U.S. Postal Service
Postal Reform Law Provides Opportunities to Address Postal Challenges Gao ID: GAO-07-685T April 19, 2007When GAO originally placed the U.S. Postal Service's (the Service) transformation efforts and long-term outlook on its high-risk list in early 2001, it was to focus urgent attention on the Service's deteriorating financial situation. Aggressive action was needed, particularly in cutting costs, improving productivity, and enhancing financial transparency. GAO testified several times since 2001 that comprehensive postal reform legislation was needed to address the Service's unsustainable business model, which assumed that increasing mail volume would cover rising costs and mitigate rate increases. This outdated model limited its flexibility and incentives needed to realize sufficient cost savings to offset rising costs, declining First-Class Mail volumes, unfunded obligations, and an expanding delivery network. This limitation threatened the Service's ability to achieve its mission of providing affordable, high-quality universal postal services on a self-financing basis. This testimony will focus on (1) why GAO recently removed the Service's transformation efforts and outlook from GAO's high-risk list, (2) the Service's financial condition in fiscal year 2007, (3) the opportunities and challenges facing the Service, and (4) major issues and areas for congressional oversight. This testimony is based on GAO's past work, review of the postal reform law, and updated information on the Service's financial condition.
Key actions by both the Service and Congress have led GAO to remove the Service's transformation efforts and long-term outlook from its high-risk list in January 2007. Specifically, the Service developed a Transformation Plan and achieved billions in cost-savings, improved productivity, downsized its workforce, and improved its financial reporting. Congress enacted a law in 2003 that reduced the Service's annual pension expenses, which enabled it to achieve record net incomes, repay debt, and delay rate increases until January 2006. Finally, the postal reform law enacted in December 2006 provides tools and mechanisms that can be used to address key challenges facing the Service as it moves into a new regulatory and increasingly competitive environment. The two key factors that will affect the Service's financial condition for this fiscal year are the new reform law and new postal rates that go into effect in May. The reform law increases the costs of funding retiree health benefits but provides opportunities to offset some of these cost pressures through efficiency gains and eliminating certain pension payments. For the rest of the year, Service officials do not expect significant changes from its projected expenses and revenues. Other factors, such as costs for fuel or labor resolutions varying from plan, could affect the Service's projected outcome for this fiscal year. Congress's continued oversight of the Service's transformation is critical at this time of significant changes for the Service, Postal Regulatory Commission (PRC), and mailing industry. Also, key to a successful transformation is innovative leadership by the Postmaster General and the PRC Chairman and their ability to work effectively with stakeholders to realize new opportunities provided under the postal reform law. GAO has identified key issues and areas for oversight related to implementing the reform law and new rate-setting structure, as well as other challenges to ensure the Service remains financially sound.
GAO-07-685T, U.S. Postal Service: Postal Reform Law Provides Opportunities to Address Postal Challenges
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Testimony:
Before the Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, 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 19, 2007:
U.S. Postal Service:
Postal Reform Law Provides Opportunities to Address Postal Challenges:
Statement of Katherine Siggerud, Director:
Physical Infrastructure
Issues:
GAO-07-685T:
GAO Highlights:
Highlights of GAO-07-685T, a testimony for the Subcommittee on Federal
Financial Management, Government Information, Federal Services and
International Security, Senate Committee on Homeland Security and
Governmental Affairs
Why GAO Did This Study:
When GAO originally placed the U.S. Postal Service‘s (the Service)
transformation efforts and long-term outlook on its high-risk list in
early 2001, it was to focus urgent attention on the Service‘s
deteriorating financial situation. Aggressive action was needed,
particularly in cutting costs, improving productivity, and enhancing
financial transparency. GAO testified several times since 2001 that
comprehensive postal reform legislation was needed to address the
Service‘s unsustainable business model, which assumed that increasing
mail volume would cover rising costs and mitigate rate increases. This
outdated model limited its flexibility and incentives needed to realize
sufficient cost savings to offset rising costs, declining First-Class
Mail volumes, unfunded obligations, and an expanding delivery network.
This limitation threatened the Service‘s ability to achieve its mission
of providing affordable, high-quality universal postal services on a
self-financing basis.
This testimony will focus on (1) why GAO recently removed the Service‘s
transformation efforts and outlook from GAO‘s high-risk list, (2) the
Service‘s financial condition in fiscal year 2007, (3) the
opportunities and challenges facing the Service, and (4) major issues
and areas for congressional oversight. This testimony is based on GAO‘s
past work, review of the postal reform law, and updated information on
the Service‘s financial condition.
What GAO Found:
Key actions by both the Service and Congress have led GAO to remove the
Service‘s transformation efforts and long-term outlook from its high-
risk list in January 2007. Specifically, the Service developed a
Transformation Plan and achieved billions in cost-savings, improved
productivity, downsized its workforce, and improved its financial
reporting. Congress enacted a law in 2003 that reduced the Service‘s
annual pension expenses, which enabled it to achieve record net
incomes, repay debt, and delay rate increases until January 2006.
Finally, as illustrated in the table, the postal reform law enacted in
December 2006 provides tools and mechanisms that can be used to address
key challenges facing the Service as it moves into a new regulatory and
increasingly competitive environment.
The two key factors that will affect the Service‘s financial condition
for this fiscal year are the new reform law and new postal rates that
go into effect in May. The reform law increases the costs of funding
retiree health benefits but provides opportunities to offset some of
these cost pressures through efficiency gains and eliminating certain
pension payments. For the rest of the year, Service officials do not
expect significant changes from its projected expenses and revenues.
Other factors, such as costs for fuel or labor resolutions varying from
plan, could affect the Service‘s projected outcome for this fiscal
year.
Table: Postal Reform Law Provides Opportunities to Address Challenges:
Challenges facing the Service: Generating sufficient revenues to cover
costs as the mail mix is changing;
Opportunities to address challenges: Provides price-setting flexibility
and allows the Service to retain earnings.
Challenges facing the Service: Controlling costs, particularly for
compensation and long-term health benefits, and improving productivity;
Opportunities to address challenges: Encourages the Service to reduce
costs and operate more efficiently in areas such as realigning its
network and workforce.
Challenges facing the Service: Maintaining affordable, reliable service
and establishing reliable mechanisms to measure and report service
performance;
Opportunities to address challenges: Establishes service standards and
monitoring by the new Postal Regulatory Commission (PRC).
Challenges facing the Service: Providing useful and reliable financial
data to assess performance;
Opportunities to address challenges: Establishes new reporting,
accounting, and ratemaking data requirements.
Challenges facing the Service: Managing its workforce to respond to
operational changes;
Opportunities to address challenges: Requires a plan to describe the
Service's vision for realigning its infrastructure and workforce,
and the resulting impacts on its workforce.
Source: GAO.
[End of table]
Congress‘s continued oversight of the Service‘s transformation is
critical at this time of significant changes for the Service, PRC, and
mailing industry. Also, key to a successful transformation is
innovative leadership by the Postmaster General and the PRC Chairman
and their ability to work effectively with stakeholders to realize new
opportunities provided under the postal reform law. GAO has identified
key issues and areas for oversight related to implementing the reform
law and new rate-setting structure, as well as other challenges to
ensure the Service remains financially sound.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-685T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine Siggerud at
(202) 512-2834 or siggerudk@gao.gov.
[End of section]
Chairman Carper and Members of the Subcommittee:
I am pleased to be here today to participate in this oversight hearing
for the U.S. Postal Service (the Service). To begin, I want to
acknowledge Congress's efforts in passing comprehensive postal reform
legislation[Footnote 1]. The Postal Accountability and Enhancement Act
(the act) provides tools and mechanisms that can be used to establish
an efficient, flexible, fair, transparent, and financially sound Postal
Service--a Service that can more effectively operate in an increasingly
competitive environment not anticipated under the Postal Reorganization
Act of 1970. Effective collaboration among the Service, the newly
established Postal Regulatory Commission (PRC), mailers, and employee
organizations can help to facilitate the successful implementation of
the act by achieving a greater understanding of each other's changing
needs and operations, and how they correspond to the American public's
need for the continued provision of affordable, high-quality postal
service[Footnote 2]s. My remarks today will focus on (1) why we
recently removed the Service's transformation efforts and outlook from
GAO's high-risk list, (2) the Service's financial condition in fiscal
year 2007, (3) the opportunities and challenges facing the Service, and
(4) major issues and areas for continued congressional oversight.
In summary:
When we originally placed the Service's transformation efforts and long-
term outlook on our high-risk list in early 2001, we stated that a
structural transformation would be needed to address the growing
financial, operational, and human capital challenges that threatened
its mission to provide affordable, high-quality universal postal
services on a self-financing basis.[Footnote 3] This designation would
help raise the urgency of taking actions to address these challenges
before the situation escalated into a crisis where the options for
action could be more limited. Since that time, key actions by both the
Service and Congress have improved the Service's financial,
operational, and human capital condition and outlook. Specifically, the
Service's management issued a Transformation Plan in 2002 that outlined
steps to guide it in addressing its challenges and has demonstrated a
commitment to implementing the Plan by cutting costs, improving
productivity, downsizing its workforce, and improving its financial
reporting. Further, a statute enacted in 2003 reduced the Service's
annual pension expenses, which allowed the Service to achieve record
net income, repay debt, and delay rate increases until January
2006.[Footnote 4] Comprehensive postal reform legislation was enacted
in December 2006 that among other factors, provides:
* a framework for modernizing the Service's rate-setting process;
* an opportunity to preserve affordable universal service by
reassessing the future needs of postal customers and taking actions to
increase value and efficiencies throughout the postal network--
fundamental principles of functioning in a competitive environment;
* recognition of the Service's long-term financial obligations by
prefunding retiree health benefit obligations, which will result in
short-term cost increases for the Service, but over the long-term this
action improves the fairness and balance of cost burdens for current
and future ratepayers;
* for a transfer of the obligation to fund civil service pension
payments attributable to past military service from postal ratepayers
to taxpayers;[Footnote 5] and:
* enhanced transparency and accountability by requiring that the
Service collect, track, and report financial and service performance
information, including the creation and reporting of modern service
standards.
Based on these actions, we determined that sufficient progress has been
made to warrant the removal of the Service from our high-risk list in
January 2007. We recognize, however, that the Service continues to face
challenges to maintain its viability as it implements significant
changes under the new law and will further discuss these challenges
below.
The Service's financial condition for the current fiscal year has been
affected by the act, which, along with the ensuing rate increase, will
continue to affect its near-and long-term financial outlook.
Specifically, changes to either projected or actual Postal Service
payments that result from this act include:
* accelerating funding of the Service's retiree health benefit
obligations,
* expensing funds previously set aside in escrow (transferring them to
the Treasury) and eliminating future escrow payments,
* transferring funding for selected military service benefits back to
the Treasury, and:
* eliminating certain annual Civil Service Retirement System (CSRS)
pension funding requirements.
Since the law was enacted, the Service has updated its expense
projections for fiscal year 2007. To date, those expenses not directly
impacted by the 2006 Act and its total revenues have tracked closely to
budgeted estimates. For the remainder of the fiscal year, Service
officials do not expect significant changes from projected expenses,
and still expect to meet revenue targets--even though the rate decision
approved by the PRC was different than what the Service
requested.[Footnote 6] These officials did acknowledge, however, that
other factors could have a favorable or unfavorable impact on the
Service's projected net loss for the year, such as the effect of rate
increases on mail volumes, changes in fuel prices, and resolution of
certain labor agreements. The Service is planning to borrow $1.8
billion this year, which will push its total outstanding debt to almost
$4 billion to meet short-term cash flow needs that come at year end.
As the Service transitions to its new statutory framework in an
increasingly competitive environment, it will continue to face
financial, operational, and human capital challenges. Table 1
illustrates how the legislation provides opportunities to address some
of these challenges.
Table 1: Reform Legislation Provides Opportunities to Address
Continuing Challenges:
Challenges facing the Service: Generating sufficient revenues to cover
costs as the mail mix is changing;
Opportunities to address challenges: Provides price-setting flexibility
and allows the Service to retain earnings.
Challenges facing the Service: Controlling costs, particularly for
compensation and long-term health benefits, and improving productivity;
Opportunities to address challenges: Encourages the Service to reduce
costs and operate more efficiently in areas such as realigning its
network and workforce.
Challenges facing the Service: Maintaining affordable, reliable service
and establishing reliable mechanisms to measure and report service
performance;
Opportunities to address challenges: Requires the Service to establish
service standards in consultation with the new Postal Regulatory
Commission, which will annually report on the Service's performance
against these standards.
Challenges facing the Service: Providing useful and reliable financial
data to assess performance to management, regulators, and oversight
bodies;
Opportunities to address challenges: Establishes new reporting,
accounting, and ratemaking data requirements.
Challenges facing the Service: Managing its workforce to respond to
operational needs;
Opportunities to address challenges: Requires a plan to describe the
Service's vision for realigning its infrastructure and workforce,
including the impacts of facility changes on its workforce and whether
the Service has sufficient flexibility to make needed workforce
changes.
Source: GAO.
[End of table]
Continued oversight will be necessary to help ensure the Service's
future financial condition remains sound and that the intent of the act
is followed throughout implementation. In particular, we have
identified major issues considered significant by various postal
stakeholders, as well as areas for continued oversight including:
* the effect of the upcoming rate increases and statutory changes on
the Postal Service's financial condition;
* the impact of the Service's decision on whether or not to submit a
rate filing later this year under the old rate structure;
* actions by the PRC to establish a new price-setting and regulatory
framework;
* the Service's ability to operate under an inflationary price cap
while some of its cost segments are increasing above the rate of
inflation;
* actions by the Service, in consultation with the PRC, to establish
modern service standards, and the Postal Service's plan for meeting
those standards;
* the Service's ability to provide high-quality delivery service as it
takes actions to reduce costs and realign its infrastructure and
workforce; and:
* the PRC's development of appropriate accounting and reporting
requirements aimed at enhancing transparency and accountability of the
Service's internal data and performance results.
The successful transformation of the Postal Service will require
innovative leadership by the Postmaster General and the Chairman of the
PRC, and their ability to work effectively with their employees, the
mailing industry, and the general public. We are encouraged by the
Service's ongoing efforts to facilitate workgroups with participants
from the mailing industry that will make recommendations regarding new
service standards and measures. It will be important for all postal
stakeholders to take full advantage of the unique opportunities that
are currently available by providing input and working together,
particularly as challenges and uncertainties will continue to threaten
the Service's financial condition and outlook.
Recent Actions Warranted the Postal Service's Removal from Our High-
Risk List:
Several actions--both by the Service and the Congress--led us to remove
the Service's transformation efforts and long-term outlook from our
high-risk list. In 2001, we made this designation because the Service's
financial outlook had deteriorated significantly. The Service had a
projected deficit of $2 billion to $3 billion, severe cash flow
pressures, debt approaching the statutory borrowing limit, cost growth
outpacing revenue increases, and limited productivity gains. Other
challenges the Service faced included liabilities that exceeded assets
by $3 billion at the end of fiscal year 2002 major liabilities and
obligations estimated at close to $100 billion, a restructuring of the
workforce due to impending retirements and operational changes, and
long-standing labor-management relations problems. We raised concerns
that the Service had no comprehensive plan to address its financial,
operational, or human capital challenges, including its plans for
reducing debt, and it did not have adequate financial reporting and
transparency that would allow the public to understand changes in its
financial situation. Thus, we recommended that the Service develop a
comprehensive plan, in conjunction with other stakeholders, which would
identify the actions needed to address its challenges and provide
publicly available quarterly financial reports with sufficient
information to understand the Service's current and projected financial
condition. As the Service's financial difficulties continued in 2002,
we concluded that the need for a comprehensive transformation of the
Service was more urgent than ever and called for Congress to act on
comprehensive postal reform legislation. The Service's basic business
model, which assumed that rising mail volume would cover rising costs
and mitigate rate increases, was outmoded as First-Class Mail volumes
stagnated or deteriorated in an increasingly competitive environment.
Since 2001, the Service's financial condition has improved and it has
reported positive net incomes for each of the last 4 years (see fig.
1).
Figure 1: Recent Postal Service Net Incomes:
[See PDF for image]
Source: Postal Service Annual Reports.
[End of figure]
The Service has made significant progress in addressing some of the
challenges that led to its high-risk designation. For example, the
Service's management developed a Transformation Plan and has
demonstrated a commitment to implementing this plan. Since our
designation in 2001, the Service has:
* Reduced workhours and improved productivity: The Service has reported
productivity gains in each year. According to the Service, its
productivity increased by a cumulative 8.3 percent over that period,
which generated $5.4 billion in cost savings. The Service reported
eliminating over 170 million workhours over this period, with a 4.5
million workhour reduction in fiscal year 2006.
* Downsized its workforce: The Service has made progress in addressing
some of the human capital challenges associated with its vast
workforce, by managing retirements, downsizing, and expanding the use
of automation. At the end of fiscal year 2006, the Service reported
that it had 696,138 career employees, the lowest count since fiscal
year 1993. Attrition and automation have allowed the Service to
downsize its workforce by more than 95,000, or about 10 percent, since
fiscal year 2001.
* Enhanced the reporting of its financial condition and outlook: The
Service responded to recommendations we made regarding the lack of
sufficient and timely periodic information on its financial condition
and outlook that is publicly available between publications of its
audited year-end financial statements by enhancing its financial
reporting and providing regular updates to the financial statements on
its Web site.[Footnote 7] The Service instituted quarterly financial
reports, expanded the discussion of financial matters in its annual
report, and upgraded its Web site to include these and other reports in
readily accessible file formats.
The 2003 pension act provided another key reason for why we removed the
high-risk designation.[Footnote 8] Much of the Service's recent
financial improvement was due to the change from this law that reduced
the Service's annual pension expenses. Between fiscal years 2003 and
2005, the Service had a total of $9 billion in decreased pension
expenses when compared to the annual expenses that would have been paid
without the statutory change. This change enabled the Service to
significantly cut its costs, achieve record net incomes, repay over $11
billion of outstanding debt, and delay rate increases until January
2006.
The Service's improved financial performance and condition during this
time was also aided by increased revenue generated from growing volumes
of Standard Mail (primarily advertising) and rate increases in June
2002 and January 2006. Standard Mail volumes grew by almost 14 percent
from fiscal year 2001 to 2006, and Standard Mail revenues, when
adjusted for inflation, increased by over 11 percent during the same
time period. In June 2002, the Service implemented a rate increase (the
price of a First-Class stamp increased from 34 cents to 37 cents) to
offset rising costs. In January 2006, the Service implemented another
rate increase (the price of a First-Class stamp increased from 37 cents
to 39 cents) to generate the additional revenue needed to set aside
$3.0 billion in an escrow account in fiscal year 2006 as required by
the 2003 pension law. Revenues in fiscal year 2006 increased by about 4
percent from the previous year due largely to the January 2006 rate
increase.
The passage of the recent postal reform legislation was another reason
why we removed this high-risk designation. Although noticeable
improvements were being made to the Service's financial, operational,
and human capital challenges, we had continued to advocate the need for
comprehensive postal reform legislation.[Footnote 9] After years of
thorough discussion, Congress passed a comprehensive postal reform law
in late December 2006 that provides tools and mechanisms that can be
used to establish an efficient, flexible, fair, transparent, and
financially sound Postal Service. Later in this statement, I will
discuss how some specific tools and mechanisms can be used to address
the continuing challenges facing the Service.
The Postal Service's Current Financial Condition:
The Service's financial condition for fiscal year 2007 has been
affected by the reform act, which, along with the May change in postal
rates, will continue to affect its near-and long-term financial
outlook. The Service will benefit financially from an increase in
postal rates in May averaging 7.6 percent. Key steps in the rate
process are provided in appendix I. The Service is estimating that it
will gain an additional $2.2 billion in net income in fiscal year 2007
as a result of the new rates. The recent rate case, in addition to
generating additional revenues, took significant strides in aligning
postal rates with the respective mail handling costs. Some rate
increases are particularly large--i.e., some catalog rates may increase
by 20 to 40 percent. The new rates structure is aimed at providing the
necessary incentives to encourage efficient mailing practices (e.g.,
shape, weight, handling, preparation, and transportation) and thereby
encourage smaller rate increases and steady mail volumes in the longer
run.
At the beginning of fiscal year 2007 (before the enactment of the
reform law), the Service expected to earn $1.7 billion in net income,
which reflected the additional revenue the Service estimated it would
receive from the May increase in postal rates. The Service, however,
planned to increase its outstanding debt of $2.1 billion at the end of
fiscal year 2006 by an additional $1.2 billion in fiscal year 2007 in
order to help fund the expected $3.3 billion escrow requirement for
2007.
Since enactment of the reform law, the Service has updated its expense
projections. While the Service's total expenses for fiscal year 2007
have been affected by passage of the act, those expenses not directly
related to the act and total revenues have tracked closely to plan. The
Service currently is estimating an overall fiscal year 2007 net loss of
$5.3 billion, largely due to changes in either projected or actual
Postal Service payments as a result from the act including:
* Accelerating funding of the Service's retiree health benefit
obligations: Beginning this fiscal year, the Postal Service must make
the first of 10 annual payments into a newly created Postal Service
Retiree Health Benefits Fund (PSRHBF) to help fund the Service's
significant unfunded retiree health obligations. The 2007 payment of
$5.4 billion is due to be paid by September 30. The Service has accrued
half of this expense--$2.7 billion--during the first 6 months of the
fiscal year and will accrue $1.35 billion in each of the remaining 2
quarters.
* One-time expensing of funds previously set aside in escrow and
eliminating future escrow payments: The act requires the Service to
transfer the $3.0 billion it escrowed in fiscal year 2006 to the
PSRHBF, which the Service recognized as a one-time expense in the first
quarter of fiscal year 2007.[Footnote 10] The reform act also
eliminated future escrow payments required under the 2003 pension law,
including the $3.3 billion payment scheduled for fiscal year 2007.
* Transferring funding for selected military service benefits back to
the Treasury: The act significantly reduced the Service's civil service
pension obligations by transferring responsibility for funding civilian
pension benefits attributable to the military service of the Service's
retirees back to the Treasury Department, where it had been prior to
enactment of the 2003 pension law. The reform act requires that any
overfunding attributable to the military benefits as of September 30,
2006, be transferred to the PSRHBF by June 30, 2007.[Footnote 11]
* Eliminating certain annual Civil Service Retirement System (CSRS)
pension funding requirements: The act eliminated the requirement that
the Service fund the annual normal cost of its civil service employees
and the amortization of the unfunded pension obligation that existed
prior to transferring the military service obligations to the Treasury
Department.[Footnote 12] The Service estimates that it will save $1.5
billion in fiscal year 2007 from eliminating the annual pension funding
requirements and amortization payments.
The result of these payments is a net increase in retirement-related
expenses of $3.9 billion,[Footnote 13] which is $600 million higher
than the expected $3.3 billion escrow payment for 2007 that was
eliminated. Thus, the Service is planning to borrow $600 million more
than initially budgeted to cover this shortfall. This increase is
anticipated to result in the Service's borrowing $1.8 billion in fiscal
year 2007, which would bring its total outstanding debt to $3.9 billion
by the end of the fiscal year.
The Service has identified other factors and uncertainties that,
depending on how results vary from budgeted estimates, could have a
favorable or unfavorable impact on the Service's projected net loss for
fiscal year 2007. For example, volumes and revenues may be affected by
a continued slowdown in the U.S. economy or unanticipated consequences
of the recent rate decision. The Service has anticipated economic
growth to pick up in the third and fourth quarters of this year, but a
slowdown may depress volume growth below projected levels for the rest
of the year. Furthermore, the unusual nature of the rate case creates
uncertainties for the Service that may affect its financial results.
These uncertainties include how the Service and its customers will
respond to the:
* limited implementation times--the 2-month implementation period (the
Postal Service Board of Governors decision on March 19, 2007, stated
that most new rates would become effective on May 14, 2007) leaves
little time for the Service to educate the public and business mailers
on the new rate changes and to allow mailers sufficient time to adjust
their mailing practices and operations accordingly;
* delayed implementation times--how mailers and the Service will be
affected by the delay in implementing new Periodical rates until mid-
July;
* magnitude of certain restructured rates, particularly for those
specific types of mail that will experience rather significant
increases, and the related impact on volumes and revenues; and:
* unfamiliarity with restructured rates--the prices for many popular
products, such as certain types of First-Class Mail, will experience
significant shifts based on the shape of the mail. For example, figure
2 shows how the cost of First-Class Mail will differ based on its
shape.
Figure 2: Cost of First-Class Mail Will Differ Based on Shape of Mail
under New Rate System:
[See PDF for image]
Source: GAO.
[End of figure]
Moreover, the Service's expense projections may be susceptible to
rising fuel prices due to the Service's vulnerability in this area or
that the outstanding contract negotiations for two of its major labor
unions would vary from projected levels. Although the extent to which
these factors and uncertainties will affect the Service's financial
condition for fiscal year 2007 is not known, they may affect its
subsequent financial outlook. For example, if the Service finds that
its financial performance and condition is weakening--either through
revenue shortfalls or expense increases--it may decide to file another
rate increase later this year.
Postal Reform Law Provides Opportunities to Address Challenges:
The new postal reform law provides new opportunities to address
challenges facing the Service as it continues its transformation in a
more competitive environment with a variety of electronic alternatives
for communications and payments. Specifically, it provides tools and
mechanisms to address the challenges of generating sufficient revenues,
controlling costs, maintaining service, providing reliable performance
information, and managing its workforce. Effectively using these tools
will be key to successfully implementing the act and addressing these
challenges.
Generating Sufficient Revenue as First-Class Mail Volume Is Declining
and Mail Mix Is Changing:
The Service continues to face challenges in generating sufficient
revenues as First-Class Mail volume continues to decline and the mail
mix changes. First-Class Mail, historically the class of mail with the
largest volumes and revenues, saw volume shrink by almost 6 percent
from fiscal year 2001 to 2006. The trends for First-Class Mail and
Standard Mail, which currently combine for about 95 percent of mail
volumes and 80 percent of revenues, experienced a historical shift in
fiscal year 2005. For the first time, Standard Mail volumes exceeded
those for First-Class Mail (see fig. 3).
Figure 3: Standard Mail Volumes Are Outpacing Those for First-Class
Mail:
[See PDF for image]
Source: Postal Service Annual Reports.
Note: First-Class Mail volume does not include Priority Mail.
[End of figure]
This shift has major revenue implications because:
* First-Class Mail generates the most revenue and is used to finance
most of the Service's institutional (overhead) costs (see fig. 4).
* Standard Mail generates less revenue per piece compared to First-
Class Mail and it takes about two pieces of Standard Mail to make the
same contribution to the Service's overhead costs as one piece of First-
Class Mail.
* Standard Mail is a more price-sensitive product compared to First-
Class Mail because it competes with other advertising media. Also,
because advertising, including Standard Mail, tends to be affected by
economic cycles to a greater extent than First-Class Mail, a larger
portion of the Service's mail volumes is more susceptible to economic
fluctuations.
Figure 4: Mail Volume, Revenues, and Contribution to Cover Overhead
Costs, Fiscal Year 2006:
[See PDF for image]
Source: Postal Service.
[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]
The act provides tools and mechanisms that can help address these
revenue challenges by promoting revenue generation and retention of
revenues. The act established flexible pricing mechanisms for the
Service's competitive and market-dominant products.[Footnote 14] For
example, it allows the Service to raise rates for its market-dominant
products, such as First-Class Mail letters, Standard Mail, and
Periodicals, up to a defined price cap; exceed the price cap should
extraordinary or exceptional circumstances arise; and use any unused
rate authority within 5 years. For its competitive products, such as
Priority Mail or Expedited Mail, the Service may raise rates as it sees
fit, as long as each competitive products covers its costs and
competitive products as a whole cover their attributable costs and make
a contribution to overhead.
The act also allows for the Service to retain any earnings, which may
promote increased financial stability. First, to the extent the Service
can generate net income to retain earnings, this could enhance its
ability to weather economic downturns. For example, a slow economic
cycle or sudden increase in fuel prices might not necessitate an
immediate rate increase if sufficient retained earnings exist to cover
related shortfalls. Furthermore, to the extent the Service can retain
earnings as liquid assets, it may reduce the Service's reliance on
borrowing to offset cash shortfalls. The Service has stated that it
will take out debt to cover cash shortfalls in fiscal year 2007 and
projects that this increase will result in $3.9 billion of outstanding
debt at the end of the year (see fig. 5). Controlling debt will be
important because the Service needs to operate within its statutorily
set borrowing limits ($3 billion in new debt each year, and $15 billion
in total debt outstanding). Reducing debt was one of the key factors we
cited in removing the Service's high-risk designation.
Figure 5: The Service Projects Nearly $4 Billion in Outstanding Debt at
the End of Fiscal Year 2007:
[See PDF for image]
Source: GAO analysis of Postal Service data.
[End of figure]
Uncertainties related to the recent rate decision and reform law may
impact the extent to which the Service is able to address its revenue
related challenges. The uncertainties include:
* How will mailers and volume respond to the new rate decision's
pricing signals?
* What types of innovative pricing methods will be allowed?
* How will the Service set rates under the new price cap system, and
how will mailers respond to this additional flexibility? How will the
Service and mailers be able to modify their information systems to
accommodate more frequent rate increases?
* How will customer behavior change as prices change under the new
system? To what extent will customers desire for mail be affected by
privacy concerns, environmental concerns, preference for electronic
alternatives, or efforts to establish Do Not Mail lists?[Footnote 15]
* How will the Service be able to enhance the value of its market-
dominant and competitive products (e.g., predictable and consistent
service, tracking and tracing capabilities, etc.)?
* What will the Service do with any retained earnings (e.g., improve
its capital program, save to weather downturns in the economy)?
Controlling Costs and Improving Productivity:
The Service faces multiple cost pressures in the near-and long-term
associated with the required multi-billion dollar payments into the
PSRHBF, dealing with key cost categories experiencing above-inflation
growth while operating under an inflationary-based price cap, and other
costs associated with providing universal postal services to a growing
network--one now expanding by about 2 million new addresses each year.
While the reform act takes actions that increase current costs by
improving the balance of retiree health benefit cost burdens between
current and future ratepayers, it also eliminates other payments and
provides opportunities to offset some of these costs pressures through
efficiency gains that could restrain future rate increases. It will be
crucial for the Service, however, to take advantage of this opportunity
and achieve sustainable, realizable cost reductions and productivity
improvements throughout its networks.
Personnel expenses (which include wages, employee and retiree benefits,
and workers' compensation) have consistently accounted for nearly 80
percent of annual operating expenses, even though the Service has
downsized its workforce by over 95,000 employees since fiscal year
2001. The Service's personnel expenses have grown at rates exceeding
inflation since fiscal year 2003 and are expected to continue
dominating the Service's financial condition. In particular, growth in
retiree health benefit costs have, on average over the last 5 years,
exceeded inflation by almost 13 percent each year. This growth is
expected to continue due to (1) rising premiums, growth in the number
of covered retirees and survivors, and increases in the Service's share
of the premiums; and (2) the Service will continue paying the
employer's share of the health insurance premiums of its retirees along
with the required payments ranging from $5.4 billion to $5.8 billion
into the PSRHBF in each of the following 9 years. While we recognize
the cost pressures that will be placed on the Service as it begins
prefunding its retiree health benefits obligations, we continue to
believe that such action is appropriate to improve the fairness and
balance of cost burdens for current and future ratepayers. Furthermore,
beginning in fiscal year 2017, the Service might enjoy a significant
reduction in its retiree health costs if its obligations are fully
funded.
In addition to these personnel expenses, the Service has also
experienced growth in its transportation costs that exceeded the rate
of inflation in fiscal years 2005 and 2006. Transportation costs
represent the second largest cost category behind compensation and
benefits. These costs grew by about 11 percent from fiscal year 2005 to
2006, largely due to rising fuel costs. In a February 2007 report, we
stated that the Service is vulnerable to fuel price fluctuations and
will be challenged to control fuel costs due to its expanding delivery
network and inability to use surcharges.[Footnote 16]
The Service has made some progress in containing cost growth, and
pledged to cut another $5 billion of costs out of its system between
fiscal years 2006 and 2010 through productivity increases and
operational improvements. The Service has reported productivity
increases for the last 7 years, but the reported increase in fiscal
year 2006 was its smallest during this period. The Service has recently
had trouble absorbing gains in mail volumes while achieving targeted
workhour reductions. Although the Service has reduced its workhours in
6 of the last 7 years, in fiscal year 2006, its goal was to reduce
workhours by 42 million, but the Service reported a decrease of only 5
million workhours.
While both the recent rate decision and reform act seek to improve
efficiencies in the postal networks, these developments will pose
challenges to the Service. In terms of the rate case, the Service will
be challenged to modify its mail processing and transportation networks
to respond to changes in mailer behaviors (e.g., in the quantity and
types of mail sent and how mail is prepared) to minimize their rates.
Furthermore, the reform act provides an opportunity to address the
Service's cost challenges because it requires the Service to develop a
plan that, among other things, includes a strategy for how the Service
intends to rationalize the postal facilities network and remove excess
processing capacity and space from the network, as well as identifying
the costs savings and other benefits associated with network
rationalization alternatives discussed in the plan. This plan provides
an opportunity to address some concerns we have raised in previous
work, in which we stated that it was not clear how the Service intended
to realign its processing and distribution network and workforce, and
that its strategy lacked sufficient transparency and accountability,
excluded stakeholder input, and lacked performance measures for
results.[Footnote 17] We are currently conducting ongoing work on the
Service's progress in this area over the past 2 years and will be
issuing a report this summer with updated findings.
Taking advantage of the opportunities available will have a direct
impact on the Service's ability to operate under an inflationary-based
rate cap, achieve positive results, and limit the growth in its debt.
If the Service is unable to achieve significant cost savings, it may
have to take other actions such as borrow an increasing amount each
year to make year-end property and equipment purchases and fund its
retiree health obligations. The following uncertainties may have a
significant impact on the Service's ability to achieve real cost
savings and productivity in the future:
* How will operating under a rate cap provide an incentive to control
costs?
* How will the Service operate under a rate cap, if certain key costs
continue to increase at levels above inflation (e.g., health benefit
costs)?
* How will the new rate designs/structure lead to efficiency
improvements throughout the mail stream?
* Will the Service's implementation of its network realignment result
in greater cost savings and improved efficiency?
* Will the Service achieve its expected return on investment and
operational performance when it deploys the next phase of automated
flat sorting equipment?
* How will the Service's financial situation be impacted when the 10-
year scheduled payments into the PSRHBF are completed?
* Will the balance of the PSRHBF--which is a function of the PSRHBF's
investment returns and the growth in the Service's retiree health
obligations--be sufficient to cover the Service's retiree health
obligation by the end of fiscal year 2016?
Maintaining, Measuring, and Reporting Service:
The Service will be challenged to continue carrying out its mission of
providing high-quality delivery and retail services to the American
people. Maintaining these services while establishing reliable
mechanisms for measuring and reporting performance will be critical to
the Service's ability to effectively function in a competitive market
and meet the needs of various postal stakeholders, including:
* The Service--so that it can effectively manage its nationwide service
and respond to changes and/or problems in its network.
* The Service's customers (who may choose other alternatives to the
mail)--so that they are aware of the Service's expected performance,
can tailor their operations to those expectations, and understand the
Service's actual performance against those targets.
* Oversight bodies--so that they are aware of the Service's ability to
carry out its mission while effectively balancing costs, service needs,
and the rate cap; can hold the Service accountable for its performance;
and understand service performance (whether reported problems are
widespread or service is getting better or worse).
The Service's delivery performance standards and results have been a
long-standing concern for mailers and Congress.[Footnote 18] We found
inadequate information is collected and available to both the Service
and others to understand and address delivery service issues.
Specifically, the Service does not measure and report its delivery
performance for most types of mail (representative measures of delivery
performance cover less than one-fifth of mail volume and do not include
key types of mail such as Standard Mail, bulk First-Class Mail,
Periodicals, and most Package Services), certain performance standards
are outdated; and that progress has been hindered by a lack of
management commitment and collaboration by the Service and mailers.
Based on these findings, we recommended the Service take actions to
modernize its delivery service standards, develop a complete set of
delivery service measures, more effectively collaborate with mailers,
and improve transparency by publicly disclosing delivery performance
information.
The Service has recently reported positive delivery results for the
limited segment of mail for which the Service does track performance.
It has reported on-time delivery performance improved in the first
quarter of fiscal year 2007 for some single-piece First-Class
Mail.[Footnote 19] However, issues such as late deliveries have been
reported in places such as Chicago, Los Angeles, and El Paso; and for
different types of mail such as Standard Mail and Periodicals. Figure 6
shows that delivery performance in Chicago for this type of mail was
worse than the national average at the end of the first quarter for
this fiscal year.
Figure 6: Delivery Performance in Chicago Was Below the National
Average for Some Single-Piece First-Class Mail at the end of First
Quarter, Fiscal Year 2007:
[See PDF for image]
Source: GAO analysis of Postal Service delivery information.
[End of figure]
The reform act provides an opportunity for the Service to address this
challenge by establishing requirements for maintaining, measuring, and
reporting on service performance. Specifically, the act identified four
key objectives for modern service standards:
* enhance the value of postal services to both senders and recipients;
* preserve regular and effective access to postal services in all
communities, including those in rural areas or where post offices are
not self-sustaining;
* reasonably assure Postal Service customers delivery reliability,
speed, and frequency consistent with reasonable rates and best business
practices; and:
* provide a system of objective external performance measurements for
each market-dominant product as a basis for measurement of Postal
Service performance.
The act also required the Service to implement modern delivery
performance standards, set goals for meeting these standards, and
annually report on its delivery speed and reliability for each market-
dominant product. Key steps specified in the act include that within 12
months of enactment (by December 2007) the Service must issue modern
service standards, and within 6 months of issuing service standards the
Service must, in consultation with the PRC, develop and submit to
Congress a plan for meeting those standards. Furthermore, within 90
days after the end of each fiscal year the Service must report to PRC
on the quality of service for each market-dominant product in terms of
speed of delivery and reliability, as well as the degree of customer
satisfaction with the service provided.[Footnote 20]
These requirements provide opportunities to resolve long-standing
deficiencies in this area. As the Service transitions to the new law,
the following uncertainties may impact its ability to address
challenges in maintaining, measuring, and reporting service performance
in the future:
* How will the Service implement representative measures of delivery
speed and reliability within the timeframes of the reform act, while
taking cost and technological limitations into account?
* How much transparency will be provided to the PRC, Congress, mailers,
and the American people, including the frequency, detail, and methods
of reporting?
Financial Performance Reporting:
Another challenge facing the Service is to provide reliable data to
management, regulators, and oversight entities to assess financial
performance. Accurate and timely data on Service costs, revenues, and
mail volumes helps provide appropriate transparency and accountability
for all postal stakeholders to have a comprehensive understanding of
the Service's financial condition and outlook and how postal rates are
aligned with costs. Earlier I discussed the past issues we have raised
related to the Service's financial reporting and the improvements that
the Service has recently made. We have also reported on the long-
standing issues of ratemaking data quality that continue to
persist.[Footnote 21]
The act establishes new reporting and accounting requirements that
should help to address this challenge. The major change is the
establishment of, and authority provided, to the new PRC to help
enhance the collection and reporting of information on postal rates and
financial performance (see table 2).
Table 2: Selected PRC Responsibilities for Financial Transparency,
Oversight, and Accountability:
Subject: Oversight of market-dominant products;
PRC Responsibilities:
* Prescribes by regulation the form and content of annual Service
reports that analyze costs, revenues, and rates, using methods that PRC
must prescribe, and in sufficient detail to demonstrate compliance with
applicable requirements. Specify which reported information shall be
made public. Initiate proceedings as necessary to improve the quality,
completeness, or accuracy of this information;
* Annually determine whether rates are in compliance, after providing
an opportunity for public comments on the Service's annual reports;
* If rates are not in compliance, order the Service to take appropriate
action to come into compliance and remedy the effects of noncompliance,
such as ordering rates to be adjusted to lawful levels;
* Consider any complaints that rates are not in compliance, which
stakeholders may file at any time during the year.
Subject: Oversight of competitive products;
PRC Responsibilities:
* Establish regulations that ensure that each competitive product
covers its attributable costs, prohibits the cross-subsidization of
competitive products by market-dominant products, and ensures that
competitive products collectively cover what PRC determines to be an
appropriate share of the Service's institutional costs (overhead
costs);
* Consider any complaints that stakeholders may file at any time during
the year. If noncompliance is found, PRC must order the Service to take
appropriate action to come into compliance and remedy the effects of
any noncompliance, such as requiring the Service to make up for revenue
shortfalls in competitive products.
Subject: Financial reporting;
PRC Responsibilities:
* Receive annual, quarterly, and other periodic reports from the
Service that contain information required by the Securities and
Exchange Commission (SEC) for registrants[A] The annual report must
also include information on the Service's pension and post-retirement
health obligations. Receive reports on the Service's compliance with
rules prescribed by the SEC for registrants in implementing section 404
of the Sarbanes-Oxley Act of 2002. Initiate proceedings as necessary to
improve the quality, completeness, or accuracy of this information;
* Establish the accounting principles and practices that the Service
must follow;
* In establishing the Service's accounting principles and practices,
consider recommendations of the Department of the Treasury, including
how to value assets and liabilities associated with providing
competitive products, among other factors.
Source: Pub.L. No. 109-435.
[A] The Postal Service is deemed the "registrant" by the reform act,
however the Service is not a registrant for the purposes of submitting
reports to the SEC.
[End of table]
Service officials have acknowledged the importance of financial
reporting, but stated that there are cost implications associated with
these improvements. The Service has recognized that it will incur costs
in complying with the Securities and Exchange Commission's (SEC)
internal control reporting rules and by changes needed to provide
separate information for competitive and market-dominant products. We
have reported that significant costs have been associated with
complying with the SEC's implementing regulations for section 404 of
the Sarbanes-Oxley Act, but have also reported that costs are expected
to decline in subsequent years given the first-year investment in
documenting internal controls.[Footnote 22]
As the Service transitions to these new reporting and accounting
requirements, its ability to address future challenges in this area
will be impacted by uncertainties including:
* How will the PRC use its discretion to define and implement the new
statutory structure?
* What criteria will PRC use for evaluating the quality, completeness,
and accuracy of ratemaking data, including the underlying accounting
data and additional data used to attribute costs and revenues to
specific types of mail?
* How will PRC balance the need for high-quality ratemaking data with
the time and expense involved in obtaining the data?
* How will PRC structure any proceedings to improve the quality of
ratemaking data and enable the Service and others to participate in
such proceedings? What proceedings might PRC initiate to address data
quality deficiencies and issues that PRC has raised in its recent
decision on the rate case?
* How will the Service be impacted by the costs associated with
complying with the SEC rules for implementing section 404 of the
Sarbanes-Oxley Act, as well as for the requirement of separate
information for competitive and market-dominant products?
Managing Its Workforce:
The Service will be challenged to manage its workforce as it
transitions to operating in a new postal environment. The Service is
one of the nation's largest employers, with almost 800,000 full and
part-time workers. Personnel-related costs, which include compensation
and benefits, are the Service's major cost category and are expected to
increase due to the reform legislation requirements to begin prefunding
retirement health benefit costs. We have reported on the human capital
challenges facing the Service, but have found the Service has made
progress in addressing some of these challenges by managing
retirements, downsizing, and expanding the use of automation.[Footnote
23]
Provisions in the reform act related to workforce management can build
on these successes. As part of the Postal Service Plan mandated by the
act, the Service must describe its long-term vision for realigning its
workforce and how it intends to implement that vision. This plan is to
include a discussion of what impact any facility changes may have on
the postal workforce and whether the Postal Service has sufficient
flexibility to make needed workforce changes.
The Service, however, faces human capital challenges that will continue
to impact its financial condition and outlook:
* Outstanding labor agreements: Labor agreements with the Service's
four major unions expired late in calendar year 2006. In January 2007,
the Service reached agreements with two of these unions, including semi-
annual cost-of-living adjustments (COLA) and scheduled salary
increases. Labor agreements, however, remain outstanding for the other
two unions that cover over 42 percent of its career employees.
* Workforce realignment: As the Service continues to make significant
changes to its operations (i.e., rationalize its facilities, increase
automation, improve retail access, and streamline its transportation
network), it will be challenged to realign its workforce based on these
changes. This challenge may become more significant as mailers alter
their behavior in response to the new rate structure. These actions
will require a different mix in the number, skills, and deployment of
its employees, and may involve repositioning, retraining, outsourcing,
and/or reducing the workforce.
* Retirements: The Service expects a significant portion of its career
workforce--over 113,000 employees--to retire within the next 5 years.
In particular, it expects nearly half of its executives to retire
during this time. The Service's decisions regarding these retirements
(that is, whether or not to fill these positions, and if so, when, with
whom, and where) may have significant financial and operational
effects.
The following uncertainties will affect the Service's ability to
address workforce-related challenges in the future:
* How will the Service be able to respond to operational changes? How
will the Service balance the varying needs of diverse customers when
realigning its delivery and processing networks?
* How will employees and employee organizations be affected and
informed of network changes and how will the Service monitor the
workplace environment?
* How will the resolutions to the outstanding labor agreements affect
the Service's financial condition?
* How will the Service take advantage of flexibilities, including
allowing more casual workers to deal with peak operating periods?
Key Issues and Areas for Continued Oversight:
The Postal Service, the PRC, and mailers face a challenging environment
with significant changes to make in the coming months related to
implementing the recent rate decision and the new postal reform law. We
have identified several major issues considered significant by various
postal stakeholders, as well as areas related to implementation of the
law that will warrant continued oversight. Specifically, focusing
attention on these issues during this important transition period will
help to ensure that the new statutory and regulatory requirements are
carried out according to the intent of the reform act and that the
Service's future financial condition is sound. These key issues and
areas for continued oversight include:
* the effect of the upcoming rate increases and statutory changes on
the Postal Service's financial condition;
* the decision by the Service whether or not to submit a rate filing
under the old rate structure;
* actions by the PRC to establish a new price-setting and regulatory
framework;
* the Service's ability to operate under an inflationary price cap
while some of its cost segments are increasing above the rate of
inflation;
* actions by the Service, in consultation with the PRC, to establish
modern service standards and performance measures, and the Postal
Service's plan for meeting those standards;
* the Service's ability to maintain high-quality delivery service as it
takes actions to reduce costs and realign its infrastructure and
workforce; and:
* the PRC's development of appropriate accounting and reporting
requirements aimed at enhancing transparency and accountability of the
Service's internal data and performance results.
One of the most important decisions for monitoring in the short term is
whether or not the Service decides to file another rate increase before
the new rate structure takes effect. The trade-offs involved in the
Service's decision on whether to file under the new or old systems
include weighing the respective costs, benefits, and possible
unintended consequences of the Service's need for new rates along with
the time and resources required by the Service, the PRC, and the
mailing industry to proceed under either the new or old systems. For
example, the Service may benefit from filing under the old system
because it would allow the Service to further align costs with prices
prior to moving into price-cap restrictions. Under the old rules, the
Service would have to satisfy the "break-even" requirements that postal
revenues will equal as nearly as practicable its total estimated costs.
Under the new rules, the Service would have to ensure that rate
increases for its market-dominant products do not exceed a cap based on
the growth in the Consumer Price Index. Filing under the old system,
however, could put additional strain on mailers and the PRC. In
particular, the PRC would be reviewing the Service's rate submission
while transitioning to its new roles and responsibilities under the
legislation--establishing a new organization structure, a new
regulatory framework with new rules and reporting requirements, which
must include time for public input, and a multitude of additional
requirements.
Recognizing these challenges, the Chairman of the PRC has suggested
(and asked for public comments on) that rather than expending resources
on extending the application of the old system, the PRC would work with
the Service and mailers to implement the new regulatory systems even
sooner than the 18 months allotted by the new law. This action could
allow the Service to implement new rates sooner under the new
regulatory system depending upon when the PRC completes its work and
the Service chooses to file new rates. The Service's decision will not
only impact its financial performance and condition, but also the
mailing industry and the focus of the PRC.
Another key provision of the law that warrants close oversight is the
requirement for the Service to develop modern service standards. We are
encouraged by the Service's actions to date to establish a workgroup
that includes participants from the mailing industry to review and
provide recommendations on service standards and measures. This
workgroup is expected to complete their work in September of this year,
and the Service is to make its decisions on the new service standards
by December 20, 2007. The Service then has 6 months to provide Congress
with a plan on how it intends to meet these standards, as well as its
strategy for realigning and removing excess capacity from the postal
network. We believe this plan is a particularly important opportunity
to increase transparency in these areas, particularly given the changes
to the Service's plans for network realignment and the limited
information available to the public. We will be reporting this summer
on the status and results of the Service's efforts to realign its mail
processing network.
Finally, the PRC's role in developing reporting requirements is
critical to enhancing the Service's transparency regarding its
performance results. Congress was particularly mindful in crafting the
reform act to ensure that the provisions for additional pricing
flexibility were balanced with increased transparency, oversight, and
accountability. The new law provides the regulator with increased
authority to establish reporting rules and monitor the Service's
compliance with service standards on an annual basis.
The successful transformation of the Postal Service will depend heavily
upon innovative leadership by the Postmaster General and the Chairman
of the PRC, and their ability to work effectively with their employees,
employee organizations, the mailing industry, Congress, and the general
public. It will be important for all postal stakeholders to take full
advantage of the unique opportunities that are currently available by
providing input and working together, particularly as challenges and
uncertainties will continue to threaten the Service's financial
condition and outlook.
Chairman Davis, this concludes my prepared statement. I would be
pleased to respond to any questions that you or the Members of the
Subcommittee 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, Joshua Bartzen, Kenneth
John, John Stradling, Jeanette Franzel, Shirley Abel, Scott McNulty,
and Kathy Gilhooly.
[End of section]
Appendix I Summary of Recent Rate Developments:
Date: 5/3/06;
Description: Postal Service submits proposal to Postal Rate Commission
(PRC)[B];
* Requests rate increases effective May 2007;
* Proposes Forever Stamp[C];
* Establishes pricing structure based on mail weights and shapes:
- Revises old structure which was primarily weight-based;
- Recognizes that different mail shapes have different processing
costs;
- Gives mailers an opportunity to minimize their rates by altering
shape of mail;
Rate increase, on-average: 8.1 percent;
First-Class stamp rate[A]: 42 cents.
Date: 2/26/07;
Description: PRC issues recommended decision on Service's proposal;
* Issued after detailed administrative proceeding involving mailers,
employee organizations, consumer representatives and competitors;
* Recommends revisions to many of the rates and rate designs submitted
by the Service:
- Increases rates substantially for some types of mail;
- Revised rates are intended to more accurately reflect costs and send
proper pricing signals;
* Approves Forever Stamp;
* Concurs with shape-based pricing structure and, according to the PRC,
the change in rates will still meet the Service's revenue needs;
* Anticipated that this would have been the last rate case initiated
prior to implementation of the new rate structure established under the
reform legislation and explained that its recommended rates are
intended to provide a sound foundation for the future;
Rate increase, on-average: 7.6 percent;
First-Class stamp rate[A]: 41 cents.
Date: 3/19/07;
Description: Postal Service's Board of Governors issues decision to
implement PRC-recommended rates;
* Implements most rates effective May 14, 2007;
* Asks PRC to reconsider some rates, most notably those for flat-sized
Standard Mail, which is generally advertising and direct mail
solicitations (this could lead to further changes in these rates);
* Delays rate implementation for Periodicals for over 2 months, citing
reactions of magazine mailers and the publishing industry's need to
update software;
* Begins sale of Forever Stamp starting April 12; stamp will be valid
for postage starting May 14;
Rate increase, on-average: 7.6 percent;
First-Class stamp rate[A]: 41 cents.
Source: U.S. Postal Service and Postal Regulatory Commission documents.
[A] First-Class stamp prices cover letters weighing up to 1 ounce that
are sent via First-Class Mail.
[B] The name of the Postal Rate Commission was changed to the Postal
Regulatory Commission due to provisions of the Postal Reform and
Enhancement Act.
[C] The Forever Stamp will sell at the First-Class one-ounce letter
rate, and will continue to be worth the price of a First-Class one-
ounce letter even if that price changes.
[End of table]
FOOTNOTES
[1] Pub. L. No. 109-435: The Postal Accountability and Enhancement Act,
enacted Dec. 20, 2006.
[2] The act renames the Postal Rate Commission as the Postal Regulatory
Commission. We will use the abbreviation PRC to represent both.
[3] GAO, U.S. Postal Service: Transformation Challenges Present
Significant Risks, GAO-01-598T (Washington, D.C.: Apr. 4, 2001).
[4] Pub. L. No. 108-18: Postal Civil Service Retirement System Funding
Reform Act of 2003.
[5] Pub. L. No. 108-18 shifted the responsibility for funding benefits
attributable to military service from taxpayers to postal ratepayers.
[6] Higher postal rates for most mail classes will be implemented on
May 14, 2007, including an increase in the price of a First-Class stamp
from 39 to 41 cents. Rates for Periodicals (e.g., magazines,
newspapers, etc.), however, will not increase until July 15, 2007, due
to the need for more time to prepare for implementation by the Service
and Periodical mailers. A detailed explanation of the recent rate
developments are covered later in the testimony.
[7] GAO-01-598T; GAO, U.S. Postal Service: Deteriorating Financial
Outlook Increases Need for Transformation, GAO-02-355 (Washington,
D.C.: Feb. 28, 2002); 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).
[8] The Postal Service Civil Service Retirement System Funding Reform
Act of 2003 (Pub. L. No. 108-18) was enacted in response to the Office
of Personnel Management's analysis, performed at our request, which
concluded that the Service was on course to overfund its pension
payments.
[9] GAO, U.S. Postal Service: Bold Action Needed to Continue Progress
on Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003);
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: Key Reasons for Postal Reform, GAO-04-565T (Washington,
D.C.: Mar. 23, 2004); U.S. Postal Service: Despite Recent Progress,
Postal Reform Legislation Is Still Needed, GAO-05-453T (Washington,
D.C.: Apr. 14, 2005).
[10] The Postal Civil Service Retirement System Funding Reform Act of
2003 required the Postal Service to escrow the reduction in its civil
service pension expenses that resulted from changes to how the Service
funded these pensions.
[11] The Office of Personnel Management has preliminarily estimated the
overfunding to be more than $16 billion.
[12] The reform act delays resumption of payments from the Postal
Service to liquidate any pension underfunding until September 30, 2018.
[13] The $3.9 billion net increase in retirement-related expenses is
comprised of the $5.4 billion retiree health payment due to the PSRHBF
by September 30, 2007, and the $1.5 billion reduction in the Service's
pension expenses through fiscal year end.
[14] Sections 201 and 202 lists which products are market-dominant and
competitive.
[15] As part of the reform act, GAO is required to issue a report on
the activities of the Postal Service to promote recycling and other
opportunities for improvement in this area.
[16] GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices
Requires Improved Tracking and Monitoring of Consumption Information,
GAO-07-244 (Washington, D.C.: Feb. 16, 2007).
[17] GAO, U.S. Postal Service: The Service's Strategy for Realigning
Its Mail Processing Infrastructure Lacks Clarity, Criteria, and
Accountability, GAO-05-261 (Washington, D.C.: Apr. 8, 2004).
[18] GAO, U.S. Postal Service: Delivery Performance Standards,
Measurement, and Reporting Need Improvement, GAO-06-733 (Washington,
D.C.: July 27, 2006).
[19] The External First-Class Measurement System (EXFC) measures
delivery performance for single-piece First-Class Mail deposited in
collection boxes in selected areas of the country. EXFC is not a
systemwide measurement of all First-Class Mail performance.
[20] The act further stipulates that the PRC must provide an
opportunity for public comment on the report and must, within 90 days
of receiving the annual service data from the Postal Service, make a
written determination of compliance as to whether any service standards
were not met. If PRC finds noncompliance, it is required to order the
Service to take such action as PRC considers appropriate to achieve
compliance. PRC also can fine the Service in cases of deliberate
noncompliance.
[21] GAO, U.S. Postal Service: Improving Ratemaking Data Quality
through Postal Service Actions and Postal Reform Legislation, GAO-05-
820 (Washington, D.C.: July 28, 2005).
[22] GAO, Internal Control: Analysis of Joint Study on Estimating the
Costs and Benefits of Rendering Opinions on Internal Control over
Financial Reporting in the Federal Environment, GAO-06-255R
(Washington, D.C.: Sept. 6, 2006); Sarbanes-Oxley Act: Consideration of
Key Principles Needed in Addressing Implementation for Smaller Public
Companies, GAO-06-361 (Washington, D.C.: Apr. 13, 2006).
[23] GAO-04-108T and GAO-05-453T.
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