Postal Reform Law: Early Transition Is Promising, but Challenges 
to Successful Implementation Remain (28-FEB-08, GAO-08-503T).	 
                                                                 
In December 2006, Congress passed the first comprehensive postal 
reform legislation in over 30 years. The Postal Accountability	 
and Enhancement Act (the act) provided opportunities to address  
many of the financial, operational, and human capital challenges 
facing the Postal Service (the Service), which contributed to	 
GAO's decision to remove the Service's transformation efforts	 
from its High-Risk List last year. Specifically, the act provides
tools and mechanisms that can be used to establish an efficient, 
flexible, fair, transparent, and financially sound Postal	 
Service--one that can more effectively operate in an increasingly
competitive environment not anticipated under the Postal	 
Reorganization Act of 1970. This testimony focuses on (1) the	 
actions to date resulting from implementing the act and how it	 
affected the Service's 2007 financial condition, (2) the	 
implementation challenges and areas for continued oversight, and 
(3) how information required under the law can contribute to	 
future postal reform decisions. The testimony is based on GAO's  
past work; a review of the implementation of the postal reform	 
law, including actions already taken; and updated information on 
the Service's financial and operational condition. The Postal	 
Service had no comments on this testimony.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-503T					        
    ACCNO:   A81153						        
  TITLE:     Postal Reform Law: Early Transition Is Promising, but    
Challenges to Successful Implementation Remain			 
     DATE:   02/28/2008 
  SUBJECT:   Accountability					 
	     Congressional oversight				 
	     Cost control					 
	     Employee retention 				 
	     Federal agency reorganization			 
	     Financial analysis 				 
	     Financial records					 
	     Human capital management				 
	     Internal controls					 
	     Postal rates					 
	     Postal service					 
	     Program evaluation 				 
	     Reporting requirements				 
	     Reports management 				 
	     Standards						 
	     Strategic planning 				 
	     Program goals or objectives			 
	     Transparency					 
	     GAO High Risk Series				 

******************************************************************
** 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-08-503T

   

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. 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. 

Testimony: 

Before the Subcommittee on Federal Workforce, Postal Service, and the 
District of Columbia, Committee on Oversight and Government Reform, 
House of Representatives: 

United States Government Accountability Office: 

GAO: 

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

Thursday, February 28, 2008: 

Postal Reform Law: 

Early Transition Is Promising, but Challenges to Successful 
Implementation Remain: 

Statement of Katherine Siggerud, Director Physical Infrastructure 
Issues: 

GAO-08-503T: 

GAO Highlights: 

Highlights of GAO-08-503T, a testimony before the Subcommittee on 
Federal Workforce, Postal Service, and the District of Columbia, 
Committee on Oversight and Government Reform, U.S. House of 
Representatives 

Why GAO Did This Study: 

In December 2006, Congress passed the first comprehensive postal reform 
legislation in over 30 years. The Postal Accountability and Enhancement 
Act (the act) provided opportunities to address many of the financial, 
operational, and human capital challenges facing the Postal Service 
(the Service), which contributed to GAOï¿½s decision to remove the 
Serviceï¿½s transformation efforts from its High-Risk List last year. 
Specifically, the act provides tools and mechanisms that can be used to 
establish an efficient, flexible, fair, transparent, and financially 
sound Postal Serviceï¿½one that can more effectively operate in an 
increasingly competitive environment not anticipated under the Postal 
Reorganization Act of 1970. 

This testimony focuses on (1) the actions to date resulting from 
implementing the act and how it affected the Serviceï¿½s 2007 financial 
condition, (2) the implementation challenges and areas for continued 
oversight, and (3) how information required under the law can 
contribute to future postal reform decisions. The testimony is based on 
GAOï¿½s past work; a review of the implementation of the postal reform 
law, including actions already taken; and updated information on the 
Serviceï¿½s financial and operational condition. The Postal Service had 
no comments on this testimony. 

What GAO Found: 

Over the last 14 months, key actions have been taken to implement the 
act. For example, a new rate-setting system and regulatory agency were 
established, the Service began prefunding its retiree health benefit 
obligations, service standards were updated, and key reports were 
issued. These actions have required the collective efforts of many 
postal stakeholders including the Service and the Postal Regulatory 
Commission. The Service reported a $5.1 billion net loss for fiscal 
year 2007. Some of the actions taken to implement the act, such as 
funding changes to its retiree health benefit obligations and pension 
requirements, directly impacted these results, as did other events such 
as the January 2006 and May 2007 rate increases. 

The uncertain economic environment serves to exacerbate the challenges 
facing the Service and contributed to lower than expected mail volumes 
and revenues in the first quarter of fiscal year 2008. The Service 
projects a $600 million net loss for 2008 as it faces challenges such 
as generating volumes (see figure) as rates increase again in May; 
managing its costs and improving operational efficiencies through 
accelerated cost reduction strategies; maintaining, measuring, and 
reporting service; and managing its workforce. 

Figure: First-Class Mail and Standard Mail Volumes have Recently 
Declined: 

This figure is a combination line graph showing first-class mail and 
standard mail volumes have recently declined. The X axis represents the 
fiscal year, and the Y axis represents the percentage. One line 
represents first-class mail percentage change, and the other represents 
the standard mail percentage change. 

[See PDF for image] 

Source: U.S. Postal Service. 

[End of figure] 

Some key areas for continued oversight include changes to mail volumes 
and revenues, efforts to control costs by optimizing the Serviceï¿½s 
infrastructure and workforce, transition to new automation and 
technology to enhance mail sorting and tracking, transparency in 
measuring and reporting delivery performance, and implementation of the 
new rate-setting regulations. 

Information required under the act can be used to facilitate 
constructive dialogue about complex postal reform issues that may 
eventually need to be revisited by Congress. The act requires multiple 
reports and studies over the next 5 to 10 years that can be used to 
continually examine and assess the Postal Serviceï¿½s position in an 
environment of increasing competition and technological advances. 
Specifically, these reports and studies will provide key information on 
the Serviceï¿½s mission and role, monopoly protections, universal service 
requirements, rate-setting and other regulatory issues, oversight 
structure, competition issues, and consumer protection. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-503T. For more information, contact 
Katherine Siggerud at (202) 512-2834 or [email protected] 

[End of section] 

Chairman Davis, Representative Marchant, and Members of the 
Subcommittee: 

I am pleased to be here today to participate in this oversight hearing 
for the U.S. Postal Service (the Service). At last year's oversight 
hearing, I testified that Congress's efforts to pass comprehensive 
postal reform provided opportunities to address many of the financial, 
operational, and human capital challenges facing the Service.[Footnote 
1] Specifically, the Postal Accountability and Enhancement Act (the 
act)[Footnote 2] provided tools and mechanisms that can be used to 
establish an efficient, flexible, fair, transparent, and financially 
sound Postal Service--one that can more effectively operate in an 
increasingly competitive environment not anticipated when the Postal 
Service was created under the Postal Reorganization Act of 1970. These 
fundamental changes contributed to GAO's decision to remove the Postal 
Service's transformation efforts from our High-Risk list in January 
2007.[Footnote 3] 

My remarks today will focus on (1) the actions to date resulting from 
implementation of the act, including how it affected the Service's 2007 
financial condition,[Footnote 4] (2) the implementation challenges and 
areas for continued oversight, and (3) the way information required 
under the law can contribute to future postal reform decisions. My 
statement is based on work we conducted in January and February 2008, 
including reviewing such Postal Service documents as the 2007 Audited 
Annual Report and Comprehensive Statement, 2008 Integrated Financial 
Plan, the financial report for the first quarter of 2008, updated 
Strategic Transformation Plan; reports and information related to the 
act; and our past work. We also interviewed Postal Service officials. 
We conducted this performance audit in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Summary: 

The Postal Service, the Postal Regulatory Commission (PRC),[Footnote 5] 
and other postal stakeholders have worked cooperatively to date to meet 
their responsibilities in fulfilling the requirements of the act. Some 
of the key actions include establishing: 

* regulations for a new rate-setting system and the Service's decision 
not to implement another rate increase under the old system, 

* the new PRC and its Office of Inspector General (OIG), 

* a retiree health benefits fund, held by the U.S. Treasury for 
prefunding retiree health insurance premiums, and transferring into 
this fund the surplus for postal employees under the Civil Service 
Retirement System (CSRS), and: 

* modern service standards for the Service's products covered by the 
postal monopoly. 

In addition, several reports required under the act have been issued, 
and the PRC has solicited public comments and held meetings to 
stimulate constructive dialogue on some of the complex issues involved 
in establishing the new regulatory framework. The Service reported a 
$5.1 billion net loss for 2007. Some of the actions taken to implement 
the act, such as funding changes to its retiree health obligations and 
pension requirements, directly impacted these results, as did other 
events such as rate increases in January 2006 and May 2007. 

The financial, operational, human capital, and regulatory challenges 
facing the Service and other stakeholders as they take actions to 
continue implementing the act are exacerbated by the current uncertain 
economic environment. A slowing economy, recent rate increases, and 
other factors have negatively impacted the Service's financial 
performance in the first quarter of 2008--its mail volumes and revenues 
were both lower than planned. The Service was able to mitigate these 
impacts by managing cost growth while achieving record service delivery 
performance for the segment of First-Class Mail[Footnote 6] that is 
currently measured.[Footnote 7] In response to concerns about 
challenges to its financial outlook, the Service filed its first rate 
increase for its market-dominant products[Footnote 8] under the act on 
February 11, 2008. This rate increase, which averages about 2.9 percent 
for the majority of its products, is scheduled to take effect on May 
12, 2008. Service officials stated this increase is expected to 
contribute an additional $700 million in revenues for 2008, and will 
need to be supplemented by accelerated cost reduction strategies 
totaling $2 billion for the year to achieve its year-end target of a 
$600 million net loss. The Service has also updated its strategies for 
addressing challenges related to achieving efficiencies through 
automation and improving service. Some key areas for continued 
oversight include changes in mail volumes and revenues, efforts to 
control costs by modernizing and optimizing the Postal Service's 
infrastructure and workforce, the transition to new automation and mail-
tracking systems, the level of transparency in measuring and reporting 
delivery performance, and the implementation of the new rate- setting 
processes and regulations. 

Information required under the act can be used to facilitate 
constructive dialogue about postal reform issues related to universal 
service, the postal monopoly, fair competition, consumer protection, 
and transparency and accountability. Specifically, the act included 
provisions for reports required over the next 5 to 10 years related to 
examining and reporting on the Postal Service's mission, role, and 
oversight structure in an increasingly competitive 
environment.[Footnote 9] This work was to be performed by multiple 
stakeholders, including the Postal Service, PRC, the Postal Service 
OIG, the Office of Personnel Management (OPM), Treasury, and GAO, with 
a wide range of deadlines. We look forward to reviewing this 
information as part of the evaluation we are required to conduct under 
the act of various options and strategies for long-term structural and 
operational reforms to assure that the Postal Service can continue 
providing affordable universal postal service. 

Key Actions Have Been Taken to Implement the Act: 

Several key actions have been taken to implement the law since it was 
enacted over 14 months ago. Some of the actions taken to implement the 
act had a direct impact on the Service's 2007 financial condition, 
while others facilitated the transition to a new financial, operating, 
and regulatory environment. Specific actions in the act that have 
affected the Service's 2007 financial condition include: 

* prefunding the Service's significant unfunded retiree health 
obligations. While this change results in significant retiree health 
benefit cost increases for a decade, over the long term this action 
improves the fairness and balance of the cost burdens for current and 
future ratepayers. The Service's 2007 payment of $5.4 billion was the 
first of 10 annual payments required under this change.[Footnote 10] 

* expensing almost $3 billion in funds previously set aside in escrow 
(transferring them to the Treasury) and eliminating future escrow 
payments, including an estimated $3.3 billion payment that had been 
scheduled for 2007.[Footnote 11] 

* transferring the estimated $27 billion funding obligation for 
selected military service benefits back to the Treasury. 

* eliminating certain annual CSRS pension funding requirements, thereby 
saving the Service approximately $1.6 billion in 2007. 

The effects of these changes, however, must be put into context with 
other actions and events during this time to gain a comprehensive 
understanding of the Service's financial and operating condition. For 
example, 

* Mail volumes and revenues: Total revenues of nearly $75 billion 
dollars in 2007 represented an increase of 3 percent from 2006. This 
revenue increase, however, was largely attributable to the January 2006 
and May 2007 rate increases--not mail volume increases.[Footnote 12] In 
particular, the Service experienced an overall decline in mail volume 
from 2006 of over 900 million pieces (a 0.4 percent decline), largely 
due to a decrease of 1.7 billion pieces of First-Class Mail and the 
smallest increase in Standard Mail volumes since 2001. 

* Operating costs: Total operating expenses of over $80 billion in 2007 
represented an increase of nearly 12 percent from 2006. This increase 
was largely due to a net increase of $6.8 billion in expenses that 
resulted from requirements of the act described earlier.[Footnote 13] 
The Service was also affected by increases in postal wage rates; rising 
fuel costs (its transportation costs grew by almost 8 percent); and the 
extension of mail service to an additional 1.8 million delivery points. 

* Productivity and cost control: The Service was able to partially 
mitigate these cost pressures by improving productivity for an eighth 
consecutive year. The Service reported a 1.7 percent increase in 
productivity, which is equivalent to $1.2 billion in cost savings. The 
Service reduced over 36 million workhours, partly by downsizing its 
career workforce by over 11,000 employees. 

* Labor agreements: The Service negotiated agreements with 3 of its 4 
major unions on wages, many benefits, and conditions of employment in 
2007.[Footnote 14] 

* Debt: The Service's outstanding debt increased $2.1 billion in 2007, 
doubling its 2006 debt balance to $4.2 billion.[Footnote 15] These 
increases were primarily used to finance year-end worker compensation 
and retiree health payments. 

* Capital: The Service reported a slight increase in capital cash 
outlays of $2.6 billion in 2006 to $2.7 billion in 2007. These funds 
were used for such projects as new facilities, automation equipment, 
and carrier vehicles. 

* Service performance: According to the Service, it reported record 
annual on-time performance for First-Class Mail measured by the EXFC 
system. The Service reported on-time performance for 2007 of 96 percent 
for its 1-day mail, 93 percent for its 2-day mail, and 90 percent for 
its 3-day mail. 

The net income reported for 2007 was a $5.1 billion loss. Removing the 
financial impact of the new law, the Postal Service's net income would 
have been $1.6 billion (which was $100 million less than the $1.7 
billion originally budgeted for the year). Because of the new law, 
however, the Service required an additional $500 million in cash to 
cover the differences between the net increase in retirement-related 
expenses of $3.8 billion[Footnote 16] and the expected $3.3 billion 
escrow payment that was avoided. 

Aside from its direct financial impact, the act required other actions 
to facilitate the transition to a new financial, operating, and 
regulatory environment. Table 1 summarizes key actions. 

Table 1: Summary of Selected Key Actions Taken to Implement Postal 
Reform Law: 

Date: May 2007; 
Party responsible: The Service's Office of the Inspector General (OIG); 
Action taken: Issued a report on workplace safety that found the 
Service exceeded its workplace safety goals for 2005 and 2006, but also 
recommended that the Service monitor costs associated with accidents. 

Date: June 2007; 
Party responsible: The Office of Personnel Management (OPM); 
Action taken: Determined the Postal Surplus/Supplemental Liability as 
of September 30, 2006, regarding the Civil Service Retirement System. 

Date: November 2007; 
Party responsible: The Postal Regulatory Commission (PRC); 
Action taken: Issued regulations that established the new rate-making 
system. The regulations consist of three parts: (1) regulations related 
to rate adjustments for market-dominant products, including the formula 
for calculating the price cap; 
(2) regulations related to competitive products; 
and (3) a Mail Classification Schedule, which categorizes products as 
either market dominant or competitive. 

Date: November 2007; 
Party responsible: The Postal Service's OIG; 
Action taken: Issued a report on the adequacy and fairness of the 
process for assessing certain rate deficiencies. This report found the 
assessments and appeals process was adequate and fair, and that there 
was no compelling reason for Congress to assign an outside body a role 
in this process. It did identify issues with the Service's monitoring 
of revenue deficiencies and updating of procedures. It determined that 
a statute of limitations on the assessment of revenue deficiencies was 
not necessary. 

Date: December 2007; 
Party responsible: The Postal Service Board of Governors; 
Action taken: Issued Board of Governors' Report to the President and 
Congress on the Representation of Women and Minorities in Supervisory 
and Management Positions in the United States Postal Service. This 
report included diversity information for both supervisory and 
management positions, as well as for the workforce as a whole; 
Issued Board of Governors' Report to the President and Congress on 
United States Postal Service Contracts with Women, Minorities and Small 
Businesses. This report stated the Service exceeded its annual goals by 
almost 12 percent for contracts issued by minority-owned and almost 22 
percent for women-owned businesses in 2007. 

Date: December 2007; 
Party responsible: The Postal Service; 
Action taken: Filed its 2007 Annual Compliance Report on the costs, 
revenues, rates, and quality of service associated with its products to 
the PRC for its evaluation. The PRC stated this report did not contain 
all of the information that normally would be provided, noting that it 
was the Service's first report under the act's tight deadline for 
filing within 90 days after the end of the fiscal year. The PRC also 
has stated that the report was prepared without the guidance of PRC 
regulations governing its form and content, which were under 
development at the time. PRC solicited public comment on the report, 
including on the degree to which the Service's operations and financial 
results complied with the policies of title 39 of the U.S. Code (i.e., 
the nation's postal laws); 
Published regulations to establish modern service standards for its 
market-dominant products, including mail covered by the postal 
monopoly. 

Date: December 2007; 
Party responsible: The Department of Treasury; 
Action taken: Issued a report with recommendations on accounting 
practices and principles that should be followed by the Service. The 
PRC is soliciting public comment on the report, including what 
financial transparency and oversight are appropriate for the Service's 
Competitive Products Fund and who should conduct such oversight. 

Date: December 2007; 
Party responsible: GAO; 
Action taken: Issued an interim report: Postal Service and Mailing 
Industry Mail-Related Recycling: Accomplishments and Postal 
Opportunities. This report found that postal stakeholders have 
undertaken numerous mail-related recycling initiatives, but the extent 
to which these initiatives have been adopted is unknown. Additionally, 
stakeholders identified opportunities for the Service to engage in, or 
encourage others to engage in, mail-related recycling. The full report 
will be issued later this year. 

Date: December 2007; 
Party responsible: The Federal Trade Commission (FTC); 
Action taken: Issued the Accounting for Laws That Apply Differently to 
the United States Postal Service and Its Private Competitors which 
identified and analyzed laws that apply differently to the Service's 
competitive products and similar products provided by private 
competitors, and estimated the Service's economic burdens and 
advantages due to these legal differences. The report discussed ways 
that the PRC or Congress may be able to minimize or eliminate 
marketplace distortions. 

Source: GAO analysis of Pub. L. 109-435. 

[End of table] 

As indicated in table 1, multiple stakeholders have taken actions to 
implement the requirements of the act. While each of these actions is 
important, I would like to highlight the efforts of the Postal Service 
and other stakeholders in modernizing service standards and of the PRC 
in transitioning to its new regulatory responsibilities. 

* Service standards: The Service has made important progress in 
implementing the act's requirements to establish modern service 
standards for market-dominant products. The Service's approach to 
developing these standards incorporated a high level of collaboration 
with mailers, consultations with the PRC, and comprehensive review of 
its network capabilities. A workgroup involving nearly 200 
representatives from the Service, mailing organizations and mailers, 
and other members of the mailing industry was particularly noteworthy 
for its efforts to identify issues and build consensus in this area. 
The result was the most sweeping update in delivery performance 
standards in many years. In particular, standards for Periodicals, 
Package Services, and Standard Mail that dated back many years were 
realigned with current postal operations.[Footnote 17] 

* Regulation: A key tenet of the act was to provide the Postal Service 
with more flexibility to set prices and introduce new products. The 
act, however, balanced this flexibility by granting the PRC enhanced 
regulatory authority to regulate these activities, and to, among other 
things, 

* regulate rates for market-dominant products and services; 

* monitor financial and service performance; 

* ensure financial transparency and data quality; and: 

* act on complaints against the Postal Service. 

The PRC has made good progress in its transformation, particularly in 
establishing a new ratemaking system. The PRC issued its first set of 
rate regulations almost 8 months ahead of the statutory deadline, and 
the Postal Service recognized this achievement and chose not to file 
another rate case under the old system. The PRC set up its new 
organizational structure, including the new PRC Inspector General, as 
well as revising key rules and regulations to reflect implementation of 
the act. The PRC has also taken an active role in consulting with the 
Service on its service standards and performance measures, solicited 
public comments, and held hearings and meetings to stimulate 
constructive dialogue among the parties. 

Remaining Implementation Challenges Exacerbated by Economic 
Uncertainty: 

The financial, operational, human capital, and regulatory challenges 
facing the Service and other stakeholders as they take actions to 
continue implementing the act are exacerbated by the current uncertain 
economic environment. The Service noted in its 2008 budget that it 
expected a net increase in costs of $1 billion net for 2008 from 
changes in the law.[Footnote 18] In addition, a slowing economy has 
negatively affected the Service's financial performance in the first 
quarter of 2008--its mail volumes and revenues were both below planned 
amounts. The Service was able to mitigate these challenges by managing 
cost growth while achieving record service delivery performance for the 
segment of First-Class Mail that is currently measured. To address 
concerns about its challenged financial outlook, the Service filed a 
rate increase February 11, 2008, averaging about 2.9 percent for the 
majority of its products. This increase is scheduled to take effect on 
May 12, 2008, and is the first of its type under the new law. According 
to Service officials, this increase is expected to contribute an 
additional $700 million in revenues for 2008, but will need to be 
supplemented by accelerated cost reduction strategies to achieve its 
year-end target of a $600 million net loss. The Service has updated its 
strategies for addressing challenges under the new law related to 
generating sufficient revenues, achieving efficiencies through 
automation, and improving service. In particular, to help address its 
revenue challenges, the Service has indicated that it plans to fully 
use its pricing authority under the rate-setting cap to implement 
smaller, more frequent, predictable rate increases, as well as work 
with its customers to develop new products and services. It also plans 
for $2 billion in cost reduction efforts in 2008. Some of the key areas 
for continued oversight include changes in mail volumes in response to 
more frequent, predictable rate increases; efforts to control costs by 
modernizing and optimizing the Postal Service's infrastructure and 
workforce; the transition to new automation and mail-tracking systems; 
the level of transparency in measuring and reporting delivery 
performance; and the implementation of the new rate-setting processes 
and regulations. 

Generating Sufficient Revenues as Mail Volumes Decline and the Mail Mix 
Changes: 

The Service continues to face challenges in generating sufficient 
revenue as mail volumes are declining and the mail mix is changing. 
This challenge became more evident after the Service's revenue and 
volume results for the first quarter of 2008 were released. Volumes 
were down 1.7 billion pieces (3 percent) compared with quarter 1 in 
2007 (see table 2), with notable declines in the two major mail 
classes: First-Class Mail and Standard Mail. These results are of 
particular concern because they occurred during a typically strong 
volume quarter that includes the holiday mailing season. 

Table 2: First Quarter Volumes for the Service's Major Mail Categories: 

Class: First-Class Mail; 
2008 quarter 1: 24.4 billion; 
Percent change from quarter 1 2007: -3.9%. 

Class: Standard Mail; 
2008 quarter 1: 27.7 billion; 
Percent change from quarter 1 2007: -2.6. 

Class: Periodicals; 
2008 quarter 1: 2.2 billion; 
Percent change from quarter 1 2007: 1.2. 

Class: Express Mail; 
2008 quarter 1: 12.3 million; 
Percent change from quarter 1 2007: -10.9. 

Class: Priority Mail; 
2008 quarter 1: 240.4 million; 
Percent change from quarter 1 2007: -4.9. 

Class: Package Services; 
2008 quarter 1: 318.2 million; 
Percent change from quarter 1 2007: -3.4. 

Class: Total all mail; 
2008 quarter 1: 55.4 billion; 
Percent change from quarter 1 2007: -3.0%. 

Source: U.S. Postal Service data. 

[End of table] 

Key declines during this time took place within the two largest 
categories, First-Class Mail and Standard Mail. In particular, volumes 
declined for flat-sized Standard Mail (e.g., catalogs) by 13 percent; 
for flat-sized First-Class Mail (e.g., large envelopes) by 15 percent; 
and single-piece First-Class Mail by nearly 7 percent. As a result of 
the overall declines in mail volume, revenues were $500 million less 
than planned. The Service attributed these volume declines and revenue 
shortfalls to multiple factors, including the effects of the May 2007 
rate increase; a slowing economy with declines in the financial and 
housing industries, business and consumer confidence, and rising fuel 
and paper prices; increasing competition from other advertising media; 
and the continued diversion of single-piece First-Class Mail to 
electronic alternatives such as Internet bill payment and direct 
deposit. 

The declines in First-Class Mail volume in the first quarter of 2008 
parallel the ongoing trends of First-Class Mail in general. This class 
of mail, once with the largest volumes and revenues, saw volumes 
decline by more than 7 percent between 2001 and 2007. The Service's 
First-Class Mail volume estimate of 95.4 billion pieces built into its 
2008 budget would be a slight decline from 2007 levels and would be the 
lowest volume level since 1994. These declines in First-Class Mail were 
mitigated in past years by growth in Standard Mail volumes and 
revenues. Standard Mail volumes exceeded those for First-Class Mail for 
the first time in 2005. This change was significant, in part because 
Standard Mail is more sensitive to prices and economic conditions and 
it takes about two pieces of Standard Mail to make the same 
contribution to the Service's overhead costs as one piece of First- 
Class Mail. The Service's 2008 budget planned a modest 1.1 percent 
growth in Standard Mail volumes because of such factors as the effects 
from the May 2007 rate increase and a projected slowness in the 
economy. The Service stated in its first quarter report for 2008 that 
these factors, among others, had an adverse impact on volumes as 
Standard Mail volumes declining by 2.6 percent compared to the first 
quarter of 2007. For the remainder of 2008, mail volumes and revenues 
will continue to face many of the same challenges that affected its 
first quarter results, particularly economic uncertainty and the 
impacts of rate increases. 

The Service recognizes that the law provides opportunities to address 
the revenue challenges it faces and that "cost cutting alone cannot 
sustain the business." The act specifically provides tools and 
mechanisms to help promote revenue generation and retention of 
revenues. The act established more timely, flexible pricing mechanisms 
for the Service's competitive and market-dominant products. For 
example, it allows the Service to use a streamlined process for raising 
the rates for its market-dominant classes, such as First-Class Mail, 
Standard Mail, and Periodicals, up to a defined price cap; to exceed 
the price cap should extraordinary or exceptional circumstances arise; 
and to use any unused rate authority within 5 years. For its 
competitive products, such as Priority Mail or Expedited Mail, the 
Service may raise rates as it sees fit, as long as each competitive 
product covers its costs and competitive products as a whole cover 
their attributable costs and make a PRC-specified contribution to 
overhead. The act also allows for new, customized products and 
services, as well as for the Service to retain any earnings, which may 
help finance capital investment and increase financial stability. In 
its updated Strategic Transformation Plan, the Service states that it 
plans on taking advantage of these new flexibilities through such 
actions as: 

* improving the value of its market-dominant products through such 
tools as Intelligent Mail,[Footnote 19] 

* tailoring competitive products to market requirements, 

* enhancing online postal services, and: 

* streamlining acceptance of mail at postal facilities for commercial 
mailers. 

The Postal Service applied its new rate-setting flexibilities when, on 
February 11, 2008, it announced its first rate increases under the act 
for its market-dominant products, including an increase in the cost of 
a First-Class stamp from 41 to 42 cents. The Service intends to raise 
the rates for each class,[Footnote 20] on average, close to the maximum 
allowed by the price cap (2.9 percent). Within each class, scheduled 
rate increases will vary for specific mailing services. For example, 
the rates for Standard Mail Flats are scheduled to increase 0.9 
percent, compared with a 3.4 percent increase for Standard Mail 
Letters. These variable increases reflect the Service's decision to 
moderate the increases for catalogs and other flats because of the 
large rate increases they experienced in May 2007. Furthermore, the 
Postal Service has recently notified the PRC of rate-setting 
initiatives for two of its competitive products. One notice pertained 
to establishing a premium for guaranteed delivery of Express Mail on 
Sunday and holidays, while the other notice pertained to establishing 
prices for a Priority Mail large-sized Flat Rate Box. 

Continued congressional oversight will be needed of the Service's 
actions under the act to address its volume and revenue challenges. 
Particular attention should be paid to monitoring how the Service and 
mailers respond to a slowing economy and the implementation of the new 
rate process. Questions to address include the following: 

* How will mailers and volume respond to changes in rates in the short 
term, as well as the Service's intent to fully use its pricing 
authority under the rate-setting cap? To what extent will these changes 
affect the mail mix, including the type, size, and weight of mail? 

* What types of innovative pricing methods will the Service offer? 

* To what extent will customers' desire for mail be affected by privacy 
concerns, environmental concerns, preference for electronic 
alternatives, or efforts at the state level to establish Do Not Mail 
lists? 

* How will the Service be able to enhance the value of the mail (e.g., 
by providing more predictable and consistent service, tracking and 
tracing capabilities)? 

* What will the Service do with any retained earnings (e.g., expand its 
capital program, save to weather downturns in the economy)? 

Controlling Costs and Improving Operational Efficiency: 

The Service faces multiple pressures in the short and long term 
associated with controlling costs and improving productivity while 
experiencing above-inflation cost growth in certain categories, revenue 
challenges, and an inflation-based price cap. In the first quarter of 
2008, the Service reported responding to revenue shortfalls by cutting 
more than $300 million in costs compared to plan, including reducing 
over 10.5 million workhours compared to the first quarter of 2007. The 
Service indicated that continued vigilance on cost will be needed for 
the rest of the year, and it will prove increasingly difficult to 
reduce workhours at the same pace if revenue challenges continue. The 
Postal Service budgeted for a $1 billion reduction in expenses for 
2008, to be achieved in part by reducing 28 million workhours and 
increasing productivity by 1 percent. Based on the first quarter's 
performance, the Postal Service recognizes that it needs to more 
aggressively reduce expenses to mitigate the financial impact of the 
economic slowdown, and it has identified an additional $1 billion in 
cost reduction efforts, many of which are tied to reduced volumes. 
While actions taken to implement the reform act put pressure on costs-
-the Service expects a net increase of $1 billion in costs in 2008--the 
act also eliminates other payments and provides opportunities to offset 
some of these cost pressures through efficiency gains that could 
restrain future rate increases. It will be crucial for the Service to 
take advantage of this opportunity and achieve sustainable, realizable 
cost reductions and productivity improvements throughout its networks. 

Personnel expenses (which include wages, employee and retiree benefits, 
and workers' compensation) have consistently accounted for nearly 80 
percent of annual operating expenses. Growth in such expenses has 
exceeded inflation in each of the last 4 years, and the expenses are 
budgeted to increase by almost $660 million in 2008. The major drivers 
of the personnel expense increase include cost of living adjustments 
(COLA), general wage increases, and health benefit expense increases. 
For example, retirement health benefit costs have tracked well above 
the rate of inflation, and will remain high because of the new 
multibillion dollar payments required by the law. 

Another cost pressure the Service faces is to modernize and maintain 
its vast infrastructure and transportation system that supports its 
expanding delivery network--projected to increase by 1.9 million 
delivery points in 2008. The Service's transportation costs have grown 
faster than the rate of inflation for the past 3 years and were 
budgeted to increase by 5.4 percent ($350 million) in 2008. The Service 
attributes these increases in part to contractual rate increases and 
rising fuel costs. We noted the Service's vulnerabilities to rising 
fuel prices in a report issued last year.[Footnote 21] We have also 
reported on the challenges facing the Service in managing its 34,000 
facilities nationwide, including the need to capture and maintain 
accurate facility data, adequately maintain facilities, address 
deferred maintenance issues, and align retail access with customer 
needs.[Footnote 22] 

The act provides an opportunity for the Service to address its cost 
challenges by establishing an inflation-based price cap for market- 
dominant products, which provides an incentive for the Postal Service 
to operate more efficiently. The act also requires the Service to 
develop a plan by June 2008 that includes its strategy for 
rationalizing the postal facilities network and removing excess 
processing capacity from the network. As part of this plan, the Service 
is to identify cost savings and other benefits associated with network 
rationalization alternatives. This plan provides an opportunity for the 
Service to make its case that realignment is needed to address 
infrastructure issues (e.g., excess capacity, maintenance needs, and 
facility locations) and reduce costs. It can also address concerns 
raised by Congress and the public about how decisions related to 
planned network changes are made and communicated to affected parties. 
We have reported our concerns that the Service's strategy for 
realigning its processing and distribution network and workforce was 
not clear, and that its strategy lacked sufficient transparency and 
accountability, adequate stakeholder input, and performance measures 
for results and we have recommendations outstanding related to these 
concerns.[Footnote 23] 

The Service recognizes these cost challenges and plans to build on its 
progress in this area. We have reported on the Service's progress in 
containing cost growth by reducing workhours, downsizing its workforce 
and improving productivity, and the Service's ability to control cost 
growth during the first quarter was encouraging. Furthermore, the 
Service should benefit from agreeing with its four major labor unions 
reducing its future share of the contributions to the cost of health 
benefit premiums for many of its employees. The Service is planning to 
continue its cost cutting efforts as part of its Strategic 
Transformation Plan and is seeking efficiency gains from a variety of 
sources including: 

* more fully automating the sorting of flat mail--in 2008, the Service 
will deploy 100 machines to automate flat sorting in 30 to 35 
facilities as part of its Phase One of the Flats Sequencing System 
(FSS); 

* outsourcing certain activities, such as expanding contract delivery 
service;[Footnote 24] 

* consolidating mail processing operations; 

* optimizing retail resources using two scheduling tools to help 
managers align staffing to changes in customer demand; and: 

* working with members of the mailing industry to optimize mailer 
preparation requirements, including the use of Intelligent Mail 
Barcodes on mailpieces, to facilitate achieving the lowest combined 
mailing cost for all parties. 

Making progress in addressing cost challenges will be important as the 
Service is required to operate under the new price cap, particularly if 
the economy continues to weaken. Progress will also be needed in areas 
where it has been difficult to achieve. For example, we reported last 
summer that progress in consolidating mail processing operations among 
facilities has been slow due to several factors.[Footnote 25] In some 
cases, the Service was not ready to proceed with the consolidation, and 
other external factors have slowed the process, including union and 
community resistance. In addition, language in recent Senate 
Appropriations Committee reports has directed the Service not to 
implement consolidation decisions in certain locations until specific 
requirements have been met.[Footnote 26] Furthermore, in its first 
quarter financial report, the Service stated that if proposed 
legislation limiting its ability to contract out mail delivery and 
other postal activities is enacted, it would place significant 
restraints on its ability to achieve cost reductions. As actions are 
carried out to control costs in the future, continued oversight will be 
needed to ensure that the Service's cost reduction strategies achieve 
their goals, without negatively affecting service. Specific oversight 
questions include the following: 

* If volume shortfalls persist, will the Service be able to implement 
corresponding cost controls? 

* If the economy continues to worsen and/or certain key costs continue 
to increase at levels above inflation (e.g., health benefit costs), how 
can the Service still meet its service goals and manage its costs under 
the rate cap? 

* How will the new rate structure lead to efficiency improvements 
throughout the mail system? 

* Will the Service's implementation of its network realignment result 
in greater cost savings and improved efficiency? 

* How do external constraints limit the Service's ability to achieve 
cost savings through network optimization and what can be done to 
alleviate these constraints? 

* Would the Service achieve its expected return on investment and 
improvements in operational performance in a second phase of automated 
flat sorting equipment? 

Managing Its Workforce: 

The Service will be challenged to manage its workforce as it 
transitions to operating in a new postal environment. The Service is 
one of the nation's largest employers, with almost 786,000 full-and 
part-time employees at the end of 2007. As the Service continues to 
improve its operational efficiencies (i.e., rationalize its facilities, 
expand service measurement, increase automation, improve retail access, 
and streamline its transportation network), it will be challenged to 
realign its workforce in accordance with these changes. These 
challenges may be compounded by such factors as (1) changes in mailers' 
behavior in response to the new rate structure and economic uncertainty 
that may reduce the level of processing needed at Postal Service 
facilities and (2) the expected retirement of a significant portion of 
its workforce, particularly at the executive level, within the next 5 
years. These actions will require a different mix in the number, 
skills, and deployment of its employees, and may involve repositioning, 
retraining, outsourcing, and further reducing its workforce. The 
Service must describe, as part of the Facilities Plan required by the 
act, its long-term vision for realigning its workforce and how it 
intends to implement that vision. This plan is to include a discussion 
of what impact any facility changes may have on the postal workforce 
and whether the Postal Service has sufficient flexibility to make 
needed workforce changes. 

The Service recognizes the challenges in aligning its workforce with 
changing customer needs, new technologies, and emerging markets. In its 
updated Strategic Transformation Plan, the Service includes specific 
actions aimed at improving workforce flexibility, succession planning, 
and staffing efficiency. As it takes actions in this area, oversight 
will be important in several areas including: 

* How will the Service's workforce be affected by the implementation of 
new automation equipment that supports such initiatives as FSS or 
Intelligent Mail? 

* How will the Service balance the varying needs of diverse customers 
when realigning its delivery and processing networks? 

* How will employees and employee organizations be affected and 
informed of network changes and how will the Service monitor the 
workplace environment? 

* How will the Service take advantage of flexibilities to deal with 
peak operating periods? 

Maintaining, Measuring, and Reporting Service: 

The Service faces continued challenges in further updating its delivery 
performance standards, implementing representative measures of delivery 
performance, setting appropriate goals for delivery speed and 
reliability, and reporting results in a transparent and accessible 
manner. This information is critical for stakeholders to understand how 
the Service is fulfilling its mission of providing affordable, high- 
quality universal service on a self-financing basis--it would assist 
the Service and its customers in identifying and addressing delivery 
problems, and help Congress, the PRC, and others to hold management 
accountable for results and conduct independent oversight. 

In July 2006, we reported that the Service's delivery performance 
standards, measurement, and reporting needed improvement.[Footnote 27] 
Among other things, we found that delivery standards for major types of 
mail had not been updated in a number of years and did not reflect 
current operations, including how mail is prepared and delivered. We 
also found that the Service does not measure the delivery performance 
of most types of mail, which limits transparency. Based on these and 
related findings, we recommended the Service take actions to modernize 
its delivery service standards, develop a complete set of delivery 
service measures, more effectively collaborate with mailers, and 
improve transparency by publicly disclosing delivery performance 
information. 

The act provided an opportunity to address these issues by requiring 
the establishment of modern delivery standards, the setting of goals 
for these standards, and annual progress reports. The act also 
established other requirements: 

* The Service must issue modern service standards by December 2007 
(these standards were issued); 

* Within 6 months of issuing service standards the Service must, in 
consultation with the PRC, develop and submit a plan, with performance 
goals, to Congress for meeting those standards. 

* Within 90 days after the end of each fiscal year, the Service must 
report to PRC on the quality of service for each market-dominant 
product in terms of speed of delivery and reliability, as well as the 
degree of customer satisfaction with the service provided. 

The act also identified four objectives for modern service standards: 

* Enhance the value of postal services to both senders and recipients. 

* Preserve regular and effective access to postal services in all 
communities, including those in rural areas or where post offices are 
not self-sustaining. 

* Reasonably assure Postal Service customers delivery reliability, 
speed, and frequency consistent with reasonable rates and best business 
practices. 

* Provide a system of objective external performance measurements for 
each market-dominant product as a basis for measurement of Postal 
Service performance. 

The Postal Service has taken an active role to address this challenge, 
including collaborating with mailers and the PRC on issuing the new 
service standards. The Service submitted to the PRC a proposal on 
service measurement using Intelligent Mail and is planning to expand 
the geographic coverage of its External First-Class Measurement System, 
and the PRC has put this proposal out for comment. The Service is also 
consulting with the PRC about other reporting issues. 

We are encouraged by the Service's progress to date as well as its 
performance during the first quarter of 2008 for the segment of First- 
Class Mail that it currently measures. The delivery performance for 
mail measured by the Service's EXFC system reported on-time deliveries 
for 96 percent of 1-day mail, 93 percent of 2-day mail, and 88 percent 
of 3-day mail, all of which were improvements over the first quarter of 
2007. We continue to believe that the key principles of completeness, 
availability, and usefulness should guide future actions related to 
updating service standards and implementing performance measurement and 
reporting systems. Continued collaboration and oversight will be 
critical to making further progress as the system becomes more and more 
developed. In particular, questions will need to be asked, including 
the following: 

* How should the standards and goals reflect different operational 
capabilities that affect the speed and reliability of delivery, such as 
presorting and separate processing streams? 

* Given the different information needs of the various stakeholder 
groups--e.g., the Service, PRC, Congress, mailers, the American public-
-what are appropriate levels of transparency for each of the key 
groups? 

- What level of detail should be available to each group? For example, 
some mailers have said they need detailed, real-time information to 
help identify and address delivery problems. 

- In what format should information be available, and how should 
privacy be protected? 

- How frequently should information be reported and/or accessible 
(e.g., quarterly, annually, or in real-time)? 

- Should mailers pay for some of the information? 

* How should mailer issues regarding the implementation of Intelligent 
Mail be addressed? 

* What exclusions, if any, should be allowed under the Service's 
reporting of annual results (e.g., exclusions for the holiday mailing 
period and incorrectly addressed and/or prepared mail)? 

Implementing New Regulatory Frameworks: 

The Postal Service and PRC will continue to be challenged to 
successfully implement the extensive regulatory changes required by the 
act. Currently, the PRC is reviewing the May 2008 rate increases filed 
by the Service and has asked for public comment on this filing. In 
addition to the PRC's regulatory responsibilities for rate setting and 
monitoring service performance discussed earlier, these parties will be 
challenged to implement other requirements related to postal costing, 
accounting, and financial reporting. We have reported on specific 
challenges the Postal Service has faced in these areas. With respect to 
its financial reporting, the Service has made significant improvements 
in the frequency, content, and availability to address our earlier 
recommendations.[Footnote 28] Furthermore, in 2005 we reported on the 
long-standing issues of ratemaking data quality, many of which persist 
today.[Footnote 29] 

The act establishes new reporting and accounting requirements that 
should help to address these challenges. The major change is the 
establishment of, and authority provided to the new PRC to help enhance 
the collection and reporting of information on the Service's postal 
rates and financial performance. The PRC has oversight responsibilities 
in such areas as: 

* Market-dominant products: The PRC must prescribe by regulation the 
form and content of annual Service reports that analyze costs, 
revenues, and rates, using methods that PRC must also prescribe; 
specify which reported information shall be made public; initiate 
proceedings as necessary to improve the quality, completeness, or 
accuracy of this information; and assess compliance and complaints. 

* Competitive products: The PRC must establish regulations that ensure 
that each competitive product covers its attributable costs, prohibit 
the cross-subsidization of competitive products by market-dominant 
products, and ensure that competitive products collectively cover what 
PRC determines to be an appropriate share of the Service's 
institutional costs (overhead costs), as well as to assess complaints. 

* Financial reporting: The PRC must (1) review annual, quarterly, and 
other periodic reports from the Service that contains information 
required by the Securities and Exchange Commission (SEC) for 
registrants,[Footnote 30] (2) review reports, due in 2010, on the 
Service's compliance with rules prescribed by the SEC for registrants 
in implementing section 404 of the Sarbanes-Oxley Act of 2002, and (3) 
by December 2008, establish the accounting principles and practices 
that the Service must follow related to its competitive products, and 
in doing so, consider Treasury recommendations. 

The Service recognizes these challenges and the potential costs 
associated with meeting the new requirements. In its updated Strategic 
Transformation Plan, it laid out a timeline for implementing the 
Sarbanes-Oxley section 404 requirements and noted that it must manage 
the uncertainties related to the implementation of the new ratemaking 
process, the extent to which the PRC incorporates recommendations from 
the Treasury report, and any developments from the FTC report. The 
Service has not yet estimated the additional costs associated with 
these new regulatory requirements. We have reported that other federal 
agencies and smaller public companies have incurred significant costs 
associated with complying with SEC's implementing regulations for 
section 404 of the Sarbanes-Oxley Act, but have also reported that 
costs are expected to decline in subsequent years given the first-year 
investment in documenting internal controls.[Footnote 31] 

In sum, these changes can help provide accurate and timely data on the 
Service's costs, revenues, and mail volumes. This information can be 
used to enhance transparency and accountability for all postal 
stakeholders so that they have a comprehensive understanding of the 
Service's financial condition and outlook and of how postal rates are 
aligned with costs. As the new regulatory framework is implemented, 
continued oversight may be required in several areas: 

* How will the PRC use its discretion to continue defining and 
implementing the new regulatory structure? 

* How effectively is the PRC carrying out its regulatory 
responsibilities regarding rate setting and monitoring service 
performance? 

* Given the complexity of regulatory changes, how can the PRC balance 
the interests of all stakeholders, particularly those with less 
expertise and resources? 

* What criteria will the PRC use for evaluating the quality, 
completeness, and accuracy of ratemaking data, including the underlying 
accounting data and additional data used to attribute costs and 
revenues to specific types of mail? Looking forward, how will the PRC, 
the Service, and other stakeholders consider and implement improvements 
to data quality over time? 

* How will the PRC balance the need for high-quality ratemaking data 
with the time and expense involved in obtaining the data? 

* How will PRC structure any proceedings to improve the quality of 
ratemaking data and enable the Service and others to participate in 
such proceedings? What proceedings might PRC initiate to address data 
quality deficiencies and issues that PRC has raised in its recent 
decision on the rate case? 

* How will the Service be affected by the costs associated with 
complying with the SEC rules for implementing section 404 of the 
Sarbanes-Oxley Act, as well as the need for separate information on 
competitive and market-dominant products? 

Required Information Can Guide Future Postal Reform Discussions: 

Information required under the act can be used to facilitate 
constructive dialogue and debate about postal reform issues related to 
universal service, the postal monopoly, fair competition, consumer 
protection, and transparency and accountability. Specifically, the act 
included provisions for reports required over the next 5 to 10 years 
related to key postal reform issues aimed at continually examining and 
reporting on the Postal Service's mission, role, and oversight 
structure in an increasingly competitive environment. The act required 
multiple stakeholders, including the Postal Service, PRC, Postal 
Service OIG, OPM, Treasury, and GAO, to issue these reports, and 
established a wide range of deadlines for this work. The information 
can be useful to Congress when it is considering key postal reform 
issues including: 

* What universal postal service will be needed in the future and how 
should it be defined, given past changes and future challenges? 

* To what extent should certain monopoly provisions be maintained or 
narrowed? 

* What role should the Service play in providing universal postal 
services vis-ï¿½-vis its competitors? 

* What are appropriate legal standards for fair competition in areas 
where the Service competes with private-sector providers? 

* What transparency, oversight, and accountability are needed for the 
Service, particularly as long as it remains a federal entity with a 
monopoly to deliver letter mail? 

* How appropriate are the new regulatory structure and rate-setting 
system? 

* What barriers, if any, have prevented progress under the act (e.g., 
in optimizing the Service's infrastructure network), and how can they 
be addressed? 

As outlined earlier, information related to some of these issues has 
already been published from the Treasury and FTC. Treasury issued a 
report on the accounting principles and practices that should be 
followed by the Service, and the FTC issued a report that analyzed laws 
that apply differently to the Service's competitive products and 
similar products provided by private competitors, and estimated the 
economic burdens on, and advantages to, the Service due to these legal 
differences. This information provides a good starting point for 
discussions on broader reform topics such as the following: 

* Universal postal service and the postal monopoly: The mission of the 
Postal Service revolves around providing affordable, high-quality 
universal postal services on a self-financing basis. While the act 
requires the PRC to provide annual reviews of service quality and the 
estimated costs of providing universal service, the act requires a more 
comprehensive study from the PRC on the scope and standards of 
universal postal service and the postal monopoly. This report, due by 
December 2008, is to describe any deficiencies in universal service and 
can include recommendations on future changes. The PRC is required to 
obtain public comments and consult with the Service in preparing this 
report. 

* Accounting, financial transparency, and oversight: The PRC solicited 
public comments on Treasury's report. In addition, the PRC raised 
questions about what financial transparency and oversight are 
appropriate for the Service's competitive products fund and whether a 
public or private entity should conduct such oversight. These comments 
will assist the PRC in fulfilling the act's requirement to establish 
accounting practices and principles for the Service to follow, and 
issue regulations for the Service's reporting of its costs, revenue, 
rates, and volumes. 

* Regulation of postal rates: The act requires the PRC to annually 
report to the President and Congress on the extent to which postal 
regulations, including those related to postal rates, achieve statutory 
objectives. Looking forward, the PRC is required to assess ratemaking 
and other provisions of the act every 5 years (with the first report 
due by December 2011), and review the system for regulating the rates 
and classes for market-dominant products by December 2016. At that 
point, the act empowers PRC to make changes to the system for 
regulating market-dominant rates. 

* Future business model: GAO is required to issue a report by December 
2011 that evaluates various options and strategies for the long-term 
structural and operational reforms of the Service. The requirement 
states that we may include, among other things, recommendations on how 
the Service's business model can be maintained or transformed to assure 
continued availability of affordable universal postal service. 

We are encouraged by the early implementation steps that the Service, 
the PRC, the Department of the Treasury, FTC, and other stakeholders 
have taken. The Service, the PRC, mailers, and other stakeholders have 
found new ways to engage in constructive dialogue and debate and in 
some cases, reach consensus on how best to proceed. These actions-- 
which contrast sharply with the adversarial ratemaking process 
abolished by the act--hold promise for future progress across a broad 
range of postal reform issues. Such progress will remain necessary as 
the Service, the mailing industry, and competitors transform themselves 
in response to the rapidly changing communications and delivery 
marketplace. 

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

Contact and Acknowledgment: 

For further information regarding this statement, please contact 
Katherine Siggerud, Director, Physical Infrastructure Issues, at (202) 
512-2834 or at [email protected]. Individuals making key contributions 
to this statement included Teresa Anderson, Joshua Bartzen, Kenneth 
John, Summer Lingard, Jeanette Franzel, Shirley Abel, Scott McNulty, 
Brandon Haller, David Hooper and Kathy Gilhooly. 

[End of section] 

Footnotes: 

[1] GAO, U.S. Postal Service: Postal Reform Law Provides Opportunities 
to Address Postal Challenges, GAO-07-684T, (Washington, D.C.: April 17, 
2007). 

[2] Pub. L. No. 109-435: The Postal Accountability and Enhancement Act, 
enacted Dec. 20, 2006. 

[3] In GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007), we determined that sufficient progress had been made to 
warrant removing the Postal Service's transformation efforts and 
outlook from our high-risk list. We had originally made this 
designation in April 2001 to reflect its growing financial, 
operational, and human capital challenges. 

[4] Unless otherwise noted, all references to specific years refer to 
the Postal Service's fiscal year, which ends on September 30. 

[5] The Postal Regulatory Commission was previously named the Postal 
Rate Commission. Section 604 of the act redesignated the Postal Rate 
Commission as the Postal Regulatory Commission. 

[6] First-Class Mail includes single-piece mail (e.g., bill payments 
and letters) and bulk mail (e.g., bills and advertising). 

[7] This segment of mail is measured using the External First-Class 
Measurement System (EXFC). The EXFC system is not a system wide 
measurement of all First-Class Mail performance. According to the 
Service, EXFC continually tests mail deposited in collection boxes in 
463 three-digit zip code areas selected for geographic and volume 
density. 

[8] The act created different pricing mechanisms for the Service's 
competitive and market-dominant products. Market-dominant products 
include those products protected by the postal monopoly, such as First- 
Class Mail letters, Standard Mail (mainly bulk advertising and direct 
mail solicitations), and Periodicals (mainly magazines and local 
newspapers) and competitive products are not protected by the postal 
monopoly and include Priority Mail and Expedited Mail. Sections 201 and 
202 of the act list which products are market-dominant and competitive. 

[9] For a listing of these reports and actions, see Congressional 
Research Service, The Postal Accountability and Enhancement Act, 
RS22573 (Washington: D.C.: Jan. 22, 2007). 

[10] These payments go into the newly created Postal Service Retiree 
Health Benefit Fund (PSRHBF). 

[11] The Postal Civil Service Retirement System Funding Reform Act of 
2003 required the Postal Service to escrow the reduction in its civil 
service pension expenses that resulted from changes to how the Service 
funded these pensions. 

[12] The January 2006 rate increase was on average, 5.4 percent, and 
the First-Class stamp rate went from 37 cents to 39 cents. The May 2007 
rate increase was, on average, 7.6 percent and the First-Class stamp 
rate increased to 41 cents. As part of this rate change, the Service 
sought to align postal rates with the respective mail handling costs. 
Some rate increases recommended by the PRC and implemented by the 
Service were particularly large, including some catalog rates that 
increased by 20 to 40 percent. The new rate structure is aimed at 
providing greater incentives for more efficient mailing practices 
(e.g., shape, weight, handling, preparation, and transportation) and 
thereby encouraging smaller rate increases in the longer run. 

[13] The $6.8 billion net increase in expenses as a result of changes 
in the act consists of the new retiree health benefit payment ($5.4 
billion) and the expensing of escrow monies ($3.0 billion), being 
offset by the $1.6 billion reduction in CSRS expenses. 

[14] The agreement with the fourth major union resulted from a binding 
arbitration decision issued in December 2007. 

[15] The Service's annual debt limit is $3 billion, and its total debt 
limit is $15 billion. 

[16] The $3.8 billion net increase in retirement-related expenses is 
comprised of the $5.4 billion retiree health payment due in 2007 and 
the $1.6 billion reduction in the Service's pension expenses in 2007. 

[17] Package Services include parcels, merchandise, catalogs, media 
mail, library mail, and books. 

[18] This negative $1 billion impact in 2008 is based on the difference 
between eliminating $5.1 billion in costs ($1.5 billion in CSRS 
contribution and $3.6 billion that was to be placed into escrow) being 
offset by $6.1 billion in additional payments and lost interest income 
on the escrow monies. 

[19] According to the Plan, Intelligent Mail is a comprehensive term 
that describes the integration of electronic mailing documentation, 
intelligent mail barcodes, and scans to track mail at all points in the 
postal processing system. 

[20] The major mail classes include First-Class Mail, Standard Mail, 
Periodicals, Package Service, and special services (e.g., Post Office 
boxes, Delivery Confirmation, and money orders). 

[21] GAO, U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices 
Requires Improved Tracking and Monitoring of Consumption Information, 
GAO-07-244 (Washington, D.C.: Feb. 16, 2007). 

[22] GAO, U.S. Postal Service Facilities: Improvements in Data Would 
Strengthen Maintenance and Alignment of Access to Retail Services, GAO-
08-41 (Washington, D.C.: Dec. 10, 2007). 

[23] GAO, U.S. Postal Service: Progress Made in Implementing Mail 
Processing Realignment Efforts, but Better Integration and Performance 
Measurement Still Needed, GAO-07-1083T (Washington, D.C.: July 26, 
2007); U.S. Postal Service: The Service's Strategy for Realigning Its 
Mail Processing Infrastructure Lacks Clarity, Criteria, and 
Accountability, GAO-05-261 (Washington, D.C.: Apr. 8, 2005); and U.S. 
Postal Service: Mail Processing Realignment Efforts Under Way Need 
Better Integration and Explanation, GAO-07-717 (Washington, D.C.: June 
21, 2007). 

[24] We are currently performing work related to the Service's 
outsourcing activities and plan to issue a report this summer. 

[25] GAO-07-717. 

[26] Senate Report No.109-293, at 228 (2006) directed that 
consolidation decisions pertaining to three locations not be 
implemented until the Postal Service received a GAO report, which was 
completed in July 2007. Senate Report No. 110-129, at 108 (2007) 
directed the Postal Service not to implement certain Area Mail 
Processing Facility consolidations until the Postal Service fully 
implements GAO's recommendations from its July 2007 report and develops 
a mechanism to evaluate potential and actual impacts on delivery. 

[27] GAO, U.S. Postal Service: Delivery Performance Standards, 
Measurement, and Reporting Need Improvement, GAO-06-733 (Washington, 
D.C.: July 27, 2006). 

[28] GAO-07-684T; GAO-01-598T; GAO, U.S. Postal Service: Deteriorating 
Financial Outlook Increases Need for Transformation, GAO-02-355 
(Washington, D.C.: Feb. 28, 2002); U.S. Postal Service: Accounting for 
Postretirement Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 
2002); U.S. Postal Service Actions to Improve Its Financial Reporting, 
GAO-03-26R (Washington, D.C.: Nov. 13, 2002). 

[29] GAO, U.S. Postal Service: Improving Ratemaking Data Quality 
through Postal Service Actions and Postal Reform Legislation, GAO-05-
820 (Washington, D.C.: July 28, 2005). 

[30] The Postal Service is deemed the "registrant" by the reform act; 
however, the Service is not a registrant for the purposes of submitting 
reports to the SEC. 

[31] GAO, Internal Control: Analysis of Joint Study on Estimating the 
Costs and Benefits of Rendering Opinions on Internal Control over 
Financial Reporting in the Federal Environment, GAO-06-255R 
(Washington, D.C.: Sept. 6, 2006); Sarbanes-Oxley Act: Consideration of 
Key Principles Needed in Addressing Implementation for Smaller Public 
Companies, GAO-06-361 (Washington, D.C.: Apr. 13, 2006).

GAO's Mission: 

The Government Accountability 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.  

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "Subscribe to Updates."  

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. Government Accountability 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, Waste, and Abuse in Federal Programs:  

Contact:  

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: [email protected]: 
Automated answering system: (800) 424-5454 or (202) 512-7470:  

Congressional Relations:  

Ralph Dawn, Managing Director, [email protected]: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548:  

Public Affairs: 

Chuck Young, Managing Director, [email protected]: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

*** End of document. ***