U.S. Postal Service: Key Considerations for Restoring Fiscal Sustainability
Published: 2017-02-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USPS is a critical part of the nation's communication and commerce, delivering 154 billion pieces of mail in fiscal year 2016 to 156 million delivery points. However, USPS's mission of providing prompt, reliable and efficient universal services to the public is at risk due to its poor financial condition. USPS's net loss was $5.6 billion in fiscal year 2016, its tenth consecutive year of net losses. At the end of fiscal year 2016, USPS had $121 billion in unfunded liabilities, mostly for retiree health and pensions, and debt—an amount equal to 169 percent of USPS's revenues.
In July 2009, GAO added USPS's financial condition to its list of high-risk areas needing attention by Congress and the executive branch. USPS's financial condition remains on GAO's High-Risk List. In previous reports, GAO has identified strategies and options for USPS to generate revenue, reduce costs, increase the efficiency of its delivery operations, and restructure the funding of USPS pension and retiree health benefits. GAO has also previously reported that a comprehensive package of actions is needed to improve USPS's financial viability.
This testimony discusses (1) factors affecting USPS's deteriorating financial condition, (2) USPS's ability to make required retiree health and pension payments, and (3) considerations and choices Congress faces in addressing USPS's financial challenges. This testimony is based primarily on past GAO work that has examined USPS's financial condition—including its liabilities—and updated USPS financial information for fiscal years 2016 and 2017.
section_title: What GAO Found
paragraphs: The U.S. Postal Service's (USPS) deteriorating financial condition is unsustainable as a result of trends including:
Declining mail volume : First-Class Mail—USPS's most profitable product—continues to decline in volume as communications and payments migrate to electronic alternatives. USPS expects this decline to continue for the foreseeable future.
Growing expenses: Key USPS expenses such as salary increases and work hours continue to grow, due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS's expenses.
USPS's financial condition makes it unlikely it will be able to fully make its required retiree health and pension payments in the near future. In fiscal year 2016, when USPS was required to make $13.0 billion in retiree health and pension payments, it made $7.0 billion in payments—mainly due to not making a required retiree health payment of $5.8 billion. USPS's required payments have been restructured for fiscal year 2017 and are estimated to total $10.3 billion. USPS's ability to make these 2017 payments will be further challenged due to:
Expiration of a temporary “exigent” rate surcharge: USPS has said the April 2016 surcharge expiration is reducing its revenues almost $2 billion annually.
No new major cost savings initiatives planned: USPS made efforts in recent years to right-size its operations, but has no current plans to initiate major new initiatives to achieve cost savings in its operations.
Large unfunded liabilities for postal retiree health and pension benefits—which were $73.4 billion at the end of fiscal year 2016—may ultimately place taxpayers, USPS employees, retirees and their beneficiaries, and USPS itself at risk. As GAO has previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills after employees have retired. Further, with USPS retirees participating in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury—and hence the taxpayer—would be needed to maintain the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in USPS benefits or pay.
Congress faces difficult choices and tradeoffs to address USPS's financial challenges. The status quo is not sustainable. Considerations for Congress include the (1) level of postal services provided to the public and the affordability of those services, (2) compensation and benefits for USPS employees and retirees in an environment of revenue pressures, and (3) tension between USPS's dual roles as an independent establishment of the executive branch required to provide universal delivery service and as a self-financing entity operating in a business-like manner.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss the varied  challenges facing the U.S. Postal Service (USPS) and choices Congress  faces in addressing USPS’s ongoing financial challenges. USPS is a  critical part of the nation’s communication and commerce, delivering 154  billion pieces of mail in fiscal year 2016 to about 156 million delivery  points, and with about 640,000 employees. USPS, however, continues to  face a serious financial situation with insufficient revenues to cover its  expenses, putting its mission of providing prompt, reliable, and efficient  universal services to the public at risk. USPS continues to incur deficits  that are unsustainable. Moreover, at the end of fiscal year 2016, USPS  had about $121 billion in unfunded liabilities and debt, most of which were  for retiree health and pension benefits. USPS continues to have $15  billion in outstanding debt—the statutory limit. These unfunded liabilities  and debt are a large financial burden, increasing from 99 percent of  USPS revenues in fiscal year 2007 to 169 percent of revenues in fiscal  year 2016. USPS also recorded a net loss of $5.6 billion in fiscal year  2016—its tenth consecutive year of net losses totaling over $62 billion.
In July 2009, we added USPS’s financial condition to our list of high-risk  areas needing attention by Congress and the executive branch. USPS’s  financial condition continues to deteriorate and remains on our High-Risk  List. We have previously issued a number of reports that identified  strategies and options for USPS to generate revenue, reduce costs,  increase the efficiency of its delivery operations, and restructure the  funding of USPS pension and retiree health benefits. We continue to  believe that a comprehensive package of actions is needed to improve  USPS’s financial viability.
This testimony discusses: (1) factors affecting USPS’s deteriorating  financial condition, (2) USPS’s ability to make required retiree health and  pension payments, and (3) considerations and choices Congress faces in  addressing USPS’s financial challenges. This testimony is based primarily  on our past reports and testimonies that examined USPS’s financial  condition, including its liabilities. The reports and testimonies cited in this  statement contain detailed information on the methods used to conduct  our work. For this testimony, we updated USPS’s financial information  with reported results for fiscal year 2016, which ended September 30,  2016. In addition, we reviewed testimony and reports prepared by USPS  and the Postal Regulatory Commission in 2016 and USPS estimates of  retiree health and pension payments that USPS will be legally required to  make in fiscal year 2017. We found these estimates to be sufficiently  reliable for providing a general description and estimate for the large  pending payments USPS faces. The work upon which this testimony is  based was conducted 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: Declining Mail Volume and Growing Expenses Contribute to USPS’s Deteriorating Financial Condition
paragraphs: After about 30 years of relatively steady growth, USPS’s expenses began  consistently exceeding revenues in fiscal year 2007—a trend that has  continued through fiscal year 2016 (see fig. 1). As a result, USPS has lost  a total of $62.4 billion since fiscal year 2007.
As we testified last year, the continued deterioration in USPS’s financial  condition is due primarily to two factors.  1. Declining First-Class Mail volumes: The long-term decline of First- Class Mail volume, which USPS expects to continue for the foreseeable future, has fundamental implications for USPS’s business model because this remains USPS’s most profitable class of mail. Domestic First-Class Mail volume declined by 2 percent in fiscal year 2016 from the previous fiscal year to 61 billion pieces—a level 41 percent below its peak in fiscal year 2001, and the smallest level since fiscal year 1981 (see fig. 2). USPS recently reported that First-Class Mail volume is declining as major commercial mailers actively  promote the use of online services, and although the rate of decline  has slowed, will continue to decline in future years with the migration  to electronic alternatives resulting from technological changes. In the  long run, USPS also faces the possibility of a future economic  downturn that could have an additional impact on First-Class Mail  volume.  2. Growing Expenses: USPS expenses increased by $3.1 billion in fiscal year 2016 from the previous year, outpacing the $2.6 billion increase in revenues. Increasing compensation and benefits expenses were a key driver of expense growth. USPS reported that compensation and benefits for active employees increased by $1.2 billion, due to contractually obligated salary escalations and additional work hours associated in large part with growth in the more labor-intensive Shipping and Packages business. In this regard, USPS reported a 14  percent growth in Shipping and Packages volume in fiscal year 2016.  However, to accommodate the surge in this volume and to minimize  service disruptions during the holiday season, USPS reported  increasing Sunday delivery service and adding non-career employees  for the holiday season. This contributed to growth in USPS work hours  in fiscal year 2016 from the previous year, when the number of USPS  career employees increased by 17,000 and the number of non-career  employees increased by 1,000. Over the past 3 years, the size of  USPS’s total workforce has increased by about 22,000, including  career and non-career employees; this growth contrasts with the trend  from fiscal years 1999 through 2013, when the workforce decreased  by more than 288,000 (see fig. 3). Compensation and benefits  comprise close to 80 percent of total USPS expenses. Thus,  expenses will continue to grow if increases in salaries and work hours  continue.
As previously discussed, USPS’s unfunded liabilities and debt have  become a large financial burden, increasing from 99 percent of USPS  revenues at the end of fiscal year 2007 to 169 percent of revenues at the  end of fiscal year 2016. These unfunded liabilities and debt—totaling  about $121 billion at the end of fiscal year 2016—consist mostly of retiree  health and pension benefit obligations for which USPS has not set aside  sufficient funds to cover.
When the Postal Accountability and Enhancement Act (PAEA)  established the Postal Service Retiree Health Benefits Fund, it required  USPS to begin prefunding health benefits for its current and future postal  retirees, with annual payments of $5.4 billion to $5.8 billion from fiscal  years 2007 through 2016, followed by actuarially determined prefunding  payments beginning in 2017 and every year thereafter. As of the end of  fiscal year 2016, USPS’s liability for retiree health benefits was about  $104.0 billion and the Postal Service Retiree Health Benefits Fund  balance was $51.9 billion, with a resulting unfunded liability of $52.1  billion. USPS has missed a total of $33.9 billion in required prefunding  payments, which represent about half of its total losses since fiscal year  2007. However, USPS would have still lost $10.6 billion during this time  period even without the annual prefunding requirement.
section_title: USPS Will Remain Unlikely to Fully Make Required Retiree Health and Pension Payments
paragraphs: USPS will remain unlikely to fully make its required retiree health and  pension payments in the near future. Beginning this fiscal year (2017),  USPS is no longer required to make fixed prefunding payments. Instead,  under the requirements established by PAEA, it is required to start  making annual payments based on actuarial determinations of the  following component costs: a 40-year amortization schedule to address the unfunded liabilities for  postal retiree health benefits,  the “normal costs” of retiree health benefits for current employees,  and a 27-year amortization schedule to address the unfunded liabilities for  postal pension benefits under the Civil Service Retirement System  (CSRS).
These payments are in addition to annual payments USPS is already  required to make to finance its pension benefits under the Federal  Employees Retirement System (FERS), which consists of a 30-year  amortization schedule to address any unfunded liabilities, and the normal  costs of FERS benefits for current employees. USPS will find it very  difficult to make all of these required payments given its financial  condition and outlook. As table 1 below shows, in fiscal year 2017, USPS  will be required to make an estimated total of $10.3 billion in payments for  retiree health and pension benefits under CSRS and FERS—about $3.3  billion more than what USPS paid in fiscal year 2016 for these benefit  programs.
In addition to declining mail volumes and increased expenses, USPS’s  ability to make its required payments for these retirement programs will  be further challenged due to:
Expiration of a temporary rate surcharge: USPS has reported that the  April 2016 expiration of a 4.3 percent “exigent” surcharge that began  in January 2014 is reducing its revenues by almost $2 billion  annually.
No new major cost-savings initiatives planned: USPS has made  efforts in recent years to right-size its operations to better adapt to  declining mail volumes that are adversely affecting its financial  position. For example, in fiscal year 2015, USPS reduced the hours of  over 13,000 post offices to better match retail service with demand  and reduced its physical footprint by consolidating 36 mail processing  facilities, and instituted operational changes to better utilize resources.  However, USPS has no current plans to initiate new major initiatives  to achieve cost savings in its operations. According to USPS, it will  continue to implement operational initiatives to contain costs and take  actions to maintain liquidity, but as we testified last year, such  actions will not be enough to stave off future losses and stabilize its  finances. Although USPS has faced stakeholder resistance to its right- sizing efforts, in the absence of such efforts, USPS will continue to  face challenges to appropriately match resources with mail volume  and help address its compensation and benefits costs.
USPS has reported that without structural change to its business model  and legislative change, it expects continuing losses and liquidity  challenges for the foreseeable future. According to USPS, it has  maintained adequate liquidity only by not making required payments to  prefund retiree health benefits and deferring needed capital investments.  Looking forward, USPS has reported that, if circumstances leave it with  insufficient cash, it may prioritize payments to its employees and  suppliers ahead of some payments to the federal government, as it has  done in the past.
Large unfunded liabilities for postal retiree health and pension benefits— which were $73.4 billion at the end of fiscal year 2016—may ultimately  place taxpayers, USPS employees, retirees and their beneficiaries, and  USPS itself at risk. As we have previously reported, funded benefits  protect the future viability of an enterprise such as USPS by not saddling  it with bills after employees have retired. Further, since USPS retirees  participate in the same health and pension benefit programs as other  federal retirees, if USPS ultimately does not adequately fund these  benefits and if Congress wants these benefits to be maintained at current  levels, funding from the U.S. Treasury, and hence the taxpayer, would be  needed to continue the benefit levels. According to USPS’s testimony last  year, “absent fundamental legislative reform, we face the prospect of  having to continue to default on these prefunding payments [for retiree  health benefits] in order to continue paying our employees and suppliers  and to provide postal services to the American public. This increases the  risk that taxpayers may ultimately be called on to fund these benefits.”  Alternatively, unfunded benefits could lead to pressure for reductions in  benefits or in pay. Thus, the timely funding of benefits protects USPS  employees, retirees and their beneficiaries, taxpayers, and the USPS  enterprise.
section_title: Congress Faces Difficult Choices to Address USPS’s Financial Condition
paragraphs: USPS’s financial situation leaves Congress with difficult choices and  trade-offs to achieve the broad-based restructuring that will be necessary  for USPS to become financially sustainable. USPS’s ability to make its  required retiree health and pension payments requires a decrease in  expenses or increase in revenues, or both. Although USPS needs to take  further action to reduce costs and increase revenues, USPS’s actions  alone under its existing authority will be insufficient to achieve sustainable  financial viability; comprehensive legislation will be needed.  Congressional decisions about how to address the following issues will  shape USPS’s future role, services, operations, networks, and ability to  adapt to changes in mail volume. In making these decisions, Congress  could consider, among other things, the following factors:
The level of postal services and the affordability of those services:  USPS’s growing financial difficulties combined with vast changes in  how people communicate provide Congress with an opportunity to  consider what postal services will be needed in the 21st century.  Specifically, Congress could consider what postal services should be  provided on a universal basis to meet customer needs and how these  services should be provided. Congress also could consider trade-offs  in reducing the level of postal services, such as providing USPS with  the authority to reduce the frequency of letter mail delivery to enable  USPS to reduce its expenses. A key factor in any consideration to  reduce postal services would include potential effects on postal  customers, mail volumes, and employees. In particular, Congress  could consider the quality of postal service—such as the frequency  and speed of mail delivery and the accessibility and scope of retail  postal services—in considering any service reduction. For example,  as part of its efforts to reduce excess capacity, in January 2015 USPS  revised its standards for on-time mail delivery by increasing the  number of days for some mail to be delivered and still be considered  on time. Even with the revised standards, on-time delivery  performance declined significantly, particularly for the second quarter  of fiscal year 2015, a decline USPS attributed to operational changes  implemented in January 2015 and adverse winter weather.  Performance has rebounded since then, facilitated in part by  increases in workforce and mail transportation capacity and costs.
Compensation and benefits in an environment of revenue pressures:  Key compensation and benefits costs for USPS employees have  increased and continue to increase, while the volume for First-Class  Mail—USPS’s most profitable product—has declined and continues to  decline. To put USPS’s situation into context, many private sector  companies (such as automobile companies, airlines, mail preparation  and printing companies, and major newspapers) took far-reaching  measures to cut costs (such as reducing or stabilizing workforce,  salaries, and benefits) when demand for their central product and  services declined. However, although USPS has taken some steps to  improve its financial situation, USPS has stated that its strategies to  increase efficiency and reduce costs are constrained by statutory,  contractual, regulatory, and political restrictions. USPS is subject to  requirements to maintain 6-day delivery, limit rate increases for most  mail within an inflation-based price cap, and participate in federal  benefit programs. Most USPS employees are covered by collective  bargaining agreements with four major labor unions which have  established salary increases, cost-of-living adjustments, and the  percentage of health insurance premiums paid by employees and  USPS. When USPS and its unions are unable to agree, the parties  are required to enter into binding arbitration by a third-party panel.  There is no statutory requirement for USPS’s financial condition to be  considered in arbitration. Considering USPS’s unsustainable financial  condition and the competitive environment, we continue to believe— as we reported in 2010—that Congress should consider revising the  statutory framework for collective bargaining to ensure that USPS’s  financial condition be considered in binding arbitration.
USPS’s dual role of providing affordable universal service while  remaining self-financing: As an independent establishment of the  executive branch, USPS has long been expected to provide  affordable, quality, and universal delivery service to all parts of the  country while remaining self-financing. USPS and other stakeholders  have considered a range of different business models to address  USPS’s financial difficulties. For example, USPS’s 2002  Transformation Plan included a range of alternatives from a publicly  supported model to a business model with a corporate structure  supported by shareholders. Any alternative business model would  need to address the level of any costs that would be transferred from  USPS, which is financed by postal ratepayers, to the federal  government, which is funded by taxpayers. In addition, if Congress  requires eligible postal retirees to participate in Medicare, as USPS  has previously proposed, it should consider the tradeoffs for the  federal budget deficit and Medicare’s financial condition, as well as  the implications for affected employees.
Finally, a fully functioning USPS Board of Governors is needed to support  USPS’s ability to carry out its critical responsibilities, as certain powers  are reserved to the nine presidentially-appointed Governors who must be  confirmed by the Senate. Because the last serving Governor left the  Board in December 2016 due to term limits, the 11-member Board  currently consists of only the Postmaster General and the Deputy  Postmaster General. According to USPS, the critical responsibilities  reserved to the Governors include setting postal prices, approving new  products, and appointing or removing the Postmaster General and the  Deputy Postmaster General. USPS stated last year that, in the event no  Governors are in place, these critical duties may not be able to be  executed, potentially leaving USPS without the ability to adjust its prices  as needed, introduce new products, or appoint or replace its two most  senior executive officers.
section_title: Conclusion
paragraphs: USPS management, unions, the public, community leaders, and  Members of Congress need to take a hard look at what level of postal  services residents and businesses need and can afford. The status quo is  not sustainable.
Chairman Chaffetz, Ranking Member Cummings, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  answer any questions that you may have at this time.
section_title: GAO Contact and Key Acknowledgments
paragraphs: For further information about this statement, please contact Lori  Rectanus, Director, Physical Infrastructure Issues, at (202) 512-2834 or  rectanusl@gao.gov. Contact points for our Congressional Relations and  Public Affairs offices may be found on the last page of this statement. In  addition to the contact named above, Frank Todisco, Chief Actuary, FSA,  MAAA, EA, Applied Research and Methods; Derrick Collins, Assistant  Director, Physical Infrastructure Issues; Samer Abbas; Antoine Clark;  Kenneth John; Josh Ormond; Crystal Wesco; and Chad Williams made  important contributions to this statement. Mr. Todisco meets the  qualification standards of the American Academy of Actuaries to render  the actuarial opinions contained in this testimony.
section_title: Appendix I: U.S. Postal Service (USPS) Financial Obligations and Related Information
paragraphs: Selected USPS liabilities (included  and Pension Funds (not fully  on USPS balance sheet) included on USPS balance sheet)  Funded  status for  FERS  (unfunded)
Funded  status for  retiree  health  benefits  (unfunded)
Funded  status for  CSRS  (unfunded)
Unfunded  obligations,  liabilities,  and debt as  percentage  of revenue  2007  2008  2009  2010  2011  2012  2013  2014  2015  2016   (12.7) (55.0) (3.1) (12.5) (53.5) (9.0) (13.2) (52.0) (7.3) (13.6) (48.6) (14.2) (46.2) (17.8) (13.7) (47.8) (18.8) (12.5) (48.3) (17.8) (0.1) (12.5) (48.9) (19.4) (3.6) (12.5) (54.8) (16.7) (3.8) (12.3) (52.1) (17.5) (3.8)
Total  USPS  liabilities,  debt, and  unfunded  obligations   (74.3)  (83.7)  (85.9)  (74.3)  (103.7)  (112.1)  (110.9)  (117.8)  (121.6)  (120.7) attributed to past service; these liabilities reflect all such projected future costs for current retirees and  beneficiaries and a portion of such projected future costs (in excess of worker contributions) for  current workers.  Unfunded obligations, liabilities, and debt are the sum of the unfunded actuarial liabilities  (obligations), USPS liabilities, and debt shown in this table.  Total USPS revenue consists of total USPS operating revenue plus interest and investment income  for each fiscal year.  Total assets consist of current assets including cash and noncurrent assets largely comprising  property and equipment measured at historic purchase value after depreciation. This does not include  assets funding the retiree health and pension benefits.
subsections: section_title: 2007 2008 2009 2010 2011 2012 2013 2014 2015 Projected 2016
paragraphs: Net CSRS  funded  Status  (unfunded)   (3.1)
Total pension  funded status  (unfunded) (9.0)  (7.3)  (17.8)  (18.8)  (17.8) (0.1) (19.4) (3.6) (16.7) (3.8) (17.5) (3.8)
5.3   (2.5)  (0.4)  12.5   (15.2)  (17.9)  (17.9)  (23.0)  (20.5)  (21.3) (52.0)   (48.6)   (46.2)   (47.9)   (48.3)   (48.9)   (54.8)   (52.1)
section_title: Total