Testimony of

Robert G. Taub

Acting Chairman

On behalf of the 

Postal Regulatory Commission

Before the

U.S. Senate Committee on Homeland Security and Governmental Affairs

January 21, 2016
1

Introduction

Chairman Johnson, Ranking Member Carper, and members of the Committee on 

Homeland Security and Governmental Affairs, good morning. My name is Robert G. 

Taub. I am the Acting Chairman of the Postal Regulatory Commission (Commission). I 

am pleased to testify before you today.

Background

The Commission is an independent federal agency that is responsible for 

ensuring transparency and accountability of the U.S. Postal Service’s operations and 

finances. Today, the Postal Service is a $69 billion operation with more than 600,000 

employees. It is not quasi government, quasi private, or quasi anything – it is 100

percent part of the Federal Government, operating as an independent establishment in 

the Executive Branch. Yet the Postal Service receives no tax dollars for operating 

expenses and relies completely on the sale of postage, products, and services to fund 

its operations.

As a separate and independent federal regulatory agency, the Postal Regulatory 

Commission determines the legality of the Postal Service’s prices and products, 

adjudicates complaints and fair competition issues, and oversees the Postal Service’s 

delivery performance consistent with statutory requirements. The Commission is the 

regulator, not the operator of our nation’s Postal Service. It is composed of five

Commissioners, each appointed by the President and confirmed by the Senate. The 

Commission receives an annual appropriation from Congress out of the Postal Service 

Fund.
2

Why a regulator for another government agency? Unlike almost any other federal 

agency, the Postal Service operates in a commercial marketplace while also having a 

large contingent of captive customers given the Postal Service’s market dominance for 

certain products and services. The public interest role of a regulator in this case is clear:

a need to protect the captive customers and ensure fair competition.

The Commission carries out this work with a very small budget and staff. Its

current year appropriation is $15.2 million to regulate the $69 billion Postal Service. The 

David and Goliath analogy is sometimes apt. Despite a steadily increasing workload, 

until this year, the Commission's annual appropriation had always been less than what it 

received in Fiscal Year (FY) 2008. FY 2008 was the last year that the Commission 

received its funds directly from the Postal Service rather than through the appropriations 

process. The Commission’s budget in FY 2008 was $14.985 million for an authorized 

complement of 70 employees; 7 years later, the Commission's appropriation in FY 2015 

was $14.7 million for an employee complement of 77. The majority of the Commission’s 

FY 2015 budget was allocated to pay and benefits ($11.175 million) with the remainder 

allocated for operating expenses ($3.525 million). In order to accommodate the 

increasing cost of personnel benefits and operating expenses, the Commission has had

to defer hiring and delay many critical Information Technology-related projects. This 

path is no longer sustainable for the Commission given existing government-wide 

information security requirements as well as an increasing regulatory workload.
3

PRC Focus on USPS Financing

Commission rules require the Postal Service to file several reports with the 

Commission regarding financial results on a monthly, quarterly, and annual basis. The 

Commission staff internally analyzes these reports. Prior to 2014, the Commission’s

Annual Compliance Determination (ACD) included a chapter on the overall financial 

health of the Postal Service. However, because the ACD is focused on rates and 

service performance, it did not include a detailed analysis of other financial data 

provided in the Postal Service’s Annual Compliance Report as well as its Securities and 

Exchange Commission equivalent Form 10-K filing. In 2014, the Commission developed 

a separate Financial Analysis report to provide greater clarity and transparency of the 

Postal Service’s financial data and trends.

This year, the Commission will prepare its third annual Financial Analysis report 

which not only reviews the overall financial position of the Postal Service, but also 

analyzes volumes, revenues, and costs of both Market Dominant and Competitive 

products. The report includes a chapter that analyzes the Postal Service’s financial 

status in terms of profitability, solvency, activity, and financial stability using accounting 

ratios. Although we are in the process of analyzing the Postal Service’s most recent 

annual financial results and preparing our Financial Analysis report for FY 2015, I would 

like to highlight our conclusions from the Commission’s last Financial Analysis report

and outline some preliminary observations based on the Commission’s review of 

FY 2015 data.
4

Overview of USPS Finances: Liabilities Outstrip Assets Resulting in Low Liquidity

In FY 2015, the Postal Service had a total net loss of $5.1 billion, which is a $448

million improvement from FY 2014. However, this is the ninth consecutive net loss 

posted since FY 2007 and has increased the cumulative net deficit since FY 2007 to 

$56.8 billion. As noted in the FY 2014 Financial Analysis report, these continuing losses 

have significantly affected the financial position of the Postal Service by negatively 

impacting liquidity, requiring the Postal Service to use all of its $15 billion statutory 

borrowing capacity, and causing total net liabilities to far exceed total net assets.

Total revenue increased $1.1 billion in FY 2015 primarily due to an increase in 

Competitive product volumes and the Market Dominant exigent surcharge.1Total 

volume declined by almost 1 percent, or 1.4 billion pieces, with Market Dominant 

products accounting for all of the volume loss. Despite the loss of Market Dominant 

volume, total revenue for Market Dominant products was slightly higher than last year. 

The exigent surcharge added $2.1 billion in revenue, which was enough to offset the 

loss of revenue due to declining volumes. Competitive product volumes continued to 

increase significantly in FY 2015, growing 16.3 percent over last year. This increased

volume added approximately $1.4 billion in revenue. Other non-mail related revenues, 

which include gains/losses on disposal of property and equipment, philately, and other 

non-mail related revenues, declined $0.3 billion.

 

1

This surcharge was permitted by the Commission after it found that the Postal Service had justified the recovery of additional 

contribution by showing a causal link between the extraordinary or exceptional circumstances of the Great Recession and mail 

volume losses.
5

Total expenses increased $0.6 billion in FY 2015. This overall increase reflected 

an increase of $1.5 billion in compensation and benefits costs and a decrease in 

workers’ compensation liability of $0.8 billion. An increase in workhours (the first since 

FY 2005) and the number of career employees (the first since FY 1999) increased 

compensation expenses by $0.8 billion. Retirement expenses also increased due to an 

increase in the Federal Employee Retirement System (FERS) annuity rate from 11.9 

percent of base pay to 13.2 percent of base pay and a supplemental payment to the 

FERS fund. Other benefits costs such as the current year premiums for retiree health 

benefits and the payment to the Department of Labor for workers’ compensation costs 

also contributed to the increase in compensation and benefits. Further data on 

personnel related costs are detailed later in this testimony.

The $0.8 billion decrease in workers’ compensation liability was due to actuarial 

changes in the development of the estimate and changes in the discount rate. Nonpersonnel expenses, including transportation, also declined in FY 2015. 

In the face of financial losses, over the past 8 years, the Postal Service has 

reduced the size of its workforce by about 200,000 career employees, cut labor related 

costs, and increased its productivity. Today the Postal Service delivers roughly the 

same volume of mail that it delivered in 1987, but with almost 168,000 fewer total 

employees. Yet even with these sizeable reductions, the Postal Service does not have 

the cash to pay down its debt or fully invest much needed capital in its operations.

The significant gap between the Postal Service’s net current assets and net 

current liabilities is of particular concern. As stated in the FY 2014 Financial Analysis
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report, the Commission determined that the current liquidity was insufficient to 

significantly improve operational efficiency in the form of capital investments and that 

the liquid, or current assets, consisting mostly of cash and cash equivalents, was

insufficient to meet the payment of current liabilities. 

In FY 2015, total current liquid assets increased by $1.7 billion from FY 2014;

however, the amount of current liabilities rose by $6.4 billion, worsening the overall 

financial situation. Most of the increase in the current liabilities is due to the fact that the 

Postal Service did not make the $5.7 billion statutorily required FY 2015 payment to the 

Postal Service Retiree Health Benefits Fund (PSRHBF). The total net current assets

were $7.9 billion at the end of FY 2015, of which $6.6 billion was cash and cash 

equivalents. Net current liabilities at the end of this fiscal year were $48.9 billion, which

included $28.1 billion in missed payments to the PSRHBF (the payments scheduled for 

 $-

 $10,000

 $20,000

 $30,000

 $40,000

 $50,000

 $60,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ in Millions

Postal Service Current Assets and Current 

Liabilities

Current Assets Current Liabilites
7

FY 2011 through FY 2015). Also included in net current liabilities is $10.1 billion of the 

total $15 billion owed to the Federal Financing Bank. Further data on the PSRHBF are 

detailed later in this testimony in the additional information on personnel related costs.

These low liquidity levels in recent years have impeded the Postal Service’s 

ability to make capital investments in infrastructure and hindered the growth and 

productivity enhancements in key assets required for primary postal operations. As the 

Postal Service noted in the FY 2015 Form 10-K statement, it now operates an aging 

vehicle fleet, increasing the need, and consequently the cost, for maintenance and 

repair. Also unmet is the need to invest in sorting and handling equipment to fully 

capitalize on business opportunities in the growing package delivery markets.

According to the Postal Service’s FY 2015 Form 10-K statement, “If our 

operations do not generate the liquidity we require, we may be forced to reduce, delay 

or cancel investments in technology, facilities, and/or transportation equipment, as we 

have done in the recent past.... Additionally, our aging facilities, equipment and 

transportation fleet could inhibit our ability to be competitive in the marketplace, deliver 

a high-quality service and meet the needs of the American public.... An aging or 

potentially obsolete infrastructure could result in loss of business and increased costs.”
8

On an operational basis the Postal Service’s net income (i.e., before including 

the statutory prefunding accruals to the PSRHBF and any non-cash adjustments to 

workers’ compensation liability) is $1.2 billion. Most of this operational net income can 

be attributed to an increase in revenues from the exigent price surcharge on Market 

Dominant products and the continuing growth in Competitive products parcels. The

exigent surcharge, effective for the full fiscal year, increased revenue by an estimated 

$2.1 billion, offsetting all of the revenue loss from the declining Market Dominant 

volume. The surcharge is expected to be removed in April.

The increase in operating net income enabled the Postal Service to improve its 

liquidity position. Compared to FY 2014, the Postal Service increased its cash position 

by $1.7 billion. This increase in cash enables the Postal Service to begin planning for 

replacement of its capital assets, primarily delivery vehicles and package sorting 

equipment. Yet, as noted, this increase is overshadowed by the increase in current 

liabilities, primarily due to the inability of the Postal Service to make the statutorily 
9

required pre-funding payments into the PSRHBF. Overall, according to the Postal 

Service, it has approximately 24 days of cash available to pay basic operating 

expenses. This consists only of available cash as the Postal Service has reached the 

statutory borrowing limit. The current level of Postal Service reported liquidity has 

improved since its low point in FY 2012, but total cash on hand plus total debt is only a 

third of what was available 10 years ago.

If a downturn in the economy or other circumstance should further stress the 

Postal Service’s cash flow, it risks not being able to pay some of its bills and could, in a 

worst case scenario, run out of cash. 

Analyzing Postal Service Financial Status: Profitability, Solvency, Activity, and 

Financial Stability

The Commission’s Financial Analysis report uses “ratio analysis” to measure the 

profitability, solvency, and financial stability of the Postal Service. As detailed in the 

Commission’s Financial Analysis reports, ratio analysis is used to conduct a quantitative 

analysis of information in a financial statement. Ratios are calculated from current fiscal 

year numbers and are then compared with previous years and historic averages to 

determine the Postal Service’s financial performance.

The ratios explain the Postal Service’s financial health and provide valuable 

insight into its past performance. The financial data used in the ratio analysis is derived 

from accounting information not adjusted for inflation, changing demographics, industry 

dynamics, or government regulations. Financial analysis used in the private sector may 

not be directly relevant to government agencies because revenue streams, equity 
10

structures, and management incentives differ. It is also difficult to determine a single 

measurement that signifies financial health for a government agency. Financial

performance, although not a primary indicator of success, influences the fulfillment of 

missions and objectives for government agencies with a service-related mission, such 

as the Postal Service.

Some of the ratios calculated by the Commission for FY 2015 show a slight 

improvement compared to the previous year with the majority deviating greatly from the 

average of the last 10 years. The Commission’s Financial Analysis report calculates 

“liquidity-related ratios” as well as “key ratios” related to sustainability.

Liquidity-related ratios are one of the most widespread indicators of an agency’s 

solvency. Calculated using the Postal Service’s financial results for FY 2015, they show 

an improvement over the prior year with values close to the historic 10-year average. 

The following table details the three liquidity-related ratios: 

Ratios

9/30/2015 

Value

9/30/2014 

Value Change Description of ratio 

Postal Service 

Historic 10 Year 

Average Value

Current Ratio 0.16 0.15 0.02

A current ratio is calculated by dividing 

current assets by current liabilities. It 

indicates an entity's ability to meet short 

term debt obligations. 0.18

Quick Ratio 0.16 0.14 0.02

This quick ratio is calculated by dividing 

liquid assets (cash, cash equivalents 

and short term investments, current 

receivables) by current liabilities. It is a 

measure of an entity's ability to meet its 

short term obligations using its most 

liquid assets (near cash or quick 

assets). 0.17

Cash Ratio 0.14 0.12 0.02

Cash ratio is calculated by dividing 

absolute liquid assets (cash, cash 

equivalents and short-term investments) 

by current liabilities. 0.12

Ratio Analysis of Postal Service Financial Statements
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The improved liquidity-related ratios are largely a result of the increased cash on 

hand held by the Postal Service after exhausting its borrowing capacity. The Postal 

Service’s working capital remains a negative value of $40.9 billion, deteriorating by $4.6 

billion from the prior year. This means that the increase in current liabilities largely due 

to the missed retiree health benefit statutory prefunding payment of $5.7 billion 

significantly exceeded the growth in current assets, 87 percent of which is cash on 

hand.

The Commission’s Financial Analysis report assesses three key ratios for Postal 

Service sustainability as detailed in the following table. Ratios for the current fiscal year 

as seen in the debt ratio and the current liability ratio have deteriorated compared to the 

prior year and the historic average for the past 10 years. 

The accruing nonpayment into the statutory retiree health benefit fund has 

skewed the Postal Service’s current liabilities in relation to its assets. To reduce its debt 

ratio to historic averages, the Postal Service would have to significantly increase its 

Ratios

9/30/2015 

Value

9/30/2014 

Value Change Description of ratio 

Postal Service 

Historic 10 Year 

Average Value

Debt ratio (debt to assets ratio) 3.10 2.97 0.12

A debt ratio is calculated by dividing 

total liabilities (i.e. long-term and shortterm liabilities) by total assets. It shows 

how much the company relies on debt to 

finance assets (similar to debt-to-equity 

ratio). 1.86

Fixed assets to Net worth -0.31 -0.36 0.05

This ratio indicates the extent to which 

the entity's cash is frozen in the form of 

fixed assets, such as property, plant, 

and equipment. 1.29

Current liability ratio 0.66 0.62 0.03

Current liability ratio is calculated by 

dividing current liabilities by total (i.e. 

current and noncurrent) liabilities. 0.51

Ratio Analysis of Postal Service Financial Statements
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current cash position or investments in capital assets and reduce its obligations to the 

PSRHBF. 

The Postal Service’s fixed assets to net worth ratio shows an insignificant 

improvement reflecting the slight increase in capital spending and the comparative $448 

million decrease in net loss over the prior year. However, the value still remains at 

negative 0.31, a result of recurring net losses accumulated over the last 9 years. A 

negative fixed assets to net worth ratio indicates the erosion through depreciation of the 

entity’s long term tangible business assets, a critical investment for a viable entity.

The current liability ratio reflects the Postal Service’s share of short term liabilities 

to total liabilities at 66 percent, an increase of 3 percent from the start of FY 2014. The 

accrual of the unpaid statutory PSRHBF prefunding payments is included in current 

obligations, accounting for the increase in current liabilities. An increasing current 

liability ratio indicates increasing obligations due to be paid within the current year. 

Understanding the Postal Service’s liabilities is critical, especially as the cash flows 

generated from operations render the Postal Service unable to meet its current 

obligations. 

Evaluating Financial Strength: Altman Z-Score

The Commission’s Financial Analysis report also uses a financial analysis 

evaluating an agency’s financial strength, defined as the Altman Z-Score, to calculate

the possibility of bankruptcy. The users, stakeholders, and the business environment 

vary between the Federal Government and the private sector. Stakeholders of private 

sector entities use financial analysis to make investment and credit decisions, and 
13

success is often measured by the company’s stock valuation. In contrast, Federal

agencies are mission-oriented and measure success through the provision of service. 

Furthermore, unlike private sector firms, Federal agencies do not have direct 

shareholders whose income and wealth is affected by management decisions.

Financial analysis can be useful in both the Federal Government and the private 

sector. It can be used as a strategic management tool that provides the public with a 

concise and systematic way to organize the data in financial statements (e.g., balance 

sheets, income statements, and statements of cash flows) into meaningful information. 

The information derived from these indicators would provide the data needed to 

evaluate an agency’s financial condition.

Financial viability is affected by a combination of environmental, economic, and 

organizational factors, including the decisions and actions of management and the 

governing board. For example, the decline in volume of First-Class Mail, which has a 

high-contribution margin (the decline being a negative environmental trend), can lead to 

the erosion of a healthy cost coverage base. However, Postal Service management’s 

response to this decline and constraints on management flexibility also affect financial 

condition.

As detailed in the Commission’s Financial Analysis report, the Commission 

calculated the Altman Z-Score to predict the probability of the Postal Service running 

out of cash to pay its creditors. Financial analysis evaluates the financial strength of an 

agency through the use of a variety of metrics. In conjunction with financial ratios, these 

metrics are used to gauge an entity’s long-term viability. However, sometimes the 
14

agency’s ratios reflect conflicting views. To help eliminate confusion, New York 

University Professor Edward Altman developed the Z-Score in 1968 as a tool to 

explicitly address the likelihood that a company could go bankrupt.

A quantitative model designed to predict the financial distress of a business, the 

Altman Z-Score uses a blend of the traditional financial ratios and a statistical method 

known as multiple discriminant analysis. The formula has achieved general acceptance 

by management accountants and auditors.

The Commission calculates the Altman Z-Score in its Financial Analysis report to 

predict the probability of bankruptcy of an entity with the attributes of the Postal Service. 

The Commission uses a factor model for a private non-manufacturer to evaluate the 

Postal Service’s financial stability as follows: 

Altman Z-Score = T1+T2+T3+T4 as denoted in the tables below. 

The four performance ratios in the calculations are combined into a single score by 

weighting. The coefficients are estimated from a set of entities that have previously 

declared bankruptcy. A matched sample of entities is collected and matched by industry 

and estimated assets.

The Commission calculates that the Postal Service’s Altman Z-Score was 

negative 6.1 on September 30, 2015. That means that there is a high probability that the 

Postal Service will go into financial distress. More commonly, a lower Altman Z-Score 

reflects higher odds of bankruptcy. This 2015 Altman Z-Score of negative 6.1 for the 

Postal Service is a setback from the FY 2014 score of negative 5.7 (and from the FY 

2013 score of negative 5.5), and it is a significant deterioration from the positive score 
15

10 years ago for FY 2005 of 0.3. Despite the results obtained, it should be mentioned 

that the Altman Z-Score as a predictor of the entity’s bankruptcy probability is only 

relative, the structure of the Postal Service’s ratios may be atypical, and interpreting the

significance of the Z-Score would require deeper analysis by Postal Service 

management.

Ratio Calculation

Ratio value 

on 

9/30/2014

Weighting factor

Product 

(col. 3 * 

col. 4)

1 2 3 4 5

T1 Working Capital/Total Assets (1.6) 1.2 (1.9)

T2 Retained Earnings/Total Assets (2.0) 1.4 (2.8)

T3 Earnings/Total Assets (0.2) 3.3 (0.7)

T4 Capital/Total Liabilities (0.7) 0.6 (0.4)

(5.7)

Altman Z-Score, FY 2014

Altman Z-score

Ratio Calculation

Ratio value 

on 

9/30/2005

Weighting factor

Product 

(col. 3 * 

col. 4)

1 2 3 4 5

T1 Working Capital/Total Assets (0.3) 1.2 (0.3)

T2 Retained Earnings/Total Assets 0.2 1.4 0.3

T3 Earnings/Total Assets 0.1 3.3 0.2

T4 Capital/Total Liabilities 0.3 0.6 0.2

0.3

Altman Z-Score, FY 2005

Altman Z-score

Ratio Calculation

Ratio value 

on 

9/30/2015

Weighting factor

Product 

(col. 3 * 

col. 4)

1 2 3 4 5

T1 Working Capital/Total Assets (1.7) 1.2 (2.0)

T2 Retained Earnings/Total Assets (2.1) 1.4 (2.9)

T3 Earnings/Total Assets (0.2) 3.3 (0.7)

T4 Capital/Total Liabilities (0.7) 0.6 (0.4)

(6.1)

Altman Z-Score, FY 2015

Altman Z-score
16

As the Commission concluded in its most recent Financial Analysis report, the 

deterioration in the Postal Service’s viability relates to the erosion of retained earnings 

caused by consecutive net losses, the statutory obligation to prefund PSRHBF benefits, 

and decreasing Retained Earnings/Total Asset ratio. A comparatively lower Working 

Capital/Total Assets ratio results from the continued lag in replacement of its almost 

fully depreciated existing assets. The significant drop in these two measures causes the 

negative fluctuation to the Postal Service Altman Z-Score when comparing FY 2015

with FY 2005.

Total Mail Volume: Continuing Declines

Total mail volume in 2015 dropped to levels not seen in more than 27 years, and 

the Postal Service anticipates further reductions in total volumes for 2016. The decline 

in mail volume is the result of the economic recession that began in December 2007

along with the acceleration of a long-term trend of mail migrating to electronic media. 

According to the Postal Service, the volume lost to electronic alternatives is not 

expected to return because the movement constitutes a fundamental and permanent 

change in mail use by households and businesses.

Market Dominant Products: continuing declines, particularly in First-Class Mail

Total Market Dominant products volume declined by approximately 2 billion 

pieces, or 1.3 percent, in FY 2015. Over the last 8 years, Market Dominant products 

volume declined by approximately 60 billion pieces. Approximately 42 percent of the 

volume decline occurred in FY 2009 when Market Dominant volume declined 12.7

percent. 
17

For specific products within the Market Dominant category, volume declines at 

different rates. In FY 2015, First-Class Mail volume declined by approximately 1.4 billion 

pieces, or 2.1 percent of total First-Class Mail and Standard Mail volume declined by

284 million pieces, or 0.4 percent of total Standard Mail. These classes constitute the 

bulk of the volume of Market Dominant products overall. In FY 2015, First-Class Mail 

and Standard Mail accounted for 93 percent of the total mail volume. The decline in 

First-Class Mail is the most troubling as First-Class Mail contributes the most to the 

overhead costs of the Postal Service.

Competitive Products: continuing increases but lower margin

Volumes and revenues for Competitive products, which are mainly parcels,

increased approximately 16.3 percent and 9.4 percent, respectively, in FY 2015. While 

Competitive products volume and revenue has grown consistently in recent years, its 

volume only makes up 2.6 percent of the total mail volume of the Postal Service. In 

addition, the margin (i.e., the overall cost coverage) on Competitive products is lower 
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than the margin for First-Class Mail. In other words, the Postal Service earns more 

money from First-Class Mail than it does from Standard Mail or Competitive Product 

parcels. Generally, it takes three pieces of Standard Mail to generate the equivalent 

profit as one First-Class Mail piece. 

The continuous decline in First-Class Mail volume and revenue seriously 

jeopardizes the Postal Service’s ability to cover its fixed overhead costs. As stated in 

the Postal Service’s FY 2015 Form 10-K statement, “Although increased Shipping and 

Packages volume has offset some of these declines, [the Postal Service] must earn 

approximately $2.50 in Shipping and Package revenue to replace the contribution lost 

from each $1 of First-Class Mail revenue because the costs of transporting and 

delivering packages are significantly higher than letters. [The Postal Service’s]

challenge to contain costs is compounded by the continuing increase in the number of 

delivery points, which, when combined with the impact of the reduction in hard copy 

mail volume, has resulted in a drop in the average number of pieces delivered per 

delivery point per day from approximately 5.5 pieces in 2007 to 3.8 pieces in 2015, a 

reduction of approximately 31 percent.”

Personnel Related Costs

In FY 2015, total personnel related expenses, including the payment to the 

PSRHBF and the non-cash adjustments to the workers’ compensation, increased by 

$649 million or 0.9 percent from the prior year. The Postal Service continues to expense 

the amount payable to the PSRHBF, although it remains unable to make the actual 
19

payment into the fund. The last Postal Service payment to the PSRHBF occurred in

2010.

Beginning in 1989, the law requires the Postal Service to pay the government’s 

share of the premium for its own annuitants, which, in FY 2015, amounted to $3.1 

billion. In 2006, the Office of Personnel Management (OPM) estimated that the Postal 

Service needed to generate $75 billion to cover benefits for all its current and future 

retirees. The 2006 Postal Accountability and Enhancement Act (PAEA) established the 

PSRHBF to collect these payments from the Postal Service. Until 2006, the Postal 

Service had $0 (i.e., zero, nothing) set aside to pay for its future retiree health benefits. 

In addition to the initial amount transferred from the Civil Service Retirement and 

Disability Fund of $17 billion into the PSRHBF upon enactment, the Postal Service paid

$20.9 billion during the first 5 years after enactment of the 2006 law to meet this overly 

ambitious statutory requirement to prefund much of its future retiree health benefits. 

Presently, even though the Postal Service has not made any of the required prefunding 

payments in the past 5 years, there is $50.3 billion in the PSRHBF and a current 

unfunded amount of $54.8 billion (this is the portion that remains unpaid by the Postal 

Service).

Under current law, in addition to the Postal Service paying the normal cost 

amounts for retiree health benefits each year, the unfunded amount of $54.8 billion will 

be amortized over 40 years beginning in FY 2017. Also, in FY 2017, the PSRHBF starts

paying the current year health benefits premiums.
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From an operations standpoint, personnel costs increased by $1.5 billion in 

FY 2015 – a majority of which comprises compensation and retirement benefits. 

Compensation increased by $818 million while retirement benefits increased by $722 

million. Compensation expenses grew over the previous year mainly due to the growth 

in Shipping and Package volumes, where, because of the size and shape of pieces, 

handling requires more workhours. An increase in wage rates also contributed to the 

growth in compensation expense, albeit to a lesser extent than the growth in workhours.

As noted previously, retirement benefits expenses grew due to an OPM mandated 

increase in the agency annuity contribution rate for the FERS. Additionally, OPM 

notified the Postal Service that the FERS annuity account is underfunded by $3.6 billion 

as of the end of FY 2014. Under current law, the unfunded liability is to be amortized 

over 30 years, and this annual payment is estimated by OPM to be $241 million. The 

Postal Service has expensed this supplemental pension charge, but noted in its annual 

Form 10-K statement that it is reviewing OPM’s underlying calculation regarding the 

unfunded pension estimate and has not yet paid this expense pending its review.

Summary: Significant Financial Obstacles for the Future

In summary, the Postal Service still faces significant financial obstacles for the 

future. Increases in revenues and subsequent higher liquidity are almost entirely due to 

the temporary Market Dominant product exigent surcharge. The additional revenue from 

Competitive products is not sufficient to offset the future revenue loss resulting from the 

termination of the exigent surcharge. The Postal Service is expected to collect all of the 

allowable additional revenue, $4.6 billion, from the exigent surcharge by April 2016, 

when it would then be removed. At that point, in order to maintain the operating net 
21

income it is currently achieving, the Postal Service will have to make up the loss of that 

revenue, which is approximately $2.1 billion annually. With the growing liability of retiree

health benefits, the inability to borrow for needed capital investments, and the continued 

loss of high margin First-Class Mail revenues, the important task of improving the 

financial condition of the Postal Service is daunting. As noted, its liabilities exceed its 

assets by almost $50 billion.

Impact of Legislative and Regulatory Requirements

The Committee’s invitation letter requested that the Commission’s testimony also 

address “the impact of legislative and regulatory burdens placed on the USPS, including 

the Universal Service Obligation (USO), rate caps and requirements, and limits to new 

business.”

The 2006 law restricted the Postal Service from offering nonpostal products and 

services except for a small number that were grandfathered in pursuant to 39 U.S.C. 

§ 404(e). As a result, the Postal Service is limited to only offering postal products as 

defined by law and the Commission is responsible for reviewing and approving the 

Postal Service’s request to add any new products and market tests.

Since the passage of the new law in 2006, the Commission has exercised its

additional regulatory responsibilities and has now close to a decade of experience in its 

enhanced role. As Congress determined then that it was appropriate for the 

Commission to provide oversight of the Postal Service when introducing new postal 

products, Congress could similarly rely on the Commission now, with its demonstrated 
22

experience, to balance the issues of fair competition if it decides to expand the Postal 

Service’s authority to introduce nonpostal products. 

However, Congress’ consideration of whether to allow the Postal Service to 

provide nonpostal services is in many ways linked to another matter that the Committee 

asked that this testimony address – the USO. Indeed, as it deliberates on this important 

issue, Congress will need to balance the existing expectations of a wholly government 

run postal administration chartered to provide universal mail service to all Americans 

with potential new nonpostal activities. And it will need to carefully resolve the question 

of how they relate to the obligation of universal service.

How does the United States define universal mail service? In 2008, the 

Commission, pursuant to law, determined that the USO has seven attributes: 

geography, range of products, access to facilities, delivery frequency, 

prices/affordability, quality of service, and users’ rights (or enforcement). 

Other nations have imposed universal service requirements directly on their

postal operator by statute, regulation, licensing, or contract. Countries like Australia, 

Canada, and Germany – just to name a few – have a detailed definition of universal 

postal service, with specific standards for delivery and retail access. Unlike other 

countries, the Commission concluded that the USO in the United States is largely 

undefined and instead is comprised of a broad set of policy statements with only a few 

legislative proscriptions. Aside from the annual appropriations mandate for the past 33 

years to provide 6 days of delivery, Congress has rarely established rigid, numerical 

standards of minimally acceptable service for any of the attributes identified by the 
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Commission. Rather, through its history, the Postal Service has been expected to use 

its flexibility to meet the needs and expectations of the Nation while balancing the 

delivery of service against budgetary constraints.

The cost of providing universal service in the U.S. is estimated by the 

Commission to be more than $4 billion annually. Title 39 U.S.C. § 3651(b)(1) requires 

the Commission to estimate in its Annual Report to the President and Congress the 

costs incurred by the Postal Service in providing three types of public services or 

activities: postal services to areas of the Nation the Postal Service would not otherwise 

serve; free or reduced rates for postal services as required by Title 39; and other public 

services or activities the Postal Service would not otherwise provide but for legal 

requirements. In the Annual Report issued earlier this month, the Commission 

estimated that the total of these three categories is $4.13 billion. Relevant to the 

Committee’s request that this testimony address the impact of legislative requirements 

on the Postal Service, in November 2015, the Commission issued an order after 

conducting a public inquiry that outlines its interpretation of the third category of public 

services or activities the Postal Service would not otherwise provide but for legal 

requirements. In future Annual Reports, the Commission will apply this interpretation if it 

determines that the costs of additional public services or activities should be included 

under this third type. 

Aside from the financial pressure of generating sufficient funds to remain solvent, 

the Postal Service must also worry about how to fund this $4 billion in universal service 

obligations. This obligation is in addition to those monies required to keep the mail 
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moving, undertake capital investments, and pay other multibillion dollar obligations such 

as retiree costs.

In balancing all of these interests when assessing the current state of the Postal 

Service, policymakers should look at the fundamental issue of the USO and decide 

exactly what we as a Nation need from the Postal Service and – most importantly – how 

those expectations are to be funded.

In the absence of a clear definition, particularly given the Postal Service’s current 

financial challenges, each of us may have a differing view of what the Postal Service

must provide in its services and operations to fulfill the USO, and since there is no 

specific agreed upon definition, all of our views will have different price tags. Senator 

Carper’s bill requires an assessment of the USO like the one completed in 2008, and I 

concur that further exploration of this fundamental question is warranted. The 

Commission recommended in its 2008 report “that Congress consider and balance all 

the features of universal service as part of any review of changes necessary to preserve 

a financially viable Postal Service.”

In 2007, a Federal Trade Commission (FTC) report mandated by the PAEA 

examined the impacts of the universal service obligation on the Postal Service’s 

competitive products market. See: Accounting for Laws That Apply Differently to the 

United States Postal Service and Its Private Competitors, Federal Trade Commission, 

December 2007. The FTC determined, based on 2006 financial results, that the USO 

ultimately put the Postal Service at an overall disadvantage in the Competitive product 

market. According to the FTC, the Postal Service benefited from an implicit subsidy of 
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between $39-$117 million per year associated with avoided Federal, state, and local 

legal requirements. However, the legal restraints imposed on it by Federal regulations 

cost the Postal Service an estimated $330-$782 million a year in reduced efficiency, 

according to the FTC.

Concluding Observations

Despite the bad financial news, there is good news, even if it is hard to see or 

seems overwhelmed by the financial position of the Postal Service. There is still 

strength in the system.

The Postal Service is the one government agency that touches every American 

on a daily basis; it is an organization that literally serves 150 million American 

households and businesses on a typical day. It facilitates trillions of dollars in 

commerce. According to the Envelope Manufacturing Association Foundation’s Institute 

of Postal Studies, its 2015 Mailing Industry Job Study found that the Postal Service 

supports a $1.4 trillion mailing industry that employs 7.5 million people. The Postal 

Service is the key cog of a marketing and distribution system through which small and 

large businesses, nonprofit organizations, and consumers can transact business, 

advertise services, and distribute products. It is a significant driver of the Nation’s 

economic engine and an essential piece of its infrastructure.

Throughout its 240-year history, the Postal Service has endured multiple 

economic recessions and a Great Depression. It has dealt with numerous disasters, 

which have interfered with mail delivery and strained the infrastructure. It has responded 
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to these immense challenges by adapting, often despite predictions of failure or even its 

demise in the face of competition from new technologies.

With the inherent and underlying strength of the system, today’s Postal Service 

can survive these challenges too. The fundamental problem as outlined in the 

Commission’s testimony today is that the Postal Service cannot currently generate 

sufficient funds to cover its mandated expenses and also invest in critically deferred 

capital needs, such as new delivery vehicles and package sortation equipment. Despite 

the very serious and real financial problems, let’s also keep in mind the good news – the 

strength in the system – and take some degree of hope knowing that this is the 

foundation that Congress and the Administration can build upon to find solutions. The 

strength in the system will be the engine that ensures the Postal Service will continue to 

meet its basic mission to “deliver.”

The pressing question is “What needs to be done to improve the financial 

condition of the Postal Service?” The Commission has made recommendations on 

modifying the retiree health benefits funding and the computation of the liabilities for 

both retiree health benefits and pensions through separate studies on those topics and 

also in our “Section 701” report. Section 701 of Title 39 mandates that the Commission 

at least every 5 years, submit a report to the President and Congress evaluating the 

operation of the changes made by the PAEA, and to make recommendations for any 

legislation or other measures necessary to improve the effectiveness and efficiency of 

our Nation’s postal laws. The Commission issued its first Section 701 report in 2011, 

and we are starting work on a new assessment to be issued later this year. Appendix A

to this testimony is the Executive Summary from that 2011 report and outlines the 
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Commission’s previous recommendations on retiree health benefits funding as well as 

other concerns.

As noted in the Committee’s invitation letter, by law, after December 20, 2016, 

the Commission will review the price cap system for regulating Market Dominant 

products to determine if the system is achieving its statutory objectives and if it is not, to 

“make such modification or adopt such alternative system” to achieve the objectives. 

There are 9 objectives listed in the law that the modern rate regulation system must be 

designed to achieve, as well as 14 factors that the Commission must take into account. 

While each of the nine objectives must be applied in conjunction with the others, I would 

observe that relevant to the focus of today’s hearing on Postal Service finances,

objective number five is “[t]o assure adequate revenues, including retained earnings, to 

maintain financial stability.”

The PAEA requires that in its Annual Report to the President and Congress, the 

Commission must address “the extent to which regulations are achieving the objectives” 

for the setting of Market Dominant and Competitive product rates. In the Annual Report

issued earlier this month, the Commission stated that in regard to the Market Dominant 

objectives, “[The law] establishes a tension between the restrictions of an inflationbased price cap on Market Dominant price increases and the objective that the Postal 

Service must be self-sufficient and maintain financial stability. Furthermore, though the 

PAEA provides incentives via the price cap to reduce costs and increase efficiency, it 

also imposes personnel-related expenses requiring the pre-funding of future healthcare 

costs for Postal Service retirees.”
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There are no easy answers. But answer we must. I’ve outlined above some work 

that the Commission has completed and will be undertaking in this regard. The 

Commission stands ready to assist in your search for answers on behalf of our Nation’s 

postal system and the more than 320 million Americans who depend on it.

On behalf of all four Commissioners and the entire hard working agency staff, 

thank you for the opportunity to testify today. I am happy to answer any questions.
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Appendix A: Excerpt from the Commission’s 2011 “section 701” report 

(September 22, 2011)
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