Declining Mail Volume and Growing Expenses Contribute to USPS’s Deteriorating Financial Condition

After about 30 years of relatively steady growth, USPS’s expenses began  consistently exceeding revenues in fiscal year 2007 (see fig. 1). As a  result, USPS has lost a total of $56.8 billion since fiscal year 2007.
The continued deterioration in USPS’s financial condition is due primarily  to two factors.  1.  Declining mail volumes: USPS continues to face decreases in mail  volume, its primary revenue source, as online communication and  e-commerce expand. While remaining USPS’s most profitable  product, First-Class Mail volume in particular has significantly  declined in recent years. For example, while total mail volume  declined 27 percent from its peak in fiscal year 2006 (including a 1  percent decline in fiscal year 2015), First-Class Mail volume has  declined to a greater extent—40 percent since its peak in fiscal  year 2001 (with a 2 percent decline in fiscal year 2015).
USPS reported that the most significant factor contributing to the  decline in First-Class Mail volume is the continued migration  toward electronic communication and transaction alternatives—a  migration USPS expects to continue for the foreseeable future.  USPS added that the decline in First-Class Mail was exacerbated  by the Great Recession that the National Bureau of Economic  Research reported as lasting from December 2007 to June 2009.  In the long run, USPS faces the risk of increasing diversion of mail  to electronic alternatives and the possibility of future economic  downturns that could negatively affect mail volumes. USPS has  reported that although increased shipping and package volume  has offset some of the declines in mail volume, this volume has a  smaller profit margin than First-Class Mail. USPS will need to be  efficient in its processing and delivery of packages to capitalize on  growth in that market.  2.  Growing Expenses: While mail volume has declined, USPS’s  operating expenses have been rising. USPS reported that its key  operating expenses grew in fiscal year 2015—notably salary  increases for unionized employees, as well as additional work  hours, in part due to a 14.1 percent growth in shipping and  packages, which are more labor intensive to process. Despite  efficiency initiatives such as consolidation of 36 mail-processing  facilities in 2015, total employee work hours increased, and the  size of USPS’s career workforce increased slightly in fiscal year  2015—the first increase in the size of the career workforce since  fiscal year 1999. Compensation and benefits comprise close to 80  percent of total USPS expenses. Thus, expenses will further grow  if increases in salaries and work hours continue. According to  USPS, increases in compensation and benefits costs (primarily  from increased wages) will add $1.1 billion in additional costs in  fiscal year 2016.
As previously discussed, USPS’s unfunded liabilities and debt have  become a large and growing financial burden, increasing from 99 percent  of USPS revenues at the end of fiscal year 2007 to 182 percent of  revenues at the end of fiscal year 2015 (see table 2 in app. I for more  detail). At the end of fiscal year 2015, USPS’s $125 billion in unfunded  liabilities and outstanding debt represented a $7.4 billion increase from  the previous year.
In addition, reduced mail volumes and growing expenses have  contributed to USPS’s inability to fully meet its requirement to prefund  retiree health benefits. The Postal Accountability and Enhancement Act  (PAEA) established the Postal Service Retiree Health Benefits Fund and  required USPS to begin prefunding health benefits for its current and  future postal retirees, with annual payments of $5.4 billion to $5.8 billion  from fiscal years 2007 through 2016, followed by actuarially determined  prefunding payments beginning in 2017 and every year thereafter. As of  the end of fiscal year 2015, USPS’s liability for retiree health benefits was  about $105.2 billion and the Postal Service Retiree Health Benefits Fund  balance was $50.3 billion, with a resulting unfunded liability of $54.8  billion. USPS has not made a prefunding payment since fiscal year 2011,  with a total of $28.1 billion in missed payments. These missed payments  represent about half of USPS’s total losses since fiscal year 2007. Even  without the annual prefunding requirement, however, USPS would have  still lost $10.8 billion during this time period. USPS has stated that it  expects to miss its required prefunding payment of $5.8 billion due at the  end of fiscal year 2016.

	USPS Will Remain Unlikely to Fully Make Required Retiree Health and Pension Payments

USPS will remain unlikely to fully make its required retiree health and  pension payments in the near future. Beginning in fiscal year 2017,  USPS’s payments will be restructured as it will no longer be required to  make fixed prefunding payments, but will be required to start making  annual payments based on actuarial determinations of the following  component costs: a 40-year amortization schedule to address the unfunded liabilities for  postal retiree health benefits,  the “normal costs” of retiree health benefits for current employees,  and a 27-year amortization schedule to address the unfunded liabilities for  postal pension benefits under the Civil Service Retirement System  (CSRS).
These payments are in addition to annual payments USPS is already  required to make to finance its pension benefits under the Federal  Employees Retirement System (FERS), which consists of a 30-year  amortization schedule to address any unfunded liabilities, and the normal  costs of FERS benefits for current employees. USPS will find it very  difficult to make all of these required payments given its financial  condition and outlook. As table 1 below shows, in fiscal year 2017, USPS  will be required to make an estimated total of $11.3 billion in payments for  retiree health and pension benefits under CSRS and FERS—about $4.6  billion more than what USPS paid in fiscal year 2015 for these benefit  programs.
In addition to declining mail volumes and increased expenses, USPS’s  ability to make its required payments for these retirement programs will  be further challenged due to:
Expiration of a temporary rate surcharge: USPS reported that it  generated $2.1 billion in additional revenue during fiscal year 2015  and $1.4 billion in additional revenue in fiscal year 2014 as a result of  a 4.3 percent “exigent” surcharge that began in January 2014.  However, USPS expects this surcharge to be discontinued around  April 2016, when the surcharge is expected to have contributed $4.6  billion in total additional revenue. USPS expects its additional revenue  from the exigent surcharge to be about $1.1 billion in fiscal year 2016,  with no additional revenue in fiscal year 2017, as the surcharge will  have expired. USPS recently reported that the expiration of the  exigent surcharge will have an adverse impact on its future operating  revenue and liquidity, and that its actions to increase efficiency,  reduce costs, and generate additional revenue may be insufficient to  meet all of its financial obligations or to carry out its strategy.
No new major cost-savings initiatives planned. USPS has no current  plans to initiate new major initiatives to achieve cost savings in its  operations.
USPS officials recently told us that it is not yet known whether USPS will  have sufficient financial resources to make all or a portion of its legally- required payments for retiree health and pension benefits at the time that  they become due. USPS further reported that without structural change to  its business model, absent legislative change, it expects continuing  losses and liquidity challenges for the foreseeable future.
Large unfunded liabilities for postal retiree health and pension benefits— which were $78.9 billion at the end of fiscal year 2015—may ultimately  place taxpayers, USPS employees, retirees and their beneficiaries, and  USPS itself at risk. As we have previously reported, funded benefits  protect the future viability of an enterprise such as USPS by not saddling  it with bills later after employees have retired. Further, since USPS  retirees participate in the same health and pension benefit programs as  other federal retirees, if USPS ultimately does not adequately fund these  benefits and if Congress wants these benefits to be maintained at current  levels, funding from the U.S. Treasury, and hence the taxpayer, would be  needed to continue the benefit levels. Alternatively, unfunded benefits  could lead to pressure for reductions in benefits or in pay. Thus, the  timely funding of benefits protects USPS employees, retirees,  beneficiaries, taxpayers, and the USPS enterprise.

	Congress Faces Difficult Choices to Address USPS’s Financial Condition

USPS’s financial situation leaves Congress with difficult choices and  trade-offs to achieve the broad-based restructuring that will be necessary  for USPS to become financially sustainable. USPS’s ability to make its  required retiree health and pension payments requires a decrease in  expenses or increase in revenues, or both. As we have previously  reported, USPS’s actions alone under its existing authority will be  insufficient to achieve sustainable financial viability; comprehensive  legislation will be needed. Congressional decisions about how to  address the following issues will shape USPS’s future role, services,  operations, networks, and ability to adapt to changes in mail volume. In  making these decisions, Congress could consider, among other things,  the following factors.
The level of postal services and the affordability of those services:  USPS’s growing financial difficulties combined with vast changes in  how people communicate provide Congress with an opportunity to  consider what postal services will be needed in the 21st century.  Specifically, Congress could consider what postal services should be  provided on a universal basis to meet customer needs and how these  services should be provided. Congress also could consider trade-offs  in reducing the level of postal services, such as providing USPS with  the authority to reduce the frequency of letter mail delivery, to enable  USPS to reduce its expenses. A key factor in any consideration to  reduce postal services would include potential effects on postal  customers, mail volumes, and employees. In particular, Congress  could consider the quality of postal service—such as the frequency  and speed of mail delivery and the accessibility and scope of retail  postal services—in considering any service reduction. In January  2015, for example, USPS revised its standards for on-time mail  delivery by increasing the number of days for some mail to be  delivered and still be considered on time. However, under the revised  delivery standards, the percentage of mail delivered on time declined  for many types of mail, such as First-Class Mail and Periodicals.  USPS attributed declines in delivery performance to operational  changes it implemented in January 2015 coupled with adverse winter  weather.
Compensation and benefits in an environment of revenue pressures:  Key compensation and benefits costs have increased and continue to  increase for USPS employees, while demand for USPS’s main  revenue source, mail and First-Class Mail in particular, has declined  and continues to decline. Further, the exigent rate increase mentioned  above is expected to expire in April 2016. To put USPS’s situation into  context, many private sector companies (such as automobile  companies, airlines, mail preparation and printing companies, and  major newspapers) took far-reaching measures to cut costs (such as  reducing or stabilizing workforce, salaries, and benefits) when the  demand of their central product and services declined. However,  although USPS also has taken a range of cost-cutting measures,  USPS has stated that its strategies to increase efficiency and reduce  costs by adjusting its network, infrastructure, and workforce and to  retain and grow revenue are currently constrained by statutory,  contractual, regulatory, and political restrictions. For example, USPS  does not administer its employees’ pension, health, and workers’  compensation benefits programs, and postal rates are regulated by  the Postal Regulatory Commission, with rate increases for most mail  limited by an inflation-based price cap. Most USPS employees are  covered by collective bargaining agreements with four major labor  unions which have established salary increases, cost-of-living  adjustments, and the share of health insurance premiums paid by  employees and USPS. When USPS and its unions are unable to  agree, the parties are required to enter into binding arbitration by a  third-party panel. There is no statutory requirement for USPS’s  financial condition to be considered in arbitration. Considering USPS’s  poor and deteriorating financial condition and the competitive  environment, we continue to believe—as we reported in 2010—that  Congress should consider revising the statutory framework for  collective bargaining to ensure that USPS’s financial condition be  considered in binding arbitration.
USPS’s dual role of providing affordable universal service while  remaining self-financing: As an independent establishment of the  executive branch, USPS has long been expected to provide  affordable, quality, universal delivery service to all parts of the country  while remaining self-financing. USPS and other stakeholders have  considered a range of different business models to address USPS’s  financial difficulties. For example, USPS’s 2002 Transformation Plan  included a range of alternatives from a publicly-supported model to a  business model with a corporate structure supported by shareholders.  An alternative business model, if any, would need to address the level  of any costs that would be transferred from USPS, which is financed  by postal ratepayers, to the federal government, which is funded by  taxpayers. In addition, if Congress requires eligible postal retirees to  participate in Medicare, as USPS has previously proposed, it should  consider the tradeoffs for the federal budget deficit and Medicare’s  financial condition, as well as the implications for affected  employees.
Finally, a fully functioning USPS Board of Governors is needed to support  USPS’s ability to carry out its critical responsibilities. USPS’s 11-seat  Board of Governors is required by law to have a quorum of six members  in order to take certain actions. Because two Governors left the Board in  December 2015 due to term limits, the Board currently consists of only  one Governor (who will not be able to serve past December 2016), the  Postmaster General, and the Deputy Postmaster General. Certain powers  are reserved to the Governors. USPS has reported that although the  inability of the Board to constitute a quorum does not inhibit or affect the  authority of the Governors in office from exercising those powers, it is not  apparent how those powers could be exercised if there were no  Governors. According to USPS, the critical responsibilities reserved to the  Governors are setting postal prices, approving new products, and  appointing or removing the Postmaster General and the Deputy  Postmaster General. USPS has stated that in the event no Governors are  in place, these critical duties may not be able to be executed, potentially  leaving USPS without the ability to adjust its prices as needed, introduce  new products, or appoint or replace its two most senior executive officers.
In conclusion, USPS management, unions, the public, community  leaders, and Members of Congress need to take a hard look at what level  of postal services residents and businesses need and can afford. The  status quo is not sustainable.
Chairman Johnson, Ranking Member Carper, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  answer any questions that you may have at this time.

	GAO Contact and Key Acknowledgments

For further information about this statement, please contact Lori  Rectanus, Director, Physical Infrastructure Issues, at (202) 512-2834 or  rectanusl@gao.gov. Contact points for our Congressional Relations and  Public Affairs offices may be found on the last page of this statement. In  addition to the contact named above, Frank Todisco, Chief Actuary, FSA,  MAAA, EA, Applied Research and Methods; Teresa Anderson; Samer  Abbas; Kenneth John; Faye Morrison; and Crystal Wesco made important  contributions to this statement. Mr. Todisco meets the qualification  standards of the American Academy of Actuaries to render the actuarial  opinions contained in this testimony.

Appendix I: U.S. Postal Service (USPS) Financial Obligations and Related Information

Selected USPS liabilities (Included  and Pension Funds (Not fully  on USPS balance sheet) included in USPS Balance Sheet)
Funded  status for  retiree  health  benefits  (unfunded)
Funded  status for  CSRS  (unfunded)
Funded  status for  FERS  (unfunded)
Unfunded  obligations,  liabilities,  and debt as  percentage  of revenue   (12.7) (55.0) (3.1) (12.5) (53.5) (9.0) (13.2) (52.0) (7.3) (13.6) (48.6) (14.2) (46.2) (17.8) (13.7) (47.9) (18.8) (12.5) (48.3) (17.8) (0.1) (12.5) (48.9) (19.4) (3.6) (12.5) (54.8) (20.4) (3.7)
Total  USPS  liabilities,  debt, and  unfunded  obligations   (74.3)  (83.7)  (85.9)  (74.3)  (103.7)  (112.1)  (110.9)  (117.8)  (125.2)
Unfunded obligations, liabilities, and debt are the sum of the unfunded actuarial liabilities  (obligations), USPS liabilities, and debt shown in this table.  Total USPS revenue consists of total USPS operating revenue plus interest and investment income  for each fiscal year.  Total assets consist of current assets including cash and noncurrent assets largely comprising  property and equipment measured at historic purchase value after depreciation. This does not include  assets funding the retiree health and pension benefits.
Net CSRS  funded  Status  (unfunded)
Net FERS  funded  status  (unfunded)
Total pension  funded status  (unfunded) (3.1)  (9.0)  (7.3)  (17.8)  (18.8)  (17.8) (0.1) (19.4) (3.6) (20.4) (3.7)
5.3   (2.5)  (0.4)  12.5   (15.2)  (17.9)  (17.9)  (23.0)  (24.1) (52.0)   (48.6)   (46.2)   (47.9)   (48.3)   (48.9)   (54.8)

	2016 Total

5.8  33.9  Pension  and retiree  health  benefit  funded  status   (49.7)  (56.0)  (52.4)  (36.1)  (61.4)  (65.8)  (66.2)  (71.9)  (78.9)
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Summary:
Why GAO Did This Study

USPS is a critical part of the nation's communication and commerce, delivering 154 billion pieces of mail in fiscal year 2015 to 155 million delivery points. However, USPS's mission of providing prompt, reliable and efficient universal services to the public at risk due to its poor financial condition. USPS's net loss was $5.1 billion in fiscal year 2015, which was its ninth consecutive year of net losses. At the end of fiscal year 2015, USPS had $125 billion in unfunded liabilities, mostly for retiree health and pensions, and debt—an amount equal to 182 percent of USPS's revenues.
In July 2009, GAO added USPS's financial condition to its list of high-risk areas needing attention by Congress and the executive branch. USPS's financial condition remains on GAO's high-risk list. In previous reports, GAO has included strategies and options for USPS to generate revenue, reduce costs, increase the efficiency of its delivery operations, and restructure the funding of USPS pension and retiree health benefits. GAO has also previously reported that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability.
This testimony discusses (1) factors affecting USPS's deteriorating financial condition, (2) USPS's ability to make required retiree health and pension payments, and (3) choices Congress faces to address USPS's financial challenges. This testimony is based primarily on GAO's work over the past 5 years that examined USPS's financial condition—including its liabilities—and updated USPS financial information for fiscal year 2015.

What GAO Found

The U.S. Postal Service's (USPS) financial condition continues to deteriorate as a result of trends including:
Declining mail volume : First-Class Mail—USPS's most profitable product—continues to decline in volume as communications and payments migrate to electronic alternatives. USPS expects this decline to continue for the foreseeable future.
Growing expenses: Key USPS expenses continue to grow, such as salary increases and work hours due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS's expenses.
USPS's financial condition makes it unlikely it will be able to fully make its required retiree health and pension payments in the near future. In fiscal year 2015, USPS was required to make $12.6 billion in retiree health and pension payments, but it only made $6.7 billion in payments as it did not make a required retiree health payment of $5.7 billion. USPS's required payments will be restructured in fiscal year 2017, with estimated payments totaling $11.3 billion—$4.6 billion more than what USPS paid in fiscal year 2015. USPS's ability to make these required payments will be further challenged due to:
Expiration of a temporary rate surcharge: This surcharge on most postal rates effective January 2014, which has generated $3.6 billion in additional annual revenues through September 2015, is expected to expire April 2016.
No new major cost savings initiatives are planned.
Large unfunded liabilities for postal retiree health and pension benefits—which were $78.9 billion at the end of fiscal year 2015—may ultimately place taxpayers, USPS employees, retirees, and their beneficiaries, and USPS itself at risk. As we have previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills later after employees have retired. Further, since USPS retirees participate in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits, and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay.
Congress faces difficult choices and tradeoffs to address USPS's financial challenges. The status quo is not sustainable. Considerations for Congress include the (1) level of postal services provided to the public and the affordability of those services, (2) compensation and benefits for USPS employees and retirees in an environment of revenue pressures, and (3) tension between USPS's dual roles as an independent establishment of the executive branch required to provide universal delivery service and as a self-financing entity operating in a businesslike manner.