U.S. Postal Service: Actions Needed to Stave off Financial Insolvency
Published: 2011-09-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: By the end of this fiscal year--in less than one month--the U.S. Postal Service (USPS) projects that it will incur a $9 billion loss; reach its $15 billion borrowing limit; not make its $5.5 billion retiree health benefits payment; and thus, become insolvent. USPS recently summarized this situation as the equivalent of facing Chapter 11 bankruptcy. In August 2011, USPS outlined new proposals to address the crisis. USPS seeks legislation to remove itself from the federal health benefit program and sponsor its own program; change pension benefits for new employees; and eliminate the layoff provisions it negotiated with its unions in collective bargaining to accelerate its delivery, processing, and retail network and workforce downsizing. Other USPS proposals, such as moving to 5-day delivery, and pending legislation include additional options for consideration. This statement discusses (1) updated information on USPS's financial crisis and (2) GAO's review and analysis of proposals to address this crisis, including USPS's new proposals, and options in current legislation. The testimony is based primarily on GAO's review of pending legislation, past and ongoing work related to postal issues, as well as USPS's recent financial results and GAO's discussions with senior postal officials regarding USPS's recent proposals. GAO has reported that action by Congress and USPS is urgently needed to restore USPS's financial viability. GAO provided a draft statement to USPS for comments and did not receive any suggested changes.
section_title: What GAO Found
paragraphs: USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years, including an $8.5 billion loss in 2010, and a net loss of $5.7 billion in the first 9 months of fiscal year 2011. USPS does not now have--nor does it expect to have--sufficient revenue to cover its costs without legislative changes. To conserve cash, USPS discontinued making its employer's contribution for the defined-benefit portion of the Federal Employees Retirement System (FERS) in June 2011, which it estimated would reduce its costs by about $800 million this fiscal year. USPS has said that mail volume decline has outpaced even its most pessimistic forecasts. USPS urgently needs to restructure its networks and workforce as its financial condition and outlook have reached a crisis level. A variety of proposals have been made to address USPS's financial crisis. These proposals affect USPS cost savings, postal rates, customer convenience, pension benefits for new employees, employee health benefits, collective bargaining agreements, and delivery and retail services. GAO has identified key issues needing consideration in determining the merits of these proposals. Examples of specific proposals and key considerations include: (1) USPS proposal to sponsor its own health benefit plan: USPS expects to save costs by increasing employee contribution rates, fully utilizing Medicare benefits, and administering its plan more efficiently than OPM. However, it is not clear whether USPS can achieve planned cost savings and what the implications are for the federal budget, as USPS has requested about $42 billion in retiree health benefit assets be transferred from Treasury to a USPS Fund. (2) USPS proposal to seek reimbursement of its $6.9 billion FERS surplus: Reimbursing the entire surplus all at once is a risk as the current FERS surplus is an estimate that could change as economic or demographic assumptions change. The President's Fiscal Year 2012 Budget Request proposed amortizing the reimbursement over 30 years, which would be consistent with the approach taken for any deficits. (3) USPS proposal on workforce optimization: USPS expects to reduce costs by closing about 300 mail processing plants and 12,000 retail facilities; reducing service; and eliminating layoff protections in collective bargaining agreements so that it can reduce its total workforce by about 125,000 career employees by 2015. This proposal accelerates the pace of USPS actions in this area, but it is not clear how USPS will address public resistance to facility closures that could lengthen the timeframes for implementation; employee resistance to making legislative changes to layoff protections; and potential loss of customers if service declines or costs increase. Little time remains to prevent USPS---the largest federal civilian employer---from insolvency. The stark reality is that USPS's business model is broken. The decline in mail volumes is continuing. The gap between revenues and expenses is growing. USPS cannot continue providing services at current levels without dramatic changes in its cost structure. Difficult choices must be made. Now is the time to decide USPS's future.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing focused on the  challenges facing the U.S. Postal Service (USPS). USPS is in a serious  financial crisis, and as mail volume continues to decline, it has not  generated sufficient revenue to cover its expenses and financial  obligations. In less than a month, USPS officials project that it will be  insolvent and default on its statutorily-mandated retiree health payment.  USPS has concluded that extraordinary steps must now be taken to  restore it to sound financial footing. Critical decisions by Congress and  USPS are needed to both avoid this projected default of the largest  federal civilian employer and address USPS’s financial and operational  challenges.
This testimony discusses (1) updated information on USPS’s financial  crisis and (2) our review and analysis of proposals to address this crisis  that include pending congressional legislation and recent USPS  proposals that would allow it to withdraw from the federal health benefit  program and sponsor its own program, change the pension program for  new hires, and accelerate its network and workforce optimization efforts.  The testimony is based primarily on our review of pending legislation,  GAO’s past and ongoing work, as well as GAO’s review of USPS’s  recent financial results and our discussions with senior postal officials  regarding USPS’s recent proposals.
We performed this work from August 2011 to September 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 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 Crisis Has Worsened, and USPS Is Likely to Face Insolvency
paragraphs: As we have noted previously, USPS urgently needs to restructure its  networks and operations as its financial condition and outlook have  reached a crisis level. USPS has experienced a cumulative net loss of  nearly $20 billion over the last 5 fiscal years, including an $8.5 billion loss  in 2010; and a reported net loss of $5.7 billion in the first 9 months of  fiscal year 2011. By the end of this fiscal year, USPS projects that it will  incur a $9 billion loss, experience a substantial cash shortfall, reach its  $15 billion borrowing limit, and not make its statutorily mandated $5.5  billion retiree health benefits payment to the federal government. USPS  summarized its situation as the equivalent of facing Chapter 11  bankruptcy.
USPS’s financial problems are related to customers’ changed mail use— that is, mail volume is declining as people shift to electronic  communications and payment alternatives rather than using USPS. Total  mail volume peaked in fiscal year 2006 at 213 billion pieces and declined  by almost 20 percent to about 170 billion pieces by the end of fiscal year  2010. In the first 3 quarters of this fiscal year, the volume for First-Class  Mail—USPS’s most profitable product that accounted for 49 percent of  USPS operating revenue—has declined by 6.5 percent compared to the  same period last year. USPS has said that mail volume declines and  changes in the mail mix have outpaced even its most pessimistic  forecasts. USPS has projected a further drop in total mail volume to about  133 billion pieces by 2020.
USPS does not now have—nor expects in the future to have—sufficient  revenue to cover its costs without legislative changes. These costs  include compensation and benefits for a workforce of about 653,000 total  employees, a network of about 33,000 USPS-operated retail and  processing facilities, and 6-day delivery services to about 150 million  locations, which expands by roughly 1 million new residences and  businesses each year. USPS had $67 billion in revenue in fiscal year  2010 and $75.5 billion in expenses, resulting in a loss of $8.5 billion,  which it expects to grow to a $20 billion loss by 2015. USPS also faces a  variety of challenges, including difficulties reducing costly excess capacity  in its networks; closing facilities due to stakeholder resistance or statutory  and regulatory requirements that restrict closings; and making the annual  prefunding retiree health benefit payments of about $5.5 billion required  since 2006. For these reasons, we placed USPS’s financial condition  and outlook on our list of high-risk programs and agencies in 2009, and it  remains on our updated list in 2011.
section_title: Proposals to Address USPS’s Financial Crisis
paragraphs: We have reviewed a variety of proposals to address USPS’s ongoing  financial difficulties by reducing costs and improving operational  efficiency, but the overall effects of these proposals are uncertain  because many questions remain. In August 2011, USPS released two  discussion drafts that outline major proposals to (1) seek legislative  authority to withdraw USPS from the Federal Employee Health Benefit  (FEHB) program and sponsor its own program and change pension  benefits for new employees, and (2) seek legislative authority to eliminate  the layoff protections it negotiated with its unions in collective bargaining  to accelerate network and workforce downsizing. USPS has not fully  developed these proposals, so answers are not available to many of the  questions that have been raised. We also reviewed other proposals  including
USPS proposals to seek reimbursement of the surplus in its Federal  Employees Retirement System (FERS) account and reduce costs by  moving to 5-day delivery, restructuring its retail network, and reducing  excess capacity in its mail processing network; pending legislation, including bills introduced in the Senate by  Senators Carper and Collins and in the House of Representatives by  Representatives Issa and Lynch;  the President’s Fiscal Year 2012 Budget Request; our recent work, including our April 2010 report on USPS’s business  model which (1) concluded that this model is broken and that USPS  needs to take more aggressive action to better align costs with  revenues and (2) discussed a series of options that included  restructuring USPS’s retiree health prefunding payments, adjusting its  workforce mix to more part-time staff, closing unneeded retail and  mail processing facilities, and moving to 5-day delivery; and,  reports by the U.S. Postal Service Office of Inspector General (USPS  OIG) and the U.S. Office of Personnel Management Office of  Inspector General (OPM OIG) related to changing the funding of  USPS’s pension and retiree benefits.
subsections: section_title: Proposals Related to Reducing Benefit Costs
paragraphs: The key considerations of the USPS benefit-related proposals include the  financial impact on USPS, its employees, future hires, retirees, the federal  budget, and benefit programs and USPS’s ability to administer its own  program. USPS costs for participating in the federal government- sponsored pension, health benefit, and workers’ compensation programs  totaled about $22 billion in fiscal year 2010, almost 30 percent of its total  expenses. This total included $5.8 billion for retirement benefits (FERS,  Social Security, and the Thrift Savings Plan), $12.8 billion for health  benefits, and $3.6 billion for workers’ compensation expenses. USPS was  not required to make any payments for Civil Service Retirement System  (CSRS) pensions in fiscal year 2010.
USPS currently has approximately 600,000 active employees and  480,000 annuitants participating in the FEHB program. In fiscal year  2010, USPS recorded over $12.8 billion in health care costs: $5.1 billion  in costs for current employees, $2.2 billion in premium costs for current  retirees, and $5.5 billion for prefunding premium costs. USPS employees  paid about 20 percent of their premium costs in fiscal year 2010 as  compared to about 28 percent paid by other federal employees. USPS  reported in its fiscal year 2010 annual report that its Retiree Health  Benefits Fund had assets of $42.5 billion. USPS’s proposal stated that  these assets would cover 47 percent of all future liabilities for current and  future retirees. Going forward, USPS’s health-related benefit costs will  continue to face pressure from rising health care premiums, continued  prefunding requirements, and increasing number of retirees (USPS  estimates that about 300,000 employees will be eligible to retire over the  next decade).
USPS has proposed establishing and managing its own health benefits  program. Its proposal briefly discusses USPS’s rationale, how it would go  about creating such a program, the governance and oversight structure,  and it views of the unions’ role under the proposed process. While the  Postal Service believes it currently has authority to withdraw from the  FEHB program pursuant to section 1005(f) of title 39 of the United States  Code, it has stated that it will seek specific statutory authority to do so.  USPS is authorized to vary, modify, or add to certain fringe benefits, but  is prohibited from making any changes to fringe benefits that on the whole  are less favorable than the fringe benefits in effect when the Postal  Reorganization Act of 1970 was enacted. The Postmaster General has  stated, however, that USPS may alter benefits for certain categories of  employees under any health benefits program it would administer.
Our April 2010 report on USPS’s business model discussed several  options and related issues pertaining to assigning financial responsibility  for benefits to USPS, its employees, and current and future ratepayers.  Key considerations include improving USPS’s poor financial condition  while keeping rates affordable, ensuring adequate funding to fulfill its  financial obligations pertaining to employee benefits, and minimizing risk  to the taxpayer if USPS would be unable to meet its responsibilities.  USPS has said it cannot afford its required prefunding payments to the  Retiree Health Benefits Fund on the basis of its significant mail volume  and revenue declines, large financial losses, and difficulties in reducing  costs. We have reported that Congress should consider a package of  actions, which could include providing financial relief to USPS by  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 payments as its core business declines. Therefore, it is  important that USPS continue to fund its retiree health benefit  obligations—including prefunding these obligations—to the maximum  extent that its finances permit. At this point, however, USPS will be  challenged to make these payments and says it will not be able to this  year.
Table 1 describes health benefit-related proposals from USPS, pending  legislation (bills introduced in 2011 by Senators Carper and Collins and  Representatives Issa and Lynch), the President’s Fiscal Year 2012  Budget Request, GAO’s report on USPS’s business model (GAO-10- 455), and a report by the USPS OIG, along with key issues that we  have identified.
Some of the key questions that should be considered by Congress,  USPS, and other stakeholders regarding USPS’s recent proposal to  create its own health benefit program include:
Legal authority – While USPS has stated that it will request legislative  authority to withdraw from FEHB and start its own health benefit  program, what other legal and regulatory provisions (e.g., its retiree  health prefunding requirements) may be affected by such a  withdrawal?
Budgetary – What impact would such a move have on the federal  budget, particularly transferring $42 billion in assets from the current  Treasury-held Fund to the proposed Postal Service-administered  health benefits program?
Financial impact to USPS – What savings would USPS expect from  such a shift, both in the short-term and in the longer-term? How would  such a change impact USPS health benefit contribution rates and  costs? How would the current costs paid by USPS to OPM to  administer the program compare to those USPS expects to incur by  administering the program itself?
Employee impacts – What would be the expected impact on  employees’ contribution rates, costs, and benefits? What would be the  impact of this proposal on collective bargaining?
Impact on other federal employees – How would the benefits,  contribution rates, and costs of other federal employees enrolled in  FEHB be impacted by this proposal? Also, how would non-USPS  federal employees who are currently enrolled in postal union  sponsored FEHB plans be impacted?
Fiduciary responsibility – How does USPS plan to acquire the  experience needed to sponsor health benefit programs for over 1  million participants? Who would decide what the required funding  level and investment strategy should be? Also, if USPS defaults on  benefit payments, what would be the federal government’s obligation?
Oversight – How would disagreements between the proposed Plan  Management body and USPS and/or employees be resolved, e.g.  scope of coverage, procedures, etc.?
Approximately 84 percent of eligible USPS employees are enrolled in  FERS, and about 16 percent are enrolled in CSRS or the Dual  CSRS/Social Security program; these programs are administered by the  Office of Personnel Management (OPM). At the end of fiscal year 2009,  OPM estimated that USPS had an unfunded CSRS liability of $7.3 billion  and a FERS surplus of $6.9 billion. USPS has asked Congress to enact  legislation that would allow it to access the FERS surplus.  To conserve  cash immediately, however, in June 2011, USPS discontinued making its  employer contribution payments for the defined benefit portion of FERS.   The current $6.9 billion FERS surplus is approximately equal to 2 years of  USPS’s FERS contributions that it has stopped making.  Thus, if USPS  continues not to make its FERS payments, its FERS surplus will be  reduced by a commensurate amount.   USPS estimated this would  reduce its costs by about $800 million in the current fiscal year but would  not impact current or future postal retirees. Both USPS and the OPM  agreed to seek a resolution of the legal issues surrounding USPS’s  decision to discontinue its FERS payments by requesting a legal opinion  from the Office of Legal Counsel at the Department of Justice.
USPS has proposed legislation that would make new employees eligible  only for the Thrift Savings Plan (possibly modified) and Social Security.  New employees would not be eligible for the FERS defined benefit  annuity or CSRS. USPS’s proposal included a brief description of why  USPS is requesting this change as well as what postal officials perceived  as inconsistencies between the current pension system and the “pay  comparability” factor and what they have characterized as “over- payment” concerns. There is disagreement regarding whether USPS has  “overpaid” CSRS between $50 billion and $75 billion. The USPS OIG and  Postal Regulatory Commission have asserted that the current method of  allocating pension costs for pay increases after 1971 results in the  inequitable allocation of pension obligations to USPS, and the USPS OIG  proposed an alternative allocation methodology. In response, the OPM  OIG has asserted that OPM does not have the authority to adopt this  proposal without further legislation, that a change in the allocation  methodology would shift substantial pension funding costs from USPS to  the U.S. Treasury, and that using the federal retirement program as a  vehicle through which to implement other policy objectives would be  unwise, inefficient, and harmful to the program itself.
Table 2 describes key provisions from USPS’s retirement-related  proposals, pending legislation (bills introduced in 2011 by Senators  Carper and Collins, and Representatives Issa and Lynch), the President’s  Fiscal Year 2012 Budget Request, GAO’s report on USPS’s business  model (GAO-10-455), and a report by the USPS OIG, along with key  issues that we have identified.
The following questions provide a starting point to consider USPS’s  proposal to withdraw from the federal pension programs:
USPS legal authority – USPS would require new statutory authority to  withdraw future employees from the federal pension annuity. USPS  proposes to eliminate the FERS annuity for new employees so that  their benefits are comparable to the private sector. Is additional  clarification needed to determine whether USPS’s pension proposal  for new employees is comparable to the private sector?
Budgetary – What would be the impact on the federal budget of  transferring the $6.9 billion FERS surplus to USPS?
Financial impact to USPS – What savings would be expected from  eliminating the FERS annuity for new hires?
Employee impacts – How would such a change impact employees’  and USPS’s contribution rates to the Thrift Savings Plan for new  hires?
Further analysis may also be needed of other options that could be  considered to reassess USPS’s current pension program. For example,  flexibilities within FERS can accommodate different accrual rates for  certain groups of employees (e.g., law enforcement officers and  congressional employees). Thus, through legislation, FERS benefits for  USPS employees could potentially be modified.
USPS also provides other benefits to employees, including workers’  compensation and life insurance (which cost nearly $3.6 billion and $210  million respectively in fiscal year 2010). Although neither of these benefits  is discussed in USPS’s recent draft proposals, legislation has been  introduced that would convert employees on long-term workers’  compensation to federal retirement programs when they reach retirement  age. Furthermore, USPS offers employees life insurance coverage  through the Federal Employees’ Group Life Insurance (FEGLI) Program.  USPS pays 100 percent of employee basic life insurance premiums, while  other federal agencies pay about 33 percent. One option discussed in our  April 2010 report would be for USPS to work with its unions in collective  bargaining to increase employee premium payments for these benefits— and, in doing so, reduce USPS’s share to levels paid by most federal  agencies. USPS estimated that this would have saved about $130 million  in fiscal year 2010.
section_title: Proposals to Reduce Costs through Network and Workforce Optimization
paragraphs: We have noted in a number of reports and testimonies that USPS needs  to eliminate costly excess capacity in its networks due to declining mail  volume, increased automation, and incentives that allow mailers to  bypass USPS processing by entering 83 percent of Standard Mail,  (primarily advertising) closer to its destination in return for a discount.  Technological innovations such as advanced sorting machines can  rapidly process and sequence mail, leaving less manual work for USPS  employees. Moreover, although customer visits and retail revenue have  declined, USPS has not made commensurate reductions in its retail  facilities.  USPS reports that about 35 percent of its retail sales are  performed at sites other than a traditional post office, such as stamp  purchases at grocery stores or on the Internet. Together, these and other  developments have resulted in the need for a smaller postal operational  network and workforce.
During the past 12 years, USPS reported that it reduced its workforce by  235,000 career employees, primarily through attrition. Currently, USPS  has about 653,000 total employees, and has a goal of reducing that  number to 425,000 by 2015. USPS plans to increase the ratio of non- career to career employees and expects attrition to eliminate about  100,000 employees.  In order to meet its 2015 goal, USPS has asked for  legislation to eliminate the layoff provisions it has negotiated with its  unions in collective bargaining so that it can accelerate reducing its  workforce by an additional 125,000 career positions. Currently, USPS’s  collective bargaining agreements with three of its major unions contain a  provision stating that USPS bargaining unit employees, who were  employed as of September 15, 1978, or, if hired after that date, have  completed 6 years of continuous service, are protected against any  involuntary layoff or force reduction.  The collective bargaining agreement  with its fourth major union states that that no bargaining unit employees  employed in the career work force will be laid off on an involuntary basis  during the period of the agreement.
USPS has proposed initiatives to remove more than $11 billion in costs  from its networks and workforce. USPS plans to reduce the number of  processing plants from over 500 to fewer than 200 and has proposed  changing service standards to increase delivery time. USPS has  announced plans to streamline its postal-operated retail facilities from  32,000 to fewer than 20,000 by 2015, and has already begun studying  3,700 retail facilities for possible closure. It also plans to continue  increasing the number of locations where postal services are provided in  privately owned businesses. We recently reported on similar retail  restructuring efforts by some foreign posts and the lessons learned to  facilitate the transitions, which took time to phase in and gain  acceptance. In addition to these network operations proposals, USPS is  also continuing to examine the locations of its area and district offices— where it has recent made progress by closing some of these offices.
USPS initiatives and legislative proposals outline significant changes in  the retail, delivery, and processing network and workforce to achieve cost  savings, including enhancing USPS’s ability to close unneeded facilities  and layoff employees. Coordination with customers will be important so  that USPS efforts to reduce its costs will not result in significantly  increasing costs or decreasing services to customers. Further, USPS has  proposed increasing the efficiency of mail delivery by reducing delivery  service from 6 to 5-days and consolidating routes. Delivery remains the  most costly activity for USPS and involves more than 310,000 carriers  accounting for approximately 47 percent ($23 billion) of USPS’s total  salary and benefit expenses in fiscal year 2010. Key proposals and  related issues are presented in Table 3.
These proposals require making trade-offs among USPS cost savings,  customer convenience and costs, employee agreements, and  expectations related to the level of services USPS can afford to provide.  Some unresolved issues and questions to consider include:
Universal service: What aspects of universal service, including 6-day  delivery, are appropriate given the changed use of mail? What, if any,  changes are needed to delivery standards to optimize USPS’s  processing network? Can USPS’s proposed retail optimization  improve customers’ access to postal products and services through  alternatives while also maximizing costs savings?
Statutory and regulatory changes: What statutory or regulatory  changes are needed to give USPS the flexibility it needs to restructure  its operations, networks, and workforce, while also assuring  appropriate oversight?  Are changes needed to facilitate more timely  review of appeals of retail facility closures and consolidations?
Stakeholder involvement: What role, if any, should Congress, the  Board of Governors, and the Postal Regulatory Commission have in  developing, approving, or reviewing decisions to modernize and  realign postal services? What input should postmasters and other  postal employees, mailers, and the public have in these decisions?
Accountability: What oversight mechanisms are needed to assure  USPS decisions are consistent, transparent, and supported by reliable  data? For example, are USPS’s decisions on facility closures  sufficiently transparent to the public?
The cost reduction proposals put forth by USPS offer options to help start  USPS on a path—admittedly a long one at this point—to financial  solvency. USPS is also looking at ways to enhance its revenue  generation capabilities, including product enhancements, increasing  market share in the parcel delivery market, and rate incentives. However,  USPS has already discontinued FERS payments and has said that it is  going to default by not making its mandated retiree health benefit  payments at the end of this month. A projected default by USPS could  increase risks to federal retirement and workers compensation programs  and diminish USPS’s trusted reputation and vital role in our economy, as  well as the quality of postal services provided to the nation.
The stark reality is that USPS’s business model is broken. The decline in  mail volumes is continuing. The gap between revenues and expenses is  growing. USPS cannot continue providing services at current levels  without dramatic changes in its cost structure. Difficult choices must be  made. Now is the time to decide USPS’s future.
Chairman Lieberman, Ranking Member Collins, 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 Phillip Herr at  (202) 512-2834 or herrp@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; Susan Ragland; Teresa Anderson; Joshua Bartzen; Erin Cohen;  John Dicken; Colin Fallon; Charles Ford; Kimberly Granger; Carol Henn;  Shelby Kain; Hannah Laufe; Margaret McDavid; Kim McGatlin; Amrita  Sen; and Crystal Wesco made important contributions to this statement.
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