Reforming the U.S. Postal Service: Background and Issues for Congress
Released: 2016-08-25T00:00:00

Overview

Prior to enactment of the Postal Reorganization Act of 1970 (PRA), mail delivery in the United States was the responsibility of the U.S. Post Office Department, a Cabinet-level department in the executive branch. PRA reform efforts were driven largely by the view that the Post Office Department was ill equipped to meet the demands of the growing U.S. population and the changing economy. Mail volume had risen sharply and the Post Office Department lacked the institutional flexibility to quickly respond to market changes.

Today, the U.S. Postal Service (USPS or Postal Service) faces similar challenges but for different reasons. Between 2006 and 2015, total mail volume dropped sharply. Market changes and global economic conditions contributed to the Postal Service's financial challenges and affected its efforts to control expenses and expand revenue. Statutory mandates, such as the requirements to maintain six-day delivery and prefund health benefits for future retirees, may limit the actions USPS might take to mitigate these challenges. According to the Postal Service, "many of the structural reforms needed to ensure long-term financial viability, such as the resolution of our unsupportable [retiree health benefit] liability, can only be achieved with comprehensive legislation."

Financial Challenges Facing the U.S. Postal Service8

This section of the report covers the current financial responsibilities, challenges, and limitations facing USPS. These issues are the result of a confluence of factors including (1) the USPS's statutorily designed organizational and financial structure, (2) U.S. and global economic conditions over the past decade, and (3) the impact that technological innovations have had on the demand for postal products and services.

On the one hand, the USPS must sell enough postal products to maintain self-sufficiency and meet other statutory requirements, such as the retiree health benefit prefunding obligation. On the other hand, the USPS generally cannot expand its operations beyond the scope of postal products and services and other limited nonpostal products authorized by statute. Statute also limits the USPS's ability to raise rates on certain postal products. These facts underlie many of the challenges facing the USPS and are also at the core of many of the reform efforts undertaken by the USPS and considered by Congress.

Financial Structure of the U.S. Postal Service

The current financial structure of the USPS was largely established by two statutes: the PRA and the Postal Accountability and Enhancement Act of 2006 (PAEA). The PRA created the USPS, which replaced the U.S. Post Office Department, as an independent agency of the executive branch, responsible for generating enough revenue to finance its own operations. Prior to the PRA, the U.S. Post Office Department was a Cabinet-level agency and was not financially self-sustaining.

Since the passage of the PRA, the USPS has generated nearly all of its funding—about $69 billion in FY2015 according to the USPS's most recent financial report—by charging users of the mail for the costs of the services it provides. Congress, however, does provide an annual appropriation—about $55 million in FY2016—to compensate the USPS for revenue it forgoes in providing free mailing privileges to the blind and certain overseas voters. In addition, the annual appropriation compensates the USPS for debt it accumulated in the 1990s while providing postal services at below-cost rates to non-profit organizations. Funds appropriated to the USPS for the annual reimbursement and revenue forgone are deposited in the Postal Service Fund, a revolving fund in the Treasury that consists largely of revenues generated from the sale of postal products and services. The revenue in the Postal Service Fund is used to fund the operations of (1) the Postal Service, which includes the U.S. Postal Inspection Service (USPIS); (2) the U.S. Postal Service Office of Inspector General (USPSOIG); and (3) the Postal Regulatory Commission (PRC).

Financial Condition of the U.S. Postal Service

The USPS's end-of-year financial results for FY2015 marked the ninth consecutive year of losses for the agency. In the years immediately prior to FY2007, the USPS ran modest profits. Between FY2007 and FY2015, the USPS accumulated $56.8 billion in financial losses, including a net loss of $5.1 billion in FY2015. This trend was reversed in the first quarter of FY2016, which showed a net income of $300 million, compared to a net loss of $800 million at the same point in FY2015. The first quarter of FY2016 includes the holiday shipping season, which is one of the busiest times for USPS. The improvement in USPS's first quarter financial results is due in part to an increase in shipping and package volume and revenue as compared to the first quarter of FY2015. Additional factors, such as a temporary increase in select postal rates, known as a "temporary exigent surcharge" or "exigent increase," will be discussed in greater detail later in this section.

What Happens When USPS Ends the Year with a Net Loss?

Constituents may ask if the USPS receives appropriations, subsidies, or a "bailout" when it ends the fiscal year with a net financial loss. The USPS does not receive additional appropriations when it ends a fiscal year with a financial loss. The USPS does, however, benefit from access to debt instruments from the U.S. Treasury.

The USPS has statutory authority to borrow a maximum of $3 billion per fiscal year and hold a maximum total debt of $15 billion. At the end of FY2012, the USPS reached its statutory debt limit. Further, USPS's total debt obligations have remained at $15 billion since FY2012. As the USPS pays down its existing debt, it accumulates new debt up to its statutory maximum. For example, on October 1, 2015, the USPS repaid $4 billion of its debt. It is expected, however, to borrow up to its statutory ceiling amount by the end of FY2016.

USPS's $15 billion in debt is issued through a variety of loan instruments, which includes fixed and floating rate loans, an overnight credit line of $600 million, and a short-term credit line that allows the USPS to borrow up to $3.4 billion with two days prior notice. The USPS's credit lines were fully drawn at the end of FY2015.

Additionally, financial losses have caused the USPS to default on certain statutorily required payments, such as the retiree health benefit prefunding obligations. Since FY2012, the USPS has defaulted on over $28 billion in statutorily required retiree health benefit prefunding obligations. Use of debt instruments and default on certain retiree health prefunding payments has likely allowed the USPS to maintain cash-on-hand sufficient to cover its operational expenses throughout each fiscal year. As Table 1 shows, the USPS has ended each fiscal year since FY2007 with at least $889 million cash-on-hand.

As shown in Table 1 and Figure 1 , in FY2015, the USPS had, on average, about 24 days of operating cash-on-hand, sufficient to pay its day-to-day operating expenses, despite ending the year with $15 billion total debt outstanding. As of the end of FY2015, when all assets and liabilities are considered (including retirement accounts, health fund balances, cash and other assets), the USPS's total liabilities exceeded its assets by about $101 billion.

Postal Services, Revenue, and Expenses

The PAEA, for the first time, provided a definition of the term postal service . Under the PAEA, postal service is defined as "the delivery of letters, printed matter, or mailable packages, including acceptance, collection, sorting, transportation, or other functions ancillary thereto." This definition is significant because it prevents the Postal Service from developing new nonpostal products (e.g., expanded banking and financial services) that could compete with private industry.

The PAEA also changed how postal rates are established and divided postal products into two distinct groups: market dominant products and competitive products.

Prior to the passage of the PAEA, there was concern that the USPS was using its revenue from market dominant products to subsidize the costs of competitive products. Cross-subsidization could, potentially, provide an advantage for the USPS in the competitive market by creating artificially low prices that did not include all the costs attributable to those products. The PAEA addressed this issue by forbidding the subsidization of competitive products with market dominant revenue and establishing the Competitive Products Fund (CPF), which receives deposits from the Postal Service Fund for revenues derived from the sale of competitive products.

Postal Revenue

In FY2015, overall revenue from postal products and services was $68.951 billion, which was an increase of $1.097 billion (or 1.6%) from FY2014. The increase was due in large part to revenue from competitive products, which offset decreased revenue from market dominant products. Nevertheless, revenue generated from the sale of market dominant products accounts for approximately 74% of USPS's annual operating revenue.

As shown in Figure 2 , total revenue from market dominant products was $52.426 billion in FY2015, a decrease of approximately $340 million (or 0.64%) from FY2014. Total revenue from competitive products, however, was approximately $16.52 billion in FY2015, an increase of $1.437 billion (or 9.52%) from FY2014.

Within the market dominant category, standard mail (i.e., advertising mail) remained one of the few profitable products. Revenue from standard mail increased approximately $217 million (or 1.24%) from FY2014 to FY2015.

Historically, competitive products have constituted a much smaller share of USPS revenue than market dominant products. Competitive products account for a larger proportion of USPS revenue than they do of USPS volume. For example, in FY2015, competitive products represented approximately 3% of mail volume, but they accounted for approximately 24% of USPS revenue. See Figure 3 below.

While market dominant products made up 97% of USPS's FY2015 volume, they generated less revenue per piece ($0.35) than competitive products ($4.17).

As explained by the USPS, since competitive products are a relatively small percentage of total mail volume, future growth in shipping and packages might not offset future decline in market dominant products:

Because Shipping and Packages represents only 20.3% of our 2014 operating revenue, compared to First-Class and Standard Mail, which represents 67.5% of operating revenue, revenue growth in Shipping and Packages, by itself, cannot fully offset the declines in First-Class Mail. Furthermore, the profit margins on both First-Class Mail and Standard Mail are greater than that of Shipping and Packages. As a result, revenue from Shipping and Packages would have to grow at a substantially higher rate than the decline in First-Class Mail revenue in order to replace the lost profit contribution of First-Class Mail.

Furthermore, the processing and delivery costs for competitive products, such as First-Class Package Service or Priority Mail, are greater than those of most market dominant products. For this reason, USPS's competitive products might be sold at a lower margin than their market dominant counterparts, meaning that a lower percentage of competitive product revenue is retained as profits for the USPS.

Mail Volume

In FY2015, mail volume for market dominant products dropped by 1.9 billion pieces, which is approximately 1.3% below FY2014. The decline for certain market dominant products was more pronounced than others. For example, in FY2015, first-class single-piece mail, a market dominant product that has historically been the largest source of revenue for the USPS, saw volume drop by nearly 1.4 billion pieces, or 2.1%.

In contrast, competitive mail volume, which is primarily shipping and package services, increased by more than 556 million pieces. This increase represents growth of 16.4% from FY2014.

Figure 4 shows the mail volume for market dominant and competitive products for FY2014 and FY2015. Detailed information on USPS's revenue and volume for FY2014 and FY2015 is provided in Appendix A .

Long-Term Trends

Total mail volume and revenue have been consistent or in decline for the past 10 years. Periods of decline have been driven largely by reductions in market dominant mail volume and revenue, which have dropped sharply since FY2009. The decline in market dominant volume has been driven by a variety of economic factors and long-term market trends, such as transition to electronic mail, that have altered the public's use of the postal service for more than a decade.

As shown in Figure 6 , growth in both competitive product volume and revenue has likely offset some of the revenue lost from the continued decline in market dominant products. Figure 7 below shows USPS's total annual mail volume and operating revenue for FY2005 through FY2015.

From FY2005 to FY2015, total annual mail volume dropped 57.5 billion pieces. The drop was largely due to volume lost in market dominant products. Total annual operating revenue, however, has remained relatively flat over the past decade. The figure shows the sharp declines in revenue and volume, which were likely due to the economic recession. While total annual volume remained in decline after FY2012, total annual revenue began to recover. By FY2015, total annual revenue was $68.9 billion, or $1 billion below what it had been in FY2005. Additionally, in FY2014 and FY2015, total annual revenue included a temporary increase in market dominant prices.

Exigent Price Increase

Under the PAEA, price increases for market dominant products are limited to a formula based on annual, unadjusted changes in the Consumer Price Index for Urban Customers (CPI-U). During "extraordinary or exceptional" circumstances (a term not defined in statute or regulation), the PAEA allows the USPS to petition the PRC for an expedited postal rate adjustment. This exigent surcharge is a rate increase above what USPS would otherwise receive based on the CPI-U formula.

In July 2010, the USPS made its first request to the PRC for an exigent surcharge. In its 2010 exigent request, the USPS sought to increase rates on its market dominant products by approximately 5.6% due to poor economic conditions and decreased mail volume. The "extraordinary or exceptional" circumstance, according to USPS's request, was the "unprecedented drop in mail volume," which they argue was caused by the recession. The PRC denied USPS's request, in part because PRC found that multiple factors contributed to reduced mail volume, not all of which were due to the recession.

In 2013, the USPS filed and the PRC approved a rate increase of 4.3% on market dominant products. Pursuant to the PRC's order, the increase went into effect on January 26, 2014. Originally, the increase was only to be in effect until the USPS recovered an additional $2.8 billion in lost revenue, which was the amount the PRC determined to be attributable to the recession. At the time, the temporary increase was expected to be in place for less than two years.

The exigent price increase has allowed the USPS to hold revenue for market dominant products steady, despite continued losses in volume. The USPS challenged the PRC methodology in court, arguing that the increase should be permitted to continue indefinitely. On June 5, 2015, the DC Circuit Court delivered an opinion upholding the temporary nature of the increase. This opinion, however, stated that the one aspect of the PRC methodology for calculating the cumulative losses attributable to the recession was "arbitrary and capricious" and must be revisited to resolve disagreement with the methodology proposed by the USPS. Following the ruling of the DC Circuit Court, the PRC increased the amount that the USPS could collect in exigent price revenue by an additional $1.4 billion.

On February 25, 2016, the PRC issued a "Notice of the Removal of the Exigent Surcharge," which announced the Postal Service's plan to remove the surcharge on April 10, 2016. As of April 10, rates on many market dominant products and services have dropped to the price they were prior to the exigent surcharge. For example, the price of a First-Class Forever stamp dropped from $0.49 to $0.47, and the price of an International Forever stamp dropped from $1.20 to $1.15. Rates for select products and services used largely by bulk mailers (e.g., discounted rates for presorted mail) were adjusted using additional criteria.

The exigent surcharge had been in place since January 26, 2014. Table 2 shows the estimated revenue from the exigent surcharge for FY2014 and FY2015.

In FY2014 and FY2015, the estimated revenue from the temporary exigent surcharge was $1.4 billion and $2.1 billion, respectively. Total revenue (excluding the surcharge) was $66.4 billion in FY2014 and $66.8 billion in FY2015. In the two full years that the exigent surcharge has been in place, it has contributed an estimated 2.1% and 3.2% to the total revenue of the USPS (or an estimated 2.7% and 4.0% to the total market dominant revenue, respectively).

Expenses from Operations

To address its financial challenges, the USPS has made several operational adjustments intended to align its revenue, mail volume, and operating expenses, including

changes to its workforce (e.g., increased use of non-career employees); consolidation of delivery routes and reductions in number of delivery facilities; reductions to retail office hours; and realignment of its mail processing and distribution network.

For FY2015, USPS's operating expenses were about $67.7 billion. Table 3 provides a further breakdown of expenses for FY2014 and FY2015.

Each fiscal year, roughly two-thirds of the USPS's operating expenses are attributable to personnel costs, through salaries, compensation benefits, workers' compensation, and retiree benefits—excluding the retiree health prefunding payments. For FY2015, personnel-related expenses were $51.8 billion, an increase of $1.5 billion (or 2.9%) from FY2014. The largest line-item for personnel costs is salaries. From FY2010 to FY2014 the costs for salaries and other compensation decreased steadily. USPS spent $35.1 billion on these costs in FY2014 and $37.5 billion in FY2010, with expenditures dropping an average of $600 million each year. These reductions have been driven by a number of USPS management decisions, including the use of voluntary separation incentives and the increased reliance on non-career employees. The current labor and employment challenges of the USPS are discussed in greater detail in the " Current Issues Facing the USPS Workforce " section of this report.

This trend, however, reversed in FY2015 when USPS's salaries and compensation costs increased by 2.3% to $35.9 billion. The USPS attributes the increased costs to "contractually obligated salary escalations and additional work hours associated in part with the growth in the more labor-intensive Shipping and Packages business."

The USPS has not seen significant reductions in non-personnel costs in recent years. For the period from FY2010 to FY2015, total non-personnel related expenses have been about $15 billion to $16 billion annually. The largest non-personnel expenses are transportation costs. The USPS spent $6.6 billion for transportation in FY2015, largely on contracts for air, ground, and water transportation of the U.S. mail. Fuel expenses are also included under transportation, but they contribute a relatively small portion of costs. The other non-personnel expenses for FY2015 include supplies and services ($2.7 billion), rent and utilities ($4.8 billion), and depreciation of USPS assets ($1.8 billion).

While the USPS has control over the majority of its expenses, there are expenses mandated by law, including the RHBF prefunding requirement. Additionally, the USPS reached its statutory debt limit of $15 billion in FY2012 and as a result the USPS has no remaining flexibility to finance operations or respond to market changes through borrowing without further action from Congress.

Prefunding Requirement for Retiree Health Benefits64

The PAEA requires the USPS to prefund its retiree health benefits. To accomplish this task, the PAEA established a prefunding schedule beginning in FY2007. For the first 10 years (FY2007-FY2016), the USPS is to make statutorily prescribed prefunding payments into the Postal Service Retiree Health Benefits Fund (RHBF). The RHBF was created under the PAEA as an on-budget account in the U.S. Treasury. The statutorily prescribed prefunding payments range from $5.4 billion to $5.8 billion annually.

The statutorily prescribed payments conclude in FY2016. Beginning in FY2017, the USPS is to continue to make annual payments to the RHBF in amounts determined by OPM. Per the PAEA, OPM is to, on an annual basis, compute the difference between the size of current employees' future retiree healthcare benefit liability and the current RHBF balance, and then determine a schedule of annual payments to liquidate any outstanding liability by September 30, 2056.

Pursuant to the PAEA, the USPS payments to the RHBF are to be derived from operating revenue held in the Postal Service Fund. Beginning in FY2017, the USPS may begin accessing funds from the RHBF to pay for its current retirees' health benefits.

Since the prefunding payment schedule began in FY2007, the USPS has made three of its annual payments in full—FY2007, FY2008, and FY2010. Congress reduced the FY2009 payment owed from $5.4 billion to $1.4 billion, which the USPS paid. The USPS defaulted on each of its annual payments for FY2011 through FY2015. The FY2016 payment is due September 30, 2016. In total, through FY2015 the USPS has contributed $20.9 billion to the RHBF and has defaulted on payments totaling $28.1 billion.

The prefunding policy has been a contentious issue. Arguments advanced in favor of the policy center on the policy protecting future customers of the USPS and taxpayers by ensuring that they will not need to finance retirement benefits currently incurred by the USPS. However, according to the USPS, the prefunding requirement has contributed "significantly" to its financial losses. In its most recent financial statement, the USPS reiterated its pursuit of legislation that would allow the USPS to change how it offers health insurance to its employees and retirees. The USPS argues that such changes would "eliminate any necessity for the [RHBF] prefunding requirement...." The changes would require statutory authorization from Congress.

Current Issues Facing the USPS Workforce71

USPS's challenging financial circumstances have prompted the agency to implement several cost-cutting strategies, one of which has been to reduce the size and cost of the USPS workforce. The sections below discuss three USPS initiatives to reduce its workforce size and cost: (1) attrition and separation incentives, (2) increased use of non-career employees, and (3) non-personnel initiatives that could impact workforce size and cost. The sections focus on implementation of these three initiatives since FY2007, at which time the USPS began to experience substantial revenue losses.

Size and Cost of the USPS Workforce

The USPS has reduced its workforce size through voluntary attrition and separation incentives. The total number of USPS employees declined 21% (168,052 employees) between FY2007 and FY2014, from 785,929 to 617,877. To increase the voluntary attrition rate, the USPS has offered certain employees separation incentives to resign or retire early, which have ranged from $10,000 to $20,000 per person. Between FY2007 and FY2014, 55,473 employees accepted a separation incentive ( Table 4 ). Many of the separation incentives offered between FY2012 and FY2014 were associated with various postal facility closure initiatives, which are discussed later in this report.

The USPS has utilized separation incentives to avoid reductions in force (RIFs), which involve involuntary employee layoffs upon the abolishment of agency positions. On January 9, 2015, however, the USPS implemented a RIF for 249 postmasters who did not accept a separation incentive offered in FY2014. Of the 249 postmasters subject to the RIF, 169 opted for a Discontinued Service Retirement (DSR), and the remaining 80 who were not eligible for DSR received severance pay based on their age and years of service. According to the USPS, all postmasters affected by the RIF were offered part-time career positions at the USPS.

Increased Use of Non-Career Employees

The USPS categorizes its workforce into two employee types: career and non-career. Career employees serve in permanent positions and are typically provided full federal benefits. Non-career employees, in contrast, serve in time-limited or otherwise temporary positions. In many cases, non-career employees earn lower wages and are not provided benefits that are provided to career employees. For example, non-career employees are not eligible for federal life insurance and are not covered under the Federal Employees Retirement System (FERS).

The USPS has increased its use of non-career employees in an effort to contain costs. The number of non-career employees grew by 28% between FY2007 and FY2014, from 101,167 to 129,577. The number of career employees, in contrast, decreased by 28% over the same time period, from 684,762 to 488,300. The largest increase in the number of non-career employees occurred between FY2011 and FY2014, rising by 46.1% (40,878 employees). The influx of non-career employees during that period was primarily attributable to the establishment of three new non-career positions: Postal Support Employees (PSEs), City Carrier Assistants (CCAs), and Mail Handler Assistants (MHAs). Employees in these three positions constituted 51% of the USPS non-career workforce in FY2014.

According to the USPS, non-career employees can reduce the overall costs of certain agency functions. Non-career employees can often perform the full range of duties undertaken by their career counterparts at lower wage rates. For instance, non-career CCAs can perform the duties of career city letter carriers at a starting rate of $15.00 per hour versus $16.71 per hour. The wage difference between CCAs and city letter carriers is greater after accounting for benefits and overtime ($19.35 per hour versus $46.11 per hour, respectively), according to a 2014 Government Accountability Office (GAO) report. In addition, the USPS OIG reported that non-career employees could be used in place of career employees earning overtime and thus could reduce compensation costs.

Impact of USPS Workforce Initiatives on Costs

The USPS's initiatives to reduce the size and cost of its workforce have reportedly contributed to lowered compensation expenses in recent years. The USPS's total compensation costs decreased $526 million from FY2013 to FY2014, and the PRC found that 36.1% of the decreased amount ($190 million) resulted from increased use of non-career employees and a decrease in employee work hours. For instance, the PRC reported that increased use of CCAs and MHAs, combined with the reduction in their career counterparts, reduced the productive hourly wage rate for the mailhandling and city carrier functions by 3.5% and 5.4%, respectively, from FY2013 to FY2014. The remaining 63.9% of the reduced amount ($336 million) reflected a one-time cost of separation incentives that were paid in FY2013, according to a 2015 PRC report. Similarly, a 2016 USPS OIG report asserted that the decline in work hours over time—a 2.8% average decline per year between 2006 and 2015—has translated into cost savings.

A 2014 GAO report on the USPS workforce, however, found that the USPS's overall expenses did not decrease amid the agency's efforts to reduce workforce size and work hours. According to the report, USPS's total expenses did not decline alongside reduced workforce size and work hours from FY2006 to FY2014 and instead fluctuated over the eight-year period. The report attributed the fluctuation to required annual RHBF payments, which varied by year. The USPS's overall expenses still declined at a slower rate compared to employee work hours (7.1% versus 24%, respectively) when excluding RHBF payments, according to the report. In response to the GAO report, the USPS attributed the slower rate of decline in overall expenses to increased hourly wage and benefit costs, increased non-personnel expenses, and other fixed costs that do not decline with decreases in mail volume.

U.S. Postal Service's Current Strategies and Initiatives

This section provides information on the U.S. Postal Service's current five-year business plan and several ongoing USPS reform initiatives. The reform initiatives discussed in this section cover a wide range of issues and various aspects of postal operations. In many instances, these initiatives are underway, pursuant to the USPS's current legal authorities. Continuation of these initiatives does not require legislative action by Congress. In some cases, however, Congress has proposed legislation that would halt or amend actions that the USPS has already initiated.

U.S. Postal Service's Five-Year Business Plan95

The USPS's Five-Year Business Plan (hereinafter, USPS Business Plan ) provides detailed analyses of the short- and long-term financial situation of the USPS and includes several reform proposals that the Postal Service argues would help it progress toward financial stability and long-term sustainability. Many of the proposed initiatives involve further adjustments to postal delivery networks. In its Business Plan , the USPS argues the adjustments―which include the closure and consolidation of selected mail processing facilities―are necessary to improve efficiency and address recent changes to mail volume (i.e., decreases in first-class mail volume and increases in package volume). Below is a selected list of the proposals contained in the USPS Business Plan :

continued consolidation of mail processing facilities (known as the Network Rationalization Initiative); full implementation of revised postal service delivery standards; adjustments to staffing and the means of providing products and services at retail locations, including increases in "self-service" kiosks and reduced hours at selected retail locations; a shift to centralized and curbside mail delivery for both business and residential customers, where appropriate; an expanded scope of products and services offered at retail locations; and a move to five-day delivery of mail while maintaining six-day delivery of packages.

Of the initiatives in the bulleted list above, the first two items are currently being implemented by the Postal Service. The third and fourth items have been implemented in part. The USPS arguably does not have authority to implement the final two items, and would likely require legislative action from Congress. Additional information on select initiatives developed and implemented (in full or in part) by the Postal Service is provided in the sections below.

Postal Service Delivery Standards99

The USPS's delivery standards are performance goals that reflect "the number of days after acceptance of a mail piece by which the sender and recipient can expect it to be delivered." Delivery standards differ for each mail class and product. Since 2012, the Postal Service has phased-in revisions to its delivery standards for market dominant products.

For example, as shown in Table 5 , the length of delivery time for First-Class mail ranges from one to three days, while periodicals take between three and nine days. Prior to the most recent revisions, the range for periodicals was from two to nine days and First-Class mail sent within a certain geographical boundary was generally guaranteed to be delivered overnight.

The delivery standards are not, however, a guarantee of specific delivery times. Based on the delivery standards, the Postal Service sets "Service Performance Targets," which are the percentage of time it expects to meet its delivery standards. Table 6 shows FY2015 service performance targets and the USPS's actual percent on-time score for each category of market dominant mail. Actual percent on-time scores that fail to meet the percent on-time service performance targets are shown in italics. Those that are more than 10 percentage points below the percent on-time performance targets are in italics and bold.

In FY2015, USPS failed to meet its percent on-time performance targets for nearly all types of market dominant mail, including all categories of First-Class mail. Single-piece letters and flats that fell within the 3-day processing window met USPS's on-time performance standards about 77% and 65% of the time, respectively. In many other instances, on-time performance was more than 10% below the USPS's targets. According to the PRC's Annual Compliance Report , the USPS largely attributes these results to (1) winter weather storms, (2) insufficient air transportation capacity, and (3) staff realignments and other issues related to the network rationalization initiative, which is discussed below.

Restructuring the Processing and Delivery Network105

The revised delivery standards discussed above are part of the USPS's broader Network Rationalization Initiative (NRI). The NRI involves the changes to delivery standards (discussed above) and the closure and consolidation of selected mail processing facilities. The USPS argues these changes are necessary to (1) address recent changes to mail volume (i.e., decreases in first-class mail volume and increases in package volume) and (2) improve the efficiency of the overall postal delivery network.

The NRI was implemented in two phases. Phase I is complete and Phase II has been partially implemented beginning in January 2015. In late 2015, the Postal Service decided to defer until 2016 most of the remaining mail processing plant consolidations that were scheduled as part of Phase II. Further, in February 2016, the Postal Service acknowledged that the Phase II closures failed to capture the savings originally projected. In its filing to the PRC, the USPS reported $64.3 million in savings and $130.2 million in costs attributable to Phase II of the NRI, which is a net loss of $65.9 million. The filing, however, did not state if the costs were a factor in USPS's decision to halt the closures.

In comparison, the USPS reported an annualized savings of $865 million from Phase I. The USPS states that the increased costs of Phase II are due to "unplanned package growth and workload shift." The U.S. Postal Service OIG, however, argues that the consolidations have likely led to increased transportation costs and it encourages greater transparency regarding USPS transportation contracts.

Unanticipated Effects of the NRI on the USPS Workforce

A 2015 USPS OIG report found that the NRI had some unanticipated effects on USPS operations, including the USPS workforce. The report asserted that revised service standards under the NRI allowed the USPS to expedite mail processing timelines, which prompted the agency to transition 5,000 employees from night to day shifts. The shift changes have resulted in decreased differential pay and additional training for new jobs for some employees, according to the report. The report further asserted that shift changes required larger mail processing plants to re-bid hundreds of jobs to employees with the new shift times, noting that the job bidding process can take "several months to complete."

Restructuring the Retail Business

Two reforms the USPS included in its Five-Year Business Plan were (1) a proposal to move from six- to five-day delivery of all or most classes of mail, but maintain or expand package delivery, and (2) a proposal to further reduce retail post office hours to better align them with estimates of operational demand.

Six- to Five-Day Delivery118

One reform that the USPS has repeatedly proposed in recent years is to move from six- to five-day delivery of all or most classes of mail—typically, USPS's market dominant products, such as first-class mail, standard mail (i.e., advertising mail), and periodicals. To maximize revenue from the competitive portion of its product line, however, USPS proposes maintaining six-day delivery of packages, or further expanding its Sunday package delivery services.

Opponents of reducing USPS's delivery days argue that it will have a negative effect on postal delivery standards, which—according to the PRC's FY2015 Annual Compliance Report —have already suffered following the closure and consolidation of postal processing facilities prior to the 2015 suspension of the process.

According to economic estimates prepared for the PRC, shifting to five-day delivery of mail while maintaining Saturday delivery of packages would increase revenues by an estimated $912 million to $1.677 billion. The estimated net profit would be less, however, due to two factors. The Postal Service may incur additional labor costs due to increased mail volume on Mondays.

Also, proposals may differ regarding Saturday operating hours at local post offices. If local post offices are open, there would be additional operational costs. In contrast, some customers may mail fewer items or choose another service for shipping packages if their local post office is closed on Saturday, potentially leading to lost revenue in competitive products. The PRC report based its estimation on a model where post offices remained open but did not sort or dispatch letter mail. Under this scenario, the PRC report estimated that the annual net savings to the Postal Service would be between $625 million and $1.393 billion.

Retail Post Office Closures126

In 2012, the USPS announced a plan to reduce hours at 13,000 "low foot traffic" U.S. Post Offices in rural communities. The Post Office Structure Plan, commonly referred to as the "POStPlan," is, according to the USPS, an initiative intended to prevent closures of postal retail facilities by reducing operational hours at selected locations. According to communications from the PRC, most POStPlan facilities are small and often in rural areas, though neither term (i.e., "small" or "rural") has been defined by either the USPS or the PRC for the purpose of identifying specific retail postal facilities.

Table 7 below provides data on the number of USPS retail facilities in existence at the end of each fiscal year from FY2010 through FY2015.

Impact of Postal Facility Closures on Postal Workforce

The USPS has implemented several non-personnel initiatives that have reportedly affected the size and cost of its workforce. GAO and the PRC, for example, reported that streamlining and consolidating activities associated with the POStPlan and NRI have reduced the number of career employees and work hours for postmasters, clerks, mailhandlers, and equipment maintenance personnel. According to a 2014 GAO report, the USPS projects the POStPlan will generate $347.2 million in savings through FY2016. The GAO report also discusses other initiatives to streamline and consolidate operations that have affected workforce size and cost, such as changes to delivery schedules and modes.

Possible Issues Facing the USPS Workforce132

Achievement of Workforce Reduction Goals

The USPS anticipates its strategic initiatives, which appear to include the aforementioned workforce initiatives, would reduce its career workforce to around 404,000 employees by FY2017. The number of career employees, however, has not decreased at projected annual rates. While USPS anticipated the career workforce to decrease by about 84,000 employees from FY2012 to FY2014, it decreased by 40,158 employees over the two-year time period. Consequently, achievement of workforce reduction targets for FY2015-FY2017 might become more difficult. It is unclear if USPS still intends to reach its FY2017 workforce reduction goal, as the agency has not explicitly revised it since April 2013. Additional separation incentives, or other workforce reduction initiatives, might be needed, however, if the USPS intends to achieve the goal.

The USPS's ability to achieve its workforce reduction goal might be affected by unanticipated policy changes or actions of stakeholders. According to a 2014 GAO report, for example, the USPS's FY2017 workforce reduction goal assumed the adoption of actions that would impact workforce size that have not occurred, such as adoption of six-day package/five-day mail delivery service. In addition, USPS postponed implementation of Phase II of the NRI, which was projected to affect around 15,000 employees. Finally, postal labor unions have made efforts to curtail reductions to the career workforce. For example, in September 2014, the American Postal Workers Union (APWU) won an arbitration award that was projected to create 9,000 positions within the clerk craft function, at least 3,000 of which must be career positions.

Limitations on Use of Non-Career Employees

The USPS's use of certain non-career employees is governed by postal labor union contracts, which limit the total number of non-career employees that can comprise the USPS workforce. Union contracts current through 2015 and 2016 raised the number of non-career employees that can be used for certain functions. The 2006-2011 National Association of Letter Carriers (NALC) contract raised the limit on the total number of covered non-career employees to 15% of the total number of career carriers in a district, compared to 3.5% in the 2006-2011 contract. (See Table 8 .)

The USPS's ability to maintain or increase its use of certain non-career employees will depend on contract negotiations. Some labor unions seem to oppose increased use of non-career employees, which appear to have affected negotiations for certain unions. For example, negotiations between the USPS and the APWU ended without an agreement on May 28, 2015. The APWU subsequently issued a press release stating that "proposed changes to the [USPS] workforce structure were completely unacceptable." The press release then cited USPS workforce proposals for the new contract, which included, among other things, an increase in the percentage of non-career employees. The APWU workforce proposals, in contrast, called for more career employees. On July 8, 2016, an arbitration panel issued a new APWU contract that maintained current levels of covered non-career employees.

Lower caps on the percentage of non-career employees might have implications for the size and cost of the USPS's workforce. According to a 2014 GAO report, the USPS asserted that it is close to reaching current caps on non-career employees. Lower caps, therefore, might require the USPS to reduce the number of non-career employees, which might prompt changes to the agency's workforce composition in ways that might increase personnel costs. For instance, compensation costs might increase if the USPS increases the number of career employees to comply with lower caps, either through additional hires or transitioning non-career employees to career positions. Alternatively, overtime pay cost might increase if the USPS reduces the number of non-career employees that were being used in place of career employees earning overtime.

Employee Morale

Some postal labor unions and Members of Congress have expressed concern about employee morale at the USPS, particularly amid the agency's efforts to reduce the size and cost of its workforce. For example, the APWU asserted that post office closures and mail processing plant consolidations are lowering employee morale. On March 5, 2014, Senator Heidi Heitkamp sent a letter to the Postmaster General that highlighted challenges identified by USPS employees in North Dakota that might lead to low morale, including long hours, poor working conditions, a lack of training, and a lack of managerial focus on addressing such issues.

On July 9, 2015, Senator Heitkamp introduced the Rural Postal Act of 2015. The bill seeks to, among other things, improve employee morale at the USPS by establishing a Chief Morale Officer. The Officer would be responsible for developing national initiatives that address employee morale and factors that might influence morale, such as factors related to working conditions, communication, and training. For example, the bill would require national initiatives to address wages and the balance between temporary and career employees. The bill also proposes the establishment of Regional Morale Officers, who would be responsible for (1) implementing the national initiatives; (2) holding monthly roundtables with employees to discuss concerns related to working conditions, staffing, communication, and training; (3) submitting biennial feedback reports to the Chief Morale Officer; and (4) communicating regularly with other Regional Morale Officers and the Chief Morale Officer to provide progress updates on achieving the initiatives. As of August 10, 2016, there has been no committee or floor action on this bill.

Further Postal Reform Issues for Congress

Updating the Postal Fleet153

To fulfill its mission of providing "prompt, reliable, and efficient" postal services to its customers, the USPS has a fleet of approximately 190,000 delivery vehicles. These vehicles transport more than 153 billion pieces of mail each year to more than 150 million delivery points. Approximately 75% of the delivery fleet (142,000 vehicles) is comprised of long-life vehicles (LLVs), which have an expected useful life of 24 years. Many LLVs were purchased in the late 1980s and early 1990s, and have now met or exceeded their life expectancy. Indeed, the average age of an LLV reached 23 years in 2015. Moreover, the USPS OIG determined the current fleet can only meet delivery needs through FY2017.

Given the need to replace much of its aging delivery fleet, the USPS has proposed acquiring up to 180,000 new delivery vehicles through its Next Generation Delivery Vehicle (NGDV) acquisition program. The NGDVs would cost between $25,000 and $35,000 each, and have a life span of 20 years. The new fleet would differ from the current LLV fleet in several ways, notably that they would be configured to handle a larger number of packages —which analysts believe will continue to grow in volume in coming years. The NGDVs would also use less fuel and more advanced safety features than the current LLV fleet.

The NGDV acquisition program will take an estimated five to seven years to complete. In January, 2015, the USPS issued a Request for Information (RFI), which provided prospective suppliers with the specifications of the NGDVs, and invited interested parties to submit information that demonstrated their ability to meet the manufacturing and production requirements of the program. Based on responses to the RFI, the USPS developed a list of "prequalified" suppliers who showed they could meet the program's requirements. Only the prequalified suppliers are eligible to participate in the next phase of the program.

In October, 2015, the USPS issued a Request for Proposal (RFP) seeking a qualified supplier to design and manufacture six "fully functional" prototypes of its NGDVs. The USPS anticipates that this phase of the program—the design, build, and testing of the prototypes—will take about two years to complete.

The final phase of the program, the production and delivery of the NGDV fleet, would begin in 2017. At that point, a second RFP would be released, which would establish the final NGDV production requirements, and indicate whether the USPS will purchase the vehicles, lease them, or both. The USPS has stated that while it is likely that just one supplier would be awarded the contract, it is possible that more than one supplier may be selected.

Nonpostal Products and Services175

The PAEA defines postal services as "the delivery of letters, printed matter, or mailable packages, including acceptance, collection, sorting, transportation, or other functions ancillary thereto" and prohibits the USPS from offering all but a limited number of excepted nonpostal products and services. This restriction prevents the Postal Service from offering or developing new nonpostal products (e.g., expanded banking and financial services) or expanding into new markets that might increase its market share and revenue.

Under the PAEA, the Postal Service is currently authorized to offer 11 nonpostal products and services, including two market dominant and nine competitive products. The two market dominant products are

USPS/public sector alliances, e.g., MoverSource, which allows the USPS to provide free change-of-address services by including moving tips and related advertisements; and philatelic sales intended for stamp collectors, e.g., uncut press sheets, framed stamps, binders for storing stamps, and philatelic guides.

The nine competitive products are

private sector advertising on USPS.com, within U.S. post offices, or in other postal venues; licensing of USPS's copyrights and trademarks; mail service promotions, which "allow merchants who offer web-based customers the ability to create mail pieces through an online service." Prices for these products are negotiated between the merchant and the Postal Service; sale of officially licensed USPS retail products; U.S. Passport photo services; photocopying services; rental, leasing, and non-sale of USPS property; use of USPS training facility and courses; and the USPS Electronic Postmark (EPM) program, which "authorizes vendors to provide their customers with Postal Service-authorized timestamps."

In FY2015, revenues from nonpostal market dominant products were $75 million and expenses were $13 million, for a net gain of $62 million. For nonpostal competitive products, revenues were $106 million and expenses were $17 million, for a net gain of $89 million. This was an increase of 13% and 4% from FY2014 nonpostal market dominant and competitive revenues, respectively.

The Postal Service is also authorized, with limitations, to conduct short-term market tests that may include nonpostal products. Market tests are generally limited to two years and have included the sale of gift cards, a same-day delivery service (Metro Post™), and an international eCommerce shipping service (GeM Merchant). The USPS OIG suggested grocery delivery as another possible market test in its June 2016 OIG Blog post.

Select postal reform legislation introduced in the 113 th and 114 th Congresses would provide the USPS with authority to offer additional nonpostal products and services. The nonpostal products and services covered in recent bills include

public Internet access; drivers' license services; hunting and fishing license services; voter registration; and postal banking and financial services.

Further, legislation introduced in the 114 th Congress, such as S. 2051 , Improving Postal Operations, Service, and Transparency Act of 2015 (iPOST Act), and H.R. 5714 , Postal Service Reform Act of 2016 , includes provisions that would allow the USPS to offer a range of nonpostal products and services that are currently prohibited under the PAEA.

Postal Banking202

In looking for ways to grow USPS's nonpostal products and services, one option is to expand the financial services it offers (e.g., international money orders, prepaid cards). The USPS offered select financial products in the 20 th century, but they have not been available since the termination of the Postal Savings System in 1967.

One reason that postal financial services are still raised as a potentially beneficial product line may be the example provided by other nations. Countries with some form of postal financial services include the United Kingdom, France, Japan, Germany, South Korea, and Brazil, in addition to many others. These examples also highlight the numerous different models that a postal system can utilize to provide financial services. In some cases, the postal service offers its own financial products through a separate entity established within the postal department. In other cases, the postal service facilitates the sale of financial services that are managed by a private financial institution. Some nations have implemented a hybrid of these two approaches. For example, South Korea uses a system wherein its postal service (Korea Post) offers its own financial services while also handling deposits made to private banks.

To further explore this idea, the USPS OIG issued a white paper in early 2014 to study whether the USPS is well positioned to offer financial services. In this report, the USPS OIG determined that financial services are the best opportunities for the USPS to generate new revenue. In addition, the report estimated there would be significant demand for these services from populations currently underserved by private banks.

Following the publication of the initial white paper, the USPS OIG completed a second study in 2015 that examined the statutory authority required to offer financial services and offered possible models that could be used. First, the report stated that the USPS could simply expand its current offering of financial products, which includes paper money orders, gift cards, and check cashing. This approach would provide limited growth opportunities, but would also incur relatively low implementation costs and is permissible under current statutory authority. The USPS OIG estimates that after a five-year period of developing these services, the USPS could generate $1.1 billion in additional revenue annually.

Beyond this approach, the white paper also identified four alternative models that draw heavily on the experience of other countries. For each of these approaches, the upfront costs would be higher and the USPS OIG states additional statutory authority would be needed. These four approaches are (1) a partnership with one outside firm to offer services through the USPS; (2) partnerships with multiple outside firms that are specialized for each individual product; (3) a marketplace model wherein the USPS facilitates many options for each financial service; and (4) a full-fledged postal bank, which would offer financial products wholly managed by the USPS or an entity within the agency.

Arguments For and Against Postal Banking

The work of the USPS OIG began a national conversation around the merits of developing postal financial services at the USPS, with many advocates for and against the concept. As mentioned above, proponents of postal financial services believe that such an expansion would offer financial services to underserved populations and provide needed revenue to the postal service at a time when demand for their traditional product line of first class mail delivery is declining.

Recently, many journalists and organizations have recommended a postal savings system as a way to reach households and individuals that do not currently make use of an insured financial institution and instead rely on alternative financial services (AFS). According to a 2013 report from the Federal Deposit Insurance Corporation (FDIC), this population is relatively large. The report found that 7.7% of all U.S. households were unbanked, meaning they had no account at an insured financial institution, while 20% of households were considered underbanked, meaning they had used AFS in the previous 12 months.

On the other side of the debate over postal financial services are those who believe the expanded services would not generate revenue or would unfairly encroach on the private market for financial services. Specifically, some have critiqued the revenue forecasts developed by the USPS OIG and the assumption that the underserved populations trust the USPS more than other institutions. Some have questioned whether there is a conflict between the two primary benefits that are currently suggested by postal banking advocates. Writing in the Washington Post , Charles Lane stated,

At bottom, though, the problem with postal banking is a certain inherent tension between its policy objectives: is the primary purpose to help low-income people, or is it to help the postal service make more money to offset the irreversible decline of its bread-and-butter business, first-class mail?

Without a more detailed estimate of the costs at which the USPS could profitably provide these services, the validity of this particular critique cannot be determined.

The U.S. Postal Savings System: 1911-1967

In evaluating the merits of expanding USPS financial products and services, many have looked to the USPS's own experience with postal banking in the first half of the 20 th century. From 1911 until 1967, the USPS operated the U.S. Postal Savings System (PSS) throughout the United States. At its peak in the late 1940s, this system had more than 4 million depositors and $3.4 billion in accounts. The purpose of this system at the time of its creation was to "get money out of hiding, to attract savings of a large number of immigrants who were accustomed to savings at post offices in their native countries, and to provide safe depositories for people who had lost confidence in private banks." This emphasis on reaching new underserved populations, providing an alternative beyond private institutions, and looking to international examples mirrors many of the arguments being made on behalf of postal financial services today.

Select Postal Banking Legislation

In the 113 th Congress, Representative Cummings introduced H.R. 2690 , Innovate to Deliver Act of 2013 , which if enacted, would have expanded USPS's authority to offer nonpostal products and services, including "check-cashing services."

As discussed in the 2015 USPS OIG report, a more comprehensive approach is for the Postal Service to become a chartered and licensed bank. As a bank, the USPS would have authority to provide a range of financial services, such as savings accounts, personal loans, check cashing services, and insurance products. In the 114 th Congress, Representative Richmond introduced H.R. 4422 which, if enacted, would provide the Postal Service with authority to "provide basic financial services" including small-dollar loans, checking and savings accounts, and other services in the public interest. Under the bill, the USPS would have authority to provide some of these services "alone, or in partnership with depository institutions." The bill, however, stopped short of establishing a new postal banking system with a chartered and licensed USPS bank.

While the specific proposals in the USPS OIG white paper, in articles, and in legislation differ in the financial products they cover, each of the proposals appears to share certain characteristics and goals. Each leverages the nationwide service network and accessibility of the USPS. Further, each seeks to achieve one or both of two goals: reach populations that are underserved by current financial institutions or provide additional revenue opportunities to the USPS.

Appendix A. USPS Revenue and Volume by Mail Category and Class

Appendix B. Postal Reform Legislation Introduced in the 113 th and 114 th Congresses