United States General Accounting Office

GAO Testimony

Before the Subcommittee on the Postal Service,

House Committee on Government Reform and Oversight

For Release on Delivery

Expected at

1:00 p.m., EDT

Thursday

April 24, 1997

U.S. POSTAL SERVICE

Continued Challenges to

Maintaining Improved

Performance

Statement of Michael E. Motley

Associate Director, Government Business

Operations Issues

GAO/T-GGD-97-88

Summary 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

GAO’s testimony addresses the challenges that confront Congress and the

Postal Service as they consider how to sustain its performance and

maintain a competitive role in providing mail service to the American

public in the future.

The Postal Service reported that fiscal year 1996 represented the second

year in a row that its financial performance was profitable and operational

performance improved. The Postal Service’s 1996 net income was

$1.6 billion and it delivered 91 percent of overnight mail on time.

Additionally, for fiscal year 1996, the Postal Service’s volume exceeded

182 billion pieces of mail and generated more than $56 billion in revenue.

While these results are encouraging, other performance data suggest that

some areas warrant closer scrutiny. Last year’s delivery of 2-day and 3-day

mail—at 80 and 83 percent respectively—did not score as high as

overnight delivery. The concern among customers is that the Postal

Service’s emphasis on overnight delivery is at the expense of 2-day and

3-day mail. Additionally, although its mail volume continues to grow, the

Postal Service is concerned that customers increasingly are turning to its

competitors or alternative communications methods. In 1996, mail volume

increased by about one-half of the Postal Service’s anticipated increase in

volume. Containing costs is another key challenge that GAO has reported

on previously. For example, last year’s operating expenses increased

4.7 percent compared to a 3.9 percent increase in operating revenues. GAO

has also found several weaknesses in the Postal Service’s internal controls

that contributed to increased costs. The Postal Service’s continued

success in both financial and operational performance will depend heavily

on controlling operating costs, strengthening internal controls, and

ensuring the integrity of its services.

The prospect that pending postal legislation may place the Postal Service

in a more competitive arena with its private sector counterparts has

prompted congressional consideration of some key reform issues. These

issues include how proposed changes to the Private Express Statutes may

affect universal mail service, postal revenues, and rates. Another reform

issue is the future role of the Postal Service in an increasingly competitive,

constantly changing communications market.

Congressional oversight remains a key tool for improving the

organizational performance of the Postal Service. One of the most

important areas for oversight is labor-management relations. Despite the

initiatives that have been established to address them, the long-standing

Page 1 GAO/T-GGD-97-88
Summary 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

labor-management relations problems GAO identified in 1994 remain

unresolved. The Government Performance and Results Act provides an

important avenue for stakeholders in reaching a consensus for addressing

such problems. Also, the Postal Service’s automation efforts will continue

to require the attention of both the Postal Service and Congress to ensure

that increased productivity and an adequate return on investments are

realized.

Page 2 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to participate in the Subcommittee’s

oversight hearing on the U.S. Postal Service. My testimony will (1) focus

on the performance of the Postal Service and the need for improving

internal controls and protecting revenue in an organization that takes in

and spends billions of dollars each year and (2) highlight some of the key

reform and oversight issues that continue to challenge the Postal Service

and Congress as they consider how U.S. mail service will be provided in

the future. I will also provide some observations from our ongoing work

relating to labor-management relations at the Postal Service and other

areas. My testimony is based on our ongoing work and work that we

completed over the past year.

Improving Internal

Controls and Revenue

Protection Remains a

Concern

First, I would like to discuss both the reported successes and some of the

remaining areas of concern related to the Postal Service’s performance.

Last year, the Postal Service reported that it had achieved outstanding

financial and operational performance. Financially, the Postal Service had

the second most profitable year in its history. According to the Postal

Service’s 1996 annual report, its fiscal year 1996 net income was

$1.6 billion. Similarly, with regard to mail delivery service, the Postal

Service continued to meet or exceed its goals for on-time delivery of

overnight mail. Most recently, the Postmaster General announced that,

during 1996, the Postal Service delivered 91 percent of overnight local

residential mail on time or better. Additionally, during fiscal year 1996, the

Postal Service’s volume exceeded 182 billion pieces of mail and generated

more than $56 billion in revenue.

While these results are encouraging, other performance data suggest that

some areas of concern warrant closer scrutiny. For example, last year’s

delivery of 2-day and 3-day mail—at 80 and 83 percent respectively—did

not score as high as overnight delivery. Such performance has raised a

concern among some customers that the Postal Service’s emphasis on

overnight delivery is at the expense of 2-day and 3-day mail. Additionally,

although its mail volume continues to grow, the Postal Service is

concerned that customers increasingly are turning to its competitors or

alternative communications methods. In 1996, mail volume increased by

about one-half of the Service’s anticipated increase in volume.

Containing costs is another key challenge that we reported on previously.

In the area of expenditures, the Postal Service’s 1996 annual report

Page 3 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

showed that its 1996 operating expenses increased 4.7 percent compared

to a 3.9 percent increase in operating revenues. Labor costs, which include

pay and benefits, continued to account for almost 80 percent of the Postal

Service’s operating expenses, and the Postal Service expects that its costs

for compensation and benefits will grow more than 6 percent in 1997.

Moreover, controlling costs will be critical with regard to capital

investments in 1997, as the Postal Service plans to commit $6 billion to

capital improvements. Over the next 5 years, the Service plans to devote

more than $14 billion in capital investments to technology, infrastructure

improvements, and customer service and revenue initiatives.

The Postal Service’s continued success in both operational and financial

performance will depend heavily on its ability to control operating costs,

strengthen internal controls, and ensure the integrity of its services.

However, we found several weaknesses in the Postal Service’s internal

controls that contributed to unnecessary increased costs.

We reported in October 19961

 that internal controls over Express Mail

Corporate Accounts (EMCA) were weak or nonexistent, which resulted in

the potential for abuse and increasing revenue losses over the past 3 fiscal

years. Specifically, we found that some mailers obtained express mail

services using invalid EMCAs and that the Postal Service did not collect the

postage due. Consequently, in fiscal year 1995, the Postal Service lost

express mail revenue of about $800,000 primarily because it had not

verified EMCAs that were later determined to be invalid.

Since our report was issued, the Postal Service has taken action or

developed plans to address these deficiencies. The Postal Service revised

its EMCA regulations to require an initial deposit of $250, up from $100, to

open an account. In addition, in a March 27, 1997, letter to EMCA

customers, the Postal Service stated that effective immediately a minimum

account balance of $250, or 4 weeks’ worth of average postage, whichever

is higher, must be maintained. Prior to this change, customers were

required to maintain a balance of $50 in their accounts. The Postal Service

also recently issued a memorandum requiring district managers to ensure

that employees perform the necessary express mail acceptance checks so

that the correct postage amounts can be collected. Finally, the Postal

Service plans to install terminals in mail processing plants to allow

Express Mail packages that are deposited in collection boxes or picked up

1

U.S. Postal Service: Revenue Losses From Express Mail Accounts Have Grown (GAO/GGD-97-3,

Oct. 24, 1996).

Page 4 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

at customers’ locations to be checked for valid EMCA numbers before they

are accepted into the mail system.

Similarly, we reported in June 19962

 that weaknesses in the Postal

Service’s controls for accepting bulk business mail prevented it from

having reasonable assurance that all significant amounts of postage

revenue due were received when mailers claimed presort/barcode

discounts. We reported that during fiscal year 1994, as much as 40 percent

of required bulk mail verifications were not performed. Bulk mail totaled

almost one-half of the Postal Service’s total revenue of $47.7 billion in

fiscal year 1994. At the same time, we found that less than 50 percent of

the required follow-up verifications to determine the accuracy of the

clerk’s work were being performed by the supervisors. In response to our

recommendations, the Postal Service is developing new and strengthening

existing internal controls to help prevent revenue losses in bulk mailings.

For example, the Postal Service plans to improve the processes used in the

verification of mail, including how units are staffed, how verifications are

performed, and how results of acceptance work are reported and

reviewed.

Another area of recent concern has been the overall integrity of the Postal

Service’s acquisitions. We concluded, in our January 1996 report,3

 that the

Postal Service did not follow required procedures for seven real estate or

equipment purchases. We estimated that these seven purchases resulted in

the Postal Service’s expending about $89 million on penalties, unusable, or

marginally usable property. Three of the seven purchases involved ethics

violations arising from the contracting officers’ failure to correct situations

in which individuals had financial relationships with the Postal Service

and with certain offerors. We also pointed out that the Office of

Government Ethics was reviewing the Postal Service’s ethics program and

reported that all areas of the program required improvement. The Office of

Government Ethics subsequently made a number of recommendations

designed to ensure that improvement of the Postal Service’s ethics

program continues through more consistent oversight and management

support.

Since our January 1996 report, the Office of Government Ethics has

completed three reviews to follow up on its open recommendations.

2

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

(GAO/GGD-96-126, June 25, 1996).

3

Postal Service: Conditions Leading to Problems in Some Major Purchases (GAO/GGD-96-59, Jan. 18,

1996).

Page 5 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

Recently, the Postal Service developed guidance for avoiding conflicts of

interest and filing financial disclosure reports as well as established

procedures to ensure that the Office of Government Ethics is notified

about all conflict-of-interest violations that are referred to the Department

of Justice. As a result of these actions, the Office of Government Ethics

closed its remaining open recommendations.

Additionally, strengthening program oversight is essential to effective mail

delivery. We found that the Postal Service did not exercise adequate

oversight of its National Change of Address (NCOA) program.4

 We reported

that the Postal Service took a positive step toward dealing with the

inefficiencies of processing misaddressed mail. However, at the same time,

we found that the NCOA program was operating without clear procedures

and sufficient oversight to ensure that the program was operating in

compliance with the privacy provisions of federal laws. Accordingly, we

recommended that the Postal Service strengthen oversight of NCOA by

developing and implementing written oversight procedures. In response to

our recommendation, the Postal Service developed written oversight

procedures for the NCOA program.

Most recently, we issued a report5

 that describes how the Postal Service

closes post offices and provides information on the number closed since

1970—over 3,900 post offices. We also provided information on the

number of appeals and their dispositions, as well as some information

about the communities where post offices were closed in fiscal years 1995

and 1996. Generally, the Postal Service initiated the closing process after a

postmaster vacancy occurred through retirement, transfer, or promotion

or after the termination of the post office building’s lease. In each case, the

Postal Service proposed less costly alternative postal services to the

affected community, such as establishing a community post office

operated by a contractor or providing postal deliveries through rural

routes and cluster boxes.

Key Reform Issues The second area I would like to discuss is the pending postal legislation.

This legislation, if enacted, might place the Postal Service in a more

competitive arena with its private sector counterparts and has raised some

key reform issues for consideration. One such issue relates to proposed

4

U.S. Postal Service: Improved Oversight Needed to Protect Privacy of Address Changes

(GAO/GGD-96-119, Aug. 13, 1996).

5

U.S. Postal Service: Information on Post Office Closures, Appeals, and Affected Communities 

(GAO/GGD-97-38BR, Mar. 11, 1997).

Page 6 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

changes to the Private Express Statutes. These Statutes were set up to

ensure that the Postal Service has enough revenue to provide universal

access to postal services to the general public and that certain mail, such

as First-Class, will bear a uniform rate. In our September 1996 report,6

 we

emphasized the importance of recognizing the Statutes’ underlying

purpose and determining how changes may affect universal mail service

and uniform rates. Most important among the potential consequences is

that relaxing the Statutes could open First-Class mail services to additional

competition, thus possibly affecting postal revenues and rates and the

Postal Service’s ability to carry out its public service mandates. However,

at the same time, the American public could benefit through improved

service. It will be important to take into account the possible

consequences for all stakeholders in deciding how mail services will be

provided to the American public in the future.

Another key reform issue is the future role of the Postal Service in the

constantly changing and increasingly competitive communications market.

For example, the use of alternative communications methods such as

electronic mail, faxes, and the Internet continues to grow at phenomenal

rates in the United States and is beginning to affect the Postal Service

markets. At the same time, the Postal Service’s competitors continue to

challenge it for major shares of the communications market. According to

the Postmaster General, the Postal Service has been losing market share in

five of its six product lines. It seems reasonable to assume that these

alternative communications methods are likely to be used more and more.

In addition, international mail has become an increasingly vital market in

which the Postal Service competes. In our March 1996 report,7

 we pointed

out that, although the Postal Service has more flexibility in setting

international rates, it still lost business to competitors because rates were

not competitive and delivery service was not reliable. We also identified

several issues surrounding the Postal Service’s role in the international

mail arena that remain unresolved. Chief among them is the

appropriateness of the Postal Service’s pricing practices in setting rates for

international mail services.

6

Postal Service Reform: Issues Relevant to Changing Restrictions on Private Letter Delivery

(GAO/GGD-96-129A/B, Sept. 12, 1996).

7

U.S. Postal Service: Unresolved Issues in the International Mail Market (GAO/GGD-96-51, Mar. 11,

1996).

Page 7 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

We also reviewed postal reform in other countries to learn about their

experiences. Recently, we issued a report8

 on Canada’s efforts since 1981

to reform its postal service, the Canada Post Corporation (CPC). Although

CPC retained basic letter mail services at a uniform rate, it also reduced the

frequency of mail delivery to some businesses, as well as in urban and

rural areas. CPC uses a regulatory rate-making process that includes the

opportunity for public comment and government approval for basic

domestic and international single-piece letters. However, postage rates for

other mail services can be approved by CPC without issuing regulations or

obtaining government approval. Some of the key concerns that have been

raised by CPC customers include CPC’s closure of rural post offices and its

conversion of others to private ownership. In addition, CPC’s competitors

have expressed concern about whether CPC is cross-subsidizing the prices

of its courier services with monopoly revenues. The Canadian government

has responded to these concerns by continuing its moratorium on post

office closings and directing CPC to discontinue delivery of unaddressed

advertising mail. The government is also considering a call for additional

government oversight of CPC.

Mr. Chairman, as you are aware, we also have a number of ongoing

reviews related to postal reform. For example, in concert with your focus

on the future role of the Postal Service, we are currently reviewing the role

and structure of the Postal Service’s Board of Governors in order to

determine its strengths and weaknesses. The Board of Governors is

responsible for directing and controlling the expenditures of the Postal

Service, reviewing its practices, participating in long-range planning, and

setting policies on all postal matters. In addition to obtaining the views of

current and former Board members, we plan to provide information on the

role and structure of Boards in other types of government-created

organizations. Another issue important to postal reform that we are

reviewing involves access to mailboxes. More specifically, we plan to

provide information on (1) public opinions on the issue of mailbox

restrictions; (2) views of the Postal Service and other major stakeholders;

and (3) this country’s experience with mailbox security and enforcement

of related laws, compared with the experiences in selected other

countries.

Oversight of the Postal

Service Remains Important

Congressional oversight remains a key to improving the organizational

performance of the Postal Service. One of the most important areas for

8

Postal Reform in Canada: Canada Post Corporation’s Universal Service and Ratemaking

(GAO/GGD-97-45BR, Mar. 5, 1997).

Page 8 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

oversight is labor-management relations. As the Postal Service focuses on

the significant challenges it faces to compete in today’s communications

marketplace, unresolved labor-management relations disputes continue to

hinder efforts to improve productivity. Generally, the long-standing

labor-management problems we identified in 1994 still remain unresolved,

despite the initiatives that have been established to address them.9

 For

example, the number of grievances requiring formal arbitration has

increased almost 76 percent, from about 51,000 in fiscal year 1993 to over

90,000 in fiscal year 1996. These difficulties continue to plague the Service

primarily because the major postal stakeholders (the Postal Service, four

major unions, and three management associations) cannot all agree on

common approaches for addressing their problems. We continue to

believe that until the major postal stakeholders develop a framework

agreement that would outline common objectives and strategies, efforts to

improve labor-management relations will likely continue to be fragmented

and difficult to sustain.

The Government Performance and Results Act (GPRA) provides a

mechanism that may be useful in focusing a dialogue that could lead to a

framework agreement. GPRA provides a legislatively based mechanism for

the major stakeholders, including Congress, to jointly engage in

discussions that focus on an agency’s mission and on establishing goals,

measuring performance, and reporting on mission-related

accomplishments. GPRA can be instrumental to the Postal Service’s efforts

to better define its current and future role.

GPRA also emphasizes the need for stakeholders to recognize and address

key internal and external factors that could affect the ability to achieve

future goals. The GPRA consultation process provides the major postal

stakeholders and Congress with opportunities to better understand the

Service’s mission, proposed goals, and most importantly, the strategies to

be used in attaining these goals, especially those that relate to the

long-standing labor-management relations problems that challenge the

Service. Given these challenges, GPRA provides a forum for stakeholders to

participate in developing and reaching consensus on strategies for

attaining results-oriented goals.

One such opportunity for obtaining stakeholder participation is by inviting

input on proposed goals and strategies. The Service recently issued a

notice for public comment in the Federal Register asking for comments by

9

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

(GAO/GGD-94-201A/B, Sept. 29, 1994).

Page 9 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

June 1, 1997, on how the Service can best achieve the three major goals

identified in the Federal Register notice. This comment period provides an

opportunity for those who might be affected by decisions relating to the

future of the Postal Service to voice their views on the strategies to be

used by the Postal Service. Other forums may also be appropriate to

further discuss issues that may be pertinent to specific stakeholders

during this stage of the implementation process.

As results-oriented goals are established, the related discussions can also

provide a foundation for the stakeholders to reach consensus on a

framework agreement. Successful labor-management relations will be

critical to achieving the Postal Service’s goals. The Postal Service and

Congress will need results-oriented goals and sound performance

information to most effectively address some of the policy issues that

surround the Postal Service’s performance in a dynamic communications

market. Recognizing that the changes envisioned by GPRA do not come

quickly or easily, sustained oversight by the Postal Service and Congress

will be necessary.

Finally, several other areas will likely continue to require the attention of

both the Postal Service and Congress. One such area is the Postal Service’s

automation efforts. The Postal Service has spent billions of dollars to

ensure that an increase in productivity and an adequate return on planned

investments are realized. Another area is the Postal Service’s 5-year capital

investment plan for 1997-2001. It calls for investing $14.3 billion, of which

$3.6 billion is designated for technology investments. Also included is

$6.6 billion for planned infrastructure improvements such as maintaining

and improving over 35,000 postal facilities and upgrading the vehicle fleet

of more than 200,000 vehicles. In addition, customer satisfaction at both

the residential and business levels will continue to be a critical area as the

Postal Service strives to improve customer service in order to remain

competitive.

The Postal Service has made considerable progress in improving its

financial and operational performance. Sustaining this progress will be

dependent upon ensuring that the key issues we identified, such as

controlling costs, protecting revenues, and clarifying the role of the Postal

Service in an increasingly competitive communications market, are

effectively addressed by the Postal Service and Congress.

Page 10 GAO/T-GGD-97-88
Statement 

U.S. Postal Service: Continued Challenges to

Maintaining Improved Performance

Mr. Chairman, this concludes my prepared statement. I have attached a list

of our Postal Service products issued since January 1996. I would be

pleased to respond to any questions you or members of the Subcommittee

may have.

Page 11 GAO/T-GGD-97-88
Attachment 

GAO Postal-Related

Products Issued Since

January 1, 1996

U.S. Postal Service: Information on Emergency Suspensions of Operations

at Post Offices (GAO/GGD-97-70R, April 23, 1997).

U.S. Postal Service: Information on Post Office Closures, Appeals, and

Affected Communities (GAO/GGD-97-38BR, Mar. 11, 1997).

Postal Reform in Canada: Canada Post Corporation’s Universal Service

and Ratemaking (GAO/GGD-97-45BR, Mar. 5, 1997).

U.S. Postal Service: Revenue Losses From Express Mail Accounts Have

Grown (GAO/GGD-97-3, Oct. 24, 1996).

Postal Service: Controls Over Postage Meters (GAO/GGD-96-194R, Sept. 26,

1996).

Inspector General: Comparison of Certain Activities of the Postal IG and

Other IGs (GAO/AIMD-96-150, Sept. 20, 1996).

Postal Service Reform: Issues Relevant to Changing Restrictions on

Private Letter Delivery (GAO/GGD-96-129A/B, Sept. 12, 1996).

U.S. Postal Service: Improved Oversight Needed to Protect Privacy of

Address Changes (GAO/GGD-96-119, Aug. 13, 1996).

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

Prevent Revenue Losses (GAO/GGD-96-126, June 25, 1996).

U.S. Postal Service: Unresolved Issues in the International Mail Market

(GAO/GGD-96-51, Mar. 11, 1996).

Postal Service: Conditions Leading to Problems in Some Major Purchases

(GAO/GGD-96-59, Jan. 18, 1996).

(240247) Page 12 GAO/T-GGD-97-88
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