U.S. Postal Service
Bold Action Needed to Continue Progress on Postal Transformation
Gao ID: GAO-04-108T November 5, 2003
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.
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 The Service has an outdated and inflexible business model amid a rapidly changing postal landscape.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.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-04-108T, U.S. Postal Service: Bold Action Needed to Continue Progress on Postal Transformation
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Testimony:
Before the Senate Committee on Governmental Affairs:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EST:
Wednesday, November 5, 2003:
U.S. POSTAL SERVICE:
Bold Action Needed to Continue Progress on Postal Transformation:
Statement of David M. Walker, Comptroller General of the United States:
GAO-04-108T:
GAO Highlights:
Highlights of GAO-04-108T, a testimony before the Senate Committee on
Governmental Affairs
Why GAO Did This Study:
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.
What GAO Found:
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.
What GAO Recommends:
GAO believes that Congress should consider the Commission‘s
recommendations and enact comprehensive postal reform legislation that
would clarify the Service‘s mission and role; enhance governance,
accountability, oversight, and transparency; improve regulation of
postal rates; and make human capital reforms.
GAO also recommends that the Postmaster General develop a
comprehensive plan to optimize its infrastructure and workforce, in
collaboration with its key stakeholders, and make it publicly
available. In addition, the Postmaster General should provide periodic
updates 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.
www.gao.gov/cgi-bin/getrpt?GAO-04-108T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Bernard L. Unger at
(202) 512-2834 or ungerb@gao.gov
[End of section]
Chairman Collins and Members of the Committee:
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).[Footnote 1] 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.[Footnote 2]
Summary:
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 to a
more high-performing, results-oriented, transparent, and accountable
organization. The Commission found that the Postal Service's current
business model has not produced the desired results because it has led
to poor financial results, difficulty in funding capital needs, lack of
incentives for good financial performance, and lack of efficiency. The
Commission offered constructive suggestions, some of which require
legislative change, and some that can be implemented under the existing
statutory framework.
The Commission's recommendations echo many of our prior reports and
address concerns that we have previously raised. We agree with the
Commission that an incremental approach to Postal Service reform will
yield too little too late given the enterprise's bleak fiscal outlook,
the magnitude of its financial obligations, the likelihood of declining
First-Class Mail volumes, and the limited potential of the Service's
legacy postal network. All options for statutory and discretionary
change need to be on the table for discussion, including the
Commission's findings and recommendations, as well as suggestions from
GAO and other stakeholders. Some of the Commission's recommendations,
such as those related to rate setting, oversight, and collective
bargaining, involve complex and controversial issues that may require
further consideration and refinement. Nevertheless, the time has come
for Congress to enact comprehensive postal reform legislation that
would clarify the Service's mission and role; enhance governance,
accountability, oversight, and transparency; improve regulation of
postal rates; and make human capital reforms.
In addition to statutory reform, we agree with the Commission that the
Service has many opportunities to become more efficient, notably by
standardizing its operations and reducing excess capacity in its
network. This vision is achievable if approached in a comprehensive,
integrated fashion, and supported by postal stakeholders. The impending
retirement of much of the Service's workforce provides an opportunity
to rightsize the organization with minimal disruption. However, the
Service has not provided adequate transparency on its plans to
rationalize its infrastructure and workforce, as well as on the status
of initiatives included in its Transformation Plan. More constructive
engagement on its efforts to rationalize its infrastructure and
workforce is needed with the Service's employee organizations, the
mailing industry, affected communities, and Congress. To facilitate the
Service's progress in implementing actions under the existing system,
we recommend that the Postmaster General develop a comprehensive and
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 updates 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. In discussing our recommendations with postal officials,
they agreed to take these actions.
We also share the Commission's concerns about the Service's funding of
its $92 billion in liabilities and obligations, which include about $48
billion in unfunded retiree health benefits, about $6.5 billion for
unfunded workers' compensation benefits, and about $5.8 billion for
unfunded Civil Service Retirement System (CSRS) pension obligations.
Although recent legislation has addressed how the Service will cover
its CSRS pension obligations over 40 years, the Service continues to
make minimum payments for the other obligations, which are currently
financed on a pay-as-you go basis. Based on known demographic trends,
the Service's share of its retirees' health insurance premiums is
expected to continue rising until about 2040. Under the Service's
existing accounting and rate-setting methods, more significant and
frequent rate hikes are likely to be needed for future ratepayers to
cover the costs of benefits that are being earned by current employees.
We recognize that building accrual-based measures of retiree health
costs into the current rate base may be difficult considering the
pressure to defer rate increases. However, in our view, it would be
more prudent to address the unfunded obligations in a manner that is
fair and balanced for both current and future ratepayers. The Postal
Service has provided Congress with proposals for funding retiree health
benefit obligations, which we will address in our forthcoming report in
this area.
The Commission's Report Made Valuable Contributions:
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.
The Need for Comprehensive Postal Reform Legislation:
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.[Footnote 3]
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).
Figure 1: First-Class Mail Volume Growth, Fiscal Years 1984 through
2004:
[See PDF for image]
[End of figure]
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.[Footnote 4]
Figure 2: Percent of U.S. Households with Computers and Internet
Connections:
[See PDF for image]
Note: Data was reported for 1984, 1989, 1993, 1997, 1998, 2000, and
2001.
[End of figure]
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.[Footnote 5] 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.
Postal Service Mission and Role Need Clarification:
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.[Footnote 6] 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.[Footnote 7] 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.[Footnote 8] 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?
Protecting the Public Interest through Enhanced Transparency,
Accountability and Public Policy Oversight:
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.[Footnote 9]
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.
Governance Structure:
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.[Footnote 10] 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?[Footnote 11]
* We believe that these concerns merit careful consideration, as well
as other concerns on which we have previously reported.[Footnote 12] 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.
Accountability Mechanisms:
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.[Footnote 13] 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?
Enhancing Transparency of Financial and Performance Information:
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,[Footnote 14] 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." [Emphasis in original.] 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.[Footnote 15] 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.[Footnote
16] 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).[Footnote 17] 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[Footnote 18] 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.
Rate-setting Structure:
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.[Footnote 19] 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.[Footnote 20] 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.[Footnote 21]
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.
Rate-Setting Oversight:
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?
The Need for Progress on Rate-Setting Issues under the Current
Structure:
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.
Human Capital Issues:
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.[Footnote 22]
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.
Achieving Effective Labor-Management Relations Will Be Fundamental to
Making Progress:
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. [Footnote 23] 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.
Reducing Grievances:
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.
Difficulty Negotiating Labor Contracts:
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.
Difficulty Controlling Workforce Costs:
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.
Unresolved Pay Comparability Issues:
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.[Footnote 24] 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).
Addressing Retiree Benefits Obligations:
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.[Footnote 25] 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?
Reforming Workers' Compensation:
Another benefit area where costs have been difficult to control is the
Service's workers' compensation benefits.[Footnote 26] 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.
Inadequate Performance Incentives:
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.[Footnote 27] 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.[Footnote 28] 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.[Footnote 29] 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?
The Postal Service Needs to Maximize Progress within Its Current
Legislative Structure:
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.
Factors That Hinder Economy and Efficiency in the Postal Network:
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.
Difficulties in Optimizing the Postal Retail Network:
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?
Difficulties in Optimizing the Postal Processing and Distribution
Network:
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.
Figure 3: Productivity of Mail Processing Plants, by Facility Size, in
Fiscal Year 2001:
[See PDF for image]
[End of figure]
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.
Figure 4: Location of Postal Service Mail Processing Facilities:
[See PDF for image]
[End of figure]
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.[Footnote 30] 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.
No Public Plan and Limited Stakeholder Engagement on Network
Rationalization Strategy:
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.
Identify Funding Needs and Strategies:
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.
Opportunities to Strengthen Information Technology Investment
Management:
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.[Footnote 31]
Data Issues Related to Achieving Greater Efficiency:
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 month, 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.
Conclusion:
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.
Matter for Congressional Consideration:
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.
Recommendation for Executive Action:
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.
Contact and Acknowledgments:
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.
FOOTNOTES
[1] President's Commission on the United States Postal Service,
Embracing the Future: Making the Tough Choices to Preserve Universal
Mail Service, (Washington, D.C.: July 31, 2003).
[2] See U.S. General Accounting Office, U.S. Postal Service: Key Postal
Transformation Issues, GAO-03-812T (Washington, D.C.: May 29, 2003);
Major Management Challenges and Program Risks: U.S. Postal Service,
GAO-03-118 (Washington, D.C.: Jan. 2003); and U.S. Postal Service:
Deteriorating Financial Outlook Increases Need for Transformation,
GAO-02-355 (Washington, D.C.: Feb. 28, 2002).
[3] GAO-03-812T; GAO-02-355; U.S. General Accounting Office, U.S.
Postal Service: Moving Forward on Financial and Transformation
Challenges, GAO-02-694T (Washington, D.C.: May 13, 2002); U.S. Postal
Service: Financial Outlook and Transformation Challenges, GAO-01-733T
(Washington, D.C.: May 15, 2001); and U.S. Postal Service:
Transformation Challenges Present Significant Risks, GAO-01-598T
(Washington, D.C.: Apr. 4, 2001).
[4] Institute for the Future, Two Scenarios of Future Mail Volumes:
2003-2017, prepared for the President's Commission on the United States
Postal Service (Palo Alto, CA: May 2003).
[5] The Service proposes domestic postage rates and fees, as required
in law, so that each class of mail or type of service must cover the
direct and indirect postal costs that are attributable to that class or
type of service plus a portion of its other remaining "institutional
costs" which include all "common" or "overhead" costs. The requirement
that each class of mail must cover its attributable costs has long been
interpreted to apply to groupings of mail within classes that are
called subclasses.
[6] U.S. General Accounting Office, U.S. Postal Service: Update on E-
Commerce Activities and Privacy Protections, GAO-02-79 (Washington,
D.C.: Dec. 21, 2001); U.S. Postal Service: Postal Activities and Laws
Related to Electronic Commerce, GAO/GGD-00-188 (Washington, D.C.: Sept.
7, 2000), U.S. Postal Service: Development and Inventory of New
Products, GAO/GGD-99-15 (Washington, D.C.: Nov. 24, 1998).
[7] For information on the Service's monopoly on mailbox access, see
U.S. General Accounting Office, U.S. Postal Service: Information About
Restrictions on Mailbox Access, GAO/GGD-97-85 (Washington, D.C.: May
30, 1997).
[8] The Service has used its regulatory power to redefine the scope of
the statutory monopoly by suspending the monopoly for urgent letters
and outbound international mail. The Service has also defined the scope
of its monopoly by issuing regulations that define a "letter" for the
purposes of enforcing the statute (39 CFR 310.1(a)) as well as
regulations specifying access to mailboxes (Domestic Mail Manual, D041
and P011.2.2).
[9] The Commission cited GAO-03-118; GAO-02-694T; GAO-02-355;
GAO-01-733T; GAO-01-598T; U.S. General Accounting Office, U.S. Postal
Service Actions to Improve Its Financial Reporting, GAO-03-26R
(Washington, D.C.: Nov. 13, 2002); and U.S. Postal Service:
Enhancements Needed in Performance Planning and Reporting, GAO-00-207
(Washington, D.C.: Sept. 19, 2000).
[10] GAO-03-812T.
[11] In Silver v. U.S. Postal Service, 951 F.2d 1033 (9th Cir. 1991),
the Court held that the Postal Service, as an independent establishment
of the executive branch, is subject to the Appointments Clause. The
Court further held that the postal governors were the head of the
Postal Service, and thus, were required to be appointed by the
President and confirmed by the Senate.
[12] U.S. General Accounting Office, U.S. Postal Service: Issues
Related to Governance of the Postal Service, GAO/GGD-97-141
(Washington, D.C.: Aug. 14, 1997).
[13] GAO-03-812T.
[14] GAO-02-355.
[15] GAO-01-598T.
[16] GAO-03-26R.
[17] GAO/GGD-00-207.
[18] First-Class Mail measurement is further limited to collection
boxes located in 463 ZIP Codes from which most First-Class Mail volume
originates and to which it is destined.
[19] GAO-03-812T.
[20] A.T. Kearney, Data Quality Study (Alexandria, Va.: Apr. 16, 1999).
[21] See documents filed under PRC Rulemaking Docket No. RM2003-5,
available at www.prc.gov.
[22] U.S. General Accounting Office, Results-Oriented Cultures:
Implementation Steps to Assist Mergers and Organizational
Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003).
[23] The National Academy of Public Administration, Evaluation of the
United States Postal Service, (Washington, D.C.: July 1, 1982); U.S.
General Accounting Office, Labor-Management Problems Persist on the
Workroom Floor, GAO-GGD-94-201A/B, (Washington, D.C.: Sept. 29, 1994);
U.S. General Accounting Office, Little Progress Made in Addressing
Persistent Labor-Management Relations Problems, GAO/GGD-98-1
(Washington, D.C.: Oct. 1, 1997); United States Postal Commission On a
Safe and Secure Workplace, Report of the United States Postal
Commission On A Safe and Secure Workplace (Washington, D.C.: Aug. 31,
2000); U.S. General Accounting Office, Major Performance and
Accountability Challenges, GAO-03-118 (Washington, D.C.: Jan. 2003).
[24] GAO-03-812T.
[25] The Service has estimated that the additional rate increase impact
in fiscal year 2006, above any inflationary increase, would be 2.0
percent under its first proposal and 0.3 percent under its second
proposal.
[26] U.S. General Accounting Office, Recent GAO Reports on the Federal
Employees' Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept.
30, 1997); Federal Employees' Compensation Act: Issues Associated With
Changing Benefits for Older Beneficiaries, GAO/GGD-96-138BR
(Washington, D.C.: Aug. 14, 1996).
[27] U.S. General Accounting Office, Results-Oriented Cultures: Using
Balanced Expectations to Manage Senior Performance, GAO-02-966
(Washington, D.C.: Sept. 27, 2002).
[28] U.S. General Accounting Office, Results-Oriented Cultures: Modern
Performance Management Systems Are Needed to Effectively Support Pay
for Performance, GAO-03-612T (Washington, D.C.: Apr. 1, 2003).
[29] U.S. General Accounting Office, Human Capital: Building on the
Current Momentum to Address High-Risk Issues, GAO-03-637T (Washington,
D.C.: Apr. 8, 2003).
[30] GAO-03-812T.
[31] U.S. General Accounting Office, United States Postal Service:
Opportunities to Strengthen IT Investment Management Capabilities,
GAO-03-3 (Washington, D.C.: Oct. 15, 2002).