U.S. Postal Service: Deteriorating Financial Outlook Increases Need for Transformation
Published: 2002-02-28T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The U.S. Postal Service (USPS) continues to experience deficits, severe cash-flow problems, rising debt, and liabilities that exceed its assets. USPS also lacks enough income to fund needed investments in safety, maintenance, expansion, and modernization and to cover its liabilities. USPS reported a $1.68 billion deficit in fiscal year 2001, up from $199 million a year earlier. The pressure to increase rates will mount as USPS contends with growing long-term obligations, including employee retirement and health benefits. Although USPS assumes that rising mail volume will cover rising costs and mitigate rate increases, this business model is increasingly problematic because of the potential for declining or stagnating mail volume. USPS has had little success in sustaining productivity increases. USPS' financial viability is also hindered by structural, legal, and practical constraints that make it difficult to close or consolidate postal facilities or realign the postal workforce. USPS must undertake a comprehensive transformation to address its financial, operational, and human capital challenges. USPS also needs to produce more timely and accessible financial information.

section_title: Letter
paragraphs: This report responds to your request in March 2001 that we assess the  financial condition of the U.S. Postal Service (USPS) and its long-term  outlook as well as the financial, operational, and structural issues that may  affect USPS’s ability to carry out its mission.  The committee and  subcommittee expressed concern about the deteriorating financial  situation of USPS and requested our review to help improve the  understanding of USPS’s current financial situation; the causes of the  anticipated financial deficits; and the implications in the short term and  long term on USPS’s financial condition, operations, and customers.  Accordingly, the specific objectives of our review were to (1) assess USPS’s  fiscal year 2001 financial results and its long-term outlook; (2) discuss the  legal requirements and practical constraints that need to be addressed as  well as selected options to be considered for USPS to achieve a successful  transformation to overcome its financial, operational, and human capital  challenges; and (3) discuss information on actions USPS has taken to  implement recommendations we made to it in April 2001 related to its  financial situation.
In April 2001, we placed USPS’s transformation efforts and long-term  outlook on our High-Risk list, noting that USPS is at growing risk of not  being able to continue its mission of providing the current level of universal  postal service throughout the nation while maintaining reasonable rates  and remaining largely self-supporting through postal revenues.  We  included USPS on our High-Risk list to focus attention on the dilemmas  facing USPS before the situation escalates into a crisis in which the options  for action may be more limited and costly.  We recommended that the  following actions be taken:  USPS should develop a comprehensive transformation plan—in  conjunction with Congress and other stakeholders, such as the postal  unions and management associations, customers, and the Postal Rate  Commission (PRC)—that would identify the actions needed to address  USPS’s financial, operational, and human capital challenges and  establish a time frame and specify key milestones for achieving positive  results.
USPS should provide summary financial reports to Congress and the  public on a quarterly basis.  These reports should provide sufficiently  detailed information for stakeholders to understand USPS’s current and  projected financial condition, how its outlook may have changed since  the previous quarter, and its progress toward achieving the desired  results specified in its comprehensive plan.
In May 2001, we testified before this committee and subcommittee on  USPS’s financial outlook and transformation challenges that needed to be  addressed. At that time, USPS’s net income had declined over the past 5  years, its outstanding debt had increased at the end of each fiscal year  since 1997, and it expected electronic diversion to cause substantial  declines in First-Class Mail volume in the next decade. We stated that USPS  faced major challenges that called for prompt, aggressive action,  particularly in the areas of cutting costs and improving productivity in the  near term. Further, we noted that Congress must revisit the statutory  framework under which USPS operates and take actions to deal with the  systemic problems facing USPS that call for a transformation if USPS is to  remain viable in the 21st century.
Our assessment of USPS’s financial condition and transformation  challenges for this report is based on our previous work; updated financial  data, projections, and other information that USPS provided to us;  interviews with USPS officials, including its chief financial officer; and  interviews with other stakeholders.  This report discusses the actual  financial results for fiscal year 2001 as compared with USPS’s budget  approved by its Board of Governors in November 2000 and USPS’s current  financial outlook. USPS’s financial situation is complex, and we could not  assess, within our available time and resource constraints, the validity of all  of the data and assumptions that support USPS’s financial projections.  One  area that may have an impact on USPS’s financial situation is its response  to the terrorist and anthrax incidents that occurred in the fall of 2001.  Accordingly, in preparing this report, we also used the results of a 1-day  conference we hosted in December 2001 at the request of the chairman and  ranking minority member of the House Committee on Government  Reform.  The conference participants discussed bioterrorism threats,  options for USPS and the mailing industry for improving security, and  issues and options relating to improving postal operations.
We conducted our review at USPS headquarters in Washington, D.C., from  March 2001 through February 2002 in accordance with generally accepted  government auditing standards. We requested comments on a draft of this  report from USPS, and its comments are discussed later in this report and  reproduced in appendix II.
subsections: section_title: Background
paragraphs: USPS is the single largest federal civilian agency, with a mission vital to the  nation’s communication and commerce. Compared with private U.S.  companies, USPS is the second largest employer with its nearly 900,000  full-time and part-time employees.  Four major unions represent the  interest of bargaining unit employees; and three management associations  represent USPS supervisors, postmasters, and other managerial,  nonbargaining personnel.  USPS currently maintains a massive  infrastructure, developed incrementally over many years, consisting of  more than 38,000 post offices, branches, and stations and 350 major mail- processing and distribution facilities.  USPS is the focal point of a $900  billion mailing industry that employs 9 million people and accounts for 8  percent of the U.S. gross domestic product, according to a recent report.
The Postal Reorganization Act of 1970 (P.L. 91-375) reorganized the former  U.S. Post Office Department into the U.S. Postal Service, an independent  establishment of the executive branch with a mandate to provide prompt,  reliable, and efficient mail services to all areas of the country.  USPS is  intended to be self-supporting from postal operations and is mandated to  break even over time. To change domestic postal rates, USPS must first  obtain a prior review from the independent PRC before it can finalize new  rates. In general, the complex process for USPS to change rates can take  about 18 months—4 to 6 months for USPS to prepare its filing for a rate  case, up to 10 months for the PRC to review proposed rate increases and  make its recommended decision, and about 2 months or longer for USPS to  make its final decisions and implement the new rates.
USPS has an 11-member Board of Governors, which is responsible for  directing the organization.  Board members include (1) nine presidential  appointees who serve on a part-time basis with 9-year staggered terms; (2)  the PMG, who is appointed by the governors; and (3) the deputy postmaster  general (DPMG), who is appointed by the governors and the PMG.  The  nine presidential appointees are chosen to represent the public interest  generally, cannot be representatives of specific interests, are subject to  Senate confirmation, and may be removed only for cause.  No more than  five of these appointees may belong to the same political party.  No other  qualifications or restrictions are specified in law.
section_title: USPS’s Deteriorating Financial Results and Outlook
paragraphs: Overall, USPS’s financial condition has continued to deteriorate. Although  USPS is mandated to break even over time, it is not generating sufficient  revenues to cover both its operating expenses and capital needs, which  continue to grow.  From fiscal year 1995 to fiscal year 2001, USPS’s net  income has continually declined (see fig. 1). Further, since fiscal year 2000,  USPS has been incurring net losses, and losses are projected for fiscal year  2002. Since its inception, USPS has accumulated losses from deficits in  prior years, and its debt balance with the U.S. Treasury continues to grow.   At the end of fiscal year 2001, USPS’s mail volumes declined for the second  time in 25 years and expense growth continued to outpace USPS’s revenue  growth.  Following the terrorist and anthrax incidents in the fall of 2001,  USPS has experienced lower mail volumes and revenues than expected and  may incur higher expenses for safety and security.  Historically, USPS has  had difficulty cutting costs related to its large workforce and  infrastructure. The continuing recession and recent terrorist incidents have  negatively affected USPS’s mail volumes; and despite USPS’s cost-cutting  efforts, revenues decreased while costs continued to rise, thus decreasing  net income. USPS’s dire financial situation, coupled with increased  competition and the availability of alternatives to the mail, threatens the  viability of USPS’s basic business model for the 21st century.
USPS reported a deficit of $1.68 billion for fiscal year 2001 and has  budgeted a deficit of $1.35 billion for fiscal year 2002.  However, this budget  estimate was forecast before the occurrence of the September 11 terrorist  attacks and anthrax incidents.  In the first postal quarter of fiscal year  2002, mail volumes were 4.9 percent below estimates that were included in  USPS’s approved budget, and revenues were $876 million less than  budgeted; costs were held to $355 million below budget. This resulted in  net income being $521 million less than planned.  However, USPS’s deficit  for fiscal year 2002 could be mitigated by the expected settlement and  implementation of its pending request for a rate increase.
Continuing deficits have resulted in insufficient cash to finance capital  project needs and repay debt. In addition, USPS’s debt continues to grow  and is nearing its $15 billion statutory limit.  USPS’s debt is budgeted to  reach $12.9 billion by the end of fiscal year 2002.  Currently, USPS’s  liabilities exceed its assets. USPS’s substantial and growing liabilities will  require increasing amounts of funds in the future.
USPS’s financial outlook is likely to continue deteriorating unless it can  find ways to stimulate revenue growth and significantly cut costs.  Even if  USPS raises rates and achieves positive net income in a given year, that will  not resolve its fundamental financial problems, including those relating to  declining mail volumes, because rate increases are likely to encourage the  shift of more mail to electronic and other alternatives.  Some costs, notably  for pensions and retiree health benefits, are difficult to control and are  expected to increase substantially in the coming decade.  Similarly, USPS  delivery costs increase annually, that is, nearly 2 million new delivery  points were added last year.  To improve its financial outlook, USPS needs  to concentrate its current efforts on cutting costs, improving productivity,  and adding value to the mail as well as overhauling its basic business  model, as described in the final section of this report.
The following table summarizes the key aspects of USPS’s declining  financial outlook.  A further discussion of fiscal year 2001 results is  included in appendix 1.
In fiscal year 2001, overall mail volume fell 0.2 percent, which was only the  second annual decline since fiscal year 1975. Growth in mail volumes for  USPS’s largest revenue source, First-Class Mail, has slowed in recent years  (see fig. 2).  In fiscal year 2001, First-Class Mail volume grew only 0.1  percent, which was the smallest growth rate in the last 25 years.  First-Class  Mail is a particularly important category of mail because it generated 54  percent of USPS revenues and covered two-thirds of institutional expenses  in fiscal year 2000.  Additionally, Standard Mail volumes—that is, primarily  advertising mail—which account for most of the remaining revenues,  decreased by 0.1 percent in fiscal year 2001, the first decline in 10 years.  In  contrast, Standard Mail volume on average had grown nearly 5.0 percent in  the previous 5 years.  USPS officials attribute the changes in mail volumes  primarily to the slowing economy and also to the diversion by mailers of  First-Class Mail, and to a lesser degree, Standard Mail, to the Internet.
Recent declines in mail volume growth are depressing revenues at a time  when expenses are growing and cash flow is needed to fund capital  expenditures and debt repayment.  Since fiscal year 1996, operating  expenses have grown faster than operating revenues and grew 4.2 percent  in fiscal year 2001, which was twice as fast as the 2.0-percent growth in  operating revenue (see fig. 3).
subsections: section_title: Declining Net Income
paragraphs: USPS’s poor financial outlook for fiscal year 2002 has been exacerbated by  the continuing recession and terrorist incidents. Mail volume and revenues  declined after September 11, while costs continued to rise, despite cost- cutting efforts.  As shown in table 2, during the first quarter of fiscal year  2002, mail revenue was 5.4 percent below budget. This shortfall resulted in  $876 million revenue less than budgeted, while expenses were $355 million  under budget.  USPS achieved a net income of only $108 million, which was  $521 million less than budgeted.  Typically, the first quarter is USPS’s most  profitable of the fiscal year.  USPS will be challenged to meet its net income  targets for the remainder of the year. Uncertainties surrounding USPS’s net  income targets include future mail volumes, the extent to which USPS can  cut costs, and the potential for other added costs.
section_title: Growing Expenses
paragraphs: In its fiscal year 2002 budget, USPS projected that its expenses would  increase 3.2 percent.  Budgeted expense increases included increases in  salaries and benefits, pensions, retiree health care, and workers’  compensation, among other items.  To help offset these expense increases,  USPS’s budget called for reductions of 13,000 work years, or a 1.9-percent  reduction, to be achieved in part by reducing the number of employees in  field operations.
Compensation and benefits covering personnel-related expenses, including  interest expenses on deferred retirement liabilities, totaled approximately  $53 billion, or about 78 percent of the total expenses in fiscal year 2001.  A  key component, USPS’s retirement-related expenses, have grown as a  percentage of total expenses from 3.9 percent in fiscal year 1972 to 14.4  percent in fiscal year 2001.  Budgeted retirement-related expenses for fiscal  year 2002 are $10.3 billion, including an interest expense of $1.6 billion.
USPS’s expenses for the remainder of fiscal year 2002 may be affected by  fluctuations in mail volumes. Further, USPS health care premium costs are  budgeted to increase 10 percent; however, this target may be exceeded as  general health insurance premium costs are expected to grow 13 percent,  according to an Office of Personnel Management (OPM) announcement in  September 2001.  Adding to financial pressures, the recent incidents of  anthrax in the mail have heightened the need to improve mail safety and  security, which will likely entail USPS’s incurring additional unplanned  expenses.
section_title: Security and Safety Needs Exacerbate Financial Problems
paragraphs: USPS has taken steps to increase mail security and safety, such as  decontaminating facilities affected by anthrax, irradiating some mail  received by the federal government, and issuing protective equipment to its  employees.  In the future, USPS faces the challenge of safeguarding  employees and customers from bioterrorism, chemical, radiological, and  explosive threats.  On December 10, 2001, we held a conference of  representatives from Congress, USPS, and other postal stakeholders to  discuss possible options to enhance mail security and postal operations.   Our report on the conference listed numerous options for USPS and the  mailing industry to make improvements in this area.  It is unclear,  however, what changes will ultimately be implemented, what the  associated costs will be, and how they will be financed—beyond the $675  million that has been appropriated for this purpose.
section_title: Revenues from Rising Postal Rates
paragraphs: USPS’s 2000 request for a rate increase was implemented in two stages—in  January and July 2001—due to differences between USPS and the PRC over  the disposition of the rate case. In addition, USPS requested an above- inflation increase in postal rates in September 2001 that is expected to be  implemented in the summer of 2002.  Table 3 shows these and other rate  actions in calendar years 2000, 2001, and 2002.  These increases may not be  enough to keep USPS from asking for another rate increase later this fall.   During fiscal year 2001, USPS planned to generate an additional $900  million dollars from rate increases that averaged about 6.0 percent.   However, the rate increases did not occur as USPS planned because the  PRC recommended rate increases averaging 4.6 percent. USPS’s governors  later overrode PRC’s recommended rates in May 2001 and approved rate  increases that would generate revenue that was close to USPS’s original  request. The timing for implementing these rate increases reduced the  amount of revenue in fiscal year 2001 by about $390 million below USPS’s  budget, according to USPS.
USPS filed for another rate increase in September 2001, which USPS  estimated would increase rates an overall average of 8.7 percent, as shown  in table 3, and asked the PRC to give this request expedited consideration.   Following the terrorist attacks, the chairman of the PRC suggested that the  parties in the rate case agree to a settlement, so that the PRC could issue a  recommended decision as soon as possible.  Recently, the parties entered  into negotiations and if the proposed agreement is implemented as  expected in the summer of 2002, the price of a First-Class stamp would rise  to 37 cents and revenues, according to USPS, would increase by about $1  billion in fiscal year 2002.
Since postal reorganization was implemented in 1971, rates for the First- Class stamp have generally tracked the rate of inflation. More recently,  however, rates for certain categories of mail have been increasing at a rate  greater than inflation. Some of these categories, such as Priority Mail and  Standard Mail, are more price-sensitive than First-Class Mail because of the  availability of other alternatives, such as FedEx, UPS, newspaper  advertising, and other forms of advertising.  Hence, rate increases affect  the volumes and competitiveness of mail, particularly the categories that  are the most price-sensitive.  Mailers have been critical of the growing  frequency and size of rate increases and may look for other communication  and delivery alternatives.
Although it is difficult to determine the impact of specific factors, recent  declines in mail volume have generally been attributed to rate increases;  the continuing recession; anthrax incidents; and increased competition,  among other things. Thus, in the first quarter of fiscal year 2002, First-Class  Mail, Standard Mail, and Priority Mail volumes fell, compared with the  same quarter last fiscal year, by 2 percent, 9 percent, and 17 percent  respectively.  For the remainder of fiscal year 2002, USPS will be  challenged to meet budgeted revenue targets on the basis of volume and  revenue forecasts that were prepared before the terrorist incidents and  when the economic outlook was more favorable.  However, USPS is  anticipating additional revenues that were not included in the original  budget from a rate increase that may be implemented in the summer, rather  than in the fall, of 2002.  Another potential source of funding would be any  additional funds appropriated by Congress.
section_title: Revenues from Additional Appropriations
paragraphs: In the fall of 2001, USPS asked Congress to appropriate about $5 billion to  cover costs related to the terrorist and anthrax-related incidents as well as  their expected negative effect on revenues. USPS subsequently asked for  $1.3 billion to cover expenditures related to these incidents through June  2002.  To date, Congress has appropriated $675 million to cover these  costs.  This is the first appropriation since fiscal year 1982 for purposes  other than revenue forgone on free and reduced rate mail.  In addition,  USPS asked for nearly $1 billion in its fiscal year 2003 appropriation  request, representing the total amount of revenue forgone for free and  reduced rate mail between 1991 and 1998, for which USPS had not yet  received appropriations. This request would be in lieu of the current  payment schedule established by a 1993 law for $29 million annual  appropriations over 42 years.  Also, it is unclear whether USPS will ask for  further appropriations to cover security-related expenses in the future.
section_title: Cash-Flow Difficulties and Increasing Debt Result in Underfunded Capital Needs
paragraphs: Historically, cash flow from USPS’s operations generally has not been  sufficient to cover the capital outlays it has needed to maintain, expand,  and modernize its physical infrastructure. In each year of this period, USPS  capital outlays have exceeded its capital depreciation, and estimated  depreciation has served to help cover future capital outlays when making  rate case requests. Currently, cash flow from USPS operations is  insufficient to fully fund its operational and capital investment needs and  repay its debts.  Thus, USPS has resorted to using debt to finance its capital  outlays. USPS had budgeted its debt to reach $12.9 billion by the end of  fiscal year 2002, which would be $2.1 billion below its $15 billion statutory  debt limit.  If higher postal rates are implemented this summer, cash flow  should improve in the short term.  However, in the long term, simply raising  rates alone is not the answer.  Such increases are likely to help facilitate the  shift of mail to electronic and other delivery alternatives.
To conserve cash in fiscal year 2002, USPS’s budget has extended its freeze  on capital commitments for most facility projects and has cut back its  overall capital expenditures.  USPS has reduced its capital commitments  to a level below that of recent years.  USPS capital commitments, which  had exceeded $3 billion from fiscal years 1997 through 2000, were reduced  from $3.6 billion to $1.0 billion in fiscal year 2001 and are budgeted at $2.4  billion in fiscal year 2002.  Capital outlays also have experienced a  downward trend, although to a lesser extent.  Recent reductions in capital  commitments and outlays are shown in table 4.
USPS has a growing backlog of facility projects and is unable to fully  finance needed improvements to its infrastructure.  The capital freeze on  most facility projects and limited funding of other capital projects is  unsustainable, given USPS’s need to maintain its massive and growing  infrastructure and modernize its information technology. Limitations on  capital investment may have the following detrimental effects:  deterioration of USPS’s existing physical infrastructure;  operational impediments from delays in repairing deteriorating facilities  or expanding to cover new delivery points;  higher future capital project costs;  deferred efficiency gains that could limit cost savings and add pressure  to increase postal rates;  higher costs and rates that could make electronic and other delivery  alternatives more attractive; and  products becoming less competitive as a result of delays in  implementing improvements, such as an information platform to enable  real-time data on the status of mailings.
section_title: Long-Term Need for Funds
paragraphs: USPS is likely to continue experiencing difficulty generating sufficient  funds to cover its increasing funding needs (see fig. 4).  Funds are needed  for (1) current operating expenditures; (2) capital projects; and (3) paying  liabilities and servicing its debt.  However, expense growth has outpaced  revenue growth, capital projects have been significantly curtailed, and  USPS’s liabilities have exceeded its assets by $2.3 billion, as of September  30, 2001.  Included in this calculation of the $2.3 billion is a deferred  retirement asset of $32 billion, which is an intangible asset that is not an  economic resource that USPS can apply to cover its liabilities.  If this $32  billion deferred retirement asset were to be excluded from total assets,  USPS’s liabilities would exceed its assets by $34.3 billion as of September  30, 2001.
Further, liabilities have been growing at an increasing rate and include $32  billion in retirement liabilities, $11.3 billion in outstanding debt, and a $6.0  billion liability for workers’ compensation claims as of September 30, 2001.   These liabilities do not include future anticipated interest expenses, such  as the $15.8 billion interest expense on the $32 billion retirement liability,  or a large obligation for retiree health insurance premiums, which USPS is  required by law to pay.  The $32 billion retirement liability continues to  increase because USPS’s annual payments, set by OPM under statutory  requirements, have been less than the annual increases in future liabilities.  These annual increases are due to increases in employee compensation and  mandated retiree cost-of-living adjustments (COLA).
USPS also had an accumulated deficit of $5.4 billion as of September 30,  2001.  The accumulated deficit represents the amount by which annual  deficits have exceeded annual positive net income since USPS’s inceptionDeficits arise when expenses exceed revenues. When expenses require  payment and there is insufficient cash flow from operations, USPS may  borrow, thus increasing its liabilities and the need for funds at some future  point to pay the liabilities. A mechanism known as the Prior Years’ Losses Recovery (PYLR) permits USPS to include in its rate request an amount  above its expected costs to make up for past operating losses over a future  period of time.  Starting with the 1980 rate case, USPS has submitted, and  the PRC has recommended, a provision for the recovery of prior years’  losses over a 9-year amortization period.  By decreasing the amortization  period to recoup losses—for example, to the 7-year amortization period  that was used in the two rate cases before 1980—USPS could implement  larger rate increases in an attempt to generate net income to cover its  accumulated deficits more rapidly.
USPS continues to depend on borrowing and has not indicated how it plans  to reduce its debt.  USPS has not generated sufficient cash flow from  operations to cover capital outlays in 11 of the last 15 fiscal years.  USPS’s  outstanding debt balance has grown steadily since fiscal year 1997, nearly  doubling from $5.9 billion to $11.3 billion at the end of fiscal year 2001 (see  fig. 5).  This trend of increasing debt levels essentially shifts the burden of  reducing the debt from current to future ratepayers and creates pressure  for USPS to raise postal rates in the future. Although this debt is not  guaranteed by the government, if future ratepayers are unable to reduce  this debt, Congress could determine that the government should step in to  pay some or all of these obligations. Simply borrowing to keep USPS  operating is not acceptable as a long-term option and is contrary to USPS’s  mandate to be self-supporting.
section_title: Options for Improving Financial Condition
paragraphs: Key options that USPS could consider to improve its financial condition  include increasing revenues and cutting costs. USPS needs sufficient  revenues so that it can cover operating costs and improve net income,  address the growing backlog of capital projects, expand to meet new  delivery point needs, continue modernization efforts, and reduce its debt.  On the revenue side, USPS has two basic options for increasing revenues:  (1) generate additional revenues from increasing volumes, improving  existing products, and developing new products and services and (2)  increase rates, possibly by increasing the rate of recovery of prior years’  losses in rate cases and/or increasing the amount for capital purposes from  depreciation to a higher figure. On the expense side, USPS can reduce  expenses by cutting costs and improving productivity. Options related to  cutting costs and improving productivity are further discussed in the next  section of this report. As for increasing revenues from new products and  services, in recent years USPS has generally had difficulty generating  positive net revenues. For example, in fiscal year 2001, USPS budgeted  $104 million for revenues from its e-commerce initiatives, but reported  actual revenues of only about $2 million in this area. In addition, increasing  rates has traditionally been the primary source of new revenue, particularly  from the largest mail categories—First-Class Mail and Standard Mail. In the  short term, USPS can realize large net revenues by increasing postal rates,  especially for less price sensitive categories, such as First-Class Mail.  However, in the long term, increasing rates may have diminishing  practicality because rate increases affect USPS’s competitiveness by  increasing incentives for mailers to find other alternatives to the mail.  Therefore, it is important for USPS to undertake transformation efforts to  operate more efficiently in order to hold down rate increases over the long  term.
On the financing side, USPS has increasingly relied on additional  borrowing to fund its capital expenditures.  A major constraint is that USPS  may soon reach its statutory borrowing limit. However, raising the debt  limit would require congressional action.  In the short term, USPS may  need to rely on additional borrowing if it is to maintain its capital program,  but increasing debt in the long term would not be prudent.
Another option for obtaining additional funding would be to request  additional appropriations from Congress. Such a request would appear  counter to Congress’s intent of establishing a self-financing independent  entity in 1970 when it reorganized the former Post Office Department to the  current U.S. Postal Service.
section_title: Transformation Required to Make USPS Financially Viable
paragraphs: A comprehensive transformation of the Postal Service is needed to ensure  its financial viability and fulfill its mission in the 21st century in the dynamic  communications and delivery sectors. Legal requirements and practical  constraints have contributed to continuing deficits, rate increases, rising  costs, and growing debt.  USPS has attempted to reduce the size of rate  increases by cutting costs and increasing its productivity, but it has been  able to achieve only limited progress.  More progress is urgently needed,  and a range of options for making improvements is available within the  current structure.  However, absent a fundamental reassessment of USPS’s  statutory framework, starting with its mission and role, USPS will continue  to be constrained in its transformation efforts. For example, USPS’s  statutory framework, which includes a monopoly on letter mail, a break- even mandate, and a cost-of-service rate-setting structure, provides limited  incentives for USPS to cut or restrain costs or to be innovative.  Furthermore, USPS faces legal and practical constraints related to  restructuring its infrastructure, including closing or consolidating postal  facilities and realigning its workforce as its operations change.  Other  structural issues, such as USPS’s governance structure, have been raised— that is, what type of governing board is appropriate for USPS given the  complex mission and role of this $70 billion entity. USPS’s basic business  model, which assumes that rising mail volume will help cover rising costs  and mitigate rate increases, is increasingly problematic as mail volume  either stagnates or further declines while costs continue to rise.
A comprehensive transformation is urgently needed, starting with actions  that USPS can take under its current authority.  Given USPS’s dire financial  situation, interim legislative changes could serve a valuable purpose.    However, action by Congress on comprehensive transformation issues will  be critical to ensuring financial viability. Leadership—starting with USPS— will be critical to achieving the necessary consensus for transformation  between Congress and the divided stakeholder community.
subsections: section_title: Need for Transformation
paragraphs: The statutory framework under which USPS operates, established under  the Postal Reorganization Act more than 30 years ago, is increasingly  problematic and is long overdue for change.  The act was enacted when  USPS faced little direct competition and could rely on increasing rates,  coupled with growing mail volumes, to cover rising costs.  Today, USPS  must operate in a vastly different environment.  The World Wide Web,  which came into widespread use in the 1990s, along with cell phones have  become essential elements of communications and commerce.  E-mail use  has exploded, more and more documents are being sent electronically, and  a growing share of payments has also shifted from mail to electronic  alternatives.  These changes continue, mail volume has started to decline,  and the prospect is for future declines over the long run.  In contrast,  USPS’s business model, developed pursuant to the Postal Reorganization  Act, has remained virtually unchanged for the past 30 years.
section_title: Transformation Efforts Are Limited by Legal Requirements and Practical Constraints
paragraphs: Postal transformation efforts are limited by a combination of legal  requirements and related practical constraints (see table 5).
section_title: Limited Progress Made to Increase Productivity
paragraphs: USPS has had long-standing difficulty in its efforts to increase postal  productivity.  In general, USPS has high fixed costs, and it has been difficult  for it to cut costs quickly when expected mail volumes and revenues fail to  materialize.  To achieve real savings and productivity improvement, USPS  would need to decrease unneeded capacity resulting from efficiency gains  and increase capacity only where such an increase is needed. USPS data  show that its productivity has increased only 11.5 percent over the past  3 decades (see fig. 6), and these limited productivity gains have resulted in  postal costs and rates being higher than they otherwise would have been.   Postal productivity decreased 0.7 percent from fiscal years 1990 to 1999,  despite billions of dollars invested in automation and information  technology over that period.  USPS made renewed progress in improving  productivity in fiscal years 2000 and 2001, a period when its productivity  rose 3.6 percent.  However, these gains may be difficult to sustain.   USPS  has budgeted for a productivity increase of 1.1 percent in fiscal year 2002,  but its productivity decreased at a 1.1-percent annualized rate in the first  quarter, primarily due to mail volume declines following recent terrorist  incidents.
Stakeholders have offered a variety of explanations for why USPS  productivity has not increased more substantially over the years. These  explanations include factors such as poor management; continuing waste  and inefficiency; legal requirements and practical constraints; increasing  compensation costs; adversarial labor-management relations; and  insufficient incentives for USPS, a government entity with a break-even  requirement, a statutory monopoly, and cost-of-service regulation, to  improve its financial performance.  Although it is difficult to estimate the  effects, if any, of these factors, it is worth noting that over the past decade,  USPS has not been able to take full advantage of its capital investments  through increases in labor productivity.  Numerous reports, including some  by us, have noted inefficiencies in the postal system and difficulties that  USPS has had in realizing opportunities for savings.  For example, in 1998,  we reported that USPS had achieved savings in carrier work hours through  automated rather than manual sorting of letters into the exact order that  carriers deliver them, but these savings had fallen short of USPS goals, in  part due to labor-management issues.
A related problem has been USPS’s difficulty in tracking specific costs and  the results of various cost-saving initiatives.  In March 2000, USPS  highlighted its intention to save $1 billion from specific productivity and  cost-saving initiatives in operations, administration, purchasing, and  transportation.  Although USPS has estimated that it saved $900 million in  fiscal year 2001 from increasing its overall productivity, it did not report— and may not be able to produce reliable data on—specific savings from its  productivity initiatives.  USPS plans to implement an activity-based costing  system in mail-processing facilities in the near future that would track  specific costs that could be compared across different locations.  Such  information would help USPS managers plan, prioritize, and track the  results of future cost-saving efforts.
section_title: Improvements to Postal Operations Are Urgently Needed
paragraphs: Although efforts may be limited by legal requirements and practical  constraints, USPS can do more in the short term under its current authority  to drive out costs and thereby increase productivity. In the longer term,  more fundamental structural changes will be needed before USPS can  achieve significant cost savings. In addition to operational efficiency,  measures to enhance mail safety and security also need to be considered.  Key areas where USPS is moving to take action under current law include  the following:  Maximize efficiency of current mail-processing facilities:   Productivity varies greatly across mail-processing facilities.  Implementing best practices throughout the organization would give  USPS the opportunity to increase the productivity of its lower  performing plants.  Consistent with this idea, a recent review identified  instances of wide variation in equipment utilization and inconsistent execution of strategies for effective utilization.  The 2001 Mailing  Industry Task Force recommended that the mailing industry and USPS  collaborate to standardize mail-processing functions to increase  efficiency.
Consolidate mail-processing facilities:  Although USPS reports that it  has recently studied whether to consolidate postal facilities, it has not  released the results of the study, and no consolidations have yet been  made.  USPS could develop a plan that outlines its current and expected  future needs for mail-processing facilities and specify changes to  address these needs.
Continue automation:  USPS recognizes that it is further along in  automating the processing of letter mail than it is in automating flat  mail, such as periodicals and catalogs, and it is currently deploying more  efficient flat sorting machines.  Its vision for mail processing and  delivery is to replace its current process of multiple bundles for letters  and flats with a single bundle for each delivery point. USPS has  developed a plan for achieving much of its vision that calls for  implementing new and enhanced automation over much of the next  decade.
Deploy the information platform:  USPS is in the process of deploying  an information platform to provide reliable, real-time information on  mailings; data on processing and delivery problems; and improved  workforce management.  However, completion of the platform is  expected to take years, and mailers have urged USPS to make more  rapid progress.
Explore mail redesign: USPS is exploring redesign of the mail  classification system and rate structure, also called “mail redesign,” to  change the postal pricing system to provide additional incentives for  efficiency. The concept is to create more homogeneous groups of mail  and increase emphasis on cost-efficient preparation.
Work with the unions to improve staffing options:  Better alignment of  the workforce with operational needs, such as changes to work rules  and job assignments, may be possible within the scope of existing  national contracts.  For example, one field office has reported working  with local unions to amend the work rules to allow greater flexibility in  addressing staffing issues at specific locations.
Continue to work with mailer groups and other stakeholders to  identify additional opportunities for cutting costs and improving  productivity: USPS has been working closely with mailer groups and  other stakeholders to identify additional opportunities for cutting costs  and improving productivity.  That continuing work has yielded many  recommendations and improvements.  For example, a recent review  made recommendations for both USPS and flats mailers, such as  adoption of more efficient USPS processes and improved packaging to  reduce costly bundle breakage. In addition, USPS recently reported that  it plans to work collaboratively with the PRC and interested customers  to explore various alternatives relating to negotiated service  agreements—in which certain mailers would perform additional  worksharing activities and receive larger discounts.
Improve workforce planning: USPS could broaden its workforce  planning from the current focus on the next 3 years to a longer horizon.    Long-term planning could address changes in automation; mail volume  and mix; and security and safety issues, among other things.  Such  planning could review needs related to the appropriate number, skills,  deployment, and part-time or full-time status of employees.  Long-term  planning could also address succession and continuity issues as most  USPS managers and half of the workforce reaches retirement eligibility  over the next decade.
Examine alternatives for providing retail services:  USPS is exploring  ways to expand the use of various alternatives to sell stamps and mail  packages.  About 80 percent of customer visits to post offices are for the  purpose of mailing letters, purchasing stamps, or a combination of the  two activities.  According to USPS, it costs 22 cents per $1 of revenue to  sell stamps at a post office counter, compared with 14 cents from  vending machines; it costs 1.3 cents through outlets such as grocery  stores and ATMs.   USPS has also tested a self-service machine:  customers weigh parcels, purchase postage, pay by credit card, and  place the parcels in a secure container for delivery. Additional  opportunities may exist for USPS to decrease costs and provide  enhanced service by partnering with and using other organizations’  facilities. Likewise, USPS may also be able to generate revenue by  partnering with other organizations that could use available space in  postal facilities to provide compatible services.
Review access to postal services:  Another area for potential savings  relates to the accessibility of receptacles that customers use to send and  receive mail.  USPS has options for savings by altering the mix of  customer receptacles used to receive mail (e.g., cluster boxes and/or  curbside mailboxes versus mailboxes attached to residences). In  addition, after the incidents of anthrax in the mail, there has been much  discussion regarding whether USPS should enhance safety by reducing  the number of street side collection boxes and/or changing their design  to provide a narrower slot for the mail.
section_title: USPS Needs to Reassess Structural Issues and Take Action
paragraphs: USPS can make some improvements within the current structure, but these  improvements will not be enough for long-term sustainability.  Less than a  year after we placed USPS’s transformation efforts and long-term outlook  on our High-Risk list, USPS’s financial situation has deteriorated, while  structural issues and limitations remain unresolved. USPS’s ability to fulfill  its mission by providing the current level of universal postal service at  reasonable rates on a self-supporting basis is at increasing risk.
USPS’s 30-year-old system of postal laws is increasingly problematic for  USPS and its competitors and is overdue for change to ensure that USPS’s  basic business model is viable.  Three key themes to address in  comprehensive transformation include reassessing (1) USPS’s statutory  framework, beginning with its mission and role in the 21st century; (2)  insufficient incentives for USPS, a governmental entity with a break-even  mandate, a statutory monopoly on letter mail, and cost-of-service  regulation; and (3) the legal requirements and practical constraints that  limit transformation efforts, including those relating to USPS’s  infrastructure and workforce.  Other structural issues, such as USPS’s  governance structure, have been raised—that is, what type of governing  board is appropriate for USPS, given the complex mission and role of this  $70 billion entity.
subsections: section_title: Postal Service’s Mission and Role
paragraphs: The starting point for postal transformation is a reassessment of USPS’s  mission and role.  Vast changes in the communications and delivery sectors  over the past 30 years—which are continuing at a rapid pace—as well as  USPS’s growing financial difficulties, provide an impetus for reconsidering  what universal postal service will be needed for the 21st century.  Key issues  include what postal services should be provided on a universal basis to  meet customer needs, how these services should be provided, and how  they should be financed—by ratepayers or taxpayers.  A related issue is  what quality of postal service should be maintained, such as the frequency  and speed of mail delivery and the accessibility and scope of retail postal  services, as well as whether certain aspects of universal postal service  should be allowed to vary in urban and rural areas. Depending on the  resolution of these fundamental issues, Congress and the stakeholder  community can better approach what legal structure would be best suited  to enable USPS to fulfill its mission in the 21st century, including what  incentives, accountability, and constraints would be appropriate.
Other issues related to USPS’s mission and role include the following:  Competition: Should USPS be allowed to compete with the private  sector and, if so, on what terms?  Which, if any, of the many federal laws,  regulations, and taxes that apply to the private sector should apply to  USPS?  If USPS is allowed to compete, should it retain its current law  enforcement powers and authority to issue regulations (e.g., regulations  defining the scope of the postal monopoly)?  In part because of different  taxation and legal treatment, some stakeholders contend that USPS  should limit its activities to providing hard-copy delivery services and,  when it competes, it should do so on the same terms as its competitors.   USPS and some other stakeholders counter that USPS is at a  competitive disadvantage due to its current universal postal service  mandate and other laws and regulations, and that USPS should have  increased flexibility.
Public/Private provision of postal services: Should core postal  functions be discharged by a public entity, private companies, or a  combination of both?  For example, should USPS remain a government  entity or should it be privatized?  Should USPS perform some functions  in partnership with the private sector, allow the private sector to  perform other functions through “worksharing discounts,” or contract  out some of its functions?  USPS gives worksharing discounts that are  based on its cost avoidance, such as accepting mail that is bar coded  and/or drop-shipped to the local postal facility, which creates the  opportunity for the least-cost provider to perform these activities.  Some  postal functions have long been provided by a combination of public  and private providers, such as mail transportation, processing, retail  services, and delivery. USPS has long contracted for mail transportation  and currently has a multibillion-dollar contract with FedEx for long- distance transportation of Priority Mail, Express Mail, and First-Class  Mail. In addition, contract stations provide postal retail services, and  some transportation contractors deliver mail along their routes.
Governance: What type of governing board is appropriate given USPS’s  mission and role?  How should members be selected, paid, and held  accountable?  What should the role and functions of the governing  board be, and is its current part-time status appropriate?  Is the present  governance structure best suited to ensuring individuals that are  qualified to direct a $70 billion entity?  Should the framework follow  recent changes in the private sector to (1) develop better-defined  criteria for board membership and (2) recognize that various roles on  the board may require various backgrounds and skills?  These questions  are relevant because USPS is intended to function in a businesslike  manner.
Accountability and transparency: Should USPS be held more directly  accountable for its performance and, if so, to what extent, to whom, and  with what mechanisms?  Specifically, how should USPS’s Board of  Governors be held accountable?  What oversight is needed to protect  the public interest, including the interest of customers with few or no  alternatives to the mail? How should the PRC and/or other pertinent  authorities exercise oversight regarding pricing; competition; and  antitrust issues, among other areas?  What recourse should customers  and competitors have to lodge complaints? What should be the role of  Congress and other federal agencies in providing accountability and  oversight? What information should USPS be required to provide  Congress and the public on its performance, including in areas such as  financial performance, productivity, and mail delivery? Transparency  and accountability are fundamental principles to ensuring public  confidence in USPS.
section_title: Need to Reassess Legal Framework and Incentives
paragraphs: The current legal framework, which was designed to help USPS fulfill  universal service mandates, does not provide the same types of incentives  that apply to the private sector.  USPS’s break-even mandate removes the  profit motive, and the rate-setting structure allows USPS to cover rising  costs by increasing rates. The postal monopoly shields USPS’s core  business of letter mail from direct competition, which could provide  additional incentives for innovation, efficiency, and competitive prices and  quality of service.  As part of their postal transformation efforts, a number  of foreign countries have made changes to their legal frameworks,  including reducing the postal monopoly, that have increased incentives.  Although it is difficult to make direct comparisons, their experiences are  relevant to consideration of structural change in USPS. Specific structural  issues relating to incentives that need to be addressed include the  following:   The postal monopoly: Should the postal monopoly be narrowed or  eliminated?  Congress created the statutory monopoly on letter mail to  enable the postal system to fulfill its universal service mandates. USPS  has further defined its letter mail monopoly through regulations.  Narrowing or eliminating the monopoly could provide incentives for  efficiency and innovation for USPS and its competitors and could lead  to greater choices for consumers. However, such a step could allow  competition for profitable segments of USPS’s market. Some believe  USPS would have difficulty competing under these circumstances,  particularly if it was required to continue the current level of universal  service with 6-day delivery of mail to every address and delivery of  single-piece First-Class Mail at uniform rates. Others disagree, pointing  to USPS’s advantages in scope and scale.  In this regard, a number of  foreign countries have narrowed their postal monopolies in recent years  and further steps in this direction are being considered.
Break-even mandate:  Can USPS remain self-supporting under its  mandate to break even over time?  If not, should USPS have a for-profit  business model?  USPS’s break-even mandate was established to foster  reasonable rates. Removal of the break-even mandate could create a  long-term financial incentive for cost savings that also could be passed  along to ratepayers. However, removing the break-even mandate could  provide an incentive for reducing the quality and scope of some costly  services. For this reason, some other countries whose postal  administrations operate on a for-profit basis have imposed specific  minimum requirements for universal postal service and added  regulatory oversight of the quality of postal service.
Rate-setting structure:  Should the current rate-setting process be  retained, modified, or replaced with a different system?  Are changes to  the current rate-setting structure needed to provide sufficient funds for  USPS’s operating and capital needs and to repay debt? Should USPS rate  setting be subject to prior review?  What should be the respective  authorities of USPS and any independent regulator, including the  authority to compel provision of information and final decision-making  authority over what rates are set?  Should legal requirements that affect  rates—including specific cost-coverage requirements, the  nondiscrimination clause, and preferred rates for certain groups—be  retained, changed, or eliminated?  The rate-setting process was created  to ensure prior independent review of domestic postal rates and fees  that includes due process for all interested parties in hearings on the  record. This process has led to proceedings that are often lengthy and  adversarial.  Although the current system was designed to enable USPS  to break even over time, in practice USPS has accumulated significant  prior years’ losses and debt. Under cost-based rate regulation, limited  incentives exist for USPS to control costs because postal rates must be  raised to cover expected costs. When cost savings are achieved, these  are passed along to customers in the next rate case. Consensus on these  issues has been difficult to achieve, but improvements in the rate-setting  area are a fundamental component of a comprehensive transformation.
Transformation will also require consideration of legal requirements and  practical constraints relating to USPS’s physical infrastructure of post  offices and mail-processing facilities and to USPS’s workforce.
section_title: Transformation: Infrastructure Issues
paragraphs: Currently, changes to USPS’s retail infrastructure are limited by both legal  requirements and practical constraints. USPS is required to render postal  services to all communities, including providing regular postal services to  rural areas, communities, and small towns where post offices are not self- sustaining. USPS must follow specific criteria and procedures set forth in  law or regulations for closing or consolidating post offices. For example, it  cannot close a small post office solely because it is operating at a deficit.  USPS also has a self-imposed moratorium on closing post offices.  As a  practical matter, members of Congress and other stakeholders have often  intervened in the past when USPS has attempted to close post offices or  consolidate postal facilities. Proposed post office closures have provoked  intense opposition because local post offices (1) have long been a critical  means of obtaining ready access to postal retail services, (2) are a part of  American culture and business, and (3) are viewed as critical to the  viability of certain towns and/or central business districts.  Similarly,  changes to USPS’s mail-processing infrastructure have been difficult to  implement. Although there are no legal requirements relating directly to  closing or consolidating mail-processing facilities, as a practical matter,  such efforts have been opposed because of the potential effects on jobs and  mail delivery service in local communities, their proximity to facilities of  large mailers, and congressional interest in the location of mail-processing  facilities.
Nevertheless, the issue of how USPS can best provide retail services and  process the mail as well as ensure the safety and security of the mail and its  employees in the 21st century needs to be addressed. Congress, USPS, and  stakeholders need to consider what access to postal retail services is  needed, how such access can be provided in an affordable manner, and  whether improvements can be made to optimize the postal infrastructure  to support changes in operations while also supporting customer  convenience and access. For example, USPS could provide more  convenient retail services at more locations, such as ATMs or at grocery  stores, rather than in traditional brick-and-mortar post offices. In addition,  recent terrorist incidents have raised new safety and security issues related  both to postal employees and customers that need to be addressed. As  discussed later in this report, a process similar to the one used for military  base closing may be useful for addressing sensitive postal facility closure  and consolidation issues.
section_title: Transformation: Human Capital Issues
paragraphs: In addition to limitations on changes to its infrastructure, changes to  USPS’s human capital, or workforce, also face limitations. USPS is required  by law to maintain compensation and benefits for all of its employees on a  standard comparable to the compensation and benefits paid for  comparable levels of work in the private sector. Further, when contract  disputes cannot be settled between postal labor and management, they  must be settled by a third party through binding arbitration. As a practical  matter, postal labor and management have had long-standing adversarial  relations.
To improve organization performance, USPS’s workforce; performance  management systems, including compensation and benefits; and work  rules should be aligned to support organizational mission and goals while  appropriately protecting workers’ rights.  As part of its comprehensive  transformation, USPS needs to address several human capital challenges  that affect USPS’s ability to meet its mission and goals.  These include (1)  assessing workforce needs to plan for the appropriate number, skills, and  deployment of employees and whether USPS has sufficient authority and  flexibility to meet changing needs; (2) maintaining the continuity of service  as many experienced managers and workers retire and leave the Service;  and (3) improving labor-management relations to resolve issues such as  developing performance management systems, including pay and other  meaningful incentives, to better link performance of all employees with  USPS’s business goals.
To successfully transform itself into a financially viable postal organization,  USPS will need to develop, in collaboration with its labor unions and  management associations, a strategy to effectively align its workforce with  its business goals and strategies. For example, agreement on business goals  between USPS and its labor unions and management associations may  facilitate decisions on introducing additional technologies, closing  processing facilities and/or consolidating its infrastructure of retail  organizations, and making appropriate changes in work rules. Also, USPS  officials are anticipating that a large number of its current workers could  retire by 2010. Fortunately, the wave of impending retirements creates both  challenges and opportunities for USPS to realign its workforce by hiring  workers with skills that are needed in the future and deploying its workers  at new or different locations while limiting layoffs of current employees.
USPS’s current workforce planning process is essentially designed to  address short-term needs. USPS develops operationally oriented plans that  project the skills and number of workers that it will need for the next 3  years assuming that with some exceptions, USPS will continue to operate  as it does now. USPS officials use their plans to identify surpluses or gaps  between needs and available staff in certain facilities for each year—with  the understanding that second- and third-year projections of workforce  needs may be less reliable given USPS’s constantly changing business  environment.
Workforce planning for a transformation differs from operational  workforce planning in several ways. First, workforce planning for a  transformation is more long term, primarily because organizations that are  as large and complex as USPS generally take several years to implement  transformation efforts. Second, a long-term workforce planning process  can help USPS anticipate workforce trends and consider alternative  solutions, such as recruiting employees from nontraditional sources. Such  a planning process could improve USPS’s flexibility in meeting its  workforce needs and improving employee relations. Third, long-term  planning focuses on broad strategies for meeting workforce needs, with the  idea that as the transformation progresses, the organization can develop  more specific projections of near-term needs and detailed plans to meet  such needs that are consistent with the organization’s broad workforce  strategy.
In planning for future leaders, USPS is challenged to ensure that it has a  sufficient number of managers with the competencies—which are  commonly described as knowledge, skills, abilities, and behavior—to lead  its workforce. USPS has implemented programs for selecting potential  successors for departing executives and training programs to prepare these  individuals to be effective managers.  However, the programs may not be  adequately addressing USPS’s long-term leadership needs. According to  USPS’s Senior Vice President for Human Resources, some USPS managers  who otherwise may have been selected to replace retiring officials are  themselves leaving the Service. The official estimated that as of November  2001, USPS had qualified staff to replace about 75 percent of the current  leadership positions, compared with its goal of about 85 percent. Also,  many of the people whom USPS has identified as potential successors are  approaching retirement eligibility themselves.  This suggests that relying on  replacements who are nearing retirement would be only a temporary  solution to the succession problem.
Transformation also needs to address the continuing challenge of long- standing disagreements between USPS management and its unions. These  differences have extended to performance management issues involving  compensation, incentives, and benefits as well as deployment of the  workforce.  Performance management systems can include pay systems  and incentive programs that link employees’ performance to specific  results and desired outcomes. These tools help focus managers’ and  employees’ efforts toward achieving organizational goals and can be  critical to an organization’s overall success. Thus, it is important that a plan  to transform USPS’s mission, goals, and workforce discuss how USPS  intends to align managers’ and employees’ efforts with its mission and  goals. The plan should also discuss areas where additional flexibility is  needed to make necessary workforce realignments, such as providing early  retirement for selected employees and determining whether contract or  legislative changes may be needed.
USPS’s PMG has stated that USPS is entering a new era of organizational  challenges and that aligning compensation-related systems with USPS’s  goals is key to success in this new era.  However, it may be difficult for  USPS to expand its performance management system for managers and  supervisors to the majority of its employees.  Most postal employees are  craft employees who transport, process, and deliver mail and who are  represented by unions. Postal managers and unions have repeatedly  disagreed over whether to implement some form of performance-based  compensation and incentive system for craft workers. “The evidence relating to private sector comparability is both voluminous and contradictory  . . . . When all is said and done, however, what stands out clearly, divorced from all the  competing multivariate regression analyses and job content analyses, is that Postal Service  jobs are highly sought after, and once obtained, are held onto. Applicant queues are long,  and the quit rate is all but non-existent. . . . These data, which show how much Postal  Service jobs are valued, both by those who want them and by those who have them, provide  powerful support for the Postal Service argument that the Postal Service provides a wage  and benefit package to APWU represented employees that is better than that available for  comparable work in the private sector.”
Compensation and benefit disputes have often been resolved in binding  arbitration, and union and postal officials have different views on third- party binding arbitration. Union officials believe that because they are not  allowed to strike, they need third-party binding arbitration to resolve  contested labor-management issues. Postal officials believe that the  binding arbitration mechanism presents a number of challenges, because a  third party is not accountable for finding revenues or cost savings to fund  increases in wages or benefits.
For transformation to be successful, it is vital for USPS and its unions to  share a common vision for the future and a mutual responsibility for  finding solutions to USPS’s financial and workforce problems. USPS’s  transformation process can provide an opportunity for postal labor and  management to move beyond past problems and redefine a future in which  they can mutually address the financial and workforce challenges of  transforming USPS.
section_title: Process of Achieving Postal Transformation
paragraphs: Strong and proactive leadership by USPS’s Board of Governors and its  executives will be essential to transforming this organization so it can fulfill  its mission and remain financially viable. As a first step, USPS’s leaders  need to provide a vision of USPS’s future in its transformation plan and  actively engage with its employees and the divided community of postal  stakeholders to achieve the necessary consensus to move forward.  In  addition, it is urgent for USPS to take aggressive action to address its  financial situation. In the short term, one possibility would be to determine  what rate increases would be needed to generate sufficient revenue to  cover costs, address unmet capital needs, and reduce debt. Further, USPS  should aggressively continue efforts to cut costs and improve productivity  in the short term as well as identify more comprehensive efforts that would  be part of its structural transformation. In the end, congressional action  will be required for a successful postal transformation.
The process of transformation should include these three steps: 1. Determine what can be accomplished within current law and what the  constraints are to making progress. 2. Determine what interim legislative changes may be needed  immediately to deal with USPS’s financial problems, and whether these  interim changes are compatible with desired long-term changes.  3. Determine what comprehensive changes are needed and work with  Congress and postal stakeholders to enact these changes into law.
To implement these steps, sustained and aggressive leadership is needed to  overcome the organization’s natural resistance to change. USPS’s Board of  Governors, its managers, leaders of employee unions and management  associations, and customers have the opportunity to work together for  change. USPS strategies for change need to be aligned with USPS’s mission  and role; support its financial viability; and deal with key areas, such as  productivity, infrastructure, performance management and workforce  issues, and employee support. Active communication throughout the  organization and with Congress, stakeholders, and the public is essential to  inform and educate people about the need for change, potential benefits for  those involved, and how their interests will be protected.  Involving  employees in developing and implementing these steps toward  transformation could foster their acceptance and instill a sense of  ownership in the new organization.
In addition, key public policy, structural, and financial issues need to be  resolved. Over the past 7 years, Congress has held numerous hearings on  postal reform issues and considered numerous proposals for changing the  nation’s postal laws, but none of the proposed bills have been enacted.  To  date, a consensus on legislative action has been difficult to achieve among  the divided stakeholder community. Further, although comprehensive  postal reform proposals have been offered that address many of the key  public policy, structural, and financial issues we have discussed in this  report, these proposals did not fully address legal requirements and  practical constraints in the areas of USPS’s infrastructure and workforce.  Congress needs to reassess USPS’s legal framework and take the necessary  action to change the nation’s postal laws in order for USPS to be financially  viable in the 21st century.
One of the areas where consensus has been difficult to achieve relates to  the issue of how much and what type of infrastructure USPS needs to get  the job done. Recognizing the difficulty and sensitivity of addressing this  issue, particularly when it involves closing and consolidating postal  facilities, Congress could establish a process similar to that used for  closing military bases. Under this process, Congress could affirm a  proposed package of closures and consolidations with an up-or-down vote.  Such a process could be analogous to the military base-closure process that  has been used in the past. Military base-closing legislation enacted in 1988  and 1990, including the Defense Base Closure and Realignment Act of 1990  (P.L. 101-510), was enacted to overcome public concern about the  economic effects of closures on communities and the perceived lack of  impartiality of the decision-making process. This legislation provided the  basis for four rounds of base realignments and closures between 1988 and  1995, the closure of 97 out of 495 major domestic military installations,  many smaller base closings, and the realignment of other facilities.
section_title: USPS’s Response to Our Past Recommendations
paragraphs: Transparency, along with accurate and timely financial reports, is vital to  ensure public confidence. In April 2001, we recommended that USPS  develop a transformation plan and institute quarterly financial reporting to  improve transparency. USPS agreed with these recommendations and is  working to implement them.
subsections: section_title: USPS Transformation Plan
paragraphs: In response to our recommendation that USPS develop a transformation  plan, last fall USPS published a draft outline of its forthcoming  transformation plan; called for public comments in the Federal Register;  and is working to finalize this plan by March 31, 2002.   Given the urgency  of USPS’s financial situation and the lengthy time it will take to implement  fundamental structural changes, the stakeholder community is looking to  USPS for leadership in presenting its vision for the future in its  transformation plan. At this juncture, USPS’s Board of Governors and  postal management have the opportunity to make the case for a  comprehensive transformation in USPS’s forthcoming transformation plan  as well as by other means, and to provide a vision for its future, followed by  options and strategies for change. USPS also could suggest ways to achieve  the necessary consensus for change among Congress, stakeholders, and  the public.
section_title: Quarterly Financial Reporting and Transparency
paragraphs: During fiscal year 2001, USPS made numerous revisions to its financial  outlook for the fiscal year with little or no public explanation, creating  confusion and raising concerns about its ability to generate timely and  reliable financial information. It was unclear to many stakeholders why  USPS’s financial outlook changed from a $480 million deficit in its fiscal  year 2001 budget approved in November 2000 to a projected $2 billion to $3  billion deficit in February 2001. We reported that greater transparency is  needed regarding USPS’s financial and operating results and projections.  To this end, we recommended that USPS implement quarterly financial  reporting; and in response, USPS published on its Web site a quarterly  financial report for the third quarter of fiscal year 2001. This report was a  good starting point for providing information to Congress and the public,  and we expect it to improve over time. However, opportunities for  improving the timeliness and accessibility of USPS financial data remain.
Although USPS issued its annual financial statement for fiscal year 2001  in December 2001, as of mid-February 2002, USPS had not published  quarterly financial reports for the fourth quarter of fiscal year 2001 or  the first quarter of fiscal year 2002.
From October 2001 to mid-January 2002, USPS had not publicly released  its financial and operating statements for the last accounting period of  fiscal year 2001 and the first three accounting periods of fiscal year 2002  until January 2002. These reports contain preliminary financial results  and other information such as workforce-related information. These  reports have not been available to the public on USPS’s Web site;  however, USPS’s Chief Financial Officer told us that he planned on  posting future accounting period reports to USPS’s Web site.
During the fall of 2001, when USPS experienced sharp declines in its mail  volumes and revenues and requested additional appropriations from  Congress, readily available and detailed information on USPS’s changing  financial situation was scarce. More timely availability of monthly and  quarterly reports, even if they contain preliminary data subject to revision,  would be useful to improve transparency for congressional oversight, the  stakeholder community, and the public.
section_title: Conclusions
paragraphs: USPS’s basic business model is not sustainable. USPS finances are  deteriorating as rates, costs, and debt spiral upward; and its liabilities  exceed its assets and are increasing.  USPS’s mail volume is starting to  decline, and much larger declines may be in the offing as mailers shift to  electronic and other delivery alternatives. Further, USPS has long-standing  and continuing difficulties with cutting costs and achieving and sustaining  productivity gains. USPS is working to make progress in these areas, but it  is limited by legal requirements and practical constraints.
Tinkering with the existing system will be insufficient to produce a  comprehensive transformation that will enable USPS to fulfill its mission in  the 21st century.  If structural issues are not addressed, we believe a crisis  will develop to the point when options for action will be more limited and  costly. As the incidents of anthrax in the mail indicated, disruptions in mail  delivery service can have far-reaching consequences for the government,  households, businesses, and the general economy.  On the positive side, a  window of opportunity is available for a comprehensive transformation.   For example, the wave of impending retirements could enable USPS to  restructure its infrastructure and workforce without large-scale layoffs.
Some progress is possible within the current structure and is urgently  needed. For example, USPS can take additional actions to cut costs and  improve productivity under its existing authority and identify incremental  legislative changes that are needed to help address its financial situation.  However, a comprehensive postal transformation will be required to fully  address USPS’s financial viability and the statutory framework under which  USPS operates.  This framework includes USPS’s mission and role in the  21st century, the postal monopoly, the break-even mandate, the statutory  monopoly on letter mail, and the cost-of-service rate-setting process. In  addition, transformation efforts have been limited by legal requirements  and practical constraints relating to closing and consolidating postal  facilities and realigning the postal workforce.
Although various legislative postal reform proposals have been developed  over the last several years that address many key transformation issues,  they did not directly address such issues as USPS’s infrastructure and  workforce. Congress has not enacted any of these proposals, as consensus  among the stakeholders has been difficult to achieve. It is clear to us that  strong leadership from USPS will be necessary to help convince Congress  and postal stakeholders that change is needed. Further, USPS’s  forthcoming transformation plan could provide an opportunity for USPS to  explain to Congress and postal stakeholders the need for change, the  actions USPS plans to take under its existing authority, and the types of  legislative changes and support it believes are necessary to improve its  financial viability and achieve a successful transformation. In addition,  USPS can further improve the transparency of its financial information by  making it available in a more timely and user-friendly manner.
Congress has a number of options for how it could address postal reform  and transformation. It could use the traditional hearings process to discuss  the need for and types of changes necessary and enact incremental  legislative changes aimed at helping USPS deal with its financial situation.  It could also establish a mechanism similar to the military base-closure  process that has been used in the past to consider issues, such as closure or  consolidation of some postal facilities.  In addition, a commission could be  established that could prepare a proposal for addressing unresolved  transformation issues. Such issues could include USPS’s mission and role  and break-even mandate, the postal monopoly, public/private provision of  postal services, competition, USPS governance and accountability,  infrastructure, workforce, and debt.
section_title: Matter for Congressional Consideration
paragraphs: Regardless of the process Congress chooses to deal with postal reform, we  believe that USPS’s worsening financial situation and outlook intensify the  need for Congress to act on meaningful postal reform and transformation  legislation. Accordingly, we suggest that Congress consider and promptly  act on incremental legislative changes that could help USPS deal with its  financial situation soon after it receives USPS’s transformation plan. In  addition, comprehensive legislative changes will be needed to address key  unresolved transformation issues. Congress could consider how best to  address such issues, such as infrastructure and workforce issues that may  require input from a variety of stakeholders and will involve some shared  sacrifice. One option may be to create a commission to address the  unresolved issues and develop a comprehensive proposal for consideration  by Congress.
section_title: Recommendations for Executive Action
paragraphs: In view of the severity of USPS’s financial situation, we recommend that  USPS’s Board of Governors and the PMG provide proactive leadership for  transformation by informing Congress and the public of the need for  change in its transformation plan and by other means and by working with  Congress and stakeholders in developing and implementing strategies for  action.  These strategies should include (1) actions that USPS can take  within its current authority, (2) specific congressional actions that would  enable USPS to take a number of incremental steps to address its growing  financial and operational challenges, and (3) a process to address a range  of comprehensive legislative reforms that will be needed to address key  unresolved transformation issues. In addition, we recommend that USPS  improve the transparency of its financial data by providing monthly and  quarterly financial reports in a user-friendly format on its Web site in a  more timely manner.
section_title: Agency Comments and Our Evaluation
paragraphs: USPS provided comments on a draft of this report in a letter from the PMG  dated February 20, 2002. These comments are summarized below and  reproduced in appendix II. In commenting on a draft of our report, the PMG  stated that the Service realizes the challenges it faces and is fully  committed to meeting them. He said that USPS has begun work on a  comprehensive transformation plan, which is due to be completed by the  end of March 2002. Further, he agreed with our recommendations and  stated that USPS plans to inform Congress and the public of the need for  change in its transformation plan and by other means. In addition, he stated  that USPS intends to work with Congress and all stakeholders in  developing and implementing strategies for action. He also agreed with our  recommendation to improve the transparency of USPS’s financial data. He  said that USPS is already providing financial reports on its Web site in a  more timely and user-friendly fashion.
The PMG also commented that USPS has met the challenge of increasing  its productivity despite significant investments in improving the quality of  customer service, which its productivity measure gives it no credit for, and  engaging in significant worksharing programs that transfer prime  opportunities for productivity gains to the mailers. He also noted that USPS  continues to take issue with comparisons between USPS and  economywide productivity measures.
As we stated in our report, although USPS has made recent productivity  gains, it has had difficulty increasing and sustaining long-term productivity  growth.  In fiscal years 2000 and 2001, USPS’s productivity rose 3.6 percent,  but its productivity increased only 11.5 percent over the past 3 decades.   Further, postal productivity decreased 0.7 percent from fiscal years 1990 to  1999, despite billions of dollars invested in automation and information  technology over that period.  To achieve real savings and productivity  improvement, USPS would need to decrease unneeded capacity resulting  from efficiency gains and increase capacity only where such an increase is  needed.
In regard to USPS’s point that its productivity measure does not address  quality, we recognize that organizations should have a variety of measures  to gauge their performance, including quality, timeliness, customer  satisfaction, and cost and productivity; and that more than one measure  should be looked at when assessing USPS’s overall performance. This does  not, however, diminish the importance of measuring USPS’s productivity,  which USPS itself has used as a performance measure for many years and  as one of the factors that has been considered in its pay-for-performance  program for its executives, managers, and supervisors. Similarly, in our  view, the fact that USPS has engaged in worksharing programs does not  diminish the need for and importance of USPS’s progress in improving the  productivity of its operations. Finally, neither our draft nor final reports  compared USPS’s productivity with economywide productivity measures.  However, we note that USPS itself made such a comparison in its 1999 and  2000 annual reports. In these reports, USPS compared its Total Factor  Productivity with Multifactor Productivity—a productivity measure used  by the Bureau of Labor Statistics for the nonfarm business sector of the  economy.
As arranged with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this report. At that time, we will send copies of this report to the  chairman and ranking minority member of the House Committee on  Government Reform, chairmen and ranking minority members of the  House and Senate Committees on Appropriations, USPS’s postmaster  general/chief executive officer, USPS’s chief financial officer, the chairman  of the Postal Rate Commission, and other interested parties. We will also  make copies available to others on request.
Staff acknowledgments are included in appendix III. If you have any  questions about this report, please contact me on (202) 512-8387 or at  ungarb@gao.gov.
section_title: Fiscal Year 2001 Results
paragraphs: The U.S. Postal Service’s (USPS) net loss of $1.68 billion in fiscal year 2001  marked its 6th consecutive year of declining net income and its 2nd  consecutive year of losses.  USPS’s financial outlook changed repeatedly  during fiscal year 2001—from a $480 million deficit in its budget approved  in November 2000 to a $2 billion to $3 billion deficit in February 2001—to  successively lower estimates near the end of the fiscal year.  According to  USPS officials, a number of factors listed below contributed to a deficit  larger than what was included in USPS’s originally approved budget (see  table 6). However, these factors were partially offset by costs that were  lower than budgeted by USPS, partly due to work-hour reductions and  cost-saving initiatives later in the year.
A slowing economy resulted in lower than budgeted volumes and  revenues.
Some postal rate increases were implemented later than expected,  resulting in less revenues than budgeted by USPS.
The diversion of First-Class Mail and, to a lesser extent, Standard Mail  (primarily advertising), to electronic communications and payment  alternatives depressed mail volume.
Mail volume and revenue declined following the September terrorist  attacks.
New products and services did not generate expected revenues,  particularly in the area of electronic commerce. (USPS budgeted $104  million for e-commerce revenues, but actual e-commerce revenues were  about $2 million.)
Expenses increased at twice the rate of revenues (4.2 percent v. 2.0  percent).
Figures 7 through 9 illustrate USPS’s net income, revenue, and mail  volumes for fiscal year 2001.
Table 7 shows trends in key financial indicators for a 30-year period as  reported by USPS, such as net income (loss), appropriations for public  service costs and other operations, outstanding debt, accumulated deficits,  capital cash outlays, and retirement-related costs.
section_title: Comments from the U.S. Postal Service
section_title: GAO Contacts and Staff Acknowledgments
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section_title: Acknowledgments
paragraphs: Teresa L. Anderson, Hazel J. Bailey, Gerald P. Barnes, Joshua M. Bartzen,  Alan N. Belkin, Christopher J. Booms, William J. Doherty, Frederick T.  Evans, Michael J.  Fischetti, Jeanette M. Franzel, Kenneth E. John, Robert  P. Lilly, Roger L. Lively, Leah Q. Nash, John D. Sawyer, Jill P. Sayre, and  Charles F. Wicker made key contributions to this report.
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section_title: Public Affairs