U.S. POSTAL SERVICE 

Transformation 

Challenges Present 

Significant Risks 

Statement by David M. Walker 

Comptroller General of the United States 

United States General Accounting Office 

GAO Testimony

Before the Committee on Government Reform

House of Representatives 

For Release on Delivery 

At 10:00 a.m. EDT 

Wednesday 

April 4, 2001 

GAO-01-598T 
Page 1 GAO-01-598T

Mr. Chairman and Members of the Committee:

We are pleased to be here today to participate in the Committee’s hearing on 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. In my testimony, I will

briefly review the Service’s growing financial, operational, and human capital challenges in an

increasingly competitive environment; discuss the Service’s financial outlook; and make

suggestions on what needs to be done to address the challenges facing the Service.

The Service’s projected financial losses have increased significantly during the past 4 months.

Over the past 2 years we have raised concerns about a range of financial, operational, and 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. Moreover, the Service’s financial

outlook has worsened more quickly than expected, and it is not clear how the Service will

address its mounting financial difficulties and other challenges. These challenges include:

• The Service’s net income has declined over the past 5 years, and the Service currently

projects a fiscal year 2001 deficit in the $2 billion to $3 billion range, up from a projected

loss of $480 million just 4 months ago. About $1.8 billion in projected losses are based on

results for the first 2 quarters and revised estimates for losses in the last 2 quarters of fiscal

year 2001. Based upon its judgment, the Service is also projecting that the slowing economy

will further lower net income by $300 million to $1.3 billion. Further, in fiscal year 2002, the

Service estimates that its deficit will be in the $2.5 billion to $3.5 billion range, assuming no

further increases to postal rates.

• The Service has experienced a net increase in outstanding debt at the end of each fiscal year

since 1997, and its total outstanding debt reached $9.3 billion at the end of fiscal year 2000.

Service officials expect the Service could reach its $15 billion statutory debt limit by the end

of fiscal year 2002, assuming no additional increases in postal rates. At the same time, the

Service has curtailed capital investment to conserve cash in fiscal year 2001. In addition, the

Service has no plan to reduce its debt. Depending on future events, the Service may face a

cash shortage in fiscal years 2002 and/or 2003.

• The Service faces increasing competition from both domestic and foreign-based entities. It

also expects electronic diversion—such as greater use of the Internet—to cause substantial

declines in First-Class Mail volume in the next decade and thus place the Service under

“extreme financial pressure.”

• Although the Service has taken steps and plans to cut costs by $2.5 billion by 2003, increase

productivity, and improve human capital programs, it has historically had great difficulty

achieving desired results in these areas. For example, numerous reports, including some by

us and the Postal Service Office of Inspector General (OIG), have noted inefficiencies in the

postal system and difficulties the Service has had in realizing opportunities for savings.

• 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 labor-management

relations problems that have hindered improvement efforts, including three labor agreements

that expired in November 2000. In addition, the Postal Service and the Postal Rate

Commission have had longstanding disagreements concerning pricing decisions.
Page 2 GAO-01-598T

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

transformational efforts (e.g., binding arbitration requirement, a cost-based rate-setting

process, and facility closure restrictions).

• 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.)

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

particularly in the areas of cutting costs and improving productivity. Accordingly, we are adding

the Postal Service’s transformational efforts and long-term outlook to our High-Risk List,

effective immediately, so that we and others can focus on its financial, operational, and human

capital challenges before the situation escalates into a crisis where the options for action may be

more limited. In this regard, we believe the following actions need to be taken:

• The Service should develop a comprehensive plan, in conjunction with Congress and other

stakeholders, such as the postal unions and management associations, customers, and the

Postal Rate Commission, that would identify the actions needed to address the Service’s

financial, operational, and human capital challenges and establish a timeframe and specify

key milestones for achieving positive results.

• The Service should 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.

• GAO will work with Congress and the Service to help identify improvement options and will

continue to analyze and report to Congress on the Service’s ongoing financial condition. In

consultation with other postal stakeholders including the Postal Service Office of Inspector

General, postal unions and management associations, the Postal Rate Commission, and

customers, we will review the Service’s financial results and future outlook, progress on

cost-cutting and productivity efforts, other countries’ experiences, and options for addressing

the Service’s short-term and long-term challenges.

Historical Perspective on the Service’s Financial Outlook

The $2 billion to $3 billion deficits estimated by the Service would be unprecedented, although

the Service did experience financial difficulties in the early 1990s. The Service’s financial

position in the early 1990s was adversely affected by the 1990-1991 recession. Also, in 1990,

legislation made the Service responsible for funding all health benefits and COLAs for its

retirees since July 1, 1971. The Service reported that its financial turnaround in the mid-1990s

was aided by rising mail volume, a rate increase that averaged approximately 10 percent in 1995,

and a “moderate” increase in expenses. In addition, in the late 1990s, the Service improved the

timely delivery of First-Class Mail.

As figure 1 shows, the Service’s financial turnaround occurred in fiscal year 1995. The Service

raised the price of the First-Class stamp from 29 cents to 32 cents on January 1, 1995. The

Service’s net income has declined in every year since fiscal year 1995 despite general rate
Page 3 GAO-01-598T

increases that raised the First-Class stamp price to 33 cents on January 10, 1999, and to 34 cents

on January 7, 2001.

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

Source: U.S. Postal Service.

One reason for the declining net income has been continued growth in postal expenses (see fig.

2). The Service’s delivery network continues to grow at a rate close to 2 million new household

and business deliveries each year. Labor-related expenses continue to account for more than

three-quarters of the Service’s total operating expenses, despite multibillion-dollar expenditures

for automation. Other operating expenses have also grown.

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Fiscal year

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Projected

Service’s projected range for fiscal

years 2001 and 2002

Dollars (in millions)
Page 4 GAO-01-598T

Figure 2: Trends in Postal Service Expenses From Fiscal Year 1990 Through 2000

Source: U.S. Postal Service.

The Service Faces Growing Challenges

The Service faces growing challenges in an increasingly competitive environment as it seeks to

fulfill its mission: bind the nation together through the correspondence of the people; provide

access in all communities; offer prompt, reliable, and efficient postal services at uniform prices;

and be self-supporting and break even financially over time. In October 1999, we testified that

the Service might be nearing the end of an era and confronting increasing challenges from

competition, notably from private delivery companies and electronic communication alternatives

such as the Internet.1 The Service told us that it expected First-Class Mail volume to decline

substantially in the next decade, assuming that the diversion of mail to electronic

communications alternatives would accelerate in a new and vastly different environment in

which the Service would be required to operate.

1 U.S. Postal Service: Challenges to Sustaining Performance Improvements Remain Formidable on the Brink of the

21st Century (GAO/T-GGD-00-2, Oct. 21, 1999).

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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Other operating expenses

Interest expense

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Page 5 GAO-01-598T

In September 2000, we testified that the Service continued to face an uncertain future in an

increasingly competitive environment.2 We reported that the Service believed that growth in its

core business had already been negatively affected by the rapid growth of the Internet, electronic

communications, and electronic commerce. We noted that a key oversight issue for the Service,

Congress, and the American people is whether the Service is heading for financial shortfalls that

could, in the long run, hinder its ability to carry out its mission of providing affordable, universal

services that bind the nation together. We also reported that the Service had experienced

increasing difficulties in meeting its goal of $100 million in net income for fiscal year 2000.

Based on its annual financial statements, the Service experienced a net loss of $199 million for

fiscal year 2000, its first deficit since fiscal year 1994.

In January 2001, we reported to Congress on the potential consequences if the Service incurred a

series of large deficits. These could include increases in postal rates, declines in service quality,

consolidation or closure of some facilities, or reconsideration of postal operations or even the

scope of postal services.3 We also noted that fundamental issues concerning the Postal Service’s

role and authority have been raised in Congress, and various stakeholders have called for

changing its legal and regulatory framework. We concluded that to be successful, the Service

would need to address formidable performance and accountability challenges in five key areas,

which can be posed as the following questions:

1. Can the Postal Service remain self-supporting while providing affordable, high-quality

universal service?

2. Can the Service become more efficient by controlling its costs and improving productivity?

3. How will the Service address critical human capital issues, such as maintaining continuity

and service in the face of the impending retirement of many postal employees, rapidly rising

retirement and other personnel-related costs, and persistent labor-management problems?

4. Does the Service have reliable performance and cost information to effectively manage

postal operations, identify inefficiencies, and track progress toward realizing anticipated cost

savings?

5. What changes may be needed in the current legal and regulatory framework governing the

Postal Service’s role and mission so that it can remain self-supporting and provide affordable

universal service in an increasingly competitive environment?

In the balance of my testimony today, I will focus on the first three questions. First, I will discuss

the Service’s short-term financial outlook and assess the Service’s increasingly dire financial

projections for this fiscal year. Second, I will discuss the Service’s financial trends and issues

relating to its cash and debt position. Third, I will focus on selected key long-term challenges,

including human capital challenges, and conclude with some specific suggestions for action.

2 U.S. Postal Service: Sustained Attention to Challenges Remains Critical (GAO/T-GGD-00-206, Sept. 19, 2000).

3 Major Management Challenges and Program Risks: U.S. Postal Service (GAO-01-262, Jan. 2001).
Page 6 GAO-01-598T

The Service’s Short-term Financial Outlook Has Deteriorated

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

losses is uncertain. The Service currently estimates that its fiscal year 2001 deficit will range

from roughly $2 billion to $3 billion—a sum that far exceeds the $480 million deficit built into

the Service’s budget that was approved last November. About $1.8 billion of this projected

deficit is based on reported losses in the first 2 quarters and revised estimates for losses in the

last 2 quarters. Depending on the economic situation for the rest of fiscal year 2001, the Service

believes that losses could be much higher. Further, in fiscal year 2002, the Service estimates that

its deficit will be in the $2.5 billion to $3.5 billion range, assuming no further increases to postal

rates.

An important caveat: Our current assessment of the Service’s financial outlook for this fiscal

year is based on a preliminary review of the financial data and projections that the Service

recently provided to us and on interviews with Service officials, including the Chief Financial

Officer. The Service’s financial situation is complex, and we are still assessing the validity of

key data and assumptions that support the Service’s financial projections. In addition, the Service

is in the process of updating some of its key projections, such as projections of its revenues for

the second half of this fiscal year. We will continue to review the Service’s financial condition

and will report again to Congress on this matter.

Factors Leading to the Service’s Expected Deficit in Fiscal Year 2001

To understand the factors affecting the Service’s financial outlook for this fiscal year, I will

discuss where the Service stands today with results from the first 2 quarters and what it expects

to happen during the last 2 quarters of the year. I will also discuss how the Service’s net income

projections have changed since the beginning of the fiscal year according to a series of

adjustments the Service has made to its projected revenue and expenses. (See fig. 3.) Finally, I

will discuss other factors that have not been included in the Service’s projections but could affect

the Service’s financial results for this year, such as the Service’s ability to achieve budgeted

savings and revenues from new initiatives.
Page 7 GAO-01-598T

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.

The Service’s financial outlook for fiscal year 2001 can be divided into the following categories:

(1) $260 million in reported losses for the first half of the fiscal year, (2) $680 million in

budgeted losses for the balance of the fiscal year, (3) $320 million in expenses higher than

estimated for the last 2 quarters, (4) $500 million in revenues lower than budgeted for the last 2

quarters due to lower-than-requested increases in postal rates, and (5) $300 million to $1.3

billion in revenues lower than budgeted for the last 2 quarters due to the slowing economy and

its impact on mail volume and revenues. The uncertainty of the impact of the economy for the

remainder of the fiscal year is the largest single factor in the Service’s projections that may

impact its expected losses for fiscal year 2001, and the estimated range is based on the Service’s

judgment.

Reported Losses for the First Half of Fiscal Year 2001

As figure 3 shows, the Service reported that its loss for the first 2 quarters of this fiscal year was

about $260 million. This reported amount is not audited and is subject to change. It is important

to note that 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 $260 million loss during

its typically strongest earnings period is a further sign of the Service’s financial difficulties. The

Service had budgeted for $200 million in net income for the first half of the fiscal year; so, thus

far it is running $460 million behind its budget targets. Further, the Service achieved nearly $1

billion in net income in the first half of last fiscal year – a year in which it ended with a $199

million loss.

Reported Net Income:

Quarters 1 and 2

Originally Budgeted Net

Income: Quarters 3 and 4

Expense Adjustments to 

Net Income: Quarters 3 and 4

Revenue Adjustments to

Net Income: Quarters 3 and 4

 Subtotal

Other Revenue Adjustments to

Net Income: Soft EconomyQuarters 3 and 4

-$260 M

-$680 M

-$320 M

-$500 M

-$1.8 B

-$300 M to

-$1.3 B

Budgeted Current

FY 2001 Revised Deficit $2.1 to $3.1B

 Net Income -$480 M -$2.1 to -3.1B

 $200 M

-$680 M
Page 8 GAO-01-598T

Additional Losses Built into the Service’s Fiscal Year 2001 Budget

In its fiscal year 2001 budget, the Service estimated that it would incur a $680 million deficit for

the last 2 quarters of the fiscal year. When this amount is added to the $260 million deficit

incurred in the first half of the fiscal year, the Service would lose nearly $1 billion in fiscal year

2001. This estimated loss does not include a number of developments that could have a negative

impact on the Service’s net income this year, which are detailed below.

Additional Unbudgeted Expenses

The Service currently projects that its expenses for the remaining 2 quarters of this fiscal year

will be $320 million greater than budgeted, and gave us supporting information for these

estimated expenses. For example, the Service told us that it is experiencing greater

transportation expenses because of increases in fuel costs and cost passthroughs from its

transportation contractors, among other factors. International mail expenses are also expected to

be higher than budgeted because of recent increases in “terminal dues” paid to foreign postal

administrations to deliver outbound U.S. international mail. Workers’ compensation expenses

are also expected to be greater than budgeted and to reach $1.1 billion for the full fiscal year – a

significant increase from last year and the late 1990s.

Additional Revenue Shortfalls Relating to Postal Rates and New Revenue Initiatives

The Service projected revenues for the last 2 quarters of fiscal year 2001 to be $500 million

below its budgeted targets due to the gap between the requested rates and those implemented in

January. The Service’s budget for fiscal year 2001 assumed that the Service would receive the

full increase in postal rates that it had requested in the 2000 rate case. However, the Postal Rate

Commission recommended a rate increase that averaged 4.6 percent—more than 2 percent lower

than the requested amount. These rates were put into effect this January and included a 1-cent

increase in the price of a First-Class stamp to 34 cents.

Additional Revenue Shortfalls Attributed to the Slowing Economy

The Service further lowered its revenue projections for the second half of fiscal year 2001 by

$300 million to $1.3 billion on the basis of the Service’s judgment of a “continued soft

economy” and the resulting negative impact on mail volume and revenues. The $1 billion range

reflects the Service’s uncertainty associated with the length and severity of the economic

slowdown and its impact on postal revenues. The Service told us it is in the process of updating

its mail volume and revenue forecasts for the rest of fiscal year 2001.

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

The Service’s expenses could be higher than it currently estimates because it is not on track to

achieve some cost-reduction targets. For example:

• The Service planned to decrease its work hours by 1.5 percent from last year’s level—which

would translate into a reduction of 13,200 work years for the full fiscal year. Although the
Page 9 GAO-01-598T

Service reported that work hours declined in the first 2 quarters of fiscal year 2001 compared

to the first 2 quarters of last fiscal year, the decline was only about half of its target.

• The Service planned for decreasing overtime work hours by about 6 percent in the first 2

quarters from last year’s level. However, the Service reported that overtime increased in the

first 2 quarters and is running about 13 percent higher than the budgeted targets so far this

fiscal year, although some recent progress has been made in reducing overtime.

• The Service’s planned reductions in total work hours assume efficiency gains in most

aspects of its operations. An estimated 60 percent of the savings is related to greater

efficiencies in handling flat mail, such as catalogs and periodicals, and from machines

sorting mail for carriers in the sequence it is to be delivered. However, these budgeted

savings will be difficult for the Service to fully realize. First, Service officials told us that it

takes three to six employees to prepare flat mail to be loaded into its new sorting machines,

thus diminishing cost efficiency, although the Service noted it is working with mailers to

address this issue. Second, the Service has reported that carrier costs exceeded budgeted

targets by $130 million for the first 2 quarters of this fiscal year. Carrier costs were

reportedly affected by greater-than-expected volumes of low-margin advertising mail; the

worst winter weather in a decade; and difficulty in finding and retaining replacements for

rural carriers, which resulted in higher overtime costs.

• The Service expected efficiency gains to result in reductions through attrition. The number

of career employees has been declining, while at the same time there have been increases in

the number of non-career workers. The Service has said that it might be necessary to offer

voluntary early retirements in some cases, or possibly move into isolated reductions-inforce.

Strategies to Improve Net Income

To improve its net income situation in fiscal year 2001 and 2002, the Service will need to

increase revenues and/or cut costs and improve productivity. Adding to this challenge will be

maintaining the quality of service. The Service is currently making efforts in these areas. The

following is a brief discussion of the Service’s short-term potential for making further progress.

• Cut operating costs and improve productivity: We have repeatedly emphasized that this

should be a priority area for the Service; however, progress historically has been difficult to

achieve. Service officials have emphasized some key barriers, such as restrictions on closing

unprofitable post offices or limited flexibility in changing workforce deployment, have

contributed to the difficulty of making progress in this area. The Service’s overall

productivity has increased only about 11 percent in the past 3 decades despite vast changes in

automation and information technology. The Service has recognized that it needs to make

progress in cutting its costs and improving productivity and is currently taking steps to do so.

Last week, the Deputy Postmaster General announced that the Service is committed to

cutting costs by $2.5 billion by 2003. 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 has not yet specified, however, how these cuts would be

achieved. The Service improved productivity in fiscal year 2000 by 2.5 percent and its

budget for fiscal year 2001 calls for a 0.7 percent productivity increase. Service officials are

also planning for a 2-percent increase in fiscal year 2002, and a 1-percent increase the year
Page 10 GAO-01-598T

after that—a set of positive productivity increases over 4 consecutive years that they noted

would be unprecedented.

• Generate more revenues from new products and services: We believe that it will be difficult

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

few years. Historically, as our 1998 report showed, the Service’s new product and service

initiatives underway during the mid-1990s generally were not profitable.4 Further, the

Service’s 5-Year Strategic Plan for fiscal years 2001 through 2005, dated September 30,

2000, stated that no significant new revenue is forecast from new products and services

during the next 5 years. The Service has not achieved its revenue targets from its new

initiatives for the first half of this fiscal year. Recently, the Service has made downward

revisions in its projected revenues from its new revenue initiatives for the second half of

fiscal year 2001.

• Raise postal rates: 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

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

The Deputy Postmaster General recently said that the Service may not be able to avoid

raising postal rates; but he added that at present, the Service does not know the timing, size,

or details of the next rate case. Some stakeholders have expressed strong concern that the

Service could request a rate increase of as much as 10 to 15 percent in the near future.

However, the Service has also said that “This [option] would worsen the competitive position

of the Postal Service and cause substantial disruption to key customer segments with little or

no minimal direct substitutes for postal services, such as the publishing industry.” In the

long run, raising rates may drive postal customers to increase their use of other alternatives,

thereby affecting mail volumes and revenues.

The Service Has Growing Cash Flow and Debt Challenges

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 capital investments. As

shown in figure 4, the Service’s cash flows from operations are typically significantly greater

than its net income. The primary reason for the difference is because net income is calculated on

the accrual basis of accounting5 and includes accrued expenses, such as depreciation expense,

that do not use cash.

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

5 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 11 GAO-01-598T

Figure 4: Postal Service Net Income and Cash Flows From Operations

Source: U.S. Postal Service.

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 anticipates that its projected operating deficit for

the full fiscal year 2001 will weaken its cash flows from operations. By way of background, the

Service has a statutory borrowing limit of $15 billion and also 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).

Service officials told us that assuming the Service’s financial outlook is on target and there are

no further changes in postal rates in fiscal years 2001 or 2002, the Service may reach its $15

billion statutory borrowing limit by September 30, 2002 (see fig. 5). Under this scenario, the

Service would have no additional borrowing authority at the beginning of fiscal year 2003. Once

the Service reaches its statutory borrowing limit, it can pay its bills only through its cash on hand

plus additional cash generated from operations until outstanding debt declines. The Service

typically generates a cash surplus in the first part of the fiscal year. However, depending on the

Service’s income and cash from operations, the Service may face a cash shortage in fiscal years

2002 and/or 2003.

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Page 12 GAO-01-598T

Figure 5: Trends in Postal Service Debt

Source: U.S. Postal Service

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. 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 $2 billion in capital

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

investment from $3.7 billion to $2.4 billion. However, reducing needed capital investments

serves only to defer capital improvements and associated efficiency gains.

Major Long-Term Performance Challenges Facing the Service

As difficult as the Service’s short-term financial outlook may be, we are also concerned about its

long-term prospects, given the trends toward increasing competition and its implications for

postal revenues, coupled with continued upward pressure on postal costs, and human capital

challenges. Therefore, unless the Service makes much more rapid progress in cutting costs and

improving productivity, it will face increasing difficulty maintaining its position as a selfsupporting provider of universal postal service at reasonable rates. The Postal Service and postal

stakeholders have been debating for years whether major changes are needed in the legal and

regulatory framework governing the Postal Service, but reaching consensus among the diverse

stakeholders has been difficult to achieve.

To address the Service’s long-term outlook, a fundamental reassessment of the Service’s

financial options and operating plans is in order. Better information may also be needed about

recent changes in the dynamic postal and delivery sector, as well as on the short and long-term

effects of postal rate changes on mail volumes, revenues, and costs. Further, an assessment is

needed of the full range of actions that the Service can take under current law and identifying

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Page 13 GAO-01-598T

areas where actions are needed. In making such a reassessment, which should also include

identifying areas where statutory changes may be needed, the Service should consult with its

stakeholders including unions and management associations, customers, and the Postal Rate

Commission.

The Service’s Viability to Fulfill Its Historic Mission

The Service faces greater competition and expects electronic diversion to cause substantial

declines in First-Class Mail volume in the next decade which, according to the Service’s most

recent 5-year Strategic Plan, would place the Service under “extreme financial pressure.” In this

event, the Service, like many of its foreign counterparts, would likely face unprecedented

challenges to its primary mission of providing universal postal service at reasonable rates while

remaining self-supporting from postal revenues. The growing challenges are as follows:

• The Service would 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 mail volume. Labor-related expenses

continue to account for more than three-quarters of total postal service operating expenses

and have reportedly been difficult to cut quickly in response to less-than-expected mail

volumes and revenues. This fiscal year, the Service reported it has experienced continuing

difficulty cutting costs when expected mail volumes and revenues did not materialize.

• If First-Class Mail volume declines and the revenue loss is not offset in other areas, rates

would need to rise for any mail categories that take on a larger burden of supporting postal

institutional costs. 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.

• Even if First-Class Mail volumes do not decline, Service officials expect that cost reductions

may not be sufficient to keep future rate increases below the rate of inflation.

• Adding to rate pressure, postal infrastructure costs continue to grow. The Service has been

adding many new delivery points to new households and businesses—a projected 1.8 million

in fiscal year 2001.

Competition is already increasing from private delivery companies, foreign postal

administrations accepting outbound international mail from within the United States; and

electronic communications alternatives, such as the Internet. As an example of trends that have

already affected the Service's mail volumes, federal agencies are mandated to move as quickly as

possible to reduce paperwork and to adopt electronic billing and payment. Two-thirds of the 880

million Social Security checks, tax refunds, and other payments that were sent by the Department

of the Treasury in fiscal year 1999 were sent electronically. Further, the banking industry's mail

volume was almost 18 percent lower in 1999 than it was in 1996. According to the Service,

longer term projections suggest that about half of the bills and payments that are currently mailed

will eventually be replaced with electronic billing and payment alternatives. It is difficult to

predict the timing and magnitude of further mail volume diversion to electronic alternatives and

the potential financial consequence. Based on anticipated electronic diversion, the Service's

baseline forecast in its 5-Year Strategic Plan calls for total First-Class Mail volume to decline at

an average annual rate of 3.6 percent from fiscal years 2004 through 2008 (see fig. 6).
Page 14 GAO-01-598T

Figure 6: Postal Service Projects Decline in First-Class Mail Volume

Source: U. S. Postal Service.

The Postal Service has raised the possibility that its financial problems may lead to cutting back

universal postal service. A postal official recently said that the Service might ultimately reduce

mail delivery from 6 to 5 days each week to remain financially sound. 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.

Control Costs and Improve Productivity

We have previously reported that the Service's continued success will depend heavily on its

ability to control operating costs and improve productivity. 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. 7). As the Postal Service and key

stakeholders have recognized, 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 OIG, have noted inefficiencies in the postal system

and difficulties the Service has had in realizing opportunities for savings. The OIG has recently

identified potential cost savings and is working to identify further opportunities.

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 15 GAO-01-598T

Figure 7: 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 requirement to provide postal services to all communities and the requirement

that postal wages be determined by binding arbitration when the Service and its labor unions

cannot reach agreement. The Service has also reported that extensive work rules and other

regulations hamper its flexibility and innovation. In addition, the Service has a self-imposed

moratorium on closing post offices and by statute, it cannot close small post offices solely for

operating at a deficit. Further, fiscal year 2001 appropriation legislation specifies that the Service

cannot close small or rural post offices in fiscal year 2001. The Service estimated several years

ago that about half of all post offices do not generate sufficient revenues to cover their costs.

In addition, some employee-related expenses are rising and are difficult to control, such as

retirement-related expenses. The Postal Service's retirement-related expenses—that is, the

payments the Service makes each fiscal year—have increased in recent years, and these trends

are expected to continue (see fig. 8). According to the Service, its retirement expenses 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

Fiscal year

Up 11%

Cumulative Percentage Change

1972

1974

1976

19781980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1973

1975

1977

19791981

1983

1985

1987

1989

1991

1993

1995

1997

1999

1971
Page 16 GAO-01-598T

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

Source: U. S. Postal Service.

The Service recognizes that it needs aggressive cost management, and the Postmaster General

has called for achieving “breakthrough” productivity savings of $1 billion annually, mainly in

mail processing, transportation, and administrative areas. However, the Service’s fiscal year

2001 budget called for saving only $550 million through such productivity initiatives. The

Service is making ongoing efforts to standardize and improve work processes to reduce

significant variations in quality, productivity, and costs across the system. The Service is also

planning to implement activity-based costing in certain processing facilities to enable it to track

activity costs and rates that can be compared across facilities for benchmarking, performance

measurement, and budgeting purposes. Another example of potential cost savings that the

Service is working to address includes manual processing of mail, which reportedly accounts for

half of all labor mail processing costs.

Human Capital Challenges

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. We believe

that these reductions should be done in a carefully planned manner to avoid negatively impacting

the workplace environment, operations, and service quality. In addition, with a large percentage

of the postal workforce nearing retirement eligibility, the Postal Service has the opportunity to

reduce the size of its workforce; but the Service will be increasingly challenged to deal with

human capital issues related to succession planning, maintaining continuity, and the associated

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)
Page 17 GAO-01-598T

cost issues. The Service will need to maintain the continuity of service to customers as many

experienced managers and workers retire and the Service restructures its workforce.

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

years 2001 and 2002 about 130,000 postal employees are already eligible, or are projected to

reach eligibility, for regular retirement. 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).

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

Source: U. S. Postal Service.

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 and reducing the number of employees, and

(2) ameliorating persistent problems in the workplace that have been exacerbated by decades of

adversarial labor-management relations. The Postal Service's human capital problems can be

seen as part of a broader pattern of human capital shortcomings that have eroded mission

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
Page 18 GAO-01-598T

capabilities across the federal government. The Service and its major unions and management

associations need to resolve long-standing labor-management problems that have hindered

improvement efforts, including efforts to cut costs and increase productivity. In addition, the

Service has recognized the need to provide its employees with the tools and incentives necessary

to allow effective participation in planning and implementing improvements.

Actions Needed

We are placing the Service’s transformational efforts and long-term outlook on our High-Risk

List, effective immediately. The Service is at growing risk of not being able to continue

providing universal postal service vital to the national economy, while maintaining reasonable

rates and remaining self-supporting through postal revenues. A structural transformation of the

Service is called for. The Service’s financial outlook has deteriorated significantly since last

November and it now projects $2 billion to $3 billion in expected losses in fiscal year 2001 and

an even higher deficit in the next fiscal year if there is no additional rate increase. The Service

has been increasing its borrowing and is approaching its $15 billion debt ceiling without any debt

reduction plan. The Service recently deferred capital investment to conserve cash, thus delaying

needed improvements and associated gains in efficiency.

In addition, 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.” Further, the

Service anticipates substantial losses in First-Class Mail volume over the next decade that would

create “extreme financial pressure.” If the Service experiences a series of large financial deficits,

universal postal service could ultimately be threatened, prices would likely increase at a much

faster rate, and other options would need to be explored.

While 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.

Inclusion of the Postal Service’s transformational efforts and long-term outlook on our HighRisk 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.

The significant shift in the Postal Service’s financial outlook in the last 4 months came as a

surprise to a variety of key stakeholders. In order to understand the Service’s financial and

human capital problems, Congress and postal stakeholders need to have frequent, transparent,

and reliable information on the Service’s current and projected financial situation, the Service’s

plans to address its growing challenges, and what progress the Service is making. Therefore, we

believe the following actions need to be taken:

• The Service should develop a comprehensive plan, in conjunction with Congress and other

stakeholders, such as the postal unions and management associations, customers, and the

Postal Rate Commission, that would identify the actions needed to address the Service’s

financial, operational, and human capital challenges and establish a timeframe and specify

key milestones for achieving positive results.
Page 19 GAO-01-598T

• The Service should 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 towards achieving the

desired results specified in its comprehensive plan.

• GAO will work with Congress and the Service to help identify improvement options and will

continue to analyze and report to Congress on the Service’s ongoing financial condition. In

consultation with other postal stakeholders including the Postal Service Office of Inspector

General, postal unions and management associations, the Postal Rate Commission, and

customers, we will review the Service’s financial results and future outlook, progress on

cost-cutting and productivity efforts, other countries’ experiences, and options for addressing

the Service’s short-term and long-term challenges.

______________________________________________________________________________

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

questions that you or the Members of the Committee 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, Joshua M.

Bartzen, Michael J. Fischetti, Jeanette M. Franzel, Melvin J. Horne, Kenneth E. John, Roger L.

Lively, Albert E. Schmidt, and Charles F. Wicker.

(393018)