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entitled 'Need for Comprehensive Postal Reform' which was released on 
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February 6, 2004:

The Honorable Susan M. Collins:

Chairman, Committee on Governmental Affairs:

United States Senate:

Subject: Need for Comprehensive Postal Reform:

Dear Chairman Collins:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

making needed human capital reforms such as (1) determining the 
Service's responsibility for pension costs related to military service, 
funding retiree health benefits, and determining what action to take on 
the escrow account established in recent pension legislation; (2) 
deciding whether postal workers' compensation benefits should be on par 
with those in the private sector; and (3) clarifying pay comparability 

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

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

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

Sincerely yours,

Signed by: 

David M. Walker:

Comptroller General of the United States:



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