U.S. Postal Service
Despite Recent Progress, Postal Reform Legislation Is Still Needed Gao ID: GAO-05-453T April 14, 2005Both 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 comprehensive postal reform legislation is needed to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases. In April 2001, GAO added the Postal Service's (the Service) transformation efforts and long-term outlook to its High-Risk List. GAO has testified that comprehensive postal reform legislation is needed to clarify the Service's mission and role; enhance governance, transparency, and accountability; improve regulation of postal rates and oversight; help to ensure the rationalization of the Service's infrastructure and workforce; and make certain human capital reforms. The Service has made significant progress on some of its key challenges but postal reform legislation continues to be needed in order to facilitate a broader transformation effort. To help Congress and other stakeholders understand Service progress and the need for postal reform, GAO will focus on (1) Service progress since GAO put Service transformation efforts and long-term outlook on GAO's High-Risk List, (2) why comprehensive postal reform legislation is needed, and (3) key areas for comprehensive postal reform. This testimony is based on an update of GAO's statement to Congress last year.
The Postal Service has made significant progress since its transformation efforts and long-term outlook were added to GAO's High-Risk List in 2001, including achieving record net income, repaying most debt, increasing productivity, and downsizing the postal workforce. However, the Service's financial progress was largely due to a transitory boost provided by 2003 pension reform legislation that reduced the Service's pension costs in fiscal years 2003 through 2005, but also benefited from increased Standard Mail volume and revenues, and certain cost-cutting and efficiency initiatives. Despite this progress, comprehensive postal reform legislation is needed to address the continuing financial, operational, governance, and human capital challenges that threaten the Service's long-term ability to provide high-quality, universal postal service at affordable rates. The Service's core business of First-Class Mail is declining, squeezing revenues available to help fund universal service costs. Meanwhile, compensation and benefits costs are rising despite workforce downsizing. The Service's financial liabilities and obligations of roughly $70 billion to $80 billion include about $50 billion to $60 billion in unfunded retiree health benefits. Progress is needed to move toward prefunding these benefits, and to increase productivity to offset rising costs, rationalize the Service's infrastructure and workforce, and implement more market-based and performance-oriented compensation systems for all employees. However, progress is hindered by limited flexibility and incentives for success under current law. Key elements for postal reform include clarifying the Service's mission and role so that the Service remains focused on universal postal service and competes appropriately; enhancing the Service's flexibility to operate in a businesslike manner with a governance structure suitable for a $70-billion entity, balanced by enhanced transparency, accountability, and oversight; making needed human capital reforms; and moving toward prefunding retiree health benefits.
GAO-05-453T, U.S. Postal Service: Despite Recent Progress, Postal Reform Legislation Is Still Needed
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Testimony:
Before the Committee on Homeland Security and Governmental Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Thursday, April 14, 2005:
U.S. Postal Service:
Despite Recent Progress, Postal Reform Legislation Is Still Needed:
Statement of David M. Walker, Comptroller General of the United States:
GAO-05-453T:
GAO Highlights:
Highlights of GAO-05-453T, a testimony before the Senate Committee on
Homeland Security and Governmental Affairs
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 comprehensive postal reform legislation is needed to minimize the
risk of a significant taxpayer bailout or dramatic postal rate
increases. In April 2001, GAO added the Postal Service‘s (the Service)
transformation efforts and long-term outlook to its High-Risk List. GAO
has testified that comprehensive postal reform legislation is needed to
clarify the Service‘s mission and role; enhance governance,
transparency, and accountability; improve regulation of postal rates
and oversight; help to ensure the rationalization of the Service‘s
infrastructure and workforce; and make certain human capital reforms.
The Service has made significant progress on some of its key challenges
but postal reform legislation continues to be needed in order to
facilitate a broader transformation effort.
To help Congress and other stakeholders understand Service progress and
the need for postal reform, GAO will focus on (1) Service progress
since GAO put Service transformation efforts and long-term outlook on
GAO‘s High-Risk List, (2) why comprehensive postal reform legislation
is needed, and (3) key areas for comprehensive postal reform. This
testimony is based on an update of GAO‘s statement to the Committee
last year.
What GAO Found:
The Postal Service has made significant progress since its
transformation efforts and long-term outlook were added to GAO‘s High-
Risk List in 2001, including achieving record net income, repaying most
debt, increasing productivity, and downsizing the postal workforce.
However, the Service‘s financial progress was largely due to a
transitory boost provided by 2003 pension reform legislation that
reduced the Service‘s pension costs in fiscal years 2003 through 2005,
but also benefited from increased Standard Mail volume and revenues,
and certain cost-cutting and efficiency initiatives.
Despite this progress, comprehensive postal reform legislation is
needed to address the continuing financial, operational, governance,
and human capital challenges that threaten the Service‘s long-term
ability to provide high-quality, universal postal service at affordable
rates. The Service‘s core business of First-Class Mail is declining,
squeezing revenues available to help fund universal service costs.
Meanwhile, compensation and benefits costs are rising despite workforce
downsizing. The Service‘s financial liabilities and obligations of
roughly $70 billion to $80 billion include about $50 billion to $60
billion in unfunded retiree health benefits. Progress is needed to move
toward prefunding these benefits, and to increase productivity to
offset rising costs, rationalize the Service‘s infrastructure and
workforce, and implement more market-based and performance-oriented
compensation systems for all employees. However, progress is hindered
by limited flexibility and incentives for success under current law.
First-Class Mail Volume Growth/Decline, Fiscal Years 1984 through 2004:
[See PDF for image]
[End of figure]
Key elements for postal reform include clarifying the Service‘s mission
and role so that the Service remains focused on universal postal
service and competes appropriately; enhancing the Service‘s flexibility
to operate in a businesslike manner with a governance structure
suitable for a $70-billion entity, balanced by enhanced transparency,
accountability, and oversight; making needed human capital reforms; and
moving toward prefunding retiree health benefits.
www.gao.gov/cgi-bin/getrpt?GAO-05-453T.
To view the full product click on the link above. For more information,
contact Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov.
[End of section]
Chairman Collins, Senator Lieberman, and Members of the Committee:
I am pleased to be here today to participate in this hearing on postal
reform. Today, I will focus on (1) the Postal Service (the Service)
results since we put its transformation efforts and long-term outlook
on our High-Risk List in 2001, (2) the need for comprehensive postal
reform, and (3) selected key areas for postal reform. This testimony is
an update of our last statement to the Committee.[Footnote 1] Our
bottom line is that the Service has made significant progress since
2001, but its recent financial success was largely due to a transitory
boost provided by 2003 pension reform legislation. Comprehensive postal
reform is urgently needed because the Service's fundamental
transformation challenges continue to exist, thereby placing universal
postal service at risk. Because comprehensive postal reform legislation
has not been enacted and the Service continues to face formidable
competition, cost and other challenges, its transformation efforts and
long-term outlook remain on our High-Risk List. More specifically:
* The Service has made significant progress since fiscal year 2001,
including achieving record net income, repaying debt, achieving
additional productivity increases, and downsizing the postal
workforce.[Footnote 2] However, most net income was due to a 2003
law[Footnote 3] that reduced Service pension benefit payments for
fiscal years 2003 through 2005. Starting in fiscal year 2006, these
"savings"[Footnote 4] must be set aside in a dedicated escrow account.
Under the 2003 law, the Service cannot use the funds in the escrow
account unless Congress eliminates the escrow requirement or specifies
by law how the escrow funds may be used. Legislative proposals would
abolish the escrow and require the Service to begin prefunding existing
and future Service obligations for retiree health benefits.
* Comprehensive postal reform legislation continues to be needed to
address the fundamental financial, operational, governance, and human
capital challenges that continue to threaten the Service's long-term
ability to remain self-supporting while providing high-quality,
universal postal service at affordable rates. The Service's core
business of First-Class Mail continues to decline, squeezing revenues
available to pay universal service costs. Meanwhile, compensation and
benefits costs continue to rise despite decreases in the number of
postal employees. The Service's financial liabilities and obligations
of roughly $70 billion to $80 billion are comprised of roughly $50
billion to $60 billion in unfunded retiree health benefits. The current
pay-as-you-go approach for these benefits will likely lead to more
dramatic and frequent postal rate increases in the future. Progress is
needed to move toward prefunding these benefits as well as increasing
productivity to offset rising costs, rationalizing and restructuring
the outmoded postal infrastructure, rightsizing the postal workforce,
and implementing more market-based and performance-oriented
compensation systems for all employees. In this regard, progress is
hindered by the Service's limited flexibility and incentives for
success under current law.
* Key areas for postal reform include clarifying the Service's mission
and role so that the Service remains focused on universal postal
service and competes appropriately; enhancing the Service's flexibility
to operate in a businesslike manner with a governance structure
suitable for a $70-billion entity, balanced by enhanced transparency,
accountability, and oversight; making needed human capital reforms; and
moving toward prefunding retiree health benefits. 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 any major changes.
Postal Service Progress:
In this section of my testimony, I will highlight significant progress
the Service has made since we placed its transformation efforts and
long-term outlook on our High-Risk List.
Record Net Income Largely Resulted from Pension Legislation:
The Service earned a total of $7 billion in fiscal years 2003 and 2004
combined (see fig. 1) and expects to earn more than $1 billion in
fiscal year 2005. However, this net income largely resulted from 2003
legislation that reduced Service pension benefit payments by $6.2
billion in fiscal years 2003 and 2004 combined and $2.8 billion in
fiscal year 2005. This legislation has enabled the Service to keep
postal rates stable since 2002 and promise not to raise rates until
2006. Absent the 2003 legislation, the Service likely would already
have raised postal rates to avoid deficits. Net income also benefited
from higher revenues associated with increased volumes of Standard Mail
(primarily advertising), as well as certain Service cost-cutting and
efficiency initiatives.
Figure 1: Postal Service Net Income, Fiscal Years 1972 through 2004:
[See PDF for image]
[End of figure]
The Postal Service Has Repaid Most of Its Debt:
Postal Service debt was reduced from a peak of $11.3 billion at the end
of fiscal year 2001 to $1.8 billion at end of fiscal year 2004 (see
fig. 2). Debt repayment, which has continued in fiscal year 2005, was
primarily enabled by pension legislation, previously discussed in this
testimony, as well as restraint over capital spending that further
reduced the Service's need for borrowing. For example, the Service
imposed a temporary freeze on most new capital facility projects in
fiscal year 2001 that has since been lifted.[Footnote 5]
Figure 2: Postal Service Debt, Fiscal Years 1972 through 2004:
[See PDF for image]
[End of figure]
Postal Service Productivity Has Continued to Increase:
Postal Service productivity increased by 5.2 percent from fiscal years
2001 to 2004, reaching its highest level since fiscal year 1972 (see
fig. 3). Productivity rose as a result of many factors, notably cost
containment resulting from large reductions in work hours enabled by
automation, information technology and other efficiency initiatives; as
well as restraint over capital spending.
Figure 3: Cumulative Productivity Growth, Fiscal Years 1972 through
2004:
[See PDF for image]
[End of figure]
The Postal Service Has Downsized Its Workforce:
The Postal Service downsized its workforce by 9.4 percent from fiscal
years 2001 to 2004; primarily from reductions in the number of career
postal employees (see fig. 4). This decline reduced the size of the
Service's career workforce to about 707,000 at the end of fiscal year
2004, which was its lowest level since fiscal year 1993. Workforce
reductions were made through attrition instead of layoffs, as employees
retired and were not replaced, notably in mail processing and
administrative functions affected by automation and information
technology. Moreover, the number of career letter carriers was also
reduced slightly despite a 3 percent increase in the number of delivery
points, as more mail was sorted by automation equipment into the order
of delivery.
Figure 4: Number of Postal Service Employees, Fiscal Years 1984 through
2004:
[See PDF for image]
[End of figure]
The Need for Postal Reform:
Key trends and challenges demonstrate the need for postal reform:
Declining First-Class Mail volume: The Service's core business of First-
Class Mail volume growth has shown a downward trend since the mid-1980s
and declined annually since fiscal year 2001--a first-time occurrence
(see fig. 5). This trend is expected to continue for the foreseeable
future, as customers continue to increase their use of electronic
alternatives for communications and payments.
Figure 5: First-Class Mail Volume Growth/Decline, Fiscal Years 1984
through 2004:
[See PDF for image]
[End of figure]
Declining First-Class Mail volume poses a fundamental challenge to the
Service's long-term viability. First-Class Mail generates about half of
the Service's mail volume, more than half of its revenues, and covers
more than two-thirds of the Service's overhead costs (see fig. 6).
About half of overhead costs, also referred to as institutional
costs,[Footnote 6] are comprised of the universal service costs of
maintaining postal delivery and retail networks. Declining First-Class
Mail volume is causing a loss of First-Class Mail revenues to cover
overhead costs, which will be difficult to recover from other classes
of mail.
Figure 6: Mail Volume, Revenues, and Contribution to Cover Overhead
Costs, Fiscal Year 2004:
[See PDF for image]
Note: Contribution data are the most recent available according to
Postal Rate Commission methodology.
[A] Other mail includes mail such as magazines, newspapers, and
parcels. Other services include postal services such as post office
boxes, money orders, and delivery confirmation.
[End of figure]
Changes in the mail mix: The shift in the Service's mail mix from First-
Class Mail to Standard Mail has resulted in shrinking revenues to cover
overhead costs. Standard Mail volume grew to nearly match First- Class
Mail in fiscal year 2004 (see fig. 7) and is expected to exceed First-
Class Mail in fiscal year 2005. However, compared with First- Class
Mail, the average piece of Standard Mail generates only about half of
the revenues and less than 40 percent of the contribution to cover
overhead costs.
Figure 7: First-Class Mail and Standard Mail Volume, Fiscal Years 1990
through 2004:
[See PDF for image]
[End of figure]
Increased competition from private delivery companies: Private delivery
companies dominate the market for parcels over 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 has
declined about 30 percent since its volume peaked in fiscal year 2000
(see fig. 8) as the highly competitive parcel market has turned to
lower-priced ground shipment alternatives. Express Mail volume has also
declined for the same reason. Adding to the competition, 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 acquisition of Kinko's.
Figure 8: Priority Mail Volume, Fiscal Years 1990 through 2004:
[See PDF for image]
[End of figure]
Subpar revenue growth: Postal revenue growth has slowed in recent years
(see fig. 9) due to declining First-Class Mail volume and shifts in the
mail mix to lower-margin products. As noted previously, the Service's
record net income was largely due to lower pension costs instead of
rising mail revenues. If revenues continue to be affected by mail
volume trends, that will lead to greater reliance on rate increases to
produce needed revenues.
Figure 9: Postal Service Revenue Growth, Fiscal Years 1990 through
2004:
[See PDF for image]
Note: Average postal rates increased 19.9 percent in fiscal year 1991,
10.2 percent in fiscal year 1995, 2.8 percent in fiscal year 1999, 6.3
percent in fiscal year 2001, and 7.7 percent in fiscal year 2002.
[End of figure]
Rising costs: Key Service costs continue to rise despite continued
downsizing and cost-cutting efforts, creating upward pressure on postal
rates. In fiscal year 2004, Service compensation and benefit costs
increased $1.7 billion, despite a decrease of nearly 22,000 career
employees from the prior fiscal year. This cost growth was due to (1)
wage increases for craft employees, including cost-of-living
adjustments plus basic pay increases; (2) rising benefits costs,
including about $500 million in additional health benefits costs for
active employees and retirees; and (3) additional workload to serve 1.8
million new delivery points and handle increased Standard Mail volume.
Significant financial liabilities and obligations: The Service
estimated it had roughly $70 billion to $80 billion in liabilities and
obligations at the end of fiscal year 2004, including roughly $50
billion to $60 billion in unfunded retiree health benefits that were
not reported on its balance sheet. Given the Service's workforce
demographics and health care trends, its payments for retiree health
benefits are projected to rise throughout the next 3 decades (see fig.
10). The Service will have difficulty financing these benefit costs,
particularly if unfavorable revenue and cost trends continue.
Figure 10: Postal Service Health Benefits Costs, Fiscal Years 1990
through 2040:
[See PDF for image]
Note: Projections are based on current law.
[End of figure]
Need for substantial improvements in postal productivity: Substantial
productivity increases continue to be needed to help keep postal rates
affordable, particularly given trends in declining First-Class Mail
volume and rising costs. Some productivity increases may result from
initiatives to standardize processes among mail processing plants where
productivity varies widely. However, it is important to recognize that
the current legal framework provides the Service with limited
incentives for increasing its productivity. Under the Service's break-
even mandate and statutory monopoly to deliver letter mail, no matter
how little productivity increases, the Service can raise rates to cover
rising costs. However, as postal management has recognized, while
raising rates may provide an immediate boost to postal revenues in the
short run, raising rates may also accelerate the diversion of First-
Class Mail to other alternatives, thus exacerbating the Service's
problems in the long run.
Uncertainties regarding postal infrastructure: The Service is using an
"evolutionary" approach to develop a more efficient and flexible
infrastructure but has disclosed limited information about its overall
plans. The Service risks falling short of achieving its goals of
rationalizing its infrastructure and workforce and removing excess
capacity from its mail processing, distribution, and transportation
networks unless it has a clear strategy that includes a comprehensive
and integrated plan along with clear criteria as a basis for its
decisions, measures to assess the impact of actions taken, and a
process for informing key stakeholders, including the Congress.
Key Areas for Postal Reform:
Postal reform is needed to address the following key areas:[Footnote 7]
* Mission and role: Congress needs to (1) clarify the Service's
mission, because current law has enabled the Service to engage in
unprofitable initiatives that are unrelated to its core mission, as
well as (2) clarify the Service's role in competing fairly, including
its monopoly to deliver letter mail, its authority to regulate the
scope of its own monopoly, and other terms of competition.
* Governance, transparency, and accountability: Congress needs to (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 (1) increased
flexibility for the Service to operate in a businesslike manner,
through streamlining the rate-setting process and allowing a certain
amount of retained earnings, with (2) enhanced 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 and incentives to
rightsize its infrastructure and reshape its workforce. Additional
flexibility should be balanced by safeguards to prevent abuse as well
as enhanced transparency, accountability, and oversight, starting with
appropriate disclosure of the Service's large financial liabilities and
obligations.
* Human capital reforms and pension benefit costs: Congress needs to
consider legislative proposals that would (1) revise the Service's
current responsibility for pension costs related to military service,
(2) move toward prefunding retiree health benefits, and (3) abolish the
escrow account established in recent pension legislation. Congress also
needs to decide whether postal workers' compensation benefits should be
on par with those in the private sector and to clarify related pay
comparability standards. In any event, progress continues to be needed
toward flexible, contemporary, performance-oriented, and market-based
compensation systems for all Service employees, consistent with proven
approaches to strategic human capital management.
Chairman Collins, this concludes my prepared statement. I would be
pleased to respond to any questions that you or the Members of the
Committee may have.
Contact and Acknowledgments:
For further information regarding this statement, please contact
Katherine Siggerud, Director, Physical Infrastructure Issues at (202)
512-2834 or at siggerudk@gao.gov. Individuals making key contributions
to this statement included Teresa Anderson, Kenneth E. John, Shirley
Abel, Kevin Bailey, Gerald P. Barnes, Nancy Boardman, Linda Calbom,
Margaret Cigno, Kathleen A. Gilhooly, Donna Leiss, and Laura Shumway.
FOOTNOTES
[1] GAO, U.S. Postal Service: Key Reasons for Postal Reform, GAO-04-
565T (Washington, D.C.: Mar. 23, 2004).
[2] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005)
[3] The Postal Civil Service Retirement System (CSRS) Funding Reform
Act of 2003 (P.L. 108-18) was enacted in response to Office of
Personnel Management's finding that the Service was on course to
overfund its CSRS obligations.
[4] GAO, Postal Pension Funding Reform: Issues Related to the Postal
Service's Proposed Use of Pension Savings, GAO-04-238 (Washington,
D.C.: Nov. 26, 2003).
[5] Congress appropriated more than $1 billion to the Service for
emergency preparedness funding, including $503 million in December
2004. The Service has requested $51 million in emergency preparedness
appropriations for fiscal year 2006.
[6] Institutional costs comprise roughly 40 percent of all postal costs
and are defined as costs that are not attributed to specific products
and services.
[7] 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).
