U.S. Postal Service: Moving Forward on Financial and		 
Transformation Challenges (13-MAY-02, GAO-02-694T).		 
                                                                 
The U.S. Postal Service continues to face financial and 	 
transformation challenges. Since GAO placed the Service's	 
long-term outlook and transformation efforts on its high-risk	 
list, the Service's financial situation has continued to decline,
and its operational challenges have increased. The Service took a
good first step when it issued its Transformation Plan. The plan 
provides information about the Service's challenges, identifies  
many actions the Service plans to take under its existing	 
authority, and outlines steps that would require congressional	 
action. The plan does not, however, adequately address some key  
issues or include an action plan with key milestones. The	 
catastrophic events of September 11 and subsequent anthrax	 
scares, coupled with the recent economic slowdown, have decreased
mail volumes and revenues. However, the Service's financial	 
difficulties are not just a cyclical phenomenon that will fade as
the economy recovers. The Service's basic business model, which  
assumes that rising mail volume will cover rising costs and	 
mitigate rate increases, is questionable as mail volumes stagnate
or deteriorate in an increasingly competitive environment. The	 
Service's Transformation Plan recognizes that postal costs are	 
rising faster than revenues and identifies many actions that the 
Service plans to take under its existing authority, notably	 
through cutting costs and improving productivity.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-694T					        
    ACCNO:   A03335						        
  TITLE:     U.S. Postal Service: Moving Forward on Financial and     
Transformation Challenges					 
     DATE:   05/13/2002 
  SUBJECT:   Cost control					 
	     Financial analysis 				 
	     Financial management				 
	     Internal controls					 
	     Performance measures				 
	     Postal service					 
	     Strategic planning 				 
	     Federal agency reorganization			 
	     USPS Transformation Plan				 

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GAO-02-694T
     
Testimony Before the Subcommittee on International Security, Proliferation
and Federal Services, Committee on Governmental Affairs, U. S. Senate

United States General Accounting Office

GAO For Release on Delivery At 10: 00 a. m. EDT Monday, May 13, 2002 U. S.
POSTAL SERVICE

Moving Forward on Financial and Transformation Challenges

Statement of David M. Walker Comptroller General of the United States

GAO- 02- 694T

Page 1 GAO- 02- 694T

Mr. Chairman and Members of the Subcommittee: We are pleased to be here
today to participate in this hearing on the financial and transformation
challenges facing the U. S. Postal Service (the Service). Since we discussed
these issues about a year ago, when we placed the Service?s long- term
outlook and transformation efforts on our High- Risk List, the Service?s
financial situation has continued to decline, and its operational challenges
have increased. As we recently reported, the need for a comprehensive
transformation of the Service is more urgent than ever. 1 The Service has
also recognized the need for reexamining and changing its existing business
model. Last month, the Service took a good first step when it issued its
Transformation Plan. The plan provides a wealth of information about the
Service?s challenges, identifies numerous actions the Service plans to take
under its existing authority, and outlines steps that would require
congressional action. At the same time, the plan does not adequately address
certain key issues or include an action plan with key milestones, which will
be critical to assuring success and assessing progress. In my testimony
today, I will focus on the Service?s current financial outlook, which
includes updated information since our report was issued. I will also offer
observations on the Service?s Transformation Plan.

Overall, the Service continues to have significant difficulties in getting
its financial house in order. Specifically:

 The catastrophic events of September 11 and subsequent use of the mail to
transmit anthrax, plus the recent economic slowdown, have served to
exacerbate the Service?s financial difficulties by decreasing mail volumes
and revenues. Only time will tell how much of this decline is temporary and
how long it will last.  Despite additional cost- cutting efforts in the
first half of fiscal year 2002,

the Service?s revenues declined approximately twice as fast as its expenses,
in part because the Service has large fixed expenses that are difficult to
cut in the short term.  The Service?s budget, prepared before September 11,
estimated a $1.35

billion deficit for fiscal year 2002, which was recently updated to an
approximately $1.5 billion deficit. The Service is headed for its third

1 U. S. General Accounting Office, U. S. Postal Service: Deteriorating
Financial Outlook Increases Need for Transformation, GAO- 02- 355
(Washington, D. C.: Feb. 28, 2002). Summary

Page 2 GAO- 02- 694T

consecutive annual deficit since fiscal year 2000 despite multiple rate
increases over this period.  Productivity increases continue to be
difficult to achieve and sustain.

During the first 2 quarters of fiscal year 2002, productivity fell below
budgeted targets. For example, in the first quarter, which was affected by
the extraordinary events of last fall, productivity fell by 1.1 percent
compared with a budgeted 1 percent increase. In the second quarter,
productivity rose by 1 percent but was budgeted to rise by 1.5 percent. 
Cash flow difficulties continue. However, Service officials express

confidence that the Service can pay its bills in fiscal year 2002 through
postal revenues and borrowing.  The Service?s debt is budgeted to rise to
$12.9 billion by the end of fiscal

year 2002, up $1.6 billion from the previous year and only $2.1 billion less
than the $15 billion statutory limit. To put this situation into context,
one biweekly postal payroll exceeds $1 billion. In addition, as we testified
a year ago, the Service does not have a debt reduction plan.  To conserve
cash and limit debt, the Service has continued its freeze on

capital spending for most facility projects, resulting in a growing backlog-
a situation that is unsustainable. Meanwhile, total capital outlays are
budgeted to decline in fiscal year 2002 for the third consecutive year to
$2.2 billion. This level of capital investment is inadequate for the Service
to maintain and modernize its infrastructure and meet other capital needs.
It could also limit the Service?s ability to cut costs and achieve
productivity gains as well as undertake major transformation efforts
involving its retail and mail- processing infrastructure.  As the Service
considers its infrastructure and capital investment needs, it

has the opportunity to rationalize its infrastructure to provide more points
of service while also reducing costs associated with ?brick and mortar?
facilities. Further, it can consider how best to enhance mail safety and
security as it assesses its facility needs.  The Service?s major
liabilities and obligations are estimated at close to

$100 billion, which include liabilities for pensions, workers? compensation
benefits, and debt to the Treasury; and other obligations for postretirement
health benefits.  The Service?s financial condition is deteriorating as it
liabilities continue to

exceed its assets. The Service?s governmental status provides insulation
from the bankruptcy process that would be applicable to private sector
companies in a similar condition. Addressing the underlying factors that are
driving the Service?s financial condition cannot be ignored and is in large
part what transformation must be about.

The Service?s financial difficulties are not just a cyclical phenomenon that
will fade as the economy recovers. The Service?s basic business model,

Page 3 GAO- 02- 694T

which assumes that rising mail volume will cover rising costs and mitigate
rate increases, is increasingly questionable as mail volumes stagnate or
deteriorate in an increasingly competitive environment. For example,
alternatives to hard- copy mail are proliferating and include numerous
alternatives such as electronic mail, automated bill payment and electronic
presentment, faxes, and cell phones with rates that do not include extra
charges for long- distance minutes.

The Service?s Transformation Plan recognized that postal costs are rising
faster than revenues and identified numerous actions that the Service plans
to take under its existing authority, notably through cutting costs and
improving productivity. Historically the Service has had difficulties in
cutting costs and achieving and sustaining increases in its productivity. In
addition, the Service faces growing retirement- related costs and
potentially significant costs to improve the safety and security of the
mail. The plan stated that the Service expects to achieve $5 billion in
savings and cost avoidance through 2006. However, it is unclear from the
Service?s Plan whether the cost cutting goals will be sufficient for the
Service to hold rates steady from mid 2002 calendar year until 2004, as it
has planned, and reduce debt and finance needed capital investments. In
addition, it is unclear what the potential financial impact would be,
particularly in the short- term, from the Service?s planned actions during
the transformation period. More specifically, it is unclear what the impact
of planned actions would be on annual revenues and expenses or when
financial benefits may be realized. Further detail on the costs and time
frames associated with specific initiatives would be useful to better
understand the financial impact of the Service?s planned actions.

Overall, the Postal Service is to be commended for raising key postal reform
issues in its Transformation Plan, suggesting near- term legislative
changes, and outlining the statutory model that the Service would prefer for
its long- term future. The plan contained many good suggestions and planned
actions on short- term actions to improve efficiency. (See app. I for key
problems that we have identified and actions and milestones in the Service?s
Transformation Plan to address them.) The plan also raised some difficult
long- term issues, such as the Service?s legal requirements and practical
constraints that limit transformation efforts. Further, the plan?s
appendixes contained useful descriptions of actions the Service plans to
take, such as its strategies to improve efficiency and develop a
performance- based culture. Other appendixes contained detailed background
information and discussed how foreign postal administrations have dealt with
similar postal reform issues.

Page 4 GAO- 02- 694T

However, the plan did not adequately address some key transformation issues
that will need to be addressed for any transformation effort to be
successful. These issues include the definition of universal postal service;
strategies to address certain human capital matters such as postal pay
comparability, performance management issues, management bonus arrangements,
and workforce deployment and utilization; the Service?s governance
structure, transparency, and accountability mechanisms; and what mechanisms
would be best suited for making progress on unresolved transformation
issues. Although the Transformation Plan recommended that Congress give the
Service much more flexibility, particularly in the ratemaking and new
products areas, it will be important that any additional flexibility be
coupled with an appropriate level of transparency and accountability.

Where do we go from here? As the Service?s Transformation Plan emphasizes,
the Service can and should make progress on the specific actions it can take
under its existing authority. Much progress can be made through exploring
constructive partnerships and relationships between the Service and other
key stakeholders, such as the mailing community and the Postal Rate
Commission (PRC). We applaud these parties for taking constructive steps in
this direction. Similarly, we encourage the Service and its major labor
unions and management associations to build on their post- September 11
working relationship by working in a partnership fashion to discuss and move
forward on difficult human capital issues. The Service also needs to work
with Congress to address a range of unresolved transformation issues. More
specific steps, time frames, and information on expected financial impacts
is needed in order for Congress to effectively monitor the Service?s
progress in implementing its plan.

Further, progress on comprehensive legislative reform has been difficult to
achieve, in part because numerous stakeholders have divergent needs and
concerns. Given the vital role of the nation?s postal system to the American
people and businesses, I urge the parties to find common ground in building
a viable postal system for the 21st century. The time has come for
comprehensive and fundamental reform. As we have stated previously, this
will likely require a special commission to address the most difficult and
controversial issues that must be addressed (e. g., defining universal
service and rationalizing infrastructure). Make no mistake about it, shared
sacrifice from all stakeholders will be necessary to achieve a successful
postal transformation.

Page 5 GAO- 02- 694T

Overall, the Service?s financial condition has continued to decline. Large
deficits continue as volumes and revenues decline; rates and debt are
spiraling upward; capital needs are going unmet; and the Service?s
liabilities exceed its assets. Despite multiple rate increases, the
Service?s net income continually declined from fiscal year 1995 through
fiscal year 2001( see fig. 1). The rate increase implemented in 1995
averaged 10.2 percent and was the largest percentage rate increase during
this period. Costs, in general, have been difficult to reduce in the short
term since the Service has high fixed costs, such as 6 days per week
delivery of mail to approximately 138 million addresses- a figure that grows
by nearly 2 million annually- and maintenance of a national retail
infrastructure of 38,000 post offices, branches, and stations. The Service
is also nearing its $15 billion statutory debt limit. To conserve cash, it
is cutting back on its capital outlays, which will hinder modernization of
the Service?s infrastructure.

Figure 1: Postal Service Net Income/ Losses from Fiscal Years 1972 to 2002

Source: Postal Service.

The Service?s Current Financial Situation

Dollars in millions -2,000 -1,500

-1,000 -500

0 500

1,000 1,500

2,000 Fiscal years 1972

1973 1974

1975 1976

1977 1978

1979 1980

1981 1982

1983 1984

1985 1986

1987 1988

1989 1990

1991 1992

1993 1994

1995

Budgeted Actual

1996 1997

1998 1999

2000 2001

2002

Page 6 GAO- 02- 694T

In its budget prepared before September 11, the Service estimated that it
would incur a $1. 35 billion deficit in fiscal year 2002, and recently
updated its deficit estimate to approximately $1.5 billion. The Service
reported almost a $200 million deficit for the first 2 quarters of fiscal
year 2002 combined. The Service recently estimated that it would lose an
additional $400 million to $800 million in the third quarter. Similarly, the
Service has not updated its outlook for the fourth quarter- which has a
budgeted $1.4 billion deficit. 2 It should also be noted that mail volumes
in the third and fourth quarters might fall below the budget targets if
current trends persist.

Further, productivity increases continue to be difficult to achieve and
sustain. During the first 2 quarters of fiscal year 2002, productivity fell
below budgeted targets. For example, in the first quarter, which was
affected by the extraordinary events of last fall, productivity fell by 1.1
percent, compared with a budgeted 1 percent increase. In the second quarter,
productivity rose by 1 percent but was budgeted to rise by 1.5 percent.
Productivity targets for the remainder of this fiscal year are budgeted to
decline.

On the other hand, the fourth quarter deficit is estimated to be offset by
about $1 billion in additional revenues from the rate increase scheduled to
occur June 30, 2002. Thus, the Service will have implemented multiple rate
increases since January 2001 (see table 1). The scheduled increase averages
7.7 percent for all rates. In addition, the price of a First- Class stamp
will increase by 3 cents, that is- an 8.8 percent increase. Despite this
rate increase, the Service is headed for its third consecutive annual
deficit.

Table 1: 2001 and 2002 Rate Increases Date Details of rate increases

January 7, 2001 Service implemented rate increases averaging 4.6 percent,
with a 1- cent increase in the First- Class stamp rate to 34 cents. July 1,
2001 Service implemented rate increases averaging 1.6 percent. June 30, 2002
Service is to implement rate increases averaging 7.7 percent, with

a 3- cent increase in the First- Class stamp rate to 37 cents. Source:
Postal Service.

2 In fiscal year 2001, the Service reported a $1. 68 billion deficit,
including a $256 million deficit in the first 2 quarters, $166 million
deficit in the third quarter, and a $1.26 billion deficit in the fourth
quarter. Factors Affecting the

Service?s Net Income for Fiscal Year 2002

Page 7 GAO- 02- 694T

The Service?s poor financial outlook for fiscal year 2002 was compounded by
further declines in mail volume in the wake of incidents of terrorism,
including anthrax in the mail, and the economic slowdown. Total mail volume
declined 4.5 percent in the first 2 quarters of fiscal year 2002, compared
with the first 2 quarters in the previous fiscal year, while total revenues
declined 0.4 percent -a revenue decline that was mitigated by rate increases
implemented in January and July 2001 that averaged a cumulative 6.2 percent.
Mail volumes declined in the first 2 quarters of fiscal year 2002 for First-
Class Mail, Priority Mail, Standard Mail (primarily advertising), and
Periodicals (see fig. 2), leading to little revenue growth or declining
revenues in each of these categories. Only time will tell how much of the
recent volume decline is temporary and how long it will last. (See app. II
for details on mail volumes and revenues in the first 2 quarters of fiscal
year 2002.)

Figure 2: Change in Selected Mail Volumes for the First 2 Quarters of Fiscal
Year 2002 Compared with the Same Period in Fiscal Year 2001

Source: Postal Service.

On the positive side, the Service has budgeted and achieved significant cost
cutting in fiscal year 2002. For the first 2 quarters of fiscal year 2002,
the Service reported that its total costs were 2.7 percent below its
budgeted estimates. The Service reported that it reduced budgeted costs

Percent change -15 -10

-5 0

-2.0 -14.6

-7.2 -3.0

First- ClassMail PriorityMail

StandardMail Periodicals

Page 8 GAO- 02- 694T

by decreasing the number of career employees and by reducing work hours
including overtime. The Service had nearly 16,000 fewer career employees at
the end of the second quarter, compared with the same period for fiscal year
2001, a decline of about 2 percent. Likewise, total work hours- including
both career and noncareer employees- fell by nearly 40 million in the first
2 quarters, a decline of 5.1 percent. Service officials have said that these
workhour savings were achieved in part because the Service had less mail to
deliver than it did a year ago, and in part through efforts to improve the
Service?s efficiency. For example, mail processing work hours fell by 8.1
percent in the first 2 quarters of fiscal year 2002, compared with the same
period in fiscal year 2001, a gain aided by initiatives such as deployment
of more efficient machines to sort flatsized mail (e. g., large envelopes
and periodicals). To make further progress in improving efficiency, the
Service could explore issues related to having sufficient flexibility to
redeploy staff as mail volumes fluctuate.

In addition to financial difficulties, the Service has also experienced some
slippages in service performance. Although the Service has maintained high
service levels for delivery of overnight First- Class Mail, its on- time
delivery scores for 2- day and 3- day First- Class Mail have generally
declined since fiscal year 1999. For example, on- time delivery of 2- day
First- Class Mail in the first quarter declined annually from a peak of 86
percent in fiscal year 1999 to 82 percent in fiscal year 2002. Likewise,
ontime delivery of 3- day First- Class Mail in the first quarter declined
annually from a peak of 87 percent in fiscal year 1999 to 72 percent in
fiscal year 2002. Similar, but less pronounced, trends applied in the second
quarter over this period. The most recent available data for the second
quarter of fiscal year 2002 show on- time delivery of 82 percent for 2- day
First- Class Mail and 74 percent for 3- day First- Class Mail. (See app. III
for detailed service performance data.) Recently, security restrictions were
imposed after September 11 that barred First- Class Mail weighing over 16
ounces from transportation on commercial airlines so that the Service
increased its reliance on trucks. It is unclear whether these shifts in
transportation modes have also affected on- time delivery of other types of
mail, such as the continuing erosion of on- time delivery performance for
Priority Mail. 3

3 For trends in Priority Mail service, see Report of the Consumer Advocate
on Quality of Services Provided by the Postal Service to the Public by the
PRC Office of the Consumer Advocate (Mar. 6, 2002).

Page 9 GAO- 02- 694T

The Service?s capital investment program continues to be severely limited by
the Service?s financial problems. The Service budgeted $2.2 billion for
capital outlays in fiscal year 2002, down from $2.9 billion in fiscal year
2001, and $3.3 billion in fiscal year 2000 (see fig. 3). Budgeted capital
cash outlays for fiscal year 2002 are at the lowest level since fiscal year
1995.

Figure 3: Postal Service Capital Cash Outlays, Fiscal Years 1990 through
2002

Note: Figures were calculated using a chain- type price index for Gross
Domestic Product as computed by the U. S. Department of Commerce. The fiscal
year 2002 figure was calculated using an estimate from the Congressional
Budget Office.

Source: Postal Service.

The Service has continued its capital freeze for most facility investments
to save cash and limit debt, resulting in a growing backlog in planned
facilities. Limitations on capital investment may have a number of
detrimental effects such as deterioration of the Service?s existing physical
infrastructure, deferred efficiency gains, and higher future capital costs.
Looking forward, the gap between resources and capital investment needs
would be exacerbated by the Service?s plans to continue automation efforts,
deploy an ?information platform? to provide better information on The
Capital Investment

Outlook

Constant 2001 dollars in millions 0 500

1,000 1,500

2,000 2,500

3,000 3,500

4,000 4,500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal
years

Budgeted capital cash outlays Capital cash outlays

Page 10 GAO- 02- 694T

postal operations and the status of mail, and implement any modernization or
restructuring of the Service?s infrastructure.

Another concern is that the Service has continued to rely on debt to finance
its capital program. This trend could not continue if the Service reaches
its $15 billion statutory debt limit. The Service?s debt is budgeted to
increase by $1.6 billion and reach $12.9 billion by the end of fiscal year
2002, only $2.1 billion below the $l5 billion statutory debt limit. Even the
remaining $2.1 billion in borrowing authority may not be available for
capital investment in future years, since fiscal prudence might suggest
stabilizing debt below the statutory limit to maintain liquidity. Further,
the Service has said that its goal is to reduce debt, which might preclude
the use of additional debt to finance capital investment. The Service?s
Transformation Plan stated that ?Since cash flow from operations is linked
to net incomes (or losses), stabilizing and reducing debt will require that
the Postal Service recover its prior years losses and carefully plan its
capital cash outlays so they do not exceed cash flow. As the past two fiscal
years have demonstrated, the Postal Service cannot simultaneously generate
net losses and reduce its borrowings.?

Looking ahead, expenses related to enhancing mail safety and security are a
key unknown cost factor. To date, the Service has relied primarily on
congressional appropriations to finance capital investment in measures
designed to improve mail safety and security. However, uncertainties remain
regarding the technologies to be deployed, the associated capital costs, and
the subsequent impact on operating costs and postal operations, and the
extent to which Congress will pay for these costs in the future. The price
tag is likely to be substantial, with the Service requesting about $800
million in supplemental appropriations for fiscal year 2003 to improve mail
safety and security. This request is in addition to the $675 million that
was appropriated in fiscal years 2001 and 2002 for security purposes.

Another uncertainty that may affect the Service?s capital program involves
its request for nearly $1 billion in congressional appropriations for
revenue foregone, 4 which the Service has said could be used to finance some

4 The Service has asked for nearly $1 billion in fiscal year 2003
appropriations for the total amount of revenue forgone for free and reduced
rate mail between 1991 and 1998 for which the Service has not yet received
appropriations. This request would be in lieu of the current payment
schedule established by a 1993 law for $29 million in annual appropriations
over 42 years.

Page 11 GAO- 02- 694T

capital facility projects. Specifically, the Service has proposed
accelerating payments for revenue foregone from $29 million annually through
2035 to a single lump- sum payment in fiscal year 2003- a change that would
increase the net present value of appropriations received by the Service for
this purpose. 5 Congress did not act on a similar proposal last year and has
not acted on the Service?s latest request.

In the short term, the Service may have to rely primarily on cutting costs
and raising rates to address its financial problems. The Service?s
Transformation Plan identified numerous short- term steps the Service plans
to take under its existing authority to cut costs and improve productivity.
Regarding rate increases, an above- inflation rate increase averaging 7.7
percent is scheduled to take effect June 30, 2002, including a 3- cent
increase in the price of a First- Class stamp from 34 to 37 cents. However,
raising rates may cause mail volumes to decrease and encourage mailers to
shift more mail to electronic and other delivery alternatives. Although the
Service plans to hold rates steady from June 2002 until calendar year 2004,
pressures to increase rates will continue in the long term to cover rising
expenses, such as wage increases and growing longterm obligations. The
Service?s total liabilities on its balance sheet were $61 billion, which
exceeded total assets by $2.3 billion at the end of fiscal year 2001. 6
These liabilities include $32 billion for pensions, 7 $6 billion for
workers? compensation benefits, and $11 billion for debt to the Treasury. In
addition, the Service has other major obligations estimated at

5 The present value of remaining payments of revenue foregone is $422
million (at an interest rate of 5. 8 percent) according to a recent
Congressional Research Service report. See The Postal Revenue Foregone
Appropriation: Overview and Current Issues, by the Congressional Research
Service (CRS Report RS21025, Updated November 23, 2001).

6 Total assets on the balance sheet include a $32 billion deferred
retirement asset, which is an intangible asset that is not an economic
resource that can be applied to cover the Service?s liabilities.

7 In addition to the $32 billion in pension liabilities, the Service would
also pay $16 billion in associated interest if the Service made the annual
scheduled minimum payments over the amortization periods prescribed by
statute. Addressing the Service?s

Financial Problems

Page 12 GAO- 02- 694T

$49 billion for post- retirement health benefits. 8 These liabilities and
obligations amount to almost $100 billion and threaten the Service?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.

In the long term, the Service?s Transformation Plan recognizes that the
Service?s basic business model is not sustainable and that much larger
declines in mail volume may be in the offing if mailers increasingly shift
to various electronic and other alternatives. Both the Service and we agree
that some progress is possible within the current structure, but that a
comprehensive postal transformation will be required to fully address the
Service?s financial viability and the statutory framework under which the
Service operates. In our view, modest tinkering with the existing system
will be insufficient to produce a lasting comprehensive transformation that
will enable the Service to fulfill its mission in the 21st century. The time
has come for comprehensive and fundamental reform. As we have stated
previously, this will likely require a special commission to address the
most difficult and controversial issues (e. g., defining universal service
and infrastructure rationalization).

Given the Service?s deteriorating financial situation, progress on
comprehensive transformation is urgently needed, and the Transformation Plan
has made a valuable contribution by identifying numerous specific steps for
making improvements within the current structure. The Service is to be
commended for raising controversial issues in its Transformation Plan and
taking positions on the changes that it believes are necessary. The
Service?s Transformation Plan conveyed a needed sense of urgency when it
stated that over the next 2 to 3 years, it is vital that significant
progress be made toward defining the long- term structure and role of the
Postal Service. To that end, the plan made a range of recommendations to
deal with transformation issues through near- term regulatory and
legislative reforms and long- term legislative solutions. For the near-
term, the plan recommended changes that would give the Service more

8 The Office of Personnel Management recently told us that its estimate of
the Service?s post- retirement health benefits obligation was about $49
billion as of September 30, 2000, of which about $17 billion was attributed
to current retirees. The Service?s financial statements do not record or
disclose an obligation for retiree health benefits, because the Service
accounts for its participation in the Federal Employees Health Benefits
Program as participation in a multi- employer plan. Thus, the Service
reports that it is not required under accounting standards to include post-
retirement health benefits obligations in its balance sheet. Moving Forward
to

Transform the Postal Service

Page 13 GAO- 02- 694T

flexibility in ratemaking, facility closings, purchasing, labor
negotiations, and other employment areas. For long- term change, the plan
outlined three options and noted the Service?s preferred option- a
?Commercial Government Enterprise.? Under this option, the Service would
remain an independent establishment of the federal government but would be
structured and operated in ?a much more businesslike manner.? In addition,
the plan contained useful discussions in detailed appendixes, such as how
foreign postal administrations have dealt with similar postal reform issues.

Although the Transformation Plan dealt with many difficult issues, it did
not include an adequate discussion of specific plans or proposals related to
some key transformation issues, including the following:

 the future nature of universal postal service, including its retail and
delivery components, and the associated infrastructure;  several key human
capital issues such as postal pay comparability,

performance incentives, labor- management relations, workforce realignment,
and management bonus arrangements;  various governance, accountability, and
transparency issues; and  a detailed action plan and recommendations on
what mechanisms would

be best suited for making progress on certain transformation issues beyond
the Service?s direct control.

Most importantly, the plan recognized the need for defining universal
service but declined to propose a definition of future universal postal
retail and delivery services for consideration. More clarity about the scope
and quality of universal postal services is needed to facilitate
consideration of a range of critical infrastructure and human capital
issues. Further, although the Transformation Plan recommended that Congress
give the Service much more flexibility, particularly in the ratemaking and
new products areas, it is important that any additional flexibility be
coupled with an appropriate level of transparency and accountability- issues
that the Transformation Plan had less to say about. Because these issues are
also critical to postal transformation, I will offer some brief observations
about them in this testimony. Our recently issued report contains a more
comprehensive discussion of these and other transformation issues. 9

9 GAO- 02- 355.

Page 14 GAO- 02- 694T

Vast changes in the communications and delivery sectors over the past 30
years- which are continuing at a rapid pace- as well as the Service?s
growing financial difficulties, provide an impetus for reconsidering what
universal postal services will be needed for the 21st 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. Some related issues include what
quality of universal postal service should be maintained- such as the
frequency and speed of mail delivery, the accessibility and scope of retail
postal services- and whether certain aspects of universal postal service
should be allowed to vary in urban and rural areas. In this regard, it will
be important to understand the current situation and opportunities for
improvement.

The Service is planning to conduct an assessment of its retail, mail
processing, and transportation networks that is likely to provide useful
information to Congress and stakeholders including the public on areas where
service may be redundant, as well as areas where more or better service may
be needed. Some benefits that may result from reassessing universal postal
service might be maximizing the use of facilities and reducing costs while
also improving service. This could be accomplished through the provision of
more points of service, improved hours of access, and greater customer
convenience to some postal retail services while reducing their cost, as
compared with more traditional means of service delivery through ?brick and
mortar? facilities. For example, the Transformation Plan contained useful
discussion about ways to enhance access and reduce the cost of some routine
postal services, such as providing stamp sales at grocery stores and through
ATMs, making vending machines for stamp purchases available 24 hours a day,
and deploying self- service equipment that can be used to mail packages
while reducing the anonymity of this mail.

We recognize that universal postal service issues are highly sensitive,
given the long- standing role that the Service plays in providing essential
communications and delivery services to communities across the nation. To
make progress in modernizing the infrastructure to support universal postal
service- such as the national network of post offices that provide universal
access to postal retail services- it will be important for the Service to
engage in frank and open discussions with all stakeholders, including the
Congress, on issues related to universal postal retail and delivery service.
Rationalizing the Service?s infrastructure may entail closing or
consolidating certain facilities where there is excess capacity while adding
new facilities to address unmet needs, such as in growing Universal Service
and

Infrastructure Issues

Page 15 GAO- 02- 694T

areas. Given the difficulty of these issues, Congress could establish a
mechanism similar to that used for closing military bases to make progress
in this important area. Such a process has been used to overcome public
concern about the economic effects of closures on communities and the
perceived lack of impartiality of the decision- making process. Under this
process, Congress could consider a proposed package of closures and
consolidations with an up- or- down vote.

Strategic human capital approaches must be at the center of efforts to
transform the culture of federal entities, including the Postal Service.
Like the rest of the federal government, the Service?s human capital
challenges are long- standing and will not be quickly or easily addressed.
To link human capital strategies to accomplishing organizational goals and
objectives, we have developed a model of strategic human capital management.
10 This model may be useful for the Service as it develops its strategic
human capital planning, including a long- term workforce plan. Such
strategies would address workforce realignment, aligning individual
performance with organizational objectives, performance incentives, and pay
comparability.

Making changes to the Service?s human capital, or workforce, will include
the challenge of dealing with legal requirements and practical constraints.
For example, the Service is required by law to maintain employee
compensation and benefits on a standard comparable to the compensation and
benefits paid for comparable levels of work in the private sector. In
addition, when contract disputes cannot be settled between postal labor and
management, they must be settled by a third party through binding
arbitration. Further, as a practical manner, labor unions and management
within the Service have had long- standing adversarial relations. As an
example of these limitations, the Service and its major employee unions have
often disagreed about how the pay comparability standard should be applied
and presented voluminous and contradictory evidence when they have taken
this matter to binding arbitration.

In addition to compensation, labor- management differences have extended to
performance management issues involving incentives and benefits as well as
deployment and use of the workforce. Performance

10 U. S. General Accounting Office, A Model of Strategic Human Capital
Management,

GAO- 02- 373SP (Washington, D. C.: Mar. 15, 2002). Human Capital Challenges

Page 16 GAO- 02- 694T

management systems can include pay systems and incentive programs that link
employees? performance to specific results and desired outcomes. In this
regard, the Transformation Plan recognized the need for a performance- based
culture, noted that continuing to improve efficiency and customer value is
contingent on exceptional performance by the Service?s employees, and
addressed plans for a new performance management system for managers.
However, the plan did not discuss how performance- based compensation and
incentive systems might cascade throughout the organization- an issue that
Service managers and unions have repeatedly disagreed on in the past.

For transformation to be successful, it is vital for the Service and its
unions to share a common vision for the future and a shared responsibility
for finding solutions to the Service?s financial and workforce problems. As
I testified before this subcommittee in March, committed, sustained, and
inspired leadership and persistent attention will be essential if lasting
changes are to be made in the human capital area. 11 In that vein, the
postmaster general, postal officials, and leaders of postal labor unions and
management associations demonstrated a positive and constructive approach by
holding daily meetings last fall to deal with issues related to mail safety
and security. The recent announcement of a tentative negotiated settlement
of contract talks between the Service and the National Association of Letter
Carriers was another positive example. These parties also recently agreed on
steps to streamline grievance and arbitration procedures to limit the number
of unresolved issues at the local level and reduce the time in handling such
disputes. These are positive steps that provide a foundation on which to
build; however, much remains to be done.

Congress has recently been focusing significant attention on corporate
governance, transparency, and accountability issues in light of Enron?s
recent decline. Recent events have raised a range of questions regarding
what can happen when one or more key players fail to adequately perform
their responsibilities. I want to underscore that serving on a board of
directors is an important and difficult responsibility that requires being
knowledgeable about the industry and finances, asking the right questions,
and doing the right thing to protect the public interest. This
responsibility

11 U. S. General Accounting Office, Managing for Results: Building on the
Momentum for Strategic Human Capital Reform, GAO- 02- 528T (Washington D.
C.: Mar. 18, 2002). Governance, Transparency,

and Accountability Issues

Page 17 GAO- 02- 694T

is especially challenging in directing the Service, which is facing
increasing competition in a rapidly changing market environment. In
addition, the board?s audit committee has an important role to play in
ensuring fair presentation and appropriate accountability of management in
connection with financial reporting, internal control, compliance, and
related matters.

We believe that a range of governance issues needs to be addressed as part
of the Service?s transformation plan. However, the Service?s transformation
plan had little to say on these matters other than proposing that the
Service be transformed into a Commercial Government Enterprise that would
act much more like a business, and, as part of that proposal, its board of
governors would be ?refocused on fiduciary duties.? Under its current
framework, the Service is intended to function in a businesslike manner,
which raises the following questions related to its governance structure:

 What type of governing board would be most appropriate considering the
Service?s size, importance, and challenges?  How should board members,
including the postmaster general and deputy

postmaster general, be selected, paid, and held accountable?  What should
be the roles and functions of the governing board, and is its

current part- time status appropriate?  Is the present governance structure
best suited to selecting well- qualified

individuals to direct a $70 billion entity? Or, 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 certain specific backgrounds and skills?

Transparency and accountability are fundamental principles to ensuring
public confidence in the Service. As part of the proposed change to a more
commercial enterprise, questions remain related to whether the Service
should be held more directly accountable for its performance and if so, to
what extent, to whom, and with what mechanisms. Other questions include

 What oversight is needed to protect the public interest, including the
interest of customers with few or no alternatives to using 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 oversight and accountability?

Page 18 GAO- 02- 694T

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

Another issue we have noted, related to transparency and accountability,
involves improvements needed in the Service?s financial reporting. The
principles for the Service?s financial information are the same as those in
our recent testimony on financial reporting issues: financial statements,
which are at the center of present- day business reporting, must be timely,
relevant, and reliable to be useful for decision- making. 12 We have
recently reported that the Service?s financial outlook was repeatedly
revised in fiscal year 2001 with little or no public explanation and that
greater transparency is needed regarding the Service?s financial and
operating results and projections. Accordingly, we have recommended that the
Service improve the transparency of its financial information by providing
monthly and quarterly financial reports in a user- friendly format on its
Web site in a more timely manner. 13

The Service has agreed with our recommendation to improve the transparency
of its financial data and stated that it was providing financial reports on
its Web site in a more timely and user- friendly manner. To date, the
Service has begun to provide monthly financial reports on its Web site. It
has also provided one quarterly financial report- for the third quarter of
fiscal year 2001. Currently, the Service has posted on its Web site the
chief financial officer?s financial presentation for the second quarter of
fiscal year 2002. This presentation has less information than the previous
publicly available quarterly report- it does not include cash flow data,
year- to- date analysis, or changes in outlook. In our opinion, this
publicly available information has not provided sufficiently detailed
information for stakeholders to understand the Service?s current and
projected financial condition or how its financial outlook has changed. More
timely, accessible, and reliable financial information is sorely needed.

Stakeholders are looking for positive, constructive ways to work through
difficult postal transformation issues and the Service?s Transformation

12 U. S. General Accounting Office, Protecting the Public?s Interest:
Considerations for Addressing Selected Regulatory Oversight, Auditing,
Corporate Governance, and Financial Reporting Issues, GAO- 02- 601T
(Washington, D. C.: Apr. 9, 2002).

13 GAO- 02- 355. Next Steps

Page 19 GAO- 02- 694T

Plan was a good start. Many postal transformation issues are complex, and
consensus is likely to be hard to achieve on key areas such as a new
definition of universal postal service, the associated infrastructure, human
capital, governance, accountability, and transparency issues, among others.
Further, a successful transformation of the Service will require shared
sacrifice. However, given the vital role of our postal system in
communications and commerce, and the Service?s declining financial outlook,
it?s time for all stakeholders to roll up their sleeves and engage in postal
transformation issues. In this regard, we note that the Service and mailers
have already made progress, such as through the Mailing Industry Task Force,
in identifying concrete ways to enhance efficiency and improve the value of
the mail. We also applaud the initiative of the Postmaster General John
Potter and PRC Chairman George Omas in agreeing to convene a summit to
discuss ways to improve the rate structure and the rate setting process. The
Service has a similar opportunity to build working partnerships with its
major labor unions and management associations so that the parties can make
progress on human capital issues.

Another critical partnership involves the Congress and postal stakeholders
in working through a range of important, complex, and controversial
transformation issues. As we noted in our report, we believe that the
Service?s worsening financial situation and outlook intensify the need for
Congress to act on meaningful postal reform and transformation legislation.
Accordingly, we stated in our recently issued report that Congress should
consider and promptly act on incremental legislative change that could help
the Service deal with its financial situation.

We believe that comprehensive legislative change will be needed to address
key unresolved transformation issues- some of which have not been fully
addressed by proposed legislation or by the Service?s Transformation Plan.
One option is to use the legislative process to enact postal reform
legislation, and some major proposals have been made in this area. Another
option could be to create an independent commission that would address key
unresolved issues and develop a comprehensive proposal for Congress to
consider.

Meanwhile, the Service?s growing financial problems call for continuing
close congressional oversight of its current financial condition and
progress in implementing its Transformation Plan. In this regard, it will be
important to have greater transparency of the Service?s financial
information to minimize possible unexpected surprises and expectation gaps.
It will also be important to have greater clarity about the time frames

Page 20 GAO- 02- 694T

and financial impact associated with the actions outlined in the
Transformation Plan that the Service plans to take immediately. To assist
the Congress in its oversight responsibilities, we are monitoring the
Service?s financial condition and the implementation of its plan. Committed
leadership and sustained attention in these areas will be important in order
to achieve the results necessary for us to reassess our inclusion of the
Postal Service?s transformation efforts and long- term outlook on our High-
Risk List.

Your strong support for the Service to develop a transformation plan has
helped move the discussion forward, and this hearing is further highlighting
the need for change. We look forward to working with the Congress in
addressing this and other important government transformation issues. In
many ways, the challenges facing the Service represent a microcosm of a
range of challenges facing other federal agencies. I would be pleased to
respond to any questions that you or other members of the subcommittee may
have.

For further information regarding this testimony, please call Bernard L.
Ungar, Director, Physical Infrastructure Issues, on (202) 512- 8387 or at
ungarb@ gao. gov. Individuals making key contributions to this testimony
included Teresa L. Anderson, Hazel J. Bailey, Tida E. Barakat, Gerald P.
Barnes, Joshua M. Bartzen, Alan N. Belkin, William J. Doherty, Frederick T.
Evans, Michael J. Fischetti, Kenneth E. John, Robert P. Lilly, and Jill P.
Sayre. Contact and

Acknowledgments

Page 21 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

1. Net Income: The Service has difficulty generating positive net income,
despite recent rate increases, and expects a large deficit in FY 2002. 1.1
Replace the break- even requirement with a provision for a reasonable rate
of return. Postal Service, Congress 1.2 Increase the amount of funds in rate
cases for capital purposes for new facilities. Postal Service, PRC 2. Cost-
cutting/ productivity: Costs are increasing faster than revenues and are
hard to cut. The Service has difficulty making and sustaining productivity
increases. 2.1 Deploy more automation (Postal Automated Redirection System,
Automated Flat Sorting Machine (AFSM 100) and tray handing systems for AFSM
100 and 1000; low- cost tray sorters, next generation parcel sorting
equipment- the parcel Singulate, Scan, Induction Unit and Automated Package
Processing System).

Postal Service, milestones from 2002- 2004

2.2 Increase throughput and reduce nonautomated letter mail stream through
equipment modifications and customer incentives (FSM 1000 automated flats
feeders and optical character readers; technology upgrades to improve
address recognition and enhance feeder systems).

Postal Service, milestones 2002- 2004

2.3 Develop more automation (e. g., Universal Tray System, automated
delivery point sequencing equipment for flats, automation of processing of
Business Reply Mail and Courtesy Reply Mail cards).

Postal Service; Universal Tray System in one site by end 2002

2.4 Move toward long- term vision of one bundle of mixed letters and flats
for each delivery point called the Delivery Point Packaging after delivery
point sequencing of flats mail is implemented.

Postal Service; one bundle: 4 years for R& D; flats- delivery point
sequencing: pursue 32 month time table for development and selection 2.5
Deploy flats remote encoding system to consolidate flats keying systems and
minimize idle time. Postal Service,

milestones from 2002- 2003 2.6 Reduce tray and piece handlings and improve
efficiency of postal operations by working with customers and the mailing
industry to explore product redesign and worksharing options.

Postal Service; mailing industry 2.7 Improve delivery productivity through
deployment/ use of the Delivery Operations Information System to provide
data to delivery supervisors; the Managed Service Points system to scan bar
codes at the delivery unit and along the carrier?s route of travel; the
Delivery Performance Achievement and Recognition System to benchmark, set
goals, and give recognition for both city and rural delivery; initiatives to
improve rural delivery; and test optimizing city carrier routing and travel
paths and the Segway Human Transporter.

Postal Service, milestones in 2002 and 2003

2.8 Modernize purchasing procedures by changing postal regulations. Postal
Service 2.9 Implement supply chain management. Consolidate purchases for
better quality and lower costs (redesign purchasing organization into
interdisciplinary commodity teams; reduce low- dollar value transactions;
and forge stronger, more effective relations with key strategic suppliers).

Postal Service 2.10 Revise certain statutory requirements relating to the
Service?s supply chain management, such as the Service Contract Act and the
Davis- Bacon Act, to reduce costs and administrative requirements not
applicable to commercial businesses.

Postal Service, Congress

Appendix I: Key Problems Identified by GAO and Actions in the Postal
Service?s Transformation Plan to Address Them

Page 22 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

2.11 Reduce injury compensation costs by expanding the Preferred Provider
Organization program throughout the Service, to reduce medical fees below
what the Department of Labor?s Office of Workers? Compensation Program
(OWCP) allows, and identify duplicate payments that get through OWCP?s
system.

Postal Service, OWCP; milestones in 2002- 2003

2.12 Reduce injury compensation costs by moving all Federal Employees?
Compensation Act (FECA) recipients to FECA annuity at age 65. The FECA
annuity would equate to the same costs as a normal retirement for all
present and former Service employees over age 65 on OWCP compensation rolls.

Postal Service, Congress, Office of Management and Budget, OWCP; milestone:
2002- 2003

2.13 Reduce injury compensation costs by encouraging OWCP to revise its
regulations to allow direct contact with the treating physician by the
employing agency (i. e., the Service).

Postal Service, OWCP; milestone: 2002- 2003 2.14 Reduce injury compensation
costs by developing joint strategies with OWCP, such as an accelerated
private sector placement program that reduces time for private sector
outplacement of injured Service employees from up to 2 years to less than 1
year. Create new internal positions to accommodate injured workers.

Postal Service, OWCP; milestone: 2002- 2003 2.15 Reduce and deter criminal
misuse of workers? compensation. Postal Service 2.16 Address issues
contributing to escalating FECA costs: Compensation rates are too generous;
should be only one rate (66 2/ 3 percent); no waiting period before wage-
loss compensation is paid.

Postal Service, Congress 2.17 Optimize the transportation and distribution
networks: the Network Integration and Alignment initiative is designed to
create a flexible logistics network to reduce the Service and customer
costs, increase overall operational effectiveness, and improve consistency
of service. Streamline and simplify the distribution network. Consolidate
sorting facilities, eliminate excess resources, and determine facility roles
and functions. Deploy Surface Air Management System and Surface Air Support
System, develop transportation optimization planning and scheduling, develop
transportation contract support system; and increase utilization of mail
transport equipment.

Postal Service, milestones in 2002- 2003

2.18 Increase retail/ customer service productivity (operational
standardization, continued automation of mail processing operations that
occur in the back rooms of post offices), implement facility design changes
where feasible to enable 24- hour access to critical products and services.

Postal Service, milestones in 2002- 2004

2.19 Expand access to postal services by moving simple transactions out of
post offices (communicate information on alternative services (i. e.,
advertising), provide an on- line postage label application so packages can
be dropped in a P. O. box, or handed to/ picked up by carriers).

Postal Service; milestones: online postage label by fall 2002 mailing season

2.20 Create new low- cost retail alternatives. Expand self- service
alternatives (kiosk services, such as ATMs, new technology for basic stamp
purchases and mailing services, automated postage printers, automated postal
center- enabling self- service purchase of stamps and mailing of packages).

Postal Service, milestones in 2002- 2003

2.21 Improve performance management around best practices, including
standardizing mail processing. Consolidate mail- processing activities and
centralize or relocate these activities. Also conduct other labor reviews
and standardize mail- processing operations, including those for Priority
Mail operations. Implement complement planning, tracking, and management
processes.

Postal Service, milestones in 2002- 2003

2.22 Manage realty assets to maximize return by reducing costs related to
properties for sale, short- term and development leasing, developmental
added value properties, and other programs.

Postal Service

Page 23 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

2.23 Achieve savings in international air transportation by deregulation to
convey to the Service authority to competitively contract in the open
market. Postal Service, Congress 3. Safety/ security: Expenditures and
funding to enhance mail safety and security are uncertain. Safety and
security needs exacerbate the Service?s financial problems. 3.1 Implement
comprehensive plan for improving mail safety and security. Postal Service,
Congress (appropriations) 3.2 Enhance security across technology to avoid
disruptions in critical operations and protect sensitive information from
unauthorized disclosure or modification (education and training,
certification process, contingency planning, intrusion protection, automated
monitoring).

Postal Service; milestones in 2002- 2007, annually, and ongoing

3.3 Ensure safe, secure, and drug- free work environment (reduce and deter
employee- on- employee assaults and credible threats, robberies, illegal
drugs). Postal Service 3.4 Provide for the security of the mail and postal
products, services, and assets (reduce and deter mail theft, related
identify theft and takeovers, criminal attacks on postal products, services,
and assets).

Postal Service 3.5 Combat crimes using the postal system (e. g., mail fraud,
and prohibited, illegal, and dangerous mailings). Postal Service 3.6 Ensure
the Service maintains its trusted brand and provides top- rate privacy
protection (standardize privacy policies and procedures, streamline
compliance procedures, work with internal and external groups to build
privacy into dataoriented initiatives).

Postal Service and external groups 4. Cash flow: Cash- flow pressures
continue because of cost/ revenue trends. 4.1 Improve cash flow by
generating net income, cost- cutting, moderate rate increase (not until
2004), and planning capital outlays so that they do not exceed cash flow.

Postal Service 5. Debt: The Service has no debt reduction plan as its debt
nears the $15 billion limit. 5.1 Reduce debt and remain within the current
statutory debt limits. This strategy will be modified as necessary to ensure
that the Service preserves its ability to meet all of its cash obligations.
To stabilize and reduce debt, the Service will need to recover prior years?
losses and plan capital cash outlays so that they do not exceed cash flow.
Also, the Service cannot simultaneously generate net losses and reduce its
borrowings.

Postal Service 5.2 Manage the Service?s mix of short- and long- term debt to
lower interest expense over time. Postal Service 6. Basic Business Model:
Mail volumes have declined in major revenue producing areas. The Service?s
business model, which relies on rising mail volumes to cover rising costs,
is not sustainable and needs a comprehensive transformation. 6.1 Transform
the Service into a commercial government enterprise (model recommended by
the Service). Congress 6.2 Enhance the value of the mail through technology
(identify/ track mail pieces through Confirm). Postal Service, PRC
milestones: Postal Service

filed for Confirm classification on April 24, 2002 6.3 Improve the access,
speed, and reliability of accountable mail services (Internet access to
delivery time and date of Certified Mail and Return Receipt; other product
enhancements).

Postal Service; milestones in 2002 (e. g., Internet access to Certified
Mail, Return Receipt) 6.4 Design rates and mail preparation to match
customer needs (simplify rate structure, preparation and acceptance
requirements for moderate users of bulk mail, and for mailing books and
parcels).

Postal Service, PRC, mailers; product redesign to take about 3 years,
implementation by summer of 2004

Page 24 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

6.5 Position mail as a key communications medium and as a customer
relationship management tool (customize postal products to enable small- and
medium- sized business customers to leverage mail for promotion).

Postal Service, milestones: ongoing

6.6 Enhance package services (acceptance scanning of return parcels, new
parcel categories- reduce number of categories, rate structures, and
confusing requirements) by providing, merchandise return, new mail
categories, and an on- line postage label application.

Postal Service; milestones same as Product Redesign (implementation by
summer 2004) except for labels by fall 2002 mailing season

6.7 Promote greater ease- of- use to improve customer satisfaction and
sales. Transform the Domestic Mail Manual and make rules and regulations
more market- responsive.

Postal Service; milestones: none

6.8 Develop a corporate- based pricing plan and a set of strategies to
develop market- based pricing. Retain and increase international market
share. Postal Service;

milestones: none 7. Rates Increases: Rates for certain categories of mail
are rising faster than inflation and more increases possible. 7.1 No rate
increases are planned until calendar year 2004. Postal Service 7.2 Next rate
increase is planned to be a moderate and negotiated settlement. Postal
Service, mailers, competitors, PRC 8. Infrastructure/ capital investment:
Changes to infrastructure are limited by legal requirements and practical
constraints. Further, the capital program freeze is unsustainable. 8.1 Lift
the self- imposed moratorium on post office closings and consolidations.
Postal Service,

done by PMG in April 2002 8.2 Close unnecessary contract postal units.
Postal Service 8.3 Implement retail access strategies to ensure that
customers retain adequate access to products and services. Postal Service
8.4 Work with the PRC to streamline the post office closing process to
minimize turnaround time. Postal Service and PRC 8.5 Repeal statutory
administrative notice procedures mandated for closing post offices (see 39
U. S. C. 404( b)), or replace them with more flexible procedures. Postal
Service, Congress 8.6 Eliminate appropriations language that discourages
post office closings and freezes service levels at the 1983 level. Congress
8.7 Optimize the retail network (through development of a network database,
baseline the current retail network; accommodate retail growth demand via a
logical system that matches appropriate channel with demonstrated
marketplace needs; replace redundant post offices, stations, and branches
that do not provide appropriate value with alternative retail channels).

Postal Service and Congress; milestones in 2002 for completing the network
database

8.8 Upgrade and reengineer the computing infrastructure to support current
and new business requirements, as well as to enable the Service to become
more efficient and to reduce operating costs. (Upgrade distributed,
midrange, and mainframe computing infrastructure and implement technical and
corporate shared services initiatives.)

Postal Service, milestones in 2002- 2009 and annually

8.9 Provide universal computing connectivity (consolidate voice, data, and
video network and implement wireless technology initiative). Postal Service,

milestones in 2002- 2008 9. Human capital: The Service faces difficult human
capital challenges, including workforce planning and realignment,
performance management, compensation and benefit issues, and labor-
management relations. 9.1 Retain employees with skills critical to the
Service?s success. (Study retention trends and develop plans for retention
and recruitment incentives to allow the Service to compete for talent.)

Postal Service, milestones in 2003

Page 25 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

9.2 Concentrate recruitment efforts on bringing talent, skills, and
experience from within and from outside the Service to address potential
loss of Service leadership. (Implement Associate Supervisor Program and
Management and Professional Specialist Intern programs, use third parties
for marketing/ attracting candidates to specialized skill positions, deploy
an automated screening process, pilot centralize recruitment structures for
hard- tofill bargaining and nonbargaining positions nationwide, and use Web
technology to enhance recruitment and hiring processes.)

Postal Service, milestones in 2002- 2004

9.3 Remove statutory salary cap for Service employees to help recruit and
retain selected managers, executives, and officers. Postal Service, Congress
9.4 Utilize succession planning to identify, develop, and select current and
future leaders. (Continue executive development programs; hold officers and
executives accountable for having/ implementing individual development plans
for successors.)

Postal Service, milestones in 2002- 2003

9.5 Ensure that a dynamic training curriculum is available to develop a pool
of talent to fill leadership positions. (Maximize available training and
development programs to have a pool of potential successors at all levels.
Establish defined career path for supervisors and managers to facilitate
succession at low- level to mid- level positions. Implement more technology-
based training. Develop learning management system to coordinate
administration, scheduling, tracking, assessment, and testing of learners.)

Postal Service, milestones in 2002- 2006

9.6 Create a performance- based pay system. Redesign performance- based pay
systems and assessment systems from executives to front line supervisors and
EAS grade- level 15. A new pay system will place a greater focus on
rewarding individual rather than group achievement. The Service will consult
with postal management associations and then phase in the new performance
assessment system.

Postal Service, management associations; milestones in 2002- 2004

9.7 Build a highly effective and motivated workforce. Use existing programs
and measures to hold district, area, and headquarters leadership accountable
for the following activities: improving percentage of favorable responses to
Voice of the Employee survey, identifying troubled worksites and develop
effective plans to correct problems, supporting District Joint Employee
Assistance Program Advisory Committee, supporting Diversity?s continuous
education initiatives, maintaining trained Threat Assessment Team and
properly prepared Crisis Management Team, providing violence awareness and
sexual harassment training according to policy. Organize the most predictive
workplace data for use by districts and areas to create proactive
interventions: Form predictive profiles to allow the Service to become more
proactive in dealing with potential workplace environment issues.

Postal Service, milestones in 2002- 2004

9.8 Improve workforce planning. Move to an integrated workforce planning
process with a single function responsible for reporting trends and issues.
Fully utilize the provisions of collective bargaining agreements to
reposition the workforce as needed to meet customer demands and operational
requirements. Execute reduction- in- force avoidance strategies, including
voluntary early retirement offerings and internal movement of employees.
Consider reductionin- force alternatives (voluntary reduced hours,
retirement incentives, layoffs, voluntary sabbaticals). Seek cost- efficient
ways to move people from positions that are no longer necessary. Modify
applicable placement, training, and rightsizing processes.

Postal Service, milestones in 2002- 2005

9.9 Expand shared services in accounting and human resources (i. e., sharing
technology, people, and other resources within and across administrative
functions to reduce costs and improve the quality of administrative
services).

Postal Service, milestones in 2002- 2004

Page 26 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

9.10 Explore outsourcing/ implement outsourcing initiatives with potential
to increase service/ quality levels, better utilize resources, reduce costs,
and allow greater emphasis on the Service?s core business. Labor Relations
is pursuing the establishment of an Employee Stock Ownership Plan for Equal
Employment Opportunity investigative work. The Service will evaluate cost
savings derived from outsourcing and Employee Stock Ownership Plan
initiatives and use existing quality and performance measures to determine
if these are improved by the initiatives.

Postal Service 9.11 Meet with craft union leaders to seek agreement on
modifications to the current interest arbitration process to include
mediation by the next cycle of negotiations.

Postal Service, craft union leaders; milestones in 2002- 2003

9.12 Replace the statutory mediation and binding arbitration provisions with
a process similar to the Railway Labor Act, including a mandated mediation
process (a single mediator selected by the secretary of labor, who by law
would be of national reputation and professional stature and a member of the
National Academy of Arbitrators) and strike and lockout provisions.

Postal Service, Congress 9.13 Improve labor- management relations. (Expand
various joint employee involvement and quality of work- life initiatives
with labor unions. Develop and provide contract administration and labor/
management training to management and bargaining unit employees. Continue to
have the Service?s leadership, employee unions, and management associations
participate in joint initiatives. Improve ability to resolve issues and
disputes, and decrease grievance activity by developing joint handbooks and
manuals. Develop and expand alternatives to traditional discipline and
dispute resolution methods, including further development and refinement of
the REDRESS program and the use of labor and management Dispute Resolution
Teams.)

Postal Service, labor unions, management associations

10. Liabilities: Liabilities exceed assets, and long- term retirement
liabilities are growing. 10.1 Increase income generation and minimize the
increase in deferred retirement costs by allowing postal retirement fund
assets to be invested in other than federal securities at higher rates of
return. This would involve investment of postal- related Civil Service
Retirement System and Federal Employees Retirement System retirement fund
assets currently managed by the Office of Personnel Management.

Postal Service, Congress 11. Transparency and reporting: Greater
transparency is needed regarding the Service?s financial operating results
and projections. 11.1 Eliminate the postal fiscal year and use only the
government fiscal year for internal and external reporting. Convert the
Service?s reporting (financial and all other) from the existing accounting
period format (i. e., 4- week accounting periods) to a calendar month
format, with monthly and quarterly reporting.

Postal Service; milestones from January 2002 to September 2003

11.2 Publish quarterly financial reports for the first, second, and third
quarters. Postal Service 12. Accountability: Limited mechanisms are in place
to promote accountability. 12.1 Redesign the performance- based pay system.
Postal Service 13. Incentives: Legal framework (monopoly, break- even
requirement, ratesetting) limit incentives to cut/ restrain costs or to
innovate. 13.1 Replace the break- even requirement with a provision for a
reasonable rate of return (also listed as 1.1 above). Postal Service,
Congress 13.2 Replace cost- of- service rate regulation (see 15 below).
Congress 14. Rate- setting process: The Service?s rate- setting process is
lengthy, adversarial and provides limited incentives to control costs.

Page 27 GAO- 02- 694T

Summary of Key Service Problems and Actions in the Service?s Transformation
Plan Follow- up responsibility for actions and

milestones

14.1 Work with the PRC to improve the rate- setting process and change the
rate and classification structure. Initiatives: phased rate changes,
operationally targeted experiments, major reclassification effort,
segmentation for major products, negotiated service agreements, volume
discounts. Initiatives to be considered: contract/ customized pricing,
bundle pricing for multiple products/ services, seasonal discounts and
premiums. Improve rate- setting process by streamlining process to allow
reasonable pricing changes without extensive regulatory hearings.

Postal Service, PRC, mailing community; the Service plans a ?summit? with
PRC and other stakeholders on changes to ratemaking and classification
processes

14.2 Review the statutory rate- setting process to identify potential
changes for improvement. For example, replace the existing statutory system
with some form of incentive regulation giving the Service pricing
flexibility for competitive products, subject to rules to protect the market
from anticompetitive Service activities.

Postal Service, PRC, Congress 15. Universal service mission/ role: The
Service has not defined what universal postal services are needed by the
American people in the 21st century and the Service?s role in providing such
services. 15.1 Obtain greater flexibility to adjust the number of delivery
days. Postal Service, Congress 15.2 Obtain greater statutory and regulatory
flexibility to redefine universal retail postal service, including standards
for access and levels of service. Postal Service, Congress, PRC 16.
Governance: The Service?s business model and governance structure are
problematic and need to be reassessed as part of transformation. 16.1 The
Service?s proposed commercial government enterprise model refocuses the
board of governors on fiduciary duties. Postal Service, Congress

Source: Postal Service and GAO- 02- 355.

Page 28 GAO- 02- 694T

Table 2: Mail Volume by Category for the First 2 Quarters of Fiscal Year
2002 Compared with the Same Period in Fiscal Year 2001

Pieces in thousands

FY 2002 FY 2001 Category Q1 Q2 Total Q1 Q2 Total

Percent change

First Class Mail 23,312,681 25,015,392 48,328,073 23,862,319 25,460,191
49,322,510 -2.0 Priority Mail 228,615 261,309 489,923 275,249 298,492
573,741 -14.6 Express Mail 13,382 14,888 28,270 15,901 16,488 32,389 -12.7
Mailgrams 895 281 1,176 870 875 1,745 -32.6 Periodicals 2, 290,100 2,
249,606 4,539,706 2,323,486 2, 354,447 4,677,932 -3.0 Standard Mail
(primarily advertising) 22,103,683 18,728,591 40,832,274 24,295,808
19,719,809 44,015,617 -7.2 Package Services 247,632 267,714 515,346 254,641
263,588 518,228 -0.6 International Mail 215,122 241,579 456,701 271,854
306,055 577,909 -21.0 U. S. Postal Service Mail 126,372 86,079 212,451
87,826 81,626 169,452 25.4 Free Mail for the Blind and Handicapped 12,942
12,801 25,743 10,898 8, 514 19,412 32.6

Total 48,551,424 46,878,239 95,429,663 51,398,851 48,510,084 99,908,936 -4.5

Source: Postal Service.

Table 3: Mail Revenue by Category for the First 2 Quarters of Fiscal Year
2002 Compared with the Same Period in Fiscal Year 2001

Dollars in thousands

FY 2002 FY 2001 Category/ service Q1 Q2 Total Q1 Q2 Total Percent

change

First- Class Mail $8,186,087 $8,719,882 $16,905,969 $8,173,027 $8,702,737
$16,875,764 0.2 Priority Mail 1,049,492 1, 257,527 2,307,019 1,092,471 1,
328,586 2,421,057 -4.7 Express Mail 194,463 220,669 415,133 222,716 240,212
462,929 -10.3 Mailgrams 426 138 565 331 347 678 -16.7 Periodicals 519,301
485,883 1,005,183 505,868 498,138 1,004,006 0.1 Standard Mail (primarily
advertising) 3,979,001 3, 337,462 7,316,463 4,053,900 3, 401,326 7,455,226
-1.9 Package Services 488,206 542,798 1,031,004 451,797 493,031 944,828 9.1
International Mail 370,041 420,671 790,711 408,162 462,045 870,207 -9.1
Services 506,659 535,025 1,041,683 422,604 452,559 875,163 19.0 Other
revenuea 73,296 105,442 178,738 95,390 100,895 196,285 9.8

Total $15,366,971 $15,625,498 $30,992,468 $15,426,266 $15,679,876
$31,106,143 -0.4

a Other revenue includes investment income, reimbursement revenue, revenue
foregone, advertising, e- commerce initiatives, retail initiatives, and
miscellaneous services such as passport services. Note: Totals may not add
due to rounding. Source: Postal Service.

Appendix II: Postal Service Mail Volume and Revenue Information

Page 29 GAO- 02- 694T

Table 4: Overnight First- Class Mail

Percent on- time delivery

Year Q1 Q2 Q3 Q4

1993 83.29% 83.01% 84.30% 83.59% 1994 83.53 78.80 82.75 82.56 1995 84.09
84.52 86.82 87.23 1996 87.76 87.31 90.41 91.21 1997 90.77 90.75 92.15 92.35
1998 92.86 92.66 93.51 93.02 1999 92.78 93.15 93.54 93.74 2000 93.43 93.53
94.44 93.89 2001 93.02 92.80 94.06 93.96 2002 92.93 93.46 N/ A N/ A

Note: N/ A = No data available for Q3 and Q4 of fiscal year 2002. Source:
Postal Service.

Table 5: Two- Day First- Class Mail

Percent on- time delivery

Year Q1 Q2 Q3 Q4

1993 77.76% 74.73% 78.27% 78.10% 1994 76.52 66.72 72.37 74.36 1995 75.53
75.04 79.07 80.10 1996 79.49 75.54 80.04 80.25 1997 75.90 71.74 78.59 78.58
1998 78.88 78.70 86.06 87.66 1999 86.47 83.36 86.89 88.37 2000 86.41 83.60
87.02 87.87 2001 85.70 81.15 84.77 86.08 2002 82.06 82.24 N/ A N/ A

Note: N/ A = No data available for Q3 and Q4 of fiscal year 2002. Source:
Postal Service.

Appendix III: Postal Service Performance Scores

Page 30 GAO- 02- 694T

Table 6: Three- Day First- Class Mail

Percent on- time delivery

Year Q1 Q2 Q3 Q4

1993 81.92% 77.16% 80.18% 81.62% 1994 79.24 65.44 76.84 78.55 1995 80.16
75.52 82.19 82.72 1996 82.24 70.93 82.44 82.82 1997 79.01 70.03 80.20 80.14
1998 80.49 74.24 83.68 86.44 1999 86.69 79.18 86.87 88.12 2000 85.59 78.87
85.60 86.38 2001 83.77 73.76 81.00 83.18 2002 72.35 73.51 N/ A N/ A

Note: N/ A = No data available for Q3 and Q4 of fiscal year 2002. Source:
Postal Service.

(543022)
*** End of document. ***