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

Letter

USPS’s Financial Crisis Has Worsened, and USPS Is Likely to Face Insolvency

As we have noted previously, USPS urgently needs to restructure its networks and operations as its financial condition and outlook have reached a crisis level. USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years, including an $8.5 billion loss in 2010; and a reported net loss of $5.7 billion in the first 9 months of fiscal year 2011. By the end of this fiscal year, USPS projects that it will incur a $9 billion loss, experience a substantial cash shortfall, reach its $15 billion borrowing limit, and not make its statutorily mandated $5.5 billion retiree health benefits payment to the federal government. USPS summarized its situation as the equivalent of facing Chapter 11 bankruptcy.

USPS’s financial problems are related to customers’ changed mail use— that is, mail volume is declining as people shift to electronic communications and payment alternatives rather than using USPS. Total mail volume peaked in fiscal year 2006 at 213 billion pieces and declined by almost 20 percent to about 170 billion pieces by the end of fiscal year 2010. In the first 3 quarters of this fiscal year, the volume for First-Class Mail—USPS’s most profitable product that accounted for 49 percent of USPS operating revenue—has declined by 6.5 percent compared to the same period last year. USPS has said that mail volume declines and changes in the mail mix have outpaced even its most pessimistic forecasts. USPS has projected a further drop in total mail volume to about 133 billion pieces by 2020.

USPS does not now have—nor expects in the future to have—sufficient revenue to cover its costs without legislative changes. These costs include compensation and benefits for a workforce of about 653,000 total employees, a network of about 33,000 USPS-operated retail and processing facilities, and 6-day delivery services to about 150 million locations, which expands by roughly 1 million new residences and businesses each year. USPS had $67 billion in revenue in fiscal year 2010 and $75.5 billion in expenses, resulting in a loss of $8.5 billion, which it expects to grow to a $20 billion loss by 2015. USPS also faces a variety of challenges, including difficulties reducing costly excess capacity in its networks; closing facilities due to stakeholder resistance or statutory and regulatory requirements that restrict closings; and making the annual prefunding retiree health benefit payments of about $5.5 billion required since 2006. For these reasons, we placed USPS’s financial condition and outlook on our list of high-risk programs and agencies in 2009, and it remains on our updated list in 2011.

Proposals to Address USPS’s Financial Crisis

We have reviewed a variety of proposals to address USPS’s ongoing financial difficulties by reducing costs and improving operational efficiency, but the overall effects of these proposals are uncertain because many questions remain. In August 2011, USPS released two discussion drafts that outline major proposals to (1) seek legislative authority to withdraw USPS from the Federal Employee Health Benefit (FEHB) program and sponsor its own program and change pension benefits for new employees, and (2) seek legislative authority to eliminate the layoff protections it negotiated with its unions in collective bargaining to accelerate network and workforce downsizing. USPS has not fully developed these proposals, so answers are not available to many of the questions that have been raised. We also reviewed other proposals including

USPS proposals to seek reimbursement of the surplus in its Federal Employees Retirement System (FERS) account and reduce costs by moving to 5-day delivery, restructuring its retail network, and reducing excess capacity in its mail processing network; pending legislation, including bills introduced in the Senate by Senators Carper and Collins and in the House of Representatives by Representatives Issa and Lynch; the President’s Fiscal Year 2012 Budget Request; our recent work, including our April 2010 report on USPS’s business model which (1) concluded that this model is broken and that USPS needs to take more aggressive action to better align costs with revenues and (2) discussed a series of options that included restructuring USPS’s retiree health prefunding payments, adjusting its workforce mix to more part-time staff, closing unneeded retail and mail processing facilities, and moving to 5-day delivery; and, reports by the U.S. Postal Service Office of Inspector General (USPS OIG) and the U.S. Office of Personnel Management Office of Inspector General (OPM OIG) related to changing the funding of USPS’s pension and retiree benefits.

Proposals Related to Reducing Benefit Costs

The key considerations of the USPS benefit-related proposals include the financial impact on USPS, its employees, future hires, retirees, the federal budget, and benefit programs and USPS’s ability to administer its own program. USPS costs for participating in the federal government- sponsored pension, health benefit, and workers’ compensation programs totaled about $22 billion in fiscal year 2010, almost 30 percent of its total expenses. This total included $5.8 billion for retirement benefits (FERS, Social Security, and the Thrift Savings Plan), $12.8 billion for health benefits, and $3.6 billion for workers’ compensation expenses. USPS was not required to make any payments for Civil Service Retirement System (CSRS) pensions in fiscal year 2010.

USPS currently has approximately 600,000 active employees and 480,000 annuitants participating in the FEHB program. In fiscal year 2010, USPS recorded over $12.8 billion in health care costs: $5.1 billion in costs for current employees, $2.2 billion in premium costs for current retirees, and $5.5 billion for prefunding premium costs. USPS employees paid about 20 percent of their premium costs in fiscal year 2010 as compared to about 28 percent paid by other federal employees. USPS reported in its fiscal year 2010 annual report that its Retiree Health Benefits Fund had assets of $42.5 billion. USPS’s proposal stated that these assets would cover 47 percent of all future liabilities for current and future retirees. Going forward, USPS’s health-related benefit costs will continue to face pressure from rising health care premiums, continued prefunding requirements, and increasing number of retirees (USPS estimates that about 300,000 employees will be eligible to retire over the next decade).

USPS has proposed establishing and managing its own health benefits program. Its proposal briefly discusses USPS’s rationale, how it would go about creating such a program, the governance and oversight structure, and it views of the unions’ role under the proposed process. While the Postal Service believes it currently has authority to withdraw from the FEHB program pursuant to section 1005(f) of title 39 of the United States Code, it has stated that it will seek specific statutory authority to do so. USPS is authorized to vary, modify, or add to certain fringe benefits, but is prohibited from making any changes to fringe benefits that on the whole are less favorable than the fringe benefits in effect when the Postal Reorganization Act of 1970 was enacted. The Postmaster General has stated, however, that USPS may alter benefits for certain categories of employees under any health benefits program it would administer.

Our April 2010 report on USPS’s business model discussed several options and related issues pertaining to assigning financial responsibility for benefits to USPS, its employees, and current and future ratepayers. Key considerations include improving USPS’s poor financial condition while keeping rates affordable, ensuring adequate funding to fulfill its financial obligations pertaining to employee benefits, and minimizing risk to the taxpayer if USPS would be unable to meet its responsibilities. USPS has said it cannot afford its required prefunding payments to the Retiree Health Benefits Fund on the basis of its significant mail volume and revenue declines, large financial losses, and difficulties in reducing costs. We have reported that Congress should consider a package of actions, which could include providing financial relief to USPS by modifying its retiree health benefit cost structure in a fiscally responsible manner.

Several legislative proposals have been made to defer costs by revising statutory requirements, including extending and revising prefunding payments to the Retiree Health Benefits Fund, with smaller payment amounts in the short term followed by larger amounts later. Deferring some prefunding of these benefits would serve as short-term fiscal relief. However, deferrals also increase the risk that USPS will not be able to make future payments as its core business declines. Therefore, it is important that USPS continue to fund its retiree health benefit obligations—including prefunding these obligations—to the maximum extent that its finances permit. At this point, however, USPS will be challenged to make these payments and says it will not be able to this year.

Table 1 describes health benefit-related proposals from USPS, pending legislation (bills introduced in 2011 by Senators Carper and Collins and Representatives Issa and Lynch), the President’s Fiscal Year 2012 Budget Request, GAO’s report on USPS’s business model (GAO-10- 455), and a report by the USPS OIG, along with key issues that we have identified.

Some of the key questions that should be considered by Congress, USPS, and other stakeholders regarding USPS’s recent proposal to create its own health benefit program include:

Legal authority – While USPS has stated that it will request legislative authority to withdraw from FEHB and start its own health benefit program, what other legal and regulatory provisions (e.g., its retiree health prefunding requirements) may be affected by such a withdrawal?

Budgetary – What impact would such a move have on the federal budget, particularly transferring $42 billion in assets from the current Treasury-held Fund to the proposed Postal Service-administered health benefits program?

Financial impact to USPS – What savings would USPS expect from such a shift, both in the short-term and in the longer-term? How would such a change impact USPS health benefit contribution rates and costs? How would the current costs paid by USPS to OPM to administer the program compare to those USPS expects to incur by administering the program itself?

Employee impacts – What would be the expected impact on employees’ contribution rates, costs, and benefits? What would be the impact of this proposal on collective bargaining?

Impact on other federal employees – How would the benefits, contribution rates, and costs of other federal employees enrolled in FEHB be impacted by this proposal? Also, how would non-USPS federal employees who are currently enrolled in postal union sponsored FEHB plans be impacted?

Fiduciary responsibility – How does USPS plan to acquire the experience needed to sponsor health benefit programs for over 1 million participants? Who would decide what the required funding level and investment strategy should be? Also, if USPS defaults on benefit payments, what would be the federal government’s obligation?

Oversight – How would disagreements between the proposed Plan Management body and USPS and/or employees be resolved, e.g. scope of coverage, procedures, etc.?

Approximately 84 percent of eligible USPS employees are enrolled in FERS, and about 16 percent are enrolled in CSRS or the Dual CSRS/Social Security program; these programs are administered by the Office of Personnel Management (OPM). At the end of fiscal year 2009, OPM estimated that USPS had an unfunded CSRS liability of $7.3 billion and a FERS surplus of $6.9 billion. USPS has asked Congress to enact legislation that would allow it to access the FERS surplus. To conserve cash immediately, however, in June 2011, USPS discontinued making its employer contribution payments for the defined benefit portion of FERS. The current $6.9 billion FERS surplus is approximately equal to 2 years of USPS’s FERS contributions that it has stopped making. Thus, if USPS continues not to make its FERS payments, its FERS surplus will be reduced by a commensurate amount. USPS estimated this would reduce its costs by about $800 million in the current fiscal year but would not impact current or future postal retirees. Both USPS and the OPM agreed to seek a resolution of the legal issues surrounding USPS’s decision to discontinue its FERS payments by requesting a legal opinion from the Office of Legal Counsel at the Department of Justice.

USPS has proposed legislation that would make new employees eligible only for the Thrift Savings Plan (possibly modified) and Social Security. New employees would not be eligible for the FERS defined benefit annuity or CSRS. USPS’s proposal included a brief description of why USPS is requesting this change as well as what postal officials perceived as inconsistencies between the current pension system and the “pay comparability” factor and what they have characterized as “over- payment” concerns. There is disagreement regarding whether USPS has “overpaid” CSRS between $50 billion and $75 billion. The USPS OIG and Postal Regulatory Commission have asserted that the current method of allocating pension costs for pay increases after 1971 results in the inequitable allocation of pension obligations to USPS, and the USPS OIG proposed an alternative allocation methodology. In response, the OPM OIG has asserted that OPM does not have the authority to adopt this proposal without further legislation, that a change in the allocation methodology would shift substantial pension funding costs from USPS to the U.S. Treasury, and that using the federal retirement program as a vehicle through which to implement other policy objectives would be unwise, inefficient, and harmful to the program itself.

Table 2 describes key provisions from USPS’s retirement-related proposals, pending legislation (bills introduced in 2011 by Senators Carper and Collins, and Representatives Issa and Lynch), the President’s Fiscal Year 2012 Budget Request, GAO’s report on USPS’s business model (GAO-10-455), and a report by the USPS OIG, along with key issues that we have identified.

The following questions provide a starting point to consider USPS’s proposal to withdraw from the federal pension programs:

USPS legal authority – USPS would require new statutory authority to withdraw future employees from the federal pension annuity. USPS proposes to eliminate the FERS annuity for new employees so that their benefits are comparable to the private sector. Is additional clarification needed to determine whether USPS’s pension proposal for new employees is comparable to the private sector?

Budgetary – What would be the impact on the federal budget of transferring the $6.9 billion FERS surplus to USPS?

Financial impact to USPS – What savings would be expected from eliminating the FERS annuity for new hires?

Employee impacts – How would such a change impact employees’ and USPS’s contribution rates to the Thrift Savings Plan for new hires?

Further analysis may also be needed of other options that could be considered to reassess USPS’s current pension program. For example, flexibilities within FERS can accommodate different accrual rates for certain groups of employees (e.g., law enforcement officers and congressional employees). Thus, through legislation, FERS benefits for USPS employees could potentially be modified.

USPS also provides other benefits to employees, including workers’ compensation and life insurance (which cost nearly $3.6 billion and $210 million respectively in fiscal year 2010). Although neither of these benefits is discussed in USPS’s recent draft proposals, legislation has been introduced that would convert employees on long-term workers’ compensation to federal retirement programs when they reach retirement age. Furthermore, USPS offers employees life insurance coverage through the Federal Employees’ Group Life Insurance (FEGLI) Program. USPS pays 100 percent of employee basic life insurance premiums, while other federal agencies pay about 33 percent. One option discussed in our April 2010 report would be for USPS to work with its unions in collective bargaining to increase employee premium payments for these benefits— and, in doing so, reduce USPS’s share to levels paid by most federal agencies. USPS estimated that this would have saved about $130 million in fiscal year 2010.

Proposals to Reduce Costs through Network and Workforce Optimization

We have noted in a number of reports and testimonies that USPS needs to eliminate costly excess capacity in its networks due to declining mail volume, increased automation, and incentives that allow mailers to bypass USPS processing by entering 83 percent of Standard Mail, (primarily advertising) closer to its destination in return for a discount. Technological innovations such as advanced sorting machines can rapidly process and sequence mail, leaving less manual work for USPS employees. Moreover, although customer visits and retail revenue have declined, USPS has not made commensurate reductions in its retail facilities. USPS reports that about 35 percent of its retail sales are performed at sites other than a traditional post office, such as stamp purchases at grocery stores or on the Internet. Together, these and other developments have resulted in the need for a smaller postal operational network and workforce.

During the past 12 years, USPS reported that it reduced its workforce by 235,000 career employees, primarily through attrition. Currently, USPS has about 653,000 total employees, and has a goal of reducing that number to 425,000 by 2015. USPS plans to increase the ratio of non- career to career employees and expects attrition to eliminate about 100,000 employees. In order to meet its 2015 goal, USPS has asked for legislation to eliminate the layoff provisions it has negotiated with its unions in collective bargaining so that it can accelerate reducing its workforce by an additional 125,000 career positions. Currently, USPS’s collective bargaining agreements with three of its major unions contain a provision stating that USPS bargaining unit employees, who were employed as of September 15, 1978, or, if hired after that date, have completed 6 years of continuous service, are protected against any involuntary layoff or force reduction. The collective bargaining agreement with its fourth major union states that that no bargaining unit employees employed in the career work force will be laid off on an involuntary basis during the period of the agreement.

USPS has proposed initiatives to remove more than $11 billion in costs from its networks and workforce. USPS plans to reduce the number of processing plants from over 500 to fewer than 200 and has proposed changing service standards to increase delivery time. USPS has announced plans to streamline its postal-operated retail facilities from 32,000 to fewer than 20,000 by 2015, and has already begun studying 3,700 retail facilities for possible closure. It also plans to continue increasing the number of locations where postal services are provided in privately owned businesses. We recently reported on similar retail restructuring efforts by some foreign posts and the lessons learned to facilitate the transitions, which took time to phase in and gain acceptance. In addition to these network operations proposals, USPS is also continuing to examine the locations of its area and district offices— where it has recent made progress by closing some of these offices.

USPS initiatives and legislative proposals outline significant changes in the retail, delivery, and processing network and workforce to achieve cost savings, including enhancing USPS’s ability to close unneeded facilities and layoff employees. Coordination with customers will be important so that USPS efforts to reduce its costs will not result in significantly increasing costs or decreasing services to customers. Further, USPS has proposed increasing the efficiency of mail delivery by reducing delivery service from 6 to 5-days and consolidating routes. Delivery remains the most costly activity for USPS and involves more than 310,000 carriers accounting for approximately 47 percent ($23 billion) of USPS’s total salary and benefit expenses in fiscal year 2010. Key proposals and related issues are presented in Table 3.

These proposals require making trade-offs among USPS cost savings, customer convenience and costs, employee agreements, and expectations related to the level of services USPS can afford to provide. Some unresolved issues and questions to consider include:

Universal service: What aspects of universal service, including 6-day delivery, are appropriate given the changed use of mail? What, if any, changes are needed to delivery standards to optimize USPS’s processing network? Can USPS’s proposed retail optimization improve customers’ access to postal products and services through alternatives while also maximizing costs savings?

Statutory and regulatory changes: What statutory or regulatory changes are needed to give USPS the flexibility it needs to restructure its operations, networks, and workforce, while also assuring appropriate oversight? Are changes needed to facilitate more timely review of appeals of retail facility closures and consolidations?

Stakeholder involvement: What role, if any, should Congress, the Board of Governors, and the Postal Regulatory Commission have in developing, approving, or reviewing decisions to modernize and realign postal services? What input should postmasters and other postal employees, mailers, and the public have in these decisions?

Accountability: What oversight mechanisms are needed to assure USPS decisions are consistent, transparent, and supported by reliable data? For example, are USPS’s decisions on facility closures sufficiently transparent to the public?

The cost reduction proposals put forth by USPS offer options to help start USPS on a path—admittedly a long one at this point—to financial solvency. USPS is also looking at ways to enhance its revenue generation capabilities, including product enhancements, increasing market share in the parcel delivery market, and rate incentives. However, USPS has already discontinued FERS payments and has said that it is going to default by not making its mandated retiree health benefit payments at the end of this month. A projected default by USPS could increase risks to federal retirement and workers compensation programs and diminish USPS’s trusted reputation and vital role in our economy, as well as the quality of postal services provided to the nation.

The stark reality is that USPS’s business model is broken. The decline in mail volumes is continuing. The gap between revenues and expenses is growing. USPS cannot continue providing services at current levels without dramatic changes in its cost structure. Difficult choices must be made. Now is the time to decide USPS’s future.

Chairman Lieberman, Ranking Member Collins, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time.

GAO Contact and Staff Acknowledgments

For further information about this statement, please contact Phillip Herr at (202) 512-2834 or herrp@gao.gov. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contact named above, Frank Todisco, Chief Actuary; Susan Ragland; Teresa Anderson; Joshua Bartzen; Erin Cohen; John Dicken; Colin Fallon; Charles Ford; Kimberly Granger; Carol Henn; Shelby Kain; Hannah Laufe; Margaret McDavid; Kim McGatlin; Amrita Sen; and Crystal Wesco made important contributions to this statement.

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