U.S. Postal Service: Deteriorating Financial Outlook Increases	 
Need for Transformation (28-FEB-02, GAO-02-355).		 
								 
GAO reports on the deteriorating financial situation of The U.S. 
Postal Service (USPS); the causes of the anticipated financial	 
deficits; and the short and long term implications on the USPS	 
financial condition, operations, and customers. USPS has	 
continuing deficits, severe cash-flow pressures, rising debt, and
liabilities that exceed its assets. USPS also lacks sufficient	 
income to fund growing capital asset needs for safety,		 
maintenance, expansion, and modernization as well as to fund its 
liabilities. In fiscal year 2001, USPS reported on a $1.68	 
billion deficit, up from a $199 million deficit in the preceding 
fiscal year. Pressures to increase rates will continue as USPS	 
needs increased funding to pay its growing long-term obligations,
including employee retirement and health benefits. USPS's basic  
business model assumes that rising mail volume will cover rising 
costs and mitigate rate increases. This is increasingly 	 
problematic since mail volume could stagnate or decline further. 
USPS also had difficulty in making and sustaining productivity	 
increases. Moreover, USPS's framework of legal requirements	 
impede its ability to ensure its own financial viability due to  
structural, legal, and practical constraints, including closing  
or consolidating postal facilities and realigning its workforce. 
The worsening financial situation and outlook require a 	 
comprehensive transformation to address its financial,		 
operational, and human capital challenges, and the need for more 
timely and accessible financial information. In the fall of 2001,
USPS published a discussion outline of concepts for postal	 
transformation and called for public comments on transformation  
issues. Although USPS has made more financial data available on  
its Web site, it has not made some key financial data publicly	 
available in as timely a manner as GAO believes is necessary to  
improve transparency.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-355 					        
    ACCNO:   A02812						        
  TITLE:     U.S. Postal Service: Deteriorating Financial Outlook     
Increases Need for Transformation				 
     DATE:   02/28/2002 
  SUBJECT:   Postal service					 
	     Financial analysis 				 
	     Future budget projections				 
	     Agency missions					 
	     Financial management				 
	     Strategic planning 				 
	     Reporting requirements				 

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GAO-02-355
     
A

Report to Congressional Requesters

February 2002 U. S. POSTAL SERVICE Deteriorating Financial Outlook Increases
Need for Transformation

GAO- 02- 355

Letter 1 Results in Brief 3 Background 6 USPS?s Deteriorating Financial
Results and Outlook 7 Transformation Required to Make USPS Financially
Viable 24 USPS Needs to Reassess Structural Issues and Take Action 33 USPS?s
Response to Our Past Recommendations 44 Conclusions 45 Matter for
Congressional Consideration 47 Recommendations for Executive Action 47
Agency Comments and Our Evaluation 47

Appendixes

Appendix I: Fiscal Year 2001 Results 50

Appendix II: Comments from the U. S. Postal Service 57

Appendix III: GAO Contacts and Staff Acknowledgments 59 GAO Contact 59
Acknowledgments 59

Tables Table 1: USPS?s Declining Financial Results and Outlook 10 Table 2:
Quarter 1, Fiscal Year 2002 Budgeted Versus Actual Results 14

Table 3: Recent Postal Rate Actions 16 Table 4: USPS?s Cash Flows and
Capital Investments in Fiscal Years 2000 through 2002 19

Table 5: Key USPS Legal Requirements and Practical Constraints That Limit
Transformation Efforts 26 Table 6: Fiscal Year 2001 Budgeted Versus Actual
Financial

Results 51 Table 7: Selected Financial Results, Fiscal Years 1972 through

2001 55 Figures Figure 1: Net Income/ Losses of USPS from Fiscal Years 1972
to

2002 8 Figure 2: Trends in USPS?s Mail Volumes, Fiscal Years 1971 through

2001 12 Figure 3: Growth in Operating Revenues and Expenses, Fiscal Years
1990 through 2001 13

Figure 4: USPS?s Need for Funds Outweighs Its Sources of Funds 21 Figure 5:
Trends in USPS?s Debt, Fiscal Years 1972 through 2002 23 Figure 6:
Cumulative Postal Productivity Growth from Fiscal Years

1971 through 2001 29 Figure 7: USPS?s Net Income for Fiscal Year 2001 52
Figure 8: Fiscal Year 2001 Revenues Compared with Budgeted Levels 53

Figure 9: Fiscal Year 2001 Mail Volumes Compared with Budgeted Levels 54

Abbreviations

APWU American Postal Workers Union COLA cost- of- living adjustment DPMG
deputy postmaster general OPM Office of Personnel Management PMG postmaster
general PRC Postal Rate Commission PYLR Prior Years? Losses Recovery USPS U.
S. Postal Service

Lett er

February 28, 2002 The Honorable Joseph I. Lieberman Chairman The Honorable
Fred Thompson Ranking Minority Member Committee on Governmental Affairs
United States Senate

The Honorable Daniel K. Akaka Chairman The Honorable Thad Cochran Ranking
Minority Member Subcommittee on International Security,

Proliferation, and Federal Services Committee on Governmental Affairs United
States Senate

This report responds to your request in March 2001 that we assess the
financial condition of the U. S. Postal Service (USPS) and its long- term
outlook as well as the financial, operational, and structural issues that
may affect USPS?s ability to carry out its mission. The committee and
subcommittee expressed concern about the deteriorating financial situation
of USPS and requested our review to help improve the understanding of USPS?s
current financial situation; the causes of the anticipated financial
deficits; and the implications in the short term and long term on USPS?s
financial condition, operations, and customers. Accordingly, the specific
objectives of our review were to (1) assess USPS?s fiscal year 2001
financial results and its long- term outlook; (2) discuss the

legal requirements and practical constraints that need to be addressed as
well as selected options to be considered for USPS to achieve a successful
transformation to overcome its financial, operational, and human capital
challenges; and (3) discuss information on actions USPS has taken to
implement recommendations we made to it in April 2001 related to its
financial situation. 1

1 U. S. General Accounting Office, U. S. Postal Service: Transformation
Challenges Present Significant Risks, GAO- 01- 598T (Washington, D. C.: Apr.
4, 2001).

In April 2001, we placed USPS?s transformation efforts and long- term
outlook on our High- Risk list, noting that USPS is at growing risk of not
being able to continue its mission of providing the current level of
universal

postal service throughout the nation while maintaining reasonable rates and
remaining largely self- supporting through postal revenues. We included USPS
on our High- Risk list to focus attention on the dilemmas facing USPS before
the situation escalates into a crisis in which the options for action may be
more limited and costly. We recommended that the following actions be taken:
 USPS should develop a comprehensive transformation plan- in

conjunction with Congress and other stakeholders, such as the postal unions
and management associations, customers, and the Postal Rate Commission
(PRC)- that would identify the actions needed to address

USPS?s financial, operational, and human capital challenges and establish a
time frame and specify key milestones for achieving positive results.  USPS
should provide summary financial reports to Congress and the public on a
quarterly basis. These reports should provide sufficiently detailed
information for stakeholders to understand USPS?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.

In May 2001, we testified before this committee and subcommittee on USPS?s
financial outlook and transformation challenges that needed to be addressed.
2 At that time, USPS?s net income had declined over the past 5 years, its
outstanding debt had increased at the end of each fiscal year since 1997,
and it expected electronic diversion to cause substantial

declines in First- Class Mail volume in the next decade. We stated that USPS
faced major challenges that called for prompt, aggressive action,
particularly in the areas of cutting costs and improving productivity in the
near term. Further, we noted that Congress must revisit the statutory
framework under which USPS operates and take actions to deal with the
systemic problems facing USPS that call for a transformation if USPS is to
remain viable in the 21 st century.

2 U. S. General Accounting Office, U. S. Postal Service: Financial Outlook
and Transformation Challenges, GAO- 01- 733T (Washington, D. C.: May 15,
2001.)

Our assessment of USPS?s financial condition and transformation challenges
for this report is based on our previous work; updated financial data,
projections, and other information that USPS provided to us; interviews with
USPS officials, including its chief financial officer; and

interviews with other stakeholders. This report discusses the actual
financial results for fiscal year 2001 as compared with USPS?s budget
approved by its Board of Governors in November 2000 and USPS?s current
financial outlook. USPS?s financial situation is complex, and we could not
assess, within our available time and resource constraints, the validity of
all of the data and assumptions that support USPS?s financial projections.
One area that may have an impact on USPS?s financial situation is its
response to the terrorist and anthrax incidents that occurred in the fall of
2001. Accordingly, in preparing this report, we also used the results of a
1- day conference we hosted in December 2001 at the request of the chairman
and

ranking minority member of the House Committee on Government Reform. 3 The
conference participants discussed bioterrorism threats, options for USPS and
the mailing industry for improving security, and issues and options relating
to improving postal operations.

We conducted our review at USPS headquarters in Washington, D. C., from
March 2001 through February 2002 in accordance with generally accepted
government auditing standards. We requested comments on a draft of this
report from USPS, and its comments are discussed later in this report and

reproduced in appendix II. Results in Brief USPS?s financial outlook is
becoming increasingly dire. USPS has continuing deficits, severe cash- flow
pressures, rising debt, and liabilities that exceed its assets. USPS also
lacks sufficient income to fund growing

capital asset needs for safety, maintenance, expansion, and modernization as
well as to fund its liabilities. In fiscal year 2001, USPS reported a $1. 68
billion deficit, up from a $199 million deficit in the preceding fiscal
year. Further, USPS budgeted for a $1.35 billion deficit in fiscal year
2002, before the catastrophic events of September 11 and subsequent use of
the mail to transmit anthrax. The combined effect of these events and the
current economic slowdown have served to further exacerbate USPS?s financial
difficulties by decreasing postal revenues, while postal costs continued to
increase despite additional USPS cost- cutting efforts. USPS?s mail volumes

3 U. S. General Accounting Office, Highlights of GAO?s Conference on Options
to Enhance Mail Security and Postal Operations, GAO- 02- 315SP (Washington,
D. C.: Dec. 20, 2001).

are beginning to decline in its major revenue producing areas, and despite
recent rate increases, its costs are increasing faster than its revenues.
USPS has requested an above- inflation rate increase that is expected to
take effect later this year. In the short term, USPS may have to rely
primarily on cutting costs and raising rates. However, raising rates may
cause mail volumes to decrease and encourage mailers to shift more mail to
electronic and other delivery alternatives. In the long term, pressures to
increase rates will continue as USPS will need increasing amounts of funds

to pay its growing long- term obligations, which include employee retirement
and health benefits. Thus, USPS?s ability to continue to fulfill its mission
by providing the current level of universal postal services at reasonable
rates on a self- supporting basis is increasingly at risk.

USPS?s basic business model, which assumes that rising mail volume will
cover rising costs and mitigate rate increases, is increasingly problematic
since mail volume could stagnate or decline further. USPS has also had
difficulty in making and sustaining productivity increases. Moreover, USPS?s
framework of legal requirements, which form the foundation of USPS?s
business model, as well as practical constraints impede USPS?s ability to
ensure its own financial viability. For example, USPS?s statutory framework,
which includes a monopoly on letter mail, a break- even mandate, and a cost-
based rate- setting structure, provides limited incentives to cut or
restrain costs or to be innovative. Furthermore, USPS faces structural,
legal, and practical constraints related to its infrastructure, including
closing or consolidating postal facilities and

realigning its workforce as its operations change. Other structural issues
have been raised, such as USPS?s governance structure- for example, what
type of governing board is appropriate for USPS, given the complex mission
and role of this $70 billion entity with nearly 900,000 employees. If USPS?s
financial and structural problems are not resolved, this could result in
additional significant rate increases, lower quality of service, and/ or the
need for additional federal appropriations. USPS could do more under its
current authority to lower costs and increase productivity. A range of
options to improve postal operations includes replicating best practices
across mail- processing plants, better aligning the workforce with
operational needs, and redesigning the mail classification system and rate
structure for more cost- efficient mail preparation. However, efforts to
improve efficiency will probably not be enough to alleviate growing

financial pressures, in part because of continuing difficulties in
significantly reducing costs, particularly in the areas relating to USPS?s
infrastructure and workforce.

USPS?s worsening financial situation and outlook intensify the need for a
comprehensive transformation that will address its financial, operational,
and human capital challenges as well as the provision by USPS of more timely
and accessible financial information. USPS has begun to implement our
previous recommendations to develop a transformation plan and improve its
financial information. In the fall of 2001, USPS published a discussion
outline of concepts for postal transformation and called for public comments
on transformation issues. USPS is working to develop and finalize its
transformation plan by March 31, 2002. In addition, although USPS has made
more financial data available on its Web site, it has not made some key
financial data publicly available in as timely a manner as we believe is
necessary to improve transparency.

Congress has considered but not enacted various legislative postal reform
proposals over the last 7 years. These reform proposals addressed many key
transformation issues but did not fully address constraints related to
USPS?s infrastructure and workforce. Also, consensus among postal

stakeholders has been difficult to achieve. Thus, strong leadership-
starting with USPS- will be critical to achieving the necessary consensus
for change between Congress and the divided stakeholder community. Further,
action by Congress on comprehensive reform legislation will be critical to
sustain USPS?s financial viability. Accordingly, we are recommending in this
report that:  USPS?s Board of Governors and postmaster general (PMG)
provide

proactive leadership for transformation by informing its employees,
Congress, stakeholders, and the public about the need for change and by
identifying in its forthcoming transformation plan (1) actions that USPS can
take within its current authority, (2) specific congressional actions

that would enable USPS to take a number of incremental steps to address its
growing financial and operational challenges, and (3) a process to address a
range of comprehensive legislative reforms that will be needed to address
key unresolved transformation issues;  USPS improve the transparency of its
financial data by posting monthly

and quarterly financial reports on its Web site in a more timely manner; 
Congress consider and promptly act on incremental legislative changes

that would provide USPS with some additional flexibilities while
incorporating appropriate safeguards to prevent abuse. In addition,
comprehensive legislative changes will be needed to address key unresolved
transformation issues. Congress could also consider how

best to address issues, such as infrastructure and workforce issues, that
may require input from a variety of stakeholders and will involve some
shared sacrifice. One option could be to create a commission to address
unresolved transformation issues and develop a comprehensive proposal for
consideration by Congress.

In commenting on a draft of our report, the PMG agreed with our
recommendations and said that USPS plans to inform Congress and the public
of the need for change in its transformation plan and by other means. In
addition, he stated that USPS intends to work with Congress and all
stakeholders in developing and implementing strategies for action. He also
agreed with our recommendation to improve the transparency of USPS?s
financial data.

Background USPS is the single largest federal civilian agency, with a
mission vital to the nation?s communication and commerce. Compared with
private U. S.

companies, USPS is the second largest employer with its nearly 900, 000
full- time and part- time employees. Four major unions represent the
interest of bargaining unit employees; and three management associations

represent USPS supervisors, postmasters, and other managerial, nonbargaining
personnel. USPS currently maintains a massive infrastructure, developed
incrementally over many years, consisting of more than 38,000 post offices,
branches, and stations and 350 major mailprocessing and distribution
facilities. USPS is the focal point of a $900 billion mailing industry that
employs 9 million people and accounts for 8 percent of the U. S. gross
domestic product, according to a recent report. 4 The Postal Reorganization
Act of 1970 (P. L. 91- 375) reorganized the former U. S. Post Office
Department into the U. S. Postal Service, an independent establishment of
the executive branch with a mandate to provide prompt,

reliable, and efficient mail services to all areas of the country. USPS is
intended to be self- supporting from postal operations and is mandated to
break even over time. To change domestic postal rates, USPS must first
obtain a prior review from the independent PRC before it can finalize new
rates. In general, the complex process for USPS to change rates can take
about 18 months- 4 to 6 months for USPS to prepare its filing for a rate
case, up to 10 months for the PRC to review proposed rate increases and 4
Mailing Industry Task Force, Seizing Opportunity: The Report of the 2001
Mailing Industry Task Force, (Oct. 15, 2001). See http:// www. usps. com/
strategicdirection/ mitf. htm.

make its recommended decision, and about 2 months or longer for USPS to make
its final decisions and implement the new rates.

USPS has an 11- member Board of Governors, which is responsible for
directing the organization. 5 Board members include (1) nine presidential
appointees who serve on a part- time basis with 9- year staggered terms; (2)
the PMG, who is appointed by the governors; and (3) the deputy postmaster
general (DPMG), who is appointed by the governors and the PMG. The nine
presidential appointees are chosen to represent the public interest
generally, cannot be representatives of specific interests, are subject to
Senate confirmation, and may be removed only for cause. No more than

five of these appointees may belong to the same political party. No other
qualifications or restrictions are specified in law. USPS?s Deteriorating

Overall, USPS?s financial condition has continued to deteriorate. Although
Financial Results and USPS is mandated to break even over time, it is not
generating sufficient

revenues to cover both its operating expenses and capital needs, which
Outlook

continue to grow. From fiscal year 1995 to fiscal year 2001, USPS?s net
income has continually declined (see fig. 1). Further, since fiscal year
2000, USPS has been incurring net losses, and losses are projected for
fiscal year 2002. Since its inception, USPS has accumulated losses from
deficits in prior years, and its debt balance with the U. S. Treasury
continues to grow.

At the end of fiscal year 2001, USPS?s mail volumes declined for the second
time in 25 years and expense growth continued to outpace USPS?s revenue
growth. Following the terrorist and anthrax incidents in the fall of 2001,
USPS has experienced lower mail volumes and revenues than expected and may
incur higher expenses for safety and security. Historically, USPS has had
difficulty cutting costs related to its large workforce and infrastructure.
The continuing recession and recent terrorist incidents have negatively
affected USPS?s mail volumes; and despite USPS?s cost- cutting efforts,
revenues decreased while costs continued to rise, thus decreasing net
income. USPS?s dire financial situation, coupled with increased competition
and the availability of alternatives to the mail, threatens the viability of
USPS?s basic business model for the 21 st century.

5 According to its bylaws, the board directs the exercise of the powers of
USPS, reviews its practices and policies, and directs and controls its
expenditures. The board is to monitor the operations and performance of USPS
and establish USPS?s basic objectives, broad policies, and long- range
goals. See 39 C. F. R. 3.1.

Figure 1: Net Income/ Losses of USPS from Fiscal Years 1972 to 2002 2000

Dollars in millions 1500 1000

500 0 -500 -1000 -1500 -2000

1972 1973

1974 1975

1976 1977

1978 1979

1980 1981

1982 1983

1984 1985

1986 1987

1988 1989

1990 1991

1992 1993

1994 1995

1996 1997

1998 1999

2000 2001

2002 Fiscal years

Actual Budgeted

Source: USPS financial data. USPS reported a deficit of $1. 68 billion for
fiscal year 2001 and has budgeted a deficit of $1. 35 billion for fiscal
year 2002. However, this budget estimate was forecast before the occurrence
of the September 11 terrorist attacks and anthrax incidents. In the first
postal quarter 6 of fiscal year 2002, mail volumes were 4. 9 percent below
estimates that were included in USPS?s approved budget, and revenues were
$876 million less than

budgeted; costs were held to $355 million below budget. This resulted in net
income being $521 million less than planned. However, USPS?s deficit 6 USPS
uses a ?postal fiscal year? for management purposes that contains 52 weeks.
USPS divides each postal fiscal year into 13 accounting periods of 4 weeks
each. The first postal quarter corresponds to the first 3 accounting periods
of the postal fiscal year. All references in this report to results for the
first quarter of postal fiscal year 2002 are for the period from September
8, 2001, through November 30, 2001.

for fiscal year 2002 could be mitigated by the expected settlement and
implementation of its pending request for a rate increase.

Continuing deficits have resulted in insufficient cash to finance capital
project needs and repay debt. In addition, USPS?s debt continues to grow and
is nearing its $15 billion statutory limit. 7 USPS?s debt is budgeted to
reach $12.9 billion by the end of fiscal year 2002. Currently, USPS?s
liabilities exceed its assets. USPS?s substantial and growing liabilities
will require increasing amounts of funds in the future.

USPS?s financial outlook is likely to continue deteriorating unless it can
find ways to stimulate revenue growth and significantly cut costs. Even if
USPS raises rates and achieves positive net income in a given year, that
will not resolve its fundamental financial problems, including those
relating to

declining mail volumes, because rate increases are likely to encourage the
shift of more mail to electronic and other alternatives. Some costs, notably
for pensions and retiree health benefits, are difficult to control and are
expected to increase substantially in the coming decade. 8 Similarly, USPS

delivery costs increase annually, that is, nearly 2 million new delivery
points were added last year. To improve its financial outlook, USPS needs to
concentrate its current efforts on cutting costs, improving productivity,
and adding value to the mail as well as overhauling its basic business

model, as described in the final section of this report. The following table
summarizes the key aspects of USPS?s declining financial outlook. A further
discussion of fiscal year 2001 results is included in appendix 1.

7 USPS also has a $3 billion statutory limit on the annual increase in its
outstanding obligations, including $2 billion for capital investment and $1
billion for other operating expenses. See 39 U. S. C. sect. 2005( a).

8 See U. S. General Accounting Office, United States Postal Service:
Information on Retirement Plans, GAO- 02- 170 (Washington, D. C.: Dec. 31,
2001).

Table 1: USPS?s Declining Financial Results and Outlook Area Results in
fiscal year 2001 Outlook for fiscal year 2002

Net income  Net loss of $1. 68 billion, despite rate  USPS will be
challenged to hold its net deficit to the $1. 35 increases during the year
averaging about 6 billion amount budgeted. percent. First- Class stamp rate
rose by 1 cent

 In the first quarter, mail volumes were 4.9 percent below to 34 cents.
budget, and revenues were $876 million below budget.  Mail volumes fell 0.2
percent and revenues fell  USPS has requested a rate increase averaging 8.7
percent. below expectations mainly due to a slowing Rates are expected to
increase this summer, with the FirstClass

economy. stamp rate rising by 3 cents.  Expenses rose twice as fast as
revenues but  Large cost reductions are planned, but uncertainty remains
were slightly less than budgeted.

regarding security- and safety- related costs.  Expenses are increasing
faster than revenues despite costcutting efforts.

Cash flow  Positive cash flow from operations was $1. 3  Continued cash
flow pressures due to continuing losses.

billion.  Insufficient cash flow precipitated cuts in

capital programs and resulted in additional borrowing.

Capital program  Freeze on capital commitments was  Freeze on capital
commitments has been extended. implemented for most facility projects.

 Capital commitment is budgeted at $2.4 billion and outlays at  Capital
commitment for new projects was $1 $2. 2 billion. However, sufficient cash
may not be available to billion, down from over $3 billion annually in fund
this level of capital commitments.

the 5 previous years.  Capital outlays were $2. 9 billion, $700 million
less than budgeted. Net position  Liabilities exceeded assets by $2.3
billion. a  Negative net position is expected to worsen. Liabilities for
pensions  Pension liabilities were $32 billion, plus an

 Pension and workers? compensation liabilities are expected and workers?
anticipated $15.8 billion for future interest to grow. compensation

charges over a 30- year period. b  Workers? compensation liabilities were
$6. 0

billion. Debt  Debt increased by $2 billion to $11. 3 billion, a

 Current net income projections do not provide the capacity new record. for
debt reduction. USPS budgeted a $1. 6 billion increase in  No debt
reduction plan. total debt.  The budgeted increase would bring debt to $12.
9 billion, or $2. 1 billion under its $15 billion limit.

Accumulated prior  Prior years? losses since fiscal year 1971  Prior
years? losses are budgeted to increase to $6.6 billion. years? losses
reached $5. 4 billion. a Net liability of $2. 3 billion includes a $32
billion deferred retirement asset, which is an intangible asset

that is not an economic resource that can be applied to cover USPS?s
liabilities. b USPS also has an unrecorded obligation for retiree health
benefit premiums that it must pay under

provisions of the Omnibus Budget Reconciliation Act of 1990 (P. L. 101-
508), as discussed later in this report.

Sources: USPS data and GAO analysis.

In fiscal year 2001, overall mail volume fell 0.2 percent, which was only
the second annual decline since fiscal year 1975. Growth in mail volumes for

USPS?s largest revenue source, First- Class Mail, has slowed in recent years
(see fig. 2). In fiscal year 2001, First- Class Mail volume grew only 0.1
percent, which was the smallest growth rate in the last 25 years. First-
Class Mail is a particularly important category of mail because it generated
54 percent of USPS revenues and covered two- thirds of institutional
expenses

in fiscal year 2000. Additionally, Standard Mail volumes- that is, primarily
advertising mail- which account for most of the remaining revenues,
decreased by 0.1 percent in fiscal year 2001, the first decline in 10 years.
In contrast, Standard Mail volume on average had grown nearly 5.0 percent in
the previous 5 years. USPS officials attribute the changes in mail volumes

primarily to the slowing economy and also to the diversion by mailers of
First- Class Mail, and to a lesser degree, Standard Mail, to the Internet.

Figure 2: Trends in USPS?s Mail Volumes, Fiscal Years 1971 through 2001

120,000 Pieces in millions

100,000 80,000 60,000 40,000 20,000

0 1971 1976 1981 1986 1991 1996 2001 Fiscal years

First- Class Mail Standard Mail Other mail

Source: USPS data.

Recent declines in mail volume growth are depressing revenues at a time when
expenses are growing and cash flow is needed to fund capital expenditures
and debt repayment. Since fiscal year 1996, operating

expenses have grown faster than operating revenues and grew 4. 2 percent in
fiscal year 2001, which was twice as fast as the 2. 0- percent growth in
operating revenue (see fig. 3).

Figure 3: Growth in Operating Revenues and Expenses, Fiscal Years 1990
through 2001 12

Annual percentage change 10

8 6 4 2 0

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

Revenues Expenses

Source: USPS data.

Declining Net Income USPS?s poor financial outlook for fiscal year 2002 has
been exacerbated by the continuing recession and terrorist incidents. Mail
volume and revenues declined after September 11, while costs continued to
rise, despite costcutting efforts. As shown in table 2, during the first
quarter of fiscal year 2002, mail revenue was 5.4 percent below budget. This
shortfall resulted in $876 million revenue less than budgeted, while
expenses were $355 million

under budget. USPS achieved a net income of only $108 million, which was
$521 million less than budgeted. Typically, the first quarter is USPS?s most
profitable of the fiscal year. USPS will be challenged to meet its net
income

targets for the remainder of the year. Uncertainties surrounding USPS?s net
income targets include future mail volumes, the extent to which USPS can cut
costs, and the potential for other added costs.

Table 2: Quarter 1, Fiscal Year 2002 Budgeted Versus Actual Results

Dollars and mail volumes in millions

Percentage Variance of

change from actual from

Percentage same period last

Budgeted Actual budgeted variance

year

Revenue $16,243 $15, 367 ($ 876) (5.4%) (0.5%) Expense $15,614 $15, 259 ($
355) (2.3) 0. 4 Net income $629 $108 ($ 521) (82.8) (56.3) Mail volumes
51,029 48, 551 (2,491) (4.9) (5.5)

Note: Negative numbers are in parentheses. Source: USPS financial and mail
volume data.

Growing Expenses In its fiscal year 2002 budget, USPS projected that its
expenses would increase 3.2 percent. Budgeted expense increases included
increases in

salaries and benefits, pensions, retiree health care, and workers?
compensation, among other items. To help offset these expense increases,
USPS?s budget called for reductions of 13, 000 work years, or a 1.9- percent
reduction, to be achieved in part by reducing the number of employees in
field operations.

Compensation and benefits covering personnel- related expenses, including
interest expenses on deferred retirement liabilities, totaled approximately
$53 billion, or about 78 percent of the total expenses in fiscal year 2001.
A key component, USPS?s retirement- related expenses, have grown as a
percentage of total expenses from 3.9 percent in fiscal year 1972 to 14.4
percent in fiscal year 2001. Budgeted retirement- related expenses for
fiscal year 2002 are $10.3 billion, including an interest expense of $1. 6
billion.

USPS?s expenses for the remainder of fiscal year 2002 may be affected by
fluctuations in mail volumes. Further, USPS health care premium costs are
budgeted to increase 10 percent; however, this target may be exceeded as

general health insurance premium costs are expected to grow 13 percent,
according to an Office of Personnel Management (OPM) announcement in
September 2001. Adding to financial pressures, the recent incidents of
anthrax in the mail have heightened the need to improve mail safety and

security, which will likely entail USPS?s incurring additional unplanned
expenses.

Security and Safety Needs USPS has taken steps to increase mail security and
safety, such as Exacerbate Financial

decontaminating facilities affected by anthrax, irradiating some mail
Problems received by the federal government, and issuing protective
equipment to its employees. In the future, USPS faces the challenge of
safeguarding employees and customers from bioterrorism, chemical,
radiological, and explosive threats. On December 10, 2001, we held a
conference of representatives from Congress, USPS, and other postal
stakeholders to discuss possible options to enhance mail security and postal
operations. Our report on the conference listed numerous options for USPS
and the

mailing industry to make improvements in this area. 9 It is unclear,
however, what changes will ultimately be implemented, what the associated
costs will be, and how they will be financed- beyond the $675 million that
has been appropriated for this purpose. Revenues from Rising

USPS?s 2000 request for a rate increase was implemented in two stages- in
Postal Rates January and July 2001- due to differences between USPS and the
PRC over the disposition of the rate case. In addition, USPS requested an
aboveinflation

increase in postal rates in September 2001 that is expected to be
implemented in the summer of 2002. Table 3 shows these and other rate
actions in calendar years 2000, 2001, and 2002. These increases may not be

enough to keep USPS from asking for another rate increase later this fall.
During fiscal year 2001, USPS planned to generate an additional $900 million
dollars from rate increases that averaged about 6.0 percent. However, the
rate increases did not occur as USPS planned because the PRC recommended
rate increases averaging 4.6 percent. USPS?s governors later overrode PRC?s
recommended rates in May 2001 and approved rate increases that would
generate revenue that was close to USPS?s original request. The timing for
implementing these rate increases reduced the

amount of revenue in fiscal year 2001 by about $390 million below USPS?s
budget, according to USPS. 9 GAO- 02- 315SP.

Table 3: Recent Postal Rate Actions Date Action

January 12, 2000 USPS requested postal rate increases averaging
approximately 6.0 percent, with a 1- cent increase in the First- Class stamp
rate to 34 cents. Rates would take effect after PRC review (not to exceed 10
months) and USPS?s Board of Governors action (approval, allow under protest,
modify, or reject). November 13, 2000 The PRC issued a recommended decision
with rate increases averaging 4.6 percent with a 1- cent increase in the
First- Class stamp rate. December 4, 2000 USPS?s Board of Governors voted to
allow under protest PRC?s recommendation. It also sent the

case back to the PRC for further consideration. January 7, 2001 USPS
implemented rate increases averaging 4.6 percent. May 7, 2001 USPS?s Board
of Governors voted unanimously to modify PRC?s recommended decision, with
rate increases averaging 1. 6 percent to generate revenues similar to those
that USPS had requested in the rate case.

July 1, 2001 USPS implemented rate increases averaging 1.6 percent.
September 24, 2001 USPS requested rate increases, which it estimated would
average 8.7 percent, with a 3- cent increase in the First- Class stamp rate
to 37 cents.

Fall- Winter 2001 The Chairman of the PRC directed rate case participants to
consider the option of a negotiated settlement, considering terrorist
incidents and their potential effect on USPS. USPS, major customers, and
PRC?s Office of the Consumer Advocate, among others, are negotiating a
proposed settlement in which rates would increase no sooner than June 30,
2002, and include a 3- cent increase in the price of a First- Class stamp.

Sources: USPS and PRC data.

USPS filed for another rate increase in September 2001, which USPS estimated
would increase rates an overall average of 8.7 percent, as shown in table 3,
and asked the PRC to give this request expedited consideration. Following
the terrorist attacks, the chairman of the PRC suggested that the

parties in the rate case agree to a settlement, so that the PRC could issue
a recommended decision as soon as possible. Recently, the parties entered
into negotiations and if the proposed agreement is implemented as expected
in the summer of 2002, the price of a First- Class stamp would rise to 37
cents and revenues, according to USPS, would increase by about $1 billion in
fiscal year 2002.

Since postal reorganization was implemented in 1971, rates for the
FirstClass stamp have generally tracked the rate of inflation. More
recently, however, rates for certain categories of mail have been increasing
at a rate greater than inflation. Some of these categories, such as Priority
Mail and Standard Mail, are more price- sensitive than First- Class Mail
because of the availability of other alternatives, such as FedEx, UPS,
newspaper advertising, and other forms of advertising. Hence, rate increases
affect the volumes and competitiveness of mail, particularly the categories
that

are the most price- sensitive. Mailers have been critical of the growing
frequency and size of rate increases and may look for other communication
and delivery alternatives.

Although it is difficult to determine the impact of specific factors, recent
declines in mail volume have generally been attributed to rate increases;
the continuing recession; anthrax incidents; and increased competition,
among other things. Thus, in the first quarter of fiscal year 2002, First-
Class Mail, Standard Mail, and Priority Mail volumes fell, compared with the

same quarter last fiscal year, by 2 percent, 9 percent, and 17 percent
respectively. For the remainder of fiscal year 2002, USPS will be challenged
to meet budgeted revenue targets on the basis of volume and revenue
forecasts that were prepared before the terrorist incidents and when the
economic outlook was more favorable. However, USPS is anticipating
additional revenues that were not included in the original budget from a
rate increase that may be implemented in the summer, rather than in the
fall, of 2002. Another potential source of funding would be any

additional funds appropriated by Congress. Revenues from Additional In the
fall of 2001, USPS asked Congress to appropriate about $5 billion to
Appropriations

cover costs related to the terrorist and anthrax- related incidents as well
as their expected negative effect on revenues. USPS subsequently asked for
$1. 3 billion to cover expenditures related to these incidents through June
2002. To date, Congress has appropriated $675 million to cover these costs.
10 This is the first appropriation since fiscal year 1982 for purposes other
than revenue forgone on free and reduced rate mail. 11 In addition, USPS
asked for nearly $1 billion in its fiscal year 2003 appropriation

request, representing the total amount of revenue forgone for free and
reduced rate mail between 1991 and 1998, for which USPS had not yet received
appropriations. This request would be in lieu of the current payment
schedule established by a 1993 law for $29 million annual

10 USPS was allocated $175 million out of emergency supplemental
appropriations for fiscal year 2001. These funds are to be used in part to
purchase mail sanitization equipment, for employee safety measures, and for
other expenses related to the anthrax attacks. An

additional emergency supplemental appropriation of $500 million was provided
in fiscal year 2002 for emergency expenses to buy equipment for sanitizing
and screening mail and to protect postal employees and customers from
biohazardous material.

11

USPS receives annual appropriations for revenue forgone, providing free and
reduced rate mail for the blind, and providing overseas voting materials for
U. S. elections. Congress appropriated about $96 million to USPS for these
purposes for fiscal year 2001.

appropriations over 42 years. Also, it is unclear whether USPS will ask for
further appropriations to cover security- related expenses in the future.
Cash- Flow Difficulties and

Historically, cash flow from USPS?s operations generally has not been
Increasing Debt Result in

sufficient to cover the capital outlays it has needed to maintain, expand,
Underfunded Capital Needs

and modernize its physical infrastructure. In each year of this period, USPS
capital outlays have exceeded its capital depreciation, and estimated
depreciation has served to help cover future capital outlays when making
rate case requests. Currently, cash flow from USPS operations is

insufficient to fully fund its operational and capital investment needs and
repay its debts. Thus, USPS has resorted to using debt to finance its
capital outlays. USPS had budgeted its debt to reach $12.9 billion by the
end of fiscal year 2002, which would be $2.1 billion below its $15 billion
statutory

debt limit. If higher postal rates are implemented this summer, cash flow
should improve in the short term. However, in the long term, simply raising
rates alone is not the answer. Such increases are likely to help facilitate
the shift of mail to electronic and other delivery alternatives.

To conserve cash in fiscal year 2002, USPS?s budget has extended its freeze
on capital commitments for most facility projects and has cut back its
overall capital expenditures. 12 USPS has reduced its capital commitments to
a level below that of recent years. USPS capital commitments, which

had exceeded $3 billion from fiscal years 1997 through 2000, were reduced
from $3.6 billion to $1. 0 billion in fiscal year 2001 and are budgeted at
$2. 4 billion in fiscal year 2002. Capital outlays also have experienced a
downward trend, although to a lesser extent. Recent reductions in capital
commitments and outlays are shown in table 4.

12

Only facility projects related to providing a safe working environment and
emergency purposes are to be permitted funding approval.

Table 4: USPS?s Cash Flows and Capital Investments in Fiscal Years 2000
through 2002

Dollars in billions

Fiscal year 2000 2001 2002 Approved

Approved Approved Categories budget Actual budget Actual budget

Cash flow from $1. 7 $1.2 $1.8 $1. 3 $0. 2 operations Capital cash 3.6 3. 3
3.5 2. 9 2. 2

outlays Capital 4.0 3. 0 3.6 1. 0 2. 4 expenditure commitments

Source: USPS financial data.

USPS has a growing backlog of facility projects and is unable to fully
finance needed improvements to its infrastructure. The capital freeze on
most facility projects and limited funding of other capital projects is
unsustainable, given USPS?s need to maintain its massive and growing

infrastructure and modernize its information technology. Limitations on
capital investment may have the following detrimental effects: 
deterioration of USPS?s existing physical infrastructure;  operational
impediments from delays in repairing deteriorating facilities or expanding
to cover new delivery points;

 higher future capital project costs;  deferred efficiency gains that
could limit cost savings and add pressure to increase postal rates;

 higher costs and rates that could make electronic and other delivery
alternatives more attractive; and

 products becoming less competitive as a result of delays in implementing
improvements, such as an information platform to enable real- time data on
the status of mailings.

Long- Term Need for Funds USPS is likely to continue experiencing difficulty
generating sufficient funds to cover its increasing funding needs (see fig.
4). Funds are needed for (1) current operating expenditures; (2) capital
projects; and (3) paying liabilities and servicing its debt. However,
expense growth has outpaced revenue growth, capital projects have been
significantly curtailed, and USPS?s liabilities have exceeded its assets by
$2.3 billion, as of September 30, 2001. Included in this calculation of the
$2.3 billion is a deferred retirement asset of $32 billion, which is an
intangible asset that is not an economic resource that USPS can apply to
cover its liabilities. If this $32 billion deferred retirement asset were to
be excluded from total assets, USPS?s liabilities would exceed its assets by
$34.3 billion as of September 30, 2001.

Further, liabilities have been growing at an increasing rate and include $32
billion in retirement liabilities, $11.3 billion in outstanding debt, and a
$6.0 billion liability for workers? compensation claims as of September 30,
2001. These liabilities do not include future anticipated interest expenses,
such

as the $15.8 billion interest expense on the $32 billion retirement
liability, or a large obligation for retiree health insurance premiums,
which USPS is required by law to pay. 13 The $32 billion retirement
liability continues to increase because USPS?s annual payments, set by OPM
under statutory requirements, have been less than the annual increases in
future liabilities. These annual increases are due to increases in employee
compensation and mandated retiree cost- of- living adjustments (COLA).

13 USPS financial statements do not record or disclose an obligation for
retiree health benefits, because USPS reports that it is part of a
multiemployer plan and thus is not required under accounting standards to
include it in its balance sheet. However, the Omnibus Budget Reconciliation
Act of 1990 (P. L. 101- 508) requires USPS to pay a share of health
insurance premiums for all employees, and their survivors, who participate
in the

Federal Employees Health Benefits Program and who retire on or after July 1,
1971. A USPS- sponsored study estimated in 1991 that this obligation was
roughly $45 billion. More recent estimates on the amount of this obligation
are not available.

Figure 4: USPS?s Need for Funds Outweighs Its Sources of Funds Source: USPS
financial data.

USPS also had an accumulated deficit of $5. 4 billion as of September 30,
2001. The accumulated deficit represents the amount by which annual

.

deficits have exceeded annual positive net income since USPS?s inception
Deficits arise when expenses exceed revenues. When expenses require payment
and there is insufficient cash flow from operations, USPS may borrow, thus
increasing its liabilities and the need for funds at some future point to
pay the liabilities. A mechanism known as the Prior Years? Losses

Recovery (PYLR) 14 permits USPS to include in its rate request an amount
above its expected costs to make up for past operating losses over a future
period of time. Starting with the 1980 rate case, USPS has submitted, and
the PRC has recommended, a provision for the recovery of prior years? losses
over a 9- year amortization period. By decreasing the amortization

period to recoup losses- for example, to the 7- year amortization period
that was used in the two rate cases before 1980- USPS could implement larger
rate increases in an attempt to generate net income to cover its accumulated
deficits more rapidly.

USPS continues to depend on borrowing and has not indicated how it plans to
reduce its debt. USPS has not generated sufficient cash flow from operations
to cover capital outlays in 11 of the last 15 fiscal years. USPS?s
outstanding debt balance has grown steadily since fiscal year 1997, nearly
doubling from $5.9 billion to $11. 3 billion at the end of fiscal year 2001
(see

fig. 5). This trend of increasing debt levels essentially shifts the burden
of reducing the debt from current to future ratepayers and creates pressure
for USPS to raise postal rates in the future. Although this debt is not
guaranteed by the government, 15 if future ratepayers are unable to reduce

this debt, Congress could determine that the government should step in to
pay some or all of these obligations. Simply borrowing to keep USPS
operating is not acceptable as a long- term option and is contrary to USPS?s
mandate to be self- supporting.

14 See USPS Board of Governors Resolution 95- 9. PYLR is a means for USPS to
repay its accumulated deficit balance and thereby restore positive equity.
15 By statute (39 U. S. C. sect. 2006( c)), USPS can request the secretary of
the Treasury to have the U. S. government guarantee its obligations; but,
according to a USPS official, USPS has never made such a request.

Figure 5: Trends in USPS?s Debt, Fiscal Years 1972 through 2002

Source: USPS financial data.

Options for Improving Key options that USPS could consider to improve its
financial condition Financial Condition include increasing revenues and
cutting costs. USPS needs sufficient revenues so that it can cover operating
costs and improve net income,

address the growing backlog of capital projects, expand to meet new delivery
point needs, continue modernization efforts, and reduce its debt. On the
revenue side, USPS has two basic options for increasing revenues: (1)
generate additional revenues from increasing volumes, improving existing
products, and developing new products and services and (2) increase rates,
possibly by increasing the rate of recovery of prior years? losses in rate
cases and/ or increasing the amount for capital purposes from

depreciation to a higher figure. 16 On the expense side, USPS can reduce 16
The law includes a provision for sinking funds or other retirements of
obligations to the extent that such provision exceeds applicable
depreciation charges. See 39 U. S. C. sect. 3621. This provision has never been
used.

expenses by cutting costs and improving productivity. Options related to
cutting costs and improving productivity are further discussed in the next
section of this report. As for increasing revenues from new products and
services, in recent years USPS has generally had difficulty generating
positive net revenues. For example, in fiscal year 2001, USPS budgeted $104
million for revenues from its e- commerce initiatives, but reported actual
revenues of only about $2 million in this area. In addition, increasing
rates has traditionally been the primary source of new revenue, particularly
from the largest mail categories- First- Class Mail and Standard Mail. In
the

short term, USPS can realize large net revenues by increasing postal rates,
especially for less price sensitive categories, such as First- Class Mail.
However, in the long term, increasing rates may have diminishing
practicality because rate increases affect USPS?s competitiveness by
increasing incentives for mailers to find other alternatives to the mail.
Therefore, it is important for USPS to undertake transformation efforts to

operate more efficiently in order to hold down rate increases over the long
term. On the financing side, USPS has increasingly relied on additional
borrowing to fund its capital expenditures. A major constraint is that USPS
may soon reach its statutory borrowing limit. However, raising the debt
limit would require congressional action. In the short term, USPS may need
to rely on additional borrowing if it is to maintain its capital program,
but increasing debt in the long term would not be prudent.

Another option for obtaining additional funding would be to request
additional appropriations from Congress. Such a request would appear counter
to Congress?s intent of establishing a self- financing independent entity in
1970 when it reorganized the former Post Office Department to the current U.
S. Postal Service. Transformation A comprehensive transformation of the
Postal Service is needed to ensure

its financial viability and fulfill its mission in the 21 st century in the
dynamic Required to Make

communications and delivery sectors. Legal requirements and practical USPS
Financially

constraints have contributed to continuing deficits, rate increases, rising
Viable costs, and growing debt. USPS has attempted to reduce the size of
rate increases by cutting costs and increasing its productivity, but it has
been

able to achieve only limited progress. More progress is urgently needed, and
a range of options for making improvements is available within the current
structure. However, absent a fundamental reassessment of USPS?s statutory
framework, starting with its mission and role, USPS will continue

to be constrained in its transformation efforts. For example, USPS?s
statutory framework, which includes a monopoly on letter mail, a breakeven
mandate, and a cost- of- service rate- setting structure, provides limited
incentives for USPS to cut or restrain costs or to be innovative.
Furthermore, USPS faces legal and practical constraints related to
restructuring its infrastructure, including closing or consolidating postal
facilities and realigning its workforce as its operations change. Other

structural issues, such as USPS?s governance structure, have been raised-
that is, what type of governing board is appropriate for USPS given the
complex mission and role of this $70 billion entity. USPS?s basic business
model, which assumes that rising mail volume will help cover rising costs

and mitigate rate increases, is increasingly problematic as mail volume
either stagnates or further declines while costs continue to rise.

A comprehensive transformation is urgently needed, starting with actions
that USPS can take under its current authority. Given USPS?s dire financial
situation, interim legislative changes could serve a valuable purpose.
However, action by Congress on comprehensive transformation issues will be
critical to ensuring financial viability. Leadership- starting with USPS-

will be critical to achieving the necessary consensus for transformation
between Congress and the divided stakeholder community.

Need for Transformation The statutory framework under which USPS operates,
established under the Postal Reorganization Act more than 30 years ago, is
increasingly problematic and is long overdue for change. The act was enacted
when USPS faced little direct competition and could rely on increasing
rates, coupled with growing mail volumes, to cover rising costs. Today, USPS
must operate in a vastly different environment. The World Wide Web, which
came into widespread use in the 1990s, along with cell phones have become
essential elements of communications and commerce. E- mail use

has exploded, more and more documents are being sent electronically, and a
growing share of payments has also shifted from mail to electronic
alternatives. These changes continue, mail volume has started to decline,
and the prospect is for future declines over the long run. In contrast,
USPS?s business model, developed pursuant to the Postal Reorganization Act,
has remained virtually unchanged for the past 30 years.

Transformation Efforts Are Postal transformation efforts are limited by a
combination of legal

Limited by Legal requirements and related practical constraints (see table
5). Requirements and Practical Constraints

Table 5: Key USPS Legal Requirements and Practical Constraints That Limit
Transformation Efforts Legal requirements Practical constraints Universal
postal service

 USPS shall have as its basic function the obligation to provide

 Strong stakeholder opposition to cuts in the frequency or quality postal
services to bind the nation together through the personal,

of postal services. educational, literary, and business correspondence of
the people.

 Self- imposed delivery standards (e. g., delivery of local FirstClass

 USPS shall provide prompt, reliable, and efficient services to Mail
overnight and long- distance First- Class Mail in 2- 3 patrons in all areas,
render postal services to all communities, and

days). serve as nearly as practicable the entire U. S. population.

 Current availability of more than 300, 000 collection boxes and

 USPS shall provide a maximum degree of effective and regular collection of
outgoing mail at post offices.

postal services to rural areas, communities, and small towns where

 Current practice of delivering residential mail to individual post offices
are not self- sustaining.

mailboxes, including those attached to the home, rather than

 At least one category of mail must be delivered at a uniform rate
requiring more efficient distribution methods such as curbside or throughout
the United States and its territories and possessions. cluster boxes.

 The PRC must issue an advisory opinion prior to changes in the nature of
postal services that will generally affect service on a nationwide or
substantially nationwide basis.

 Those who believe they are not receiving postal services in accordance
with the policies of Title 39 of the U. S. Code may lodge a complaint with
the PRC, which, if it found the complaint to be justified, would render a
recommended decision or public report on the matter.

 For many years, USPS appropriations have been contingent on 6day delivery
and rural delivery of mail at not less than the 1983 level.

Postal monopoly

 Only USPS can deliver letter mail, with ?letters? being defined by 
USPS?s monopoly helps it maintain universal postal service, USPS in
regulations. USPS has suspended the letter mail including uniform frequency
of delivery on every route and monopoly in its regulations for extremely
urgent letters and uniform, reasonable rates. outbound international mail.

 USPS?s monopoly prevents direct competition, which could

 Only USPS can put mail in recipients? mailboxes, with specific create
additional incentives for innovation and competitive prices restrictions
detailed in USPS regulations. and service quality.

Financial

 There is a $15- billion limit on total USPS debt; and annual  If USPS
were to request investing or borrowing outside the increases are limited to
$3 billion in USPS obligations, including $2 Treasury, obtaining Treasury?s
approval may be difficult, because billion for capital improvements and $1
billion to defray operating historically Treasury has favored having USPS
conduct its expenses.

financing through the Treasury.

 USPS must invest and borrow through the U. S. Treasury or obtain Treasury
approval to do otherwise.

(Continued From Previous Page)

Legal requirements Practical constraints Retail facilities

 Prohibition on closing small post offices solely for operating at a

 USPS?s self- imposed moratorium on closing post offices. deficit.

 Strong opposition to post office closings, consolidations, and

 Statutory process and criteria for post office closings, including
relocations from the local community, affected members of

appellate review by the PRC. Congress, and others opposed to closing post
offices and/ or

 Processes for closing, consolidating, and relocating post offices
relocating post offices away from downtown areas.

further prescribed in USPS regulations.  For many years, USPS has been
prohibited from using its annual appropriations from Congress to consolidate
or close small rural or other small post offices in the fiscal year covered
by the act.

Mail- processing facilities

 Requirements for closing, consolidating, or relocating post offices 
Stakeholder opposition that may include affected workers, local specified in
USPS regulations may be applicable to a mailprocessing communities, mailers,
and members of Congress. facility that includes a post office.

 Lack of funds to finance the up- front costs of consolidations.

Human capital

 The federal pay cap is made applicable to postal pay.

 Adversarial labor- management relations.

 Postal compensation and benefits for all officers and employees  Long-
standing work rules in agreements with USPS?s four major are required to be
comparable to those of workers in the private unions could complicate
realignment efforts, such as work rules sector.

relating to the operational full-/ part- time ratio dating from the

 Collective bargaining is required for unionized employees, 1970s. In 1991,
the allowable full-/ part- time ratio changed from including mediation
followed by binding arbitration by a third- party 90/ 10 to 80/ 20 for
clerks and 88/ 12 for carriers. In 1984, USPS panel when the parties are
unable to agree.

agreed to double- time above 60 hours per week and other

 USPS is required to provide a program of consultation with overtime
procedures. management and supervisory associations, and such  Another area
where the work rules may vary by union contract organizations are entitled
to participate directly in the planning and involves no- layoff provisions.
In the most recent contract with development of compensation and benefit
programs. USPS?s largest union, the no- layoff provision was modified to

 USPS must establish a grievance process. include all of its workers hired
after November 2000.

 A huge number and backlog of grievances is costly and contributes to
workplace tension.

Rate- setting and regulatory structure

 Postal rates and fees shall provide sufficient revenues so that  In
practice, postal revenues have not covered costs, resulting in USPS?s total
estimated income and appropriations will equal as the accumulation of prior
years? losses and debt that is nearly as practicable its total estimated
costs- a requirement approaching the statutory limit. interpreted to mean
that USPS should ?break- even? over time. On  Persistent disagreements
between USPS and the PRC on the basis of law, regulation, and precedent,
USPS costs include pricing matters and the quality of data used for rate-
setting operating costs, depreciation, a portion of prior years? losses, and

purposes. a contingency. Each mail category must cover its costs, a  USPS
can shield proprietary information from disclosure, the requirement that has
been applied at the subclass level. This costbased PRC has no subpoena
power, and the PRC cannot compel

system is referred to as a cost- of- service regulation. USPS to conduct
special studies for rate- setting purposes.

 An independent body, the PRC, must review USPS proposals to change
domestic postal rates and fees.

(Continued From Previous Page)

Legal requirements Practical constraints

 The PRC is required to provide due process to interested parties and has
up to 10 months to issue a recommended decision. Rate cases follow specific
procedures set by statute and PRC regulations. Rate case precedents also
help define what data must be submitted.

 USPS?s governors may approve, allow under protest, reject, or modify PRC?s
decision. Modification can only be made by a unanimous vote when the
governors find it is in accord with the record and applicable laws and if
recommended rates are not consistent with the break- even provision listed
above.  In recommending rates, the PRC must apply nine statutory criteria,
such as the establishment and maintenance of a fair and equitable schedule.
Rate case precedents also help guide the establishment of rates, including
their markups over attributable costs.

 Reduced rates must be provided for nonprofit groups, classroom mail and
library mail; free mail must be provided to the blind, and overseas voting
materials must be delivered free.

 Except as authorized by law (e. g., see above bullet), USPS shall not make
undue or unreasonable discrimination or preference among users- a provision
referred to as the nondiscrimination clause.

 The PRC must review proposed changes to the mail classification system and
issue a recommended decision. This authority, which covers proposed new
domestic postal products and services to be offered on a permanent or
experimental basis, is further detailed in PRC regulations.

 The PRC is authorized to consider rate complaints and issue a recommended
decision.

 USPS must report annually the costs, revenues, and volumes of
international mail to the PRC, which then issues a report to Congress.

Sources: U. S. Code, Code of Federal Regulations, and GAO analysis.

Limited Progress Made to USPS has had long- standing difficulty in its
efforts to increase postal Increase Productivity

productivity. In general, USPS has high fixed costs, and it has been
difficult for it to cut costs quickly when expected mail volumes and
revenues fail to materialize. To achieve real savings and productivity
improvement, USPS would need to decrease unneeded capacity resulting from
efficiency gains and increase capacity only where such an increase is
needed. USPS data

show that its productivity has increased only 11.5 percent over the past 3
decades (see fig. 6), and these limited productivity gains have resulted in
postal costs and rates being higher than they otherwise would have been.
Postal productivity decreased 0.7 percent from fiscal years 1990 to 1999,
despite billions of dollars invested in automation and information
technology over that period. USPS made renewed progress in improving

productivity in fiscal years 2000 and 2001, a period when its productivity
rose 3. 6 percent. However, these gains may be difficult to sustain. USPS
has budgeted for a productivity increase of 1.1 percent in fiscal year 2002,
but its productivity decreased at a 1. 1- percent annualized rate in the
first quarter, primarily due to mail volume declines following recent
terrorist incidents.

Figure 6: Cumulative Postal Productivity Growth from Fiscal Years 1971
through 2001 14

Cumulative percentage change 12 10

8 6

Up 11.5% 4

2 0

1971 1976 1981 1986 1991 1996 2001 Fiscal years

Source: USPS data.

Stakeholders have offered a variety of explanations for why USPS
productivity has not increased more substantially over the years. These
explanations include factors such as poor management; continuing waste and
inefficiency; legal requirements and practical constraints; increasing
compensation costs; adversarial labor- management relations; and
insufficient incentives for USPS, a government entity with a break- even
requirement, a statutory monopoly, and cost- of- service regulation, to
improve its financial performance. Although it is difficult to estimate the

effects, if any, of these factors, it is worth noting that over the past
decade, USPS has not been able to take full advantage of its capital
investments through increases in labor productivity. Numerous reports,
including some

by us, have noted inefficiencies in the postal system and difficulties that
USPS has had in realizing opportunities for savings. For example, in 1998,
we reported that USPS had achieved savings in carrier work hours through
automated rather than manual sorting of letters into the exact order that
carriers deliver them, but these savings had fallen short of USPS goals, in

part due to labor- management issues. 17 A related problem has been USPS?s
difficulty in tracking specific costs and the results of various cost-
saving initiatives. In March 2000, USPS highlighted its intention to save $1
billion from specific productivity and cost- saving initiatives in
operations, administration, purchasing, and transportation. Although USPS
has estimated that it saved $900 million in fiscal year 2001 from increasing
its overall productivity, it did not report-

and may not be able to produce reliable data on- specific savings from its
productivity initiatives. USPS plans to implement an activity- based costing
system in mail- processing facilities in the near future that would track
specific costs that could be compared across different locations. Such

information would help USPS managers plan, prioritize, and track the results
of future cost- saving efforts. Improvements to Postal Although efforts may
be limited by legal requirements and practical Operations Are Urgently
constraints, USPS can do more in the short term under its current authority
Needed

to drive out costs and thereby increase productivity. In the longer term,
more fundamental structural changes will be needed before USPS can achieve
significant cost savings. In addition to operational efficiency, measures to
enhance mail safety and security also need to be considered. Key areas where
USPS is moving to take action under current law include the following:

17 U. S. General Accounting Office, U. S. Postal Service: Progress Made in
Implementing Automated Letter Sequencing, but Some Issues Remain, GAO/ GGD-
98- 73 (Washington, D. C.: Apr. 17, 1998).

 Maximize efficiency of current mail- processing facilities:

Productivity varies greatly across mail- processing facilities. Implementing
best practices throughout the organization would give USPS the opportunity
to increase the productivity of its lower

performing plants. Consistent with this idea, a recent review identified
instances of wide variation in equipment utilization and inconsistent
execution of strategies for effective utilization. 18 The 2001 Mailing
Industry Task Force recommended that the mailing industry and USPS
collaborate to standardize mail- processing functions to increase
efficiency. 19  Consolidate mail- processing facilities: Although USPS
reports that it has recently studied whether to consolidate postal
facilities, it has not released the results of the study, and no
consolidations have yet been

made. USPS could develop a plan that outlines its current and expected
future needs for mail- processing facilities and specify changes to address
these needs.  Continue automation: USPS recognizes that it is further along
in

automating the processing of letter mail than it is in automating flat mail,
such as periodicals and catalogs, and it is currently deploying more
efficient flat sorting machines. Its vision for mail processing and delivery
is to replace its current process of multiple bundles for letters and flats
with a single bundle for each delivery point. USPS has developed a plan for
achieving much of its vision that calls for implementing new and enhanced
automation over much of the next decade.

 Deploy the information platform: USPS is in the process of deploying an
information platform to provide reliable, real- time information on
mailings; data on processing and delivery problems; and improved workforce
management. However, completion of the platform is expected to take years,
and mailers have urged USPS to make more rapid progress.

18 Report of the Periodicals Operations Review Team, sponsored by the
American Business Press, the Magazine Publishers of America, and USPS (Mar.
1999). 19 Seizing Opportunity: The Report of the 2001 Mailing Industry Task
Force, led by chief executives of 11 companies and the DPMG, (Oct. 15,
2001).

 Explore mail redesign: USPS is exploring redesign of the mail
classification system and rate structure, also called ?mail redesign,? to
change the postal pricing system to provide additional incentives for
efficiency. The concept is to create more homogeneous groups of mail and
increase emphasis on cost- efficient preparation.  Work with the unions to
improve staffing options: Better alignment of

the workforce with operational needs, such as changes to work rules and job
assignments, may be possible within the scope of existing national
contracts. For example, one field office has reported working

with local unions to amend the work rules to allow greater flexibility in
addressing staffing issues at specific locations.  Continue to work with
mailer groups and other stakeholders to identify additional opportunities
for cutting costs and improving productivity: USPS has been working closely
with mailer groups and other stakeholders to identify additional
opportunities for cutting costs and improving productivity. That continuing
work has yielded many recommendations and improvements. For example, a
recent review made recommendations for both USPS and flats mailers, such as
adoption of more efficient USPS processes and improved packaging to

reduce costly bundle breakage. In addition, USPS recently reported that it
plans to work collaboratively with the PRC and interested customers to
explore various alternatives relating to negotiated service agreements- in
which certain mailers would perform additional worksharing activities and
receive larger discounts.  Improve workforce planning: USPS could broaden
its workforce planning from the current focus on the next 3 years to a
longer horizon. Long- term planning could address changes in automation;
mail volume

and mix; and security and safety issues, among other things. Such planning
could review needs related to the appropriate number, skills, deployment,
and part- time or full- time status of employees. Long- term planning could
also address succession and continuity issues as most USPS managers and half
of the workforce reaches retirement eligibility over the next decade.

 Examine alternatives for providing retail services: USPS is exploring ways
to expand the use of various alternatives to sell stamps and mail packages.
About 80 percent of customer visits to post offices are for the

purpose of mailing letters, purchasing stamps, or a combination of the two
activities. According to USPS, it costs 22 cents per $1 of revenue to

sell stamps at a post office counter, compared with 14 cents from vending
machines; it costs 1. 3 cents through outlets such as grocery stores and
ATMs. USPS has also tested a self- service machine: customers weigh parcels,
purchase postage, pay by credit card, and place the parcels in a secure
container for delivery. Additional opportunities may exist for USPS to
decrease costs and provide enhanced service by partnering with and using
other organizations? facilities. Likewise, USPS may also be able to generate
revenue by

partnering with other organizations that could use available space in postal
facilities to provide compatible services.  Review access to postal
services: Another area for potential savings

relates to the accessibility of receptacles that customers use to send and
receive mail. USPS has options for savings by altering the mix of customer
receptacles used to receive mail (e. g., cluster boxes and/ or curbside
mailboxes versus mailboxes attached to residences). In addition, after the
incidents of anthrax in the mail, there has been much

discussion regarding whether USPS should enhance safety by reducing the
number of street side collection boxes and/ or changing their design to
provide a narrower slot for the mail.

USPS Needs to USPS can make some improvements within the current structure,
but these Reassess Structural improvements will not be enough for long- term
sustainability. Less than a

year after we placed USPS?s transformation efforts and long- term outlook
Issues and Take Action

on our High- Risk list, USPS?s financial situation has deteriorated, while
structural issues and limitations remain unresolved. USPS?s ability to
fulfill its mission by providing the current level of universal postal
service at reasonable rates on a self- supporting basis is at increasing
risk.

USPS?s 30- year- old system of postal laws is increasingly problematic for
USPS and its competitors and is overdue for change to ensure that USPS?s
basic business model is viable. Three key themes to address in comprehensive
transformation include reassessing (1) USPS?s statutory framework, beginning
with its mission and role in the 21 st century; (2) insufficient incentives
for USPS, a governmental entity with a break- even mandate, a statutory
monopoly on letter mail, and cost- of- service regulation; and (3) the legal
requirements and practical constraints that limit transformation efforts,
including those relating to USPS?s infrastructure and workforce. Other
structural issues, such as USPS?s governance structure, have been raised-
that is, what type of governing

board is appropriate for USPS, given the complex mission and role of this
$70 billion entity. Postal Service?s Mission and

The starting point for postal transformation is a reassessment of USPS?s
Role

mission and role. Vast changes in the communications and delivery sectors
over the past 30 years- which are continuing at a rapid pace- as well as
USPS?s growing financial difficulties, provide an impetus for reconsidering

what universal postal service will be needed for the 21 st century. Key
issues include what postal services should be provided on a universal basis
to meet customer needs, how these services should be provided, and how they
should be financed- by ratepayers or taxpayers. A related issue is what
quality of postal service should be maintained, such as the frequency and
speed of mail delivery and the accessibility and scope of retail postal
services, as well as whether certain aspects of universal postal service
should be allowed to vary in urban and rural areas. Depending on the
resolution of these fundamental issues, Congress and the stakeholder
community can better approach what legal structure would be best suited to
enable USPS to fulfill its mission in the 21 st century, including what
incentives, accountability, and constraints would be appropriate.

Other issues related to USPS?s mission and role include the following: 
Competition: Should USPS be allowed to compete with the private

sector and, if so, on what terms? Which, if any, of the many federal laws,
regulations, and taxes that apply to the private sector should apply to
USPS? If USPS is allowed to compete, should it retain its current law

enforcement powers and authority to issue regulations (e. g., regulations
defining the scope of the postal monopoly)? In part because of different
taxation and legal treatment, some stakeholders contend that USPS should
limit its activities to providing hard- copy delivery services and, when it
competes, it should do so on the same terms as its competitors. USPS and
some other stakeholders counter that USPS is at a competitive disadvantage
due to its current universal postal service

mandate and other laws and regulations, and that USPS should have increased
flexibility.  Public/ Private provision of postal services: Should core
postal functions be discharged by a public entity, private companies, or a
combination of both? For example, should USPS remain a government entity or
should it be privatized? Should USPS perform some functions in partnership
with the private sector, allow the private sector to

perform other functions through ?worksharing discounts,? or contract out
some of its functions? USPS gives worksharing discounts that are based on
its cost avoidance, such as accepting mail that is bar coded and/ or drop-
shipped to the local postal facility, which creates the opportunity for the
least- cost provider to perform these activities. Some postal functions have
long been provided by a combination of public and private providers, such as
mail transportation, processing, retail services, and delivery. USPS has
long contracted for mail transportation and currently has a multibillion-
dollar contract with FedEx for longdistance

transportation of Priority Mail, Express Mail, and First- Class Mail. In
addition, contract stations provide postal retail services, and some
transportation contractors deliver mail along their routes.  Governance:
What type of governing board is appropriate given USPS?s mission and role?
How should members be selected, paid, and held

accountable? What should the role and functions of the governing board be,
and is its current part- time status appropriate? Is the present governance
structure best suited to ensuring individuals that are qualified to direct a
$70 billion entity? Should the framework follow recent changes in the
private sector to (1) develop better- defined criteria for board membership
and (2) recognize that various roles on the board may require various
backgrounds and skills? These questions are relevant because USPS is
intended to function in a businesslike manner.  Accountability and
transparency: Should USPS be held more directly

accountable for its performance and, if so, to what extent, to whom, and
with what mechanisms? Specifically, how should USPS?s Board of Governors be
held accountable? What oversight is needed to protect the public interest,
including the interest of customers with few or no alternatives to the mail?
How should the PRC and/ or other pertinent

authorities exercise oversight regarding pricing; competition; and antitrust
issues, among other areas? What recourse should customers and competitors
have to lodge complaints? What should be the role of Congress and other
federal agencies in providing accountability and

oversight? What information should USPS be required to provide Congress and
the public on its performance, including in areas such as financial
performance, productivity, and mail delivery? Transparency

and accountability are fundamental principles to ensuring public confidence
in USPS.

Need to Reassess Legal The current legal framework, which was designed to
help USPS fulfill Framework and Incentives universal service mandates, does
not provide the same types of incentives that apply to the private sector.
USPS?s break- even mandate removes the profit motive, and the rate- setting
structure allows USPS to cover rising costs by increasing rates. The postal
monopoly shields USPS?s core

business of letter mail from direct competition, which could provide
additional incentives for innovation, efficiency, and competitive prices and
quality of service. As part of their postal transformation efforts, a number
of foreign countries have made changes to their legal frameworks,

including reducing the postal monopoly, that have increased incentives.
Although it is difficult to make direct comparisons, their experiences are
relevant to consideration of structural change in USPS. Specific structural
issues relating to incentives that need to be addressed include the
following:  The postal monopoly: Should the postal monopoly be narrowed or

eliminated? Congress created the statutory monopoly on letter mail to enable
the postal system to fulfill its universal service mandates. USPS has
further defined its letter mail monopoly through regulations. Narrowing or
eliminating the monopoly could provide incentives for efficiency and
innovation for USPS and its competitors and could lead to greater choices
for consumers. However, such a step could allow

competition for profitable segments of USPS?s market. Some believe USPS
would have difficulty competing under these circumstances, particularly if
it was required to continue the current level of universal

service with 6- day delivery of mail to every address and delivery of
single- piece First- Class Mail at uniform rates. Others disagree, pointing
to USPS?s advantages in scope and scale. In this regard, a number of foreign
countries have narrowed their postal monopolies in recent years and further
steps in this direction are being considered.  Break- even mandate: Can
USPS remain self- supporting under its

mandate to break even over time? If not, should USPS have a for- profit
business model? USPS?s break- even mandate was established to foster
reasonable rates. Removal of the break- even mandate could create a long-
term financial incentive for cost savings that also could be passed along to
ratepayers. However, removing the break- even mandate could provide an
incentive for reducing the quality and scope of some costly

services. For this reason, some other countries whose postal administrations
operate on a for- profit basis have imposed specific minimum requirements
for universal postal service and added regulatory oversight of the quality
of postal service.

 Rate- setting structure: Should the current rate- setting process be
retained, modified, or replaced with a different system? Are changes to the
current rate- setting structure needed to provide sufficient funds for

USPS?s operating and capital needs and to repay debt? Should USPS rate
setting be subject to prior review? What should be the respective
authorities of USPS and any independent regulator, including the authority
to compel provision of information and final decision- making authority over
what rates are set? Should legal requirements that affect rates- including
specific cost- coverage requirements, the

nondiscrimination clause, and preferred rates for certain groups- be
retained, changed, or eliminated? The rate- setting process was created to
ensure prior independent review of domestic postal rates and fees that
includes due process for all interested parties in hearings on the

record. This process has led to proceedings that are often lengthy and
adversarial. Although the current system was designed to enable USPS to
break even over time, in practice USPS has accumulated significant prior
years? losses and debt. Under cost- based rate regulation, limited

incentives exist for USPS to control costs because postal rates must be
raised to cover expected costs. When cost savings are achieved, these are
passed along to customers in the next rate case. Consensus on these

issues has been difficult to achieve, but improvements in the rate- setting
area are a fundamental component of a comprehensive transformation.
Transformation will also require consideration of legal requirements and
practical constraints relating to USPS?s physical infrastructure of post
offices and mail- processing facilities and to USPS?s workforce.

Transformation: Currently, changes to USPS?s retail infrastructure are
limited by both legal Infrastructure Issues

requirements and practical constraints. USPS is required to render postal
services to all communities, including providing regular postal services to
rural areas, communities, and small towns where post offices are not
selfsustaining.

USPS must follow specific criteria and procedures set forth in law or
regulations for closing or consolidating post offices. For example, it
cannot close a small post office solely because it is operating at a
deficit. USPS also has a self- imposed moratorium on closing post offices.
As a

practical matter, members of Congress and other stakeholders have often
intervened in the past when USPS has attempted to close post offices or
consolidate postal facilities. Proposed post office closures have provoked

intense opposition because local post offices (1) have long been a critical
means of obtaining ready access to postal retail services, (2) are a part of
American culture and business, and (3) are viewed as critical to the

viability of certain towns and/ or central business districts. Similarly,
changes to USPS?s mail- processing infrastructure have been difficult to
implement. Although there are no legal requirements relating directly to
closing or consolidating mail- processing facilities, 20 as a practical
matter, such efforts have been opposed because of the potential effects on
jobs and mail delivery service in local communities, their proximity to
facilities of large mailers, and congressional interest in the location of
mail- processing

facilities. Nevertheless, the issue of how USPS can best provide retail
services and process the mail as well as ensure the safety and security of
the mail and its employees in the 21 st century needs to be addressed.
Congress, USPS, and stakeholders need to consider what access to postal
retail services is needed, how such access can be provided in an affordable
manner, and whether improvements can be made to optimize the postal
infrastructure to support changes in operations while also supporting
customer

convenience and access. For example, USPS could provide more convenient
retail services at more locations, such as ATMs or at grocery stores, rather
than in traditional brick- and- mortar post offices. In addition, recent
terrorist incidents have raised new safety and security issues related both
to postal employees and customers that need to be addressed. As discussed
later in this report, a process similar to the one used for military base
closing may be useful for addressing sensitive postal facility closure and
consolidation issues.

Transformation: Human In addition to limitations on changes to its
infrastructure, changes to Capital Issues

USPS?s human capital, or workforce, also face limitations. USPS is required
by law to maintain compensation and benefits for all of its employees on a
standard comparable to the compensation and benefits paid for comparable
levels of work in the private sector. Further, when contract disputes cannot
be settled between postal labor and management, they must be settled by a
third party through binding arbitration. As a practical matter, postal labor
and management have had long- standing adversarial relations.

To improve organization performance, USPS?s workforce; performance
management systems, including compensation and benefits; and work 20
Requirements for closing, consolidating, or relocating post offices
specified in USPS regulations may be applicable to a mail- processing
facility that includes a post office.

rules should be aligned to support organizational mission and goals while
appropriately protecting workers? rights. As part of its comprehensive
transformation, USPS needs to address several human capital challenges that
affect USPS?s ability to meet its mission and goals. These include (1)
assessing workforce needs to plan for the appropriate number, skills, and
deployment of employees and whether USPS has sufficient authority and
flexibility to meet changing needs; (2) maintaining the continuity of
service as many experienced managers and workers retire and leave the
Service; and (3) improving labor- management relations to resolve issues
such as developing performance management systems, including pay and other

meaningful incentives, to better link performance of all employees with
USPS?s business goals.

To successfully transform itself into a financially viable postal
organization, USPS will need to develop, in collaboration with its labor
unions and management associations, a strategy to effectively align its
workforce with its business goals and strategies. For example, agreement on
business goals

between USPS and its labor unions and management associations may facilitate
decisions on introducing additional technologies, closing processing
facilities and/ or consolidating its infrastructure of retail organizations,
and making appropriate changes in work rules. Also, USPS officials are
anticipating that a large number of its current workers could

retire by 2010. Fortunately, the wave of impending retirements creates both
challenges and opportunities for USPS to realign its workforce by hiring
workers with skills that are needed in the future and deploying its workers
at new or different locations while limiting layoffs of current employees.

USPS?s current workforce planning process is essentially designed to address
short- term needs. USPS develops operationally oriented plans that project
the skills and number of workers that it will need for the next 3 years
assuming that with some exceptions, USPS will continue to operate as it does
now. USPS officials use their plans to identify surpluses or gaps between
needs and available staff in certain facilities for each year- with the
understanding that second- and third- year projections of workforce needs
may be less reliable given USPS?s constantly changing business environment.
Workforce planning for a transformation differs from operational workforce
planning in several ways. First, workforce planning for a

transformation is more long term, primarily because organizations that are
as large and complex as USPS generally take several years to implement
transformation efforts. Second, a long- term workforce planning process

can help USPS anticipate workforce trends and consider alternative
solutions, such as recruiting employees from nontraditional sources. Such a
planning process could improve USPS?s flexibility in meeting its workforce
needs and improving employee relations. Third, long- term planning focuses
on broad strategies for meeting workforce needs, with the

idea that as the transformation progresses, the organization can develop
more specific projections of near- term needs and detailed plans to meet
such needs that are consistent with the organization?s broad workforce

strategy. In planning for future leaders, USPS is challenged to ensure that
it has a sufficient number of managers with the competencies- which are
commonly described as knowledge, skills, abilities, and behavior- to lead
its workforce. USPS has implemented programs for selecting potential
successors for departing executives and training programs to prepare these
individuals to be effective managers. However, the programs may not be
adequately addressing USPS?s long- term leadership needs. According to
USPS?s Senior Vice President for Human Resources, some USPS managers

who otherwise may have been selected to replace retiring officials are
themselves leaving the Service. The official estimated that as of November
2001, USPS had qualified staff to replace about 75 percent of the current

leadership positions, compared with its goal of about 85 percent. Also, many
of the people whom USPS has identified as potential successors are
approaching retirement eligibility themselves. This suggests that relying on
replacements who are nearing retirement would be only a temporary solution
to the succession problem.

Transformation also needs to address the continuing challenge of
longstanding disagreements between USPS management and its unions. These
differences have extended to performance management issues involving
compensation, incentives, and benefits as well as deployment of the
workforce. Performance management systems can include pay systems and
incentive programs that link employees? performance to specific

results and desired outcomes. These tools help focus managers? and
employees? efforts toward achieving organizational goals and can be critical
to an organization?s overall success. Thus, it is important that a plan to
transform USPS?s mission, goals, and workforce discuss how USPS intends to
align managers? and employees? efforts with its mission and goals. The plan
should also discuss areas where additional flexibility is needed to make
necessary workforce realignments, such as providing early

retirement for selected employees and determining whether contract or
legislative changes may be needed.

USPS?s PMG has stated that USPS is entering a new era of organizational
challenges and that aligning compensation- related systems with USPS?s goals
is key to success in this new era. However, it may be difficult for USPS to
expand its performance management system for managers and supervisors to the
majority of its employees. Most postal employees are craft employees who
transport, process, and deliver mail and who are represented by unions.
Postal managers and unions have repeatedly disagreed over whether to
implement some form of performance- based

compensation and incentive system for craft workers. Another area of
disagreement involves the appropriate level of compensation and benefits for
postal employees. USPS and its major labor unions have often disagreed with
how the comparability standard established by law to pay compensation and
benefits comparable to those in the private sector should be applied. For
example, the Supplemental Opinion for the 2000 National Agreement between
USPS and the American Postal Workers Union (APWU) noted the following:

?The evidence relating to private sector comparability is both voluminous
and contradictory . . . . When all is said and done, however, what stands
out clearly, divorced from all the competing multivariate regression
analyses and job content analyses, is that Postal Service jobs are highly
sought after, and once obtained, are held onto. Applicant queues are long,

and the quit rate is all but non- existent. . . . These data, which show how
much Postal Service jobs are valued, both by those who want them and by
those who have them, provide powerful support for the Postal Service
argument that the Postal Service provides a wage and benefit package to APWU
represented employees that is better than that available for comparable work
in the private sector.? 21 Compensation and benefit disputes have often been
resolved in binding

arbitration, and union and postal officials have different views on
thirdparty binding arbitration. Union officials believe that because they
are not allowed to strike, they need third- party binding arbitration to
resolve

contested labor- management issues. Postal officials believe that the
binding arbitration mechanism presents a number of challenges, because a
third party is not accountable for finding revenues or cost savings to fund
increases in wages or benefits.

For transformation to be successful, it is vital for USPS and its unions to
share a common vision for the future and a mutual responsibility for 21 See
In the Matter of: United States Postal Service and American Postal Workers
Union, AFL- CIO, 2000 National Agreement, Supplemental Opinion Dealing with
Economic Issues, (Jan. 11, 2002, pp. 7- 8).

finding solutions to USPS?s financial and workforce problems. USPS?s
transformation process can provide an opportunity for postal labor and
management to move beyond past problems and redefine a future in which they
can mutually address the financial and workforce challenges of transforming
USPS.

Process of Achieving Postal Strong and proactive leadership by USPS?s Board
of Governors and its Transformation

executives will be essential to transforming this organization so it can
fulfill its mission and remain financially viable. As a first step, USPS?s
leaders need to provide a vision of USPS?s future in its transformation plan
and actively engage with its employees and the divided community of postal
stakeholders to achieve the necessary consensus to move forward. In
addition, it is urgent for USPS to take aggressive action to address its

financial situation. In the short term, one possibility would be to
determine what rate increases would be needed to generate sufficient revenue
to cover costs, address unmet capital needs, and reduce debt. Further, USPS
should aggressively continue efforts to cut costs and improve productivity
in the short term as well as identify more comprehensive efforts that would
be part of its structural transformation. In the end, congressional action
will be required for a successful postal transformation. The process of
transformation should include these three steps: 1. Determine what can be
accomplished within current law and what the

constraints are to making progress. 2. Determine what interim legislative
changes may be needed

immediately to deal with USPS?s financial problems, and whether these
interim changes are compatible with desired long- term changes.

3. Determine what comprehensive changes are needed and work with Congress
and postal stakeholders to enact these changes into law. To implement these
steps, sustained and aggressive leadership is needed to overcome the
organization?s natural resistance to change. USPS?s Board of Governors, its
managers, leaders of employee unions and management associations, and
customers have the opportunity to work together for change. USPS strategies
for change need to be aligned with USPS?s mission

and role; support its financial viability; and deal with key areas, such as
productivity, infrastructure, performance management and workforce issues,
and employee support. Active communication throughout the

organization and with Congress, stakeholders, and the public is essential to
inform and educate people about the need for change, potential benefits for
those involved, and how their interests will be protected. Involving
employees in developing and implementing these steps toward transformation
could foster their acceptance and instill a sense of ownership in the new
organization.

In addition, key public policy, structural, and financial issues need to be
resolved. Over the past 7 years, Congress has held numerous hearings on
postal reform issues and considered numerous proposals for changing the
nation?s postal laws, but none of the proposed bills have been enacted. To
date, a consensus on legislative action has been difficult to achieve among

the divided stakeholder community. Further, although comprehensive postal
reform proposals have been offered that address many of the key public
policy, structural, and financial issues we have discussed in this

report, these proposals did not fully address legal requirements and
practical constraints in the areas of USPS?s infrastructure and workforce.
Congress needs to reassess USPS?s legal framework and take the necessary
action to change the nation?s postal laws in order for USPS to be
financially viable in the 21 st century.

One of the areas where consensus has been difficult to achieve relates to
the issue of how much and what type of infrastructure USPS needs to get the
job done. Recognizing the difficulty and sensitivity of addressing this
issue, particularly when it involves closing and consolidating postal
facilities, Congress could establish a process similar to that used for

closing military bases. Under this process, Congress could affirm a proposed
package of closures and consolidations with an up- or- down vote. Such a
process could be analogous to the military base- closure process that has
been used in the past. Military base- closing legislation enacted in 1988

and 1990, including the Defense Base Closure and Realignment Act of 1990 (P.
L. 101- 510), was enacted to overcome public concern about the economic
effects of closures on communities and the perceived lack of

impartiality of the decision- making process. This legislation provided the
basis for four rounds of base realignments and closures between 1988 and
1995, the closure of 97 out of 495 major domestic military installations,
many smaller base closings, and the realignment of other facilities.

USPS?s Response to Transparency, along with accurate and timely financial
reports, is vital to Our Past

ensure public confidence. In April 2001, we recommended that USPS develop a
transformation plan and institute quarterly financial reporting to
Recommendations improve transparency. USPS agreed with these recommendations
and is working to implement them.

USPS Transformation Plan In response to our recommendation that USPS develop
a transformation plan, last fall USPS published a draft outline of its
forthcoming transformation plan; called for public comments in the Federal
Register;

and is working to finalize this plan by March 31, 2002. Given the urgency of
USPS?s financial situation and the lengthy time it will take to implement
fundamental structural changes, the stakeholder community is looking to USPS
for leadership in presenting its vision for the future in its transformation
plan. At this juncture, USPS?s Board of Governors and

postal management have the opportunity to make the case for a comprehensive
transformation in USPS?s forthcoming transformation plan as well as by other
means, and to provide a vision for its future, followed by options and
strategies for change. USPS also could suggest ways to achieve the necessary
consensus for change among Congress, stakeholders, and the public.

Quarterly Financial During fiscal year 2001, USPS made numerous revisions to
its financial

Reporting and Transparency outlook for the fiscal year with little or no
public explanation, creating confusion and raising concerns about its
ability to generate timely and

reliable financial information. It was unclear to many stakeholders why
USPS?s financial outlook changed from a $480 million deficit in its fiscal
year 2001 budget approved in November 2000 to a projected $2 billion to $3
billion deficit in February 2001. We reported that greater transparency is
needed regarding USPS?s financial and operating results and projections. To
this end, we recommended that USPS implement quarterly financial

reporting; and in response, USPS published on its Web site a quarterly
financial report for the third quarter of fiscal year 2001. This report was
a good starting point for providing information to Congress and the public,
and we expect it to improve over time. However, opportunities for improving
the timeliness and accessibility of USPS financial data remain.

 Although USPS issued its annual financial statement for fiscal year 2001
in December 2001, as of mid- February 2002, USPS had not published

quarterly financial reports for the fourth quarter of fiscal year 2001 or
the first quarter of fiscal year 2002. 22  From October 2001 to mid-
January 2002, USPS had not publicly released

its financial and operating statements for the last accounting period of
fiscal year 2001 and the first three accounting periods of fiscal year 2002
until January 2002. These reports contain preliminary financial results and
other information such as workforce- related information. These reports have
not been available to the public on USPS?s Web site; however, USPS?s Chief
Financial Officer told us that he planned on posting future accounting
period reports to USPS?s Web site.

During the fall of 2001, when USPS experienced sharp declines in its mail
volumes and revenues and requested additional appropriations from Congress,
readily available and detailed information on USPS?s changing financial
situation was scarce. More timely availability of monthly and quarterly
reports, even if they contain preliminary data subject to revision, would be
useful to improve transparency for congressional oversight, the stakeholder
community, and the public.

Conclusions USPS?s basic business model is not sustainable. USPS finances
are deteriorating as rates, costs, and debt spiral upward; and its
liabilities

exceed its assets and are increasing. USPS?s mail volume is starting to
decline, and much larger declines may be in the offing as mailers shift to
electronic and other delivery alternatives. Further, USPS has long- standing
and continuing difficulties with cutting costs and achieving and sustaining
productivity gains. USPS is working to make progress in these areas, but it
is limited by legal requirements and practical constraints.

Tinkering with the existing system will be insufficient to produce a
comprehensive transformation that will enable USPS to fulfill its mission in
the 21 st century. If structural issues are not addressed, we believe a
crisis

will develop to the point when options for action will be more limited and
costly. As the incidents of anthrax in the mail indicated, disruptions in
mail 22 USPS has a long- standing practice of withholding detailed financial
information on the

fourth quarter of a fiscal year and the first accounting periods of the
following fiscal year until its annual financial statements have been
audited and approved by the Board of Governors. The board approved USPS?s
audited financial statements for fiscal year 2001 in December 2001.

delivery service can have far- reaching consequences for the government,
households, businesses, and the general economy. On the positive side, a
window of opportunity is available for a comprehensive transformation. For
example, the wave of impending retirements could enable USPS to restructure
its infrastructure and workforce without large- scale layoffs.

Some progress is possible within the current structure and is urgently
needed. For example, USPS can take additional actions to cut costs and
improve productivity under its existing authority and identify incremental
legislative changes that are needed to help address its financial situation.
However, a comprehensive postal transformation will be required to fully
address USPS?s financial viability and the statutory framework under which
USPS operates. This framework includes USPS?s mission and role in the 21 st
century, the postal monopoly, the break- even mandate, the statutory
monopoly on letter mail, and the cost- of- service rate- setting process. In
addition, transformation efforts have been limited by legal requirements

and practical constraints relating to closing and consolidating postal
facilities and realigning the postal workforce. Although various legislative
postal reform proposals have been developed over the last several years that
address many key transformation issues, they did not directly address such
issues as USPS?s infrastructure and workforce. Congress has not enacted any
of these proposals, as consensus among the stakeholders has been difficult
to achieve. It is clear to us that

strong leadership from USPS will be necessary to help convince Congress and
postal stakeholders that change is needed. Further, USPS?s forthcoming
transformation plan could provide an opportunity for USPS to explain to
Congress and postal stakeholders the need for change, the actions USPS plans
to take under its existing authority, and the types of legislative changes
and support it believes are necessary to improve its financial viability and
achieve a successful transformation. In addition,

USPS can further improve the transparency of its financial information by
making it available in a more timely and user- friendly manner.

Congress has a number of options for how it could address postal reform and
transformation. It could use the traditional hearings process to discuss the
need for and types of changes necessary and enact incremental legislative
changes aimed at helping USPS deal with its financial situation. It could
also establish a mechanism similar to the military base- closure process
that has been used in the past to consider issues, such as closure or

consolidation of some postal facilities. In addition, a commission could be
established that could prepare a proposal for addressing unresolved

transformation issues. Such issues could include USPS?s mission and role and
break- even mandate, the postal monopoly, public/ private provision of
postal services, competition, USPS governance and accountability,
infrastructure, workforce, and debt. Matter for Regardless of the process
Congress chooses to deal with postal reform, we Congressional believe that
USPS?s worsening financial situation and outlook intensify the

need for Congress to act on meaningful postal reform and transformation
Consideration

legislation. Accordingly, we suggest that Congress consider and promptly act
on incremental legislative changes that could help USPS deal with its
financial situation soon after it receives USPS?s transformation plan. In
addition, comprehensive legislative changes will be needed to address key
unresolved transformation issues. Congress could consider how best to
address such issues, such as infrastructure and workforce issues that may
require input from a variety of stakeholders and will involve some shared
sacrifice. One option may be to create a commission to address the
unresolved issues and develop a comprehensive proposal for consideration by
Congress.

Recommendations for In view of the severity of USPS?s financial situation,
we recommend that Executive Action

USPS?s Board of Governors and the PMG provide proactive leadership for
transformation by informing Congress and the public of the need for change
in its transformation plan and by other means and by working with Congress
and stakeholders in developing and implementing strategies for action. These
strategies should include (1) actions that USPS can take

within its current authority, (2) specific congressional actions that would
enable USPS to take a number of incremental steps to address its growing
financial and operational challenges, and (3) a process to address a range

of comprehensive legislative reforms that will be needed to address key
unresolved transformation issues. In addition, we recommend that USPS
improve the transparency of its financial data by providing monthly and
quarterly financial reports in a user- friendly format on its Web site in a
more timely manner. Agency Comments and

USPS provided comments on a draft of this report in a letter from the PMG
Our Evaluation

dated February 20, 2002. These comments are summarized below and reproduced
in appendix II. In commenting on a draft of our report, the PMG stated that
the Service realizes the challenges it faces and is fully

committed to meeting them. He said that USPS has begun work on a
comprehensive transformation plan, which is due to be completed by the end
of March 2002. Further, he agreed with our recommendations and stated that
USPS plans to inform Congress and the public of the need for change in its
transformation plan and by other means. In addition, he stated that USPS
intends to work with Congress and all stakeholders in developing and
implementing strategies for action. He also agreed with our

recommendation to improve the transparency of USPS?s financial data. He said
that USPS is already providing financial reports on its Web site in a more
timely and user- friendly fashion. The PMG also commented that USPS has met
the challenge of increasing

its productivity despite significant investments in improving the quality of
customer service, which its productivity measure gives it no credit for, and
engaging in significant worksharing programs that transfer prime
opportunities for productivity gains to the mailers. He also noted that USPS
continues to take issue with comparisons between USPS and

economywide productivity measures. As we stated in our report, although USPS
has made recent productivity gains, it has had difficulty increasing and
sustaining long- term productivity growth. In fiscal years 2000 and 2001,
USPS?s productivity rose 3.6 percent,

but its productivity increased only 11.5 percent over the past 3 decades.
Further, postal productivity decreased 0.7 percent from fiscal years 1990 to
1999, despite billions of dollars invested in automation and information
technology over that period. To achieve real savings and productivity
improvement, USPS would need to decrease unneeded capacity resulting from
efficiency gains and increase capacity only where such an increase is
needed.

In regard to USPS?s point that its productivity measure does not address
quality, we recognize that organizations should have a variety of measures
to gauge their performance, including quality, timeliness, customer

satisfaction, and cost and productivity; and that more than one measure
should be looked at when assessing USPS?s overall performance. This does
not, however, diminish the importance of measuring USPS?s productivity,
which USPS itself has used as a performance measure for many years and as
one of the factors that has been considered in its pay- for- performance
program for its executives, managers, and supervisors. Similarly, in our
view, the fact that USPS has engaged in worksharing programs does not
diminish the need for and importance of USPS?s progress in improving the
productivity of its operations. Finally, neither our draft nor final reports

compared USPS?s productivity with economywide productivity measures.
However, we note that USPS itself made such a comparison in its 1999 and
2000 annual reports. In these reports, USPS compared its Total Factor
Productivity with Multifactor Productivity- a productivity measure used by
the Bureau of Labor Statistics for the nonfarm business sector of the
economy.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
the date of this report. At that time, we will send copies of this report to
the chairman and ranking minority member of the House Committee on
Government Reform, chairmen and ranking minority members of the House and
Senate Committees on Appropriations, USPS?s postmaster general/ chief
executive officer, USPS?s chief financial officer, the chairman

of the Postal Rate Commission, and other interested parties. We will also
make copies available to others on request. Staff acknowledgments are
included in appendix III. If you have any questions about this report,
please contact me on (202) 512- 8387 or at ungarb@ gao. gov.

Bernard L. Ungar Director, Physical Infrastructure Issues

Appendi Appendi xes x I

Fiscal Year 2001 Results The U. S. Postal Service?s (USPS) net loss of $1.
68 billion in fiscal year 2001 marked its 6 th consecutive year of declining
net income and its 2nd consecutive year of losses. USPS?s financial outlook
changed repeatedly during fiscal year 2001- from a $480 million deficit in
its budget approved in November 2000 to a $2 billion to $3 billion deficit
in February 2001- to successively lower estimates near the end of the fiscal
year. According to USPS officials, a number of factors listed below
contributed to a deficit larger than what was included in USPS?s originally
approved budget (see table 6). However, these factors were partially offset
by costs that were lower than budgeted by USPS, partly due to work- hour
reductions and cost- saving initiatives later in the year.

 A slowing economy resulted in lower than budgeted volumes and revenues.

 Some postal rate increases were implemented later than expected, resulting
in less revenues than budgeted by USPS.

 The diversion of First- Class Mail and, to a lesser extent, Standard Mail
(primarily advertising), to electronic communications and payment
alternatives depressed mail volume.  Mail volume and revenue declined
following the September terrorist attacks.  New products and services did
not generate expected revenues, particularly in the area of electronic
commerce. (USPS budgeted $104

million for e- commerce revenues, but actual e- commerce revenues were about
$2 million.)  Expenses increased at twice the rate of revenues (4. 2
percent v. 2. 0

percent).

Table 6: Fiscal Year 2001 Budgeted Versus Actual Financial Results

Dollars and mail volumes in millions

Percentage Variance of

change from actual from

Percentage same period last

Area Actual Budgeted budgeted variance

year

Revenue $65,869 $67,925 ($ 2, 056) (3.0%) 2. 0% Expense $67,549 $68,405 ($
856) (1. 3) 4. 2 Net income ($ 1,680) ($ 480) ($ 1,200) N/ A N/ A Mail
volumes 207,463 207,721 (258) (0. 1) (0.2)

Note 1: N/ A indicates that USPS does not calculate these data. Note 2:
Negative numbers are in parentheses. Source: USPS financial and mail volume
data.

Figures 7 through 9 illustrate USPS?s net income, revenue, and mail volumes
for fiscal year 2001.

Figure 7: USPS?s Net Income for Fiscal Year 2001 1000

Dollars in millions Bugeted net income

500 0 -500

-$ 480 M Actual net income -1,000

-1,500 -$ 1.7 B -2,000

-2,500 Start of

Middle of End of

fiscal year fiscal year

fiscal year

Actual Budgeted

Source: USPS financial data.

Figure 8: Fiscal Year 2001 Revenues Compared with Budgeted Levels 200

Dollars in millions 100

0 -100 -200 -300 -400 -500 -600 -700

Class Mail Package Services

Mail Mailgrams

Mail Mail

Mail and

revenues Services First- Periodicals Priority Priority International
Standard advertising)

initiatives other and Special (primarily New Source: USPS financial data.

Figure 9: Fiscal Year 2001 Mail Volumes Compared with Budgeted Levels 1200

Pieces in millions 1000

800 600 400 200

0 -200 -400 -600 -800 -1000 -1200

Mail Services

Mail and

M ail

M ail

Class Periodicals Priority Mail Mailgrams

Standard (primarily advertisting)

First- Package Express International Source: USPS data.

Table 7 shows trends in key financial indicators for a 30- year period as
reported by USPS, such as net income (loss), appropriations for public
service costs and other operations, outstanding debt, accumulated deficits,
capital cash outlays, and retirement- related costs.

Table 7: Selected Financial Results, Fiscal Years 1972 through 2001

Dollars in millions

Appropriations For public

Other Capital

Net income service

appropriations Outstanding

Accumulated cash

RetirementFiscal year (loss)

costs a b debt deficit balance

outlays c related costs d

1972 ($ 175) $920 $504 $250 ($ 175) $331 $446 1973 (13) 920 566 250 (188)
363 560 1974 (439) 920 830 765 (627) 696 700 1975 (989) 920 613 1, 783 (1,
616) 728 752 1976 (1,176) 920 725 3, 030 (2, 791) 673 1, 003 1976 TQ e 15
230 189 3, 530 (2, 776) 122 251 1977 (687) 920 792 2, 468 (3, 464) 419 1,
076 1978 (380) 920 802 2, 405 (3, 843) 336 1, 178 1979 470 920 800 1, 888
(3, 374) 387 1, 405 1980 (306) 828 782 1, 841 (3, 680) 371 1, 457 1981 (588)
486 789 1, 608 (4, 268) 499 1, 539 1982 802 12 695 1,536 (3,466) 436 1, 720
1983 616 0 789 1, 464 (2, 850) 600 1, 864 1984 118 0 879 1, 465 (2, 732) 860
1, 847 1985 (251) 0 970 2,075 (2,984) 997 2, 260 1986 304 0 716 3, 234 (2,
679) 1, 247 2, 360 1987 (223) 0 650 4,728 (2,902) 1,664 3, 225 1988 (597) 0
517 5,880 (3,499) 1,708 4, 186 1989 61 0 436 6,476 (3,438) 1,400 4, 474 1990
(874) 0 453 6,971 (4,312) 1,858 3, 962 1991 (1,469) 0 562 8,440 (5,780)
2,321 6, 625 1992 (536) 0 545 9,924 (6,317) 2,454 5, 931 1993 (1,765) 0 164
9,748 (8,082) 1,819 7, 068 1994 (914) 0 160 8,988 (8,995) 1,722 6, 616 1995
1,770 0 146 7, 280 (7, 225) 1, 795 6, 970 1996 1,567 0 122 5, 919 (5, 658)
2, 336 7, 614 1997 1,264 0 112 5, 872 (4, 394) 3, 207 8, 003 1998 550 0 96
6,421 (3,844) 3,006 8, 279 1999 363 0 100 6, 917 (3, 481) 3, 788 8, 694 2000
(199) 0 93 9, 316 (3, 680) 3, 254 9, 273 2001 (1,680) 0 96 11,315 (5,360)
2,932 9, 743

Note: Negative numbers are in parentheses.

a The Postal Reorganization Act provides an authorization for appropriations
as reimbursement to USPS for public service costs incurred by it in
providing a maximum degree of effective and regular postal service
nationwide, in communities where post offices may not be deemed self-
sustaining. See 39 U. S. C. sect. 2401( b). b Appropriations during this period
were principally for revenue forgone for free and reduced rate mail. These
figures represent appropriations that were recorded in USPS?s operating
statements.

c Capital cash outlays consist of the purchase of property and equipment,
net of the proceeds from the sale of property and equipment. d Retirement-
related costs consist of the following expense categories: retirement,
retiree health benefits, related interest, and Omnibus Budget and
Reconciliation Act adjustments.

e TQ represents transition quarter, a period beginning July 1, 1976, and
ending September 30, 1976. In a change taking effect October 1, 1976, the U.
S. government changed its fiscal year from a period ending June 30 to a
period beginning each October 1 and ending the following September 30.
Source: USPS financial data.

Appendi x II Comments from the U. S. Postal Service

Appendi x I II

GAO Contacts and Staff Acknowledgments GAO Contact Bernard L. Ungar (202)
512- 8387 Acknowledgments Teresa L. Anderson, Hazel J. Bailey, Gerald P.
Barnes, Joshua M. Bartzen,

Alan N. Belkin, Christopher J. Booms, William J. Doherty, Frederick T.
Evans, Michael J. Fischetti, Jeanette M. Franzel, Kenneth E. John, Robert P.
Lilly, Roger L. Lively, Leah Q. Nash, John D. Sawyer, Jill P. Sayre, and
Charles F. Wicker made key contributions to this report.

(543004)

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GAO United States General Accounting Office

Page i GAO- 02- 355 USPS's Financial Outlook and Transformation

Contents

Contents

Page ii GAO- 02- 355 USPS's Financial Outlook and Transformation

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Appendix I

Appendix I Fiscal Year 2001 Results

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Appendix I Fiscal Year 2001 Results

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Appendix I Fiscal Year 2001 Results

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Appendix I Fiscal Year 2001 Results

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Appendix II

Appendix II Comments from the U. S. Postal Service

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Appendix III

United States General Accounting Office Washington, D. C. 20548- 0001

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