U.S. Postal Service: Legislation Needed to Address Key Challenges
Published: 2010-12-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Postal Service's (USPS) financial condition and outlook deteriorated sharply during fiscal years 2007 through 2009. USPS actions to cut costs and increase revenues were insufficient to offset declines in mail volume and revenues. Mail volume declined from 213 billion pieces in fiscal year 2006, to 171 billion pieces in fiscal year 2010--or about 20 percent. Volume declines resulted from the recession and changes in the use of mail as transactions and messages continued to shift to electronic alternatives. In this environment, USPS initiatives to increase revenues had limited results. USPS expects mail volume to decline further to about 150 billion pieces by 2020. This trend exposes weaknesses in USPS's business model, which has relied on growth in mail volume to help cover costs. GAO and others have reported on options for improving USPS's financial condition, including GAO's April 2010 report on USPS's business model (GAO-10-455). Recently, legislation has been introduced that addresses USPS's finances and the need for flexibility to help modernize operations. This testimony discusses (1) updated information on USPS's financial condition and outlook, (2) the need to modernize and restructure USPS, and (3) key issues that need to be addressed by postal legislation. It is based primarily on GAO's past and ongoing work. In comments on our statement, USPS generally agreed with its accuracy and provided technical comments that were incorporated as appropriate.
section_title: What GAO Found
paragraphs: USPS's financial condition continued to decline in fiscal year 2010 and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key results for fiscal year 2010 included total revenue of $67.1 billion and total expenses of $75.6 billion, resulting in (1) a record loss of $8.5 billion--up $4.7 billion from fiscal year 2009, (2) a $1.8 billion increase in outstanding debt to the Treasury, thus making the total outstanding debt $12 billion, and (3) a $1.2 billion cash balance at the end of the fiscal year. USPS's budget for fiscal year 2011 projects (1) a $6.4 billion loss, (2) a $3 billion increase in debt to the $15 billion statutory limit, and (3) an end-of-year cash shortfall of $2.7 billion. USPS has reported achieving close to $13 billion in cost savings in the past 5 fiscal years. However, as its most profitable core product, First-Class Mail, continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS needs to become much leaner and more flexible. Key challenges include: changing use of the mail; compensation and benefit costs that are close to 80 percent of total costs; difficulties realigning networks to remove costly excess capacity and improve efficiency; constrained capital investment, which has declined to one of the lowest levels in two decades and led to delays in buying new vehicles; lack of borrowing capacity when USPS reaches its statutory debt limit; and large unfunded financial obligations and liabilities of roughly $100 billion at the end of fiscal year 2010. Proposed postal legislation, including S. 3831, provides a starting point for addressing key issues facing USPS and facilitating changes, such as rightsizing networks, that will take time to implement and produce results. Also, decisions on postal issues may involve trade-offs related to USPS's role as a federal entity expected to provide universal postal service while being self-financing through businesslike operations. Three key areas addressed by the bill include compensation and benefits; rightsizing USPS networks and workforce; and whether to allow USPS to expand its nonpostal activities. For example, resolving large USPS funding requirements for retiree health benefits is important, while continuing to prefund retiree health benefits to the extent USPS's finances permit. It is equally important to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Allowing USPS to expand into nonpostal activities raises issues of how to mitigate risks associated with new lines of business, assure fair competition with the private sector, and how to finance such efforts. Congress and USPS urgently need to take action to restore USPS's financial viability as business and consumer use of the mail continues to evolve.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing on proposed  legislation to address the U.S. Postal Service’s (USPS) challenges to  remain self-supporting while providing effective and efficient universal  postal service to the nation. My statement will discuss (1) updated  information on USPS’s financial condition and outlook, (2) the need to  modernize and restructure USPS, and (3) key issues that need to be  addressed by postal legislation.
This statement is based on our past and ongoing work, including our  reviews of USPS’s business model, financial condition, networks, service,  and postal reform issues. We interviewed USPS officials and reviewed the  POST Act of 2010; USPS’s audited financial statements for the fiscal year  ended September 30, 2010; and other reports, testimonies, and  communications on USPS’s financial condition, operations, and outlook.  We conducted this performance audit in November 2010 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 Continues to Decline and Its Financial Outlook Is Poor
paragraphs: USPS’s financial condition continued to decline over the past fiscal year  and its financial outlook is poor for fiscal year 2011 and the foreseeable  future. Key USPS results for fiscal year 2010 included a $1.0 billion decline  in total revenue to $67.1 billion, and a $3.7 billion increase in total  expenses to $75.6 billion, resulting in    a record loss of about $8.5 billion,    a $1.8 billion increase in outstanding debt (which left $1.2 billion of  available borrowing authority),    a total of $12 billion in outstanding debt due to the Treasury, and    a $1.2 billion cash balance at the end of the fiscal year.
USPS has recently released its budget for fiscal year 2011, projecting    a $6.4 billion loss (see fig. 1)—one of the largest in USPS history— including the impact of a $5.5 billion payment due in 2011 to prefund  retiree health benefits;    a $3 billion increase in outstanding debt due to the Department of the   Treasury (Treasury), thereby reaching its $15 billion statutory limit; and    a $2.7 billion cash shortfall at the end of the fiscal year.
USPS’s revenue drop in fiscal year 2010 was driven by continuing declines  in total mail volume. In fiscal year 2010, mail volume decreased about 6  billion pieces from the previous fiscal year to 171 billion pieces. This  volume was about 20 percent below the peak of 213 billion pieces  delivered during fiscal year 2006. Most of the volume declines were in  profitable First-Class Mail—which were particularly significant because  the average piece of First-Class Mail generated about three times the  profitability of the average piece of Standard Mail.
USPS currently projects mail volume to increase by about 2 billion pieces  in fiscal year 2011.  In this fiscal year, First-Class Mail is expected to  decrease by 3 billion pieces, but Standard Mail is expected to increase by 5  billion pieces. With these volume changes and expected small rate  increases, USPS projects revenues to increase $0.6 billion in fiscal year  2011.
Meanwhile, USPS’s expenses increased by $3.7 billion in fiscal year 2010  compared to fiscal year 2009 for several reasons. First, in fiscal year 2010,  USPS made its statutorily required payment of $5.5 billion to prefund  health benefits for its retirees, in contrast to fiscal year 2009 when  Congress deferred all but $1.4 billion of USPS’s scheduled payment of $5.4  billion. Second, USPS’s workers’ compensation costs in fiscal year 2010  were $3.6 billion, up $1.3 billion from the previous fiscal year, primarily  from the non-cash effect of changes in the discount rates used to estimate  the liability. Third, results of USPS cost savings efforts in fiscal year 2010  were insufficient to offset rising costs in other areas.
According to USPS, it achieved a total of close to $13 billion in cost  savings from fiscal years 2006 through 2010 (see fig. 2), primarily by  reducing 280 million work hours and its workforce by 131,000 employees.  Most savings resulted from attrition, reductions in overtime, and changes  in postal operations. USPS reported saving $3 billion in fiscal year 2010,  primarily because of a reduction of 75 million work hours—half the  savings achieved in fiscal year 2009. Looking forward, USPS projects cost  savings of $2 billion in fiscal year 2011, primarily from continued attrition  and associated savings.
section_title: Further Actions Are Needed to Modernize and Restructure USPS
paragraphs: As its core product—First-Class Mail—continues to decline, USPS must  modernize and restructure to become more efficient, control costs, keep  rates affordable, and meet changing customer needs. To do so, USPS will  need to become much leaner and more flexible. Key challenges include the  following:    Mail volume and changing use of the mail: USPS projects mail volume to  continue declining to about 150 billion pieces by fiscal year 2020—about  30 percent below its 2006 peak. Most of the declines are projected to be in  profitable First-Class Mail. Use of the mail is changing as communications  and payments continue to shift to electronic alternatives—a shift that is  being facilitated by rapid adoption of broadband. These trends expose  weaknesses in USPS’s business model, which has relied on volume growth  to help cover costs.
Postal revenues: USPS expects revenue to stagnate in the next decade as  continued declines in mail volume are offset by rate increases. Rate  increases are generally limited by the inflationary price cap on market- dominant products that generate close to 90 percent of USPS revenue.
Compensation and benefit costs: Compensation and benefits, including  retiree health benefits and workers’ compensation, totaled about $60  billion in fiscal year 2010, or close to 80 percent of USPS costs. USPS pays  a higher share of employee health and life insurance premiums than other  federal agencies.
Difficulties achieving network realignment: Realigning USPS’s mail  processing and retail facilities will be crucial for it to achieve sustainable  cost reductions and productivity improvements, but limited progress has  been made in rightsizing these networks to eliminate costly excess  capacity. Although USPS is working to consolidate some mail processing  operations, it has closed few large mail processing facilities since 2005.  Similarly, its network of post offices and postal retail facilities has  remained largely static despite expanded use of retail alternatives and  population shifts.
Capital investment: Continuing losses from operations have constrained  funds for USPS capital investment.  USPS’s purchases of capital property  and equipment and building improvements have declined in recent years,  from $1.8 billion in fiscal year 2009 to $1.4 billion in fiscal year 2010. The  deferral of maintenance could impede modernization and efficiency gains  from optimizing mail processing, retail, and delivery networks.  Further,  USPS has delayed buying new delivery vehicles for lack of capital  resources. We have an ongoing review of USPS’s delivery fleet of about  185,000 vehicles, including about 140,000 long-life vehicles purchased in  the late 1980s and early 1990s that are nearing the end of their 24-year  expected operating time frame. USPS has estimated replacing its delivery  fleet will cost about $5 billion.
Lack of borrowing capacity: USPS expects to increase its outstanding  debt to Treasury during fiscal year 2011 by $3 billion, thereby reaching its  total statutory debt limit of $15 billion. Even with this debt increase, USPS  projects a cash shortfall at the end of this fiscal year. Its cash outlook is  uncertain, as indicated by recent experience. USPS reported in August  2010 that it “would likely experience a cash shortfall if legislation similar  to that passed in September 2009 is not passed.” USPS ended fiscal year  2010 with cash of about $1.2 billion and remaining annual borrowing  authority of an additional $1.2 billion, or slightly more than the funds  needed for one biweekly payroll.  USPS projects it will have insufficient  cash at the end of fiscal year 2011 to meet all of its obligations.
Large unfunded financial obligations and liabilities: USPS’s unfunded  obligations and liabilities were roughly $100 billion at the end of fiscal year  2010.  Looking forward, USPS will continue to be challenged by these  financial obligations and liabilities, together with expected large financial  losses and long-term declines in First-Class Mail volume.
section_title: Key Issues Need to Be Addressed by Postal Legislation
paragraphs: Proposed postal legislation, including S. 3831, provides a starting point for  considering key issues where congressional decisions are needed to help  USPS undertake needed reforms. This bill is based on legislative proposals  USPS made this past spring. Resolving large USPS funding requirements  for pension and retiree health benefits is important. It is equally important  to USPS’s future to address constraints and legal restrictions, such as  those related to closing facilities, so that USPS can take more aggressive  action to reduce costs. Urgent action is needed as some changes, such as  rightsizing networks, will take time to implement and produce results.  In  addition, including incentives and oversight mechanisms would make an  important contribution to assuring an appropriate balance between  providing USPS with more flexibility and assuring sufficient transparency,  oversight, and accountability.
Congressional decisions may involve difficult trade-offs related to USPS’s  role as a federal entity expected to provide universal mail delivery and  ready access to postal retail service while being self-financing through  businesslike operations. Future USPS actions and other stakeholder  actions are expected to be informed and guided based on congressional  decisions related to public policy questions, such as:    Benefits: What changes, if any, should be made to USPS pension and  retiree health benefit obligations and payment schedules? What would be  the impact on the federal budget?
Delivery: Should the long-standing requirement for Saturday delivery be  dropped so USPS can implement its proposal to reduce delivery frequency  to 5 days a week? What would be the specific effects on operations, costs,  workforce mix, employees, service, competition, the value of mail, mail  volume, and revenue? How would shifting to 5-day delivery affect  customers including business mailers and the public?
Post office closings: Should USPS have greater flexibility to rightsize its  retail networks and workforce, which may involve closing post offices and  moving retail services to alternative commercial locations that are often  open more days and longer hours than postal facilities? Or should USPS  retain its retail facilities and provide new nonpostal products and  services?
Nonpostal products: Should USPS be allowed to offer new nonpostal  products and services that compete with private-sector firms? If so, how  should fair competition be assured? Would it need additional capital for  such initiatives? If so, how would they be financed?
Processes for change: What role should Congress, the PRC, USPS,  employees, and customers, including business mailers and the public, have  in decisions on postal policy issues? What incentives and oversight  mechanisms are needed as part of congressional actions to assure an  appropriate balance between providing USPS with more flexibility and  assuring sufficient transparency, oversight, and accountability?
We have discussed several options that Congress and USPS could consider  in a report we issued last April, and are currently conducting a  congressionally requested review of USPS’s 5-day delivery proposal. In  this testimony, we will highlight some options related to three areas that  are also addressed by S. 3831—compensation and benefits, rightsizing  networks and workforce, and expanding nonpostal activities.
subsections: section_title: Postal Compensation and Benefits
paragraphs: S. 3831 addresses key retiree health and pension benefit issues.  Specifically, it requires OPM to recalculate USPS’s CSRS pension  obligation in a way expected to make the federal government responsible  for a greater share of USPS’s CSRS pension obligation.  The bill also  authorizes the USPS Board of Governors to transfer any part of a resulting  pension surplus to the Postal Service Retiree Health Benefits Fund. The  sponsor of S. 3831 has estimated that these legislative changes could result  in an increase in the government’s pension obligations of approximately  $50 billion.  Such an increase could impact the federal budget deficit and  require funding over time.
USPS has said it cannot afford its required prefunding payments to the  retiree health benefit fund on the basis of its significant volume and  revenue declines, large losses, debt nearing its limit, and limited cost- cutting opportunities under its current authority. We have reported that  Congress should consider providing financial relief to USPS, including  modifying its retiree health benefit cost structure in a fiscally responsible  manner. Several legislative proposals have been made to defer costs by  revising statutory requirements, including extending and revising  prefunding payments to the Retiree Health Benefits Fund, with smaller  payment amounts in the short term followed by larger amounts later.  Deferring some prefunding of these benefits would serve as short-term  fiscal relief. However, deferrals also increase the risk that USPS will not be  able to make future benefit payments as its core business declines.   Therefore, it is important that USPS fund its retiree health benefit  obligations—including prefunding these obligations—to the maximum  extent that its finances permit. In addition to considering what is  affordable and a fair balance of payments between current and future  ratepayers, Congress would also have to address the impact of these  proposals on the federal budget. Further, the Congressional Budget Office  has raised concerns about how aggressive USPS’s cost-cutting measures  would be if prefunding payments for retiree health care were reduced.
Congress could revisit other aspects of the postal compensation and  benefits framework. USPS is required to maintain compensation and  benefits comparable to the private sector, a requirement that has been a  source of disagreement between USPS and its unions in collective  bargaining and binding arbitration. If USPS and its unions go to  arbitration, there is no statutory requirement for arbitrators to consider  USPS’s financial condition. We continue to favor such an arbitration  requirement. The law also requires USPS’s fringe benefits to be at least as  favorable as those in effect when the Postal Reorganization Act of 1970  was enacted. Career employees participate in federal pension and benefit  programs, and USPS covers a higher proportion of its employees’ health  care and life insurance premiums than most other federal agencies. USPS  is also required by law to participate in the federal workers’ compensation  program, and some benefits paid exceed those provided in the private  sector. Furthermore, USPS employees in this program can choose not to  retire when they become eligible to retire, and they often decide to remain  on the more generous workers’ compensation rolls.
section_title: Rightsizing USPS’s Networks and Workforce
paragraphs: Congressional action is needed to speed USPS’s progress in rightsizing its  networks and workforce, and S. 3831 seeks to address these issues. Such  progress is limited by both stakeholder resistance and statutory  requirements. USPS has costly excess capacity and inadequate flexibility  to quickly reduce costs in its processing and retail networks. USPS has  faced formidable resistance to facility closures and consolidations because  of concerns about possible effects on service, employees, and  communities, particularly in small towns or rural areas. We have suggested  that Congress consider establishing a panel similar to the military Base  Realignment and Closure Commissions to facilitate action and progress.  Such panels have successfully informed prior difficult restructuring  decisions. The panel could consider options for USPS’s networks  including the following:    Mail processing: Decisions to maintain or close facilities are best made  in the context of a comprehensive, integrated approach for optimizing  the processing network. Issues include how to inform Congress and the  public, address resistance, and ensure employees will be treated fairly.  Related issues include whether to relax current delivery standards to  enable additional facility closures and associated savings.
Retail: USPS has retained most of its retail facilities in recent years  despite the growing use of less costly alternatives to traditional post  offices, such as self-service kiosks and stamp sales in grocery stores,  drug stores, and over the Internet. USPS has called for statutory  changes to facilitate modernizing its retail services.
section_title: Expanding USPS Nonpostal Activities
paragraphs: USPS has asked Congress to change the law so it can diversify into  nonpostal areas to find new opportunities for revenue growth, and S. 3831  would authorize such action. This could involve USPS entering into new  business areas or earning revenues from partners selling nonpostal  products at USPS facilities. About 10 years ago, we reported that USPS  incurred losses on early electronic commerce and other nonpostal  initiatives, and its management of its electronic commerce initiatives was  fragmented, with inconsistent implementation and incomplete financial  information. Congress then restricted USPS from engaging in new  nonpostal activities in the Postal Accountability and Enhancement Act of  2006. Allowing USPS to expand into new nonpostal activities would raise  issues about the areas in which it should be allowed to compete with the  private sector, how to assure fair competition, how to mitigate risks  associated with entering new lines of business, and how to finance such  efforts. Related issues could include whether USPS’s mission and role as a  government entity with a monopoly should be changed, what  transparency and accountability would apply, whether USPS would be  subject to the same regulatory entities and regulations as its competitors,  and whether losses would be borne by postal ratepayers or taxpayers.
A senior USPS official told us that USPS is studying various possibilities  for introducing new products and services. A continued issue is whether  USPS would make money if it was allowed to compete in new nonpostal  areas. USPS has reported that if it could enter such areas, such as banking  or sales of consumer goods, its opportunities would be limited by its high  cost structure and the relatively light customer traffic of post offices  compared with commercial retailers. (There are 600 weekly counter  customers at the average post office, compared to 20,000 at the average  major supermarket, according to USPS.) USPS has said that the possibility  of building a sizable presence in logistics, banking, integrated marketing,  and document management was currently not viable because of its net  losses, high wage and benefit costs, and limited access to cash to support  necessary investment. USPS concluded that building a sizable business in  any of these areas would require “time, resources, new capabilities (often  with the support of acquisitions or partnerships) and profound alterations  to the postal business model.”
In summary, the need for postal reform continues as business and  consumer use of the mail continues to evolve. Congress and USPS  urgently need to reach agreement on a package of actions to restore  USPS’s financial viability and enable it to begin making necessary changes.
Mr. Chairman, that concludes my prepared statement. I would be pleased  to answer any questions that you or other Members of the Subcommittee  may have.
section_title: Contact and Staff Acknowledgments
paragraphs: For further information about this statement, please contact Phillip Herr at  (202) 512-2834 or herrp@gao.gov. Individuals who made key contributions  to this statement include Joseph Applebaum, Chief Actuary; Susan Ragland,  Director, Financial Management and Assurance; Amy Abramowitz; Teresa  Anderson; Joshua Bartzen; Kenneth John; Hannah Laufe; SaraAnn  Moessbauer; Robert Owens; Crystal Wesco; and Jarrod West.
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