

retail services. The plan said that the Service has begun a retail network 

optimization process, in which redundant retail operations would be 

consolidated, starting with poor-performing contract postal units, and 

replaced with alternative methods of retail access. The optimization 

process involves a national retail database that is to be used with a 

criteria-based methodology for modeling retail optimization and 

restructuring scenarios. The Service has also said it intends to expand 

retail service in markets where it is underrepresented, while reducing 

retail infrastructure in markets where it is overrepresented. 

Under current law, the Service is not allowed to close post offices for 

economic reasons alone. The Commission recommended that legal 

restrictions that limit the Service’s flexibility in this area be repealed and 

that the Service be allowed to close post offices that are no longer 

necessary for the fulfillment of universal service. While we agree that the 

Service should have the ability to align its retail network with customer 

needs in order to fulfill its universal service obligation in a cost-effective, 

efficient manner, we also believe that the Postal Service must assure 

Congress that the alignment will be done in a fair, rational, and fact-based 

manner. 

In contemplating the Commission’s recommendation to repeal the post 

office closing law, we have identified the following key questions: 

• 	 What national standards, if any, should apply to universal access to 

postal retail service? 

• 	 What criteria and process should be used to realign the Service’s retail 

infrastructure? 

Page 47 GAO-04-108T 
Difficulties in Optimizing the 

Postal Processing and 

Distribution Network 

• 	 Should the Service have greater freedom to reshape its retail 

infrastructure, or should Congress have involvement in such decisions, 

possibly by using a model such as the military base-closing process to 

close post offices that are no longer needed? 

• 	 Should current statutory restrictions on closing post offices be 

retained, modified, or repealed? 

• What transparency and accountability is appropriate in this area? 

The Commission found that the Service’s processing and distribution 

network is plagued with problems, including lack of standardization, 

inefficiency, and excess capacity. The Service has approximately 500 

facilities dedicated to processing the mail that do not share a standard 

footprint for architectural design, equipment complement and layout, or 

mail processing procedures. The lack of standardization may be one of the 

contributors to variations in productivity among mail processing facilities. 

Smaller facilities, as measured by volume, number of employees, and 

physical space, tend to have higher productivity, which is a possible 

indication of diseconomies of scale. For example, on average, small 

facilities tend to handle more mail, relative to work hours expended, than 

large facilities (see fig. 3). Standardizing operations across facilities may 

minimize diseconomies of scale and should be considered as part of 

planning plant consolidations or closings. In addition, standardization of 

processing and distribution facilities is widespread in process-oriented 

industries where standardization is viewed as vital to increased flexibility 

and efficiency. It may be difficult for the Service to become a world-class 

organization without establishing a standard footprint throughout its 

processing and distribution network. 

Page 48 GAO-04-108T 
Figure 3: Productivity of Mail Processing Plants, by Facility Size, in Fiscal Year 2001 

In addition to the lack of standardization, the Service’s processing and 

distribution facilities may not be optimally located. To a large degree, the 

processing and distribution network has evolved gradually in response to 

volume growth. Figure 4 shows the location of the Service’s processing 

facilities in the continental contiguous United States. Distributing mail 

between these facilities utilizes thousands of transportation lanes and 

results in too many partially full trucks traveling between plants. Better 

utilization of trucks and lanes may save the Postal Service money and, if 

properly executed, could improve service. 

Page 49 GAO-04-108T 
Figure 4: Location of Postal Service Mail Processing Facilities 

Another issue raised by the Commission related to the processing and 

distribution network is the assertion that the Postal Service has too many 

facilities, and the ones it has are not always used effectively, resulting in 

excess capacity throughout the network. Excess capacity can be very 

costly as it may require increased maintenance, facility, and labor costs. 

With changes in the types and volumes of mail and advances in both 

processing and information technology, the current network may be too 

large. We caution, however, that any consolidation plan should consider 

the effects of potential diseconomies of scale. Consolidating small 

facilities that may be more efficient into inefficient large facilities may not 

achieve the desired cost savings or service improvements. To achieve 

sustained cost savings, the Service will need to take a critical look at how 

to standardize and rightsize the processing and distribution network to 

maximize efficiency. As we have previously reported, any effort to 

rationalize the Service’s processing network must also take into 

Page 50 GAO-04-108T 
No Public Plan and Limited 

Stakeholder Engagement on 

Network Rationalization 

Strategy 

consideration the increased safety and security needs created by the 

anthrax attacks and the proper extent and location of mail safety 

equipment.30 Other considerations also include how network realignment 

could affect the need for a mix of workforce skills and abilities, as well as 

workforce diversity and demographics. 

The Commission noted the importance of the Service working with 

stakeholders to successfully implement best execution strategies, 

streamline the postal network, and decide the fate of unnecessary postal 

facilities. We agree. However, to date, the Service has not made public a 

comprehensive infrastructure rationalization plan and has had limited 

engagement with stakeholders who may be affected. Such a plan should 

lay out the Service’s vision and how it plans to reach it, including the 

criteria, process, and data it uses to make its decisions. In our view, the 

lack of this type of information will likely lead to suspicion and lack of 

trust about the objectivity, fairness, and impartiality of Service decisions 

and the lack of input from stakeholders could prevent the Service from 

achieving the goal of a more efficient network. Further, we believe that it 

is essential for the Service to engage its stakeholders in its plan 

development process to address legitimate concerns and minimize 

disruption, thus alleviating some of the resistance that is often 

encountered when the Service tries to close facilities. 

A comprehensive network integration and rationalization plan will be 

important for Congress to have regardless of whether a commission is 

established to consider network rationalization. One of the most important 

deliverables in the Service’s Transformation Plan, the Network Integration 

and Alignment (NIA) project, is a set of processes and tools used to 

analyze the optimal number, locations, and functions of mail processing 

and transportation facilities. The NIA strategy was to have been developed 

by the fall of 2002. The Service did not meet this time frame, and the 

Commission has reported that the Service hopes to begin putting the new 

strategy into effect at the end of this year. It has already begun to close 

some types of facilities and build others, without disclosing how these 

activities fit into the NIA strategy. 

To succeed in optimizing its networks, the Service must work with its key 

stakeholders, including employee organizations, the mailing industry, 

affected communities, and Congress. However, based on difficulties it has 

30

GAO-03-812T. 

Page 51 GAO-04-108T 
encountered in the past, the Service appears to be reluctant to divulge its 

network optimization plans, including the timing and funding needs 

associated with these plans, to Congress or its stakeholders. We believe 

that the Service will face more resistance if it approaches transformation 

in an insular, incremental fashion. For example, some union 

representatives have acknowledged that the Postal Service needs to 

rationalize its infrastructure, and they have committed to working with the 

Service to achieve this goal. However, they have received limited 

information to date concerning the Postal Service’s plans for closings and 

consolidations. Likewise, various mailers have expressed concern that the 

Postal Service does not adequately seek input regarding customer needs 

when planning major changes. This concept is anathema to best practices 

employed in private sector service industries. 

Recognizing the difficulties the Service has experienced in rationalizing its 

network, including closing unneeded facilities, the Commission 

recommended that Congress establish a Postal Network Optimization 

Commission (P-NOC), similar to the base-closing model and provisions in 

proposed postal reform legislation introduced by Senator Carper. The 

P-NOC would be charged with making recommendations to Congress and 

the President relating to the consolidation and rationalization of the 

Service’s mail processing and distribution infrastructure. Under the 

Commission’s proposal, P-NOC recommendations would become final 

unless Congress disapproves them in their entirety within 45 days. The 

intent of this recommendation corresponds with our observation that a 

base-closing model may prove necessary to address politically sensitive 

changes to postal facilities. 

Regardless of whether or not a P-NOC is implemented, the following three 

key factors will be needed to guide decisions: 

• 	 principles for rationalizing infrastructure that are fact-based, clearly 

defined, and transparent; 

• players who should be involved in making the decisions; and 

• 	 processes that should govern how decisions are made and 

implemented. 

Identify Funding Needs and To accomplish major transformation, the Service will need to identify its 

Strategies 	 funding needs related to its major transformation initiatives and its 

strategies for funding these initiatives. Historically, postal policy has been 

to fund capital expenditure as much as possible through cash flow from 

Page 52 GAO-04-108T 
Opportunities to Strengthen 

Information Technology 

Investment Management 

operations, with shortfalls financed through debt. By law, the Postal 

Service’s total debt cannot exceed $15 billion, and annual increases in the 

Service’s outstanding debt cannot exceed $3 billion. In fiscal year 2001, the 

Service was faced with insufficient cash flow from operations and with 

debt balances that were approaching statutory limits. Consequently, the 

Service imposed a freeze on capital expenditures for most facilities that 

continued through fiscal years 2002 and 2003. Implementing best 

execution strategies is difficult under these circumstances, especially 

since the Service has not specified what its funding needs will be to 

rationalize its infrastructure and implement other Transformation Plan 

initiatives. More information in this area would be useful for Congress and 

other stakeholders to understand the Service’s future financial needs. It 

would also be useful for the Service to assess what funding it could 

receive from continuing to identify and dispose of surplus real estate. 

The Commission recommended that the Postal Service be encouraged to 

include policy and goals related to the active management of its real estate 

in future strategic plans. Disposing of surplus real estate would not only 

save the Postal Service maintenance and repair expenses but may also 

provide a source of funds that can be used to finance capital projects. 

Furthermore, aggressive management of its underutilized real estate assets 

could also facilitate local redevelopment. In addition, passage of the Postal 

Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18) 

provided the Postal Service with some financial relief. Outstanding debt at 

the end of fiscal year 2004 is budgeted to be $2.6 billion to $3.1 billion, 

down from an estimated $7.3 billion at the end of fiscal year 2003 and $11.1 

billion at the end of fiscal year 2002. We believe the Service has a window 

of opportunity for financing major infrastructure changes that may not last 

long if First-Class Mail volumes continue to decline. Taking advantage of 

this opportunity could better position the Service for the future. 

As the Service has recognized, improving its information technology (IT) 

infrastructure should be considered as part of any network rationalization 

project. We share the view of the Commission that transformation should 

include enhanced information systems because streamlined and integrated 

operations will require a strong IT infrastructure. The Service has a 

number of IT initiatives designed to enhance the efficiency of the 

processing and distribution network that are currently at various levels of 

deployment. Among these is the Intelligent Mail program, the Surface Air 

Management System, and the Transportation Optimization Planning and 

Scheduling system. While the Service’s IT initiatives may provide 

enhanced IT capabilities, it is not clear how they will be integrated or 

when they will be fully deployed. 

Page 53 GAO-04-108T 
As we have previously reported, the Service has established significant 

capabilities for managing its IT investments, but shows mixed progress in 

managing its IT investments as a portfolio. The Service has not utilized 

criteria that adequately address cost, benefit, schedule, and risk so that it 

can effectively analyze, prioritize, or select its investments from a portfolio 

perspective. Also, the Service does not regularly evaluate completed 

projects and currently has no institutionalized processes that enable it to 

learn from its current practices and investments and from other 

organizations. Accordingly, the Service cannot ensure that it is selecting 

leading-edge IT investments that will maximize returns to the organization 

and achieve strategic change.31 

Data Issues Related to 

Achieving Greater Efficiency 

Accurate cost and performance data are the cornerstone of efficiency 

improvements and are vital if the Service is to achieve best execution. In 

this regard, the Commission noted that the Service could use better realtime information on the location of individual mail pieces and the 

containers they travel in to improve its efficiency, such as re-routing mail 

to less busy facilities to ensure its more rapid processing, as well as 

adjusting for weather conditions or vehicle breakdowns. In addition, to 

determine best execution, the Service would need to know how much 

each process, function, and operation actually costs to perform and how 

these functions interrelate. For example, when determining what portion 

of overall operations may be performed cheaper by the private sector, it 

would be necessary to know what the actual cost and quality of each 

function is and what the effect on overall costs and quality would be if this 

function were contracted out. Some unions, mailers, and other groups 

have raised concerns about the information used to make outsourcing 

decisions, as well as the accuracy of data systems used to measure 

performance and productivity. 

Recognizing that it will need improved cost information, the Service 

reports that it is currently implementing an activity-based costing system 

in over 380 mail processing facilities, which is intended to provide specific 

data to managers to help them evaluate and reduce operational costs. In 

addition, the Service has continued implementing the recommendations of 

the 1999 Data Quality Study to improve key postal cost data. Data quality 

31U.S. General Accounting Office, United States Postal Service: Opportunities to 

Strengthen IT Investment Management Capabilities, GAO-03-3 (Washington, D.C.: Oct. 15, 

2002). 

Page 54 GAO-04-108T 
Conclusion 

issues continue to be of interest to the House Committee on Government 

Reform, which has asked GAO to follow up on the Service’s progress in 

this area. Others with expertise in postal data quality issues, such as the 

Postal Rate Commission and the Postal Service’s Office of Inspector 

General, may have insights on costing and performance data necessary to 

address issues that have been raised by the Commission’s proposals. Later 

this year, the Postal Rate Commission plans to host public sessions 

where staff from the Service will provide briefings on changes the Service 

has made to update data systems related to carrier costs and on recent 

changes in the Service’s accounting and reporting systems. Such 

constructive exchanges help to further mutual understanding and progress 

on data quality issues. Continued focus on improving the quality of postal 

costing and performance data would also be necessary to successfully 

implement the Commission’s proposals. 

We and the Commission agree that the Service faces an uncertain future. 

Also, we agree that both congressional action on comprehensive postal 

reform legislation and continued actions by the Postal Service to make 

improvements under its existing authority are necessary to ensure the 

future viability of the Postal Service. The Commission’s key conclusions, 

consistent with our past work, were that the Service faces financial 

pressure due to its outmoded business model, significant financial 

obligations, operating inefficiencies, electronic diversion and mail volume 

trends, and statutory and practical constraints. The Service’s current 

business model is not sustainable in today’s competitive environment. 

Thus, we believe that now is the time to “get it right” and modernize the 

statutory framework that governs the Service. 

In addition to statutory reform, we agree with the Commission that the 

Service can and should do more within its existing authority to work 

toward “best execution” that incorporates corporate best practices and 

enables those who can perform best and for the best price to provide 

postal activities, whether that is the Service, the mailing industry, 

transportation firms, or other companies. The Service has many 

opportunities to become more efficient, such as by standardizing its 

operations and reducing excess capacity of its network. Impending 

retirement of much of the Service’s workforce also creates an opportunity 

for the Service to realign its workforce through attrition. The 

Commission’s vision of rightsizing the Service’s infrastructure and 

workforce is achievable if approached in a comprehensive, integrated 

fashion, and supported by postal stakeholders. 

Page 55 GAO-04-108T 
Matter for 

Congressional 

Consideration 

Recommendation for 

Executive Action 

However, since the Service issued its Transformation Plan in April 2002, it 

has not provided adequate transparency on its plans to rationalize its 

infrastructure and workforce; the status of initiatives included in its 

Transformation Plan; and how it plans to integrate the strategies, timing, 

and funding necessary to implement its plans. In addition, the Service has 

had limited constructive engagement with employee organizations, the 

mailing industry, affected communities, and Congress with regard to its 

efforts to implement its key transformation initiatives related to 

rationalizing its infrastructure and workforce. As the Service knows from 

the difficulties it has encountered when it has tried to make changes to its 

facility locations in the past, these decisions can be highly controversial. 

However, if those who are potentially affected by such decisions do not 

have sufficient information about how they may be impacted by proposed 

facility changes, the Service is unlikely to gain the necessary support to 

successfully achieve a much more efficient network. 

In view of the Service’s continuing financial, operational, and structural 

problems, as well as trends that increase the urgency of making rapid 

progress in transforming its organization, we believe that Congress should 

consider the Commission’s recommendations as well as GAO’s reform 

suggestions and enact comprehensive postal reform legislation. Some of 

the key areas that need to be addressed as part of comprehensive reform 

legislation include clarifying the Service’s mission and role; enhancing 

governance, accountability, oversight, and transparency; improving 

regulation of postal rates; and making human capital reforms. 

To facilitate the Service’s progress in implementing actions under the 

existing system, we recommend that the Postmaster General develop an 

integrated plan to optimize its infrastructure and workforce, in 

collaboration with its key stakeholders, and make it available to Congress 

and the general public. In addition, the Postmaster General should provide 

periodic reports to Congress and the public on the status of implementing 

its transformation initiatives and other Commission recommendations that 

fall within the scope of its existing authority. Postal officials have agreed 

to take these actions. 

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

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

Committee may have. 

Page 56 GAO-04-108T 
Contact and 

Acknowledgments 

(543078) 

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

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

ungarb@gao.gov, or call Linda Calbom, Director, Financial Management 

and Assurance, on (202) 512-8341 or at calboml@gao.gov for pension and 

retiree health issues. Individuals making key contributions to this 

testimony included Teresa Anderson, Gerald P. Barnes, Joshua Bartzen, 

Alan Belkin, Amy Choi, Margaret Cigno, Keith Cunningham, William 

Doherty, Brad Dubbs, Kathleen A. Gilhooly, Kenneth E. John, Roger Lively, 

Scott McNulty, and Lisa Shames. 

Page 57 GAO-04-108T 
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