Need for Comprehensive Postal Reform (06-FEB-04, GAO-04-455R).	 
                                                                 
This letter responds to a request by the Chairman, Senate	 
Committee on Governmental Affairs, for GAO's views on the need	 
for postal reform and is based upon prior testimonies related to 
this issue. Since the Postal Service's transformation efforts and
financial outlook had been placed on GAO's High-Risk List in	 
April 2001, the Comptroller General has testified on several	 
occasions about the governance, financial, operational, and human
capital challenges that threaten the Service's ability to carry  
out its mission. If not effectively addressed in a timely manner,
these challenges serve to threaten the Service's ability to	 
remain self-supporting while providing affordable, high-quality, 
and universal postal services to all Americans. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-455R					        
    ACCNO:   A09232						        
  TITLE:     Need for Comprehensive Postal Reform		      
     DATE:   02/06/2004 
  SUBJECT:   Agency missions					 
	     Financial management				 
	     Postal law 					 
	     Postal service					 
	     Postal service employees				 
	     Strategic planning 				 
	     Internal controls					 
	     Risk management					 
	     Human capital					 

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GAO-04-455R

United States General Accounting Office Washington, DC 20548

February 6, 2004

The Honorable Susan M. Collins Chairman, Committee on Governmental Affairs
United States Senate

Subject: Need for Comprehensive Postal Reform

Dear Chairman Collins:

This letter responds to your request for our views on the need for postal
reform and is based upon our prior testimonies related to this issue.1 In
summary, we believe that comprehensive postal reform is urgently needed.
The ability of the Service to remain financially viable is at risk because
its current business model-which relies on mail volume growth to cover the
costs of its expanding delivery network-is not well aligned with 21st
century realities. Since we placed the Postal Service's transformation
efforts and financial outlook on our High-Risk List in April 2001, I have
testified on several occasions about the governance, financial,
operational, and human capital challenges that threaten the Service's
ability to carry out its mission. If not effectively addressed in a timely
manner, these challenges serve to threaten the Service's ability to remain
self-supporting while providing affordable, high-quality, and universal
postal services to all Americans.

The following key trends serve to reinforce our view that enactment of
postal reform legislation is needed:

o  	Declining mail volume: Total mail volume declined in fiscal year 2003
for the third year in a row-a historical first for the Service, which has
depended on rising mail volume to help cover rising costs and mitigate
rate increases. First-Class Mail volume declined by a record 3.2 percent
in fiscal year 2003 and is projected to decline annually for the
foreseeable future. Some of this decline is due to technology advances
(e.g. E-mail, digital phones, faxes, and electronic bill payments) that
are likely to increase in the future. This trend is particularly
significant because First-Class Mail covers more than two-thirds of the
Service's institutional costs.

1 See U.S. General Accounting Office, U.S. Postal Service: Bold Action
Needed to Continue Progress on Postal Transformation, GAO-04-108T
(Washington, D.C.: Nov. 5, 2003); and U.S. Postal Service: Key Elements of
Comprehensive Postal Reform, GAO-04-397T (Washington, D.C.: Jan.28, 2004).

                           GAO-04-455R Postal Reform

o  	Changes in the mail mix: The Service's mail mix is changing with
declining volume for high-margin products, such as First-Class Mail, and
increasing volume of lower-margin products, such as some types of Standard
Mail. These changes reduce revenues available to cover the Service's
institutional costs.

o  	Increased competition from private delivery companies: Private
delivery companies dominate the market for parcels greater than 2 pounds
and appear to be making inroads into the market for small parcels.
Priority Mail volume fell 13.9 percent in fiscal year 2003 and over the
last 3 years has declined nearly 30 percent. Once a highly profitable
growth product for the Service, Priority Mail volume is declining as the
highly competitive parcel market turns to lower-priced ground shipment
alternatives. Express Mail volume is declining for the same reason. In
addition, United Parcel Service (UPS) and FedEx have established national
retail networks through UPS's acquisition of MailBoxes Etc., now called
UPS Stores, and FedEx's recent acquisition of Kinko's.

o  	Subpar revenue growth: The Service's revenues are budgeted for zero
growth in fiscal year 2004, which would be the first year since postal
reorganization that postal revenues have failed to increase. However, as
the Service has recognized, even the zero-growth target will be
challenging. In the absence of revenue growth generated by increasing
volume, the Service must rely more heavily on rate increases to cover
rising costs and help finance capital investment needs.

o  	Declining capital investment: The Service's capital cash outlays
declined from $3.3 billion in fiscal year 2000 to $1.3 billion in fiscal
year 2003, which was the lowest level since fiscal year 1986, and far
below the level of the late 1990s, when the Service spent more than $3
billion annually. Capital cash outlays are budgeted to increase to $2.4
billion in fiscal year 2004, but this level may not be sufficient to
enable the Service to fully fund its capital investment needs. In the
longer term, it is unclear what the Service's needs will be to maintain
and modernize its physical infrastructure, as well as how these needs will
be funded.

o  	Renewed difficulties in substantially improving postal productivity:
The Service's productivity increased by 1.8 percent in fiscal year 2003
but is estimated to increase by only 0.4 percent in fiscal year 2004. In
the absence of mail volume growth, substantial productivity increases will
be required to help cover cost increases generated by rising wages and
benefit costs and to mitigate rate increases.

o  	Significant financial liabilities and obligations: Despite the passage
of legislation that reduced the Service's pension obligations, the Service
has about $88 billion to $98 billion in liabilities and obligations that
include $47 billion to $57 billion in unfunded retiree health benefits.
Under the current pay-as-you-go system, the Service may have difficulty
financing its retiree health benefits obligation in the future if mail
volume trends continue to impact revenues while costs in this area
continue to rise. The Service has recently proposed two options to
Congress, so the Service could prefund this obligation to the extent that
it is financially able.

Page 2

GAO-04-455R Postal Reform

o  	Uncertain funding for emergency preparedness: The Service requested
$350 million for emergency preparedness for fiscal year 2004, which it did
not receive, and $779 million for fiscal year 2005. If the money is not
appropriated, funding for this purpose may have to be built into postal
rates.

o  	Challenges to achieve sufficient cost cutting: The Service achieved
additional cost cutting to compensate for below-budget revenues in fiscal
year 2003. Despite this progress, in the longer term it is unclear whether
continued cost-cutting efforts can offset declines in First-Class Mail
volume without impacting the quality of service.

Although we have discussed numerous actions that the Postal Service can
take within its existing authority to improve its overall efficiency and
effectiveness, we do not believe that incremental steps toward postal
transformation can resolve the fundamental and systemic issues associated
with the Service's current business model. To avoid the risk of a
significant taxpayer bailout or dramatic postal rate increases, we believe
that Congress should enact comprehensive postal reform legislation that
includes the Service's overall statutory framework, resolution of issues
regarding the Service's pension and retiree health benefits obligations,
and whether there is a continued need for an escrow account.

The key areas of the Service's statutory framework that need to be
addressed include:

o  	clarifying the Service's mission and role by defining the scope of
universal service and the postal monopoly and by clarifying the role of
the Service in regard to competition and its regulatory functions;

o  	enhancing governance, transparency, and accountability by delineating
public policy, operational, and regulatory responsibilities; by ensuring
managerial accountability through a strong, well-qualified corporate-style
board that holds its officers responsible and accountable for achieving
real results; and by defining appropriate reporting mechanisms to enhance
the Service's transparency and accountability for financial and
performance results;

o  	improving flexibilities and oversight by balancing increased
flexibility for the Service- through streamlining the rate-setting process
and allowing a certain amount of retained earnings-with appropriate
oversight by an independent regulatory body to protect postal customers
against undue discrimination, to restrict cross-subsidies, and to ensure
due process. In addition, the Service needs additional flexibility to
rationalize its infrastructure and reshape its workforce. Any such
additional flexibility should be accompanied by appropriate safeguards to
prevent abuse along with enhanced transparency and accountability
mechanisms; and

o  	making needed human capital reforms such as (1) determining the
Service's responsibility for pension costs related to military service,
funding retiree health benefits, and determining what action to take on
the escrow account established in recent pension legislation; (2) deciding
whether postal workers' compensation

Page 3 GAO-04-455R Postal Reform

benefits should be on par with those in the private sector; and (3)
clarifying pay comparability standards.

We believe that Congress now has a rare opportunity to assure the
Service's longterm financial viability through comprehensive postal reform
legislation that addresses the Service's key structural and systemic
deficiencies, its unfunded obligations, including its retiree health
benefits obligation, and the escrow requirement. Key legislative and
administrative actions in connection with transforming the Postal Service
can also serve as positive examples for other key government
transformation efforts.

                                   _ _ _ _ _

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the date of this letter. At that time, we will provide copies to
interested congressional committees. We will also make copies available to
others on request. In addition, the report will be available at no charge
on the GAO Web site at http://www.gao.gov.

For additional information about this report, please contact Mark L.
Goldstein, Director, Physical Infrastructure Issues at (202) 512-2834 or
at [email protected]. Please contact me if I can be of any further
assistance to help make comprehensive postal reform a reality.

Sincerely yours,

David M. Walker Comptroller General

of the United States

(543095)

Page 4

GAO-04-455R Postal Reform

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