U.S. Postal Service: Continuing Financial Challenges and the Need for Postal Reform
Released: 2016-05-11T00:00:00

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 (see fig. 1). As a result, USPS has lost a total of $56.8 billion since fiscal year 2007.

The continued deterioration in USPS’s financial condition is due primarily to two factors. 1. Declining mail volumes: USPS continues to face decreases in mail volume, its primary revenue source, as online communication and e-commerce expand. While remaining USPS’s most profitable product, First-Class Mail volume in particular has significantly declined in recent years. For example, while total mail volume declined 27 percent from its peak in fiscal year 2006 (including a 1 percent decline in fiscal year 2015), First-Class Mail volume has declined to a greater extent—40 percent since its peak in fiscal year 2001 (with a 2 percent decline in fiscal year 2015).

USPS reported that the most significant factor contributing to the decline in First-Class Mail volume is the continued migration toward electronic communication and transaction alternatives—a migration USPS expects to continue for the foreseeable future. USPS added that the decline in First-Class Mail was exacerbated by the Great Recession that the National Bureau of Economic Research reported as lasting from December 2007 to June 2009. In the long run, USPS faces the risk of increasing diversion of mail to electronic alternatives and the possibility of future economic downturns that could negatively affect mail volumes. USPS has reported that although increased shipping and package volume has offset some of the declines in mail volume, this volume has a smaller profit margin than First-Class Mail. USPS will need to be efficient in its processing and delivery of packages to capitalize on growth in that market. 2. Growing Expenses: While mail volume has declined, USPS’s operating expenses have been rising. USPS reported that its key operating expenses grew in fiscal year 2015—notably salary increases for unionized employees, as well as additional work hours, in part due to a 14.1 percent growth in shipping and packages, which are more labor intensive to process. Despite efficiency initiatives such as consolidation of 36 mail-processing facilities in 2015, total employee work hours increased, and the size of USPS’s career workforce increased slightly in fiscal year 2015—the first increase in the size of the career workforce since fiscal year 1999. Compensation and benefits comprise close to 80 percent of total USPS expenses. Thus, expenses will further grow if increases in salaries and work hours continue. According to USPS, increases in compensation and benefits costs (primarily from increased wages) will add $1.1 billion in costs in fiscal year 2016.

As previously discussed, USPS’s unfunded liabilities and debt have become a large and growing financial burden, increasing from 99 percent of USPS revenues at the end of fiscal year 2007 to 182 percent of revenues at the end of fiscal year 2015 (see table 2 in app. I for more detail). At the end of fiscal year 2015, USPS’s $125 billion in unfunded liabilities and outstanding debt represented a $7.4 billion increase from the previous year.

In addition, reduced mail volumes and growing expenses have contributed to USPS’s inability to fully meet its requirement to prefund retiree health benefits. The Postal Accountability and Enhancement Act (PAEA) established the Postal Service Retiree Health Benefits Fund and 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 2015, USPS’s liability for retiree health benefits was about $105.2 billion and the Postal Service Retiree Health Benefits Fund balance was $50.3 billion, with a resulting unfunded liability of $54.8 billion. USPS has missed a total of $28.1 billion in required prefunding payments, which represent about half of USPS’s total losses since fiscal year 2007. Even without the annual prefunding requirement, however, USPS would have still lost $10.8 billion during this time period. USPS has stated that it expects to miss its required prefunding payment of $5.8 billion due at the end of fiscal year 2016.

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 in fiscal year 2017, USPS’s payments will be restructured as it will no longer be required to make fixed prefunding payments, but will be 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) (see table 2 in app. I for more detail).

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 $11.3 billion in payments for retiree health and pension benefits under CSRS and FERS—about $4.6 billion more than what USPS paid in fiscal year 2015 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 additional revenue generated by a 4.3 percent “exigent” surcharge that began in January 2014 generated $4.6 billion in additional revenue, including $1.1 billion in fiscal year 2016, $2.1 billion in fiscal year 2015, and $1.4 billion in fiscal year 2014. However, this surcharge was discontinued April 10, 2016, resulting in the reduction of many postal rates, including the rate for a First-Class Mail stamp that was reduced from 49 to 47 cents. USPS has reported that the expiration of the exigent surcharge will have an adverse impact on its future operating revenue and liquidity, and that its actions to increase efficiency, reduce costs, and generate additional revenue may be insufficient to meet all of its financial obligations or to carry out its strategy.

No new major cost-savings initiatives planned. USPS has no current plans to initiate new major initiatives to achieve cost savings in its operations. USPS has reported that it will continue to implement operational initiatives to contain costs, but such actions will not be enough to stave off future losses and stabilize its finances.

USPS has reported that without structural and other changes to its business model, absent legislative change, it expects continuing losses and liquidity challenges for the foreseeable future. According to USPS, it has maintained adequate liquidity in order to continue achieving its primary mission of providing universal postal services only by not making required payments to prefund retiree health benefits, and by deferring needed capital investments.

Large unfunded liabilities for postal retiree health and pension benefits— which were $78.9 billion at the end of fiscal year 2015—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, “Absent fundamental legislative reform, we face the prospect of having to continue to default on these prefunding payments 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, 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. As we have previously reported, 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. In January 2015, for example, 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. However, under the revised delivery standards, the percentage of mail delivered on time declined for many types of mail, such as First-Class Mail and Periodicals. USPS attributed declines in delivery performance to operational changes it implemented in January 2015 coupled with adverse winter weather. In its March 2016 Annual Compliance Determination report, PRC expressed strong concern with declines in delivery performance, particularly for single-piece First-Class Mail letters and postcards with a 3-5 day delivery standard, and directed USPS to improve delivery performance for First-Class Mail letters and postcards in fiscal year 2016.

Compensation and benefits in an environment of revenue pressures: Key compensation and benefits costs have increased and continue to increase for USPS employees, while demand for USPS’s main revenue source, mail and First-Class Mail in particular, has declined and continues to decline. Further, the exigent rate increase mentioned above expired on April 10, 2016. 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 the demand of their central product and services declined. However, although USPS also has taken a range of cost-cutting measures, USPS has stated that its strategies to increase efficiency and reduce costs by adjusting its network, infrastructure, and workforce and to retain and grow revenue are currently constrained by statutory, contractual, regulatory, and political restrictions. For example, USPS does not administer its employees’ pension, health, and workers’ compensation benefits programs, and postal rates are regulated by the Postal Regulatory Commission, with rate increases for most mail limited by an inflation-based price cap. 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 share 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 poor and deteriorating 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. An alternative business model, if any, 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. USPS’s 11-seat Board of Governors is required by law to have a quorum of six members in order to take certain actions. Because two Governors left the Board in December 2015 due to term limits, the Board currently consists of only one Governor (who will not be able to serve past December 2016), the Postmaster General, and the Deputy Postmaster General. Certain powers are reserved to the Governors. USPS has reported that although the inability of the Board to constitute a quorum does not inhibit or affect the authority of the Governors in office from exercising those powers, it is not apparent how those powers could be exercised if there were no Governors. According to USPS, the critical responsibilities reserved to the Governors are setting postal prices, approving new products, and appointing or removing the Postmaster General and the Deputy Postmaster General. USPS has stated 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.

In 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; Samer Abbas; Kenneth John; Malika Rice; and Crystal Wesco 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 in USPS Balance Sheet)

Funded status for retiree health benefits (unfunded)

Funded status for CSRS (unfunded)

Funded status for FERS (unfunded)

Unfunded obligations, liabilities, and debt as percentage of revenue (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) (20.4) (3.7)

Total USPS liabilities, debt, and unfunded obligations (74.3) (83.7) (85.9) (74.3) (103.7) (112.1) (110.9) (117.8) (125.2)

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.

Net CSRS funded Status (unfunded)

Net FERS funded status (unfunded)

Total pension funded status (unfunded) (3.1) (9.0) (7.3) (17.8) (18.8) (17.8) (0.1) (19.4) (3.6) (20.4) (3.7)

5.3 (2.5) (0.4) 12.5 (15.2) (17.9) (17.9) (23.0) (24.1) (52.0) (48.6) (46.2) (47.9) (48.3) (48.9) (54.8)

2016 Total

5.8 33.9 Pension and retiree health benefit funded status (49.7) (56.0) (52.4) (36.1) (61.4) (65.8) (66.2) (71.9) (78.9)

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