U.S. Postal Service: Deteriorating Postal Finances Require Aggressive Actions to Reduce Costs
Published: 2009-01-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: When Congress passed the Postal Accountability and Enhancement Act in December 2006, the U.S. Postal Service (USPS) had just completed fiscal year 2006 with its largest mail volume ever--213 billion pieces of mail and a net income of $900 million. Two years later, USPS's mail volume dropped almost 5 percent--the largest single-year decline. The Postmaster General testified last March before this subcommittee that USPS was facing a potential net loss of over $1 billion for fiscal year 2008. He noted that USPS anticipated continued deterioration due to the economic slowdown, as the financial, credit, and housing sectors are among its key business drivers. He also said that the shifts in transactions and messages from mail to electronic communications and from advertising mail to lower-cost electronic media have affected the USPS's financial situation. This testimony focuses on (1) USPS's financial condition and outlook and (2) options and actions for USPS to remain financially viable in the short and long term. It is based on GAO's past work and updated postal financial information. We asked USPS for comments on our statement. USPS generally agreed with the accuracy of our statement and provided technical corrections and some additional perspective, which we incorporated where appropriate.
section_title: What GAO Found
paragraphs: USPS has reported that the declining economy accelerated declines in mail volume in fiscal year 2008 and flattened revenues despite postal rate increases. In fiscal year 2008, mail volume fell by 9.5 billion pieces, fuel prices increased costs by over $500 million, and cost-of-living allowances for postal employees increased costs by $560 million. Cutting costs by $2 billion--primarily by cutting over 50 million work hours--did not close the gap between revenues and expenses. Thus, USPS recorded a loss of $2.8 billion for fiscal year 2008. Its debt increased by $3 billion by the end of the year to $7.2 billion. USPS's outlook for fiscal year 2009 has become more pessimistic. USPS projects a volume decline of 10 billion to 15 billion pieces, another loss, and $3 billion more in debt. At this pace, USPS could reach its $15 billion statutory debt limit by fiscal year 2011. In the short term, several options could assist USPS through its difficulties, some of which would require congressional action. USPS has proposed that Congress give it immediate financial relief totaling about $25 billion over the next 8 years by changing the funding of its retiree health benefits. Although GAO recognizes the need to provide USPS with immediate financial relief, such relief is no substitute for aggressive USPS action to preserve its long-term viability. USPS projects an improvement in its financial condition in fiscal year 2010. Therefore, GAO believes it would be preferable to provide 2-year relief totaling $4.3 billion. This would have less impact on the retiree health benefits fund, and then Congress could revisit USPS's financial condition to determine whether additional relief is needed. In the long term, USPS action beyond its current cost-cutting efforts is urgently needed to reduce costs and improve efficiency. GAO agrees with the Postal Regulatory Commission that unfavorable mail volume and revenue trends may imperil USPS's financial viability and that USPS must dramatically reduce its costs to remain viable. Two areas for further action to reduce costs include compensation and benefits, which is close to 80 percent of its costs, and mail processing and retail networks. GAO previously reported that excess capacity in USPS's mail processing infrastructure has impeded efficiency gains. USPS has considered several options to realign its facility network, such as outsourcing operations in some mail processing facilities, but has taken only limited action. Another option would be for USPS to close unnecessary retail facilities and thereby reduce its large maintenance backlog. While it has been difficult for USPS to take action in these areas, Congress encouraged USPS to expeditiously move forward in its streamlining efforts in the postal reform act of 2006. GAO recommended that USPS enhance transparency and strengthen accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly and achieve the desired results, and it has made improvements in this area. Accelerated volume declines and changes in the public's use of mail indicate that USPS needs to move beyond incremental efforts and take aggressive action to streamline its workforce and network costs to assure its long-term viability.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this oversight hearing on  the state of the U.S. Postal Service (USPS). As requested, my statement  addresses the following:  1.  USPS’s financial condition and outlook.  2.  Options or actions available for USPS to remain financially viable in  the short and long term.
My statement is based on our prior work and updated information on  USPS’s financial condition and outlook. We reviewed USPS’s budget for  fiscal year 2009 and preliminary information on results for the first quarter  of the fiscal year and met with the Chief Financial Officer and other postal  officials. We conducted this performance audit in accordance with  generally accepted government auditing standards. These standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: USPS’s Current Financial Condition and Outlook Have Deteriorated
paragraphs: USPS’s financial condition deteriorated in fiscal year 2008. According to  USPS, this was due largely to declines in the economy—particularly in the  financial and housing sectors—that were reflected in a 4.5 percent decline  in total mail volumes and flattened revenues despite rate increases. In  addition, fuel prices increased costs by over $500 million, and cost-of- living allowances provided to postal employees increased costs by about  $560 million. Even after reducing over $2 billion in costs, primarily by  cutting more than 50 million work hours, USPS was not able to close the  gap between revenues and expenses. Thus, USPS finished fiscal year 2008  with a $2.8 billion loss—the second-largest loss since 1971 (see app. I).
Further, USPS productivity decreased 0.5 percent in fiscal year 2008,  which was the first decline since fiscal year 1999. According to USPS,  productivity declined because its cost-cutting efforts were not sufficient to  offset the impact of declining mail volume. USPS debt increased by $3  billion in fiscal year 2008—the annual statutory limit—and reached $7.2  billion in total outstanding debt at the end of the fiscal year, or nearly half  of the $15 billion statutory debt limit. At the end of fiscal year 2005, USPS  had no outstanding debt. At this pace, USPS would be constrained at the  end of fiscal year 2011 by the $15 billion statutory debt limit.
subsections: section_title: Rate Increases and Cost- Cutting Efforts are Insufficient to Offset the Impact of Volume Declines
paragraphs: As USPS has reported, it experienced the single largest volume drop in its  history in fiscal year 2008 when mail volume fell by 9.5 billion pieces (see  app. II). First-Class Mail volume (e.g., correspondence, bills, payments,  and statements) declined 4.8 percent, while Standard Mail (primarily  advertising) declined 4.3 percent. Volume declines accelerated during  fiscal year 2008 (see fig. 1). Preliminary results for the first quarter of fiscal  year 2009 indicate that the trend of accelerating volume declines is  continuing.
According to USPS, difficulties faced by the hard-hit financial and housing  sectors, which are major mail users, contributed to mail volume declines  in fiscal year 2008. Advertising mail was adversely affected, particularly  credit card, mortgage, and home equity solicitations. Volume declines also  came from catalogue retailers, the printing and publishing business, and  the services sector. Mail volume in fiscal year 2008 was also affected by  the continuing shift of mail to electronic communication and payment  alternatives. The accelerating declines in mail volumes resulted in a  similar trend for total USPS revenues.
USPS stepped up cost-cutting efforts during fiscal year 2008 but did not  cut costs sufficiently to offset the impact of declining mail volumes. USP S  has large overhead (institutional) costs that are hard to change in the short term, including providing 6-day delivery and retail services at close to  37,000 post offices and retail facilities across the country. Compensatio and benefits for USPS’s workforce, which was about 663,000 career  employees and nearly 102,000 noncareer employees at the end of fisc year 2008, generated close to 80 percent of USPS costs. USPS has  collective bargaining agreements with its four largest unions that e 2010 and 2011. These agreements include layoff protections, as well as  work rules that constrain USPS’s flexibility. They also include semiannu cost-of-living allowances (COLA) linked to the Consumer Price Index  (CPI). In addition, the agreements cover many benefits, such as the  employer and employee contributions to health benefits premiums. U the current collective bargaining agreements, USPS’s share of the  employee health benefit premiums was 85 percent in fiscal year 20 07 and  will decrease by 1 percent each year beginning in fiscal year 2008 or 2009  through 2011 or 2012, depending on the terms of the agreements with the  unions. USPS’s share of the premiums in fiscal year 2007 was about 13  percent more than for most other federal agencies.
section_title: USPS’s Fiscal Year 2009 Outlook Has Become Mo Pessimistic
paragraphs: According to USPS officials, USPS’s financial outlook has continued to  deteriorate based on preliminary results for the first quarter of fiscal year  2009, as well as updated projections for mail volume and revenue.  Preliminary first quarter results indicate that USPS incurred a deficit, as  expense reductions did not fully offset large declines in volume and  revenue. In response, USPS has cut work hour targets for its field  operations for the rest of the fiscal year. However, USPS officials told us  these targets could be difficult to achieve, and they expect the net loss for fiscal year 2009 to exceed last year’s net loss. In light of these results and  updated projections, USPS officials told us this month that they expect  fiscal year 2009 mail volume to decline by 10 billion to 15 billion pieces.
USPS officials project revenues to fall below the target in USPS’s original budget and for debt to increase by $3 billion.
USPS officials said they expect to have sufficient cash reserves to make  mandated year-end payments for retiree health benefits and workers’  compensation, unless the USPS net loss for fiscal year 2009 exceeds $5  billion. Given difficult and uncertain economic conditions, it will be  important for USPS to continue providing Congress and stakeholders timely and sufficiently detailed information to understand USPS’s current  financial situation and outlook.
section_title: Aggressive USPS Action Is Needed t Preserve USPS’s Financial Viability
paragraphs: Various options or actions are available for USPS to remain financially  viable in the short and long term. In the short term, USPS has asked  Congress to consider its proposal for immediate financial relief. In the  long term, aggressive USPS action beyond its current cost-cutting effort urgently needed to reduce costs and improve efficiency, particularly in  light of accelerated declines in mail volume and changes in the public’s  use of mail. We agree with the Postal Regulatory Commission (PRC) that  unfavorable mail volume and revenue trends may imperil USPS’s financial  viability and that USPS must dramatically reduce its costs to remain  viable.
As the PRC has noted, current pressures from declining revenue and  volume do not appear to be abating, but rather seem to be increasing.  During the economic downturn, there has been accelerated diversion of  business and individual mail, and some mailers have left the market  entirely. An economic recovery may not bring a corresponding recov mail volume due to continuing social and technological trends that have  changed the way that people communicate and use the mail. Specifically:   First-Class Mail volume has declined in recent years and is expected to  decline for the foreseeable future as businesses, nonprofit  organizations, governments, and households continue to mo ve their  correspondence and transactions to electronic alternatives, such as  Internet bill payment, automatic deduction, and direct deposit. USPS analysis has found that electronic diversion is associated with the  growing adoption of broadband technology. As PRC reported, available  alternatives to mail eventually result in substitution effects.
It is unclear whether Standard Mail will continue to grow with an  economic recovery. Standard Mail now faces growing competition  from electronic alternatives, such as Internet-based search engine  marketing, e-mail offers, and advertisements on Web sites. In addition,  Standard Mail is price-sensitive, as was demonstrated when catalog  advertising declined in response to the 2007 postal rate increase.  Although Standard Mail rate increases are limited by the price cap,  future rate increases will likely have some impact on volume.
Periodicals (e.g., mailed newspapers and magazines) volume has been  declining due to changing reading preferences and these declines are  expected to continue. Overall newspaper readership is falling.  Also,  the Christian Science Monitor and U.S. News and World Report  recently announced that they would discontinue their printed editions.  Businesses and consumers are becoming more likely to obtain news  and information from the Internet, a trend that is particularly evident  among young people.
subsections: section_title: Options to Assist USPS through Its Short Term Difficulties
paragraphs: Several options could assist USPS through its short-term difficulties, some  of which would require congressional action. Although we recognize the  need to provide USPS with immediate financial relief, such relief should  meet its short-term needs and is no substitute for aggressive USPS action  to preserve its long-term viability. Key options include the following:    Reduce USPS payments for retiree health benefits for 8 years.
USPS has proposed that Congress give it immediate financial relief by  reducing its retiree health benefits payments by an estimated $25  billion from 2009 through 2016. Specifically, USPS has proposed that  Congress change the statutory obligation to pay retiree health benefits  premiums for current retirees from USPS to the Postal Service Retiree  Health Benefits Fund (Fund) for the next 8 years. Because the Fund  would pay the estimated $25 billion in premium payments over the next  8 years, this would decrease the Fund by approximately $32 billion  (including interest charges) as of 2017. With this option, starting in  fiscal year 2017, USPS would have a total unfunded retiree health  benefits obligation currently estimated at about $75 billion, rather than  an estimated $43 billion, that would then need to be amortized in future  years. In the long term, the large impact this unfunded obligation would  have on the Fund would create the risk that USPS would have difficulty  making future payments, particularly considering mail volume trends  and the impact of payments on postal rates if mail volume declines  continue.  USPS’s proposal would also shift responsibility for paying  the benefits of postal employees from current rate payers to future rate  payers. USPS would continue to make annual payments ranging from  $5.4 billion to $5.8 billion from fiscal years 2009 through 2016 (as  shown in Table 1) for its obligation for future retiree health benefits, as  required by PAEA.  Thus, under USPS’s proposal, it would save $2  billion in fiscal year 2009.
Reduce USPS payments for retiree health benefits for 2 years.
Another option would be for Congress to provide USPS with 2-year  relief for retiree health benefits premium payments, totaling about  $4.3 billion, which would be consistent with providing immediate  financial relief, while having much less impact on the Fund than  USPS’s proposal. Specifically, Congress could revise USPS’s statutory  obligation so that it would not pay for current retiree health benefits  for fiscal years 2009 and 2010. USPS has provided information related  to its financial situation for fiscal years 2009 and 2010 which projected  that its financial condition would improve beginning in 2010.   Therefore, we believe that the option to provide 2-year relief totaling  $4.3 billion would be preferable to USPS’s proposal.  Under this short- term option Congress could revisit USPS’s financial condition to  determine whether further relief is needed and also review what  actions USPS has taken to assure its long-term financial viability.
Work with unions to modify work rules.
One option that would not require congressional action is similar to  actions taken by other financially stressed entities, whereby USPS and  its unions could agree on ways to achieve additional short-term  savings, such as by modifying work rules to facilitate reducing work  hours. For example, USPS and the National Association of Letter  Carriers recently agreed on a new procedure to expedite the  evaluation and adjustment of city delivery carrier routes. According to  USPS officials, this new process is aimed at enhancing USPS’s ability  to respond to declining mail volumes and is expected to make a key  contribution to the budgeted savings of $1.3 billion in city delivery  costs in fiscal years 2009 and 2010.
Other options are based on provisions in the statute and could include 1)  seeking regulatory approval for an exigent rate increase and 2) increasing  USPS’s annual borrowing limit. USPS could request PRC approval for an  exigent rate increase that would increase rates for market-dominant  classes of mail above the statutory price cap. Mailers have voiced strong  concern about the potential impact of an exigent rate increase on their  businesses. In our view, this option should be a last resort. Such an  increase could be self-defeating for USPS in both the short and long term  because it could increase incentives for mailers to further reduce their use  of the mail.
Congress could also temporarily expand the statutory $3 billion annual  limit on increases in USPS debt, which would provide USPS with access to  funding if it has difficulty making mandated year-end payments. Raising  USPS’s annual debt limit could address a cash shortage and would be  preferable to an exigent rate increase. However, it is unclear when USPS  would repay any added debt, which would move USPS closer to the $15  billion statutory debt limit. In our view, this option should be regarded  only as an emergency stopgap measure.
section_title: Comprehensive Action Is Needed to Help Keep USPS Financially Viable in the Long-Term
paragraphs: Action is urgently needed to streamline USPS costs in two areas where it  has been particularly difficult—the compensation and benefits area, which  generates close to 80 percent of its costs, and USPS’s mail processing and  retail networks. As USPS’s mail volumes decline, it does not have  sufficient revenue to cover the growing costs of providing service to new  residences and businesses, while also maintaining its large network of  processing and retail facilities. We have reported for many years that USPS  needs to rightsize its workforce and realign its network of mail processing  and retail facilities. USPS has made some progress, particularly by  reducing its workforce by more than 100,000 employees with no layoffs  and by closing some smaller mail processing facilities. Yet, more will need  to be done.
USPS has several options for realigning its mail processing operations to  eliminate excess capacity and costs, but has taken only limited action. In  2005, we reported that according to USPS officials, declining mail volume,  worksharing, and the evolution of mail processing operations from  manual to automated equipment led to excess capacity that has impeded  efficiency gains. While USPS has terminated operations at 54 Airport Mail  Centers in fiscal years 2006 through 2008, it has closed only one of over  400 major mail processing facilities as a result of consolidating its mail  processing operations. Another realignment option USPS is considering  is outsourcing operations in its network of 21 bulk mail processing  centers.
Another option we reported on would be for USPS to close unnecessary  retail facilities, and by reducing the number of facilities, USPS could lower  the costs of maintaining its network of facilities. USPS’s network of retail  facilities has been largely static despite population shifts and changes in  mailing behavior. In considering options to provide retail services at a  lower cost, it is important to note that large retail facilities—generally  located in large urban areas—generate much larger costs for the retail  network than the smallest rural facilities and may therefore potentially  generate more cost savings.
Closing postal facilities is often controversial but is necessary to  streamline costs. Congress encouraged USPS to expeditiously move  forward in its streamlining efforts in PAEA. We recommended that USPS  enhance transparency and strengthen accountability of its realignment  efforts to assure stakeholders that realignment would be implemented  fairly and achieve the desired results. USPS has taken steps to address our  recommendations and thus should be positioned to take action.
Other long-term options for reducing costs include more fundamental  changes that would have public policy implications for Congress to  consider—such as potential changes in USPS’s universal service from 6 to  5 delivery days per week as discussed in a recent PRC study, and potential  changes to USPS’s business model, which we will be discussing in a PAEA- required report that will be issued by December 2011. These studies will  provide Congress with information about how to address challenges for  USPS to meet the changing needs of mailers and the public.
We asked USPS to comment on a draft of our testimony.  USPS generally  agreed with the accuracy of our statement and provided technical  corrections and some additional perspective, which we incorporated  where appropriate. USPS reiterated its position regarding the funding of  retiree health benefits and the difficulties related to its cost-cutting efforts.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to answer any questions that you or the Members of the Subcommittee  may have.
section_title: Contact and Acknowledgments
paragraphs: 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,  Joshua Bartzen, Heather Frevert, David Hooper, Kenneth John, Emily  Larson, Susan Ragland, and Crystal Wesco.
section_title: Appendix I: USPS Financial Information for Fiscal Years 1972 through 2008
paragraphs: (Loss) Total Revenues Total Expenses  Outstanding debt $(175) (13) (439) (989) (1,176) (687) (380) (306) (588) (251) (223) (597) (874) (1,469) (536) (1,765) (914) (199) (1,680) (676)
1,800  (Loss) Total Revenues Total Expenses  Outstanding debt (5,142) (2,806)
section_title: Appendix II: Mail Volume, Fiscal Years 1990 through 2008
paragraphs: (millions)
Standard  Mail volume:  percent  change (millions)
Total  international  volume  (millions) (millions)
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