	Recent Actions Warranted the Postal Service’s Removal from Our High-Risk List

Several actions—both by the Service and the Congress—led us to remove  the Service’s transformation efforts and long-term outlook from our high- risk list. The Service’s basic business model, which assumed that rising  mail volume would cover rising costs and mitigate rate increases, was  outmoded as First-Class Mail volumes stagnated or deteriorated in an  increasingly competitive environment. Much of the Service’s recent financial  improvement was due to the change from this law that reduced the  Service’s annual pension expenses. This change enabled the Service to significantly cut its  costs, achieve record net incomes, repay over $11 billion of outstanding  debt, and delay rate increases until January 2006. After years of thorough  discussion, Congress passed a comprehensive postal reform law in late  December 2006 that provides tools and mechanisms that can be used to  establish an efficient, flexible, fair, transparent, and financially sound  Postal Service. The Postal Service’s Current Financial Condition

The Service’s financial condition for fiscal year 2007 has been affected by  the reform act, which, along with the May change in postal rates, will  continue to affect its near- and long-term financial outlook. Since enactment of the reform law, the Service has updated its expense  projections. These uncertainties  include how the Service and its customers will respond to the:  limited implementation times—the 2-month implementation period (the  Postal Service Board of Governors decision on March 19, 2007, stated that  most new rates would become effective on May 14, 2007) leaves little time  for the Service to educate the public and business mailers on the new rate  changes and to allow mailers sufficient time to adjust their mailing  practices and operations accordingly;   delayed implementation times—how mailers and the Service will be  affected by the delay in implementing new Periodical rates until mid-July;   magnitude of certain restructured rates, particularly for those specific  types of mail that will experience rather significant increases, and the  related impact on volumes and revenues; and   unfamiliarity with restructured rates—the prices for many popular  products, such as certain types of First-Class Mail, will experience  significant shifts based on the shape of the mail. Postal Reform Law Provides Opportunities to Address Challenges

The new postal reform law provides new opportunities to address  challenges facing the Service as it continues its transformation in a more  competitive environment with a variety of electronic alternatives for  communications and payments. 3). 4). Reducing debt was one of the key factors we cited in  removing the Service’s high-risk designation. While the reform act takes actions that increase current costs by  improving the balance of retiree health benefit cost burdens between  current and future ratepayers, it also eliminates other payments and  provides opportunities to offset some of these costs pressures through  efficiency gains that could restrain future rate increases. We  have identified several major issues considered significant by various  postal stakeholders, as well as areas related to implementation of the law  that will warrant continued oversight. These key issues and areas for continued oversight  include:  the effect of the upcoming rate increases and statutory changes on the  Postal Service’s financial condition; the decision by the Service whether or not to submit a rate filing under the  old rate structure;   actions by the PRC to establish a new price-setting and regulatory  the Service’s ability to operate under an inflationary price cap while some  of its cost segments are increasing above the rate of inflation;   actions by the Service, in consultation with the PRC, to establish modern  service standards and performance measures, and the Postal Service’s  plan for meeting those standards; the Service’s ability to maintain high-quality delivery service as it takes  actions to reduce costs and realign its infrastructure and workforce; and the PRC’s development of appropriate accounting and reporting  requirements aimed at enhancing transparency and accountability of the  Service’s internal data and performance results. The successful transformation of the Postal Service will depend heavily  upon innovative leadership by the Postmaster General and the Chairman  of the PRC, and their ability to work effectively with their employees,  employee organizations, the mailing industry, Congress, and the general  public.
Why GAO Did This Study

When GAO originally placed the U.S. Postal Service's (the Service) transformation efforts and long-term outlook on its high-risk list in early 2001, it was to focus urgent attention on the Service's deteriorating financial situation. Aggressive action was needed, particularly in cutting costs, improving productivity, and enhancing financial transparency. GAO testified several times since 2001 that comprehensive postal reform legislation was needed to address the Service's unsustainable business model, which assumed that increasing mail volume would cover rising costs and mitigate rate increases. This outdated model limited its flexibility and incentives needed to realize sufficient cost savings to offset rising costs, declining First-Class Mail volumes, unfunded obligations, and an expanding delivery network. This limitation threatened the Service's ability to achieve its mission of providing affordable, high-quality universal postal services on a self-financing basis. This testimony will focus on (1) why GAO recently removed the Service's transformation efforts and outlook from GAO's high-risk list, (2) the Service's financial condition in fiscal year 2007, (3) the opportunities and challenges facing the Service, and (4) major issues and areas for congressional oversight. This testimony is based on GAO's past work, review of the postal reform law, and updated information on the Service's financial condition.

What GAO Found

Key actions by both the Service and Congress have led GAO to remove the Service's transformation efforts and long-term outlook from its high-risk list in January 2007. Specifically, the Service developed a Transformation Plan and achieved billions in cost-savings, improved productivity, downsized its workforce, and improved its financial reporting. Congress enacted a law in 2003 that reduced the Service's annual pension expenses, which enabled it to achieve record net incomes, repay debt, and delay rate increases until January 2006. Finally, the postal reform law enacted in December 2006 provides tools and mechanisms that can be used to address key challenges facing the Service as it moves into a new regulatory and increasingly competitive environment. The two key factors that will affect the Service's financial condition for this fiscal year are the new reform law and new postal rates that go into effect in May. The reform law increases the costs of funding retiree health benefits but provides opportunities to offset some of these cost pressures through efficiency gains and eliminating certain pension payments. For the rest of the year, Service officials do not expect significant changes from its projected expenses and revenues. Other factors, such as costs for fuel or labor resolutions varying from plan, could affect the Service's projected outcome for this fiscal year. Congress's continued oversight of the Service's transformation is critical at this time of significant changes for the Service, Postal Regulatory Commission (PRC), and mailing industry. Also, key to a successful transformation is innovative leadership by the Postmaster General and the PRC Chairman and their ability to work effectively with stakeholders to realize new opportunities provided under the postal reform law. GAO has identified key issues and areas for oversight related to implementing the reform law and new rate-setting structure, as well as other challenges to ensure the Service remains financially sound.