No matter how well-laid the plans for modernizing the nation’s postal network, for these efforts to succeed in elevating postal operations to a new standard of excellence, they must more effectively utilize the Postal Service’s most valuable assets—its employees. The ambitious plans laid out in this report provide the basis for sweeping changes in the way that the Postal Service meets its mission and pursues additional “break-through” improvements in productivity.

These changes will have a profound impact on the Postal Service as an institution. The level of success achieved by the Postal Service will hinge on its ability to successfully deploy and motivate a talented, capable, nimble workforce of a size appropriate to the future postal needs of the nation and to give its employees a personal stake in the success of the institution’s ambitious goals.

The new Board of Directors and Postal Service management must assume responsibility for building and maintaining a world-class workforce in terms of service standards and efficiencies. Essential to this process is the ability of management and labor to work constructively together to determine the right size of the postal workforce and to ensure appropriate flexibilities in its deployment. This is the critical issue when it comes to controlling the future costs and capabilities of the workforce. Far more than individual benefits, the size of the workforce determines the costs of the workforce.

Background

The last major overhaul of the Postal Service in 1970 was caused, in part, by the demands of postal workers for adequate pay and the needs of management to have the cooperation of employees as the Postal Service embarked on a significant modernization to meet the country’s changing postal needs. Today, the Postal Service again must significantly overhaul its operations to reflect changes in technology as well as shifts in how the nation uses the mail. Once more, successful adaptation hinges on the cooperation and support of the workforce that makes the regular, reliable and universal delivery of the nation’s mail possible.

The challenge today, however, is far more complex. Postal workers enjoy special status within the Federal workforce. They are granted the right to negotiate wages, hours, and workplace conditions through collective bargaining. The 1970 Act was debated and enacted against the dramatic backdrop of the first major strike of Federal workers in U.S. history, involving approximately 152,000 postal employees in 671 locations. The strike was particularly paralyzing to business in New York City, the country’s financial center. The strike was over shortly after it began, and in 1971, the U.S. government signed the first comprehensive Federal labor contract ever achieved through collective bargaining. The ongoing right to collective bargaining (absent the option to strike) was a key outcome, in addition to language in the 1970 Act requiring the Postal Service to offer compensation to employees that is comparable to the private sector. [1]

Exhibit 6-1

Source: USPS

Thirty years later, the overall result has been positive for the workforce. Postal clerks and city letter carriers, for example, have an average annual wage of more than $42,500. Postal workers also enjoy the job security and ample benefits packages that make Federal employment attractive. According to the Postal Service, average annual total compensation, including both wages and benefits, for postal clerks and for city letter carriers is nearly $60,000.

Given this “best of both worlds” package, it is entirely under-standable why so many would be attracted to Postal Service employment. As of July 2001, the Postal Service had a backlog of some 400,000 job applicants and virtually no turnover. [2] In 2002, less than 1.5% of bargaining unit employees resigned before they retired, a “quit rate” that is lower than the rate for most private firms in America.

The Postal Service Pays More than 76% of its Revenues to Employees

The Postal Service employs approximately 843,000 people in both career and non-career positions (Exhibit 6-1), making its workforce more than twice the size of the United Parcel Service and more than four times the size of FedEx. All tallied, the Postal Service’s workforce as of 2002 was second in size only to Wal-Mart in the United States and was the fourth largest civilian workforce in the world (Exhibit 6-2). Approximately, one out of every three civilian employees of the U.S. government works for the Postal Service. [3] Given these facts, it comes as little surprise that more than $3 out of every $4 earned by the institution in Fiscal Year 2002—some $51.5 billion of $66.5 billion—went to pay the wages and benefits of its employees. [4]

Unlike their private-sector counterparts, however, total compensation costs are largely outside management’s control. Benefits are effectively set by statute. Costs for retiree health care and pension plans are skyrocketing for all employers, and the Postal Service has unfunded obligations for retiree health benefits of approximately $48 billion. [5] Yet retiree health care and pension benefits are effectively “off the table” of collective bargaining.

Exhibit 6-2

Source: Number of employees rankings by Fortune Magazine, April 14, 2003.

Exhibit 6-3

Source: USPS

Improve, Rather than Overhaul, Tools Available to Manage Workforce

The Commission firmly believes that postal workers should continue to have access to collective bargaining and total compensation comparable to, but not exceeding, the private sector. Both are consistent with an enterprise that operates in a business-like fashion and is charged with being self-financing. However, the Commission proposes several reforms aimed at achieving the following goals: delivering much-needed clarity to the definition of “comparability;” adjusting the collective bargaining model to encourage more timely resolution and greater fiscal restraint; reforming a broken system for dealing with employee-management disputes; and granting the Postal Service latitude to deal with the mounting costs of its workforce in innovative ways that neither add to the burden on ratepayers nor sacrifice the Postal Service’s commitment to compensating its employees at a level comparable to that of the private sector.

First and foremost, Postal Service management must repair its strained relationship with its employees, most prominently evidenced by the unusually high number of workforce grievances filed and appealed and the relatively frequent occurrence of contract negotiations being settled through protracted arbitration.

Second, management and employee unions must have a constructive mechanism to work together to bring expenses and revenues of the Postal Service into alignment. This includes allowing management greater flexibility in the deployment of the workforce as the nation’s postal network is realigned and redesigned over time. It also entails establishing an impartial mechanism for resolving deeply divisive debates about the possible existence of a total compensation premium for postal workers. Third, the Commission believes that successful management of the workforce requires far more than fixing problems and controlling costs. Building an incentive-based culture up and down the ranks is key to elevating the Postal Service to a new standard of performance. To align personal and institutional goals, the Commission recommends the development of an objective, understandable pay-for-performance program that grants all employees, not just management, a meaningful stake in the success of the Postal Service. Simply put, the Postal Service cannot deliver the service the nation needs and deserves if its managers and employees are not working together effectively. As such, the Postal Service must be given an array of tools to manage its workforce constructively in a period of fundamental change.

Toward More Constructive Collective Bargaining

As mentioned previously, postal workers enjoy a special status within the Federal government in light of their right to negotiate compensation and other basic working rights and conditions through collective bargaining. The Commission favors retaining this important tradition, but recommends several constructive reforms aimed at strengthening this vital process to improve the often adversarial relationship between management and employees.

In making its recommendations, however, the Commission wishes to clearly note that its collective bargaining proposals are prospective. They would not affect existing negotiated agreements. Nor would they impact the status of current Postal Service retirees. The Commission endorses the collective bargaining process. Its recommendations simply aim to make possible in the future a more effective and constructive engagement between Postal Service management and the men and women who handle, process, and deliver the nation’s mail.

The unique status of the Postal Service—a government entity required to act in a businesslike manner—is readily apparent in the design of its collective bargaining process. On the one hand, if the Postal Service were a standard Federal agency, its wages and benefits would not be subject to negotiation. On the other hand, if it were a private corporation, it would operate under a collective bargaining model that would arm each side with the ultimate “big stick”—for employees, the right to strike; for the Postal Service, the right to lockout workers without a contract.

Given the essential nature of the service provided by postal workers, Congress expressly forbade these traditional bargaining weapons in the 1970 Act. Instead, the existing collective bargaining provisions provide two avenues for the parties to use in reaching an agreement—they can jointly agree on alternative negotiation procedures before an existing agreement expires, or follow the procedures outlined in statute. The statutory process allows a minimum of 225 days of negotiation, fact finding and arbitration. In recent years, the parties have consistently agreed to forego that process in favor of alternative procedures. The alternative process used by the parties typically involves a three-person arbitration board consisting of one arbitrator selected by management, one selected by the union, and a third “neutral” arbitrator selected by the other two. Because the parties often agree to go directly to arbitration, the fact-finding process is rarely used. One seasoned participant aptly likened this segment of the process to a “dead letter.” [6]

Under the alternative process generally used by the parties, the arbitration board is not limited to selecting a proposal submitted by one of the parties. Instead, the board has the freedom to fashion a compromise or to come up with a wholly new, binding approach. Further, because the alternative procedures generally do not include strict time requirements, the length of the proceedings are often extended far beyond the timeframes contemplated in the 1970 Act’s collective bargaining provisions. In fact, the last three proceedings took between 13 months and 17 months to conclude.

Not only has the current process resulted in lengthy proceedings, the Postal Service also lags behind the private sector in its ability to negotiate contract settlements without resorting to arbitration. With respect to the Postal Service’s largest union, nearly 1 in 3 contract agreements have required arbitration. [7] However, the testimonies of numerous collective bargaining experts persuasively make the case that the fault lies not with the parties, but with a process ill-suited to the unique context of the Postal Service.

At the heart of the problem is the inherently circular nature of the current collective bargaining model. Parties enter into negotiations, identify issues that can be agreed upon, and then work toward each other on the issues that divide them. At a certain point, absent the “big sticks,” parties sometimes conclude they have nothing to lose by going to arbitration. At that point, both sides revert to their original position and prepare to begin their arguments all over again for the arbitrators. In short, the current system provides few incentives for the parties to reach a negotiated settlement. Instead, it appears to leave difficult decisions to arbitrators, rather than the parties who have to live with the arbitrators’ decisions.

At a time when the Postal Service needs to significantly control costs and realign its workforce, a process that fosters management- employee discord and deters timely and reasonable compromises is especially counterproductive. It produces a “chilling effect” not only on the collective bargaining process, but also on the relationship between management and employees, and ultimately the service both are capable of delivering to customers.

The solution initially advocated by the Postal Service in its Transformation Plan would grant the Postal Service and its employees the same right to strike and to lockout, respectively, enjoyed by their private-sector counterparts. While adding the risk of such extreme actions into the mix certainly could stimulate dispute resolutions, the Postal Service has since, appropriately, reconsidered this recommendation recognizing its high price. Without question, a strike of potentially hundreds of thousands of postal workers would be unprecedented in scope and devastating in its impact on the economy. The nation simply cannot accept such a risk.

The Commission recommends a more constructive, middle-ground approach. In fact, in the primary weakness of the current model—its drawn-out pacing, litigious nature and multiple redundancies—lie the core ingredients of a better approach called “mediation and arbitration.” “Med-arb,” as it is known, is far better suited to ensure each stage of the labor-management dialogue builds on the progress to date, rather than permitting the parties to retrench to the hard-line positions from which they began their negotiations.

Under a med-arb approach, the rarely used “fact-finding” phase would be replaced with an intensive and mandatory mediation stage that the Commission proposes to begin immediately after a contract expires without a new agreement in place. In this phase, a respected and experienced mediator—jointly selected by the parties from a list provided by the Director of the Federal Mediation and Conciliation Service (“FMCS”)—works with the parties to navigate any stalemates and forge an agreement, if possible. If not, the list of outstanding issues is narrowed, so the arbitration can focus on the key differences rather than reopen every debate. Also to keep the process advancing toward resolution, the Commission proposes that this mandatory mediation phase last no more than 30 days.

A New, Time-Sensitive Approach to Arbitration

If the process moves to arbitration, once again the progress to date is maintained. This is due to a core med-arb requirement—that the mediator serve on the arbitration panel, along with two other neutral arbitrators (each of whom would be selected by one of the parties from a list provided by the Director of FMCS). By carrying over the mediator, the progress gained in the negotiation and mediation phases is not lost, as it often is under the current model. All parties are focused solely on the outstanding issues identified in the mediation phase. The arbitrators also are aware of what tentative concessions both sides have offered in seeking to reach agreement. Therefore, there is little opportunity for either side to revert to original bargaining positions, open up old debates and force the entire process to start from scratch.

To further strengthen the momentum toward resolution, the Commission proposes that the arbitration stage last no more than 60 days and be broken up into several distinct phases. For the first 40 days, both sides should present their arguments to the arbitration panel and continue negotiating with each other. At the end of that period, each side should be required to produce two good-faith offers, share them with the other side, and try once more to negotiate a resolution.

If there still is no agreement, then the Commission proposes to escalate the stakes, asking each side to produce one “last best final offer” (“LBFO”). To further nudge the parties together, the Commission proposes that the arbitration panel be required to select one of the two packages and be permitted to fashion its own award only if both packages fail to honor the comparability standard set by the Postal Regulatory Board (discussed in the next section). The LBFO strategy is a technique used in negotiations with essential employees, such as police officers and firefighters, in numerous states. [8] It places extraordinary pressure on both sides to produce a reasonable, workable compromise that incorporates the core interests of both parties. It also places a high risk on insisting on one-sided demands (i.e. the likelihood the arbitrators will simply select the other negotiating party’s package).

The Commission proposes that the arbitration panel have only three days to settle on a tentative award. At that time, the Commission proposes a 10-day period, which offers the two parties one last chance to fashion their own final agreement. This reflects a central theme of the new model crafted by this Commission: At every stage, parties have the opportunity to forge their own agreement and preempt the arbitrators’ award. The resulting cycle—repeatedly going back to the negotiating table with a more refined set of choices and pressed on by a strict timeline and the prospect of an LBFO award—keeps the pressure on the parties that have to live with the final outcome of the process to take care of business themselves and do so in a timely and mutually agreeable manner, rather than a lengthy and confrontational one.

Comparability Must Cover Total Compensation

The most thorny issue in collective bargaining today is pay and benefit comparability. As mentioned earlier, Postal Service workers currently enjoy the best of both the public- and private-sector worlds—salaries akin to those offered by leading corporations, plus the substantial job security and benefits associated with Federal employment. This notion of matching private-sector compensation is clearly endorsed in the 1970 Act, which directs compensation for Postal Service employees and officers to be “comparable to the rates and types of compensation paid in the private sector of the economy of the United States.” Yet the statute contradicts itself by excluding pensions from collective bargaining and effectively taking retiree health benefits off the table, as well, by requiring that they be maintained at the generous levels in place when the 1970 Act became law. By demanding pay comparability yet effectively excluding sizable pension and health benefits from collective bargaining, the 1970 Act forces negotiators and arbitrators alike to focus almost exclusively on wages. The consequence has been a heated 30-year debate over the meaning of pay comparability, one that regularly antagonizes the collective bargaining process. It is the Commission’s view that the benefits of comparability are undermined for all parties when significant segments of total compensation are rendered non-negotiable. For bargaining-unit employees, this places disproportionate downward pressure on wages, rather than across wages and benefits. For ratepayers, it is unfair to ask that they finance postal compensation above the generous provisions of the law (i.e. comparability to the private sector).

Compensation Premium Debate Requires Independent Resolution

While the Commission strongly supports total compensation comparability, it recommends that this commitment be appropriately and clearly measured by an independent entity—the Postal Regulatory Board—and used as a ceiling in collective bargaining. While the clear intent of the comparability standard is to ensure wages do not lag behind the private sector, expert witnesses made the case to the Commission that a premium may exist today. [9] Appearing to support these claims is the low turnover rate and the fact that new hires, on average, receive a 28.4% pay increase when they join the Postal Service. [10]

In the arena of benefits, the contrast is even more pronounced. While health care benefits are part of the collective bargaining process, employees have access to the full range of generous plans available to Federal employees. They also contribute only slightly more than half (16.5% of the total premium) of what private-sector workers contribute (about 31.5% of the total premium) [11] and of what other Federal workers pay (about 28% of the total premium) for health care coverage.

Retirement benefits are even more generous, rising with inflation (a rare provision among private plans). The Postal Service, like the Federal government overall, permits employees to retire as early as age 55 (under the Civil Service Retirement System, CSRS) and as early as age 57 (under the Federal Employee Retirement System, FERS) with a full pension. And, while fewer private companies today offer retiree health care benefits (and many more are shifting a greater percentage of the costs to recipients), [12] these benefits remain a mainstay at the Postal Service.

In sum, these benefits accounted for just under $20 billion of the $51.5 billion the Postal Service spent on its employees in Fiscal Year 2002—almost $1 out of every $3 the Postal Service spent in that fiscal year. [13] A lack of negotiating authority with respect to these costs would be intolerable to most private-sector companies. They should be brought within the collective bargaining process at the business-oriented Postal Service, as well.

To assist the Postal Regulatory Board, the Commission recommends clarifying the meaning of the term “comparability” by revising 39 U.S.C. § 101(c). The Commission suggests a definition substantially similar to the following:

As an employer, the Postal Service shall achieve and maintain compensation for its officers and employees comparable to the total rates and types of compensation paid in the private sector of the economy of the United States. The term “total rates and types of compensation” shall include wages, holidays, leave, insurance, pensions, medical and hospital benefits, the continuity and stability of employment and all other benefits received.

a standard of comparability to the total compensation and benefits paid for comparable levels of work in the private sector of the economy as determined by the Postal Regulatory Board. Factors to be considered by the Postal Regulatory Board should include the economic history of the employer, present financial health and ability to pay, as well as anticipated future growth, productivity, and total labor costs.

In making the determination of whether a compensation premium exists, the Postal Regulatory Board should be authorized to consult with the Secretary of Labor, the Secretary of the Treasury, the Director of the Office of Personnel Management, the Comptroller General of the United States, and other individuals and organizations that the Postal Regulatory Board deems necessary.

The Commission believes that all individual components of total compensation should be subject to the collective bargaining process, as is the case in the private sector. This approach could require granting the Postal Service and its unions the flexibility to develop new plans separate and apart from existing Federal pension and health care programs. The Commission, however, is concerned about the potential impact of such a step on other Federal employees. Therefore, it recommends that the Postal Service work with the Department of the Treasury, the Office of Personnel Management, and others to determine the impact that creating separate Postal Service pension and health care plans would have on existing Federal systems and workers.

As a first step, the Commission recommends: (1) authorizing the Postal Service to negotiate FERS eligibility requirements and employee contributions; (2) authorizing the Postal Service to negotiate the eligibility and retiree contributions under the post-retirement health care component of the Federal Employee Health Benefit Program for future Postal Service retirees; and (3) repealing language in the 1970 Act that effectively freezes fringe benefits at levels in place when the Postal Reorganization Act became law on July 1, 1971.

By excluding significant benefits from the collective bargaining process, the 1970 Act denies negotiators and arbitrators alike the ability to factor the entire wage/benefit package into the agreement. By amending the 1970 Act to include a broader range of benefits in the collective bargaining process, negotiators and arbitrators will be better able to ensure private-sector comparability across most wage and benefits components.

Addressing the Protected Status of Represented Employees in the Comparability Analysis

The Commission’s proposed definition of comparability includes the phrase “continuity and stability of employment” as a benefit to be considered in the computation of comparable total compensation. This language refers to protection against layoff, a benefit currently enjoyed by more than 580,000 Postal Service employees (Exhibit 6-4). Layoff protection is not guaranteed by the 1970 Act, but instead is negotiated by the Postal Service and its major unions as part of the collective bargaining process. The “no layoffs or reduction in force” provisions (Article 6) in the current collective bargaining agreements date back almost 25 years and have been included in successive agreements. For three of the Postal Service unions, layoff protection covers all career employees who have been part of the Postal Service workforce on a full-time basis for at least six years. For the fourth union, layoff protection extends to every career employee regardless of his or her term of service.

Exhibit 6-4

The Commission believes that existing protections against layoff will not impair the ability of the Postal Service to “rightsize” its workforce in the near term. The Commission also believes it is critical for Postal Service management to ensure that future collective bargaining agreements provide the necessary flexibility to manage the size and deployment of the Postal Service workforce.

The Commission, however, was divided on the appropriateness of no-layoff provisions in future agreements between the Postal Service and its represented workforce. In light of the potential of declining mail volumes, a majority of commissioners (6) believe that future Postal Service managers should have the flexibility to make necessary adjustments in the size of the workforce without the constraints imposed by these provisions. These commissioners note that protection against layoff is a benefit not available to other Federal employees, who are subject to Federal reduction-in-force requirements in the event there is no longer any work for them to perform. They also note that layoff protection is rare in the private sector today, as companies demand the flexibility to rightsize their workforces as market conditions warrant.

A majority of commissioners would therefore recommend that the 1970 Act be amended to require that future Postal Service employees (i.e., employees hired by the Postal Service after a change in the law) be covered by the same reduction-in-force rules as other Federal employees and to specify that this requirement may not be varied through the collective bargaining process. Under this approach, Postal Service workers hired before the change in the law could continue to enjoy layoff protection negotiated on their behalf through the collective bargaining process.

A minority of commissioners (3) believe that a statutory prohibition against the negotiation of no-layoff provisions protecting future Postal Service workers would undermine the authority of the new Board of Directors and would unnecessarily intrude into the collective bargaining process. The minority notes that Postal Service management has the ability today, and will continue to have the ability, to seek the removal of these provisions in future negotiations with the major Postal Service unions.

The minority also believes that job security is a legitimate subject of collective bargaining. In their view, specific circumstances may arise in which offering job security or no-layoff arrangements would demonstrably be in the best interests of the Postal Service. In addition, the minority notes that taking layoff protection off the negotiating table through an overriding statutory prohibition is inconsistent with the Commission’s approach to governance and its desire to expand the range of issues subject to collective bargaining between the Postal Service and its represented workforce.

Comparability Analysis Should Bind Labor Negotiations

Finally, the Commission believes that the 1970 Act should be amended to establish that the comparability standard determined by the Postal Regulatory Board creates a ceiling over the negotiation and arbitration process. This limitation should be imposed immediately on the compensation of employees hired after the comparability analysis is completed, and gradually for existing employees, in the event that the Postal Regulatory Board determines a total compensation premium exists. Specifically, the Commission suggests that 39 U.S.C. § 1207(c)(2) be revised to read:

The arbitration board shall give the parties a full and fair hearing, including an opportunity to present evidence in support of their claims, and an opportunity to present their case in person, by counsel, or by other representative as they may elect. For existing employees, the arbitration board must consider the Postal Regulatory Board’s calculation of the total compensation premium and consider the Postal Regulatory Board’s deadline for eliminating the total compensation premium. For new employees, the arbitration board must apply the Postal Regulatory Board’s calculation of total compensation as a cap on total compensation. Decisions of the arbitration board shall be conclusive and binding upon the parties. The arbitration board shall render its decision within 60 days after its appointment.

In effect, this recommendation would create a two-tiered system aimed at applying the discipline of a comparability standard to the collective bargaining process without unduly disrupting the relationship between management and current employees. For new workers hired after the comparability determination is made, its findings will immediately serve as a ceiling on total compensation. However, for existing employees, if the Postal Regulatory Board determines a compensation premium exists, then it will calculate the extent of the premium and set a reasonable timeframe for the Postal Service and unions to eliminate the disparity.

Because it is not the Commission’s intent to lower the real wages of existing employees, this time frame should be long enough to permit achieving comparability over a period of years. However, to keep the process advancing, arbitrators should be required to consider the extent to which each proposal advances comparability in determining their award. In addition, the Postal Regulatory Board should be tasked with periodically reviewing both its initial determination and the Postal Service’s progress in eliminating any premium. Beyond that, how the Postal Service and the unions meet this goal within the Postal Regulatory Board’s time frame shall remain flexible and be determined within the context of the collective bargaining process.

One inherent flaw in the current process, as it applies to the Postal Service, is the common knowledge among all parties that ratepayers can be asked to make up any deficit. This is hardly the case in the private sector, where management ultimately could plead for the parties’ mutual interest in the enterprise’s financial viability. Having the Postal Regulatory Board’s comparability standard limit total compensation seeks to replicate this private-sector discipline.

Addressing Significant Retiree Benefit Obligations

Nearly half a million Americans today are retired postal workers. As a result, pension and retiree health benefits alone comprise $6 billion of the annual $12 billion the Postal Service pays out in fringe benefits. [16] As pension and health care costs skyrocket for all employers, the Postal Service is not alone in its need to manage this large liability effectively. Postal Service employees, too, have a stake in this effort. Particularly given the fact that more than 45% of the Postal Service’s career workforce is within a decade of the minimum retirement age (Exhibit 6-3), involving these benefits in the collective bargaining process will ensure that the health care needs of future postal retirees are adequately addressed as the Postal Service works to control and manage this large category of expense.

Postal Service Owes the Public Complete Transparency

The Postal Service must also address the substantial benefits obligations its legacy systems have already accrued. In this arena, the Postal Service has a “good news, bad news” situation. The good news is that recently enacted legislation reduced the Postal Service’s unfunded liability for CSRS pension benefits (those covering employees hired before 1984) from $32.3 billion to $5.8 billion. [17] The bad news, however, is that the Postal Service today continues to have an unfunded retiree health benefit obligation of about $48 billion. [18]

Board of Directors consider funding a reserve account to begin paying down this obligation, so future ratepayers are not forced to pay for postal services delivered to the nation today.

Taxpayers, Not Ratepayers, Should Finance Military Pensions

With regard to the CSRS pension fund surplus, President Bush in April signed into law the Postal Civil Service Retirement System Funding Reform Act (Public Law 108-18), which lowered the Postal Service’s annual contribution to fund its remain-ing liability. Because the old statutory funding formula required higher payments that would have eventually resulted in the Postal Service overfunding its CSRS obligations, the new formula will translate into about $3 billion in available revenues in 2003, which are being used to pay down a sizable portion of the Postal Service’s debt owed to the Department of the Treasury.

This legislation was a positive step. However, included in the law permitting the Postal Service to adjust its pension contributions was language requiring the Postal Service to fund the CSRS retirement benefits of its employees that were earned while serving in the U.S. military. The cumulative cost to the Postal Service of funding the military service component of its CSRS retirees’ pension payments has been estimated by the GAO to be $27.9 billion. [19]

As explained by the Office of Personnel Management (“OPM”) during Congressional hearings on this legislation, it has been standard practice for all Federal agencies to cover the total actual pension costs of their retirees under FERS since its inception in 1984. OPM noted that contributions made by Federal agencies for their retirees under CSRS have always been handled differently, with many agency contributions (such as those made by the Postal Service) being calculated based on legislative mandates that are not linked to actual costs. OPM viewed the bill that was later enacted as P.L. 108-18 as an opportunity to make future Postal Service CSRS contributions incorporate all retirement liabilities associated with Postal Service retirees, as well as all payments and earnings. In OPM’s view, this approach simply made Postal Service contribu-tions for CSRS costs consistent with those it makes for costs under FERS.

In addition, requiring Federal agencies financed through Congressional appropriations to cover the military retirement benefits of its employees still ultimately taps resources from the same appropriate revenue source—taxpayers. Requiring a self-financing Federal entity to follow suit is wholly different. It asks those who use the nation’s postal system to subsidize the U.S. military every time they use the mail. The Commission recommends repeal of this requirement. Fortunately, by directing the Postal Service, the Department of the Treasury, and OPM to submit proposals regarding the funding of military benefits of postal employees, P.L. 108-18 provides the basis for Congress to revisit the issue. The Commission supports returning responsibility for this portion of retiree benefits to the Department of the Treasury, where it resided before the recent legislation, and where this liability can be financed through funds generated by taxpayers.

Building an Incentive-Based Culture of Excellence

With a stronger collective bargaining process in place that permits the Postal Service to address the entire compensation equation, it is equally important that Postal Service management acknowledge that employee morale is vital to the success of any service-oriented enterprise. This is especially true at such a defining moment for the Postal Service, when substantial productivity gains and significant realignment of the workforce are needed to ensure the institution’s continued ability to fulfill its mission of universal service at affordable rates. To address employee job satisfaction and motivate the workforce behind broad institutional goals, the Postal Service has some significant repair work to do in order to strengthen the management-employee relationship. Central to this effort is substantially reducing the backlog of employee grievances pending arbitration and getting at the root cause of the unusually high volume of complaints. After the repair work is done, the Postal Service needs to build a well-designed incentive compensation program that goes beyond the upper ranks of management and makes all employees meaningful participants in the Postal Service’s success.

Last but not least, in light of its businesslike orientation, the Postal Service should be permitted to offer attractive and competitive salaries that can assist in recruiting and retaining top-level business leadership that is necessary to guide the Postal Service to a higher standard of excellence and value to the nation.

Reducing Grievances

Employee morale is an essential element of an incentive-based culture. It is undermined when employee-management relations are acrimonious. Unfortunately, the high number of “second step” grievances and the large backlog of grievances pending arbitration at the Postal Service today clearly indicate that the relationship between Postal Service management and workers is strained—to the detriment of employee morale, productivity and, ultimately, service to ratepayers. As cost containment and employee efficiency become pivotal to profitability, numerous service industries have worked with their unions to make dispute resolution more efficient and less contentious. The time has come to make this same progress in the Postal Service grievance process.

There is much ground to be gained. In 2002, 184,329 grievances filed by members of the Postal Service’s four major unions reached a “second step” appeal, and 106,834 were pending arbitration (Exhibit 6-4). Clearly something is wrong when a unionized workforce of 746,000 employees generates more than 184,000 “second step” grievances in a year’s time.

By comparison, with a workforce of nearly 102,000 employees, American Airlines launched a major Alternative Dispute Resolution initiative when its backlog of employee complaints reached a mere 800. [20] The Commission is confident in its assessment that not only does the current grievance dispute resolution process at the Postal Service lag behind the best practices of the business world; it likely brings up the rear.

While the Postal Service has separate dispute resolution agreements with each of its four major unions, the process starts generally with an employee, possibly accompanied by a union steward, discussing the dispute with the supervisor. [21] If a successful process were in place, most grievances would be resolved at this stage, by the primary parties. More often than not, however, the grievance escalates through numerous time-consuming steps, ultimately ending with arbitration. Here, the adversarial relationship is quite apparent in both the significant number of grievances appealed and the significant backlog of complaints awaiting arbitration. In Fiscal Year 2002, 115,065 grievances advanced to “second step” appeal and 89,784 were “pending arbitration” at just one union, the American Postal Workers Union, adding up to two grievances for every three of their represented employees (Exhibit 6-5).

Exhibit 6-5

A Strained Relationship: "Second Step" Appeals and Pending Arbitration

Source: ADR Associates, LLC, Report to Commission (June 2003).
*Data through April 7, 2003

The Commission notes the encouraging progress being made by the National Association of Letter Carriers. The union and the Postal Service recently completed the first totally restructured and streamlined grievance procedures for any postal union in 23 years. After only one year, its pilot phase resulted in 78% of grievances being resolved locally and a 65% decline in appeals. And, as of July 2003, the backlog of pending grievances was down 74% since 1998. The Commission believes that Postal Service managers should work aggressively to establish similar productive agreements and relationships with the other employee unions.

By resolving more disputes at the local level, reducing the number of steps involved before a case goes to arbitration and establishing a common understanding between the Postal Service and the union with regard to key contract provisions, the NALC process aims both to resolve individual grievances quickly and locally and also to foster awareness among all parties of what, precisely, the work rules and other contract stipulations are in order to prevent future disputes. Given the success of these reforms, the Commission believes that a concerted effort to establish similar agreements with the other major postal unions should be a primary objective. The Commission suggests that the Postal Service establish pilot programs with the following attributes:

• Mandatory mediation at the local level;

• Use of neutral third parties as mediators; and

• Jointly developed training for both union and management representatives.

For such programs to be successful, it is imperative that the Postal Service give clear direction that settlement of problems and cooperative labor-management relations are a priority. Additionally, it must hold managers accountable for behavior that results in poor labor-management relations.

Pay-for-Performance Incentives

Performance-based compensation programs, designed correctly, are a valuable tool for aligning the goals of employees with an institution’s mission-critical performance targets. With its large employee base, as well as its service and business orientations, the Postal Service is ideally positioned to reap the benefits of a well-designed and well-executed incentive compensation program. Toward that end, the Commission recommends that the Postal Service undertake a careful study of performance-based compensation, for both management and represented employees, and that it work with the unions and management associations to design and implement a pay-for-performance initiative that is meaningful to employees and capable of taking the Postal Service to a higher level of operational efficiency, productivity and quality.

While the Postal Service has attempted to implement performance-based compensa-tion programs in the past, these efforts have often run into challenges. Two years ago, the Economic Value Added Variable Pay Program and related Merit Pay Program were terminated amid political criticism. On the merits, the six-year effort appears to have been effective in focusing management on preventing workplace injuries, increasing productivity, improving on-time delivery and even reducing by 5% compensation costs as a percentage of Postal Service operating expenses. The effort eliminated cost-of-living and other standard pay increases for its top 83,000 employees, requiring instead that each manager earn any pay increase through performance. While the program was attacked for handing out more than $1 billion to Postal Service managers, it is worth noting that canceling automatic pay increases saved $2.4 billion.

The initiative’s shortcoming? It failed to involve the workforce as a whole. In fairness to the Postal Service, however, the notion of variable pay based on performance is frequently opposed by some union leaders. Earlier this year, the Postal Service began the National Performance Assessment, which relies on a balanced scorecard approach that links objective measures such as customer service, employee productivity and business productivity with compensation. While the focus again is on top managers, the Postal Service has plans to expand the program in 2004. The Commission urges union leadership to reconsider such initiatives and their ability to enhance the compensation of the represented workforce.

In a large organization in need of significant realignment, productivity gains and high-quality service, performance-based compensation can offer meaningful incentives to align the interests of workers with the specific performance goals of the institution as a whole. The Commission believes that developing and properly designing such a plan can serve as a powerful communications and motivational tool, helping employees understand how they can contribute to the organization’s financial health and success—and be rewarded for their effort.

In crafting its program, the Commission recommends that the Postal Service empha-size the following “best practice” features: 1) effective alignment of strategic priorities with desired employee behavior; 2) a simple plan design; 3) clear communication of the plan to employees; 4) a credible and reliable measurement process; 5) proper integration of the plan with workplace processes and systems; and 6) reasonable assurances that the plan will pay for itself through improved productivity. [22]

The Commission also encourages the Postal Service and its unions to think broadly in terms of incentives. For example, employees represented by the National Rural Letter Carriers’ Association today enjoy a very effective non-monetary incentive—an evaluated route process in which rural carriers are compensated for completing a set route, no matter how quickly and efficiently they get the job done. [23] This approach benefits both parties. It limits overtime costs to the Postal Service (the root cause of many carrier-related grievances), and it rewards productive workers, compensating them equally for performing their route in five hours, for example, as they would have been paid for eight hours of work. In other words, if they beat the “evaluated time” for their route, they are not penalized financially for doing so. The Postal Service should consider similar approaches with employees represented by its other unions.

Executive Compensation

While the 1970 Act calls for pay comparability for both managers and represented employees, it also includes a salary cap. As a consequence, executive compensation is nowhere near that of corporate leaders running comparably large enterprises. While it is not feasible that Postal Service executive compensation rival its private-sector counterparts, it is the Commission’s view that top managers’ pay

Exhibit 6-6

Source: USPS Transformation Plan.

should move significantly in that direction, with the caveat that it be closely tied to key performance measures for the Postal Service overall. As a consequence, the Commission recommends repeal of the Federal salary cap as it applies to the Postal Service (currently $171,900) and that the Board of Directors be authorized to establish rates of pay for top Postal Service officers and employees that are competitive with the private sector. Many Federal entities requiring a capable, experi-enced CEO and other top officers to ensure the quality and continuity of operations already have such authority. These entities include the Tennessee Valley Authority, the Federal Reserve Board, the Public Company Accounting Oversight Board and the Federal Home Loan Banks. [24]

Without such a move, the result is a compression of salaries at the top, leaving little financial incentive for top employees to take on new levels of responsibility or to perform at “break-through” levels. This cap also presents a significant recruiting and retention challenge for the top leadership posts. When compared to wages paid for similar private-sector positions, and even other self-financing government enterprises, the Postal Service simply cannot compete in attracting and retaining key managers who are capable of lifting the enterprise to new levels of performance and service. The cap should be lifted and the Board should have the discretion to set compensation to attract and retain qualified individuals in key leadership posts.

opportunities today to control labor costs and gain new efficiencies from its workforce through greater application of standard business practices. By making slight but meaningful adjustments in the Federal Employees’ Compensation Act (FECA) to reflect the Postal Service’s unique businesslike and self-financing role, the Postal Service can advance its goal of a leaner, more productive and less costly workforce, and emerge a stronger and more stable organization fully capable of continuing to play a vital role at the center of U.S. commerce and society.

Rein in Workers’ Compensation Liabilities

The 1970 Act requires Postal Service employees—like all Federal employees—to be covered by FECA, which authorizes the Federal workers’ compensation program. Under FECA, the Postal Service has maintained a broad and effective workers’ compensation program and recent efforts have lowered injury rates considerably. Since Fiscal Year 2000, the Postal Service has linked management compensation to improved worker safety. During this period, the Postal Service has seen annual improvements in safety, as measured by the Occupational Safety and Health Administration’s Injury Illness Frequency Rates. The Postal Service has also recently initiated an Ergonomic Strategic Partnership with OSHA, the American Postal Workers Union, and the National Postal Mail Handlers Union to reduce the number of musculoskeletal disorders, which account for more than 40% of workplace injuries and illnesses. The Commission applauds these efforts at making the Postal Service a safer workplace and urges the Postal Service to continue to make worker safety a top priority. Unfortunately, the application of FECA to the Postal Service has led to some costly and unintended consequences, most notably a $6.5 billion unfunded liability. [25] Unlike most workers’ compensation plans governing the private sector, FECA imposes no waiting period before benefits begin. Employees with dependents are eligible for 75% of their pay, rather than the standard 66 2/3%. There is also no maximum dollar cap on FECA payments. As a result, particularly when employees are receiving the 75% benefit, they often do not opt to retire, staying permanently on the more generous workers’ compen-sation rolls. Exhibit 6-7 illustrates the difference in take-home pay for an employee receiving a CSRS-based pension benefit versus the same employee receiving workers’ compensation benefits.

Exhibit 6-7

Source: USPS Transformation Plan

The Commission believes that the Postal Service, given its unique businesslike charter, should be provided relief from those provisions of FECA that are creating costly unintended consequences. Specifically, the Commission recommends that the Postal Service be permitted to:

• Impose a three-day waiting period before benefits begin;

• Limit benefits to two-thirds of an employee’s pay; and

• Transition workers’ compensation recipients to the appropriate retirement program when they become eligible for retirement. Similar measures are fairly standard practice in the provate sector.

District Managers, Managers of Post Office Operations, and Postmasters (Exhibit 6-8). While the Postal Service’s management structure is generally sound, there is always room for substantial improvement in an organization of the Postal Service’s size and nationwide reach. It is critical, for example, that communication of strategy and goals not get lost along the way from senior managers to represented employees. The Postal Service must also continually focus on removing layers of managerial bureaucracy with an eye toward simplicity and downward delegation. Removing layers of management and resting authority in lower level managers will free senior executives to focus on higher level strategy and goal-setting.

Exhibit 6-8

The Commission believes that the Postal Service’s network rationalization effort, already underway, provides a unique opportunity for the Postal Service to examine and realign its management structure at the same time it is working to realign its physical infrastructure and represented workforce. The Commission encourages the Postal Service to use this opportunity to examine every management position and managerial layer to determine how it fits into the larger organization and whether it aids in the fulfillment of the Postal Service’s overall mission. As part of the effort, the Postal Service should conduct a review of the entire management structure, size, and cost to determine whether each component necessary and consistent with the best practices of the private sector and to require managers to justify their functions and the size of their respective staffs.

The Postal Service, for example, recently announced the consolidation of the administrative functions in five of its 85 districts, thereby reducing the total number of districts to 80. [26] Is further consolidation possible? Does every district need to be headed by a single executive? Does the Postal Service have the appropriate number of areas and districts? These are the questions that Postal Service management must continually ask itself as it seeks to remove bureaucratic redundancies.

The Commission also believes that the Postal Service would benefit from greater consistency and standardization throughout its management ranks. To optimize efficiency, promote transparency, and improve communication across the organization, it is important that each managerial role be clearly articulated and standardized. While flexibility is important to foster a healthy work environment, it is vital that functions and roles be identical regardless of geography. Much like represented employees moving between plants, a Manager of Post Office Operations in Boston, for instance, should be able to replace seamlessly a Manager of Post Office Operations in San Francisco.

Finally, as with its workforce in general, the Postal Service will see large numbers of its managerial employees become eligible for retirement within the next few years–fully 55% of officers and executives will be eligible in 2006 compared with 26% in 2002. While this provides an opportunity for the Postal Service to simplify its management structure and remove redundant positions and unnecessary layers, it also presents the risk that the Postal Service may lose key personnel. The Commission believes the development of a succession plan for key management positions throughout the organization must be an ongoing priority of the Board of Directors.

Conclusion

As valuable as the Postal Service is to the nation, its ability to deliver that value is only as great as the capability, motivation and satisfaction of the people who make the daily delivery of the mail to virtually every American home and business possible. Their desire to make the modernization of the nation’s postal network a success, along with their willingness to make possible the Postal Service’s ambitious goals to rein in costs while improving productivity and service, will in no small part determine the success or failure of the entire transformation endeavor and, ultimately, the fate of universal service at affordable rates.

A new collective bargaining process that brings management and employees together and places a premium on constructive and timely resolutions, more businesslike flexibil-ity that permits the Postal Service to address mounting benefits liabilities, and a new commitment to making all employees vested in the enterprise—all these steps can help bring under control the extraordinary costs of the Postal Service’s national employee base. This result can be achieved without turning to ratepayers or sacrificing the Postal Service’s commitment to compensating its employees comparably to the private sector.

If the Postal Service proves capable of focusing its mission and purpose, its workforce must be no larger than necessary and committed to facing the realities of declining mail volumes and revenues. In this area, its strategy must be two-fold: minimizing the risk to taxpayers and ratepayers, and realigning the workforce to the realities of a leaner Postal Service without sacrificing service. A lean, motivated and strategically deployed workforce is essential to this equation.

Equally important is the potential of technology, even amid such a challenging transition, to propel the Postal Service to a new standard of excellence.

Endnotes

11. United States Postal Service, “History of the United States Postal Service 1775-1993,” On-line Posting, July 7, 2003, .

12. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing With Economic Issues,” Before the Interest Arbitration Panel in the Matter of United States Postal Service and American Postal Workers Union, AFL-CIO, Dec. 18, 2001, p. 3.

13. United States Office of Personnel Management, “Federal Civilian Workforce Statistics: Employ-ment and Trends as of March 2002,” June 2002, p. 6.

14. United States Postal Service, Annual Report 2002, p. 51.

15. Anderson, Barry B., Congressional Budget Office, Letter to the Honorable Jim Nussle regarding the proposal to reduce payments by the Postal Service to the Civil Service Retirement System, On-line Posting, Jan. 27, 2003, endnote 7, .

16. Dufek, Robert A., Counsel, United States Postal Service, Testimony Before President’s Commission on the United States Postal Service, Apr. 29, 2003, p. 5.

17. LeRoy, Michael H., Professor, Institute of Labor and Industrial Relations, and College of Law, University of Chicago at Urbana-Champaign, “Analysis of the U.S. Postal Service’s Current Collective Bargaining Model and Possible Alternatives,” May 10, 2003, p. 6.

18. Ibid., p. 2.

19. Wachter, Michael L., Professor, University of Pennsylvania Law School, Testimony Before President’s Commission on the United States Postal Service, Apr. 29, 2003, p. 4; Walker, David M., Comptroller General, United States General Accounting Office, Testimony Before President’s Commission on the United States Postal Service, May 29, 2003, p. 16-17.

10. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing With Economic Issues,” p. 8.

11. Rand, Thomas O.S., Consultant, Aon Consulting, Testimony Before President’s Commission on the United States Postal Service, May 28, 2003, p. 5.

12. The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2001 Annual Survey, p. 144.

13. Rand, Thomas O.S., Testimony Before President’s Commission on the United States Postal Service, p. 1.

14. Goldberg, Stephen B., Clauss, Carin A., and Dufek, Robert A., “Supplemental Opinion Dealing With Economic Issues,” p. 8-9.

15. Sauber, James, Research Director, and O’Hara, Amy, Research Economist, National Association of Letter Carriers, “Postal Service Benefit Costs: A Response to the Testimony of Thomas Rand to the President’s Commission on the United States Postal Service by the National Association of Letter Carriers.”

16. Dufek, Robert A., Testimony Before President’s Commission on the United States Postal Service, p. 7.

17. United States Postal Service, FY2003 Third Quarter Report: Financial Conditions and Results, On-line Posting, .

18. Anderson, Barry B., Letter to the Honorable Jim Nussle regarding the proposal to reduce payments by the Postal Service to the Civil Service Retirement System, endnote 7.

19. United States General Accounting Office, “Review of OPM Analysis of USPS CSRS Costs,” GAO-03-448R, Jan. 31, 2003, p. 28.

20. Roscoe, Jerry P., ADR Associates, LLC., “Analysis of United States Postal Service Grievance Procedures,” June 26, 2003, p. 23.

21. Agreement between United States Postal Service and American Postal Workers Union AFL-CIO, 2000-2003, Article 15, p. 90-109; Agreement between United States Postal Service and the National Postal Mail Handlers Union, A Division of the Laborers’ International Union of North America AFL-CIO, 2000-2004, Article 15, p. 68-84; Agreement between the United States Postal Service and National Rural Letter Carriers’ Association, 2000-2004, Article 15, p. 65-74; Agreement between United States Postal Service and National Association of Letter Carriers AFL-CIO, 2001-2006, Article 15, p. 66-78.

22. Watson Wyatt Worldwide, “Compensation and Incentive System Design Study,” June 6, 2003, p. 9-10.

23. Baffa, Gus, President, National Rural Letter Carriers Association, Testimony Before President’s Commission on the United States Postal Service, Apr. 29, 2003, p. 2.

24. Powelson, Richard, “TVA managers get $7.4 million in bonus pay,” Knox News, On-line Posting, Mar. 22, 2003, ; “Federal Reserve Board – 20 Highest Paid Employees,” American Banker Online, June 26, 2002, ; Blackwell, Rob, “What the Regulators Make,” American Banker Online, Aug. 27, 2002, ; Gordon, Mary, “SEC picks Fed official to oversee accountants,”The Register-Guard, On-line Posting, Apr. 16, 2003, ; 2002 Financial Report, Federal Home Loan Banks, Mar. 28, 2003, p. 142.

25. Annual Report, Notes to the Financial Statements, Note 3, p. 44.

26. United States Postal Service, “5 districts to consolidate: Springfield, MA; Akron, OH; Lancaster, PA; Long Beach, CA; San Jose, CA,” uspsnewsbreak p.m., July 11, 2003.

Forward • Executive Summary

Chapter 1 • Chapter 2 • Chapter 3 • Chapter 4 • Chapter 6
Conclusion