Testimony 

Before the Senate Committee on 

Governmental Affairs and the House 

Committee on Government Reform

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:30 p.m. EST 

Tuesday, March 23, 2004 U.S. POSTAL SERVICE

Key Reasons for Postal 

Reform 

Statement for the Record by David M. Walker 

Comptroller General of the United States 

GAO-04-565T 
www.gao.gov/cgi-bin/getrpt?GAO-04-565T. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Goldstein 

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

Highlights of GAO-04-565T, a statement 

for the record for the Senate Committee 

on Governmental Affairs and the House 

Committee on Government Reform 

March 23, 2004

U.S. POSTAL SERVICE

Key Reasons for Postal Reform 

Comprehensive postal reform is urgently needed. The Postal Service’s financial 

viability is at risk because its business model—which relies on mail volume 

growth to cover the costs of its expanding delivery network—is not aligned with 

21st century realities. Financial, operational, governance, and human capital 

challenges threaten the Service’s ability to remain self-supporting while 

providing affordable, high-quality, and universal postal service. Key trends that 

demonstrate the need for reform include declining mail volume, particularly for 

First-Class Mail; changes in the mail mix from high-margin to lower-margin 

products; increased competition from private delivery companies; and subpar 

revenue growth. Moreover, the Service continues to have significant financial 

liabilities and obligations (e.g., retiree health obligations), uncertain funding for 

emergency preparedness, challenges to achieving sufficient cost-cutting, 

renewed difficulties in substantially improving postal productivity, and 

uncertainties regarding the adequacy of capital investment. Thus, the Service’s 

transformation efforts and financial outlook continue to be on GAO’s High-Risk 

List. 

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

The Postal Service is taking actions within its existing authority to make 

incremental progress toward transformation, but these steps cannot resolve the 

fundamental issues associated with the Service’s current business model. To 

avoid the risk of a significant taxpayer bailout or dramatic increases in postal 

rates, Congress should enact comprehensive postal reform legislation that 

addresses the Service’s key structural and systemic deficiencies, including its 

unfunded obligation for retiree health benefits and the escrow requirement. It is 

important that Congress act before the Service faces a crisis that could limit 

congressional options, particularly because it will take time for the Service to 

implement major changes. 

In GAO’s view, specific elements of comprehensive postal reform legislation 

should address the following: clarify the Service’s mission and role; enhance the 

Service’s governance, transparency, and accountability; improve flexibilities and 

oversight; and make needed human capital reforms. 

Both the Presidential Commission 

on the U.S. Postal Service and 

GAO’s past work have reported 

that universal postal service is at 

risk and that reform is needed to 

minimize the risk of a significant 

taxpayer bailout or dramatic postal 

rate increases. The administration 

has also supported comprehensive 

postal reform. 

Recent congressional hearings 

have highlighted broad consensus 

on the need for postal reform 

among diverse stakeholders that 

include the Postal Service, postal 

employee organizations, the 

mailing industry, and Postal 

Service competitors. GAO has also 

testified in detail about the need for 

postal reform. 

In light of these developments, 

GAO was asked to briefly 

summarize the need for postal 

reform and elements that should be 

addressed by postal reform 

legislation. This statement for the 

record is based on prior GAO 

reports and testimonies. 
Page 1 GAO-04-565T 

Chairman Collins, Chairman Davis, and Members of the Committees: 

We are pleased to have the opportunity to comment on the need for postal 

reform and elements that should be addressed by postal reform legislation. 

This statement is based on our prior work.1

 First, comprehensive postal 

reform is urgently needed. The Postal Service’s financial viability is at risk 

because its business model—which relies on mail volume growth to cover 

the costs of its expanding delivery network—is not aligned with 21st 

century realities. Financial, operational, governance, and human capital 

challenges threaten the Service’s ability to remain self-supporting while 

providing affordable, high-quality, and universal postal service. Thus, the 

Service’s transformation efforts and financial outlook continue to be on 

our High-Risk List. Second, specific elements of comprehensive postal 

reform legislation should address the following: clarify the Service’s 

mission and role; enhance the Service’s governance, transparency, and 

accountability; improve flexibilities and oversight; and make needed 

human capital reforms. 

The Postal Service is taking actions within its existing authority to make 

incremental progress toward transformation, but these steps cannot 

resolve the fundamental issues associated with the Service’s current 

business model. To avoid the risk of a significant taxpayer bailout or 

dramatic increases in postal rates, Congress should enact comprehensive 

postal reform legislation that addresses the Service’s key structural and 

systemic deficiencies, including its unfunded obligation for retiree health 

benefits and the escrow requirement established by P.L. 108-18.2

 It is 

important that Congress act before the Service faces a crisis that could 

limit congressional options, particularly because it will take time for the 

Service to implement major changes. The following key trends 

demonstrate that postal reform legislation is needed: 

 1

See U.S. General Accounting Office, Need for Comprehensive Postal Reform, 

GAO-04-455R (Washington, D.C.: Feb. 6, 2004); U.S. Postal Service: Key Elements of 

Comprehensive Postal Reform, GAO-04-397T (Washington, D.C.: Jan. 28, 2004); U.S. Postal 

Service: Bold Action Needed to Continue Progress on Postal Transformation, 

GAO-04-108T (Washington, D.C.: Nov. 5, 2003). 

2

The Postal Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18), 

enacted in April 2003, required that, beginning in fiscal year 2006, the difference between 

the Service’s contributions under new and old funding methods—the “savings”—be held in 

an escrow account until the law is changed. 

The Need for Postal 

Reform 
Page 2 GAO-04-565T 

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

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

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

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

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

future as customers increase their use of electronic alternatives for 

communications and payments. This trend is particularly significant 

because First-Class Mail covers more than two-thirds of the Service’s 

institutional costs. 

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

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

the volume of lower-margin products, such as some types of Standard 

Mail, increases. These changes reduce the revenues available to cover the 

Service’s institutional costs. 

• Increased competition from private delivery companies: Private delivery 

companies dominate the market for parcels greater than 2 pounds and 

appear to be making inroads into the market for small parcels. Once a 

highly profitable growth product for the Service, Priority Mail volume is 

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

ground shipment alternatives. Priority Mail volume fell 13.9 percent in 

fiscal year 2003 and has declined nearly 30 percent during the last 3 years. 

Express Mail volume is also declining for the same reason. In addition, 

United Parcel Service (UPS) and FedEx have established national retail 

networks through UPS’s acquisition of MailBoxes Etc., now called UPS 

Stores, and FedEx’s recent acquisition of Kinko’s. 

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

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

reorganization that postal revenues have failed to increase. However, as 

the Service has recognized, even this target will be a challenging one. In 

the absence of revenue growth generated by increasing volume, the 

Service must rely more heavily on rate increases to cover rising costs and 

help finance capital investment needs. 

• Significant financial liabilities and obligations: Despite the passage of 

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

about $88 billion to $98 billion in liabilities and obligations, including $47 

billion to $57 billion in unfunded retiree health benefits. Under the current 

pay-as-you-go system, the Service may have difficulty financing its retiree 

health benefits obligation in the future if mail volume trends continue to 
Page 3 GAO-04-565T 

affect revenues while costs continue to rise. The Service has recently 

proposed two options to Congress so the Service can begin to prefund this 

obligation to the extent that it is financially able. 

• Uncertain funding for emergency preparedness: The Service requested 

$350 million for emergency preparedness for fiscal year 2004, which it did 

not receive, and $779 million for fiscal year 2005. If no funds are 

appropriated, such funding may have to be built into postal rates. 

• Challenges to achieve sufficient cost-cutting: The Service achieved 

additional cost-cutting to compensate for below-budget revenues in fiscal 

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

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

volume without affecting the quality of service. 

• Renewed difficulties in substantially improving postal productivity: The 

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

budgeted to increase by only 0.4 percent in fiscal year 2004. In the absence 

of mail volume growth, substantial productivity increases will be required 

to help cover cost increases generated by rising wages and benefit costs 

and to mitigate rate increases. 

• Uncertainties regarding the adequacy of capital investment: The 

Service’s capital cash outlays declined from $3.3 billion in fiscal year 2000 

to $1.3 billion in fiscal year 2003, which was the lowest level since fiscal 

year 1986. Looking forward, it is unclear what the Service’s needs will be 

for maintaining and modernizing its physical infrastructure, as well as 

whether its plans for capital investment will be adequate for 

transformation. 

Key areas of the Service’s statutory framework that need to be addressed 

include: 

• Mission and Role: Congress needs to (1) define the scope of universal 

service and the postal monopoly and (2) clarify the Service’s role with 

regard to competition and regulation. 

• Governance, Transparency, and Accountability: Congress should (1) 

delineate public policy, operational, and regulatory responsibilities; (2) 

ensure managerial accountability through a strong, well-qualified 

corporate-style board that holds its officers responsible and accountable 

Key Areas for Postal 

Reform 
Page 4 GAO-04-565T 

for achieving real results; and (3) define appropriate reporting 

mechanisms to enhance the Service’s transparency and accountability for 

financial and performance results. 

• Flexibility and Oversight: Congress needs to balance increased flexibility 

for the Service—through streamlining the rate-setting process and 

allowing a certain amount of retained earnings—with appropriate 

oversight by an independent regulatory body to protect postal customers 

against undue discrimination, restrict cross-subsidies, and ensure due 

process. In addition, the Service needs additional flexibility to rationalize 

its infrastructure and reshape its workforce. Any such additional flexibility 

should be accompanied by appropriate safeguards to prevent abuse, along 

with mechanisms for enhanced transparency and accountability. 

• Human capital reforms: Congress needs to (1) determine the Service’s 

responsibility for pension costs related to military service, funding retiree 

health benefits, and determine what action to take on the escrow account 

established in recent pension legislation; (2) decide whether postal 

workers’ compensation benefits should be on par with those in the private 

sector; and (3) clarify pay comparability standards. 

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

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

goldsteinm@gao.gov. Individuals making key contributions to this 

statement included Teresa Anderson, Gerald P. Barnes, Margaret Cigno, 

Kathleen A. Gilhooly, and Kenneth E. John. 

Contact and 

Acknowledgments 

(543100) 
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