February 12, 2003

Mr. Dennis Shea
Executive Director
President’s Commission on the United States Postal Service
1120 Vermont Avenue, NW, Suite 971
Washington, DC 20005

Dear Mr. Shea:

Please find attached the Office of Inspector General’s comment to the Commission. 

The comment addresses ten major management issues that we believe must be addressed if the Postal Service is to remain a viable commercial enterprise.  The OIG has conducted audits and investigations that examine these issues. This comment summarizes our work in these key areas to help the Commission as it prepares its report to the President.

My staff and I look forward to further assisting you in your challenging and important work.  If you or your staff have any questions, please contact Tom Sharkey, Special Assistant to the Deputy Inspector General, or me, at 703-248-2300.

Sincerely,

Karla W. Corcoran

cc:       Governors of the United States Postal Service
            Mr. Potter
            Mr. Nolan
            Ms. Gibbons
            Mr. Johnstone
            Mr. Strasser

Comment of the United States Postal Service
Office of Inspector General
 to the
President’s Commission
on the
United States Postal Service

February 12, 2003

Executive Summary

The Office of Inspector General (OIG) was created in 1996 to serve as the Postal Service’s first independent oversight agency.  Our statutory mission is to conduct independent audits, reviews, and investigations of postal programs and operations.  Since our inception, the OIG has identified over $2 billion in potential monetary benefits.

Based on our work, the OIG believes regardless of the organizational model used, the Postal Service may be sustainable if the Postal Service is held accountable for results.  As the Postal Service works to transform itself for the future, it must rely on performance management principles to measure progress and inject accountability into programs and operations. 

This comment discusses ten major management issues that the OIG believes must be addressed if the Postal Service is to remain a viable commercial enterprise:

1.      Physical Security and Safeguarding the Mail;

2.      Maintaining Customer Confidence;

3.      Improving Financial Performance and Accountability;

4.      Resolving Workforce and Workplace Issues;

5.      Controlling Workers’ Compensation Costs;

6.      Managing Acquisitions and Contracts;

7.      Leveraging Technology;

8.      Improving the Quality of Information for Making Decisions;

9.      Safeguarding the Integrity, Confidentiality, and Availability of Information; and,

10. Balancing Public Service and Commercial Enterprise.

The OIG has conducted audits and investigations that examine these issues.   This comment synopsizes our work into focus points that may be helpful to the Commission as it prepares its report to the President.

With a strengthened adherence to accountability in its operations, the OIG believes the Postal Service can remain a viable and relevant element of every American’s life far into the 21^st Century.

Introduction

The Office of Inspector General (OIG) commends the members of the President’s Commission on the United States Postal Service for taking on the daunting but critical task of examining the current state of the Postal Service and formulating a vision for its future.  The results of the OIG's audits and investigations can provide valuable information to assist the Commission in its historic mission.

The Office of Inspector General was created in 1996 to serve as the Postal Service’s first independent oversight agency.  Under the aegis of the Inspector General Act, our mission is to conduct independent audits, reviews, and investigations of postal programs and operations.  Since our inception, the OIG has identified over $2 billion in potential monetary benefits.  Our audits and investigations have resulted in major operational and program improvements.  In addition, the OIG Hotline serves as a valuable tool to assist the Postal Service and the American public in identifying and preventing fraud, waste, abuse, and mismanagement.

Based on our work, the OIG believes regardless of the organizational model used, the Postal Service may be sustainable if it is held accountable for results.  As the Postal Service works to transform itself for the future, it must rely on performance management principles to measure progress and inject accountability into programs and operations.

In order to improve accountability, the Postal Service should clearly articulate its organizational goals; its methods for achieving those goals through programs and initiatives, and the ways it will monitor success.  The Postal Service’s pledge in its April 2002 Transformation Plan to create a performance-driven culture is a step in a positive direction.

As it proceeds with transformation, the Postal Service continues to face significant challenges, including financial instability, bioterrorism threats, and labor problems.  The Postal Service faces a challenging financial situation.  It has reported billions of dollars in losses over the past years in its financial statements despite recent rate increases, employee reductions, and a freeze on capital expenditures.  These challenges are a call to action that the Postal Service cannot ignore.  The recent discovery that the Postal Service’s obligation to the civil service retirement system is overfunded may lead to legislation to correct this situation.  However, even if legislation passes easing the Postal Service’s funding requirement, the Postal Service must maintain its fiscal discipline to address other short and long-term costs.

Major Management Issues

To assist the Postal Service in meeting its challenges, the OIG has identified the following 10 major management issues that must be addressed if the Postal Service is to remain a viable and relevant enterprise:

1.      Physical Security and Safeguarding the Mail;

2.      Maintaining Customer Confidence;

3.      Improving Financial Performance and Accountability;

4.      Resolving Workforce and Workplace Issues;

5.      Controlling Workers’ Compensation Costs;

6.      Managing Acquisitions and Contracts;

7.      Leveraging Technology;

8.      Improving the Quality of Information for Making Decisions;

9.      Safeguarding the Integrity, Confidentiality, and Availability of Information; and,

10. Balancing Public Service and Commercial Enterprise.

The OIG has conducted a number of audits and investigations that examine these issues.  Our findings and recommendations relative to this work may be of assistance to the Commission’s subcommittees.  Our work is also synopsized by major management issue in the following narrative. 

1.  Physical Security and Safeguarding the Mail

With 38,000 facilities and over 200 billion pieces of mail delivered each year, the Postal Service faces the enormous challenge of moving the mail efficiently and economically while effectively safeguarding postal employees, customers, and the mail.  Historically, the Postal Service has dealt with disasters, both natural and man-made, which have interfered with mail delivery. However, the October 2001 anthrax attacks using the mail exposed a new danger, and as a result, led to a new emphasis on the security of the postal system.  Our reviews have found that the Postal Service’s communication and safety efforts were adequate to ensure the safety and health of employees.

Since the anthrax attacks of October 2001, the Postal Service has sought new methods to ensure the physical security and safety of the mail through the detection of biohazardous materials and sanitization of the mail. These technological solutions may necessitate procuring new equipment and changing processes to accommodate use of new equipment.  Regardless of technology or any other improvement or expenditure, the threat of terrorists using the mail to carry out an attack can be reduced, but not eliminated.  To better protect its employees and customers, the OIG believes the Postal Service must also reassess its facility designs, especially the ventilation systems, maintenance practices, and emergency response and evacuation procedures.

2. Maintaining Customer Confidence

To remain competitive, the Postal Service must be customer-focused and deliver the mail in a timely and accurate manner and at affordable rates.  Moreover, the Postal Service needs to adapt its services to address changing customer needs and a changing mailing public.  In today’s marketplace, customers have more choices about how they conduct postal transactions, transmit messages, and deliver merchandise.  Increasing customer confidence will be the key to growing new business.  The Postal Service views its access to the American household as a unique asset it can leverage as it faces increasing competition.  The Postal Service must continue to develop and provide products and services that retain relevance and value for customers with changing needs by:

·        identifying better ways to deliver the mail;

·        optimizing the current infrastructure;

·        increasing customer satisfaction; and

·        adjusting to a changing mailing public, including any changes in the customer base and customers with increased technological options.

To effectively transition to a changing customer base, the Postal Service must address such factors as declining mail volumes due partly to new technological options such as electronic bill paying, different mail mixes including increased package delivery, and rapid growth in delivery points.  These factors can impact the efficiency of mail collections, processing, and delivery to customers, as well as consistently pose challenges in efficiently scheduling and procuring transportation, identifying efficient processing and delivery modes, effectively scheduling staff, and maximizing technological options.

3. Improving Financial Performance and Accountability

The Postal Service relies on strong financial management controls to maximize revenue and minimize costs.  The OIG has credited the Postal Service for recognizing the need to improve its financial reporting systems.  However, the Postal Service still needs to effectively protect revenues, manage costs, and increase productivity in order to improve its financial condition.  Further, the Postal Service must provide users of its financial reports with the necessary information to make informed decisions.  The Postal Service also needs to change certain procurement policies and procedures while continuing to be accountable for its primary objective of delivering the mail.

Recent concerns expressed by the General Accounting Office and confirmed by the Office of Personnel Management and the U.S. Department of the Treasury have identified the Postal Service’s potential overfunding of the civil service retirement system.  As a result, Congress is considering legislation that would change the way the Postal Service pays into the civil service retirement fund that would enable it to save billions of dollars.  However, passage of such legislation is not assured at this time.  Even if such legislation were to pass, there are other long-term future costs the Postal Service will have to address, such as increasing workers’ compensation costs, retiree health care costs, reducing long-term debt, and the potential costs associated with removing the freeze on capital expenditures. 

Our reviews have identified ways in which the Postal Service can improve its financial performance and accountability. Our review of the Postal Service accounting system, for example, found that program managers need the means to effectively track financial obligations.  In another review, Postal Service program managers expressed concerns regarding the absence of complete financial information needed to develop, justify, and defend program budgets.

4.  Resolving Workforce and Workplace Issues

Resolving labor management problems is critical for the Postal Service to achieve its mission in the 21st century.  With more than 850,000 full and part-time employees working at more than 38,000 facilities nationwide, the Postal Service realizes that to operate effectively, in a rapidly changing environment, it needs to give employee issues a higher priority and enhance each employee’s contribution to organizational performance.  In addition, the Postal Service needs an effective way to link employees’ pay to their performance.

Labor-management problems cost the Postal Service millions of dollars each year.  Much of this cost is related to the thousands of grievances filed annually and the missed opportunities to prevent and/or resolve grievances at the lowest possible level.  Although several independent organizations, including the OIG, have made numerous recommendations on how to improve relations between the Postal Service and its unions, many of these recommendations have not been fully implemented.

Although the Postal Service has made tremendous strides over the past two years in reducing labor costs, an additional $2 billion in cost savings could have been realized since 1990, primarily by reducing work hours.  The Postal Service's investment in technology resulted in about $3 billion in cost savings during this same period, but it has been unable to achieve expected returns on these investments through reduced labor costs, in part because of the terms of national union agreements that prevent it from reducing staff.

Postal employees who report fraud, waste, abuse, and mismanagement to the OIG are a tremendous resource to the OIG.  The OIG continues to work with the Postal Service to prevent reprisals against employees who come forward. The Postal Service is moving forward with regulations calling for former Postal Service executives to serve as hearing officers for whistleblower adverse actions. Postal Service administrative law judges will officiate on lesser actions. The OIG has concerns with this approach and will review the Postal Service's final proposal very carefully. If the Postal Service's internal regulations are inadequate, legislation may be necessary to secure whistleblower protection for Postal Service employees.

5.  Controlling Workers’ Compensation Costs

Workers’ compensation costs have increased 35 percent in the last three years.  As the largest participant in the Federal Workers’ Compensation Program, the Postal Service has accounted for $760 million of the total $2.2 billion in federal worker’s compensation outlays for claims for 2002.  Controlling workers’ compensation costs is a priority issue for the Postal Service critical to improving its financial condition.

As the Postal Service is self-insured for workers’ compensation costs, the payments it makes out of operating funds directly affects net income.  In FY 2002, the Postal Service paid over $760 million for employee injury claims, a $66 million increase over the $694 million paid in FY 2001.  The OIG has identified ways the Postal Service could better administer its workers’ compensation program to ensure its viability, including better program administration, controlling costs, combating fraud, and ensuring the health and safety of employees.

The OIG believes legislative reform of the Federal Employees Compensation Act may need to be considered to prevent the Federal Employees’ Compensation Act being a retirement system for workers’ compensation beneficiaries.  Legislation requiring employees who are totally disabled, or those where reemployment is not determined, to retire, either on medical disability or voluntary retirement under their applicable retirement program, and converting future employees, ages 65 and older, on the periodic rolls to the proposed Federal Employees’ Compensation Act annuity, would decrease the number of employees on the periodic rolls and reduce compensation and medical costs.

6. Managing Acquisitions and Contracts

The Postal Service manages approximately $18 billion annually in contracts for essential goods and services, including facilities, mail processing equipment, and supplies.  Consequently, this makes the Postal Service one of the largest civilian contracting agencies in government. During FY 2002, postal purchases included over $627 million in noncompetitive contracts and over $295 million in credit card purchases.  The Postal Service is also one of America’s largest owners, developers, and managers of real estate, committing over $700 million in FY 2002 for repair, renovation, and construction of new facilities, and over $800 million in rent.

The Postal Service is accountable to the public for ensuring that it purchases high quality products and services for the lowest possible prices.  The OIG has also sought to better protect the interest of the Postal Service by promoting changes to its procurement policies and procedures.  Unlike most other federal agencies, the Postal Service is not subject to the Federal Acquisition Regulations.   While the OIG does not believe the Postal Service should be subject to these regulations, there are best practices from this and other sources that could better protect its interests.

Nearly two years ago, the OIG proposed revisions to the Postal Service’s Purchasing Manual and requested that they be addressed as part of the Manual’s re-issuance.  These revisions included retaining and strengthening the examination of records clause, requiring certain contractors to have an approved accounting system, installing a more business-like debarment and suspension system, and incorporating a computer security standard provision.  In addition, OIG testimony has pointed out the Postal Service was the only major federal procurement agency that still does not fully honor debarments by other federal agencies.  As a result, contractors who have been convicted of defrauding other federal agencies, and have been debarred from contracting with those agencies, are free to contract with the Postal Service.  Furthermore, the Postal Service requires a higher standard of evidence than is required anywhere else in the federal government to debar a contractor for fraud.  This standard is unnecessary and inhibits the Postal Service from protecting itself from fraudulent contractors.

The OIG continues to reach out to contracting officials throughout the Postal Service with fraud awareness and prevention messages.  Increased fraud awareness and improved contracting procedures will help to prevent the Postal Service from being the victim of contract fraud schemes.

7.   Leveraging Technology

The Postal Service provides a basic and fundamental service to the American public.  It entered the 21st century facing challenges posed by new technology and a changing business world, which threatened its very existence and relevance.

To address changing customer needs, the Postal Service has committed resources to help ensure better data management, track mail piece information, and improve communication between the Postal Service and its customers.  The large size and diversity of the Postal Service’s customer base presents technological challenges and demands that solutions be simple, easy-to-use, and competitive.  To be successful, the Postal Service should also ensure the corresponding cost savings projected from technology investments are realized by efficiently redeploying the resources replaced by the new technology.  Decisions on technology investments should continue to be scrutinized more closely and be based on information that is current, accurate, and reliable.

Amidst the debate over the future of the Postal Service and its efforts to leverage new technologies and approaches to improve operations, the Postal Service must continue to be accountable for its primary objective -- delivering the mail.  A significant disruption of these core operations would be readily noticeable and would further jeopardize the public's confidence in the Postal Service's ability to compete in a changing marketplace and the overall financial condition of the Postal Service.

8. Improving the Quality of Information for Making Decisions

Accurate measurement of mail delivery is key to improving and sustaining service performance.  Data justifying the need for major capital expenditures must be reliable so postal management can decide whether to invest in a project.  Furthermore, reliable data is needed to assess whether the project’s estimated and actual return on investment has been realized.  However, in many instances, the OIG has found the Postal Service does not adequately capture or track the data necessary to support effective decision-making or to monitor expenses.

The Postal Service has also recognized the need to improve its financial reporting systems.  Projects initiated by the Postal Service include replacing the current general ledger system, implementing a monthly reporting cycle, realigning its fiscal year with the government fiscal year, and consolidating common accounting services.  The OIG supports these efforts to improve financial management.

9.  Safeguarding the Integrity, Confidentiality, and Availability of Information

The terrorist attacks of 2001 have demonstrated how the nation’s infrastructure, including information systems, may be vulnerable to attacks.  Computers and electronic data are vital to the critical operations of the Postal Service.  The same factors that benefit operations—speed and accessibility—also make it possible for individuals and organizations to interfere with or eavesdrop on operations, possibly for purposes of fraud or sabotage.  For example, terrorist organizations could use computer networks to attack the federal infrastructure.  Attacks that have already occurred on both government and private industry websites reveal the damage a computer security breach can inflict on brand integrity and an organization’s revenue stream.

Our work on telecommunications security continues to identify vulnerabilities in the security of computer equipment that are being addressed by postal management. Tests conducted on postal servers and databases revealed vulnerabilities that, if left uncorrected, could result in the loss of confidentiality and integrity of vital data.  Our reviews of e-business agreements have found that in some cases the agreements did not contain adequate security provisions. There remains a continuing need to emphasize computer security throughout the Postal Service.

The Postal Service needs to continually protect consumer information and guarantee customer privacy on its website and the programs operating on it.  The Postal Service is working to correct these deficiencies by appointing a chief privacy officer, increasing focus on security, and updating policies in these areas. 

10.  Balancing Public Service and Commercial Enterprise

The Postal Service is an independent establishment of the executive branch that is required to act in a businesslike manner.  As a government monopoly, funded by the public’s purchase of products and services, the Postal Service must be accountable to the public.  While fulfilling its public role of providing universal service, the Postal Service also must compete with private industry and foreign posts. The Postal Service needs a clearly defined, long-term strategy to achieve an appropriate balance between public service and commercial enterprise that transcends short-term changes in senior management.

Conclusion

The OIG believes that accountability is of utmost importance.  Without accountability, problems may be masked by spending more money.  Historically, Postal Service programs seemingly are deemed “successful” if they merely obtain management approval, regardless of whether or not they provide the highest level of service for the least cost.  With greater accountability, this paradigm will change.

Like all federal agencies, the Postal Service needs to manage better all the time.  With a strengthened adherence to accountability in its operations, the Postal Service will remain a viable and relevant element of every American’s life far into the 21^st Century. 

The President has charged this Commission with examining the state of the Postal Service, preparing and submitting a report articulating a vision for the future of the Postal Service, and recommending legislative and administrative reforms needed to ensure the viability of the Postal Service.   It is a monumental mission and one vitally important to the future of the Postal Service.  The Office of Inspector General commends you for the work you are doing.  Please know the OIG stands ready to assist you in every possible way.