Testimony 

Before the Special Panel on Postal Reform 

and Oversight, Committee on Government 

Reform, House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:00 p.m. EST 

Wednesday, January 28, 2004 U.S. POSTAL SERVICE 

Key Elements of 

Comprehensive Postal 

Reform 

Statement of David M. Walker, 

Comptroller General of the United States 

GAO-04-397T 
www.gao.gov/cgi-bin/getrpt?GAO-04-397T. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Goldstein 

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

Highlights of GAO-04-397T, a testimony 

before the Special Panel on Postal Reform 

and Oversight, House Committee on 

Government Reform 

January 28, 2004

U.S. POSTAL SERVICE 

Key Elements of Comprehensive Postal 

Reform 

GAO believes that comprehensive postal reform is urgently needed. The Service 

achieved notable success in fiscal year 2003, but this respite is likely to be shortlived. The outlook is for continuing declines in the core business of First-Class 

Mail, while some key costs are rising and productivity gains are likely to slow. 

First-Class Mail Volume Growth, Fiscal Years 1984 through 2003 

Key postal reform issues that need to be addressed are: 

The Service’s Mission and Role as a Self-Financing Federal Entity 

The Service has a broadly defined mission that enables it to engage in 

unprofitable and costly endeavors. In our view, the time has come for Congress 

to clarify the Service’s core mission and ensure continuity across changes in its 

management. Key issues include what should be the scope of the postal 

monopoly, and should the Service retain its regulatory functions. 

Governance, Transparency, and Accountability Mechanisms 

Better governance, transparency, and accountability mechanisms are needed. 

Qualification requirements are too general to ensure that board appointees have 

the experience needed to oversee a large business-like operation. Enhanced 

transparency and accountability mechanisms are also needed for financial and 

performance information, such as reporting requirements. 

Flexibilities and Independent Oversight 

The Service needs additional flexibilities so it can generate needed revenues, 

contain costs, and provide quality service. Major changes to the rate-setting 

structure are needed to enhance flexibility, encourage greater cost allocation, 

provide better cost data, and strengthen independent oversight. Also, current 

legal and other constraints serve to limit the Service’s ability to rationalize its 

infrastructure and workforce, including closing unnecessary post offices. 

Human Capital Reforms, Including Pension, Benefit, and Escrow Issues 

Outstanding human capital issues include the Service’s responsibility for 

pension costs related to military service, funding the Service’s significant 

obligations for retiree health benefits, and determining what action to take on 

the escrow account established as a result of the enactment of P.L. 108-18. Other 

key areas for reform include workers’ compensation and pay comparability. 

Both the Presidential Commission 

on the U.S. Postal Service and 

GAO’s past work have reported 

that universal postal service is at 

risk and that reform is needed to 

minimize the risk of a significant 

taxpayer bailout or dramatic postal 

rate increases. 

GAO has testified that Congress 

should enact comprehensive postal 

reform legislation that would 

clarify the Postal Service’s (the 

Service) mission and role; enhance 

governance, transparency, and 

accountability; improve regulation 

of postal rates and oversight; help 

to ensure the rationalization of the 

Service’s infrastructure and 

workforce; and make needed 

human capital reforms. 

The administration has also 

supported postal reform, outlining 

guiding principles intended to 

ensure that the Service: 

implements best practices with a 

governing body equipped to meet 

its responsibilities; enhances 

transparency of timely and 

accurate data on postal costs and 

performance; provides greater 

flexibility for the Service to meet 

its customer obligations; ensures 

accountability through appropriate 

independent oversight; and keeps 

the Service financially selfsufficient, covering all of its 

obligations. GAO was asked to 

discuss comprehensive postal 

reform in light of these principles. 

This testimony is largely based on 

prior GAO reports and testimonies. 
Page 1 GAO-04-397T 

Chairman McHugh and Members of the Special Panel: 

I am pleased to be here today to participate in this hearing on postal 

reform. In my testimony today, I will focus on (1) the need for postal 

reform and (2) key areas for comprehensive postal reform. Recently, the 

U.S. Postal Service (the Service) has gained some financial breathing room 

primarily because legislation enacted in April 2003 (P.L. 108-18)1

 has 

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

net income in fiscal year 2003 was a record $3.9 billion, of which about $3 

billion was the result of this legislation. In addition, the Service reported 

that it has made notable progress in its cost-cutting efforts. In fiscal year 

2003, the Service downsized its workforce by 27,000 employees, increased 

its productivity for a record fourth consecutive year, and achieved $1.1 

billion in cost reductions. As a result, the Service reduced its debt by $3.8 

billion in fiscal year 2003 to $7.3 billion at the end of the fiscal year. The 

Service also maintained high levels of customer satisfaction and timely 

delivery of collection-box First-Class Mail, setting new records in each of 

these areas. The Service is justifiably proud of these achievements. 

However, as the Service has recognized, its respite is likely to be shortlived, given increasing competition and the Service’s formidable financial, 

operational, and human capital challenges. As the President’s Commission 

on the United States Postal Service (the presidential commission) noted, 

the nation’s communications, technology, and delivery markets have seen 

vast changes since the Service was created by the Postal Reorganization 

Act of 1970.2

 New types of electronic communications include the use of email, wireless technology, and electronic bill payment services. These 

technological advances appear to have placed First-Class Mail volume in 

the early stages of a long-term decline. In addition, the Service faces 

increased competition from private delivery companies, some of which 

have established national ground delivery systems and a national network 

of retail facilities. 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 

 1

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

18, 117 Stat. 624. 

2

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 2 GAO-04-397T 

universal mail service can be sustained over the long term with a selffinancing public institution. 

Recent developments strengthen our view that enactment of postal reform 

legislation is urgently needed so that the Service can achieve a successful 

transformation to modernize itself and continue as a viable provider of 

universal postal service in the 21st century. To summarize: 

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

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

depended on rising mail volume to help cover rising costs and mitigate 

rate increases. First-Class Mail volume declined by a record 3.2 percent 

in fiscal year 2003 and is projected to decline annually for the 

foreseeable future. This trend is particularly significant because FirstClass Mail covers more than two-thirds of the Service’s institutional 

costs. 

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

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

and increasing volume of lower-margin products, such as some types of 

Standard Mail. These changes reduce revenues available (contribution) 

to cover the Service’s institutional costs. 

• Increased competition from private delivery companies: Private 

delivery companies dominate the market for parcels greater than 2 

pounds and appear to be making inroads into the market for small 

parcels. Priority Mail volume fell 13.9 percent in fiscal year 2003 and 

over the last 3 years has declined nearly 30 percent. Once a highly 

profitable growth product for the Service, Priority Mail volume is 

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

ground shipment alternatives. Express Mail volume is declining for the 

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

established national networks of retail facilities through UPS’s 

acquisition of MailBoxes Etc., now called UPS Stores, and FedEx’s 

recent acquisition of Kinko’s. 

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

growth in fiscal year 2004, which would be the first year since postal 

reorganization that postal revenues have failed to increase. However, 

as the Service has recognized, even the zero-growth target will be 

challenging. In the absence of revenue growth generated by increasing 

volume, the Service must rely more heavily on rate increases to cover 

rising costs and help finance capital investment needs. 
Page 3 GAO-04-397T 

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

declined from $3.3 billion in fiscal year 2000 to $1.3 billion in fiscal year 

2003, which was the lowest level since fiscal year 1986, and far below 

the level of the late 1990s, when the Service spent more than $3 billion 

annually. Capital cash outlays are budgeted to increase to $2.4 billion in 

fiscal year 2004, but this level may not be sufficient to enable the 

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

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

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

• Renewed difficulties in substantially improving postal productivity:

The Service’s productivity increased by 1.8 percent in fiscal year 2003 

but is estimated to increase by only 0.4 percent in fiscal year 2004. In 

the absence of mail volume growth, substantial productivity increases 

will be required to help cover cost increases generated by rising wages 

and benefit costs and to mitigate rate increases. 

• Significant financial liabilities and obligations: Despite the passage 

of legislation that reduced the Service’s pension obligations, the 

Service has about $88 billion to $98 billion in liabilities and obligations 

that include $47 billion to $57 billion in unfunded retiree health 

benefits. Under the current pay-as-you go system, the Service may have 

difficulty financing its retiree health benefits obligation in the future if 

mail volume trends continue to impact revenues while costs in this 

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

Congress so the Service could prefund this obligation to the extent that 

it is financially able. 

• Uncertain funding for emergency preparedness: The Service 

requested $350 million for emergency preparedness for fiscal year 2004, 

which it did not receive, and $779 million for fiscal year 2005. If the 

money is not appropriated, funding for this purpose may have to be 

built into postal rates. 

• Challenges to achieve sufficient cost cutting: The Service achieved 

additional cost cutting to compensate for below-budget revenues in 

fiscal year 2003. Despite this progress, in the longer term it is unclear 

whether continued cost-cutting efforts can offset declines in First-Class 

Mail volume without impacting the quality of service. 

In view of the Service’s continuing financial, operational, and human 

capital challenges, as well as trends that increase the urgency of making 

rapid progress in transforming its organization, we believe that Congress 

should enact comprehensive postal reform legislation that includes the 
Page 4 GAO-04-397T 

Service’s overall statutory framework, resolution of issues regarding the 

Service’s pension and retiree health benefits obligations, and whether 

there is a continued need for an escrow account. We are pleased that the 

administration has engaged with Congress and other stakeholders on 

these important issues, and agree with the administration’s principles for 

postal reform.3

 We also believe that the findings and recommendations of 

the presidential commission’s report made a valuable contribution to 

assist Congress, the administration, the Service, and other stakeholders in 

considering the actions needed to transform the Service to a more highperforming, results-oriented, transparent, and accountable organization. 

My testimony, based on our prior reports and testimonies4

 and our 

continuing work in this area,5

 will address the need for postal reform and 

the key areas for comprehensive postal reform, including 

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

universal service and the postal monopoly and clarifying the role of the 

Service in regard to competition; 

• enhancing governance, transparency, and accountability by delineating 

public policy, operational, and regulatory responsibilities, as well as 

defining appropriate transparency and accountability mechanisms; 

• improving flexibilities and oversight by balancing increased postal 

flexibility with an appropriate level of independent oversight and 

addressing selected legal and other constraints that limit the Service’s 

 3

http://www.treas.gov/press/releases/js1044.htm. 

4

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

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

Financial and Transformation Challenges, GAO-02-694T (Washington, D.C.: May 13, 

2002); U.S. Postal Service: Deteriorating Financial Outlook Increases Need for 

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

Financial Outlook and Transformation Challenge; 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). 

5

We did not independently verify any Postal Service data, although data from its financial 

statements were audited by an independent auditor. Some other data, such as data on mail 

volumes and costs, were produced by data systems that have been reviewed by the Postal 

Rate Commission, by stakeholders participating in rate cases, and by the 1999 Data Quality 

Study. See A.T. Kearney, Data Quality Study (Alexandria, Virginia: Apr. 16, 1999). 
Page 5 GAO-04-397T 

ability to rationalize its infrastructure and workforce; and 

• making needed human capital reforms such as determining the 

Service’s responsibility for pension costs related to military service, 

funding retiree health benefits, and determining what action to take on 

the escrow account established in recent pension legislation, deciding 

whether postal workers’ compensation benefits should be on par with 

those in the private sector, and clarifying pay comparability standards. 

Our conviction, shared by the presidential commission, the Service, the 

administration, and others, is that postal reform is needed. The status quo 

has not produced satisfactory results and the temporary surpluses 

generated by P.L. 108-18 are unsustainable. Incremental steps toward 

postal transformation cannot resolve the fundamental and systemic issues 

associated with the Service’s current business model. The Service’s longterm financial challenges remain, and, accordingly, the Service’s long-term 

outlook and transformation efforts remain on our High-Risk List. 

Fundamental changes will need to be made to the Service’s business 

model, and the legal and regulatory framework that supports it, to help 

assure the Service’s long-term financial viability. Now that the presidential 

commission has finished its work, the time has come for Congress to act. 

Structural issues contributing to the need for postal reform include the 

following: 

• Uncertain financial future: The Service is intended to be selfsupporting through postal revenues. However, as the presidential 

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 over $85 billion in 

financial liabilities and obligations over the past three decades. These 

liabilities and obligations include large unfunded obligations for retiree 

health benefits, workers’ compensation liabilities, remaining pension 

obligations, and debt. Given the Service’s demographics and current 

health care trends, the costs and obligations related to retiree health 

benefits are expected to continue rising at a rapid rate. These growing 

obligations will increase financial pressure on the Service at a time 

when revenues from First-Class Mail are expected to continue to 

decline. 

• Difficulty financing capital needs: In recent years, as the Service’s 

debt level neared its $15 billion cap, the Service found it problematic to 

obtain adequate financing for capital needs and thus curtailed capital 

spending. Recently enacted pension legislation has resulted in an 

increase in cash flow, and the Service plans to increase capital 

The Need for 

Comprehensive Postal 

Reform Legislation 
Page 6 GAO-04-397T 

spending for fiscal year 2004. However, in the longer term, it may be 

difficult for the Service to obtain adequate funds to address its capital 

needs, including modernizing its aging network of postal facilities, 

without significantly increasing rates or debt. An additional potential 

source of funding is the disposition of surplus real estate, because the 

Service is allowed by law to retain all revenues received from the 

disposition of postal assets. Although the current market value of the 

Service’s portfolio is unknown, its book value is approximately $15 

billion. 

• Limited incentives for success: The current legal framework, which 

was designed to help the Service fulfill universal service mandates, 

does not provide the same types of incentives that apply to the private 

sector. Under the statutory break-even mandate and postal monopoly, 

the Service does not have the profit motive or direct competition (in 

letter mail) like the private sector does. In addition, the rate-setting 

structure has allowed the Service to cover rising costs by increasing 

rates. Moreover, 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, limiting incentives for cutting costs and 

improving productivity. In this regard, a limited retained earnings 

provision could enable the Service and its employees to benefit from 

whatever cost reductions are achieved. 

Despite the above, the Service has achieved success in reducing total work 

hours and downsizing its workforce by over 74,000 employees over the 

past 3 fiscal years, which has helped the Service contain its costs. 

However, cost cutting is likely to achieve diminishing returns under the 

current structure, which restricts the Service’s flexibility and provides 

limited incentives. Thus, postal reform is needed to enhance incentives 

and enable the Service to achieve major advances in postal productivity 

and continued cost reductions. Such advances may be achieved through 

continuing automation as well as realignment of the Service’s processing 

and retail networks. 

As previously noted, the likelihood of declining First-Class Mail volume is 

another key impetus for postal reform. Its rate of growth has been in longterm decline since the 1980s. First-Class Mail can be divided into two 

categories that are both declining in volume: (1) single-piece mail, such as 

letters, which is sent at the rate of 37 cents plus 23 cents for each 

additional ounce; and (2) bulk mail, which receives discounts for 

worksharing activities performed by mailers (see fig. 1). The single-piece 

mail includes remittance mail, which is impacted by diversion to other 

forms of payment, such as automatic deductions from bank accounts, 
Page 7 GAO-04-397T 

automatic charges to credit cards, and other electronic payments. The 

bulk mail includes mailings of bills and statements, and advertising mail. 

Single-piece First-Class Mail volume declined by a record 5.4 percent in 

fiscal year 2003, while bulk First-Class Mail volume declined by 1 

percent—the first such decline since worksharing discounts were 

implemented in fiscal year 1976. 

Figure 1: First-Class Mail Volume Growth, Fiscal Years 1984 through 2003 

First-Class Mail generates more than half of the Service’s revenue and 

covers more than two-thirds of its institutional costs. Standard Mail 

volume is growing, but it makes a smaller per-piece contribution than 

First-Class Mail and its volume is considered more price sensitive to rate 

increases. Parcel Post volume is also growing, but not enough to offset 

declines in Priority Mail. Periodicals mail is priced at cost, and other 

sources of Service revenue make a relatively small contribution to its 

institutional costs. Thus, the loss of contribution from declining First-Class 

Mail volume is difficult to recover from other classes of mail. 

Looking ahead, a report prepared for the presidential commission found 

that growth in electronic payments is likely to be an important factor in its 

forecast of gradual declines in First-Class Mail volume.6

 The rapid 

 6

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, California: May 

2003). 
Page 8 GAO-04-397T 

diffusion of computer, Internet, and broadband 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. These trends point to the strong potential for 

further 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 

electronic alternatives, including the Internet. 

If the Service’s core business of First-Class Mail continues to decline, it 

will face the formidable challenge of maintaining affordable universal 

postal service by growing revenues, significantly cutting costs, or reducing 

service standards. In order to achieve net cost savings, the Service’s costcutting 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 

infrastructure and workforce costs associated with having to deliver mail 

to over 1.5 million new addresses every year. Thus, maintaining the quality 

and affordability of postal services would likely require dramatic 

improvement in the Service’s efficiency. In order to do so, the Service will 

need to become a much leaner and more flexible organization and 

rightsize its processing and retail networks and its workforce. 

More significant and frequent rate hikes are also likely to be needed to 

cover the costs of benefits that are being earned by current employees and 

financed under existing cash-based accounting and rate-setting methods. 

One of the key reform challenges facing Congress and the Service is the 

funding of the Service’s financial liabilities and obligations, including 

unfunded retiree health benefits, workers’ compensation benefits, and 

Civil Service Retirement System (CSRS) pension obligations. Although 

recent legislation addressed how the Service will cover its CSRS pension 

obligations over a 40-year period, 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 

payments on its retirees’ health insurance premiums are expected to 

continue rising until about 2040. 

Congress is currently reviewing the Service’s retirement-related 

obligations. We believe that it would be prudent for the Service to address 

the unfunded obligations today, in a manner that is fair and balanced for 

both current and future ratepayers. In response to the requirement in the 

Postal Civil Service Retirement System Funding Reform Act of 2003 

(P.L.108-18) that the Service report on how it proposes to use the pension 
Page 9 GAO-04-397T 

“savings” resulting from the act, the Service proposed to prefund at least a 

portion of its retiree health benefits obligation. We found that although 

this proposal would result in marginally higher postal rate increases, at 

least in the short term, it strikes a reasonable and equitable balance 

between current and future ratepayers, and addressed one of the Service’s 

substantial future obligations. On a related matter, we recommended that 

Congress repeal the escrow requirement established by P.L. 108-18 after 

receiving an acceptable plan from the Service describing how it intends to 

rationalize its infrastructure and workforce and is confident that the 

Service is making satisfactory progress on transforming itself into a more 

efficient organization and implementing its other transformation goals.7

This recommendation and related considerations, including responsibility 

for military service pension costs, are discussed further in this statement. 

Taken together, consideration of the escrow requirement, postal reform, 

and the Service’s retiree health benefits obligation represents a rare 

opportunity to address the Service’s long-term financial viability. 

We and the presidential commission have reported that universal postal 

service is at risk and that reform is needed to minimize the risk of a 

significant taxpayer bailout or dramatic and more frequent postal rate 

increases. We have testified that Congress should enact comprehensive 

postal reform legislation that would clarify the Service’s mission and role; 

enhance its governance, transparency, and accountability; balance 

enhanced flexibility and oversight to improve regulation of postal rates; 

help to ensure the rationalization of the Service’s infrastructure and 

workforce; and make needed human capital reforms. The administration 

has also supported postal reform and outlined guiding principles to ensure 

that the Service: implements best practices with a governing body 

equipped to meet the responsibilities and objectives of an enterprise of its 

size and scope; enhances transparency of timely and accurate data on 

postal costs and performance; provides greater flexibility for the Service 

to meet its obligations to customers in a dynamic marketplace; ensures 

additional accountability through appropriate independent oversight; and 

keeps the Service financially self-sufficient, covering all of its obligations. 

In the following sections of this testimony, I discuss comprehensive postal 

reform in light of these principles. 

 7

U.S. General Accounting Office, Postal Pension Funding Reform: Issues Related to the 

Postal Service’s Proposed Use of Pension Savings, GAO-04-238 (Washington, D.C.: Nov. 26, 

2003). 

Major Elements 

Needed for 

Comprehensive Postal 

Reform 
Page 10 GAO-04-397T 

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. As the presidential 

commission recognized, the nation’s postal laws that established the 

Service in the early 1970s 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 moneylosing initiatives in electronic commerce and remittance processing, 

among other things.8

 The Service’s ill-fated ventures were also questioned 

by some postal stakeholders as unfair competition, since they were crosssubsidized by a 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 presidential 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. 

Key questions in this area include the following: 

• How should universal postal service be defined in the 21st century? 

• 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? 

• 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 its regulatory responsibilities and law 

enforcement functions? 

 8

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); and U.S. Postal Service: Development and Inventory of 

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

Postal Service Mission and 

Role Need Clarification 
Page 11 GAO-04-397T 

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.9 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. Narrowing or eliminating 

the monopoly could increase consumer choice and provide incentives for 

the Service to become more effective and efficient. For example, in the 

competitive parcel market, 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. 

Another issue is whether the 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.10 The presidential 

commission has recommended separating these functions so that the 

Postal Service cannot define and regulate the scope of its own monopoly. 

As the presidential commission noted, it is a fundamental premise of 

American justice that parties that administer laws should not have a 

financial interest in the outcome. Questions relating to the postal 

monopoly include the following: 

• 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? 

• Should the Service continue to have the power to define and regulate 

its own statutory monopoly, including use of the suspension process? 

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

postal monopoly and the mailbox monopoly? If so, should a clear 

statement of congressional intent be provided to guide regulatory 

decisions, or should the regulator have unfettered discretion to 

 9

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). 

10The Service has used its regulatory power to further define 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 C.F.R. § 310.1(a)) as well as 

regulations specifying access to mailboxes (Domestic Mail Manual, D041 and P011.2.2). 
Page 12 GAO-04-397T 

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 cost 

effective for private delivery companies to deliver items to mailboxes if 

individuals could veto access and redefine mailbox access as the 

delivery companies 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? 

In our view, the Service must have greater flexibility to operate in a 

businesslike fashion, but with this latitude comes the need for enhanced 

governance, transparency, and accountability mechanisms. Managerial 

accountability must come from the top, with the Service governed by a 

strong, well-qualified corporate-style board that holds its officers 

responsible and accountable for achieving real results both currently and 

over time. In addition, despite recent improvements, we continue to be 

concerned that additional transparency mechanisms be implemented to 

enhance the Service’s accountability for financial and performance results. 

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 an appropriate guide for governance. Having a well qualified, 

independent, adequately resourced, and accountable board is critical for a 

major federal institution with annual revenues approaching $70 billion and 

almost 830,000 employees at the end of fiscal year 2003. We agree with the 

presidential commission that the Service’s legacy governance structure 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. In this regard, one issue is what 

statutory qualification requirements are appropriate for the board to 

ensure that it has the kind of expertise necessary to oversee a major 

government business. 

Another major issue 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. Specifically, how should the Service’s governing 

The Need for Enhanced 

Governance, Transparency, 

and Accountability 

Mechanisms 

Governance Issues 
Page 13 GAO-04-397T 

board, along with top management, be held accountable? The presidential 

commission recommended that the Postal Rate Commission (PRC) be 

replaced with a newly created regulatory board endowed with broad 

public policy responsibilities as well as broad mandates and authority for 

accountability and oversight. These recommendations raise fundamental 

questions, including the following: 

• Who should make certain 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 can 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? How should it be structured to 

preserve its independence from political manipulation and minimize 

the risk of regulatory capture? 

• What statutory guidance and constraints should apply to regulatory 

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

congressional review? 

A key element of postal reform will be the statutory reporting 

requirements needed to ensure transparency and accountability of 

financial and performance information. The Service remains a public 

institution with a monopoly on providing vital postal services to the 

nation. Hence, appropriate transparency is needed so that stakeholders 

are well apprised of the Service’s financial situation and performance and 

understand how future results may be affected by impending events, so 

that changes do not come as a surprise to those responsible for or 

impacted by its performance. 

The Service has made recent progress in this area, but it recognizes that 

further progress should be made. Enhanced transparency will be essential 

for stakeholders to better understand the Service’s financial situation and 

performance results, conduct independent oversight, and hold 

Enhancing Transparency and 

Accountability of Financial and 

Performance Information 
Page 14 GAO-04-397T 

management accountable.11 In addition, enhanced reporting will be even 

more critical if the Service obtains greater flexibility to set postal rates in a 

streamlined manner that relies on rapid verification of compliance. A key 

issue is whether statutory change is needed to enhance the level of 

transparency that the Service must provide. We were pleased the Service 

has recently taken steps to enhance its financial reporting. The Chairman 

of the Service’s Board of Governors also recently indicated that the 

Service would make further enhancements along the lines of some SEC 

reporting requirements. In our view, it will be important for Congress to 

obtain clarification from the Service on how and when it intends to 

develop financial statements and disclosures comparable to those 

provided by publicly traded companies. If Congress determines that the 

Service’s proposed approach is not acceptable or timely, or if the Service 

does not fulfill the commitment it makes in this regard, Congress could 

consider mandating SEC-type reporting requirements for the Service, or 

giving a regulatory body authority in this area. 

In addition, there are areas where stakeholders still have little information, 

such as the Service’s financial needs for maintaining and modernizing its 

infrastructure, and the true market value of the Service’s vast real estate 

holdings. Further, we 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 monopoly. The Service’s customers have 

a right to know what they are getting for their money, particularly captive 

customers with few or no alternatives to using the mail. Information about 

service quality would become even more important if the Service obtains 

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

presidential commission recommended that a regulatory body be required 

to prepare a comprehensive annual report assessing the 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. 

 11U.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). 
Page 15 GAO-04-397T 

Key questions related to transparency and accountability include the 

following: 

• What transparency of the Service’s financial and performance results is 

appropriate for oversight and accountability? What mechanisms should 

be established to facilitate and ensure adequate transparency? 

• What transparency and accountability mechanisms are needed to 

prevent unfair competition and inappropriate cross-subsidization? 

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

statutory requirement, with major Securities and Exchange 

Commission (SEC) reporting requirements? 

Giving the Service greater flexibility to operate in a businesslike manner 

also would require enhanced oversight by an independent regulatory body 

endowed with sufficient authority and resources, as well as continued 

congressional oversight. Current law mandates independent review of 

postal rates and has the laudable goals of protecting postal customers 

against undue discrimination, restricting cross-subsidies, and ensuring due 

process. However, the current rate-setting structure is adversarial, lengthy 

and expensive. It also serves to significantly limit the Service’s rate-setting 

flexibility while providing poor incentives for appropriate cost allocation. 

In addition, the Postal Rate Commission (PRC) has limited authority, 

particularly in the areas of cost allocation and ensuring the quality of the 

supporting data. Improvements in the rate-setting area will be a 

fundamental component of postal reform legislation. Furthermore, the 

Service faces legal and other constraints that limit its flexibility to 

rationalize its infrastructure and workforce. Legislative reforms are 

needed in this area as well. 

As long as the Service remains a federal entity protected by the postal 

monopoly, its ability to compete with the private sector should be 

balanced with appropriate oversight and adequate legal standards to 

ensure fair competition between the Service and private competitors. 

Clear lines of authority in this area must be established if the rate-setting 

process is to be streamlined and sped up. A key issue for Congress to 

consider is 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. Key 

shortcomings of the current rate-setting structure include the following: 

Flexibilities and 

Independent Oversight 

More Flexibility and Enhanced 

Oversight Needed in RateSetting Area 
Page 16 GAO-04-397T 

• Adversarial, burdensome, and lengthy rate-setting proceedings.

Statutory requirements for rate and classification cases impose a 

litigious, costly, and lengthy rate-setting process that can delay needed 

new revenues by more than a year. Because the law enables any 

interested party to participate, most changes require a major 

proceeding that places the Service in an adversarial relationship with 

its major customers and at a distinct competitive disadvantage. Rate 

cases tend to pit the Service and postal stakeholders against each 

other, since the zero-sum nature of the break-even requirement 

provides powerful incentives for parties to attempt to shift postal costs 

in ways that serve their self-interests. 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, makes it difficult for 

smaller stakeholders to effectively participate. Statutory rules against 

ex parte communications help to preserve due process and fairness, 

but also make it difficult for experts to constructively discuss technical 

issues and resolve problems as they arise. 

• Unresolved, recurring disputes. The current rate-setting structure, 

which seeks to assure all parties due process, enables them to 

repeatedly raise issues that have previously been considered. The 

Service has a unique opportunity to repeatedly raise issues by building 

them into its initial rate proposals. For many years, cost allocation 

issues have been debated and are frequently a key reason why rate 

cases are so lengthy and litigious, since their disposition can directly 

affect rates. Although interested parties should have an opportunity to 

participate in rate cases, the need to address complex cost allocations 

in every rate proceeding is inconsistent with having a streamlined ratesetting process that swiftly resolves complaints about rates. 

• Poor incentives for data quality. Current law gives the Service 

opportunities to seek advantage in litigious rate cases through its 

control over what data are collected and how those data are analyzed 

and reported. PRC cannot compel the Service to collect data, update 

data, or subpoena information. The 1999 Data Quality Study, which you 

requested, Mr. Chairman, found that key postal cost data had not been 

updated for many years and were used regardless of their 

obsolescence.12 Although the Service has worked to address these and 

 12A.T. Kearney, Data Quality Study (Alexandria, Virginia: Apr. 16, 1999). 
Page 17 GAO-04-397T 

other deficiencies identified by the study, it is fair to question why 

these problems could linger for so long. 

• Disincentives for maximizing cost allocation. Under current law, all 

classes of mail and types of service must cover their attributable costs, 

while institutional costs are allocated based on judgment informed by 

broad statutory criteria.13 In effect, the Service loses pricing flexibility 

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

a structural disincentive to allocate costs. The presidential 

commission’s conclusion that more postal costs can and should be 

allocated raises the issue of whether more regulatory authority is 

needed to ensure that all costs that can be rationally attributed are 

properly allocated. 

• Need for Periodic Reporting. As the presidential commission noted, 

independent regulatory oversight should ensure that the outcome 

cannot be unduly influenced through the selective provision of 

information to the regulator. To this end, a key issue is whether the law 

should mandate the Service to submit periodic reports in accordance 

with form, content, and timing requirements determined by a 

regulatory body. This could involve changing the statute to clarify that 

the regulator could compel the collection and provision of necessary 

data, including rate-setting and performance information, that would be 

analyzed according to cost allocation methods determined by the 

regulator. 

A particularly controversial area includes consideration of worksharing 

discounts, which are applicable to about three-quarters of the Service’s 

mail volume. Worksharing discounts did not exist when the Postal 

Reorganization Act of 1970 was enacted. 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.14 Over time, the PRC developed a guideline 

for recommending worksharing discounts so that the estimated reduction 

 13The 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 institutional costs. This 

requirement has long been interpreted to apply to subclasses of mail. 

14PRC is required to consider nine factors in making recommended decisions on postal 

rates, including such factors as fairness and equity and coverage of attributable costs. See 

39 U.S.C. § 3622(b). 

Worksharing discounts 
Page 18 GAO-04-397T 

in Service revenues would be no more than equal to the estimated 

reduction in related Service costs. 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 versus a set of key principles or criteria for 

worksharing discounts should be established in law. Other issues and 

questions that have been raised in the rate-setting area 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? 

• 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 a regulatory body be 

authorized to order the discontinuance of postal products and services 

that consistently fail to cover their costs? 

• Could a complaint process, as a key mechanism to seek redress for 

rates established with no prior review, create an incentive for 

numerous complaints that could become a de facto review of virtually 

all rates? Even if a regulatory body could order changes in rates after 

the fact, would it be reluctant to do so, given the potential financial 

impact and disruption for the Service and the mailing industry? 

• How much time is needed for meaningful after-the-fact review of 

changes in postage rates and review of complaints? What due process 

rules should be established for stakeholder participation in rate 

complaints and other rate-setting matters? 

• 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 

Service to collect data, as some have suggested? 
Page 19 GAO-04-397T 

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

the mailer-specific cost savings that the Service expects to achieve? If 

so, how should the regulatory body balance its needs for such 

information with limitations relating to the practicality and burden of 

producing it? 

• What statutory criteria should govern the adoption and review of 

negotiated service agreements (NSA)? Could NSAs create competitive 

harm, and, if so, what measures should be taken to mitigate this risk 

(e.g., prior review and other limitations)? 

• Would a transition period be needed to successfully implement a 

different rate-setting system and address major unresolved cost 

allocation issues, as well as for the Service to improve its cost 

allocation methods and underlying information systems that provide 

costing data? 

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

rate-setting structure is clear. However, many questions remain about 

what changes should be made 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-ofservice regulatory model but raises many issues that deserve thoughtful 

consideration.15 By its very nature, any fundamental change to the ratesetting 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 weighed against the benefits and risks of the status quo. If the 

Service is to be limited to its core mission, the flexibility provided by a 

price-cap system could become a key tool to successfully managing the 

transition to a leaner, more efficient postal system. A price-cap system 

also could enable the Service to implement a strategy of smaller, more 

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

infrequent, yet significant increases. We recognize that these proposals 

have been reviewed in numerous hearings, surfacing many issues and 

creating a valuable record to build on. Key questions to consider include 

the following: 

 15A price-cap system could limit rate increases for certain postal products and services 

according to a specified index, such as the Consumer Price Index. 

Price-cap regulation 
Page 20 GAO-04-397T 

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

Service to maximize its financial performance, since it 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 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 the law require that rates for each class of mail or type of 

service cover the direct and indirect postal costs attributable to them? 

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 wages and benefits for postal 

employees? 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? 

• How could the Service redesign the rate and classification system, as it 

did through the 1995 reclassification case, if it were subject to a price 

cap? How could more limited classification changes be adopted? 

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

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

industries? How could flexibility be built into the system to minimize 

risk and handle “the law of unintended consequences?” 
Page 21 GAO-04-397T 

• Should Congress specify provisions of a price-cap system? If so, what 

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? 

• What other regulatory models should be considered in the rate-setting 

area? 

The Service’s uncertain future regarding its mail volume and revenue 

growth makes it imperative for the Service to become a more costeffective and efficient organization. To facilitate this, the Service’s 

governing body and management must have the authority and flexibility to 

reduce costs and modify its business operations. There are a number of 

inefficiencies in the Service’s current infrastructure, which has evolved 

piecemeal over decades and may not adequately reflect current and future 

needs. This infrastructure includes approximately 38,000 post offices, 

stations, and branches; 500 mail processing and distribution facilities; and 

other facilities. On the retail side, many post office transactions, like 

selling stamps, can be conducted more efficiently through other retail 

alternatives. On the processing and distribution side, efficiency varies 

across facilities, in part because the Service does not have standardized 

operations. 

Although the Service recognizes the need to rationalize its infrastructure, 

several current legal constraints hinder its flexibility. A key question for 

Congress to consider is whether current legal restrictions on closing post 

offices should be retained, modified, or repealed. Under current law, the 

Service is not allowed to close post offices for economic reasons alone.16

In making a determination on whether to close or consolidate a post 

office, the Service is required to consider the effect on the community, 

postal employees at that office, and the resulting economic savings, among 

other things.17 All post office closings are also subject to a statutory 

 1639 U.S.C. § 101(b). 

1739 U.S.C. § 404(b)(2). 

Constraints to Flexibility of the 

Service’s Operations and 

Infrastructure 
Page 22 GAO-04-397T 

process that governs notification and appeals, which can delay closings for 

an extended period.18 In addition, annual appropriations bills have long 

specified that no appropriated funds shall be used to consolidate or close 

small rural and other small post offices. 

Regulations further specify processes that the Service must follow for 

closing, consolidating, and relocating post offices. The Service can also 

suspend post office operations in an emergency without following the 

normal procedures but must notify affected customers individually and 

establish alternative services as quickly as possible. While there are no 

statutory regulations against closing mail processing and distribution 

facilities, these facilities are often co-located with post offices that are 

subject to statutory constraints. In addition, the Service often encounters 

political resistance when it determines to close, consolidate, or relocate 

postal facilities. Government officials are understandably concerned about 

decisions that affect customers, postal employees, as well as communities 

and constituents. In any event, it will be important for the Service to 

communicate with and consider the concerns of those affected by facility 

closings or other changes. 

Greater flexibility for the Service to reshape its infrastructure must be 

accompanied by enhanced transparency and accountability mechanisms. 

Because rationalizing its infrastructure and workforce is crucial to the 

Service’s future financial viability and has potentially broad impacts, we 

recommended that the Service prepare a publicly available plan that lays 

out its vision and strategies in this area.19 This plan should include the key 

principles or criteria that will guide the Service’s decisions, the processes 

that will be used to make its decisions, and the players that will be 

involved. We have also recommended that repeal of the escrow 

requirement be contingent on Congress’s receipt of a satisfactory plan 

from the Service describing how it intends to rationalize its infrastructure 

and workforce.20 Both the House and Senate oversight committees have 

sent letters to the Postmaster General requesting the Service to provide 

Congress with a plan for rationalizing the Service’s infrastructure and 

workforce. Service officials told us that they are in the process of 

 1839 U.S.C. § 404(b)(3)(4)(5). 

19GAO-04-108T. 

20GAO-04-238. 
Page 23 GAO-04-397T 

developing the requested plan and intend to provide it to Congress by 

February 2. 

The Postal Service’s human capital is critical to providing vital postal 

services to the American people and achieving a successful postal 

transformation. The Service employed almost 830,000 people at the end of 

fiscal year 2003, whose pay and benefits accounted for more than threequarters of the Service’s expenses. The Service reported that its operating 

expenses fell by about $1.3 billion in fiscal year 2003 due primarily to 

pension reform and work hour reductions. Another area where the Service 

continues to make encouraging progress is in the declining number of total 

grievances, which as of the end of fiscal year 2003 had fallen to 93,483, less 

than half the number at the end of fiscal year 1998. Further progress on 

controlling human capital costs will be critical to sustain both affordable 

and universal postal service. The Service’s hourly compensation costs, 

including wages and benefits, are rising faster than inflation, and key 

issues remain unresolved regarding the Service’s pension and retiree 

health benefits obligations. We believe that the time is right to consider 

what statutory structure would be appropriate to address these issues, 

facilitate best practices, and improve labor-management relations and 

overall working conditions. In this section of my statement, I will focus on 

(1) funding of pension and retiree health benefits obligations; (2) workers’ 

compensation provisions; and (3) criteria for pay comparability. 

The Service’s substantial obligations for its retirement-related benefits 

need to be addressed, especially in connection with its retiree health 

benefits. A key issue is how to assign responsibility and structure a 

mechanism for covering the costs of providing retirement-related benefits. 

Another issue is how changes in funding these obligations could affect 

postal ratepayers, taxpayers, and the federal budget. 

The Postal Civil Service Retirement System Funding Reform Act of 2003 

(P.L. 108-18), enacted in April 2003, 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. At the same time, the act shifted 

responsibility for funding pension benefits attributable to military service 

from taxpayers to postal ratepayers. The act 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 

Human Capital Issues 

Postal Pension and Retiree 

Health Benefits Issues 
Page 24 GAO-04-397T 

military service pension costs, the act required the Service, the Office of 

Personnel Management (OPM), and the Treasury Department to each 

submit proposals to the President, Congress, and the GAO by September 

30, 2003. The act also required the Service to submit a proposal to the 

same recipients on how it planned to use the future “savings.” We, in turn, 

provided our analysis of these proposals on November 26, 2003.21 

Regarding the military service issue, the Service believes that the Treasury 

should bear responsibility for pension costs related to military service, 

while Treasury and OPM believe that this responsibility should remain 

with the Service. We do not take a position on whether the Service or the 

Treasury should bear responsibility for the military service costs, because 

we believe that this is a policy decision that should be made by Congress. 

Instead, we have identified and assessed the agencies’ respective positions 

and provided additional information to assist Congress in making its 

decision. In this regard, two key issues were raised by the agencies, with 

differing views provided—(1) the relationship of military service to 

employing agencies’ operations and (2) consistency among agencies, 

especially self-supporting ones. Regarding the first issue, the Service 

believes that there is no relationship between military service and postal 

operations and therefore the Service should not bear the pension costs 

related to military service. Treasury’s view is that the employing agencies 

should bear this cost, because receiving credit for past military service is a 

civilian retirement benefit. Absent a conscious, voluntary, and contractual 

decision to the contrary, typical cost attribution methods would allocate 

service to the agency that benefited from the military service (Department 

of Defense). Under such a method, the taxpayers would bear the cost of 

pensions related to military service. 

Regarding consistency, we reported that the Service is required to fund the 

dynamic normal cost of CSRS benefits, whereas some self-supporting 

agencies pay only a portion of this cost. Thus, we stated in our Matters for 

Congressional Consideration that Congress should consider treating all 

self-supporting entities consistently by requiring dynamic funding of the 

full cost of pension benefit costs not paid by employee contributions and 

deposits exclusive of military service costs. We also recommended that 

Congress should consider requiring consistency across self-supporting 

 21U.S. General Accounting Office, Postal Pension Funding Reform: Review of Military 

Service Funding Proposals, GAO-04-281 (Washington, D.C.: Nov. 26, 2003); and Postal 

Pension Funding Reform: Issues Related to the Postal Service’s Proposed Use of Pension 

Savings, GAO-04-238 (Washington, D.C.: Nov. 26, 2003). 
Page 25 GAO-04-397T 

agencies in assigning responsibility for pension costs related to military 

service. 

Should Congress decide that the Service should retain responsibility for 

funding military service pension benefits, the appropriate method for 

allocating the cost of these benefits would need to be decided. In this 

regard, we recommended in our report that an additional option should be 

explored for allocating these costs. Specifically, one that makes the 

Service responsible only for military service that became creditable after 

postal reorganization took effect on July 1, 1971.22

The second issue that Congress must consider is the Postal Service’s 

report on use of the pension “savings.” The Service submitted two 

proposals, both of which would affect postal rates to varying degrees. The 

first proposal recommends that the Service be relieved of the burden of 

funding pension benefits attributable to military service, and that the 

Service, in turn, would begin to prefund its retiree health benefits 

obligation for current and former employees, which has been estimated in 

fiscal year 2003 at between $47 billion and $57 billion. The second 

proposal is based on the premise that the 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 obligation only for employees hired after fiscal year 2002 and use 

the remaining “savings” to repay debt and to fund productivity and costsaving capital investments. In our report, we noted that if either of these 

proposals were accepted, Congress would need to address implementation 

issues related to prefunding the retiree health benefits obligation, 

including who determines the amount of the obligation, what demographic 

and economic assumptions should be reflected in the obligation amount, 

and what funding and investment approach should be used. 

We assessed these proposals according to their fairness and affordability 

and how they addressed the Service’s transformation efforts, including its 

cost saving and productivity improvement initiatives. We found that the 

first proposal strikes a more equitable balance of allocating costs between 

current and future ratepayers because benefits being earned by today’s 

employees would be built into the current postal rate base. Under the 

second proposal, a substantial portion of the retiree health benefits 

 22Military service that became creditable after postal reorganization would be for 

employees who did not have at least 5 years of civilian service prior to July 1, 1971. 
Page 26 GAO-04-397T 

obligation would remain unfunded, thereby placing the burden of the 

retiree health benefits being earned today on future ratepayers. Both of 

the proposals attempted to balance short-term rate mitigation with some 

level of prefunding of the Service’s retirement health benefits obligation. 

In its first proposal, the Service estimated that an additional rate increase 

of 2 percent over the rate of inflation would be required in fiscal year 2006. 

The Service’s second proposal would require only an additional increase 

of 0.3 percent over the rate of inflation since it would be funding a smaller 

portion of the retiree health benefits obligation. To mitigate the impact of 

any marginally higher rates needed to prefund retiree health benefits, we 

believe that the Service must transform itself into a more efficient and 

effective organization through continued modernization efforts. 

Another matter we considered in evaluating the Service’s proposals was 

the impact of the escrow requirement embodied in P.L. 108-18, which we 

determined could lead to unnecessary rate increases. However, we 

reported that Congress would need to have sufficient information to 

determine that the Service is making progress in achieving its 

transformation goals, including its initiatives to rationalize its 

infrastructure and workforce. Therefore, we recommended that Congress 

should repeal the escrow requirement upon receipt from the Service of an 

acceptable plan for rationalizing its infrastructure and workforce. Both the 

House and Senate oversight committees subsequently requested that the 

Service provide a plan on how it intends to rationalize its infrastructure 

and workforce, and the Service agreed to provide such a plan. 

Another benefit area where postal costs have been difficult to control 

involves the Service’s workers’ compensation benefits under the Federal 

Employees’ Compensation Act (FECA). The Service reported nearly $1.5 

billion in workers’ compensation expense in fiscal year 2003, only $50 

million less than the record set in the previous fiscal year, while its 

unfunded liability for workers’ compensation rose $526 million to a record 

$7.2 billion at the end of the fiscal year. We have reported on FECA issues, 

including how these benefits compare with those of other federal and state 

workers’ compensation laws and possible changes to FECA benefits for 

beneficiaries at or beyond retirement age.23 We reported that to help 

address FECA-related cost issues, Congress could consider converting 

 23U.S. General Accounting Office, Recent GAO Reports on the Federal Employees’ 

Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept. 30, 1997); and Federal 

Employees’ Compensation Act: Issues Associated with Changing Benefits for Older 

Beneficiaries, GAO/GGD-96-138BR (Washington, D.C.: Aug. 14, 1996). 

Workers’ Compensation Issues 
Page 27 GAO-04-397T 

from the current FECA benefit structure to a FECA annuity. The 

presidential commission concluded that the Service should be provided 

relief from FECA provisions creating costly unintended consequences and 

that its workers’ compensation program should be made more comparable 

to programs in the private sector. For example, the commission noted that 

unlike most private sector plans, FECA imposes no waiting period before 

benefits begin. The commission also pointed out that there is no maximum 

dollar cap on FECA payments, so that employees eligible for retirement 

often opt to stay on the FECA rolls rather than retiring. The current 

approach is costly and provides certain perverse incentives. As a result, 

we believe that placing workers’ compensation benefits on a par with 

those in the private sector merits careful consideration. 

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 financially viable organization that can maintain affordable postal rates. 

One of the limitations in the existing collective bargaining process is that 

the interests of postal ratepayers do not appear to have been sufficiently 

considered. One option recommended by the presidential commission was 

to amend the law to mandate that a regulatory body clarify the term 

“comparability.” In our view, Congress could revisit the statutory 

comparability standard so that it would more fully reflect the ratepayers’ 

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

Comparability could be specified to include 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. 

Some key questions related to the human capital area include the 

following: 

• Should postal ratepayers or taxpayers pay for postal pension benefits 

attributable to military service of postal workers? Should this issue be 

resolved in a consistent manner for the Postal Service and other federal 

agencies that are also self-supporting? 

• Should postal retiree health benefits be prefunded rather than paid on a 

pay-as-you go basis, and if so, to what extent? Should this issue be 

resolved in statute or delegated to an administrative or regulatory 

process? 

Pay Comparability Issues 
Page 28 GAO-04-397T 

• Should workers’ compensation benefits for Service employees be 

greater than those generally available to private sector employees? 

What other opportunities exist to provide incentives to minimize 

workers’ compensation costs? 

• Should 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, what mechanisms should be required for independent 

reporting and oversight? 

• Should the statutory pay cap on postal executives be lifted, and if so, 

how would executive pay be linked to performance? Should additional 

disclosure and/or independent reviews be mandated in this area? 

Chairman McHugh, that concludes my prepared statement. I would be 

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

Special Panel may have. 

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

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

goldsteinm@gao.gov; or Linda Calbom, Director, Financial Management 

and Assurance, at (202) 512-8341 or at calboml@gao.gov for pension and 

retiree health issues. Individuals making key contributions to this 

testimony included Teresa Anderson, Alan Belkin, Margaret Cigno, 

Kathleen A. Gilhooly, Kenneth E. John, and Scott McNulty. 

Contact and 

Acknowledgments 

(543092) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability of the

federal government for the American people. GAO examines the use of public 

funds; evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good 

government is reflected in its core values of accountability, integrity, and 

reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web 

site daily. The list contains links to the full-text document files. To have GAO email this list to you every afternoon, go to www.gao.gov and select “Subscribe to 

e-mail alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to

a single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact:

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

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and

Testimony 

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Public Affairs