U.S. Postal Service Key Reasons for Postal Reform (23-MAR-04,	 
GAO-04-565T).							 
                                                                 
Both the Presidential Commission on the U.S. Postal Service and  
GAO's past work have reported that universal postal service is at
risk and that reform is needed to minimize the risk of a	 
significant taxpayer bailout or dramatic postal rate increases.  
The administration has also supported comprehensive postal	 
reform. Recent congressional hearings have highlighted broad	 
consensus on the need for postal reform among diverse		 
stakeholders that include the Postal Service, postal employee	 
organizations, the mailing industry, and Postal Service 	 
competitors. GAO has also testified in detail about the need for 
postal reform. In light of these developments, GAO was asked to  
briefly summarize the need for postal reform and elements that	 
should be addressed by postal reform legislation. This statement 
for the record is based on prior GAO reports and testimonies.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-565T					        
    ACCNO:   A09569						        
  TITLE:     U.S. Postal Service Key Reasons for Postal Reform	      
     DATE:   03/23/2004 
  SUBJECT:   Federal agency reorganization			 
	     Financial analysis 				 
	     Financial management				 
	     Postal service					 
	     Strategic planning 				 
	     Postal rates					 
	     Agency missions					 
	     Internal controls					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-04-565T

United States General Accounting Office

GAO Testimony

Before the Senate Committee on Governmental Affairs and the House
Committee on Government Reform

For Release on Delivery

Expected at 2:30 p.m. EST U.S. POSTAL SERVICE

Tuesday, March 23, 2004

                         Key Reasons for Postal Reform

Statement for the Record by David M. Walker Comptroller General of the United
States

GAO-04-565T

Highlights of GAO-04-565T, a statement for the record for the Senate
Committee on Governmental Affairs and the House Committee on Government
Reform

Both the Presidential Commission on the U.S. Postal Service and GAO's past
work have reported that universal postal service is at risk and that
reform is needed to minimize the risk of a significant taxpayer bailout or
dramatic postal rate increases. The administration has also supported
comprehensive postal reform.

Recent congressional hearings have highlighted broad consensus on the need
for postal reform among diverse stakeholders that include the Postal
Service, postal employee organizations, the mailing industry, and Postal
Service competitors. GAO has also testified in detail about the need for
postal reform.

In light of these developments, GAO was asked to briefly summarize the
need for postal reform and elements that should be addressed by postal
reform legislation. This statement for the record is based on prior GAO
reports and testimonies.

www.gao.gov/cgi-bin/getrpt?GAO-04-565T.

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

March 23, 2004

U.S. POSTAL SERVICE

Key Reasons for Postal Reform

Comprehensive postal reform is urgently needed. The Postal Service's
financial viability is at risk because its business model-which relies on
mail volume growth to cover the costs of its expanding delivery network-is
not aligned with 21st century realities. Financial, operational,
governance, and human capital challenges threaten the Service's ability to
remain self-supporting while providing affordable, high-quality, and
universal postal service. Key trends that demonstrate the need for reform
include declining mail volume, particularly for First-Class Mail; changes
in the mail mix from high-margin to lower-margin products; increased
competition from private delivery companies; and subpar revenue growth.
Moreover, the Service continues to have significant financial liabilities
and obligations (e.g., retiree health obligations), uncertain funding for
emergency preparedness, challenges to achieving sufficient cost-cutting,
renewed difficulties in substantially improving postal productivity, and
uncertainties regarding the adequacy of capital investment. Thus, the
Service's transformation efforts and financial outlook continue to be on
GAO's High-Risk List.

First-Class Mail Volume Growth, Fiscal Years 1984 through 2003

The Postal Service is taking actions within its existing authority to make
incremental progress toward transformation, but these steps cannot resolve
the fundamental issues associated with the Service's current business
model. To avoid the risk of a significant taxpayer bailout or dramatic
increases in postal rates, Congress should enact comprehensive postal
reform legislation that addresses the Service's key structural and
systemic deficiencies, including its unfunded obligation for retiree
health benefits and the escrow requirement. It is important that Congress
act before the Service faces a crisis that could limit congressional
options, particularly because it will take time for the Service to
implement major changes.

In GAO's view, specific elements of comprehensive postal reform
legislation should address the following: clarify the Service's mission
and role; enhance the Service's governance, transparency, and
accountability; improve flexibilities and oversight; and make needed human
capital reforms.

Chairman Collins, Chairman Davis, and Members of the Committees:

We are pleased to have the opportunity to comment on the need for postal
reform and elements that should be addressed by postal reform legislation.
This statement is based on our prior work.1 First, comprehensive postal
reform is urgently needed. The Postal Service's financial viability is at
risk because its business model-which relies on mail volume growth to
cover the costs of its expanding delivery network-is not aligned with 21st
century realities. Financial, operational, governance, and human capital
challenges threaten the Service's ability to remain self-supporting while
providing affordable, high-quality, and universal postal service. Thus,
the Service's transformation efforts and financial outlook continue to be
on our High-Risk List. Second, specific elements of comprehensive postal
reform legislation should address the following: clarify the Service's
mission and role; enhance the Service's governance, transparency, and
accountability; improve flexibilities and oversight; and make needed human
capital reforms.

The Postal Service is taking actions within its existing authority to make
incremental progress toward transformation, but these steps cannot resolve
the fundamental issues associated with the Service's current business
model. To avoid the risk of a significant taxpayer bailout or dramatic
increases in postal rates, Congress should enact comprehensive postal
reform legislation that addresses the Service's key structural and
systemic deficiencies, including its unfunded obligation for retiree
health benefits and the escrow requirement established by P.L. 108-18.2 It
is important that Congress act before the Service faces a crisis that
could limit congressional options, particularly because it will take time
for the Service to implement major changes. The following key trends
demonstrate that postal reform legislation is needed:

  The Need for Postal Reform

1See U.S. General Accounting Office, Need for Comprehensive Postal Reform,
GAO-04-455R (Washington, D.C.: Feb. 6, 2004); U.S. Postal Service: Key
Elements of Comprehensive Postal Reform, GAO-04-397T (Washington, D.C.:
Jan. 28, 2004); U.S. Postal Service: Bold Action Needed to Continue
Progress on Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5,
2003).

2The Postal Civil Service Retirement System Funding Reform Act of 2003
(P.L. 108-18), enacted in April 2003, required that, beginning in fiscal
year 2006, the difference between the Service's contributions under new
and old funding methods-the "savings"-be held in an escrow account until
the law is changed.

Page 1 GAO-04-565T

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 as customers increase their use of electronic
alternatives for communications and payments. This trend is particularly
significant because First-Class Mail covers more than two-thirds of the
Service's institutional costs.

o  	Changes in the mail mix: The Service's mail mix is changing as the
volume for high-margin products, such as First-Class Mail, declines and
the volume of lower-margin products, such as some types of Standard Mail,
increases. These changes reduce the 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. 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. Priority Mail volume fell 13.9 percent in
fiscal year 2003 and has declined nearly 30 percent during the last 3
years. Express Mail volume is also 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 this target will be a challenging one. 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  	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,
including $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

Page 2 GAO-04-565T

affect revenues while costs continue to rise. The Service has recently
proposed two options to Congress so the Service can begin to prefund this
obligation to the extent that it is financially able.

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 no funds are
appropriated, such funding 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 affecting the quality of service.

o  	Renewed difficulties in substantially improving postal productivity:
The Service's productivity increased by 1.8 percent in fiscal year 2003
but is budgeted 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  	Uncertainties regarding the adequacy of 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. Looking forward, it is unclear what the Service's needs
will be for maintaining and modernizing its physical infrastructure, as
well as whether its plans for capital investment will be adequate for
transformation.

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

o  	Mission and Role: Congress needs to (1) define the scope of universal
service and the postal monopoly and (2) clarify the Service's role with
regard to competition and regulation.

o  	Governance, Transparency, and Accountability: Congress should (1)
delineate public policy, operational, and regulatory responsibilities; (2)
ensure managerial accountability through a strong, well-qualified
corporate-style board that holds its officers responsible and accountable

  Key Areas for Postal Reform

Page 3 GAO-04-565T

for achieving real results; and (3) define appropriate reporting
mechanisms to enhance the Service's transparency and accountability for
financial and performance results.

o  	Flexibility and Oversight: Congress needs to balance 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, restrict cross-subsidies, and 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 mechanisms for enhanced transparency and
accountability.

o  Human capital reforms: Congress needs to (1) determine the Service's

  Contact and Acknowledgments

(543100)

responsibility for pension costs related to military service, funding
retiree health benefits, and determine what action to take on the escrow
account established in recent pension legislation; (2) decide whether
postal workers' compensation benefits should be on par with those in the
private sector; and (3) clarify pay comparability standards.

For further information regarding this statement, please contact Mark L.
Goldstein, Director, Physical Infrastructure Issues, at (202) 512-2834 or
at [email protected]. Individuals making key contributions to this
statement included Teresa Anderson, Gerald P. Barnes, Margaret Cigno,
Kathleen A. Gilhooly, and Kenneth E. John.

Page 4 GAO-04-565T

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

  GAO's Mission

Obtaining Copies of GAO Reports and Testimony

The General Accounting Office, the audit, evaluation and investigative arm
of Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability of
the federal government for the American people. GAO examines the use of
public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.

Order by Mail or Phone 	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud,	Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm

  Waste, and Abuse in E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Jeff Nelligan, Managing Director, [email protected] (202) 512-4800

Public Affairs 	U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***