U.S. Postal Service: Urgent Action Needed to Achieve Financial Sustainability
Published: 2013-02-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USPS is in a serious financial crisis as its declining mail volume has not generated sufficient revenue to cover its expenses and financial obligations. First-Class Mail--which is highly profitable and generates the majority of the revenues used to cover overhead costs--declined 33 percent since it peaked in fiscal year 2001, and USPS projects a continued decline through fiscal year 2020. Declining mail volume is putting USPS's mission of providing prompt, reliable, and efficient universal services to the public at risk.
This testimony discusses (1) USPS's financial condition, (2) initiatives to reduce costs and increase revenues, and (3) actions needed to improve USPS's financial situation. The testimony is based primarily on our past and ongoing work and our analysis of USPS's recent financial results.
In previous reports, GAO has provided strategies and options that USPS and Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency. GAO has also stated that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability.
section_title: What GAO Found
paragraphs: The U.S. Postal Service (USPS) continues to incur unsustainable operating deficits, has not made required payments of $11.1 billion to prefund retiree health benefits, and has reached its $15 billion borrowing limit. Thus far, USPS has been able to operate within these constraints, but now faces a critical shortage of liquidity that threatens its financial solvency and ability to finance needed capital investment. USPS had an almost 25 percent decline in total mail volume and net losses totaling $40 billion since fiscal year 2006. While USPS achieved about $15 billion in savings and reduced its workforce by about 168,000 over this period, its debt and unfunded benefit liabilities grew to $96 billion by the end of fiscal year 2012. USPS expects mail volume and revenue to continue decreasing as online bill communication and e-commerce expand.
USPS has reported on several initiatives to reduce costs and increase its revenues to curtail future net losses. To reduce costs, USPS announced a 5-year business plan in February 2012 with the goal of achieving $22.5 billion in annual cost savings by the end of fiscal year 2016. USPS has begun implementing this plan, which includes making changes to its mail processing, retail, and delivery networks and redesigning its workforce in line with changing mail volume. To achieve greater savings, USPS's Board of Governors recently directed postal management to accelerate these efforts. To increase revenue, USPS is pursuing 55 initiatives. While USPS expects shipping and package services to continue to grow, such growth is not expected to fully offset declining mail volume.
USPS needs to reduce its expenses to avoid even greater financial losses, repay its outstanding debt, continue funding its retirement obligations, and increase capital for investment, including replacing its aging vehicle fleet. Also, Congress needs to act to (1) modify USPS's retiree health benefit payments in a fiscally responsible manner; (2) facilitate USPS's ability to align costs with revenues based on changing workload and mail use; and (3) require that any binding arbitration resulting from collective bargaining takes USPS's financial condition into account. No one action in itself will address USPS's financial condition; we have previously recommended a comprehensive package of actions. If Congress does not act soon, USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of postal services. USPS also reported that it would prioritize payments to employees and suppliers ahead of those to the federal government.

section_title: Letter
paragraphs: We appreciate the opportunity to be here today to discuss the status of  the U.S. Postal Service’s (USPS) financial condition and actions needed  to address USPS’s financial challenges. We added USPS’s financial  condition to our High Risk List in 2009, and USPS continues to face a  serious financial crisis as its mail volume declines. USPS has not  generated sufficient revenue to cover its expenses and financial  obligations. While USPS must continue its efforts to align costs with  revenues, congressional action is needed to facilitate necessary changes  and help the Postal Service begin to transition to financial sustainability.
This testimony discusses (1) USPS’s financial condition, (2) its initiatives  to reduce costs and increase revenues, and (3) actions needed to  improve its financial situation. This testimony is based primarily on our  past and ongoing work examining various aspects of USPS’s operations  and our analysis of its recent financial results, an analysis that we  performed from January 2013 to February 2013. Our work 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: USPS’s Financial Condition
paragraphs: USPS faces a dire financial situation and does not have sufficient  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 operating deficits that are unsustainable, has not made  required payments of $11.1 billion to prefund retiree health benefit  liabilities, and has reached its $15 billion borrowing limit. Moreover,  USPS lacks liquidity to maintain its financial solvency or finance needed  capital investment. As presented in table 1, since fiscal year 2006, USPS  has achieved about $15 billion in savings and reduced its workforce by  about 168,000, while also experiencing a 25 percent decline in total mail  volume and net losses totaling $40 billion.
As a result of significant declines in volume and revenue, USPS reported  that it took unprecedented actions to reduce its costs by $6.1 billion in  fiscal year 2009. Also, in fiscal year 2009, a cash shortfall necessitated  congressional action to reduce USPS’s mandated payment to prefund  retiree health benefits from $5.4 billion to $1.4 billion. In 2011, USPS’s  $5.5 billion required retiree health benefit payment was delayed until  August 1, 2012. USPS missed that payment as well as the $5.6 billion  that was due by September 30, 2012.
USPS continues to face significant decreases in mail volume and  revenues as online communication and e-commerce expand. While  remaining among USPS’s most profitable products, both First-Class Mail  and Standard Mail volumes have declined in recent years as illustrated in  figure 1. First-Class Mail—which is highly profitable and generates the  majority of the revenues used to cover overhead costs—declined 33  percent since it peaked in fiscal year 2001, and USPS projects a  continued decline through fiscal year 2020. Standard Mail (primarily  advertising) has declined 23 percent since it peaked in fiscal year 2007,  and USPS projects that it will remain roughly flat through fiscal year 2020.  Standard Mail is profitable overall, but it takes about three pieces of  Standard Mail, on average, to equal the profit from the average piece of  First-Class Mail. First-Class Mail and Standard Mail also face competition  from electronic alternatives, as many businesses and consumers have  moved to electronic payments over the past decade in lieu of using the  mail to pay bills. USPS reported that for the first time, in fiscal year 2010,  fewer than 50 percent of household bills were paid by mail.
In addition to lost mail volume and revenue, USPS also has incurred debt,  workers’ compensation, and unfunded benefit liabilities, such as pension  and retiree health benefits, that totaled $96 billion at the end of fiscal year  2012. Table 2 shows the amounts of these liabilities over the last 6 fiscal  years. One of these liabilities, USPS’s debt to the U.S. Treasury,  increased over this period from $4 billion to its statutory limit of $15 billion.
Thus, USPS can no longer borrow to maintain its financial solvency or  finance needed capital investment. USPS continues to incur  unsustainable operating deficits. In this regard, the USPS Board of  Governors recently directed postal management to accelerate  restructuring efforts to achieve greater savings.
These selected USPS liabilities increased from 83 percent of revenues in  fiscal year 2007 to 147 percent of revenues in fiscal year 2012 as  illustrated in figure 2. This trend demonstrates how USPS liabilities have  become a large and growing financial burden.
USPS’s dire financial condition makes paying for these liabilities highly  challenging. In addition to reaching its limit in borrowing authority in fiscal  year 2012, USPS did not make required prefunding payments of $11.1  billion for fiscal year 2011 and 2012 retiree health benefits. At the end of  fiscal year 2012, USPS had $48 billion in unfunded retiree health benefit  liabilities.
Looking forward, USPS has warned that it suffers from a severe lack of  liquidity. As USPS has reported, “Even with some regulatory and  legislative changes, our ability to generate sufficient cash flows from  current and future management actions to increase efficiency, reduce  costs, and generate revenue may not be sufficient to meet all of our  financial obligations.” For this reason, USPS has stated that it continues  to lack the financial resources to make its annual retiree health benefit  prefunding payment. USPS has also reported that in the short term,  should circumstances leave it with insufficient liquidity, it may need to  prioritize payments to its employees and suppliers ahead of those to the  federal government. For example, near the end of fiscal year 2011, in  order to maintain its liquidity USPS temporarily halted its regular  contributions for the Federal Employees Retirement System (FERS) that  are supposed to cover the cost of benefits being earned by current  employees. However, USPS has since made up those missed FERS  payments. USPS’s statements about its liquidity raise the issue of  whether USPS will need additional financial help to remain solvent while it  restructures and, more fundamentally, whether it can remain financially  self-sustainable in the long term.
USPS has also raised the concern that its ability to negotiate labor  contracts is essential to maintaining financial stability and that failure to  do so could have significant adverse consequences on its ability to meet  its financial obligations. 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 share of  health insurance premiums paid by employees and USPS. When USPS  and its unions are unable to agree, binding arbitration by a third-party  panel is used to establish agreement. There is no statutory requirement  for USPS’s financial condition to be considered in arbitration. In 2010, we  reported that the time has come to reexamine USPS’s 40-year-old  structure for collective bargaining, noting that wages and benefits  comprise 80 percent of its costs at a time of escalating losses and a  dramatically changed competitive environment. We also reported that  Congress should consider revising the statutory framework for collective  bargaining to ensure that USPS’s financial condition be considered in  binding arbitration.
section_title: USPS Initiatives to Reduce Costs and Increase Revenues
paragraphs: USPS has several initiatives to reduce costs and increase its revenues to  curtail future net losses. In February 2012, USPS announced a 5-year  business plan with the goal of achieving $22.5 billion in annual cost  savings by the end of fiscal year 2016. USPS has begun implementing  this plan, which includes initiatives to save:    $9 billion in mail processing, retail, and delivery operations, including  consolidation of the mail processing network, and restructuring retail  and delivery operations;    $5 billion in compensation and benefits and non-personnel initiatives;    $8.5 billion through proposed legislative changes, such as moving to a  5-day delivery schedule and eliminating the obligation to prefund  USPS’s retiree health benefits.
Simultaneously, USPS’s 5-year plan would further reduce the overall size  of the postal workforce by roughly 155,000 career employees, with many  of those reductions expected to result from attrition. According to the plan,  half of USPS’s career employees are currently eligible for full or early  retirement. Reducing its workforce is vital because, as noted,  compensation and benefits costs continue to generate about 80 percent  of USPS’s expenses. Compensation alone (primarily wages) exceeded  $36 billion in fiscal year 2012, or close to half of its costs. Compensation  costs decreased by $542 million in fiscal year 2012 as USPS offered  separation incentives to postmasters and mail handlers to encourage  more attrition. This fiscal year, separation incentives were offered to  employees represented by the American Postal Workers Union (e.g., mail  processing and retail clerks) to encourage further attrition as processing  and retail operations are redesigned and consolidated to more closely  correspond with workload.
To accelerate implementation of its plan, in early February 2013, USPS  announced plans to transition to a new delivery schedule by early August  2013 that would limit its delivery of mail on Saturdays to mail addressed  to Post Office Boxes and to packages. USPS’s operational plan for the  new delivery schedule anticipates a combination of employee  reassignment and attrition to generate an expected annual cost savings  of about $2 billion once its plan is fully implemented. Over the past  several years, USPS has advocated shifting to a 5-day delivery schedule  for both mail and packages. According to USPS, however, recent strong  growth in package delivery—as we will discuss in more detail below—and  projections for continued strong package growth throughout the coming  decade led to a revised approach to maintain package delivery 6 days per  week.
Another key area of potential savings included in the 5-year plan focused  on reducing compensation and benefit costs. USPS’s largest benefit  payments in fiscal year 2012 included:    $7.8 billion in current-year health insurance premiums for employees,  retirees, and their survivors (USPS’s health benefit payments would  have been $13.4 billion if USPS had paid the required $5.6 billion  retiree health prefunding payment);    $3.0 billion in FERS pension funding contributions;    $1.8 billion in social security contributions;    $1.4 billion in workers’ compensation payments; and    $1.0 billion in Thrift Savings Plan contributions.
USPS has proposed administering its own health care plan for its  employees and retirees and withdrawing from the Federal Employee  Health Benefits (FEHB) program so that it can better manage its costs  and achieve significant savings, which USPS has estimated could be over  $7 billion annually. About $5.5 billion of the estimated savings would  come from eliminating the retiree health benefit prefunding payment and  another $1.5 billion would come from reducing health care costs. We are  currently reviewing USPS’s proposal including its potential financial  effects on participants and USPS.
To increase revenue, USPS is working to increase use of shipping and  package services. With the continued increase in e-commerce, USPS  projects that shipping and package volume will grow by 7 percent in fiscal  year 2013, after increasing 7.5 percent in fiscal year 2012. Revenue from  these two product categories represented about 18 percent of USPS’s  fiscal year 2012 operating revenue. However, USPS does not expect that  continued growth in shipping and package services will fully offset the  continued decline of revenue from First-Class Mail and other products.
We recently reported that USPS is pursuing 55 initiatives to generate  revenue. Forty-eight initiatives are extensions of existing lines of postal  products and services, such as offering Post Office Box customers a suite  of service enhancements (e.g., expanded lobby hours and earlier pickup  times) at selected locations and increasing public awareness of the  availability of postal services at retail stores. The other seven initiatives  included four involving experimental postal products, such as prepaid  postage on the sale of greeting cards, and three that were extensions of  nonpostal services that are not directly related to mail delivery. USPS  offers 12 nonpostal services including Passport Photo Services, the sale  of advertising to support change-of-address processing, and others  generating a net income of $141 million in fiscal year 2011. USPS has  also increased its use of negotiated service agreements that offer  competitively priced contracts as well as promotions with temporary rate  reductions that are targeted to retain mail volume. We are currently  reviewing USPS’s use of negotiated service agreements.
As USPS attempts to reduce costs and increase revenue, its mission to  provide universal service continues. USPS’s network serves more than  152 million residential and business delivery points. In May 2011, we  reported that many of USPS’s delivery vehicles were reaching the end of  their expected 24-year operational life and that USPS’s financial  challenges pose a significant barrier to replacing or refurbishing its fleet.
As a result, USPS’s approach has been to maintain the delivery fleet until  USPS determines how to address longer term needs, but USPS has been  increasingly incurring costs for unscheduled maintenance because of  breakdowns. The eventual replacement of its vehicle delivery fleet  represents yet another financial challenge facing USPS. We are currently  reviewing USPS’s investments in capital assets.
section_title: Actions Needed to Improve USPS’s Financial Situation
paragraphs: We have issued a number of reports on strategies and options for USPS  to improve its financial situation by optimizing its network and  restructuring the funding of its pension and retiree health benefit liabilities.
subsections: section_title: Network Optimization
paragraphs: To assist Congress in addressing issues related to reducing USPS’s  expenses, we have issued several reports analyzing USPS’s initiatives to  optimize its mail processing, delivery, and retail networks.
In April 2012, we issued a report related to USPS’s excess capacity in its  network of 461 mail processing facilities. We found that USPS’s mail  processing network exceeds what is needed for declining mail volume.  USPS proposed consolidating its mail processing network, a plan based  on proposed changes to overnight delivery service standards for First- Class Mail and Periodicals. Such a change would have enabled USPS to  reduce an excess of 35,000 positions and 3,000 pieces of mail  equipment, among other things. We found, however, that stakeholder  issues and other challenges could prevent USPS from implementing its  plan for consolidating its mail processing network. Although some  business mailers and Members of Congress expressed support for  consolidating mail processing facilities, other mailers, Members of  Congress, affected communities, and employee organizations raised  concerns. Key issues raised by business mailers were that closing  facilities could increase their transportation costs and decrease service.  Employee associations were concerned that reducing service could result  in a greater loss of mail volume and revenue that could worsen USPS’s  financial condition. We reported that if Congress preferred to retain the  current delivery service standards and associated network, decisions will  need to be made about how USPS’s costs for providing these services  will be paid.
In March 2011, we reported on USPS’s proposal to reduce costs by  moving from a 6-day to a 5-day delivery schedule. USPS delivers to  more than 152 million addresses. USPS also estimated that 5-day  delivery would result in minimal mail volume decline. We found that the  extent to which USPS can achieve cost savings from this change and  mitigate volume and revenue loss depends on how well and how quickly  USPS can realign its operations, workforce, and networks; maintain  service quality; and communicate with stakeholders. USPS has spent  considerable time and resources developing plans to facilitate this  transition. Nevertheless, risks and uncertainties remain, such as how  quickly USPS can realign its workforce through attrition; how effectively it  can modify certain finance systems; and how mailers will respond to this  change in service.
In April 2012, we reported that USPS has taken several actions to  restructure its retail network—which included almost 32,000 postal- managed facilities in fiscal year 2012—through reducing its workforce and  its footprint while expanding retail alternatives. We also reported on  concerns customers and other stakeholders have expressed regarding  the impact of post office closures on communities, the adequacy of retail  alternatives, and access to postal services, among others. We discussed  challenges USPS faces, such as legal restrictions and resistance from  some Members of Congress and the public, that have limited USPS’s  ability to change its retail network by moving postal services to more  nonpostal-operated locations (such as grocery stores), similar to what  other nations have done. The report concluded that USPS cannot  support its current level of services and operations from its current  revenues. We noted that policy issues remain unresolved related to what  level of retail services USPS should provide, how the cost of these  services should be paid, and how USPS should optimize its retail  network.
In November 2011, we reported that USPS had expanded access to its  services through alternatives to post offices in support of its goals to  improve service and financial performance and recommended that USPS  develop and implement a plan with a timeline to guide efforts to  modernize USPS’s retail network, and that addresses both traditional post  offices and retail alternatives as well. We added that the plan should  also include:  (1) criteria for ensuring the retail network continues to provide adequate  access for customers as it is restructured;  (2) procedures for obtaining reliable retail revenue and cost data to  measure progress and inform future decision making; and  (3) a method to assess whether USPS’s communications strategy is  effectively reaching customers, particularly those customers in areas  where post offices may close.
In November 2012, we reported that although contract postal units  (CPUs)—independent businesses compensated by USPS to sell most of  the same products and services as post offices at the same price—have  declined in number, they have supplemented post offices by providing  additional locations and hours of service. More than 60 percent of CPUs  are in urban areas where they can provide customers nearby alternatives  when they face long lines at post offices. In fiscal year 2011, after  compensating CPUs, USPS retained 87 cents of every dollar of CPU  revenue. We found that limited interest from potential partners, competing  demands on USPS staff resources, and changes to USPS’s retail network  posed potential challenges to USPS’s use of CPUs.
section_title: Addressing USPS Benefit Liabilities
paragraphs: To assist Congress in addressing issues related to funding USPS’s  liabilities, we have also issued several reports that address USPS’s  liabilities, including its retiree health benefits, pension, and workers’  compensation.
In December 2012, we reported that USPS’s deteriorating financial  outlook will make it difficult to continue the current schedule for  prefunding postal retiree health benefits in the short term, and possibly to  fully fund the remaining $48 billion unfunded liability over the remaining  decades of the statutorily required actuarial funding schedule. However,  we also reported that deferring funding could increase costs for future  ratepayers and increase the possibility that USPS may not be able to pay  for some or all of its liability. We stated that failure to prefund these  benefits is a potential concern. Making affordable prefunding payments  would protect the viability of USPS by not saddling it with bills later on,  when employees are already retired and no longer helping it generate  revenue; it can also make the promised benefits more secure. Thus, as  we have previously reported, we continue to believe that it is important for  USPS to prefund these benefits to the maximum extent that its finances  permit. We also recognize that without congressional or further USPS  actions to align revenue and costs, USPS will not have the finances  needed to make annual payments and reduce its long term retiree health  unfunded liability. No funding approach will be viable unless USPS can  make the required payments.
We reported on options with regard to the FERS surplus, noting the  degree of uncertainty inherent in this estimate and reporting on the  implications of alternative approaches to accessing this surplus. The  estimated FERS surplus decreased from 2011 to 2012, and at the end of  fiscal year 2012, USPS had an estimated FERS surplus of $3.0 billion  and an estimated CSRS deficit of $18.7 billion.
In 2012, we reported on workers’ compensation benefits paid to both  postal and nonpostal beneficiaries under the Federal Employees’  Compensation Act (FECA). USPS has large FECA program costs. At  the time of their injury, 43 percent of FECA beneficiaries in 2010 were  employed by USPS. FECA provides benefits to federal workers who  sustained injuries or illnesses while performing federal duties, and  benefits are not taxed or subject to age restrictions. Various proposals to  modify FECA’s benefit levels have been advanced. At the request of  Congress, we have provided information to assist it in making decisions  about the FECA program.
section_title: Concluding Observations
paragraphs: In summary, to improve its financial situation, USPS needs to reduce its  expenses to close the gap between revenue and expenses, repay its  outstanding debt, continue funding its retirement obligations, and increase  capital for investment, such as replacing its aging vehicle fleet. In  addition, as noted in prior reports, congressional action is needed to (1)  modify USPS’s retiree health benefit payments in a fiscally responsible  manner; (2) facilitate USPS’s ability to align costs with revenues based on  changing workload and mail use; and (3) require that any binding  arbitration resulting from collective bargaining takes USPS’s financial  condition into account. As we have continued to underscore, Congress  and USPS need to reach agreement on a comprehensive package of  actions to improve USPS’s financial viability. In previous reports, we have  provided strategies and options, to both reduce costs and enhance  revenues, that Congress could consider to better align USPS costs with  revenues and address constraints and legal restrictions that limit USPS’s  ability to reduce costs and improve efficiency; we have also reported on  implications for addressing USPS’s benefit liabilities. If Congress does not  act soon, USPS could be forced to take more drastic actions that could  have disruptive, negative effects on its employees, customers, and the  availability of reliable and affordable postal services.
Chairman Carper, Ranking Member Coburn, 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 Staff Acknowledgments
paragraphs: For further information about this statement, please contact Lorelei St.  James, Director, Physical Infrastructure, at (202) 512-2834 or  stjamesl@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;  Samer Abbas, Teresa Anderson, Barbara Bovbjerg, Kyle Browning, Colin  Fallon, Imoni Hampton, Kenneth John, Kim McGatlin, Amelia Shachoy,  Andrew Sherrill, and Crystal Wesco made important contributions to this  statement.
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