U.S. Postal Service: Bold Action Needed to Continue Progress on  
Postal Transformation (05-NOV-03, GAO-04-108T). 		 
                                                                 
Last year the President established a commission to examine the  
future of the U.S. Postal Service (the Service). Its report,	 
issued in July 2003, contained a proposed vision for the Service 
and recommendations to ensure the viability of postal services.  
GAO was asked to discuss (1) its perspective on the commission's 
report and (2) suggestions for next steps. This testimony is	 
based on GAO's analysis of the Commission's report and prior GAO 
reports and testimonies.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-108T					        
    ACCNO:   A08826						        
  TITLE:     U.S. Postal Service: Bold Action Needed to Continue      
Progress on Postal Transformation				 
     DATE:   11/05/2003 
  SUBJECT:   Agency evaluation					 
	     Agency missions					 
	     Federal agency reorganization			 
	     Internal controls					 
	     Postal facilities					 
	     Postal rates					 
	     Postal service					 
	     Postal service employees				 
	     Strategic planning 				 

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GAO-04-108T

                    United States General Accounting Office

GAO Testimony

Before the Senate Committee on Governmental Affairs

For Release on Delivery Expected at 2:00 p.m. EST

Wednesday, November 5, 2003

U.S. POSTAL SERVICE

        Bold Action Needed to Continue Progress on Postal Transformation

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

GAO-04-108T

Highlights of GAO-04-108T, a testimony before the Senate Committee on
Governmental Affairs

Last year the President established a commission to examine the future of
the U.S. Postal Service (the Service). Its report, issued in July 2003,
contained a proposed vision for the Service and recommendations to ensure
the viability of postal services. GAO was asked to discuss (1) its
perspective on the commission's report and (2) suggestions for next steps.
This testimony is based on GAO's analysis of the Commission's report and
prior GAO reports and testimonies.

GAO believes that Congress should consider the Commission's
recommendations and enact comprehensive postal reform legislation that
would clarify the Service's mission and role; enhance governance,
accountability, oversight, and transparency; improve regulation of postal
rates; and make human capital reforms.

GAO also recommends that the Postmaster General develop a comprehensive
plan to optimize its infrastructure and workforce, in collaboration with
its key stakeholders, and make it publicly available. In addition, the
Postmaster General should provide periodic updates to Congress and the
public on the status of implementing its transformation initiatives and
other Commission recommendations that fall within the scope of its
existing authority. Postal officials have agreed to take these actions.

www.gao.gov/cgi-bin/getrpt?GAO-04-108T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Bernard L. Ungar at (202)
512-2834 or [email protected].

November 5, 2003

U.S. POSTAL SERVICE

Bold Action Needed to Continue Progress on Postal Transformation

The Commission found that the Service faces a bleak fiscal outlook. The
Service has an outdated and inflexible business model amid a rapidly
changing postal landscape. First-Class Mail appears to be on the brink of
long-term decline as Americans take advantage of cheaper electronic
alternatives. Thus, universal postal service is at risk. These findings
are similar to our past work and point to the need for fundamental reforms
to minimize the risk of a significant taxpayer bailout or dramatic postal
rate increases. The Commission made recommendations to Congress and the
Service aimed at achieving such reforms, which GAO believes merit
consideration.

First Class Mail Volume Growth from Fiscal Years 1984-2004

GAO agrees with the Commission that now is the time to modernize the
nation's postal laws rather than waiting until a financial crisis occurs
that limits congressional options. Key aspects of the Service's existing
legislative framework that need to be addressed are 1) a broadly defined
mission that enables the Service to engage in unprofitable and
controversial endeavors, 2) a governance structure that does not ensure
governing board members who have the requisite knowledge and skills, 3)
the need for additional accountability, oversight, and transparency
provisions; 4) a lengthy, burdensome rate-setting process, and 5)
provisions that hinder the Service in rationalizing its infrastructure and
workforce.

GAO also agrees with the Commission that the Service can take steps now to
modernize and increase efficiency and effectiveness, improve its financial
position, and rationalize its infrastructure and workforce. The Service
has begun to implement its Transformation Plan initiatives, cut its costs
and the size of its workforce, and improve its efficiency. However, since
the Service issued its Transformation Plan in April 2002, it has not
provided adequate transparency on its overall plans to rationalize its
infrastructure and workforce; the status of initiatives included in its
Transformation Plan; and how it plans to integrate the strategies, timing,
and funding necessary to move toward becoming a high-performing
organization. The Service's vision of rightsizing its infrastructure and
workforce is achievable if approached in a comprehensive, integrated
fashion, with appropriate communication and coordination with postal
stakeholders.

Chairman Collins and Members of the Committee:

I am pleased to be here today to participate in this hearing on the report
of the President's Commission on the United States Postal Service (the
Commission).1 Recently, the U.S. Postal Service (the Service) has gained
some financial breathing room because recently enacted legislation has
reduced the Service's payments for its pension obligations. The Service
has estimated that its net income in fiscal year 2003 will be over $4
billion, of which about $3 billion was the result of recent legislation.
However, the Service's long-term financial challenges remain, and,
accordingly, the Service's long-term outlook and transformation efforts
remain on our High-Risk List. Since we placed the Service on our High-Risk
List in April 2001, the Service has developed its 2002 Transformation
Plan, cut various costs, and improved its productivity. However, these
incremental steps cannot resolve the fundamental and systemic issues
associated with the Service's current business model.

We have called for actions to address the Service's financial situation
and long-term outlook, including overhauling its existing business model.
We previously suggested that a commission could be established to study
postal issues and make recommendations, and like you, were pleased that
the President established the Commission to propose a vision for the
future of the Service and recommendations to ensure the viability of
postal services. As we testified before the Commission, fundamental
changes will need to be made to the Service's business model, and the
legal and regulatory framework that supports it, to provide for the
Service's long-term financial viability. The Commission proposed
far-reaching changes in each of these areas. The vision for the Service
set forth in the Commission's report, combined with its comprehensive
recommendations, has the potential to fundamentally affect the nature of
postal services, their cost, and how they are provided to the American
people.

In my testimony today, I will discuss our perspective on the Commission's
report and offer suggestions on steps that Congress and the Service need
to take for continued progress on postal transformation. My testimony
today is based on our analysis of the Commission's report, discussions

1President's Commission on the United States Postal Service, Embracing the
Future: Making the Tough Choices to Preserve Universal Mail Service,
(Washington, D.C.: July 31, 2003).

with postal stakeholders, prior GAO reports and testimonies on postal
transformation issues, and our continuing work in this area.2

Summary 	Overall, the Commission's report provides a valuable contribution
to assist Congress, the Service, the executive branch, and stakeholders in
considering the actions needed to transform the Postal Service to a more
high-performing, results-oriented, transparent, and accountable
organization. The Commission found that the Postal Service's current
business model has not produced the desired results because it has led to
poor financial results, difficulty in funding capital needs, lack of
incentives for good financial performance, and lack of efficiency. The
Commission offered constructive suggestions, some of which require
legislative change, and some that can be implemented under the existing
statutory framework.

The Commission's recommendations echo many of our prior reports and
address concerns that we have previously raised. We agree with the
Commission that an incremental approach to Postal Service reform will
yield too little too late given the enterprise's bleak fiscal outlook, the
magnitude of its financial obligations, the likelihood of declining
First-Class Mail volumes, and the limited potential of the Service's
legacy postal network. All options for statutory and discretionary change
need to be on the table for discussion, including the Commission's
findings and recommendations, as well as suggestions from GAO and other
stakeholders. Some of the Commission's recommendations, such as those
related to rate setting, oversight, and collective bargaining, involve
complex and controversial issues that may require further consideration
and refinement. Nevertheless, the time has come for Congress to enact
comprehensive postal reform legislation that would clarify the Service's
mission and role; enhance governance, accountability, oversight, and
transparency; improve regulation of postal rates; and make human capital
reforms.

In addition to statutory reform, we agree with the Commission that the
Service has many opportunities to become more efficient, notably by

2See U.S. General Accounting Office, U.S. Postal Service: Key Postal
Transformation Issues, GAO-03-812T (Washington, D.C.: May 29, 2003); Major
Management Challenges and Program Risks: U.S. Postal Service, GAO-03-118
(Washington, D.C.: Jan. 2003); and U.S. Postal Service: Deteriorating
Financial Outlook Increases Need for Transformation, GAO-02-355
(Washington, D.C.: Feb. 28, 2002).

standardizing its operations and reducing excess capacity in its network.
This vision is achievable if approached in a comprehensive, integrated
fashion, and supported by postal stakeholders. The impending retirement of
much of the Service's workforce provides an opportunity to rightsize the
organization with minimal disruption. However, the Service has not
provided adequate transparency on its plans to rationalize its
infrastructure and workforce, as well as on the status of initiatives
included in its Transformation Plan. More constructive engagement on its
efforts to rationalize its infrastructure and workforce is needed with the
Service's employee organizations, the mailing industry, affected
communities, and Congress. To facilitate the Service's progress in
implementing actions under the existing system, we recommend that the
Postmaster General develop a comprehensive and integrated plan to optimize
its infrastructure and workforce, in collaboration with its key
stakeholders, and make it available to Congress and the general public. In
addition, the Postmaster General should provide periodic updates to
Congress and the public on the status of implementing its transformation
initiatives and other Commission recommendations that fall within the
scope of its existing authority. In discussing our recommendations with
postal officials, they agreed to take these actions.

We also share the Commission's concerns about the Service's funding of its
$92 billion in liabilities and obligations, which include about $48
billion in unfunded retiree health benefits, about $6.5 billion for
unfunded workers' compensation benefits, and about $5.8 billion for
unfunded Civil Service Retirement System (CSRS) pension obligations.
Although recent legislation has addressed how the Service will cover its
CSRS pension obligations over 40 years, the Service continues to make
minimum payments for the other obligations, which are currently financed
on a pay-as-you go basis. Based on known demographic trends, the Service's
share of its retirees' health insurance premiums is expected to continue
rising until about 2040. Under the Service's existing accounting and
rate-setting methods, more significant and frequent rate hikes are likely
to be needed for future ratepayers to cover the costs of benefits that are
being earned by current employees. We recognize that building
accrual-based measures of retiree health costs into the current rate base
may be difficult considering the pressure to defer rate increases.
However, in our view, it would be more prudent to address the unfunded
obligations in a manner that is fair and balanced for both current and
future ratepayers. The Postal Service has provided Congress with proposals
for funding retiree health benefit obligations, which we will address in
our forthcoming report in this area.

  The Commission's Report Made Valuable Contributions

Overall, the Commission's report provides a valuable contribution to
assist Congress, the Service, the executive branch, and stakeholders in
considering the actions needed to transform the Postal Service into a more
high-performing, results-oriented, and accountable organization. Tomorrow,
we plan to hold a forum at GAO with Postmaster General Jack Potter and
other national leaders and experts to discuss ways in which Congress and
the executive branch can foster federal agencies' and their networks'
efforts to become high-performing organizations.

We are pleased that the Commission's report facilitated consideration and
debate by presenting the issues in a way that can be understood by a
general audience, and we commend the Commission for the open and
transparent process used to engage stakeholders in developing its report.
We also share the report's emphasis on a customer-oriented Postal Service
that can continue to meet the nation's vital need for universal postal
service. Citizens and businesses depend on the Service to provide
affordable postal services that are essential for communications and
commerce on a universal basis.

The Commission's report also made an important contribution by addressing
difficult infrastructure and human capital issues. We agree with the
Commission that transforming the Service will require a fundamental
reexamination and realignment in both of these areas, which collectively
account for most of the Service's costs and are the linchpin to delivering
high-quality service. As the Commission noted, the nation's
communications, technology, and delivery markets have seen vast changes
since the Postal Service was created by the Postal Reorganization Act of
1970. New types of electronic communications include the use of e-mail,
wireless technology, and electronic bill payment services. These changes
appear to have placed First-Class Mail volume in the early stages of what
may be a long-term decline.

In this new environment, unless the Service's operating expenses can be
reduced correspondingly, with a rightsizing of both its infrastructure and
workforce, it is questionable whether affordable universal mail service
can be sustained over the long term with a self-financing public
institution. Further, it takes time for an organization as large and
complex as the Service to make fundamental changes, particularly when some
of these may hinge on congressional action. Fortunately, the Commission
and others, including the Service, have identified numerous changes, many
of them possible within existing law, which can reduce the Service's

The Need for Comprehensive Postal Reform Legislation

operating costs while maintaining and enhancing the quality and value of
postal services.

With respect to human capital issues, the Commission has recognized that
management reform and improvements in managing the Service's employees
will be vital to comprehensive postal transformation. We applaud the
Commission's efforts to develop new approaches in these areas. While
postal stakeholders may differ over the Commission's recommendations, we
share the Commission's view that the status quo is not a viable option.
All options for statutory and discretionary change need to be on the table
for discussion. If the Service and its employee unions do not believe that
some of the Commission's workforce recommendations are viable, we believe
that alternative solutions, or a package approach, to the workforce issues
raised by the Commission and us in our previous work need to be explored.

The Commission recognized that comprehensive reform to the nation's postal
laws is needed so that the Service can successfully meet the formidable
challenges it faces and continue to provide affordable and high-quality
universal postal services. The Commission reported that "it is the
Commission's emphatic view that an incremental approach to Postal Service
reform will yield too little too late given the enterprise's bleak fiscal
outlook, the depth of current debt and unfunded obligations, the downward
trend in First-Class Mail volumes and the limited potential of its legacy
postal network that was built for a bygone era." We agree. Our prior
reports and testimonies have concluded that comprehensive postal reform
legislation is needed and have provided information on key issues to be
considered.3 The Commission's findings are generally consistent with our
past work, and its recommendations address postal reform issues in a
comprehensive manner. Now that the Commission has finished its work, the
time has come for Congress to act.

The Commission's recommendations represent a thoughtful package that would
preserve the historic values of universal postal service; make important
statutory changes in many key areas, including governance,

3GAO-03-812T; GAO-02-355; U.S. General Accounting Office, U.S. Postal
Service: Moving Forward on Financial and Transformation Challenges,
GAO-02-694T (Washington, D.C.: May 13, 2002); U.S. Postal Service:
Financial Outlook and Transformation Challenges, GAO-01-733T (Washington,
D.C.: May 15, 2001); and U.S. Postal Service: Transformation Challenges
Present Significant Risks, GAO-01-598T (Washington, D.C.: Apr. 4, 2001).

oversight, and human capital; and create a mechanism for making further
changes over time. In our view, the Postal Service's current financial
breathing room gives Congress an opportunity to carefully consider postal
transformation issues and "get it right" when making fundamental decisions
about rechartering the nation's postal system for the 21st century.

Consistent with the need for Congress to rethink the role of the federal
government in the 21st century, now is the time to rethink and clarify the
mission and role of the Postal Service. The Commission's report concluded
that a number of trends are driving the need for a sweeping exploration of
the Postal Service's role and operations in the 21st century. In this
regard, we share the Commission's concerns about the likelihood of
declining First-Class Mail volumes in both the short-term and the
long-term. First-Class Mail generates more than half of the Service's
revenue. The revenue generated by First-Class Mail was used to cover about
69 percent of the Service's institutional cost in fiscal year 2002. The
loss of contribution from declining First-Class Mail volume would be
difficult to recover from other classes of mail. However, the rate of
growth for First-Class Mail has been in long-term decline since the 1980s.
First-Class Mail volume has steadily declined since it peaked 2 years ago.
Its volume is estimated to have declined by 3.1 percent in fiscal year
2003 and is projected to decline by 1.3 percent in fiscal year 2004 (see
figure 1).

Figure1: First-Class Mail Volume Growth, Fiscal Years 1984 through 2004

Looking ahead, we share the Commission's concern that electronic diversion
of First-Class Mail threatens to significantly accelerate the decline in
the Service's mail volume. Although the role of the Internet has been much
commented on, it can be easy to overlook the fact that the Internet is a
relatively recent historical phenomenon, with use of the World Wide Web
greatly increasing in the 1990s. As recently as 5 years ago, only 37
percent of U.S. households had a computer, and only 19 percent of U.S.
households were connected to the Internet (see figure 2). The rapid
diffusion of computer and Internet technologies has led to high adoption
rates among those with high levels of income and education-the same groups
that send and receive a disproportionate share of First-Class Mail. Thus,
the trend data point to the strong potential for further electronic
diversion. Raising postal rates to offset this trend may provide an
immediate boost to the Service's revenues, but over the longer term will
likely accelerate the transition of mailed communications and payments to

electronic alternatives, including the Internet. A report prepared for the
Commission found that growth in electronic payments is likely to be an
important factor in its forecast of gradual declines in First-Class Mail

4

volume.

Figure 2: Percent of U.S. Households with Computers and Internet
Connections

Note: Data was reported for 1984, 1989, 1993, 1997, 1998, 2000, and 2001.

4Institute for the Future, Two Scenarios of Future Mail Volumes:
2003-2017, prepared for the President's Commission on the United States
Postal Service (Palo Alto, CA: May 2003).

The Commission's report highlighted why the status quo has not produced
satisfactory results and is ill suited for the 21st century. Key
weaknesses include:

o  	Uncertain financial future: In theory, the Postal Service is
self-supporting through postal revenues. In practice, as the Commission
noted, even after recent statutory changes reduced the Service's unfunded
liability for Civil Service Retirement System (CSRS) pension benefits, the
Service has accumulated about $92 billion in liabilities and obligations
over the past three decades. These liabilities and obligations include
debt, large unfunded obligations for retiree health benefits obligations,
and remaining unfunded pension and workers' compensation liabilities.
Thus, current ratepayers have not fully covered the total costs generated
to provide the postal services they have received. A continuation of these
trends would be diametrically opposed to the Commission's vision of a
fiscally sound Postal Service that can sustain universal postal service,
particularly if the Service's core business of First-Class Mail continues
to decline in the coming years.

o  	Difficulty financing capital needs: In recent years, the Service has
found it problematic to obtain adequate financing for capital needs. Thus,
the Service has often increasingly resorted to borrowing to finance its
capital improvements. In fiscal year 2001, the Service was faced with
insufficient cash flow from operations and with debt balances that were
approaching statutory limits. Consequently, the Service imposed a freeze
on capital expenditures for most facilities that continued through fiscal
years 2002 and 2003. The Service was able to repay some of its debt in
fiscal year 2003, primarily because it generated a positive cash flow from
a reduction in its pension costs. However, looking forward, it may be
difficult for the Service to obtain adequate funds to address its
long-term capital needs, including modernizing its aging network of postal
facilities, without significantly increasing rates or debt. The
Commission's recommendations in the areas of retained earnings and
disposition of excess Postal Service real estate represent carefully
considered alternatives to help provide the Service with sufficient
revenue for both its operating and capital needs.

o  	Lack of incentives for good financial performance: The "break-even"
mandate requires the Service's revenues and appropriations to equal its
total estimated costs as nearly as practicable. For many years, this
mandate has been interpreted to mean that the Postal Service should break
even over time. As such, the break-even mandate removes the profit motive,
and the rate-setting structure allows the Postal Service to

cover rising costs by raising rates. Further, the lack of a provision for
retained earnings also limits incentives for productivity improvement and
cost reduction. Under the current structure, whatever cost reductions the
Service achieves in one rate cycle are used to reset the estimated costs
that the Service is to recover in the next rate cycle. In contrast, a
limited retained earnings provision would enable the Service and its
employees to benefit from whatever cost reductions are achieved.

o  	Lack of efficiency: The Service has improved its efficiency in recent
years, but much more progress needs to be made. The Commission identified
significant variation in efficiency among mail processing plants and
called for more efficient operations through standardization. We agree
with the Commission that the Service has significant opportunities to
improve its efficiency through best execution strategies in which those
who can do it best and at the best price would perform postal activities
while the Service rightsizes its infrastructure and workforce. However, as
we have previously reported, both legal and practical constraints have
hindered progress in these areas.

o  	Disincentives for maximizing allocation of postal costs: Under the
current regulatory model, all classes of mail and types of service must
cover their attributable costs, while institutional costs (i.e., common or
overhead costs) are allocated based on judgment informed by broad
statutory criteria.5 In effect, the Postal Service loses pricing
flexibility as costs are allocated to specific postal products and
services, creating a structural disincentive for the Service to maximize
cost allocation to various classes of mail and types of service.
Understanding, measuring, and reporting postal costs have greatly improved
over the years. However, the proportion of postal costs allocated by the
Service has increased by only 9 percent since postal reorganization.
Further, cost allocation disputes persist, as illustrated by the different
methodologies used by the Service and the PRC for allocating mail
processing costs- that is, the Service allocated 58 percent of postal
costs in fiscal year 2002, while the PRC allocated 62 percent. We
recognize that it may be difficult to use the data that are currently
collected by the Service to

5The Service proposes domestic postage rates and fees, as required in law,
so that each class of mail or type of service must cover the direct and
indirect postal costs that are attributable to that class or type of
service plus a portion of its other remaining "institutional costs" which
include all "common" or "overhead" costs. The requirement that each class
of mail must cover its attributable costs has long been interpreted to
apply to groupings of mail within classes that are called subclasses.

allocate a higher proportion of costs. Nevertheless, the Commission's
conclusion that more postal costs can and should be allocated raises the
issue of whether increasing regulatory authority over cost allocation
would be necessary to ensure that all costs that can be rationally
attributed are properly allocated. Furthermore, improvement in the
Service's data collection could also enable greater allocation.

Postal Service Mission and Role Need Clarification

It is important for Congress to consider how best to clarify the mission
and role of the Postal Service as part of a fundamental reexamination of
the role of the federal government in the 21st century. The starting point
is to consider the Commission's recommendation that Congress amend the
nation's postal laws "to clarify that the mission of the Postal Service is
to provide high-quality, essential postal services to all persons and
communities by the most cost-effective and efficient means possible at
affordable, and where appropriate, uniform rates." This recommendation is
coupled with proposals to create a mechanism for change by giving broad
authority to a newly created Postal Regulatory Board, including authority
to review and issue binding decisions on certain Postal Service proposals
to redefine delivery frequency requirements; uniform postal rates; and the
Postal Service's monopoly to deliver mail and place items in mailboxes.

The Commission sought to clarify the nature of the Service's universal
postal service mission by recommending that Postal Service activities be
limited to accepting, collecting, sorting, transporting, and delivering
letters, newspapers, magazines, advertising mail, and parcels and
providing other governmental services on a reimbursable basis when in the
public interest. The Commission recognized that the nation's postal laws
did not envision the challenge of setting appropriate boundaries on the
Service's commercial activities and maintaining fair competition between
the Service and the private sector. These issues need to be addressed
because the Service has repeatedly strayed from its core mission. We have
reported on the Service's money-losing initiatives in electronic commerce
and remittance processing, among other things.6 The Service's ill-fated
ventures were also questioned by some postal stakeholders as unfair
competition, since they were cross-subsidized by a

6U.S. General Accounting Office, U.S. Postal Service: Update on E-Commerce
Activities and Privacy Protections, GAO-02-79 (Washington, D.C.: Dec. 21,
2001); U.S. Postal Service: Postal Activities and Laws Related to
Electronic Commerce, GAO/GGD-00-188 (Washington, D.C.: Sept. 7, 2000),
U.S. Postal Service: Development and Inventory of New Products,
GAO/GGD-99-15 (Washington, D.C.: Nov. 24, 1998).

tax-exempt entity that is also exempt from many laws and regulations
governing the private sector. Further, such ventures have raised the
fundamental issue of why the federal government is becoming involved in
areas that are well served by the private sector. Although the current
Postmaster General has appropriately focused on the Service's core
business of delivering the mail and sharply curtailed its nonpostal
initiatives, the Commission recommended codifying this policy. In our
view, the time has come for Congress to clarify the Service's core mission
and ensure continuity across changes in postal management.

However, it will be important to understand the implications of generally
limiting the Postal Service to its traditional role of handling the
nation's mail, as the Commission has recommended. In that event, the
Service will face the formidable challenge of maintaining affordable
universal postal service by growing revenues or significantly cutting its
costs as its core business of First-Class Mail declines. In order to
achieve net cost savings, the Service's cost-cutting efforts must
currently offset billions of dollars in annual cost increases for general
wage increases, cost-of-living adjustments, and rising benefits costs,
particularly in health insurance premiums, as well as costs associated
with having to deliver mail to over 1.5 million new addresses every year.
Declining First-Class Mail volume will intensify the financial squeeze by
reducing the volume of highly profitable mail. Thus, if the Service is
limited to its traditional role, maintaining the quality and affordability
of postal services would likely require dramatic improvement in the
Service's efficiency. The Service would need to become a much leaner and
more flexible organization and rightsize its network of mail processing
and distribution facilities. Consistent with our past work and the
testimony of many key stakeholders, the Commission recognized that
comprehensive reform of the nation's postal laws would be necessary to
facilitate changes in these areas. In the next section of this statement,
we discuss the Commission's recommendations involving governance,
transparency, accountability, rate setting, and human capital. In our
view, revisiting these areas may involve taking substantive and political
risks, but we agree with the Commission that such risks must be taken if
the Service is to remain successful in the coming decades.

In our view, key questions related to clarifying the Service's mission and
role include:

o  	How should universal postal service be defined, given past changes and
future challenges?

o  	Should the Service be allowed to compete in areas where there are
private-sector providers? If so, in what areas and on what terms? What
laws should be applied equally to the Service and to its competitors? What
transparency and accountability mechanisms are needed to prevent unfair
competition and inappropriate cross-subsidization? Should the Service's
competitive products and services be subject to antitrust and general
competition-related laws? Should they be subject to consumer protection
laws?

o  	Should the Service retain governmental authority, including its
regulatory responsibilities and law enforcement functions?

On a related issue, the Service's current statutory monopoly on the
delivery of letter mail and its monopoly over access to mailboxes have
historically been justified as necessary for the preservation of universal
service.7 However, questions have been raised regarding whether these
restrictions continue to be needed, and if so, to what extent and whether
the Service should be able to define their scope. A key issue is whether
the Postal Service, as a commercial competitor in the overnight and parcel
delivery markets, should have the authority to regulate the scope of
competition in these areas.8 The Commission has recommended separating
these functions so that the Postal Service cannot define and regulate the
scope of its own monopoly.

As the Commission noted, it is a fundamental premise of American justice
that parties that administer laws should not have a financial interest in
the outcome. Accordingly, the Commission recommended that an independent
entity should be responsible for reviewing the costs and benefits of the
monopoly as well as for reviewing the thicket of vague and contradictory
regulations in this area and modernizing the law to define the postal
monopoly in clear and understandable terms. The independent entity could
narrow the postal monopoly over time if and when the evidence shows that
suppression of competition is not necessary to the protection

7For information on the Service's monopoly on mailbox access, see U.S.
General Accounting Office, U.S. Postal Service: Information About
Restrictions on Mailbox Access, GAO/GGD-97-85 (Washington, D.C.: May 30,
1997).

8The Service has used its regulatory power to redefine the scope of the
statutory monopoly by suspending the monopoly for urgent letters and
outbound international mail. The Service has also defined the scope of its
monopoly by issuing regulations that define a "letter" for the purposes of
enforcing the statute (39 CFR 310.1(a)) as well as regulations specifying
access to mailboxes (Domestic Mail Manual, D041 and P011.2.2).

of universal service without undue risk to the taxpayer. Narrowing or
eliminating the monopoly could increase consumer choice and provide
incentives for the Service to become more effective and efficient. For
example, in recent years, FedEx has expanded its role in delivering
residential parcels and UPS has shortened its guaranteed transit time on
ground shipments traveling to some of the country's biggest metropolitan
areas. As Congress considers the Commission's recommendations relating to
the postal monopoly, we believe that key questions include:

o  	Is a government monopoly needed to enable affordable universal postal
service, especially if such service is provided at uniform rates? If so,
what scope of monopoly is needed to accomplish its goal?

o  	Should the Service continue to have the power to define (and redefine)
its own statutory monopoly through suspensions and regulations?

o  	Should a regulatory body have authority to redefine and narrow the
postal monopoly and the mailbox monopoly, or should such decisions be made
through the legislative process? If authority is delegated to a regulatory
body, should a clear statement of congressional intent be provided to
guide regulatory decisions, or should the regulator have unfettered
discretion to consider options to expand or contract the Service's
monopoly? What principles should guide the process, and what key players
should be involved?

o  	Similarly, should the regulator be able to consider opening up access
to the mailbox? If so, under what circumstances? Would it be
cost-effective for private delivery companies to deliver items to
mailboxes if individuals could veto access and redefine mailbox access as
they move from one home to another?

o  	Should any regulatory decisions be governed by process requirements to
enable stakeholder input? Should such processes facilitate congressional
review of any changes, as is the case for some other types of
communications regulated by the federal government?

Protecting the Public Interest through Enhanced Transparency,
Accountability and Public Policy Oversight

The Commission concluded that the Postal Service must have greater
flexibility to operate in a businesslike fashion, but that with this
latitude comes the need for enhanced transparency to enable effective
management and congressional and other oversight. We agree. As the
Commission noted, managerial accountability must come from the top, with
the Service governed by a strong corporate-style board that holds its
officers responsible for performance. The Commission concluded that giving
the Service greater flexibility while preserving its monopoly would

                              Governance Structure

require enhanced oversight by an independent regulatory body endowed with
broad authority, adequate resources, and clear direction to protect the
public interest and ensure that the Postal Service fulfills its duties.
The Commission cited reports that we have issued since September 2000
urging greater financial transparency and expressing concern about sharp
declines in the Service's financial position that were accompanied by too
little explanation.9 To enable sufficient accountability, oversight, and
transparency, the Commission recommended changes to the Service's
governance structure, the creation of a Postal Regulatory Board that would
have broad powers, and mechanisms to facilitate and ensure greater
transparency of the Service's financial and performance results. Key
issues include whether the Commission's recommendations are necessary,
have struck the appropriate balance between multiple objectives, and would
be practical to implement.

The Commission found that given its importance to the country and the
challenges to its future, the Postal Service should meet the highest
standards of corporate leadership, including a strong, strategic Board of
Directors coupled with enhanced oversight and financial transparency.
Specifically, the Commission concluded that if the Postal Service is to
adapt successfully to a changing postal market, overcome its significant
financial challenges, and emerge an efficient and more businesslike
institution, then it must be guided by a nimble and results-oriented
management and corporate governance structure charged with applying the
best business practices of the private sector to the public-spirited
mission of delivering the nation's mail. We agree. As we have reported, if
the Service is to successfully operate in a more competitive environment,
the role and structure of a private-sector board of directors may be a
more appropriate guide in this area.10 Having a well-qualified,
independent, adequately resourced, and accountable board is critical for a
major federal institution with annual revenues approaching $70 billion and
approximately 829,000 employees.

9The Commission cited GAO-03-118; GAO-02-694T; GAO-02-355; GAO-01-733T;
GAO-01-598T; U.S. General Accounting Office, U.S. Postal Service Actions
to Improve Its Financial Reporting, GAO-03-26R (Washington, D.C.: Nov. 13,
2002); and U.S. Postal Service: Enhancements Needed in Performance
Planning and Reporting, GAO-00-207 (Washington, D.C.: Sept. 19, 2000).

10GAO-03-812T.

Another concern is what qualification requirements would be appropriate
for the Postal Service's governing board to ensure that it possesses the
kind of expertise necessary to oversee a major government business.
Consistent with this view, the Commission recommended that all directors
should be selected based on "business acumen and other experience
necessary to manage an enterprise of the Postal Service's size and
significance." The report also suggested that the board possess
"significant financial and business expertise" and that among other
things, board members have no material relationship with the Service or
its management team. However, the Commission recommended that these
criteria be incorporated into the Board's bylaws or governance guidelines
rather than into statute.

In this area, we believe that potential issues include:

o  	Would the proposed qualification requirements be sufficient to produce
a well-qualified board with outstanding and experienced directors, in part
because of the flexibility inherent in the appointment process?

o  	Would the proposed board become politicized, in part because most
directors would be subject to approval and removal by a political
appointee, (i.e., the Secretary of the Treasury), with no Senate
confirmation, no requirement for the board to have a bipartisan
membership, and the possibility of removal for any reason?

o  	Would the pool of qualified candidates be unduly restricted because
some corporations have a material relationship with the Service, while
some retired corporate leaders would be over the proposed mandatory
retirement age of 70 for Service board members?

o  	Would selection of members of the proposed board of directors by an
official other than the President be consistent with the Appointments
Clause in Article II, section 2, clause 2 of the Constitution, which
requires that the heads of executive branch departments be appointed
directly by the President with the advice and consent of the Senate?11

11In Silver v. U.S. Postal Service, 951 F.2d 1033 (9th Cir. 1991), the
Court held that the Postal Service, as an independent establishment of the
executive branch, is subject to the Appointments Clause. The Court further
held that the postal governors were the head of the Postal Service, and
thus, were required to be appointed by the President and confirmed by the
Senate.

                           Accountability Mechanisms

o  	We believe that these concerns merit careful consideration, as well as
other concerns on which we have previously reported.12 In particular, it
is debatable whether it would be appropriate for the Secretary of the
Treasury to have the authority to approve most future appointments to the
governing board of the Service, which fulfills vital government functions
and includes nearly one-third of the federal civilian workforce. An
alternative option may be to have a number of persons, including the
Secretary of the Treasury, to advise the President on such appointments.
Another key issue is whether these appointments should continue to be made
with the advice and consent of the Senate, which is a mechanism to involve
the legislative branch in matters of postal governance. However, we agree
with the Commission's conclusion that the legacy governance structure of
the Service is increasingly at odds with its mission in the modern
environment and that the Service's governing structure needs to consist of
members with the requisite knowledge and experience.

The Commission's report made a contribution in identifying the fundamental
activities necessary for good corporate governance. The report made a
number of recommendations for the proposed board of directors to more
effectively discharge its duties, including refocusing the board on a
high-level strategic focus on cost reduction and service quality, as well
as minimizing the financial risk to taxpayers and restoring the fiscal
health of the institution as a whole. In this regard, we believe that the
current Board of Governors should refocus its activities along the lines
suggested by the Commission.

We have reported that a major issue related to the Service's mission and
role is whether the Service should be held more directly accountable for
its performance, and if so, to what extent, to whom, and with what
mechanisms.13 Specifically, how should the Service's governing board be
held accountable? The Commission found that the Service urgently needs a
vigilant, broadly empowered and independent regulatory body to focus on
its ability to fulfill its core duties in an appropriate and effective
manner. The Commission recommended that the Postal Rate Commission be
abolished and replaced with a newly created Postal Regulatory Board
endowed with broad public policy responsibilities as well as broad

12U.S. General Accounting Office, U.S. Postal Service: Issues Related to
Governance of the Postal Service, GAO/GGD-97-141 (Washington, D.C.: Aug.
14, 1997).

13GAO-03-812T.

mandates and authority for accountability and oversight. The regulator
would also have authority in numerous areas including rate setting,
retained earnings, financial transparency, service standards, performance
reporting, and enforcing pay comparability, among others.

A key objective of the Commission's recommendations was to focus the
proposed Postal Service board of directors on the business aspects of the
Postal Service while transferring public policy responsibilities from the
Service to an independent regulator with no stake in the outcome. The
recommendations also would transfer key public policy responsibilities
from Congress to the regulator. For example, the newly created regulatory
body could, over time, redefine the Service's universal service mission
and statutory monopoly. The Commission's accountability and oversight
provisions would make major changes to the current structure. Thus, the
Commission's recommendations in this area raise fundamental issues. In our
view, key questions include:

o  	Who should make public policy decisions regarding the Postal Service:
the Service, an independent regulator, or Congress?

o  	What accountability should apply to a monopoly provider of vital
postal services that also is a major competitor in the communications and
delivery marketplace?

o  	How should the Service be held accountable if it remains an
independent establishment of the executive branch?

o  	To what extent should the Service be accountable to Congress and the
executive branch without being subject to undue political control?

o  	To what extent should a regulatory body exercise accountability? For
what purpose? With what authority?

o  	Although additional oversight of the Service appears necessary, would
the Service have sufficient management flexibility given the fairly broad
authority the Commission proposes be given to the regulatory body?

o  	How should the regulatory body be structured to preserve its
independence from political control and minimize the risk of regulatory
capture?

Enhancing Transparency of Financial and Performance Information

o  	What statutory guidance and constraints should apply to regulatory
actions, including due process and recourse to judicial and/or
congressional review?

o  	What transparency of financial and performance results is appropriate
for the Service as a federal establishment and would be necessary for
oversight and accountability? What mechanisms should be established to
facilitate and ensure transparency?

o  	Should the Service comply, either on a voluntary basis or through a
statutory requirement, with major Securities and Exchange Commission (SEC)
reporting requirements?

The Commission noted that as a public entity, the Postal Service is wholly
owned by the American people, who, as the Service's shareholders, are due
a regular and full accounting of the fiscal health and challenges facing
this vital national institution. The Commission stated that the Service
has a responsibility to the public to be transparent in its financial
reporting. We agree. Reporting requirements should ensure accountability
and transparency of financial and organizational reports. We have
recommended that the Postal Service improve its transparency,14 and to the
Service's credit, it has made progress in providing greater transparency
on its financial results and outlook. The Service has instituted quarterly
financial reports, expanded the discussion of financial matters in its
annual report, and included more information and explanation in the
financial and operating statements prepared for each 4-week accounting
period. The Service has also upgraded its Web site to include these and
other reports in a readily accessible format. The Service is clearly
moving in the right direction. However, we agree with the Commission that
more progress can and should be made.

In an area where we have particular concern that the Service have
transparent, appropriate accounting, the Commission recommended that the
Service's governing board work with its independent auditor to determine
the most appropriate accounting treatment of the Service's unfunded
retiree health benefit obligations in accordance with applicable
accounting standards. The Commission also recommended that the board
consider funding a reserve account to address these obligations to the

14GAO-02-355.

extent that Postal Service finances permit. These recommendations are
similar to our previous statements, which noted that

o  	the Service's current accounting treatment does not reflect the legal
nature and the economic reality of its related obligation to pay for these
costs;

o  	the Service's treatment of retiree health benefit costs in its
financial statements has not sufficiently recognized the magnitude,
importance, or meaning of this obligation to decision makers or
stakeholders; and

o  	because the retiree health benefit obligations are funded on a
pay-as-you-go basis, rather than on a full accrual basis, current
ratepayers are not paying for the full costs of the services they are
receiving.

We continue to believe that the time has come for the Service to formally
reassess how it accounts for and discloses these very significant
financial obligations. In our view, given the legal nature, economic
substance, and stakeholder implication of these obligations, the Service
should account for these retiree health costs and related obligations in
its financial statements on an accrual basis. We recognize that a change
to accrual accounting could have a significant impact on rates. However,
the Service could work with the PRC and other stakeholders to determine
how best to phase in such a change to mitigate the immediate impact on
ratepayers. Regardless of whether the Service changes its accounting for
retiree health costs, we continue to believe the Service should disclose
the funded status of all of its retiree health and pension obligations.

The Commission enunciated an ambitious standard for the Service when it
stated that "As a unifying force in American commerce and society, and as
a customer-financed government endeavor, the Postal Service should be
setting the standard for financial transparency by which all other Federal
entities are judged." [Emphasis in original.] The Commission also found
that given its important public mission and central role in the nation's
economy, changes in the Service's economic health should not come as a
surprise to those responsible for or impacted by its performance. In this
regard, the Commission found that while the Service often conducts
financial reporting over and above what is required by federal agencies,
it remains behind the level of disclosure offered by its corporate peers.

We believe that technical compliance with accounting and reporting
requirements should be a floor for financial transparency, not a ceiling.
Thus, we were pleased that in keeping with its theme of incorporating best

practices, the Commission said it "strongly recommends" that the Service
voluntarily comply with major Securities and Exchange Commission (SEC)
reporting requirements. The Service has the opportunity to proactively
work with the SEC to define how it could voluntarily comply with SEC
requirements in a manner appropriate to its unique legal status.

Enhanced financial transparency is particularly important because the
Service is the hub of a $900 billion mailing industry and is a vital part
of the nation's communications and payment network. Its recent financial
difficulties have accentuated the need for stakeholders to be well
apprised of the Service's financial situation and to understand how future
operating results may be affected by impending events. Although the
Service has traditionally provided a range of detailed financial and
operating data to stakeholders throughout the fiscal year, its periodic
financial reports did not clearly explain changes in its financial
condition, results of operations, and its outlook, and were not always
readily available to the public. Thus, in April 2001, we recommended that
the Service provide quarterly financial reports to Congress and the public
with sufficiently detailed information for stakeholders to understand the
Service's current and projected financial condition and how its outlook
may have changed since the previous quarter.15 In November 2002, we found
that the Service's financial reports provided to date had provided only
limited analysis and explanations to help stakeholders understand what had
changed, why it had changed, and how these changes affected the Service's
current financial situation and expected outlook.16 Since then, the
Service has improved its quarterly financial reports. We also discussed
the SEC's reporting structure as a model for the Service to consider.

As the Commission recognized, the Service remains a public institution
with a monopoly on providing vital postal services to the nation, and
enhanced financial information will be essential to improve managerial
accountability and public policy oversight. In this regard, there are
areas where stakeholders have little information, such as the Service's
unmet financial needs to maintain and modernize its infrastructure, or the
true market value of the Service's vast real estate holdings. Therefore,
progress in enhancing the Service's financial transparency is worthy of
continued congressional attention.

15GAO-01-598T. 16GAO-03-26R.

In addition to the above areas, we have reported on, and continue to have
concerns about, the Service's annual performance reporting that is
required under the Government Performance and Results Act (GPRA).17 The
Service's recently filed 5-Year Strategic Plan for Fiscal Years 2004-2008
contained a clear mission statement and presented a useful discussion of
the prospects for mail volume, including three specific forecasts.
However, the plan represented a missed opportunity because it failed to
adequately communicate what the Service intends to accomplish over the
period covered by the plan. For example, the plan contained little new
information on the Service's goals and strategies for network and
workforce realignment over the next 5 years. The plan continues a trend in
which the Service's GPRA reports have provided less and less new
information to Congress, postal stakeholders, and the American people.

We also continue to be concerned that the Service does not communicate its
delivery performance for all of its major mail categories, particularly
those covered by its statutory monopoly to deliver letter mail. The
Service's customers should have a right to know what they are getting for
their money, particularly captive customers with few or no alternatives to
using the mail. However, the Service's public reporting is limited to
on-time delivery of First-Class Mail deposited in collection boxes18 and
does not include bulk mailing of First-Class Mail by businesses. In
addition, stakeholders and individuals have expressed concerns about the
accuracy of mail delivery, but no public information is provided for this
aspect of mail service. The Commission recognized that information about
service quality would become even more important if the Service obtains
more flexibility and incentives to cut its costs. Accordingly, the
Commission recommended that the Postal Regulatory Board be required to
prepare a comprehensive annual report assessing the Postal Service's
performance in meeting established service standards. If such a report is
to be meaningful, the regulator may also need authority to require the
Service to collect service performance data.

Without sufficient transparency, it is difficult to hold management
accountable for results and conduct independent oversight. The Service has
the opportunity to seek out best practices and continually improve as
standards evolve and experience accumulates, and its recent track record

17GAO/GGD-00-207.

18First-Class Mail measurement is further limited to collection boxes
located in 463 ZIP Codes from which most First-Class Mail volume
originates and to which it is destined.

                             Rate-setting Structure

suggests that some improvement is possible. A key issue is whether
statutory change is needed to enhance the level of transparency that the
Service must provide, particularly if it obtains greater flexibility along
the lines recommended by the Commission.

The Commission concluded that it is imperative that the Postal Service, an
institution with a statutory monopoly over the delivery of letter mail,
have clear, independent regulatory oversight that includes oversight over
its postal rates. The Commission found that the current statutory
structure produced independent review of postal rates and had the laudable
goals of protecting postal customers against undue discrimination while
restricting cross-subsidies. However, the Commission stated that the
current rate-setting structure should be abolished so that these goals can
be accomplished more efficiently and effectively, by establishing an
incentive-based rate-setting system. We agree that major changes are
needed in this area. As we have testified, improvements in the postal
rate-setting structure will be a fundamental component of a comprehensive
transformation.19 The existing statutory structure is increasingly ill
suited to meeting the needs of the Postal Service and the American people.
Its shortcomings include the following:

o  	Lengthy and burdensome rate-setting proceedings - The Commission found
that the current rate-setting structure imposes a litigious, costly, and
lengthy rate-setting process that can delay needed new revenues by more
than a year. We agree. The Service and other stakeholders report spending
millions of dollars in each rate case on attorneys, economists,
statisticians, and other postal experts who pore over many thousands of
pages of testimony, interrogatories, and rebuttals. The high cost of
participation, coupled with the increasing complexity of rate-setting data
and methods, make it difficult for smaller stakeholders to effectively
participate in the regulatory process.

o  	Bias toward adversarial relationships - As the Commission noted, every
significant change requires a major proceeding that places the Postal
Service in an adversarial relationship with its major customers and at a
distinct competitive disadvantage. Rate cases tend to pit the Service and
many postal stakeholders against each other, since the zero-sum nature of
the revenue requirement provides powerful incentives for parties to
attempt to shift postal costs in ways that serve their immediate
self-interests. The adversarial rate-setting process has

19GAO-03-812T.

consumed the attention of all of the parties involved, increasing the
difficulty of focusing on constructive efforts to find mutually acceptable
approaches to difficult technical issues. During lengthy rate cases, rules
against ex parte communications help preserve due process and fairness,
but also make it difficult for rate-setting experts at the Service and the
PRC to constructively discuss technical issues and resolve problems as
they arise.

Despite these structural impediments, rate-setting experts at the Service
and PRC have made some progress in improving communications in recent
years, notably during the 1999 Data Quality Study on the quality of data
used for rate-setting purposes, as well as during subsequent efforts to
improve data collection systems.20 We are pleased that the Service has
convened periodic briefings with representatives of the PRC, the Service's
Office of the Inspector General, and us, in which it engaged with the
parties and provided detailed status reports on initiatives to improve
rate-setting data systems. We are also encouraged that the Service has
started to engage with the PRC in planning some improvements to its
rate-setting systems, and we commend the Service for offering public
briefings to provide additional transparency on modifications to key data
systems. These efforts facilitate constructive dialogue on data quality
issues, providing opportunities for the parties to make continuous
progress as postal operations, technology, and data systems change.

o  	Perennial disagreements - Cost allocation issues have been debated for
many years and are frequently a key reason why postal rate cases are so
lengthy and litigious, since their disposition can directly affect postal
rates. The statutory structure seeks to assure all parties due process by
enabling them to raise whatever issues they wish, regardless of how many
times the same issues may have been considered in the past. The Postal
Service has a special opportunity to repeatedly raise issues by building
them into its initial proposals for changes to postal rates. For example,
the Postal Service and PRC have strongly disagreed on the allocation of
mail processing costs in rate cases dating from 1997-to the point that two
sets of postal costs are routinely prepared, one according to the Postal
Service's preferred methodology and one according to the PRC's
methodology. This situation epitomizes the downside of enabling parties to
repeatedly litigate the same issues in the name of due process. Although
the

20A.T. Kearney, Data Quality Study (Alexandria, Va.: Apr. 16, 1999).

Commission noted that interested parties should have an opportunity to
participate in rate-setting matters, the need to address complex cost
allocations in each and every rate proceeding conflicts with the
Commission's vision of a streamlined rate-setting process that can swiftly
resolve complaints about postage rates.

o  	Poor incentives for data quality - The current statutory model gives
the Service opportunities to seek advantage in litigious rate-setting
proceedings through its control over what data are collected and how those
data are analyzed and reported. The PRC cannot compel the Service to
collect data, or update data it has collected. The PRC also cannot
subpoena data that the Service has collected. The 1999 Data Quality Study
found that key postal cost data had not been updated for many years and
were used regardless of their obsolescence. Although the Service has
worked to address these and other deficiencies identified by the study, as
noted above, it is fair to question why the regulatory process had enabled
these problems to continue for so many years. Further, regarding the
sufficiency of data in the recent negotiated service agreement (NSA) case,
the Service provided no mailer-specific cost data corresponding to
mailer-specific discounts, creating uncertainty regarding whether the
discount was set appropriately in relation to the cost savings that the
Service should be expected to achieve as a result of the NSA.

o  	Disputes over cost allocation - The Service is generally opposed to
PRC proposals that would require the Service to provide more detailed
annual information on postal costs and information on cost allocation
methodologies used to produce that data. In support of its view, the
Service has asserted that the current statutory structure generally limits
the PRC to a reactive role in considering proposed rates and supporting
information provided by the Service in rate and classification cases. This
perspective contrasts with the Commission's vision of independent
regulatory oversight in which the outcome cannot be unduly influenced
through the selective provision of information to the regulator. To this
end, the Commission recommended that the Service periodically report on
the allocation of costs in accordance with form, content, and timing
requirements determined by the Postal Regulatory Board, the recommended
successor to the PRC.

o  	Lack of mailer-specific data - Looking forward, a key issue is what
data on the mailer-specific costs, volumes, and revenues of the Postal
Service, if any, should be provided to justify mailer-specific discounts
that result from NSAs. The Service has generally opposed providing

such mailer-specific data in the future as overly burdensome, unwise, and
impractical, in part because its cost measurement systems are geared to
providing aggregate data at the subclass level. The PRC is currently
reviewing what cost data should be provided to justify mailer-specific
postal rates, and key stakeholders have filed conflicting testimony on the
issues in this area.21 Regardless of the outcome, it is reasonable to ask
how the Service can effectively identify, prioritize, and negotiate
mutually beneficial NSAs if little reliable data are available on the cost
savings that the Service should realize as a result of the mailer-specific
requirements of each NSA.

The above problems are well documented. They have been cited in numerous
independent reviews over the years, including some by us. The parties are
familiar with the status quo, and we suspect that the high stakes involved
make parties understandably reluctant to make changes, particularly when
the financial consequences are difficult to foresee. In recent public
meetings held to discuss possible changes to the rate-setting process
within existing law, the Service dismissed many of the suggestions that
were made. Moreover, the Service and other stakeholders have reached no
consensus about proposals for legislative reform. Therefore, the
Commission was advocating bold action when it concluded that the current
rate-setting process should be abolished and replaced with a more
streamlined structure that continues to impose rigorous standards on rate
setting, but does so without impeding the ability of Postal Service
officials to manage and lead.

The Commission's report built on the legislative debate in which price cap
regulation has emerged as a leading alternative to the current statutory
model for regulating postal prices. Specifically, the Commission
recommended that the existing system of setting postal rates be abolished
and replaced with a price-cap system to regulate the rates of
noncompetitive postal products and services, coupled with providing the
Service with pricing flexibility for competitive postal products and
services, subject to a rule against cross-subsidization. The Commission's
proposed price-cap system is intended to enhance the Service's management
flexibility to set rates within ceilings established by the Postal
Regulatory Board, so that if the rate ceiling is appropriately
constructed, the Postal Service will feel intense pressure to rein in
spending and improve efficiency and productivity. A price-cap system

21See documents filed under PRC Rulemaking Docket No. RM2003-5, available
at www.prc.gov.

could enable the Service to implement a strategy of smaller, more frequent
changes in postal rates, as opposed to a strategy of more infrequent,
significant increases.

The Commission's recommended price-cap system has some similarities with
price-cap systems that were offered in successive postal reform bills
introduced by Rep. John M. McHugh. These proposals were reviewed in
numerous hearings, and the extensive record surfaced many issues and
concerns. In our view, key questions include the following:

o  	Would a price-cap system provide the intended incentives for the
Postal Service to maximize its financial performance, since the Service is
a public institution that is not accountable to shareholders who hold
stock and demand management accountability?

o  	Would a price cap provide incentives for the Postal Service to reduce
the quality of service for captive customers? If so, what transparency and
accountability mechanisms would be needed to ensure the quality of
universal postal service?

o  	Could the Service use its flexibility to raise rates within the price
cap to unfairly shift the burden of institutional costs away from
competitive products and services and onto its most captive customers?

o  	Should postal rates be required to cover attributable costs? If so, at
what level (e.g., mail class, subclass, rate category, etc.)?

o  	Could the Service generate sufficient revenues if its rates were
constrained by a price cap? If not, under what circumstances, if any,
should the Service be authorized to raise rates in excess of the cap? How
can ratepayers be assured that it would not be too easy for the Service to
obtain such increases, which would vitiate the intent of the price cap?
What process should apply to such "exigent" rate increases?

o  	Would a price cap restrain the growth of postal wages? If so, to what
extent and would such a result be desirable?

o  	How would a price cap system affect historic preferences that have
been provided to certain mailers, such as mailers of nonprofit mail,
periodicals, and library mail?

o  	How could the Postal Service redesign the rate and classification
system, as it did through the 1995 reclassification case, if it were
subject to a price cap?

o  	Would adopting a price cap system be too risky, given the problems
that have surfaced in some price-cap models adopted by other regulated
industries? How could flexibility be built into the price-cap system
itself to minimize risk and handle "the law of unintended consequences?"

o  	Should provisions of a price-cap system be specified by the
legislative process? If so, which features should be codified in statute
and which should be left to the regulatory process?

o  	What issues should be considered in adapting price-cap regulation from
other industries and foreign postal systems to the unique context of
regulating postal rates in the United States?

o  	What transition features should be required, such as a "baseline" rate
case, in order to successfully implement a price-cap system?

o  	Should a revised and streamlined cost-of-service model be considered
as an alternative to abolishing the current rate-setting structure and
replacing it with a new model? If so, what statutory changes should be
considered? Would such changes prove sufficient to remedy the shortcomings
of the current rate-setting structure?

As the above discussion demonstrates, the need for changing the postal
rate-setting structure is clear. The current structure delays price
changes through lengthy, contentious, and burdensome proceedings and has
poor incentives for providing quality data. However, many questions remain
about what changes should be made to the rate-setting process and the
potential problems associated with those changes. Specifically, the option
of adopting a price-cap model for regulating postal rates has emerged as a
main alternative to a cost-of-service regulatory model but raises many
issues that deserve thoughtful consideration. By its very nature, such
fundamental change to the rate-setting system would necessarily entail
substantial uncertainty, risks, and the possibility for further change to
deal with unanticipated consequences. In this regard, the benefits and
risks of adopting a price-cap system need to be carefully considered and
weighed against the benefits and risks of the status quo. If the Service
is to be limited to its core mission, the flexibility inherent in a price
cap system could become a key management tool to successfully managing the
transition to a leaner, more efficient postal system.

Rate-Setting Oversight

In our view, as long as the Service remains a federal entity protected by
the postal monopoly, it is appropriate that the Service's ability to
compete with the private sector be balanced with oversight and legal
standards to ensure fair competition between the Service and private
competitors. The Commission sought to create such a balance by
recommending enhanced powers for the newly created Postal Regulatory
Board, including a complaint process in which rates can be reviewed
against statutory limits that provide for due process and resolution of
the complaint within 60 days. Depending on the outcome, the regulator
could order rate adjustments to bring rates into conformity with statutory
criteria. In our view, clear lines of authority in this area must be
established if the rate-setting process is to be streamlined and speeded
up. A key issue for Congress to consider is whether the Commission's
recommendations have struck the appropriate balance between flexibility
and accountability. Another issue is what due process rules should be
established in order to enable stakeholders to provide meaningful input
and participate in rate-setting matters, including the right to appeal
regulatory decisions.

The Commission also proposed requirements for worksharing discounts that
are established based on the costs that the Postal Service is estimated to
avoid as a result of mailer worksharing activities to prepare, sort, and
transport the mail. Specifically, the Commission stated that a specific
requirement should be "that no new workshared discount for a
non-competitive product should exceed costs saved (including the present
value of projected future costs saved) and that the Postal Regulatory
Board should have the authority to conduct an expedited, after-the-fact
review upon written complaint that such a discount is excessive." In that
case, the Commission said the regulator should be authorized to perform an
expedited, after-the-fact review upon written complaint to ensure
discounts do not exceed savings to the Postal Service. These
recommendations raise the issue of whether different standards should
apply for new and existing worksharing discounts.

By way of background, worksharing discounts did not exist when the Service
was created by the Postal Reorganization Act of 1970. Thus, there is
little statutory guidance in this area except for the mandate for the PRC
to consider-along with other factors-the degree of preparation of mail for
delivery into the postal system performed by the mailer and its effect
upon reducing costs to the Service. Over time, the PRC developed a
guideline for recommending worksharing discounts so that the estimated
reduction in Postal Service revenues would equal the estimated reduction
in its costs. The objective of this guideline is to create incentives for
the lowest-cost provider to perform certain postal activities, which can
be

either the mailer performing worksharing activities or the Service
performing additional activities when mailers do not workshare. Because
worksharing discounts have become an integral part of the rate-setting
structure, a key issue is whether statutory guidance would be appropriate
in this area; and if so, whether hard-and-fast rules for worksharing
discounts should be established in law.

Because postal rate-setting is at the heart of proposals for comprehensive
legislative reform, it is important for Members of Congress to be aware of
the many issues and questions that have been raised in this area. We
believe that some of the issues and questions that arise from the
Commission's recommendations include the following:

o  	Should the break-even mandate continue to govern the postal
rate-setting process, or should the Service be allowed to retain a certain
amount of earnings?

o  	How would the proposed Postal Regulatory Board consider postal costing
issues under the Commission's proposals, since the Commission would
abolish the current mechanism used to resolve these issues on a
case-by-case basis (i.e., litigation in postal rate cases)? Specifically,
what process should govern regulatory decisions regarding the measurement,
allocation, and reporting of postal costs and revenues? Should the
regulatory body also be given the authority to compel the Postal Service
to collect data, as some have suggested?

o  	Would meaningful after-the-fact review of changes in postage rates be
difficult to accomplish within the recommended 60-day time frame for
considering complaints? Should stakeholders also be given the opportunity
to obtain information through a discovery process; and if so, would a
longer time frame be needed to consider complaints? What due process rules
should be established for stakeholder participation in rate complaints and
other rate-setting matters?

o  	Should the Commission's recommendation to allow NSAs be adopted, and,
if so, what specific criteria are appropriate in this area? Could NSAs
create competitive harm, and, if so, what measures should be taken to
mitigate this risk (e.g., prior review and other limitations)?

The Need for Progress on Rate-Setting Issues under the Current Structure

o  	If mailer-specific discounts are authorized, should data be required
on the mailer-specific cost savings that the Postal Service expects to
achieve? If so, how should the regulator balance its needs for such
information with limitations relating to the practicality and burden of
producing it?

o  	Is after-the-fact rate review incompatible with the need to ensure
fair competition by an organization that can leverage the revenues and
infrastructure obtained through its monopoly on delivering letter mail? If
not, should measures be taken to limit the potential for unfair
competition, such as providing limitations on the introduction of
subsidized new products and services? Should the regulator be authorized
to order the discontinuance of postal products and services that
consistently fail to cover their costs?

o  	Would the complaint process, as the only means for stakeholders to
seek to alter postal rates under the Commission's proposals, create an
incentive for numerous complaints that could become a de facto review of
virtually all postal rates?

o  	Even if a regulator could order changes in rates after-the-fact, would
it be reluctant to exercise that authority, given the potential financial
impact and disruption for the Service and the mailing community?

o  	The Commission's report did not address whether the proposed Postal
Regulatory Board could be held accountable for its actions in the
rate-setting area through appellate review. Should the Postal Regulatory
Board's actions be subject to appellate review, and if so, under what
criteria?

o  	Another potential issue is whether a transition period would be needed
to successfully implement a vastly different rate-setting system similar
to what the Commission has recommended. For example, would a transition
period be needed to enable the proposed Postal Regulatory Board to address
major unresolved cost allocation issues, as well as for the Postal Service
to make improvements to its cost allocation methods and underlying data
systems that collect information for costing purposes?

The Service and the PRC continue to have long-standing disagreements on
rate-setting issues that have added to the length, cost, and burden of
litigating rate cases. These issues have been a major focus of contentious
rate proceedings, and, if left unresolved, will likely be re-litigated in
the next rate case. As noted previously, a key unresolved issue is the

allocation of mail processing costs, which has implications for most
postal rates since the Service's mail processing and distribution network
handles most mail. Specifically, the Service and the PRC disagree over the
extent to which mail processing costs vary with mail volume and thus can
be allocated to various mail categories, as opposed to being classified as
institutional costs (i.e., overhead costs that the Service incurs
regardless of mail volume). This disagreement has generated thousands of
pages of evidence in rate cases and disagreements over the underlying
assumptions, data, and analytic techniques. Although the arguments on both
sides are rather arcane, the resolution of this dispute could have
important practical consequences for postal rates and worksharing
discounts. The estimated savings resulting from worksharing discounts-
which is a key basis for establishing these discounts-is reduced as more
mail processing costs are classified as institutional costs, since such
costs do not vary regardless of how much mail is processed. Thus, the
rates that apply to workshared mail, which accounts for three-quarters of
total mail volume, could be affected by the resolution of this technical
dispute.

In our opinion, the gap between rate cases provides a rare opportunity for
the parties to take a fresh look at the issue of mail processing volume
variability. Key postal cost dynamics have changed in recent years,
including the shift from increasing to decreasing mail volume, the
prospect for further declines in First-Class Mail volume, and the
Service's initiative to realign its mail processing and distribution
network. Such changes create uncertainty about whether historical
relationships between mail volume and mail processing costs continue to
apply, since historically mail processing costs increased as mail volume
increased and the Service expanded its mail processing infrastructure
incrementally. We urge the parties to reconsider their reliance on formal
litigation so that this issue can be addressed before the inception of the
next rate case. Progress in this area could diminish the burden on the
Service and other stakeholders who participate in rate cases. In this
regard, we note that the parties have worked hard to reach negotiated
settlements to the last rate case and several other rate and
classification proceedings since then. Given these outcomes, it is
reasonable to expect similar progress in the area of mail-processing
volume variability if the parties have the will to resolve their
differences. If the parties do not make progress, that will further
indicate the need for a new rate-making structure, as the Commission has
recommended, so that technical issues can be resolved in a more
businesslike and expeditious manner.

Human Capital Issues

The Postal Service's human capital-its people-is critical to providing
vital postal services to the American people and achieving a successful
postal transformation. The Commission concluded that as valuable as the
Postal Service is to the nation, its ability to deliver that value is only
as great as the capability, motivation, and satisfaction of the people who
make possible the daily delivery of mail to American homes and businesses.
We agree. Only through the efforts of its workforce are more than 200
billion pieces of mail delivered, 6 days each week, to the American
people. Thus, we agree with the Commission's conclusion that few of the
reforms outlined in its report would be possible without the support and
contributions of the Service's most mission-critical asset: its people. As
we recently reported, an organization's people must be at the center of
any transformation effort.22

For this reason, the Commission focused on serious, long-standing issues
in the human capital area that impose both statutory and practical
constraints on the transformation of the organization. The problems can be
grouped into three areas: (1) poor labor-management relations
characterized by poor communication, lack of trust, excessive grievances,
and difficulty negotiating labor contracts; (2) difficulty controlling
workforce costs, including issues of workforce size, flexibility, pay
comparability, workers' compensation, and escalating benefits costs; and
(3) inadequate incentives for individual performance and the need for a
stronger linkage between individual and organizational goals. The
Commission proposed important changes in each of these areas, some of
which would require the commitment of the parties to address them in a
constructive manner, and some of which would require changes to existing
law. Given the central importance of the Service's human capital, all of
these proposals deserve close scrutiny and a fair hearing, despite the
strong negative reactions that have been voiced by some stakeholders.
Rather than declaring such proposals to be politically off-limits, we
encourage Congress and the parties to approach these issues with open
minds to explore whether a package of changes can be made that is mutually
beneficial to the Service, its people, and the public. Much has changed in
this area over the past 30 years, and the time is right to consider what
statutory structure would be appropriate to enable the

22U.S. General Accounting Office, Results-Oriented Cultures:
Implementation Steps to Assist Mergers and Organizational Transformations,
GAO-03-669 (Washington, D.C.: July 2, 2003).

Achieving Effective Labor-Management Relations Will Be Fundamental to
Making Progress

Postal Service to incorporate best practices and improve working
conditions for its employees.

We and others have reported that adversarial labor-management relations
have been a persistent issue for the Service and its major labor unions
and have been a root cause of problems in improving the Service's
operational efficiency as well as improving its culture and the quality of
work life. 23 Poor communications, lack of trust, an excessive number of
grievances, and difficulty negotiating labor contracts have been at the
heart of labor-management issues. Such problems have increased the
difficulty in constructively working on difficult issues involving the
size, flexibility, compensation, benefits, incentives, and culture of the
workforce. We are encouraged by recent progress in this area, such as
reports by union officials of better communications, sharp reductions in
the number of outstanding grievances, and labor contracts that were
successfully negotiated between the parties without the need for binding
arbitration. However, progress has been uneven and much more work remains
to be done. We agree with the Commission's bottom line that Postal Service
management must repair its strained relationship with postal employees.

Historically, autocratic management, persistent confrontation and
conflict, and ineffective performance systems often characterized the
organizational culture on the workroom floor. These problems resulted in
an underperforming organization with major deficiencies in morale and
quality of work life; huge numbers of grievances with high costs for the
Service and its employees; and protracted, acrimonious contract
negotiations. In our past reports, we found that these conditions have
existed over many years because labor and management leadership, at both
the national and local levels, have often had difficulty working together
to find solutions to their problems. Under these circumstances, it was
difficult for the parties to develop and sustain the level of trust
necessary for maintaining a constructive working relationship and

23The National Academy of Public Administration, Evaluation of the United
States Postal Service, (Washington, D.C.: July 1, 1982); U.S. General
Accounting Office, Labor-Management Problems Persist on the Workroom
Floor, GAO-GGD-94-201A/B, (Washington, D.C.: Sept. 29, 1994); U.S. General
Accounting Office, Little Progress Made in Addressing Persistent
Labor-Management Relations Problems, GAO/GGD-98-1 (Washington, D.C.: Oct.
1, 1997); United States Postal Commission On a Safe and Secure Workplace,
Report of the United States Postal Commission On A Safe and Secure
Workplace (Washington, D.C.: Aug. 31, 2000); U.S. General Accounting
Office, Major Performance and Accountability Challenges, GAO-03-118
(Washington, D.C.: Jan. 2003).

agreeing on major changes to maximize the Service's efficiency and the
quality of work life.

Poor labor-management relations are incompatible with the Commission's
vision of achieving a more positive and productive climate necessary for a
high-performing organization with a culture of excellence. Such a culture
change will require better labor-management relations in which the parties
maintain open communications, develop trust, and are willing to take risks
to achieve mutually beneficial results.

On the positive side, officials from some of the Service's unions have
told us that they have seen improvements in labor-management relations in
recent years. They cited examples of improved communication and
collaboration at the national and local levels, including

o  	Quality of Worklife and Employee Involvement programs, in which union
and management officials reportedly have successfully communicated and
made progress on finding ways to improve efficiency and the work
environment;

o  	Joint Contract Interpretation manuals, as well as training implemented
jointly by labor and management officials, which are intended to prevent
disputes as well as help resolve current disputes and the backlog of
grievances; and

o  	An Ergonomic Strategic Partnership among the Occupational Safety and
Health Administration (OSHA) and postal labor unions to improve workplace
safety and reduce risk factors, particularly ergonomic-related hazards.

Reducing Grievances

As the Commission noted, employee morale is an essential element of an
incentive-based culture, but is undermined when employee-management
relations are acrimonious. We agree with the Commission that the high
number of remaining grievances and the large backlog of grievances pending
arbitration are an indication of strained relations between postal
managers and workers, to the detriment of morale, productivity, and,
ultimately, service to ratepayers. As the Commission concluded, satisfied
employees are of far more value to the nation's postal endeavor than those
in a contentious relationship with their employer. Thus, we agree with the
Commission that it is imperative that the Service give clear direction
that settlement of problems and cooperative labor-management relations are
a

priority. Rather than allowing problems to fester on the workroom floor,
better communications and improved working relationships are needed to
resolve problems as they arise, minimizing the need to resort to the
grievance process to resolve disputes. This will require greater
accountability for both supervisors and those they supervise, as well as
for top management. We agree with the Commission that the Service must
hold managers accountable for any behavior that results in poor
labor-management relations, and we believe this principle should apply
equally to employees at all levels of the organization.

The Commission noted that encouraging progress is being made by the
Service and the National Association of Letter Carriers in resolving
grievances using a restructured and streamlined grievance process. It
recommended that such progress be used as a model, with the Service
working diligently with other unions to institute procedures aimed at
reducing the time to process grievances and the number of grievances
appealed to arbitration. Recognizing that the success of any process
depends on the collective commitment of the parties, we encourage the
Service and its unions to make continued progress in this area.

Difficulty Negotiating Labor Contracts

Since postal reorganization, the Service and its major labor unions have
often found it difficult to negotiate labor contracts without resorting to
binding arbitration. The Commission criticized the collective bargaining
process as overly lengthy and litigious, providing few incentives for the
parties to reach negotiated settlements. It made detailed statutory
recommendations to improve the process, including mandating the use of a
"mediation and arbitration" approach and specific deadlines for completing
various process steps and accelerating final resolution period. Postal
union officials have strongly opposed these recommendations, stating that
the parties have used the "mediation and arbitration" approach in the past
and have the flexibility within existing law to mutually agree on any
process for contract negotiations. Union officials have also said that
existing deadlines are already difficult to meet, in part due to
scheduling difficulties involving the availability of mediators and
arbitrators. In their view, success is dependent on "people" issues,
including good working relationships, communications, and trust, rather
than on the formal process. They also have noted that the current
contracts between the Service and three of its four major postal labor
unions were negotiated without the use of an arbitrator and asserted that
these outcomes demonstrate that progress has been made within the existing
structure. We recognize these points, but believe that, as with other
human capital

Difficulty Controlling Workforce Costs

issues, the time has come to re-examine all aspects of a structure that
was developed more than 30 years ago.

Progress on controlling human capital costs will be critical to efforts to
achieve "best execution" to sustain affordable universal postal service
and to enhance the value of the mail. The Postal Service employed about
829,000 people at the end of fiscal year 2003, whose pay and benefits
accounted for more than three-quarters of the Service's expenses. In this
regard, we note that a recent analysis prepared by PRC staff showed that
for the period between fiscal years 1998 and 2002 postal wage costs
increased by 3.3 percent over inflation and postal benefits costs rose
28.1 percent over inflation. The Commission concluded that the size of the
workforce largely determines its costs, observing that it will be critical
for management and labor to work together constructively to determine the
right size of the postal workforce and to ensure appropriate flexibilities
in its deployment. As we have previously reported, nearly half of the
Service's career workforce will reach retirement eligibility by 2010,
creating an opportunity for the Service to gain resource flexibility
through the attrition of retiring employees, while also minimizing
disruption to its workforce.

We note that the Postmaster General initiated a constructive working
relationship between national postal management and the leadership of its
labor unions and management associations to deal with issues of mail
security after anthrax was found in the mail. Such communication and
partnerships cannot be legislatively mandated. However, better working
relationships would help the Service and its employee organizations
address difficult workforce size and flexibility issues in a manner that
would allow the Service to rightsize its workforce in the least disruptive
manner possible, including the ranks of both managers and their employees.
All issues should be on the table, including work rules that constrain
greater efficiency; working conditions that constrain the treatment,
morale, and discretionary effort of the workforce; and constraints on
having the most effective and efficient provider perform postal
activities, including limitations on outsourcing.

Unresolved Pay Comparability Issues

We agree with the Commission's conclusion that the most thorny issue in
collective bargaining today is pay and benefit comparability. Although the
parties disagree about whether a wage and benefit premium exists and about
the basis for making these comparisons, the Service's ability to control
costs in this area will be critical to achieving a more efficient

organization. As we have previously testified, one of the limitations in
the existing collective bargaining process is that the interests of all
postal stakeholders, such as ratepayers, do not appear to have been
sufficiently considered.24 The Commission recommended that the Postal
Reorganization Act be amended to clarify the term "comparability" and that
the new Postal Regulatory Board should be authorized to determine
comparable total compensation for all Postal Service employees. These
recommendations have been strongly opposed by the Service's major labor
unions, variously opposing them as "draconian" measures that would
"destroy" collective bargaining for postal workers. The unions have also
questioned why a regulatory body headed by three political appointees
should have the power to effectively set a cap on postal wages.

With respect to clarifying the comparability standard, one option could be
to revisit the guiding principles incorporated into the statutory wage and
comparability standard so that it would more fully reflect all stakeholder
interests and the Service's overall financial condition and outlook. These
principles could specify that comparability includes total wage,
compensation, and benefit costs, as well as the relationship of these
costs to total costs, their impact on rates and revenues, and the
Service's overall financial condition. Another option could be to delete
pay comparability provisions from the statute, as some postal union
officials have suggested. This option would raise the issue of what, if
any, standard would remain to guide negotiators and arbitrators in the
collective bargaining process.

With respect to shifting authority over total postal compensation to a
newly created regulatory body, we note that this change would appear
contrary to the Commission's principle that the Service needs additional
flexibility to manage its operations. A related issue is how the Service
will be able to pay competitive compensation for certain skills. We also
question why a second body-in addition to the system of third-party
arbitration-should be added to the already complex processes for
determining postal pay and benefits. Thus, it is not clear whether this
recommendation would add value to the collective bargaining process.

Another controversial Commission recommendation was that the Postal
Service pension and postretirement health benefit plans should be subject
to collective bargaining-meaning that the Service and its unions should
have the flexibility to develop new plans that are separate and apart from

24GAO-03-812T.

existing federal pension and retiree health benefit plans. The Commission
recognized that such a change could have an uncertain impact on the entire
federal pension and retiree health benefit programs. Although the Service
may have the authority under existing law to withdraw from the federal
health program for its current employees under certain circumstances, it
would still be required to contribute to the health costs of its current
retirees. The Commission recommended that the Service work with the
Department of the Treasury, the Office of Personnel Management (OPM), and
other pertinent parties to determine the potential impacts that separate
funds would have. Because these recommendations could have major effects
on all federal employees, much more information would be needed in order
to determine the potential impact of statutory changes in this area on the
federal budget and employees. It is also not clear whether, as a practical
matter, expanding the scope of collective bargaining to all postal
benefits would result in cost savings for the Postal Service. For example,
where the Service has flexibility, the Service has agreed in collective
bargaining agreements to pay a higher percentage of health insurance
premiums for its employees as compared to other federal agencies (about 85
percent vs. up to 75 percent).

Addressing Retiree Benefits Obligations

We agree with the Commission that the Service's substantial obligations
for its retirement-related benefits need to be addressed, including
benefits for pensions and retiree health. Key issues include how to assign
responsibility and structure a mechanism for covering the costs of
providing retirement-related benefits and how the accounting standards
should be applied. In addition, concerns have been raised about how
changes in funding these obligations could impact the federal budget, as
well as postal ratepayers.

The recently enacted law (P.L. 108-18) changed the method by which the
Service funds the Civil Service Retirement System (CSRS) pension benefits
of its current and former employees to prevent a projected overfunding
from materializing, while at the same time shifting responsibility for
funding benefits attributable to military service from taxpayers to postal
ratepayers. The law also required that, beginning in fiscal year 2006, the
difference between the Service's contributions under the new and old
funding methods-the "savings"-be held in an escrow account until the law
is changed. To facilitate consideration of which agency-the Postal Service
or the Treasury Department-should fund military service costs, the law
required the Postal Service, the Office of Personnel Management, and the
Treasury Department to each submit

proposals to the President, Congress, and the GAO by September 30, 2003.
The law also required the Postal Service to submit a proposal to the same
recipients on how it planned to use the future "savings." We, in turn,
have until November 30, 2003, to analyze these proposals and will provide
our reports to Congress before Thanksgiving.

The Service submitted two proposals for use of the "savings," both of
which would affect postal rates to varying degrees.25 The first proposal
recommends that the Service be relieved of the burden of funding benefits
attributable to military service, and that the Service, in turn, would
prefund its retiree health benefits obligations for current and former
employees, which has been estimated at approximately $50 billion. This
proposal is consistent with the Commission's recommendation that
responsibility for funding CSRS pension benefits relating to the military
service of postal retirees should be returned to the Department of the
Treasury. The second proposal is based on the premise that the Postal
Service will remain responsible for funding military service benefits as
currently required by P.L. 108-18. Under this proposal, the Service said
that it would fund its retiree health benefits obligations only for its
employees hired after fiscal year 2002 and use the remaining "savings" in
priority sequence, to repay debt; and to fund productivity and cost-saving
capital investments. This proposal appears consistent with the Commission
recommendation that the Service should consider funding a reserve account
for unfunded retiree health care obligations to the extent that its
financial condition allows.

There are a number of key questions related to the Service's proposals
that we are considering as part of our mandated review, including

o  	What is the relationship of military service to federal civilian
service and benefits?

o  	What have been the historical changes to the funding of CSRS benefits
to Postal Service employees and retirees?

25The Service has estimated that the additional rate increase impact in
fiscal year 2006, above any inflationary increase, would be 2.0 percent
under its first proposal and 0.3 percent under its second proposal.

o  	What correlation exists between the cost attribution and funding
methods of the Federal Employees Retirement System (FERS) and the current
CSRS methods applicable to USPS?

o  How have other self-supporting agencies funded CSRS benefits?

o  What are the various options for allocating military service costs?

o  	What would be the effects of the Service's proposals on the unified
federal budget? On ratepayers? On the Service's overall financial
situation and transformation efforts?

o  	What alternatives exist for funding health benefit obligations to
existing postal retirees and employees and distributing that
responsibility between current and future ratepayers?

o  	What issues need to be addressed regarding the Service's accounting
treatment of retiree benefit obligations?

o  	What are the potential consequences to the Service and postal rates
should the Service be required to make payments, beginning in fiscal year
2006, into an escrow account without the authority to spend the escrowed
funds for postal purposes?

Reforming Workers' Compensation

Another benefit area where costs have been difficult to control is the
Service's workers' compensation benefits.26 The Commission found that
under the Federal Employees' Compensation Act (FECA), the Service has
maintained a broad and effective workers' compensation program and that
recent efforts have lowered injury rates considerably. However, the
Commission also concluded that the Service, given its unique status,
should be provided relief from FECA provisions that were creating costly
unintended consequences. The Commission recommended making the Service's
workers' compensation program more comparable to programs in the private
sector in order to control costs, provide adequate benefits, and address
the Service's unfunded liability of $6.5 billion in this area. We

26U.S. General Accounting Office, Recent GAO Reports on the Federal
Employees' Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept. 30,
1997); Federal Employees' Compensation Act: Issues Associated With
Changing Benefits for Older Beneficiaries, GAO/GGD-96-138BR (Washington,
D.C.: Aug. 14, 1996).

Inadequate Performance Incentives

believe that placing workers' compensation benefits on a par with those in
the private sector merits careful consideration.

As the Commission pointed out, a key goal of human capital reform should
be to establish an incentive-based culture of excellence. We have reported
that leading organizations use their performance management systems to
accelerate change, achieve desired organizational results, and facilitate
communication throughout the year so that discussions about individual and
organizational performance are integrated and ongoing.27 Modern,
effective, and credible performance appraisal systems are a key aspect of
performance management. The Commission concluded that the level of success
achieved by the Postal Service will hinge on its ability to successfully
deploy and motivate a talented, capable, nimble workforce of a size
appropriate to the future postal needs of the nation and to give its
employees a personal stake in the success of the institution's ambitious
goals.

In this regard, we have reported that the need for results-oriented pay
reform is one of the most pressing human capital issues facing the federal
government today.28 Successful implementation of results-oriented pay
reform, commonly referred to as "pay for performance," requires modern,
reliable, effective, and as appropriate, validated performance management
systems. Such systems need adequate safeguards, including reasonable
transparency and appropriate accountability mechanisms. In fiscal year
1995, the Service implemented a pay-for-performance system for its
executives, managers, postmasters, supervisors, and other nonbargaining
employees. This system was discontinued in fiscal year 2002, in part
because of concerns that large payouts were made when the Service was
recording large deficits. The Service revised its merit-based pay program
for its executives and officers in fiscal year 2002 and revised its
merit-based pay program for its postmasters, managers, and supervisors in
fiscal year 2004.

27U.S. General Accounting Office, Results-Oriented Cultures: Using
Balanced Expectations to Manage Senior Performance, GAO-02-966
(Washington, D.C.: Sept. 27, 2002).

28U.S. General Accounting Office, Results-Oriented Cultures: Modern
Performance Management Systems Are Needed to Effectively Support Pay for
Performance, GAO-03-612T (Washington, D.C.: Apr. 1, 2003).

Given the concerns that led to the overhaul of the Service's previous
merit-based pay systems, it is important that these systems be evaluated
to ensure that they are administered fairly and provide meaningful
incentives. Such incentives would require valid measures that correspond
with individual and organizational performance goals, as well as targets
that are sufficiently challenging that they are not met automatically. For
example, any productivity-based measures should result in real and
measurable savings.

In addition, as we have reported, proposed changes to the Senior Executive
Service could provide a model for better linking pay and performance of
senior executives.29 For example, the proposed Senior Executive Service
Reform Act of 2003 includes a number of important reforms that would
increase the pay cap for senior executives while also linking their pay
more closely to performance. Similar issues would appear to apply to
lifting the statutory pay cap for postal executives.

Over the years, the Service's major labor unions have consistently opposed
extending a pay-for-performance system to craft employees. Presidential
Commissioner Norman Seabrook shared their concerns, stating that in
practice, pay for performance systems are characterized by nepotism,
favoritism, and horrible morale among the workers. Union concerns also
include tying employee compensation to results that depend in part on
external events beyond their control as well as on the quality of postal
management. It is reasonable to question whether a pay-for-performance
system could be agreed on, implemented, and successful in the face of
strong opposition of national and local union leaders. Union concerns are
understandable because past history has led some union officials to
question whether a pay-for-performance system could be successfully
implemented.

Nevertheless, as the Commission pointed out, properly designed
performance-based compensation can serve as a powerful communications and
motivational tool, helping employees understand how they can contribute to
the Service's financial health and success-and be rewarded for their
efforts. In our view, aligning the interests of individual workers with
the specific performance goals of the Service will be essential for the
future. As the Commission concluded, the desire of the

29U.S. General Accounting Office, Human Capital: Building on the Current
Momentum to Address High-Risk Issues, GAO-03-637T (Washington, D.C.: Apr.
8, 2003).

workforce to make the modernization of the nation's postal network a
success, along with its willingness to make possible the Service's
ambitious goals to rein in costs while improving productivity and service,
will in no small part determine the success or failure of the entire
transformation endeavor, and, ultimately, the fate of universal service at
affordable rates.

As the above discussion illustrates, human capital reform is necessary,
but many issues remain to be resolved. We believe that key questions for
Congress to consider include:

o  	What statutory changes can be made that would provide additional
incentives for the Service, its employee organizations, and its employees
to resolve their differences in an appropriate and expeditious manner,
including through the grievance process and at the bargaining table? What
opportunities exist to facilitate better communication, streamline lengthy
processes, and minimize their cost?

o  	Should the existing statutory standards for comparability of postal
wages and benefits be clarified to include specific performance criteria
and factors upon which a comparison must be made, such as the Service's
overall financial condition and outlook?

o  	If comparability standards are retained, should they be enforced by an
outside regulatory body or should they be considered self-enforcing
through the collective bargaining process?

o  	What practical consequences could be expected if all postal benefits,
including all health and retirement benefits, became subject to the
collective bargaining process? What would be the potential effects on the
financing of benefits for employees of both the Service and the rest of
the federal government? Could increases in postal benefits costs also be
expected over time, given the Service's history of agreeing to pay a
larger share of insurance premiums than other federal agencies pay?

o  	Should workers' compensation benefits for Service employees be greater
than those generally available to private sector employees? What
opportunities exist to provide incentives to minimize workers'
compensation costs?

o  	Should the statutory pay cap on postal executives be lifted, and, if
so, how would executive pay be linked to performance? Would increased
accountability apply to postal executives for individual and
organizational results, particularly when problems arise? What

  The Postal Service Needs to Maximize Progress within Its Current Legislative
  Structure

disclosure of postal executive compensation-including bonuses and other
forms of compensation-would be appropriate to incorporate best practices
that have been put into place in the private sector?

While the Commission made a number of recommendations that require
legislative changes, it also made suggestions for improving efficiency and
service that can be implemented under the current law. These
recommendations centered on standardizing and streamlining the postal
network, both the processing and distribution infrastructure and retail
facilities, with major efficiency gains accruing from changes in the
processing and distribution network. The Commission commended the Postal
Service for undertaking an ambitious effort, the Network Integration and
Alignment project, to rationalize the processing and distribution network.
We agree that this project could exert meaningful influence on the
Service's efficiency, but we have concerns about the lack of publicly
available information on the Service's plans and related funding
strategies in this area. The Commission also pointed out that better
postal data would aid the Service's efforts to increase efficiency. We
believe that the availability, accuracy, and relevance of postal data
should be central to any meaningful transformation effort.

The Commission recommended a core philosophy for an improved national mail
service-the concept of best execution. This concept, as described by the
Commission, includes employing corporate best practices in all operations,
as well as selecting the provider who can perform the service at the
highest level of quality for the lowest cost. Best execution has important
implications for the Postal Service because it means that the Service
should consider who could perform the work best, postal employees or
private sector providers, when considering outsourcing and expanding
worksharing opportunities. Some postal union officials have stated that
the Service can provide better execution than private sector providers.
While this may be true, best execution may be difficult to realize under
the existing environment due to

o  lack of incentives to perform at the highest level possible;

o  an outdated, inefficient infrastructure; and

o  insufficient data to assess the true cost of operations.

We have addressed the issue of lack of incentives in a previous section.
In the next sections we will discuss the importance of economy and
efficiency in the postal network and related data issues.

Factors That Hinder Economy and Efficiency in the Postal Network

Difficulties in Optimizing the Postal Retail Network

The Commission characterized the current postal network as too costly, too
inefficient, too large, and lacking standardization. It envisioned a
streamlined, standardized network capable of delivering universal service
in the most efficient and cost-effective manner possible. We believe this
vision is achievable if approached in a comprehensive, integrated fashion,
and supported by postal stakeholders. However, practical impediments may
hinder the Postal Service from rightsizing its infrastructure.
Historically, the Service has encountered resistance from employees,
mailers, communities, and Congress when it attempted to close facilities.
Proactively working with stakeholders to garner input and support for its
infrastructure initiatives may address legitimate concerns and thereby
alleviate some of this resistance. Another impediment has been the
Service's limited options for funding capital improvements. Earlier we
discussed how retained earnings could increase the Postal Service's
funding flexibility. However, this change would require legislative
action. If the Service is to achieve best execution, it should increase
current efforts to address problems with its infrastructure. The Service
also needs to identify its funding needs for implementing its plans in
this area. For purposes of our discussion we have separated the postal
infrastructure into two distinct, yet inter-related, areas: (1) the
network of post offices and other retail facilities and (2) the network of
mail processing and distribution facilities.

The Commission concluded that the Service needs to constructively address
the fact that many of the nation's post offices are no longer necessary to
the fulfill the universal service obligation. We understand that making
changes to retail operations is often controversial because communities do
not like to lose their local post offices and changes in this area are
often perceived as a reduction in services. Unfortunately, the Postal
Service has not done enough to inform the public of the many retail
options currently available. Currently there are over 70,000 locations
where stamps are sold, such as ATMs, grocery and other retail stores, and
postal vending machines. Stamps can also be purchased via the Internet,
through the mail, or from rural carriers. In addition, the Service is
extending retail access to 2,500 self-service kiosks and Hallmark Gold
Crown card shops. Yet, about 80 percent of all stamp revenue is still
generated at the retail counter. Two Commission recommendations in this
area that we concur with were: (1) the Service should dramatically

escalate its efforts to increase alternative access to postal services,
and (2) the Service should market these alternatives more aggressively.

We believe that the Service should strive to improve accessibility to
postal retail services as it implements its strategy of rationalizing its
retail network, including closing post offices. The Service's
Transformation Plan stated that the Service would create new, low-cost
retail alternatives to extend the times and places that its services are
available, including self-service, partnerships with commercial retailers,
and Internet access to retail services. The plan said that the Service has
begun a retail network optimization process, in which redundant retail
operations would be consolidated, starting with poor-performing contract
postal units, and replaced with alternative methods of retail access. The
optimization process involves a national retail database that is to be
used with a criteria-based methodology for modeling retail optimization
and restructuring scenarios. The Service has also said it intends to
expand retail service in markets where it is underrepresented, while
reducing retail infrastructure in markets where it is overrepresented.

Under current law, the Service is not allowed to close post offices for
economic reasons alone. The Commission recommended that legal restrictions
that limit the Service's flexibility in this area be repealed and that the
Service be allowed to close post offices that are no longer necessary for
the fulfillment of universal service. While we agree that the Service
should have the ability to align its retail network with customer needs in
order to fulfill its universal service obligation in a cost-effective,
efficient manner, we also believe that the Postal Service must assure
Congress that the alignment will be done in a fair, rational, and
fact-based manner.

In contemplating the Commission's recommendation to repeal the post office
closing law, we have identified the following key questions:

o  	What national standards, if any, should apply to universal access to
postal retail service?

o  	What criteria and process should be used to realign the Service's
retail infrastructure?

Difficulties in Optimizing the Postal Processing and Distribution Network

o  	Should the Service have greater freedom to reshape its retail
infrastructure, or should Congress have involvement in such decisions,
possibly by using a model such as the military base-closing process to
close post offices that are no longer needed?

o  	Should current statutory restrictions on closing post offices be
retained, modified, or repealed?

o  What transparency and accountability is appropriate in this area?

The Commission found that the Service's processing and distribution
network is plagued with problems, including lack of standardization,
inefficiency, and excess capacity. The Service has approximately 500
facilities dedicated to processing the mail that do not share a standard
footprint for architectural design, equipment complement and layout, or
mail processing procedures. The lack of standardization may be one of the
contributors to variations in productivity among mail processing
facilities. Smaller facilities, as measured by volume, number of
employees, and physical space, tend to have higher productivity, which is
a possible indication of diseconomies of scale. For example, on average,
small facilities tend to handle more mail, relative to work hours
expended, than large facilities (see fig. 3). Standardizing operations
across facilities may minimize diseconomies of scale and should be
considered as part of planning plant consolidations or closings. In
addition, standardization of processing and distribution facilities is
widespread in process-oriented industries where standardization is viewed
as vital to increased flexibility and efficiency. It may be difficult for
the Service to become a world-class organization without establishing a
standard footprint throughout its processing and distribution network.

Figure 3: Productivity of Mail Processing Plants, by Facility Size, in
Fiscal Year 2001

In addition to the lack of standardization, the Service's processing and
distribution facilities may not be optimally located. To a large degree,
the processing and distribution network has evolved gradually in response
to volume growth. Figure 4 shows the location of the Service's processing
facilities in the continental contiguous United States. Distributing mail
between these facilities utilizes thousands of transportation lanes and
results in too many partially full trucks traveling between plants. Better
utilization of trucks and lanes may save the Postal Service money and, if
properly executed, could improve service.

Figure 4: Location of Postal Service Mail Processing Facilities

Another issue raised by the Commission related to the processing and
distribution network is the assertion that the Postal Service has too many
facilities, and the ones it has are not always used effectively, resulting
in excess capacity throughout the network. Excess capacity can be very
costly as it may require increased maintenance, facility, and labor costs.
With changes in the types and volumes of mail and advances in both
processing and information technology, the current network may be too
large. We caution, however, that any consolidation plan should consider
the effects of potential diseconomies of scale. Consolidating small
facilities that may be more efficient into inefficient large facilities
may not achieve the desired cost savings or service improvements. To
achieve sustained cost savings, the Service will need to take a critical
look at how to standardize and rightsize the processing and distribution
network to maximize efficiency. As we have previously reported, any effort
to rationalize the Service's processing network must also take into

No Public Plan and Limited Stakeholder Engagement on Network
Rationalization Strategy

consideration the increased safety and security needs created by the
anthrax attacks and the proper extent and location of mail safety
equipment.30 Other considerations also include how network realignment
could affect the need for a mix of workforce skills and abilities, as well
as workforce diversity and demographics.

The Commission noted the importance of the Service working with
stakeholders to successfully implement best execution strategies,
streamline the postal network, and decide the fate of unnecessary postal
facilities. We agree. However, to date, the Service has not made public a
comprehensive infrastructure rationalization plan and has had limited
engagement with stakeholders who may be affected. Such a plan should lay
out the Service's vision and how it plans to reach it, including the
criteria, process, and data it uses to make its decisions. In our view,
the lack of this type of information will likely lead to suspicion and
lack of trust about the objectivity, fairness, and impartiality of Service
decisions and the lack of input from stakeholders could prevent the
Service from achieving the goal of a more efficient network. Further, we
believe that it is essential for the Service to engage its stakeholders in
its plan development process to address legitimate concerns and minimize
disruption, thus alleviating some of the resistance that is often
encountered when the Service tries to close facilities.

A comprehensive network integration and rationalization plan will be
important for Congress to have regardless of whether a commission is
established to consider network rationalization. One of the most important
deliverables in the Service's Transformation Plan, the Network Integration
and Alignment (NIA) project, is a set of processes and tools used to
analyze the optimal number, locations, and functions of mail processing
and transportation facilities. The NIA strategy was to have been developed
by the fall of 2002. The Service did not meet this time frame, and the
Commission has reported that the Service hopes to begin putting the new
strategy into effect at the end of this year. It has already begun to
close some types of facilities and build others, without disclosing how
these activities fit into the NIA strategy.

To succeed in optimizing its networks, the Service must work with its key
stakeholders, including employee organizations, the mailing industry,
affected communities, and Congress. However, based on difficulties it has

30GAO-03-812T.

encountered in the past, the Service appears to be reluctant to divulge
its network optimization plans, including the timing and funding needs
associated with these plans, to Congress or its stakeholders. We believe
that the Service will face more resistance if it approaches transformation
in an insular, incremental fashion. For example, some union
representatives have acknowledged that the Postal Service needs to
rationalize its infrastructure, and they have committed to working with
the Service to achieve this goal. However, they have received limited
information to date concerning the Postal Service's plans for closings and
consolidations. Likewise, various mailers have expressed concern that the
Postal Service does not adequately seek input regarding customer needs
when planning major changes. This concept is anathema to best practices
employed in private sector service industries.

Recognizing the difficulties the Service has experienced in rationalizing
its network, including closing unneeded facilities, the Commission
recommended that Congress establish a Postal Network Optimization
Commission (P-NOC), similar to the base-closing model and provisions in
proposed postal reform legislation introduced by Senator Carper. The P-NOC
would be charged with making recommendations to Congress and the President
relating to the consolidation and rationalization of the Service's mail
processing and distribution infrastructure. Under the Commission's
proposal, P-NOC recommendations would become final unless Congress
disapproves them in their entirety within 45 days. The intent of this
recommendation corresponds with our observation that a base-closing model
may prove necessary to address politically sensitive changes to postal
facilities.

Regardless of whether or not a P-NOC is implemented, the following three
key factors will be needed to guide decisions:

o  	principles for rationalizing infrastructure that are fact-based,
clearly defined, and transparent;

o  players who should be involved in making the decisions; and

o  	processes that should govern how decisions are made and implemented.

Identify Funding Needs and To accomplish major transformation, the Service
will need to identify its

Strategies 	funding needs related to its major transformation initiatives
and its strategies for funding these initiatives. Historically, postal
policy has been to fund capital expenditure as much as possible through
cash flow from

Opportunities to Strengthen Information Technology Investment Management

operations, with shortfalls financed through debt. By law, the Postal
Service's total debt cannot exceed $15 billion, and annual increases in
the Service's outstanding debt cannot exceed $3 billion. In fiscal year
2001, the Service was faced with insufficient cash flow from operations
and with debt balances that were approaching statutory limits.
Consequently, the Service imposed a freeze on capital expenditures for
most facilities that continued through fiscal years 2002 and 2003.
Implementing best execution strategies is difficult under these
circumstances, especially since the Service has not specified what its
funding needs will be to rationalize its infrastructure and implement
other Transformation Plan initiatives. More information in this area would
be useful for Congress and other stakeholders to understand the Service's
future financial needs. It would also be useful for the Service to assess
what funding it could receive from continuing to identify and dispose of
surplus real estate.

The Commission recommended that the Postal Service be encouraged to
include policy and goals related to the active management of its real
estate in future strategic plans. Disposing of surplus real estate would
not only save the Postal Service maintenance and repair expenses but may
also provide a source of funds that can be used to finance capital
projects. Furthermore, aggressive management of its underutilized real
estate assets could also facilitate local redevelopment. In addition,
passage of the Postal Civil Service Retirement System Funding Reform Act
of 2003 (P.L. 108-18) provided the Postal Service with some financial
relief. Outstanding debt at the end of fiscal year 2004 is budgeted to be
$2.6 billion to $3.1 billion, down from an estimated $7.3 billion at the
end of fiscal year 2003 and $11.1 billion at the end of fiscal year 2002.
We believe the Service has a window of opportunity for financing major
infrastructure changes that may not last long if First-Class Mail volumes
continue to decline. Taking advantage of this opportunity could better
position the Service for the future.

As the Service has recognized, improving its information technology (IT)
infrastructure should be considered as part of any network rationalization
project. We share the view of the Commission that transformation should
include enhanced information systems because streamlined and integrated
operations will require a strong IT infrastructure. The Service has a
number of IT initiatives designed to enhance the efficiency of the
processing and distribution network that are currently at various levels
of deployment. Among these is the Intelligent Mail program, the Surface
Air Management System, and the Transportation Optimization Planning and
Scheduling system. While the Service's IT initiatives may provide enhanced
IT capabilities, it is not clear how they will be integrated or when they
will be fully deployed.

As we have previously reported, the Service has established significant
capabilities for managing its IT investments, but shows mixed progress in
managing its IT investments as a portfolio. The Service has not utilized
criteria that adequately address cost, benefit, schedule, and risk so that
it can effectively analyze, prioritize, or select its investments from a
portfolio perspective. Also, the Service does not regularly evaluate
completed projects and currently has no institutionalized processes that
enable it to learn from its current practices and investments and from
other organizations. Accordingly, the Service cannot ensure that it is
selecting leading-edge IT investments that will maximize returns to the
organization and achieve strategic change.31

Data Issues Related to Achieving Greater Efficiency

Accurate cost and performance data are the cornerstone of efficiency
improvements and are vital if the Service is to achieve best execution. In
this regard, the Commission noted that the Service could use better
real-time information on the location of individual mail pieces and the
containers they travel in to improve its efficiency, such as re-routing
mail to less busy facilities to ensure its more rapid processing, as well
as adjusting for weather conditions or vehicle breakdowns. In addition, to
determine best execution, the Service would need to know how much each
process, function, and operation actually costs to perform and how these
functions interrelate. For example, when determining what portion of
overall operations may be performed cheaper by the private sector, it
would be necessary to know what the actual cost and quality of each
function is and what the effect on overall costs and quality would be if
this function were contracted out. Some unions, mailers, and other groups
have raised concerns about the information used to make outsourcing
decisions, as well as the accuracy of data systems used to measure
performance and productivity.

Recognizing that it will need improved cost information, the Service
reports that it is currently implementing an activity-based costing system
in over 380 mail processing facilities, which is intended to provide
specific data to managers to help them evaluate and reduce operational
costs. In addition, the Service has continued implementing the
recommendations of the 1999 Data Quality Study to improve key postal cost
data. Data quality

31U.S. General Accounting Office, United States Postal Service:
Opportunities to Strengthen IT Investment Management Capabilities,
GAO-03-3 (Washington, D.C.: Oct. 15, 2002).

Conclusion

issues continue to be of interest to the House Committee on Government
Reform, which has asked GAO to follow up on the Service's progress in this
area. Others with expertise in postal data quality issues, such as the
Postal Rate Commission and the Postal Service's Office of Inspector
General, may have insights on costing and performance data necessary to
address issues that have been raised by the Commission's proposals. Later
this year, the Postal Rate Commission plans to host public sessions where
staff from the Service will provide briefings on changes the Service has
made to update data systems related to carrier costs and on recent changes
in the Service's accounting and reporting systems. Such constructive
exchanges help to further mutual understanding and progress on data
quality issues. Continued focus on improving the quality of postal costing
and performance data would also be necessary to successfully implement the
Commission's proposals.

We and the Commission agree that the Service faces an uncertain future.
Also, we agree that both congressional action on comprehensive postal
reform legislation and continued actions by the Postal Service to make
improvements under its existing authority are necessary to ensure the
future viability of the Postal Service. The Commission's key conclusions,
consistent with our past work, were that the Service faces financial
pressure due to its outmoded business model, significant financial
obligations, operating inefficiencies, electronic diversion and mail
volume trends, and statutory and practical constraints. The Service's
current business model is not sustainable in today's competitive
environment. Thus, we believe that now is the time to "get it right" and
modernize the statutory framework that governs the Service.

In addition to statutory reform, we agree with the Commission that the
Service can and should do more within its existing authority to work
toward "best execution" that incorporates corporate best practices and
enables those who can perform best and for the best price to provide
postal activities, whether that is the Service, the mailing industry,
transportation firms, or other companies. The Service has many
opportunities to become more efficient, such as by standardizing its
operations and reducing excess capacity of its network. Impending
retirement of much of the Service's workforce also creates an opportunity
for the Service to realign its workforce through attrition. The
Commission's vision of rightsizing the Service's infrastructure and
workforce is achievable if approached in a comprehensive, integrated
fashion, and supported by postal stakeholders.

  Matter for Congressional Consideration

Recommendation for Executive Action

However, since the Service issued its Transformation Plan in April 2002,
it has not provided adequate transparency on its plans to rationalize its
infrastructure and workforce; the status of initiatives included in its
Transformation Plan; and how it plans to integrate the strategies, timing,
and funding necessary to implement its plans. In addition, the Service has
had limited constructive engagement with employee organizations, the
mailing industry, affected communities, and Congress with regard to its
efforts to implement its key transformation initiatives related to
rationalizing its infrastructure and workforce. As the Service knows from
the difficulties it has encountered when it has tried to make changes to
its facility locations in the past, these decisions can be highly
controversial. However, if those who are potentially affected by such
decisions do not have sufficient information about how they may be
impacted by proposed facility changes, the Service is unlikely to gain the
necessary support to successfully achieve a much more efficient network.

In view of the Service's continuing financial, operational, and structural
problems, as well as trends that increase the urgency of making rapid
progress in transforming its organization, we believe that Congress should
consider the Commission's recommendations as well as GAO's reform
suggestions and enact comprehensive postal reform legislation. Some of the
key areas that need to be addressed as part of comprehensive reform
legislation include clarifying the Service's mission and role; enhancing
governance, accountability, oversight, and transparency; improving
regulation of postal rates; and making human capital reforms.

To facilitate the Service's progress in implementing actions under the
existing system, we recommend that the Postmaster General develop an
integrated plan to optimize its infrastructure and workforce, in
collaboration with its key stakeholders, and make it available to Congress
and the general public. In addition, the Postmaster General should provide
periodic reports to Congress and the public on the status of implementing
its transformation initiatives and other Commission recommendations that
fall within the scope of its existing authority. Postal officials have
agreed to take these actions.

Chairman Collins, that concludes my prepared statement. I would be pleased
to respond to any questions that you or the Members of the Committee may
have.

  Contact and Acknowledgments

(543078)

For further information regarding this testimony, please call Bernard L.
Ungar, Director, Physical Infrastructure Issues, on (202) 512-2834 or at
[email protected], or call Linda Calbom, Director, Financial Management and
Assurance, on (202) 512-8341 or at [email protected] for pension and retiree
health issues. Individuals making key contributions to this testimony
included Teresa Anderson, Gerald P. Barnes, Joshua Bartzen, Alan Belkin,
Amy Choi, Margaret Cigno, Keith Cunningham, William Doherty, Brad Dubbs,
Kathleen A. Gilhooly, Kenneth E. John, Roger Lively, Scott McNulty, and
Lisa Shames.

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