U.S. Postal Service: Bold Action Needed to Continue Progress on Postal Transformation
Published: 2003-11-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Last year the President established a commission to examine the future of the U.S. Postal Service (the Service). Its report, issued in July 2003, contained a proposed vision for the Service and recommendations to ensure the viability of postal services. GAO was asked to discuss (1) its perspective on the commission's report and (2) suggestions for next steps. This testimony is based on GAO's analysis of the Commission's report and prior GAO reports and testimonies.
section_title: What GAO Found
paragraphs: The Commission found that the Service faces a bleak fiscal outlook. The Service has an outdated and inflexible business model amid a rapidly changing postal landscape. First-Class Mail appears to be on the brink of long-term decline as Americans take advantage of cheaper electronic alternatives. Thus, universal postal service is at risk. These findings are similar to our past work and point to the need for fundamental reforms to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases. The Commission made recommendations to Congress and the Service aimed at achieving such reforms, which GAO believes merit consideration. GAO agrees with the Commission that now is the time to modernize the nation's postal laws rather than waiting until a financial crisis occurs that limits congressional options. Key aspects of the Service's existing legislative framework that need to be addressed are 1) a broadly defined mission that enables the Service to engage in unprofitable and controversial endeavors, 2) a governance structure that does not ensure governing board members who have the requisite knowledge and skills, 3) the need for additional accountability, oversight, and transparency provisions; 4) a lengthy, burdensome rate-setting process, and 5) provisions that hinder the Service in rationalizing its infrastructure and workforce. GAO also agrees with the Commission that the Service can take steps now to modernize and increase efficiency and effectiveness, improve its financial position, and rationalize its infrastructure and workforce. The Service has begun to implement its Transformation Plan initiatives, cut its costs and the size of its workforce, and improve its efficiency. However, since the Service issued its Transformation Plan in April 2002, it has not provided adequate transparency on its overall plans to rationalize its infrastructure and workforce; the status of initiatives included in its Transformation Plan; and how it plans to integrate the strategies, timing, and funding necessary to move toward becoming a high-performing organization. The Service's vision of rightsizing its infrastructure and workforce is achievable if approached in a comprehensive, integrated fashion, with appropriate communication and coordination with postal stakeholders.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing on the report of  the President’s Commission on the United States Postal Service (the  Commission). Recently, the U.S. Postal Service (the Service) has gained  some financial breathing room because recently enacted legislation has  reduced the Service’s payments for its pension obligations. The Service  has estimated that its net income in fiscal year 2003 will be over $4 billion,  of which about $3 billion was the result of recent legislation. However, the  Service’s long-term financial challenges remain, and, accordingly, the  Service’s long-term outlook and transformation efforts remain on our  High-Risk List. Since we placed the Service on our High-Risk List in April  2001, the Service has developed its 2002 Transformation Plan, cut various  costs, and improved its productivity. However, these incremental steps  cannot resolve the fundamental and systemic issues associated with the  Service’s current business model.
We have called for actions to address the Service’s financial situation and  long-term outlook, including overhauling its existing business model. We  previously suggested that a commission could be established to study  postal issues and make recommendations, and like you, were pleased that  the President established the Commission to propose a vision for the  future of the Service and recommendations to ensure the viability of postal  services. As we testified before the Commission, fundamental changes will  need to be made to the Service’s business model, and the legal and  regulatory framework that supports it, to provide for the Service’s long- term financial viability. The Commission proposed far-reaching changes in  each of these areas. The vision for the Service set forth in the  Commission’s report, combined with its comprehensive recommendations,  has the potential to fundamentally affect the nature of postal services,  their cost, and how they are provided to the American people.
In my testimony today, I will discuss our perspective on the Commission’s  report and offer suggestions on steps that Congress and the Service need  to take for continued progress on postal transformation. My testimony  today is based on our analysis of the Commission’s report, discussions  with postal stakeholders, prior GAO reports and testimonies on postal  transformation issues, and our continuing work in this area.
subsections: section_title: The Commission’s Report Made Valuable Contributions
paragraphs: Overall, the Commission’s report provides a valuable contribution to assist  Congress, the Service, the executive branch, and stakeholders in  considering the actions needed to transform the Postal Service into a more  high-performing, results-oriented, and accountable organization.  Tomorrow, we plan to hold a forum at GAO with Postmaster General Jack  Potter and other national leaders and experts to discuss ways in which  Congress and the executive branch can foster federal agencies’ and their  networks’ efforts to become high-performing organizations.
We are pleased that the Commission’s report facilitated consideration and  debate by presenting the issues in a way that can be understood by a  general audience, and we commend the Commission for the open and  transparent process used to engage stakeholders in developing its report.  We also share the report’s emphasis on a customer-oriented Postal Service  that can continue to meet the nation’s vital need for universal postal  service. Citizens and businesses depend on the Service to provide  affordable postal services that are essential for communications and  commerce on a universal basis.
The Commission’s report also made an important contribution by  addressing difficult infrastructure and human capital issues. We agree with  the Commission that transforming the Service will require a fundamental  reexamination and realignment in both of these areas, which collectively  account for most of the Service’s costs and are the linchpin to delivering  high-quality service. As the Commission noted, the nation’s  communications, technology, and delivery markets have seen vast changes  since the Postal Service was created by the Postal Reorganization Act of  1970. New types of electronic communications include the use of e-mail,  wireless technology, and electronic bill payment services. These changes  appear to have placed First-Class Mail volume in the early stages of what  may be a long-term decline.
In this new environment, unless the Service’s operating expenses can be  reduced correspondingly, with a rightsizing of both its infrastructure and  workforce, it is questionable whether affordable universal mail service can  be sustained over the long term with a self-financing public institution.  Further, it takes time for an organization as large and complex as the  Service to make fundamental changes, particularly when some of these  may hinge on congressional action. Fortunately, the Commission and  others, including the Service, have identified numerous changes, many of  them possible within existing law, which can reduce the Service’s  operating costs while maintaining and enhancing the quality and value of  postal services.
With respect to human capital issues, the Commission has recognized that  management reform and improvements in managing the Service’s  employees will be vital to comprehensive postal transformation. We  applaud the Commission’s efforts to develop new approaches in these  areas. While postal stakeholders may differ over the Commission’s  recommendations, we share the Commission’s view that the status quo is  not a viable option. All options for statutory and discretionary change  need to be on the table for discussion. If the Service and its employee  unions do not believe that some of the Commission’s workforce  recommendations are viable, we believe that alternative solutions, or a  package approach, to the workforce issues raised by the Commission and  us in our previous work need to be explored.
section_title: The Need for Comprehensive Postal Reform Legislation
paragraphs: The Commission recognized that comprehensive reform to the nation’s  postal laws is needed so that the Service can successfully meet the  formidable challenges it faces and continue to provide affordable and  high-quality universal postal services. The Commission reported that “it is  the Commission’s emphatic view that an incremental approach to Postal  Service reform will yield too little too late given the enterprise’s bleak  fiscal outlook, the depth of current debt and unfunded obligations, the  downward trend in First-Class Mail volumes and the limited potential of its  legacy postal network that was built for a bygone era.” We agree. Our prior  reports and testimonies have concluded that comprehensive postal reform  legislation is needed and have provided information on key issues to be  considered. The Commission’s findings are generally consistent with our  past work, and its recommendations address postal reform issues in a  comprehensive manner. Now that the Commission has finished its work,  the time has come for Congress to act.
The Commission’s recommendations represent a thoughtful package that  would preserve the historic values of universal postal service; make  important statutory changes in many key areas, including governance,  oversight, and human capital; and create a mechanism for making further  changes over time. In our view, the Postal Service’s current financial  breathing room gives Congress an opportunity to carefully consider postal  transformation issues and “get it right” when making fundamental  decisions about rechartering the nation’s postal system for the 21st  century.
Consistent with the need for Congress to rethink the role of the federal  government in the 21st century, now is the time to rethink and clarify the  mission and role of the Postal Service. The Commission’s report  concluded that a number of trends are driving the need for a sweeping  exploration of the Postal Service’s role and operations in the 21st century.  In this regard, we share the Commission’s concerns about the likelihood of  declining First-Class Mail volumes in both the short-term and the long- term. First-Class Mail generates more than half of the Service’s revenue.  The revenue generated by First-Class Mail was used to cover about 69  percent of the Service’s institutional cost in fiscal year 2002. The loss of  contribution from declining First-Class Mail volume would be difficult to  recover from other classes of mail. However, the rate of growth for First- Class Mail has been in long-term decline since the 1980s. First-Class Mail  volume has steadily declined since it peaked 2 years ago. Its volume is  estimated to have declined by 3.1 percent in fiscal year 2003 and is  projected to decline by 1.3 percent in fiscal year 2004 (see figure 1).
Looking ahead, we share the Commission’s concern that electronic  diversion of First-Class Mail threatens to significantly accelerate the  decline in the Service’s mail volume. Although the role of the Internet has  been much commented on, it can be easy to overlook the fact that the  Internet is a relatively recent historical phenomenon, with use of the  World Wide Web greatly increasing in the 1990s. As recently as 5 years  ago, only 37 percent of U.S. households had a computer, and only 19  percent of U.S. households were connected to the Internet (see figure 2).  The rapid diffusion of computer and Internet technologies has led to high  adoption rates among those with high levels of income and education—the  same groups that send and receive a disproportionate share of First-Class  Mail. Thus, the trend data point to the strong potential for further  electronic diversion. Raising postal rates to offset this trend may provide  an immediate boost to the Service’s revenues, but over the longer term will  likely accelerate the transition of mailed communications and payments to  electronic alternatives, including the Internet. A report prepared for the  Commission found that growth in electronic payments is likely to be an  important factor in its forecast of gradual declines in First-Class Mail  volume.
The Commission’s report highlighted why the status quo has not produced  satisfactory results and is ill suited for the 21st century. Key weaknesses  include:
Uncertain financial future: In theory, the Postal Service is self- supporting through postal revenues. In practice, as the Commission  noted, even after recent statutory changes reduced the Service’s  unfunded liability for Civil Service Retirement System (CSRS) pension  benefits, the Service has accumulated about $92 billion in liabilities and  obligations over the past three decades. These liabilities and  obligations include debt, large unfunded obligations for retiree health  benefits obligations, and remaining unfunded pension and workers’  compensation liabilities. Thus, current ratepayers have not fully  covered the total costs generated to provide the postal services they  have received. A continuation of these trends would be diametrically  opposed to the Commission’s vision of a fiscally sound Postal Service  that can sustain universal postal service, particularly if the Service’s  core business of First-Class Mail continues to decline in the coming  years.
Difficulty financing capital needs: In recent years, the Service has  found it problematic to obtain adequate financing for capital needs.  Thus, the Service has often increasingly resorted to borrowing to  finance its capital improvements. In fiscal year 2001, the Service was  faced with insufficient cash flow from operations and with debt  balances that were approaching statutory limits. Consequently, the  Service imposed a freeze on capital expenditures for most facilities that  continued through fiscal years 2002 and 2003. The Service was able to  repay some of its debt in fiscal year 2003, primarily because it  generated a positive cash flow from a reduction in its pension costs.  However, looking forward, it may be difficult for the Service to obtain  adequate funds to address its long-term capital needs, including  modernizing its aging network of postal facilities, without significantly  increasing rates or debt. The Commission’s recommendations in the  areas of retained earnings and disposition of excess Postal Service real  estate represent carefully considered alternatives to help provide the  Service with sufficient revenue for both its operating and capital needs.
Lack of incentives for good financial performance: The “break-even”  mandate requires the Service’s revenues and appropriations to equal its  total estimated costs as nearly as practicable. For many years, this  mandate has been interpreted to mean that the Postal Service should  break even over time. As such, the break-even mandate removes the  profit motive, and the rate-setting structure allows the Postal Service to  cover rising costs by raising rates. Further, the lack of a provision for  retained earnings also limits incentives for productivity improvement  and cost reduction. Under the current structure, whatever cost  reductions the Service achieves in one rate cycle are used to reset the  estimated costs that the Service is to recover in the next rate cycle. In  contrast, a limited retained earnings provision would enable the  Service and its employees to benefit from whatever cost reductions are  achieved.
Lack of efficiency: The Service has improved its efficiency in recent  years, but much more progress needs to be made. The Commission  identified significant variation in efficiency among mail processing  plants and called for more efficient operations through standardization.  We agree with the Commission that the Service has significant  opportunities to improve its efficiency through best execution  strategies in which those who can do it best and at the best price would  perform postal activities while the Service rightsizes its infrastructure  and workforce. However, as we have previously reported, both legal  and practical constraints have hindered progress in these areas.
Disincentives for maximizing allocation of postal costs: Under the  current regulatory model, all classes of mail and types of service must  cover their attributable costs, while institutional costs (i.e., common or  overhead costs) are allocated based on judgment informed by broad  statutory criteria. In effect, the Postal Service loses pricing flexibility  as costs are allocated to specific postal products and services, creating  a structural disincentive for the Service to maximize cost allocation to  various classes of mail and types of service. Understanding, measuring,  and reporting postal costs have greatly improved over the years.  However, the proportion of postal costs allocated by the Service has  increased by only 9 percent since postal reorganization. Further, cost  allocation disputes persist, as illustrated by the different methodologies  used by the Service and the PRC for allocating mail processing costs—  that is, the Service allocated 58 percent of postal costs in fiscal year  2002, while the PRC allocated 62 percent. We recognize that it may be  difficult to use the data that are currently collected by the Service to  allocate a higher proportion of costs. Nevertheless, the Commission’s  conclusion that more postal costs can and should be allocated raises  the issue of whether increasing regulatory authority over cost  allocation would be necessary to ensure that all costs that can be  rationally attributed are properly allocated. Furthermore, improvement  in the Service’s data collection could also enable greater allocation.
subsections: section_title: Postal Service Mission and Role Need Clarification
paragraphs: It is important for Congress to consider how best to clarify the mission  and role of the Postal Service as part of a fundamental reexamination of  the role of the federal government in the 21st century. The starting point is  to consider the Commission’s recommendation that Congress amend the  nation’s postal laws “to clarify that the mission of the Postal Service is to  provide high-quality, essential postal services to all persons and  communities by the most cost-effective and efficient means possible at  affordable, and where appropriate, uniform rates.” This recommendation  is coupled with proposals to create a mechanism for change by giving  broad authority to a newly created Postal Regulatory Board, including  authority to review and issue binding decisions on certain Postal Service  proposals to redefine delivery frequency requirements; uniform postal  rates; and the Postal Service’s monopoly to deliver mail and place items in  mailboxes.
The Commission sought to clarify the nature of the Service’s universal  postal service mission by recommending that Postal Service activities be  limited to accepting, collecting, sorting, transporting, and delivering  letters, newspapers, magazines, advertising mail, and parcels and  providing other governmental services on a reimbursable basis when in  the public interest. The Commission recognized that the nation’s postal  laws did not envision the challenge of setting appropriate boundaries on  the Service’s commercial activities and maintaining fair competition  between the Service and the private sector. These issues need to be  addressed because the Service has repeatedly strayed from its core  mission. We have reported on the Service’s money-losing initiatives in  electronic commerce and remittance processing, among other things. The  Service’s ill-fated ventures were also questioned by some postal  stakeholders as unfair competition, since they were cross-subsidized by a  tax-exempt entity that is also exempt from many laws and regulations  governing the private sector. Further, such ventures have raised the  fundamental issue of why the federal government is becoming involved in  areas that are well served by the private sector. Although the current  Postmaster General has appropriately focused on the Service’s core  business of delivering the mail and sharply curtailed its nonpostal  initiatives, the Commission recommended codifying this policy. In our  view, the time has come for Congress to clarify the Service’s core mission  and ensure continuity across changes in postal management.
However, it will be important to understand the implications of generally  limiting the Postal Service to its traditional role of handling the nation’s  mail, as the Commission has recommended. In that event, the Service will  face the formidable challenge of maintaining affordable universal postal  service by growing revenues or significantly cutting its costs as its core  business of First-Class Mail declines. In order to achieve net cost savings,  the Service’s cost-cutting efforts must currently offset billions of dollars in  annual cost increases for general wage increases, cost-of-living  adjustments, and rising benefits costs, particularly in health insurance  premiums, as well as costs associated with having to deliver mail to over  1.5 million new addresses every year. Declining First-Class Mail volume  will intensify the financial squeeze by reducing the volume of highly  profitable mail. Thus, if the Service is limited to its traditional role,  maintaining the quality and affordability of postal services would likely  require dramatic improvement in the Service’s efficiency. The Service  would need to become a much leaner and more flexible organization and  rightsize its network of mail processing and distribution facilities.  Consistent with our past work and the testimony of many key  stakeholders, the Commission recognized that comprehensive reform of  the nation’s postal laws would be necessary to facilitate changes in these  areas. In the next section of this statement, we discuss the Commission’s  recommendations involving governance, transparency, accountability, rate  setting, and human capital. In our view, revisiting these areas may involve  taking substantive and political risks, but we agree with the Commission  that such risks must be taken if the Service is to remain successful in the  coming decades.
In our view, key questions related to clarifying the Service’s mission and  role include:
How should universal postal service be defined, given past changes and  future challenges?
Should the Service be allowed to compete in areas where there are  private-sector providers? If so, in what areas and on what terms? What  laws should be applied equally to the Service and to its competitors?  What transparency and accountability mechanisms are needed to  prevent unfair competition and inappropriate cross-subsidization?  Should the Service’s competitive products and services be subject to  antitrust and general competition-related laws? Should they be subject  to consumer protection laws?
Should the Service retain governmental authority, including its  regulatory responsibilities and law enforcement functions?
On a related issue, the Service’s current statutory monopoly on the  delivery of letter mail and its monopoly over access to mailboxes have  historically been justified as necessary for the preservation of universal  service. However, questions have been raised regarding whether these  restrictions continue to be needed, and if so, to what extent and whether  the Service should be able to define their scope. A key issue is whether the  Postal Service, as a commercial competitor in the overnight and parcel  delivery markets, should have the authority to regulate the scope of  competition in these areas. The Commission has recommended separating  these functions so that the Postal Service cannot define and regulate the  scope of its own monopoly.
As the Commission noted, it is a fundamental premise of American justice  that parties that administer laws should not have a financial interest in the  outcome. Accordingly, the Commission recommended that an independent  entity should be responsible for reviewing the costs and benefits of the  monopoly as well as for reviewing the thicket of vague and contradictory  regulations in this area and modernizing the law to define the postal  monopoly in clear and understandable terms. The independent entity  could narrow the postal monopoly over time if and when the evidence  shows that suppression of competition is not necessary to the protection  of universal service without undue risk to the taxpayer. Narrowing or  eliminating the monopoly could increase consumer choice and provide  incentives for the Service to become more effective and efficient. For  example, in recent years, FedEx has expanded its role in delivering  residential parcels and UPS has shortened its guaranteed transit time on  ground shipments traveling to some of the country’s biggest metropolitan  areas. As Congress considers the Commission’s recommendations relating  to the postal monopoly, we believe that key questions include:
Is a government monopoly needed to enable affordable universal postal  service, especially if such service is provided at uniform rates? If so,  what scope of monopoly is needed to accomplish its goal?
Should the Service continue to have the power to define (and redefine)  its own statutory monopoly through suspensions and regulations?
Should a regulatory body have authority to redefine and narrow the  postal monopoly and the mailbox monopoly, or should such decisions  be made through the legislative process? If authority is delegated to a  regulatory body, should a clear statement of congressional intent be  provided to guide regulatory decisions, or should the regulator have  unfettered discretion to consider options to expand or contract the  Service’s monopoly? What principles should guide the process, and  what key players should be involved?
Similarly, should the regulator be able to consider opening up access to  the mailbox? If so, under what circumstances? Would it be cost- effective for private delivery companies to deliver items to mailboxes if  individuals could veto access and redefine mailbox access as they  move from one home to another?
Should any regulatory decisions be governed by process requirements  to enable stakeholder input? Should such processes facilitate  congressional review of any changes, as is the case for some other  types of communications regulated by the federal government?
section_title: Protecting the Public Interest through Enhanced Transparency, Accountability and Public Policy Oversight
paragraphs: The Commission concluded that the Postal Service must have greater  flexibility to operate in a businesslike fashion, but that with this latitude  comes the need for enhanced transparency to enable effective  management and congressional and other oversight. We agree. As the  Commission noted, managerial accountability must come from the top,  with the Service governed by a strong corporate-style board that holds its  officers responsible for performance. The Commission concluded that  giving the Service greater flexibility while preserving its monopoly would  require enhanced oversight by an independent regulatory body endowed  with broad authority, adequate resources, and clear direction to protect  the public interest and ensure that the Postal Service fulfills its duties. The  Commission cited reports that we have issued since September 2000  urging greater financial transparency and expressing concern about sharp  declines in the Service’s financial position that were accompanied by too  little explanation. To enable sufficient accountability, oversight, and  transparency, the Commission recommended changes to the Service’s  governance structure, the creation of a Postal Regulatory Board that  would have broad powers, and mechanisms to facilitate and ensure  greater transparency of the Service’s financial and performance results.  Key issues include whether the Commission’s recommendations are  necessary, have struck the appropriate balance between multiple  objectives, and would be practical to implement.
subsections: section_title: Governance Structure
paragraphs: The Commission found that given its importance to the country and the  challenges to its future, the Postal Service should meet the highest  standards of corporate leadership, including a strong, strategic Board of  Directors coupled with enhanced oversight and financial transparency.  Specifically, the Commission concluded that if the Postal Service is to  adapt successfully to a changing postal market, overcome its significant  financial challenges, and emerge an efficient and more businesslike  institution, then it must be guided by a nimble and results-oriented  management and corporate governance structure charged with applying  the best business practices of the private sector to the public-spirited  mission of delivering the nation’s mail. We agree. As we have reported, if  the Service is to successfully operate in a more competitive environment,  the role and structure of a private-sector board of directors may be a more  appropriate guide in this area. Having a well-qualified, independent,  adequately resourced, and accountable board is critical for a major federal  institution with annual revenues approaching $70 billion and  approximately 829,000 employees.
Another concern is what qualification requirements would be appropriate  for the Postal Service’s governing board to ensure that it possesses the  kind of expertise necessary to oversee a major government business.  Consistent with this view, the Commission recommended that all directors  should be selected based on “business acumen and other experience  necessary to manage an enterprise of the Postal Service’s size and  significance.” The report also suggested that the board possess “significant  financial and business expertise” and that among other things, board  members have no material relationship with the Service or its management  team. However, the Commission recommended that these criteria be  incorporated into the Board’s bylaws or governance guidelines rather than  into statute.
In this area, we believe that potential issues include:
Would the proposed qualification requirements be sufficient to produce  a well-qualified board with outstanding and experienced directors, in  part because of the flexibility inherent in the appointment process?
Would the proposed board become politicized, in part because most  directors would be subject to approval and removal by a political  appointee, (i.e., the Secretary of the Treasury), with no Senate  confirmation, no requirement for the board to have a bipartisan  membership, and the possibility of removal for any reason?
Would the pool of qualified candidates be unduly restricted because  some corporations have a material relationship with the Service, while  some retired corporate leaders would be over the proposed mandatory  retirement age of 70 for Service board members?
Would selection of members of the proposed board of directors by an  official other than the President be consistent with the Appointments  Clause in Article II, section 2, clause 2 of the Constitution, which  requires that the heads of executive branch departments be appointed  directly by the President with the advice and consent of the Senate?
We believe that these concerns merit careful consideration, as well as  other concerns on which we have previously reported. In particular, it  is debatable whether it would be appropriate for the Secretary of the  Treasury to have the authority to approve most future appointments to  the governing board of the Service, which fulfills vital government  functions and includes nearly one-third of the federal civilian  workforce. An alternative option may be to have a number of persons,  including the Secretary of the Treasury, to advise the President on such  appointments. Another key issue is whether these appointments should  continue to be made with the advice and consent of the Senate, which  is a mechanism to involve the legislative branch in matters of postal  governance. However, we agree with the Commission’s conclusion that  the legacy governance structure of the Service is increasingly at odds  with its mission in the modern environment and that the Service’s  governing structure needs to consist of members with the requisite  knowledge and experience.
The Commission’s report made a contribution in identifying the  fundamental activities necessary for good corporate governance. The  report made a number of recommendations for the proposed board of  directors to more effectively discharge its duties, including refocusing the  board on a high-level strategic focus on cost reduction and service quality,  as well as minimizing the financial risk to taxpayers and restoring the  fiscal health of the institution as a whole. In this regard, we believe that  the current Board of Governors should refocus its activities along the lines  suggested by the Commission.
section_title: Accountability Mechanisms
paragraphs: We have reported that a major issue related to the Service’s mission and  role is whether the Service should be held more directly accountable for  its performance, and if so, to what extent, to whom, and with what  mechanisms. Specifically, how should the Service’s governing board be  held accountable? The Commission found that the Service urgently needs  a vigilant, broadly empowered and independent regulatory body to focus  on its ability to fulfill its core duties in an appropriate and effective  manner. The Commission recommended that the Postal Rate Commission  be abolished and replaced with a newly created Postal Regulatory Board  endowed with broad public policy responsibilities as well as broad  mandates and authority for accountability and oversight. The regulator  would also have authority in numerous areas including rate setting,  retained earnings, financial transparency, service standards, performance  reporting, and enforcing pay comparability, among others.
A key objective of the Commission’s recommendations was to focus the  proposed Postal Service board of directors on the business aspects of the  Postal Service while transferring public policy responsibilities from the  Service to an independent regulator with no stake in the outcome. The  recommendations also would transfer key public policy responsibilities  from Congress to the regulator. For example, the newly created regulatory  body could, over time, redefine the Service’s universal service mission and  statutory monopoly. The Commission’s accountability and oversight  provisions would make major changes to the current structure. Thus, the  Commission’s recommendations in this area raise fundamental issues. In  our view, key questions include:
Who should make public policy decisions regarding the Postal Service:  the Service, an independent regulator, or Congress?
What accountability should apply to a monopoly provider of vital  postal services that also is a major competitor in the communications  and delivery marketplace?
How should the Service be held accountable if it remains an  independent establishment of the executive branch?
To what extent should the Service be accountable to Congress and the  executive branch without being subject to undue political control?
To what extent should a regulatory body exercise accountability? For  what purpose? With what authority?
Although additional oversight of the Service appears necessary, would  the Service have sufficient management flexibility given the fairly  broad authority the Commission proposes be given to the regulatory  body?
How should the regulatory body be structured to preserve its  independence from political control and minimize the risk of regulatory  capture?
What statutory guidance and constraints should apply to regulatory  actions, including due process and recourse to judicial and/or  congressional review?
What transparency of financial and performance results is appropriate  for the Service as a federal establishment and would be necessary for  oversight and accountability? What mechanisms should be established  to facilitate and ensure transparency?
Should the Service comply, either on a voluntary basis or through a  statutory requirement, with major Securities and Exchange  Commission (SEC) reporting requirements?
section_title: Enhancing Transparency of Financial and Performance Information
paragraphs: The Commission noted that as a public entity, the Postal Service is wholly  owned by the American people, who, as the Service’s shareholders, are  due a regular and full accounting of the fiscal health and challenges facing  this vital national institution. The Commission stated that the Service has a  responsibility to the public to be transparent in its financial reporting. We  agree. Reporting requirements should ensure accountability and  transparency of financial and organizational reports. We have  recommended that the Postal Service improve its transparency, and to  the Service’s credit, it has made progress in providing greater transparency  on its financial results and outlook. The Service has instituted quarterly  financial reports, expanded the discussion of financial matters in its  annual report, and included more information and explanation in the  financial and operating statements prepared for each 4-week accounting  period. The Service has also upgraded its Web site to include these and  other reports in a readily accessible format. The Service is clearly moving  in the right direction. However, we agree with the Commission that more  progress can and should be made.
In an area where we have particular concern that the Service have  transparent, appropriate accounting, the Commission recommended that  the Service’s governing board work with its independent auditor to  determine the most appropriate accounting treatment of the Service’s  unfunded retiree health benefit obligations in accordance with applicable  accounting standards. The Commission also recommended that the board  consider funding a reserve account to address these obligations to the  extent that Postal Service finances permit. These recommendations are  similar to our previous statements, which noted that the Service’s current accounting treatment does not reflect the legal  nature and the economic reality of its related obligation to pay for  these costs; the Service’s treatment of retiree health benefit costs in its financial  statements has not sufficiently recognized the magnitude, importance,  or meaning of this obligation to decision makers or stakeholders; and because the retiree health benefit obligations are funded on a pay-as- you-go basis, rather than on a full accrual basis, current ratepayers are  not paying for the full costs of the services they are receiving.
We continue to believe that the time has come for the Service to formally  reassess how it accounts for and discloses these very significant financial  obligations. In our view, given the legal nature, economic substance, and  stakeholder implication of these obligations, the Service should account  for these retiree health costs and related obligations in its financial  statements on an accrual basis. We recognize that a change to accrual  accounting could have a significant impact on rates. However, the Service  could work with the PRC and other stakeholders to determine how best to  phase in such a change to mitigate the immediate impact on ratepayers.  Regardless of whether the Service changes its accounting for retiree health  costs, we continue to believe the Service should disclose the funded status  of all of its retiree health and pension obligations.
The Commission enunciated an ambitious standard for the Service when it  stated that “As a unifying force in American commerce and society, and as  a customer-financed government endeavor, the Postal Service should be  setting the standard for financial transparency by which all other Federal  entities are judged.”  The Commission also found  that given its important public mission and central role in the nation’s  economy, changes in the Service’s economic health should not come as a  surprise to those responsible for or impacted by its performance. In this  regard, the Commission found that while the Service often conducts  financial reporting over and above what is required by federal agencies, it  remains behind the level of disclosure offered by its corporate peers.
We believe that technical compliance with accounting and reporting  requirements should be a floor for financial transparency, not a ceiling.  Thus, we were pleased that in keeping with its theme of incorporating best  practices, the Commission said it “strongly recommends” that the Service  voluntarily comply with major Securities and Exchange Commission  (SEC) reporting requirements. The Service has the opportunity to  proactively work with the SEC to define how it could voluntarily comply  with SEC requirements in a manner appropriate to its unique legal status.
Enhanced financial transparency is particularly important because the  Service is the hub of a $900 billion mailing industry and is a vital part of  the nation’s communications and payment network. Its recent financial  difficulties have accentuated the need for stakeholders to be well apprised  of the Service’s financial situation and to understand how future operating  results may be affected by impending events. Although the Service has  traditionally provided a range of detailed financial and operating data to  stakeholders throughout the fiscal year, its periodic financial reports did  not clearly explain changes in its financial condition, results of operations,  and its outlook, and were not always readily available to the public. Thus,  in April 2001, we recommended that the Service provide quarterly financial  reports to Congress and the public with sufficiently detailed information  for stakeholders to understand the Service’s current and projected  financial condition and how its outlook may have changed since the  previous quarter. In November 2002, we found that the Service’s financial  reports provided to date had provided only limited analysis and  explanations to help stakeholders understand what had changed, why it  had changed, and how these changes affected the Service’s current  financial situation and expected outlook. Since then, the Service has  improved its quarterly financial reports. We also discussed the SEC’s  reporting structure as a model for the Service to consider.
As the Commission recognized, the Service remains a public institution  with a monopoly on providing vital postal services to the nation, and  enhanced financial information will be essential to improve managerial  accountability and public policy oversight. In this regard, there are areas  where stakeholders have little information, such as the Service’s unmet  financial needs to maintain and modernize its infrastructure, or the true  market value of the Service’s vast real estate holdings. Therefore, progress  in enhancing the Service’s financial transparency is worthy of continued  congressional attention.
In addition to the above areas, we have reported on, and continue to have  concerns about, the Service’s annual performance reporting that is  required under the Government Performance and Results Act (GPRA).The Service’s recently filed 5-Year Strategic Plan for Fiscal Years 2004- 2008 contained a clear mission statement and presented a useful  discussion of the prospects for mail volume, including three specific  forecasts. However, the plan represented a missed opportunity because it  failed to adequately communicate what the Service intends to accomplish  over the period covered by the plan. For example, the plan contained little  new information on the Service’s goals and strategies for network and  workforce realignment over the next 5 years. The plan continues a trend in  which the Service’s GPRA reports have provided less and less new  information to Congress, postal stakeholders, and the American people.
We also continue to be concerned that the Service does not communicate  its delivery performance for all of its major mail categories, particularly  those covered by its statutory monopoly to deliver letter mail. The  Service’s customers should have a right to know what they are getting for  their money, particularly captive customers with few or no alternatives to  using the mail. However, the Service’s public reporting is limited to on- time delivery of First-Class Mail deposited in collection boxes and does  not include bulk mailing of First-Class Mail by businesses. In addition,  stakeholders and individuals have expressed concerns about the accuracy  of mail delivery, but no public information is provided for this aspect of  mail service. The Commission recognized that information about service  quality would become even more important if the Service obtains more  flexibility and incentives to cut its costs. Accordingly, the Commission  recommended that the Postal Regulatory Board be required to prepare a  comprehensive annual report assessing the Postal Service’s performance  in meeting established service standards. If such a report is to be  meaningful, the regulator may also need authority to require the Service to  collect service performance data.
Without sufficient transparency, it is difficult to hold management  accountable for results and conduct independent oversight. The Service  has the opportunity to seek out best practices and continually improve as  standards evolve and experience accumulates, and its recent track record  suggests that some improvement is possible. A key issue is whether  statutory change is needed to enhance the level of transparency that the  Service must provide, particularly if it obtains greater flexibility along the  lines recommended by the Commission.
section_title: Rate-setting Structure
paragraphs: The Commission concluded that it is imperative that the Postal Service, an  institution with a statutory monopoly over the delivery of letter mail, have  clear, independent regulatory oversight that includes oversight over its  postal rates. The Commission found that the current statutory structure  produced independent review of postal rates and had the laudable goals of  protecting postal customers against undue discrimination while restricting  cross-subsidies. However, the Commission stated that the current rate- setting structure should be abolished so that these goals can be  accomplished more efficiently and effectively, by establishing an  incentive-based rate-setting system. We agree that major changes are  needed in this area. As we have testified, improvements in the postal rate- setting structure will be a fundamental component of a comprehensive  transformation. The existing statutory structure is increasingly ill suited  to meeting the needs of the Postal Service and the American people. Its  shortcomings include the following:
Lengthy and burdensome rate-setting proceedings - The Commission  found that the current rate-setting structure imposes a litigious, costly,  and lengthy rate-setting process that can delay needed new revenues by  more than a year. We agree. The Service and other stakeholders report  spending millions of dollars in each rate case on attorneys, economists,  statisticians, and other postal experts who pore over many thousands  of pages of testimony, interrogatories, and rebuttals. The high cost of  participation, coupled with the increasing complexity of rate-setting  data and methods, make it difficult for smaller stakeholders to  effectively participate in the regulatory process.
Bias toward adversarial relationships - As the Commission noted, every  significant change requires a major proceeding that places the Postal  Service in an adversarial relationship with its major customers and at a  distinct competitive disadvantage. Rate cases tend to pit the Service  and many postal stakeholders against each other, since the zero-sum  nature of the revenue requirement provides powerful incentives for  parties to attempt to shift postal costs in ways that serve their  immediate self-interests. The adversarial rate-setting process has  consumed the attention of all of the parties involved, increasing the  difficulty of focusing on constructive efforts to find mutually  acceptable approaches to difficult technical issues. During lengthy rate  cases, rules against ex parte communications help preserve due  process and fairness, but also make it difficult for rate-setting experts  at the Service and the PRC to constructively discuss technical issues  and resolve problems as they arise.
Despite these structural impediments, rate-setting experts at the  Service and PRC have made some progress in improving  communications in recent years, notably during the 1999 Data Quality  Study on the quality of data used for rate-setting purposes, as well as  during subsequent efforts to improve data collection systems. We are  pleased that the Service has convened periodic briefings with  representatives of the PRC, the Service’s Office of the Inspector  General, and us, in which it engaged with the parties and provided  detailed status reports on initiatives to improve rate-setting data  systems. We are also encouraged that the Service has started to engage  with the PRC in planning some improvements to its rate-setting  systems, and we commend the Service for offering public briefings to  provide additional transparency on modifications to key data systems.  These efforts facilitate constructive dialogue on data quality issues,  providing opportunities for the parties to make continuous progress as  postal operations, technology, and data systems change.
Perennial disagreements - Cost allocation issues have been debated for  many years and are frequently a key reason why postal rate cases are  so lengthy and litigious, since their disposition can directly affect  postal rates. The statutory structure seeks to assure all parties due  process by enabling them to raise whatever issues they wish,  regardless of how many times the same issues may have been  considered in the past. The Postal Service has a special opportunity to  repeatedly raise issues by building them into its initial proposals for  changes to postal rates. For example, the Postal Service and PRC have  strongly disagreed on the allocation of mail processing costs in rate  cases dating from 1997—to the point that two sets of postal costs are  routinely prepared, one according to the Postal Service’s preferred  methodology and one according to the PRC’s methodology. This  situation epitomizes the downside of enabling parties to repeatedly  litigate the same issues in the name of due process. Although the  Commission noted that interested parties should have an opportunity  to participate in rate-setting matters, the need to address complex cost  allocations in each and every rate proceeding conflicts with the  Commission’s vision of a streamlined rate-setting process that can  swiftly resolve complaints about postage rates.
Poor incentives for data quality - The current statutory model gives the  Service opportunities to seek advantage in litigious rate-setting  proceedings through its control over what data are collected and how  those data are analyzed and reported. The PRC cannot compel the  Service to collect data, or update data it has collected. The PRC also  cannot subpoena data that the Service has collected. The 1999 Data  Quality Study found that key postal cost data had not been updated for  many years and were used regardless of their obsolescence. Although  the Service has worked to address these and other deficiencies  identified by the study, as noted above, it is fair to question why the  regulatory process had enabled these problems to continue for so many  years. Further, regarding the sufficiency of data in the recent  negotiated service agreement (NSA) case, the Service provided no  mailer-specific cost data corresponding to mailer-specific discounts,  creating uncertainty regarding whether the discount was set  appropriately in relation to the cost savings that the Service should be  expected to achieve as a result of the NSA.
Disputes over cost allocation - The Service is generally opposed to PRC  proposals that would require the Service to provide more detailed  annual information on postal costs and information on cost allocation  methodologies used to produce that data. In support of its view, the  Service has asserted that the current statutory structure generally  limits the PRC to a reactive role in considering proposed rates and  supporting information provided by the Service in rate and  classification cases. This perspective contrasts with the Commission’s  vision of independent regulatory oversight in which the outcome  cannot be unduly influenced through the selective provision of  information to the regulator. To this end, the Commission  recommended that the Service periodically report on the allocation of  costs in accordance with form, content, and timing requirements  determined by the Postal Regulatory Board, the recommended  successor to the PRC.
Lack of mailer-specific data - Looking forward, a key issue is what data  on the mailer-specific costs, volumes, and revenues of the Postal  Service, if any, should be provided to justify mailer-specific discounts  that result from NSAs. The Service has generally opposed providing  such mailer-specific data in the future as overly burdensome, unwise,  and impractical, in part because its cost measurement systems are  geared to providing aggregate data at the subclass level. The PRC is  currently reviewing what cost data should be provided to justify mailer- specific postal rates, and key stakeholders have filed conflicting  testimony on the issues in this area. Regardless of the outcome, it is  reasonable to ask how the Service can effectively identify, prioritize,  and negotiate mutually beneficial NSAs if little reliable data are  available on the cost savings that the Service should realize as a result  of the mailer-specific requirements of each NSA.
The above problems are well documented. They have been cited in  numerous independent reviews over the years, including some by us. The  parties are familiar with the status quo, and we suspect that the high  stakes involved make parties understandably reluctant to make changes,  particularly when the financial consequences are difficult to foresee. In  recent public meetings held to discuss possible changes to the rate-setting  process within existing law, the Service dismissed many of the suggestions  that were made. Moreover, the Service and other stakeholders have  reached no consensus about proposals for legislative reform. Therefore,  the Commission was advocating bold action when it concluded that the  current rate-setting process should be abolished and replaced with a more  streamlined structure that continues to impose rigorous standards on rate  setting, but does so without impeding the ability of Postal Service officials  to manage and lead.
The Commission’s report built on the legislative debate in which price cap  regulation has emerged as a leading alternative to the current statutory  model for regulating postal prices. Specifically, the Commission  recommended that the existing system of setting postal rates be abolished  and replaced with a price-cap system to regulate the rates of  noncompetitive postal products and services, coupled with providing the  Service with pricing flexibility for competitive postal products and  services, subject to a rule against cross-subsidization. The Commission’s  proposed price-cap system is intended to enhance the Service’s  management flexibility to set rates within ceilings established by the  Postal Regulatory Board, so that if the rate ceiling is appropriately  constructed, the Postal Service will feel intense pressure to rein in  spending and improve efficiency and productivity. A price-cap system  could enable the Service to implement a strategy of smaller, more frequent  changes in postal rates, as opposed to a strategy of more infrequent,  significant increases.
The Commission’s recommended price-cap system has some similarities  with price-cap systems that were offered in successive postal reform bills  introduced by Rep. John M. McHugh. These proposals were reviewed in  numerous hearings, and the extensive record surfaced many issues and  concerns. In our view, key questions include the following:
Would a price-cap system provide the intended incentives for the  Postal Service to maximize its financial performance, since the Service  is a public institution that is not accountable to shareholders who hold  stock and demand management accountability?
Would a price cap provide incentives for the Postal Service to reduce  the quality of service for captive customers? If so, what transparency  and accountability mechanisms would be needed to ensure the quality  of universal postal service?
Could the Service use its flexibility to raise rates within the price cap to  unfairly shift the burden of institutional costs away from competitive  products and services and onto its most captive customers?
Should postal rates be required to cover attributable costs? If so, at  what level (e.g., mail class, subclass, rate category, etc.)?
Could the Service generate sufficient revenues if its rates were  constrained by a price cap? If not, under what circumstances, if any,  should the Service be authorized to raise rates in excess of the cap?  How can ratepayers be assured that it would not be too easy for the  Service to obtain such increases, which would vitiate the intent of the  price cap? What process should apply to such “exigent” rate increases?
Would a price cap restrain the growth of postal wages? If so, to what  extent and would such a result be desirable?
How would a price cap system affect historic preferences that have  been provided to certain mailers, such as mailers of nonprofit mail,  periodicals, and library mail?
How could the Postal Service redesign the rate and classification  system, as it did through the 1995 reclassification case, if it were  subject to a price cap?
Would adopting a price cap system be too risky, given the problems  that have surfaced in some price-cap models adopted by other  regulated industries? How could flexibility be built into the price-cap  system itself to minimize risk and handle “the law of unintended  consequences?”
Should provisions of a price-cap system be specified by the legislative  process? If so, which features should be codified in statute and which  should be left to the regulatory process?
What issues should be considered in adapting price-cap regulation from  other industries and foreign postal systems to the unique context of  regulating postal rates in the United States?
What transition features should be required, such as a “baseline” rate  case, in order to successfully implement a price-cap system?
Should a revised and streamlined cost-of-service model be considered  as an alternative to abolishing the current rate-setting structure and  replacing it with a new model? If so, what statutory changes should be  considered? Would such changes prove sufficient to remedy the  shortcomings of the current rate-setting structure?
As the above discussion demonstrates, the need for changing the postal  rate-setting structure is clear. The current structure delays price changes  through lengthy, contentious, and burdensome proceedings and has poor  incentives for providing quality data. However, many questions remain  about what changes should be made to the rate-setting process and the  potential problems associated with those changes. Specifically, the option  of adopting a price-cap model for regulating postal rates has emerged as a  main alternative to a cost-of-service regulatory model but raises many  issues that deserve thoughtful consideration. By its very nature, such  fundamental change to the rate-setting system would necessarily entail  substantial uncertainty, risks, and the possibility for further change to deal  with unanticipated consequences. In this regard, the benefits and risks of  adopting a price-cap system need to be carefully considered and weighed  against the benefits and risks of the status quo. If the Service is to be  limited to its core mission, the flexibility inherent in a price cap system  could become a key management tool to successfully managing the  transition to a leaner, more efficient postal system.
section_title: Rate-Setting Oversight
paragraphs: In our view, as long as the Service remains a federal entity protected by  the postal monopoly, it is appropriate that the Service’s ability to compete  with the private sector be balanced with oversight and legal standards to  ensure fair competition between the Service and private competitors. The  Commission sought to create such a balance by recommending enhanced  powers for the newly created Postal Regulatory Board, including a  complaint process in which rates can be reviewed against statutory limits  that provide for due process and resolution of the complaint within 60  days. Depending on the outcome, the regulator could order rate  adjustments to bring rates into conformity with statutory criteria. In our  view, clear lines of authority in this area must be established if the rate- setting process is to be streamlined and speeded up. A key issue for  Congress to consider is whether the Commission’s recommendations have  struck the appropriate balance between flexibility and accountability.  Another issue is what due process rules should be established in order to  enable stakeholders to provide meaningful input and participate in rate- setting matters, including the right to appeal regulatory decisions.
The Commission also proposed requirements for worksharing discounts  that are established based on the costs that the Postal Service is estimated  to avoid as a result of mailer worksharing activities to prepare, sort, and  transport the mail. Specifically, the Commission stated that a specific  requirement should be “that no new workshared discount for a non- competitive product should exceed costs saved (including the present  value of projected future costs saved) and that the Postal Regulatory  Board should have the authority to conduct an expedited, after-the-fact  review upon written complaint that such a discount is excessive.” In that  case, the Commission said the regulator should be authorized to perform  an expedited, after-the-fact review upon written complaint to ensure  discounts do not exceed savings to the Postal Service. These  recommendations raise the issue of whether different standards should  apply for new and existing worksharing discounts.
By way of background, worksharing discounts did not exist when the  Service was created by the Postal Reorganization Act of 1970. Thus, there  is little statutory guidance in this area except for the mandate for the PRC  to consider—along with other factors—the degree of preparation of mail  for delivery into the postal system performed by the mailer and its effect  upon reducing costs to the Service. Over time, the PRC developed a  guideline for recommending worksharing discounts so that the estimated  reduction in Postal Service revenues would equal the estimated reduction  in its costs. The objective of this guideline is to create incentives for the  lowest-cost provider to perform certain postal activities, which can be  either the mailer performing worksharing activities or the Service  performing additional activities when mailers do not workshare. Because  worksharing discounts have become an integral part of the rate-setting  structure, a key issue is whether statutory guidance would be appropriate  in this area; and if so, whether hard-and-fast rules for worksharing  discounts should be established in law.
Because postal rate-setting is at the heart of proposals for comprehensive  legislative reform, it is important for Members of Congress to be aware of  the many issues and questions that have been raised in this area. We  believe that some of the issues and questions that arise from the  Commission’s recommendations include the following:
Should the break-even mandate continue to govern the postal rate- setting process, or should the Service be allowed to retain a certain  amount of earnings?
How would the proposed Postal Regulatory Board consider postal  costing issues under the Commission’s proposals, since the  Commission would abolish the current mechanism used to resolve  these issues on a case-by-case basis (i.e., litigation in postal rate  cases)? Specifically, what process should govern regulatory decisions  regarding the measurement, allocation, and reporting of postal costs  and revenues? Should the regulatory body also be given the authority  to compel the Postal Service to collect data, as some have suggested?
Would meaningful after-the-fact review of changes in postage rates be  difficult to accomplish within the recommended 60-day time frame for  considering complaints? Should stakeholders also be given the  opportunity to obtain information through a discovery process; and if  so, would a longer time frame be needed to consider complaints? What  due process rules should be established for stakeholder participation in  rate complaints and other rate-setting matters?
Should the Commission’s recommendation to allow NSAs be adopted,  and, if so, what specific criteria are appropriate in this area? Could  NSAs create competitive harm, and, if so, what measures should be  taken to mitigate this risk (e.g., prior review and other limitations)?
If mailer-specific discounts are authorized, should data be required on  the mailer-specific cost savings that the Postal Service expects to  achieve? If so, how should the regulator balance its needs for such  information with limitations relating to the practicality and burden of  producing it?
Is after-the-fact rate review incompatible with the need to ensure fair  competition by an organization that can leverage the revenues and  infrastructure obtained through its monopoly on delivering letter mail?  If not, should measures be taken to limit the potential for unfair  competition, such as providing limitations on the introduction of  subsidized new products and services? Should the regulator be  authorized to order the discontinuance of postal products and services  that consistently fail to cover their costs?
Would the complaint process, as the only means for stakeholders to  seek to alter postal rates under the Commission’s proposals, create an  incentive for numerous complaints that could become a de facto  review of virtually all postal rates?
Even if a regulator could order changes in rates after-the-fact, would it  be reluctant to exercise that authority, given the potential financial  impact and disruption for the Service and the mailing community?
The Commission’s report did not address whether the proposed Postal  Regulatory Board could be held accountable for its actions in the rate- setting area through appellate review. Should the Postal Regulatory  Board’s actions be subject to appellate review, and if so, under what  criteria?
Another potential issue is whether a transition period would be needed  to successfully implement a vastly different rate-setting system similar  to what the Commission has recommended. For example, would a  transition period be needed to enable the proposed Postal Regulatory  Board to address major unresolved cost allocation issues, as well as for  the Postal Service to make improvements to its cost allocation methods  and underlying data systems that collect information for costing  purposes?
section_title: The Need for Progress on Rate- Setting Issues under the Current Structure
paragraphs: The Service and the PRC continue to have long-standing disagreements on  rate-setting issues that have added to the length, cost, and burden of  litigating rate cases. These issues have been a major focus of contentious  rate proceedings, and, if left unresolved, will likely be re-litigated in the  next rate case. As noted previously, a key unresolved issue is the  allocation of mail processing costs, which has implications for most postal  rates since the Service’s mail processing and distribution network handles  most mail. Specifically, the Service and the PRC disagree over the extent  to which mail processing costs vary with mail volume and thus can be  allocated to various mail categories, as opposed to being classified as  institutional costs (i.e., overhead costs that the Service incurs regardless  of mail volume). This disagreement has generated thousands of pages of  evidence in rate cases and disagreements over the underlying  assumptions, data, and analytic techniques. Although the arguments on  both sides are rather arcane, the resolution of this dispute could have  important practical consequences for postal rates and worksharing  discounts. The estimated savings resulting from worksharing discounts—  which is a key basis for establishing these discounts—is reduced as more  mail processing costs are classified as institutional costs, since such costs  do not vary regardless of how much mail is processed. Thus, the rates that  apply to workshared mail, which accounts for three-quarters of total mail  volume, could be affected by the resolution of this technical dispute.
In our opinion, the gap between rate cases provides a rare opportunity for  the parties to take a fresh look at the issue of mail processing volume  variability. Key postal cost dynamics have changed in recent years,  including the shift from increasing to decreasing mail volume, the prospect  for further declines in First-Class Mail volume, and the Service’s initiative  to realign its mail processing and distribution network. Such changes  create uncertainty about whether historical relationships between mail  volume and mail processing costs continue to apply, since historically mail  processing costs increased as mail volume increased and the Service  expanded its mail processing infrastructure incrementally. We urge the  parties to reconsider their reliance on formal litigation so that this issue  can be addressed before the inception of the next rate case. Progress in  this area could diminish the burden on the Service and other stakeholders  who participate in rate cases. In this regard, we note that the parties have  worked hard to reach negotiated settlements to the last rate case and  several other rate and classification proceedings since then. Given these  outcomes, it is reasonable to expect similar progress in the area of mail- processing volume variability if the parties have the will to resolve their  differences. If the parties do not make progress, that will further indicate  the need for a new rate-making structure, as the Commission has  recommended, so that technical issues can be resolved in a more  businesslike and expeditious manner.
section_title: Human Capital Issues
paragraphs: The Postal Service’s human capital—its people—is critical to providing  vital postal services to the American people and achieving a successful  postal transformation. The Commission concluded that as valuable as the  Postal Service is to the nation, its ability to deliver that value is only as  great as the capability, motivation, and satisfaction of the people who  make possible the daily delivery of mail to American homes and  businesses. We agree. Only through the efforts of its workforce are more  than 200 billion pieces of mail delivered, 6 days each week, to the  American people. Thus, we agree with the Commission’s conclusion that  few of the reforms outlined in its report would be possible without the  support and contributions of the Service’s most mission-critical asset: its  people. As we recently reported, an organization’s people must be at the  center of any transformation effort.
For this reason, the Commission focused on serious, long-standing issues  in the human capital area that impose both statutory and practical  constraints on the transformation of the organization. The problems can  be grouped into three areas: (1) poor labor-management relations  characterized by poor communication, lack of trust, excessive grievances,  and difficulty negotiating labor contracts; (2) difficulty controlling  workforce costs, including issues of workforce size, flexibility, pay  comparability, workers’ compensation, and escalating benefits costs; and  (3) inadequate incentives for individual performance and the need for a  stronger linkage between individual and organizational goals. The  Commission proposed important changes in each of these areas, some of  which would require the commitment of the parties to address them in a  constructive manner, and some of which would require changes to  existing law. Given the central importance of the Service’s human capital,  all of these proposals deserve close scrutiny and a fair hearing, despite the  strong negative reactions that have been voiced by some stakeholders.  Rather than declaring such proposals to be politically off-limits, we  encourage Congress and the parties to approach these issues with open  minds to explore whether a package of changes can be made that is  mutually beneficial to the Service, its people, and the public. Much has  changed in this area over the past 30 years, and the time is right to  consider what statutory structure would be appropriate to enable the  Postal Service to incorporate best practices and improve working  conditions for its employees.
subsections: section_title: Achieving Effective Labor- Management Relations Will Be Fundamental to Making Progress
paragraphs: We and others have reported that adversarial labor-management relations  have been a persistent issue for the Service and its major labor unions and  have been a root cause of problems in improving the Service’s operational  efficiency as well as improving its culture and the quality of work life. Poor communications, lack of trust, an excessive number of grievances,  and difficulty negotiating labor contracts have been at the heart of labor- management issues. Such problems have increased the difficulty in  constructively working on difficult issues involving the size, flexibility,  compensation, benefits, incentives, and culture of the workforce. We are  encouraged by recent progress in this area, such as reports by union  officials of better communications, sharp reductions in the number of  outstanding grievances, and labor contracts that were successfully  negotiated between the parties without the need for binding arbitration.  However, progress has been uneven and much more work remains to be  done. We agree with the Commission’s bottom line that Postal Service  management must repair its strained relationship with postal employees.
Historically, autocratic management, persistent confrontation and conflict,  and ineffective performance systems often characterized the  organizational culture on the workroom floor. These problems resulted in  an underperforming organization with major deficiencies in morale and  quality of work life; huge numbers of grievances with high costs for the  Service and its employees; and protracted, acrimonious contract  negotiations. In our past reports, we found that these conditions have  existed over many years because labor and management leadership, at  both the national and local levels, have often had difficulty working  together to find solutions to their problems. Under these circumstances, it  was difficult for the parties to develop and sustain the level of trust  necessary for maintaining a constructive working relationship and  agreeing on major changes to maximize the Service’s efficiency and the  quality of work life.
Poor labor-management relations are incompatible with the Commission’s  vision of achieving a more positive and productive climate necessary for a  high-performing organization with a culture of excellence. Such a culture  change will require better labor-management relations in which the parties  maintain open communications, develop trust, and are willing to take risks  to achieve mutually beneficial results.
On the positive side, officials from some of the Service’s unions have told  us that they have seen improvements in labor-management relations in  recent years. They cited examples of improved communication and  collaboration at the national and local levels, including
Quality of Worklife and Employee Involvement programs, in which  union and management officials reportedly have successfully  communicated and made progress on finding ways to improve  efficiency and the work environment;
Joint Contract Interpretation manuals, as well as training implemented  jointly by labor and management officials, which are intended to  prevent disputes as well as help resolve current disputes and the  backlog of grievances; and
An Ergonomic Strategic Partnership among the Occupational Safety  and Health Administration (OSHA) and postal labor unions to improve  workplace safety and reduce risk factors, particularly ergonomic- related hazards.
As the Commission noted, employee morale is an essential element of an  incentive-based culture, but is undermined when employee-management  relations are acrimonious. We agree with the Commission that the high  number of remaining grievances and the large backlog of grievances  pending arbitration are an indication of strained relations between postal  managers and workers, to the detriment of morale, productivity, and,  ultimately, service to ratepayers. As the Commission concluded, satisfied  employees are of far more value to the nation’s postal endeavor than those  in a contentious relationship with their employer. Thus, we agree with the  Commission that it is imperative that the Service give clear direction that  settlement of problems and cooperative labor-management relations are a  priority. Rather than allowing problems to fester on the workroom floor,  better communications and improved working relationships are needed to  resolve problems as they arise, minimizing the need to resort to the  grievance process to resolve disputes. This will require greater  accountability for both supervisors and those they supervise, as well as for  top management. We agree with the Commission that the Service must  hold managers accountable for any behavior that results in poor labor- management relations, and we believe this principle should apply equally  to employees at all levels of the organization.
The Commission noted that encouraging progress is being made by the  Service and the National Association of Letter Carriers in resolving  grievances using a restructured and streamlined grievance process. It  recommended that such progress be used as a model, with the Service  working diligently with other unions to institute procedures aimed at  reducing the time to process grievances and the number of grievances  appealed to arbitration. Recognizing that the success of any process  depends on the collective commitment of the parties, we encourage the  Service and its unions to make continued progress in this area.
Since postal reorganization, the Service and its major labor unions have  often found it difficult to negotiate labor contracts without resorting to  binding arbitration. The Commission criticized the collective bargaining  process as overly lengthy and litigious, providing few incentives for the  parties to reach negotiated settlements. It made detailed statutory  recommendations to improve the process, including mandating the use of  a “mediation and arbitration” approach and specific deadlines for  completing various process steps and accelerating final resolution period.  Postal union officials have strongly opposed these recommendations,  stating that the parties have used the “mediation and arbitration” approach  in the past and have the flexibility within existing law to mutually agree on  any process for contract negotiations. Union officials have also said that  existing deadlines are already difficult to meet, in part due to scheduling  difficulties involving the availability of mediators and arbitrators. In their  view, success is dependent on “people” issues, including good working  relationships, communications, and trust, rather than on the formal  process. They also have noted that the current contracts between the  Service and three of its four major postal labor unions were negotiated  without the use of an arbitrator and asserted that these outcomes  demonstrate that progress has been made within the existing structure.  We recognize these points, but believe that, as with other human capital  issues, the time has come to re-examine all aspects of a structure that was  developed more than 30 years ago.
section_title: Difficulty Controlling Workforce Costs
paragraphs: Progress on controlling human capital costs will be critical to efforts to  achieve “best execution” to sustain affordable universal postal service and  to enhance the value of the mail. The Postal Service employed about  829,000 people at the end of fiscal year 2003, whose pay and benefits  accounted for more than three-quarters of the Service’s expenses. In this  regard, we note that a recent analysis prepared by PRC staff showed that  for the period between fiscal years 1998 and 2002 postal wage costs  increased by 3.3 percent over inflation and postal benefits costs rose 28.1  percent over inflation. The Commission concluded that the size of the  workforce largely determines its costs, observing that it will be critical for  management and labor to work together constructively to determine the  right size of the postal workforce and to ensure appropriate flexibilities in  its deployment. As we have previously reported, nearly half of the  Service’s career workforce will reach retirement eligibility by 2010,  creating an opportunity for the Service to gain resource flexibility through  the attrition of retiring employees, while also minimizing disruption to its  workforce.
We note that the Postmaster General initiated a constructive working  relationship between national postal management and the leadership of its  labor unions and management associations to deal with issues of mail  security after anthrax was found in the mail. Such communication and  partnerships cannot be legislatively mandated. However, better working  relationships would help the Service and its employee organizations  address difficult workforce size and flexibility issues in a manner that  would allow the Service to rightsize its workforce in the least disruptive  manner possible, including the ranks of both managers and their  employees. All issues should be on the table, including work rules that  constrain greater efficiency; working conditions that constrain the  treatment, morale, and discretionary effort of the workforce; and  constraints on having the most effective and efficient provider perform  postal activities, including limitations on outsourcing.
We agree with the Commission’s conclusion that the most thorny issue in  collective bargaining today is pay and benefit comparability. Although the  parties disagree about whether a wage and benefit premium exists and  about the basis for making these comparisons, the Service’s ability to  control costs in this area will be critical to achieving a more efficient  organization. As we have previously testified, one of the limitations in the  existing collective bargaining process is that the interests of all postal  stakeholders, such as ratepayers, do not appear to have been sufficiently  considered. The Commission recommended that the Postal  Reorganization Act be amended to clarify the term “comparability” and  that the new Postal Regulatory Board should be authorized to determine  comparable total compensation for all Postal Service employees. These  recommendations have been strongly opposed by the Service’s major  labor unions, variously opposing them as “draconian” measures that would  “destroy” collective bargaining for postal workers. The unions have also  questioned why a regulatory body headed by three political appointees  should have the power to effectively set a cap on postal wages.
With respect to clarifying the comparability standard, one option could be  to revisit the guiding principles incorporated into the statutory wage and  comparability standard so that it would more fully reflect all stakeholder  interests and the Service’s overall financial condition and outlook. These  principles could specify that comparability includes total wage,  compensation, and benefit costs, as well as the relationship of these costs  to total costs, their impact on rates and revenues, and the Service’s overall  financial condition. Another option could be to delete pay comparability  provisions from the statute, as some postal union officials have suggested.  This option would raise the issue of what, if any, standard would remain to  guide negotiators and arbitrators in the collective bargaining process.
With respect to shifting authority over total postal compensation to a  newly created regulatory body, we note that this change would appear  contrary to the Commission’s principle that the Service needs additional  flexibility to manage its operations. A related issue is how the Service will  be able to pay competitive compensation for certain skills. We also  question why a second body—in addition to the system of third-party  arbitration—should be added to the already complex processes for  determining postal pay and benefits. Thus, it is not clear whether this  recommendation would add value to the collective bargaining process.
Another controversial Commission recommendation was that the Postal  Service pension and postretirement health benefit plans should be subject  to collective bargaining—meaning that the Service and its unions should  have the flexibility to develop new plans that are separate and apart from  existing federal pension and retiree health benefit plans. The Commission  recognized that such a change could have an uncertain impact on the  entire federal pension and retiree health benefit programs. Although the  Service may have the authority under existing law to withdraw from the  federal health program for its current employees under certain  circumstances, it would still be required to contribute to the health costs  of its current retirees. The Commission recommended that the Service  work with the Department of the Treasury, the Office of Personnel  Management (OPM), and other pertinent parties to determine the potential  impacts that separate funds would have. Because these recommendations  could have major effects on all federal employees, much more information  would be needed in order to determine the potential impact of statutory  changes in this area on the federal budget and employees. It is also not  clear whether, as a practical matter, expanding the scope of collective  bargaining to all postal benefits would result in cost savings for the Postal  Service. For example, where the Service has flexibility, the Service has  agreed in collective bargaining agreements to pay a higher percentage of  health insurance premiums for its employees as compared to other federal  agencies (about 85 percent vs. up to 75 percent).
We agree with the Commission that the Service’s substantial obligations  for its retirement-related benefits need to be addressed, including benefits  for pensions and retiree health. Key issues include how to assign  responsibility and structure a mechanism for covering the costs of  providing retirement-related benefits and how the accounting standards  should be applied. In addition, concerns have been raised about how  changes in funding these obligations could impact the federal budget, as  well as postal ratepayers.
The recently enacted law (P.L. 108-18) changed the method by which the  Service funds the Civil Service Retirement System (CSRS) pension  benefits of its current and former employees to prevent a projected  overfunding from materializing, while at the same time shifting  responsibility for funding benefits attributable to military service from  taxpayers to postal ratepayers. The law also required that, beginning in  fiscal year 2006, the difference between the Service’s contributions under  the new and old funding methods—the “savings”—be held in an escrow  account until the law is changed. To facilitate consideration of which  agency—the Postal Service or the Treasury Department—should fund  military service costs, the law required the Postal Service, the Office of  Personnel Management, and the Treasury Department to each submit  proposals to the President, Congress, and the GAO by September 30, 2003.  The law also required the Postal Service to submit a proposal to the same  recipients on how it planned to use the future “savings.” We, in turn, have  until November 30, 2003, to analyze these proposals and will provide our  reports to Congress before Thanksgiving.
The Service submitted two proposals for use of the “savings,” both of  which would affect postal rates to varying degrees. The first proposal  recommends that the Service be relieved of the burden of funding benefits  attributable to military service, and that the Service, in turn, would  prefund its retiree health benefits obligations for current and former  employees, which has been estimated at approximately $50 billion. This  proposal is consistent with the Commission’s recommendation that  responsibility for funding CSRS pension benefits relating to the military  service of postal retirees should be returned to the Department of the  Treasury. The second proposal is based on the premise that the Postal  Service will remain responsible for funding military service benefits as  currently required by P.L. 108-18. Under this proposal, the Service said that  it would fund its retiree health benefits obligations only for its employees  hired after fiscal year 2002 and use the remaining “savings” in priority  sequence, to repay debt; and to fund productivity and cost-saving capital  investments. This proposal appears consistent with the Commission  recommendation that the Service should consider funding a reserve  account for unfunded retiree health care obligations to the extent that its  financial condition allows.
There are a number of key questions related to the Service’s proposals that  we are considering as part of our mandated review, including
What is the relationship of military service to federal civilian service  and benefits?
What have been the historical changes to the funding of CSRS benefits  to Postal Service employees and retirees?
What correlation exists between the cost attribution and funding  methods of the Federal Employees Retirement System (FERS) and the  current CSRS methods applicable to USPS?
How have other self-supporting agencies funded CSRS benefits?
What are the various options for allocating military service costs?
What would be the effects of the Service’s proposals on the unified  federal budget? On ratepayers? On the Service’s overall financial  situation and transformation efforts?
What alternatives exist for funding health benefit obligations to  existing postal retirees and employees and distributing that  responsibility between current and future ratepayers?
What issues need to be addressed regarding the Service’s accounting  treatment of retiree benefit obligations?
What are the potential consequences to the Service and postal rates  should the Service be required to make payments, beginning in fiscal  year 2006, into an escrow account without the authority to spend the  escrowed funds for postal purposes?
Another benefit area where costs have been difficult to control is the  Service’s workers’ compensation benefits. The Commission found that  under the Federal Employees’ Compensation Act (FECA), the Service has  maintained a broad and effective workers’ compensation program and that  recent efforts have lowered injury rates considerably. However, the  Commission also concluded that the Service, given its unique status,  should be provided relief from FECA provisions that were creating costly  unintended consequences. The Commission recommended making the  Service’s workers’ compensation program more comparable to programs  in the private sector in order to control costs, provide adequate benefits,  and address the Service’s unfunded liability of $6.5 billion in this area. We  believe that placing workers’ compensation benefits on a par with those in  the private sector merits careful consideration.
section_title: Inadequate Performance Incentives
paragraphs: As the Commission pointed out, a key goal of human capital reform should  be to establish an incentive-based culture of excellence. We have reported  that leading organizations use their performance management systems to  accelerate change, achieve desired organizational results, and facilitate  communication throughout the year so that discussions about individual  and organizational performance are integrated and ongoing. Modern,  effective, and credible performance appraisal systems are a key aspect of  performance management. The Commission concluded that the level of  success achieved by the Postal Service will hinge on its ability to  successfully deploy and motivate a talented, capable, nimble workforce of  a size appropriate to the future postal needs of the nation and to give its  employees a personal stake in the success of the institution’s ambitious  goals.
In this regard, we have reported that the need for results-oriented pay  reform is one of the most pressing human capital issues facing the federal  government today. Successful implementation of results-oriented pay  reform, commonly referred to as “pay for performance,” requires modern,  reliable, effective, and as appropriate, validated performance management  systems. Such systems need adequate safeguards, including reasonable  transparency and appropriate accountability mechanisms. In fiscal year  1995, the Service implemented a pay-for-performance system for its  executives, managers, postmasters, supervisors, and other nonbargaining  employees. This system was discontinued in fiscal year 2002, in part  because of concerns that large payouts were made when the Service was  recording large deficits. The Service revised its merit-based pay program  for its executives and officers in fiscal year 2002 and revised its merit- based pay program for its postmasters, managers, and supervisors in fiscal  year 2004.
Given the concerns that led to the overhaul of the Service’s previous merit- based pay systems, it is important that these systems be evaluated to  ensure that they are administered fairly and provide meaningful  incentives. Such incentives would require valid measures that correspond  with individual and organizational performance goals, as well as targets  that are sufficiently challenging that they are not met automatically. For  example, any productivity-based measures should result in real and  measurable savings.
In addition, as we have reported, proposed changes to the Senior  Executive Service could provide a model for better linking pay and  performance of senior executives. For example, the proposed Senior  Executive Service Reform Act of 2003 includes a number of important  reforms that would increase the pay cap for senior executives while also  linking their pay more closely to performance. Similar issues would appear  to apply to lifting the statutory pay cap for postal executives.
Over the years, the Service’s major labor unions have consistently opposed  extending a pay-for-performance system to craft employees. Presidential  Commissioner Norman Seabrook shared their concerns, stating that in  practice, pay for performance systems are characterized by nepotism,  favoritism, and horrible morale among the workers. Union concerns also  include tying employee compensation to results that depend in part on  external events beyond their control as well as on the quality of postal  management. It is reasonable to question whether a pay-for-performance  system could be agreed on, implemented, and successful in the face of  strong opposition of national and local union leaders. Union concerns are  understandable because past history has led some union officials to  question whether a pay-for-performance system could be successfully  implemented.
Nevertheless, as the Commission pointed out, properly designed  performance-based compensation can serve as a powerful  communications and motivational tool, helping employees understand  how they can contribute to the Service’s financial health and success—and  be rewarded for their efforts. In our view, aligning the interests of  individual workers with the specific performance goals of the Service will  be essential for the future. As the Commission concluded, the desire of the  workforce to make the modernization of the nation’s postal network a  success, along with its willingness to make possible the Service’s  ambitious goals to rein in costs while improving productivity and service,  will in no small part determine the success or failure of the entire  transformation endeavor, and, ultimately, the fate of universal service at  affordable rates.
As the above discussion illustrates, human capital reform is necessary, but  many issues remain to be resolved. We believe that key questions for  Congress to consider include:
What statutory changes can be made that would provide additional  incentives for the Service, its employee organizations, and its  employees to resolve their differences in an appropriate and  expeditious manner, including through the grievance process and at the  bargaining table? What opportunities exist to facilitate better  communication, streamline lengthy processes, and minimize their cost?
Should the existing statutory standards for comparability of postal  wages and benefits be clarified to include specific performance criteria  and factors upon which a comparison must be made, such as the  Service’s overall financial condition and outlook?
If comparability standards are retained, should they be enforced by an  outside regulatory body or should they be considered self-enforcing  through the collective bargaining process?
What practical consequences could be expected if all postal benefits,  including all health and retirement benefits, became subject to the  collective bargaining process? What would be the potential effects on  the financing of benefits for employees of both the Service and the rest  of the federal government? Could increases in postal benefits costs also  be expected over time, given the Service’s history of agreeing to pay a  larger share of insurance premiums than other federal agencies pay?
Should workers’ compensation benefits for Service employees be  greater than those generally available to private sector employees?  What opportunities exist to provide incentives to minimize workers’  compensation costs?
Should the statutory pay cap on postal executives be lifted, and, if so,  how would executive pay be linked to performance? Would increased  accountability apply to postal executives for individual and  organizational results, particularly when problems arise? What  disclosure of postal executive compensation—including bonuses and  other forms of compensation—would be appropriate to incorporate  best practices that have been put into place in the private sector?
section_title: The Postal Service Needs to Maximize Progress within Its Current Legislative Structure
paragraphs: While the Commission made a number of recommendations that require  legislative changes, it also made suggestions for improving efficiency and  service that can be implemented under the current law. These  recommendations centered on standardizing and streamlining the postal  network, both the processing and distribution infrastructure and retail  facilities, with major efficiency gains accruing from changes in the  processing and distribution network. The Commission commended the  Postal Service for undertaking an ambitious effort, the Network  Integration and Alignment project, to rationalize the processing and  distribution network. We agree that this project could exert meaningful  influence on the Service’s efficiency, but we have concerns about the lack  of publicly available information on the Service’s plans and related funding  strategies in this area. The Commission also pointed out that better postal  data would aid the Service’s efforts to increase efficiency. We believe that  the availability, accuracy, and relevance of postal data should be central to  any meaningful transformation effort.
The Commission recommended a core philosophy for an improved  national mail service—the concept of best execution. This concept, as  described by the Commission, includes employing corporate best  practices in all operations, as well as selecting the provider who can  perform the service at the highest level of quality for the lowest cost. Best  execution has important implications for the Postal Service because it  means that the Service should consider who could perform the work best,  postal employees or private sector providers, when considering  outsourcing and expanding worksharing opportunities. Some postal union  officials have stated that the Service can provide better execution than  private sector providers. While this may be true, best execution may be  difficult to realize under the existing environment due to  lack of incentives to perform at the highest level possible; an outdated, inefficient infrastructure; and  insufficient data to assess the true cost of operations.
We have addressed the issue of lack of incentives in a previous section. In  the next sections we will discuss the importance of economy and  efficiency in the postal network and related data issues.
subsections: section_title: Factors That Hinder Economy and Efficiency in the Postal Network
paragraphs: The Commission characterized the current postal network as too costly,  too inefficient, too large, and lacking standardization. It envisioned a  streamlined, standardized network capable of delivering universal service  in the most efficient and cost-effective manner possible. We believe this  vision is achievable if approached in a comprehensive, integrated fashion,  and supported by postal stakeholders. However, practical impediments  may hinder the Postal Service from rightsizing its infrastructure.  Historically, the Service has encountered resistance from employees,  mailers, communities, and Congress when it attempted to close facilities.  Proactively working with stakeholders to garner input and support for its  infrastructure initiatives may address legitimate concerns and thereby  alleviate some of this resistance. Another impediment has been the  Service’s limited options for funding capital improvements. Earlier we  discussed how retained earnings could increase the Postal Service’s  funding flexibility. However, this change would require legislative action.  If the Service is to achieve best execution, it should increase current  efforts to address problems with its infrastructure. The Service also needs  to identify its funding needs for implementing its plans in this area. For  purposes of our discussion we have separated the postal infrastructure  into two distinct, yet inter-related, areas: (1) the network of post offices  and other retail facilities and (2) the network of mail processing and  distribution facilities.
subsections: section_title: Difficulties in Optimizing the Postal Retail Network
paragraphs: The Commission concluded that the Service needs to constructively  address the fact that many of the nation’s post offices are no longer  necessary to the fulfill the universal service obligation. We understand that  making changes to retail operations is often controversial because  communities do not like to lose their local post offices and changes in this  area are often perceived as a reduction in services. Unfortunately, the  Postal Service has not done enough to inform the public of the many retail  options currently available. Currently there are over 70,000 locations  where stamps are sold, such as ATMs, grocery and other retail stores, and  postal vending machines. Stamps can also be purchased via the Internet,  through the mail, or from rural carriers. In addition, the Service is  extending retail access to 2,500 self-service kiosks and Hallmark Gold  Crown card shops. Yet, about 80 percent of all stamp revenue is still  generated at the retail counter. Two Commission recommendations in this  area that we concur with were: (1) the Service should dramatically  escalate its efforts to increase alternative access to postal services, and  (2) the Service should market these alternatives more aggressively.
We believe that the Service should strive to improve accessibility to postal  retail services as it implements its strategy of rationalizing its retail  network, including closing post offices. The Service’s Transformation Plan  stated that the Service would create new, low-cost retail alternatives to  extend the times and places that its services are available, including self- service, partnerships with commercial retailers, and Internet access to  retail services. The plan said that the Service has begun a retail network  optimization process, in which redundant retail operations would be  consolidated, starting with poor-performing contract postal units, and  replaced with alternative methods of retail access. The optimization  process involves a national retail database that is to be used with a  criteria-based methodology for modeling retail optimization and  restructuring scenarios. The Service has also said it intends to expand  retail service in markets where it is underrepresented, while reducing  retail infrastructure in markets where it is overrepresented.
Under current law, the Service is not allowed to close post offices for  economic reasons alone. The Commission recommended that legal  restrictions that limit the Service’s flexibility in this area be repealed and  that the Service be allowed to close post offices that are no longer  necessary for the fulfillment of universal service. While we agree that the  Service should have the ability to align its retail network with customer  needs in order to fulfill its universal service obligation in a cost-effective,  efficient manner, we also believe that the Postal Service must assure  Congress that the alignment will be done in a fair, rational, and fact-based  manner.
In contemplating the Commission’s recommendation to repeal the post  office closing law, we have identified the following key questions:
What national standards, if any, should apply to universal access to  postal retail service?
What criteria and process should be used to realign the Service’s retail  infrastructure?
Should the Service have greater freedom to reshape its retail  infrastructure, or should Congress have involvement in such decisions,  possibly by using a model such as the military base-closing process to  close post offices that are no longer needed?
Should current statutory restrictions on closing post offices be  retained, modified, or repealed?
What transparency and accountability is appropriate in this area?
section_title: Difficulties in Optimizing the Postal Processing and Distribution Network
paragraphs: The Commission found that the Service’s processing and distribution  network is plagued with problems, including lack of standardization,  inefficiency, and excess capacity. The Service has approximately 500  facilities dedicated to processing the mail that do not share a standard  footprint for architectural design, equipment complement and layout, or  mail processing procedures. The lack of standardization may be one of the  contributors to variations in productivity among mail processing facilities.  Smaller facilities, as measured by volume, number of employees, and  physical space, tend to have higher productivity, which is a possible  indication of diseconomies of scale. For example, on average, small  facilities tend to handle more mail, relative to work hours expended, than  large facilities (see fig. 3). Standardizing operations across facilities may  minimize diseconomies of scale and should be considered as part of  planning plant consolidations or closings. In addition, standardization of  processing and distribution facilities is widespread in process-oriented  industries where standardization is viewed as vital to increased flexibility  and efficiency. It may be difficult for the Service to become a world-class  organization without establishing a standard footprint throughout its  processing and distribution network.
In addition to the lack of standardization, the Service’s processing and  distribution facilities may not be optimally located. To a large degree, the  processing and distribution network has evolved gradually in response to  volume growth. Figure 4 shows the location of the Service’s processing  facilities in the continental contiguous United States. Distributing mail  between these facilities utilizes thousands of transportation lanes and  results in too many partially full trucks traveling between plants. Better  utilization of trucks and lanes may save the Postal Service money and, if  properly executed, could improve service.
Another issue raised by the Commission related to the processing and  distribution network is the assertion that the Postal Service has too many  facilities, and the ones it has are not always used effectively, resulting in  excess capacity throughout the network. Excess capacity can be very  costly as it may require increased maintenance, facility, and labor costs.  With changes in the types and volumes of mail and advances in both  processing and information technology, the current network may be too  large. We caution, however, that any consolidation plan should consider  the effects of potential diseconomies of scale. Consolidating small  facilities that may be more efficient into inefficient large facilities may not  achieve the desired cost savings or service improvements. To achieve  sustained cost savings, the Service will need to take a critical look at how  to standardize and rightsize the processing and distribution network to  maximize efficiency. As we have previously reported, any effort to  rationalize the Service’s processing network must also take into  consideration the increased safety and security needs created by the  anthrax attacks and the proper extent and location of mail safety  equipment. Other considerations also include how network realignment  could affect the need for a mix of workforce skills and abilities, as well as  workforce diversity and demographics.
section_title: No Public Plan and Limited Stakeholder Engagement on Network Rationalization Strategy
paragraphs: The Commission noted the importance of the Service working with  stakeholders to successfully implement best execution strategies,  streamline the postal network, and decide the fate of unnecessary postal  facilities. We agree. However, to date, the Service has not made public a  comprehensive infrastructure rationalization plan and has had limited  engagement with stakeholders who may be affected. Such a plan should  lay out the Service’s vision and how it plans to reach it, including the  criteria, process, and data it uses to make its decisions. In our view, the  lack of this type of information will likely lead to suspicion and lack of  trust about the objectivity, fairness, and impartiality of Service decisions  and the lack of input from stakeholders could prevent the Service from  achieving the goal of a more efficient network. Further, we believe that it  is essential for the Service to engage its stakeholders in its plan  development process to address legitimate concerns and minimize  disruption, thus alleviating some of the resistance that is often  encountered when the Service tries to close facilities.
A comprehensive network integration and rationalization plan will be  important for Congress to have regardless of whether a commission is  established to consider network rationalization. One of the most important  deliverables in the Service’s Transformation Plan, the Network Integration  and Alignment (NIA) project, is a set of processes and tools used to  analyze the optimal number, locations, and functions of mail processing  and transportation facilities. The NIA strategy was to have been developed  by the fall of 2002. The Service did not meet this time frame, and the  Commission has reported that the Service hopes to begin putting the new  strategy into effect at the end of this year. It has already begun to close  some types of facilities and build others, without disclosing how these  activities fit into the NIA strategy.
To succeed in optimizing its networks, the Service must work with its key  stakeholders, including employee organizations, the mailing industry,  affected communities, and Congress. However, based on difficulties it has  encountered in the past, the Service appears to be reluctant to divulge its  network optimization plans, including the timing and funding needs  associated with these plans, to Congress or its stakeholders. We believe  that the Service will face more resistance if it approaches transformation  in an insular, incremental fashion. For example, some union  representatives have acknowledged that the Postal Service needs to  rationalize its infrastructure, and they have committed to working with the  Service to achieve this goal. However, they have received limited  information to date concerning the Postal Service’s plans for closings and  consolidations. Likewise, various mailers have expressed concern that the  Postal Service does not adequately seek input regarding customer needs  when planning major changes. This concept is anathema to best practices  employed in private sector service industries.
Recognizing the difficulties the Service has experienced in rationalizing its  network, including closing unneeded facilities, the Commission  recommended that Congress establish a Postal Network Optimization  Commission (P-NOC), similar to the base-closing model and provisions in  proposed postal reform legislation introduced by Senator Carper. The  P-NOC would be charged with making recommendations to Congress and  the President relating to the consolidation and rationalization of the  Service’s mail processing and distribution infrastructure. Under the  Commission’s proposal, P-NOC recommendations would become final  unless Congress disapproves them in their entirety within 45 days. The  intent of this recommendation corresponds with our observation that a  base-closing model may prove necessary to address politically sensitive  changes to postal facilities.
Regardless of whether or not a P-NOC is implemented, the following three  key factors will be needed to guide decisions: principles for rationalizing infrastructure that are fact-based, clearly  defined, and transparent; players who should be involved in making the decisions; and processes that should govern how decisions are made and  implemented.
section_title: Identify Funding Needs and Strategies
paragraphs: To accomplish major transformation, the Service will need to identify its  funding needs related to its major transformation initiatives and its  strategies for funding these initiatives. Historically, postal policy has been  to fund capital expenditure as much as possible through cash flow from  operations, with shortfalls financed through debt. By law, the Postal  Service’s total debt cannot exceed $15 billion, and annual increases in the  Service’s outstanding debt cannot exceed $3 billion. In fiscal year 2001, the  Service was faced with insufficient cash flow from operations and with  debt balances that were approaching statutory limits. Consequently, the  Service imposed a freeze on capital expenditures for most facilities that  continued through fiscal years 2002 and 2003. Implementing best  execution strategies is difficult under these circumstances, especially  since the Service has not specified what its funding needs will be to  rationalize its infrastructure and implement other Transformation Plan  initiatives. More information in this area would be useful for Congress and  other stakeholders to understand the Service’s future financial needs. It  would also be useful for the Service to assess what funding it could  receive from continuing to identify and dispose of surplus real estate.
The Commission recommended that the Postal Service be encouraged to  include policy and goals related to the active management of its real estate  in future strategic plans. Disposing of surplus real estate would not only  save the Postal Service maintenance and repair expenses but may also  provide a source of funds that can be used to finance capital projects.  Furthermore, aggressive management of its underutilized real estate assets  could also facilitate local redevelopment. In addition, passage of the Postal  Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18)  provided the Postal Service with some financial relief. Outstanding debt at  the end of fiscal year 2004 is budgeted to be $2.6 billion to $3.1 billion,  down from an estimated $7.3 billion at the end of fiscal year 2003 and $11.1  billion at the end of fiscal year 2002. We believe the Service has a window  of opportunity for financing major infrastructure changes that may not last  long if First-Class Mail volumes continue to decline. Taking advantage of  this opportunity could better position the Service for the future.
section_title: Opportunities to Strengthen Information Technology Investment Management
paragraphs: As the Service has recognized, improving its information technology (IT)  infrastructure should be considered as part of any network rationalization  project. We share the view of the Commission that transformation should  include enhanced information systems because streamlined and integrated  operations will require a strong IT infrastructure. The Service has a  number of IT initiatives designed to enhance the efficiency of the  processing and distribution network that are currently at various levels of  deployment. Among these is the Intelligent Mail program, the Surface Air  Management System, and the Transportation Optimization Planning and  Scheduling system. While the Service’s IT initiatives may provide  enhanced IT capabilities, it is not clear how they will be integrated or  when they will be fully deployed.
As we have previously reported, the Service has established significant  capabilities for managing its IT investments, but shows mixed progress in  managing its IT investments as a portfolio. The Service has not utilized  criteria that adequately address cost, benefit, schedule, and risk so that it  can effectively analyze, prioritize, or select its investments from a portfolio  perspective. Also, the Service does not regularly evaluate completed  projects and currently has no institutionalized processes that enable it to  learn from its current practices and investments and from other  organizations. Accordingly, the Service cannot ensure that it is selecting  leading-edge IT investments that will maximize returns to the organization  and achieve strategic change.
section_title: Data Issues Related to Achieving Greater Efficiency
paragraphs: Accurate cost and performance data are the cornerstone of efficiency  improvements and are vital if the Service is to achieve best execution. In  this regard, the Commission noted that the Service could use better real- time information on the location of individual mail pieces and the  containers they travel in to improve its efficiency, such as re-routing mail  to less busy facilities to ensure its more rapid processing, as well as  adjusting for weather conditions or vehicle breakdowns. In addition, to  determine best execution, the Service would need to know how much  each process, function, and operation actually costs to perform and how  these functions interrelate. For example, when determining what portion  of overall operations may be performed cheaper by the private sector, it  would be necessary to know what the actual cost and quality of each  function is and what the effect on overall costs and quality would be if this  function were contracted out. Some unions, mailers, and other groups  have raised concerns about the information used to make outsourcing  decisions, as well as the accuracy of data systems used to measure  performance and productivity.
Recognizing that it will need improved cost information, the Service  reports that it is currently implementing an activity-based costing system  in over 380 mail processing facilities, which is intended to provide specific  data to managers to help them evaluate and reduce operational costs. In  addition, the Service has continued implementing the recommendations of  the 1999 Data Quality Study to improve key postal cost data. Data quality  issues continue to be of interest to the House Committee on Government  Reform, which has asked GAO to follow up on the Service’s progress in  this area. Others with expertise in postal data quality issues, such as the  Postal Rate Commission and the Postal Service’s Office of Inspector  General, may have insights on costing and performance data necessary to  address issues that have been raised by the Commission’s proposals. Later  this year, the Postal Rate Commission plans to host public sessions  where staff from the Service will provide briefings on changes the Service  has made to update data systems related to carrier costs and on recent  changes in the Service’s accounting and reporting systems. Such  constructive exchanges help to further mutual understanding and progress  on data quality issues. Continued focus on improving the quality of postal  costing and performance data would also be necessary to successfully  implement the Commission’s proposals.
section_title: Conclusion
paragraphs: We and the Commission agree that the Service faces an uncertain future.  Also, we agree that both congressional action on comprehensive postal  reform legislation and continued actions by the Postal Service to make  improvements under its existing authority are necessary to ensure the  future viability of the Postal Service. The Commission’s key conclusions,  consistent with our past work, were that the Service faces financial  pressure due to its outmoded business model, significant financial  obligations, operating inefficiencies, electronic diversion and mail volume  trends, and statutory and practical constraints. The Service’s current  business model is not sustainable in today’s competitive environment.  Thus, we believe that now is the time to “get it right” and modernize the  statutory framework that governs the Service.
In addition to statutory reform, we agree with the Commission that the  Service can and should do more within its existing authority to work  toward “best execution” that incorporates corporate best practices and  enables those who can perform best and for the best price to provide  postal activities, whether that is the Service, the mailing industry,  transportation firms, or other companies. The Service has many  opportunities to become more efficient, such as by standardizing its  operations and reducing excess capacity of its network. Impending  retirement of much of the Service’s workforce also creates an opportunity  for the Service to realign its workforce through attrition. The  Commission’s vision of rightsizing the Service’s infrastructure and  workforce is achievable if approached in a comprehensive, integrated  fashion, and supported by postal stakeholders.
However, since the Service issued its Transformation Plan in April 2002, it  has not provided adequate transparency on its plans to rationalize its  infrastructure and workforce; the status of initiatives included in its  Transformation Plan; and how it plans to integrate the strategies, timing,  and funding necessary to implement its plans. In addition, the Service has  had limited constructive engagement with employee organizations, the  mailing industry, affected communities, and Congress with regard to its  efforts to implement its key transformation initiatives related to  rationalizing its infrastructure and workforce. As the Service knows from  the difficulties it has encountered when it has tried to make changes to its  facility locations in the past, these decisions can be highly controversial.  However, if those who are potentially affected by such decisions do not  have sufficient information about how they may be impacted by proposed  facility changes, the Service is unlikely to gain the necessary support to  successfully achieve a much more efficient network.
section_title: Matter for Congressional Consideration
paragraphs: In view of the Service’s continuing financial, operational, and structural  problems, as well as trends that increase the urgency of making rapid  progress in transforming its organization, we believe that Congress should  consider the Commission’s recommendations as well as GAO’s reform  suggestions and enact comprehensive postal reform legislation. Some of  the key areas that need to be addressed as part of comprehensive reform  legislation include clarifying the Service’s mission and role; enhancing  governance, accountability, oversight, and transparency; improving  regulation of postal rates; and making human capital reforms.
section_title: Recommendation for Executive Action
paragraphs: To facilitate the Service’s progress in implementing actions under the  existing system, we recommend that the Postmaster General develop an  integrated plan to optimize its infrastructure and workforce, in  collaboration with its key stakeholders, and make it available to Congress  and the general public. In addition, the Postmaster General should provide  periodic reports to Congress and the public on the status of implementing  its transformation initiatives and other Commission recommendations that  fall within the scope of its existing authority. Postal officials have agreed  to take these actions.
Chairman Collins, that concludes my prepared statement. I would be  pleased to respond to any questions that you or the Members of the  Committee may have.
section_title: Contact and Acknowledgments
paragraphs: For further information regarding this testimony, please call Bernard L.  Ungar, Director, Physical Infrastructure Issues, on (202) 512-2834 or at  ungarb@gao.gov, or call Linda Calbom, Director, Financial Management  and Assurance, on (202) 512-8341 or at calboml@gao.gov for pension and  retiree health issues. Individuals making key contributions to this  testimony included Teresa Anderson, Gerald P. Barnes, Joshua Bartzen,  Alan Belkin, Amy Choi, Margaret Cigno, Keith Cunningham, William  Doherty, Brad Dubbs, Kathleen A. Gilhooly, Kenneth E. John, Roger Lively,  Scott McNulty, and Lisa Shames.
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