U.S. Postal Service: Modernization and Restructuring Needed to Address Financial Challenges
Published: 2011-03-02T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Postal Service's (USPS) financial condition and outlook are deteriorating because revenues are not sufficient to cover its expenses and financial obligations. These challenges continue to threaten USPS's financial viability and GAO has therefore retained USPS on its high risk list issued in February 2011. USPS also faces cost pressures from maintaining a national network of processing, retail, and delivery operations. This testimony discusses (1) updated information on USPS's financial condition and outlook and (2) actions needed to modernize and restructure USPS. It is based primarily on GAO's past and ongoing work, as well as GAO's review of USPS's recent financial results and the President's proposed budget for fiscal year 2012.
section_title: What GAO Found
paragraphs: USPS experienced a net loss of $329 million in the first quarter of fiscal year 2011 and is projecting a $6.4 billion total net loss for fiscal year 2011. Mail volumes, USPS's main revenue source, have generally been decreasing as customers have shifted to electronic alternatives. This trend exposes weaknesses in USPS's business model, which has relied on mail volume growth to help cover costs. While USPS continues to reduce employees' work hours, its cost reduction efforts have not been sufficient to offset lost revenue. Since fiscal year 2006, USPS has relied on debt to help cover its obligations. If it borrows $3 billion in fiscal year 2011 as its plans indicate, USPS will reach its $15 billion statutory debt limit. The President's Fiscal Year 2012 Budget Request proposes providing USPS with over $4.5 billion in short-term financial relief in fiscal year 2011 by reducing its retiree health benefit payment by $4 billion and reimbursing it for approximately $550 million in Federal Employee Retirement System payments. While useful, these actions would not sufficiently address USPS's structural problems. USPS's financial condition has reached a tipping point. Given USPS's role in facilitating key aspects of the U.S. economy, Congress, the administration, USPS, and stakeholders need to reach agreement on a package of actions to restore USPS's financial viability, facilitate progress toward modernizing its services to meet changing customer needs, and remove barriers restricting USPS actions. This would allow USPS to optimize its networks and workforce so that it can become more efficient and reduce costs. GAO recently reported on lessons learned from foreign posts' modernization efforts, including using outreach and communication strategies to inform public officials and customers of increased access to products and services to help gain acceptance for retail network changes. Some posts also developed labor transition strategies that included training, relocation, job search services, and financial incentives to support employees who were negatively affected. While USPS has taken steps to generate ideas for modernizing its retail and delivery networks, the experiences of foreign posts suggest that it will be critically important for USPS to fully develop and implement similar outreach, communication, and labor transition strategies. While this testimony contains no new recommendations, GAO has reported that Congress, the administration, and USPS urgently need to reach agreement on a package of actions to restore USPS's financial viability by modernizing its operations, networks, and workforce. GAO has also recommended that Congress consider providing USPS with financial relief, and in doing so, consider all options available to reduce costs. In commenting on this statement, USPS generally agreed with its accuracy and provided technical comments that were incorporated as appropriate.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing on the U.S.  Postal Service’s (USPS) financial condition, a topic we have addressed in  recent reports and testimonies. My statement will discuss (1) updated  information on USPS’s financial condition and outlook and (2) actions  needed to modernize and restructure USPS.
This statement is based primarily on our past and ongoing work, and  updated financial information, including our reviews of USPS’s business  model, financial condition, networks, service, and postal reform issues.  To perform our work, we reviewed USPS’s financial statements for the  fiscal year that ended September 30, 2010, and for the first quarter of fiscal  year 2011 that ended December 31, 2010; USPS’s Fiscal Year 2011  Integrated Financial Plan; the President’s Fiscal Year 2012 Budget Request;  and other reports, testimonies, and documentation on USPS’s financial  condition, operations, and outlook. In addition, we interviewed senior  USPS officials. We conducted this performance audit in February 2011 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 objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our objectives.
subsections: section_title: USPS’s Financial Condition Continues to Deteriorate, and USPS May Face a Cash Shortfall This Fiscal Year
paragraphs: USPS’s financial condition has deteriorated significantly since fiscal year  2006, and its financial outlook is grim in both the short- and long-term. In  July 2009, we added USPS’s financial condition and outlook to our high- risk list because USPS was incurring billion-dollar deficits and its debt was  increasing as mail volumes and revenues declined and costs rose. USPS  experienced a net loss of $329 million in the first quarter of fiscal year 2011  and is projecting a $6.4 billion total net loss for fiscal year 2011. In  February 2011, we retained USPS on our updated high-risk list and  reported that USPS finds itself without sufficient revenues to cover its  expenses and financial obligations (see table 1).
Mail volumes have generally been decreasing as customers have  increasingly shifted to electronic communications and payment  alternatives (see fig. 1), a trend that is expected to continue. USPS’s two  major products are First-Class Mail and Standard Mail. These accounted  for nearly 94 percent of all mail volume and 77 percent of USPS revenues  in fiscal year 2010. One piece of First-Class Mail generated about three  times the profitability of the average piece of Standard Mail. USPS expects  First-Class Mail volumes to continue declining in both the short- and long- term, as customers increasingly rely on electronic alternatives. In the first  quarter of fiscal year 2011, First-Class Mail decreased by about 6 percent  compared to the same period last year, while Standard Mail volumes grew  by about 9 percent. Figure 2 depicts actual and projected mail volume  trends—which show that by fiscal year 2020 mail volume is projected to  decline to a level not seen since fiscal year 1986. Additionally, USPS  expects the gap between First-Class and Standard Mail to expand— Standard Mail volumes first exceeded those in First-Class Mail in fiscal  year 2005.
In 2010, USPS delivered mail to over 150 million addresses nationwide.  USPS has about 670,000 full-and part-time employees, and reports that,  when benchmarked against other large posts, it has the highest percentage  of full-time employees—about 79 percent. USPS has reported achieving  cost savings close to $13 billion in the last 5 years. For example, USPS  eliminated 125,000 full- and part-time positions (about 16 percent). Despite  these achievements, USPS has had difficulty significantly reducing its  compensation and benefits costs and has struggled to optimize its  workforce and retail, mail processing, and delivery networks. For  example, during the first quarter of fiscal year 2011 despite a reduction of  6.4 million work hours when compared with the same period last year,  savings from this reduction were partially offset by wage increases and  increase in total retirement and health benefits expenses. Further, some  USPS savings during these years came as a result of congressional  action—Congress deferred $4 billion of USPS’s $5.4 billion scheduled  payment to its retiree health benefit fund that was due at the end of fiscal  year 2009. Table 2 provides an overview of key components of USPS’s  operational network.
USPS has relied increasingly on debt to fund its operations and has  increased its net borrowing by nearly $12 billion over the last 5 years.  USPS also ended fiscal year 2010 with about $1.2 billion in cash and  unfunded obligations and liabilities of roughly $105 billion (see table 3).  For fiscal year 2011, USPS has not updated its financial projections based  on its first quarter results and it still plans to borrow an additional $3  billion—an increase that would place USPS at its $15 billion statutory limit  and prevent it from further borrowing in fiscal year 2012 absent  congressional action. USPS also projects a $2.7 billion cash shortfall at the  end of fiscal year 2011.
The President’s Fiscal Year 2012 Budget Request also proposes changes  that, if enacted, would provide USPS with over $4.5 billion in short-term  financial relief for fiscal year 2011. The majority of this relief—$4 billion— would come as a result of USPS paying $1.5 billion into the Postal Service  Retiree Health Benefit Fund instead of the $5.5 billion required under  current law. The remaining relief would come from reducing USPS’s  obligation for future funding of retirement payments to the Federal  Employees Retirement System (FERS). This relief, however, would be  somewhat offset by terminating $29 million in annual appropriations in  fiscal year 2012, that reimburses USPS for revenue foregone from reduced  rate mail.
USPS’s financial problems will not be fixed easily or quickly. USPS  projects future mail volume declines, stagnant revenues, large financial  losses and continued significant financial obligations.
section_title: Actions Are Urgently Needed to Modernize and Restructure USPS to Achieve Financial Viability
paragraphs: Considering USPS’s important role, action is urgently needed to facilitate  its financial viability as USPS cannot support its current level of service  and operations. Congress, USPS, the administration, and stakeholders  need to reach agreement on a package of actions to restore USPS’s  financial viability and take steps to modernize and restructure it. USPS  needs to become a leaner, more flexible organization so that it can operate  more efficiently, control costs, keep rates affordable, and meet customers’  changing needs. In considering proposed legislation, incentives and  oversight mechanisms would help to ensure an appropriate balance  between providing USPS with more flexibility and assuring sufficient  transparency, oversight, and accountability.
We have previously identified five key areas where action is needed to  facilitate progress toward meeting USPS’s growing fiscal challenges:    Realign postal service with customers’ changing use of mail: As mail use  by businesses and consumers continues to change, USPS has stated that it  cannot afford to sustain its current level of delivery and retail services. For  example, it has estimated that it could reduce its costs by about $3 billion  annually if it reduced delivery frequency from 6 days to 5 days per week,  but congressional action would be needed for this change. USPS filed its  proposal to eliminate Saturday delivery with the Postal Regulatory  Commission (PRC) on March 30, 2010, and the PRC’s advisory opinion is  expected to be released in 2011. Key questions to consider when  evaluating this proposal include:    What aspects of universal postal service, including 6-day delivery, are  appropriate in light of fundamental changes in customers’ use of the  mail?
What, if any, changes are needed to other elements of universal service  (e.g., delivery standards)? How can USPS improve customers’ access to  postal services while modernizing its retail network to maximize costs  savings?
Should USPS implement its proposal to reduce delivery frequency to 5  days a week? How would such a change affect its operations, costs,  workforce mix, employees, service, competition, value of mail, mail  volume, and revenue? How would shifting to 5-day delivery affect  business mailers and the public?
Realign operations, networks, and workforce: USPS’s operations,  networks, and workforce need to be realigned with the changes in mail  usage and customer behavior, as USPS now has costly excess capacity.  Key questions to consider when evaluating proposed actions in this area  include:   How should USPS optimize its operations, networks, and workforce to  support changes in services? How quickly can this happen? How can it  work with its employees and customers to minimize potential  disruptions?
Should USPS have greater flexibility to realign its retail networks and  workforce, which may involve closing post offices and moving retail  services to alternative commercial locations that are often open 7 days  a week and keep longer hours than postal facilities?
What process is appropriate to assure sufficient transparency,  oversight, and accountability?
Reduce compensation and benefit costs: Wages and benefits represent 80  percent of USPS’s costs (about $60 billion in fiscal year 2010). One of the  most difficult yet critical challenges is making changes to USPS’s  compensation systems. These systems have been set in law and also  negotiated during collective bargaining with its four largest employee  unions. USPS also consulted with its three management associations. We  suggested that Congress should consider revisiting the statutory  framework for USPS’s collective bargaining to ensure that binding  arbitration takes USPS’s financial condition into account. We also  reported other possible options for reducing compensation and benefit  costs, including implementing a two-tier pay system, outsourcing if it  results in cost savings, or revising employees’ share of health and life  insurance premiums. Key questions to consider when evaluating proposals  in this area include:   What changes, if any, should be made to USPS’s compensation and  benefits?
Is it appropriate that USPS pays a larger share of its employees’ health  and life insurance premiums than do most other federal agencies? What  impact would changes to these premiums have on USPS and its  employees?
Generating revenue through new or enhanced products and services: A  key issue is whether USPS can generate sufficient new revenues using the  pricing and product flexibility provided in the Postal Accountability and  Enhancement Act of 2006 or if changes are needed. In 2009, USPS asked  Congress to change the law to permit it to diversify into nonpostal areas to  find new opportunities for revenue growth. USPS also asked for additional  pricing flexibility in a 2010 action plan. However, it is unclear what the  potential impact of such changes would be and what statutory or  regulatory changes would be needed. Key questions to consider when  evaluating proposals in this area include:   New products and services: What opportunities are there to introduce  profitable new postal products and enhancements to existing ones?
Should USPS engage in nonpostal areas where there are private sector  providers? If so, under what terms?
Funding postal retiree health benefits: USPS has said that it cannot afford  its required annual prefunding payments ($5.5 billion in fiscal year 2011  and gradually increasing to $5.8 billion by 2016), and it has requested that  Congress reduce these payments. Several proposals have been put forth  to revise the current statutory requirements and reduce or defer some of  these costs, thereby providing USPS with financial relief. Changes to this  structure, however, could affect the federal budget, and the Congressional  Budget Office has raised concerns about how aggressive USPS’s cost- cutting measures would be if these payments were reduced. As we  reported in 2010, Congress should consider modifying USPS’s retiree  health benefit payments in a fiscally responsible manner. However, we  also believe that it is important that USPS fund its retiree health benefit  financial obligations—including prefunding these obligations—to the  maximum extent that its finances permit. Key questions to consider when  evaluating proposals in this area include:   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?
The President’s Fiscal Year 2012 Budget Request proposed specific short- term financial relief measures, that it stated are grounded in principles of  fiscal responsibility and sound financial management. The budget request  states that these steps are to provide USPS with the “breathing room”  necessary to continue restructuring its operations without severe  disruptions and notes that they must be coupled with meaningful business  model reforms to make USPS viable for the medium- and long-term. To  that end, the budget request outlines three principles to guide these  reforms: (1) realigning postal infrastructure, including processing and  delivery facilities; (2) adapting the postal workforce to the 21st century;  and (3) enhancing service and accelerating the value of USPS services  while respecting fair competition in the marketplace. However, while  promoting realignment and modernization, the budget request would also  continue to restrict USPS from reducing delivery from 6 days a week and  closing small rural and other small post offices.
Much attention has been focused on ways postal services may be  reduced—such as USPS’s proposals to move to 5-day-a week delivery or to  close post offices. Less attention has been given to more positive aspects  of USPS’s plans to modernize its retail services, which it believes will  improve customer access and convenience while reducing costs and  improving efficiency. In a recently issued report on strategies and  initiatives foreign posts have used to modernize their delivery and retail  networks, we discussed some lessons learned that could inform USPS’s  modernization efforts.
Although the foreign posts we reviewed reported that changing how postal  services were provided was challenging, they also found that outreach and  communication strategies helped to inform public officials and customers  of increased access to products and services and to gain acceptance for  retail network changes. For example, when realigning their respective  retail networks, Australia Post developed a labor outreach strategy, and  the Swedish postal operator, Posten AB, created a communications  strategy to inform customers of its retail network transformation.  Additionally, foreign posts modernized their retail networks by forming  partnerships with private sector businesses such as grocery stores to sell  postal services. According to the foreign posts we reviewed, retail  modernization improved customer service, in some cases because the  private sector partners stayed open longer, reduced operating and labor  costs through closures of post-owned and -operated facilities, or both.
When modernizing, foreign posts also transitioned their workforce to have  a greater percentage of part-time employees, which they reported afforded  flexibility to adjust work to decreased mail volumes. A few foreign posts  developed labor transition plans or strategies under which they provided  training, relocation and job search services, and financial incentives to  support employees who were negatively affected by the modernizations.
The foreign posts we reviewed did not plan or implement changes or  realize improvements to their networks overnight. Modernization took  several posts 10 to 20 years to implement and was often met with  stakeholder resistance. Among the key principles that foreign posts used  to help modernize and restructure their organizations are the following:    Strategic outreach and coordination with governments, the public, mailers,  small businesses, and retail customers can address political resistance.  For example, foreign posts communicated with and reached out to  customers to increase acceptance of changes and to better meet  customers’ needs, including providing alternatives before implementing  major retail network changes.
A labor relations strategy can assist employees in making the necessary  transition to modernization changes. For example, a few foreign posts  provided training, relocation and job search services, and financial  incentives to support employees who were negatively affected by the  modernizations.
The lesson from these experiences is that USPS needs to clarify what its  modernization plans are, how and over what period it will implement  them, and what improvements in customer service and cost savings it  expects to achieve. In its efforts to modernize its retail network, USPS  needs to assure customers that they will have alternative access to postal  services, such as through self-service retail kiosks or retail partners. While  USPS has taken steps in the past year to generate ideas for modernizing its  retail and delivery networks, the experiences of foreign posts suggest that  it will be critically important for USPS to fully develop and implement  similar outreach, communication, and labor transition strategies.
In summary, modernizing and restructuring USPS so that it can be viable  in the future is imperative given its financial condition. While we recognize  that this will not be easy, changes—some difficult—are needed to ensure  that postal services remain available to all U.S. residents and businesses.  Mr. Chairman, this concludes my prepared statement. I would be pleased  to answer any questions that you or other Members of the Subcommittee  may have.
section_title: Contacts 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 Susan Ragland, Director, Financial Management  and Assurance; Teresa Anderson, Joshua Bartzen, Heather Frevert,  Margaret McDavid, Robert Owens, and Crystal Wesco.
section_title: Related GAO Products
paragraphs: U.S. Postal Service: Foreign Posts’ Strategies Could Inform U.S. Postal  Service’s Efforts to Modernize. GAO-11-282. Washington, D.C.: February  16, 2011.
High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February  2011.
U.S. Postal Service: Legislation Needed to Address Key Challenges.  GAO-11-244T. Washington, D.C.: December 2, 2010.
U.S. Postal Service: Mail Processing Network Initiatives Progressing,  and Guidance for Consolidating Area Mail Processing Operations Being  Followed. GAO-10-731. Washington, D.C.: June 16, 2010.
U.S. Postal Service: Action Needed to Facilitate Financial Viability.  GAO-10-601T. Washington, D.C.: April 22, 2010.
U.S. Postal Service: Action Needed to Facilitate Financial Viability.  GAO-10-624T. Washington, D.C.: April 15, 2010.
U.S. Postal Service: Strategies and Options to Facilitate Progress toward  Financial Viability. GAO-10-455. Washington, D.C.: April 12, 2010.
U.S. Postal Service: Financial Crisis Demands Aggressive Action.  GAO-10-538T. Washington, D.C.: March 18, 2010.
High-Risk Series: Restructuring the U.S. Postal Service to Achieve  Sustainable Financial Viability. GAO-09-937SP. Washington, D.C.: July  28, 2009.
U.S. Postal Service: Network Rightsizing Needed to Help Keep USPS  Financially Viable. GAO-09-674T. Washington, D.C.: May 20, 2009.
U.S. Postal Service: Deteriorating Postal Finances Require Aggressive  Actions to Reduce Costs. GAO-09-332T. Washington, D.C.: January 28,  2009.
U.S. Postal Service Facilities: Improvements in Data Would Strengthen  Maintenance and Alignment of Access to Retail Services. GAO-08-41.  Washington, D.C.: December 10, 2007.
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