U.S. Postal Service: Financial Outlook and Transformation	 
Challenges (15-MAY-01, GAO-01-733T).				 
								 
The U.S. Postal Service (USPS) faces major challenges that	 
collectively call for a structural transformation if it is to	 
remain viable in the 21st century. This testimony discusses USPS'
current financial outlook, actions USPS has taken or planned to  
take, and the transformation issues that will need to be	 
addressed. GAO found that structural transformation of USPS is	 
needed because it faces major financial, operational, and human  
capital challenges. It is at a growing risk of being unable to	 
continue providing universal postal service vital to the national
economy at reasonable rates while remaining self-supporting	 
through postal revenues. Although USPS has announced some steps  
to address its growing challenges, it has no comprehensive plan  
to address its various financial, operational, or human capital  
challenges. USPS needs to develop a transformation plan in	 
conjunction with Congress and other stakeholders that would	 
address the key transformation issues facing USPS.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-733T					        
    ACCNO:   A00998						        
  TITLE:     U.S. Postal Service: Financial Outlook and Transformation
             Challenges                                                       
     DATE:   05/15/2001 
  SUBJECT:   Postal service					 
	     Deficit reduction					 
	     Industrial relations				 
	     Productivity in government 			 
	     Debt						 
	     Federal employee retirement programs		 
	     Financial analysis 				 
	     Financial management				 
	     Human resources utilization			 
	     Civil Service Retirement System			 
	     Federal Employees Retirement System		 
	     USPS Priority Mail Program 			 

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GAO-01-733T
     
U. S. POSTAL SERVICE Financial Outlook and Transformation Challenges
Statement by David M. Walker Comptroller General of the United States

United States General Accounting Office GAO Testimony Before the Committee
on Governmental Affairs and its Subcommittee on International Security,
Proliferation, and Federal Services U. S. Senate

For Release on Delivery At 10: 00 a. m. EDT Tuesday, May 15, 2001 GAO- 01-
733T

Page 1 GAO- 01- 733T Mr. Chairman and Members of the Committee and
Subcommittee:

We are pleased to be here today to participate in this joint hearing on the
financial outlook and transformation challenges of 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. Your Committee and Subcommittee have expressed concern with the
Service?s deteriorating financial outlook. In my testimony today, I will
focus on the Service?s current financial outlook, actions the Service has
taken or planned, and the transformation issues that will need to be
addressed.

Summary A structural transformation of the Service is called for because the
Service faces major financial, operational, and human capital challenges. It
is at growing risk of not being able to continue providing universal postal
service vital to the national economy at reasonable rates while remaining
self- supporting through postal revenues. Accordingly,

in April 2001, we placed the Service?s transformational efforts and long-
term outlook on our High- Risk List. This inclusion on our High- Risk 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 and costly.

Key factors contributing to our decision to place the Service?s
transformational efforts and long- term outlook on our High- Risk List
included the following: The Service?s financial outlook has deteriorated
significantly, its borrowing is increasing, and the Service?s debt is
approaching the $15 billion statutory ceiling without any debt reduction
plan. Also, the large number of retirements expected over the next several
years will place even more pressure on the Service?s expenses and its need
for cash.

The Service recently deferred capital investment to conserve cash, thus
delaying needed infrastructure improvements. These deferrals appear likely
to continue.

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.?

Potential losses in First- Class Mail volume over the next decade could
create large financial deficits, leading to a situation where universal
postal service could ultimately be threatened, prices would likely increase
at a much faster rate, and other options would need to be explored.

The Service is subject to several statutory and other restrictions that
serve to limit its transformational efforts (e. g., binding arbitration
requirement, the rate- setting process, and facility closure restrictions).

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

Page 2 GAO- 01- 733T labor- management relations problems that have hindered
improvement efforts,

including three labor agreements that expired in November 2000 and may now
be resolved through binding arbitration. In addition, the Postal Service and
the Postal Rate Commission have had longstanding disagreements concerning
pricing decisions.

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). Although 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. In April 2001, we
recommended that the Postal Service develop a transformation plan in
conjunction with Congress and other stakeholders that would address the key
transformation issues facing the Service. 1 Service officials told us that
they generally agree with the recommendation. I recently met with the Deputy
Postmaster General, and we discussed ways that the Service could implement
it.

We appreciate the difficulty of this task, given the long- standing nature
of the structural problems and major differences in stakeholders? views. But
the sense of urgency is growing. The basic statutory framework that governs
the Postal Service has not changed since 1970, despite the fact that
developments in technology and a more competitive marketplace provide more
communications and delivery choices to businesses and consumers. The
Service?s ability to provide universal postal service as we know it today
will be increasingly threatened unless changes are made, both within current
law and to the legal and regulatory framework that governs the Service.

What is the Service?s Current Financial Outlook?

The Service is projecting significant losses over the next 2 years, although
the full extent of the losses is unclear. The Service currently estimates
that its fiscal year 2001 deficit will range from $1.6 billion to $2.4
billion and also estimates that its deficit will be $1.5 billion to $2.5
billion next fiscal year, assuming no further increase in postal rates next
year. If such deficits occur, they could be the largest that the Service has
incurred since fiscal year 1993 (see fig. 1).

The Service?s latest deficit projections for fiscal years 2001 and 2002
incorporate the expected impact from its Board of Governor?s recent decision
to raise most postal rates on July 1, 2001 (the rate for single- piece
First- Class mail of up to 1 ounce will remain at 34 cents). Service
officials estimate that the higher rates will increase its revenues by about
$200 million in fiscal year 2001 and about $975 million in fiscal year 2002.

1 U. S. Postal Service: Transformation Challenges Present Significant Risks
(GAO- 01- 598T, April 4, 2001).

Page 3 GAO- 01- 733T Figure 1: Postal Service Net Income From Fiscal Year
1990 through 2002 Source: U. S. Postal Service. The Service?s estimated
fiscal year 2001 deficit of $1.6 to $2.4 billion far exceeds the $480

million deficit built into the Service?s budget that was approved last
November. About $271 million of the Service?s current deficit projections
were based on reported losses through the end of the Service?s accounting
period ending April 20, 2001, and the rest is based on projected losses for
the rest of the fiscal year (see fig 2).

-3, 000 -2, 500

-2, 000 -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
year

2002 Service?s projected range for fiscal

years 2001 and 2002 Dollars (in millions)

Projected range Projected

Actual A

Page 4 GAO- 01- 733T Figure 2: The Postal Service?s Net Income for Fiscal
Year 2001 Source: U. S. Postal Service. The Service?s current deficit
estimate of $1.6 billion to $2.4 billion for fiscal year 2001 is

roughly half a billion dollars lower than the Service?s estimate we cited in
our April testimony of a $2.1 billion to $3.1 billion loss. According to
Service officials, the less pessimistic outlook is due to three factors.
First, the Service reports making additional progress in controlling costs,
and expects that progress to continue for the rest of the fiscal year.
Second, the Service expects to gain revenues as a result of its recent
decision to raise most postal rates on July 1, 2001. Third, the Service
updated its projections about the potential effect of the soft economy on
postal revenues for the rest of the fiscal year.

Although the Service appears headed for a large deficit in fiscal year 2001
and has explained its basis for the estimates to us, we believe that too
many uncertainties exist to predict the size of this year?s deficit at this
time with any precision. The Service?s financial outlook is a moving target
and may change, depending on the resolution of uncertainties that could
affect its revenues and expenses for the rest of this fiscal year. For
example, the impact of the economy on postal revenues remains somewhat
unclear, as are the financial implications of the ongoing contract
negotiations between the Service and three of its major labor unions. We
will continue to review the Service?s financial condition and will report
again to Congress on this matter. Regardless of the exact size of the
Service?s deficit, the severity of the Service?s financial situation is
highlighted by the fact that a large deficit is likely to occur despite two
rate increases in

the same year.

-2, 500 -2, 000

-1, 500 -1, 000

-500 0

500 1,000

Actual net income

Dollars (in millions)

Budgeted net income

-$ 1. 6 B -$ 2. 4 B $- 271 M

4/ 20/ 01 Postal Service?s estimated range of net income for full fiscal
year

Start of fiscal year

-$ 480 M

Middle of fiscal year

End of fiscal year

Actual net income Budgeted net income

A

Page 5 GAO- 01- 733T

Components of the Service?s Projected Deficit for Fiscal Year 2001 The
Service?s projected deficit for fiscal year 2001 can be divided into the
following categories: (1) $271 million in reported losses through the end of
the Service?s accounting period ending April 20, 2001, (2) $911 million in
budgeted losses for the rest of the fiscal year, (3) $120 million in
expenses projected to exceed budgeted targets for

the rest of the fiscal year, (4) $155 million in revenues projected to fall
below budgeted targets for the rest of the fiscal year because the Service
did not initially receive the full rate increase it had requested, and (5)
$150 million to $950 million in revenues projected to fall below budgeted
targets for the rest of the fiscal year due to the soft economy and its
impact on mail volume and revenues (see fig. 3). The $800 million deficit
range reflects the Service?s judgment that the soft economy will have an
uncertain impact on its revenues.

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. $431 M

Budgeted Budgeted Current Current

-$ 911 M -$ 271 M

-$ 911 M Reported Net Income:

As of 4/ 20/ 01 Originally Budgeted Net Income: 4/ 21/ 01 - FY- end

Expense Adjustments to Net Income: 4/ 21/ 01 - FY- end

Revenue Adjustments to Net Income: 4/ 21/ 01 - FY- end

Subtotal

Other Revenue Adjustments to Net Income: Soft Economy 4/ 21/ 01 - FY- end

-$ 120 M -$ 155 M

-$ 150 M to -$ 950 M

-$ 1.5 B

Net Income -$ 480 M -$ 1.6 to -2.4 B

FY 2001 Revised Deficit $1.6 to $2.4 B FY 2001 Revised Deficit $1.6 to $2.4
B

A

Page 6 GAO- 01- 733T Reported Losses for the First Part of Fiscal Year 2001
As figure 3 shows, the Service reported that its loss for the first part of
this fiscal year

through April 20, 2001, was $271 million. This reported amount is not
audited and is subject to change. 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 Service budgeted for a $431
million surplus through April 20, therefore, its net income fell $702
million below this target. To put some perspective on the Service?s income
estimates, in the first part of last fiscal year, the Service achieved $1.1
billion in net income but ended the year with a net loss of $199 million.

Through April 20 of fiscal year 2001, total mail volume continued to grow,
and it was also greater than that planned for by the Service in its fiscal
year 2001 budget. In particular, Standard A advertising mail volumes grew
more rapidly than the Service had expected. At the same time, however, some
mail volumes were less than what the Service had planned for in its budget,
particularly First- Class Mail and Priority Mail volumes (see fig. 4).

Page 7 GAO- 01- 733T Figure 4: Mail Volume for FY 2001 Through April 20,
2001 Compared to Budgeted Levels Source: U. S. Postal Service. These mail
volume shortfalls contributed to the Service?s mail revenues being less than

budgeted for in the first part of fiscal year 2001. First- Class and
Priority Mail, when combined, account for close to two- thirds of the
Service?s mail revenues and generate revenues that pay for approximately
three- quarters of the Service?s overhead costs. Thus, the Service cites the
shortfalls in First- Class Mail and Priority Mail volume as important
reasons that its total revenues have fallen short of budgeted targets. The
Service has also noted that Standard A advertising mail is lower margin mail
in that each mail piece generates less money toward overhead costs than each
piece of First- Class Mail and Priority Mail. In addition, the Service has
estimated that the decision by the Postal Rate Commission to

not recommend the full rate increase requested by the Service will lower its
total revenues by $390 million this fiscal year, including $235 million in
the fiscal year through April 20.

Further, the Service incurred a shortfall of $228 million from other types
of revenue that included a $138 million shortfall in planned revenue from e-
commerce, advertising, and retail initiatives. These initiatives generated
only $2 million in revenues in fiscal year 2001 through April 20. The
Service explained that as experience with its new ventures progresses, it
has become clear that the business plans were overly aggressive.

-1,000 -500

0 500

1,000 1,500

2,000 2,500

Pieces (in millions)

First- Class Mail Priority Mail

Periodicals Express Mail and Mailgrams

International Mail Standard A Mail

(primarily advertising) Package Services

Page 8 GAO- 01- 733T Figure 5 shows the Service?s total revenues, including
shortfalls in various mail

categories, special services, 2 and other types of revenue. Figure 5:
Revenues for FY 2001 Through April 20, 2001 Compared to Budgeted Levels
Source: U. S. Postal Service. The Service?s expenses in fiscal year 2001
through April 20 were about the same as its

budgeted target of $41.9 billion- with reported expenses $50 million below
this target, a difference of 0.1 percent. During this period, First- Class
Mail and Priority Mail volumes fell below expected levels. Service officials
have told us that the cost of handling FirstClass Mail and Priority Mail did
not decline commensurate with the decline in volume because it is difficult
to make such a short- term adjustment. Moreover, the Service incurred
additional costs to handle higher- than- expected increases in other mail
volumes, particularly Standard A advertising mail. Thus, the Service?s
overall workload was higher than it had budgeted for. As a result, some
compensation and other costs

were reported to be higher than budgeted, but these additional costs were
fully offset in the first part of the fiscal year by cost reductions in
other areas.

2 Special services include registered and certified mail, postal money
orders, and post office boxes, among other things.

-400 -300

-200 -100

0 100

200 300

Dollars (in millions)

First- Class Mail Priority Mail

Periodicals Package Services

Special Services International Mail

Standard A Mail (primarily advertising)

New initiatives and other revenues

Express Mail and Mailgrams

Page 9 GAO- 01- 733T Budgeted Losses for the Rest of Fiscal Year 2001 In its
fiscal year 2001 budget, the Service estimated that it would incur a $911
million

deficit for the rest of the fiscal year after April 20, 2001. When this
amount is added to the $271 million deficit incurred in the first part of
the fiscal year, the Service would lose nearly $1.2 billion in fiscal year
2001. This amount does not include developments in the rest of the fiscal
year that the Service projects will have a negative impact on its net
income, which are detailed below.

Expenses for the Rest of Fiscal Year 2001 in Addition to Those Previously
Budgeted The Service currently projects that its expenses for the rest of
fiscal year 2001 will be $120 million greater than budgeted, including the
following:

Transportation and energy expenses: The Service continues to expect
transportation and energy expenses to exceed budgeted amounts for the rest
of the fiscal year due to rising prices and cost passthroughs from
contractors. Postal officials are concerned that fuel and energy prices may
increase substantially in the near future, which also may increase inflation
and future cost of living adjustment payments to Service employees and
retirees. In addition, unbudgeted transportation- related costs will be
incurred for start- up costs associated with the Service?s new multiyear
contract with FedEx to transport Priority Mail and Express Mail.

Other expenses: Workers? compensation expenses are projected to be about $50
million over budget for the rest of fiscal year 2001, according to the
Service, and to reach about $1 billion for the full fiscal year. The Service
also expects a small impact to result from recent increases in ?terminal
dues? paid to foreign postal administrations to deliver outbound U. S.
international mail that were not factored into the Service?s budget.

Revenue Shortfalls for the Rest of Fiscal Year 2001 The Service projects
revenues will be below its budgeted targets for the rest of the fiscal year
for two reasons. First, the Service budget assumed that it would receive the
full rate increase it had requested. However, this did not occur. On January
7, 2001, the Service implemented under protest a smaller- than- requested
increase that the Postal Rate Commission had recommended (including a 1-
cent increase in the basic First- Class stamp rate to 34 cents). The Service
subsequently decided to override the Commission?s recommendation on May 7,
2001, and raise rates again on July 1, 2001, to generate the revenues it had
originally requested (leaving the First- Class stamp rate at 34 cents).
Thus, the Service projects that revenues for fiscal year 2001 will be $390
million below what its budget had assumed-$ 235 million, as a result of the
shortfall, through April 20 and $155 million, as a result of the projected
shortfall, for the rest of the fiscal year.

Page 10 GAO- 01- 733T Second, the Service projects that from April 21
through the end of the fiscal year, its revenues will fall below budgeted
targets by $150 million to $950 million due to the soft

economy and its impact on postal revenues. This range reflects the Service?s
uncertainty about the length and severity of the economic slowdown.

Other Factors May Add to the Service?s Deficit for Fiscal Year 2001 The
Service?s revenues will likely be lower than budgeted targets for the rest
of the fiscal year and its expenses will likely be higher than budgeted
targets for a variety of reasons:

The Service is unlikely to achieve its ambitious $289 million revenue target
for the full fiscal year for revenues from e- commerce, advertising, and
retail initiatives, given that these initiatives generated only $2 million
in fiscal year 2001 through April 20 - a shortfall of $138 million from the
Service?s budget target for this period. In addition, the Service may not
achieve its $454 million target for other miscellaneous revenues, given that
these revenues fell $90 million short of the budget target for the first
part of the fiscal year. The Service?s historical difficulty in making
profits from its new products and services suggests the Board of Governors
may wish to look at the Service?s policies and practices for determining
when the Service should enter into new ventures and when such ventures
should be discontinued. 3 Although the Service reports that compensation
expenses have been below budgeted

targets in recent weeks and that it imposed a hiring freeze on all
headquarters positions in April, it is still unclear whether the Service?s
compensation expenses will achieve the budgeted target for the full fiscal
year because these expenses were $132 million over budget for the fiscal
year through April 20.

The Service may incur additional expenses depending on the outcome of
ongoing litigation regarding its previous contracts with Emery Worldwide
Airlines Inc., which sorted and transported Priority Mail until early 2001.

The Service will also need to continue to control expenses such as those for
supplies and services so that below- budget expenses for the first part of
the fiscal year are not simply deferred to a later time.

Additional Information Could Help Explain the Service?s Changing Financial
Outlook

The Service has made numerous revisions to its estimated net income for
fiscal year 2001 with little or no public explanation, creating confusion
and raising concerns about its ability to generate timely and reliable
financial information. The significant shift in the Postal Service?s
financial outlook in early 2001 came as a surprise to a variety of key
stakeholders, with many concerns raised after the Service revised its
estimated net income for fiscal year 2001 from a $480 million deficit last
November to a $2 billion to $3 billion deficit this February. Currently, the
Service estimates a $1.6 billion to $2.4 billion deficit for fiscal year
2001 (see table 1).

3 U. S. Postal Service: Development and Inventory of New Products (GAO/ GGD-
99- 15, Nov. 24, 1998; and U. S. Postal Service: Postal Activities and Laws
Related to Electronic Commerce (GAO/ GGD- 00- 188, Sept. 7, 2000).

Page 11 GAO- 01- 733T Table 1: Postal Service Estimated Net Income for
Fiscal Year 2001 Date USPS Estimate of Net Income for Fiscal Year 2001
Source

1/ 12/ 00 - USPS requests rate increase.

2/ 8/ 00 $500 million surplus USPS preliminary performance plan for FY 2001
9/ 30/ 00 $150 million surplus USPS 5- Year Strategic Plan for FY 2001- 2005
10/ 6/ 00 $480 million deficit USPS final performance plan for FY 2001

11/ 13/ 00 - Postal Rate Commission recommends lower- than- requested rates.

11/ 14/ 00 $480 million deficit USPS- approved budget for FY 2001 12/ 4/ 00
$960 million deficit Postmaster General (Federal Times)

12/ 4/ 00 - USPS states it will implement Commission- recommended rates
under protest.

12/ 18/ 00 $1.3 billion deficit USPS Chief Financial Officer 1/ 7/ 01 -
Higher rates go into effect.

2/ 7/ 01 $2-$ 3 billion deficit USPS revised budget submission to OMB for FY
2001 5/ 7/ 01 $1.6-$ 2. 4 billion deficit USPS estimate provided to GAO

5/ 7/ 01 - USPS Board of Governors overrules the Commission; most rates will
increase again on July 1, 2001, to generate the revenues USPS originally
requested. (The basic First- Class stamp rate remains at 34 cents.)

Source: U. S. Postal Service and Federal Times. Postal stakeholders have
raised concerns about the reliability of the Service?s estimates of its net
income for fiscal year 2001. In addition, some stakeholders have said that
they do not understand how the Service?s financial outlook rapidly worsened
to such a great extent from last fall to early this year. To further better
understanding, the Service should provide more complete and readily
accessible information to Congress and the public on changes in its
financial outlook. For example:

Last fall, the Service did not publicly explain why its published estimates
of net income for fiscal year 2001 changed by $630 million over a 1- week
period. Specifically, the Service revised its estimate of net income for
fiscal year 2001 from a $150 million surplus in its 5- Year Strategic Plan
dated September 30, 2000, to a $480 million deficit in the Service?s final
annual performance plan for fiscal year 2001 dated October 6, 2000. The
final plan did not explain why the Service?s financial outlook changed over
this period. Service officials told us that the change was due to its
decision to lower estimated revenues for fiscal year 2001.

Further, although Service officials have provided explanations of changes in
the Service?s financial outlook in open forums- such as monthly Board of
Governor?s meetings, meetings with mailer groups, and in testimony before
Congress- these explanations have not been as readily accessible to those
not in attendance.

Greater transparency is needed in connection with the Service?s financial
and operating results and projections. To this end, in April 2001, we
recommended that the Service 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 to address its
financial, operational, and human capital challenges. Service officials told
us that they generally agree with our

Page 12 GAO- 01- 733T recommendation and are considering how to best
implement it. On May 11, 2001, the Deputy Postmaster General, the Chief
Financial Officer, and I met to discuss how to proceed in this area. As we
discussed in that meeting, one way the Service could achieve

greater transparency would be to post this information on its Web site to
facilitate timely communication of the information.

The Service?s Financial Outlook for Fiscal Year 2002

The Service currently estimates that its deficit for fiscal year 2002 will
be $1.5 billion to $2.5 billion. This range is about $1 billion less than
the Service projected earlier this year because the Service has decided to
implement higher rates for most categories of mail on July 1, 2001. Many
uncertainties exist that could affect the Service?s net income for fiscal
year 2002. For example, the estimated deficit for fiscal year 2002 assumes
no further increases to postal rates in fiscal year 2002. However, the
Service?s Board of Governors directed postal management to prepare a request
for another rate increase. If the Service

seeks another rate increase to be implemented during fiscal year 2002, its
deficit projection could change.

The Service Has Growing Cash Flow and Debt Challenges The Service?s
declining net income and current losses are putting pressures on its cash
flows from operations (the funds that remain after the Service pays its
expenses) and debt situation. The Service has been generating less cash flow
from operations that are used for capital expenditures and debt repayment.
Therefore, the Service has relied increasingly upon debt to finance its
capital expenditures and expects to reach its $15 billion statutory debt
limit by the end of fiscal year 2003, assuming no further increases in
postal rates after July 1, 2001. Under this scenario, the Service could pay
bills only through its cash on hand plus additional cash generated from
operations until outstanding debt declines.

As shown in figure 6, the Service?s cash flows from operations are typically
significantly greater than its net income. The primary reason for the
difference is that net income is calculated on the accrual basis of
accounting 4 and includes accrued expenses, such as depreciation expense,
that do not use cash.

4 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.

Page 13 GAO- 01- 733T Figure 6: Postal Service Net Income and Cash Flows
From Operations Source: U. S. Postal Service. The Service is currently
experiencing some cash flow pressure because of its deficits, but it
anticipates it will make all of its fiscal year 2001 year- end payments for
retirement

expenses and worker?s compensation. 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 this year. 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 about $1.7 billion in capital commitments
this fiscal year. Preliminary budget plans for fiscal year 2002 would reduce
capital investment from originally planned levels. To the extent that a
freeze on needed capital investments is required to conserve cash, it may
simply change the timing of such expenses and raise the final cost, while
deferring any related expected benefits.

The Service has mounting debt and many billions of dollars in liabilities
for future retirement and worker?s compensation expenses. These liabilities
have increased in part because the Service was statutorily mandated to
assume responsibility for funding all cost of living adjustments and health
benefits for its retirees since July 1, 1971. For the remainder of this
decade, these liabilities will continue to have an increasing impact on the
Service?s future cash flows, placing the Service under growing financial
pressure.

-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)

Page 14 GAO- 01- 733T 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 its capital investments. The Service
has experienced a net increase in outstanding debt at

the end of each fiscal year since 1997; and 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 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). Assuming
that the Service?s latest financial outlook is on target, the Service would
reach its $15 billion statutory borrowing limit by September 30,

2003 (see fig. 7). Figure 7: Trends in Postal Service Debt Source: U. S.
Postal Service. Growing Retirement Expenses

The Postal Service's retirement- related expenses have increased in recent
years, and these trends are expected to continue (see fig. 8). The Service?s
retirement liabilities translate into annual payments from the Service to
the federal government?s Office of

Personnel Management, which administers payments to retirees. The Service
has been making these payments at the end of each fiscal year. According to
the Service, these payments 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

16

Dollars (in billions) Fiscal year

Outstanding debt at end of fiscal year Statutory debt limit

Projected outstanding debt at the fiscal year end

2000 2001 2002

2003

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 2001

2002 2003

Statutory debt limit

Page 15 GAO- 01- 733T Figure 8: Postal Service Projects Increases in
Retirement- Related Expenses Source: U. S. Postal Service. The Service has
projected that among its current employees as of October 2000, about 130,000
postal employees were already eligible, or will reach eligibility, for
regular

retirement in calendar years 2001 and 2002. 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). Although many employees do not retire immediately,
the increasing number of postal employees who will become eligible to retire
in the remainder of this decade raises questions about succession and
workforce planning. If retirees are not replaced with the appropriate number
of employees possessing the needed skills, the resulting loss of
institutional knowledge and expertise may affect mission achievement.

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)

A

Page 16 GAO- 01- 733T Figure 9: A Large Percentage of the Postal Workforce
Is Nearing Retirement Source: U. S. Postal Service. The Service has reported
unfunded Civil Service Retirement System retirement liabilities of $32.2
billion at September 30, 2000. These liabilities represent the amount due to
the Office of Personnel Management to cover Civil Service Retirement System
pay increases and Civil Service Retirement System retirees? cost of living
adjustments. The Service also

has related future interest payments estimated at $16.5 billion. These
liabilities are being paid through annual installments. In fiscal year 2000,
the Service paid $3.6 billion toward its liability to the Office of
Personnel Management for these Civil Service Retirement System costs. The
Service?s total annual retirement expenses for both the Civil Service

Retirement System and the Federal Employees Retirement System is projected
to be $9.1 billion for fiscal year 2001. The Service projects its total
retirement expenses will increase annually to $14 billion in fiscal year
2010. These increased payments could reduce the Service?s cash flows and
place upward pressures on postal rates.

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

A

Page 17 GAO- 01- 733T What Actions Has the Service Taken or Planned to
Address Its Financial Problems?

We believe that the Service?s deteriorating financial situation calls for
prompt, aggressive action, particularly in the areas of cutting costs and
improving productivity in the near term. The Service has initiated efforts
in this regard and has also launched new products and services to increase
revenues. However, we believe that it will be difficult for the Service to
generate significant revenues from new products and services in the next few
years. 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 continually raise rates to maintain service and to meet its
break- even mandate, at least in the short term. However, simply raising
rates is not the answer. The Service and the Congress must take actions in
order to deal with the systemic problems facing the Service.

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. 10).
Although the Service achieved a 2.5 percent increase in its productivity in
fiscal year 2000, as the Postal Service and key stakeholders have
recognized, sustained 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?s
Inspector General, have noted inefficiencies in the postal system and
difficulties the Service has had in realizing opportunities for savings over
the long term.

Page 18 GAO- 01- 733T Figure 10: 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 mandate to provide postal services to all communities.
In

addition, the Service has had difficulty in achieving the expected savings
from implementing new technology. The Service has also reported that
extensive work rules and other regulations hamper its flexibility and
innovation; and by law, wages and work rules are determined by binding
arbitration- a third- party panel- when the Service and

its labor unions cannot reach agreement. This process has been criticized as
lessening the incentives for both sides to reach agreement. However, no
consensus exists on alternatives to this process.

The Service has a self- imposed moratorium on closing post offices. By law,
the Service cannot close small post offices solely for operating at a
deficit. Further, fiscal year 2001 appropriation legislation restricts the
Service from closing small or rural post offices in fiscal year 2001, and
this provision has been included in the Service?s appropriation legislation
for many years. The Service estimated several years ago that about half of
all post offices do not generate sufficient revenues to cover their costs.
However, the law also provides that the Service in determining whether to
close or consolidate post offices must consider the effects on the local
community, employees at the post offices, provision of universal service,
the resulting savings, and other factors that the Service determines are
necessary. Furthermore, the Service has a long, complex, detailed

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

A

Page 19 GAO- 01- 733T process for closing post offices in cases such as
consolidating multiple post offices in substandard buildings that are
located in an area with significant population loss.

Breakthrough Productivity Initiatives The Service recognizes that it needs
aggressive cost management. In March 2000, the Postmaster General called for
achieving ?breakthrough? productivity savings of $1 billion annually, mainly
in mail processing, transportation, and administrative areas. The Service?s
fiscal year 2001 budget called for saving $550 million through such
productivity initiatives and $450 million in additional savings from other
cost reduction initiatives. The Service set a goal of increasing its
productivity by 0.7 percent for fiscal year 2001 and reports that its
productivity increased 1.9 percent for fiscal year 2001 through April 20,
which equates to reduced expenses of $775 million. At the same time, given
past experience, the Service faces a significant challenge to achieve and
sustain large increases in productivity over the long term. Looking ahead,
the Deputy Postmaster General announced that the Service is committed to
cutting costs by $2.5 billion by 2003. Also, 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 defines breakthrough productivity as a systemic focus on
improving productivity by ?reducing costs through everything from machine
utilization, to standardized processes, to staffing and scheduling, and to
resource management.? The breakthrough productivity initiatives fall into
four key areas: (1) operations, (2) administration, (3) purchasing, and (4)
transportation.

Operations: According to the Service, savings in operations will be achieved
by implementing best practices on a nationwide basis in areas with the
greatest potential for savings, such as using standardized operating
procedures and adjusting employees? work schedules to more closely coincide
with mail volume. Further savings are to be achieved by accelerating the
automation program, which is to reduce the need for manual sorting of mail.

Administration: Administrative positions are to be reduced by centralizing
functions, using electronic technology, and eliminating unnecessary
administrative transactions. For example, the Service is replacing its
outdated time and attendance reporting system with a Web- based application
requiring much less time to administer.

Purchasing: The Service plans to cut the cost of purchased goods and
services by standardizing purchasing sources and leveraging the Service?s
size to obtain better prices.

Transportation: The Service reports making across- the- board efforts to
reduce the cost of transporting mail at all points in the system, largely by
reviewing all mail transportation contracts to identify and eliminate
underused and redundant service. These reviews are nearly complete. The
Service has reported that it expects considerable savings from moving mail
by truck instead of by air due to lower rates.

Page 20 GAO- 01- 733T Other Cost Reduction Programs In addition to the
Service?s ?breakthrough? productivity initiatives, the Service has announced
that it plans to achieve $450 million in savings through other automation
initiatives, including the following:

Upgrading letter- sorting equipment: The Service continues to upgrade this
equipment with enhanced optical character reading, barcode sorting, and
remote encoding functions.

Adding and upgrading equipment to sort flat mail such as catalogs and
periodicals: New equipment is being deployed to replace some older models
and handle additional capacity, and some current models are being equipped
with automatic feeders and optical character readers. Adding and upgrading
material- handling equipment: Robots are being deployed to

load mail containers for dispatch, enhancing equipment that transports and
stages mail in processing plants, and deploying new technology to dispatch
and route mail transported on commercial air carriers. What Transformational
Issues Will Need to Be Addressed? In addition to the financial and
operational issues discussed above, over the past 2 years

we have raised concerns about a range of 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. We have
also discussed the constraints facing the Service, some of which include
legal and regulatory requirements, that may impede its ability to carry out
its mission. The 30- year- old legal and regulatory system established by
the nation?s postal laws is increasingly problematic for both the Service
and its competitors and is overdue for change. When the Service was created
as an independent establishment of the executive branch by the Postal
Reorganization Act of 1970, it faced little direct competition. Today, the
Service faces growing competition from both private delivery companies and
the Internet, and even foreign postal administrations.

In this vastly changed environment, the Service is subject to several
statutory and regulatory restrictions that limit its transformational
efforts and do not apply to its competitors (e. g., universal postal service
requirement, binding arbitration requirement, rate- setting process, and
facility closure restrictions). At the same time, the Service has a
statutory postal monopoly to deliver letter mail, and also benefits from
laws that apply

to the Service differently than they apply to its competitors, such as not
paying taxes and not being subject to antitrust laws. Congress needs to
revisit what statutory and regulatory framework would be appropriate for the
Service in the 21 st century.

Financial Challenges Changes in the marketplace, including greater
competition, may lead to increasing financial difficulties for the Service
and threaten its ability to provide universal postal service at reasonable
rates while remaining self- supporting from postal revenues.

Page 21 GAO- 01- 733T Recently, the Service initiated a study to determine
the potential cost savings from reducing mail delivery from 6 to 5 days each
week. 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.

Competition is already increasing from private delivery companies and
foreign postal administrations accepting outbound international mail from
within the United States. For example, United Parcel Service (UPS) is
offering a hybrid mail service in which letters are electronically sent to a
recently acquired UPS company and then printed and inserted into the U. S.
postal system. In addition, at least eight foreign postal administrations
now offer services from within the United States to American consumers.

Although it is difficult to predict the timing, magnitude, and potential
financial impact of further mail volume diversion to other competitors and
to electronic alternatives, according to the Service?s latest 5- Year
Strategic Plan, longer- term projections suggest that about half of mailed
bills and payments will eventually be replaced with electronic billing and
payment alternatives. Thus, under the Service's baseline forecast that is
included in its 5- Year Strategic Plan, First- Class Mail volume would
decline at an average

annual rate of 3.6 percent from fiscal years 2004 through 2008 (see fig.
11).

Page 22 GAO- 01- 733T Figure 11: Postal Service Projects Decline in First-
Class Mail Volume Source: U. S. Postal Service. If First- Class Mail volume
declines and the revenue loss is not offset by increasing mail volume in
other areas, such as advertising mail or by revenues from new initiatives
such

as e- commerce, rates would need to rise for any mail categories that take
on a larger burden of supporting postal overhead costs. The Service would
also 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 the
mail volume. However, these costs may be difficult to adjust in the short
term. Adding to rate pressure, postal infrastructure costs continue to grow.
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. Each year the Service adds new delivery points for
new households and businesses- a projected 1.8 million in fiscal year 2001.

Human Capital Challenges 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

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)

Page 23 GAO- 01- 733T and establishing succession planning for impending
retirements; and (2) ameliorating the persistent problems in the workplace
that have been exacerbated by decades of

adversarial labor- management relations and that hinder efforts to improve
productivity. The Postal Service's human capital problems can be seen as
part of a broader pattern of human capital shortcomings that have
contributed to programmatic problems and risks across the federal
government.

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. These
reductions should be done in a carefully planned manner to

avoid negatively affecting the workplace environment, operations, and
service quality. The Service will be increasingly challenged to deal with
human capital issues related to succession planning, maintaining continuity,
and the associated cost issues. With a large percentage of the postal
workforce nearing retirement eligibility, the Postal Service has the
opportunity to realign its workforce and assure that it has the leadership,
knowledge, and skills necessary to efficiently and effectively carry out its
mission. Given the nature of these issues, the Service will need to include
effective participation of its employees in planning and implementing
workplace improvements. The Service will also need to maintain the
continuity of service to customers as many experienced managers and workers
retire and the Service restructures its workforce.

Fundamental improvement is needed in postal labor- management relations. The
Service and its major unions and management associations need to resolve
long- standing labormanagement problems that have hindered improvement
efforts, including efforts to cut costs and increase productivity. For
example, the Service has made progress in reducing the number of grievances,
but at the end of fiscal year 2000, the Service reported about 147,000
pending or appealed grievances. For the Service to be successful, it is
critical that it achieves and sustains collaborative working relationships
with its labor unions and management associations.

Transformation Questions

If the Postal Service is to transform itself into a modern, efficient, high-
performance organization that continues to provide affordable, universal
postal service in the 21 st century, the starting point is to define and
clarify the Service?s mission and role over the

long term. The Service needs to address questions about its basic mission-
that is, the type of postal services that should be provided on a universal
basis to meet business and residential customer needs, how these services
should be provided, and how they should be financed. Further, questions
arise related to what kind of governance and regulatory framework is needed
to ensure public accountability. Some of the specific questions that need to
be addressed as part of the structural transformation include the following:

What is the appropriate mission and role of the Postal Service in the 21 st
century? How should ?universal postal service? be defined? How should
universal postal

Page 24 GAO- 01- 733T service obligations be provided? 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?

Can the Postal Service remain self- supporting under a break- even mandate?
If not, what types of financing options should be considered? Should the
Service be allowed to make a profit? Should universal postal services be
subsidized? What changes to the governance and organization structure are
needed to realign the

organization so that it can successfully achieve its mission? What type of
governing board is appropriate? What should be its role? What criteria would
be appropriate for selecting board members?

What should be the related regulatory framework providing oversight in the
areas of rate setting, new postal products, and fair competition? How much
flexibility should the Service have to change rates? What oversight is
needed to protect customers with few or no alternatives to the mail? How
should the Postal Rate Commission and other pertinent regulatory authorities
exercise oversight with respect to competition and antitrust issues?

How is the Service to use its employees to accomplish its mission in an
efficient, effective, and economic manner? What are the Service?s current
and future human capital needs? How will the Service ensure that it has the
knowledge, skills, and the abilities that are needed? How will the Service
make the necessary changes to its workforce, including its size,
organization, and deployment?

What performance management and incentive systems are needed to improve
individual and team performance? How can the Service ensure that its
managers and supervisors are prepared and trained to provide effective
leadership? What labor policies are needed? How can the Service?s management
and postal unions and management associations develop a shared understanding
of the Service?s vision; undertake a mutual effort to achieve it; and
resolve problems and conflicts over

wages, work rules, and individual cases in a fair and effective manner? What
operational changes are needed to support the Service?s mission? How can
technology help the Service improve productivity, reduce costs, and enhance
customer service?

Are fundamental changes needed in how the major functional areas are carried
out- mail collection, transportation and mail processing, delivery, and
retail services? Is the Service?s current physical infrastructure aligned to
efficiently and effectively

support operations? What types of and how many facilities are needed? Should
certain existing facilities be consolidated or eliminated? Should certain
functions be contracted out or addressed via public/ private partnerships?

Page 25 GAO- 01- 733T What performance and cost information is needed and
collected to support Service operations and measure results? What
information on projected and actual

performance should be periodically reported to the public? How well
integrated are the Service?s financial, management, and performance
reporting systems?

In addition, several issues need to be addressed related to how the Service
should be held accountable for results. We have reported that the Postal
Service?s annual performance plans and its first performance report under
the Government Performance and Results Act of 1993 have not been as useful
to Congress, postal managers, and customers as they could have been. In our
view, the Service?s recently published preliminary performance plan for
fiscal year 2002 did not fully address the concerns we previously raised
about the Service?s approach to setting goals and reporting on results. For
example, the preliminary plan dropped important goals for net income and for
the

timely delivery of 2- and 3- day First- Class Mail. Also, a number of issues
have been raised related to the reliability and credibility of the data the
Service uses for ratemaking. Timely, accurate, and relevant information will
be critical for effective management as well as communications with
customers, Congress, and other stakeholders.

Engagement with Postal Stakeholders

Engaging with stakeholders will be an essential part of developing a
consensus to address the Service?s transformational issues. When the Service
begins to engage with its stakeholders to develop a comprehensive
transformation plan, it will face a stakeholder community far from consensus
on what needs to be done. It would be useful for the Service to develop an
approach for engaging with its stakeholders in the development of its
comprehensive plan.

In response to the joint request to us from this Committee and Subcommittee,
we are working to identify improvement options suggested by various
stakeholders and will summarize the results in our subsequent report to you.
We have begun this effort and have talked to several stakeholders and plan
to continue these discussions. Some of the stakeholders we have talked to so
far have included postal unions, mailer groups, competitors, the Service?s
Office of Inspector General, and Postal Rate Commission officials. They
provided a variety of suggestions for action, some within the existing legal
framework and others that would require statutory change, as follows:

The Service?s mission and role: Representatives of a mailer group and a
Service competitor said that the Service?s mission should be more clearly
defined and raised the issue of whether the Service should be changed to a
stock- owned corporation. In the mailer?s view, making the Service a
corporation with shareholders would hold it accountable and create
incentives for success. In the competitor?s view, the Service

should either be restricted to offering monopoly services that do not
compete with the private sector or be held to the same rules as its
competitors.

Page 26 GAO- 01- 733T Regulation of postal rates: A mailer group and a union
representative favor statutory changes to give the Service more flexibility
to set postal rates. For example, a union

representative said that the Service should be able to adjust postal rates
in response to economic trends. However, Postal Rate Commission officials
and a mailer group representative stated that the Service has the
flexibility under current law to request alternative rate structures, such
as peak- load pricing and phased rate increases.

Transparency and accountability: Postal Rate Commission officials and mailer
group representatives recommended that the Service provide more frequent and
complete financial and service quality information to the public. For
example, they said the Service should regularly disclose the on- time
delivery of different classes of mail so that it can be held accountable for
the quality of service it provides. Workplace environment: Several
stakeholders stated that better communication is

needed among employees, management, and external stakeholders to improve the
atmosphere in the workplace and increase productivity. A postal union
representative noted that a different management style is needed to
encourage employees to give additional discretionary effort. For example,
the representative suggested initiating more ?bottom- up? communication from
employees. Pay and performance incentives: Some stakeholders noted that
greater incentives are

needed to maximize productivity and efficiency. For example, a mailer group
representative said that management and employees need more effective
incentives to further organizational achievement of goals. On the other
hand, union officials said that the existing management bonus system
encourages managers to take unwarranted action to receive bonuses. Further,
a union official noted that city and rural carriers work side by side in
some suburban areas under different pay systems, different ways of setting
and adjusting the workload, and different incentives for good performance.
Flexible staffing: A mailer group representative favored greater use of
flexible

staffing procedures to minimize compensation costs, such as using more
noncareer workers to handle peak mail volumes. Union officials expressed a
different view, favoring the elimination of noncareer jobs to save money.

Retail infrastructure: Mailer group representatives said that the Service
should consider, as part of a package of changes, restructuring the retail
network by closing post offices and/ or relocating retail operations from
some post offices to postal retail operations provided in other locations
such as retail stores. For example, a mailer group representative suggested
a reevaluation of the statutory restrictions on closing post offices,
including a reconsideration of the prohibition against closing post offices
solely for operating at a deficit. The mailer group representative suggested
that the military base- closing model could be used when evaluating the
possibility of closing unprofitable post offices.

Page 27 GAO- 01- 733T Mail processing network: Some stakeholders said that
the Service could become more productive by using existing automation
equipment more efficiently and

continuing automation efforts. A mailer group representative advocated that
the Service achieve greater standardization of mail processing operations by
adopting best practices throughout the system to the maximum extent
possible. A representative of an equipment manufacturer said that the
Service needed better long- term planning in this area, as well as working
more effectively with its major suppliers.

Delivery network: A mailer representative said the Service could save money
if some existing residential customers (e. g., customers with mailboxes
attached to their homes) were required to use cluster boxes, thus increasing
route efficiency.

Worksharing discounts: A union official stated that worksharing discounts-
that is, discounts to mailers for mail preparation such as barcoding,
presorting, and dropshipping mail- should be greatly reduced or eliminated.
In the union official?s view, the Service could improve its net revenue by
doing the worksharing functions inhouse at less cost. In contrast, a mailer
group representative said more worksharing incentives are needed for the
Service to process mail efficiently, save money, and encourage growth in
mail volume. Further, Postal Rate Commission officials said that the Service
has the ability under current law to request additional types of worksharing
discounts. Productivity initiatives: A mailer group representative stressed
the importance of the

Service improving its productivity through cost cutting. For example, he
said that the legislatively established rate- setting process provides
little incentive for innovation and efficiency since the Service can cover
its costs by increasing postal rates. Union officials said that unions and
employees could contribute toward developing initiatives to improve the
Service?s productivity if there was greater prior consultation. At the same
time, however, one union official described the Service?s current
productivity initiatives as harassment of employees.

Administrative improvements: The recent statement of the Service?s Inspector
General before the House Committee on Government Reform suggested a number
of actions the Service could take to improve its performance,
accountability, and financial position. One area cited where additional
efficiencies could be improved was in the Service?s contract management
practices. For example, one Inspector

General investigation reported that the Service paid over $800,000 for
asbestos abatement work that was either over- billed or not performed. The
report suggested that the Service needed to strengthen its quality assurance
procedures and training of Service contracting officials to ensure accurate
contractor billings. New products: Some stakeholders have said that the
Service should have a more

business- like approach to its new product initiatives so that the Service
would stop spending money on projects that are not generating a positive
return.

Page 28 GAO- 01- 733T Debt limit: A mailer group representative and a union
official favored raising the statutory debt limit to give the Service the
flexibility to borrow instead of raising

rates. _____________________________________________________________________

Mr. Chairman, that concludes my prepared statement. I would be pleased to
respond to any questions that you or the Members of the Committee and
Subcommittee 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, Gerald P. Barnes, Joshua M. Bartzen, William J.
Doherty, Michael J. Fischetti, Jeanette M. Franzel, Kenneth E. John, Roger
L. Lively, Albert E. Schmidt, and Charles F. Wicker.

(393021)
*** End of document. ***