USPS’s Dire Financial Outlook and Changing Mail Use Require Network Restructuring

USPS urgently needs to restructure its networks and operations as its  financial condition and outlook reach a crisis level. USPS has experienced  a cumulative net loss of nearly $20 billion over the last 5 fiscal years and  has already reported a net loss of $2.6 billion through the first 6 months of  fiscal year 2011. By the end of this fiscal year, USPS projects that it will  incur a $8.3 billion loss, experience a substantial cash shortfall, reach its  $15 billion borrowing limit, and be unable to make its scheduled retiree  health benefits payment to the federal government. USPS’s financial  problems have been building, as customers’ mail use has been changing— that is, mail volume is declining as customers shift to electronic  communications and payment alternatives. Total mail volume peaked in  fiscal year 2006 at 213 billion pieces and declined by about 20 percent by  the end of fiscal year 2010, to about 170 billion pieces. In the first 2  quarters of this fiscal year, the volume for First-Class Mail—USPS’s most  profitable product that accounted for 44 percent of USPS total volume— has declined by almost 7 percent. USPS has projected a further drop in  total mail volume to 150 billion pieces or less by 2020.
Declining mail volume exposes fundamental weaknesses in USPS’s  business model, which has historically relied on mail volume growth to  help cover the costs associated with national retail, processing, and  delivery networks. USPS does not have sufficient revenue to cover the  growing costs of expanding delivery service to roughly 1 million new  residences and businesses each year while maintaining about 33,000  USPS-operated retail and processing facilities. Furthermore, USPS faces a  variety of challenges in trying to reduce costs, including an inflexible cost  structure; legal and regulatory restrictions; stakeholder resistance;  difficulty reducing compensation and benefit costs, which comprise 80  percent of USPS’s total expenses; and increasing difficulty in achieving  work hour savings. For these reasons and more, we placed USPS’s  financial condition and outlook on our 2011 list of high-risk programs and  agencies.

		Retail

USPS currently operates about 32,500 retail facilities. Customers can also  purchase some USPS products or services at over 70,000 locations,  including about 3,700 contract postal units and community post offices  and through partnerships with retailers, as well as through usps.com. In  fiscal year 2010, about 31 percent of retail revenue from USPS products  and services was generated through retail alternatives, and USPS  estimates that by 2020, these alternatives may account for nearly 60  percent of retail sales. Meanwhile, fewer customers are visiting USPS- operated retail locations. According to USPS, customer visits have  declined over the last decade by about 21 percent and retail revenue  generated at USPS-operated retail locations has dropped by about 16  percent, yet the number of USPS-operated facilities has remained largely  unchanged since fiscal year 2001.
Although the number of channels through which customers can access  USPS’s products and services is expanding, USPS has been slow to  modernize its legacy retail network. Figure 1 compares the number of  selected groups of postal retail facilities—USPS-operated facilities and  non-USPS-operated—in fiscal years 2001 and 2010. Non-USPS facilities  may be operated by partners and are therefore less costly for USPS and  may be more conveniently located where there is higher customer traffic.  While USPS has slightly reduced the total number of USPS-operated and  non-USPS-operated retail facilities over the last 10 years, the ratio of  USPS-operated versus non-USPS-operated facilities has barely changed  (88 percent in fiscal year 2001 compared with 90 percent in fiscal year  2010). Foreign postal operators we studied have modernized their legacy  brick-and-mortar retail networks by drastically reducing the proportion of  facilities they operate relative to the proportion of those operated by  others.
Several factors have constrained USPS’s efforts to make significant  changes to its retail network:     Legal requirements: USPS officials have stated that the legal process  has hindered USPS’s ability to make progress in retail realignment.  Statutory requirements prohibit USPS from closing small post offices  solely for operating at a deficit, and, therefore, certain retail facilities  cannot be closed based on financial performance alone. USPS has  reported that about 80 percent of postal retail facilities do not generate  sufficient revenue to cover their costs. Additionally, the Postal  Regulatory Commission (PRC) has authority to hear appeals on “post  office” closures. However, USPS and the PRC have differed in their  interpretation of the PRC’s statutory authority to review appeals of  USPS decisions to close stations and branches. Further, when USPS  proposes changes in the nature of postal services that will generally  affect service on a nationwide or substantially nationwide basis, it must  request an advisory opinion from the PRC.
According to USPS officials, the amount of time taken to complete the  required statutory process for closing facilities has hindered USPS  from timely realignment of its retail network. USPS is required to  provide 60 days advance notice of closing a post office, and any person  served by the facility may appeal the closure decision. The PRC has 120  days after receiving an appeal to make a determination, which is made  on a case-by-case basis. So far this fiscal year, the PRC has received  more appeals of retail facility closures than it did in the last decade  combined (18 in 2011 compared with 8 in fiscal years 2001 through  2010). Of these 18 appeals, 10 involved stations and branches. The PRC  may affirm USPS’s decision or require USPS to reconsider its closure  decisions, but the ultimate authority to close a post office rests with  USPS. Currently, after the PRC’s determination, USPS must wait at  least 90 days to take action after posting a final closure determination.
In its filings with the PRC, USPS has asserted that, in cases where the  closing involves a station or branch, the PRC lacks subject matter  jurisdiction to hear appeals that do not involve a “post office.”  Nevertheless, the PRC issues determinations on appeals of USPS  decisions to close retail facilities, including stations and branches. This  issue remains unresolved.
In 2009, USPS filed a request for a PRC advisory opinion of its analysis  of over 4,000 stations and branches for possible closure, which resulted  in the closure of about 145 facilities from this proceeding. The PRC’s  opinion advised USPS to improve public notice and input prior to  making closure decisions. It also suggested that USPS implement  uniform procedures for closing or consolidating all types of retail  facilities—post offices, stations, or branches. Since then, USPS officials  have told us that they plan additional closings of certain retail facilities.
Stakeholder resistance: USPS has often faced formidable resistance  from employees, affected communities, and Members of Congress  when it has attempted to close post offices because of concerns about  possible effects on service, employees, and communities. Although  USPS is taking steps to improve its communication for making these  retail changes, stakeholders continue to protest the closure of postal  facilities.
The foreign posts we recently studied have also experienced declining  mail volume and revenue. Their solutions to addressing stakeholder  resistance involved regular engagement with stakeholders, including  strategic communication and outreach efforts. These posts emphasized  that although a neighborhood post office would be closing, retail  alternatives were available with local merchants who had extended  operating hours and were located where customers frequently visit—such  as grocery, convenience, and drug stores. For example, when modernizing  its retail network, the Swedish postal operator launched a nationwide  campaign that focused on the post as “a service” instead of “a place” and  proactively informed customers about how and where they could access  postal services. The Swedish Post reported that customers adapted to the  change and preferred the expanded service options. Officials we  interviewed at Australia Post discussed the importance of involving local  communities in deciding, for example, whether to contract with a local  retail partner or close a post office.

		Mail Processing

USPS has taken actions to reduce excess capacity and improve  operational efficiency throughout its mail processing network for sorting  and transporting mail, but has had difficulty comprehensively adjusting its  network to respond to the unprecedented mail volume decline since fiscal  year 2006. As a result, costly excess capacity remains. USPS’s mail  processing network comprises over 500 mail processing facilities and  corresponding transportation services, equipment, and staff. USPS has  made some progress in streamlining its processing network, such as by  closing smaller facilities like Airport Mail Centers and Remote Encoding  Centers. These and other actions have helped USPS eliminate nearly 108  million workhours from its processing network over the last 5 years (or  nearly 40 percent of its total workhour reduction over that time).
Costly excess mail processing capacity remains for several reasons:    Mail volume has declined, particularly single-piece First-Class Mail,  which has dropped by about 23 billion pieces over the past decade. As  a result, less mail is processed end-to-end through USPS’s processing  network. In 2009, for example, a USPS official testified that USPS had  50 percent excess plant capacity in its First-Class Mail processing  operations.
Continuing automation improvements enable USPS to sort mail faster  and more efficiently. Some space once needed for manual sorting is  now excess.
Eighty-three percent of Standard Mail in fiscal year 2010 was  destination entered by mailers, meaning that it bypassed most of  USPS’s mail processing network and long-distance transportation. This  increase—16 percent over the last decade—has left USPS with excess  processing capacity.
As a result of these factors, USPS’s mail processing network could handle  significantly more mail than is currently going through the system. USPS has  often faced resistance from employees, affected communities, and Members  of Congress when it has attempted to consolidate its processing operations  and networks, close mail processing facilities, or both because of concerns  about possible effects on service, employees, and communities. In  particular, we have reported that stakeholders have concerns about USPS’s  ongoing efforts to consolidate its Area Mail Processing (AMP) facilities.  Proposals to consolidate these processing operations and facilities are  intended to reduce costs and increase efficiency by making better use of  excess capacity or underused resources. The AMP proposals consist of  consolidating operations from one mail processing facility that downsizes  its mail processing operations to other facilities nearby that gain the  processing operations. USPS has improved its processes for communicating  and implementing its AMP consolidation plans and is currently evaluating  over 130 proposals for consolidations.

		Delivery

USPS has ongoing efforts to increase the efficiency of mail delivery, which  is its most costly activity and involves more than 310,000 carriers  accounting for approximately 47 percent ($23 billion) of USPS’s total  salary and benefit expenses in fiscal year 2010. Two key efforts are  underway:    Realignment of city delivery routes to remove excess capacity and  improve efficiency. USPS expects this effort to generate nearly $1  billion in annual savings by reducing space needs in post offices and  other facilities and helping provide more consistent delivery service.
Installation of new automated systems to sort certain mail, such as  catalogs and magazines, into delivery order so that costly manual  sorting by carriers is no longer needed. USPS expects this effort to  improve delivery accuracy, consistency, and timeliness.
These efforts, along with other actions and declines in volumes, have helped  USPS eliminate approximately 70 million delivery work hours over the last 5  fiscal years (or nearly a quarter of USPS’s total workhour reduction over  that time). USPS has attempted to further reduce delivery costs by asking  Congress not to include the language in its annual appropriations legislation  that requires it to deliver mail 6 days a week. USPS officials have stated that  moving to 5-day delivery would result in annual savings of about $3 billion  once the change would be fully implemented.
Because USPS expects mail volume to continue declining, it will need to  continue working to improve delivery efficiency. According to USPS, it  generated $1.80 in daily revenue contribution for each delivery point in  fiscal year 2000; by fiscal year 2009, that number had shrunk to $1.40, and  by fiscal year 2020, USPS estimates that it could decline to about $1.00.  While moving to 5-day delivery would not, by itself, resolve USPS’s  considerable financial challenges, this and other restructuring strategies  will need to be considered to adapt to changes in mail use and achieve  financial viability.

	USPS and Congress Need to Take Urgent Action to Restructure Networks

Congress and USPS urgently need to reach agreement on a package of  actions that will address difficult constraints and legal restrictions and  allow USPS to accelerate progress on restructuring its networks. Members  of the 112th Congress have introduced legislation to promote network  restructuring, and USPS has proposed regulatory changes. We also have  recommended in prior reports that USPS realign its postal operations,  networks, and workforce with changes in mail usage and customer  behavior. As part of this work, we proposed options for action by  Congress and USPS to reduce costs and improve efficiency.
These proposals and options, which are presented in more detail below,  offer an opportunity to reconsider some of the key statutory requirements  and processes for closing postal facilities, many of which have not  changed significantly since the 1970s and may not be conducive to the  type of networkwide changes that are currently needed. Table 1 highlights  Congress’s, USPS’s, and GAO’s key retail proposals and options.
In addition to options for retail networks, the following are among the  options we have previously identified for restructuring USPS’s mail  processing and delivery networks:  Mail processing network options:    Close unneeded mail processing facilities.
Relax delivery standards to facilitate closures and consolidations.
Expand the use of more cost-efficient delivery methods, such as  clusterboxes and curbline delivery.
Decrease delivery frequency from 6 to 5 days a week.
Stakeholders have raised concerns about these restructuring options and  strategies. For example, postmaster management associations and the  PRC have raised objections to USPS’s proposed rule to modify its retail  structure. Similarly, USPS received a variety of comments raising  concerns about its 5-day delivery proposal.

		Realigning Postal Networks Involves Key Public Policy Questions and Consideration of Changes

Restructuring decisions involve key public policy questions as well as  difficult trade-offs—for example, what postal services are needed and  what is affordable? Some tension exists between USPS’s role as a federal  government entity expected to provide universal postal services, including  access to retail service, while also being self-financing through  businesslike operations. As we have reported, Congress’s decisions about  how to address the following questions will shape USPS’s future role,  operations, networks, and ability to adapt to changes in mail use and mail  volume:    Universal service: What aspects of universal service, including 6-day  delivery, are appropriate in light of fundamental changes in customers’  use of the mail? What, if any, changes are needed to delivery standards?  How can USPS improve customers’ access to postal services through  modernizing its retail network to maximize costs savings?
Statutory and regulatory changes: What statutory or regulatory  changes are needed to give USPS the flexibility it needs to restructure  its operations, networks, and workforce, while also assuring  appropriate oversight? For example, what changes may be needed to  clarify whether or not the PRC has the authority to review appeals of  closures and consolidations of stations and branches?
Stakeholder involvement: What role, if any, should Congress, the  Board of Governors, and the PRC have in developing, approving, or  reviewing decisions to modernize and realign postal services? What  input should postmasters or other postal employees and the public  have in these decisions? How and when should USPS notify the public  of its decisions to modernize and realign services?
Accountability: What incentives and oversight mechanisms would  help to balance the public’s expectations of universal service, USPS’s  need for more flexibility to achieve efficiencies, and the government’s  responsibility to ensure sufficient transparency, oversight, and  accountability?
In order for USPS to be self-sustaining, it needs to significantly reduce its  costs to match its revenues. Change is needed to needed to facilitate  restructuring postal networks and operations. Some changes to consider  include:    Revise legal requirements to facilitate networkwide restructuring.
This would broaden the current focus on individual facility closures,  which are often contentious, time consuming and inefficient, to a  broader networkwide restructuring, perhaps similar to the Defense  Base Closure and Realignment and Commission (BRAC) approach.  Under this approach, expert panels have successfully informed and  permitted difficult restructuring decisions, helping to provide  consensus on intractable decisions.
Adapt PRC review processes to changes made to facilitate  networkwide review. The current appeals process focuses on decisions  USPS has made about individual facilities closing. Another oversight  approach to facilitate networkwide restructuring would be an annual  reporting and review requirement, whereby USPS would report all  service changes, including facility closures, completed over the past  year and changes planned for the next fiscal year in its annual  compliance report to the PRC. The PRC could then review and  comment on any potential impacts on service in its annual compliance  determination report.
Improve outreach and transparency of information used to make  decisions. For example, strategically communicate and conduct  outreach with retail customers, government officials, and employee  groups; use maps and a template of specified data to show all locations  of postal facilities, alternatives, and retail partners where postal  services are available in a designated service area; indicate proposed  changes in this context; and allow the public to submit questions or  comments.
Enhance public input by simplifying rules and requirements so that  they are consistent, timely, and easy to understand. For example,  eliminate references to internal USPS terms that are not clear to the  public, such as whether a retail facility is a post office, station, or  branch, and clearly define what is meant by such terms as facility  closings, consolidations, discontinuance, conversions, or replacements.
In summary, effectively rightsizing USPS will require both congressional  support and USPS leadership to address resistance to change. USPS senior  management will need to provide leadership and work with stakeholders  for such actions to be successfully implemented. USPS must explain its  plans in an open and transparent manner; engage with its unions,  management associations, the mailing industry, and political leaders; and  then demonstrate the results of its actions. In turn, stakeholders need to  recognize that major change is urgently needed if USPS is to be financially  viable and self-sustaining. It is time for USPS management, unions, the  public, community leaders, and Members of Congress to take a hard look  at what postal services residents and businesses need and can afford. The  status quo is no longer sustainable. Changes are necessary to ensure that  postal services remain available to all U.S. residents and businesses by a  USPS that is financially healthy and self-supporting.
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.

	Contacts and Staff Acknowledgments

For further information about this statement, please contact Phillip Herr at  (202) 512-2834 or herrp@gao.gov. Individuals who made key contributions  to this statement include Susan Ragland, Director, Financial Management  and Assurance; Amy Abramowitz, Teresa Anderson, Joshua Bartzen, Erin  Cohen, Shelby Kain, Margaret McDavid, Sara Ann Moessbauer, Amrita  Sen, and Crystal Wesco.
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Summary:
Why GAO Did This Study

The U.S. Postal Service (USPS) recently reported that its financial results for the first half of this fiscal year--a net loss of $2.6 billion--are worse than projected. USPS expects continued financial challenges as mail volume continues to decline. Most notable is the decline of First-Class Mail (its most profitable mail) by over 25 billion pieces, or about 25 percent, over the past decade. GAO has reported on proposals to revise USPS pension and retiree health obligations, but such actions alone will not be sufficient to address the accelerating volume decline and changing use of the mail. This statement discusses (1) why it is important to restructure USPS's networks and (2) what actions are needed to facilitate additional progress. This statement is based primarily on past and ongoing GAO work.

What GAO Found

USPS urgently needs to restructure its networks and operations as its financial condition and outlook are reaching a crisis. USPS has been experiencing billion-dollar losses and cash shortfalls over the last 5 years, and expects to reach its $15 billion borrowing limit this year. USPS officials have stated that USPS may default on its retiree health payments owed to the federal government in September 2011. These financial problems are due to declining mail volume brought on by customers' shift to electronic alternatives and USPS's difficulty in reducing costs and eliminating excess network capacity. USPS faces restructuring challenges in three areas: (1) Retail--Although USPS has provided alternatives to post offices, it has been slow to modernize its network. As customer visits to, and revenue generated at, post offices have declined, USPS has not made commensurate reductions in its number of retail facilities. (2) Mail processing--USPS has improved operational efficiency and reduced employee work hours, but excess capacity remains as large mail volume declines continue. (3) Delivery--USPS has adjusted routes and deployed new sorting equipment to make delivery more efficient, but additional efforts are needed, since delivery is USPS's most costly activity. Restructuring decisions involve key public policy questions. For example, what postal services are needed and what is affordable? In order for USPS to be self-sustaining, it needs to significantly reduce its costs to match its revenues. Change is needed to facilitate restructuring postal networks and operations. GAO has suggested the following changes: (1) Revise legal requirements to facilitate network-wide restructuring, perhaps similar to the Defense Base Closure and Realignment Commission approach. (2) Improve outreach and the transparency of information used to make decisions. (3) Enhance public input by simplifying rules and requirements so that they are consistent, timely, and easy for the public to understand.

What GAO Recommends

GAO is not making new recommendations in this statement. Recently, GAO has reported that Congress, the administration, and USPS urgently need to reach agreement on a package of actions that will address constraints and legal restrictions to facilitate progress in rightsizing USPS's operations, networks, and workforce. GAO has also recommended that Congress consider providing USPS with financial relief, and in doing so, consider all options available to reduce costs.