Testimony 

Before the President's Commission on the 

United States Postal Service 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 8:30 a.m. EDT 

Thursday, May 29, 2003 U.S. POSTAL SERVICE 

Key Postal Transformation 

Issues 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-03-812T 
The ability of the Service to remain financially viable is at risk because 

growth in mail volume has stagnated and its business model is not well 

suited to operate efficiently in a competitive environment. As the figure 

shows, growth in the volume of First-Class and Standard Mail, the two 

largest revenue-producing classes, has declined. 

Growth Rates in Key Mail Classes 

Key issues for the Commission to consider include the following: 

Role and Mission. Over the past 30 years, competition has increased and 

private-sector firms are performing more traditional postal functions. 

Customers’ needs have also changed with new communication alternatives. 

In determining what universal postal services are needed and the roles for 

public and private providers, factors to consider are how to enhance 

customer convenience and create opportunities for least-cost providers. 

Governance Structure and Accountability Mechanisms. Qualification 

requirements for members of the governing board should ensure that 

appointees possess the experience needed to oversee a large business-like 

operation, and the board should have sufficient authority in areas such as 

setting rates and executive pay. Reporting requirements should ensure 

accountability and transparency of financial and organizational results. 

Flexibilities and Incentives to Increase Revenue and Control Costs. 

The Service will need appropriate flexibilities and incentives to balance its 

revenue generation and cost containment capabilities in areas such as 

allowing retained earnings, closing unneeded post offices, and containing 

costs related to infrastructure rationalization, workforce realignment, and 

wage and benefit comparability. Also, the Service’s long-term retiree health 

and workers’ compensation obligations need to be addressed. 

Effective Labor-Management Relations and Support Systems. To 

improve operational efficiency and enhance performance accountability for 

all employees, postal managers and unions need better cooperation to 

realign the workforce for the future and focus performance management and 

workforce planning systems on organizational goals and results. 

The President established this 

Commission to examine the state 

of the U.S. Postal Service (the 

Service) and submit a report by 

July 31, 2003, with a proposed 

future vision for the Service and 

recommendations to ensure the 

viability of postal services. GAO 

has provided congressional 

committees with many reports and 

testimonies on postal matters, and 

this testimony is based largely on 

these prior reports and testimonies. 

In April 2001, GAO put the 

Service’s long-term financial 

outlook and transformation on its 

High-Risk List for several reasons. 

The Service was experiencing 

• significant deficits, 

• severe cash-flow pressures, 

• rising debt, 

• cost growth outpacing 

revenue increases, 

• limited productivity gains, and

• liabilities in excess of assets. 

Under its 1970s-era business 

model, the Service was relying on 

raising rates and incrementally 

reducing costs to carry out its 

mission. GAO concluded that this 

business model was not sustainable 

in today’s competitive 

environment. 

The Commission’s report will be an 

important guide for comprehensive 

postal transformation. In this 

testimony, GAO presents key 

issues the Commission should 

consider to enhance the long-term 

financial viability of the Service by 

making it a more results-oriented 

and efficient organization. 

www.gao.gov/cgi-bin/getrpt?GAO-03-812T.

To view the full product, click on the link 

above. For more information, contact Bernie 

Ungar, 202-512-2834, ungarb@gao.gov. 

Highlights of GAO-03-812T, a testimony 

before the President’s Commission on the 

United States Postal Service 

May 29, 2003

U.S. POSTAL SERVICE 

Key Postal Transformation Issues 
Page 1 GAO-03-812T 

Messrs. Chairmen and Commission Members: 

I am pleased to have this opportunity to appear before you to present our 

views on the transformation of the U.S. Postal Service (the Service). GAO 

has been involved in reviewing postal issues on behalf of Congress for 

decades and has issued many reports and testified numerous times before 

congressional committees on postal matters. My testimony today is based 

largely on these prior reports and testimonies. (See the section called 

Related GAO Products at the end of this statement.) 

As you know, in April 2001, we put the Postal Service’s long-term financial 

outlook and transformation efforts on our High-Risk List. We did this for 

several reasons. The Postal Service was experiencing growing financial, 

operational, and human capital challenges, including declining net income, 

severe cash-flow pressures and rising debt, increasing competition, and 

difficulty cutting costs and achieving productivity gains. These challenges 

were threatening the Service’s ability to carry out its mission of providing 

affordable, high-quality universal postal services on a self-financing basis. 

Given advances in communications, such as electronic communication 

devices and the Internet, increasing domestic and foreign competition, 

changes in the growth of mail volume, and the need to serve more and 

more addresses yearly, we were concerned that the Postal Service would 

have difficulty in effectively carrying out its mission in the future. We were 

also concerned because the Service did not have a comprehensive 

transformation plan to guide it in the future, and because the significant 

shift in the Service’s financial outlook came as a surprise to many key 

stakeholders. In fall of 2001, the Service’s financial situation became even 

more complex and critical due to the events of September 11th and the 

subsequent use of the mail to transmit anthrax. 

Consequently, we called for a number of actions to address our concerns 

about the Postal Service’s financial situation and long-term outlook. We 

recommended that the Postal Service develop and implement a 

comprehensive transformation plan that would lay out actions it could 

take under existing law, actions that would require incremental legislative 

action to help address the Service’s more immediate financial difficulties, 

and comprehensive legislative action to address key unresolved 

transformation issues. We also suggested that Congress consider various 

approaches to addressing long-standing and difficult-to-resolve issues 

affecting the Postal Service’s financial situation, such as by establishing a 

commission to study the issues and make recommendations. 
Page 2 GAO-03-812T 

We are pleased that the President established a Commission to examine 

the state of the Postal Service and submit a report to the President by July 

31, 2003, that would propose a vision for the future of the Service and 

recommendations to ensure the viability of postal services. We have 

previously provided this Commission with a number of GAO reports, 

testimonies, and other information related to the Postal Service and offer 

our assistance to the Commission as it completes its work. We look 

forward to the Commission’s report and believe it will be an important 

guide for Congress as it considers comprehensive postal transformation. 

In this testimony, I will discuss four key issues the Commission should 

consider to address deficiencies in the Service’s business model and 

enhance the Service’s long-term financial viability by making it a more 

results-oriented, efficient organization. These areas include the Service’s 

(1) role and mission, (2) governance structure and accountability 

mechanisms, (3) flexibilities and incentives to increase revenue and 

control costs, and (4) effective labor-management relations and support 

systems to improve organizational efficiency. 

The Service has responded to a number of our concerns and taken actions 

to address its short-term financial challenges. In April 2002, the Service 

published its Transformation Plan and has begun to implement it. The 

Service has also taken actions to control costs by reducing the size of its 

work force and labor hours usage and by improving productivity. In fiscal 

year 2002, the Service reported that, for the first time in over 30 years, its 

operating expenses were reduced below those of the previous year. 

Furthermore, in large part based on an Office of Personnel Management 

(OPM) study undertaken at the request of GAO, legislation was passed in 

April 2003 that enabled the Postal Service to reduce its pension cost by 

about $3 billion per year over the next few years. 

These incremental steps, although useful, cannot resolve the fundamental 

and systemic issues associated with the Service’s current business model. 

The Postal Reorganization Act of 1970 (P.L. 91-375) provided the legal 

framework for the Service’s current business model. In passing the Act, 

Congress intended the Service to operate in a business-like manner. 

However, in contrast, the Act also included such provisions as monopoly 

protections on letter mail and access to mailboxes, a mandate to break 

even financially over time, and a rate-setting process that is based on 

specific cost-coverage requirements—often referred to as “cost-of-service 

regulation.” Furthermore, the Act generally did not envision the extent to 

which the Postal Service would be directly competing with private-sector 

companies. As such, the Service’s current business model, which relies on 

Short-Term Financial 

Pressures Have Been 

Alleviated but 

Fundamental Issues 

Remain 
Page 3 GAO-03-812T 

increasing mail volumes to finance universally available postal services 

through an expanding delivery network, is outmoded in today’s rapidly 

changing and increasingly competitive business environment. 

Today, businesses and consumers have many more communications and 

delivery choices than they did 30 years ago. New types of electronic 

communication devices include E-mail, cell phones, fax machines, and 

electronic bill payment services. There is also greater competition in the 

mail and package delivery markets. These market changes have been 

driven by the need for more time-sensitive movement of products and 

services, as well as the ability to track products and services throughout 

the delivery process from origin to destination. 

These changes in the postal marketplace have highlighted the following 

fundamental issues with the Service’s business model: 

• The Service’s ability to remain financially viable under its current business 

model is at risk as the growth in mail volumes has stagnated or declined, 

leading to less revenue unless rates are increased. Further, it has been 

estimated that about 45 percent of the Service’s mail delivery routes do not 

generate adequate revenue to cover their costs. 

• The Service does not have the flexibilities or incentives necessary to 

operate efficiently in a highly competitive environment. This is particularly 

important because the Service has historically not been able to 

significantly control and/or reduce costs in its two major cost areas: 

employee-related costs, which continue to account for over three-quarters 

of the Service’s total operating expenses, and overall infrastructure costs 

for the Service’s retail and processing networks. 

• Long-standing adversarial relationships between postal managers and 

labor unions have hindered efforts to increase efficiency and create a 

more results-oriented culture that would help achieve long-term financial 

viability for the Service, along with a fair and positive work environment 

for employees. 

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 long-term financial viability. The Postal Service’s shortterm financial relief provides a limited window of opportunity to bring 

about this fundamental change. The time has come to take bold and 

comprehensive action designed to transform the Postal Service to meet 

the challenges and new realities of the 21st century. This will involve 
Page 4 GAO-03-812T 

actions by both the executive and legislative branches of government as 

well as a variety of other postal stakeholders. 

Today, I will direct my comments to the following four areas that will be 

critical to addressing problems with the Service’s current business model 

and ensuring its future financial viability: (1) role and mission, (2) 

governance structure and accountability mechanisms, (3) flexibility and 

incentives to increase revenues and control costs, and (4) the link between 

labor-management relations and improving operational efficiency. 

Over the years, postal stakeholders have raised numerous issues regarding 

the Service’s role and mission relative to the private sector. Among these 

issues are the following: 

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

future challenges? 

• Should the Service remain a government entity or should it be wholly or 

partially privatized? 

• Is a government monopoly needed to provide universal postal services? 

Should the Postal Service’s monopoly protections be reduced or 

eliminated, and if so, how should a minimal service level be ensured? 

• Should the Service retain its governmental functions, including regulatory 

responsibilities related to protecting the mail monopoly and the integrity 

of the mail, as well as its law enforcement functions related to mail fraud, 

security, and theft? 

• To what extent should the Postal Service, the mailing industry, and other 

private-sector companies perform various postal functions, such as 

collection, processing, transportation, and retail services? Should 

additional worksharing be encouraged, and how should long-standing cost 

issues be resolved? 

• Should the Service be allowed to compete in areas where there are 

private-sector providers? If so, on what terms, and what transparency and 

accountability mechanisms are needed to prevent cross subsidies between 

competitive and monopoly products and services? 

The Postal Service’s current mission is to provide access to universal 

postal services in all communities at reasonable rates. Universal postal 

Role and Mission 

Universal Postal Service 
Page 5 GAO-03-812T 

service is not defined in law, but the Service’s interpretation of this 

responsibility has evolved throughout its history to accommodate 

changing customer demands. Currently, universal postal service includes a 

uniform rate for one category of mail, 6-day per week mail delivery, and 

access to postal retail services. Vast changes in communications and 

delivery options, as well as the growth of the related competitive 

environment, over the past 30 years are continuing at a rapid pace. These 

changes provide an impetus for reconsidering what universal postal 

service will be needed for the 21st century. Such considerations should 

include recognition of different needs for different customer segments. As 

the mail stream has evolved away from personal correspondence and 

towards more advertising mail, the need for uniform rates and service may 

be changing. In addition, access to postal services involves many more 

options today, such as vending machines, ATMs, and grocery stores, which 

could reduce reliance upon traditional post offices and improve service. 

Once the scope of universal postal service is addressed, the next questions 

relate to whether core postal functions should be discharged by a public 

entity, private companies, or a combination of both. The current statutory 

framework provides the Service with a monopoly on letter mail and access 

to mailboxes to fund universal postal service. The Service generally carries 

out its mission by collecting, transporting, processing, and delivering mail 

to addresses throughout the United States and to foreign postal 

administrations for deliveries to addresses outside this country. In 

addition to its retail services and mail delivery roles, the Postal Service is 

also charged with governmental functions for enforcing federal laws 

related to mail fraud, security, and theft. 

Since the 1970 reorganization, the Service’s role has changed as it has 

engaged the private sector in postal activities in several ways. For 

example, the Service has (1) arranged for private entities, such as grocery 

stores, to sell stamps; (2) increased its contracting with private firms to 

transport mail; and (3) offered worksharing rates, which include discounts 

to mailers to carry out certain mail processing operations, such as 

presorting, barcoding, and transporting mail directly to Postal Service 

facilities for delivery by the Service to its customers. The purpose of these 

activities has been to increase customer convenience, cut Postal Service 

operating costs, and create the opportunity for the least-cost provider to 

perform certain postal activities. For example, as shown in figure 1, mail 

volume growth since fiscal year 1972 has been in workshared mail. In 

fiscal year 2002, nearly three-quarters of the Postal Service’s mail volume 

consisted of mail that involved some aspect of worksharing. 

Postal, Government, and 

Private-sector Functions 
Page 6 GAO-03-812T 

Figure 1: Growth in Workshared Mail Volume Between Fiscal Years 1972 and 2002 

Note: Workshared mail receives a lower rate due to such mailer activities as presorting, bar coding, 

and destination entry. Most Standard Mail and Periodicals volumes were counted as workshared 

beginning in fiscal year 1971 because the Service required presorting of this mail by Zip Code and 

such worksharing was recognized in its postal rates. Worksharing rates for First-Class Mail were 

introduced in fiscal year 1977. 

A number of issues have been raised related to whether the worksharing 

rates accurately reflect the Service’s estimated cost savings from mailer 

worksharing activities. We are currently assessing these issues and plan to 

issue a report later this year. 

At the same time, the Service’s involvement in what is often called 

“nonpostal” or “nontraditional” areas has also been controversial. These 

nonpostal activities refer to new products or services that generate 

revenues and are not directly related to the Service’s core postal activities. 

Nonpostal activities are not subject to the same regulatory scrutiny by the 

Postal Rate Commission (PRC) that postal activities currently face. Some 

examples of nonpostal activities include electronic billing and payment 

services, as well as electronic greeting cards. As we discuss later, we have 

reported on the Service’s difficulties in meeting its performance goals 
Page 7 GAO-03-812T 

related to nonpostal activities and about controversies regarding the 

Service’s involvement in nonpostal activities that are also provided by 

private-sector companies. Recently, the Service discontinued some of its 

nonpostal activities, but it remains a valid question as to whether the 

Service has the appropriate incentives, transparency and accountability 

mechanisms, cost-structure, and marketing skills to succeed in nonpostalrelated areas. 

Key issues have been raised about whether the Service’s current 

governance structure and accountability mechanisms are sufficient for an 

organization with annual revenues approaching $70 billion and over 

850,000 employees. Some of the issues relate to the Board of Governors’ 

limited authority in areas such as setting postal rates and executive pay; 

qualifications requirements that are too general to ensure that Board 

appointees possess the kind of experience necessary to oversee a major 

government business; and limited transparency and accountability 

mechanisms for organizational performance and 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 a more appropriate 

guide in this area. 

Having a qualified and independent board is important to ensuring that the 

board can play a significant role in the following three areas:1

• First, boards should provide strategic advice to management in order to 

help comply with overall statutory requirements and realize organization 

goals. 

• Second, boards need to help manage risk, including risk related to 

attempts to maximize current value at the expense of mortgaging the 

future. Risk management must also consider the interests of key 

stakeholder groups, such as employees, customers, and the communities 

in which the organization operates. 

• Third, boards have a clear responsibility to hold management accountable 

for results. 

 1

U.S. General Accounting Office, Major Management Challenges and Program Risks: U.S. 

Postal Service, GAO-03-118 (Washington, D.C.: Jan. 2003). 

Governance Structure 

and Accountability 

Mechanisms 
Page 8 GAO-03-812T 

The Service is not subject to the same level of transparency and 

accountability mechanisms as other “business-like entities,” such as 

private-sector companies, that regularly report to shareholders and/or 

regulators (e.g., the Securities and Exchange Commission). Some 

important issues to consider include what regulatory structure and 

oversight mechanisms may be needed, to whom the Service should be 

accountable, and what appropriate mechanisms are needed for consumer 

protection—particularly for those with few or no alternatives to the mail 

system? Concerns have also been raised about the need to provide 

accountability for performance, especially in areas where the Service is 

provided with additional flexibility. As we have reported in the past, many 

concerns have been raised about areas where the Service has had 

flexibility, such as the international and new products areas, and its 

financial performance has not met its stated goals and objectives.2

 Further, 

if the Service is allowed to compete, should it be subject to the same laws 

and regulations as its competitors? If the Service retains some monopoly 

protections while also providing competitive products, steps will be 

needed to ensure that products are not being cross-subsidized. 

Another key question involves determining what level of transparency 

through public reporting on the Service’s financial and operating 

performance, as well as its progress in implementing its transformation, is 

appropriate. We have reported concerns about the Service’s public 

reporting in the following areas: retiree health benefit obligations; periodic 

financial reporting; nonpostal new products and services, including ecommerce initiatives; annual performance reporting as required under the 

Government Performance and Results Act (GPRA); and the status of 

implementing initiatives from its Transformation Plan.3

 Our concerns 

related to the Service’s reporting on its retiree health benefit obligations 

are discussed in more detail later in this statement. 

 2

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). 

3

U.S. General Accounting Office, U.S. Postal Service: Accounting for Postretirement 

Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 2002). U.S. Postal Service Actions to 

Improve Its Financial Reporting, GAO-03-26R (Washington, D.C.: Nov. 13, 2002). See also 

GAO-02-79, GAO-00-188, and GAO-03-118. 
Page 9 GAO-03-812T 

Regarding the Service’s periodic financial reporting, we reported in 

November 2002 on the lack of sufficient and timely periodic information 

on the Service’s financial condition and outlook available to the public 

between publications of its audited year-end financial statements.4 Since 

our report was issued, the Service has taken steps to improve this 

information, including making its quarterly financial reports available on 

its Web site. However, we continue to have concerns about some of the 

Service’s financial and performance information, including information 

related to its e-commerce and other nonpostal activities, as well as the 

lack of delivery performance information for all of its major mail 

categories. In order to determine whether further changes in financial 

reporting are needed, the Commission should consider the SEC reporting 

requirements as a possible guide in this area. In addition, other current 

reporting mechanisms, such as the Service’s annual performance reports 

required under GPRA, could be adapted to communicate the Service’s 

delivery performance for all of its major mail categories, as well as update 

its progress on implementing its Transformation Plan. 

The Service has limited financial incentives under its current business 

model with its break-even mandate and cost-of-service rate-setting 

structure. To enhance its long-term financial viability in a competitive 

environment, the Service will need appropriate flexibilities and incentives 

to balance its revenue generation and cost containment capabilities. The 

Postal Service argues that it has difficultly raising revenue under the 

lengthy rate-setting process, which does not allow the Service to change 

its prices in a timely manner to respond to changing economic conditions. 

The Service indicated that it would like additional flexibility in connection 

with retaining earnings, setting rates, and developing and promoting new 

products and services. These flexibilities could enhance its revenuegenerating capability and help offset continued anticipated volume 

declines. However, these flexibilities will need to be coupled with 

reasonable transparency and appropriate accountability mechanisms to 

prevent abuse. 

The Service also does not have adequate flexibility to address its cost 

structure, especially in the areas of infrastructure rationalization and 

workforce realignment. Furthermore, cost issues related to compensation 

and benefits, including its workers’ compensation obligations and its long-

 4

See GAO-03-26R. 

Flexibilities and 

Incentives to Increase 

Revenues and Control 

Costs 
Page 10 GAO-03-812T 

term retiree health obligations, need to be addressed. The Commission 

will need to consider what flexibility and incentives are appropriate to 

allow the Postal Service to make changes in its revenue and cost structure 

to reflect changing economic conditions and improve its efficiency in an 

increasingly competitive environment. 

Although the Service’s break-even mandate was established to foster 

reasonable rates, this mandate removes the profit motive. In its 

Transformation Plan, the Service proposed a revision to its break-even 

mandate that would permit it to retain earnings. Key questions for 

consideration include the following: 

• Could the Service remain self-supporting under its mandate to break even 

over time? 

• Should the Service’s business model be adjusted to allow some additional 

flexibility to retain a reasonable level of earnings? 

• Would changing the Service’s break-even mandate lead to a reduction in 

the quality and scope of universal postal service? 

To address concerns about potential service reductions, some other 

countries, such as Germany and the Netherlands, whose postal 

administrations operate on a for-profit basis, have imposed specific 

minimum requirements for universal postal service and added regulatory 

oversight in connection with the quality of postal service. 

The Service’s cost-of-service rate-setting structure allows the Service to 

cover rising costs by increasing rates. The rate-setting process was created 

to ensure prior independent review of Service-proposed domestic postal 

rates and fees. It also includes due process for all interested parties in 

hearings on the record. This process has led to proceedings that are often 

lengthy and adversarial. Although the current system was designed to 

enable the Service to break even over time, in practice the Service has 

accumulated significant prior years’ losses and debt and has had difficulty 

funding capital investments without borrowing. Some of the key questions 

related to the current rate-setting process include the following: 

• Should the current rate-setting process be retained, modified, or replaced 

with a different system? Are changes to the current rate-setting structure 

needed to provide sufficient funds for the Service’s operating and capital 

Break-even Mandate 

Rate-setting Structure 
Page 11 GAO-03-812T 

needs and to repay debt? Should the Service’s rate setting be subject to 

prior regulatory review? 

• What should be the respective authorities and responsibilities of the 

Service and any independent regulator, including the authority to compel 

provision of information and final decision-making authority over what 

rates are set? 

• Should legal requirements that affect rates—including that each mail class 

cover its costs, and preferred rates for certain groups—be retained, 

changed, or eliminated? 

Consensus on these issues will be difficult to achieve, but improvements in 

the rate-setting structure will be a fundamental component of a 

comprehensive transformation. One innovation in the rate-setting process 

that was recently approved by the PRC on an experimental basis was the 

Service’s proposal for a negotiated service agreement (NSA). An NSA is a 

customer-specific agreement with the Service, whereby the customer 

agrees to perform specified mail preparation activities; and if the 

customer’s total mailings exceed a pre-set volume threshold, then the 

customer receives a discount rate and/or predetermined services. The 

Service anticipates that such agreements will result in additional volume 

and revenue. 

The key financial challenge facing the Service is whether it will be able to 

generate sufficient revenues to cover its costs in the face of stagnating or 

declining mail volume growth. Some of the limitations in the Service’s 

current business model related to its revenue-generating capacity have 

become more evident as mail volumes have recently declined in major 

mail classes, particularly in First-Class Mail. The overall growth rate for 

First-Class Mail has been trending downward for about 20 years. These 

declines are significant because, as seen in figure 2, the revenue generated 

from First-Class Mail is used to cover about 69 percent of the Service’s 

institutional costs. The Service’s institutional costs comprise nearly 40 

percent of its total costs. 

Revenue Generation 
Page 12 GAO-03-812T 

Figure 2: First-Class Mail Volume, Revenue, and Contribution to Institutional Costs in Fiscal Year 2002 

As seen in table 1, the loss in contribution from declining First-Class Mail 

volume would be difficult to recover from other classes of mail. 

Table 1: Additional Volume Increases that Would be Necessary to Recover Loss in 

Contribution From a 1 Percent Decline in First-Class Mail Volume 

Type of mail Volume increase necessary 

Actual volume change between 

fiscal years 2001 and 2002

Priority 14% (11%)

Express 43% (12%)

Standard 3% (3%)

Package Services 116% (2%)

Source: GAO analysis of Postal Service and Postal Rate Commission data. 

As part of its Transformation Plan, the Service stated that it would like to 

generate revenues from new products and services, and it has requested 

additional flexibility in this area. Many questions, however, have been 

raised about the Service’s ability to generate revenues to cover the costs 

from its new products and services. This area has been the source of much 

controversy, particularly related to whether the Service is or should be 

allowed to enter into markets where private-sector companies are 

operating, and whether these products and services are being crosssubsidized by monopoly-protected postal products and services. We have 

issued several reports regarding the Service’s activities related to new 
Page 13 GAO-03-812T 

products and services.5 We have consistently found that the Service’s 

performance did not meet its stated goals, and that it did not have 

appropriate financial information and controls in this area. Although it was 

not possible for us to determine the extent of any cross-subsidy due to 

incomplete financial information, it was clear that, as of fiscal year 2002, 

the Service was not generating sufficient revenues to cover its costs 

related to these new product areas. 

Another revenue-generating opportunity discussed in the Transformation 

Plan is leveraging existing assets and infrastructure, such as postal-owned 

vehicles, facilities, and its nationwide 6-day-a-week, last-mile delivery 

network. Further explorations of opportunities related to its existing 

assets could potentially provide additional revenue. As part of its 

Transformation Plan, the Service has stated that it may have the capacity 

to generate revenue by offering access to available space in warehouses 

and vehicles. 

Clearly, one of the fundamental deficiencies in the current business model 

is that it does not provide appropriate incentives to operate in the most 

cost-effective manner. The cost-based rate structure, monopoly 

protections, and break-even mandate provide limited incentives for the 

Service to control costs, particularly in its two largest cost areas—

infrastructure and workforce. The Service’s extensive infrastructure 

network has evolved piecemeal over time and may not reflect the most 

efficient operating structure. The Service may be able to operate more 

economically and efficiently by consolidating a number of its processing 

facilities. Many concerns have also been raised about the efficiency of the 

Service’s retail network, consisting of thousands of post offices, branches, 

and stations. In the workforce area, employee wages and benefits 

comprise about three-quarters of the Service’s total operating expenses. 

This percentage has not changed dramatically over the last 30 years, 

despite numerous automation initiatives undertaken by the Service. 

Some of the key questions that relate to improving the Service’s efficiency 

include the following: 

 5

See GAO-02-79, GAO/GGD-00-188, and GAO/GGD-99-15. 

Cost Restrictions 
Page 14 GAO-03-812T 

• What is the optimal size and composition of the Postal Service’s 

infrastructure and workforce? What service levels should be provided? 

• What impediments limit the Service’s ability to sustain long-term efficiency 

and productivity improvements, such as standardization of its processing 

plants? 

• Should current restrictions on closing or consolidating post offices be 

changed to facilitate optimizing the Service’s retail network? 

• How should mail safety and security considerations be incorporated into 

the Service’s network optimization plans? Should operations be 

redesigned to accommodate mail security concerns, particularly for highrisk “unknown” sender or collection mail? What are the costs and who 

should pay for mail security enhancements? 

A key to becoming a more cost-effective and efficient organization will be 

to rationalize the Service’s infrastructure to better support its future 

operations. A wide variation exists in the efficiency levels across mail 

processing plants, and the Service does not have standardized operations 

throughout its nationwide network of processing plants. According to 

postal officials, in some areas it is difficult to achieve efficient operations 

due to plant layouts or locations. For example, in some older facilities 

processing operations are spread over multiple floors or span several 

buildings, while many of the newer plants are laid out on one floor to 

better accommodate the automated equipment used today. In addition, the 

location of some plants, such as those in big cities, may hinder operations 

because of surrounding traffic congestion. On the retail side, the Service 

has estimated that many of its post offices are not profitable and many of 

the transactions that take place at a post office, like selling stamps, can be 

conducted more efficiently through other retail alternatives. 

Currently, the Service is analyzing the optimization of its retail function 

and has begun to put additional emphasis on using means other than post 

offices to provide retail services to its customers. In addition, the Service 

is studying the optimization of its mail processing and transportation 

network. According to the Service’s Transformation Plan, its strategy for 

optimizing its mail processing and transportation network was to have 

been developed by fall of 2002. However, recently postal managers told us 

that the Service is still in the process of developing its overall concept and 

strategies for its revised network and anticipates that it will release its 

initial plans in January 2004. We are reviewing the Service’s approach to 

Infrastructure Optimization 
Page 15 GAO-03-812T 

its network optimization study and will report later on the results of our 

review. 

The Postal Service’s infrastructure includes a variety of structures, 

including over 300,000 collection boxes, 38,000 post offices, stations, and 

branches, 500 mail processing plants, and various other types of facilities. 

The Service delivers mail to over 140 million business and residential 

addresses, including individual mailboxes, cluster boxes, and post office 

boxes. As of October 2002, it reported having 115 facilities or land parcels 

that were vacant or underutilized. The federal government’s real property 

area is a new area that GAO has recently identified as high-risk.6

 Longstanding problems with excess and underutilized property, deteriorating 

facilities, unreliable real property data, and costly space are challenges 

shared by several agencies. These factors have multibillion-dollar cost 

implications and can seriously jeopardize mission accomplishment. 

Rationalization of any excess infrastructure can also result in additional 

cash from sales proceeds. 

Historically, closing and consolidating post offices and processing plants 

has often been controversial on account of worker, community, and 

congressional interests. The Service’s current business model includes 

statutory restrictions that limit its ability to close and/or consolidate post 

offices. We have reported that the Service has faced resistance to closures 

because of the potential effects on jobs and mail delivery service to local 

communities.7

 Given the controversy that surrounds closure of postal 

facilities, some mechanism, such as the military base-closure process, may 

be needed. Once agreement is reached on closing/consolidating postal 

facilities, steps would need to be taken to help ensure that unneeded 

postal properties are promptly and appropriately handled. 

Furthermore, safety and security concerns will need to be considered as 

part of the Service’s network optimizing efforts. At the request of the 

House Committee on Government Reform, we held a conference on issues 

related to mail security in December 2001 and issued a report on the 

 6

U.S. General Accounting Office, High-Risk Series: Federal Real Property, GAO-03-122

(Washington, D.C.: Jan. 2003). 

7

U.S. General Accounting Office, U.S. Postal Service: Deteriorating Financial Outlook 

Increases Need for Transformation, GAO-02-355 (Washington, D.C.: Feb. 28, 2002). 
Page 16 GAO-03-812T 

concerns and suggestions that resulted from that conference.8 Some of the 

conference discussion revolved around whether separate processing 

operations would be needed for mail streams with different levels of risk. 

For example, mail from collection boxes is deemed to be higher risk 

because the sender is unknown, while much of the bulk business mail is 

considered lower risk because it is from known shippers. The Service will 

need to determine whether it should place biohazard detection equipment 

in all processing plants or establish separate processes for various levels 

of risk in the mail stream. Another related issue is who should pay for 

costs related to enhancing mail security—ratepayers, taxpayers, or both. 

To date, the Postal Service has received $762 million in appropriated funds 

to cover costs associated with the anthrax and terrorist attacks. The 

Service requested another $350 million in its fiscal year 2004 

appropriations request for emergency preparedness costs. 

In the workforce area, the Service has significant unresolved cost issues 

related to 

• wage and benefit premiums associated with some of its employees whose 

compensation is determined through collective bargaining; 

• compensation limitations for executives subject to executive pay caps; 

• impact on Service costs of recent legislation requiring the Service to cover 

pension costs for the time its employees served in the military; 

• rising health care costs for current and retired employees; 

• impact on Service costs of not accruing its retiree health benefit costs; and 

• growth in workers’ compensation costs. 

We recognize that the Service’s recent workforce reductions have resulted 

in some cost savings. However, achieving more significant savings in total 

costs will require further reducing the size of its workforce and examining 

its current compensation and benefits arrangements, including workers’ 

compensation. Further, the Service should revisit the accounting and 

funding treatment of its long-term retiree health obligations. In fiscal year 

2002, the Service had over 854,000 total employees, and the compensation 

 8

U.S. General Accounting Office, Highlights of GAO’s Conference on Options to Enhance 

Mail Security and Postal Operations, GAO-02-315SP (Washington, D.C.: Dec. 20, 2001). 

Workforce Size, Composition, 

and Costs 
Page 17 GAO-03-812T 

and benefit costs for these employees amounted to about $53 billion. 

About 90 percent of the Service’s 750,000 career employees are covered by 

collective bargaining agreements. 

One of the most difficult challenges that the Service faces is making 

changes to its compensation systems. The Postal Service is required by 

statute to provide its employees with wages and benefits comparable to 

those of private-sector employees, but it faces several problems in this 

area. On the one hand, postal officials have stated that the statutory pay 

cap for postal executives has limited its ability to provide compensation 

that is comparable to that in the private sector for selected managerial, 

executive, and officer level positions. This restriction may make it more 

difficult for the Service to recruit and retain key executive talent. On the 

other hand, the Commission heard testimony from Professor Wachter at 

its hearing in Chicago that postal employees whose pay is set through 

collective bargaining have a significant wage and benefit premium over 

comparable private-sector employees.9

 This premium was estimated to be 

34.2 percent in the 2000-2001 interest arbitration proceeding between the 

Postal Service and the American Postal Workers Union, which covers 

approximately 366,000 employees. 

The issues of wage and benefit comparability and factors that need to be 

considered under the collective bargaining process are fundamentally 

important to the Service’s future transformation efforts. As the Postal 

Service noted in its testimony before the Commission, the cost of postal 

benefits has risen about 27 percent more than those of the private sector 

in the last 20 years. The Service also testified that there are substantial 

fringe benefit costs (retirement and retiree health care benefits) that are 

statutorily mandated, and thus outside the scope of collective bargaining. 

The Commission has also heard that the Service’s costs for some 

employee benefits within the scope of collective bargaining—those for 

health benefits for active employees—are higher than those in the private 

sector as well as other federal agencies. For example, the Postal Service 

pays about 85 percent of its employees’ health benefit premiums, while 

other federal agencies pay up to 75 percent of these costs. Furthermore, 

we believe the fact that the Service pays a higher percentage of its 

 9

See Statement of Michael L. Wachter, Before the President’s Commission on the United 

States Postal Service, April 29, 2003. Professor Wachter is a professor of Law and 

Economics at the University of Pennsylvania. He has consulted for the Postal Service since 

1981 and testifies on its behalf in interest arbitration panels on issues involving Postal 

Service wage and benefit comparability. 

Wage and Benefit 

Comparability 
Page 18 GAO-03-812T 

employees’ insurance premiums and continues to pay a portion of the 

premiums after retirement is an important consideration in assessing the 

total wage and benefit comparability of postal employees. 

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 organization. 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. As a 

starting point, the Commission may want to revisit the guiding principles 

incorporated into the 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 include the full 

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

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

overall financial condition. In addition, postal labor and management have 

disagreed on the benchmarks that should be used in making total 

compensation comparisons. For example, questions exist as to whether 

the private-sector comparison group should be unionized workers, nonunionized, or some combination thereof, and whether the total value of 

benefits has been factored into this comparison. It may be beneficial for 

any legislation requiring compensation comparability to include specific 

criteria and factors upon which a comparison must be made. 

Another benefit area where costs have been difficult to control is the 

Service’s workers’ compensation benefits. This presents a significant 

challenge to the Service, because these costs totaled $1.5 billion in fiscal 

year 2002, an increase of over $500 million, or 50 percent, from the 

previous year. In addition, the Service’s total liability for its workers’ 

compensation benefits amounted to $6.7 billion at the end of fiscal year 

2002. The Service attributed the cost increases to a record number of 

compensation claims filed and a rise in the average cost per medical claim. 

While we have not reviewed the reasons for the cost increases, we believe 

that the significantly increased costs warrant attention by the Service. 

In addition, the Commission may want to consider the comparability of 

the Service’s workers’ compensation benefits as it considers the Service’s 

total compensation and benefits for postal employees. Several GAO 

reports have raised issues about benefit payment policies under the 

Federal Employees’ Compensation Act (FECA), including how these 

benefits compare to those of other federal and state workers’ 

compensation laws and changing benefit payments for retirement-aged 

Workers’ Compensation Costs 
Page 19 GAO-03-812T 

beneficiaries.10 In April 1996, we reported on our comparison of benefits 

authorized by FECA with those authorized under the Longshore and 

Harbor Workers’ Compensation Act and state workers’ compensation 

laws. 11 We found that, in general, FECA provided the same types of 

benefits to injured federal workers as those provided under other federal 

and state workers’ compensation laws; however, there were three 

principle ways in which FECA benefits were more generous: 

• FECA’s authorized maximum weekly benefit amount was greater; 

• FECA provided claimants who had a spouse and/or dependent with an 

additional benefit of 8-1/3 percent of salary; and 

• FECA provided eligible federal workers who suffered traumatic injuries 

with additional salary continuation benefits for a period not to exceed 45 

days. 

We have also reported on possible changes to FECA benefits for 

beneficiaries who are at or beyond retirement age.12 We noted that older 

FECA beneficiaries made up a high percentage of cases on the long-term 

rolls and accounted for a substantial portion of the FECA benefits paid for 

long-term compensation. We identified two prior proposals for reducing 

FECA benefits to those who become eligible for retirement. One would 

convert compensation benefits received by retirement-eligible injured 

workers to retirement benefits. However, this approach raises complex 

issues related to changing workers’ compensation benefits to taxable 

income and allowing for varying amounts of retirement benefits. The 

second proposal would convert FECA benefits to a newly established 

FECA annuity, thus avoiding the complexity of shifting from one benefit 

program to another. To help address FECA-related cost issues, the 

Commission and Congress could consider converting from the current 

FECA benefit structure to a FECA annuity. 

 10U.S. General Accounting Office, Recent GAO Reports on the Federal Employees’ 

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

11U.S. General Accounting Office, Workers’ Compensation: Selected Comparisons of 

Federal and State Laws, GAO/GGD-96-76 (Washington, D.C.: Apr. 3, 1996). 

12U.S. General Accounting Office, Federal Employees’ Compensation Act: Issues 

Associated With Changing Benefits for Older Beneficiaries, GAO/GGD-96-138BR

(Washington, D.C. Aug. 14, 1996). 
Page 20 GAO-03-812T 

Recent statutory changes in how the Service funds its Civil Service 

Retirement System (CSRS) pension costs will result in substantial 

financial savings to the Service. Those savings represent an opportunity 

for the Service to address its significant financial challenges, including its 

large unfunded retiree health obligation. While the pension obligation is 

being funded as benefits are earned and recovered through rates, the 

retiree health obligation is not. The health obligation is also not reflected 

in the Service’s financial statements. Recent estimates put the present 

value of the Service’s retiree health obligation at between $40 and $50 

billion. Under the Service’s current rate-setting method, the increasing 

cost of these obligations will result in sharply escalating future rates. The 

Commission could be instrumental in guiding the Service on how best to 

address this and other major financial management challenges as the 

Service strives to transform itself. 

In April 2003, the President signed into law the Postal Civil Service 

Retirement System Funding Reform Act of 2003 (P.L. 108-18). The Act was 

the culmination of an analysis we requested in May 2002 that the Office of 

Personnel Management (OPM) perform on the extent to which the Service 

had funded and was projected to have funded the CSRS costs of its 

employees and annuitants.13 In November 2002, OPM reported that, based 

on the level of contributions set forth in what was then the current law, 

the Service would overfund its pension obligation by $77.7 billion. 

However, OPM’s calculation assumed that the Service was responsible at 

that time for funding the cost of military service of applicable Service 

employees, which was consistent with the administration’s legislative 

proposal. According to OPM, the administration’s legislative proposal was 

modeled after the other major federal retirement system, the Federal 

Employee Retirement System (FERS), whereby the agencies fund benefits 

related to military service. Because under then current law this military 

funding was the responsibility of Treasury, we asked OPM to recalculate 

this overfunded amount, excluding the benefits attributable to military 

 13These costs are those attributable to service rendered since the July 1, 1971, effective date 

of the Postal Reorganization Act. 

Pension and Retiree Health 

Obligations 
Page 21 GAO-03-812T 

service, and found that it was actually $104.9 billion.14 Measured on a 

present value basis as of September 30, 2002, this shift in military service 

cost amounts to over $27 billion. (See appendix for additional details on 

these calculations.) 

P.L. 108-18 did in fact make the Service responsible for funding these 

military costs. The Act also changed how the Service funds its CSRS 

pension costs and, in so doing, reduced its payments to the Civil Service 

Retirement and Disability Fund (CSRDF) by an average of over $3 billion 

per year over the next 5 years and the full $77.7 billion over the next 40 

years to prevent any overfunding from occurring. Furthermore, Congress 

acted on our suggestion to consider the Service’s $11 billion in outstanding 

debt to the federal government and directed the Service to apply the 

savings in fiscal years 2003 and 2004 that result from enactment of this 

legislation to reducing its debt. The legislation also requires that the 

Service submit a proposal to the President, Congress, and GAO detailing 

how savings attributable to any fiscal year after 2005 and held in escrow 

should be expended, including for debt repayment, pre-funding its retiree 

health obligation, productivity and cost saving capital investments, 

delaying or moderating postal rate increases, or any other matter. GAO has 

60 days from the time it receives the Service’s report to submit a written 

evaluation of it. Furthermore, we are beginning work on developing 

various alternatives for funding the existing unfunded retiree health 

obligation and future costs. Without a major change in its funding 

approach, this obligation will exacerbate the Service’s financial problems 

in the future. 

The law also requires the Service to consider your work in formulating its 

plan for the savings. Accordingly, we believe that the issue of how the 

Service currently accounts for and funds its retiree health benefits needs 

to be seriously considered as part of any effort to address the future 

viability of the Postal Service and should be factored into the 

Commission’s deliberations. 

 14Until passage of P.L. 108-18, Treasury funded the cost of military service creditable 

towards a CSRS benefit not otherwise paid for by employees. The Act shifted responsibility 

for funding military service costs from the Treasury to the Postal Service – retroactive to 

July 1, 1971, and prospectively. However, the Act also requires the Postal Service, the 

Treasury, and OPM each to review this provision and submit proposals by September 30, 

2003, detailing whether and to what extent the Treasury or the Postal Service should be 

responsible for funding these benefits in the long term. GAO has 60 days from the time it 

receives these reports to submit a written evaluation of them to the House and Senate 

oversight committees. 
Page 22 GAO-03-812T 

Unlike its CSRS pension obligation, which the Act put on course to be fully 

funded, the retiree health benefit obligation is funded on a pay-as-you-go 

basis as premiums are paid, rather than on a full accrual basis.15

Consequently, while the pension benefits being earned now by Postal 

Service employees are recovered through current postal rates, the retiree 

health benefits of those same employees are not being recognized in rates 

until after they retire. This pay-as-you-go approach is also being used to 

reflect retiree health costs in the Service’s financial statements. We believe 

that it would be preferable for the Service to account for these retiree 

health costs and related obligation in its financial statements on an accrual 

basis. As we noted in our September 2002 correspondence to the 

Postmaster General,16 the Service’s current accounting treatment does not 

reflect the economic reality of its legal obligation to pay for these costs, 

and current ratepayers are not paying for the full costs of the services they 

are receiving. Although the Service did revisit this issue and did discuss it 

in the management discussion and analysis section of its financial 

statements for fiscal year 2002, it did not adopt accrual accounting for 

retiree health benefit costs, or change its financial disclosure treatment as 

we suggested. Consequently, we continue to believe that the Service’s 

treatment of retiree health benefit costs in its financial statements does 

not sufficiently recognize the magnitude, importance, or meaning of this 

obligation to decision makers or stakeholders. In our view, the time has 

come for the Service to formally reassess how it accounts for and 

discloses this very significant financial obligation. 

Irrespective of the accounting treatment, we believe the Service needs to 

work with the PRC to determine how best to address this issue in the ratesetting process. We recognize that the adoption of accrual accounting for 

retiree health obligations and inclusion of the related costs in postal rates 

could mean that customers face significant rate increases sooner than 

might otherwise be the case. However, without a change now, a sharp 

escalation in rates in future years will be necessary to fund these costs on 

a pay-as-you-go-basis. 

 15The Postal Service paid about $1 billion to OPM in fiscal year 2002 for the cost of retiree 

health care benefits for its more than 475,000 employees and survivor annuitants who 

participate in the Federal Employees Health Benefits Program (FEHBP). 

16See GAO-02-916R. 
Page 23 GAO-03-812T 

Thus far, I have focused most of my comments on areas that require 

statutory or regulatory changes. However, one of the most important 

factors in the Service’s future success may not depend solely on actions by 

the Commission, Congress, or other stakeholders. Rather, it will depend to 

a large extent on the Service’s support systems and its ability to work 

together with its unions to make the changes needed to improve 

organizational efficiency and sustain productivity improvements. This may 

require significant changes in organizational culture and practices, which 

have historically been difficult to achieve. We have written many reports 

discussing the long-standing adversarial relationships between postal 

managers and unions.17 These adversarial relationships have major 

financial, operational, and human capital implications because personnelrelated costs represent the largest single element of the Service’s annual 

expenses, and they are the primary determinant of prices and the key 

factor in the Service’s overall financial viability. In addition, postal 

employees represent a valuable asset and are a key element in any overall 

transformation effort. Disagreements between these groups have included 

performance management issues, including whether to implement some 

type of performance-based incentive system for employees covered under 

collective bargaining, and work rules, such as the deployment and 

utilization of the workforce. Furthermore, the Service’s ability to realign 

its workforce may be limited because its workforce planning is essentially 

designed to support short-term operations rather than assess long-term 

workforce needs, and it may not have sufficient flexibility to make needed 

changes in its work rules. 

We have found that high-performing organizations often must 

fundamentally change their cultures so that they are more results-oriented, 

customer-focused, and collaborative in nature.18 To foster such cultures, 

these organizations use their performance management systems as a 

strategic tool to drive change and achieve desired results. The Service will 

need to modernize its performance management systems to create a clear 

linkage—”line of sight”—between individual performance and 

 17For example, see U.S. General Accounting Office, U.S. Postal Service: LaborManagement Problems Persist on the Workroom Floor, GAO/GGD-94-201A/B (Washington 

D.C.: Sept. 29, 1994); U.S. Postal Service: Little Progress Made in Addressing Persistent 

Labor-Management Problems, GAO/GGD-98-1 (Washington D.C.: Oct. 1, 1997). 

18U.S. General Accounting Office, Results-Oriented Cultures: Creating a Clear Linkage 

between Individual Performance and Organizational Success, GAO-03-488 (Washington, 

D.C.: Mar. 14, 2003). 

Effective LaborManagement 

Relations and Support 

Systems Are Key to 

Improving 

Operational 

Efficiency 

Performance Management 
Page 24 GAO-03-812T 

organizational success. First among the key practices high-performing 

organizations use to develop effective performance management systems 

is to align individual performance expectations with organizational goals. 

Another key practice is to involve employees and stakeholders to gain 

ownership of the performance management system. 

Poor relationships between postal managers and employees have made it 

difficult to develop and implement changes to the Service’s performance 

management systems. One of the key challenges in developing a more 

performance-based culture will be for the Service to work in collaboration 

with its labor unions and management associations to align individual 

performance with institutional goals and objectives. The Service’s 

bargaining unit employees, who make up approximately 90 percent of its 

workforce, do not have performance-based compensation systems and 

have generally opposed them. Another key challenge will be in addressing 

those areas where the Service believes it needs additional human capital 

flexibilities to realign its workforce or modify work rules, but has been or 

could be hampered through current collective bargaining agreements.19

Modern, reliable, effective, and as appropriate, validated performance 

management systems with adequate safeguards, including reasonable 

transparency and appropriate accountability mechanisms, must serve as 

the fundamental underpinning of any successful results-oriented pay 

reform. The Service reported that it implemented a pay-for-performance 

system for its executives, managers, postmasters, supervisors, and other 

non-bargaining employees in fiscal year 1995, but that this system was 

discontinued in fiscal year 2002. Congress and the Postal Service’s Office 

of Inspector General have expressed concerns about certain aspects of 

this system, such as the payouts made at the same time the Service was 

incurring huge losses. The Service reported that it implemented a meritbased pay program in 2002 for its executives and officers, under which 

goals related to the Service’s overall performance goals are set for 

individuals at the beginning of the fiscal year. The Service also reports that 

it is in the process of extending a merit-based pay system for the 

remaining non-bargaining employees later this year. Care should be taken 

in the design of these systems to ensure that they comply with applicable 

law (e.g., pension cost savings cannot be used for management bonuses) 

 19In broad terms, human capital flexibilities represent the policies and practices that an 

organization has the authority to implement in managing its workforce to accomplish its 

mission and achieve its goals. 
Page 25 GAO-03-812T 

and that any productivity-based measures result in real savings or more 

effective utilization of any existing excess capacity. 

Addressing challenges in performance management will require the 

Service’s managers and employees to share a common vision for the future 

and a mutual responsibility for the Service’s financial and operating 

performance. Postal managers and employees will need to balance their 

individual interests with those of the organization, particularly in the 

performance management and workforce realignment areas. A common 

vision and a balanced approach should help achieve and sustain 

productivity improvements that will be necessary to enhance overall 

organizational effectiveness and individual performance while 

appropriately protecting workers’ rights. 

Another key human capital challenge is to take steps to ensure that an 

organization has sufficient numbers of people in place with the right skills, 

tools, and incentives to get the job done. The Service’s ability to make 

changes in the size, cost, and deployment of its workforce has been 

hampered by some provisions of the collective bargaining agreements. For 

example, in our reviews, postal plant managers have told us that because 

of restrictive job classification rules, the Service has too little flexibility to 

move employees to locations and positions where they are needed. A 

postal plant manager told us that because of restrictive workforce rules, 

many supervisors believe it is too arduous to deal with poor performers 

and that about 60 percent of grievances were work rule based. Changes to 

the Service’s operating environment, such as optimizing its mailprocessing network, may require a different mix in the number, skills, and 

deployment of its employees. These changes may involve repositioning, 

retraining, outsourcing, and reducing the workforce. 

To deal with these challenges, the Service will need effective human 

capital strategies. It will also need reasonable flexibility to address certain 

challenges. However, these additional authorities should include 

appropriate safeguards to prevent abuse of employees. In previous reports 

and testimonies, we have emphasized that in addressing these human 

capital challenges, organizations should identify and use the flexibilities 

already available under existing laws and regulations and then seek 

additional flexibilities when necessary and based on sound business 

Workforce Realignment 
Page 26 GAO-03-812T 

cases.20 These additional flexibilities could include (1) more flexible pay 

approaches, (2) greater flexibility to streamline and improve the hiring 

process, (3) increased flexibility in addressing employees’ poor job 

performance, (4) additional workforce restructuring options, and (5) 

expanded flexibility in acquiring and retaining part-time or temporary 

employees. The tailored use of such flexibilities for acquiring, developing, 

and retaining talent is an important cornerstone of strategic human capital 

management so that organizations become more results-oriented, 

integrated, and customer focused. To address employees’ concerns that 

some flexibilities could be unfairly applied, the Service will need to 

develop clear and transparent guidelines for using flexibilities, and then 

hold managers and supervisors accountable for their fair and effective use. 

By more effectively using flexibilities, the Service would be in a better 

position to manage its workforce, ensure accountability, and transform its 

culture to become more results-oriented and efficient. 

In closing, this Commission’s report will be an important tool to guide 

comprehensive postal transformation by addressing the major issues 

related to the legal and regulatory framework of the Service’s business 

model along with various operational and governance issues. As the 

Commission considers the future direction of the Service, its efforts will 

involve balancing the Service’s future role and mission; governance 

structure, transparency and accountability mechanisms; and various 

incentives to increase revenues and control costs. More fundamentally, the 

Commission’s report can provide proposals and mechanisms to help 

Congress and the President deal with the controversial and long-standing 

issues that have hampered various postal reform efforts in the past. 

For the Service to become a more efficient organization in the 21st 

century, it will need to 

• continue implementation of its Transformation Plan and other 

Commission recommendations aimed at driving down costs and 

increasing efficiencies; 

• continue enhancements to its financial transparency, including 

appropriate recognition of its expenses and obligations for retiree health 

 20U.S. General Accounting Office, Human Capital: Effective Use of Flexibilities Can 

Assist Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 

2002). 
Page 27 GAO-03-812T 

benefits as well as disclosure of performance information and 

transformation progress; 

• provide thoughtful consideration of how its pension cost savings can be 

effectively used after fiscal year 2004 to enhance the long-term viability of 

the Service; 

• develop a comprehensive plan for optimizing its infrastructure and 

workforce; and 

• work with its unions and management associations to create a resultsoriented culture, as well as appropriate work rules and realignment 

flexibilities, that would help achieve both long-term financial viability for 

the Service and a fair, positive work environment for employees. 

Finally, in many ways, the Service’s transformation issues are an 

illustration of the types of challenges that many government agencies face 

in positioning themselves for the 21st century rather than simply building 

on past practices. The Postal Service plays an important role for our 

nation and all Americans. It helps to connect our nation both domestically 

and internationally. However, the world has changed dramatically since 

the last postal reorganization in 1970. The Service must change to 

recognize these realities and position itself for the future. The time for 

action is now. 

Messrs. Chairmen, this concludes my testimony. I would be pleased to 

answer any questions that you or Members of the Commission may have. 

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, Joshua Bartzen, Margaret Cigno, 

William Doherty, Scott McNulty, Lisa Shames, and Jill Sayre. 

Contacts and 

Acknowledgments 
Page 28 GAO-03-812T 

In May 2002, we asked OPM to estimate—as of September 30, 2002—the 

extent to which the Postal Service had funded and was projected to have 

funded the CSRS costs of its employees and annuitants for civilian service 

rendered since July 1, 1971, the effective date of the Postal Reorganization 

Act. In order to make these determinations, OPM had to first estimate how 

much of the net assets of the Civil Service Retirement and Disability Fund 

(CSRDF) were attributable to the Service’s CSRS participants. OPM 

accomplished this task by first constructing a hypothetical “Postal Fund,” 

into which agency and employee contributions were credited and from 

which benefit payments and a portion of the CSRDF’s administrative 

expenses were charged. It was also necessary for OPM to allocate a 

portion of the CSRDF’s actual investment returns since fiscal year 1972 to 

the “Postal Fund,” even though under what was then current law Treasury 

bore all investment risk and any resulting gains and losses. OPM also 

assumed in its initial calculations that the Service was responsible for the 

applicable military service costs of its employees, which was consistent 

with the administration’s legislative proposal. However, under the then 

current law, funding of these military costs was the responsibility of the 

Treasury. 

Table 2 shows the current and projected funded status of future CSRS 

benefits payable to the Service’s employees and annuitants calculated to 

reflect both the administration’s proposal that the Service be responsible 

for military service costs and the then current law, which had Treasury 

responsible for these costs. The present value of future contributions in 

table 2 reflects the Postal Service’s funding of CSRS benefits as 

established in the then current law. 

Table 2: Funded Status of Postal Service CSRS Benefits Under Pre-P.L. 108-18 

Funding Approach 

Dollars in billions as of September 30, 2002 

The Service responsible 

for benefits attributable 

to military service 

The Service not 

responsible for 

benefits 

attributable to 

military service

Present value of future CSRS benefits ($190.4) ($179.1)

“Postal fund” net assets 168.4 185.0

Current amount of benefits (to be 

funded) / overfunded (22.0) 5.9

Present value of future contributions 99.7 99.0

Projected overfunding $ 77.7 $104.9

Source: Developed by GAO based on OPM data and actuarial calculations. 

Appendix: Analysis of the Postal Service’s 

Civil Service Retirement System Liability 
Page 29 GAO-03-812T 

The extent to which the Service had already funded all future benefits is 

the difference between the present value of those future benefits and the 

hypothetical “Postal Fund.” The extent to which the Service is projected to 

have funded all future benefits is the difference between the current 

amount to be funded (or the current overfunding) and the present value of 

all future contributions based on what was then the current law. 

Calculating the funded status of civilian benefits established a benchmark 

from which the cost of alternatives to the funding of military service could 

be calculated. 

Table 3 shows the effect on the projected overfunding as a result of 

changing the approach to funding future CSRS benefits. All present value 

figures in tables 2 and 3 reflect CSRS-wide demographic assumptions. P.L. 

108-18 permits the Postal Service to request that OPM reconsider 

calculating these present values using Postal Service-specific demographic 

assumptions. Both tables show that the shift of military service costs from 

the Treasury to the Postal Service amounts to over $27 billion. 

Table 3: Funded Status of Postal Service CSRS Benefits Under P.L. 108-18 Funding 

Approach 

Dollars in billions as of September 30, 2002 

The Service 

responsible for 

benefits 

attributable to 

military service 

The Service not 

responsible for 

military related 

benefits

Current amount of benefits (to be funded) / 

overfunded ($ 22.0) $ 5.9

Present value of regular agency contributions 11.8 11.8

Present value of employee contributions 4.7 4.7

Present value of future employee military 

service deposits 0.7 0

Projected (underfunding) / overfunding ($ 4.8) $ 22.4

Source: Developed by GAO based on OPM data and actuarial calculations. 

The administration believed that making the Postal Service responsible for 

funding military service benefits—both retrospectively to fiscal year 1972 

and prospectively from enactment of any legislation—was appropriate in 

part because its legislative proposal would shift investment risk to the 

Postal Service. Since fiscal year 1972, the CSRDF earned more than OPM 

assumed it would. Consequently, while P.L. 108-18 made the Service 

responsible for funding the cost of military service benefits for all 

employees hired after June 30, 1971, and a portion of the costs for those 

employees hired before July 1, 1971, the Service received the benefit of 
Page 30 GAO-03-812T 

these higher than expected investment returns. Similarly, in the future, 

investment returns that are above or below expectations will decrease or 

increase the Postal Service’s pension costs, respectively. Furthermore, P.L. 

108-18 results in postal ratepayers paying for the cost of military service 

creditable towards a CSRS benefit the same as they currently do for the 

Service’s employees who participate in the Federal Employees Retirement 

System. 
Page 31 GAO-03-812T 

Major Management Challenges and Program Risks: U.S. Postal Service. 

GAO-03-118. Washington, D.C.: Jan. 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 Challenges. 

GAO-01-733T. Washington, D.C.: May 15, 2001. 

U.S. Postal Service: Transformation Challenges Present Significant 

Risks. GAO-01-598T. Washington, D.C.: Apr. 4, 2001. 

U.S. Postal Service: Sustained Attention to Challenges Remains Critical. 

GAO/T-GGD-00-206. Washington, D.C.: Sept. 19, 2000. 

U.S. Postal Service: Issues Associated with Anthrax Testing at the 

Wallingford Facility, GAO-03-787T. Washington, D.C.: May 19, 2003. 

U.S. Postal Service: Better Guidance Is Needed to Improve 

Communication Should Anthrax Contamination Occur in the Future. 

GAO-03-316. Washington, D.C.: Apr. 7, 2003. 

Contract Management: Postal Service’s National Office Supply Contract 

Has Not Been Effectively Implemented. GAO-03-230. Washington, D.C.: 

Jan. 17, 2003. 

High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: 

Jan. 2003. 

U.S. Postal Service: More Consistent Implementation of Policies and 

Procedures for Cash Security Needed. GAO-03-267. Washington, D.C.: 

Nov. 15, 2002. 

United States Postal Service: Opportunities to Strengthen IT Investment 

Management Capabilities. GAO-03-3. Washington, D.C.: Oct. 15, 2002. 

Diffuse Security Threats: USPS Air Filtration Systems Need More 

Testing and Cost Benefit Analysis before Implementation. GAO-02-838. 

Washington, D.C.: Aug. 22, 2002. 

Related GAO Products 

Transformation 

Cost Cutting, 

Productivity, Security, 

and Financial Issues 
Page 32 GAO-03-812T 

Diffuse Security Threats: Technologies for Mail Sanitization Exist, but 

Challenges Remain. GAO-02-365. Washington, D.C.: Apr. 23, 2002. 

Highlights of GAO’s Conference on Options to Enhance Mail Safety and 

Postal Operations. GAO-02-315SP. Washington, D.C.: Dec. 20, 2001. 

Breast Cancer Research Stamp: Millions Raised for Research, but Better 

Cost Recovery Criteria Needed. GAO/GGD-00-80. Washington, D.C.: Apr. 

28, 2000. 

U.S. Postal Service: Changes Made to Improve Acceptance Controls for 

Business Mail. GAO/GGD-00-31. Washington, D.C.: Nov. 9, 1999. 

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. 

U.S. Postal Service: Stronger Mail Acceptance Controls Could Help 

Prevent Revenue Losses. GAO/GGD-96-126. Washington, D.C.: June 25, 

1996. 

Workers’ Compensation: Selected Comparisons of Federal and State 

Laws. GAO/GGD-96-76. Washington, D.C.: Apr. 3, 1996. 

Results-Oriented Cultures: Creating a Clear Linkage between Individual 

Performance and Organizational Success. GAO-03-488. Washington, D.C.: 

Mar. 14, 2003. 

Postal Service: Employee Issues Associated with the Potential Closure of 

the San Mateo IT Center. GAO-03-205. Washington, D.C.: Jan. 31, 2003 

Human Capital: Effective Use of Flexibilities Can Assist Agencies in 

Managing Their Workforces. GAO-03-2. Washington, D.C.: Dec. 6, 2002. 

U.S. Postal Service: Diversity in District Management-Level Positions. 

GAO/GGD-00-142. Washington, D.C.: June 30, 2000. 

U.S. Postal Service: Diversity in the Postal Career Executive Service. 

GAO/GGD-00-76. Washington, D.C.: Mar. 30, 2000. 

Human Capital 
Page 33 GAO-03-812T 

Equal Employment Opportunity: The Postal Service Needs to Better 

Ensure the Quality of EEO Complaint Data. GAO/GGD-99-167. 

Washington, D.C.: Sept. 28, 1999. 

U.S. Postal Service: Diversity in High-Level EAS Positions. GAO/GGD99-26. Washington, D.C.: Feb. 26, 1999. 

U.S. Postal Service: Little Progress Made in Addressing Persistent LaborManagement Problems. GAO/GGD-98-1. Washington, D.C.: Oct. 1, 1997. 

U.S. Postal Service: Labor-Management Problems Persist on the 

Workroom Floor. GAO/GGD-94-201A/B. Washington, D.C.: Sept. 29, 1994. 

Review of the Office of Personnel Management’s Analysis of the United 

States Postal Service’s Funding of Civil Service Retirement System 

Costs. GAO-03-448R. Washington, D.C.: Jan. 31, 2003. 

Postal Service Employee Workers’ Compensation Claims Not Always 

Processed Timely, but Problems Hamper Complete Measurement. GAO03-158R. Washington, D.C.: Dec. 20, 2002. 

U.S. Postal Service: Actions to Improve Its Financial Reporting. GAO-03-

26R. Washington, D.C.: Nov. 13, 2002. 

U.S. Postal Service: Accounting for Postretirement Benefits. GAO-02-

916R. Washington, D.C.: Sept. 12, 2002. 

United States Postal Service: Information on Retirement Plans. GAO-02-

170. Washington, D.C.: Dec. 31, 2001. 

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: Enhancements Needed in Performance Planning and 

Reporting. GAO/GGD-00-207. Washington, D.C.: Sept. 19, 2000. 

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: Challenges to Sustaining Performance 

Improvements Remain Formidable on the Brink of the 21st Century. 

GAO/T-GGD-00-2. Washington, D.C.: Oct. 21, 1999. 

Financial and 

Performance 

Transparency 
Page 34 GAO-03-812T 

The Results Act: Observations on the Postal Service’s Preliminary 

Performance Plan for Fiscal Year 2000. GAO/GGD-99-72R. Washington, 

D.C.: Apr. 30, 1999. 

U.S. Postal Service: Development and Inventory of New Products. 

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

Financial Reporting: Accounting for the Postal Service’s Postretirement 

Health Care Costs. GAO/AFMD-92-32. Washington, D.C.: May 20, 1992. 

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