U.S. Postal Service: Key Considerations for Restoring Fiscal Sustainability
Released: 2017-02-07T00:00:00

Letter

Declining Mail Volume and Growing Expenses Contribute to USPS’s Deteriorating Financial Condition

After about 30 years of relatively steady growth, USPS’s expenses began consistently exceeding revenues in fiscal year 2007—a trend that has continued through fiscal year 2016 (see fig. 1). As a result, USPS has lost a total of $62.4 billion since fiscal year 2007.

As we testified last year, the continued deterioration in USPS’s financial condition is due primarily to two factors. 1. Declining First-Class Mail volumes: The long-term decline of First- Class Mail volume, which USPS expects to continue for the foreseeable future, has fundamental implications for USPS’s business model because this remains USPS’s most profitable class of mail. Domestic First-Class Mail volume declined by 2 percent in fiscal year 2016 from the previous fiscal year to 61 billion pieces—a level 41 percent below its peak in fiscal year 2001, and the smallest level since fiscal year 1981 (see fig. 2). USPS recently reported that First-Class Mail volume is declining as major commercial mailers actively promote the use of online services, and although the rate of decline has slowed, will continue to decline in future years with the migration to electronic alternatives resulting from technological changes. In the long run, USPS also faces the possibility of a future economic downturn that could have an additional impact on First-Class Mail volume. 2. Growing Expenses: USPS expenses increased by $3.1 billion in fiscal year 2016 from the previous year, outpacing the $2.6 billion increase in revenues. Increasing compensation and benefits expenses were a key driver of expense growth. USPS reported that compensation and benefits for active employees increased by $1.2 billion, due to contractually obligated salary escalations and additional work hours associated in large part with growth in the more labor-intensive Shipping and Packages business. In this regard, USPS reported a 14 percent growth in Shipping and Packages volume in fiscal year 2016. However, to accommodate the surge in this volume and to minimize service disruptions during the holiday season, USPS reported increasing Sunday delivery service and adding non-career employees for the holiday season. This contributed to growth in USPS work hours in fiscal year 2016 from the previous year, when the number of USPS career employees increased by 17,000 and the number of non-career employees increased by 1,000. Over the past 3 years, the size of USPS’s total workforce has increased by about 22,000, including career and non-career employees; this growth contrasts with the trend from fiscal years 1999 through 2013, when the workforce decreased by more than 288,000 (see fig. 3). Compensation and benefits comprise close to 80 percent of total USPS expenses. Thus, expenses will continue to grow if increases in salaries and work hours continue.

As previously discussed, USPS’s unfunded liabilities and debt have become a large financial burden, increasing from 99 percent of USPS revenues at the end of fiscal year 2007 to 169 percent of revenues at the end of fiscal year 2016. These unfunded liabilities and debt—totaling about $121 billion at the end of fiscal year 2016—consist mostly of retiree health and pension benefit obligations for which USPS has not set aside sufficient funds to cover.

When the Postal Accountability and Enhancement Act (PAEA) established the Postal Service Retiree Health Benefits Fund, it required USPS to begin prefunding health benefits for its current and future postal retirees, with annual payments of $5.4 billion to $5.8 billion from fiscal years 2007 through 2016, followed by actuarially determined prefunding payments beginning in 2017 and every year thereafter. As of the end of fiscal year 2016, USPS’s liability for retiree health benefits was about $104.0 billion and the Postal Service Retiree Health Benefits Fund balance was $51.9 billion, with a resulting unfunded liability of $52.1 billion. USPS has missed a total of $33.9 billion in required prefunding payments, which represent about half of its total losses since fiscal year 2007. However, USPS would have still lost $10.6 billion during this time period even without the annual prefunding requirement.

USPS Will Remain Unlikely to Fully Make Required Retiree Health and Pension Payments

USPS will remain unlikely to fully make its required retiree health and pension payments in the near future. Beginning this fiscal year (2017), USPS is no longer required to make fixed prefunding payments. Instead, under the requirements established by PAEA, it is required to start making annual payments based on actuarial determinations of the following component costs: a 40-year amortization schedule to address the unfunded liabilities for postal retiree health benefits, the “normal costs” of retiree health benefits for current employees, and a 27-year amortization schedule to address the unfunded liabilities for postal pension benefits under the Civil Service Retirement System (CSRS).

These payments are in addition to annual payments USPS is already required to make to finance its pension benefits under the Federal Employees Retirement System (FERS), which consists of a 30-year amortization schedule to address any unfunded liabilities, and the normal costs of FERS benefits for current employees. USPS will find it very difficult to make all of these required payments given its financial condition and outlook. As table 1 below shows, in fiscal year 2017, USPS will be required to make an estimated total of $10.3 billion in payments for retiree health and pension benefits under CSRS and FERS—about $3.3 billion more than what USPS paid in fiscal year 2016 for these benefit programs.

In addition to declining mail volumes and increased expenses, USPS’s ability to make its required payments for these retirement programs will be further challenged due to:

Expiration of a temporary rate surcharge: USPS has reported that the April 2016 expiration of a 4.3 percent “exigent” surcharge that began in January 2014 is reducing its revenues by almost $2 billion annually.

No new major cost-savings initiatives planned: USPS has made efforts in recent years to right-size its operations to better adapt to declining mail volumes that are adversely affecting its financial position. For example, in fiscal year 2015, USPS reduced the hours of over 13,000 post offices to better match retail service with demand and reduced its physical footprint by consolidating 36 mail processing facilities, and instituted operational changes to better utilize resources. However, USPS has no current plans to initiate new major initiatives to achieve cost savings in its operations. According to USPS, it will continue to implement operational initiatives to contain costs and take actions to maintain liquidity, but as we testified last year, such actions will not be enough to stave off future losses and stabilize its finances. Although USPS has faced stakeholder resistance to its right- sizing efforts, in the absence of such efforts, USPS will continue to face challenges to appropriately match resources with mail volume and help address its compensation and benefits costs.

USPS has reported that without structural change to its business model and legislative change, it expects continuing losses and liquidity challenges for the foreseeable future. According to USPS, it has maintained adequate liquidity only by not making required payments to prefund retiree health benefits and deferring needed capital investments. Looking forward, USPS has reported that, if circumstances leave it with insufficient cash, it may prioritize payments to its employees and suppliers ahead of some payments to the federal government, as it has done in the past.

Large unfunded liabilities for postal retiree health and pension benefits— which were $73.4 billion at the end of fiscal year 2016—may ultimately place taxpayers, USPS employees, retirees and their beneficiaries, and USPS itself at risk. As we have previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills after employees have retired. Further, since USPS retirees participate in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. According to USPS’s testimony last year, “absent fundamental legislative reform, we face the prospect of having to continue to default on these prefunding payments [for retiree health benefits] in order to continue paying our employees and suppliers and to provide postal services to the American public. This increases the risk that taxpayers may ultimately be called on to fund these benefits.” Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay. Thus, the timely funding of benefits protects USPS employees, retirees and their beneficiaries, taxpayers, and the USPS enterprise.

Congress Faces Difficult Choices to Address USPS’s Financial Condition

USPS’s financial situation leaves Congress with difficult choices and trade-offs to achieve the broad-based restructuring that will be necessary for USPS to become financially sustainable. USPS’s ability to make its required retiree health and pension payments requires a decrease in expenses or increase in revenues, or both. Although USPS needs to take further action to reduce costs and increase revenues, USPS’s actions alone under its existing authority will be insufficient to achieve sustainable financial viability; comprehensive legislation will be needed. Congressional decisions about how to address the following issues will shape USPS’s future role, services, operations, networks, and ability to adapt to changes in mail volume. In making these decisions, Congress could consider, among other things, the following factors:

The level of postal services and the affordability of those services: USPS’s growing financial difficulties combined with vast changes in how people communicate provide Congress with an opportunity to consider what postal services will be needed in the 21st century. Specifically, Congress could consider what postal services should be provided on a universal basis to meet customer needs and how these services should be provided. Congress also could consider trade-offs in reducing the level of postal services, such as providing USPS with the authority to reduce the frequency of letter mail delivery to enable USPS to reduce its expenses. A key factor in any consideration to reduce postal services would include potential effects on postal customers, mail volumes, and employees. In particular, Congress could consider the quality of postal service—such as the frequency and speed of mail delivery and the accessibility and scope of retail postal services—in considering any service reduction. For example, as part of its efforts to reduce excess capacity, in January 2015 USPS revised its standards for on-time mail delivery by increasing the number of days for some mail to be delivered and still be considered on time. Even with the revised standards, on-time delivery performance declined significantly, particularly for the second quarter of fiscal year 2015, a decline USPS attributed to operational changes implemented in January 2015 and adverse winter weather. Performance has rebounded since then, facilitated in part by increases in workforce and mail transportation capacity and costs.

Compensation and benefits in an environment of revenue pressures: Key compensation and benefits costs for USPS employees have increased and continue to increase, while the volume for First-Class Mail—USPS’s most profitable product—has declined and continues to decline. To put USPS’s situation into context, many private sector companies (such as automobile companies, airlines, mail preparation and printing companies, and major newspapers) took far-reaching measures to cut costs (such as reducing or stabilizing workforce, salaries, and benefits) when demand for their central product and services declined. However, although USPS has taken some steps to improve its financial situation, USPS has stated that its strategies to increase efficiency and reduce costs are constrained by statutory, contractual, regulatory, and political restrictions. USPS is subject to requirements to maintain 6-day delivery, limit rate increases for most mail within an inflation-based price cap, and participate in federal benefit programs. Most USPS employees are covered by collective bargaining agreements with four major labor unions which have established salary increases, cost-of-living adjustments, and the percentage of health insurance premiums paid by employees and USPS. When USPS and its unions are unable to agree, the parties are required to enter into binding arbitration by a third-party panel. There is no statutory requirement for USPS’s financial condition to be considered in arbitration. Considering USPS’s unsustainable financial condition and the competitive environment, we continue to believe— as we reported in 2010—that Congress should consider revising the statutory framework for collective bargaining to ensure that USPS’s financial condition be considered in binding arbitration.

USPS’s dual role of providing affordable universal service while remaining self-financing: As an independent establishment of the executive branch, USPS has long been expected to provide affordable, quality, and universal delivery service to all parts of the country while remaining self-financing. USPS and other stakeholders have considered a range of different business models to address USPS’s financial difficulties. For example, USPS’s 2002 Transformation Plan included a range of alternatives from a publicly supported model to a business model with a corporate structure supported by shareholders. Any alternative business model would need to address the level of any costs that would be transferred from USPS, which is financed by postal ratepayers, to the federal government, which is funded by taxpayers. In addition, if Congress requires eligible postal retirees to participate in Medicare, as USPS has previously proposed, it should consider the tradeoffs for the federal budget deficit and Medicare’s financial condition, as well as the implications for affected employees.

Finally, a fully functioning USPS Board of Governors is needed to support USPS’s ability to carry out its critical responsibilities, as certain powers are reserved to the nine presidentially-appointed Governors who must be confirmed by the Senate. Because the last serving Governor left the Board in December 2016 due to term limits, the 11-member Board currently consists of only the Postmaster General and the Deputy Postmaster General. According to USPS, the critical responsibilities reserved to the Governors include setting postal prices, approving new products, and appointing or removing the Postmaster General and the Deputy Postmaster General. USPS stated last year that, in the event no Governors are in place, these critical duties may not be able to be executed, potentially leaving USPS without the ability to adjust its prices as needed, introduce new products, or appoint or replace its two most senior executive officers.

Conclusion

USPS management, unions, the public, community leaders, and Members of Congress need to take a hard look at what level of postal services residents and businesses need and can afford. The status quo is not sustainable.

Chairman Chaffetz, Ranking Member Cummings, 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.

GAO Contact and Key Acknowledgments

For further information about this statement, please contact Lori Rectanus, Director, Physical Infrastructure Issues, at (202) 512-2834 or rectanusl@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, FSA, MAAA, EA, Applied Research and Methods; Derrick Collins, Assistant Director, Physical Infrastructure Issues; Samer Abbas; Antoine Clark; Kenneth John; Josh Ormond; Crystal Wesco; and Chad Williams made important contributions to this statement. Mr. Todisco meets the qualification standards of the American Academy of Actuaries to render the actuarial opinions contained in this testimony.

Appendix I: U.S. Postal Service (USPS) Financial Obligations and Related Information

Selected USPS liabilities (included and Pension Funds (not fully on USPS balance sheet) included on USPS balance sheet) Funded status for FERS (unfunded)

Funded status for retiree health benefits (unfunded)

Funded status for CSRS (unfunded)

Unfunded obligations, liabilities, and debt as percentage of revenue 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (12.7) (55.0) (3.1) (12.5) (53.5) (9.0) (13.2) (52.0) (7.3) (13.6) (48.6) (14.2) (46.2) (17.8) (13.7) (47.8) (18.8) (12.5) (48.3) (17.8) (0.1) (12.5) (48.9) (19.4) (3.6) (12.5) (54.8) (16.7) (3.8) (12.3) (52.1) (17.5) (3.8)

Total USPS liabilities, debt, and unfunded obligations (74.3) (83.7) (85.9) (74.3) (103.7) (112.1) (110.9) (117.8) (121.6) (120.7) attributed to past service; these liabilities reflect all such projected future costs for current retirees and beneficiaries and a portion of such projected future costs (in excess of worker contributions) for current workers. Unfunded obligations, liabilities, and debt are the sum of the unfunded actuarial liabilities (obligations), USPS liabilities, and debt shown in this table. Total USPS revenue consists of total USPS operating revenue plus interest and investment income for each fiscal year. Total assets consist of current assets including cash and noncurrent assets largely comprising property and equipment measured at historic purchase value after depreciation. This does not include assets funding the retiree health and pension benefits.

2007 2008 2009 2010 2011 2012 2013 2014 2015 Projected 2016

Net CSRS funded Status (unfunded) (3.1)

Total pension funded status (unfunded) (9.0) (7.3) (17.8) (18.8) (17.8) (0.1) (19.4) (3.6) (16.7) (3.8) (17.5) (3.8)

5.3 (2.5) (0.4) 12.5 (15.2) (17.9) (17.9) (23.0) (20.5) (21.3) (52.0) (48.6) (46.2) (47.9) (48.3) (48.9) (54.8) (52.1)

Total