U.S. POSTAL SERVICE 

Financial Outlook and 

Transformation 

Challenges 

Statement by David M. Walker 

Comptroller General of the United States 

United States General Accounting Office 

GAO Testimony

Before the Committee on Governmental Affairs

and its Subcommittee on International Security, 

Proliferation, and Federal Services 

U.S. Senate 

For Release on Delivery 

At 10:00 a.m. EDT 

Tuesday, 

May 15, 2001 

GAO-01-733T 
Page 1 GAO-01-733T 

Mr. Chairman and Members of the Committee and Subcommittee: 

We are pleased to be here today to participate in this joint hearing on the financial 

outlook and transformation challenges of the U.S. Postal Service (the Service). Overall, 

the Service faces major challenges that collectively call for a structural transformation if 

it is to remain viable in the 21st century. Your Committee and Subcommittee have 

expressed concern with the Service’s deteriorating financial outlook. In my testimony 

today, I will focus on the Service’s current financial outlook, actions the Service has 

taken or planned, and the transformation issues that will need to be addressed. 

Summary

A structural transformation of the Service is called for because the Service faces major 

financial, operational, and human capital challenges. It is at growing risk of not being 

able to continue providing universal postal service vital to the national economy at 

reasonable rates while remaining self-supporting through postal revenues. Accordingly, 

in April 2001, we placed the Service’s transformational efforts and long-term outlook on 

our High-Risk List. This inclusion on our High-Risk List will focus needed attention on 

the dilemmas facing the Service before the situation escalates into a crisis where the 

options for action may be more limited and costly. 

Key factors contributing to our decision to place the Service’s transformational efforts 

and long-term outlook on our High-Risk List included the following: 

• The Service’s financial outlook has deteriorated significantly, its borrowing is 

increasing, and the Service’s debt is approaching the $15 billion statutory ceiling 

without any debt reduction plan. Also, the large number of retirements expected 

over the next several years will place even more pressure on the Service’s expenses 

and its need for cash. 

• The Service recently deferred capital investment to conserve cash, thus delaying 

needed infrastructure improvements. These deferrals appear likely to continue. 

• In March 2001, the Postal Service’s Board of Governors wrote the President and 

Congress asking for a comprehensive review of postal laws. The Board said “We have 

unanimously concluded that the present statutory scheme puts at serious risk our 

ability to provide consistent and satisfactory levels of universal service to the 

American people, generally recognized as delivery to every address every day, at 

uniform, affordable rates.” 

• Potential losses in First-Class Mail volume over the next decade could create large 

financial deficits, leading to a situation where universal postal service could 

ultimately be threatened, prices would likely increase at a much faster rate, and other 

options would need to be explored. 

• The Service is subject to several statutory and other restrictions that serve to limit its 

transformational efforts (e.g., binding arbitration requirement, the rate-setting 

process, and facility closure restrictions). 

• The Service has also had periodic conflicts with some of its key stakeholders 

including postal unions and the Postal Rate Commission. We have noted longstanding 
Page 2 GAO-01-733T 

labor-management relations problems that have hindered improvement efforts, 

including three labor agreements that expired in November 2000 and may now be 

resolved through binding arbitration. In addition, the Postal Service and the Postal 

Rate Commission have had longstanding disagreements concerning pricing decisions. 

• Finally, two key leadership positions need to be filled relating to postal operations 

and rate setting (Postmaster General and Chairman of the Postal Rate Commission). 

Although the Service has announced some steps to address its growing challenges, it has 

no comprehensive plan to address its numerous financial, operational, or human capital 

challenges. In April 2001, we recommended that the Postal Service develop a 

transformation plan in conjunction with Congress and other stakeholders that would 

address the key transformation issues facing the Service.1

 Service officials told us that 

they generally agree with the recommendation. I recently met with the Deputy 

Postmaster General, and we discussed ways that the Service could implement it. 

We appreciate the difficulty of this task, given the long-standing nature of the structural 

problems and major differences in stakeholders’ views. But the sense of urgency is 

growing. The basic statutory framework that governs the Postal Service has not changed 

since 1970, despite the fact that developments in technology and a more competitive 

marketplace provide more communications and delivery choices to businesses and 

consumers. The Service’s ability to provide universal postal service as we know it today 

will be increasingly threatened unless changes are made, both within current law and to 

the legal and regulatory framework that governs the Service. 

What is the Service’s Current Financial Outlook? 

The Service is projecting significant losses over the next 2 years, although the full extent 

of the losses is unclear. The Service currently estimates that its fiscal year 2001 deficit 

will range from $1.6 billion to $2.4 billion and also estimates that its deficit will be $1.5 

billion to $2.5 billion next fiscal year, assuming no further increase in postal rates next 

year. If such deficits occur, they could be the largest that the Service has incurred since 

fiscal year 1993 (see fig. 1). 

The Service’s latest deficit projections for fiscal years 2001 and 2002 incorporate the 

expected impact from its Board of Governor’s recent decision to raise most postal rates 

on July 1, 2001 (the rate for single-piece First-Class mail of up to 1 ounce will remain at 

34 cents). Service officials estimate that the higher rates will increase its revenues by 

about $200 million in fiscal year 2001 and about $975 million in fiscal year 2002. 

1 U.S. Postal Service: Transformation Challenges Present Significant Risks (GAO-01-598T, April 4, 2001).
Page 3 GAO-01-733T 

Figure 1: Postal Service Net Income From Fiscal Year 1990 through 2002

Source: U.S. Postal Service. 

The Service’s estimated fiscal year 2001 deficit of $1.6 to $2.4 billion far exceeds the $480 

million deficit built into the Service’s budget that was approved last November. About 

$271 million of the Service’s current deficit projections were based on reported losses 

through the end of the Service’s accounting period ending April 20, 2001, and the rest is 

based on projected losses for the rest of the fiscal year (see fig 2). 

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Fiscal year

2002

Service’s projected range for fiscal

years 2001 and 2002

Dollars (in millions)

Projected range

Projected

Actual

A
Page 4 GAO-01-733T 

Figure 2: The Postal Service’s Net Income for Fiscal Year 2001

Source: U.S. Postal Service. 

The Service’s current deficit estimate of $1.6 billion to $2.4 billion for fiscal year 2001 is 

roughly half a billion dollars lower than the Service’s estimate we cited in our April 

testimony of a $2.1 billion to $3.1 billion loss. According to Service officials, the less 

pessimistic outlook is due to three factors. First, the Service reports making additional 

progress in controlling costs, and expects that progress to continue for the rest of the 

fiscal year. Second, the Service expects to gain revenues as a result of its recent decision 

to raise most postal rates on July 1, 2001. Third, the Service updated its projections about 

the potential effect of the soft economy on postal revenues for the rest of the fiscal year. 

Although the Service appears headed for a large deficit in fiscal year 2001 and has 

explained its basis for the estimates to us, we believe that too many uncertainties exist to 

predict the size of this year’s deficit at this time with any precision. The Service’s 

financial outlook is a moving target and may change, depending on the resolution of 

uncertainties that could affect its revenues and expenses for the rest of this fiscal year. 

For example, the impact of the economy on postal revenues remains somewhat unclear, 

as are the financial implications of the ongoing contract negotiations between the 

Service and three of its major labor unions. We will continue to review the Service’s 

financial condition and will report again to Congress on this matter. Regardless of the 

exact size of the Service’s deficit, the severity of the Service’s financial situation is 

highlighted by the fact that a large deficit is likely to occur despite two rate increases in 

the same year. 

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

Actual net income

Dollars (in millions)

Budgeted net income

-$1.6 B

-$2.4 B

$-271 M

4/20/01

Postal Service’s

estimated range of net

income for full fiscal year

Start of 

fiscal year

-$480 M

Middle of

fiscal year

End of

fiscal year

Actual net income

Budgeted net income

A
Page 5 GAO-01-733T 

Components of the Service’s Projected Deficit for Fiscal Year 2001 

The Service’s projected deficit for fiscal year 2001 can be divided into the following 

categories: (1) $271 million in reported losses through the end of the Service’s 

accounting period ending April 20, 2001, (2) $911 million in budgeted losses for the rest 

of the fiscal year, (3) $120 million in expenses projected to exceed budgeted targets for 

the rest of the fiscal year, (4) $155 million in revenues projected to fall below budgeted 

targets for the rest of the fiscal year because the Service did not initially receive the full 

rate increase it had requested, and (5) $150 million to $950 million in revenues projected 

to fall below budgeted targets for the rest of the fiscal year due to the soft economy and 

its impact on mail volume and revenues (see fig. 3). The $800 million deficit range 

reflects the Service’s judgment that the soft economy will have an uncertain impact on 

its revenues. 

Figure 3: Changes in the Postal Service’s Financial Outlook for Fiscal Year 2001

Legend: Dollars in millions (M), billions (B). 

Source: GAO presentation based on U.S. Postal Service estimates, which are subject to change. 

 $431 M

Budgeted Current Current

-$911 M

-$271 M

-$911 M

Reported Net Income:

As of 4/20/01

Originally Budgeted Net

Income: 4/21/01 - FY-end

Expense Adjustments to

Net Income: 4/21/01 - FY-end

Revenue Adjustments to

Net Income: 4/21/01 - FY-end

Subtotal

Other Revenue Adjustments to

Net Income: Soft Economy -

4/21/01 - FY-end

-$120 M

-$155 M

-$150 M to

-$950 M

-$1.5 B

Net Income -$480 M -$1.6 to -2.4 B

FY 2001 Revised Deficit $1.6 to $2.4 B

A
Page 6 GAO-01-733T 

Reported Losses for the First Part of Fiscal Year 2001 

As figure 3 shows, the Service reported that its loss for the first part of this fiscal year 

through April 20, 2001, was $271 million. This reported amount is not audited and is 

subject to change. Historically, the Service’s financial performance tends to be stronger 

in the first part of the fiscal year, which includes the busy holiday mailing season. The 

Service budgeted for a $431 million surplus through April 20, therefore, its net income 

fell $702 million below this target. To put some perspective on the Service’s income 

estimates, in the first part of last fiscal year, the Service achieved $1.1 billion in net 

income but ended the year with a net loss of $199 million. 

Through April 20 of fiscal year 2001, total mail volume continued to grow, and it was also 

greater than that planned for by the Service in its fiscal year 2001 budget. In particular, 

Standard A advertising mail volumes grew more rapidly than the Service had expected. 

At the same time, however, some mail volumes were less than what the Service had 

planned for in its budget, particularly First-Class Mail and Priority Mail volumes 

(see fig. 4). 
Page 7 GAO-01-733T 

Figure 4: Mail Volume for FY 2001 Through April 20, 2001 Compared to Budgeted Levels

Source: U.S. Postal Service. 

These mail volume shortfalls contributed to the Service’s mail revenues being less than 

budgeted for in the first part of fiscal year 2001. First-Class and Priority Mail, when 

combined, account for close to two-thirds of the Service’s mail revenues and generate 

revenues that pay for approximately three-quarters of the Service’s overhead costs. 

Thus, the Service cites the shortfalls in First-Class Mail and Priority Mail volume as 

important reasons that its total revenues have fallen short of budgeted targets. The 

Service has also noted that Standard A advertising mail is lower margin mail in that each 

mail piece generates less money toward overhead costs than each piece of First-Class 

Mail and Priority Mail. 

In addition, the Service has estimated that the decision by the Postal Rate Commission to 

not recommend the full rate increase requested by the Service will lower its total 

revenues by $390 million this fiscal year, including $235 million in the fiscal year through 

April 20. 

Further, the Service incurred a shortfall of $228 million from other types of revenue that 

included a $138 million shortfall in planned revenue from e-commerce, advertising, and 

retail initiatives. These initiatives generated only $2 million in revenues in fiscal year 

2001 through April 20. The Service explained that as experience with its new ventures 

progresses, it has become clear that the business plans were overly aggressive. 

-1,000

-500

0

500

1,000

1,500

2,000

2,500

Pieces (in millions)

First-Class Mail

Priority Mail

Periodicals

Express Mail and Mailgrams

International Mail

Standard A Mail

(primarily advertising)

Package Services
Page 8 GAO-01-733T 

Figure 5 shows the Service’s total revenues, including shortfalls in various mail 

categories, special services,2

 and other types of revenue. 

Figure 5: Revenues for FY 2001 Through April 20, 2001 Compared to Budgeted Levels 

Source: U.S. Postal Service. 

The Service’s expenses in fiscal year 2001 through April 20 were about the same as its 

budgeted target of $41.9 billion—with reported expenses $50 million below this target, a 

difference of 0.1 percent. During this period, First-Class Mail and Priority Mail volumes 

fell below expected levels. Service officials have told us that the cost of handling FirstClass Mail and Priority Mail did not decline commensurate with the decline in volume 

because it is difficult to make such a short-term adjustment. Moreover, the Service 

incurred additional costs to handle higher-than-expected increases in other mail 

volumes, particularly Standard A advertising mail. Thus, the Service’s overall workload 

was higher than it had budgeted for. As a result, some compensation and other costs 

were reported to be higher than budgeted, but these additional costs were fully offset in 

the first part of the fiscal year by cost reductions in other areas. 

2 Special services include registered and certified mail, postal money orders, and post office boxes, among other

things.

-400

-300

-200

-100

0

100

200

300

Dollars (in millions)

First-Class Mail

Priority Mail

Periodicals

Package Services

Special Services

International Mail

Standard A Mail

(primarily advertising)

New initiatives and

other revenues

Express Mail and

Mailgrams
Page 9 GAO-01-733T 

Budgeted Losses for the Rest of Fiscal Year 2001

In its fiscal year 2001 budget, the Service estimated that it would incur a $911 million 

deficit for the rest of the fiscal year after April 20, 2001. When this amount is added to 

the $271 million deficit incurred in the first part of the fiscal year, the Service would lose 

nearly $1.2 billion in fiscal year 2001. This amount does not include developments in the 

rest of the fiscal year that the Service projects will have a negative impact on its net 

income, which are detailed below. 

Expenses for the Rest of Fiscal Year 2001 in Addition to Those Previously Budgeted

The Service currently projects that its expenses for the rest of fiscal year 2001 will be 

$120 million greater than budgeted, including the following: 

• Transportation and energy expenses: The Service continues to expect transportation 

and energy expenses to exceed budgeted amounts for the rest of the fiscal year due 

to rising prices and cost passthroughs from contractors. Postal officials are 

concerned that fuel and energy prices may increase substantially in the near future, 

which also may increase inflation and future cost of living adjustment payments to 

Service employees and retirees. In addition, unbudgeted transportation-related costs 

will be incurred for start-up costs associated with the Service’s new multiyear 

contract with FedEx to transport Priority Mail and Express Mail. 

• Other expenses: Workers’ compensation expenses are projected to be about $50 

million over budget for the rest of fiscal year 2001, according to the Service, and to 

reach about $1 billion for the full fiscal year. The Service also expects a small impact 

to result from recent increases in “terminal dues” paid to foreign postal 

administrations to deliver outbound U.S. international mail that were not factored 

into the Service’s budget. 

Revenue Shortfalls for the Rest of Fiscal Year 2001

The Service projects revenues will be below its budgeted targets for the rest of the fiscal 

year for two reasons. First, the Service budget assumed that it would receive the full 

rate increase it had requested. However, this did not occur. On January 7, 2001, the 

Service implemented under protest a smaller-than-requested increase that the Postal 

Rate Commission had recommended (including a 1-cent increase in the basic First-Class 

stamp rate to 34 cents). The Service subsequently decided to override the Commission’s 

recommendation on May 7, 2001, and raise rates again on July 1, 2001, to generate the 

revenues it had originally requested (leaving the First-Class stamp rate at 34 cents). 

Thus, the Service projects that revenues for fiscal year 2001 will be $390 million below 

what its budget had assumed—$235 million, as a result of the shortfall, through April 20 

and $155 million, as a result of the projected shortfall, for the rest of the fiscal year. 
Page 10 GAO-01-733T

Second, the Service projects that from April 21 through the end of the fiscal year, its 

revenues will fall below budgeted targets by $150 million to $950 million due to the soft 

economy and its impact on postal revenues. This range reflects the Service’s uncertainty 

about the length and severity of the economic slowdown. 

Other Factors May Add to the Service’s Deficit for Fiscal Year 2001

The Service’s revenues will likely be lower than budgeted targets for the rest of the fiscal 

year and its expenses will likely be higher than budgeted targets for a variety of reasons: 

• The Service is unlikely to achieve its ambitious $289 million revenue target for the 

full fiscal year for revenues from e-commerce, advertising, and retail initiatives, given 

that these initiatives generated only $2 million in fiscal year 2001 through April 20 – a 

shortfall of $138 million from the Service’s budget target for this period. In addition, 

the Service may not achieve its $454 million target for other miscellaneous revenues, 

given that these revenues fell $90 million short of the budget target for the first part 

of the fiscal year. The Service’s historical difficulty in making profits from its new 

products and services suggests the Board of Governors may wish to look at the 

Service’s policies and practices for determining when the Service should enter into 

new ventures and when such ventures should be discontinued.3

• Although the Service reports that compensation expenses have been below budgeted 

targets in recent weeks and that it imposed a hiring freeze on all headquarters 

positions in April, it is still unclear whether the Service’s compensation expenses will 

achieve the budgeted target for the full fiscal year because these expenses were $132 

million over budget for the fiscal year through April 20. 

• The Service may incur additional expenses depending on the outcome of ongoing 

litigation regarding its previous contracts with Emery Worldwide Airlines Inc., which 

sorted and transported Priority Mail until early 2001. 

• The Service will also need to continue to control expenses such as those for supplies 

and services so that below-budget expenses for the first part of the fiscal year are not 

simply deferred to a later time. 

Additional Information Could Help Explain the Service’s Changing Financial 

Outlook 

 

The Service has made numerous revisions to its estimated net income for fiscal year 2001 

with little or no public explanation, creating confusion and raising concerns about its 

ability to generate timely and reliable financial information. The significant shift in the 

Postal Service’s financial outlook in early 2001 came as a surprise to a variety of key 

stakeholders, with many concerns raised after the Service revised its estimated net 

income for fiscal year 2001 from a $480 million deficit last November to a $2 billion to $3 

billion deficit this February. Currently, the Service estimates a $1.6 billion to $2.4 billion 

deficit for fiscal year 2001 (see table 1). 

3 U.S. Postal Service: Development and Inventory of New Products (GAO/GGD-99-15, Nov. 24, 1998; and U.S.

Postal Service: Postal Activities and Laws Related to Electronic Commerce (GAO/GGD-00-188, Sept. 7, 2000).
Page 11 GAO-01-733T

Table 1: Postal Service Estimated Net Income for Fiscal Year 2001

Date 

USPS Estimate of 

Net Income for Fiscal Year 2001 Source 

1/12/00 – USPS requests rate increase. 

2/8/00 $500 million surplus USPS preliminary performance plan for FY 2001 

9/30/00 $150 million surplus USPS 5-Year Strategic Plan for FY 2001-2005 

10/6/00 $480 million deficit USPS final performance plan for FY 2001 

11/13/00 – Postal Rate Commission recommends lower-than-requested rates. 

11/14/00 $480 million deficit USPS-approved budget for FY 2001 

12/4/00 $960 million deficit Postmaster General (Federal Times) 

12/4/00 – USPS states it will implement Commission-recommended rates under protest. 

12/18/00 $1.3 billion deficit USPS Chief Financial Officer 

1/7/01 – Higher rates go into effect. 

2/7/01 $2-$3 billion deficit USPS revised budget submission to OMB for FY 

2001 

5/7/01 $1.6-$2.4 billion deficit USPS estimate provided to GAO 

5/7/01 – USPS Board of Governors overrules the Commission; most rates will increase again on July 1, 2001, 

to generate the revenues USPS originally requested. (The basic First-Class stamp rate remains at 34 cents.) 

Source: U.S. Postal Service and Federal Times. 

Postal stakeholders have raised concerns about the reliability of the Service’s estimates 

of its net income for fiscal year 2001. In addition, some stakeholders have said that they 

do not understand how the Service’s financial outlook rapidly worsened to such a great 

extent from last fall to early this year. To further better understanding, the Service 

should provide more complete and readily accessible information to Congress and the 

public on changes in its financial outlook. For example: 

• Last fall, the Service did not publicly explain why its published estimates of net 

income for fiscal year 2001 changed by $630 million over a 1-week period. 

Specifically, the Service revised its estimate of net income for fiscal year 2001 from a 

$150 million surplus in its 5-Year Strategic Plan dated September 30, 2000, to a $480 

million deficit in the Service’s final annual performance plan for fiscal year 2001 

dated October 6, 2000. The final plan did not explain why the Service’s financial 

outlook changed over this period. Service officials told us that the change was due to 

its decision to lower estimated revenues for fiscal year 2001. 

• Further, although Service officials have provided explanations of changes in the 

Service’s financial outlook in open forums—such as monthly Board of Governor’s 

meetings, meetings with mailer groups, and in testimony before Congress—these 

explanations have not been as readily accessible to those not in attendance. 

Greater transparency is needed in connection with the Service’s financial and operating 

results and projections. To this end, in April 2001, we recommended that the Service 

provide summary financial reports to Congress and the public on a quarterly basis. 

These reports should present sufficiently detailed information for stakeholders to 

understand the Service’s current and projected financial condition; how its outlook may 

have changed since the previous quarter; and its progress toward achieving the desired 

results specified in its comprehensive plan to address its financial, operational, and 

human capital challenges. Service officials told us that they generally agree with our 
Page 12 GAO-01-733T

recommendation and are considering how to best implement it. On May 11, 2001, the 

Deputy Postmaster General, the Chief Financial Officer, and I met to discuss how to 

proceed in this area. As we discussed in that meeting, one way the Service could achieve 

greater transparency would be to post this information on its Web site to facilitate timely 

communication of the information. 

The Service’s Financial Outlook for Fiscal Year 2002 

The Service currently estimates that its deficit for fiscal year 2002 will be $1.5 billion to 

$2.5 billion. This range is about $1 billion less than the Service projected earlier this year 

because the Service has decided to implement higher rates for most categories of mail on 

July 1, 2001. Many uncertainties exist that could affect the Service’s net income for fiscal 

year 2002. For example, the estimated deficit for fiscal year 2002 assumes no further 

increases to postal rates in fiscal year 2002. However, the Service’s Board of Governors 

directed postal management to prepare a request for another rate increase. If the Service 

seeks another rate increase to be implemented during fiscal year 2002, its deficit 

projection could change. 

The Service Has Growing Cash Flow and Debt Challenges 

The Service’s declining net income and current losses are putting pressures on its cash 

flows from operations (the funds that remain after the Service pays its expenses) and 

debt situation. The Service has been generating less cash flow from operations that are 

used for capital expenditures and debt repayment. Therefore, the Service has relied 

increasingly upon debt to finance its capital expenditures and expects to reach its $15 

billion statutory debt limit by the end of fiscal year 2003, assuming no further increases 

in postal rates after July 1, 2001. Under this scenario, the Service could pay bills only 

through its cash on hand plus additional cash generated from operations until 

outstanding debt declines. 

As shown in figure 6, the Service’s cash flows from operations are typically significantly 

greater than its net income. The primary reason for the difference is that net income is 

calculated on the accrual basis of accounting4

 and includes accrued expenses, such as 

depreciation expense, that do not use cash. 

4 Under the accrual basis of accounting, revenues are recorded when earned, and expenses are recorded when

incurred, even if these activities are not concurrent with the related receipt or outlay of cash.
Page 13 GAO-01-733T

Figure 6: Postal Service Net Income and Cash Flows From Operations

Source: U.S. Postal Service. 

The Service is currently experiencing some cash flow pressure because of its deficits, 

but it anticipates it will make all of its fiscal year 2001 year-end payments for retirement 

expenses and worker’s compensation. To avoid a cash shortage during fiscal year 2001, 

the Service has placed a freeze on capital commitments that will affect more than 800 

facility projects this year. Last year the Service had planned capital commitments of $3.6 

billion for fiscal year 2001, but Service officials recently announced reductions in this 

area and told us they now anticipate a reduction to about $1.7 billion in capital 

commitments this fiscal year. Preliminary budget plans for fiscal year 2002 would reduce 

capital investment from originally planned levels. To the extent that a freeze on needed 

capital investments is required to conserve cash, it may simply change the timing of such 

expenses and raise the final cost, while deferring any related expected benefits. 

The Service has mounting debt and many billions of dollars in liabilities for future 

retirement and worker’s compensation expenses. These liabilities have increased in part 

because the Service was statutorily mandated to assume responsibility for funding all 

cost of living adjustments and health benefits for its retirees since July 1, 1971. For the 

remainder of this decade, these liabilities will continue to have an increasing impact on 

the Service’s future cash flows, placing the Service under growing financial pressure. 

-3

-2

-1

0

1

2

3

4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fiscal year

Net income

Net cash provided by operating activities

Dollars (in billions)
Page 14 GAO-01-733T

The amount that the Service borrows on an annual basis is largely determined by the 

difference between its cash flows from operations and the amount it spends on its 

capital investments. The Service has experienced a net increase in outstanding debt at 

the end of each fiscal year since 1997; and beginning in 1998, the Service’s cash outlays 

for capital expenditures exceeded its cash flows from operations. The Service’s debt 

increased from $5.9 billion at the end of fiscal year 1997 to $9.3 billion at September 30, 

2000. The Service has an annual limit of increasing its outstanding obligations by $3 

billion (that includes a $2 billion limit for capital improvements and a $1 billion limit to 

defray operating expenses). Assuming that the Service’s latest financial outlook is on 

target, the Service would reach its $15 billion statutory borrowing limit by September 30, 

2003 (see fig. 7). 

Figure 7: Trends in Postal Service Debt 

Source: U.S. Postal Service. 

Growing Retirement Expenses 

The Postal Service's retirement-related expenses have increased in recent years, and 

these trends are expected to continue (see fig. 8). The Service’s retirement liabilities 

translate into annual payments from the Service to the federal government’s Office of 

Personnel Management, which administers payments to retirees. The Service has been 

making these payments at the end of each fiscal year. According to the Service, these 

payments are estimated to increase by $554 million in fiscal year 2001 to $9.1 billion and 

are projected to reach $14.0 billion in fiscal year 2010. In addition, the Service has 

estimated that its retiree health benefit premium expenses will increase by $114 million 

in fiscal year 2001 to $858 million, and the Service has projected that these expenses will 

reach about $2.0 billion in fiscal year 2010. 

0

2

4

6

8

10

12

14

16

Dollars (in billions)

Fiscal year

Outstanding debt at end of fiscal year

Statutory debt limit

Projected outstanding

debt at the fiscal year end

2000

2001

2002

2003

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2002

2003

Statutory debt limit
Page 15 GAO-01-733T

Figure 8: Postal Service Projects Increases in Retirement-Related Expenses

Source: U.S. Postal Service. 

The Service has projected that among its current employees as of October 2000, about 

130,000 postal employees were already eligible, or will reach eligibility, for regular 

retirement in calendar years 2001 and 2002. This projection includes 36 percent of 

executives, 25 percent of managers and supervisors, and 16 percent of the career 

workforce. By calendar year 2010, 85 percent of postal executives, 74 percent of postal 

managers and supervisors, and 50 percent of the career workforce will reach retirement 

eligibility, according to Service projections (see fig. 9). Although many employees do not 

retire immediately, the increasing number of postal employees who will become eligible 

to retire in the remainder of this decade raises questions about succession and 

workforce planning. If retirees are not replaced with the appropriate number of 

employees possessing the needed skills, the resulting loss of institutional knowledge and 

expertise may affect mission achievement. 

0

2

4

6

8

10

12

14

16

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal year

Retirement benefits

Retirement health benefits

Dollars (in billions)

A
Page 16 GAO-01-733T

Figure 9: A Large Percentage of the Postal Workforce Is Nearing Retirement

Source: U.S. Postal Service.

The Service has reported unfunded Civil Service Retirement System retirement liabilities 

of $32.2 billion at September 30, 2000. These liabilities represent the amount due to the 

Office of Personnel Management to cover Civil Service Retirement System pay increases 

and Civil Service Retirement System retirees’ cost of living adjustments. The Service also 

has related future interest payments estimated at $16.5 billion. These liabilities are being 

paid through annual installments. In fiscal year 2000, the Service paid $3.6 billion toward 

its liability to the Office of Personnel Management for these Civil Service Retirement 

System costs. The Service’s total annual retirement expenses for both the Civil Service 

Retirement System and the Federal Employees Retirement System is projected to be $9.1 

billion for fiscal year 2001. The Service projects its total retirement expenses will 

increase annually to $14 billion in fiscal year 2010. These increased payments could 

reduce the Service’s cash flows and place upward pressures on postal rates. 

24

20

12

25

29

22

0

20

40

60

80

100

Executives Managers and

supervisors

Career

employees

Postal workforce

Calendar years 2001-2002

Calendar years 2003-2005

Calendar year 2006-2010

36

25

16

85

74

50

Percentage retirement-eligible

A
Page 17 GAO-01-733T

What Actions Has the Service Taken or Planned to Address Its Financial 

Problems? 

We believe that the Service’s deteriorating financial situation calls for prompt, aggressive 

action, particularly in the areas of cutting costs and improving productivity in the near 

term. The Service has initiated efforts in this regard and has also launched new products 

and services to increase revenues. However, we believe that it will be difficult for the 

Service to generate significant revenues from new products and services in the next few 

years. To the extent that operating costs are not contained or reduced, or revenues are 

not generated from new products and services, the Service will likely need to continually 

raise rates to maintain service and to meet its break-even mandate, at least in the short 

term. However, simply raising rates is not the answer. The Service and the Congress 

must take actions in order to deal with the systemic problems facing the Service. 

Postal productivity—the relationship between the Service's outputs of delivering mail to 

an expanding delivery network and resources expended in producing them—increased 

only about 11 percent in the past 3 decades, despite vast changes in automation and 

information technology (see fig. 10). Although the Service achieved a 2.5 percent 

increase in its productivity in fiscal year 2000, as the Postal Service and key stakeholders 

have recognized, sustained long-term increases in its productivity will be essential to 

controlling costs and thus keeping postage rates affordable. However, numerous 

reports, including some by us and the Postal Service’s Inspector General, have noted 

inefficiencies in the postal system and difficulties the Service has had in realizing 

opportunities for savings over the long term. 
Page 18 GAO-01-733T

Figure 10: Postal Service Productivity Growth Since Fiscal Year 1971

Source: U.S. Postal Service. 

The Service's ability to improve productivity and control costs is constrained by a 

number of factors, such as its mandate to provide postal services to all communities. In 

addition, the Service has had difficulty in achieving the expected savings from 

implementing new technology. The Service has also reported that extensive work rules 

and other regulations hamper its flexibility and innovation; and by law, wages and work 

rules are determined by binding arbitration—a third-party panel—when the Service and 

its labor unions cannot reach agreement. This process has been criticized as lessening 

the incentives for both sides to reach agreement. However, no consensus exists on 

alternatives to this process. 

The Service has a self-imposed moratorium on closing post offices. By law, the Service 

cannot close small post offices solely for operating at a deficit. Further, fiscal year 2001 

appropriation legislation restricts the Service from closing small or rural post offices in 

fiscal year 2001, and this provision has been included in the Service’s appropriation 

legislation for many years. The Service estimated several years ago that about half of all 

post offices do not generate sufficient revenues to cover their costs. However, the law 

also provides that the Service in determining whether to close or consolidate post offices 

must consider the effects on the local community, employees at the post offices, 

provision of universal service, the resulting savings, and other factors that the Service 

determines are necessary. Furthermore, the Service has a long, complex, detailed 

0

2

4

6

8

10

12

14

Fiscal year

Up 11%

Cumulative Percentage Change

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

1971

A
Page 19 GAO-01-733T

process for closing post offices in cases such as consolidating multiple post offices in 

substandard buildings that are located in an area with significant population loss. 

Breakthrough Productivity Initiatives 

The Service recognizes that it needs aggressive cost management. In March 2000, the 

Postmaster General called for achieving “breakthrough” productivity savings of $1 billion 

annually, mainly in mail processing, transportation, and administrative areas. The 

Service’s fiscal year 2001 budget called for saving $550 million through such productivity 

initiatives and $450 million in additional savings from other cost reduction initiatives. 

The Service set a goal of increasing its productivity by 0.7 percent for fiscal year 2001 

and reports that its productivity increased 1.9 percent for fiscal year 2001 through April 

20, which equates to reduced expenses of $775 million. At the same time, given past 

experience, the Service faces a significant challenge to achieve and sustain large 

increases in productivity over the long term. Looking ahead, the Deputy Postmaster 

General announced that the Service is committed to cutting costs by $2.5 billion by 2003. 

Also, he said that over the next 5 years the Service plans to cut 75,000 work years, reduce 

administrative costs by 25 percent, and cut transportation costs by 10 percent. 

The Service defines breakthrough productivity as a systemic focus on improving 

productivity by “reducing costs through everything from machine utilization, to 

standardized processes, to staffing and scheduling, and to resource management.” The 

breakthrough productivity initiatives fall into four key areas: (1) operations, (2) 

administration, (3) purchasing, and (4) transportation. 

• Operations: According to the Service, savings in operations will be achieved by 

implementing best practices on a nationwide basis in areas with the greatest potential 

for savings, such as using standardized operating procedures and adjusting 

employees’ work schedules to more closely coincide with mail volume. Further 

savings are to be achieved by accelerating the automation program, which is to 

reduce the need for manual sorting of mail. 

• Administration: Administrative positions are to be reduced by centralizing functions, 

using electronic technology, and eliminating unnecessary administrative 

transactions. For example, the Service is replacing its outdated time and attendance 

reporting system with a Web-based application requiring much less time to 

administer. 

• Purchasing: The Service plans to cut the cost of purchased goods and services by 

standardizing purchasing sources and leveraging the Service’s size to obtain better 

prices. 

• Transportation: The Service reports making across-the-board efforts to reduce the 

cost of transporting mail at all points in the system, largely by reviewing all mail 

transportation contracts to identify and eliminate underused and redundant service. 

These reviews are nearly complete. The Service has reported that it expects 

considerable savings from moving mail by truck instead of by air due to lower rates. 
Page 20 GAO-01-733T

Other Cost Reduction Programs

In addition to the Service’s “breakthrough” productivity initiatives, the Service has 

announced that it plans to achieve $450 million in savings through other automation 

initiatives, including the following: 

• Upgrading letter-sorting equipment: The Service continues to upgrade this equipment 

with enhanced optical character reading, barcode sorting, and remote encoding 

functions. 

• Adding and upgrading equipment to sort flat mail such as catalogs and periodicals: 

New equipment is being deployed to replace some older models and handle 

additional capacity, and some current models are being equipped with automatic 

feeders and optical character readers.

• Adding and upgrading material-handling equipment: Robots are being deployed to 

load mail containers for dispatch, enhancing equipment that transports and stages 

mail in processing plants, and deploying new technology to dispatch and route mail 

transported on commercial air carriers.

What Transformational Issues Will Need to Be Addressed?

In addition to the financial and operational issues discussed above, over the past 2 years 

we have raised concerns about a range of human capital challenges that threaten the 

Postal Service’s ability to continue to provide affordable, high-quality universal postal 

service on a self-financing basis. We have also discussed the constraints facing the 

Service, some of which include legal and regulatory requirements, that may impede its 

ability to carry out its mission. The 30-year-old legal and regulatory system established 

by the nation’s postal laws is increasingly problematic for both the Service and its 

competitors and is overdue for change. When the Service was created as an independent 

establishment of the executive branch by the Postal Reorganization Act of 1970, it faced 

little direct competition. Today, the Service faces growing competition from both private 

delivery companies and the Internet, and even foreign postal administrations. 

In this vastly changed environment, the Service is subject to several statutory and 

regulatory restrictions that limit its transformational efforts and do not apply to its 

competitors (e.g., universal postal service requirement, binding arbitration requirement, 

rate-setting process, and facility closure restrictions). At the same time, the Service has 

a statutory postal monopoly to deliver letter mail, and also benefits from laws that apply 

to the Service differently than they apply to its competitors, such as not paying taxes and 

not being subject to antitrust laws. Congress needs to revisit what statutory and 

regulatory framework would be appropriate for the Service in the 21st century. 

Financial Challenges

Changes in the marketplace, including greater competition, may lead to increasing 

financial difficulties for the Service and threaten its ability to provide universal postal 

service at reasonable rates while remaining self-supporting from postal revenues. 
Page 21 GAO-01-733T

Recently, the Service initiated a study to determine the potential cost savings from 

reducing mail delivery from 6 to 5 days each week. Can the Postal Service continue to 

maintain the scope and quality of its retail and delivery services? The answer, at least in 

the short term, is “yes” – but in the long term, the Service’s prospects are uncertain. 

 

Competition is already increasing from private delivery companies and foreign postal 

administrations accepting outbound international mail from within the United States. For 

example, United Parcel Service (UPS) is offering a hybrid mail service in which letters 

are electronically sent to a recently acquired UPS company and then printed and inserted 

into the U.S. postal system. In addition, at least eight foreign postal administrations now 

offer services from within the United States to American consumers. 

Although it is difficult to predict the timing, magnitude, and potential financial impact of 

further mail volume diversion to other competitors and to electronic alternatives, 

according to the Service’s latest 5-Year Strategic Plan, longer-term projections suggest 

that about half of mailed bills and payments will eventually be replaced with electronic 

billing and payment alternatives. Thus, under the Service's baseline forecast that is 

included in its 5-Year Strategic Plan, First-Class Mail volume would decline at an average 

annual rate of 3.6 percent from fiscal years 2004 through 2008 (see fig. 11). 
Page 22 GAO-01-733T

Figure 11: Postal Service Projects Decline in First-Class Mail Volume 

Source: U. S. Postal Service. 

If First-Class Mail volume declines and the revenue loss is not offset by increasing mail 

volume in other areas, such as advertising mail or by revenues from new initiatives such 

as e-commerce, rates would need to rise for any mail categories that take on a larger 

burden of supporting postal overhead costs. The Service would also face the challenge of 

responding to any volume declines or changes in the mail mix by attempting to reduce 

mail processing, personnel, and other costs that have traditionally been considered to 

vary with changes in the mail volume. However, these costs may be difficult to adjust in 

the short term. Adding to rate pressure, postal infrastructure costs continue to grow. The 

Service maintains a delivery and retail network that includes more than 235,000 city and 

rural delivery routes; more than 38,000 post offices, stations, and branches; and more 

than 350 major mail processing and distribution facilities. Each year the Service adds 

new delivery points for new households and businesses—a projected 1.8 million in fiscal 

year 2001. 

Human Capital Challenges

The Postal Service faces additional difficult human capital challenges that must be 

successfully addressed to maintain organizational effectiveness and improve the 

workplace environment as well as control workforce costs. These challenges include (1) 

restructuring the postal workforce of about 900,000 career and non-career employees 

1.5

4

1.7

1.3

-3.6

3.7

8.6

3.2

2.5

1.6

-6

-4

-2

0

2

4

6

8

10 Average annual percentage change

1972-1979 1980-1989 1990-1999

Fiscal year

2000-2003 2004-2008

Service projections

First-Class Mail volume

Standard A mail volume (primarily advertisements)
Page 23 GAO-01-733T

and establishing succession planning for impending retirements; and (2) ameliorating the 

persistent problems in the workplace that have been exacerbated by decades of 

adversarial labor-management relations and that hinder efforts to improve productivity. 

The Postal Service's human capital problems can be seen as part of a broader pattern of 

human capital shortcomings that have contributed to programmatic problems and risks 

across the federal government. 

The Service's Strategic Plan stated that the expected decline in postal workload—in part 

due to automation and the implementation of information technology—“will inevitably 

result in both restructuring and a reduction in the workforce.” Some of the planned 

reductions are to be accomplished through eliminating staff vacancies and the work 

associated with them. These reductions should be done in a carefully planned manner to 

avoid negatively affecting the workplace environment, operations, and service quality. 

The Service will be increasingly challenged to deal with human capital issues related to 

succession planning, maintaining continuity, and the associated cost issues. With a large 

percentage of the postal workforce nearing retirement eligibility, the Postal Service has 

the opportunity to realign its workforce and assure that it has the leadership, knowledge, 

and skills necessary to efficiently and effectively carry out its mission. Given the nature 

of these issues, the Service will need to include effective participation of its employees in 

planning and implementing workplace improvements. The Service will also need to 

maintain the continuity of service to customers as many experienced managers and 

workers retire and the Service restructures its workforce. 

Fundamental improvement is needed in postal labor-management relations. The Service 

and its major unions and management associations need to resolve long-standing labormanagement problems that have hindered improvement efforts, including efforts to cut 

costs and increase productivity. For example, the Service has made progress in reducing 

the number of grievances, but at the end of fiscal year 2000, the Service reported about 

147,000 pending or appealed grievances. For the Service to be successful, it is critical 

that it achieves and sustains collaborative working relationships with its labor unions 

and management associations. 

Transformation Questions

If the Postal Service is to transform itself into a modern, efficient, high-performance 

organization that continues to provide affordable, universal postal service in the 21st

century, the starting point is to define and clarify the Service’s mission and role over the 

long term. The Service needs to address questions about its basic mission—that is, the 

type of postal services that should be provided on a universal basis to meet business and 

residential customer needs, how these services should be provided, and how they should 

be financed. Further, questions arise related to what kind of governance and regulatory 

framework is needed to ensure public accountability. Some of the specific questions 

that need to be addressed as part of the structural transformation include the following: 

• What is the appropriate mission and role of the Postal Service in the 21st century? 

How should “universal postal service” be defined? How should universal postal 
Page 24 GAO-01-733T

service obligations be provided? Should the postal monopoly be narrowed or ended? 

Should the Postal Service be allowed to compete in areas served by the private sector 

and, if so, under what circumstances? To what extent should the Service be subject 

to the same laws as its competitors? 

• Can the Postal Service remain self-supporting under a break-even mandate? If not, 

what types of financing options should be considered? Should the Service be allowed 

to make a profit? Should universal postal services be subsidized? 

• What changes to the governance and organization structure are needed to realign the 

organization so that it can successfully achieve its mission? What type of governing 

board is appropriate? What should be its role? What criteria would be appropriate for 

selecting board members? 

• What should be the related regulatory framework providing oversight in the areas of 

rate setting, new postal products, and fair competition? How much flexibility should 

the Service have to change rates? What oversight is needed to protect customers with 

few or no alternatives to the mail? How should the Postal Rate Commission and other 

pertinent regulatory authorities exercise oversight with respect to competition and 

antitrust issues? 

• How is the Service to use its employees to accomplish its mission in an efficient, 

effective, and economic manner? What are the Service’s current and future human 

capital needs? How will the Service ensure that it has the knowledge, skills, and the 

abilities that are needed? How will the Service make the necessary changes to its 

workforce, including its size, organization, and deployment? 

• What performance management and incentive systems are needed to improve 

individual and team performance? How can the Service ensure that its managers and 

supervisors are prepared and trained to provide effective leadership? What labor 

policies are needed? How can the Service’s management and postal unions and 

management associations develop a shared understanding of the Service’s vision; 

undertake a mutual effort to achieve it; and resolve problems and conflicts over 

wages, work rules, and individual cases in a fair and effective manner? 

• What operational changes are needed to support the Service’s mission? How can 

technology help the Service improve productivity, reduce costs, and enhance 

customer service? 

• Are fundamental changes needed in how the major functional areas are carried out—

mail collection, transportation and mail processing, delivery, and retail services? Is 

the Service’s current physical infrastructure aligned to efficiently and effectively 

support operations? What types of and how many facilities are needed? Should 

certain existing facilities be consolidated or eliminated? Should certain functions be 

contracted out or addressed via public/private partnerships? 
Page 25 GAO-01-733T

• What performance and cost information is needed and collected to support Service 

operations and measure results? What information on projected and actual 

performance should be periodically reported to the public? How well integrated are 

the Service’s financial, management, and performance reporting systems? 

In addition, several issues need to be addressed related to how the Service should be 

held accountable for results. We have reported that the Postal Service’s annual 

performance plans and its first performance report under the Government Performance 

and Results Act of 1993 have not been as useful to Congress, postal managers, and 

customers as they could have been. In our view, the Service’s recently published 

preliminary performance plan for fiscal year 2002 did not fully address the concerns we 

previously raised about the Service’s approach to setting goals and reporting on results. 

For example, the preliminary plan dropped important goals for net income and for the 

timely delivery of 2- and 3-day First-Class Mail. 

Also, a number of issues have been raised related to the reliability and credibility of the 

data the Service uses for ratemaking. Timely, accurate, and relevant information will be 

critical for effective management as well as communications with customers, Congress, 

and other stakeholders. 

 

Engagement with Postal Stakeholders 

Engaging with stakeholders will be an essential part of developing a consensus to 

address the Service’s transformational issues. When the Service begins to engage with 

its stakeholders to develop a comprehensive transformation plan, it will face a 

stakeholder community far from consensus on what needs to be done. It would be 

useful for the Service to develop an approach for engaging with its stakeholders in the 

development of its comprehensive plan. 

In response to the joint request to us from this Committee and Subcommittee, we are 

working to identify improvement options suggested by various stakeholders and will 

summarize the results in our subsequent report to you. We have begun this effort and 

have talked to several stakeholders and plan to continue these discussions. Some of the 

stakeholders we have talked to so far have included postal unions, mailer groups, 

competitors, the Service’s Office of Inspector General, and Postal Rate Commission 

officials. They provided a variety of suggestions for action, some within the existing legal 

framework and others that would require statutory change, as follows: 

• The Service’s mission and role: Representatives of a mailer group and a Service 

competitor said that the Service’s mission should be more clearly defined and raised 

the issue of whether the Service should be changed to a stock-owned corporation. In 

the mailer’s view, making the Service a corporation with shareholders would hold it 

accountable and create incentives for success. In the competitor’s view, the Service 

should either be restricted to offering monopoly services that do not compete with 

the private sector or be held to the same rules as its competitors. 
Page 26 GAO-01-733T

• Regulation of postal rates: A mailer group and a union representative favor statutory 

changes to give the Service more flexibility to set postal rates. For example, a union 

representative said that the Service should be able to adjust postal rates in response 

to economic trends. However, Postal Rate Commission officials and a mailer group 

representative stated that the Service has the flexibility under current law to request 

alternative rate structures, such as peak-load pricing and phased rate increases. 

• Transparency and accountability: Postal Rate Commission officials and mailer group 

representatives recommended that the Service provide more frequent and complete 

financial and service quality information to the public. For example, they said the 

Service should regularly disclose the on-time delivery of different classes of mail so 

that it can be held accountable for the quality of service it provides. 

• Workplace environment: Several stakeholders stated that better communication is 

needed among employees, management, and external stakeholders to improve the 

atmosphere in the workplace and increase productivity. A postal union 

representative noted that a different management style is needed to encourage 

employees to give additional discretionary effort. For example, the representative 

suggested initiating more “bottom-up” communication from employees. 

• Pay and performance incentives: Some stakeholders noted that greater incentives are 

needed to maximize productivity and efficiency. For example, a mailer group 

representative said that management and employees need more effective incentives 

to further organizational achievement of goals. On the other hand, union officials said 

that the existing management bonus system encourages managers to take 

unwarranted action to receive bonuses. Further, a union official noted that city and 

rural carriers work side by side in some suburban areas under different pay systems, 

different ways of setting and adjusting the workload, and different incentives for 

good performance. 

• Flexible staffing: A mailer group representative favored greater use of flexible 

staffing procedures to minimize compensation costs, such as using more noncareer 

workers to handle peak mail volumes. Union officials expressed a different view, 

favoring the elimination of noncareer jobs to save money. 

• Retail infrastructure: Mailer group representatives said that the Service should 

consider, as part of a package of changes, restructuring the retail network by closing 

post offices and/or relocating retail operations from some post offices to postal retail 

operations provided in other locations such as retail stores. For example, a mailer 

group representative suggested a reevaluation of the statutory restrictions on closing 

post offices, including a reconsideration of the prohibition against closing post 

offices solely for operating at a deficit. The mailer group representative suggested 

that the military base-closing model could be used when evaluating the possibility of 

closing unprofitable post offices. 
Page 27 GAO-01-733T

• Mail processing network: Some stakeholders said that the Service could become 

more productive by using existing automation equipment more efficiently and 

continuing automation efforts. A mailer group representative advocated that the 

Service achieve greater standardization of mail processing operations by adopting 

best practices throughout the system to the maximum extent possible. A 

representative of an equipment manufacturer said that the Service needed better 

long-term planning in this area, as well as working more effectively with its major 

suppliers. 

• Delivery network: A mailer representative said the Service could save money if some 

existing residential customers (e.g., customers with mailboxes attached to their 

homes) were required to use cluster boxes, thus increasing route efficiency. 

• Worksharing discounts: A union official stated that worksharing discounts—that is, 

discounts to mailers for mail preparation such as barcoding, presorting, and 

dropshipping mail—should be greatly reduced or eliminated. In the union official’s 

view, the Service could improve its net revenue by doing the worksharing functions inhouse at less cost. In contrast, a mailer group representative said more worksharing 

incentives are needed for the Service to process mail efficiently, save money, and 

encourage growth in mail volume. Further, Postal Rate Commission officials said that 

the Service has the ability under current law to request additional types of worksharing 

discounts. 

• Productivity initiatives: A mailer group representative stressed the importance of the 

Service improving its productivity through cost cutting. For example, he said that the 

legislatively established rate-setting process provides little incentive for innovation 

and efficiency since the Service can cover its costs by increasing postal rates. Union 

officials said that unions and employees could contribute toward developing 

initiatives to improve the Service’s productivity if there was greater prior 

consultation. At the same time, however, one union official described the Service’s 

current productivity initiatives as harassment of employees. 

• Administrative improvements: The recent statement of the Service’s Inspector 

General before the House Committee on Government Reform suggested a number of 

actions the Service could take to improve its performance, accountability, and 

financial position. One area cited where additional efficiencies could be improved 

was in the Service’s contract management practices. For example, one Inspector 

General investigation reported that the Service paid over $800,000 for asbestos 

abatement work that was either over-billed or not performed. The report suggested 

that the Service needed to strengthen its quality assurance procedures and training of 

Service contracting officials to ensure accurate contractor billings. 

• New products: Some stakeholders have said that the Service should have a more 

business-like approach to its new product initiatives so that the Service would stop 

spending money on projects that are not generating a positive return. 
Page 28 GAO-01-733T

• Debt limit: A mailer group representative and a union official favored raising the 

statutory debt limit to give the Service the flexibility to borrow instead of raising 

rates.

_____________________________________________________________________ 

Mr. Chairman, that concludes my prepared statement. I would be pleased to respond to 

any questions that you or the Members of the Committee and Subcommittee may have. 

Contact and Acknowledgments 

For further information regarding this testimony, please contact Bernard L. Ungar, 

Director, Physical Infrastructure Issues, on (202) 512-8387. Individuals making key 

contributions to this testimony included John H. Anderson Jr., Teresa L. Anderson, Hazel 

J. Bailey, Gerald P. Barnes, Joshua M. Bartzen, William J. Doherty, Michael J. Fischetti, 

Jeanette M. Franzel, Kenneth E. John, Roger L. Lively, Albert E. Schmidt, and Charles F. 

Wicker. 

(393021)