U.S. Postal Service
Key Postal Transformation Issues Gao ID: GAO-03-812T May 29, 2003The President established this Commission to examine the state of the U.S. Postal Service (the Service) and submit a report by July 31, 2003, with a proposed future vision for the Service and recommendations to ensure the viability of postal services. GAO has provided congressional committees with many reports and testimonies on postal matters, and this testimony is based largely on these prior reports and testimonies. In April 2001, GAO put the Service's long-term financial outlook and transformation on its High-Risk List for several reasons. The Service was experiencing significant deficits, severe cash-flow pressures, rising debt, cost growth outpacing revenue increases, limited productivity gains, and liabilities in excess of assets. Under its 1970s-era business model, the Service was relying on raising rates and incrementally reducing costs to carry out its mission. GAO concluded that this business model was not sustainable in today's competitive environment. The Commission's report will be an important guide for comprehensive postal transformation. In this testimony, GAO presents key issues the Commission should consider to enhance the long-term financial viability of the Service by making it a more results-oriented and efficient organization.
The ability of the Service to remain financially viable is at risk because growth in mail volume has stagnated and its business model is not well suited to operate efficiently in a competitive environment. Growth in the volume of First-Class and Standard Mail, the two largest revenue-producing classes, has declined. There are several key issues for the Commission to consider. Role and Mission: Over the past 30 years, competition has increased and private-sector firms are performing more traditional postal functions. Customers' needs have also changed with new communication alternatives. In determining what universal postal services are needed and the roles for public and private providers, factors to consider are how to enhance customer convenience and create opportunities for least-cost providers. Governance Structure and Accountability Mechanisms: Qualification requirements for members of the governing board should ensure that appointees possess the experience needed to oversee a large business-like operation, and the board should have sufficient authority in areas such as setting rates and executive pay. Reporting requirements should ensure accountability and transparency of financial and organizational results. Flexibilities and Incentives to Increase Revenue and Control Costs: The Service will need appropriate flexibilities and incentives to balance its revenue generation and cost containment capabilities in areas such as allowing retained earnings, closing unneeded post offices, and containing costs related to infrastructure rationalization, workforce realignment, and wage and benefit comparability. Also, the Service's long-term retiree health and workers' compensation obligations need to be addressed. Effective Labor-Management Relations and Support Systems: To improve operational efficiency and enhance performance accountability for all employees, postal managers and unions need better cooperation to realign the workforce for the future and focus performance management and workforce planning systems on organizational goals and results.
GAO-03-812T, U.S. Postal Service: Key Postal Transformation Issues
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Testimony:
Before the President's Commission on the United States Postal Service:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 8:30 a.m. EDT:
Thursday, May 29, 2003:
U.S. POSTAL SERVICE:
Key Postal Transformation Issues:
Statement of David M. Walker
Comptroller General of the United States:
GAO-03-812T:
GAO Highlights:
Highlights of GAO-03-812T, a testimony before the President‘s
Commission on the United States Postal Service
Why GAO Did This Study:
The President established this Commission to examine the state of the
U.S. Postal Service (the Service) and submit a report by July 31,
2003, with a proposed future vision for the Service and
recommendations to ensure the viability of postal services. GAO has
provided congressional committees with many reports and testimonies on
postal matters, and this testimony is based largely on these prior
reports and testimonies.
In April 2001, GAO put the Service‘s long-term financial outlook and
transformation on its High-Risk List for several reasons. The Service
was experiencing
* significant deficits,
* severe cash-flow pressures,
* rising debt,
* cost growth outpacing revenue increases,
* limited productivity gains, and
* liabilities in excess of assets.
Under its 1970s-era business model, the Service was relying on raising
rates and incrementally reducing costs to carry out its mission. GAO
concluded that this business model was not sustainable in today‘s
competitive environment.
The Commission‘s report will be an important guide for comprehensive
postal transformation. In this testimony, GAO presents key issues the
Commission should consider to enhance the long-term financial
viability of the Service by making it a more results-oriented and
efficient organization.
What GAO Found:
The ability of the Service to remain financially viable is at risk
because growth in mail volume has stagnated and its business model is
not well suited to operate efficiently in a competitive environment.
As the figure shows, growth in the volume of First-Class and Standard
Mail, the two largest revenue-producing classes, has declined.
Key issues for the Commission to consider include the following:
Role and Mission. Over the past 30 years, competition has increased
and private-sector firms are performing more traditional postal
functions. Customers‘ needs have also changed with new communication
alternatives. In determining what universal postal services are needed
and the roles for public and private providers, factors to consider
are how to enhance customer convenience and create opportunities for
least-cost providers.
Governance Structure and Accountability Mechanisms.
Qualification
requirements for members of the governing board should ensure that
appointees possess the experience needed to oversee a large business-
like operation, and the board should have sufficient authority in
areas such as setting rates and executive pay. Reporting requirements
should ensure accountability and transparency of financial and
organizational results.
Flexibilities and Incentives to Increase Revenue and Control Costs.
The Service will need appropriate flexibilities and incentives to
balance its revenue generation and cost containment capabilities in
areas such as allowing retained earnings, closing unneeded post
offices, and containing costs related to infrastructure
rationalization, workforce realignment, and wage and benefit
comparability. Also, the Service‘s long-term retiree health and
workers‘ compensation obligations need to be addressed.
Effective Labor-Management Relations and Support Systems. To improve
operational efficiency and enhance performance accountability for all
employees, postal managers and unions need better cooperation to
realign the workforce for the future and focus performance management
and workforce planning systems on organizational goals and results.
www.gao.gov/cgi-bin/getrpt?GAO-03-812T.
To view the full product, click on the link above. For more
information, contact Bernie Ungar, 202-512-2834, ungarb@gao.gov.
[End of section]
Messrs. Chairmen and Commission Members:
I am pleased to have this opportunity to appear before you to present
our views on the transformation of the U.S. Postal Service (the
Service). GAO has been involved in reviewing postal issues on behalf of
Congress for decades and has issued many reports and testified numerous
times before congressional committees on postal matters. My testimony
today is based largely on these prior reports and testimonies. (See the
section called Related GAO Products at the end of this statement.):
As you know, in April 2001, we put the Postal Service's long-term
financial outlook and transformation efforts on our High-Risk List. We
did this for several reasons. The Postal Service was experiencing
growing financial, operational, and human capital challenges, including
declining net income, severe cash-flow pressures and rising debt,
increasing competition, and difficulty cutting costs and achieving
productivity gains. These challenges were threatening the Service's
ability to carry out its mission of providing affordable, high-quality
universal postal services on a self-financing basis. Given advances in
communications, such as electronic communication devices and the
Internet, increasing domestic and foreign competition, changes in the
growth of mail volume, and the need to serve more and more addresses
yearly, we were concerned that the Postal Service would have difficulty
in effectively carrying out its mission in the future. We were also
concerned because the Service did not have a comprehensive
transformation plan to guide it in the future, and because the
significant shift in the Service's financial outlook came as a surprise
to many key stakeholders. In fall of 2001, the Service's financial
situation became even more complex and critical due to the events of
September 11th and the subsequent use of the mail to transmit anthrax.
Consequently, we called for a number of actions to address our concerns
about the Postal Service's financial situation and long-term outlook.
We recommended that the Postal Service develop and implement a
comprehensive transformation plan that would lay out actions it could
take under existing law, actions that would require incremental
legislative action to help address the Service's more immediate
financial difficulties, and comprehensive legislative action to address
key unresolved transformation issues. We also suggested that Congress
consider various approaches to addressing long-standing and difficult-
to-resolve issues affecting the Postal Service's financial situation,
such as by establishing a commission to study the issues and make
recommendations.
We are pleased that the President established a Commission to examine
the state of the Postal Service and submit a report to the President by
July 31, 2003, that would propose a vision for the future of the
Service and recommendations to ensure the viability of postal services.
We have previously provided this Commission with a number of GAO
reports, testimonies, and other information related to the Postal
Service and offer our assistance to the Commission as it completes its
work. We look forward to the Commission's report and believe it will be
an important guide for Congress as it considers comprehensive postal
transformation. In this testimony, I will discuss four key issues the
Commission should consider to address deficiencies in the Service's
business model and enhance the Service's long-term financial viability
by making it a more results-oriented, efficient organization. These
areas include the Service's (1) role and mission, (2) governance
structure and accountability mechanisms, (3) flexibilities and
incentives to increase revenue and control costs, and (4) effective
labor-management relations and support systems to improve
organizational efficiency.
Short-Term Financial Pressures Have Been Alleviated but Fundamental
Issues Remain:
The Service has responded to a number of our concerns and taken actions
to address its short-term financial challenges. In April 2002, the
Service published its Transformation Plan and has begun to implement
it. The Service has also taken actions to control costs by reducing the
size of its work force and labor hours usage and by improving
productivity. In fiscal year 2002, the Service reported that, for the
first time in over 30 years, its operating expenses were reduced below
those of the previous year. Furthermore, in large part based on an
Office of Personnel Management (OPM) study undertaken at the request of
GAO, legislation was passed in April 2003 that enabled the Postal
Service to reduce its pension cost by about $3 billion per year over
the next few years.
These incremental steps, although useful, cannot resolve the
fundamental and systemic issues associated with the Service's current
business model. The Postal Reorganization Act of 1970 (P.L. 91-375)
provided the legal framework for the Service's current business model.
In passing the Act, Congress intended the Service to operate in a
business-like manner. However, in contrast, the Act also included such
provisions as monopoly protections on letter mail and access to
mailboxes, a mandate to break even financially over time, and a rate-
setting process that is based on specific cost-coverage requirements--
often referred to as "cost-of-service regulation." Furthermore, the Act
generally did not envision the extent to which the Postal Service would
be directly competing with private-sector companies. As such, the
Service's current business model, which relies on increasing mail
volumes to finance universally available postal services through an
expanding delivery network, is outmoded in today's rapidly changing and
increasingly competitive business environment.
Today, businesses and consumers have many more communications and
delivery choices than they did 30 years ago. New types of electronic
communication devices include E-mail, cell phones, fax machines, and
electronic bill payment services. There is also greater competition in
the mail and package delivery markets. These market changes have been
driven by the need for more time-sensitive movement of products and
services, as well as the ability to track products and services
throughout the delivery process from origin to destination.
These changes in the postal marketplace have highlighted the following
fundamental issues with the Service's business model:
* The Service's ability to remain financially viable under its current
business model is at risk as the growth in mail volumes has stagnated
or declined, leading to less revenue unless rates are increased.
Further, it has been estimated that about 45 percent of the Service's
mail delivery routes do not generate adequate revenue to cover their
costs.
* The Service does not have the flexibilities or incentives necessary
to operate efficiently in a highly competitive environment. This is
particularly important because the Service has historically not been
able to significantly control and/or reduce costs in its two major cost
areas: employee-related costs, which continue to account for over
three-quarters of the Service's total operating expenses, and overall
infrastructure costs for the Service's retail and processing networks.
* Long-standing adversarial relationships between postal managers and
labor unions have hindered efforts to increase efficiency and create a
more results-oriented culture that would help achieve long-term
financial viability for the Service, along with a fair and positive
work environment for employees.
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 Postal
Service's short-term financial relief provides a limited window of
opportunity to bring about this fundamental change. The time has come
to take bold and comprehensive action designed to transform the Postal
Service to meet the challenges and new realities of the 21st century.
This will involve actions by both the executive and legislative
branches of government as well as a variety of other postal
stakeholders.
Today, I will direct my comments to the following four areas that will
be critical to addressing problems with the Service's current business
model and ensuring its future financial viability: (1) role and
mission, (2) governance structure and accountability mechanisms, (3)
flexibility and incentives to increase revenues and control costs, and
(4) the link between labor-management relations and improving
operational efficiency.
Role and Mission:
Over the years, postal stakeholders have raised numerous issues
regarding the Service's role and mission relative to the private
sector. Among these issues are the following:
* How should universal postal service be defined given past changes and
future challenges?
* Should the Service remain a government entity or should it be wholly
or partially privatized?
* Is a government monopoly needed to provide universal postal services?
Should the Postal Service's monopoly protections be reduced or
eliminated, and if so, how should a minimal service level be ensured?
* Should the Service retain its governmental functions, including
regulatory responsibilities related to protecting the mail monopoly and
the integrity of the mail, as well as its law enforcement functions
related to mail fraud, security, and theft?
* To what extent should the Postal Service, the mailing industry, and
other private-sector companies perform various postal functions, such
as collection, processing, transportation, and retail services? Should
additional worksharing be encouraged, and how should long-standing cost
issues be resolved?
* Should the Service be allowed to compete in areas where there are
private-sector providers? If so, on what terms, and what transparency
and accountability mechanisms are needed to prevent cross subsidies
between competitive and monopoly products and services?
Universal Postal Service:
The Postal Service's current mission is to provide access to universal
postal services in all communities at reasonable rates. Universal
postal service is not defined in law, but the Service's interpretation
of this responsibility has evolved throughout its history to
accommodate changing customer demands. Currently, universal postal
service includes a uniform rate for one category of mail, 6-day per
week mail delivery, and access to postal retail services. Vast changes
in communications and delivery options, as well as the growth of the
related competitive environment, over the past 30 years are continuing
at a rapid pace. These changes provide an impetus for reconsidering
what universal postal service will be needed for the 21st century. Such
considerations should include recognition of different needs for
different customer segments. As the mail stream has evolved away from
personal correspondence and towards more advertising mail, the need for
uniform rates and service may be changing. In addition, access to
postal services involves many more options today, such as vending
machines, ATMs, and grocery stores, which could reduce reliance upon
traditional post offices and improve service.
Postal, Government, and Private-sector Functions:
Once the scope of universal postal service is addressed, the next
questions relate to whether core postal functions should be discharged
by a public entity, private companies, or a combination of both. The
current statutory framework provides the Service with a monopoly on
letter mail and access to mailboxes to fund universal postal service.
The Service generally carries out its mission by collecting,
transporting, processing, and delivering mail to addresses throughout
the United States and to foreign postal administrations for deliveries
to addresses outside this country. In addition to its retail services
and mail delivery roles, the Postal Service is also charged with
governmental functions for enforcing federal laws related to mail
fraud, security, and theft.
Since the 1970 reorganization, the Service's role has changed as it has
engaged the private sector in postal activities in several ways. For
example, the Service has (1) arranged for private entities, such as
grocery stores, to sell stamps; (2) increased its contracting with
private firms to transport mail; and (3) offered worksharing rates,
which include discounts to mailers to carry out certain mail processing
operations, such as presorting, barcoding, and transporting mail
directly to Postal Service facilities for delivery by the Service to
its customers. The purpose of these activities has been to increase
customer convenience, cut Postal Service operating costs, and create
the opportunity for the least-cost provider to perform certain postal
activities. For example, as shown in figure 1, mail volume growth since
fiscal year 1972 has been in workshared mail. In fiscal year 2002,
nearly three-quarters of the Postal Service's mail volume consisted of
mail that involved some aspect of worksharing.
Figure 1: Growth in Workshared Mail Volume Between Fiscal Years 1972
and 2002:
[See PDF for image]
Note: Workshared mail receives a lower rate due to such mailer
activities as presorting, bar coding, and destination entry. Most
Standard Mail and Periodicals volumes were counted as workshared
beginning in fiscal year 1971 because the Service required presorting
of this mail by Zip Code and such worksharing was recognized in its
postal rates. Worksharing rates for First-Class Mail were introduced in
fiscal year 1977.
[End of figure]
A number of issues have been raised related to whether the worksharing
rates accurately reflect the Service's estimated cost savings from
mailer worksharing activities. We are currently assessing these issues
and plan to issue a report later this year.
At the same time, the Service's involvement in what is often called
"nonpostal" or "nontraditional" areas has also been controversial.
These nonpostal activities refer to new products or services that
generate revenues and are not directly related to the Service's core
postal activities. Nonpostal activities are not subject to the same
regulatory scrutiny by the Postal Rate Commission (PRC) that postal
activities currently face. Some examples of nonpostal activities
include electronic billing and payment services, as well as electronic
greeting cards. As we discuss later, we have reported on the Service's
difficulties in meeting its performance goals related to nonpostal
activities and about controversies regarding the Service's involvement
in nonpostal activities that are also provided by private-sector
companies. Recently, the Service discontinued some of its nonpostal
activities, but it remains a valid question as to whether the Service
has the appropriate incentives, transparency and accountability
mechanisms, cost-structure, and marketing skills to succeed in
nonpostal-related areas.
Governance Structure and Accountability Mechanisms:
Key issues have been raised about whether the Service's current
governance structure and accountability mechanisms are sufficient for
an organization with annual revenues approaching $70 billion and over
850,000 employees. Some of the issues relate to the Board of Governors'
limited authority in areas such as setting postal rates and executive
pay; qualifications requirements that are too general to ensure that
Board appointees possess the kind of experience necessary to oversee a
major government business; and limited transparency and accountability
mechanisms for organizational performance and results. If the Service
is to successfully operate in a more competitive environment, the role
and structure of a private-sector Board of Directors may be a more
appropriate guide in this area.
Having a qualified and independent board is important to ensuring that
the board can play a significant role in the following three
areas:[Footnote 1]
* First, boards should provide strategic advice to management in order
to help comply with overall statutory requirements and realize
organization goals.
* Second, boards need to help manage risk, including risk related to
attempts to maximize current value at the expense of mortgaging the
future. Risk management must also consider the interests of key
stakeholder groups, such as employees, customers, and the communities
in which the organization operates.
* Third, boards have a clear responsibility to hold management
accountable for results.
The Service is not subject to the same level of transparency and
accountability mechanisms as other "business-like entities," such as
private-sector companies, that regularly report to shareholders and/or
regulators (e.g., the Securities and Exchange Commission). Some
important issues to consider include what regulatory structure and
oversight mechanisms may be needed, to whom the Service should be
accountable, and what appropriate mechanisms are needed for consumer
protection--particularly for those with few or no alternatives to the
mail system? Concerns have also been raised about the need to provide
accountability for performance, especially in areas where the Service
is provided with additional flexibility. As we have reported in the
past, many concerns have been raised about areas where the Service has
had flexibility, such as the international and new products areas, and
its financial performance has not met its stated goals and
objectives.[Footnote 2] Further, if the Service is allowed to compete,
should it be subject to the same laws and regulations as its
competitors? If the Service retains some monopoly protections while
also providing competitive products, steps will be needed to ensure
that products are not being cross-subsidized.
Another key question involves determining what level of transparency
through public reporting on the Service's financial and operating
performance, as well as its progress in implementing its
transformation, is appropriate. We have reported concerns about the
Service's public reporting in the following areas: retiree health
benefit obligations; periodic financial reporting; nonpostal new
products and services, including e-commerce initiatives; annual
performance reporting as required under the Government Performance and
Results Act (GPRA); and the status of implementing initiatives from its
Transformation Plan.[Footnote 3] Our concerns related to the Service's
reporting on its retiree health benefit obligations are discussed in
more detail later in this statement.
Regarding the Service's periodic financial reporting, we reported in
November 2002 on the lack of sufficient and timely periodic information
on the Service's financial condition and outlook available to the
public between publications of its audited year-end financial
statements.[Footnote 4] Since our report was issued, the Service has
taken steps to improve this information, including making its quarterly
financial reports available on its Web site. However, we continue to
have concerns about some of the Service's financial and performance
information, including information related to its e-commerce and other
nonpostal activities, as well as the lack of delivery performance
information for all of its major mail categories. In order to determine
whether further changes in financial reporting are needed, the
Commission should consider the SEC reporting requirements as a possible
guide in this area. In addition, other current reporting mechanisms,
such as the Service's annual performance reports required under GPRA,
could be adapted to communicate the Service's delivery performance for
all of its major mail categories, as well as update its progress on
implementing its Transformation Plan.
Flexibilities and Incentives to Increase Revenues and Control Costs:
The Service has limited financial incentives under its current business
model with its break-even mandate and cost-of-service rate-setting
structure. To enhance its long-term financial viability in a
competitive environment, the Service will need appropriate
flexibilities and incentives to balance its revenue generation and cost
containment capabilities. The Postal Service argues that it has
difficultly raising revenue under the lengthy rate-setting process,
which does not allow the Service to change its prices in a timely
manner to respond to changing economic conditions. The Service
indicated that it would like additional flexibility in connection with
retaining earnings, setting rates, and developing and promoting new
products and services. These flexibilities could enhance its revenue-
generating capability and help offset continued anticipated volume
declines. However, these flexibilities will need to be coupled with
reasonable transparency and appropriate accountability mechanisms to
prevent abuse.
The Service also does not have adequate flexibility to address its cost
structure, especially in the areas of infrastructure rationalization
and workforce realignment. Furthermore, cost issues related to
compensation and benefits, including its workers' compensation
obligations and its long-term retiree health obligations, need to be
addressed. The Commission will need to consider what flexibility and
incentives are appropriate to allow the Postal Service to make changes
in its revenue and cost structure to reflect changing economic
conditions and improve its efficiency in an increasingly competitive
environment.
Break-even Mandate:
Although the Service's break-even mandate was established to foster
reasonable rates, this mandate removes the profit motive. In its
Transformation Plan, the Service proposed a revision to its break-even
mandate that would permit it to retain earnings. Key questions for
consideration include the following:
* Could the Service remain self-supporting under its mandate to break
even over time?
* Should the Service's business model be adjusted to allow some
additional flexibility to retain a reasonable level of earnings?
* Would changing the Service's break-even mandate lead to a reduction
in the quality and scope of universal postal service?
To address concerns about potential service reductions, some other
countries, such as Germany and the Netherlands, whose postal
administrations operate on a for-profit basis, have imposed specific
minimum requirements for universal postal service and added regulatory
oversight in connection with the quality of postal service.
Rate-setting Structure:
The Service's cost-of-service rate-setting structure allows the Service
to cover rising costs by increasing rates. The rate-setting process was
created to ensure prior independent review of Service-proposed domestic
postal rates and fees. It also includes due process for all interested
parties in hearings on the record. This process has led to proceedings
that are often lengthy and adversarial. Although the current system was
designed to enable the Service to break even over time, in practice the
Service has accumulated significant prior years' losses and debt and
has had difficulty funding capital investments without borrowing. Some
of the key questions related to the current rate-setting process
include the following:
* Should the current rate-setting process be retained, modified, or
replaced with a different system? Are changes to the current rate-
setting structure needed to provide sufficient funds for the Service's
operating and capital needs and to repay debt? Should the Service's
rate setting be subject to prior regulatory review?
* What should be the respective authorities and responsibilities of the
Service and any independent regulator, including the authority to
compel provision of information and final decision-making authority
over what rates are set?
* Should legal requirements that affect rates--including that each mail
class cover its costs, and preferred rates for certain groups--be
retained, changed, or eliminated?
Consensus on these issues will be difficult to achieve, but
improvements in the rate-setting structure will be a fundamental
component of a comprehensive transformation. One innovation in the
rate-setting process that was recently approved by the PRC on an
experimental basis was the Service's proposal for a negotiated service
agreement (NSA). An NSA is a customer-specific agreement with the
Service, whereby the customer agrees to perform specified mail
preparation activities; and if the customer's total mailings exceed a
pre-set volume threshold, then the customer receives a discount rate
and/or predetermined services. The Service anticipates that such
agreements will result in additional volume and revenue.
Revenue Generation:
The key financial challenge facing the Service is whether it will be
able to generate sufficient revenues to cover its costs in the face of
stagnating or declining mail volume growth. Some of the limitations in
the Service's current business model related to its revenue-generating
capacity have become more evident as mail volumes have recently
declined in major mail classes, particularly in First-Class Mail. The
overall growth rate for First-Class Mail has been trending downward for
about 20 years. These declines are significant because, as seen in
figure 2, the revenue generated from First-Class Mail is used to cover
about 69 percent of the Service's institutional costs. The Service's
institutional costs comprise nearly 40 percent of its total costs.
Figure 2: First-Class Mail Volume, Revenue, and Contribution to
Institutional Costs in Fiscal Year 2002:
[See PDF for image]
[End of figure]
As seen in table 1, the loss in contribution from declining First-Class
Mail volume would be difficult to recover from other classes of mail.
Table 1: Additional Volume Increases that Would be Necessary to Recover
Loss in Contribution From a 1 Percent Decline in First-Class Mail
Volume:
Type of mail: Priority; Volume increase necessary: 14%; Actual volume
change between fiscal years 2001 and 2002: (11%).
Type of mail: Express; Volume increase necessary: 43%; Actual volume
change between fiscal years 2001 and 2002: (12%).
Type of mail: Standard; Volume increase necessary: 3%; Actual volume
change between fiscal years 2001 and 2002: (3%).
Type of mail: Package Services; Volume increase necessary: 116%; Actual
volume change between fiscal years 2001 and 2002: (2%).
Source: GAO analysis of Postal Service and Postal Rate Commission data.
[End of table]
As part of its Transformation Plan, the Service stated that it would
like to generate revenues from new products and services, and it has
requested additional flexibility in this area. Many questions, however,
have been raised about the Service's ability to generate revenues to
cover the costs from its new products and services. This area has been
the source of much controversy, particularly related to whether the
Service is or should be allowed to enter into markets where private-
sector companies are operating, and whether these products and services
are being cross-subsidized by monopoly-protected postal products and
services. We have issued several reports regarding the Service's
activities related to new products and services.[Footnote 5] We have
consistently found that the Service's performance did not meet its
stated goals, and that it did not have appropriate financial
information and controls in this area. Although it was not possible for
us to determine the extent of any cross-subsidy due to incomplete
financial information, it was clear that, as of fiscal year 2002, the
Service was not generating sufficient revenues to cover its costs
related to these new product areas.
Another revenue-generating opportunity discussed in the Transformation
Plan is leveraging existing assets and infrastructure, such as postal-
owned vehicles, facilities, and its nationwide 6-day-a-week, last-mile
delivery network. Further explorations of opportunities related to its
existing assets could potentially provide additional revenue. As part
of its Transformation Plan, the Service has stated that it may have the
capacity to generate revenue by offering access to available space in
warehouses and vehicles.
Cost Restrictions:
Clearly, one of the fundamental deficiencies in the current business
model is that it does not provide appropriate incentives to operate in
the most cost-effective manner. The cost-based rate structure, monopoly
protections, and break-even mandate provide limited incentives for the
Service to control costs, particularly in its two largest cost areas--
infrastructure and workforce. The Service's extensive infrastructure
network has evolved piecemeal over time and may not reflect the most
efficient operating structure. The Service may be able to operate more
economically and efficiently by consolidating a number of its
processing facilities. Many concerns have also been raised about the
efficiency of the Service's retail network, consisting of thousands of
post offices, branches, and stations. In the workforce area, employee
wages and benefits comprise about three-quarters of the Service's total
operating expenses. This percentage has not changed dramatically over
the last 30 years, despite numerous automation initiatives undertaken
by the Service.
Some of the key questions that relate to improving the Service's
efficiency include the following:
* What is the optimal size and composition of the Postal Service's
infrastructure and workforce? What service levels should be provided?
* What impediments limit the Service's ability to sustain long-term
efficiency and productivity improvements, such as standardization of
its processing plants?
* Should current restrictions on closing or consolidating post offices
be changed to facilitate optimizing the Service's retail network?
* How should mail safety and security considerations be incorporated
into the Service's network optimization plans? Should operations be
redesigned to accommodate mail security concerns, particularly for
high-risk "unknown" sender or collection mail? What are the costs and
who should pay for mail security enhancements?
Infrastructure Optimization:
A key to becoming a more cost-effective and efficient organization will
be to rationalize the Service's infrastructure to better support its
future operations. A wide variation exists in the efficiency levels
across mail processing plants, and the Service does not have
standardized operations throughout its nationwide network of processing
plants. According to postal officials, in some areas it is difficult to
achieve efficient operations due to plant layouts or locations. For
example, in some older facilities processing operations are spread over
multiple floors or span several buildings, while many of the newer
plants are laid out on one floor to better accommodate the automated
equipment used today. In addition, the location of some plants, such as
those in big cities, may hinder operations because of surrounding
traffic congestion. On the retail side, the Service has estimated that
many of its post offices are not profitable and many of the
transactions that take place at a post office, like selling stamps, can
be conducted more efficiently through other retail alternatives.
Currently, the Service is analyzing the optimization of its retail
function and has begun to put additional emphasis on using means other
than post offices to provide retail services to its customers. In
addition, the Service is studying the optimization of its mail
processing and transportation network. According to the Service's
Transformation Plan, its strategy for optimizing its mail processing
and transportation network was to have been developed by fall of 2002.
However, recently postal managers told us that the Service is still in
the process of developing its overall concept and strategies for its
revised network and anticipates that it will release its initial plans
in January 2004. We are reviewing the Service's approach to its network
optimization study and will report later on the results of our review.
The Postal Service's infrastructure includes a variety of structures,
including over 300,000 collection boxes, 38,000 post offices, stations,
and branches, 500 mail processing plants, and various other types of
facilities. The Service delivers mail to over 140 million business and
residential addresses, including individual mailboxes, cluster boxes,
and post office boxes. As of October 2002, it reported having 115
facilities or land parcels that were vacant or underutilized. The
federal government's real property area is a new area that GAO has
recently identified as high-risk.[Footnote 6] Long-standing problems
with excess and underutilized property, deteriorating facilities,
unreliable real property data, and costly space are challenges shared
by several agencies. These factors have multibillion-dollar cost
implications and can seriously jeopardize mission accomplishment.
Rationalization of any excess infrastructure can also result in
additional cash from sales proceeds.
Historically, closing and consolidating post offices and processing
plants has often been controversial on account of worker, community,
and congressional interests. The Service's current business model
includes statutory restrictions that limit its ability to close and/or
consolidate post offices. We have reported that the Service has faced
resistance to closures because of the potential effects on jobs and
mail delivery service to local communities.[Footnote 7] Given the
controversy that surrounds closure of postal facilities, some
mechanism, such as the military base-closure process, may be needed.
Once agreement is reached on closing/consolidating postal facilities,
steps would need to be taken to help ensure that unneeded postal
properties are promptly and appropriately handled.
Furthermore, safety and security concerns will need to be considered as
part of the Service's network optimizing efforts. At the request of the
House Committee on Government Reform, we held a conference on issues
related to mail security in December 2001 and issued a report on the
concerns and suggestions that resulted from that conference.[Footnote
8] Some of the conference discussion revolved around whether separate
processing operations would be needed for mail streams with different
levels of risk. For example, mail from collection boxes is deemed to be
higher risk because the sender is unknown, while much of the bulk
business mail is considered lower risk because it is from known
shippers. The Service will need to determine whether it should place
biohazard detection equipment in all processing plants or establish
separate processes for various levels of risk in the mail stream.
Another related issue is who should pay for costs related to enhancing
mail security--ratepayers, taxpayers, or both. To date, the Postal
Service has received $762 million in appropriated funds to cover costs
associated with the anthrax and terrorist attacks. The Service
requested another $350 million in its fiscal year 2004 appropriations
request for emergency preparedness costs.
Workforce Size, Composition, and Costs:
In the workforce area, the Service has significant unresolved cost
issues related to:
* wage and benefit premiums associated with some of its employees whose
compensation is determined through collective bargaining;
* compensation limitations for executives subject to executive pay
caps;
* impact on Service costs of recent legislation requiring the Service
to cover pension costs for the time its employees served in the
military;
* rising health care costs for current and retired employees;
* impact on Service costs of not accruing its retiree health benefit
costs; and
* growth in workers' compensation costs.
We recognize that the Service's recent workforce reductions have
resulted in some cost savings. However, achieving more significant
savings in total costs will require further reducing the size of its
workforce and examining its current compensation and benefits
arrangements, including workers' compensation. Further, the Service
should revisit the accounting and funding treatment of its long-term
retiree health obligations. In fiscal year 2002, the Service had over
854,000 total employees, and the compensation and benefit costs for
these employees amounted to about $53 billion. About 90 percent of the
Service's 750,000 career employees are covered by collective bargaining
agreements.
Wage and Benefit Comparability:
One of the most difficult challenges that the Service faces is making
changes to its compensation systems. The Postal Service is required by
statute to provide its employees with wages and benefits comparable to
those of private-sector employees, but it faces several problems in
this area. On the one hand, postal officials have stated that the
statutory pay cap for postal executives has limited its ability to
provide compensation that is comparable to that in the private sector
for selected managerial, executive, and officer level positions. This
restriction may make it more difficult for the Service to recruit and
retain key executive talent. On the other hand, the Commission heard
testimony from Professor Wachter at its hearing in Chicago that postal
employees whose pay is set through collective bargaining have a
significant wage and benefit premium over comparable private-sector
employees.[Footnote 9] This premium was estimated to be 34.2 percent in
the 2000-2001 interest arbitration proceeding between the Postal
Service and the American Postal Workers Union, which covers
approximately 366,000 employees.
The issues of wage and benefit comparability and factors that need to
be considered under the collective bargaining process are fundamentally
important to the Service's future transformation efforts. As the Postal
Service noted in its testimony before the Commission, the cost of
postal benefits has risen about 27 percent more than those of the
private sector in the last 20 years. The Service also testified that
there are substantial fringe benefit costs (retirement and retiree
health care benefits) that are statutorily mandated, and thus outside
the scope of collective bargaining. The Commission has also heard that
the Service's costs for some employee benefits within the scope of
collective bargaining--those for health benefits for active employees-
-are higher than those in the private sector as well as other federal
agencies. For example, the Postal Service pays about 85 percent of its
employees' health benefit premiums, while other federal agencies pay up
to 75 percent of these costs. Furthermore, we believe the fact that the
Service pays a higher percentage of its employees' insurance premiums
and continues to pay a portion of the premiums after retirement is an
important consideration in assessing the total wage and benefit
comparability of postal employees.
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. 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. As a starting point, the Commission may want
to revisit the guiding principles incorporated into the 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 include the full compensation and
benefit costs, as well as the relationship of these costs relative to
total costs, impact on rates and revenues, and the Service's overall
financial condition. In addition, postal labor and management have
disagreed on the benchmarks that should be used in making total
compensation comparisons. For example, questions exist as to whether
the private-sector comparison group should be unionized workers, non-
unionized, or some combination thereof, and whether the total value of
benefits has been factored into this comparison. It may be beneficial
for any legislation requiring compensation comparability to include
specific criteria and factors upon which a comparison must be made.
Workers' Compensation Costs:
Another benefit area where costs have been difficult to control is the
Service's workers' compensation benefits. This presents a significant
challenge to the Service, because these costs totaled $1.5 billion in
fiscal year 2002, an increase of over $500 million, or 50 percent, from
the previous year. In addition, the Service's total liability for its
workers' compensation benefits amounted to $6.7 billion at the end of
fiscal year 2002. The Service attributed the cost increases to a record
number of compensation claims filed and a rise in the average cost per
medical claim. While we have not reviewed the reasons for the cost
increases, we believe that the significantly increased costs warrant
attention by the Service.
In addition, the Commission may want to consider the comparability of
the Service's workers' compensation benefits as it considers the
Service's total compensation and benefits for postal employees. Several
GAO reports have raised issues about benefit payment policies under the
Federal Employees' Compensation Act (FECA), including how these
benefits compare to those of other federal and state workers'
compensation laws and changing benefit payments for retirement-aged
beneficiaries.[Footnote 10] In April 1996, we reported on our
comparison of benefits authorized by FECA with those authorized under
the Longshore and Harbor Workers' Compensation Act and state workers'
compensation laws. [Footnote 11] We found that, in general, FECA
provided the same types of benefits to injured federal workers as those
provided under other federal and state workers' compensation laws;
however, there were three principle ways in which FECA benefits were
more generous:
* FECA's authorized maximum weekly benefit amount was greater;
* FECA provided claimants who had a spouse and/or dependent with an
additional benefit of 8-1/3 percent of salary; and
* FECA provided eligible federal workers who suffered traumatic
injuries with additional salary continuation benefits for a period not
to exceed 45 days.
We have also reported on possible changes to FECA benefits for
beneficiaries who are at or beyond retirement age.[Footnote 12] We
noted that older FECA beneficiaries made up a high percentage of cases
on the long-term rolls and accounted for a substantial portion of the
FECA benefits paid for long-term compensation. We identified two prior
proposals for reducing FECA benefits to those who become eligible for
retirement. One would convert compensation benefits received by
retirement-eligible injured workers to retirement benefits. However,
this approach raises complex issues related to changing workers'
compensation benefits to taxable income and allowing for varying
amounts of retirement benefits. The second proposal would convert FECA
benefits to a newly established FECA annuity, thus avoiding the
complexity of shifting from one benefit program to another. To help
address FECA-related cost issues, the Commission and Congress could
consider converting from the current FECA benefit structure to a FECA
annuity.
Pension and Retiree Health Obligations:
Recent statutory changes in how the Service funds its Civil Service
Retirement System (CSRS) pension costs will result in substantial
financial savings to the Service. Those savings represent an
opportunity for the Service to address its significant financial
challenges, including its large unfunded retiree health obligation.
While the pension obligation is being funded as benefits are earned and
recovered through rates, the retiree health obligation is not. The
health obligation is also not reflected in the Service's financial
statements. Recent estimates put the present value of the Service's
retiree health obligation at between $40 and $50 billion. Under the
Service's current rate-setting method, the increasing cost of these
obligations will result in sharply escalating future rates. The
Commission could be instrumental in guiding the Service on how best to
address this and other major financial management challenges as the
Service strives to transform itself.
In April 2003, the President signed into law the Postal Civil Service
Retirement System Funding Reform Act of 2003 (P.L. 108-18). The Act was
the culmination of an analysis we requested in May 2002 that the Office
of Personnel Management (OPM) perform on the extent to which the
Service had funded and was projected to have funded the CSRS costs of
its employees and annuitants.[Footnote 13] In November 2002, OPM
reported that, based on the level of contributions set forth in what
was then the current law, the Service would overfund its pension
obligation by $77.7 billion. However, OPM's calculation assumed that
the Service was responsible at that time for funding the cost of
military service of applicable Service employees, which was consistent
with the administration's legislative proposal. According to OPM, the
administration's legislative proposal was modeled after the other major
federal retirement system, the Federal Employee Retirement System
(FERS), whereby the agencies fund benefits related to military service.
Because under then current law this military funding was the
responsibility of Treasury, we asked OPM to recalculate this overfunded
amount, excluding the benefits attributable to military service, and
found that it was actually $104.9 billion.[Footnote 14] Measured on a
present value basis as of September 30, 2002, this shift in military
service cost amounts to over $27 billion. (See appendix for additional
details on these calculations.):
P.L. 108-18 did in fact make the Service responsible for funding these
military costs. The Act also changed how the Service funds its CSRS
pension costs and, in so doing, reduced its payments to the Civil
Service Retirement and Disability Fund (CSRDF) by an average of over $3
billion per year over the next 5 years and the full $77.7 billion over
the next 40 years to prevent any overfunding from occurring.
Furthermore, Congress acted on our suggestion to consider the Service's
$11 billion in outstanding debt to the federal government and directed
the Service to apply the savings in fiscal years 2003 and 2004 that
result from enactment of this legislation to reducing its debt. The
legislation also requires that the Service submit a proposal to the
President, Congress, and GAO detailing how savings attributable to any
fiscal year after 2005 and held in escrow should be expended, including
for debt repayment, pre-funding its retiree health obligation,
productivity and cost saving capital investments, delaying or
moderating postal rate increases, or any other matter. GAO has 60 days
from the time it receives the Service's report to submit a written
evaluation of it. Furthermore, we are beginning work on developing
various alternatives for funding the existing unfunded retiree health
obligation and future costs. Without a major change in its funding
approach, this obligation will exacerbate the Service's financial
problems in the future.
The law also requires the Service to consider your work in formulating
its plan for the savings. Accordingly, we believe that the issue of how
the Service currently accounts for and funds its retiree health
benefits needs to be seriously considered as part of any effort to
address the future viability of the Postal Service and should be
factored into the Commission's deliberations.
Unlike its CSRS pension obligation, which the Act put on course to be
fully funded, the retiree health benefit obligation is funded on a pay-
as-you-go basis as premiums are paid, rather than on a full accrual
basis.[Footnote 15] Consequently, while the pension benefits being
earned now by Postal Service employees are recovered through current
postal rates, the retiree health benefits of those same employees are
not being recognized in rates until after they retire. This pay-as-you-
go approach is also being used to reflect retiree health costs in the
Service's financial statements. We believe that it would be preferable
for the Service to account for these retiree health costs and related
obligation in its financial statements on an accrual basis. As we noted
in our September 2002 correspondence to the Postmaster
General,[Footnote 16] the Service's current accounting treatment does
not reflect the economic reality of its legal obligation to pay for
these costs, and current ratepayers are not paying for the full costs
of the services they are receiving. Although the Service did revisit
this issue and did discuss it in the management discussion and analysis
section of its financial statements for fiscal year 2002, it did not
adopt accrual accounting for retiree health benefit costs, or change
its financial disclosure treatment as we suggested. Consequently, we
continue to believe that the Service's treatment of retiree health
benefit costs in its financial statements does not sufficiently
recognize the magnitude, importance, or meaning of this obligation to
decision makers or stakeholders. In our view, the time has come for the
Service to formally reassess how it accounts for and discloses this
very significant financial obligation.
Irrespective of the accounting treatment, we believe the Service needs
to work with the PRC to determine how best to address this issue in the
rate-setting process. We recognize that the adoption of accrual
accounting for retiree health obligations and inclusion of the related
costs in postal rates could mean that customers face significant rate
increases sooner than might otherwise be the case. However, without a
change now, a sharp escalation in rates in future years will be
necessary to fund these costs on a pay-as-you-go-basis.
Effective Labor-Management Relations and Support Systems Are Key to
Improving Operational Efficiency:
Thus far, I have focused most of my comments on areas that require
statutory or regulatory changes. However, one of the most important
factors in the Service's future success may not depend solely on
actions by the Commission, Congress, or other stakeholders. Rather, it
will depend to a large extent on the Service's support systems and its
ability to work together with its unions to make the changes needed to
improve organizational efficiency and sustain productivity
improvements. This may require significant changes in organizational
culture and practices, which have historically been difficult to
achieve. We have written many reports discussing the long-standing
adversarial relationships between postal managers and unions.[Footnote
17] These adversarial relationships have major financial, operational,
and human capital implications because personnel-related costs
represent the largest single element of the Service's annual expenses,
and they are the primary determinant of prices and the key factor in
the Service's overall financial viability. In addition, postal
employees represent a valuable asset and are a key element in any
overall transformation effort. Disagreements between these groups have
included performance management issues, including whether to implement
some type of performance-based incentive system for employees covered
under collective bargaining, and work rules, such as the deployment and
utilization of the workforce. Furthermore, the Service's ability to
realign its workforce may be limited because its workforce planning is
essentially designed to support short-term operations rather than
assess long-term workforce needs, and it may not have sufficient
flexibility to make needed changes in its work rules.
Performance Management:
We have found that high-performing organizations often must
fundamentally change their cultures so that they are more results-
oriented, customer-focused, and collaborative in nature.[Footnote 18]
To foster such cultures, these organizations use their performance
management systems as a strategic tool to drive change and achieve
desired results. The Service will need to modernize its performance
management systems to create a clear linkage--"line of sight"--between
individual performance and organizational success. First among the key
practices high-performing organizations use to develop effective
performance management systems is to align individual performance
expectations with organizational goals. Another key practice is to
involve employees and stakeholders to gain ownership of the performance
management system.
Poor relationships between postal managers and employees have made it
difficult to develop and implement changes to the Service's performance
management systems. One of the key challenges in developing a more
performance-based culture will be for the Service to work in
collaboration with its labor unions and management associations to
align individual performance with institutional goals and objectives.
The Service's bargaining unit employees, who make up approximately 90
percent of its workforce, do not have performance-based compensation
systems and have generally opposed them. Another key challenge will be
in addressing those areas where the Service believes it needs
additional human capital flexibilities to realign its workforce or
modify work rules, but has been or could be hampered through current
collective bargaining agreements.[Footnote 19]
Modern, reliable, effective, and as appropriate, validated performance
management systems with adequate safeguards, including reasonable
transparency and appropriate accountability mechanisms, must serve as
the fundamental underpinning of any successful results-oriented pay
reform. The Service reported that it implemented a pay-for-performance
system for its executives, managers, postmasters, supervisors, and
other non-bargaining employees in fiscal year 1995, but that this
system was discontinued in fiscal year 2002. Congress and the Postal
Service's Office of Inspector General have expressed concerns about
certain aspects of this system, such as the payouts made at the same
time the Service was incurring huge losses. The Service reported that
it implemented a merit-based pay program in 2002 for its executives and
officers, under which goals related to the Service's overall
performance goals are set for individuals at the beginning of the
fiscal year. The Service also reports that it is in the process of
extending a merit-based pay system for the remaining non-bargaining
employees later this year. Care should be taken in the design of these
systems to ensure that they comply with applicable law (e.g., pension
cost savings cannot be used for management bonuses) and that any
productivity-based measures result in real savings or more effective
utilization of any existing excess capacity.
Addressing challenges in performance management will require the
Service's managers and employees to share a common vision for the
future and a mutual responsibility for the Service's financial and
operating performance. Postal managers and employees will need to
balance their individual interests with those of the organization,
particularly in the performance management and workforce realignment
areas. A common vision and a balanced approach should help achieve and
sustain productivity improvements that will be necessary to enhance
overall organizational effectiveness and individual performance while
appropriately protecting workers' rights.
Workforce Realignment:
Another key human capital challenge is to take steps to ensure that an
organization has sufficient numbers of people in place with the right
skills, tools, and incentives to get the job done. The Service's
ability to make changes in the size, cost, and deployment of its
workforce has been hampered by some provisions of the collective
bargaining agreements. For example, in our reviews, postal plant
managers have told us that because of restrictive job classification
rules, the Service has too little flexibility to move employees to
locations and positions where they are needed. A postal plant manager
told us that because of restrictive workforce rules, many supervisors
believe it is too arduous to deal with poor performers and that about
60 percent of grievances were work rule based. Changes to the Service's
operating environment, such as optimizing its mail-processing network,
may require a different mix in the number, skills, and deployment of
its employees. These changes may involve repositioning, retraining,
outsourcing, and reducing the workforce.
To deal with these challenges, the Service will need effective human
capital strategies. It will also need reasonable flexibility to address
certain challenges. However, these additional authorities should
include appropriate safeguards to prevent abuse of employees. In
previous reports and testimonies, we have emphasized that in addressing
these human capital challenges, organizations should identify and use
the flexibilities already available under existing laws and regulations
and then seek additional flexibilities when necessary and based on
sound business cases.[Footnote 20] These additional flexibilities could
include (1) more flexible pay approaches, (2) greater flexibility to
streamline and improve the hiring process, (3) increased flexibility in
addressing employees' poor job performance, (4) additional workforce
restructuring options, and (5) expanded flexibility in acquiring and
retaining part-time or temporary employees. The tailored use of such
flexibilities for acquiring, developing, and retaining talent is an
important cornerstone of strategic human capital management so that
organizations become more results-oriented, integrated, and customer
focused. To address employees' concerns that some flexibilities could
be unfairly applied, the Service will need to develop clear and
transparent guidelines for using flexibilities, and then hold managers
and supervisors accountable for their fair and effective use. By more
effectively using flexibilities, the Service would be in a better
position to manage its workforce, ensure accountability, and transform
its culture to become more results-oriented and efficient.
In closing, this Commission's report will be an important tool to guide
comprehensive postal transformation by addressing the major issues
related to the legal and regulatory framework of the Service's business
model along with various operational and governance issues. As the
Commission considers the future direction of the Service, its efforts
will involve balancing the Service's future role and mission;
governance structure, transparency and accountability mechanisms; and
various incentives to increase revenues and control costs. More
fundamentally, the Commission's report can provide proposals and
mechanisms to help Congress and the President deal with the
controversial and long-standing issues that have hampered various
postal reform efforts in the past.
For the Service to become a more efficient organization in the 21st
century, it will need to:
* continue implementation of its Transformation Plan and other
Commission recommendations aimed at driving down costs and increasing
efficiencies;
* continue enhancements to its financial transparency, including
appropriate recognition of its expenses and obligations for retiree
health benefits as well as disclosure of performance information and
transformation progress;
* provide thoughtful consideration of how its pension cost savings can
be effectively used after fiscal year 2004 to enhance the long-term
viability of the Service;
* develop a comprehensive plan for optimizing its infrastructure and
workforce; and
* work with its unions and management associations to create a results-
oriented culture, as well as appropriate work rules and realignment
flexibilities, that would help achieve both long-term financial
viability for the Service and a fair, positive work environment for
employees.
Finally, in many ways, the Service's transformation issues are an
illustration of the types of challenges that many government agencies
face in positioning themselves for the 21st century rather than simply
building on past practices. The Postal Service plays an important role
for our nation and all Americans. It helps to connect our nation both
domestically and internationally. However, the world has changed
dramatically since the last postal reorganization in 1970. The Service
must change to recognize these realities and position itself for the
future. The time for action is now.
Messrs. Chairmen, this concludes my testimony. I would be pleased to
answer any questions that you or Members of the Commission may have.
Contacts 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, Joshua Bartzen, Margaret
Cigno, William Doherty, Scott McNulty, Lisa Shames, and Jill Sayre.
[End of section]
Appendix I: Analysis of the Postal Service's Civil Service Retirement
System Liability:
In May 2002, we asked OPM to estimate--as of September 30, 2002--the
extent to which the Postal Service had funded and was projected to have
funded the CSRS costs of its employees and annuitants for civilian
service rendered since July 1, 1971, the effective date of the Postal
Reorganization Act. In order to make these determinations, OPM had to
first estimate how much of the net assets of the Civil Service
Retirement and Disability Fund (CSRDF) were attributable to the
Service's CSRS participants. OPM accomplished this task by first
constructing a hypothetical "Postal Fund," into which agency and
employee contributions were credited and from which benefit payments
and a portion of the CSRDF's administrative expenses were charged. It
was also necessary for OPM to allocate a portion of the CSRDF's actual
investment returns since fiscal year 1972 to the "Postal Fund," even
though under what was then current law Treasury bore all investment
risk and any resulting gains and losses. OPM also assumed in its
initial calculations that the Service was responsible for the
applicable military service costs of its employees, which was
consistent with the administration's legislative proposal. However,
under the then current law, funding of these military costs was the
responsibility of the Treasury.
Table 2 shows the current and projected funded status of future CSRS
benefits payable to the Service's employees and annuitants calculated
to reflect both the administration's proposal that the Service be
responsible for military service costs and the then current law, which
had Treasury responsible for these costs. The present value of future
contributions in table 2 reflects the Postal Service's funding of CSRS
benefits as established in the then current law.
Table 2: Funded Status of Postal Service CSRS Benefits Under Pre-P.L.
108-18 Funding Approach:
Dollars in billions as of September 30, 2002.
Present value of future CSRS benefits; Dollars in billions as of
September 30, 2002: The Service responsible for benefits attributable
to military service: ($190.4); Dollars in billions as of September 30,
2002: The Service not responsible for benefits attributable to military
service: ($179.1).
"Postal fund" net assets; Dollars in billions as of September 30, 2002:
The Service responsible for benefits attributable to military service:
168.4; Dollars in billions as of September 30, 2002: The Service not
responsible for benefits attributable to military service: 185.0.
Current amount of benefits (to be funded) / overfunded; Dollars in
billions as of September 30, 2002: The Service responsible for benefits
attributable to military service: (22.0); Dollars in billions as of
September 30, 2002: The Service not responsible for benefits
attributable to military service: 5.9.
Present value of future contributions; Dollars in billions as of
September 30, 2002: The Service responsible for benefits attributable
to military service: 99.7; Dollars in billions as of September 30,
2002: The Service not responsible for benefits attributable to military
service: 99.0.
Projected overfunding; Dollars in billions as of September 30, 2002:
The Service responsible for benefits attributable to military service:
$ 77.7; Dollars in billions as of September 30, 2002: The Service not
responsible for benefits attributable to military service: $104.9.
Source: Developed by GAO based on OPM data and actuarial calculations.
[End of table]
The extent to which the Service had already funded all future benefits
is the difference between the present value of those future benefits
and the hypothetical "Postal Fund." The extent to which the Service is
projected to have funded all future benefits is the difference between
the current amount to be funded (or the current overfunding) and the
present value of all future contributions based on what was then the
current law. Calculating the funded status of civilian benefits
established a benchmark from which the cost of alternatives to the
funding of military service could be calculated.
Table 3 shows the effect on the projected overfunding as a result of
changing the approach to funding future CSRS benefits. All present
value figures in tables 2 and 3 reflect CSRS-wide demographic
assumptions. P.L. 108-18 permits the Postal Service to request that OPM
reconsider calculating these present values using Postal Service-
specific demographic assumptions. Both tables show that the shift of
military service costs from the Treasury to the Postal Service amounts
to over $27 billion.
Table 3: Funded Status of Postal Service CSRS Benefits Under P.L. 108-
18 Funding Approach:
[See PDF for image]
Source: Developed by GAO based on OPM data and actuarial calculations.
[End of table]
The administration believed that making the Postal Service responsible
for funding military service benefits--both retrospectively to fiscal
year 1972 and prospectively from enactment of any legislation--was
appropriate in part because its legislative proposal would shift
investment risk to the Postal Service. Since fiscal year 1972, the
CSRDF earned more than OPM assumed it would. Consequently, while P.L.
108-18 made the Service responsible for funding the cost of military
service benefits for all employees hired after June 30, 1971, and a
portion of the costs for those employees hired before July 1, 1971, the
Service received the benefit of these higher than expected investment
returns. Similarly, in the future, investment returns that are above or
below expectations will decrease or increase the Postal Service's
pension costs, respectively. Furthermore, P.L. 108-18 results in postal
ratepayers paying for the cost of military service creditable towards a
CSRS benefit the same as they currently do for the Service's employees
who participate in the Federal Employees Retirement System.
[End of section]
Related GAO Products:
Transformation:
Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118. Washington, D.C.: Jan. 2003.
U.S. Postal Service: Moving Forward on Financial and Transformation
Challenges. GAO-02-694T. Washington, D.C.: May 13, 2002.
U.S. Postal Service: Deteriorating Financial Outlook Increases Need for
Transformation. GAO-02-355. Washington, D.C.: Feb. 28, 2002.
U.S. Postal Service: Financial Outlook and Transformation Challenges.
GAO-01-733T. Washington, D.C.: May 15, 2001.
U.S. Postal Service: Transformation Challenges Present Significant
Risks. GAO-01-598T. Washington, D.C.: Apr. 4, 2001.
U.S. Postal Service: Sustained Attention to Challenges Remains
Critical. GAO/T-GGD-00-206. Washington, D.C.: Sept. 19, 2000.
Cost Cutting, Productivity, Security, and Financial Issues:
U.S. Postal Service: Issues Associated with Anthrax Testing at the
Wallingford Facility, GAO-03-787T. Washington, D.C.: May 19, 2003.
U.S. Postal Service: Better Guidance Is Needed to Improve Communication
Should Anthrax Contamination Occur in the Future. GAO-03-316.
Washington, D.C.: Apr. 7, 2003.
Contract Management: Postal Service's National Office Supply Contract
Has Not Been Effectively Implemented. GAO-03-230. Washington, D.C.:
Jan. 17, 2003.
High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.:
Jan. 2003.
U.S. Postal Service: More Consistent Implementation of Policies and
Procedures for Cash Security Needed. GAO-03-267. Washington, D.C.: Nov.
15, 2002.
United States Postal Service: Opportunities to Strengthen IT Investment
Management Capabilities. GAO-03-3. Washington, D.C.: Oct. 15, 2002.
Diffuse Security Threats: USPS Air Filtration Systems Need More Testing
and Cost Benefit Analysis before Implementation. GAO-02-838.
Washington, D.C.: Aug. 22, 2002.
Diffuse Security Threats: Technologies for Mail Sanitization Exist, but
Challenges Remain. GAO-02-365. Washington, D.C.: Apr. 23, 2002.
Highlights of GAO's Conference on Options to Enhance Mail Safety and
Postal Operations. GAO-02-315SP. Washington, D.C.: Dec. 20, 2001.
Breast Cancer Research Stamp: Millions Raised for Research, but Better
Cost Recovery Criteria Needed. GAO/GGD-00-80. Washington, D.C.: Apr.
28, 2000.
U.S. Postal Service: Changes Made to Improve Acceptance Controls for
Business Mail. GAO/GGD-00-31. Washington, D.C.: Nov. 9, 1999.
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.
U.S. Postal Service: Stronger Mail Acceptance Controls Could Help
Prevent Revenue Losses. GAO/GGD-96-126. Washington, D.C.: June 25,
1996.
Workers' Compensation: Selected Comparisons of Federal and State Laws.
GAO/GGD-96-76. Washington, D.C.: Apr. 3, 1996.
Human Capital:
Results-Oriented Cultures: Creating a Clear Linkage between Individual
Performance and Organizational Success. GAO-03-488. Washington, D.C.:
Mar. 14, 2003.
Postal Service: Employee Issues Associated with the Potential Closure
of the San Mateo IT Center. GAO-03-205. Washington, D.C.: Jan. 31,
2003:
Human Capital: Effective Use of Flexibilities Can Assist Agencies in
Managing Their Workforces. GAO-03-2. Washington, D.C.: Dec. 6, 2002.
U.S. Postal Service: Diversity in District Management-Level Positions.
GAO/GGD-00-142. Washington, D.C.: June 30, 2000.
U.S. Postal Service: Diversity in the Postal Career Executive Service.
GAO/GGD-00-76. Washington, D.C.: Mar. 30, 2000.
Equal Employment Opportunity: The Postal Service Needs to Better Ensure
the Quality of EEO Complaint Data. GAO/GGD-99-167. Washington, D.C.:
Sept. 28, 1999.
U.S. Postal Service: Diversity in High-Level EAS Positions. GAO/GGD-99-
26. Washington, D.C.: Feb. 26, 1999.
U.S. Postal Service: Little Progress Made in Addressing Persistent
Labor-Management Problems. GAO/GGD-98-1. Washington, D.C.: Oct. 1,
1997.
U.S. Postal Service: Labor-Management Problems Persist on the Workroom
Floor. GAO/GGD-94-201A/B. Washington, D.C.: Sept. 29, 1994.
Financial and Performance Transparency:
Review of the Office of Personnel Management's Analysis of the United
States Postal Service's Funding of Civil Service Retirement System
Costs. GAO-03-448R. Washington, D.C.: Jan. 31, 2003.
Postal Service Employee Workers' Compensation Claims Not Always
Processed Timely, but Problems Hamper Complete Measurement. GAO-03-
158R. Washington, D.C.: Dec. 20, 2002.
U.S. Postal Service: Actions to Improve Its Financial Reporting. GAO-
03-26R. Washington, D.C.: Nov. 13, 2002.
U.S. Postal Service: Accounting for Postretirement Benefits. GAO-02-
916R. Washington, D.C.: Sept. 12, 2002.
United States Postal Service: Information on Retirement Plans. GAO-02-
170. Washington, D.C.: Dec. 31, 2001.
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: Enhancements Needed in Performance Planning and
Reporting. GAO/GGD-00-207. Washington, D.C.: Sept. 19, 2000.
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: Challenges to Sustaining Performance Improvements
Remain Formidable on the Brink of the 21st Century. GAO/T-GGD-00-2.
Washington, D.C.: Oct. 21, 1999.
The Results Act: Observations on the Postal Service's Preliminary
Performance Plan for Fiscal Year 2000. GAO/GGD-99-72R. Washington,
D.C.: Apr. 30, 1999.
U.S. Postal Service: Development and Inventory of New Products. GAO/
GGD-99-15. Washington, D.C.: Nov. 24, 1998.
Financial Reporting: Accounting for the Postal Service's Postretirement
Health Care Costs. GAO/AFMD-92-32. Washington, D.C.: May 20, 1992.
FOOTNOTES
[1] U.S. General Accounting Office, Major Management Challenges and
Program Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.: Jan.
2003).
[2] 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).
[3] U.S. General Accounting Office, U.S. Postal Service: Accounting for
Postretirement Benefits, GAO-02-916R (Washington, D.C.: Sept. 12,
2002). U.S. Postal Service Actions to Improve Its Financial Reporting,
GAO-03-26R (Washington, D.C.: Nov. 13, 2002). See also GAO-02-79,
GAO-00-188, and GAO-03-118.
[4] See GAO-03-26R.
[5] See GAO-02-79, GAO/GGD-00-188, and GAO/GGD-99-15.
[6] U.S. General Accounting Office, High-Risk Series: Federal Real
Property, GAO-03-122 (Washington, D.C.: Jan. 2003).
[7] U.S. General Accounting Office, U.S. Postal Service: Deteriorating
Financial Outlook Increases Need for Transformation, GAO-02-355
(Washington, D.C.: Feb. 28, 2002).
[8] U.S. General Accounting Office, Highlights of GAO's Conference on
Options to Enhance Mail Security and Postal Operations, GAO-02-315SP
(Washington, D.C.: Dec. 20, 2001).
[9] See Statement of Michael L. Wachter, Before the President's
Commission on the United States Postal Service, April 29, 2003.
Professor Wachter is a professor of Law and Economics at the University
of Pennsylvania. He has consulted for the Postal Service since 1981 and
testifies on its behalf in interest arbitration panels on issues
involving Postal Service wage and benefit comparability.
[10] 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).
[11] U.S. General Accounting Office, Workers' Compensation: Selected
Comparisons of Federal and State Laws, GAO/GGD-96-76 (Washington, D.C.:
Apr. 3, 1996).
[12] U.S. General Accounting Office, Federal Employees' Compensation
Act: Issues Associated With Changing Benefits for Older Beneficiaries,
GAO/GGD-96-138BR (Washington, D.C. Aug. 14, 1996).
[13] These costs are those attributable to service rendered since the
July 1, 1971, effective date of the Postal Reorganization Act.
[14] Until passage of P.L. 108-18, Treasury funded the cost of military
service creditable towards a CSRS benefit not otherwise paid for by
employees. The Act shifted responsibility for funding military service
costs from the Treasury to the Postal Service - retroactive to July 1,
1971, and prospectively. However, the Act also requires the Postal
Service, the Treasury, and OPM each to review this provision and submit
proposals by September 30, 2003, detailing whether and to what extent
the Treasury or the Postal Service should be responsible for funding
these benefits in the long term. GAO has 60 days from the time it
receives these reports to submit a written evaluation of them to the
House and Senate oversight committees.
[15] The Postal Service paid about $1 billion to OPM in fiscal year
2002 for the cost of retiree health care benefits for its more than
475,000 employees and survivor annuitants who participate in the
Federal Employees Health Benefits Program (FEHBP).
[16] See GAO-02-916R.
[17] For example, see U.S. General Accounting Office, U.S. Postal
Service: Labor-Management Problems Persist on the Workroom Floor, GAO/
GGD-94-201A/B (Washington D.C.: Sept. 29, 1994); U.S. Postal Service:
Little Progress Made in Addressing Persistent Labor-Management
Problems, GAO/GGD-98-1 (Washington D.C.: Oct. 1, 1997).
[18] U.S. General Accounting Office, Results-Oriented Cultures:
Creating a Clear Linkage between Individual Performance and
Organizational Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003).
[19] In broad terms, human capital flexibilities represent the policies
and practices that an organization has the authority to implement in
managing its workforce to accomplish its mission and achieve its goals.
[20] U.S. General Accounting Office, Human Capital: Effective Use of
Flexibilities Can Assist Agencies in Managing Their Workforces,
GAO-03-2 (Washington, D.C.: Dec. 6, 2002).
