Major Management Challenges and Program Risks: U.S. Postal Service
(Letter Report, 01/01/2001, GAO/GAO-01-262).

This report, part of GAO's high risk series, discusses the major
management challenges and program risks facing the U.S. Postal Service
(USPS). To be successful in providing affordable universal service, USPS
must address formidable challenges in the areas of (1) self-support, (2)
cost-control, (3) human capital issues, (4) performance information, and
(5) legal issues.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-262
     TITLE:  Major Management Challenges and Program Risks: U.S. Postal
	     Service
      DATE:  01/01/2001
   SUBJECT:  Risk management
	     Accountability
	     Antitrust law
	     Internal controls
	     Postal service
	     Performance measures
	     Personnel management
	     Public administration
IDENTIFIER:  High Risk Series 2001
	     GAO High Risk Program

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GAO-01-262

Performance and Accountability Series

January 2001 Major Management Challenges and Program Risks

U. S. Postal Service

GAO- 01- 262

Lett er

January 2001 The President of the Senate The Speaker of the House of
Representatives

This report addresses the major performance and accountability challenges
facing the U. S. Postal Service as it seeks to bind the nation together
through the correspondence of the people, to provide access in all

communities, and to offer prompt, reliable, and efficient postal services at
uniform prices. It includes a summary of actions that the Service has taken
and that are under way to address these challenges. It also outlines further
actions that GAO believes are needed. This analysis should help the new
Congress and administration carry out their responsibilities and improve
government for

the benefit of the American people. This report is part of a special series,
first issued in January 1999, entitled the Performance and Accountability
Series: Major Management Challenges

and Program Risks. In that series, GAO advised the Congress that it planned
to reassess the methodologies and criteria used to determine which federal
government operations and functions should be highlighted and which should
be designated as “high risk.” GAO completed the assessment,
considered comments provided on a publicly available exposure draft, and
published its guidance document, Determining Performance and Accountability
Challenges and High Risks (GAO- 01- 159SP), in

November 2000. The full 2001 Performance and Accountability Series contains
separate reports on 21 agencies-- covering each cabinet department, most
major independent agencies,

and the U. S. Postal Service. The series also includes a

governmentwide perspective on performance and management challenges across
the federal government. As a companion volume to this series, GAO is issuing
an update on those government operations and programs

that its work identified as “high risk” because of either their
greater vulnerabilities to waste, fraud, abuse, and mismanagement or major
challenges associated with their economy, efficiency, or effectiveness.
David M. Walker Comptroller General of the United States

Overview In fiscal year 2000, the U. S. Postal Service employed nearly one-
third of the federal civilian workforce, provided delivery services for
almost 208 billion pieces of mail to more than 130 million households and
businesses, and earned almost $65 billion in operating revenue. Both
Congress and the public expect the Service to fulfill its primary mission of
providing universal postal service at reasonable rates while remaining self-
supporting from postal revenues. Overall, during the late 1990s the Service
improved its financial position through net income exceeding $5 billion and
improved the timely delivery of First- Class

Mail. Moreover, in fiscal year 2000, the Service improved productivity and
implemented cost- cutting measures while generally maintaining its overnight
First- Class Mail delivery performance. However, mail volumes grew more
slowly than expected, and postal costs were difficult to restrain. Thus, the
Service incurred a deficit of almost $200 million in fiscal year 2000. In
addition,

postal rates are scheduled to increase in early 2001. Looking ahead, we have
reported that the Postal Service faces an uncertain future as competition
increases in the communications and delivery services sectors. The

Service has reported that it faces significant threats from electronic
substitution of mailed bills and payments and anticipates a financial
squeeze resulting from declining First- Class Mail volumes that cover most
postal overhead costs. Thus, a key oversight issue we identified for the
Postal Service, Congress, and the American people was whether the Service
might be headed for financial shortfalls that could, in the long run, hinder
its ability to remain self- supporting while carrying out its mission of
providing affordable, universal postal services that bind the nation
together.

The potential consequences if the Service incurs a series of large financial
deficits could be increases in postal rates, declines in service quality,
consolidation or closure of some facilities, or reconsideration of the scope
of postal services as well as postal operations.

The Postal Service is also challenged to operate in an uncertain legal and
regulatory environment, with unresolved regulatory issues about the Postal
Service's future role and an ongoing debate over whether fundamental changes
should be made to the legal and regulatory system governing the Service. The
Postmaster General recently said that the Postal

Service is at a crossroads with regard to its ability to continue to provide
affordable universal service. To be successful, the Service must address
formidable challenges in five key areas.

Remain self- supporting while providing affordable, high- quality universal
service

? Control costs and improve productivity ? Address long- term human capital
issues ? Provide complete and reliable performance

information ? Address legal and regulatory issues

Remain selfsupporting We have reported that the Service faces growing
challenges from competition, notably from private

delivery companies and electronic communications alternatives such as the
Internet. The Service projects that such competition will lead to
substantial declines in the Service's First- Class Mail volume in the next
decade. We have also reported that should this occur, the Service will
likely face unprecedented challenges as it seeks to fulfill its primary
mission of providing universal postal

service at reasonable rates while remaining selfsupporting from postal
revenues. Although it is difficult to predict the timing and magnitude of
further mail volume diversion to electronic alternatives and the

potential financial consequence, the Service's baseline forecast calls for
total First- Class Mail volume to decline at an average annual rate of 3.6
percent from fiscal years 2004 through 2008. The Service has reported that
it can sustain its viability over the next 5 years by “dramatically
cutting costs and seeking new revenue sources within the current

regulatory structure.” However, the Service has also reported that
planned reductions in its costs may not be sufficient to keep future rate
increases below inflation, especially for any mail categories that take on a
larger burden of supporting postal infrastructure costs as a result of
volume loss in other categories. Further, the Service has recognized the
difficulty of generating significant revenue from new products and services
over the next 5 years. Historically, as our 1998 report showed, the
Service's new product and service initiatives underway during the mid- 1990s
generally were not profitable.

Control costs We testified in 1998 and 1999 House postal oversight hearings
that the Service's continued success will depend heavily on its ability to
control operating costs

and improve productivity. As the Postal Service and key stakeholders have
recognized, long- term increases in its productivity will be essential to
controlling costs and thus keeping postage rates affordable. Numerous
reports, including some by us, have noted inefficiencies in the postal
system and difficulties the Service has had

in realizing opportunities for savings. Postal productivity has increased
only about 11 percent over the past three decades, despite substantial
investments in automation and information technology. The Service's goal is
to achieve “breakthrough” productivity increases that

generate $3 billion to $4 billion cost savings by 2005. Most of the savings
are to come from productivity increases in mail processing operations, while
additional savings are to come from administrative activities,

purchasing, transportation, and other operations. The Service's ability to
improve productivity and control costs is, however, constrained by a number
of factors, such as its requirement to maintain a national infrastructure of
post offices, many of which are small

and unprofitable. Despite heavy investments in automation over the past
decade, postal labor- related costs continue to account for over three-
quarters of total operating expenses. In addition, some employee- related
expenses are rising and are difficult to control, such as retirement, health
care, and workers compensation costs. Human capital

We believe that with a workforce of more than 900, 000 issues employees, the
Postal Service faces difficult human capital challenges that must be
successfully addressed to maintain organizational effectiveness and improve

the workplace environment as well as control workforce costs. These
challenges include (1) restructuring the postal workforce and reducing the
number of employees, (2) maintaining effective operations as most executives
and about half of the postal workforce reach

retirement eligibility over the next decade, and (3) ameliorating persistent
problems in the workplace that have been exacerbated by decades of
adversarial labor- management relations. The Postal Service's human capital
problems can be seen as part of a broader pattern of human capital
shortcomings that have eroded mission capabilities across the federal
government. See our High- Risk Series: An Update (GAO- 01- 263, Jan. 2001)
for a discussion of human capital as a newly designated governmentwide high-
risk area.

Progress, however, will not be easy. By law, a third- party arbitration
board imposes a labor- management contract when the parties fail to agree,
and binding arbitration has often been used to settle impasses in the
contract negotiations. As of December 2000, contracts had expired between
the Service and three of its four major labor unions, and the parties had
been unable to reach agreement in contract negotiations. The Service has
reported that it is bound by extensive work rules and other regulations that
hamper flexibility and innovation. Further, the Service has stated it is
already facing problems in recruiting, motivating, and retaining employees,
especially in the technical, professional, and managerial categories, and it
will face succession issues as a substantial number of managers reach
retirement age. Moreover, as we have reported, persistent workplace problems
have impeded efforts to improve efficiency and effectiveness. One indication
of these

impediments is the time and cost expended to handle about 146,000 pending or
appealed grievances. We recommended that postal management and the heads of
the postal labor unions and management associations develop a long- term
framework agreement to improve the workplace environment. Although the
parties have held a series of meetings, such a framework agreement

has not been developed. On the other hand, the Service has reached
agreements with some of the unions to address specific workplace issues such
as the handling

of employee grievances. Further, the Service has made the “Voice of
the Employee” one of its top three corporate goal areas, established
specific targets for improvement, and initiated numerous programs to improve
the workplace environment.

Performance We remain concerned about the quality and

information transparency of the Postal Service's performance information.
Without complete and reliable performance data, the Service and other
stakeholders cannot determine the Service's progress towards meeting its

intended performance results. For example, we reported that the Service's
financial data for its electronic commerce (e- commerce) initiatives were
not sufficiently complete and reliable to assess the Service's

performance. The Service agreed with our recommendation that it provide
complete and accurate information on its e- commerce costs and revenues and
said it is instituting a standard financial reporting procedure in this
area.

In addition, we recently reported that the Postal Service's annual
performance plans and performance reports may not have been as useful to
Congress, postal managers, and customers as they could have been, in part
because they contained incomplete and possibly misleading explanations of
some results. We recommended, and the Service agreed, that the Service

should make its future performance reports reflect straightforward and
clearly stated comparisons of planned targets and results. In addition, we
recommended that the Service's future performance plans should have clear
criteria for measuring performance and provide more complete explanations of
its goals and strategies. In response, the Service made changes that
strengthened its final annual performance plan for fiscal year 2001.

Legal issues The Postal Service is challenged to operate in an uncertain
legal and regulatory environment. As we have previously reported, postal
stakeholders are engaged in an ongoing debate over whether the Service
should be allowed to compete with private companies and, if so, under what
circumstances. Congress, the Service, its competitors, and others have
debated fundamental issues regarding the Service's legal authority and
regulatory framework. Further, some stakeholders have raised antitrust and
fair competition concerns relating to current and potential alliances and
partnerships involving the Service and others, including private

sector companies such as FedEx, as well as foreign postal administrations.
In addition, the Service has raised concerns about its lack of flexibility
to set prices and the lengthy postal ratemaking process and has called for
changes to the existing regulatory framework for setting domestic postal
rates. Without a clear consensus among postal stakeholders, Congress is
likely

to be asked to consider various legislative proposals concerning the
Service's role and what regulatory framework should apply to the Service.

Major Performance and Accountability Challenges

The Postal Service, the single largest federal civilian agency, has a
mission vital to the nation's communications and commerce. As an independent
establishment of the executive branch, the Service is charged with providing
postal services to bind the

nation together through the personal, educational, literary, and business
correspondence of the people. The Service has a statutory monopoly that
restricts the private delivery of letters to enable the Service to fulfill
its universal service mandates. To carry out its mission, the Service
maintains a delivery and retail infrastructure that includes more than
235,000 city and rural delivery

routes; more than 38,000 post offices, stations, and branches; and more than
350 major mail processing and distribution facilities. This physical
infrastructure continues to grow, and the Service added about 2 million
delivery points in fiscal year 2000. Further, the Service is required to
break even over the long run by operating in a businesslike manner and
currently receives little federal financial assistance to meet its public
service obligations. To change domestic postage rates, the Service must file
a proposal with the independent Postal Rate Commission (PRC)- starting a
complex process that is to result in a PRC- recommended decision within 10
months and subsequent Service action.

Total revenues of about $65 billion in fiscal year 2000.

? Over 900,000 employees. ? Largest federal civilian agency. ? Ranks 2nd in
employment and 8th in

revenues compared to U. S. companies. ? Mail delivery 6 days each week. ?
Uniform postal rates for First- Class letter mail. ? Prompt, reliable, and
efficient postal services

to patrons in all areas, including rural areas, communities, and small towns
where post offices are not self- sustaining.

Remain SelfSupporting The Postal Service expects diversion of mailed bills
and

While payments to electronic billing and payment alternatives Providing

to cause a substantial decline in First- Class Mail volume Affordable,
HighQuality and “extreme financial pressure” for the Service.
The Universal financial squeeze- which has already begun- will

Service challenge the Service to remain self- supporting while providing
affordable high- quality service. To address this

challenge, the Service's basic strategy is a combination of aggressive cost-
cutting and new revenue- generation. In the long term, the Service will be
challenged to address the following questions: (1) Can the Service maintain
and, where necessary, improve on the quality of mail delivery service? (2)
Can the Service continue to provide affordable postal rates? (3) Can the
Service

remain self- supporting through postal revenues? (4) Can the Service
continue in the long term to provide the current level and scope of
universal postal service?

To put its financial and service outlook into context, in the late 1990s,
the Postal Service improved its financial position through net income of
about $5. 5 billion, which helped keep postal rates affordable. Over the
same period, the Service also improved delivery performance as measured by
on- time delivery of First- Class Mail. In fiscal year 2000, the Service
achieved on- time delivery for 94 percent of overnight First- Class Mail and
85 percent for 2- and 3- day First- Class Mail. However, the

Postal Service has encountered increasing financial difficulties as its net
income decreased annually from fiscal years 1995 through 2000, when the
Service incurred a deficit of almost $200 millionits first deficit since
fiscal year 1994 (see fig. 1). Moreover, although in January 2000, the
Service projected $500 million in net income for fiscal year 2001, by
October 2000, it projected a $480 million deficit despite a planned rate
increase midway through the fiscal year. The Service stated that increases
in anticipated expenses, such as for fuel costs and cost- of- living
allowances, as well as lower

than expected revenue growth accounted for most of the difference. Figure 1:
Postal Service Net Income Is Declining 2,000 Dollars (in millions)

1,500 1,000

500 0 -500 -1,000 -1,500 -2,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Fiscal years

Actual Projected (2001)

Source: U. S. Postal Service.

Looking ahead, competition is increasing from private delivery companies,
foreign postal administrations accepting outbound international mail in the
United States, and electronic communications alternatives such as the
Internet. As an example of trends that have already affected the Service's
mail volumes, federal

agencies are mandated to move as quickly as possible to reduce paperwork and
to adopt electronic billing and payment. Two- thirds of the 880 million
Social Security checks, tax refunds, and other payments that were sent by
the Department of the Treasury in fiscal year 1999

were sent electronically, not mailed. Further, the banking industry's mail
volume was almost 18 percent lower in 1999 than it was in 1996. According to
the Service, longer term projections suggest that about half of the bills
and payments that are currently mailed will eventually be replaced with
electronic billing and

payment alternatives. The Postal Service's 5- Year Strategic Plan for fiscal
years 2001 through 2005 adopted a baseline assumption of First- Class Mail
volume declining by an average of 3.6 percent annually from fiscal years
2004 through 2008 (see fig. 2). Such a decline would be significant because
First- Class Mail generated 58 percent of the Service's total revenues and
covered

two- thirds of postal overhead costs in fiscal year 1999.

Figure 2: Postal Service Projects Decline in First- Class Mail Volume 10

Average annual percentage change

8.6

8 6 4

3.7 4.0 3.2

2.5

2

1.5 1.7 1.6

1.3 0 -2 -4

-3.6

1972- 1979 1980- 1989 1990- 1999 2000- 2003 2004- 2008

USPS projections

Fiscal years

First- Class Mail volume Standard A mail volume (primarily advertisements)

Source: U. S. Postal Service.

Should projected mail declines occur, one challenge for the Service would be
continuing to cover its overhead costs that do not vary with mail volume-
such as costs

for maintaining delivery routes and post offices. The Service has warned
that its planned cost reductions from its “breakthrough
productivity” initiative and capital investment strategies may not be
sufficient to keep future rate increases below inflation, especially for any
mail categories that would assume more overhead costs as volumes decline in
other mail categories.

Another challenge would be to cut mail processing and other costs that have
traditionally been considered to vary with volume.

In addition to cutting costs, the Postal Service aims to increase net
revenues from existing products such as Priority Mail (expedited delivery
service), which is forecast to grow through fiscal year 2008 in its baseline
planning scenario. The Service also aims to increase revenues from new
products and services. For example, in the electronic- commerce area, which
generally involves products and services provided through use of the
Internet, the Service's new offerings face both traditional competitors in
the delivery service sector,

such as FedEx and United Parcel Service (UPS); and a broad range of
competitors, such as technology companies, financial institutions, and
foreign postal administrations. However, the Service's Strategic Plan has
warned that no significant new revenue is forecast

from new products and services during the next 5 years. Finally, the Postal
Service has noted that many forecasts suggest that the impact on the Service
from electronic substitution may be even more dramatic than the

Service believes. Accordingly, the Service presented a rapid diversion
scenario in its Strategic Plan, in which electronic substitutes would
supplant not only bill presentment and payment, but also business
communications and direct mail. The Strategic Plan stated that such an
outcome would threaten double- digit percentage increases in postal prices
and require serious consideration of alternatives, such as revising delivery

service standards, consolidating or closing some facilities, and reducing
other services. Further, the Service would have to reduce its workforce at a
significantly higher rate than could be absorbed through attrition or other
means.

Control Costs and The Service has long struggled to reduce costs and

Improve increase its productivity. Adding to the difficulty of this
Productivity

task, the Service has experienced rising infrastructure costs of adding
delivery routes and continued growth in total mail volume. Further, in 1998,
the Service declared a moratorium on closing post offices and by law is not
allowed to close small post offices solely for operating

at a deficit. The Service has recognized that it needs aggressive cost
management and anticipates the need for a “structural
transformation” that is to include,

among other things, achieving “breakthrough” productivity
savings of $1 billion annually. To help achieve productivity gains, the
Service plans continued capital investments of over $17 billion over the
next 5 years in automation, modernization, and information technology. The
Service also plans to standardize and improve work processes to reduce
significant variations in quality, productivity, and costs across the
system. The Service made some progress in fiscal year 2000 in controlling
costs through reducing the number of workhours by 0.6 percent, which was the
first such reduction since fiscal year 1992. The Service plans to further
reduce workhours by 1.5 percent in fiscal year 2001.

However, as the Service has recognized, some employee- related expenses will
be difficult to control. The Postal Service's retirement- related and
workers compensation expenses have increased in recent years, and these
trends are expected to continue (see fig. 3). According to the Service, its
retirement expenses are

estimated to increase by $554 million in fiscal year 2001 to $9. 1 billion
and are projected to reach $14. 0 billion in fiscal year 2010. In addition
to these costs, the Service has estimated that its retiree health benefit
premiums will increase by $114 million in fiscal year 2001 to $858 million,
and the Service has projected that these premiums will reach about $2. 0
billion in fiscal year 2010.

The Service is also dealing with rising workers compensation costs that have
been difficult to control. According to the Service, its workers
compensation expenses are estimated to increase by $83 million to an
estimated $1. 0 billion in fiscal year 2001 and are projected to increase
annually to $3. 0 billion in fiscal year 2010. The Service reported making
efforts to reduce workers compensation costs, such as efforts to help
employees with work- related injuries or illnesses return to work. For
fiscal year 2001, the Service established specific goals for improving its
Occupational Safety and Health Administration (OSHA) injury/ illness rate,
its motor vehicle accident rate, and its safety program evaluation score.

Figure 3: Postal Service Projects Increases in Retirement- Related Costs and
Workers Compensation Costs

16 Dollars (in billions)

14 12 10

8 6 4 2 0

1990 1992

1994 1996

1998 2000

2002 2004

2006 2008

2010 Fiscal years

Retirement benefits Worker's compensation Retirement health benefits

Source: U. S. Postal Service.

Recent reports have identified specific opportunities for reducing costs.
For example: ? In March 1999, a joint mailing industry/ Postal Service
operations review concluded that it had observed system inefficiencies in
both postal and mailer processes that, along with other factors, had
contributed to increases in the Service's costs of

handling Periodicals mail. The Service and the mailing industry have since
agreed on some actions to be taken to address the recommendations of this
review. ? In November 1999, we concluded that the Service

still could not ensure that it is collecting all the revenue due from its
business mail operations that handle about half of the Service's mail
revenue. We reported the Service had made changes that were generally along
the lines we recommended in 1996, and its controls over the acceptance of
business mail appeared to have improved. However, we identified the need for
further improvements and recommended additional steps the Service needed to
take to ensure that Service business mail acceptance controls were working
as intended. The Service has acted to implement the recommendations.

Stakeholders and the Service have recognized that achieving productivity
gains is a key strategy to control costs. In March 2000, the Mailers
Council, a coalition of mailers and mailing associations, reported that:
“As a result of these factors, at a time when every competing
technology is becoming less expensive, the cost of using the nation's mail
system is becoming more expensive. To ensure the Service's survival,
therefore, the Mailers

Council believes postal management must focus its considerable skills and
resources on those factors it can control, and thereby generate needed
productivity gains.” Postal productivity- the relationship between the

Service's outputs of delivering mail to an expanding delivery network and
resources expended in producing them- increased only about 11 percent in the
past three decades- despite vast changes in automation and information
technology (see fig. 4). In recent years, the Service has had difficulty
making improvements in postal productivity, which declined 3.3 percent from
fiscal years 1993 to 1999. Although productivity

increased by 2.4 percent in fiscal year 2000, it is expected to grow 0. 7
percent in fiscal year 2001. As the Service and key stakeholders have
recognized, longterm increases in its productivity will be essential in
restraining postal rate increases and thus will be essential for the
Service's future success.

Figure 4: Postal Service Productivity Growth Since Fiscal Year 1971

14 Cumulative percentage change 12

10 8 6

Up 11 %

4 2 0

1971 1972

1973 1974

1975 1976

1977 1978

1979 1980

1981 1982

1983 1984

1985 1986

1987 1988

1989 1990

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

Fiscal years

Source: U. S. Postal Service.

Address LongTerm With more than 900,000 employees, the Postal Service

Human faces difficult human capital challenges that include Capital Issues

(1) restructuring the postal workforce and reducing the number of employees,
(2) maintaining effective operations as most executives and about half of
the postal workforce reach retirement eligibility over the next decade, and
(3) ameliorating persistent problems in the workplace that have been
exacerbated by decades of adversarial labor- management relations. The
Service may face a major transition in each of these areas as it is
increasingly affected by declining mail volumes and rising human capital
costs that are difficult to control. The Service has recognized the
importance of focusing on these human capital challenges by establishing the
Voice of the Employee as one of its top three corporate

goals and has implemented and planned a number of initiatives to deal with
these challenges. However, to be successful in a competitive environment,
the Service and its major unions and management associations will need to
find common ground to address long- standing problems. Workforce

The Service's Strategic Plan stated that the expected Restructuring and
decline in postal workload- in part due to automation Reductions and the
implementation of information technology- “will inevitably result in
both restructuring and a reduction in the workforce.” Some of the
planned

reductions are to be accomplished through eliminating staff vacancies and
the work associated with them. In March 2000, the Postmaster General said
that 11, 000 career vacancies had been absorbed through attrition, and that
number would reach at least 20, 000 as the Service moves forward. The
Service has reported other options that include using contracting services,

overtime, and casual part- time employees instead of hiring new employees.
However, the Service has also reported that extensive work rules and other
regulations hamper its flexibility and innovation.

Retirement and With a large percentage of the postal workforce nearing
Succession Issues

retirement eligibility, the Postal Service will be increasingly challenged
to deal with succession, continuity, and associated cost issues. This
challenge includes maintaining the continuity of service to customers as
many experienced managers and workers

retire and the Service restructures its workforce. The Service has projected
that among its current employees as of October 2000, in calendar years 2001
and 2002 about 130,000 postal employees are already at or are projected to
reach eligibility for regular retirement,

including 36 percent of executives, 25 percent of managers and supervisors,
and 16 percent of the career workforce. By calendar year 2010, 85 percent of
postal executives, 74 percent of postal managers and supervisors, and 50
percent of the career workforce will reach retirement eligibility, according
to Service projections (see fig. 5).

Figure 5: A Large Percentage of the Postal Workforce Is Nearing Retirement
Eligibility

100 Percentage retirement- eligible

85

80

74 25

60

29 50 24

40

22 20

20

12

36 25 16

0 Executives Managers

Craft and

employees supervisors

Postal workforce

Calendar years 2001- 2002 Calendar years 2003- 2005 Calendar years 2006-
2010

Source: U. S. Postal Service.

The Service has reported it faces potentially serious succession problems in
the managerial ranks. In replacing large numbers of experienced managers,
the Service has said that executives, managers, and supervisors will require
new and different skills from those in the past, with a premium on technical
skills and

the ability to communicate with a more diverse workforce. The Service
reported establishing programs for executive succession planning to develop
people for corporate needs and to foster diversity among the leadership
ranks, as well as programs for developing managers and first- line
supervisors.

Address Problems We have issued several reports related to the longstanding
in the Postal

problems in the postal workplace that have Workplace been exacerbated by
adversarial labor- management relations. As the Service's Strategic Plan
recognized: “A solution to the need for improved workplace relations

must be found if the Postal Service and the associated postal jobs are to
survive in the more competitive world of the future.” The Strategic
Plan said that “the Postal Service has a long way to go to more
effectively balance efficient management of the enterprise with the creation
of a workplace that is safe and meets employee needs for dignity, respect,
and opportunity.” To this end, the Service has implemented a number of
initiatives and established specific goals to improve the workplace
environment, such as (1) improve employees' safety, security, and well-
being; (2) improve workplace relations by building leadership skills and
behaviors;

(3) improve understanding of employee issues and concerns; and (4) ensure an
inclusive and fair environment with opportunities for all employees. Our
past reports have found that postal workplace and

labor- management relations problems had generally contributed to a
sometimes contentious work environment and lower productivity, notably in
mail processing and letter delivery operations. We have reported that the
parties could not agree on common approaches for addressing the problems,
which prevented them from sustaining the intended benefits of specific
improvement efforts that could help improve the workplace climate. We
recommended that postal management and the heads of the postal labor unions

and management associations develop a long- term framework agreement to
improve the workplace environment. Although the parties have held a series
of meetings, such a framework agreement has not been developed. In other
areas, however, the Postal Service reported taking a number of steps to
improve the workplace environment. For example, the Service deployed a
national mediation program in 1999 to resolve and expedite employee
complaints at the lowest possible level. According to the Service's General
Counsel, this program, called Resolving Employee Disputes, Reaching
Equitable Solutions Swiftly (REDRESS), has helped to reduce the number of
Equal Employment Opportunity (EEO) complaints, reversing the past trend
toward more EEO complaints. In addition, the Service reached agreements with
some of the unions to address specific

workplace issues, such as the handling of employee grievances. Recently, the
Service reported making progress in reducing the number of grievances filed
by efforts such as streamlining the grievance process and placing more
accountability on resolving grievances at the local level. We testified in
September 2000 that as of the end of fiscal year 1999, the Service reported
more than 210,000 pending or appealed grievances. By the end of fiscal year
2000, the Service reported reductions to under 147,000 pending or appealed
grievances. Provide Complete

We remain concerned about the quality and and Reliable

transparency of the Postal Service's performance Performance information,
particularly in areas such as its

Information e- commerce initiatives. Without complete and reliable
performance data, the Service and other stakeholders cannot determine the
Service's progress towards

meeting its intended performance results. Postal stakeholders have also
expressed considerable concern about the reliability and credibility of the
Service's

ratemaking and performance data. As the Postal Service has recognized,
timely, accurate, and relevant information will be critical for effective
management as well as communications with customers, Congress, and other
stakeholders. Although the Service has begun to take actions in this area,
continued attention will be necessary to ensure that improvements are made
and postal ratemaking and performance data are reliable and credible. For
example: ? The Postal Service has recognized that it needs to take action to
address long- standing issues related to the quality of data used in
ratemaking. An April 1999

study on the quality of data used by the Service for ratemaking concluded
that improvements are needed to ensure that ratemaking data will be
sufficiently complete and accurate. The Postal Service has made a good start
in addressing the study's recommendations by setting priorities and

identifying the necessary actions and additional resources. ? Our September
2000 report found deficiencies in the financial information the Service
provided for its e- commerce initiatives that raised concerns about its

accuracy and completeness. In our view, these financial data were not
sufficiently complete and reliable for assessing the Service's progress
toward meeting its overall financial performance expectation, which is that
aggregate e- commerce revenues are to cover the Service's direct and

indirect costs and contribute to overhead. The Service agreed with our
recommendation that it provide complete and accurate information on its

e- commerce costs and revenues and said it is instituting a standard
financial reporting procedure in this area. We also recently reported that
the Postal Service's annual performance plans and performance reports under
the Government Performance and Results Act of

1993 might not have been as useful to Congress, postal managers, and
customers as they could have been. Although we noted that the Service's
fiscal year 1999 performance report contained several positive aspects, we
believe that it was misleading for the performance report to highlight that
the Service exceeded its targets for on- time delivery of First- Class Mail.
This statement was based on performance in the second half of fiscal year
1999- excluding the peak holiday mailing season-

when full- year performance showed on- time delivery met, but did not
exceed, the target for overnight FirstClass Mail, and was one percentage
point less than the target for 2- and 3- day First- Class Mail. The
usefulness of performance plans and reports depends upon their ability to
communicate clearly and effectively. We recommended, and the Service agreed,
that the

Service should make its future performance reports reflect straightforward
and clearly stated comparisons of planned targets and results. In addition,
we recommended that the Service's future performance

plans should have clear criteria for measuring performance and provide more
complete explanations of its goals and strategies. In response, the Service
made changes that strengthened its final annual performance plan for fiscal
year 2001.

Address Legal and The Postal Service is challenged to operate in an
Regulatory Issues

uncertain legal and regulatory environment, with an ongoing debate over
whether the Service should be allowed to compete with private companies and,
if so, under what circumstances. For example, some private sector businesses
believe that they are placed at a competitive disadvantage because the
current legal framework allows the Postal Service to develop new products
and enter into markets currently being served by the private sector but
exempts it from some of the laws and regulations that apply to private
sector

businesses. Further, some stakeholders have raised antitrust and fair
competition concerns relating to current and potential alliances and
partnerships involving the Service and others, including private sector
companies such as FedEx. On the other hand, the Postal Service and some
other stakeholders have said that current laws and regulatory oversight put
the Service at a competitive disadvantage and have called for changes in the
regulatory framework for setting

domestic postal rates that would give the Service increased flexibility. The
debate is likely to continue over whether changes are needed to federal law
to ensure that the Service can continue to fulfill its mission while also
ensuring fair competition.

Issues Relating to The long- standing debate over the Postal Service's role
the Postal Service's and what legal and regulatory system should apply to
Legal Authority and the Service has been fueled by the changing competitive
Regulatory environment. Since the Service was created as an Framework

independent establishment of the executive branch by the Postal
Reorganization Act of 1970, it has been charged with overstepping its
mandate by offering retail

and service products that are claimed to be not directly related to its
primary mission. These concerns have been exacerbated by vast changes in the
communications and delivery sectors. When the Service was created in the
early 1970s, it faced little direct competition. For example, FedEx did not
exist, and the World Wide Web had not been developed. Now, the Service faces
growing competition from private delivery

companies, foreign postal administrations, and electronic communications
alternatives. Moreover, the Service has ventured into new areas of
competition by offering new electronic products and services as well as
other nonpostal products, such as telephone calling cards and retail
merchandise. In this context, the Service's private sector competitors and
others have repeatedly raised concerns to regulatory authorities,

including the independent Postal Rate Commission, as well as to Congress.

Some competitors and others contend that the Postal Service should refrain
from entering markets currently being served by the private sector and
should limit its activities to providing traditional mail delivery services.
In addition, some stakeholders assert that if the Postal Service is to
compete in these markets, the laws should be changed so that they apply
equally to the Service and its competitors. For example, some private sector
businesses believe that they are placed at a competitive disadvantage
because federal law exempts the Service

from taxes and some of the laws and regulations that apply to private sector
businesses. On the other hand, the Postal Service and some other
stakeholders have said that current laws and regulatory oversight put the
Service at a competitive disadvantage and have called for changes to give
the Service increased flexibility. The Service has reported that its
disadvantages include “heavy government oversight and regulation,
significant limitations and restrictions on income, investments, pricing and
employment, and many other areas including maintaining facilities in
locations which are not self supporting.”

Debate continues about the Service's role in areas that compete directly
with the private sector, such as in the e- commerce area. The Postal
Service, some competitors, and others have conflicting views on the extent
of the Service's legal authority to offer e- commerce products and services
and under what circumstances it should offer such services. For example, the
President and CEO of the Computer & Communications Industry Association
recently objected to the Service offering competitive e- commerce products
and services on the

grounds that with an infrastructure established through taxpayer subsidies
and its government- sponsored postal monopoly, the Service's entrance into
these markets would be unfair and detrimental to competition and

innovation. The Service has responded that it has an extensive history of
applying the latest technology and that it makes sense to use the Internet
in the same way to contribute to the accomplishment of its mission for the
American people. To this end, the Service has stated that it approves only
e- commerce initiatives that fit within the context of its mission and
enable the Service

to better serve its customers. Another area of recent controversy has
involved the application of antitrust and fair competition principles to the
Postal Service's activities. For example, the Postal Rate Commission (PRC)
recently considered the application of antitrust and fair competition
principles

to a proposed test of a postal product called Mailing Online, which allows
mailers to electronically transmit material that is printed out and mailed
closer to its destination. PRC found that competition and antitrust laws
were relevant to its decision and concluded that Mailing Online, as
recommended by the terms of PRC's decision, would not constitute unfair
competition or result in an unfair competitive advantage for the Postal
Service.

Concerns Relating Some stakeholders have raised additional antitrust and to
Postal Service

fair competition concerns relating to current and Alliances and

potential alliances and partnerships involving the Partnerships Service and
other private sector companies, such as FedEx. For example, some
stakeholders, including members of Congress, have raised antitrust and fair
competition concerns relating to the implications and regulatory review of a
potential Postal Service alliance with FedEx that was under discussion
during 2000. As of December 2000, it was unclear whether the parties would
reach an alliance and, if so, what regulatory review might take place. In
addition, UPS filed a formal complaint in October 1998 with PRC regarding a
Postal Service electronic commerce service called PosteCS that is the
product of an alliance between the Service

and the postal administrations of Canada and France. As of December 2000,
this complaint remained under review.

These antitrust issues are being raised as the lines between public and
private providers of postal services are blurring, with globalization of
delivery services; privatization of some foreign postal administrations; and
the integration of fulfillment, just- in- time logistics, and e- commerce
services with traditional postal functions. For example, the German postal
administration, Deutsche Post, is partially privatized, expanding globally
through acquisitions in Europe and the United States, and offers a range of
services including postal, express delivery, fulfillment, logistics, and e-
commerce services. Also, the TNT Post Group NV of the Netherlands, a
publicly traded company that includes the Dutch postal administration, has
recently signed an agreement to form a global joint venture with the British
and

Singapore postal administrations to deliver international mail.

The Postal Service has stated that alliances and partnerships will be an
important part of its strategy to grow revenues in the domestic package
market. For example, the Service recently developed programs with Airborne
and Emery to enable their customers to send packages to households using the
Postal Service. The Service is also partnering with Mailboxes, Etc., to
provide postal package services. In the international area, the Service has
partnered with DHL to deliver certain packages sent abroad from the United
States. Finally, the Service has also discussed a possible alliance with
FedEx in which FedEx would reportedly deliver certain packages originating
with the Postal Service, while the Service would reportedly deliver certain
FedEx packages to their final destination.

More broadly, one recent study of the parcel service industry in the United
States concluded that the traditional structure of governmental
policymaking, planning, and regulation is increasingly mismatched to the
freight transportation system. The study noted that parcel delivery services
have grown to be a major player in the transportation field, as large or
larger than most of the major traditional elements of the freight
transportation system- airlines, pipelines, railroads, etc. According to the
study, parcel delivery services exemplify the trend to integrating different
transportation modes to meet different speed and other service requirements.
For government, the study found that policies and programs based on the
older modal

view of transportation will need to change to take this trend into account
and to adapt to the changing landscape of globalization, mass customization,
and

rapid customer response. Issues Involving

Congress, the Postal Service, some competitors, and Regulation of Postal
other stakeholders have debated whether changes are Rates

needed in the regulatory framework for setting domestic postal rates and, if
so, what changes should be made. The Postal Service has called for changing
the laws establishing the regulatory framework for changing rates for
existing domestic postal products as well as establishing rates for new
postal products. The Service

has long contended that it has been hampered by lack of flexibility to set
prices and by a lengthy postal ratemaking process. The Postmaster General
has called regulatory reform “an absolute requirement,” saying
that “we are going to wind up with an inferior Postal Service in the
future if we do not change the regulatory environment.” The Service
cannot change its prices for existing domestic postal products or establish
rates for new domestic postal products without prior regulatory review.
Under the current ratemaking process, the

Service is required to file a request with PRC for a recommended decision on
proposed changes in rates for domestic postal services. PRC decisions and
actions must be based on evidentiary records developed in administrative
hearings that are quasi- judicial and adversarial in nature. All interested
parties, including the Service's competitors, have the opportunity to
examine the Service's proposals and express their views. PRC is required to
issue a recommended decision to the

Service's Board of Governors on proposed rates within 10 months, and the
Board of Governors makes the final decision. Although the Postal Service,
some mailer groups, and others have called for changing the current process
of regulating postal rates to give the Service greater flexibility, some
stakeholders, such as UPS and the Newspaper Association of America, have
expressed

concern about giving the Postal Service, a government entity with monopoly
powers, additional pricing flexibility. Both have said that PRC's authority
needs to be strengthened under the current ratesetting process.

The Continuing Fundamental issues concerning the Postal Service's role
Debate Over the and authority have been raised in Congress, and various

Legal and stakeholders have called for changing its legal and Regulatory
regulatory framework. Key questions that have been Framework

raised, and are likely to persist, include: ? What are the appropriate
mission and role of the

Postal Service? Should “universal postal service” be defined
and, if so, how? Should the Service be privatized? Should the postal
monopoly be narrowed or ended? ? Should the Postal Service be allowed to
compete in

areas served by the private sector and, if so, under what circumstances? To
what extent should the Service be subject to the same laws as its
competitors?

? What should be the related regulatory framework providing oversight in the
areas of pricing, new postal products, and fair competition? How should PRC
and other pertinent regulatory authorities exercise oversight with respect
to competition and antitrust issues?

Key Contact Bernard L. Ungar, Director Physical Infrastructure Team

(202) 512- 8387 ungarb@ gao. gov

Related GAO Products Remain SelfSupporting U. S. Postal Service: Sustained
Attention to Challenges While

Remains Critical (GAO/ T- GGD- 00- 206, Sept. 19, 2000). Providing
Affordable HighQuality U. S. Postal Service: Challenges to Sustaining

Service Performance Improvements Remain Formidable on the

Brink of the 21 st Century (GAO/ T- GGD- 00- 2, Oct. 21, 1999).

U. S. Postal Service: Development and Inventory of New Products (GAO/ GGD-
99- 15, Nov. 24, 1998). Control Costs and

U. S. Postal Service: Changes Made to Improve Improve Acceptance Controls
for Business Mail (GAO/ GGD- 0031, Productivity

Nov. 9, 1999). U. S. Postal Service: Stronger Mail Acceptance Controls Could
Help Prevent Revenue Losses (GAO/ GGD- 96- 126, June 25, 1996).

Address LongTerm U. ManagementLevel

S. Postal Service: Diversity in District Human Positions (GAO/ GGD- 00- 142,
June 30, 2000). Capital Issues

U. S. Postal Service: Diversity in the Postal Career Executive Service (GAO/
GGD- 00- 76, Mar. 30, 2000). U. S. Postal Service: Diversity in High- Level
EAS Positions (GAO/ GGD- 99- 26, Feb. 26, 1999). U. S. Postal Service:
Little Progress Made in Addressing Persistent Labor- Management Problems
(GAO/ GGD- 98- 1, Oct. 1, 1997).

U. S. Postal Service: Labor- Management Problems Persist on the Workroom
Floor (GAO/ GGD- 94- 201A/ B, Sept. 29, 1994).

Provide Complete U. S. Postal Service: Enhancements Needed in and Reliable

Performance Planning and Reporting (GAO/ GGD- 00- 207, Performance Sept. 19,
2000).

Information Breast Cancer Research Stamp: Millions Raised for

Research, but Better Cost Recovery Criteria Needed (GAO/ GGD- 00- 80, Apr.
28, 2000). Equal Employment Opportunity: The Postal Service Needs to Better
Ensure the Quality of EEO Complaint Data (GAO/ GGD- 99- 167, Sept. 28,
1999).

The Results Act: Observations on the Postal Service's Preliminary
Performance Plan for Fiscal Year 2000 (GAO/ GGD- 99- 72R, Apr. 30, 1999).

Address Legal and U. S. Postal Service: Postal Activities and Laws Related

Regulatory Issues to Electronic Commerce (GAO/ GGD- 00- 188, Sept. 7,

2000)

Performance and Accountability Series

Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241)

Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242)

Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243)

Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244)

Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245)

Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246)

Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247)

Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248)

Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249)

Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250)

Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
251)

Major Management Challenges and Program Risks: Department of State (GAO- 01-
252)

Major Management Challenges and Program Risks: Department of Transportation
(GAO- 01- 253)

Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254)

Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255)

Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256)

Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257)

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258)

Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259)

Major Management Challenges and Program Risks: Small Business Administration
(GAO- 01- 260)

Major Management Challenges and Program Risks: Social Security
Administration (GAO- 01- 261)

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262)

High- Risk Series: An Update (GAO- 01- 263)

GAO United States General Accounting Office

Page 1 GAO- 01- 262 U. S. Postal Service Challenges

Contents Letter 3 Overview 6 Major Performance and Accountability Challenges

13 Related GAO Products

39 Performance and Accountability Series

41

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Comptroller General of the United States

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Accounting Office

Washington, D. C. 20548

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Postal Service Challenges

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Related GAO Products Page 40 GAO- 01- 262 U. S. Postal Service Challenges

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Performance and Accountability Series

Page 42 GAO- 01- 262 U. S. Postal Service Challenges

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