U.S. Postal Service: Escalating Financial Problems Require Major Cost Reductions to Limit Losses
Published: 2009-03-25T00:00:00

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 financial condition has deteriorated. Mail volume declined by a record 9.5 billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of $2.8 billion--the second largest since 1971. According to USPS, this was largely due to declines in the economy, especially in the financial and housing sectors, as well as shifts in transactions, messages, and advertising from mail to electronic alternatives. Declining mail volume flattened revenues despite rate increases, while USPS's cost-cutting efforts were insufficient to offset the impact of declining mail volume and rising costs in fuel and cost-of-living allowances for postal employees. USPS's initial fiscal year 2009 budget expected that the turmoil in the economy would result in more mail volume decline and a loss of $3.0 billion. 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 comments, which we incorporated where appropriate.
section_title: What GAO Found
paragraphs: USPS's financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year. Key results include: (1) accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces, and (2) accelerating losses after the first quarter, with a total loss of about $2 billion. USPS's updated fiscal year 2009 projections suggest the magnitude of the challenges it faces: (1) mail volume will decline by a record 22.7 billion pieces (11.2 percent),(2) a record $6.4 billion net loss and an unprecedented cash shortfall of $1.5 billion, assuming that cost-cutting targets of $5.9 billion are achieved, and (3) plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the $15 billion statutory limit. In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall. USPS's most immediate challenge is to dramatically reduce costs fast enough to meet its financial obligations. USPS has proposed that Congress give it financial relief of $25 billion over 8 years by changing the statutory mandate for funding its retiree health benefits. GAO recognizes the need for immediate financial relief, but prefers 2-year relief so that Congress can determine what further actions are needed. It is not clear that either option would be sufficient because USPS projects it will operate on a thin margin, risking a larger cash shortfall if it does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as fuel cost increases. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS's current effort is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS's business model and its ability to remain self-financing may be in jeopardy. Action is needed to streamline costs in two difficult areas: (1) compensation and benefits, which generate close to 80 percent of costs and (2) mail processing and retail networks, which have growing excess capacity. Closing postal facilities is controversial, but necessary, because the declining mail volume and growing deficits indicate that USPS cannot afford to maintain such an extensive network. Information will be critical to determine what other actions are needed, including options to cut costs as well as their impact on mail volume and mail users. It is also imperative to review mail use, what future postal services will be needed, and what options are available in many areas, including universal service, workforce costs, retail services, mail processing, delivery, transportation, and USPS's business model.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this oversight hearing on  the financial stability of the U.S. Postal Service (USPS). As requested, my  statement addresses the following:  1.  USPS’s financial condition and outlook.  2.  Options and actions to help USPS remain financially viable in the short  and long term.
My statement is based on our testimony in January on USPS’s financial  condition, other prior work, and updated information on USPS’s financial  condition and outlook. We reviewed USPS’s budget for fiscal year 2009  and information on results for the fiscal year to date, including preliminary  data for January 2009, and met with senior USPS officials. We conducted  this performance audit in accordance with generally accepted government  auditing standards. Those 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 Financial Condition and Outlook Are Deteriorating
paragraphs: USPS’s financial condition has continued to deteriorate in the first 5  months of fiscal year 2009 and USPS expects its financial condition to  continue deteriorating for the rest of the fiscal year, including:  accelerating declines in mail volume after the first quarter, with a total  decline of about 11 billion pieces; and  accelerating losses after the first quarter, with a total loss of about $2  billion.
USPS has updated its projections for fiscal year 2009, projecting  a mail volume decline by a record 22.7 billion pieces (11.2 percent)  from fiscal year 2008;  a record $6.4 billion net loss, and an unprecedented $1.5 billion cash  shortfall (i.e., insufficient cash to cover expenses and obligations),  assuming cost-cutting targets of $5.9 billion are achieved; and     plans to increase outstanding debt by $3 billion (the annual statutory  limit) to $10.2 billion, or two-thirds of the total $15 billion statutory  limit.
USPS attributes much of its net loss this fiscal year to the economic  recession that has resulted in unprecedented declines in mail volume and  decreased revenues. Thus far in fiscal year 2009, First-Class Mail volume  (e.g., correspondence, bills, payments, and statements) dropped about 9  percent, while Standard Mail volume (primarily advertising) dropped  about 15 percent. According to USPS, the housing market downturn, the  credit crisis, and lower retail sales have contributed to these volume  declines. The financial and housing sectors are major mail users, mailing  bills, statements, and advertising such as credit card, mortgage, and home  equity solicitations. Volume declines have accelerated for both First-Class  Mail and Standard Mail, as shown by quarterly data (see fig. 1) and results  for January 2009 (see app. I).
In addition, USPS projects its financial difficulties will continue in fiscal  year 2010 and result in an even greater cash shortfall at the end of that  fiscal year, despite plans for additional cost-cutting and additional  borrowing of $3 billion, which would bring USPS’s total debt to $13.2  billion. Thus, USPS’s immediate problem is to generate sufficient cash to  remain financially viable in fiscal years 2009 and 2010.
subsections: section_title: Cost-Cutting Efforts and Rate Increases Have Not Fully Offset the Impact of Volume Declines and Other Factors that Increased Costs
paragraphs: USPS reports reducing expenses by $773 million in the first 5 months of  fiscal year 2009 (compared to the first 5 months of fiscal year 2008),  primarily through reductions of 50 million work hours that USPS made as  it adjusted to declining mail volumes and workload. USPS reduced  overtime and captured additional work hour savings as it reduced the size  of its workforce through attrition and implemented other cost-saving  initiatives. However, these savings and added revenue from rate increases  were insufficient to fully offset the impact of declines in mail volume and  rising costs from cost-of-living allowances (COLA) provided to postal  employees covered by union contracts, as well as rising workers’  compensation and retirement costs. Also, although almost 8,500  employees accepted USPS’s early retirement offer during the first quarter  of fiscal year 2009, the resulting savings to date have been limited because  the effective dates for the majority of these retirements were December  31, 2008 or later.
USPS has high 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. Compensation and benefits for  USPS’s workforce, which included about 646,000 career employees and  about 98,000 noncareer employees in February 2009, generate close to 80  percent of its costs. Collective bargaining agreements with USPS’s four  largest unions include layoff protections and work rules that constrain  USPS’s flexibility, as well as semiannual COLAs linked to the Consumer  Price Index (CPI) and employee benefits including health and life  insurance premium payments. Under these agreements, which expire in  2010 or 2011:    USPS paid 85 percent of employee health benefit premiums in fiscal  year 2007, about 13 percent more than the share for other federal  agencies. USPS’s share is decreasing annually to 81 percent in 2011 or  80 percent in 2012, depending on the agreement.
USPS pays 100 percent of employee life insurance premiums, about 67  percent more than most other federal agencies.
USPS pays 100 percent of both employee health benefit premiums and life  insurance premiums for its Postal Career Executive Service, which  included 724 executives in fiscal year 2008. Executives at comparable  grades in most other federal agencies do not receive such benefits.
section_title: USPS’s Outlook Is Worsening, and USPS Projects a Cash Shortfall at the End of the Fiscal Year
paragraphs: USPS’s financial outlook has continued to deteriorate during fiscal year  2009. USPS has increased its estimate of losses in total mail volume in  fiscal year 2009 to 22.7 billion pieces (11.2 percent). As a result, USPS now  projects a net loss of $6.4 billion for fiscal year 2009, despite increasing its  cost-cutting target to $5.9 billion for the fiscal year. Based on these  projections, USPS expects cash from operations and borrowing will be  insufficient to cover expenses at the end of the fiscal year, with the  shortfall projected to be $1.5 billion. This projected net loss and cash  shortfall assumes USPS will meet its cost-cutting target and factors in  USPS’s plans to borrow $3 billion.
USPS’s Chief Financial Officer told us on March 16 that achieving USPS’s  target to eliminate 100 million work hours this fiscal year will be critical to  achieving its goal of reducing costs by $5.9 billion. He expressed guarded  optimism that USPS can reach this ambitious cost-cutting target,  explaining that the target is difficult, but achievable. He noted that USPS  plans to continue efforts to reduce work hours as it responds to mail  volume declines, including reductions in overtime and additional work  hour savings achieved through attrition and other initiatives. Additional  USPS cost-saving efforts include:  Implementing a service-wide hiring freeze and reducing staffing levels  for managers and other employees not covered by union agreements  by 15 percent at headquarters and 19 percent at the nine Area offices.
Evaluating more than 93,000 city delivery carrier routes (more than  half of all city routes), eliminating about 2,500 city routes, and  adjusting many other city routes, which USPS expects will result in  saving about 3.2 million work hours in fiscal year 2009. An agreement  between USPS and the National Association of Letter Carriers to  expedite evaluation and adjustment of city delivery routes enabled this  progress.
Consolidating excess capacity in mail processing and transportation  networks, including consolidating operations at some mail processing  facilities, moving some mail processing employees from the day shift  to evening hours, and streamlining transportation.    Halting construction starts of new postal facilities.
To increase its revenues, USPS has increased rates, including a January  2009 increase for competitive products (e.g., Priority Mail and Express  Mail), and a planned May 2009 increase for market-dominant products  (e.g., First-Class Mail, Standard Mail, Periodicals, and some types of  Package Services). USPS has also introduced volume discounts,  negotiated service agreements, and added some enhancements to  competitive products since the Postal Accountability and Enhancement  Act of 2006 (PAEA) was enacted in 2006. However, these products  generated only about 11 percent of USPS’s revenues and covered about 6  percent of its overhead costs in fiscal year 2008. USPS is considering  alternatives to try to increase First-Class Mail and Standard Mail revenues.
section_title: USPS Recently Reported on the Service Quality of Many Market-Dominant Products
paragraphs: USPS will be challenged to achieve and maintain high-quality service as it  works to implement unprecedented cost-cutting measures. USPS recently  reported for the first time on the service quality of many market-dominant  postal products; thereby making important progress in improving  transparency and meeting the requirements of PAEA. USPS has cautioned  that limitations have affected the quality of new measurement data and  said that it will work to improve data quality. As table 1 shows, on-time  delivery of all major types of market-dominant products in the first quarter  of fiscal year 2009 fell short of USPS’s targets for the full fiscal year.
To put these results into context, the timeliness of mail delivery is an  important part of USPS’s mission of providing affordable, high-quality  universal postal services on a self-financing basis.  USPS has stated that  service is at the heart of its brand and the key to increasing its  competitiveness and profitability.
section_title: Action Is Needed on Options to Preserve USPS’s Financial Viability
paragraphs: Action is needed on various options, as no single action will be sufficient  for USPS to remain financially viable in the short and long term. The short- term challenge for USPS is to cut costs quickly enough to offset the  unprecedented volume and revenue declines so that it does not run out of  cash this fiscal year. The long-term challenge is to restructure USPS’s  entire operations and networks to reflect the changes in mail volume,  mailer preferences, and USPS’s capacity to cover its costs. Based on  USPS’s poor financial condition and outlook, the time to take action is  relatively short, and USPS’s business model and its ability to remain self- financing may be in jeopardy.
A key factor in determining USPS’s financial viability is whether mail  volume will rebound sufficiently once the economy improves, as volume  has done in the past, so that USPS revenues will cover costs (see fig. 2).
As the Postal Regulatory Commission (PRC) noted in December 2008,  current pressures from declining volume and revenue 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 to  electronic alternatives, and some mailers have left the mail entirely. An  economic recovery may not stimulate the same rebound in mail volume as  in the past, because of changes in how 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 move to  electronic alternatives, such as Internet bill payment, automatic  deduction, and direct deposit. USPS’s analysis has found that  electronic diversion is associated with the growing adoption of  broadband technology. As PRC reported, the availability of alternatives  to mail eventually impacts mail volume.
It is unclear whether Standard Mail will 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. The average  rate increase for Standard Mail is limited by the price cap to the  increase in the Consumer Price Index, but future rate increases will  likely have some impact on volume.
subsections: section_title: Options to Assist USPS through Its Short-Term Difficulties
paragraphs: Options to assist USPS through its short-term difficulties—some of which  would require congressional action—include:    Reduce USPS payments for retiree health benefits for 8 years: 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. This proposal would also reduce USPS’s expenses through 2016  by an estimated $25 billion—with $2 billion in fiscal year 2009, $2.3  billion in fiscal year 2010, and the remaining annual expenses  increasing from $2.6 billion to $4.2 billion over the remaining 6 years.  This proposal is poorly matched to alleviate USPS’s immediate  projected cash shortfalls. In addition, this proposal would reduce the  Fund balance by an estimated $32 billion (including interest charges)  by 2016, so that in 2017, the remaining current unfunded obligation  would be an estimated $75 billion (rather than $43 billion) to be  amortized for future payments. This large obligation 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 volume declines continue. USPS’s proposal  also would shift responsibility for these benefits from current to future  rate payers.
Reduce USPS payments for retiree health benefits for 2 years:  Another option would be for Congress to revise USPS’s statutory  obligation so that the Fund, not USPS, would pay for current retiree  health benefits for only 2 years (fiscal years 2009 and 2010), which  would provide USPS with $4.3 billion in relief. We support this option  because it would have much less impact on the Fund and it would  allow Congress to revisit USPS’s financial condition to determine if  further relief is needed and review actions USPS has taken in 2009 and  2010 to improve its viability. Relief from retiree health premium costs  is no substitute for aggressive USPS action—beyond current efforts— to dramatically reduce costs and improve efficiency.
It is not clear that either of these options would be sufficient, because  USPS projects it will operate on a thin margin. This means that even if  such relief is provided, a cash shortfall could develop in either fiscal year  2009 and/or 2010 if USPS does not meet its ambitious cost-cutting goals,  mail volume declines more than projected, or unexpected costs  materialize, such as unexpected increases in fuel costs.
One option that would not require congressional action would be for USPS  and its unions to continue their dialogue and agree on ways to achieve  additional short-term savings, such as by modifying rules to facilitate  reducing work hours. Such labor-management cooperation is critical to  USPS’s ability to make immediate changes in order to achieve cost  reductions.
Other available options, based on statutory provisions, could include (1)  seeking PRC approval for an exigent rate increase and (2) increasing  USPS’s annual borrowing limit. First, 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 such a rate increase on their  businesses. In our view, this option should be a last resort. It 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.  Second, Congress could temporarily raise the statutory $3 billion annual  limit on increases in USPS’s debt, which would provide USPS with funding  if needed. This option would be preferable to an exigent rate increase.  However, it is unclear when USPS would repay any added debt, which  would quicken USPS’s movement toward its $15 billion statutory debt  limit. In our view, this option should be regarded only as an emergency  stop-gap measure.
section_title: Comprehensive Action Is Urgently Needed on Options to Keep USPS Viable
paragraphs: Although USPS is taking unprecedented actions to cut costs,  comprehensive action beyond USPS’s current efforts is urgently needed to  maintain financial viability. Given the growing gap between revenues and  expenses, USPS’s business model and its ability to remain self-financing  may be in jeopardy.  Progress in many areas will be needed so that USPS  can cover operating expenses and maintain and modernize its  infrastructure.
I want to emphasize that action is urgently needed to streamline USPS’s  costs in two areas where it has been particularly difficult—compensation  and benefits and the mail processing and retail networks. We have  reported for many years that USPS needs to right size 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 since 2000 with no layoffs and by closing some smaller  mail processing facilities. Yet, as USPS recognizes, more needs to be done.  USPS no longer has sufficient revenue to cover the cost of maintaining its  large network of processing and retail facilities. Closing postal facilities  would be controversial, but is necessary to streamline costs. Congress  encouraged USPS to expeditiously move forward in its streamlining efforts  in PAEA, and its continued support would be helpful to facilitate progress  in this area. We recommended that USPS enhance the transparency and  strengthen the accountability of its realignment efforts to assure  stakeholders that realignment would be implemented fairly, preserve  access to postal services, and achieve the desired results. USPS has taken  steps to address our recommendations and, thus, should be positioned to  take action.
In addition, it is imperative for USPS and Congress to take informed action  to review mail use, what future postal services will be needed, and what  operational and statutory options are available to provide those services.  Key areas with options include:    Universal Postal Service: A recently completed PRC study identified  options for universal service and trade-offs involving quality and costs.  When USPS asked Congress in January 2009 to eliminate the long- standing statutory provision mandating 6-day delivery, it provided little  information on where it would reduce delivery frequency, and the  potential impact on cost, mail volume, revenue, and mail users.  Because the number of delivery days is fundamental to universal  service, Congress should have more complete information before it  considers any statutory changes in this area. A mechanism to obtain  such information would be for USPS to request an advisory opinion  from PRC, which would lead to a public proceeding that could  generate information on USPS’s request and stakeholder input.
USPS workforce costs: USPS’s ability to control wage and benefit costs  will be critical to cost-saving efforts. One option would be for USPS  and its unions to negotiate changes to wages and benefits that apply to  employees covered by collective bargaining agreements. USPS will  begin negotiating next year with two of its major unions, whose  agreements will expire in November 2010, and the following year with  its other two major unions, whose agreements expire in November  2011.
Retail postal service: USPS has alternatives to provide lower-cost  retail services than in traditional post offices, such as contract postal  facilities, carrier pick-up of packages, and selling stamps at  supermarkets, drug stores, and by telephone, mail, and the Internet.  USPS’s retail network has been largely static, despite the expansion of  alternatives, population shifts, and changes in mailing behavior. We  have reported that USPS could close unnecessary retail facilities and  lower its network costs. It is important to note that large retail  facilities—generally located in large urban areas where more postal  retail alternatives are available—generate much higher costs than the  smallest rural facilities and may, therefore, potentially generate more  cost savings.
Mail processing: USPS has several options for realigning its mail  processing operations to eliminate growing excess capacity and  associated 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 has led to excess capacity that has  impeded efficiency gains. USPS has terminated operations at 58  Airport Mail Centers in recent years, but has closed only 1 of over 400  major mail processing facilities. As USPS consolidates its operations,  it needs to consider how it can best use its facilities, if it is cost  effective to retain ones that are underutilized, and take the actions  necessary to right size its network.
Transportation: Various options exist for reducing USPS’s  transportation costs beyond its current streamlining efforts. For  example, a joint USPS-mailer workgroup has identified a destination  entry discount for First-Class Mail as an option that could reduce the  need for USPS to provide long-distance transportation and some mail  processing. USPS could publicly provide its analysis of the potential  savings and the impact of such a discount.
Delivery: USPS has various options for reducing delivery costs by  continuing to realign delivery routes, implementing efficiency  initiatives, and making more fundamental changes to delivery  operations, such as delivering mail to more cost-effective receptacles,  including cluster boxes.
USPS’s business model: We will discuss options to change USPS’s  business model in a report that PAEA requires us to issue by  December 2011.
Given USPS’s projection that it faces record losses and cash shortfalls, it is  important for USPS to continue providing Congress and the public with  timely and sufficiently detailed information to understand USPS’s current  financial situation and outlook. Such information is essential to help  congressional policymakers understand USPS actions and plans to  maintain its financial viability in both the short and long term, particularly  in view of proposals to give USPS financial relief from some retiree health  benefit costs. Recently USPS took steps in this direction by providing  monthly financial information to the PRC, which then made this  information publicly available.
We asked USPS to comment on a draft of our testimony.  USPS generally  agreed with the accuracy of our statement and provided technical  comments, which we incorporated where appropriate.
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,  David Hooper, Kenneth John, Emily Larson, Joshua Ormond, Susan  Ragland, and Crystal Wesco.
section_title: Appendix I: Preliminary U.S. Postal Service Mail Volume and Revenue for January 2009 and the First 4 Months of Fiscal Year 2009
paragraphs: (Volume and revenue data in thousands)
FY 2008 through Jan. 2008 Market-dominant products primarily include First-Class Mail—domestic and international single-piece  mail (e.g., bill payments and letters) and domestic bulk mail (e.g., bills and advertising); Standard Mail  (mainly bulk advertising and direct mail solicitations), periodicals (mainly magazines and local  newspapers), some types of package services (primarily single-piece Parcel Post, Media Mail, library  mail, and bound printed matter). Market-dominant revenues also include revenues from services such  as post office boxes and Delivery Confirmation.
Competitive products primarily include Express Mail; Priority Mail; bulk Parcel Post, which the Postal  Service calls Parcel Select; and bulk international mail. The Postal Service did not report separate  data for each competitive product, which the Postal Service considers to be proprietary.
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