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entitled 'U.S. Postal Service: Deteriorating Financial Outlook 
Increases Need for Transformation' which was released on February 28, 
2002.   

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United States General Accounting Office: 
GAO:   

Report to Congressional Requesters:   

February 2002:   

U.S. Postal Service:   

Deteriorating Financial Outlook Increases Need for Transformation:   

GAO-02-355:   

Contents:   

Letter:   

Results in Brief:   

Background:   

USPS's Deteriorating Financial Results and Outlook:   

Transformation Required to Make USPS Financially Viable:   

USPS Needs to Reassess Structural Issues and Take Action:   

USPS's Response to Our Past Recommendations:   

Conclusions:   

Matter for Congressional Consideration:   

Recommendations for Executive Action:   

Agency Comments and Our Evaluation:   

Appendixes:   

Appendix I: Fiscal Year 2001 Results:   

Appendix II: Comments from the U.S. Postal Service:   

Appendix III: GAO Contacts and Staff Acknowledgments:   

GAO Contact:   

Acknowledgments:   

Tables:   

Table 1: USPS's Declining Financial Results and Outlook:   

Table 2: Quarter 1, Fiscal Year 2002 Budgeted Versus Actual Results:   

Table 3: Recent Postal Rate Actions:   

Table 4: USPS's Cash Flows and Capital Investments in Fiscal Years 
2000 through 2002:   

Table 5: Key USPS Legal Requirements and Practical Constraints That 
Limit Transformation Efforts:   

Table 6: Fiscal Year 2001 Budgeted Versus Actual Financial Results:   

Table 7: Selected Financial Results, Fiscal Years 1972 through 2001:   

Figures:   

Figure 1: Net Income/Losses of USPS from Fiscal Years 1972 to 2002:   

Figure 2: Trends in USPS's Mail Volumes, Fiscal Years 1971 through 
2001:   

Figure 3: Growth in Operating Revenues and Expenses, Fiscal Years 1990 
through 2001:   

Figure 4: USPS's Need for Funds Outweighs Its Sources of Funds:   

Figure 5: Trends in USPS's Debt, Fiscal Years 1972 through 2002:   

Figure 6: Cumulative Postal Productivity Growth from Fiscal Years
1971 through 2001:   

Figure 7: USPS's Net Income for Fiscal Year 2001:   

Figure 8: Fiscal Year 2001 Revenues Compared with Budgeted Levels:   

Figure 9: Fiscal Year 2001 Mail Volumes Compared with Budgeted 
Levels:   

Abbreviations:   

APWU: American Postal Workers Union:   

COLA: cost-of-living adjustment:   

DPMG: deputy postmaster general:   

OPM: Office of Personnel Management:   

PMG: postmaster general:   

PRC: Postal Rate Commission:   

PYLR: Prior Years' Losses Recovery:   

USPS: U.S. Postal Service:   

[End of section]   

United States General Accounting Office: 
Washington, D.C. 20548:   

February 28, 2002:   

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Fred Thompson: 
Ranking Minority Member:
Committee on Governmental Affairs: 
United States Senate:  

The Honorable Daniel K. Akaka:
Chairman:
The Honorable Thad Cochran:
Ranking Minority Member:
Subcommittee on International Security, Proliferation, and Federal 
Services: 
Committee on Governmental Affairs: 
United States Senate:   

This report responds to your request in March 2001 that we assess the 
financial condition of the U.S. Postal Service (USPS) and its long-
term outlook as well as the financial, operational, and structural 
issues that may affect USPS's ability to carry out its mission. The 
committee and subcommittee expressed concern about the deteriorating 
financial situation of USPS and requested our review to help improve 
the understanding of USPS's current financial situation; the causes of 
the anticipated financial deficits; and the implications in the short 
term and long term on USPS's financial condition, operations, and 
customers. Accordingly, the specific objectives of our review were to 
(1) assess USPS's fiscal year 2001 financial results and its long-term 
outlook; (2) discuss the legal requirements and practical constraints 
that need to be addressed as well as selected options to be considered 
for USPS to achieve a successful transformation to overcome its 
financial, operational, and human capital challenges; and (3) discuss 
information on actions USPS has taken to implement recommendations we 
made to it in April 2001 related to its financial situation.[Footnote 
1]  

In April 2001, we placed USPS's transformation efforts and long-term 
outlook on our High-Risk list, noting that USPS is at growing risk of 
not being able to continue its mission of providing the current level 
of universal postal service throughout the nation while maintaining 
reasonable rates and remaining largely self-supporting through postal 
revenues. We included USPS on our High-Risk list to focus attention on 
the dilemmas facing USPS before the situation escalates into a crisis 
in which the options for action may be more limited and costly. We 
recommended that the following actions be taken:   

* USPS should develop a comprehensive transformation plan—in 
conjunction with Congress and other stakeholders, such as the postal 
unions and management associations, customers, and the Postal Rate 
Commission (PRC)—that would identify the actions needed to address 
USPS's financial, operational, and human capital challenges and 
establish a time frame and specify key milestones for achieving 
positive results.   

* USPS should provide summary financial reports to Congress and the 
public on a quarterly basis. These reports should provide sufficiently 
detailed information for stakeholders to understand USPS's current and 
projected financial condition, how its outlook may have changed since 
the previous quarter, and its progress toward achieving the desired 
results specified in its comprehensive plan.   

In May 2001, we testified before this committee and subcommittee on 
USPS's financial outlook and transformation challenges that needed to 
be addressed.[Footnote 2] At that time, USPS's net income had declined 
over the past 5 years, its outstanding debt had increased at the end 
of each fiscal year since 1997, and it expected electronic diversion 
to cause substantial declines in First-Class Mail volume in the next 
decade. We stated that USPS faced major challenges that called for 
prompt, aggressive action, particularly in the areas of cutting costs 
and improving productivity in the near term. Further, we noted that 
Congress must revisit the statutory framework under which USPS 
operates and take actions to deal with the systemic problems facing 
USPS that call for a transformation if USPS is to remain viable in the 
21st century.   

Our assessment of USPS's financial condition and transformation 
challenges for this report is based on our previous work; updated 
financial data, projections, and other information that USPS provided 
to us; interviews with USPS officials, including its chief financial 
officer; and interviews with other stakeholders. This report discusses 
the actual financial results for fiscal year 2001 as compared with 
USPS's budget approved by its Board of Governors in November 2000 and 
USPS's current financial outlook. USPS's financial situation is 
complex, and we could not assess, within our available time and 
resource constraints, the validity of all of the data and assumptions 
that support USPS's financial projections. One area that may have an 
impact on USPS's financial situation is its response to the terrorist 
and anthrax incidents that occurred in the fall of 2001. Accordingly, 
in preparing this report, we also used the results of a 1-day 
conference we hosted in December 2001 at the request of the chairman 
and ranking minority member of the House Committee on Government 
Reform.[Footnote 3] The conference participants discussed bioterrorism 
threats, options for USPS and the mailing industry for improving 
security, and issues and options relating to improving postal 
operations.   

We conducted our review at USPS headquarters in Washington, D.C., from 
March 2001 through February 2002 in accordance with generally accepted 
government auditing standards. We requested comments on a draft of 
this report from USPS, and its comments are discussed later in this 
report and reproduced in appendix II.   

Results in Brief:   

USPS's financial outlook is becoming increasingly dire. USPS has 
continuing deficits, severe cash-flow pressures, rising debt, and 
liabilities that exceed its assets. USPS also lacks sufficient income 
to fund growing capital asset needs for safety, maintenance, 
expansion, and modernization as well as to fund its liabilities. In 
fiscal year 2001, USPS reported a $1.68 billion deficit, up from a 
$199 million deficit in the preceding fiscal year. Further, USPS 
budgeted for a $1.35 billion deficit in fiscal year 2002, before the 
catastrophic events of September 11 and subsequent use of the mail to 
transmit anthrax. The combined effect of these events and the current 
economic slowdown have served to further exacerbate USPS's financial 
difficulties by decreasing postal revenues, while postal costs 
continued to increase despite additional USPS cost-cutting efforts. 
USPS's mail volumes are beginning to decline in its major revenue 
producing areas, and despite recent rate increases, its costs are 
increasing faster than its revenues. USPS has requested an above-
inflation rate increase that is expected to take effect later this 
year. In the short term, USPS may have to rely primarily on cutting 
costs and raising rates. However, raising rates may cause mail volumes 
to decrease and encourage mailers to shift more mail to electronic and 
other delivery alternatives. In the long term, pressures to increase 
rates will continue as USPS will need increasing amounts of funds to 
pay its growing long-term obligations, which include employee 
retirement and health benefits. Thus, USPS's ability to continue to 
fulfill its mission by providing the current level of universal postal 
services at reasonable rates on a self-supporting basis is 
increasingly at risk.   

USPS's basic business model, which assumes that rising mail volume 
will cover rising costs and mitigate rate increases, is increasingly 
problematic since mail volume could stagnate or decline further. USPS 
has also had difficulty in making and sustaining productivity 
increases. Moreover, USPS's framework of legal requirements, which 
form the foundation of USPS's business model, as well as practical 
constraints impede USPS's ability to ensure its own financial 
viability. For example, USPS's statutory framework, which includes a 
monopoly on letter mail, a break-even mandate, and a cost-based rate-
setting structure, provides limited incentives to cut or restrain 
costs or to be innovative. Furthermore, USPS faces structural, legal, 
and practical constraints related to its infrastructure, including 
closing or consolidating postal facilities and realigning its 
workforce as its operations change. Other structural issues have been 
raised, such as USPS's governance structure—for example, what type of 
governing board is appropriate for USPS, given the complex mission and 
role of this $70 billion entity with nearly 900,000 employees. If 
USPS's financial and structural problems are not resolved, this could 
result in additional significant rate increases, lower quality of 
service, and/or the need for additional federal appropriations. USPS 
could do more under its current authority to lower costs and increase 
productivity. A range of options to improve postal operations includes 
replicating best practices across mail-processing plants, better 
aligning the workforce with operational needs, and redesigning the 
mail classification system and rate structure for more cost-efficient 
mail preparation. However, efforts to improve efficiency will probably 
not be enough to alleviate growing financial pressures, in part 
because of continuing difficulties in significantly reducing costs, 
particularly in the areas relating to USPS's infrastructure and 
workforce.   

USPS's worsening financial situation and outlook intensify the need 
for a comprehensive transformation that will address its financial, 
operational, and human capital challenges as well as the provision by 
USPS of more timely and accessible financial information. USPS has 
begun to implement our previous recommendations to develop a 
transformation plan and improve its financial information. In the fall 
of 2001, USPS published a discussion outline of concepts for postal 
transformation and called for public comments on transformation 
issues. USPS is working to develop and finalize its transformation 
plan by March 31, 2002. In addition, although USPS has made more 
financial data available on its Web site, it has not made some key 
financial data publicly available in as timely a manner as we believe 
is necessary to improve transparency.   

Congress has considered but not enacted various legislative postal 
reform proposals over the last 7 years. These reform proposals 
addressed many key transformation issues but did not fully address 
constraints related to USPS's infrastructure and workforce. Also, 
consensus among postal stakeholders has been difficult to achieve. 
Thus, strong leadership—starting with USPS—will be critical to 
achieving the necessary consensus for change between Congress and the 
divided stakeholder community. Further, action by Congress on 
comprehensive reform legislation will be critical to sustain USPS's 
financial viability. Accordingly, we are recommending in this report 
that:   

* USPS's Board of Governors and postmaster general (PMG) provide 
proactive leadership for transformation by informing its employees, 
Congress, stakeholders, and the public about the need for change and 
by identifying in its forthcoming transformation plan (1) actions that 
USPS can take within its current authority, (2) specific congressional 
actions that would enable USPS to take a number of incremental steps 
to address its growing financial and operational challenges, and (3) a 
process to address a range of comprehensive legislative reforms that 
will be needed to address key unresolved transformation issues;   

* USPS improve the transparency of its financial data by posting 
monthly and quarterly financial reports on its Web site in a more 
timely manner;   

* Congress consider and promptly act on incremental legislative 
changes that would provide USPS with some additional flexibilities 
while incorporating appropriate safeguards to prevent abuse. In 
addition, comprehensive legislative changes will be needed to address 
key unresolved transformation issues. Congress could also consider how 
best to address issues, such as infrastructure and workforce issues, 
that may require input from a variety of stakeholders and will involve 
some shared sacrifice. One option could be to create a commission to 
address unresolved transformation issues and develop a comprehensive 
proposal for consideration by Congress.   

In commenting on a draft of our report, the PMG agreed with our 
recommendations and said that USPS plans to inform Congress and the 
public of the need for change in its transformation plan and by other 
means. In addition, he stated that USPS intends to work with Congress 
and all stakeholders in developing and implementing strategies for 
action. He also agreed with our recommendation to improve the 
transparency of USPS's financial data.   

Background:   

USPS is the single largest federal civilian agency, with a mission 
vital to the nation's communication and commerce. Compared with 
private U.S. companies, USPS is the second largest employer with its 
nearly 900,000 full-time and part-time employees. Four major unions 
represent the interest of bargaining unit employees; and three 
management associations represent USPS supervisors, postmasters, and 
other managerial, nonbargaining personnel. USPS currently maintains a 
massive infrastructure, developed incrementally over many years, 
consisting of more than 38,000 post offices, branches, and stations 
and 350 major mail-processing and distribution facilities. USPS is the 
focal point of a $900 billion mailing industry that employs 9 million 
people and accounts for 8 percent of the U.S. gross domestic product, 
according to a recent report.[Footnote 4]   

The Postal Reorganization Act of 1970 (P.L. 91-375) reorganized the 
former U.S. Post Office Department into the U.S. Postal Service, an 
independent establishment of the executive branch with a mandate to 
provide prompt, reliable, and efficient mail services to all areas of 
the country. USPS is intended to be self-supporting from postal 
operations and is mandated to break even over time. To change domestic 
postal rates, USPS must first obtain a prior review from the 
independent PRC before it can finalize new rates. In general, the 
complex process for USPS to change rates can take about 18 months-4 to 
6 months for USPS to prepare its filing for a rate case, up to 10 
months for the PRC to review proposed rate increases and make its 
recommended decision, and about 2 months or longer for USPS to make 
its final decisions and implement the new rates.   

USPS has an 11-member Board of Governors, which is responsible for 
directing the organization.[Footnote 5] Board members include (1) nine 
presidential appointees who serve on a part-time basis with 9-year 
staggered terms; (2) the PMG, who is appointed by the governors; and 
(3) the deputy postmaster general (DPMG), who is appointed by the 
governors and the PMG. The nine presidential appointees are chosen to 
represent the public interest generally, cannot be representatives of 
specific interests, are subject to Senate confirmation, and may be 
removed only for cause. No more than five of these appointees may 
belong to the same political party. No other qualifications or 
restrictions are specified in law.   

USPS's Deteriorating Financial Results and Outlook:   

Overall, USPS's financial condition has continued to deteriorate. 
Although USPS is mandated to break even over time, it is not 
generating sufficient revenues to cover both its operating expenses 
and capital needs, which continue to grow. From fiscal year 1995 to 
fiscal year 2001, USPS's net income has continually declined (see 
figure 1). Further, since fiscal year 2000, USPS has been incurring 
net losses, and losses are projected for fiscal year 2002. Since its 
inception, USPS has accumulated losses from deficits in prior years, 
and its debt balance with the U.S. Treasury continues to grow. At the 
end of fiscal year 2001, USPS's mail volumes declined for the second 
time in 25 years and expense growth continued to outpace USPS's 
revenue growth. Following the terrorist and anthrax incidents in the 
fall of 2001, USPS has experienced lower mail volumes and revenues 
than expected and may incur higher expenses for safety and security. 
Historically, USPS has had difficulty cutting costs related to its 
large workforce and infrastructure. The continuing recession and 
recent terrorist incidents have negatively affected USPS's mail 
volumes; and despite USPS's cost-cutting efforts, revenues decreased 
while costs continued to rise, thus decreasing net income. USPS's dire 
financial situation, coupled with increased competition and the 
availability of alternatives to the mail, threatens the viability of 
USPS's basic business model for the 21st century.   

Figure 1: Net Income/Losses of USPS from Fiscal Years 1972 to 2002:   

[Refer to PDF for image: vertical bar graph]   

Net Income/Losses of USPS from Fiscal Years 1972 to 2002 are depicted 
in millions of dollars as actual dollars and budgeted dollars (2002).   

Source: USPS financial data.   

[End of figure]   

USPS reported a deficit of $1.68 billion for fiscal year 2001 and has 
budgeted a deficit of $1.35 billion for fiscal year 2002. However, 
this budget estimate was forecast before the occurrence of the 
September 11 terrorist attacks and anthrax incidents. In the first 
postal quarter[Footnote 6] of fiscal year 2002, mail volumes were 4.9 
percent below estimates that were included in USPS's approved budget, 
and revenues were $876 million less than budgeted; costs were held to 
$355 million below budget. This resulted in net income being $521 
million less than planned. However, USPS's deficit for fiscal year 
2002 could be mitigated by the expected settlement and implementation 
of its pending request for a rate increase.   

Continuing deficits have resulted in insufficient cash to finance 
capital project needs and repay debt. In addition, USPS's debt 
continues to grow and is nearing its $15 billion statutory limit. 
[Footnote 7] USPS's debt is budgeted to reach $12.9 billion by the end 
of fiscal year 2002. Currently, USPS's liabilities exceed its assets. 
USPS's substantial and growing liabilities will require increasing 
amounts of funds in the future.   

USPS's financial outlook is likely to continue deteriorating unless it 
can find ways to stimulate revenue growth and significantly cut costs. 
Even if USPS raises rates and achieves positive net income in a given 
year, that will not resolve its fundamental financial problems, 
including those relating to declining mail volumes, because rate 
increases are likely to encourage the shift of more mail to electronic 
and other alternatives. Some costs, notably for pensions and retiree 
health benefits, are difficult to control and are expected to increase 
substantially in the coming decade.[Footnote 8] Similarly, USPS 
delivery costs increase annually, that is, nearly 2 million new 
delivery points were added last year. To improve its financial 
outlook, USPS needs to concentrate its current efforts on cutting 
costs, improving productivity, and adding value to the mail as well as 
overhauling its basic business model, as described in the final 
section of this report.   

The following table summarizes the key aspects of USPS's declining 
financial outlook. A further discussion of fiscal year 2001 results is 
included in appendix 1.   

Table 1: USPS's Declining Financial Results and Outlook:   

Area: Net income; 
Results in fiscal year 2001: 
* Net loss of $1.68 billion, despite rate increases during the year 
averaging about 6 percent. First-Class stamp rate rose by 1 cent to 34 
cents. 
* Mail volumes fell 0.2 percent and revenues fell below expectations 
mainly due to a slowing economy.
* Expenses rose twice as fast as revenues but were slightly less than 
budgeted. 
Outlook for fiscal year 2002: 
* USPS will be challenged to hold its net deficit to the $1.35 billion 
amount budgeted.
* In the first quarter, mail volumes were 4.9 percent below budget, 
and revenues were $876 million below budget. 
* USPS has requested a rate increase averaging 8.7 percent. Rates are 
expected to increase this summer, with the First-Class stamp rate 
rising by 3 cents. 
* Large cost reductions are planned, but uncertainty remains regarding 
security- and safety-related costs. 
* Expenses are increasing faster than revenues despite cost-cutting 
efforts.   

Area: Cash flow; 
Results in fiscal year 2001: 
* Positive cash flow from operations was $1.3 billion. 
* Insufficient cash flow precipitated cuts in capital programs and 
resulted in additional borrowing. 
Outlook for fiscal year 2002: 
* Continued cash flow pressures due to continuing losses.  

Area: Capital program; 
Results in fiscal year 2001: 
* Freeze on capital commitments was implemented for most facility 
projects. 
* Capital commitment for new projects was $1 billion, down from over 
$3 billion annually in the 5 previous years. 
* Capital outlays were $2.9 billion, $700 million less than budgeted.	
Outlook for fiscal year 2002: 
* Freeze on capital commitments has been extended. 
* Capital commitment is budgeted at $2.4 billion and outlays at $2.2 
billion. However, sufficient cash may not be available to fund this 
level of capital commitments.   

Area: Net position; 
Results in fiscal year 2001: 
Liabilities exceeded assets by $2.3 billion.[A] 
Outlook for fiscal year 2002: 
* Negative net position is expected to worsen.   

Area: Liabilities for pensions and workers' compensation; 
Results in fiscal year 2001: 
* Pension liabilities were $32 billion, plus an anticipated $15.8 
billion for future interest charges over a 30-year period.[B] 
* Workers' compensation liabilities were $6.0 billion. 
Outlook for fiscal year 2002: 
* Pension and workers' compensation liabilities are expected to grow.  

Area: Debt; 
Results in fiscal year 2001: 
* Debt increased by $2 billion to $11.3 billion, a new record. 
* No debt reduction plan. 
Outlook for fiscal year 2002: 
* Current net income projections do not provide the capacity for debt 
reduction. USPS budgeted a $1.6 billion increase in total debt. 
* The budgeted increase would bring debt to $12.9 billion, or $2.1 
billion under its $15 billion limit.   

Area: Accumulated prior-years' losses; 	
Results in fiscal year 2001: 
* Prior years' losses since fiscal year 1971 reached $5.4 billion. 
Outlook for fiscal year 2002: 
Prior years' losses are budgeted to increase to $6.6 billion. 
	
[A] Net liability of $2.3 billion includes a $32 billion deferred 
retirement asset, which is an intangible asset that is not an economic 
resource that can be applied to cover USPS's liabilities.   

[B] USPS also has an unrecorded obligation for retiree health benefit 
premiums that it must pay under provisions of the Omnibus Budget 
Reconciliation Act of 1990 (PL. 101-508), as discussed later in this 
report.   

Sources: USPS data and GAO analysis.   

[End of table]   

In fiscal year 2001, overall mail volume fell 0.2 percent, which was 
only the second annual decline since fiscal year 1975. Growth in mail 
volumes for USPS's largest revenue source, First-Class Mail, has 
slowed in recent years (see figure 2). In fiscal year 2001, First-
Class Mail volume grew only 0.1 percent, which was the smallest growth 
rate in the last 25 years. First-Class Mail is a particularly 
important category of mail because it generated 54 percent of USPS 
revenues and covered two-thirds of institutional expenses in fiscal 
year 2000. Additionally, Standard Mail volumes—that is, primarily 
advertising mail—which account for most of the remaining revenues, 
decreased by 0.1 percent in fiscal year 2001, the first decline in 10 
years. In contrast, Standard Mail volume on average had grown nearly 
5.0 percent in the previous 5 years. USPS officials attribute the 
changes in mail volumes primarily to the slowing economy and also to 
the diversion by mailers of First-Class Mail, and to a lesser degree, 
Standard Mail, to the Internet.   

Figure 2: Trends in USPS's Mail Volumes, Fiscal Years 1971 through 
2001:   

[Refer to PDF for image: multiple line graph]   

The graph depicts pieces in millions during fiscal years 1971 through 
2001 for the following: 
First-Class Mail; 
Standard Mail; 
Other mail.   

Source: USPS data.   

[End of figure]   

Recent declines in mail volume growth are depressing revenues at a 
time when expenses are growing and cash flow is needed to fund capital 
expenditures and debt repayment. Since fiscal year 1996, operating 
expenses have grown faster than operating revenues and grew 4.2 
percent in fiscal year 2001, which was twice as fast as the 2.0-
percent growth in operating revenue (see figure 3). 
									
Figure 3: Growth in Operating Revenues and Expenses, Fiscal Years 1990 
through 2001:   

[Refer to PDF for image: vertical bar graph]   

The graph depicts annual percentage change during fiscal years 1990 
through 2001 for revenues and expenses.   

Source: USPS data.   

[End of figure]   

Declining Net Income:   

USPS's poor financial outlook for fiscal year 2002 has been 
exacerbated by the continuing recession and terrorist incidents. Mail 
volume and revenues declined after September 11, while costs continued 
to rise, despite cost-cutting efforts. As shown in table 2, during the 
first quarter of fiscal year 2002, mail revenue was 5.4 percent below 
budget. This shortfall resulted in $876 million revenue less than 
budgeted, while expenses were $355 million under budget. USPS achieved 
a net income of only $108 million, which was $521 million less than 
budgeted. Typically, the first quarter is USPS's most profitable of 
the fiscal year. USPS will be challenged to meet its net income 
targets for the remainder of the year. Uncertainties surrounding 
USPS's net income targets include future mail volumes, the extent to 
which USPS can cut costs, and the potential for other added costs.   

Table 2: Quarter 1, Fiscal Year 2002 Budgeted Versus Actual Results 
(Dollars and mail volumes in millions): 
	
Revenue: 
Budgeted: $16,243; 
Actual: $15,367; 
Variance of actual from budgeted: ($876); 
Percentage variance: (5.4%); 
Percentage change from same period last year: (0.5%).   

Expense: 
Budgeted: $15,614; 
Actual: $15,259; 
Variance of actual from budgeted: ($355); 
Percentage variance: (2.3); 
Percentage change from same period last year: 0.4%.   

Net income: 
Budgeted: $629; 
Actual: $108; 
Variance of actual from budgeted: ($521); 
Percentage variance: (82.8); 
Percentage change from same period last year: (56.3%).   

Mail volumes: 
Budgeted: 51,029; 
Actual: 48,551; 
Variance of actual from budgeted: (2,491); 
Percentage variance: (4.9); 
Percentage change from same period last year: (5.5%).   

Note: Negative numbers are in parentheses.   

Source: USPS financial and mail volume data.   

[End of table]   

Growing Expenses:   

In its fiscal year 2002 budget, USPS projected that its expenses would 
increase 3.2 percent. Budgeted expense increases included increases in 
salaries and benefits, pensions, retiree health care, and workers' 
compensation, among other items. To help offset these expense 
increases, USPS's budget called for reductions of 13,000 work years, 
or a 1.9-percent reduction, to be achieved in part by reducing the 
number of employees in field operations.   

Compensation and benefits covering personnel-related expenses, 
including interest expenses on deferred retirement liabilities, 
totaled approximately $53 billion, or about 78 percent of the total 
expenses in fiscal year 2001. A key component, USPS's retirement-
related expenses, have grown as a percentage of total expenses from 
3.9 percent in fiscal year 1972 to 14.4 percent in fiscal year 2001. 
Budgeted retirement-related expenses for fiscal year 2002 are $10.3 
billion, including an interest expense of $1.6 billion.   

USPS's expenses for the remainder of fiscal year 2002 may be affected 
by fluctuations in mail volumes. Further, USPS health care premium 
costs are budgeted to increase 10 percent; however, this target may be 
exceeded as general health insurance premium costs are expected to 
grow 13 percent, according to an Office of Personnel Management (OPM) 
announcement in September 2001. Adding to financial pressures, the 
recent incidents of anthrax in the mail have heightened the need to 
improve mail safety and security, which will likely entail USPS's 
incurring additional unplanned expenses.   

Security and Safety Needs Exacerbate Financial Problems:   

USPS has taken steps to increase mail security and safety, such as 
decontaminating facilities affected by anthrax, irradiating some mail 
received by the federal government, and issuing protective equipment 
to its employees. In the future, USPS faces the challenge of 
safeguarding employees and customers from bioterrorism, chemical, 
radiological, and explosive threats. On December 10, 2001, we held a 
conference of representatives from Congress, USPS, and other postal 
stakeholders to discuss possible options to enhance mail security and 
postal operations. Our report on the conference listed numerous 
options for USPS and the mailing industry to make improvements in this 
area.[Footnote 9] It is unclear, however, what changes will ultimately 
be implemented, what the associated costs will be, and how they will 
be financed—beyond the $675 million that has been appropriated for 
this purpose.   

Revenues from Rising Postal Rates:   

USPS's 2000 request for a rate increase was implemented in two stages—
in January and July 2001—due to differences between USPS and the PRC 
over the disposition of the rate case. In addition, USPS requested an 
above-inflation increase in postal rates in September 2001 that is 
expected to be implemented in the summer of 2002. Table 3 shows these 
and other rate actions in calendar years 2000, 2001, and 2002. These 
increases may not be enough to keep USPS from asking for another rate 
increase later this fall. During fiscal year 2001, USPS planned to 
generate an additional $900 million dollars from rate increases that 
averaged about 6.0 percent. However, the rate increases did not occur 
as USPS planned because the PRC recommended rate increases averaging 
4.6 percent. USPS's governors later overrode PRC's recommended rates 
in May 2001 and approved rate increases that would generate revenue 
that was close to USPS's original request. The timing for implementing 
these rate increases reduced the amount of revenue in fiscal year 2001 
by about $390 million below USPS's budget, according to USPS.   

Table 3: Recent Postal Rate Actions:   

Date: January 12, 2000; 
Action: USPS requested postal rate increases averaging approximately 
6.0 percent, with a 1-cent increase in the First-Class stamp rate to 
34 cents. Rates would take effect after PRC review (not to exceed 10 
months) and USPS's Board of Governors action (approval, allow under 
protest, modify, or reject).  

Date: November 13, 2000; 
Action: The PRC issued a recommended decision with rate increases 
averaging 4.6 percent with a 1-cent increase in the First-Class stamp 
rate.   

Date: December 4, 2000; 
Action: USPS's Board of Governors voted to allow under protest PRC's 
recommendation. It also sent the case back to the PRC for further 
consideration.   

Date: January 7, 2001; 
Action: USPS implemented rate increases averaging 4.6 percent.   

Date: May 7, 2001; 
Action: USPS's Board of Governors voted unanimously to modify PRC's 
recommended decision, with rate increases averaging 1.6 percent to 
generate revenues similar to those that USPS had requested in the rate 
case.  

Date: July 1, 2001; 
Action: USPS implemented rate increases averaging 1.6 percent.   

Date: September 24, 2001; 
Action: USPS requested rate increases, which it estimated would 
average 8.7 percent, with a 3-cent increase in the First-Class stamp 
rate to 37 cents.   

Date: Fall-Winter 2001; 
Action: The Chairman of the PRC directed rate case participants to 
consider the option of a negotiated settlement, considering terrorist 
incidents and their potential effect on USPS. USPS, major customers, 
and PRC's Office of the Consumer Advocate, among others, are 
negotiating a proposed settlement in which rates would increase no 
sooner than June 30, 2002, and include a 3-cent increase in the price 
of a First-Class stamp.  

Sources: USPS and PRC data.   

[End of table]   

USPS filed for another rate increase in September 2001, which USPS 
estimated would increase rates an overall average of 8.7 percent, as 
shown in table 3, and asked the PRC to give this request expedited 
consideration. Following the terrorist attacks, the chairman of the 
PRC suggested that the parties in the rate case agree to a settlement, 
so that the PRC could issue a recommended decision as soon as 
possible. Recently, the parties entered into negotiations and if the 
proposed agreement is implemented as expected in the summer of 2002, 
the price of a First-Class stamp would rise to 37 cents and revenues, 
according to USPS, would increase by about $1 billion in fiscal year 
2002.   

Since postal reorganization was implemented in 1971, rates for the 
First-Class stamp have generally tracked the rate of inflation. More 
recently, however, rates for certain categories of mail have been 
increasing at a rate greater than inflation. Some of these categories, 
such as Priority Mail and Standard Mail, are more price-sensitive than 
First-Class Mail because of the availability of other alternatives, 
such as FedEx, UPS, newspaper advertising, and other forms of 
advertising. Hence, rate increases affect the volumes and 
competitiveness of mail, particularly the categories that are the most 
price-sensitive. Mailers have been critical of the growing frequency 
and size of rate increases and may look for other communication and 
delivery alternatives.   

Although it is difficult to determine the impact of specific factors, 
recent declines in mail volume have generally been attributed to rate 
increases; the continuing recession; anthrax incidents; and increased 
competition, among other things. Thus, in the first quarter of fiscal 
year 2002, First-Class Mail, Standard Mail, and Priority Mail volumes 
fell, compared with the same quarter last fiscal year, by 2 percent, 9 
percent, and 17 percent respectively. For the remainder of fiscal year 
2002, USPS will be challenged to meet budgeted revenue targets on the 
basis of volume and revenue forecasts that were prepared before the 
terrorist incidents and when the economic outlook was more favorable. 
However, USPS is anticipating additional revenues that were not 
included in the original budget from a rate increase that may be 
implemented in the summer, rather than in the fall, of 2002. Another 
potential source of funding would be any additional funds appropriated 
by Congress.   

Revenues from Additional Appropriations:   

In the fall of 2001, USPS asked Congress to appropriate about $5 
billion to cover costs related to the terrorist and anthrax-related 
incidents as well as their expected negative effect on revenues. USPS 
subsequently asked for $1.3 billion to cover expenditures related to 
these incidents through June 2002. To date, Congress has appropriated 
$675 million to cover these costs.[Footnote 10] This is the first 
appropriation since fiscal year 1982 for purposes other than revenue 
forgone on free and reduced rate mail.[Footnote 11] In addition, USPS 
asked for nearly $1 billion in its fiscal year 2003 appropriation 
request, representing the total amount of revenue forgone for free and 
reduced rate mail between 1991 and 1998, for which USPS had not yet 
received appropriations. This request would be in lieu of the current 
payment schedule established by a 1993 law for $29 million annual 
appropriations over 42 years. Also, it is unclear whether USPS will 
ask for further appropriations to cover security-related expenses in 
the future.   

Cash-Flow Difficulties and Increasing Debt Result in Underfunded 
Capital Needs:   

Historically, cash flow from USPS's operations generally has not been 
sufficient to cover the capital outlays it has needed to maintain, 
expand, and modernize its physical infrastructure. In each year of 
this period, USPS capital outlays have exceeded its capital 
depreciation, and estimated depreciation has served to help cover 
future capital outlays when making rate case requests. Currently, cash 
flow from USPS operations is insufficient to fully fund its 
operational and capital investment needs and repay its debts. Thus, 
USPS has resorted to using debt to finance its capital outlays. USPS 
had budgeted its debt to reach $12.9 billion by the end of fiscal year 
2002, which would be $2.1 billion below its $15 billion statutory debt 
limit. If higher postal rates are implemented this summer, cash flow 
should improve in the short term. However, in the long term, simply 
raising rates alone is not the answer. Such increases are likely to 
help facilitate the shift of mail to electronic and other delivery 
alternatives.   

To conserve cash in fiscal year 2002, USPS's budget has extended its 
freeze on capital commitments for most facility projects and has cut 
back its overall capital expenditures.[Footnote 12] USPS has reduced 
its capital commitments to a level below that of recent years. USPS 
capital commitments, which had exceeded $3 billion from fiscal years 
1997 through 2000, were reduced from $3.6 billion to $1.0 billion in 
fiscal year 2001 and are budgeted at $2.4 billion in fiscal year 2002. 
Capital outlays also have experienced a downward trend, although to a 
lesser extent. Recent reductions in capital commitments and outlays 
are shown in table 4.   

Table 4: USPS's Cash Flows and Capital Investments in Fiscal Years 
2000 through 2002:   

Category: Cash flow from operations; 
Fiscal year 2000 Approved budget: $1.7 billion; 
Fiscal year 2000 Actual: $1.2 billion; 
Fiscal year 2001 Approved budget: $1.8 billion; 
Fiscal year 2001 Actual: $1.3 billion; 
Fiscal year 2002 Approved budget: $0.2 billion.   

Category: Capital cash outlays; 
Fiscal year 2000 Approved budget: $3.6 billion; 
Fiscal year 2000 Actual: $3.3 billion; 
Fiscal year 2001 Approved budget: $3.5 billion; 
Fiscal year 2001 Actual: $2.9 billion; 
Fiscal year 2002 Approved budget: $2.2 billion.   

Category: Capital expenditure commitments; 
Fiscal year 2000 Approved budget: $4.0 billion; 
Fiscal year 2000 Actual: $3.0 billion; 
Fiscal year 2001 Approved budget: $3.6 billion; 
Fiscal year 2001 Actual: $1.0 billion; 
Fiscal year 2002 Approved budget: $2.4 billion.   

Source: USPS financial data.   

[End of table]   

USPS has a growing backlog of facility projects and is unable to fully 
finance needed improvements to its infrastructure. The capital freeze 
on most facility projects and limited funding of other capital 
projects is unsustainable, given USPS's need to maintain its massive 
and growing infrastructure and modernize its information technology. 
Limitations on capital investment may have the following detrimental 
effects:   

* deterioration of USPS's existing physical infrastructure;   

* operational impediments from delays in repairing deteriorating 
facilities or expanding to cover new delivery points;   

* higher future capital project costs;   

* deferred efficiency gains that could limit cost savings and add 
pressure to increase postal rates;   

* higher costs and rates that could make electronic and other delivery 
alternatives more attractive; and;   

* products becoming less competitive as a result of delays in
implementing improvements, such as an information platform to enable 
real-time data on the status of mailings.   

Long-Term Need for Funds:   

USPS is likely to continue experiencing difficulty generating 
sufficient funds to cover its increasing funding needs (see fig. 4). 
Funds are needed for (1) current operating expenditures; (2) capital 
projects; and (3) paying liabilities and servicing its debt. However, 
expense growth has outpaced revenue growth, capital projects have been 
significantly curtailed, and USPS's liabilities have exceeded its 
assets by $2.3 billion, as of September 30, 2001. Included in this 
calculation of the $2.3 billion is a deferred retirement asset of $32 
billion, which is an intangible asset that is not an economic resource 
that USPS can apply to cover its liabilities. If this $32 billion 
deferred retirement asset were to be excluded from total assets, 
USPS's liabilities would exceed its assets by $34.3 billion as of 
September 30, 2001.   

Further, liabilities have been growing at an increasing rate and 
include $32 billion in retirement liabilities, $11.3 billion in 
outstanding debt, and a $6.0 billion liability for workers' 
compensation claims as of September 30, 2001. These liabilities do not 
include future anticipated interest expenses, such as the $15.8 
billion interest expense on the $32 billion retirement liability, or a 
large obligation for retiree health insurance premiums, which USPS is 
required by law to pay.[Footnote 13] The $32 billion retirement 
liability continues to increase because USPS's annual payments, set by 
OPM under statutory requirements, have been less than the annual 
increases in future liabilities. These annual increases are due to 
increases in employee compensation and mandated retiree cost-of-living 
adjustments (COLA).   

Figure 4: USPS's Need for Funds Outweighs Its Sources of Funds:   

[Refer to PDF for image: illustration]   

The illustration depicts a scale with Source of Funds on the lighter 
side, and on the heavier side.   

Components of each side are as follows:   

Source of Funds: 
Operating revenues; 
Borrowing from Treasury; 
Appropriations.   

Need for Funds: 
Operating expenses; 
Capital expenditures; 
Retirement liabilities; 
Retiree health care obligation; 
Treasury debt; 
Workers' compensation liabilities; 
Accumulated deficit.   

Source: USPS financial data.   

[End of figure]   

USPS also had an accumulated deficit of $5.4 billion as of September 
30, 2001. The accumulated deficit represents the amount by which 
annual deficits have exceeded annual positive net income since USPS's 
inception. Deficits arise when expenses exceed revenues. When expenses 
require payment and there is insufficient cash flow from operations, 
USPS may borrow, thus increasing its liabilities and the need for 
funds at some future point to pay the liabilities. A mechanism known 
as the Prior Years' Losses Recovery (PYLR)[Footnote 14] permits USPS 
to include in its rate request an amount above its expected costs to 
make up for past operating losses over a future period of time. 
Starting with the 1980 rate case, USPS has submitted, and the PRC has 
recommended, a provision for the recovery of prior years' losses over 
a 9-year amortization period. By decreasing the amortization period to 
recoup losses—for example, to the 7-year amortization period that was 
used in the two rate cases before 1980—USPS could implement larger 
rate increases in an attempt to generate net income to cover its 
accumulated deficits more rapidly.   

USPS continues to depend on borrowing and has not indicated how it 
plans to reduce its debt. USPS has not generated sufficient cash flow 
from operations to cover capital outlays in 11 of the last 15 fiscal 
years. USPS's outstanding debt balance has grown steadily since fiscal 
year 1997, nearly doubling from $5.9 billion to $11.3 billion at the 
end of fiscal year 2001 (see figure 5). This trend of increasing debt 
levels essentially shifts the burden of reducing the debt from current 
to future ratepayers and creates pressure for USPS to raise postal 
rates in the future. Although this debt is not guaranteed by the 
government,[Footnote 15] if future ratepayers are unable to reduce 
this debt, Congress could determine that the government should step in 
to pay some or all of these obligations. Simply borrowing to keep USPS 
operating is not acceptable as a long-term option and is contrary to 
USPS's mandate to be self-supporting.   

Figure 5: Trends in USPS's Debt, Fiscal Years 1972 through 2002:   

[Refer to PDF for image: line graph]   

The graph depicts debt in millions of dollars for fiscal years 1972 
through 2002 in the following categories: 
Outstanding debt at end of fiscal year; 
Projected outstanding debt.   

Source: USPS financial data.   

[End of figure]   

Options for Improving Financial Condition:   

Key options that USPS could consider to improve its financial 
condition include increasing revenues and cutting costs. USPS needs 
sufficient revenues so that it can cover operating costs and improve 
net income, address the growing backlog of capital projects, expand to 
meet new delivery point needs, continue modernization efforts, and 
reduce its debt. On the revenue side, USPS has two basic options for 
increasing revenues: (1) generate additional revenues from increasing 
volumes, improving existing products, and developing new products and 
services and (2) increase rates, possibly by increasing the rate of 
recovery of prior years' losses in rate cases and/or increasing the 
amount for capital purposes from depreciation to a higher figure. 
[Footnote 16] On the expense side, USPS can reduce expenses by cutting 
costs and improving productivity. Options related to cutting costs and 
improving productivity are further discussed in the next section of 
this report. As for increasing revenues from new products and 
services, in recent years USPS has generally had difficulty generating 
positive net revenues. For example, in fiscal year 2001, USPS budgeted 
$104 million for revenues from its e-commerce initiatives, but 
reported actual revenues of only about $2 million in this area. In 
addition, increasing rates has traditionally been the primary source 
of new revenue, particularly from the largest mail categories—First-
Class Mail and Standard Mail. In the short term, USPS can realize 
large net revenues by increasing postal rates, especially for less 
price sensitive categories, such as First-Class Mail. However, in the 
long term, increasing rates may have diminishing practicality because 
rate increases affect USPS's competitiveness by increasing incentives 
for mailers to find other alternatives to the mail. Therefore, it is 
important for USPS to undertake transformation efforts to operate more 
efficiently in order to hold down rate increases over the long term.   

On the financing side, USPS has increasingly relied on additional 
borrowing to fund its capital expenditures. A major constraint is that 
USPS may soon reach its statutory borrowing limit. However, raising 
the debt limit would require congressional action. In the short term, 
USPS may need to rely on additional borrowing if it is to maintain its 
capital program, but increasing debt in the long term would not be 
prudent.   

Another option for obtaining additional funding would be to request 
additional appropriations from Congress. Such a request would appear 
counter to Congress's intent of establishing a self-financing 
independent entity in 1970 when it reorganized the former Post Office 
Department to the current U.S. Postal Service.   

Transformation Required to Make USPS Financially Viable:   

A comprehensive transformation of the Postal Service is needed to 
ensure its financial viability and fulfill its mission in the 21st 
century in the dynamic communications and delivery sectors. Legal 
requirements and practical constraints have contributed to continuing 
deficits, rate increases, rising costs, and growing debt. USPS has 
attempted to reduce the size of rate increases by cutting costs and 
increasing its productivity, but it has been able to achieve only 
limited progress. More progress is urgently needed, and a range of 
options for making improvements is available within the current 
structure. However, absent a fundamental reassessment of USPS's 
statutory framework, starting with its mission and role, USPS will 
continue to be constrained in its transformation efforts. For example, 
USPS's statutory framework, which includes a monopoly on letter mail, 
a break-even mandate, and a cost-of-service rate-setting structure, 
provides limited incentives for USPS to cut or restrain costs or to be 
innovative. Furthermore, USPS faces legal and practical constraints 
related to restructuring its infrastructure, including closing or 
consolidating postal facilities and realigning its workforce as its 
operations change. Other structural issues, such as USPS's governance 
structure, have been raised—that is, what type of governing board is 
appropriate for USPS given the complex mission and role of this $70 
billion entity. USPS's basic business model, which assumes that rising 
mail volume will help cover rising costs and mitigate rate increases, 
is increasingly problematic as mail volume either stagnates or further 
declines while costs continue to rise.   

A comprehensive transformation is urgently needed, starting with 
actions that USPS can take under its current authority. Given USPS's 
dire financial situation, interim legislative changes could serve a 
valuable purpose. However, action by Congress on comprehensive 
transformation issues will be critical to ensuring financial 
viability. Leadership-—starting with USPS--will be critical to 
achieving the necessary consensus for transformation between Congress 
and the divided stakeholder community.   

Need for Transformation:   

The statutory framework under which USPS operates, established under 
the Postal Reorganization Act more than 30 years ago, is increasingly 
problematic and is long overdue for change. The act was enacted when 
USPS faced little direct competition and could rely on increasing 
rates, coupled with growing mail volumes, to cover rising costs. 
Today, USPS must operate in a vastly different environment. The World 
Wide Web, which came into widespread use in the 1990s, along with cell 
phones have become essential elements of communications and commerce. 
E-mail use has exploded, more and more documents are being sent 
electronically, and a growing share of payments has also shifted from 
mail to electronic alternatives. These changes continue, mail volume 
has started to decline, and the prospect is for future declines over 
the long run. In contrast, USPS's business model, developed pursuant 
to the Postal Reorganization Act, has remained virtually unchanged for 
the past 30 years.   

Transformation Efforts Are Limited by Legal Requirements and Practical 
Constraints:   

Postal transformation efforts are limited by a combination of legal 
requirements and related practical constraints (see table 5).  

Table 5: Key USPS Legal Requirements and Practical Constraints That 
Limit Transformation Efforts:   

Universal postal service:   

Legal requirements: 
* USPS shall have as its basic function the obligation to provide 
postal services to bind the nation together through the personal, 
educational, literary, and business correspondence of the people. 
* USPS shall provide prompt, reliable, and efficient services to 
patrons in all areas, render postal services to all communities, and 
serve as nearly as practicable the entire U.S. population. 
* USPS shall provide a maximum degree of effective and regular postal 
services to rural areas, communities, and small towns where post 
offices are not self-sustaining. 
* At least one category of mail must be delivered at a uniform rate 
throughout the United States and its territories and possessions. 
* The PRC must issue an advisory opinion prior to changes in the 
nature of postal services that will generally affect service on a 
nationwide or substantially nationwide basis. 
* Those who believe they are not receiving postal services in 
accordance with the policies of Title 39 of the U.S. Code may lodge a 
complaint with the PRC, which, if it found the complaint to be 
justified, would render a recommended decision or public report on the 
matter. 
* For many years, USPS appropriations have been contingent on 6-day 
delivery and rural delivery of mail at not less than the 1983 level.   

Practical constraints: 
* Strong stakeholder opposition to cuts in the frequency or quality of 
postal services. 
* Self-imposed delivery standards (e.g., delivery of local First-Class 
Mail overnight and long-distance First-Class Mail in 2-3 days). 
* Current availability of more than 300,000 collection boxes and 
collection of outgoing mail at post offices. 
* Current practice of delivering residential mail to individual 
mailboxes, including those attached to the home, rather than requiring 
more efficient distribution methods such as curbside or cluster 
boxes.   

Postal monopoly:   

Legal requirements: 
* Only USPS can deliver letter mail, with "letters" being defined by 
USPS in regulations. USPS has suspended the letter mail monopoly in 
its regulations for extremely urgent letters and outbound 
international mail. 
* Only USPS can put mail in recipients' mailboxes, with specific 
restrictions detailed in USPS regulations.   

Practical constraints: 
* USPS's monopoly helps it maintain universal postal service, 
including uniform frequency of delivery on every route and uniform, 
reasonable rates. 
* USPS's monopoly prevents direct competition, which could create 
additional incentives for innovation and competitive prices and 
service quality.   

Financial:   

Legal requirements: 
* There is a $15-billion limit on total USPS debt; and annual 
increases are limited to $3 billion in USPS obligations, including $2 
billion for capital improvements and $1 billion to defray operating 
expenses. 
* USPS must invest and borrow through the U.S. Treasury or obtain 
Treasury approval to do otherwise.   

Practical constraints: 
* If USPS were to request investing or borrowing outside the Treasury, 
obtaining Treasury's approval may be difficult, because historically 
Treasury has favored having USPS conduct its financing through the 
Treasury.  

Retail facilities:   

Legal requirements: 
* Prohibition on closing small post offices solely for operating at a 
deficit. 
* Statutory process and criteria for post office closings, including 
appellate review by the PRC. 
* Processes for closing, consolidating, and relocating post offices 
further prescribed in USPS regulations.	
* For many years, USPS has been prohibited from using its annual 
appropriations from Congress to consolidate or close small rural or 
other small post offices in the fiscal year covered by the act.	  

Practical constraints: 
* USPS's self-imposed moratorium on closing post offices. 
* Strong opposition to post office closings, consolidations, and 
relocations from the local community, affected members of Congress, 
and others opposed to closing post offices and/or relocating post 
offices away from downtown areas. 
	
Mail-processing facilities:   

Legal requirements: 
* Requirements for closing, consolidating, or relocating post offices 
specified in USPS regulations may be applicable to a mail-processing 
facility that includes a post office.   

Practical constraints: 
* Stakeholder opposition that may include affected workers, local 
communities, mailers, and members of Congress. 
* Lack of funds to finance the up-front costs of consolidations.   

Human capital:   

Legal requirements: 
* The federal pay cap is made applicable to postal pay. 
* Postal compensation and benefits for all officers and employees are 
required to be comparable to those of workers in the private sector. 
* Collective bargaining is required for unionized employees, including 
mediation followed by binding arbitration by a third-party panel when 
the parties are unable to agree. 
* USPS is required to provide a program of consultation with 
management and supervisory associations, and such organizations are 
entitled to participate directly in the planning and development of 
compensation and benefit programs. 
* USPS must establish a grievance process.   

Practical constraints: 
* Adversarial labor-management relations. 
* Long-standing work rules in agreements with USPS's four major unions 
could complicate realignment efforts, such as work rules relating to 
the operational full-/part-time ratio dating from the 1970s. In 1991, 
the allowable full-/part-time ratio changed from 90/10 to 80/20 for 
clerks and 88/12 for carriers. In 1984, USPS agreed to double-time 
above 60 hours per week and other overtime procedures. 
* Another area where the work rules may vary by union contract 
involves no-layoff provisions. In the most recent contract with USPS's 
largest union, the no-layoff provision was modified to include all of 
its workers hired after November 2000. 
* A huge number and backlog of grievances is costly and contributes to 
workplace tension.   

Rate-setting and regulatory structure:   

Legal requirements: 
* Postal rates and fees shall provide sufficient revenues so that 
USPS's total estimated income and appropriations will equal as nearly 
as practicable its total estimated costs—a requirement interpreted to 
mean that USPS should "break-even" over time. On the basis of law, 
regulation, and precedent, USPS costs include operating costs, 
depreciation, a portion of prior years' losses, and a contingency. 
Each mail category must cover its costs, a requirement that has been 
applied at the subclass level. This cost-based system is referred to 
as a cost-of-service regulation. 
* An independent body, the PRC, must review USPS proposals to change 
domestic postal rates and fees. 
* The PRC is required to provide due process to interested parties and 
has up to 10 months to issue a recommended decision. Rate cases follow 
specific procedures set by statute and PRC regulations. Rate case 
precedents also help define what data must be submitted. 
* USPS's governors may approve, allow under protest, reject, or modify 
PRC's decision. Modification can only be made by a unanimous vote when 
the governors find it is in accord with the record and applicable laws 
and if recommended rates are not consistent with the break-even 
provision listed above. 
* In recommending rates, the PRC must apply nine statutory criteria, 
such as the establishment and maintenance of a fair and equitable 
schedule. Rate case precedents also help guide the establishment of 
rates, including their markups over attributable costs. 
* Reduced rates must be provided for nonprofit groups, classroom mail 
and library mail; free mail must be provided to the blind, and 
overseas voting materials must be delivered free. 
* Except as authorized by law (e.g., see above bullet), USPS shall not 
make undue or unreasonable discrimination or preference among users—a 
provision referred to as the nondiscrimination clause. 
* The PRC must review proposed changes to the mail classification 
system and issue a recommended decision. This authority, which covers 
proposed new domestic postal products and services to be offered on a 
permanent or experimental basis, is further detailed in PRC 
regulations. 
* The PRC is authorized to consider rate complaints and issue a 
recommended decision. 
* USPS must report annually the costs, revenues, and volumes of 
international mail to the PRC, which then issues a report to 
Congress.   

Practical constraints: 
* In practice, postal revenues have not covered costs, resulting in 
the accumulation of prior years' losses and debt that is approaching 
the statutory limit. 
* Persistent disagreements between USPS and the PRC on pricing matters 
and the quality of data used for rate-setting purposes. 
* USPS can shield proprietary information from disclosure, the PRC has 
no subpoena power, and the PRC cannot compel USPS to conduct special 
studies for rate-setting purposes.  

Sources: U.S. Code, Code of Federal Regulations, and GAO analysis.   

[End of table]   

Limited Progress Made to Increase Productivity:   

USPS has had long-standing difficulty in its efforts to increase 
postal productivity. In general, USPS has high fixed costs, and it has 
been difficult for it to cut costs quickly when expected mail volumes 
and revenues fail to materialize. To achieve real savings and 
productivity improvement, USPS would need to decrease unneeded 
capacity resulting from efficiency gains and increase capacity only 
where such an increase is needed. USPS data show that its productivity 
has increased only 11.5 percent over the past 3 decades (see figure 
6), and these limited productivity gains have resulted in postal costs 
and rates being higher than they otherwise would have been. Postal 
productivity decreased 0.7 percent from fiscal years 1990 to 1999, 
despite billions of dollars invested in automation and information 
technology over that period. USPS made renewed progress in improving 
productivity in fiscal years 2000 and 2001, a period when its 
productivity rose 3.6 percent. However, these gains may be difficult 
to sustain. USPS has budgeted for a productivity increase of 1.1 
percent in fiscal year 2002, but its productivity decreased at a 1.1-
percent annualized rate in the first quarter, primarily due to mail 
volume declines following recent terrorist incidents.   

Figure 6: Cumulative Postal Productivity Growth from Fiscal Years 1971 
through 2001:   

[Refer to PDF for image: line graph]   

The graph depicts the cumulative percentage change of Postal 
Productivity Growth from Fiscal Years 1971 through 2001. At the 
conclusion of fiscal year 2001, growth was up 11.5% from fiscal year 
1971.   

Source: USPS data.   

[End of figure]   

Stakeholders have offered a variety of explanations for why USPS 
productivity has not increased more substantially over the years. 
These explanations include factors such as poor management; continuing 
waste and inefficiency; legal requirements and practical constraints; 
increasing compensation costs; adversarial labor-management relations; 
and insufficient incentives for USPS, a government entity with a break-
even requirement, a statutory monopoly, and cost-of-service 
regulation, to improve its financial performance. Although it is 
difficult to estimate the effects, if any, of these factors, it is 
worth noting that over the past decade, USPS has not been able to take 
full advantage of its capital investments through increases in labor 
productivity. Numerous reports, including some by us, have noted 
inefficiencies in the postal system and difficulties that USPS has had 
in realizing opportunities for savings. For example, in 1998, we 
reported that USPS had achieved savings in carrier work hours through 
automated rather than manual sorting of letters into the exact order 
that carriers deliver them, but these savings had fallen short of USPS 
goals, in part due to labor-management issues.[Footnote 17]   

A related problem has been USPS's difficulty in tracking specific 
costs and the results of various cost-saving initiatives. In March 
2000, USPS highlighted its intention to save $1 billion from specific 
productivity and cost-saving initiatives in operations, 
administration, purchasing, and transportation. Although USPS has 
estimated that it saved $900 million in fiscal year 2001 from 
increasing its overall productivity, it did not report—and may not be 
able to produce reliable data on—specific savings from its 
productivity initiatives. USPS plans to implement an activity-based 
costing system in mail-processing facilities in the near future that 
would track specific costs that could be compared across different 
locations. Such information would help USPS managers plan, prioritize, 
and track the results of future cost-saving efforts.   

Improvements to Postal Operations Are Urgently Needed:   

Although efforts may be limited by legal requirements and practical 
constraints, USPS can do more in the short term under its current 
authority to drive out costs and thereby increase productivity. In the 
longer term, more fundamental structural changes will be needed before 
USPS can achieve significant cost savings. In addition to operational 
efficiency, measures to enhance mail safety and security also need to 
be considered. Key areas where USPS is moving to take action under 
current law include the following:   

* Maximize efficiency of current mail-processing facilities: 
Productivity varies greatly across mail-processing facilities. 
Implementing best practices throughout the organization would give 
USPS the opportunity to increase the productivity of its lower 
performing plants. Consistent with this idea, a recent review 
identified instances of wide variation in equipment utilization and 
inconsistent execution of strategies for effective utilization. 
[Footnote 18] The 2001 Mailing Industry Task Force recommended that 
the mailing industry and USPS collaborate to standardize mail-
processing functions to increase efficiency.[Footnote 19]   

* Consolidate mail-processing facilities: Although USPS reports that 
it has recently studied whether to consolidate postal facilities, it 
has not released the results of the study, and no consolidations have 
yet been made. USPS could develop a plan that outlines its current and 
expected future needs for mail-processing facilities and specify 
changes to address these needs.   

* Continue automation: USPS recognizes that it is further along in 
automating the processing of letter mail than it is in automating flat 
mail, such as periodicals and catalogs, and it is currently deploying 
more efficient flat sorting machines. Its vision for mail processing 
and delivery is to replace its current process of multiple bundles for 
letters and flats with a single bundle for each delivery point. USPS 
has developed a plan for achieving much of its vision that calls for 
implementing new and enhanced automation over much of the next 
decade.   

* Deploy the information platform: USPS is in the process of deploying 
an information platform to provide reliable, real-time information on 
mailings; data on processing and delivery problems; and improved 
workforce management. However, completion of the platform is expected 
to take years, and mailers have urged USPS to make more rapid 
progress.   

* Explore mail redesign: USPS is exploring redesign of the mail 
classification system and rate structure, also called "mail redesign," 
to change the postal pricing system to provide additional incentives 
for efficiency. The concept is to create more homogeneous groups of 
mail and increase emphasis on cost-efficient preparation.   

* Work with the unions to improve staffing options: Better alignment 
of the workforce with operational needs, such as changes to work rules 
and job assignments, may be possible within the scope of existing 
national contracts. For example, one field office has reported working 
with local unions to amend the work rules to allow greater flexibility 
in addressing staffing issues at specific locations.   

* Continue to work with mailer groups and other stakeholders to 
identify additional opportunities for cutting costs and improving 
productivity: USPS has been working closely with mailer groups and 
other stakeholders to identify additional opportunities for cutting 
costs and improving productivity. That continuing work has yielded 
many recommendations and improvements. For example, a recent review 
made recommendations for both USPS and flats mailers, such as adoption 
of more efficient USPS processes and improved packaging to reduce 
costly bundle breakage. In addition, USPS recently reported that it 
plans to work collaboratively with the PRC and interested customers to 
explore various alternatives relating to negotiated service agreements—
in which certain mailers would perform additional worksharing 
activities and receive larger discounts.   

* Improve workforce planning: USPS could broaden its workforce 
planning from the current focus on the next 3 years to a longer 
horizon. Long-term planning could address changes in automation; mail 
volume and mix; and security and safety issues, among other things. 
Such planning could review needs related to the appropriate number, 
skills, deployment, and part-time or full-time status of employees. 
Long-term planning could also address succession and continuity issues 
as most USPS managers and half of the workforce reaches retirement 
eligibility over the next decade.   

* Examine alternatives for providing retail services: USPS is 
exploring ways to expand the use of various alternatives to sell 
stamps and mail packages. About 80 percent of customer visits to post 
offices are for the purpose of mailing letters, purchasing stamps, or 
a combination of the two activities. According to USPS, it costs 22 
cents per $1 of revenue to sell stamps at a post office counter, 
compared with 14 cents from vending machines; it costs 1.3 cents 
through outlets such as grocery stores and ATMs. USPS has also tested 
a self-service machine: customers weigh parcels, purchase postage, pay 
by credit card, and place the parcels in a secure container for 
delivery. Additional opportunities may exist for USPS to decrease 
costs and provide enhanced service by partnering with and using other 
organizations' facilities. Likewise, USPS may also be able to generate 
revenue by partnering with other organizations that could use 
available space in postal facilities to provide compatible services.   

* Review access to postal services: Another area for potential savings 
relates to the accessibility of receptacles that customers use to send 
and receive mail. USPS has options for savings by altering the mix of 
customer receptacles used to receive mail (e.g., cluster boxes and/or 
curbside mailboxes versus mailboxes attached to residences). In 
addition, after the incidents of anthrax in the mail, there has been 
much discussion regarding whether USPS should enhance safety by 
reducing the number of street side collection boxes and/or changing 
their design to provide a narrower slot for the mail.   

USPS Needs to Reassess Structural Issues and Take Action:   

USPS can make some improvements within the current structure, but 
these improvements will not be enough for long-term sustainability. 
Less than a year after we placed USPS's transformation efforts and 
long-term outlook on our High-Risk list, USPS's financial situation 
has deteriorated, while structural issues and limitations remain 
unresolved. USPS's ability to fulfill its mission by providing the 
current level of universal postal service at reasonable rates on a 
self-supporting basis is at increasing risk.   

USPS's 30-year-old system of postal laws is increasingly problematic 
for USPS and its competitors and is overdue for change to ensure that 
USPS's basic business model is viable. Three key themes to address in 
comprehensive transformation include reassessing (1) USPS's statutory 
framework, beginning with its mission and role in the 21st century; 
(2) insufficient incentives for USPS, a governmental entity with a 
break-even mandate, a statutory monopoly on letter mail, and cost-of-
service regulation; and (3) the legal requirements and practical 
constraints that limit transformation efforts, including those 
relating to USPS's infrastructure and workforce. Other structural 
issues, such as USPS's governance structure, have been raised—that is, 
what type of governing board is appropriate for USPS, given the 
complex mission and role of this $70 billion entity.   

Postal Service's Mission and Role:   

The starting point for postal transformation is a reassessment of 
USPS's mission and role. Vast changes in the communications and 
delivery sectors over the past 30 years—which are continuing at a 
rapid pace—as well as USPS's growing financial difficulties, provide 
an impetus for reconsidering what universal postal service will be 
needed for the 21' century Key issues include what postal services 
should be provided on a universal basis to meet customer needs, how 
these services should be provided, and how they should be financed—by 
ratepayers or taxpayers. A related issue is what quality of postal 
service should be maintained, such as the frequency and speed of mail 
delivery and the accessibility and scope of retail postal services, as 
well as whether certain aspects of universal postal service should be 
allowed to vary in urban and rural areas. Depending on the resolution 
of these fundamental issues, Congress and the stakeholder community 
can better approach what legal structure would be best suited to 
enable USPS to fulfill its mission in the 21' century, including what 
incentives, accountability, and constraints would be appropriate.   

Other issues related to USPS's mission and role include the 
following:   

* Competition: Should USPS be allowed to compete with the private 
sector and, if so, on what terms? Which, if any, of the many federal 
laws, regulations, and taxes that apply to the private sector should 
apply to USPS? If USPS is allowed to compete, should it retain its 
current law enforcement powers and authority to issue regulations 
(e.g., regulations defining the scope of the postal monopoly)? In part 
because of different taxation and legal treatment, some stakeholders 
contend that USPS should limit its activities to providing hard-copy 
delivery services and, when it competes, it should do so on the same 
terms as its competitors. USPS and some other stakeholders counter 
that USPS is at a competitive disadvantage due to its current 
universal postal service mandate and other laws and regulations, and 
that USPS should have increased flexibility.   

* Public/Private provision of postal services: Should core postal 
functions be discharged by a public entity, private companies, or a 
combination of both? For example, should USPS remain a government 
entity or should it be privatized? Should USPS perform some functions 
in partnership with the private sector, allow the private sector to 
perform other functions through "worksharing discounts," or contract 
out some of its functions? USPS gives worksharing discounts that are 
based on its cost avoidance, such as accepting mail that is bar coded 
and/or drop-shipped to the local postal facility, which creates the 
opportunity for the least-cost provider to perform these activities. 
Some postal functions have long been provided by a combination of 
public and private providers, such as mail transportation, processing, 
retail services, and delivery. USPS has long contracted for mail 
transportation and currently has a multibillion-dollar contract with 
FedEx for long-distance transportation of Priority Mail, Express Mail, 
and First-Class Mail. In addition, contract stations provide postal 
retail services, and some transportation contractors deliver mail 
along their routes.   

* Governance: What type of governing board is appropriate given USPS's 
mission and role? How should members be selected, paid, and held 
accountable? What should the role and functions of the governing board 
be, and is its current part-time status appropriate? Is the present 
governance structure best suited to ensuring individuals that are 
qualified to direct a $70 billion entity? Should the framework follow 
recent changes in the private sector to (1) develop better-defined 
criteria for board membership and (2) recognize that various roles on 
the board may require various backgrounds and skills? These questions 
are relevant because USPS is intended to function in a businesslike 
manner.   

* Accountability and transparency: Should USPS be held more directly 
accountable for its performance and, if so, to what extent, to whom, 
and with what mechanisms? Specifically, how should USPS's Board of 
Governors be held accountable? What oversight is needed to protect the 
public interest, including the interest of customers with few or no 
alternatives to the mail? How should the PRC and/or other pertinent 
authorities exercise oversight regarding pricing; competition; and 
antitrust issues, among other areas? What recourse should customers 
and competitors have to lodge complaints? What should be the role of 
Congress and other federal agencies in providing accountability and 
oversight? What information should USPS be required to provide 
Congress and the public on its performance, including in areas such as 
financial performance, productivity, and mail delivery? Transparency 
and accountability are fundamental principles to ensuring public 
confidence in USPS.   

Need to Reassess Legal Framework and Incentives:   

The current legal framework, which was designed to help USPS fulfill 
universal service mandates, does not provide the same types of 
incentives that apply to the private sector. USPS's break-even mandate 
removes the profit motive, and the rate-setting structure allows USPS 
to cover rising costs by increasing rates. The postal monopoly shields 
USPS's core business of letter mail from direct competition, which 
could provide additional incentives for innovation, efficiency, and 
competitive prices and quality of service. As part of their postal 
transformation efforts, a number of foreign countries have made 
changes to their legal frameworks, including reducing the postal 
monopoly, that have increased incentives. Although it is difficult to 
make direct comparisons, their experiences are relevant to 
consideration of structural change in USPS. Specific structural issues 
relating to incentives that need to be addressed include the 
following:   

* The postal monopoly: Should the postal monopoly be narrowed or 
eliminated? Congress created the statutory monopoly on letter mail to 
enable the postal system to fulfill its universal service mandates. 
USPS has further defined its letter mail monopoly through regulations. 
Narrowing or eliminating the monopoly could provide incentives for 
efficiency and innovation for USPS and its competitors and could lead 
to greater choices for consumers. However, such a step could allow 
competition for profitable segments of USPS's market. Some believe 
USPS would have difficulty competing under these circumstances, 
particularly if it was required to continue the current level of 
universal service with 6-day delivery of mail to every address and 
delivery of single-piece First-Class Mail at uniform rates. Others 
disagree, pointing to USPS's advantages in scope and scale. In this 
regard, a number of foreign countries have narrowed their postal 
monopolies in recent years and further steps in this direction are 
being considered.   

* Break-even mandate: Can USPS remain self-supporting under its 
mandate to break even over time? If not, should USPS have a for-profit 
business model? USPS's break-even mandate was established to foster 
reasonable rates. Removal of the break-even mandate could create a 
long-term financial incentive for cost savings that also could be 
passed along to ratepayers. However, removing the break-even mandate 
could provide an incentive for reducing the quality and scope of some 
costly services. For this reason, some other countries whose postal 
administrations operate on a for-profit basis have imposed specific 
minimum requirements for universal postal service and added regulatory 
oversight of the quality of postal service.  

* Rate-setting structure: Should the current rate-setting process be 
retained, modified, or replaced with a different system? Are changes 
to the current rate-setting structure needed to provide sufficient 
funds for USPS's operating and capital needs and to repay debt? Should 
USPS rate setting be subject to prior review? What should be the 
respective authorities of USPS and any independent regulator, 
including the authority to compel provision of information and final 
decision-making authority over what rates are set? Should legal 
requirements that affect rates—including specific cost-coverage 
requirements, the nondiscrimination clause, and preferred rates for 
certain groups—be retained, changed, or eliminated? The rate-setting 
process was created to ensure prior independent review of domestic 
postal rates and fees that includes due process for all interested 
parties in hearings on the record. This process has led to proceedings 
that are often lengthy and adversarial. Although the current system 
was designed to enable USPS to break even over time, in practice USPS 
has accumulated significant prior years' losses and debt. Under cost-
based rate regulation, limited incentives exist for USPS to control 
costs because postal rates must be raised to cover expected costs. 
When cost savings are achieved, these are passed along to customers in 
the next rate case. Consensus on these issues has been difficult to 
achieve, but improvements in the rate-setting area are a fundamental 
component of a comprehensive transformation.   

Transformation will also require consideration of legal requirements 
and practical constraints relating to USPS's physical infrastructure 
of post offices and mail-processing facilities and to USPS's 
workforce.   

Transformation: Infrastructure Issues:   

Currently, changes to USPS's retail infrastructure are limited by both 
legal requirements and practical constraints. USPS is required to 
render postal services to all communities, including providing regular 
postal services to rural areas, communities, and small towns where 
post offices are not self-sustaining. USPS must follow specific 
criteria and procedures set forth in law or regulations for closing or 
consolidating post offices. For example, it cannot close a small post 
office solely because it is operating at a deficit. USPS also has a 
self-imposed moratorium on closing post offices. As a practical 
matter, members of Congress and other stakeholders have often 
intervened in the past when USPS has attempted to close post offices 
or consolidate postal facilities. Proposed post office closures have 
provoked intense opposition because local post offices (1) have long 
been a critical means of obtaining ready access to postal retail 
services, (2) are a part of American culture and business, and (3) are 
viewed as critical to the viability of certain towns and/or central 
business districts. Similarly, changes to USPS's mail-processing 
infrastructure have been difficult to implement. Although there are no 
legal requirements relating directly to closing or consolidating mail-
processing facilities,[Footnote 20] as a practical matter, such 
efforts have been opposed because of the potential effects on jobs and 
mail delivery service in local communities, their proximity to 
facilities of large mailers, and congressional interest in the 
location of mail-processing facilities.   

Nevertheless, the issue of how USPS can best provide retail services 
and process the mail as well as ensure the safety and security of the 
mail and its employees in the 21st century needs to be addressed. 
Congress, USPS, and stakeholders need to consider what access to 
postal retail services is needed, how such access can be provided in 
an affordable manner, and whether improvements can be made to optimize 
the postal infrastructure to support changes in operations while also 
supporting customer convenience and access. For example, USPS could 
provide more convenient retail services at more locations, such as 
ATMs or at grocery stores, rather than in traditional brick-and-mortar 
post offices. In addition, recent terrorist incidents have raised new 
safety and security issues related both to postal employees and 
customers that need to be addressed. As discussed later in this 
report, a process similar to the one used for military base closing 
may be useful for addressing sensitive postal facility closure and 
consolidation issues.   

Transformation: Human Capital Issues:   

In addition to limitations on changes to its infrastructure, changes 
to USPS's human capital, or workforce, also face limitations. USPS is 
required by law to maintain compensation and benefits for all of its 
employees on a standard comparable to the compensation and benefits 
paid for comparable levels of work in the private sector. Further, 
when contract disputes cannot be settled between postal labor and 
management, they must be settled by a third party through binding 
arbitration. As a practical matter, postal labor and management have 
had long-standing adversarial relations.   

To improve organization performance, USPS's workforce; performance 
management systems, including compensation and benefits; and work 
rules should be aligned to support organizational mission and goals 
while appropriately protecting workers' rights. As part of its 
comprehensive transformation, USPS needs to address several human 
capital challenges that affect USPS's ability to meet its mission and 
goals. These include (1) assessing workforce needs to plan for the 
appropriate number, skills, and deployment of employees and whether 
USPS has sufficient authority and flexibility to meet changing needs; 
(2) maintaining the continuity of service as many experienced managers 
and workers retire and leave the Service; and (3) improving labor-
management relations to resolve issues such as developing performance 
management systems, including pay and other meaningful incentives, to 
better link performance of all employees with USPS's business goals.   

To successfully transform itself into a financially viable postal 
organization, USPS will need to develop, in collaboration with its 
labor unions and management associations, a strategy to effectively 
align its workforce with its business goals and strategies. For 
example, agreement on business goals between USPS and its labor unions 
and management associations may facilitate decisions on introducing 
additional technologies, closing processing facilities and/or 
consolidating its infrastructure of retail organizations, and making 
appropriate changes in work rules. Also, USPS officials are 
anticipating that a large number of its current workers could retire 
by 2010. Fortunately, the wave of impending retirements creates both 
challenges and opportunities for USPS to realign its workforce by 
hiring workers with skills that are needed in the future and deploying 
its workers at new or different locations while limiting layoffs of 
current employees.   

USPS's current workforce planning process is essentially designed to 
address short-term needs. USPS develops operationally oriented plans 
that project the skills and number of workers that it will need for 
the next 3 years assuming that with some exceptions, USPS will 
continue to operate as it does now USPS officials use their plans to 
identify surpluses or gaps between needs and available staff in 
certain facilities for each year—with the understanding that second- 
and third-year projections of workforce needs may be less reliable 
given USPS's constantly changing business environment.   

Workforce planning for a transformation differs from operational 
workforce planning in several ways. First, workforce planning for a 
transformation is more long term, primarily because organizations that 
are as large and complex as USPS generally take several years to 
implement transformation efforts. Second, a long-term workforce 
planning process can help USPS anticipate workforce trends and 
consider alternative solutions, such as recruiting employees from 
nontraditional sources. Such a planning process could improve USPS's 
flexibility in meeting its workforce needs and improving employee 
relations. Third, long-term planning focuses on broad strategies for 
meeting workforce needs, with the idea that as the transformation 
progresses, the organization can develop more specific projections of 
near-term needs and detailed plans to meet such needs that are 
consistent with the organization's broad workforce strategy.   

In planning for future leaders, USPS is challenged to ensure that it 
has a sufficient number of managers with the competencies—which are 
commonly described as knowledge, skills, abilities, and behavior—to 
lead its workforce. USPS has implemented programs for selecting 
potential successors for departing executives and training programs to 
prepare these individuals to be effective managers. However, the 
programs may not be adequately addressing USPS's long-term leadership 
needs. According to USPS's Senior Vice President for Human Resources, 
some USPS managers who otherwise may have been selected to replace 
retiring officials are themselves leaving the Service. The official 
estimated that as of November 2001, USPS had qualified staff to 
replace about 75 percent of the current leadership positions, compared 
with its goal of about 85 percent. Also, many of the people whom USPS 
has identified as potential successors are approaching retirement 
eligibility themselves. This suggests that relying on replacements who 
are nearing retirement would be only a temporary solution to the 
succession problem.   

Transformation also needs to address the continuing challenge of 
longstanding disagreements between USPS management and its unions. 
These differences have extended to performance management issues 
involving compensation, incentives, and benefits as well as deployment 
of the workforce. Performance management systems can include pay 
systems and incentive programs that link employees' performance to 
specific results and desired outcomes. These tools help focus 
managers' and employees' efforts toward achieving organizational goals 
and can be critical to an organization's overall success. Thus, it is 
important that a plan to transform USPS's mission, goals, and 
workforce discuss how USPS intends to align managers' and employees' 
efforts with its mission and goals. The plan should also discuss areas 
where additional flexibility is needed to make necessary workforce 
realignments, such as providing early retirement for selected 
employees and determining whether contract or legislative changes may 
be needed.  

USPS's PMG has stated that USPS is entering a new era of 
organizational challenges and that aligning compensation-related 
systems with USPS's goals is key to success in this new era. However, 
it may be difficult for USPS to expand its performance management 
system for managers and supervisors to the majority of its employees. 
Most postal employees are craft employees who transport, process, and 
deliver mail and who are represented by unions. Postal managers and 
unions have repeatedly disagreed over whether to implement some form 
of performance-based compensation and incentive system for craft 
workers.   

Another area of disagreement involves the appropriate level of 
compensation and benefits for postal employees. USPS and its major 
labor unions have often disagreed with how the comparability standard 
established by law to pay compensation and benefits comparable to 
those in the private sector should be applied. For example, the 
Supplemental Opinion for the 2000 National Agreement between USPS and 
the American Postal Workers Union (APWU) noted the following:   

"The evidence relating to private sector comparability is both 
voluminous and contradictory....When all is said and done, however, 
what stands out clearly, divorced from all the competing multivariate 
regression analyses and job content analyses, is that Postal Service 
jobs are highly sought after, and once obtained, are held onto. 
Applicant queues are long, and the quit rate is all but non-
existent...These data, which show how much Postal Service jobs are 
valued, both by those who want them and by those who have them, 
provide powerful support for the Postal Service argument that the 
Postal Service provides a wage and benefit package to APWU represented 
employees that is better than that available for comparable work in 
the private sector."[Footnote 21]   

Compensation and benefit disputes have often been resolved in binding 
arbitration, and union and postal officials have different views on 
third-party binding arbitration. Union officials believe that because 
they are not allowed to strike, they need third-party binding 
arbitration to resolve contested labor-management issues. Postal 
officials believe that the binding arbitration mechanism presents a 
number of challenges, because a third party is not accountable for 
finding revenues or cost savings to fund increases in wages or 
benefits.   

For transformation to be successful, it is vital for USPS and its 
unions to share a common vision for the future and a mutual 
responsibility for finding solutions to USPS's financial and workforce 
problems. USPS's transformation process can provide an opportunity for 
postal labor and management to move beyond past problems and redefine 
a future in which they can mutually address the financial and 
workforce challenges of transforming USPS.   

Process of Achieving Postal Transformation:   

Strong and proactive leadership by USPS's Board of Governors and its 
executives will be essential to transforming this organization so it 
can fulfill its mission and remain financially viable. As a first 
step, USPS's leaders need to provide a vision of USPS's future in its 
transformation plan and actively engage with its employees and the 
divided community of postal stakeholders to achieve the necessary 
consensus to move forward. In addition, it is urgent for USPS to take 
aggressive action to address its financial situation. In the short 
term, one possibility would be to determine what rate increases would 
be needed to generate sufficient revenue to cover costs, address unmet 
capital needs, and reduce debt. Further, USPS should aggressively 
continue efforts to cut costs and improve productivity in the short 
term as well as identify more comprehensive efforts that would be part 
of its structural transformation. In the end, congressional action 
will be required for a successful postal transformation.
The process of transformation should include these three steps:   

1. Determine what can be accomplished within current law and what the 
constraints are to making progress.   

2. Determine what interim legislative changes may be needed 
immediately to deal with USPS's financial problems, and whether these 
interim changes are compatible with desired long-term changes.   

3. Determine what comprehensive changes are needed and work with 
Congress and postal stakeholders to enact these changes into law.   

To implement these steps, sustained and aggressive leadership is 
needed to overcome the organization's natural resistance to change. 
USPS's Board of Governors, its managers, leaders of employee unions 
and management associations, and customers have the opportunity to 
work together for change. USPS strategies for change need to be 
aligned with USPS's mission and role; support its financial viability; 
and deal with key areas, such as productivity, infrastructure, 
performance management and workforce issues, and employee support. 
Active communication throughout the organization and with Congress, 
stakeholders, and the public is essential to inform and educate people 
about the need for change, potential benefits for those involved, and 
how their interests will be protected. Involving employees in 
developing and implementing these steps toward transformation could 
foster their acceptance and instill a sense of ownership in the new 
organization.   

In addition, key public policy, structural, and financial issues need 
to be resolved. Over the past 7 years, Congress has held numerous 
hearings on postal reform issues and considered numerous proposals for 
changing the nation's postal laws, but none of the proposed bills have 
been enacted. To date, a consensus on legislative action has been 
difficult to achieve among the divided stakeholder community. Further, 
although comprehensive postal reform proposals have been offered that 
address many of the key public policy, structural, and financial 
issues we have discussed in this report, these proposals did not fully 
address legal requirements and practical constraints in the areas of 
USPS's infrastructure and workforce. Congress needs to reassess USPS's 
legal framework and take the necessary action to change the nation's 
postal laws in order for USPS to be financially viable in the 21st 
century.   

One of the areas where consensus has been difficult to achieve relates 
to the issue of how much and what type of infrastructure USPS needs to 
get the job done. Recognizing the difficulty and sensitivity of 
addressing this issue, particularly when it involves closing and 
consolidating postal facilities, Congress could establish a process 
similar to that used for closing military bases. Under this process, 
Congress could affirm a proposed package of closures and 
consolidations with an up-or-down vote. Such a process could be 
analogous to the military base-closure process that has been used in 
the past. Military base-closing legislation enacted in 1988 and 1990, 
including the Defense Base Closure and Realignment Act of 1990 (P.L. 
101-510), was enacted to overcome public concern about the economic 
effects of closures on communities and the perceived lack of 
impartiality of the decision-making process. This legislation provided 
the basis for four rounds of base realignments and closures between 
1988 and 1995, the closure of 97 out of 495 major domestic military 
installations, many smaller base closings, and the realignment of 
other facilities.   

USPS's Response to Our Past Recommendations:   

Transparency, along with accurate and timely financial reports, is 
vital to ensure public confidence. In April 2001, we recommended that 
USPS develop a transformation plan and institute quarterly financial 
reporting to improve transparency. USPS agreed with these 
recommendations and is working to implement them.  

USPS Transformation Plan:   

In response to our recommendation that USPS develop a transformation 
plan, last fall USPS published a draft outline of its forthcoming 
transformation plan; called for public comments in the Federal 
Register; and is working to finalize this plan by March 31, 2002. 
Given the urgency of USPS's financial situation and the lengthy time 
it will take to implement fundamental structural changes, the 
stakeholder community is looking to USPS for leadership in presenting 
its vision for the future in its transformation plan. At this 
juncture, USPS's Board of Governors and postal management have the 
opportunity to make the case for a comprehensive transformation in 
USPS's forthcoming transformation plan as well as by other means, and 
to provide a vision for its future, followed by options and strategies 
for change. USPS also could suggest ways to achieve the necessary 
consensus for change among Congress, stakeholders, and the public.   

Quarterly Financial Reporting and Transparency:   

During fiscal year 2001, USPS made numerous revisions to its financial 
outlook for the fiscal year with little or no public explanation, 
creating confusion and raising concerns about its ability to generate 
timely and reliable financial information. It was unclear to many 
stakeholders why USPS's financial outlook changed from a $480 million 
deficit in its fiscal year 2001 budget approved in November 2000 to a 
projected $2 billion to $3 billion deficit in February 2001. We 
reported that greater transparency is needed regarding USPS's 
financial and operating results and projections. To this end, we 
recommended that USPS implement quarterly financial reporting; and in 
response, USPS published on its Web site a quarterly financial report 
for the third quarter of fiscal year 2001. This report was a good 
starting point for providing information to Congress and the public, 
and we expect it to improve over time. However, opportunities for 
improving the timeliness and accessibility of USPS financial data 
remain.   

* Although USPS issued its annual financial statement for fiscal year 
2001 in December 2001, as of mid-February 2002, USPS had not published 
quarterly financial reports for the fourth quarter of fiscal year 2001 
or the first quarter of fiscal year 2002.[Footnote 22]   

* From October 2001 to mid-January 2002, USPS had not publicly 
released its financial and operating statements for the last 
accounting period of fiscal year 2001 and the first three accounting 
periods of fiscal year 2002 until January 2002. These reports contain 
preliminary financial results and other information such as workforce-
related information. These reports have not been available to the 
public on USPS's Web site; however, USPS's Chief Financial Officer 
told us that he planned on posting future accounting period reports to 
USPS's Web site.   

During the fall of 2001, when USPS experienced sharp declines in its 
mail volumes and revenues and requested additional appropriations from 
Congress, readily available and detailed information on USPS's 
changing financial situation was scarce. More timely availability of 
monthly and quarterly reports, even if they contain preliminary data 
subject to revision, would be useful to improve transparency for 
congressional oversight, the stakeholder community, and the public.   

Conclusions:   

USPS's basic business model is not sustainable. USPS finances are 
deteriorating as rates, costs, and debt spiral upward; and its 
liabilities exceed its assets and are increasing. USPS's mail volume 
is starting to decline, and much larger declines may be in the offing 
as mailers shift to electronic and other delivery alternatives. 
Further, USPS has long-standing and continuing difficulties with 
cutting costs and achieving and sustaining productivity gains. USPS is 
working to make progress in these areas, but it is limited by legal 
requirements and practical constraints.   

Tinkering with the existing system will be insufficient to produce a 
comprehensive transformation that will enable USPS to fulfill its 
mission in the 21st century. If structural issues are not addressed, 
we believe a crisis will develop to the point when options for action 
will be more limited and costly. As the incidents of anthrax in the 
mail indicated, disruptions in mail delivery service can have far-
reaching consequences for the government, households, businesses, and 
the general economy. On the positive side, a window of opportunity is 
available for a comprehensive transformation. For example, the wave of 
impending retirements could enable USPS to restructure its 
infrastructure and workforce without large-scale layoffs.   

Some progress is possible within the current structure and is urgently 
needed. For example, USPS can take additional actions to cut costs and 
improve productivity under its existing authority and identify 
incremental legislative changes that are needed to help address its 
financial situation. However, a comprehensive postal transformation 
will be required to fully address USPS's financial viability and the 
statutory framework under which USPS operates. This framework includes 
USPS's mission and role in the 21' century, the postal monopoly, the 
break-even mandate, the statutory monopoly on letter mail, and the 
cost-of-service rate-setting process. In addition, transformation 
efforts have been limited by legal requirements and practical 
constraints relating to closing and consolidating postal facilities 
and realigning the postal workforce.   

Although various legislative postal reform proposals have been 
developed over the last several years that address many key 
transformation issues, they did not directly address such issues as 
USPS's infrastructure and workforce. Congress has not enacted any of 
these proposals, as consensus among the stakeholders has been 
difficult to achieve. It is clear to us that strong leadership from 
USPS will be necessary to help convince Congress and postal 
stakeholders that change is needed. Further, USPS's forthcoming 
transformation plan could provide an opportunity for USPS to explain 
to Congress and postal stakeholders the need for change, the actions 
USPS plans to take under its existing authority, and the types of 
legislative changes and support it believes are necessary to improve 
its financial viability and achieve a successful transformation. In 
addition, USPS can further improve the transparency of its financial 
information by making it available in a more timely and user-friendly 
manner.   

Congress has a number of options for how it could address postal 
reform and transformation. It could use the traditional hearings 
process to discuss the need for and types of changes necessary and 
enact incremental legislative changes aimed at helping USPS deal with 
its financial situation. It could also establish a mechanism similar 
to the military base-closure process that has been used in the past to 
consider issues, such as closure or consolidation of some postal 
facilities. In addition, a commission could be established that could 
prepare a proposal for addressing unresolved transformation issues. 
Such issues could include USPS's mission and role and break-even 
mandate, the postal monopoly, public/private provision of postal 
services, competition, USPS governance and accountability, 
infrastructure, workforce, and debt.   

Matter for Congressional Consideration:   

Regardless of the process Congress chooses to deal with postal reform, 
we believe that USPS's worsening financial situation and outlook 
intensify the need for Congress to act on meaningful postal reform and 
transformation legislation. Accordingly, we suggest that Congress 
consider and promptly act on incremental legislative changes that 
could help USPS deal with its financial situation soon after it 
receives USPS's transformation plan. In addition, comprehensive 
legislative changes will be needed to address key unresolved 
transformation issues. Congress could consider how best to address 
such issues, such as infrastructure and workforce issues that may 
require input from a variety of stakeholders and will involve some 
shared sacrifice. One option may be to create a commission to address 
the unresolved issues and develop a comprehensive proposal for 
consideration by Congress.   

Recommendations for Executive Action:   

In view of the severity of USPS's financial situation, we recommend 
that USPS's Board of Governors and the PMG provide proactive 
leadership for transformation by informing Congress and the public of 
the need for change in its transformation plan and by other means and 
by working with Congress and stakeholders in developing and 
implementing strategies for action. These strategies should include 
(1) actions that USPS can take within its current authority, (2) 
specific congressional actions that would enable USPS to take a number 
of incremental steps to address its growing financial and operational 
challenges, and (3) a process to address a range of comprehensive 
legislative reforms that will be needed to address key unresolved 
transformation issues. In addition, we recommend that USPS improve the 
transparency of its financial data by providing monthly and quarterly 
financial reports in a user-friendly format on its Web site in a more 
timely manner.   

Agency Comments and Our Evaluation:   

USPS provided comments on a draft of this report in a letter from the 
PMG dated February 20, 2002. These comments are summarized below and 
reproduced in appendix H. In commenting on a draft of our report, the 
PMG stated that the Service realizes the challenges it faces and is 
fully committed to meeting them. He said that USPS has begun work on a 
comprehensive transformation plan, which is due to be completed by the 
end of March 2002. Further, he agreed with our recommendations and 
stated that USPS plans to inform Congress and the public of the need 
for change in its transformation plan and by other means. In addition, 
he stated that USPS intends to work with Congress and all stakeholders 
in developing and implementing strategies for action. He also agreed 
with our recommendation to improve the transparency of USPS's 
financial data. He said that USPS is already providing financial 
reports on its Web site in a more timely and user-friendly fashion.   

The PMG also commented that USPS has met the challenge of increasing 
its productivity despite significant investments in improving the 
quality of customer service, which its productivity measure gives it 
no credit for, and engaging in significant worksharing programs that 
transfer prime opportunities for productivity gains to the mailers. He 
also noted that USPS continues to take issue with comparisons between 
USPS and economywide productivity measures.   

As we stated in our report, although USPS has made recent productivity 
gains, it has had difficulty increasing and sustaining long-term 
productivity growth. In fiscal years 2000 and 2001, USPS's 
productivity rose 3.6 percent, but its productivity increased only 
11.5 percent over the past 3 decades. Further, postal productivity 
decreased 0.7 percent from fiscal years 1990 to 1999, despite billions 
of dollars invested in automation and information technology over that 
period. To achieve real savings and productivity improvement, USPS 
would need to decrease unneeded capacity resulting from efficiency 
gains and increase capacity only where such an increase is needed.   

In regard to USPS's point that its productivity measure does not 
address quality, we recognize that organizations should have a variety 
of measures to gauge their performance, including quality, timeliness, 
customer satisfaction, and cost and productivity; and that more than 
one measure should be looked at when assessing USPS's overall 
performance. This does not, however, diminish the importance of 
measuring USPS's productivity, which USPS itself has used as a 
performance measure for many years and as one of the factors that has 
been considered in its pay-for-performance program for its executives, 
managers, and supervisors. Similarly, in our view, the fact that USPS 
has engaged in worksharing programs does not diminish the need for and 
importance of USPS's progress in improving the productivity of its 
operations. Finally, neither our draft nor final reports compared 
USPS's productivity with economywide productivity measures. However, 
we note that USPS itself made such a comparison in its 1999 and 2000 
annual reports. In these reports, USPS compared its Total Factor 
Productivity with Multifactor Productivity—-a productivity measure 
used by the Bureau of Labor Statistics for the nonfarm business sector 
of the economy.   

As arranged with your offices, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days after the date of this report. At that time, we will send 
copies of this report to the chairman and ranking minority member of 
the House Committee on Government Reform, chairmen and ranking 
minority members of the House and Senate Committees on Appropriations, 
USPS's postmaster general/chief executive officer, USPS's chief 
financial officer, the chairman of the Postal Rate Commission, and 
other interested parties. We will also make copies available to others 
on request.   

Staff acknowledgments are included in appendix DI If you have any 
questions about this report, please contact me on (202) 512-8387 or at 
ungarb@gao.gov.   

Signed by:   

Bernard L. Ungar: 
Director, Physical Infrastructure Issues:   

[End of section]   

Appendix I: Fiscal Year 2001 Results:   

The U.S. Postal Service's (USPS) net loss of $1.68 billion in fiscal 
year 2001 marked its 6th consecutive year of declining net income and 
its 2nd consecutive year of losses. USPS's financial outlook changed 
repeatedly during fiscal year 2001—from a $480 million deficit in its 
budget approved in November 2000 to a $2 billion to $3 billion deficit 
in February 2001—to successively lower estimates near the end of the 
fiscal year. According to USPS officials, a number of factors listed 
below contributed to a deficit larger than what was included in USPS's 
originally approved budget (see table 6). However, these factors were 
partially offset by costs that were lower than budgeted by USPS, 
partly due to work-hour reductions and cost-saving initiatives later 
in the year.   

* A slowing economy resulted in lower than budgeted volumes and 
revenues.   

* Some postal rate increases were implemented later than expected, 
resulting in less revenues than budgeted by USPS.   

* The diversion of First-Class Mail and, to a lesser extent, Standard 
Mail (primarily advertising), to electronic communications and payment 
alternatives depressed mail volume.   

* Mail volume and revenue declined following the September terrorist 
attacks.   

* New products and services did not generate expected revenues, 
particularly in the area of electronic commerce. (USPS budgeted $104 
million for e-commerce revenues, but actual e-commerce revenues were 
about $2 million.)   

* Expenses increased at twice the rate of revenues (4.2 percent v. 2.0 
percent).   

Table 6: Fiscal Year 2001 Budgeted Versus Actual Financial Results:   

Dollars and mail volumes in millions:   

Area: Revenue; 
Actual: $65,869; 
Budgeted: $67,925; 
Variance of actual from	budgeted: ($2,056); 
Percentage variance: (3.0%); 
Percentage change from same period last year: 2.0%.   

Area: Expense; 
Actual: $67,549; 
Budgeted: $68,405; 
Variance of actual from	budgeted: ($856); 
Percentage variance: (1.3%); 
Percentage change from same period last year: 4.2%.   

Area: Net income; 
Actual: ($1,680); 
Budgeted: ($480); 
Variance of actual from	budgeted: ($1,200); 
Percentage variance: N/A; 
Percentage change from same period last year: N/A.   

Area: Mail volumes; 
Actual: 207,463; 
Budgeted: 207,721; 
Variance of actual from	budgeted: (258); 
Percentage variance: (0.1%); 
Percentage change from same period last year: (0.2%).   

Note 1: N/A indicates that USPS does not calculate these data.  

Note 2: Negative numbers are in parentheses.  

Source: USPS financial and mail volume data.   

[End of table]   

Figures 7 through 9 illustrate USPS's net income, revenue, and mail 
volumes for fiscal year 2001.   

Figure 7: USPS's Net Income for Fiscal Year 2001:   

[Refer to PDF for image: multiple line graph]   

The graph depicts the budgeted and actual net income in millions of 
dollars for fiscal year 2001. At the end if the fiscal year, the 
following figures were depicted: 
Budgeted net income: -$480 million; 
Actual net income: -$1.7 billion.   

Source: USPS financial data.   

[End of figure]   

Figure 8: Fiscal Year 2001 Revenues Compared with Budgeted Levels:   

[Refer to PDF for image: vertical bar graph]   

The graph depicts fiscal year 2001 revenues compared with budgeted 
levels in the following categories in millions of dollars: 
First-class mail; 
Periodicals; 
Package Services; 
Priority Mail; 
Priority Mail and Mailgrams; 
International mail; 
Standard Mail (primarily advertising); 
New initiatives and other revenues; 
Special Services.   

Source: USPS financial data.   

[End of figure]   

Figure 9: Fiscal Year 2001 Mail Volumes Compared with Budgeted 
Levels:   

[Refer to PDF for image: vertical bar graph]   

The graph depicts fiscal year 2001 mail volumes compared with budgeted 
levels in the following categories in millions of pieces: 
First-class mail; 
Periodicals; 
Package Services; 
Priority Mail; 
Priority Mail and Mailgrams; 
International mail; 
Standard Mail (primarily advertising); 
New initiatives and other revenues; 
Special Services.   

Source: USPS data.   

[End of figure]   

Table 7 shows trends in key financial indicators for a 30-year period 
as reported by USPS, such as net income (loss), appropriations for 
public service costs and other operations, outstanding debt, 
accumulated deficits, capital cash outlays, and retirement-related 
costs.   

Table 7: Selected Financial Results, Fiscal Years 1972 through 2001 
(Dollars in millions): 
						
Fiscal year: 1972; 
Net income (loss): ($175); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $504; 
Outstanding debt: $250; 
Accumulated deficit balance: ($175); 
Capital	cash outlays[C]: $331; 
Retirement-related costs[D]: $446.   

Fiscal year: 1973; 
Net income (loss): ($13); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $566; 
Outstanding debt: $250; 
Accumulated deficit balance: ($188); 
Capital	cash outlays[C]: $363; 
Retirement-related costs[D]: $560.   

Fiscal year: 1974; 
Net income (loss): ($439); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $830; 
Outstanding debt: $765; 
Accumulated deficit balance: ($627); 
Capital	cash outlays[C]: $696; 
Retirement-related costs[D]: $700;   

Fiscal year: 1975; 
Net income (loss): ($989); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $613; 
Outstanding debt: $1,783; 
Accumulated deficit balance: ($1,616); 
Capital	cash outlays[C]: $728; 
Retirement-related costs[D]: $752.   

Fiscal year: 1976; 
Net income (loss): ($1,176); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $725; 
Outstanding debt: $3,030; 
Accumulated deficit balance: ($2,791); 
Capital	cash outlays[C]: $673; 
Retirement-related costs[D]: $1,003.   

Fiscal year: 1976 TQ[E]; 
Net income (loss): $15; 
Appropriations: For public service costs[A]: $230; 
Appropriations: Other appropriations[B]: $189; 
Outstanding debt: $3,530; 
Accumulated deficit balance: ($2,776); 
Capital	cash outlays[C]: $122; 
Retirement-related costs[D]: $251.   

Fiscal year: 1977; 
Net income (loss): ($687); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $792; 
Outstanding debt: $2,468; 
Accumulated deficit balance: ($3,464); 
Capital	cash outlays[C]: $419; 
Retirement-related costs[D]: $1,076.   

Fiscal year: 1978; 
Net income (loss): ($380); 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $802; 
Outstanding debt: $2,405; 
Accumulated deficit balance: ($3,843); 
Capital	cash outlays[C]: $336; 
Retirement-related costs[D]: $1,178.   

Fiscal year: 1979; 
Net income (loss): $470; 
Appropriations: For public service costs[A]: $920; 
Appropriations: Other appropriations[B]: $800; 
Outstanding debt: $1,888; 
Accumulated deficit balance: ($3,374); 
Capital	cash outlays[C]: $387; 
Retirement-related costs[D]: $1,405.   

Fiscal year: 1980; 
Net income (loss): ($306); 
Appropriations: For public service costs[A]: $828; 
Appropriations: Other appropriations[B]: $782; 
Outstanding debt: $1,841; 
Accumulated deficit balance: ($3,680); 
Capital	cash outlays[C]: $371; 
Retirement-related costs[D]: $1,457.   

Fiscal year: 1981; 
Net income (loss): ($588); 
Appropriations: For public service costs[A]: $486; 
Appropriations: Other appropriations[B]: $789; 
Outstanding debt: $1,608; 
Accumulated deficit balance: ($4,268); 
Capital	cash outlays[C]: $499; 
Retirement-related costs[D]: $1,539.   

Fiscal year: 1982; 
Net income (loss): $802; 
Appropriations: For public service costs[A]: $12; 
Appropriations: Other appropriations[B]: $695; 
Outstanding debt: $1,536; 
Accumulated deficit balance: ($3,466); 
Capital	cash outlays[C]: $436; 
Retirement-related costs[D]: $1,720.   

Fiscal year: 1983; 
Net income (loss): $616; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $789; 
Outstanding debt: $1,464; 
Accumulated deficit balance: ($2,850); 
Capital	cash outlays[C]: $600; 
Retirement-related costs[D]: $1,864.   

Fiscal year: 1984; 
Net income (loss): $118; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $879; 
Outstanding debt: $1,465; 
Accumulated deficit balance: ($2,732); 
Capital	cash outlays[C]: $860; 
Retirement-related costs[D]: $1,847.   

Fiscal year: 1985; 
Net income (loss): ($251); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $970; 
Outstanding debt: $2,075; 
Accumulated deficit balance: ($2,984); 
Capital	cash outlays[C]: $997; 
Retirement-related costs[D]: $2,260.   

Fiscal year: 1986; 
Net income (loss): $304; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $716; 
Outstanding debt: $3,234; 
Accumulated deficit balance: ($2,679); 
Capital	cash outlays[C]: $1,247;; 
Retirement-related costs[D]: $2,360.   

Fiscal year: 1987; 
Net income (loss): ($223); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $650; 
Outstanding debt: $4,728; 
Accumulated deficit balance: ($2,902); 
Capital	cash outlays[C]: $1,664; 
Retirement-related costs[D]: $3,225.   

Fiscal year: 1988; 
Net income (loss): ($597); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $517; 
Outstanding debt: $5,880; 
Accumulated deficit balance: ($3,499); 
Capital	cash outlays[C]: $1,708; 
Retirement-related costs[D]: $4,186.   

Fiscal year: 1989; 
Net income (loss): $61; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $436; 
Outstanding debt: $6,476; 
Accumulated deficit balance: ($3,438); 
Capital	cash outlays[C]: $1,400; 
Retirement-related costs[D]: $4,474.   

Fiscal year: 1990; 
Net income (loss): ($874); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $453; 
Outstanding debt: $6,971; 
Accumulated deficit balance: ($4,312); 
Capital	cash outlays[C]: $1,858; 
Retirement-related costs[D]: $3,962.   

Fiscal year: 1991; 
Net income (loss): ($1,469); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $562; 
Outstanding debt: $8,440; 
Accumulated deficit balance: ($5,780); 
Capital	cash outlays[C]: $2,321; 
Retirement-related costs[D]: $6,625.   

Fiscal year: 1992; 
Net income (loss): ($536); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $545; 
Outstanding debt: $9,924; 
Accumulated deficit balance: ($6,317); 
Capital	cash outlays[C]: $2,454; 
Retirement-related costs[D]: $5,931.   

Fiscal year: 1993; 
Net income (loss): ($1,765); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $164; 
Outstanding debt: $9,748; 
Accumulated deficit balance: ($8,082); 
Capital	cash outlays[C]: $1,819; 
Retirement-related costs[D]: $7,068.   

Fiscal year: 1994; 
Net income (loss): ($914); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $160; 
Outstanding debt: $8,988; 
Accumulated deficit balance: ($8,995); 
Capital	cash outlays[C]: $1,722; 
Retirement-related costs[D]: $6,616.   

Fiscal year: 1995; 
Net income (loss): $1,770; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $146; 
Outstanding debt: $7,280; 
Accumulated deficit balance: ($7,225); 
Capital	cash outlays[C]: $1,795; 
Retirement-related costs[D]: $6,970.   

Fiscal year: 1996; 
Net income (loss): $1,567; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $122; 
Outstanding debt: $5,919; 
Accumulated deficit balance: ($5,658); 
Capital	cash outlays[C]: $2,336; 
Retirement-related costs[D]: $7,614.   

Fiscal year: 1997; 
Net income (loss): $1,264; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $112; 
Outstanding debt: $5,872; 
Accumulated deficit balance: ($4,394); 
Capital	cash outlays[C]: $3,207; 
Retirement-related costs[D]: $8,003;   

Fiscal year: 1998; 
Net income (loss): $550; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $96; 
Outstanding debt: $6,421; 
Accumulated deficit balance: ($3,844); 
Capital	cash outlays[C]: $3,006; 
Retirement-related costs[D]: $8,279.   

Fiscal year: 1999; 
Net income (loss): $363; 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $100; 
Outstanding debt: $6,917; 
Accumulated deficit balance: ($3,481); 
Capital	cash outlays[C]: $3,788; 
Retirement-related costs[D]: $8,694.   

Fiscal year: 2000; 
Net income (loss): ($199); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $93; 
Outstanding debt: $9,316; 
Accumulated deficit balance: ($3,680); 
Capital	cash outlays[C]: $3,254; 
Retirement-related costs[D]: $9,273.   

Fiscal year: 2001; 
Net income (loss): ($1,680); 
Appropriations: For public service costs[A]: 0; 
Appropriations: Other appropriations[B]: $96; 
Outstanding debt: $11,315; 
Accumulated deficit balance: ($5,360); 
Capital	cash outlays[C]: $2,932; 
Retirement-related costs[D]: $9,743;   

Note: Negative numbers are in parentheses.   

[A] The Postal Reorganization Act provides an authorization for 
appropriations as reimbursement to USPS for public service costs 
incurred by it in providing a maximum degree of effective and regular 
postal service nationwide, in communities where post offices may not 
be deemed self-sustaining. See 39 U.S.C. § 2401(b).   

[B] Appropriations during this period were principally for revenue 
forgone for free and reduced rate mail. These figures represent 
appropriations that were recorded in USPS's operating statements.   

[C] Capital cash outlays consist of the purchase of property and 
equipment, net of the proceeds from the sale of property and 
equipment.   

[D] Retirement-related costs consist of the following expense 
categories: retirement, retiree health benefits, related interest, and 
Omnibus Budget and Reconciliation Act adjustments.   

[E] TQ represents transition quarter, a period beginning July 1, 1976, 
and ending September 30, 1976. In a change taking effect October 1, 
1976, the U.S. government changed its fiscal year from a period ending 
June 30 to a period beginning each October 1 and ending the following 
September 30.   

Source: USPS financial data.   

[End of table]   

[End of section]   

Appendix II: Comments from the U.S. Postal Service:   

John E. Potter: 
Postmaster General, CEO: 
United States Postal Service: 
475 L'Enfant Plaza SW: 
Washington DC 20260-0010: 
[hyperlink, http://www.usps.com]   

February 20, 2002:   

Mr. Bernard L. Ungar: 
Director, Physical Infrastructure Issues: 
United States General Accounting Office: 
Washington, DC 20548-0001:   

Dear Mr. Ungar:   

Thank you for providing the Postal Service with an opportunity to 
review and comment on the draft report entitled, U.S. Postal Service: 
Deteriorating Financial Outlook Increases Need for Transformation a 
follow-up to earlier work concerning the Postal Service's 
transformation efforts and long-term outlook.   

We appreciate your grasp of the issues facing the Postal Service in 
our efforts to provide universal service at affordable rates. This has 
been a particularly difficult challenge in light of recent economic 
conditions, the aftermath of September 11 as well as anthrax in the 
mail. As your report indicates, even in the absence of recent events, 
the Postal Service faces a variety of legal and practical constraints 
that must be overcome in order to make many of the changes that must 
be made.   

We are aware that continuing rate increases are not the solution to 
our problem. We must find ways of generating new revenues, while 
continuing to reduce costs. We believe, however, that we have made 
progress, as evidenced by productivity growth and reduced employment 
(30,000 fewer career employees in the past two and one-half years). We 
should note that we continue to take issue with comparisons between 
Postal Service and economy-wide productivity measures. The Postal 
Service operates in the service sector and is labor-intensive. 
Further, the Postal Service engages in significant worksharing 
programs that over the years have transferred prime opportunities for 
productivity gains to the private sector. Moreover, the Postal Service 
has made significant investments since the Postal Reorganization was 
implemented in 1971 to improve the quality of customer service. The 
Total Factor Productivity measure gives no credit for these 
improvements. I believe we have met the challenge of increasing 
productivity despite these issues.   

We fully agree with the recommendation in your report of the need to 
inform Congress and the public of the need for postal change. Our 
Transformation Plan and related activities will do that. We intend to 
work with Congress and all stakeholders in developing and implementing 
strategies for action. Our Transformation Plan will outline strategies 
that the Postal Service can follow under its current authority and 
will specify congressional actions that would empower the Postal 
Service to take incremental steps to address financial and operational 
issues. Finally, the plan will present a range of alternative business 
models that may better address the long-term viability of the national 
postal system.  

We also agree with the recommendation that we improve the transparency 
of our financial data, and we already are providing financial reports 
on our website in a more timely and user-friendly fashion.
If you or your staff would like to discuss any of these comments 
further, I am available at your convenience.   

Sincerely,   

Signed by:   

John E. Potter:   

[End of section]   

Appendix III: GAO Contacts and Staff Acknowledgments  

GAO Contact:   

Bernard L. Ungar (202) 512-8387:   

Acknowledgments:   

Teresa L. Anderson, Hazel J. Bailey, Gerald P. Barnes, Joshua M. 
Bartzen, Alan N. Belkin, Christopher J. Booms, William J. Doherty, 
Frederick T. Evans, Michael J. Fischetti, Jeanette M. Franzel, Kenneth 
E. John, Robert P. Lilly, Roger L. Lively, Leah Q. Nash, John D. 
Sawyer, Jill P. Sayre, and Charles F. Wicker made key contributions to 
this report.   

[End of section]   

Footnotes:   

[1] U.S. General Accounting Office, U.S. Postal Service: 
Transformation Challenges Present Significant Risks, [hyperlink, 
http://www.gao.gov/products/GAO-01-598T] (Washington, D.C.: Apr. 4, 
2001).   

[2] U.S. General Accounting Office, U.S. Postal Service: Financial 
Outlook and Transformation Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-01-733T] (Washington, D.C.: May 15, 
2001.)   

[3] U.S. General Accounting Office, Highlights of GAO's Conference on 
Options to Enhance Mail Security and Postal Operations, [hyperlink, 
http://www.gao.gov/products/GAO-02-315SP] (Washington, D.C.: Dec. 20, 
2001).   

[4] Mailing Industry Task Force, Seizing Opportunity: The Report of 
the 2001 Mailing Industry Task Force, (Oct. 15, 2001). See [hyperlink, 
http://www.usps.com/strategicclirection/mitf.htm].  

[5] According to its bylaws, the board directs the exercise of the 
powers of USPS, reviews its practices and policies, and directs and 
controls its expenditures. The board is to monitor the operations and 
performance of USPS and establish USPS's basic objectives, broad 
policies, and long-range goals. See 39 C.F.R. 3.1.   

[6] USPS uses a "postal fiscal year" for management purposes that 
contains 52 weeks. USPS divides each postal fiscal year into 13 
accounting periods of 4 weeks each. The first postal quarter 
corresponds to the first 3 accounting periods of the postal fiscal 
year. All references in this report to results for the first quarter 
of postal fiscal year 2002 are for the period from September 8, 2001, 
through November 30, 2001.   

[7] USPS also has a $3 billion statutory limit on the annual increase 
in its outstanding obligations, including $2 billion for capital 
investment and $1 billion for other operating expenses. See 39 U.S.C. 
§ 2005(a).   

[8] See U.S. General Accounting Office, United States Postal Service: 
Information on Retirement Plans, [hyperlink, 
http://www.gao.gov/products/GAO-02-170] (Washington, D.C.: Dec. 31, 
2001).   

[9] [hyperlink, http://www.gao.gov/products/GAO-02-315SP].   

[10] USPS was allocated $175 million out of emergency supplemental 
appropriations for fiscal year 2001. These funds are to be used in 
part to purchase mail sanitization equipment, for employee safety 
measures, and for other expenses related to the anthrax attacks. An 
additional emergency supplemental appropriation of $500 million was 
provided in fiscal year 2002 for emergency expenses to buy equipment 
for sanitizing and screening mail and to protect postal employees and 
customers from biohazardous material.   

[11] USPS receives annual appropriations for revenue forgone, 
providing free and reduced rate mail for the blind, and providing 
overseas voting materials for U.S. elections. Congress appropriated 
about $96 million to USPS for these purposes for fiscal year 2001.   

[12] Only facility projects related to providing a safe working 
environment and emergency purposes are to be permitted funding 
approval.   

[13] USPS financial statements do not record or disclose an obligation 
for retiree health benefits, because USPS reports that it is part of a 
multiemployer plan and thus is not required under accounting standards 
to include it in its balance sheet. However, the Omnibus Budget 
Reconciliation Act of 1990 (P.L. 101-508) requires USPS to pay a share 
of health insurance premiums for all employees, and their survivors, 
who participate in the Federal Employees Health Benefits Program and 
who retire on or after July 1, 1971. A USPS-sponsored study estimated 
in 1991 that this obligation was roughly $45 billion. More recent 
estimates on the amount of this obligation are not available.   

[14] See USPS Board of Governors Resolution 95-9. PYLR is a means for 
USPS to repay its accumulated deficit balance and thereby restore 
positive equity.   

[15] By statute (39 U.S.C. § 2006(c)), USPS can request the secretary 
of the Treasury to have the U.S. government guarantee its obligations; 
but, according to a USPS official, USPS has never made such a 
request.   

[16] The law includes a provision for sinking funds or other 
retirements of obligations to the extent that such provision exceeds 
applicable depreciation charges. See 39 U.S.C. § 3621. This provision 
has never been used.   

[17] U.S. General Accounting Office, U.S. Postal Service: Progress 
Made in Implementing Automated Letter Sequencing, but Some Issues 
Remain, [hyperlink, http://www.gao.gov/products/GAO/GGD-98-73] 
(Washington, D.C.: Apr. 17, 1998).   

[18] Report of the Periodicals Operations Review Team, sponsored by 
the American Business Press, the Magazine Publishers of America, and 
USPS (Mar. 1999).   

[19] Seizing Opportunity: The Report of the 2001 Mailing Industry Task 
Force, led by chief executives of 11 companies and the DPMG, (Oct. 15, 
2001).   

[20] Requirements for closing, consolidating, or relocating post 
offices specified in USPS regulations may be applicable to a mail-
processing facility that includes a post office.   

[21] See In the Matter of United States Postal Service and American 
Postal Workers Union, AFL-CIO, 2000 National Agreement, Supplemental 
Opinion Dealing with Economic Issues, (Jan. 11, 2002, pp. 7-8).   

[22] USPS has a long-standing practice of withholding detailed 
financial information on the fourth quarter of a fiscal year and the 
first accounting periods of the following fiscal year until its annual 
financial statements have been audited and approved by the Board of 
Governors. The board approved USPS's audited financial statements for 
fiscal year 2001 in December 2001.   

[End of section]   

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