Postal Reform Law
Early Transition Is Promising, but Challenges to Successful Implementation Remain Gao ID: GAO-08-503T February 28, 2008In December 2006, Congress passed the first comprehensive postal reform legislation in over 30 years. The Postal Accountability and Enhancement Act (the act) provided opportunities to address many of the financial, operational, and human capital challenges facing the Postal Service (the Service), which contributed to GAO's decision to remove the Service's transformation efforts from its High-Risk List last year. Specifically, the act provides tools and mechanisms that can be used to establish an efficient, flexible, fair, transparent, and financially sound Postal Service--one that can more effectively operate in an increasingly competitive environment not anticipated under the Postal Reorganization Act of 1970. This testimony focuses on (1) the actions to date resulting from implementing the act and how it affected the Service's 2007 financial condition, (2) the implementation challenges and areas for continued oversight, and (3) how information required under the law can contribute to future postal reform decisions. The testimony is based on GAO's past work; a review of the implementation of the postal reform law, including actions already taken; and updated information on the Service's financial and operational condition. The Postal Service had no comments on this testimony.
Over the last 14 months, key actions have been taken to implement the act. For example, a new rate-setting system and regulatory agency were established, the Service began prefunding its retiree health benefit obligations, service standards were updated, and key reports were issued. These actions have required the collective efforts of many postal stakeholders including the Service and the Postal Regulatory Commission. The Service reported a $5.1 billion net loss for fiscal year 2007. Some of the actions taken to implement the act, such as funding changes to its retiree health benefit obligations and pension requirements, directly impacted these results, as did other events such as the January 2006 and May 2007 rate increases. The uncertain economic environment serves to exacerbate the challenges facing the Service and contributed to lower than expected mail volumes and revenues in the first quarter of fiscal year 2008. The Service projects a $600 million net loss for 2008 as it faces challenges such as generating volumes as rates increase again in May; managing its costs and improving operational efficiencies through accelerated cost reduction strategies; maintaining, measuring, and reporting service; and managing its workforce. Some key areas for continued oversight include changes to mail volumes and revenues, efforts to control costs by optimizing the Service's infrastructure and workforce, transition to new automation and technology to enhance mail sorting and tracking, transparency in measuring and reporting delivery performance, and implementation of the new rate-setting regulations. Information required under the act can be used to facilitate constructive dialogue about complex postal reform issues that may eventually need to be revisited by Congress. The act requires multiple reports and studies over the next 5 to 10 years that can be used to continually examine and assess the Postal Service's position in an environment of increasing competition and technological advances. Specifically, these reports and studies will provide key information on the Service's mission and role, monopoly protections, universal service requirements, rate-setting and other regulatory issues, oversight structure, competition issues, and consumer protection.
GAO-08-503T, Postal Reform Law: Early Transition Is Promising, but Challenges to Successful Implementation Remain
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Testimony:
Before the Subcommittee on Federal Workforce, Postal Service, and the
District of Columbia, Committee on Oversight and Government Reform,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EST:
Thursday, February 28, 2008:
Postal Reform Law:
Early Transition Is Promising, but Challenges to Successful
Implementation Remain:
Statement of Katherine Siggerud, Director Physical Infrastructure
Issues:
GAO-08-503T:
GAO Highlights:
Highlights of GAO-08-503T, a testimony before the Subcommittee on
Federal Workforce, Postal Service, and the District of Columbia,
Committee on Oversight and Government Reform, U.S. House of
Representatives
Why GAO Did This Study:
In December 2006, Congress passed the first comprehensive postal reform
legislation in over 30 years. The Postal Accountability and Enhancement
Act (the act) provided opportunities to address many of the financial,
operational, and human capital challenges facing the Postal Service
(the Service), which contributed to GAO‘s decision to remove the
Service‘s transformation efforts from its High-Risk List last year.
Specifically, the act provides tools and mechanisms that can be used to
establish an efficient, flexible, fair, transparent, and financially
sound Postal Service”one that can more effectively operate in an
increasingly competitive environment not anticipated under the Postal
Reorganization Act of 1970.
This testimony focuses on (1) the actions to date resulting from
implementing the act and how it affected the Service‘s 2007 financial
condition, (2) the implementation challenges and areas for continued
oversight, and (3) how information required under the law can
contribute to future postal reform decisions. The testimony is based on
GAO‘s past work; a review of the implementation of the postal reform
law, including actions already taken; and updated information on the
Service‘s financial and operational condition. The Postal Service had
no comments on this testimony.
What GAO Found:
Over the last 14 months, key actions have been taken to implement the
act. For example, a new rate-setting system and regulatory agency were
established, the Service began prefunding its retiree health benefit
obligations, service standards were updated, and key reports were
issued. These actions have required the collective efforts of many
postal stakeholders including the Service and the Postal Regulatory
Commission. The Service reported a $5.1 billion net loss for fiscal
year 2007. Some of the actions taken to implement the act, such as
funding changes to its retiree health benefit obligations and pension
requirements, directly impacted these results, as did other events such
as the January 2006 and May 2007 rate increases.
The uncertain economic environment serves to exacerbate the challenges
facing the Service and contributed to lower than expected mail volumes
and revenues in the first quarter of fiscal year 2008. The Service
projects a $600 million net loss for 2008 as it faces challenges such
as generating volumes (see figure) as rates increase again in May;
managing its costs and improving operational efficiencies through
accelerated cost reduction strategies; maintaining, measuring, and
reporting service; and managing its workforce.
Figure: First-Class Mail and Standard Mail Volumes have Recently
Declined:
This figure is a combination line graph showing first-class mail and
standard mail volumes have recently declined. The X axis represents the
fiscal year, and the Y axis represents the percentage. One line
represents first-class mail percentage change, and the other represents
the standard mail percentage change.
[See PDF for image]
Source: U.S. Postal Service.
[End of figure]
Some key areas for continued oversight include changes to mail volumes
and revenues, efforts to control costs by optimizing the Service‘s
infrastructure and workforce, transition to new automation and
technology to enhance mail sorting and tracking, transparency in
measuring and reporting delivery performance, and implementation of the
new rate-setting regulations.
Information required under the act can be used to facilitate
constructive dialogue about complex postal reform issues that may
eventually need to be revisited by Congress. The act requires multiple
reports and studies over the next 5 to 10 years that can be used to
continually examine and assess the Postal Service‘s position in an
environment of increasing competition and technological advances.
Specifically, these reports and studies will provide key information on
the Service‘s mission and role, monopoly protections, universal service
requirements, rate-setting and other regulatory issues, oversight
structure, competition issues, and consumer protection.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-503T. For more information, contact
Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov
[End of section]
Chairman Davis, Representative Marchant, 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). At last year's oversight
hearing, I testified that Congress's efforts to pass comprehensive
postal reform provided opportunities to address many of the financial,
operational, and human capital challenges facing the Service.[Footnote
1] Specifically, the Postal Accountability and Enhancement Act (the
act)[Footnote 2] provided tools and mechanisms that can be used to
establish an efficient, flexible, fair, transparent, and financially
sound Postal Service--one that can more effectively operate in an
increasingly competitive environment not anticipated when the Postal
Service was created under the Postal Reorganization Act of 1970. These
fundamental changes contributed to GAO's decision to remove the Postal
Service's transformation efforts from our High-Risk list in January
2007.[Footnote 3]
My remarks today will focus on (1) the actions to date resulting from
implementation of the act, including how it affected the Service's 2007
financial condition,[Footnote 4] (2) the implementation challenges and
areas for continued oversight, and (3) the way information required
under the law can contribute to future postal reform decisions. My
statement is based on work we conducted in January and February 2008,
including reviewing such Postal Service documents as the 2007 Audited
Annual Report and Comprehensive Statement, 2008 Integrated Financial
Plan, the financial report for the first quarter of 2008, updated
Strategic Transformation Plan; reports and information related to the
act; and our past work. We also interviewed Postal Service officials.
We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
Summary:
The Postal Service, the Postal Regulatory Commission (PRC),[Footnote 5]
and other postal stakeholders have worked cooperatively to date to meet
their responsibilities in fulfilling the requirements of the act. Some
of the key actions include establishing:
* regulations for a new rate-setting system and the Service's decision
not to implement another rate increase under the old system,
* the new PRC and its Office of Inspector General (OIG),
* a retiree health benefits fund, held by the U.S. Treasury for
prefunding retiree health insurance premiums, and transferring into
this fund the surplus for postal employees under the Civil Service
Retirement System (CSRS), and:
* modern service standards for the Service's products covered by the
postal monopoly.
In addition, several reports required under the act have been issued,
and the PRC has solicited public comments and held meetings to
stimulate constructive dialogue on some of the complex issues involved
in establishing the new regulatory framework. The Service reported a
$5.1 billion net loss for 2007. Some of the actions taken to implement
the act, such as funding changes to its retiree health obligations and
pension requirements, directly impacted these results, as did other
events such as rate increases in January 2006 and May 2007.
The financial, operational, human capital, and regulatory challenges
facing the Service and other stakeholders as they take actions to
continue implementing the act are exacerbated by the current uncertain
economic environment. A slowing economy, recent rate increases, and
other factors have negatively impacted the Service's financial
performance in the first quarter of 2008--its mail volumes and revenues
were both lower than planned. The Service was able to mitigate these
impacts by managing cost growth while achieving record service delivery
performance for the segment of First-Class Mail[Footnote 6] that is
currently measured.[Footnote 7] In response to concerns about
challenges to its financial outlook, the Service filed its first rate
increase for its market-dominant products[Footnote 8] under the act on
February 11, 2008. This rate increase, which averages about 2.9 percent
for the majority of its products, is scheduled to take effect on May
12, 2008. Service officials stated this increase is expected to
contribute an additional $700 million in revenues for 2008, and will
need to be supplemented by accelerated cost reduction strategies
totaling $2 billion for the year to achieve its year-end target of a
$600 million net loss. The Service has also updated its strategies for
addressing challenges related to achieving efficiencies through
automation and improving service. Some key areas for continued
oversight include changes in mail volumes and revenues, efforts to
control costs by modernizing and optimizing the Postal Service's
infrastructure and workforce, the transition to new automation and mail-
tracking systems, the level of transparency in measuring and reporting
delivery performance, and the implementation of the new rate- setting
processes and regulations.
Information required under the act can be used to facilitate
constructive dialogue about postal reform issues related to universal
service, the postal monopoly, fair competition, consumer protection,
and transparency and accountability. Specifically, the act included
provisions for reports required over the next 5 to 10 years related to
examining and reporting on the Postal Service's mission, role, and
oversight structure in an increasingly competitive
environment.[Footnote 9] This work was to be performed by multiple
stakeholders, including the Postal Service, PRC, the Postal Service
OIG, the Office of Personnel Management (OPM), Treasury, and GAO, with
a wide range of deadlines. We look forward to reviewing this
information as part of the evaluation we are required to conduct under
the act of various options and strategies for long-term structural and
operational reforms to assure that the Postal Service can continue
providing affordable universal postal service.
Key Actions Have Been Taken to Implement the Act:
Several key actions have been taken to implement the law since it was
enacted over 14 months ago. Some of the actions taken to implement the
act had a direct impact on the Service's 2007 financial condition,
while others facilitated the transition to a new financial, operating,
and regulatory environment. Specific actions in the act that have
affected the Service's 2007 financial condition include:
* prefunding the Service's significant unfunded retiree health
obligations. While this change results in significant retiree health
benefit cost increases for a decade, over the long term this action
improves the fairness and balance of the cost burdens for current and
future ratepayers. The Service's 2007 payment of $5.4 billion was the
first of 10 annual payments required under this change.[Footnote 10]
* expensing almost $3 billion in funds previously set aside in escrow
(transferring them to the Treasury) and eliminating future escrow
payments, including an estimated $3.3 billion payment that had been
scheduled for 2007.[Footnote 11]
* transferring the estimated $27 billion funding obligation for
selected military service benefits back to the Treasury.
* eliminating certain annual CSRS pension funding requirements, thereby
saving the Service approximately $1.6 billion in 2007.
The effects of these changes, however, must be put into context with
other actions and events during this time to gain a comprehensive
understanding of the Service's financial and operating condition. For
example,
* Mail volumes and revenues: Total revenues of nearly $75 billion
dollars in 2007 represented an increase of 3 percent from 2006. This
revenue increase, however, was largely attributable to the January 2006
and May 2007 rate increases--not mail volume increases.[Footnote 12] In
particular, the Service experienced an overall decline in mail volume
from 2006 of over 900 million pieces (a 0.4 percent decline), largely
due to a decrease of 1.7 billion pieces of First-Class Mail and the
smallest increase in Standard Mail volumes since 2001.
* Operating costs: Total operating expenses of over $80 billion in 2007
represented an increase of nearly 12 percent from 2006. This increase
was largely due to a net increase of $6.8 billion in expenses that
resulted from requirements of the act described earlier.[Footnote 13]
The Service was also affected by increases in postal wage rates; rising
fuel costs (its transportation costs grew by almost 8 percent); and the
extension of mail service to an additional 1.8 million delivery points.
* Productivity and cost control: The Service was able to partially
mitigate these cost pressures by improving productivity for an eighth
consecutive year. The Service reported a 1.7 percent increase in
productivity, which is equivalent to $1.2 billion in cost savings. The
Service reduced over 36 million workhours, partly by downsizing its
career workforce by over 11,000 employees.
* Labor agreements: The Service negotiated agreements with 3 of its 4
major unions on wages, many benefits, and conditions of employment in
2007.[Footnote 14]
* Debt: The Service's outstanding debt increased $2.1 billion in 2007,
doubling its 2006 debt balance to $4.2 billion.[Footnote 15] These
increases were primarily used to finance year-end worker compensation
and retiree health payments.
* Capital: The Service reported a slight increase in capital cash
outlays of $2.6 billion in 2006 to $2.7 billion in 2007. These funds
were used for such projects as new facilities, automation equipment,
and carrier vehicles.
* Service performance: According to the Service, it reported record
annual on-time performance for First-Class Mail measured by the EXFC
system. The Service reported on-time performance for 2007 of 96 percent
for its 1-day mail, 93 percent for its 2-day mail, and 90 percent for
its 3-day mail.
The net income reported for 2007 was a $5.1 billion loss. Removing the
financial impact of the new law, the Postal Service's net income would
have been $1.6 billion (which was $100 million less than the $1.7
billion originally budgeted for the year). Because of the new law,
however, the Service required an additional $500 million in cash to
cover the differences between the net increase in retirement-related
expenses of $3.8 billion[Footnote 16] and the expected $3.3 billion
escrow payment that was avoided.
Aside from its direct financial impact, the act required other actions
to facilitate the transition to a new financial, operating, and
regulatory environment. Table 1 summarizes key actions.
Table 1: Summary of Selected Key Actions Taken to Implement Postal
Reform Law:
Date: May 2007;
Party responsible: The Service's Office of the Inspector General (OIG);
Action taken: Issued a report on workplace safety that found the
Service exceeded its workplace safety goals for 2005 and 2006, but also
recommended that the Service monitor costs associated with accidents.
Date: June 2007;
Party responsible: The Office of Personnel Management (OPM);
Action taken: Determined the Postal Surplus/Supplemental Liability as
of September 30, 2006, regarding the Civil Service Retirement System.
Date: November 2007;
Party responsible: The Postal Regulatory Commission (PRC);
Action taken: Issued regulations that established the new rate-making
system. The regulations consist of three parts: (1) regulations related
to rate adjustments for market-dominant products, including the formula
for calculating the price cap;
(2) regulations related to competitive products;
and (3) a Mail Classification Schedule, which categorizes products as
either market dominant or competitive.
Date: November 2007;
Party responsible: The Postal Service's OIG;
Action taken: Issued a report on the adequacy and fairness of the
process for assessing certain rate deficiencies. This report found the
assessments and appeals process was adequate and fair, and that there
was no compelling reason for Congress to assign an outside body a role
in this process. It did identify issues with the Service's monitoring
of revenue deficiencies and updating of procedures. It determined that
a statute of limitations on the assessment of revenue deficiencies was
not necessary.
Date: December 2007;
Party responsible: The Postal Service Board of Governors;
Action taken: Issued Board of Governors' Report to the President and
Congress on the Representation of Women and Minorities in Supervisory
and Management Positions in the United States Postal Service. This
report included diversity information for both supervisory and
management positions, as well as for the workforce as a whole;
Issued Board of Governors' Report to the President and Congress on
United States Postal Service Contracts with Women, Minorities and Small
Businesses. This report stated the Service exceeded its annual goals by
almost 12 percent for contracts issued by minority-owned and almost 22
percent for women-owned businesses in 2007.
Date: December 2007;
Party responsible: The Postal Service;
Action taken: Filed its 2007 Annual Compliance Report on the costs,
revenues, rates, and quality of service associated with its products to
the PRC for its evaluation. The PRC stated this report did not contain
all of the information that normally would be provided, noting that it
was the Service's first report under the act's tight deadline for
filing within 90 days after the end of the fiscal year. The PRC also
has stated that the report was prepared without the guidance of PRC
regulations governing its form and content, which were under
development at the time. PRC solicited public comment on the report,
including on the degree to which the Service's operations and financial
results complied with the policies of title 39 of the U.S. Code (i.e.,
the nation's postal laws);
Published regulations to establish modern service standards for its
market-dominant products, including mail covered by the postal
monopoly.
Date: December 2007;
Party responsible: The Department of Treasury;
Action taken: Issued a report with recommendations on accounting
practices and principles that should be followed by the Service. The
PRC is soliciting public comment on the report, including what
financial transparency and oversight are appropriate for the Service's
Competitive Products Fund and who should conduct such oversight.
Date: December 2007;
Party responsible: GAO;
Action taken: Issued an interim report: Postal Service and Mailing
Industry Mail-Related Recycling: Accomplishments and Postal
Opportunities. This report found that postal stakeholders have
undertaken numerous mail-related recycling initiatives, but the extent
to which these initiatives have been adopted is unknown. Additionally,
stakeholders identified opportunities for the Service to engage in, or
encourage others to engage in, mail-related recycling. The full report
will be issued later this year.
Date: December 2007;
Party responsible: The Federal Trade Commission (FTC);
Action taken: Issued the Accounting for Laws That Apply Differently to
the United States Postal Service and Its Private Competitors which
identified and analyzed laws that apply differently to the Service's
competitive products and similar products provided by private
competitors, and estimated the Service's economic burdens and
advantages due to these legal differences. The report discussed ways
that the PRC or Congress may be able to minimize or eliminate
marketplace distortions.
Source: GAO analysis of Pub. L. 109-435.
[End of table]
As indicated in table 1, multiple stakeholders have taken actions to
implement the requirements of the act. While each of these actions is
important, I would like to highlight the efforts of the Postal Service
and other stakeholders in modernizing service standards and of the PRC
in transitioning to its new regulatory responsibilities.
* Service standards: The Service has made important progress in
implementing the act's requirements to establish modern service
standards for market-dominant products. The Service's approach to
developing these standards incorporated a high level of collaboration
with mailers, consultations with the PRC, and comprehensive review of
its network capabilities. A workgroup involving nearly 200
representatives from the Service, mailing organizations and mailers,
and other members of the mailing industry was particularly noteworthy
for its efforts to identify issues and build consensus in this area.
The result was the most sweeping update in delivery performance
standards in many years. In particular, standards for Periodicals,
Package Services, and Standard Mail that dated back many years were
realigned with current postal operations.[Footnote 17]
* Regulation: A key tenet of the act was to provide the Postal Service
with more flexibility to set prices and introduce new products. The
act, however, balanced this flexibility by granting the PRC enhanced
regulatory authority to regulate these activities, and to, among other
things,
* regulate rates for market-dominant products and services;
* monitor financial and service performance;
* ensure financial transparency and data quality; and:
* act on complaints against the Postal Service.
The PRC has made good progress in its transformation, particularly in
establishing a new ratemaking system. The PRC issued its first set of
rate regulations almost 8 months ahead of the statutory deadline, and
the Postal Service recognized this achievement and chose not to file
another rate case under the old system. The PRC set up its new
organizational structure, including the new PRC Inspector General, as
well as revising key rules and regulations to reflect implementation of
the act. The PRC has also taken an active role in consulting with the
Service on its service standards and performance measures, solicited
public comments, and held hearings and meetings to stimulate
constructive dialogue among the parties.
Remaining Implementation Challenges Exacerbated by Economic
Uncertainty:
The financial, operational, human capital, and regulatory challenges
facing the Service and other stakeholders as they take actions to
continue implementing the act are exacerbated by the current uncertain
economic environment. The Service noted in its 2008 budget that it
expected a net increase in costs of $1 billion net for 2008 from
changes in the law.[Footnote 18] In addition, a slowing economy has
negatively affected the Service's financial performance in the first
quarter of 2008--its mail volumes and revenues were both below planned
amounts. The Service was able to mitigate these challenges by managing
cost growth while achieving record service delivery performance for the
segment of First-Class Mail that is currently measured. To address
concerns about its challenged financial outlook, the Service filed a
rate increase February 11, 2008, averaging about 2.9 percent for the
majority of its products. This increase is scheduled to take effect on
May 12, 2008, and is the first of its type under the new law. According
to Service officials, this increase is expected to contribute an
additional $700 million in revenues for 2008, but will need to be
supplemented by accelerated cost reduction strategies to achieve its
year-end target of a $600 million net loss. The Service has updated its
strategies for addressing challenges under the new law related to
generating sufficient revenues, achieving efficiencies through
automation, and improving service. In particular, to help address its
revenue challenges, the Service has indicated that it plans to fully
use its pricing authority under the rate-setting cap to implement
smaller, more frequent, predictable rate increases, as well as work
with its customers to develop new products and services. It also plans
for $2 billion in cost reduction efforts in 2008. Some of the key areas
for continued oversight include changes in mail volumes in response to
more frequent, predictable rate increases; efforts to control costs by
modernizing and optimizing the Postal Service's infrastructure and
workforce; the transition to new automation and mail-tracking systems;
the level of transparency in measuring and reporting delivery
performance; and the implementation of the new rate-setting processes
and regulations.
Generating Sufficient Revenues as Mail Volumes Decline and the Mail Mix
Changes:
The Service continues to face challenges in generating sufficient
revenue as mail volumes are declining and the mail mix is changing.
This challenge became more evident after the Service's revenue and
volume results for the first quarter of 2008 were released. Volumes
were down 1.7 billion pieces (3 percent) compared with quarter 1 in
2007 (see table 2), with notable declines in the two major mail
classes: First-Class Mail and Standard Mail. These results are of
particular concern because they occurred during a typically strong
volume quarter that includes the holiday mailing season.
Table 2: First Quarter Volumes for the Service's Major Mail Categories:
Class: First-Class Mail;
2008 quarter 1: 24.4 billion;
Percent change from quarter 1 2007: -3.9%.
Class: Standard Mail;
2008 quarter 1: 27.7 billion;
Percent change from quarter 1 2007: -2.6.
Class: Periodicals;
2008 quarter 1: 2.2 billion;
Percent change from quarter 1 2007: 1.2.
Class: Express Mail;
2008 quarter 1: 12.3 million;
Percent change from quarter 1 2007: -10.9.
Class: Priority Mail;
2008 quarter 1: 240.4 million;
Percent change from quarter 1 2007: -4.9.
Class: Package Services;
2008 quarter 1: 318.2 million;
Percent change from quarter 1 2007: -3.4.
Class: Total all mail;
2008 quarter 1: 55.4 billion;
Percent change from quarter 1 2007: -3.0%.
Source: U.S. Postal Service data.
[End of table]
Key declines during this time took place within the two largest
categories, First-Class Mail and Standard Mail. In particular, volumes
declined for flat-sized Standard Mail (e.g., catalogs) by 13 percent;
for flat-sized First-Class Mail (e.g., large envelopes) by 15 percent;
and single-piece First-Class Mail by nearly 7 percent. As a result of
the overall declines in mail volume, revenues were $500 million less
than planned. The Service attributed these volume declines and revenue
shortfalls to multiple factors, including the effects of the May 2007
rate increase; a slowing economy with declines in the financial and
housing industries, business and consumer confidence, and rising fuel
and paper prices; increasing competition from other advertising media;
and the continued diversion of single-piece First-Class Mail to
electronic alternatives such as Internet bill payment and direct
deposit.
The declines in First-Class Mail volume in the first quarter of 2008
parallel the ongoing trends of First-Class Mail in general. This class
of mail, once with the largest volumes and revenues, saw volumes
decline by more than 7 percent between 2001 and 2007. The Service's
First-Class Mail volume estimate of 95.4 billion pieces built into its
2008 budget would be a slight decline from 2007 levels and would be the
lowest volume level since 1994. These declines in First-Class Mail were
mitigated in past years by growth in Standard Mail volumes and
revenues. Standard Mail volumes exceeded those for First-Class Mail for
the first time in 2005. This change was significant, in part because
Standard Mail is more sensitive to prices and economic conditions 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. The Service's 2008 budget planned a modest 1.1 percent
growth in Standard Mail volumes because of such factors as the effects
from the May 2007 rate increase and a projected slowness in the
economy. The Service stated in its first quarter report for 2008 that
these factors, among others, had an adverse impact on volumes as
Standard Mail volumes declining by 2.6 percent compared to the first
quarter of 2007. For the remainder of 2008, mail volumes and revenues
will continue to face many of the same challenges that affected its
first quarter results, particularly economic uncertainty and the
impacts of rate increases.
The Service recognizes that the law provides opportunities to address
the revenue challenges it faces and that "cost cutting alone cannot
sustain the business." The act specifically provides tools and
mechanisms to help promote revenue generation and retention of
revenues. The act established more timely, flexible pricing mechanisms
for the Service's competitive and market-dominant products. For
example, it allows the Service to use a streamlined process for raising
the rates for its market-dominant classes, such as First-Class Mail,
Standard Mail, and Periodicals, up to a defined price cap; to exceed
the price cap should extraordinary or exceptional circumstances arise;
and to 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
product covers its costs and competitive products as a whole cover
their attributable costs and make a PRC-specified contribution to
overhead. The act also allows for new, customized products and
services, as well as for the Service to retain any earnings, which may
help finance capital investment and increase financial stability. In
its updated Strategic Transformation Plan, the Service states that it
plans on taking advantage of these new flexibilities through such
actions as:
* improving the value of its market-dominant products through such
tools as Intelligent Mail,[Footnote 19]
* tailoring competitive products to market requirements,
* enhancing online postal services, and:
* streamlining acceptance of mail at postal facilities for commercial
mailers.
The Postal Service applied its new rate-setting flexibilities when, on
February 11, 2008, it announced its first rate increases under the act
for its market-dominant products, including an increase in the cost of
a First-Class stamp from 41 to 42 cents. The Service intends to raise
the rates for each class,[Footnote 20] on average, close to the maximum
allowed by the price cap (2.9 percent). Within each class, scheduled
rate increases will vary for specific mailing services. For example,
the rates for Standard Mail Flats are scheduled to increase 0.9
percent, compared with a 3.4 percent increase for Standard Mail
Letters. These variable increases reflect the Service's decision to
moderate the increases for catalogs and other flats because of the
large rate increases they experienced in May 2007. Furthermore, the
Postal Service has recently notified the PRC of rate-setting
initiatives for two of its competitive products. One notice pertained
to establishing a premium for guaranteed delivery of Express Mail on
Sunday and holidays, while the other notice pertained to establishing
prices for a Priority Mail large-sized Flat Rate Box.
Continued congressional oversight will be needed of the Service's
actions under the act to address its volume and revenue challenges.
Particular attention should be paid to monitoring how the Service and
mailers respond to a slowing economy and the implementation of the new
rate process. Questions to address include the following:
* How will mailers and volume respond to changes in rates in the short
term, as well as the Service's intent to fully use its pricing
authority under the rate-setting cap? To what extent will these changes
affect the mail mix, including the type, size, and weight of mail?
* What types of innovative pricing methods will the Service offer?
* To what extent will customers' desire for mail be affected by privacy
concerns, environmental concerns, preference for electronic
alternatives, or efforts at the state level to establish Do Not Mail
lists?
* How will the Service be able to enhance the value of the mail (e.g.,
by providing more predictable and consistent service, tracking and
tracing capabilities)?
* What will the Service do with any retained earnings (e.g., expand its
capital program, save to weather downturns in the economy)?
Controlling Costs and Improving Operational Efficiency:
The Service faces multiple pressures in the short and long term
associated with controlling costs and improving productivity while
experiencing above-inflation cost growth in certain categories, revenue
challenges, and an inflation-based price cap. In the first quarter of
2008, the Service reported responding to revenue shortfalls by cutting
more than $300 million in costs compared to plan, including reducing
over 10.5 million workhours compared to the first quarter of 2007. The
Service indicated that continued vigilance on cost will be needed for
the rest of the year, and it will prove increasingly difficult to
reduce workhours at the same pace if revenue challenges continue. The
Postal Service budgeted for a $1 billion reduction in expenses for
2008, to be achieved in part by reducing 28 million workhours and
increasing productivity by 1 percent. Based on the first quarter's
performance, the Postal Service recognizes that it needs to more
aggressively reduce expenses to mitigate the financial impact of the
economic slowdown, and it has identified an additional $1 billion in
cost reduction efforts, many of which are tied to reduced volumes.
While actions taken to implement the reform act put pressure on costs-
-the Service expects a net increase of $1 billion in costs in 2008--the
act also eliminates other payments and provides opportunities to offset
some of these cost pressures through efficiency gains that could
restrain future rate increases. It will be crucial for the Service 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. Growth in such expenses has
exceeded inflation in each of the last 4 years, and the expenses are
budgeted to increase by almost $660 million in 2008. The major drivers
of the personnel expense increase include cost of living adjustments
(COLA), general wage increases, and health benefit expense increases.
For example, retirement health benefit costs have tracked well above
the rate of inflation, and will remain high because of the new
multibillion dollar payments required by the law.
Another cost pressure the Service faces is to modernize and maintain
its vast infrastructure and transportation system that supports its
expanding delivery network--projected to increase by 1.9 million
delivery points in 2008. The Service's transportation costs have grown
faster than the rate of inflation for the past 3 years and were
budgeted to increase by 5.4 percent ($350 million) in 2008. The Service
attributes these increases in part to contractual rate increases and
rising fuel costs. We noted the Service's vulnerabilities to rising
fuel prices in a report issued last year.[Footnote 21] We have also
reported on the challenges facing the Service in managing its 34,000
facilities nationwide, including the need to capture and maintain
accurate facility data, adequately maintain facilities, address
deferred maintenance issues, and align retail access with customer
needs.[Footnote 22]
The act provides an opportunity for the Service to address its cost
challenges by establishing an inflation-based price cap for market-
dominant products, which provides an incentive for the Postal Service
to operate more efficiently. The act also requires the Service to
develop a plan by June 2008 that includes its strategy for
rationalizing the postal facilities network and removing excess
processing capacity from the network. As part of this plan, the Service
is to identify cost savings and other benefits associated with network
rationalization alternatives. This plan provides an opportunity for the
Service to make its case that realignment is needed to address
infrastructure issues (e.g., excess capacity, maintenance needs, and
facility locations) and reduce costs. It can also address concerns
raised by Congress and the public about how decisions related to
planned network changes are made and communicated to affected parties.
We have reported our concerns that the Service's strategy for
realigning its processing and distribution network and workforce was
not clear, and that its strategy lacked sufficient transparency and
accountability, adequate stakeholder input, and performance measures
for results and we have recommendations outstanding related to these
concerns.[Footnote 23]
The Service recognizes these cost challenges and plans to build on its
progress in this area. We have reported on the Service's progress in
containing cost growth by reducing workhours, downsizing its workforce
and improving productivity, and the Service's ability to control cost
growth during the first quarter was encouraging. Furthermore, the
Service should benefit from agreeing with its four major labor unions
reducing its future share of the contributions to the cost of health
benefit premiums for many of its employees. The Service is planning to
continue its cost cutting efforts as part of its Strategic
Transformation Plan and is seeking efficiency gains from a variety of
sources including:
* more fully automating the sorting of flat mail--in 2008, the Service
will deploy 100 machines to automate flat sorting in 30 to 35
facilities as part of its Phase One of the Flats Sequencing System
(FSS);
* outsourcing certain activities, such as expanding contract delivery
service;[Footnote 24]
* consolidating mail processing operations;
* optimizing retail resources using two scheduling tools to help
managers align staffing to changes in customer demand; and:
* working with members of the mailing industry to optimize mailer
preparation requirements, including the use of Intelligent Mail
Barcodes on mailpieces, to facilitate achieving the lowest combined
mailing cost for all parties.
Making progress in addressing cost challenges will be important as the
Service is required to operate under the new price cap, particularly if
the economy continues to weaken. Progress will also be needed in areas
where it has been difficult to achieve. For example, we reported last
summer that progress in consolidating mail processing operations among
facilities has been slow due to several factors.[Footnote 25] In some
cases, the Service was not ready to proceed with the consolidation, and
other external factors have slowed the process, including union and
community resistance. In addition, language in recent Senate
Appropriations Committee reports has directed the Service not to
implement consolidation decisions in certain locations until specific
requirements have been met.[Footnote 26] Furthermore, in its first
quarter financial report, the Service stated that if proposed
legislation limiting its ability to contract out mail delivery and
other postal activities is enacted, it would place significant
restraints on its ability to achieve cost reductions. As actions are
carried out to control costs in the future, continued oversight will be
needed to ensure that the Service's cost reduction strategies achieve
their goals, without negatively affecting service. Specific oversight
questions include the following:
* If volume shortfalls persist, will the Service be able to implement
corresponding cost controls?
* If the economy continues to worsen and/or certain key costs continue
to increase at levels above inflation (e.g., health benefit costs), how
can the Service still meet its service goals and manage its costs under
the rate cap?
* How will the new rate structure lead to efficiency improvements
throughout the mail system?
* Will the Service's implementation of its network realignment result
in greater cost savings and improved efficiency?
* How do external constraints limit the Service's ability to achieve
cost savings through network optimization and what can be done to
alleviate these constraints?
* Would the Service achieve its expected return on investment and
improvements in operational performance in a second phase of automated
flat sorting equipment?
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 786,000 full-and
part-time employees at the end of 2007. As the Service continues to
improve its operational efficiencies (i.e., rationalize its facilities,
expand service measurement, increase automation, improve retail access,
and streamline its transportation network), it will be challenged to
realign its workforce in accordance with these changes. These
challenges may be compounded by such factors as (1) changes in mailers'
behavior in response to the new rate structure and economic uncertainty
that may reduce the level of processing needed at Postal Service
facilities and (2) the expected retirement of a significant portion of
its workforce, particularly at the executive level, within the next 5
years. These actions will require a different mix in the number,
skills, and deployment of its employees, and may involve repositioning,
retraining, outsourcing, and further reducing its workforce. The
Service must describe, as part of the Facilities Plan required by the
act, 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 recognizes the challenges in aligning its workforce with
changing customer needs, new technologies, and emerging markets. In its
updated Strategic Transformation Plan, the Service includes specific
actions aimed at improving workforce flexibility, succession planning,
and staffing efficiency. As it takes actions in this area, oversight
will be important in several areas including:
* How will the Service's workforce be affected by the implementation of
new automation equipment that supports such initiatives as FSS or
Intelligent Mail?
* 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 Service take advantage of flexibilities to deal with
peak operating periods?
Maintaining, Measuring, and Reporting Service:
The Service faces continued challenges in further updating its delivery
performance standards, implementing representative measures of delivery
performance, setting appropriate goals for delivery speed and
reliability, and reporting results in a transparent and accessible
manner. This information is critical for stakeholders to understand how
the Service is fulfilling its mission of providing affordable, high-
quality universal service on a self-financing basis--it would assist
the Service and its customers in identifying and addressing delivery
problems, and help Congress, the PRC, and others to hold management
accountable for results and conduct independent oversight.
In July 2006, we reported that the Service's delivery performance
standards, measurement, and reporting needed improvement.[Footnote 27]
Among other things, we found that delivery standards for major types of
mail had not been updated in a number of years and did not reflect
current operations, including how mail is prepared and delivered. We
also found that the Service does not measure the delivery performance
of most types of mail, which limits transparency. Based on these and
related 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 act provided an opportunity to address these issues by requiring
the establishment of modern delivery standards, the setting of goals
for these standards, and annual progress reports. The act also
established other requirements:
* The Service must issue modern service standards by December 2007
(these standards were issued);
* Within 6 months of issuing service standards the Service must, in
consultation with the PRC, develop and submit a plan, with performance
goals, to Congress for meeting those standards.
* 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.
The act also identified four 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.
* Provide a system of objective external performance measurements for
each market-dominant product as a basis for measurement of Postal
Service performance.
The Postal Service has taken an active role to address this challenge,
including collaborating with mailers and the PRC on issuing the new
service standards. The Service submitted to the PRC a proposal on
service measurement using Intelligent Mail and is planning to expand
the geographic coverage of its External First-Class Measurement System,
and the PRC has put this proposal out for comment. The Service is also
consulting with the PRC about other reporting issues.
We are encouraged by the Service's progress to date as well as its
performance during the first quarter of 2008 for the segment of First-
Class Mail that it currently measures. The delivery performance for
mail measured by the Service's EXFC system reported on-time deliveries
for 96 percent of 1-day mail, 93 percent of 2-day mail, and 88 percent
of 3-day mail, all of which were improvements over the first quarter of
2007. We continue to believe that the key principles of completeness,
availability, and usefulness should guide future actions related to
updating service standards and implementing performance measurement and
reporting systems. Continued collaboration and oversight will be
critical to making further progress as the system becomes more and more
developed. In particular, questions will need to be asked, including
the following:
* How should the standards and goals reflect different operational
capabilities that affect the speed and reliability of delivery, such as
presorting and separate processing streams?
* Given the different information needs of the various stakeholder
groups--e.g., the Service, PRC, Congress, mailers, the American public-
-what are appropriate levels of transparency for each of the key
groups?
- What level of detail should be available to each group? For example,
some mailers have said they need detailed, real-time information to
help identify and address delivery problems.
- In what format should information be available, and how should
privacy be protected?
- How frequently should information be reported and/or accessible
(e.g., quarterly, annually, or in real-time)?
- Should mailers pay for some of the information?
* How should mailer issues regarding the implementation of Intelligent
Mail be addressed?
* What exclusions, if any, should be allowed under the Service's
reporting of annual results (e.g., exclusions for the holiday mailing
period and incorrectly addressed and/or prepared mail)?
Implementing New Regulatory Frameworks:
The Postal Service and PRC will continue to be challenged to
successfully implement the extensive regulatory changes required by the
act. Currently, the PRC is reviewing the May 2008 rate increases filed
by the Service and has asked for public comment on this filing. In
addition to the PRC's regulatory responsibilities for rate setting and
monitoring service performance discussed earlier, these parties will be
challenged to implement other requirements related to postal costing,
accounting, and financial reporting. We have reported on specific
challenges the Postal Service has faced in these areas. With respect to
its financial reporting, the Service has made significant improvements
in the frequency, content, and availability to address our earlier
recommendations.[Footnote 28] Furthermore, in 2005 we reported on the
long-standing issues of ratemaking data quality, many of which persist
today.[Footnote 29]
The act establishes new reporting and accounting requirements that
should help to address these challenges. The major change is the
establishment of, and authority provided to the new PRC to help enhance
the collection and reporting of information on the Service's postal
rates and financial performance. The PRC has oversight responsibilities
in such areas as:
* Market-dominant products: The PRC must prescribe by regulation the
form and content of annual Service reports that analyze costs,
revenues, and rates, using methods that PRC must also prescribe;
specify which reported information shall be made public; initiate
proceedings as necessary to improve the quality, completeness, or
accuracy of this information; and assess compliance and complaints.
* Competitive products: The PRC must establish regulations that ensure
that each competitive product covers its attributable costs, prohibit
the cross-subsidization of competitive products by market-dominant
products, and ensure that competitive products collectively cover what
PRC determines to be an appropriate share of the Service's
institutional costs (overhead costs), as well as to assess complaints.
* Financial reporting: The PRC must (1) review annual, quarterly, and
other periodic reports from the Service that contains information
required by the Securities and Exchange Commission (SEC) for
registrants,[Footnote 30] (2) review reports, due in 2010, on the
Service's compliance with rules prescribed by the SEC for registrants
in implementing section 404 of the Sarbanes-Oxley Act of 2002, and (3)
by December 2008, establish the accounting principles and practices
that the Service must follow related to its competitive products, and
in doing so, consider Treasury recommendations.
The Service recognizes these challenges and the potential costs
associated with meeting the new requirements. In its updated Strategic
Transformation Plan, it laid out a timeline for implementing the
Sarbanes-Oxley section 404 requirements and noted that it must manage
the uncertainties related to the implementation of the new ratemaking
process, the extent to which the PRC incorporates recommendations from
the Treasury report, and any developments from the FTC report. The
Service has not yet estimated the additional costs associated with
these new regulatory requirements. We have reported that other federal
agencies and smaller public companies have incurred significant costs
associated with complying with 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 31]
In sum, these changes can help provide accurate and timely data on the
Service's costs, revenues, and mail volumes. This information can be
used to enhance transparency and accountability for all postal
stakeholders so that they have a comprehensive understanding of the
Service's financial condition and outlook and of how postal rates are
aligned with costs. As the new regulatory framework is implemented,
continued oversight may be required in several areas:
* How will the PRC use its discretion to continue defining and
implementing the new regulatory structure?
* How effectively is the PRC carrying out its regulatory
responsibilities regarding rate setting and monitoring service
performance?
* Given the complexity of regulatory changes, how can the PRC balance
the interests of all stakeholders, particularly those with less
expertise and resources?
* What criteria will the 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? Looking forward, how will the PRC,
the Service, and other stakeholders consider and implement improvements
to data quality over time?
* How will the 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 affected by the costs associated with
complying with the SEC rules for implementing section 404 of the
Sarbanes-Oxley Act, as well as the need for separate information on
competitive and market-dominant products?
Required Information Can Guide Future Postal Reform Discussions:
Information required under the act can be used to facilitate
constructive dialogue and debate about postal reform issues related to
universal service, the postal monopoly, fair competition, consumer
protection, and transparency and accountability. Specifically, the act
included provisions for reports required over the next 5 to 10 years
related to key postal reform issues aimed at continually examining and
reporting on the Postal Service's mission, role, and oversight
structure in an increasingly competitive environment. The act required
multiple stakeholders, including the Postal Service, PRC, Postal
Service OIG, OPM, Treasury, and GAO, to issue these reports, and
established a wide range of deadlines for this work. The information
can be useful to Congress when it is considering key postal reform
issues including:
* What universal postal service will be needed in the future and how
should it be defined, given past changes and future challenges?
* To what extent should certain monopoly provisions be maintained or
narrowed?
* What role should the Service play in providing universal postal
services vis-à-vis its competitors?
* What are appropriate legal standards for fair competition in areas
where the Service competes with private-sector providers?
* What transparency, oversight, and accountability are needed for the
Service, particularly as long as it remains a federal entity with a
monopoly to deliver letter mail?
* How appropriate are the new regulatory structure and rate-setting
system?
* What barriers, if any, have prevented progress under the act (e.g.,
in optimizing the Service's infrastructure network), and how can they
be addressed?
As outlined earlier, information related to some of these issues has
already been published from the Treasury and FTC. Treasury issued a
report on the accounting principles and practices that should be
followed by the Service, and the FTC issued a report that analyzed laws
that apply differently to the Service's competitive products and
similar products provided by private competitors, and estimated the
economic burdens on, and advantages to, the Service due to these legal
differences. This information provides a good starting point for
discussions on broader reform topics such as the following:
* Universal postal service and the postal monopoly: The mission of the
Postal Service revolves around providing affordable, high-quality
universal postal services on a self-financing basis. While the act
requires the PRC to provide annual reviews of service quality and the
estimated costs of providing universal service, the act requires a more
comprehensive study from the PRC on the scope and standards of
universal postal service and the postal monopoly. This report, due by
December 2008, is to describe any deficiencies in universal service and
can include recommendations on future changes. The PRC is required to
obtain public comments and consult with the Service in preparing this
report.
* Accounting, financial transparency, and oversight: The PRC solicited
public comments on Treasury's report. In addition, the PRC raised
questions about what financial transparency and oversight are
appropriate for the Service's competitive products fund and whether a
public or private entity should conduct such oversight. These comments
will assist the PRC in fulfilling the act's requirement to establish
accounting practices and principles for the Service to follow, and
issue regulations for the Service's reporting of its costs, revenue,
rates, and volumes.
* Regulation of postal rates: The act requires the PRC to annually
report to the President and Congress on the extent to which postal
regulations, including those related to postal rates, achieve statutory
objectives. Looking forward, the PRC is required to assess ratemaking
and other provisions of the act every 5 years (with the first report
due by December 2011), and review the system for regulating the rates
and classes for market-dominant products by December 2016. At that
point, the act empowers PRC to make changes to the system for
regulating market-dominant rates.
* Future business model: GAO is required to issue a report by December
2011 that evaluates various options and strategies for the long-term
structural and operational reforms of the Service. The requirement
states that we may include, among other things, recommendations on how
the Service's business model can be maintained or transformed to assure
continued availability of affordable universal postal service.
We are encouraged by the early implementation steps that the Service,
the PRC, the Department of the Treasury, FTC, and other stakeholders
have taken. The Service, the PRC, mailers, and other stakeholders have
found new ways to engage in constructive dialogue and debate and in
some cases, reach consensus on how best to proceed. These actions--
which contrast sharply with the adversarial ratemaking process
abolished by the act--hold promise for future progress across a broad
range of postal reform issues. Such progress will remain necessary as
the Service, the mailing industry, and competitors transform themselves
in response to the rapidly changing communications and delivery
marketplace.
Mr. Chairman, 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 Acknowledgment:
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, Summer Lingard, Jeanette Franzel, Shirley Abel, Scott McNulty,
Brandon Haller, David Hooper and Kathy Gilhooly.
[End of section]
Footnotes:
[1] GAO, U.S. Postal Service: Postal Reform Law Provides Opportunities
to Address Postal Challenges, GAO-07-684T, (Washington, D.C.: April 17,
2007).
[2] Pub. L. No. 109-435: The Postal Accountability and Enhancement Act,
enacted Dec. 20, 2006.
[3] In GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007), we determined that sufficient progress had been made to
warrant removing the Postal Service's transformation efforts and
outlook from our high-risk list. We had originally made this
designation in April 2001 to reflect its growing financial,
operational, and human capital challenges.
[4] Unless otherwise noted, all references to specific years refer to
the Postal Service's fiscal year, which ends on September 30.
[5] The Postal Regulatory Commission was previously named the Postal
Rate Commission. Section 604 of the act redesignated the Postal Rate
Commission as the Postal Regulatory Commission.
[6] First-Class Mail includes single-piece mail (e.g., bill payments
and letters) and bulk mail (e.g., bills and advertising).
[7] This segment of mail is measured using the External First-Class
Measurement System (EXFC). The EXFC system is not a system wide
measurement of all First-Class Mail performance. According to the
Service, EXFC continually tests mail deposited in collection boxes in
463 three-digit zip code areas selected for geographic and volume
density.
[8] The act created different pricing mechanisms for the Service's
competitive and market-dominant products. Market-dominant products
include those products protected by the postal monopoly, such as First-
Class Mail letters, Standard Mail (mainly bulk advertising and direct
mail solicitations), and Periodicals (mainly magazines and local
newspapers) and competitive products are not protected by the postal
monopoly and include Priority Mail and Expedited Mail. Sections 201 and
202 of the act list which products are market-dominant and competitive.
[9] For a listing of these reports and actions, see Congressional
Research Service, The Postal Accountability and Enhancement Act,
RS22573 (Washington: D.C.: Jan. 22, 2007).
[10] These payments go into the newly created Postal Service Retiree
Health Benefit Fund (PSRHBF).
[11] 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.
[12] The January 2006 rate increase was on average, 5.4 percent, and
the First-Class stamp rate went from 37 cents to 39 cents. The May 2007
rate increase was, on average, 7.6 percent and the First-Class stamp
rate increased to 41 cents. As part of this rate change, the Service
sought to align postal rates with the respective mail handling costs.
Some rate increases recommended by the PRC and implemented by the
Service were particularly large, including some catalog rates that
increased by 20 to 40 percent. The new rate structure is aimed at
providing greater incentives for more efficient mailing practices
(e.g., shape, weight, handling, preparation, and transportation) and
thereby encouraging smaller rate increases in the longer run.
[13] The $6.8 billion net increase in expenses as a result of changes
in the act consists of the new retiree health benefit payment ($5.4
billion) and the expensing of escrow monies ($3.0 billion), being
offset by the $1.6 billion reduction in CSRS expenses.
[14] The agreement with the fourth major union resulted from a binding
arbitration decision issued in December 2007.
[15] The Service's annual debt limit is $3 billion, and its total debt
limit is $15 billion.
[16] The $3.8 billion net increase in retirement-related expenses is
comprised of the $5.4 billion retiree health payment due in 2007 and
the $1.6 billion reduction in the Service's pension expenses in 2007.
[17] Package Services include parcels, merchandise, catalogs, media
mail, library mail, and books.
[18] This negative $1 billion impact in 2008 is based on the difference
between eliminating $5.1 billion in costs ($1.5 billion in CSRS
contribution and $3.6 billion that was to be placed into escrow) being
offset by $6.1 billion in additional payments and lost interest income
on the escrow monies.
[19] According to the Plan, Intelligent Mail is a comprehensive term
that describes the integration of electronic mailing documentation,
intelligent mail barcodes, and scans to track mail at all points in the
postal processing system.
[20] The major mail classes include First-Class Mail, Standard Mail,
Periodicals, Package Service, and special services (e.g., Post Office
boxes, Delivery Confirmation, and money orders).
[21] 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).
[22] GAO, U.S. Postal Service Facilities: Improvements in Data Would
Strengthen Maintenance and Alignment of Access to Retail Services, GAO-
08-41 (Washington, D.C.: Dec. 10, 2007).
[23] GAO, U.S. Postal Service: Progress Made in Implementing Mail
Processing Realignment Efforts, but Better Integration and Performance
Measurement Still Needed, GAO-07-1083T (Washington, D.C.: July 26,
2007); 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, 2005); and U.S.
Postal Service: Mail Processing Realignment Efforts Under Way Need
Better Integration and Explanation, GAO-07-717 (Washington, D.C.: June
21, 2007).
[24] We are currently performing work related to the Service's
outsourcing activities and plan to issue a report this summer.
[25] GAO-07-717.
[26] Senate Report No.109-293, at 228 (2006) directed that
consolidation decisions pertaining to three locations not be
implemented until the Postal Service received a GAO report, which was
completed in July 2007. Senate Report No. 110-129, at 108 (2007)
directed the Postal Service not to implement certain Area Mail
Processing Facility consolidations until the Postal Service fully
implements GAO's recommendations from its July 2007 report and develops
a mechanism to evaluate potential and actual impacts on delivery.
[27] GAO, U.S. Postal Service: Delivery Performance Standards,
Measurement, and Reporting Need Improvement, GAO-06-733 (Washington,
D.C.: July 27, 2006).
[28] GAO-07-684T; 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).
[29] 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).
[30] 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.
[31] 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).
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