U.S. Postal Service: Transformation Challenges Present
Significant Risks (04-APR-01, GAO-01-598T).
This testimony discusses the challenges facing the U.S. Postal
Service. Overall the Service faces major challenges that
collectively call for a structural transformation if it is to
remain viable for the 21st century. The Service's financial
outlook has worsened, and it is not clear how the Service will
address its mounting financial difficulties and other challenges.
These challenges include (1) reduced net income, (2) increased
debt, (3) increased competition, (3) management-labor relations
problems, and (4) statutory restrictions. Because of the
Service's rapidly deteriorating financial situation, GAO is
placing the Service on its High-Risk List, effectively
immediately. GAO believes that several actions need to be taken
to address the Service's continued problems. Such actions include
(1) developing a comprehensive plan to address the financial,
operational, and human capital challenges, (2) providing
quarterly financial reports to Congress and the public, and (3)
identifying, in conjunction with GAO and other stakeholders,
improvement options that will cut costs and improve productivity.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-598T
ACCNO: A00731
TITLE: U.S. Postal Service: Transformation Challenges Present
Significant Risks
DATE: 04/04/2001
SUBJECT: Competition
Cost control
Financial management
Industrial relations
Personnel management
Postal service
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GAO-01-598T
U. S. POSTAL SERVICE Transformation Challenges Present Significant Risks
Statement by David M. Walker Comptroller General of the United States
United States General Accounting Office GAO Testimony Before the Committee
on Government Reform House of Representatives
For Release on Delivery At 10: 00 a. m. EDT Wednesday April 4, 2001 GAO- 01-
598T
GAO- 01- 598T Page 1 Mr. Chairman and Members of the Committee:
We are pleased to be here today to participate in the Committee's hearing on
the U. S. Postal Service (the Service). Overall, the Service faces major
challenges that collectively call for a structural transformation if it is
to remain viable in the 21 st century. In my testimony, I will briefly
review the Service's growing financial, operational, and human capital
challenges in an increasingly competitive environment; discuss the Service's
financial outlook; and make suggestions on what needs to be done to address
the challenges facing the Service.
The Service's projected financial losses have increased significantly during
the past 4 months. Over the past 2 years we have raised concerns about a
range of financial, operational, and human capital challenges that threaten
the Postal Service's ability to continue to provide affordable, high-
quality universal postal service on a self- financing basis. Moreover, the
Service's financial outlook has worsened more quickly than expected, and it
is not clear how the Service will address its mounting financial
difficulties and other challenges. These challenges include:
The Service's net income has declined over the past 5 years, and the Service
currently projects a fiscal year 2001 deficit in the $2 billion to $3
billion range, up from a projected loss of $480 million just 4 months ago.
About $1.8 billion in projected losses are based on results for the first 2
quarters and revised estimates for losses in the last 2 quarters of fiscal
year 2001. Based upon its judgment, the Service is also projecting that the
slowing economy will further lower net income by $300 million to $1.3
billion. Further, in fiscal year 2002, the Service estimates that its
deficit will be in the $2.5 billion to $3.5 billion range, assuming no
further increases to postal rates.
The Service has experienced a net increase in outstanding debt at the end of
each fiscal year since 1997, and its total outstanding debt reached $9.3
billion at the end of fiscal year 2000. Service officials expect the Service
could reach its $15 billion statutory debt limit by the end of fiscal year
2002, assuming no additional increases in postal rates. At the same time,
the Service has curtailed capital investment to conserve cash in fiscal year
2001. In addition, the Service has no plan to reduce its debt. Depending on
future events, the Service may face a cash shortage in fiscal years 2002
and/ or 2003.
The Service faces increasing competition from both domestic and foreign-
based entities. It also expects electronic diversion- such as greater use of
the Internet- to cause substantial declines in First- Class Mail volume in
the next decade and thus place the Service under “extreme financial
pressure.”
Although the Service has taken steps and plans to cut costs by $2.5 billion
by 2003, increase productivity, and improve human capital programs, it has
historically had great difficulty achieving desired results in these areas.
For example, numerous reports, including some by us and the Postal Service
Office of Inspector General (OIG), have noted inefficiencies in the postal
system and difficulties the Service has had in realizing opportunities for
savings.
The Service has also had periodic conflicts with some of its key
stakeholders including postal unions and the Postal Rate Commission. We have
noted longstanding labor- management relations problems that have hindered
improvement efforts, including three labor agreements that expired in
November 2000. In addition, the Postal Service and the Postal Rate
Commission have had longstanding disagreements concerning pricing decisions.
GAO- 01- 598T Page 2
The Service is subject to several statutory and other restrictions that
serve to limit its transformational efforts (e. g., binding arbitration
requirement, a cost- based rate- setting process, and facility closure
restrictions).
Finally, two key leadership positions need to be filled relating to postal
operations and rate setting (Postmaster General and Chairman of the Postal
Rate Commission.)
We believe that the Service's deteriorating financial situation calls for
prompt, aggressive action, particularly in the areas of cutting costs and
improving productivity. Accordingly, we are adding the Postal Service's
transformational efforts and long- term outlook to our High- Risk List,
effective immediately, so that we and others can focus on its financial,
operational, and human capital challenges before the situation escalates
into a crisis where the options for action may be more limited. In this
regard, we believe the following actions need to be taken:
The Service should develop a comprehensive plan, in conjunction with
Congress and other stakeholders, such as the postal unions and management
associations, customers, and the Postal Rate Commission, that would identify
the actions needed to address the Service's financial, operational, and
human capital challenges and establish a timeframe and specify key
milestones for achieving positive results.
The Service should provide summary financial reports to Congress and the
public on a quarterly basis. These reports should present sufficiently
detailed information for stakeholders to understand the Service's current
and projected financial condition, how its outlook may have changed since
the previous quarter, and its progress toward achieving the desired results
specified in its comprehensive plan.
GAO will work with Congress and the Service to help identify improvement
options and will continue to analyze and report to Congress on the Service's
ongoing financial condition. In consultation with other postal stakeholders
including the Postal Service Office of Inspector General, postal unions and
management associations, the Postal Rate Commission, and customers, we will
review the Service's financial results and future outlook, progress on cost-
cutting and productivity efforts, other countries' experiences, and options
for addressing the Service's short- term and long- term challenges.
Historical Perspective on the Service's Financial Outlook
The $2 billion to $3 billion deficits estimated by the Service would be
unprecedented, although the Service did experience financial difficulties in
the early 1990s. The Service's financial position in the early 1990s was
adversely affected by the 1990- 1991 recession. Also, in 1990, legislation
made the Service responsible for funding all health benefits and COLAs for
its retirees since July 1, 1971. The Service reported that its financial
turnaround in the mid- 1990s was aided by rising mail volume, a rate
increase that averaged approximately 10 percent in 1995, and a
“moderate” increase in expenses. In addition, in the late 1990s,
the Service improved the timely delivery of First- Class Mail.
As figure 1 shows, the Service's financial turnaround occurred in fiscal
year 1995. The Service raised the price of the First- Class stamp from 29
cents to 32 cents on January 1, 1995. The Service's net income has declined
in every year since fiscal year 1995 despite general rate
GAO- 01- 598T Page 3 increases that raised the First- Class stamp price to
33 cents on January 10, 1999, and to 34 cents
on January 7, 2001. Figure 1: Postal Service Net Income From Fiscal Year
1990 Through 2002
Source: U. S. Postal Service. One reason for the declining net income has
been continued growth in postal expenses (see fig. 2). The Service's
delivery network continues to grow at a rate close to 2 million new
household and business deliveries each year. Labor- related expenses
continue to account for more than three- quarters of the Service's total
operating expenses, despite multibillion- dollar expenditures for
automation. Other operating expenses have also grown.
-4000 -3000
-2000 -1000
0 1000
2000 3000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Fiscal year
2002
Actual Projected
Service's projected range for fiscal years 2001 and 2002
Dollars (in millions)
GAO- 01- 598T Page 4 Figure 2: Trends in Postal Service Expenses From Fiscal
Year 1990 Through 2000
Source: U. S. Postal Service.
The Service Faces Growing Challenges
The Service faces growing challenges in an increasingly competitive
environment as it seeks to fulfill its mission: bind the nation together
through the correspondence of the people; provide access in all communities;
offer prompt, reliable, and efficient postal services at uniform prices; and
be self- supporting and break even financially over time. In October 1999,
we testified that the Service might be nearing the end of an era and
confronting increasing challenges from competition, notably from private
delivery companies and electronic communication alternatives such as the
Internet. 1 The Service told us that it expected First- Class Mail volume to
decline substantially in the next decade, assuming that the diversion of
mail to electronic communications alternatives would accelerate in a new and
vastly different environment in which the Service would be required to
operate.
1 U. S. Postal Service: Challenges to Sustaining Performance Improvements
Remain Formidable on the Brink of the 21st Century (GAO/ T- GGD- 00- 2, Oct.
21, 1999).
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Labor- related expenses Other operating expenses Interest expense
Fiscal year Expenditures (dollars in billions) 70
60 50 40 30 20 10
0
GAO- 01- 598T Page 5 In September 2000, we testified that the Service
continued to face an uncertain future in an
increasingly competitive environment. 2 We reported that the Service
believed that growth in its core business had already been negatively
affected by the rapid growth of the Internet, electronic communications, and
electronic commerce. We noted that a key oversight issue for the Service,
Congress, and the American people is whether the Service is heading for
financial shortfalls that could, in the long run, hinder its ability to
carry out its mission of providing affordable, universal services that bind
the nation together. We also reported that the Service had experienced
increasing difficulties in meeting its goal of $100 million in net income
for fiscal year 2000. Based on its annual financial statements, the Service
experienced a net loss of $199 million for fiscal year 2000, its first
deficit since fiscal year 1994.
In January 2001, we reported to Congress on the potential consequences if
the Service incurred a series of large deficits. These could include
increases in postal rates, declines in service quality, consolidation or
closure of some facilities, or reconsideration of postal operations or even
the scope of postal services. 3 We also noted that fundamental issues
concerning the Postal Service's role and authority have been raised in
Congress, and various stakeholders have called for changing its legal and
regulatory framework. We concluded that to be successful, the Service would
need to address formidable performance and accountability challenges in five
key areas, which can be posed as the following questions:
1. Can the Postal Service remain self- supporting while providing
affordable, high- quality universal service? 2. Can the Service become more
efficient by controlling its costs and improving productivity? 3. How will
the Service address critical human capital issues, such as maintaining
continuity
and service in the face of the impending retirement of many postal
employees, rapidly rising retirement and other personnel- related costs, and
persistent labor- management problems? 4. Does the Service have reliable
performance and cost information to effectively manage
postal operations, identify inefficiencies, and track progress toward
realizing anticipated cost savings? 5. What changes may be needed in the
current legal and regulatory framework governing the
Postal Service's role and mission so that it can remain self- supporting and
provide affordable universal service in an increasingly competitive
environment?
In the balance of my testimony today, I will focus on the first three
questions. First, I will discuss the Service's short- term financial outlook
and assess the Service's increasingly dire financial projections for this
fiscal year. Second, I will discuss the Service's financial trends and
issues relating to its cash and debt position. Third, I will focus on
selected key long- term challenges, including human capital challenges, and
conclude with some specific suggestions for action.
2 U. S. Postal Service: Sustained Attention to Challenges Remains Critical
(GAO/ T- GGD- 00- 206, Sept. 19, 2000). 3 Major Management Challenges and
Program Risks: U. S. Postal Service (GAO- 01- 262, Jan. 2001).
GAO- 01- 598T Page 6
The Service's Short- term Financial Outlook Has Deteriorated
The Service is projecting significant losses over the next 2 years, although
the full extent of the losses is uncertain. The Service currently estimates
that its fiscal year 2001 deficit will range from roughly $2 billion to $3
billion- a sum that far exceeds the $480 million deficit built into the
Service's budget that was approved last November. About $1.8 billion of this
projected deficit is based on reported losses in the first 2 quarters and
revised estimates for losses in the last 2 quarters. Depending on the
economic situation for the rest of fiscal year 2001, the Service believes
that losses could be much higher. Further, in fiscal year 2002, the Service
estimates that its deficit will be in the $2.5 billion to $3.5 billion
range, assuming no further increases to postal rates.
An important caveat: Our current assessment of the Service's financial
outlook for this fiscal year is based on a preliminary review of the
financial data and projections that the Service recently provided to us and
on interviews with Service officials, including the Chief Financial Officer.
The Service's financial situation is complex, and we are still assessing the
validity of key data and assumptions that support the Service's financial
projections. In addition, the Service is in the process of updating some of
its key projections, such as projections of its revenues for the second half
of this fiscal year. We will continue to review the Service's financial
condition and will report again to Congress on this matter.
Factors Leading to the Service's Expected Deficit in Fiscal Year 2001
To understand the factors affecting the Service's financial outlook for this
fiscal year, I will discuss where the Service stands today with results from
the first 2 quarters and what it expects to happen during the last 2
quarters of the year. I will also discuss how the Service's net income
projections have changed since the beginning of the fiscal year according to
a series of adjustments the Service has made to its projected revenue and
expenses. (See fig. 3.) Finally, I will discuss other factors that have not
been included in the Service's projections but could affect the Service's
financial results for this year, such as the Service's ability to achieve
budgeted savings and revenues from new initiatives.
GAO- 01- 598T Page 7 Figure 3: Changes in the Postal Service's Financial
Outlook for Fiscal Year 2001
Legend: Dollars in millions (M), billions (B). Source: GAO presentation
based on U. S. Postal Service estimates, which are subject to change.
The Service's financial outlook for fiscal year 2001 can be divided into the
following categories: (1) $260 million in reported losses for the first half
of the fiscal year, (2) $680 million in budgeted losses for the balance of
the fiscal year, (3) $320 million in expenses higher than estimated for the
last 2 quarters, (4) $500 million in revenues lower than budgeted for the
last 2 quarters due to lower- than- requested increases in postal rates, and
(5) $300 million to $1.3 billion in revenues lower than budgeted for the
last 2 quarters due to the slowing economy and its impact on mail volume and
revenues. The uncertainty of the impact of the economy for the remainder of
the fiscal year is the largest single factor in the Service's projections
that may impact its expected losses for fiscal year 2001, and the estimated
range is based on the Service's judgment.
Reported Losses for the First Half of Fiscal Year 2001 As figure 3 shows,
the Service reported that its loss for the first 2 quarters of this fiscal
year was about $260 million. This reported amount is not audited and is
subject to change. It is important to note that historically, the Service's
financial performance tends to be stronger in the first part of the fiscal
year, which includes the busy holiday mailing season. The $260 million loss
during its typically strongest earnings period is a further sign of the
Service's financial difficulties. The Service had budgeted for $200 million
in net income for the first half of the fiscal year; so, thus far it is
running $460 million behind its budget targets. Further, the Service
achieved nearly $1 billion in net income in the first half of last fiscal
year – a year in which it ended with a $199 million loss.
Reported Net Income: Quarters 1 and 2
Originally Budgeted Net Income: Quarters 3 and 4
Expense Adjustments to Net Income: Quarters 3 and 4 Revenue Adjustments to
Net Income: Quarters 3 and 4
Subtotal
Other Revenue Adjustments to Net Income: Soft EconomyQuarters 3 and 4
-$ 260 M -$ 680 M -$ 320 M -$ 500 M
-$ 1.8 B
-$ 300 M to -$ 1.3 B Budgeted Current
FY 2001 Revised Deficit $2.1 to $3. 1B Net Income -$ 480 M -$ 2.1 to -3. 1B
$200 M -$ 680 M
GAO- 01- 598T Page 8 Additional Losses Built into the Service's Fiscal Year
2001 Budget
In its fiscal year 2001 budget, the Service estimated that it would incur a
$680 million deficit for the last 2 quarters of the fiscal year. When this
amount is added to the $260 million deficit incurred in the first half of
the fiscal year, the Service would lose nearly $1 billion in fiscal year
2001. This estimated loss does not include a number of developments that
could have a negative impact on the Service's net income this year, which
are detailed below.
Additional Unbudgeted Expenses The Service currently projects that its
expenses for the remaining 2 quarters of this fiscal year will be $320
million greater than budgeted, and gave us supporting information for these
estimated expenses. For example, the Service told us that it is experiencing
greater transportation expenses because of increases in fuel costs and cost
passthroughs from its transportation contractors, among other factors.
International mail expenses are also expected to be higher than budgeted
because of recent increases in “terminal dues” paid to foreign
postal administrations to deliver outbound U. S. international mail.
Workers' compensation expenses are also expected to be greater than budgeted
and to reach $1.1 billion for the full fiscal year – a significant
increase from last year and the late 1990s.
Additional Revenue Shortfalls Relating to Postal Rates and New Revenue
Initiatives The Service projected revenues for the last 2 quarters of fiscal
year 2001 to be $500 million below its budgeted targets due to the gap
between the requested rates and those implemented in January. The Service's
budget for fiscal year 2001 assumed that the Service would receive the full
increase in postal rates that it had requested in the 2000 rate case.
However, the Postal Rate Commission recommended a rate increase that
averaged 4.6 percent- more than 2 percent lower than the requested amount.
These rates were put into effect this January and included a 1- cent
increase in the price of a First- Class stamp to 34 cents.
Additional Revenue Shortfalls Attributed to the Slowing Economy The Service
further lowered its revenue projections for the second half of fiscal year
2001 by $300 million to $1.3 billion on the basis of the Service's judgment
of a“ continued soft economy” and the resulting negative impact
on mail volume and revenues. The $1 billion range reflects the Service's
uncertainty associated with the length and severity of the economic slowdown
and its impact on postal revenues. The Service told us it is in the process
of updating its mail volume and revenue forecasts for the rest of fiscal
year 2001.
Other Factors May Add to the Service's Deficit for Fiscal Year 2001 The
Service's expenses could be higher than it currently estimates because it is
not on track to achieve some cost- reduction targets. For example:
The Service planned to decrease its work hours by 1.5 percent from last
year's level- which would translate into a reduction of 13,200 work years
for the full fiscal year. Although the
GAO- 01- 598T Page 9 Service reported that work hours declined in the first
2 quarters of fiscal year 2001 compared
to the first 2 quarters of last fiscal year, the decline was only about half
of its target.
The Service planned for decreasing overtime work hours by about 6 percent in
the first 2 quarters from last year's level. However, the Service reported
that overtime increased in the first 2 quarters and is running about 13
percent higher than the budgeted targets so far this fiscal year, although
some recent progress has been made in reducing overtime.
The Service's planned reductions in total work hours assume efficiency gains
in most aspects of its operations. An estimated 60 percent of the savings is
related to greater efficiencies in handling flat mail, such as catalogs and
periodicals, and from machines sorting mail for carriers in the sequence it
is to be delivered. However, these budgeted savings will be difficult for
the Service to fully realize. First, Service officials told us that it takes
three to six employees to prepare flat mail to be loaded into its new
sorting machines, thus diminishing cost efficiency, although the Service
noted it is working with mailers to address this issue. Second, the Service
has reported that carrier costs exceeded budgeted targets by $130 million
for the first 2 quarters of this fiscal year. Carrier costs were reportedly
affected by greater- than- expected volumes of low- margin advertising mail;
the worst winter weather in a decade; and difficulty in finding and
retaining replacements for rural carriers, which resulted in higher overtime
costs.
The Service expected efficiency gains to result in reductions through
attrition. The number of career employees has been declining, while at the
same time there have been increases in the number of non- career workers.
The Service has said that it might be necessary to offer voluntary early
retirements in some cases, or possibly move into isolated reductions-
inforce.
Strategies to Improve Net Income
To improve its net income situation in fiscal year 2001 and 2002, the
Service will need to increase revenues and/ or cut costs and improve
productivity. Adding to this challenge will be maintaining the quality of
service. The Service is currently making efforts in these areas. The
following is a brief discussion of the Service's short- term potential for
making further progress.
Cut operating costs and improve productivity: We have repeatedly emphasized
that this should be a priority area for the Service; however, progress
historically has been difficult to achieve. Service officials have
emphasized some key barriers, such as restrictions on closing unprofitable
post offices or limited flexibility in changing workforce deployment, have
contributed to the difficulty of making progress in this area. The Service's
overall productivity has increased only about 11 percent in the past 3
decades despite vast changes in automation and information technology. The
Service has recognized that it needs to make progress in cutting its costs
and improving productivity and is currently taking steps to do so. Last
week, the Deputy Postmaster General announced that the Service is committed
to cutting costs by $2.5 billion by 2003. He said that over the next 5
years, the Service plans to cut 75,000 work years, reduce administrative
costs by 25 percent, and cut transportation costs by 10 percent. The Service
has not yet specified, however, how these cuts would be achieved. The
Service improved productivity in fiscal year 2000 by 2.5 percent and its
budget for fiscal year 2001 calls for a 0.7 percent productivity increase.
Service officials are also planning for a 2- percent increase in fiscal year
2002, and a 1- percent increase the year
GAO- 01- 598T Page 10 after that- a set of positive productivity increases
over 4 consecutive years that they noted
would be unprecedented.
Generate more revenues from new products and services: We believe that it
will be difficult for the Service to generate significant revenues from new
products and services in the next few years. Historically, as our 1998
report showed, the Service's new product and service initiatives underway
during the mid- 1990s generally were not profitable. 4 Further, the
Service's 5- Year Strategic Plan for fiscal years 2001 through 2005, dated
September 30, 2000, stated that no significant new revenue is forecast from
new products and services during the next 5 years. The Service has not
achieved its revenue targets from its new initiatives for the first half of
this fiscal year. Recently, the Service has made downward revisions in its
projected revenues from its new revenue initiatives for the second half of
fiscal year 2001.
Raise postal rates: To the extent that operating costs are not contained or
reduced, or revenues are not generated from new products and services, the
Service will likely need to raise rates to maintain service and to meet its
break- even mandate, at least in the short term. The Deputy Postmaster
General recently said that the Service may not be able to avoid raising
postal rates; but he added that at present, the Service does not know the
timing, size, or details of the next rate case. Some stakeholders have
expressed strong concern that the Service could request a rate increase of
as much as 10 to 15 percent in the near future. However, the Service has
also said that “This [option] would worsen the competitive position of
the Postal Service and cause substantial disruption to key customer segments
with little or no minimal direct substitutes for postal services, such as
the publishing industry.” In the long run, raising rates may drive
postal customers to increase their use of other alternatives, thereby
affecting mail volumes and revenues.
The Service Has Growing Cash Flow and Debt Challenges
The amount that the Service borrows on an annual basis is largely determined
by the difference between its cash flows from operations and the amount it
spends on capital investments. As shown in figure 4, the Service's cash
flows from operations are typically significantly greater than its net
income. The primary reason for the difference is because net income is
calculated on the accrual basis of accounting 5 and includes accrued
expenses, such as depreciation expense, that do not use cash.
4 U. S. Postal Service: Development and Inventory of New Products (GAO/ GGD-
99- 15, Nov. 24, 1998).
5 Under the accrual basis of accounting, revenues are recorded when earned
and expenses are recorded when incurred, even if these activities are not
concurrent with the related receipt or outlay of cash.
GAO- 01- 598T Page 11 Figure 4: Postal Service Net Income and Cash Flows
From Operations
Source: U. S. Postal Service. Beginning in 1998, the Service's cash outlays
for capital expenditures exceeded its cash flows from operations. The
Service's debt increased from $5.9 billion at the end of fiscal year 1997 to
$9.3 billion at September 30, 2000. The Service anticipates that its
projected operating deficit for the full fiscal year 2001 will weaken its
cash flows from operations. By way of background, the Service has a
statutory borrowing limit of $15 billion and also has an annual limit of
increasing its outstanding obligations by $3 billion (that includes a $2
billion limit for capital improvements and a $1 billion limit to defray
operating expenses).
Service officials told us that assuming the Service's financial outlook is
on target and there are no further changes in postal rates in fiscal years
2001 or 2002, the Service may reach its $15 billion statutory borrowing
limit by September 30, 2002 (see fig. 5). Under this scenario, the Service
would have no additional borrowing authority at the beginning of fiscal year
2003. Once the Service reaches its statutory borrowing limit, it can pay its
bills only through its cash on hand plus additional cash generated from
operations until outstanding debt declines. The Service typically generates
a cash surplus in the first part of the fiscal year. However, depending on
the Service's income and cash from operations, the Service may face a cash
shortage in fiscal years 2002 and/ or 2003.
-3 -2
-1 0
1 2
3 4
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Fiscal year
Net income Net cash provided by operating activities
Dollars (in billions)
GAO- 01- 598T Page 12 Figure 5: Trends in Postal Service Debt
Source: U. S. Postal Service To avoid a cash shortage during fiscal year
2001, the Service has placed a freeze on capital commitments that will
affect more than 800 facility projects. Last year the Service had planned
capital commitments of $3.6 billion for fiscal year 2001, but Service
officials recently announced reductions in this area and told us they now
anticipate a reduction to $2 billion in capital commitments this fiscal
year. Preliminary budget plans for fiscal year 2002 would reduce capital
investment from $3.7 billion to $2.4 billion. However, reducing needed
capital investments serves only to defer capital improvements and associated
efficiency gains.
Major Long- Term Performance Challenges Facing the Service
As difficult as the Service's short- term financial outlook may be, we are
also concerned about its long- term prospects, given the trends toward
increasing competition and its implications for postal revenues, coupled
with continued upward pressure on postal costs, and human capital
challenges. Therefore, unless the Service makes much more rapid progress in
cutting costs and improving productivity, it will face increasing difficulty
maintaining its position as a selfsupporting provider of universal postal
service at reasonable rates. The Postal Service and postal stakeholders have
been debating for years whether major changes are needed in the legal and
regulatory framework governing the Postal Service, but reaching consensus
among the diverse stakeholders has been difficult to achieve.
To address the Service's long- term outlook, a fundamental reassessment of
the Service's financial options and operating plans is in order. Better
information may also be needed about recent changes in the dynamic postal
and delivery sector, as well as on the short and long- term effects of
postal rate changes on mail volumes, revenues, and costs. Further, an
assessment is needed of the full range of actions that the Service can take
under current law and identifying
0 2
4 6
8 10
12 14
16
1972 1973
1974 1975
1976 1977
1978 1979
1980 1981
1982 1983
1984 1985
1986 1987
19881989 1990
1991 1992
1993 1994
1995 1996
1997 1998
1999 2000
2001 2002
Dollars (in billions)
Fiscal year
Outstanding debt at end of fiscal year Statutory debt limit
Statutory debt limit Projected outstanding debt at the fiscal year end
2000 2001
2002
GAO- 01- 598T Page 13 areas where actions are needed. In making such a
reassessment, which should also include
identifying areas where statutory changes may be needed, the Service should
consult with its stakeholders including unions and management associations,
customers, and the Postal Rate Commission.
The Service's Viability to Fulfill Its Historic Mission
The Service faces greater competition and expects electronic diversion to
cause substantial declines in First- Class Mail volume in the next decade
which, according to the Service's most recent 5- year Strategic Plan, would
place the Service under “extreme financial pressure.” In this
event, the Service, like many of its foreign counterparts, would likely face
unprecedented challenges to its primary mission of providing universal
postal service at reasonable rates while remaining self- supporting from
postal revenues. The growing challenges are as follows:
The Service would face the challenge of responding to any volume declines or
changes in the mail mix by attempting to reduce mail processing, personnel,
and other costs that have traditionally been considered to vary with changes
in mail volume. Labor- related expenses continue to account for more than
three- quarters of total postal service operating expenses and have
reportedly been difficult to cut quickly in response to less- than- expected
mail volumes and revenues. This fiscal year, the Service reported it has
experienced continuing difficulty cutting costs when expected mail volumes
and revenues did not materialize.
If First- Class Mail volume declines and the revenue loss is not offset in
other areas, rates would need to rise for any mail categories that take on a
larger burden of supporting postal institutional costs. The Service
maintains a delivery and retail network 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.
Even if First- Class Mail volumes do not decline, Service officials expect
that cost reductions may not be sufficient to keep future rate increases
below the rate of inflation.
Adding to rate pressure, postal infrastructure costs continue to grow. The
Service has been adding many new delivery points to new households and
businesses- a projected 1.8 million in fiscal year 2001.
Competition is already increasing from private delivery companies, foreign
postal administrations accepting outbound international mail from within 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. 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. It is difficult to predict the timing and
magnitude of further mail volume diversion to electronic alternatives and
the potential financial consequence. Based on anticipated electronic
diversion, the Service's baseline forecast in its 5- Year Strategic Plan
calls for total First- Class Mail volume to decline at an average annual
rate of 3.6 percent from fiscal years 2004 through 2008 (see fig. 6).
GAO- 01- 598T Page 14 Figure 6: Postal Service Projects Decline in First-
Class Mail Volume
Source: U. S. Postal Service. The Postal Service has raised the possibility
that its financial problems may lead to cutting back universal postal
service. A postal official recently said that the Service might ultimately
reduce mail delivery from 6 to 5 days each week to remain financially sound.
Can the Postal Service continue to maintain the scope and quality of its
retail and delivery services? The answer, at least in the short term, is
“yes”– but in the long term, the Service's prospects are
uncertain.
Control Costs and Improve Productivity
We have previously reported that the Service's continued success will depend
heavily on its ability to control operating costs and improve productivity.
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 3 decades,
despite vast changes in automation and information technology (see fig. 7).
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. However, numerous reports, including
some by us and the Postal Service OIG, have noted inefficiencies in the
postal system and difficulties the Service has had in realizing
opportunities for savings. The OIG has recently identified potential cost
savings and is working to identify further opportunities.
1.5 4
1.7 1.3 -3. 6 3.7
8.6 3.2
2.5 1.6
-6 -4
-2 0
2 4
6 8
10 Average annual percentage change 1972- 1979 1980- 1989 1990- 1999 Fiscal
year
2000- 2003 2004- 2008 Service projections
First- Class Mail volume Standard A mail volume (primarily advertisements)
GAO- 01- 598T Page 15 Figure 7: Postal Service Productivity Growth Since
Fiscal Year 1971
Source: U. S. Postal Service. The Service's ability to improve productivity
and control costs is constrained by a number of factors, such as its
requirement to provide postal services to all communities and the
requirement that postal wages be determined by binding arbitration when the
Service and its labor unions cannot reach agreement. The Service has also
reported that extensive work rules and other regulations hamper its
flexibility and innovation. In addition, the Service has a self- imposed
moratorium on closing post offices and by statute, it cannot close small
post offices solely for operating at a deficit. Further, fiscal year 2001
appropriation legislation specifies that the Service cannot close small or
rural post offices in fiscal year 2001. The Service estimated several years
ago that about half of all post offices do not generate sufficient revenues
to cover their costs.
In addition, some employee- related expenses are rising and are difficult to
control, such as retirement- related expenses. The Postal Service's
retirement- related expenses- that is, the payments the Service makes each
fiscal year- have increased in recent years, and these trends are expected
to continue (see fig. 8). 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, the Service has estimated that its retiree health benefit premium
expenses will increase by $114 million in fiscal year 2001 to $858 million,
and the Service has projected that these expenses will reach about $2.0
billion in fiscal year 2010.
0 2
4 6
8 10
12 14
Fiscal year
Up 11%
Cumulative Percentage Change 1972
1974 1976
1978 1980
1982 1984
1986 1988
1990 1992
1994 1996
1998 2000 1973
1975 1977
1979 1981
1983 1985
1987 1989
1991 1993
1995 1997
1999 1971
GAO- 01- 598T Page 16 Figure 8: Postal Service Projects Increases in
Retirement- Related Expenses
Source: U. S. Postal Service. The Service recognizes that it needs
aggressive cost management, and the Postmaster General has called for
achieving “breakthrough” productivity savings of $1 billion
annually, mainly in mail processing, transportation, and administrative
areas. However, the Service's fiscal year 2001 budget called for saving only
$550 million through such productivity initiatives. The Service is making
ongoing efforts to standardize and improve work processes to reduce
significant variations in quality, productivity, and costs across the
system. The Service is also planning to implement activity- based costing in
certain processing facilities to enable it to track activity costs and rates
that can be compared across facilities for benchmarking, performance
measurement, and budgeting purposes. Another example of potential cost
savings that the Service is working to address includes manual processing of
mail, which reportedly accounts for half of all labor mail processing costs.
Human Capital Challenges
The Service's Strategic Plan stated that the expected decline in postal
workload- in part due to automation 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. We believe that these reductions should be done in a carefully
planned manner to avoid negatively impacting the workplace environment,
operations, and service quality. In addition, with a large percentage of the
postal workforce nearing retirement eligibility, the Postal Service has the
opportunity to reduce the size of its workforce; but the Service will be
increasingly challenged to deal with human capital issues related to
succession planning, maintaining continuity, and the associated
0 2
4 6
8 10
12 14
16 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2004 2005 2006 2007 2008 2009 2010
Fiscal year
Retirement benefits Retirement health benefits
Dollars (in billions)
GAO- 01- 598T Page 17 cost issues. The Service will need to maintain 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 eligible, or are projected to reach eligibility, for regular
retirement. This projection includes 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. 9).
Figure 9: A Large Percentage of the Postal Workforce Is Nearing Retirement
Source: U. S. Postal Service. The Postal Service faces additional 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 of about 900,000 career and non- career employees and
reducing the number of employees, and (2) 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
24 20
12 25
29 22
0 20
40 60
80 100
Executives Managers and supervisors
Career employees
Postal workforce
Calendar years 2001- 2002 Calendar years 2003- 2005 Calendar year 2006- 2010
36 25
16 85
74 50 Percentage retirement- eligible
GAO- 01- 598T Page 18 capabilities across the federal government. The
Service and its major unions and management
associations need to resolve long- standing labor- management problems that
have hindered improvement efforts, including efforts to cut costs and
increase productivity. In addition, the Service has recognized the need to
provide its employees with the tools and incentives necessary to allow
effective participation in planning and implementing improvements.
Actions Needed
We are placing the Service's transformational efforts and long- term outlook
on our High- Risk List, effective immediately. The Service is at growing
risk of not being able to continue providing universal postal service vital
to the national economy, while maintaining reasonable rates and remaining
self- supporting through postal revenues. A structural transformation of the
Service is called for. The Service's financial outlook has deteriorated
significantly since last November and it now projects $2 billion to $3
billion in expected losses in fiscal year 2001 and an even higher deficit in
the next fiscal year if there is no additional rate increase. The Service
has been increasing its borrowing and is approaching its $15 billion debt
ceiling without any debt reduction plan. The Service recently deferred
capital investment to conserve cash, thus delaying needed improvements and
associated gains in efficiency.
In addition, in March 2001, the Postal Service's Board of Governors wrote
the President and Congress asking for a comprehensive review of postal laws.
The Board said “We have unanimously concluded that the present
statutory scheme puts at serious risk our ability to provide consistent and
satisfactory levels of universal service to the American people, generally
recognized as delivery to every address every day, at uniform, affordable
rates.” Further, the Service anticipates substantial losses in First-
Class Mail volume over the next decade that would create “extreme
financial pressure.” If the Service experiences a series of large
financial deficits, universal postal service could ultimately be threatened,
prices would likely increase at a much faster rate, and other options would
need to be explored.
While the Service has announced some steps to address its growing
challenges, it has no comprehensive plan to address its numerous financial,
operational, or human capital challenges. Inclusion of the Postal Service's
transformational efforts and long- term outlook on our HighRisk List will
focus needed attention on the dilemmas facing the Service before the
situation escalates into a crisis where the options for action may be more
limited.
The significant shift in the Postal Service's financial outlook in the last
4 months came as a surprise to a variety of key stakeholders. In order to
understand the Service's financial and human capital problems, Congress and
postal stakeholders need to have frequent, transparent, and reliable
information on the Service's current and projected financial situation, the
Service's plans to address its growing challenges, and what progress the
Service is making. Therefore, we believe the following actions need to be
taken:
The Service should develop a comprehensive plan, in conjunction with
Congress and other stakeholders, such as the postal unions and management
associations, customers, and the Postal Rate Commission, that would identify
the actions needed to address the Service's financial, operational, and
human capital challenges and establish a timeframe and specify key
milestones for achieving positive results.
GAO- 01- 598T Page 19
The Service should provide summary financial reports to Congress and the
public on a quarterly basis. These reports should present sufficiently
detailed information for stakeholders to understand the Service's current
and projected financial condition, how its outlook may have changed since
the previous quarter, and its progress towards achieving the desired results
specified in its comprehensive plan.
GAO will work with Congress and the Service to help identify improvement
options and will continue to analyze and report to Congress on the Service's
ongoing financial condition. In consultation with other postal stakeholders
including the Postal Service Office of Inspector General, postal unions and
management associations, the Postal Rate Commission, and customers, we will
review the Service's financial results and future outlook, progress on cost-
cutting and productivity efforts, other countries' experiences, and options
for addressing the Service's short- term and long- term challenges.
______________________________________________________________________________
Mr. Chairman, that concludes my prepared statement. I would be pleased to
respond to any questions that you or the Members of the Committee may have.
Contact and Acknowledgments
For further information regarding this testimony, please contact Bernard L.
Ungar, Director, Physical Infrastructure Issues, on (202) 512- 8387.
Individuals making key contributions to this testimony included John H.
Anderson Jr., Teresa L. Anderson, Hazel J. Bailey, Joshua M. Bartzen,
Michael J. Fischetti, Jeanette M. Franzel, Melvin J. Horne, Kenneth E. John,
Roger L. Lively, Albert E. Schmidt, and Charles F. Wicker.
(393018)
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