U.S. Postal Service: Congressional Action Is Essential to Enable a Sustainable Business Model
Released: 2020-05-07T00:00:00

Letter

Background

USPS has the mission of providing prompt, reliable, and efficient universal postal service, and federal law requires USPS to “provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.” USPS is required to serve, as nearly as practicable, the entire population of the United States.

USPS has a number of key stakeholders, each with different interests in USPS and its operations (see fig. 1). USPS is a key part of the mailing industry, and over time, it has become both a competitor and partner to private companies that also operate in the broader mail and delivery industries. For example, although United Parcel Service (UPS) and FedEx both pay USPS to deliver packages that they enter into USPS’s system at local post offices where carriers pick up their mail, they also compete with USPS for end-to-end package delivery business, such as moving packages from the retailer to the purchaser. Similarly, FedEx is USPS’s largest contractor, providing air transportation for Priority Mail Express (formerly Express Mail), Priority Mail, and First-Class Mail. UPS is also one of USPS’s largest contractors, providing long-distance mail transportation.

Over the years, legislation has changed key aspects of the business model used to provide the nation’s postal services. Until 1970, the federal government provided postal services via the U.S. Post Office Department, a government agency that received annual appropriations from Congress. At that time, Congress was involved in many aspects of the department’s operations, such as selecting postmasters and setting postal rates and wages. In addition, the President controlled the hiring and firing of Postmasters General, as it was a cabinet-level position. By the late 1960s, the department had several major problems including financial losses, management problems, service breakdowns, and low productivity. Because key postal business decisions were made by Congress through the legislative process, postal management had limited ability to plan and finance department operations and capital investments in accordance with postal needs.

In order to improve and modernize postal services, the Postal Reorganization Act (PRA) was enacted in 1970 and replaced the U.S. Post Office Department with USPS, an independent establishment of the executive branch of the government of the United States. Congress designed USPS to be a self-sustaining, business-like entity headed by a Board of Governors that would cover its operating costs primarily with revenues generated through the sales of postage and postal-related products and services.

However, by the early 2000s, USPS faced a bleak financial outlook that put its mission of providing universal postal service at risk, according to the 2003 Presidential Commission on the United States Postal Service. The Commission evaluated USPS’s business model and concluded that USPS must have greater flexibility to operate in a business-like fashion, but that this latitude required enhanced transparency to enable effective management and congressional oversight. The Postal Accountability and Enhancement Act (PAEA) was enacted in 2006. PAEA provided USPS additional pricing flexibility for mail products, but with provisions for increased transparency, oversight, and accountability, among other things.

Specifically, PAEA gave USPS broader latitude to change postal rates in a more streamlined process that included review by the newly created Postal Regulatory Commission (PRC). The PRC, which replaced the former Postal Rate Commission, is an independent establishment of the executive branch responsible for regulating USPS. PRC is required to make annual determinations of USPS’s compliance with mail delivery standards and postal rate requirements. If PRC finds noncompliance, it is required to specify USPS actions to restore compliance.

USPS Cannot Become Financially Self-Sustaining under Its Current Business Model due to Three Key Challenges

USPS’s current business model is not financially sustainable due to declining mail volumes, increased compensation and benefits costs, and increased unfunded liabilities and debt. USPS’s costs continue to rise faster than its revenues, and although USPS has made changes over the years to address these challenges, its efforts have been limited by stakeholder opposition and statutory requirements.

Declining Mail Volumes

As online communication and payments have expanded, USPS continues to face decreases in mail volume, its primary revenue source. First-Class Mail volume has declined 44 percent since fiscal year 2006, the year that total mail volume peaked. The long-term decline of First-Class Mail volume, which USPS has stated was exacerbated by the Great Recession and expects to continue for the foreseeable future, has fundamental implications for USPS’s business model because First-Class Mail is USPS’s most profitable class of mail. USPS Marketing Mail— which comprises most other mail volume—declined 27 percent from fiscal year 2007 to fiscal year 2019, in part due to electronic advertising alternatives. The volume of USPS competitive products more than tripled since fiscal year 2007. This volume, however, began to decline in the second half of fiscal year 2019 due to growing competition for package delivery.

USPS has taken steps to right size its operations in response to declining mail volumes. For example, in both 2009 and 2011, USPS announced plans to close several thousand USPS retail facilities. However, due to stakeholder opposition—including from members of Congress, postal unions, and local communities, among others—USPS instead closed a few hundred retail facilities. USPS also expanded the alternative options for customers to access retail postal products and services outside of USPS-operated postal facilities—such as self-service kiosks and partnerships with other retailers such as contract postal units. According to USPS, as a compromise effort to right size the retail network and due in part to USPS’s efforts to expand retail alternatives, USPS began reducing retail hours at selected post offices in 2012, ultimately decreasing retail hours at approximately 13,000 post offices. Another major cost-cutting effort was its 2011 Network Rationalization Initiative, a multi-part plan to consolidate its mail processing network. USPS consolidated more than 160 mail processing facilities, but did not fully implement this initiative following opposition from various stakeholders.

In addition to stakeholder opposition to changing postal services, federal laws also factor into USPS’s limited ability to respond to declining mail volumes. For example, federal laws define the level of postal services USPS is to provide, postal products, and pricing.

Postal services to be provided: USPS has limited ability to make changes in the postal services it provides. Specifically, USPS is required to provide 6-days-a-week delivery and to operate postal facilities across the country. Federal law requires USPS to provide the maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self- sustaining. Federal law also limits USPS’s ability to close retail facilities. For example, USPS cannot close a small post office solely because it is unprofitable. As of the end of fiscal year 2019, there were approximately 34,600 postal retail outlets nationwide, including approximately 31,300 USPS-managed post offices, branches, and stations, and, as we recently reported, USPS’s analysis showed that about 36 percent of its retail facilities were unprofitable in fiscal year 2018.

Postal products and pricing: USPS’s pricing flexibility is limited by a price cap on market-dominant products that generally limits rate increases for these products to a common measure of inflation. Each competitive product is required to cover its attributable costs; competitive products collectively are required to recover their attributable costs; and competitive products collectively are required to cover a PRC-specified minimum of USPS’s institutional costs. In addition, USPS is prohibited from providing new nonpostal products and services. Such requirements affect USPS’s ability to increase revenues.

Increased Compensation and Benefits Costs

While mail volumes have decreased, USPS’s compensation and benefits costs for current employees have been increasing since 2014, despite USPS’s efforts to control these costs. Although USPS reduced its total workforce (career and non-career employees) from 785,900 in fiscal year 2007, to 617,700 in fiscal year 2013, its workforce increased to about 630,000 in fiscal year 2019. Similarly, as we previously reported, recent trends show total work hours increased from a combination of new hiring and increased work hours for current employees. Specifically, we reported that from fiscal years 2014 through 2018, work hours increased by 5.4 percent. The number of work hours associated with higher costs— overtime and penalty overtime—have also been increasing. According to USPS, total compensation and benefits costs increased by almost $1 billion in fiscal year 2019 alone.

USPS has implemented changes to help control employee compensation and benefits costs, including lowering pay for new career employees and increasing use of non-career employees. For example, as we previously reported, starting about 10 years ago, USPS’s collective bargaining agreements have included the ability to hire up to 20 percent of the workforce as non-career employees. Non-career employees are less costly because they generally have lower pay rates and are not entitled to the full federal benefits received by career employees. According to USPS officials, non-career employees are also “more flexible” because there are fewer restrictions on their tasks and schedules. We recently reported that our analysis estimated that USPS likely saved about $6.6 billion from fiscal years 2016 through 2018 from increased use of non- career employees. USPS has recognized trade-offs in increasing the use of non-career employees in entry-level positions, such as a high turnover rate, as would be expected for almost any entry-level position in the private sector.

With respect to benefits costs for current postal employees, we have recently reported that USPS has also achieved savings by gradually decreasing its contribution percentage for employee health insurance premiums over the past decade, with corresponding increases in the contribution percentage paid by employees. These changes were negotiated with the four major postal labor unions and were included in successive collective bargaining agreements, each of which covered a multi-year period. We found that the reduction in USPS health insurance contributions generated estimated savings of about $1.4 billion for fiscal years 2016 through 2018.

A number of restrictions limit USPS’s ability to control employee compensation and benefits costs. As we recently reported, USPS compensation and benefits costs—which represent about three-fourths of its total costs—are driven by a mix of USPS contracts and policies, including collective bargaining agreements negotiated with unions representing 92 percent of USPS employees, and statutory requirements governing USPS employee pay and benefits. When USPS and its unions are unable to agree, the parties are required to enter into binding arbitration by a third-party panel. USPS’s collective bargaining agreements with these labor unions, some of which were established through binding arbitration, have established salary increases and cost- of-living adjustments and, as mentioned above, have also capped the number of non-career employees at approximately 20 percent of the number of employees covered by the agreements. Federal law requires USPS to participate in the Federal Employees Health Benefits Program (FEHBP), which covers current employees and retirees, as well as federal pension and workers’ compensation programs. Further, USPS must provide fringe benefits that, as a whole, are no less favorable than those in effect when the Postal Reorganization Act of 1970 was enacted.

Increased Unfunded Liabilities and Debt

USPS’s unfunded liabilities and debt, which consist mostly of unfunded liabilities for retiree health and pension benefits, have become a significant financial burden, increasing from 99 percent of USPS’s annual revenues at the end of fiscal year 2007 to 226 percent of its fiscal year 2019 revenues. At the end of fiscal year 2019, USPS’s unfunded liabilities and debt totaled approximately $161 billion. However, it has begun paying down this debt in recent years, leaving a balance of $11 billion at the end of fiscal year 2019 (see fig. 2).

Total unfunded liabilities have risen in part due to USPS not making payments to fund its retiree health and pension benefits. USPS has stated that it prioritizes its “primary universal service mission” when it is unable to fulfill all of its financial obligations, and that it therefore did not make payments to fund its postal retiree health benefits and pensions to minimize the risk of running out of cash. In doing so, USPS cited its precarious financial condition and the need to cover current and anticipated costs and any contingencies. It has not paid $55.4 billion in required payments for funding these benefits through fiscal year 2019, including $47.2 billion in missed funding payments for retiree health benefits since fiscal year 2010, and $8.2 billion for funding pension benefits since fiscal year 2014. In addition, for many years, USPS had been at its statutory debt limit of $15 billion; however, it has begun paying down this debt in recent years, leaving a balance of $11 billion at the end of fiscal year 2019.

A number of federal laws define the requirements for USPS’s retiree health and pension benefits that comprise most of its unfunded liabilities.

Retiree health benefits: Federal law establishes certain requirements for postal retiree health benefits, including basic requirements for coverage eligibility and contributions. In administering the FEHBP, the Office of Personnel Management (OPM) negotiates with the insurance providers to establish the level of benefits provided to beneficiaries. USPS is required to prefund its share of health benefits for its retirees. Under PAEA, the first 10 years of prefunding payments were fixed—ranging from $5.4 billion to $5.8 billion annually from fiscal years 2007 to 2016. From fiscal years 2007 through 2016, USPS was also required to continue “pay-as-you-go” payments for its share of premiums for current retirees. The permanent schedule for USPS payments to prefund postal retiree health benefits under PAEA required USPS to make annual payments starting in fiscal year 2017. Currently, USPS no longer makes payments for retiree health benefits premiums. Starting in 2016, these premiums are paid out of the RHB Fund until it is depleted, whereupon USPS will resume paying premiums on a pay-as-you-go basis. As we previously reported, survey data we reviewed indicated that most companies do not offer retiree health benefits and that the number of companies providing such benefits is decreasing over time. Many companies that have retained their retiree health benefits have done so by making changes to control costs, including tightening eligibility and restructuring benefits. However, all approaches we identified have different potential effects and would require congressional action.

Pension benefits: Federal law also requires USPS to finance its pension benefits under the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS) and contains specific provisions defining USPS’s required contribution level to fund these benefits. USPS’s payments consist of a rolling 30-year amortization schedule to address unfunded FERS liabilities, an amortization schedule to address unfunded CSRS liabilities by 2043, and the normal costs of FERS benefits for current employees.

Selected Domestic Companies and Foreign Posts Took Key Steps to Address Major Challenges

The large domestic companies we selected in the airline, auto, and railroad industries took actions over a number of years to address major business challenges. Airlines such as Delta, American, and United faced competition from low-cost airlines, downward pressure on airfares, and rising compensation, benefits, and volatile fuel costs. These challenges were exacerbated by the economic downturn that began in 2000, the terrorist attacks of September 11, 2001, and the Great Recession that began in December 2007, all of which temporarily depressed demand for airline travel. Similarly, General Motors (GM) and Ford Motor Company (Ford) faced competition from lower cost competitors, the Great Recession, a workforce and networks too large to be supported by smaller sales volumes, and other changes in the market. Likewise, large U.S. railroads competed for freight and passengers from other transportation modes, such as the trucking and airline industries that operated over publicly provided infrastructure, while railroads had to invest in their own infrastructure.

Based on our review of the selected companies’ annual reports and statements to the SEC as well as selected federal laws, and GAO, CRS, and other organizations’ reports, books, and academic articles, among other sources, we found that selected companies made changes to (1) products and services, (2) financial self-sustainment, and (3) use of the bankruptcy process. While some of the selected businesses restructured through a bankruptcy proceeding, other businesses took similar actions outside of the bankruptcy process. Mergers also played an important role for the airlines and railroads.

Actions Taken by Companies to Address Challenges

Actions Regarding Products and Services

The selected companies made multiple changes to their products and services. Specifically:

Airlines: Selected airlines altered pricing by changing route structure to focus on more profitable routes and adding fees, such as for checked baggage. In addition, all three selected airlines merged with other major airlines, thereby broadening their routes and revenues.

Automakers: Selected automakers focused on producing more profitable brands and models, discontinuing some models and introducing others. For example, during its financial difficulties about a decade ago, GM discontinued a number of unprofitable brands. In 2018, after years of declining car sales, Ford said it would eliminate some of its most well-known cars in North America, allowing it to devote more resources to sport utility vehicles and trucks.

Railroads: Large railroads focused on more profitable routes and abandoned unprofitable routes or sold them to other railroads. For example, the federal government created a new freight railroad, Conrail, by merging several bankrupt railroads in the Northeast and Midwest. As we have reported previously, federal government deregulation of railroad pricing and contracts after 1980 also helped Conrail to reach profitability and increase capital investment.

Actions Regarding Financial Self-Sustainment

Cost reduction was a major theme for the selected businesses in the airline, automotive, and rail industries, particularly with respect to compensation, benefits, and infrastructure costs. Specifically:

Airlines: The three selected airlines negotiated wage cuts and work rule changes with their unions; made workforce reductions, in part by outsourcing work; and cut pension and retiree health benefit programs. Wage cuts included all levels of employees, such as management, pilots, flight attendants, and mechanics. Benefit cuts involved reducing the level of pensions and retiree health benefits and transitioning pension programs from defined benefits plans to defined contribution plans that were structured to be less costly. Airlines also reduced infrastructure costs by eliminating some hubs, reducing the total number of aircraft, and changing the mix of aircraft in their fleet to save on maintenance and fuel costs. The airlines further cut costs by restructuring debt, reducing facility leasing costs, and renegotiating aircraft leases and vendor contracts.

While in bankruptcy, the airlines took major actions to reduce their costs. For example, United implemented steep pay cuts, cut retiree health benefits, and terminated its defined benefit pension plans, resulting in the Pension Benefit Guaranty Corporation (PBGC) assuming responsibility for some of its pension payments, and a reduction in benefits for the plan’s participants. United also cut its workforce size by 31 percent, reduced the number of airplanes by 19 percent, and reduced the total number of flights by 13 percent. Delta and American also reduced pay and pension benefits while in bankruptcy, and the PBGC assumed responsibility for some of Delta’s pension liabilities.

Automakers: The two selected automakers negotiated pay cuts, lower wages for entry-level employees, and changes to work rules designed to increase competitiveness; cut the workforce size in about half; made changes to employee benefits; closed many auto plants and dealerships; eliminated some vehicle brands and models; and changed the production process to increase efficiency. Specifically, The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) agreed to cuts in compensation for the automakers’ employees to levels paid by GM and Ford’s competitors. UAW also agreed to move retiree health care benefits into a private Voluntary Employee Beneficiary Association (VEBA) for current and former UAW-represented employees in 2007; the VEBA took over health benefits for retirees starting in 2010. The automakers also closed defined benefit pension plans to new participants and moved to defined contribution pension plans for eligible new employees.

Railroads: The Staggers Rail Act of 1980 was enacted to improve the financial stability of the railroad system. Subsequently, railroads improved their financial health through, among other things, cost reduction measures such as reducing their workforce through layoffs and federal buyouts agreed to by unions, and abandoned or sold off unprofitable rail lines to reduce infrastructure and operating costs. Overall railroad employment fell greatly as railroads consolidated, reduced service, and changed work rules. For example, Conrail reduced its workforce from about 82,000 employees in 1977 to about 21,000 in 1996. Congress specifically facilitated Conrail’s downsizing by passing the Northeast Rail Service Act of 1981, which among other things, directed a $200 million a year reduction in labor costs and authorized Conrail to terminate employees.

The U.S. government provided assistance to selected companies in various forms, including appropriated funds, loans, and other actions that helped enable companies to reduce their expenses. For example:

Automakers: The federal government committed $49.5 billion in funding to help GM continue to operate while restructuring. After the government became the majority owner of the GM that emerged from bankruptcy, the Administration laid out core principles that included managing its ownership in a hands-off manner and voting as a shareholder only on core governance issues.

Airlines: Under the 2001 Air Transportation Safety and System Stabilization Act, the federal government provided nearly $5 billion in compensation to airlines for losses due to the September 11, 2001 terrorist attacks, including $856 million for American, $668 million for Delta, and $782 million for United. Additionally, under the Emergency Wartime Supplemental Appropriations Act, $2.4 billion was appropriated to the Transportation Security Administration to compensate airlines for certain security expenses and fees, including $358 million to American, $411 million to Delta, and $300 million to United.

Railroads: The federal government spent about $8 billion creating, subsidizing, and preparing Conrail for sale to the private sector. This funding included $7 billion through 1988 for purchasing properties of bankrupt railroads, operating subsidies, and capital improvements and employee buyouts. Amtrak, the national passenger railroad, took over money-losing intercity and commuter passenger rail services and funded federal payments of up to $25,000 for each laid-off employee as authorized by legislation.

Use of Bankruptcy

Some airlines, automakers, and railroads made changes through the bankruptcy process. Specifically:

Airlines: All three selected airlines went through bankruptcy proceedings—United in December 2002, Delta in September 2005, and American in November 2011. The actions these airlines took to reduce costs while in bankruptcy are discussed above.

Automakers: GM declared bankruptcy in June 2009 to implement its restructuring plan. The federal government became GM’s majority shareholder and continued to provide financial assistance while GM was in bankruptcy. The bankruptcy court approved the sale of substantially all of old GM’s assets to a newly formed company (“new GM”) in June 2009 as well the old GM’s amended bankruptcy plan in March 2011, and its assets and liabilities were transferred to liquidating trusts. These actions and the restructuring—which included major cost reductions described above—helped enable GM to report positive net income in every year from 2010 through 2019.

Railroads: In 1970, the Penn Central Railroad, one of the largest in the country at the time, filed for bankruptcy. As Penn Central’s losses continued while in bankruptcy, the value of whatever assets that might have been available to satisfy its creditors’ claims was further eroded. Therefore, the bankruptcy proceeding was initiated to liquidate the railroad to meet the demands of its creditors. Faced with the potential cessation of railroad service for an entire section of the country, the federal government created Conrail to take over and operate specified portions of Penn Central as well as several other bankrupt railroads in the Northeast United States. Legislation was enacted that, combined with Conrail actions described above, enabled Conrail to become profitable.

Foreign Governments and Foreign Posts Took Actions to Address Challenges

In the countries we selected, foreign governments also took actions to develop goals for their postal operators that enabled changes in the postal operators’ institutional structures and actions to address competitive pressures, economic downturns, and market changes. Based on our review of the selected countries’ government reports, including summaries of postal reform legislation, annual reports from foreign posts, and interviews with foreign government officials and representatives of foreign posts, we found that changes were made to foreign posts’: (1) products and services; (2) financial self-sustainment; and (3) institutional structure. Some of these actions were authorized by legislation that changed the status and duties of the postal operators; others were taken over a lengthy period that predated passage of key legislation. Some foreign posts also diversified into nonpostal products and services; however, postal-specific challenges and changes are the focus of this discussion.

Actions Regarding Products and Services

The selected foreign posts made multiple changes to their products and services. We found that, when transforming their postal operations, selected countries determined the level of postal services they deemed necessary to adequately serve the public. The main product changes involved expansion of their package delivery business by enhancing service and investing in facilities and sorting equipment dedicated to handling packages. Large increases in their package volumes and revenues helped offset declining letter mail volume and revenues.

Two of the selected foreign posts reduced service levels to help control costs. For example, according to New Zealand Post officials, in response to reduced mail volume, New Zealand Post reduced its required frequency of mail delivery in urban areas from 5 to 3 days while maintaining 5-day delivery in rural areas with the stated goal of ensuring that postal service remained viable without government subsidization. Australia Post revised the service standards it provided for delivery of letter mail in 2016, resulting in slower delivery of some mail.

In addition, the main pricing changes have involved price increases for all mail, as well as the introduction of discounted postal rates for letter mail entered at processing facilities that generally were closer to the final destination of the mail. For example, Royal Mail raised postal rates above the rate of inflation after relaxation of its price cap. In France, the postal regulator established a price cap in 2015 of 3.5 percent per year (in addition to inflation) and established a new cap in 2018 of 5 percent annual rate increases (including inflation) for 2019 through 2022 for letter mail and packages considered part of universal postal service. The 2018 price cap allows La Poste more price flexibility than the previous one. Likewise, Australia Post implemented an above-inflation rate increase in January 2020, citing the need to generate revenues to offset growing financial pressures from declining letter mail volume.

Actions Regarding Financial Self-Sustainment

Cost reduction was a major theme for the selected foreign posts, particularly with respect to compensation, benefits, and infrastructure costs. These actions were stimulated in part by reductions in mail volume and the associated revenues and workload, and in part by legislative or regulatory changes that allowed greater competition and created incentives, such as privatization, which resulted in shareholder pressure to enhance or encourage organizational profitability and efficiency. Because postal operations are labor-intensive, actions to address workforce costs were particularly important to improving financial results. These often went hand in hand with outsourcing, network restructuring, reductions in service levels to better align service with demand, and other changes to increase productivity and achieve cost savings. The governments and the postal operators of selected countries also considered the effects on stakeholders when making postal reform decisions. Specific changes varied from one foreign post to another.

Workforce: In Germany, Deutsche Post officials told us that its employees hired after 1990 were designated private sector employees with lower pay and benefits than postal employees who were previously hired as civil servants. In France, La Poste officials told us that La Poste likewise transitioned its workforce in the 1990s from civil servants to private employees and ended recruitment of civil servants in 2000. They also said that this transition provided La Poste with a more flexible workforce and reduced its pension liability. Australia Post closed its defined benefit pension plan to new employees in 2012, while Royal Mail is transitioning to a defined contribution pension plan that it introduced in 2018. Royal Mail and New Zealand Post also have reduced the size of their workforce in recent years.

Infrastructure: Some selected foreign posts consolidated their mail processing networks to reduce costs. For example, following the reunification of Germany, Deutsche Post replaced more than 320 mail processing facilities with 82 such facilities. Royal Mail and La Poste reduced the number of mail sorting centers by about 40 percent over the past two decades.

In addition, all five selected postal operators have made changes to reduce retail network costs. As we reported in 2011, some foreign posts reduced the number of postal operator-owned and -operated facilities and in some cases closed facilities in an effort to reduce costs. At the same time, some minimized this disruption by expanding retail access through alternatives such as Internet sales and partnerships with retail businesses such as grocery stores or pharmacies. We reported that these changes either reduced operating and labor costs or improved customer service, in some cases because the partner retail facility stays open longer, or both.

This trend continues. Deutsche Post, Post Office Limited in the United Kingdom, La Poste, Australia Post, and New Zealand Post have outsourced or franchised most of their postal retail functions to private nonpostal operators. For example, Deutsche Post franchised its postal retail outlets to local businesses to not only reduce expenses, but also increase the availability of postal retail services nationwide by putting retail counters in stores that were open longer than traditional post offices. Deutsche Post representatives stated that while there was some initial resistance to these changes, these concerns abated after a few months as customers realized they received better service and longer hours. The representatives also said the number of retail outlets has increased in recent years in response to increased demand for e-commerce package returns. La Poste has a substantial and growing proportion of retail facilities operated by private providers (in partnership with small shops, especially in rural areas) or co- located in local government-owned buildings (in partnership with local town halls in rural areas). In addition, Australia Post combined its letter and parcel delivery networks in 2018 to obtain efficiencies.

Productivity: All of the postal operators in the selected countries took actions to enhance productivity, such as improving automation of mail processing, modernizing and streamlining operations, and changing work processes. For example, Deutsche Post officials stated they had streamlined their parcel sorting process and went from 140 parcel sorting centers in 1990 to 34 in 2019. Deutsche Post officials stated that this streamlining improved service performance for parcels; previously, most parcels were delivered within 3 or 4 days; by 2019, 93 percent of parcels were delivered within 1 day. Royal Mail officials also stated that they increased their level of automation and introduced new methods of parcel delivery, such as new high-capacity equipment for mail carriers, to increase efficiency as well.

Government Assistance: The governments of some of the selected countries provided assistance to their postal operators in various forms, including assuming pension costs, granting tax exemptions, and providing subsidies to postal retail operations. For example, the governments of France and the United Kingdom assumed costs of defined benefit pensions for postal employees who are civil servants, while the government of Germany assumed these costs to the extent that they exceed the costs of private sector pensions. While all new employees are employed as private sector employees, German audit officials stated that the government’s pension obligation for postal employees who are or were civil servants and their dependents will last until 2079 and cost the government about €306 billion.

The assumption of these pension plans was important in facilitating the privatization of these postal operators, according to Royal Mail and Deutsche Post officials, because without the reduced unfunded pension liabilities, the stock offerings for the newly created companies would have been much less attractive to private investors. France also provides subsidies for certain postal activities. In addition, the United Kingdom split off the postal retail network from Royal Mail into Post Office Limited, a separate entity owned and subsidized by the national government.

Actions Regarding Institutional Structure

Each of the five foreign countries we selected changed their institutional structure following the development of goals for postal transformation that were tailored to national needs and priorities. Each of these countries had definitions of universal postal services including provisions for nationwide delivery and access to postal retail services. As the following examples illustrate, the national context of each country has been of central importance to shaping these goals. In addition, postal transformation in the three selected European countries—Germany, the United Kingdom, and France—also had an international context in the broader effort to create and promote a single European internal market.

Germany: In the 1990s, the German government changed its postal operator, Deutsche Post, from a government agency to a government- owned corporation. In 2000, the government changed Deutsche Post to a privately owned company so it could raise capital, modernize, and create a sustainable infrastructure. Goals for the newly created Deutsche Post were to maintain the high level of postal services, increase efficiency, and enhance profit. The legislation that created Deutsche Post also gave it more flexibility to respond to changes in the market. Currently, Deutsche Post remains a private company with the government holding a minority of its shares.

United Kingdom: In 1969, the government of the United Kingdom changed the Post Office, its postal operator, from a government department to Royal Mail, a government-owned corporation prior to changing it to a privately owned company. It began privatizing Royal Mail in 2013 so Royal Mail could become more modern and competitive by raising private capital, operating with more flexibility, and be subject to shareholder scrutiny to drive efficiency. As mentioned above, the government of the United Kingdom also split off postal retail units into a new government-owned entity called “Post Office Limited” that is separate from Royal Mail.

France: In 1991, the government of France changed La Poste, the postal service of France, from a government department to a public industrial and commercial establishment. In 2010, the government of France converted La Poste into a state-owned public limited company. This step allowed La Poste to raise additional public capital for investments to maintain and modernize its network, build a European parcel and express network, allow acquisitions outside Europe, and add nonpostal products and services, such as expanding its banking services.

Australia: In 1989, the government of Australia changed its postal operator, Australia Post, from a government department to a government-owned corporation. It is required to earn a reasonable rate of return on its assets, maintain its equity, pay a reasonable dividend to the government, and be liable for the same taxes and charges as its competitors.

New Zealand: According to a recent report, New Zealand Post began as a government department and became a state-owned enterprise in 1987, when legislation (State-Owned Enterprises Act 1986) created several such entities to address challenges in the national economy. Such corporations are required to be as profitable and efficient as a comparable business not owned by the state.

USPS’s Transformation Involves Reassessment of Three Critical Foundational Elements of Its Business Model

Congress will face difficult choices in fundamentally reassessing the three critical foundational elements of USPS’s business model—level of universal postal service, financial sustainability, and institutional structure. These choices are likely to require changes in laws and will have differing effects on postal stakeholders. While the specific impacts will depend on the changes made, some or all of USPS’s stakeholders could be affected and these impacts should be considered as part of any reassessment. All three key areas are interrelated and significant changes in one area may affect another. For example, we have testified that Congress faces a tradeoff between the level of postal services the nation needs and the level of postal services the nation is willing to pay for.

Level of Universal Postal Service Needed

Based on our prior work, a starting point for a fundamental reassessment of USPS’s business model should be determining the level of postal services the nation needs. While mail volumes have declined since fiscal year 2006, businesses, governments, and households still pay USPS billions of dollars annually to deliver more than 140 billion of pieces of mail, demonstrating a continued nationwide demand for postal services. We and others—such as USPS, PRC, and USPS OIG—have called for a fundamental reexamination of what postal services the nation needs now and may need in the future. In particular, we have testified that USPS’s growing financial difficulties, combined with changing demand for postal services, have provided Congress with an opportunity to examine and potentially redefine what postal services should be provided on a universal basis and how they should be provided.

As mentioned above, there are numerous federal laws and requirements related to the provision of universal postal service. For example, 6-day delivery has long been required by annual USPS appropriations acts. Over the past decade, legislation has been introduced, and USPS and others have proposed reducing the frequency of delivery. However, no legislation has been enacted that would allow USPS to reduce delivery frequency.

There is also no consensus on the level of postal services the nation needs. Changes in service levels face opposition from some stakeholders, such as labor unions, affected communities, and the general public. Currently, legislation has been introduced that supports the preservation of both 6-day and door-to-door delivery for addresses that have it, and some mailer groups support one or both of these positions. Representatives from postal labor unions we spoke with stated that universal postal service is appropriate as currently defined and could be expanded to provide more products and services. Stakeholders have also expressed differing views on whether the frequency of delivery should be reduced to help USPS address its financial problems. USPS and PRC have estimated that eliminating Saturday delivery would reduce USPS’s costs but also would likely affect mail volume sent by business mailers, although USPS and PRC disagreed on the degree to which it would do so. USPS estimated that it could save $1.4 billion to $1.8 billion a year by reducing the frequency of mail delivery to 5 days while maintaining 7-day package delivery. To put these potential savings into context, delivery is USPS’s most costly operation. We reported, however, that USPS would face challenges in, among other things, how efficiently USPS would absorb the additional volume delivered in the remaining delivery days and its potential effect on mail volume. We also described potential trade-offs, such as possibly reducing the demand and value of USPS products if customers are not getting their delivery needs met.

Further, key postal stakeholders hold opposing views on many other options that have been proposed. For example, to raise revenues, USPS and some postal labor unions favor eliminating or raising the price cap on market-dominant products, which would enable USPS to raise rates more than the rate of inflation but would require changing the current regulatory system. Mailers, however, have expressed opposition to increasing postage rates higher than the rate of inflation.

Postal labor unions also favor increasing revenues by introducing new postal and nonpostal products and services. We have recently found, however, that USPS’s nonpostal revenues generated at postal retail facilities are small and that there are limited opportunities to generate revenues from nonpostal products and services from USPS’s delivery network. For example, we reported that nonpostal products and services offered through USPS’s postal retail facilities generated about $431 million in fiscal year 2018, accounting for less than 1 percent of USPS’s total revenue. In addition, we reported several potential limitations to USPS adding nonpostal services to USPS’s mail carrier activities, such as checking in on homebound and older residents and reporting signs of blighted properties. These limitations included, among other things, limited net revenue potential and a potential adverse effect on mail service delivery.

Financial Sustainability

A fundamental reassessment of USPS’s business model would include determining the degree to which USPS should be financially self- sustaining, i.e., the degree to which USPS’s operating costs and liabilities should be covered by ratepayers (such as businesses and individuals who pay USPS to send mail). If a reassessment concluded that USPS should be fully self-sustaining, past legislative proposals that would change elements of USPS’s costs and revenues may be worth congressional consideration. Stakeholders, however, have not reached a consensus on any of these proposals and none has been enacted.

Another avenue is to focus on reducing costs. As we have also reported, compensation and benefits costs, which comprise about three-quarters of USPS’s operating costs, are driven by a mix of USPS contracts and policies, including collective bargaining agreements negotiated with unions representing 92 percent of USPS employees and statutory requirements governing USPS employee pay and benefits. USPS compensation and benefits costs for its active employees increased by almost $1 billion in fiscal year 2019 despite a slight decrease in the size of the workforce and declining workload from reduced mail volume.

While USPS has been able to make some reductions in pay and benefits, its ability to control compensation costs is significantly inhibited by the collective bargaining process, which results in binding arbitration if an impasse is reached. According to USPS, all negotiations take place against the backdrop of binding arbitration (and the arbitrators have historically been reluctant to deviate from the status quo), resulting in only incremental changes. We have long supported changing the laws regarding collective bargaining to require that USPS’s financial condition be considered in binding arbitration. We have also reported that the collective bargaining structure, which was established many years ago, should be reexamined considering the dramatic changes in USPS’s competitive environment and rising personnel costs that have contributed to USPS’s losses.

Multiple bills have been proposed changing the process and/or criteria for collective bargaining to a different standard. The 2018 report from the Task Force on the United States Postal System recommended that collective bargaining over compensation should be eliminated for postal employees. While eliminating or revising the collective bargaining process could potentially provide USPS greater flexibility in employee pay, there would be trade-offs. For example, we recently found that the potential annual cost savings associated with USPS implementing cuts for all current employee pay by 1 percent would be about $321 million; a 10 percent cut would potentially save $3.2 billion. However, we also reported that while USPS could reduce its compensation costs through efforts such as reducing mail delivery frequency, USPS would face challenges in realizing these savings, such as the extent to which workhours could be reduced. Furthermore, these savings could be offset by other factors including service or morale issues.

With respect to benefits, we recently reported on a wide range of possible changes that would reduce or limit costs for postal retiree health benefits, nearly all of which would require a legislative change. Some approaches would shift costs to the federal government; some would reduce benefits or increase costs to postal retirees or employees; and some approaches would change how benefits are funded. Similar types of legislative changes could be considered with respect to postal pension benefits.

In addition, if Congress decides that USPS should be financially self- sustaining but makes no changes to improve USPS’s financial condition, USPS will be unable to address unfunded liabilities for postal retiree health and pension benefits, an inability that could eventually translate into higher costs for future postal ratepayers. Ultimately, if USPS’s expenses continue to exceed its revenues, USPS is likely to continue to miss required payments, reduce operations, or seek federal appropriations through the annual appropriations process to cover its operating costs.

If Congress determines that USPS should no longer be expected to be financially self-sustaining or if actions taken do not restore financial self- sustainability, Congress could provide financial assistance—not unlike what happened in other countries or for selected domestic business—to enable USPS to cover its costs, and to fulfill its obligation to provide federal health and pension benefits to postal employees and retirees. Federal financial assistance could be provided in various forms, such as:

Appropriating funds to help cover USPS’s operating costs, essentially the same arrangement that was used to finance the former U.S. Post Office Department.

Appropriating funds to supplement USPS’s payment of certain costs, such as to help fund its capital investments. For example, the federal government provides Amtrak, which is operated as a for-profit corporation with annual grants to operate and make capital investments in passenger rail service to supplement the revenues it generates.

Assuming some or all of USPS’s unfunded liabilities for retiree health benefits. This could take different forms, such as direct assumption of responsibility for unfunded liabilities or, more indirectly, requiring postal retirees to participate in Medicare which would decrease USPS’s costs but increase Medicare’s costs.

Assuming some or all of USPS’s unfunded liabilities for pension benefits.

Writing off some or all of USPS’s debts to the U.S. Treasury.

Options regarding the federal government providing ongoing financial assistance to USPS could have effects on both USPS and the federal government as a whole. Notably, this assistance would have to be funded in some way—either through offsetting reductions in federal expenditures in other areas, through tax increases, or through an increase in federal deficits. Moreover, reliance on federal funding could mean that USPS would be exposed to the uncertainty inherent in the annual appropriations process. In addition, access to annual appropriations to cover financial shortfalls could have an unintended consequence of reducing USPS’s incentives to become more cost-efficient.

At present, there is no consensus on USPS’s level of financial self- sustainability should be. For example, representatives of labor unions we spoke with stated that Congress should address issues regarding postal retiree benefits before any reassessment of USPS’s financial self- sufficiency can occur. Increased federal financial support of USPS might also face political opposition, due to concerns about minimizing federal deficits and ensuring fair competition between USPS and the private sector.

Institutional Structure

The final area of consideration in any reassessment of USPS’s business model is identifying what institutional structure could best deliver the level of postal services at the level of financial sustainability that Congress has determined. As an independent establishment of the executive branch, USPS must provide universal postal service while being expected to be financially self-sustaining. Thus, there may be a tension between attempting to fulfill public service missions while operating in an efficient, business-like and financially self-sustaining manner. USPS officials told us that as an entity of the federal government, its primary purpose is the achievement of its statutory universal service mission, and it has no incentive to seek to maximize profits at the expense of achieving its public service mission over the long term.

Therefore, according to USPS, if it were maintained as an independent establishment of the executive branch or converted into a more typical government agency, it could continue to prioritize this public service mission. Additionally, there is widespread support for USPS’s institutional status as an independent establishment of the executive branch. Congressional resolutions have been introduced stating that “Congress should take all appropriate measures to ensure that the United States Postal Service remains an independent establishment of the Federal Government and is not subject to privatization.” Likewise, all four of the largest USPS unions, both of its management organizations, and a number of mailer groups and mailers support keeping USPS an independent establishment of the executive branch.

Nonetheless, considering the depth of USPS’s financial problems and its poor financial outlook, now may be an appropriate time for Congress to reconsider what institutional structure will be most appropriate for USPS in the 21st century. However, any substantial change to USPS’s institutional status would require changing federal law. Based on our past work and options identified by USPS and others, Congress has a range of options it could consider in reassessing USPS’s structure (see table 1).

The potential advantages and disadvantages of placing USPS into alternative institutional structures for USPS have long been debated. Several options have been discussed:

USPS could revert to a traditional federal agency. USPS and its governance would be more consistent with other federal activities that are dependent on federal appropriations provided through the annual appropriations process. Many postal stakeholders, however, do not support such a change. For example, USPS told us that if it became a typical government agency reliant on federal appropriations to fill any operating gap, the political constraints that typically apply to government agencies could reduce USPS’s adaptability. Furthermore, changing USPS to a typical government agency could reduce its incentives to increase revenues or reduce costs in response to changing communication technologies and patterns. Consistent with this point, the 1968 presidential commission found that when it operated as a federal agency, the former U.S. Post Office Department had a lack of innovation, cost-control, and capital investment with major managerial decisions made through the legislative process. These and other issues led to persistent operational deficits, low productivity, and poor mail service.

USPS could remain an independent establishment of the federal government with additional authority—relative to the status quo—over certain aspects of its business model. For example, USPS could be provided more flexibility to raise postal rates, introduce new nonpostal products, and make various changes to reduce its costs such as reducing the frequency of delivery or further consolidating its retail, transportation, and processing networks. USPS has long advocated for additional flexibility under its current institutional structure—such as to eliminate the price cap on market-dominant products and have greater flexibility to offer nonpostal products. Representatives from postal unions also stated that USPS should be provided additional flexibility, such as to expand into nonpostal products, which some representatives stated could help preserve its public service mission to provide universal postal services. Consensus does not, however, exist as to what flexibility should be given to USPS. For example, some mailer groups favor keeping the price cap unchanged, stating the cap is sufficient and provides incentives for increased efficiency.

In addition, some stakeholders have supported further limiting USPS’s flexibility to reduce service standards, close retail outlets, or consolidate processing facilities, while other stakeholders noted that greater flexibilities in these areas would reduce USPS’s costs and enhance its efficiency.

If USPS were to become a government-owned corporation or a government-sponsored enterprise, USPS could be incentivized to increase efficiency as a federally chartered entity providing a public service with a predominantly business nature. For example, three of the four third-party experts we spoke with stated that USPS should retain its current mission of universal postal service but become more like a private company with greater freedom to operate in a business- like manner. The new structure could promote greater incentives toward cost control and financial success. Government-owned corporations are federally chartered entities that provide a public service with a predominantly business nature. These corporations can have a board of directors that is appointed by the President. Government-sponsored enterprises are federally chartered entities that are privately owned and, typically, have a board of directors appointed by private sector owners.

If USPS were to be a private company it would become accountable to the shareholders of that company. USPS told us that as a private company, its primary incentive could be to maximize profits and that, in USPS’s view, private shareholders would be most focused on short-term financial outcomes. Thus, any such design of a private USPS would need to balance its profit motive with the nation’s needs for universal postal service and the affordability of that service. For example, while Royal Mail is a private corporation owned by shareholders, the government of the United Kingdom still mandates 6- day delivery for letter mail (and 5-day delivery for packages) with specified delivery standards, and some mail types are subject to price controls. In addition, the United Kingdom monitors the provision of universal postal service and can take enforcement actions regarding regulatory conditions and competition law. Similarly, Germany has legal instruments to enforce the provision of universal postal services, although according to German government officials these instruments have not been used.

Although some of the domestic businesses we examined reduced their costs through bankruptcy, this is likely not an option for USPS. As detailed in its report (see appendix I), National Bankruptcy Conference (NBC) found that USPS is not eligible to become a “debtor” under chapters 11 or 9 of the current Bankruptcy Code. According to NBC, a court likely would deem USPS to be a “governmental unit”—meaning it could not file for relief under chapter 11—and a court would deem USPS not to be a “municipality”—meaning it could not file for relief under chapter 9. Therefore, legislation amending the Code would be required to make USPS eligible for relief.

According to NBC, however, even if the Bankruptcy Code were amended to allow USPS to file as a chapter 11 or 9 debtor, the Code would still not currently authorize a bankruptcy court to discharge the ongoing statutory obligations that have led to USPS’s current financial situation, and amending the Code to authorize such court action could raise constitutional (separation of powers) concerns. Moreover, NBC noted the bankruptcy process is designed to address obligations that have already accrued, not to override or amend statutes that apply to a debtor’s post- bankruptcy operations and obligations. In NBC’s opinion, because USPS’s pension and health care obligations are imposed by statute instead of by contract as in most bankruptcy reorganization proceedings, the bankruptcy process is not an effective or appropriate mechanism to address USPS’s obligations or potential transformation. NBC thus concluded that “although the bankruptcy process and bankruptcy tools raise interesting ideas for restructuring USPS’s existing and future obligations…all roads for doing so lead back to Congress.”

Implementation Considerations

Any changes that Congress makes to USPS’s business model will take time to implement and will need to be reevaluated as market conditions evolve. We have reported that fully implementing major transformations of government agencies can take years, and we also found that to be the case for the selected domestic businesses and foreign posts noted in this report, regardless of the changes needed. For example, railroads in the Northeast, airlines, and automakers took many years to implement a series of changes to their businesses. It took Germany more than a decade to fully liberalize and then privatize its postal operator, and the United Kingdom’s effort to privatize its postal operator took about 5 years. All of these organizations continue to adapt as they address ongoing challenges in a changing and highly competitive business environment. For example, GM recently stated that years after exiting bankruptcy and restoring profitability, it is closing some factories and focusing on developing electric and self-driving cars. Several freight railroads facing a downturn in freight traffic have also decided to run longer trains less frequently to reduce labor costs and increase efficiencies.

Similarly, changes in the use of postal services will continue for the foreseeable future, necessitating continued adaptation. Some of the countries we selected are anticipating the need to be prepared for possible future changes. For example: In August 2019, German government officials said they would consider reducing postal delivery frequency from 6 to 5 days a week as part of an ongoing review to adapt Germany’s 20-year old postal law to changing market conditions and customer demands.

In the United Kingdom, the postal regulator assessed postal users’ needs in 2020 in light of the changes in the postal market and to prepare for its regulatory review, which is to be concluded by 2022.

A 2018 consultant’s report to the European Union (EU) recommended that the EU relax its universal service obligations to accommodate future changes in the postal market. The EU is currently studying how postal users’ needs are changing to determine if it needs to change its framework to allow member states to change their definitions of universal service obligations.

In November 2019, the Australian government ordered a review of Australia Post’s long-term strategy to operate as a sustainable postal service provider, considering market conditions such as e-commerce, the regulatory environment and changes in business and consumer service needs.

The government of New Zealand is scheduled to revise its memorandum of understanding with New Zealand Post defining universal service obligations by 2021.

GAO’s Calls for Congressional Action to Address USPS’s Solvency Remain Unaddressed

PAEA required GAO to evaluate strategies and options for the long-term structural and operational reform of USPS by December 2011. As USPS continued to face financial challenges, we accelerated this evaluation, which we issued in April 2010. However, we found that USPS’s business model, which was to provide universal postal service through self-supporting, business-like operations as an independent establishment of the executive branch, was not viable due to USPS’s inability to reduce costs sufficiently to respond to continuing declines in mail volume and revenue. In particular, we identified strategies to reduce compensation and benefit costs, reduce other operations and network costs, improve efficiency, and generate revenues through product and pricing flexibility. We also stated that while USPS may be able to improve its financial viability if it took more aggressive action to reduce costs, it was unlikely that those actions alone would fully resolve USPS’s problems unless Congress also took action.

Therefore, we stated that Congress should consider, among other things, any and all options available to reduce USPS’s costs. While bills on these issues were introduced and in some cases passed congressional committees, postal reform legislation to address these considerations has not been enacted. In addition, in our most recent update to our High Risk List in 2019, we reiterated the basic elements of our 2010 matter for congressional consideration by stating that Congress should consider various options to better align USPS’s costs with its revenues. We stated that Congress should consider addressing constraints and legal restrictions that limit USPS’s ability to reduce costs and improve efficiency through considering a comprehensive package of legislative actions. To date, such a legislative package has not been enacted.

Furthermore, we reported in 2018 that the financial outlook for the Postal Service’s Retiree Health Benefits Fund was poor, as USPS had not made any payments into it since 2010. OPM then forecasted the fund would be depleted by 2030 if USPS continued to not make payments. Therefore, we stated that Congress should consider passing legislation to put postal retiree health benefits on a more sustainable financial footing. However, legislation has not yet been enacted to address this issue.

Conclusions

We have often reported over the past 10 years that USPS’s ability to take actions taken under its current authority is insufficient to fully address its financial situation. Absent congressional action on critical foundational elements of the USPS business model, USPS’s mission and financial solvency are increasingly in peril. USPS’s growing difficulties to provide universal postal service in a financially self-sustaining matter provide Congress with the need to consider fundamental reform of the entire framework of postal services in the United States. In so doing, we continue to believe that as we stated in 2010, Congress should consider any and all available options. Comprehensive postal reform has not taken place in part because of the difficulty in obtaining compromise among various stakeholders with divergent views. Comprehensive, effective, and successful reform cannot occur until there is leadership and clarity around: what services should be provided, whether USPS is to be fully financially self-sustaining or the extent of federal financial support, and what institutional structure best supports these changes.

Congressional leadership is critical in transforming USPS because consensus on policy decisions involving value judgments, trade-offs, and effects on postal stakeholders will be difficult to achieve. In addressing these issues, while all stakeholders’ interests should be understood and taken into consideration, the fundamental needs of the nation must take precedence. Continued inaction will result in deepening financial problems—putting USPS’s mission to provide universal postal service at greater risk and minimizing the ability to make the most appropriate or sustainable policy decisions.

Matters for Congressional Consideration

We are making the following three matters for congressional consideration: Congress should consider reassessing and determining the level of universal postal service the nation requires. (Matter for Consideration 1)

Congress should consider determining the extent to which USPS should be financially self-sustaining and what changes to law would be appropriate to enable USPS to meet this goal. (Matter for Consideration 2)

Congress should consider determining the most appropriate institutional structure for USPS. (Matter for Consideration 3)

Agency Comments and Our Evaluation

We provided a draft of this report to USPS and PRC. USPS and PRC provided written responses which are reproduced in appendixes IV and V, respectively.

In its response, USPS concurred with our first two matters to reassess and determine the level of universal postal services the nation requires and to determine the extent to which USPS should be financially self- sustaining. USPS noted that the recent COVID-19 pandemic has both highlighted USPS’s essential role in the nation’s infrastructure and has caused a significant and sudden decline in mail volume, leading to a short-term liquidity crisis. USPS stated that while action by Congress is critical to ensure its ability to operate in the short-term, its financial situation has long been unsustainable due to statutory and regulatory structures that limit their ability to increase revenues and decrease costs. USPS noted that these changes require Congress to adopt reforms to secure USPS’s long-term financial viability. In addition, USPS concurred with the National Bankruptcy Conference’s legal analysis that Federal bankruptcy laws do not apply to USPS and that all roads for USPS restructuring lead back to Congress.

USPS generally agreed with our third matter, stating that determining the institutional structure could logically be a part of a comprehensive congressional examination of its business model. USPS stated that it does not believe that corporatization or privatization would unlock new efficiency potential in USPS and that sustainable postal service does not hinge on the provider’s institutional form. However, as we and USPS have stated, its current legal and regulatory structure does not provide flexibility in some key areas. While our report states that a corporate or privatized institutional structure could provide both the flexibility and a greater incentive to operate in a more business-like manner than USPS’s current structure, we also recognize there are advantages and disadvantages to any institutional structure. As a result, we are not recommending any particular institutional structure for USPS, but are urging that Congress identify what institutional structure could best deliver the level of postal services at the level of financial sustainability that Congress determines.

In its response, PRC agreed with all of our matters for congressional consideration. Particularly, PRC noted that the matter to reassess and determine the level of universal postal service the nation requires must be addressed as soon as possible. The PRC noted that given USPS’s severe and worsening financial situation (even before the impacts of the current pandemic crisis), a clear and specific definition of universal postal service and how that obligation can be funded must be provided. The PRC stated that Congress may want to consider mandating that PRC define and update the universal service definition by regulation.

Both USPS and PRC provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees, the Postmaster General, the Chairman of PRC, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making key contributions to this report are listed in appendix VI.

Appendix I: Reprint of National Bankruptcy Conference’s Report on U.S. Postal Service Bankruptcy Issues

Appendix II: Selected Legal Requirements Applicable to the U.S. Postal Service (USPS)

Appendix II: Selected Legal Requirements Applicable to the U.S. Postal Service (USPS)

Mail delivery quality and frequency 39 U.S.C. § 101(e),(f); see, e.g., Pub. L. 116-6, 133 Stat. 180 (2019)

Legal requirements USPS is required to provide prompt, reliable, and efficient services to patrons in all areas, render postal services to all communities, and serve as nearly as practicable the entire population of the United States. USPS is specifically required to receive, transmit, and deliver written and printed matter, parcels, and like matter throughout the United States, its territories and possessions, and pursuant to certain agreements, throughout the world. USPS is required to provide a maximum degree of effective and regular postal services to rural areas, communities, and small towns where post offices are not self-sustaining. No small post office can be closed solely for operating at a deficit, it being the specific intent of the Congress that effective postal services be insured to residents of both urban and rural communities. Statutory and regulatory requirements specify the process and criteria for post office closings, including appellate review by the Postal Regulatory Commission (PRC). In determining all policies for postal services, USPS is required to give the highest consideration to the requirement for the most expeditious collection, transportation, and delivery of important letter mail. In selecting modes of transportation, USPS is required to give the highest consideration to the prompt and economical delivery of all mail.

Service standards 39 U.S.C. § 3691, 39 C.F.R. Pt. 121 Letter mail monopoly 18 U.S.C. §§ 1693-99; 39 U.S.C. §§ 601-06 Mailbox monopoly 18 U.S.C. § 1725 Collective bargaining 39 U.S.C. §§1004,1206-07 Benefit programs 39 U.S.C. § 1005; 5 U.S.C. §§ 8348(h), 8423, 8909a Level of benefits 39 U.S.C. § 1005(f)

Comparability 39 U.S.C. §§ 101(c), 1003(a)

Workers’ compensation 39 U.S.C. § 1005(c)

For many years, provisions in annual appropriations acts have stated “hat 6-day delivery and rural delivery of mail shall continue at not less than the 1983 level.” USPS is required to establish modern service standards for each market-dominant product (e.g., delivery of First-Class Mail within the continental United States in 2-3 delivery days); these service standards are defined in the Code of Federal Regulations. USPS’s letter delivery monopoly is codified in criminal and civil laws known as the Private Express Statutes. These laws generally prohibit anyone from establishing, operating, or using a private company to carry letters for compensation on regular trips or at stated periods over postal routes or between places where mail regularly is carried. Restricts access to mailboxes by prohibiting anyone from knowingly and willingly placing mailable matter without postage in any mailbox, providing USPS exclusive access to mailboxes. USPS negotiates collective bargaining agreements with its labor unions. If the parties are unable to reach an agreement, binding arbitration by a third-party panel will ultimately be used to establish agreement. USPS is also required to consult with postal supervisory and managerial organizations concerning changes in pay, benefits, and other programs that affect their membership. USPS is required to participate in federal pension and health benefit programs, with specific provisions regarding the required level of USPS’s funding of these programs. For example, USPS is required to prefund both postal pension benefits and postal retiree health benefits, each with payments that fully cover USPS’s share of future benefit costs. The law requires USPS’s fringe benefits to be at least as favorable as those in effect when the Postal Reorganization Act of 1970 was enacted, unless variation of benefits is collectively bargained. Compensation for USPS officers and employees is required to be comparable to the rates and types of compensation paid in the private sector of the U.S. economy. USPS policy also is required to maintain compensation and benefits for all officers and employees on a standard of comparability to comparable levels of work in the private sector. USPS is required to participate in the federal workers’ compensation program, which covers postal and other federal employees and provides compensation to federal employees, as well as dependents, in the event of an employee’s death.

Citation(s) Access to facilities 39 U.S.C. § 403(b)

Legal requirements USPS is required to establish and maintain postal facilities of such character and in such locations, that postal patrons throughout the Nation will, consistent with reasonable economies of postal operations, have ready access to essential postal services. Generally, annual appropriations prohibit USPS from using funding to consolidate or close small rural or other small post offices.

Appropriations restrictions See, e.g., Pub. L. 116-6, 133 Stat. 180 (2019) Processing/logistics facilities Pub. L. 109–435 § 302(c)(5), (2006), 120 Stat. 3219, codified at 39 U.S.C. § 3691 note Price cap 39 U.S.C. § 3622(d)

The law requires USPS to provide public information and opportunities for public input and comment before closing or consolidating any mail processing or logistics facilities, and take comments into account when making a final decision.

An inflation-based price cap generally limits rate increases for market-dominant products, including First-Class Mail, USPS Marketing Mail, Periodicals and Package Services such as Bound Printed Matter, Media Mail, and Library Mail. The PRC, an independent establishment of the executive branch, must review USPS proposals to change domestic postal rates and fees.

Debt limits 39 U.S.C. § 2005 Restriction on nonpostal lines of business 39 U.S.C. §§ 404(e), 102(5)

Investment of postal retiree funds 5 U.S.C. §§ 8348(c), 8909a(c)

Whenever USPS proposes a change in the nature of postal services that will have an effect on a substantially nationwide basis, it must request an advisory opinion from the PRC on the proposal. USPS has the authority to borrow up to $15 billion from the U.S. Treasury. The annual net increase of obligations for capital improvements and defraying operating expenses is limited to $3 billion. USPS is limited to providing nonpostal services to those offered as of January 1, 2006 that PRC has authorized USPS to continue. Nonpostal service is defined to mean any service that is not a postal service. A postal service is defined as the delivery of letters, printed matter, or mailable packages, including acceptance, collection, sorting, transportation, or other function ancillary thereto. Funds set aside for postal pensions and retiree health benefits are required by law to be invested in U.S. Treasury securities.

Appendix III: U.S. Postal Service Financial Information for Fiscal Years 1972 through 2019

Dollars in millions Fiscal year 1972

Appendix IV: Comments from the U.S. Postal Service

Appendix V: Comments from the Postal Regulatory Commission

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact Staff Acknowledgments

Lori Rectanus, (202) 512-2834 or rectanusl@gao.gov.

In addition to the individual named above, Derrick Collins (Assistant Director); Greg Hanna (Analyst-in-Charge); Amy Abramowitz; Kenneth John; Hannah Laufe; Serena Lo; Michael Mgebroff; Joshua Ormond; Joshua Parr; Susan Sawtelle; Crystal Wesco; and Laurel Voloder made key contributions to this report.