U.S. Postal Service: Challenges to Sustaining Improved Performance
(Testimony, 03/12/97, GAO/T-GGD-97-53).

This testimony (1) focuses on the performance of the Postal Service and
the need to improve internal controls and protect revenue in an
organization that takes in and spends billions of dollars each year and
(2) highlights some of the key reform and oversight issues that continue
to challenges the Postal Service and Congress as they consider how U.S.
mail service should be provided in the future.  GAO also provides
observations from its ongoing work on labor-management relations at the
Postal Service and other areas.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-97-53
     TITLE:  U.S. Postal Service: Challenges to Sustaining Improved 
             Performance
      DATE:  03/12/97
   SUBJECT:  Postal service
             Internal controls
             Cost control
             Losses
             Financial management
             Mail delivery problems
             Postal rates
             Labor-management relations
             Congressional oversight
IDENTIFIER:  USPS National Change of Address Program
             USPS Ethics Program
             
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Cover
================================================================ COVER


Before the Subcommittee on the Postal Service,
House Committee on Government Reform and Oversight

For Release on Delivery
Expected at 1:00 p.m., EST
Wednesday
March 12, 1997

U.S.  POSTAL SERVICE - CHALLENGES
TO SUSTAINING IMPROVED PERFORMANCE

Statement of Michael E.  Motley
Acting Director, Government Business
Operations Issues

GAO/T-GGD-97-53

GAO/GGD-97-53t


(240236)


Abbreviations
=============================================================== ABBREV

  CPC - Canada Post Corporation
  EMCA - Express Mail Corporate Account
  GPRA - Government Performance and Results Act
  NCOA - National Change of Address (program)

U.S.  POSTAL SERVICE:  CHALLENGES
TO SUSTAINING IMPROVED PERFORMANCE
====================================================== Chapter Summary

GAO's testimony addresses the challenges that confront Congress and
the Postal Service as they consider how to sustain its performance
and maintain a competitive role in providing mail service to the
American public in the future. 

The Postal Service reported that fiscal year 1996 represented the
second year in a row that its financial performance was profitable
and operational performance improved.  The Postal Service's 1996 net
income was $1.6 billion and it delivered 91 percent of overnight mail
on time.  Additionally, for fiscal year 1996, the Postal Service's
volume exceeded 182 billion pieces of mail and generated more than
$56 billion in revenue. 

While these results are encouraging, other performance data suggest
that some areas warrant closer scrutiny.  Last year's delivery of
2-day and 3-day mail--at 80 and 83 percent respectively--did not
score as high as overnight delivery.  The concern among customers is
that the Postal Service's emphasis on overnight delivery is at the
expense of 2-day and 3-day mail.  Additionally, although its mail
volume continues to grow, the Postal Service is concerned that
customers increasingly are turning to its competitors or alternative
communications methods.  In 1996, mail volume increased by about
one-half of anticipated increase in volume.  Containing costs is
another key challenge that GAO has reported on previously.  For
example, last year's operating expenses increased 4.7 percent
compared to a 3.9 percent increase in operating revenues.  GAO has
also found several weaknesses in the Postal Service's internal
controls that contributed to increased costs.  The Postal Service's
continued success in both financial and operational performance will
depend heavily on controlling operating costs, strengthening internal
controls, and ensuring the integrity of its services. 

The prospect that pending postal legislation may place the Postal
Service in a more competitive arena with its private sector
counterparts has prompted congressional consideration of some key
reform issues.  These issues include how proposed changes to the
Private Express Statutes may affect universal mail service, postal
revenues, and rates.  Another reform issue is the future role of the
Postal Service in an increasingly competitive, constantly changing
communications market. 

Congressional oversight remains a key tool for improving the
organizational performance of the Postal Service.  One of the most
important areas for oversight is labor-management relations.  Despite
the initiatives that have been established to address them, the
long-standing labor-management relations problems GAO identified in
1994 remain unresolved.  The Government Performance and Results Act
(GPRA) provides an important avenue for addressing such problems. 
Also, the Postal Service's automation efforts will continue to
require the attention of both the Postal Service and Congress to
ensure that increased productivity and an adequate return on
investments are realized. 


U.S.  POSTAL SERVICE:  CHALLENGES
TO SUSTAINING IMPROVED PERFORMANCE
==================================================== Chapter Statement

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to participate in the Subcommittee's
oversight hearing on the U.S.  Postal Service.  My testimony will (1)
focus on the performance of the Postal Service and the need for
improving internal controls and protecting revenue in an organization
that takes in and spends billions of dollars each year and (2)
highlight some of the key reform and oversight issues that continue
to challenge the Postal Service and Congress as they consider how
U.S.  mail service will be provided in the future.  I will also
provide some observations from our ongoing work relating to
labor-management relations at the Postal Service and other areas.  My
testimony is based on our ongoing work and work that we completed
over the past year. 


      IMPROVING INTERNAL CONTROLS
      AND REVENUE PROTECTION
      REMAINS A CONCERN
------------------------------------------------ Chapter Statement:0.1

First, I would like to discuss both the reported successes and some
of the remaining areas of concern related to the Postal Service's
performance.  Last year, the Postal Service reported that it had
achieved outstanding financial and operational performance. 
Financially, the Postal Service had the second most profitable year
in its history.  According to the Postal Service's 1996 annual
report, its fiscal year 1996 net income was $1.6 billion.  Similarly,
with regard to mail delivery service, the Postal Service continued to
meet or exceed its goals for on-time delivery of overnight mail. 
Most recently, the Postmaster General announced that, during 1996,
the Postal Service delivered 91 percent of overnight mail on time or
better.  Additionally, during fiscal year 1996, the Postal Service's
volume exceeded 182 billion pieces of mail and generated more than
$56 billion in revenue. 

While these results are encouraging, other performance data suggest
that some areas of concern warrant closer scrutiny.  For example,
last year's delivery of 2-day and 3-day mail--at 80 and 83 percent
respectively--did not score as high as overnight delivery.  Such
performance has raised a concern among some customers that the Postal
Service's emphasis on overnight delivery is at the expense of 2-day
and 3-day mail.  Additionally, although its mail volume continues to
grow, the Postal Service is concerned that customers increasingly are
turning to its competitors or alternative communications methods.  In
1996, mail volume increased by about one-half of anticipated increase
in volume. 

Containing costs is another key challenge that we reported on
previously.  In the area of expenditures, the Postal Service's 1996
annual report showed that its 1996 operating expenses increased 4.7
percent compared to a 3.9 percent increase in operating revenues. 
Labor costs, which include pay and benefits, continued to account for
almost 80 percent of the Postal Service's operating expenses, and the
Postal Service expects that its costs for compensation and benefits
will grow more than 6 percent in 1997.  Moreover, controlling costs
will be critical with regard to capital investments in 1997, as the
Postal Service plans to commit $6 billion to capital improvements. 
Over the next 5 years, the Service plans to devote more than $14
billion in capital investments to technology, infrastructure
improvements, and customer service and revenue initiatives. 

The Postal Service's continued success in both operational and
financial performance will depend heavily on its ability to control
operating costs, strengthen internal controls, and ensure the
integrity of its services.  However, we found several weaknesses in
the Postal Service's internal controls that contributed to
unnecessary increased costs. 

We reported in October 1996\1 that internal controls over Express
Mail Corporate Accounts (EMCA) were weak or nonexistent, which
resulted in the potential for abuse and increasing revenue losses
over the past 3 fiscal years.  Specifically, we found that some
mailers obtained express mail services using invalid EMCAs and that
the Postal Service did not collect the postage due.  Consequently, in
fiscal year 1995, the Postal Service lost express mail revenue of
about $800,000 primarily because it had not verified EMCAs that were
later determined to be invalid. 

Since our report was issued, the Postal Service has developed plans
to address these deficiencies.  The Postal Service is revising its
regulations to require an initial deposit of $250, up from $100, to
open an EMCA.  It also plans to issue a memorandum requiring that
district managers ensure that employees perform the necessary express
mail acceptance checks so that the correct postage amounts can be
collected.  Finally, the Postal Service plans to install terminals in
mail processing plants to allow Express Mail packages that are
deposited in collection boxes or picked up at customers' locations to
be checked for valid EMCA numbers before they are accepted into the
mail system. 

Similarly, we reported in June 1996\2 that weaknesses in the Postal
Service's controls for accepting bulk business mail prevent it from
having reasonable assurance that all significant amounts of postage
revenue due are received when mailers claim presort/barcode
discounts.  We reported that during fiscal year 1994, as much as 40
percent of required bulk mail verifications were not performed.  Bulk
mail totalled almost one-half of the Postal Service's total revenue
of $47.7 billion in fiscal year 1994.  At the same time, we found
that less than 50 percent of the required follow-up verifications to
determine the accuracy of the clerk's work were being performed by
the supervisors.  In response to our recommendations, the Postal
Service is developing new and strengthening existing internal
controls to help prevent revenue losses in bulk mailings.  For
example, the Postal Service plans to improve the processes used in
verification of mail, including how units are staffed, how
verifications are performed, and how results of acceptance work are
reported and reviewed. 

To avoid additional unwarranted costs, the Postal Service also needs
to better ensure the overall integrity of its acquisitions and
services.  We concluded, in our January 1996 report\3 , that the
Postal Service did not follow required procedures for seven real
estate or equipment purchases.  We estimated that these seven
purchases resulted in the Postal Service's expending about $89
million on penalties, unusable, or marginally usable property.  Three
of the seven purchases involved ethics violations arising from the
contracting officers' failure to correct situations in which
individuals had financial relationships with the Postal Service and
with certain offerors.  We also pointed out that the Office of
Government Ethics was reviewing the Postal Service's ethics program
and reported that all areas of the program required improvement.  The
Office of Government Ethics subsequently made a number of
recommendations designed to ensure that improvement of the Postal
Service's ethics program continues through more consistent oversight
and management support. 

Since our January 1996 report, the Office of Government Ethics has
completed three reviews to follow up on its open recommendations. 
Recently, the Postal Service developed guidance for avoiding
conflicts of interest and filing financial disclosure reports as well
as established procedures to ensure that the Office of Government
Ethics is notified about all conflict-of-interest violations that are
referred to the Department of Justice.  As a result of these actions,
the Office of Government Ethics closed its remaining open
recommendations. 

Additionally, strengthening program oversight is essential to
effective mail delivery.  We found that the Postal Service did not
exercise adequate oversight of its National Change of Address (NCOA)
program.\4 We reported that the Postal Service took a positive step
toward dealing with the inefficiencies of processing misaddressed
mail.  However, at the same time, we found that the NCOA program was
operating without clear procedures and sufficient oversight to ensure
that the program was operating in compliance with the privacy
provisions of federal laws.  Accordingly, we recommended that the
Postal Service strengthen oversight of NCOA by developing and
implementing written oversight procedures.  In response to our
recommendation, the Postal Service developed written oversight
procedures for the NCOA program. 

Most recently, we issued a report\5 that describes how the Postal
Service closes post offices and provides information on the number
closed since 1970--over 3,900 post offices.  We also provided
information on the number of appeals and their dispositions, as well
as some information about the communities where post offices were
closed in fiscal years 1995 and 1996.  Generally, the Postal Service
initiated the closing process after a postmaster vacancy occurred
through retirement, transfer or promotion, or after the termination
of the post office building's lease.  In each case, the Postal
Service proposed less costly alternative postal services to the
affected community, such as establishing a community post office
operated by a contractor or providing postal deliveries through rural
routes and cluster boxes. 


--------------------
\1 U.S.  Postal Service:  Revenue Losses From Express Mail Accounts
Have Grown (GAO/GGD-97-3, Oct.  24, 1996). 

\2 U.S Postal Service:  Stronger Mail Acceptance Controls Could Help
Prevent Revenue Losses (GAO/GGD-96-126, June 25, 1996). 

\3 Postal Service:  Conditions Leading to Problems in Some Major
Purchases (GAO/GGD-96-59, Jan.  18, 1996). 

\4 U.S.  Postal Service:  Improved Oversight Needed to Protect
Privacy of Address Changes (GAO/GGD-96-119, Aug.  13, 1996). 

\5 U.S.  Postal Service:  Information on Post Office Closures,
Appeals, and Affected Communities (GAO/GGD-97-38BR, Mar.  11, 1997). 


      KEY REFORM ISSUES
------------------------------------------------ Chapter Statement:0.2

The second area I would like to discuss is the pending postal
legislation.  This legislation may place the Postal Service in a more
competitive arena with its private sector counterparts and has raised
some key reform issues for consideration.  One such issue relates to
proposed changes to the Private Express Statutes.  These Statutes
were set up to ensure that the Postal Service has enough revenue to
provide universal access to postal services to the general public and
that certain mail, such as First-Class, will bear a uniform rate.  In
our September 1996 report,\6 we emphasized the importance of
recognizing the Statute's underlying purpose and determining how
changes may affect universal mail service and uniform rates.  Most
important among the potential consequences is that relaxing the
Statutes could open First-Class mail services to additional
competition, thus possibly affecting postal revenues and rates and
the Postal Service's ability to carry out its public service
mandates.  However, at the same time, the American public could
benefit through improved service.  It will be important to take into
account the possible consequences for all stakeholders in deciding
how mail services will be provided to the American public in the
future. 

Another key reform issue is the future role of the Postal Service in
the constantly changing and increasingly competitive communications
market.  For example, the use of alternative communications methods
such as electronic mail, faxes, and the Internet continues to grow at
phenomenal rates in the United States and is beginning to affect the
Postal Service markets.  At the same time, the Postal Service's
competitors continue to challenge it for major shares of the
communications market.  According to the Postmaster General, the
Postal Service has been losing market share in five of its six
product lines.  It seems reasonable to assume that these alternative
communications methods are likely to be used more and more.  In
addition, international mail has become an increasingly vital market
in which the Postal Service competes.  In our March 1996 report,\7 we
pointed out that, although the Postal Service has more flexibility in
setting international rates, it still lost business to competitors
because rates were not competitive and delivery service was not
reliable.  We also identified several issues surrounding the Postal
Service's role in the international mail arena that remain
unresolved.  Chief among them is the appropriateness of the Postal
Service's pricing practices in setting rates for international mail
services. 

We also reviewed postal reform in other countries to learn about
their experiences.  Recently, we issued a report\8 on Canada's
efforts since 1981 to reform its postal service, the Canada Post
Corporation (CPC).  Although CPC retained basic letter mail services
at a uniform rate, it also reduced the frequency of mail delivery to
some businesses, as well as in urban and rural areas.  CPC uses a
regulatory rate-making process that includes the opportunity for
public comment and government approval for basic domestic and
international single-piece letters.  However, postage rates for other
mail services can be approved by CPC without issuing regulations or
obtaining government approval.  Some of the key concerns that have
been raised by CPC customers include CPC's closure of rural post
offices and its conversion of others to private ownership.  In
addition, CPC's competitors have expressed concern about whether CPC
is cross-subsidizing the prices of its courier services with monopoly
revenues.  The Canadian government has responded to these concerns by
continuing its moratorium on post office closings and directing CPC
to discontinue delivery of unaddressed advertising mail.  The
government is also considering a call for additional government
oversight of CPC. 

Mr.  Chairman, as you are aware, we also have a number of ongoing
reviews related to postal reform.  For example, in concert with your
focus on the future role of the Postal Service, we are currently
reviewing the role and structure of the Postal Service's Board of
Governors in order to determine its strengths and weaknesses.  The
Board of Governors is responsible for directing and controlling the
expenditures of the Postal Service, reviewing its practices,
participating in long-range planning, and setting policies on all
postal matters.  In addition to obtaining the views of current and
former Board members, we will provide information on the role and
structure of Boards in other types of government-created
organizations.  Another issue important to postal reform that we are
reviewing involves access to mailboxes.  More specifically, we plan
to provide information on (1) public opinions on the issue of mailbox
restrictions; (2) views of the Postal Service and other major
stakeholders; and (3) this country's experience with mailbox security
and enforcement of related laws, compared with the experiences in
selected other countries. 


--------------------
\6 Postal Service Reform:  Issues Relevant to Changing Restrictions
on Private Letter Delivery (GAO/GGD-96-129A/B, Sept.  12, 1996). 

\7 U.S.  Postal Service:  Unresolved Issues in the International Mail
Market (GAO/GGD-96-51, Mar.  11, 1996). 

\8 Postal Reform in Canada:  Canada Post Corporation's Universal
Service and Ratemaking (GAO/GGD-97-45BR, Mar.  5, 1997). 


      OVERSIGHT OF THE POSTAL
      SERVICE REMAINS IMPORTANT
------------------------------------------------ Chapter Statement:0.3

Congressional oversight remains a key to improving the organizational
performance of the Postal Service.  One of the most important areas
for oversight is labor-management relations.  As the Postal Service
focuses on the significant challenges it faces to compete in today's
communications marketplace, unresolved labor-management relations
disputes continue to hinder efforts to improve productivity. 
Generally, the long-standing labor-management problems we identified
in 1994 still remain unresolved, despite the initiatives that have
been established to address them.\9 For example, the number of
grievances requiring formal arbitration has increased almost 76
percent, from about 51,000 in fiscal year 1993 to over 90,000 in
fiscal year 1996.  These difficulties continue to plague the Service
primarily because the major postal stakeholders (the Postal Service,
four major unions, and three management associations) cannot agree on
common approaches for addressing their problems.  We continue to
believe that until the major postal stakeholders develop a framework
agreement that would outline common objectives and strategies,
efforts to improve labor-management relations will likely continue to
be fragmented and difficult to sustain. 

The Government Performance and Results Act (GPRA) provides a
mechanism that may be useful in focusing a dialogue that could lead
to a framework agreement.  GPRA provides a legislatively based
mechanism for the major stakeholders, including Congress, to jointly
engage in discussions that focus on an agency's mission and on
establishing goals, measuring performance, and reporting on
mission-related accomplishments.  GPRA can be instrumental to the
Postal Service's efforts to better define its current and future
role.  As results-oriented goals are established to achieve that
role, the related discussions can also provide a foundation for a
framework agreement.  Successful labor-management relations will be
critical to achieving the Postal Service's goals.  The Postal Service
and Congress will need results-oriented goals and sound performance
information to most effectively address some of the policy issues
that surround the Postal Service's performance in a dynamic
communications market.  Recognizing that the changes envisioned by
GPRA do not come quickly or easily, sustained oversight by the Postal
Service and Congress will be necessary. 

Finally, several other areas will continue to require the attention
of both the Postal Service and Congress.  One such area is the Postal
Service's automation efforts.  The Postal Service has spent billions
of dollars to ensure that an increase in productivity and an adequate
return on planned investments are realized.  Another area is the
Postal Service's 5-year capital investment plan for 1997-2001.  It
calls for investing $14.3 billion, of which $3.6 billion is
designated for technology investments.  Also included is $6.6 billion
for planned infrastructure improvements such as maintaining and
improving over 35,000 postal facilities and upgrading the vehicle
fleet of more than 200,000 vehicles.  In addition, customer
satisfaction at both the residential and business levels will
continue to be a critical area as the Postal Service strives to
improve customer service in order to remain competitive. 

The Postal Service has made considerable progress in improving its
financial and operational performance.  Sustaining this progress will
be dependent upon ensuring that the key issues we identified, such as
controlling costs, protecting revenues, and clarifying the role of
the Postal Service in an increasingly competitive communications
market, are effectively addressed by the Postal Service and Congress. 


--------------------
\9 U.S.  Postal Service:  Labor-Management Problems Persist on the
Workroom Floor (GAO/GGD-94-201A/B, Sept.  29, 1994). 


------------------------------------------------ Chapter Statement:0.4

Mr.  Chairman, this concludes my prepared statement.  I have attached
a list of our Postal Service products issued since January 1996.  I
would be pleased to respond to any questions you or members of the
Subcommittee may have. 


GAO POSTAL-RELATED PRODUCTS ISSUED
SINCE JANUARY 1, 1996
=========================================================== Appendix 0

U.S.  Postal Service:  Information on Post Office Closures, Appeals,
and Affected Communities (GAO/GGD-97-38BR, Mar.  11, 1997). 

Postal Reform in Canada:  Canada Post Corporation's Universal Service
and Ratemaking (GAO/GGD-97-45BR, Mar.  5, 1997). 

U.S.  Postal Service:  Revenue Losses From Express Mail Accounts Have
Grown (GAO/GGD-97-3, Oct.  24, 1996). 

Postal Service:  Controls Over Postage Meters (GAO/GGD-96-194R, Sept. 
26, 1996). 

Inspector General:  Comparison of Certain Activities of the Postal IG
and Other IGs (GAO/AIMD-96-150, Sept.  20, 1996). 

Postal Service Reform:  Issues Relevant to Changing Restrictions on
Private Letter Delivery (GAO/GGD-96-129A/B, Sept.  12, 1996). 

U.S.  Postal Service:  Improved Oversight Needed to Protect Privacy
of Address Changes (GAO/GGD-96-119, Aug.  13, 1996). 

U.S.  Postal Service:  Stronger Mail Acceptance Controls Could Help
Prevent Revenue Losses (GAO/GGD-96-126, June 25, 1996). 

U.S.  Postal Service:  Unresolved Issues in the International Mail
Market (GAO/GGD-96-51, Mar.  11, 1996). 

Postal Service:  Conditions Leading to Problems in Some Major
Purchases (GAO/GGD-96-59, Jan.  18, 1996). 


*** End of document. ***