Excerpts of Testimony by David M. Walker
Comptroller General of the United States
Before the Subcommittee on Oversight of Government
Management, the Federal Workforce, and the District of
Columbia, Committee on Homeland Security and
Governmental Affairs, U.S. Senate on March 15, 2006

GAO’S HIGH-RISK PROGRAM

In 2001, we placed the Postal Service’s (the Service) transformation and long-term outlook on our high-risk list because it faced formidable financial, operational, and human capital challenges that threatened its long-term viability. We called for prompt, aggressive action by the Service in addressing these challenges and for a structural
transformation that would modernize the Service’s outdated business model. Since then, the Service has made significant progress in addressing some of the challenges we identified, such as cutting costs, improving productivity, downsizing its workforce, and improving its financial reporting. Much of the Service’s recent financial success, however, was due to legislation passed in 2003 that reduced the Service’s annual pension benefit payments, thus enabling the Service to achieve record net incomes, repay over $11 billion of outstanding debt, and delay rate increases until January 2006. Despite the temporary relief provided by the legislation, the Service continues to face many challenges that will increase pressure for rate increases both in the short term and over time. These challenges include:

* generating sufficient revenues as First-Class Mail volume declines and the mail mix changes to volume growth in primarily lower contribution mail;

* controlling costs and improving productivity as growth in expenses continues to outpace revenues; compensation and benefit costs rise; workhour reductions become more difficult to realize and the number of delivery points continues to increase;

* addressing other financial issues, such as growing unfunded retiree health obligations, required multi-billion dollar escrow payments, and military service pension obligations;

* managing workforce changes related to retirements and network consolidations;

* providing reliable data to assess performance;

* maintaining high-quality universal services; and:

* addressing external uncertainties, such as pending postal reform legislation, four vacancies on the Postal Service’s Board of Governors, and potential security risks from biohazard and other threats.

Recently, the Service issued an updated Strategic Transformation Plan (Plan) that details its goals and strategies for the next 5 years. We support the intent of the Plan, including the Service’s recent efforts to begin optimizing its operating network. However, as we recently reported, the success of the Service’s optimization efforts will require enhanced transparency of its decision-making criteria, effective coordination with all key stakeholders, and a process for evaluating and measuring performance. Furthermore, we continue to believe that the Plan’s incremental steps alone cannot remedy the major challenges facing the Service. Despite its efforts, the Service’s underlying business model depends on growing mail volume to mitigate rate increases and cover its universal service costs. This model is unsustainable because it lacks the necessary incentives and flexibilities to achieve sufficient cost savings needed to offset growing personnel costs, declining mail volumes, and the continued expansion of the Service’s delivery network. We continue to believe that comprehensive postal reform is urgently needed to modernize the Service’s business model.

Recognizing that the future of postal services remains at risk, the House and Senate have each passed postal reform bills that now are pending conference deliberations. Both bills would give the Service additional flexibility in pricing and allow it to retain earnings, create incentives to reduce costs and increase efficiency, reduce the administrative burden of the rate-making process, enhance transparency and accountability, eliminate the escrow fund, transfer military service pension costs back to the Department of the Treasury (the Treasury), and begin prefunding retiree health benefits. The legislation aims to encourage cost cutting that could restrain future rate increases and also improves the fairness and balance of cost burdens for current and future ratepayers by beginning to prefund retiree health benefits. It is important that this legislation be enacted as soon as possible to begin the Service’s overdue transition to a modernized business model. Although the legislation may result in short-term rate increases, these increases are likely to be more modest and predictable than the significant and frequent rate increases that would be needed if no action is taken to eliminate the escrow requirement, transfer military service pension costs back to the Treasury, and begin prefunding growing retiree health benefit obligations.

GAO’S HIGH-RISK PROGRAM (PDF)