USPS’s Financial Condition Continues to Deteriorate, and Its Financial Condition Has Been Added to Our High-Risk List

USPS’s financial condition and outlook continue to deteriorate with a  worsening outlook for mail volume and revenue. USPS currently projects a  mail volume decline of 13.7 percent for fiscal year 2009, triple the 4.5  percent decline in fiscal year 2008 and the largest percentage decline since  the Great Depression. As a result, USPS is projecting the following for  fiscal year 2009:        a net loss of about $7 billion, even if it achieves record cost savings of  about $6 billion;    an increase in outstanding debt by the annual statutory limit of $3 billion;  and,    despite this borrowing, an unprecedented $1 billion cash shortfall.
USPS has reported that it does not expect to generate sufficient cash from  operations to fully make its mandated payment of $5.4 billion for future  retiree health benefits that is due by September 30, 2009. Further, USPS  recently reported to Congress that—due to the need to maintain sufficient  cash to cover costs—it will not fully make this payment, even if it receives  $2 billion in relief from fiscal year 2009 retiree health benefits payments  that would be provided by H.R. 22, which has been reported out of the  House Committee on Oversight and Government Reform.
USPS also expects continued financial problems in fiscal year 2010, with a  similar deficit even if it achieves larger cost savings, and an even larger  cash shortfall. Under this scenario, USPS would increase its outstanding  debt by an additional $3 billion, which would bring its total debt to $13.2  billion at the end of fiscal year 2010—only $1.8 billion less than its $15  billion statutory limit.
USPS’s projected cost cutting of about $6 billion for this fiscal year is  much larger than its previous annual cost-cutting targets that have ranged  from nearly $900 million to $2 billion since 2001. However, USPS projects  cash shortfalls because cost cutting and rate increases will not fully offset  the impact of mail volume declines and other factors that increase costs— notably semiannual cost-of-living allowances (COLA) for employees  covered by union contracts. Compensation and benefits constitute close to  80 percent of its costs—a percentage that has remained similar over the  years despite major advances in technology and automating postal  operations. Also, USPS continues to pay a higher share of employee health  benefit premiums than other federal agencies. Further, it has high  overhead (institutional) costs that are hard to change in the short term,  such as providing universal service that includes 6-day delivery and  maintaining a network of 37,000 post offices and retail facilities, as well as  a delivery network of more than 149 million addresses.
Two days ago, we added USPS’s financial condition to the list of high-risk  areas needing attention by Congress and the executive branch to achieve  broad-based transformation. We reported that USPS urgently needs to  restructure to address its current and long-term financial viability.  USPS’s  cost structure has not been cut fast enough to offset accelerated decline in  mail volume and revenue. In this regard, USPS has high personnel costs,  including those to provide 6-day delivery and retail services.  To achieve  financial viability, USPS must align its costs with revenues, generate  sufficient earnings to finance capital investment, and manage its debt.
We noted that mail use has been changing over the past decade as  businesses and consumers have moved to electronic communication and  payment alternatives. Further innovations in, and use of, e-commerce and  broadband are expected. The percentage of households paying bills by  mail is declining while the percentage of electronic payments is increasing  (see fig. 1). Mail volume peaked in 2006, and its decline has accelerated  with the economic recession, particularly among major mail users in the  advertising, financial, and housing sectors. Mail volume has typically  returned after recessions, but USPS’s 5-year forecast suggests that much  of the lost volume will not return.
For these reasons, we concluded that action is needed in multiple areas,  including possible action and support by Congress, as no single change  will be sufficient to address USPS’s challenges.
The short-term challenge for USPS is to cut costs quickly enough to offset  the unprecedented volume and revenue declines, so that it can cover its  operating expenses.
The long-term challenge is to restructure USPS operations, networks, and  workforce to reflect changes in mail volume, use of the mail, and revenue.
Accordingly, we have called for USPS to develop and implement a broad  restructuring plan—with input from the Postal Regulatory Commission  (PRC) and other stakeholders, and approval by Congress and the  administration—that includes key milestones and time frames for actions,  addresses key issues, and identifies what steps Congress and other  stakeholders may need to take. We stated that USPS’s restructuring plan  should address how it plans to  realign postal services, such as delivery frequency, delivery standards, and  access to retail services, with changes in the use of mail by consumers and  businesses;    better align costs and revenues, including compensation and benefit costs;    optimize its operations, networks, and workforce;  increase mail volumes and revenues; and  retain earnings, so that it can finance needed capital investments and  repay its growing debt.

	Network Restructuring Needed to Help USPS Achieve Financial Viability

USPS needs to optimize its retail, mail processing, and delivery networks  to eliminate growing excess capacity and maintenance backlogs, reduce  costs, and improve efficiency. We recently reported that USPS needs to  rightsize its retail and mail processing networks and reduce the size of its  workforce. USPS has a window of opportunity to further reduce the cost  and size of its workforce through attrition and the large number of  upcoming retirements to minimize the need for layoffs. As the Postmaster  General testified this March, about 160,000 USPS employees are eligible  for regular retirement this fiscal year, and this number will grow within the  next 4 years to nearly 300,000. USPS has begun efforts to realign and  consolidate some of its mail processing, retail, and delivery operations, but  much more restructuring is urgently needed. We recognize that USPS  would face formidable resistance to restructuring with many facility  closures and consolidations because of concerns that these actions would  impact service, employees, and local communities. USPS senior  management will need to provide leadership and work with stakeholders  to overcome resistance for its actions to be successfully implemented.  USPS must use an open and transparent process that is fairly and  consistently applied; engage with its unions, management associations, the  mailing industry, and political leaders; and demonstrate results of actions.  In turn, these stakeholders and Congress need to recognize that major  changes are urgently needed for USPS to be financially viable.

		USPS Has Recently Begun Efforts to Consolidate Retail Facilities

To its credit, USPS recently began a national initiative to consolidate some  of its 3,200 postal retail stations and branches in urban and suburban  areas. It has nearly completed an initial review to identify which facilities  will be studied for consolidation, and expects the studies to take about 4  months, with final decisions made starting this October. USPS has  processes for notifying its unions and management associations, soliciting  community input, and notifying affected employees as it winnows the list  of stations and branches it is considering for consolidation (see fig. 2).
On July 2, 2009, USPS requested that PRC provide an advisory opinion on  USPS’s retail consolidation initiative, which has led to a public process  that will provide stakeholders with opportunities for input. In its request,  USPS stated it would identify opportunities to consolidate retail  operations and improve efficiency, but only after concluding that such  changes will continue to provide ready access to essential postal services.
USPS noted that the branches and stations considered for consolidation  are often in close proximity to each other. USPS stated that it could not  estimate the savings because it had not made decisions on how many or  which facilities would be closed. Going forward, issues may include  whether stations and branches will be considered subject to statutory  requirements for maintaining and closing post offices, and the similar  question of whether any branches and stations are covered by the long- standing appropriations provision that restricts post office closures.
USPS is required, among other things, to provide adequate, prompt,  reliable, and efficient services to all communities, including a maximum  degree of effective and regular services in rural areas, communities, and  small towns where post offices are not self-sustaining. USPS is  specifically prohibited from closing small post offices solely for operating  at a deficit. Consistent with reasonable economies, USPS is authorized to  establish and maintain facilities as are necessary to provide ready access  to essential services to customers throughout the nation. Before closing a  post office, USPS must, among other things, provide customers with at  least 60 days of notice before the proposed closure date, and any person  served by the post office may appeal its closure to the PRC. However,  USPS plans state that customers will have 20 days to comment on a  proposed closure of a station or branch and that no appeals will be  permitted. USPS explained that stations and branches are different from  post offices. A recent Congressional Research Service report discussed  this matter and other issues related to the closure of these retail facilities.
To put USPS’s retail consolidation initiative into context, we recently  testified before this subcommittee that USPS can streamline its network of  37,000 post offices, branches, and stations—a network that has remained  largely static despite expanding use of retail alternatives and shifts in  population. We have previously reported that the number of postal retail  facilities has varied widely among comparable counties in urban areas,  and a number of facilities we visited appeared to merit consideration for  closure based on leading federal practices for rightsizing facility  networks. Our report also noted that USPS has a maintenance backlog  for its retail facilities, and USPS officials stated that USPS has historically  underfunded its maintenance needs. USPS has limited its capital  expenditures to help conserve cash, which may affect its maintenance  backlog. Fewer retail facilities would reduce maintenance needs.

		USPS Has Made Limited Progress in Consolidating Its Mail Processing Network

USPS has begun efforts to consolidate some mail processing operations,  but much more needs to be done to restructure this network, particularly  since USPS has closed only 1 of its approximately 400 major mail  processing facilities. In the Postal Accountability and Enhancement Act of  2006, Congress encouraged USPS to expeditiously move forward in its  streamlining efforts, recognizing that the 400 processing facilities are more  than USPS needs and streamlining this network can help eliminate excess  costs. USPS has substantial excess capacity in its processing network that  is growing with declining mail volume. According to USPS, it has 50  percent excess capacity for processing First-Class Mail.
USPS is using the Area Mail Processing process to propose consolidating  some mail processing operations (see app. I and  http://www.usps.com/all/amp.htm). USPS is also consolidating processing  and transportation operations from Bulk Mail Centers and Surface  Transfer Centers into what it refers to as Network Distribution Centers,  which USPS officials expect to be completed this November (see  http://www.usps.com/all/ndc.htm). In the past decade, USPS has closed  some smaller facilities, such as 68 Airport Mail Centers and 50 Remote  Encoding Centers. In 2005, we recommended that USPS enhance  transparency and strengthen accountability of its realignment efforts to  assure stakeholders that such efforts would be implemented fairly and  achieve the desired results. We since testified that USPS took steps to  address these recommendations and should be positioned for action.

		USPS Has Ongoing Efforts to Improve Delivery Efficiency

USPS has ongoing efforts to increase the efficiency of mail delivery, which  is USPS’s largest cost segment and includes more than 350,000 carriers  that account for approximately 45 percent of salary and benefit expenses.  Two key efforts are (1) realignment of city delivery routes and (2)  installing new Flats Sequencing Systems to automate the sorting of flat- sized mail—such as catalogs and magazines—into delivery order, so that  time-consuming and costly manual sorting by carriers is no longer needed.
First, USPS is realigning city carrier routes to remove excess capacity and  improve efficiency, which is expected to generate nearly $1 billion in  annual savings. USPS also expects this effort to result in reduced facility  space needs, increased employee satisfaction, and more consistent  delivery service. Route realignment has been made possible by  collaboration between USPS and the National Association of Letter  Carriers. The parties agreed on the original realignment process, which  resulted in eliminating 2,500 routes. A modified process, which will cover  all city delivery routes, has resulted in the elimination of an additional  1,800 routes through June 2009 (see fig. 3), and additional routes may be  eliminated. Thus, route realignment should result in further savings next  fiscal year.
USPS has established policies and procedures to notify customers if they  will be affected by route realignment and taken actions to keep affected  stakeholders informed. For example, USPS has made updated route  information available on the Internet, which the mailing industry needs to  prepare and organize the mail so USPS can efficiently handle it.
Second, USPS has begun to install 100 automated sorting machines for its  $1.5 billion Flats Sequencing System to sort flat-sized mail into delivery  order, which is scheduled to be completed in October 2010. USPS expects  this to improve delivery accuracy, consistency, and timeliness. USPS has  worked with the mailing industry to facilitate implementation, since the  industry plays a major role in preparing, transporting, and addressing flat- sized mail for efficient USPS handling. Mailer representatives have praised  USPS communications and coordination with them—a process that is  continuing to address implementation issues. USPS and the two carrier  unions (the National Association of Letter Carriers and the National Rural  Letter Carriers’ Association) reached agreement on revised work rules and  procedures to realign routes and capture work hour savings. Because of  mail volume declines, to maximize program savings, USPS is reconsidering  where to deploy the machines and the number of delivery routes covered  by the program. On routes covered by the machines, city carriers, on  average, will be manually sorting nearly 500 fewer flat-sized mail pieces  each day.
Finally, USPS has proposed moving to 5-day delivery to help address its  financial problems. USPS is studying how 5-day delivery could be  implemented, potential savings, and impacts on its employees. The study,  which USPS expects to complete this fall, will incorporate input from  postal unions and management associations, the mailing industry, and  consumer and market research. Cutting delivery frequency would affect  universal postal service and could further accelerate the decline in mail  volume and revenues. Considering the potential impact on cost, volume,  revenues, employees, and customers, it will be important for USPS to  make its study publicly available so that Congress and stakeholders can  better understand USPS’s proposal and consider the trade-offs involved.
As USPS has recognized, implementing 5-day delivery would require  congressional action because a long-standing appropriations provision  mandates 6-day delivery. PRC officials have stated that USPS would be  required to seek an advisory opinion from PRC on such a change, which  would lead to a public hearing with stakeholder input. According to USPS  officials, USPS would need about 6 months to prepare for and implement  5-day delivery, including moving employees to other locations,  reprogramming payroll systems, and realigning operations.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to answer any questions that you or other Members of the Subcommittee  may have.

	GAO Contact and Staff Acknowledgments

For further information regarding this statement, please contact Phillip  Herr at (202) 512-2834 or herrp@gao.gov. Individuals who made key  contributions to this statement include Shirley Abel, Teresa Anderson,  Gerald P. Barnes, Josh Bartzen, Paul Hobart, Kenneth E. John, David  Hooper, Hannah Laufe, Emily Larson, Josh Ormond, Susan Ragland, Amy  Rosewarne, Travis Thomson, and Crystal Wesco.

Appendix I: Status of 2008-2009 Proposed Area Mail Processing Consolidations as of July 23, 2009

Area Mail Processing (AMP) study initiated  34.   Western Nassau, NY, to Mid-Island, NY  35.  Wilkes Barre, PA, to Scranton, PA, and Lehigh Valley, PA  nnonced on Jne 6, 2009, tht it hd hlted the Indstry, Cliforni, stdy because it  determined there were no significnt opportnities to improve efficiency or service t tht time.  nnonced on My 5, 2009, tht it hd hlted the Plttsbrgh, New York, stdy because of  nresolved service isses.
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Summary:
Why GAO Did This Study

The U.S. Postal Service's (USPS) financial condition has worsened this year, with the recession and changing mail use causing declines in mail volume and revenues despite postal rate increases. GAO testified in May to this subcommittee that USPS expects these declines to lead to a record net loss and an unprecedented cash shortfall even if ambitious cost cutting is achieved. GAO reported that maintaining USPS's financial viability as the provider of affordable, high-quality universal postal service will require actions in a number of areas, such as (1) rightsizing its retail and mail processing networks by consolidating operations and closing unnecessary facilities and (2) reducing the cost and size of its workforce, which generates about 80 percent of its costs. Today GAO is releasing its report on USPS efforts to improve the efficiency of delivery. Delivery accounts for nearly half of USPS salary and benefit costs. This testimony (1) updates USPS's financial condition and outlook and explains GAO's decision to place USPS's financial condition on the High-Risk List and (2) discusses the need for USPS to restructure its mail processing, retail, and delivery networks and its efforts to improve their efficiency. It is based on GAO's past and ongoing work and updated USPS information.

What GAO Found

USPS's financial condition and outlook continue to deteriorate with a worsening outlook for mail volume and revenue. USPS now projects mail volume to decline by about 28 billion pieces to about 175 billion pieces in fiscal year 2009, a decline of 13.7 percent. As a result, USPS projects (1) a net loss of about $7 billion even with record savings of about $6 billion; (2) an increase in outstanding debt by the annual $3 billion limit; and, (3) despite this borrowing, an unprecedented $1 billion cash shortfall. Thus, USPS recently reported to Congress that, due to the need to maintain sufficient cash to cover costs, it will not fully make its mandated payment of $5.4 billion for future retiree health benefits due by September 30, 2009, even if it receives $2 billion in relief under pending House legislation. GAO added USPS's financial condition to the High-Risk List this week. GAO reported USPS urgently needs to restructure to address its current and long-term financial viability. Accordingly, GAO calls for USPS to develop and implement a broad restructuring plan--with input from the Postal Regulatory Commission and other stakeholders, and approval by Congress and the administration--that includes key milestones and time frames for actions, addresses key issues, and identifies what steps Congress and other stakeholders may need to take. USPS needs to optimize its retail, mail processing, and delivery networks to eliminate growing excess capacity and maintenance backlogs, reduce costs, and improve efficiency. USPS has a window of opportunity to reduce the cost and size of its workforce through attrition and the large number of upcoming retirements to minimize the need for layoffs. Although USPS has begun efforts to realign and consolidate some mail processing, retail, and delivery operations, much more is urgently needed. GAO recognizes that USPS would face formidable resistance to restructuring with many facility closures and consolidations because of concerns that these actions would affect service, employees, and communities. USPS management will need to provide leadership and work with stakeholders to overcome resistance for its actions to be successfully implemented. USPS must use an open, transparent, fair, and consistent process; engage with its unions, management associations, the mailing industry, and political leaders; and demonstrate results. In turn, these stakeholders and Congress need to recognize that major restructuring is urgently needed for USPS to be financially viable. To its credit, USPS recently began a national initiative to consolidate some of its 3,200 postal retail stations and branches in urban and suburban areas. USPS has begun efforts to consolidate some mail processing operations but has closed only 1 of 400 major mail processing facilities. USPS is realigning city carrier routes to remove excess capacity and improve efficiency, which is expected to save nearly $1 billion annually; has begun to install automated equipment to reduce costly manual sorting of flat-sized mail; and is studying how it could shift to 5-day delivery and the potential savings.