U.S. Postal Service Key Reasons for Postal Reform
Gao ID: GAO-04-565T March 23, 2004Both the Presidential Commission on the U.S. Postal Service and GAO's past work have reported that universal postal service is at risk and that reform is needed to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases. The administration has also supported comprehensive postal reform. Recent congressional hearings have highlighted broad consensus on the need for postal reform among diverse stakeholders that include the Postal Service, postal employee organizations, the mailing industry, and Postal Service competitors. GAO has also testified in detail about the need for postal reform. In light of these developments, GAO was asked to briefly summarize the need for postal reform and elements that should be addressed by postal reform legislation. This statement for the record is based on prior GAO reports and testimonies.
Comprehensive postal reform is urgently needed. The Postal Service's financial viability is at risk because its business model--which relies on mail volume growth to cover the costs of its expanding delivery network--is not aligned with 21st century realities. Financial, operational, governance, and human capital challenges threaten the Service's ability to remain self-supporting while providing affordable, high-quality, and universal postal service. Key trends that demonstrate the need for reform include declining mail volume, particularly for First-Class Mail; changes in the mail mix from high-margin to lower-margin products; increased competition from private delivery companies; and subpar revenue growth. Moreover, the Service continues to have significant financial liabilities and obligations (e.g., retiree health obligations), uncertain funding for emergency preparedness, challenges to achieving sufficient cost-cutting, renewed difficulties in substantially improving postal productivity, and uncertainties regarding the adequacy of capital investment. Thus, the Service's transformation efforts and financial outlook continue to be on GAO's High-Risk List. The Postal Service is taking actions within its existing authority to make incremental progress toward transformation, but these steps cannot resolve the fundamental issues associated with the Service's current business model. To avoid the risk of a significant taxpayer bailout or dramatic increases in postal rates, Congress should enact comprehensive postal reform legislation that addresses the Service's key structural and systemic deficiencies, including its unfunded obligation for retiree health benefits and the escrow requirement. It is important that Congress act before the Service faces a crisis that could limit congressional options, particularly because it will take time for the Service to implement major changes. In GAO's view, specific elements of comprehensive postal reform legislation should address the following: clarify the Service's mission and role; enhance the Service's governance, transparency, and accountability; improve flexibilities and oversight; and make needed human capital reforms.
GAO-04-565T, U.S. Postal Service Key Reasons for Postal Reform
This is the accessible text file for GAO report number GAO-04-565T
entitled 'U.S. Postal Service Key Reasons for Postal Reform' which was
released on March 23, 2004.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Testimony:
Before the Senate Committee on Governmental Affairs and the House
Committee on Government Reform:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:30 p.m. EST:
Tuesday, March 23, 2004:
U.S. Postal Service:
Key Reasons for Postal Reform:
Statement for the Record by David M. Walker, Comptroller General of the
United States:
GAO-04-565T:
GAO Highlights:
Highlights of GAO-04-565T, a statement for the record for the Senate
Committee on Governmental Affairs and the House Committee on Government
Reform
Why GAO Did This Study:
Both the Presidential Commission on the U.S. Postal Service and GAO‘s
past work have reported that universal postal service is at risk and
that reform is needed to minimize the risk of a significant taxpayer
bailout or dramatic postal rate increases. The administration has also
supported comprehensive postal reform.
Recent congressional hearings have highlighted broad consensus on the
need for postal reform among diverse stakeholders that include the
Postal Service, postal employee organizations, the mailing industry,
and Postal Service competitors. GAO has also testified in detail about
the need for postal reform.
In light of these developments, GAO was asked to briefly summarize the
need for postal reform and elements that should be addressed by postal
reform legislation. This statement for the record is based on prior GAO
reports and testimonies.
What GAO Found:
Comprehensive postal reform is urgently needed. The Postal Service‘s
financial viability is at risk because its business model”which relies
on mail volume growth to cover the costs of its expanding delivery
network”is not aligned with 21st century realities. Financial,
operational, governance, and human capital challenges threaten the
Service‘s ability to remain self-supporting while providing affordable,
high-quality, and universal postal service. Key trends that demonstrate
the need for reform include declining mail volume, particularly for
First-Class Mail; changes in the mail mix from high-margin to lower-
margin products; increased competition from private delivery companies;
and subpar revenue growth. Moreover, the Service continues to have
significant financial liabilities and obligations (e.g., retiree health
obligations), uncertain funding for emergency preparedness, challenges
to achieving sufficient cost-cutting, renewed difficulties in
substantially improving postal productivity, and uncertainties
regarding the adequacy of capital investment. Thus, the Service‘s
transformation efforts and financial outlook continue to be on GAO‘s
High-Risk List.
The Postal Service is taking actions within its existing authority to
make incremental progress toward transformation, but these steps cannot
resolve the fundamental issues associated with the Service‘s current
business model. To avoid the risk of a significant taxpayer bailout or
dramatic increases in postal rates, Congress should enact comprehensive
postal reform legislation that addresses the Service‘s key structural
and systemic deficiencies, including its unfunded obligation for
retiree health benefits and the escrow requirement. It is important
that Congress act before the Service faces a crisis that could limit
congressional options, particularly because it will take time for the
Service to implement major changes.
In GAO‘s view, specific elements of comprehensive postal reform
legislation should address the following: clarify the Service‘s mission
and role; enhance the Service‘s governance, transparency, and
accountability; improve flexibilities and oversight; and make needed
human capital reforms.
www.gao.gov/cgi-bin/getrpt?GAO-04-565T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Mark Goldstein at (202)
512-2834 or goldsteinm@gao.gov.
[End of section]
Chairman Collins, Chairman Davis, and Members of the Committees:
We are pleased to have the opportunity to comment on the need for
postal reform and elements that should be addressed by postal reform
legislation. This statement is based on our prior work.[Footnote 1]
First, comprehensive postal reform is urgently needed. The Postal
Service's financial viability is at risk because its business model--
which relies on mail volume growth to cover the costs of its expanding
delivery network--is not aligned with 21st century realities.
Financial, operational, governance, and human capital challenges
threaten the Service's ability to remain self-supporting while
providing affordable, high-quality, and universal postal service. Thus,
the Service's transformation efforts and financial outlook continue to
be on our High-Risk List. Second, specific elements of comprehensive
postal reform legislation should address the following: clarify the
Service's mission and role; enhance the Service's governance,
transparency, and accountability; improve flexibilities and oversight;
and make needed human capital reforms.
The Need for Postal Reform:
The Postal Service is taking actions within its existing authority to
make incremental progress toward transformation, but these steps cannot
resolve the fundamental issues associated with the Service's current
business model. To avoid the risk of a significant taxpayer bailout or
dramatic increases in postal rates, Congress should enact comprehensive
postal reform legislation that addresses the Service's key structural
and systemic deficiencies, including its unfunded obligation for
retiree health benefits and the escrow requirement established by P.L.
108-18.[Footnote 2] It is important that Congress act before the
Service faces a crisis that could limit congressional options,
particularly because it will take time for the Service to implement
major changes. The following key trends demonstrate that postal reform
legislation is needed:
* Declining mail volume: Total mail volume declined in fiscal year 2003
for the third year in a row--a historical first for the Service, which
has depended on rising mail volume to help cover rising costs and
mitigate rate increases. First-Class Mail volume declined by a record
3.2 percent in fiscal year 2003 and is projected to decline annually
for the foreseeable future as customers increase their use of
electronic alternatives for communications and payments. This trend is
particularly significant because First-Class Mail covers more than two-
thirds of the Service's institutional costs.
* Changes in the mail mix: The Service's mail mix is changing as the
volume for high-margin products, such as First-Class Mail, declines and
the volume of lower-margin products, such as some types of Standard
Mail, increases. These changes reduce the revenues available to cover
the Service's institutional costs.
* Increased competition from private delivery companies: Private
delivery companies dominate the market for parcels greater than 2
pounds and appear to be making inroads into the market for small
parcels. Once a highly profitable growth product for the Service,
Priority Mail volume is declining as the highly competitive parcel
market turns to lower-priced ground shipment alternatives. Priority
Mail volume fell 13.9 percent in fiscal year 2003 and has declined
nearly 30 percent during the last 3 years. Express Mail volume is also
declining for the same reason. In addition, United Parcel Service (UPS)
and FedEx have established national retail networks through UPS's
acquisition of MailBoxes Etc., now called UPS Stores, and FedEx's
recent acquisition of Kinko's.
* Subpar revenue growth: The Service's revenues are budgeted for zero
growth in fiscal year 2004, which would be the first year since postal
reorganization that postal revenues have failed to increase. However,
as the Service has recognized, even this target will be a challenging
one. In the absence of revenue growth generated by increasing volume,
the Service must rely more heavily on rate increases to cover rising
costs and help finance capital investment needs.
* Significant financial liabilities and obligations: Despite the
passage of legislation that reduced the Service's pension obligations,
the Service has about $88 billion to $98 billion in liabilities and
obligations, including $47 billion to $57 billion in unfunded retiree
health benefits. Under the current pay-as-you-go system, the Service
may have difficulty financing its retiree health benefits obligation in
the future if mail volume trends continue to affect revenues while
costs continue to rise. The Service has recently proposed two options
to Congress so the Service can begin to prefund this obligation to the
extent that it is financially able.
* Uncertain funding for emergency preparedness: The Service requested
$350 million for emergency preparedness for fiscal year 2004, which it
did not receive, and $779 million for fiscal year 2005. If no funds are
appropriated, such funding may have to be built into postal rates.
* Challenges to achieve sufficient cost-cutting: The Service achieved
additional cost-cutting to compensate for below-budget revenues in
fiscal year 2003. Despite this progress, in the longer term it is
unclear whether continued cost-cutting efforts can offset declines in
First-Class Mail volume without affecting the quality of service.
* Renewed difficulties in substantially improving postal productivity:
The Service's productivity increased by 1.8 percent in fiscal year 2003
but is budgeted to increase by only 0.4 percent in fiscal year 2004. In
the absence of mail volume growth, substantial productivity increases
will be required to help cover cost increases generated by rising wages
and benefit costs and to mitigate rate increases.
* Uncertainties regarding the adequacy of capital investment: The
Service's capital cash outlays declined from $3.3 billion in fiscal
year 2000 to $1.3 billion in fiscal year 2003, which was the lowest
level since fiscal year 1986. Looking forward, it is unclear what the
Service's needs will be for maintaining and modernizing its physical
infrastructure, as well as whether its plans for capital investment
will be adequate for transformation.
Key Areas for Postal Reform:
Key areas of the Service's statutory framework that need to be
addressed include:
* Mission and Role: Congress needs to (1) define the scope of universal
service and the postal monopoly and (2) clarify the Service's role with
regard to competition and regulation.
* Governance, Transparency, and Accountability: Congress should (1)
delineate public policy, operational, and regulatory responsibilities;
(2) ensure managerial accountability through a strong, well-qualified
corporate-style board that holds its officers responsible and
accountable for achieving real results; and (3) define appropriate
reporting mechanisms to enhance the Service's transparency and
accountability for financial and performance results.
* Flexibility and Oversight: Congress needs to balance increased
flexibility for the Service--through streamlining the rate-setting
process and allowing a certain amount of retained earnings--with
appropriate oversight by an independent regulatory body to protect
postal customers against undue discrimination, restrict cross-
subsidies, and ensure due process. In addition, the Service needs
additional flexibility to rationalize its infrastructure and reshape
its workforce. Any such additional flexibility should be accompanied by
appropriate safeguards to prevent abuse, along with mechanisms for
enhanced transparency and accountability.
* Human capital reforms: Congress needs to (1) determine the Service's
responsibility for pension costs related to military service, funding
retiree health benefits, and determine what action to take on the
escrow account established in recent pension legislation; (2) decide
whether postal workers' compensation benefits should be on par with
those in the private sector; and (3) clarify pay comparability
standards.
Contact and Acknowledgments:
For further information regarding this statement, please contact Mark
L. Goldstein, Director, Physical Infrastructure Issues, at (202) 512-
2834 or at goldsteinm@gao.gov. Individuals making key contributions to
this statement included Teresa Anderson, Gerald P. Barnes, Margaret
Cigno, Kathleen A. Gilhooly, and Kenneth E. John.
FOOTNOTES
[1] See U.S. General Accounting Office, Need for Comprehensive Postal
Reform, GAO-04-455R (Washington, D.C.: Feb. 6, 2004); U.S. Postal
Service: Key Elements of Comprehensive Postal Reform, GAO-04-397T
(Washington, D.C.: Jan. 28, 2004); U.S. Postal Service: Bold Action
Needed to Continue Progress on Postal Transformation, GAO-04-108T
(Washington, D.C.: Nov. 5, 2003).
[2] The Postal Civil Service Retirement System Funding Reform Act of
2003 (P.L. 108-18), enacted in April 2003, required that, beginning in
fiscal year 2006, the difference between the Service's contributions
under new and old funding methods--the "savings"--be held in an escrow
account until the law is changed.
