USPS’s financial condition has deteriorated significantly since fiscal year 2006, and its financial outlook is grim in both the short- and long-term. In July 2009, we added USPS’s financial condition and outlook to our high- risk list because USPS was incurring billion-dollar deficits and its debt was increasing as mail volumes and revenues declined and costs rose. USPS experienced a net loss of $329 million in the first quarter of fiscal year 2011 and is projecting a $6.4 billion total net loss for fiscal year 2011. In February 2011, we retained USPS on our updated high-risk list and reported that USPS finds itself without sufficient revenues to cover its expenses and financial obligations (see table 1). Mail volumes have generally been decreasing as customers have increasingly shifted to electronic communications and payment alternatives (see fig. 1), a trend that is expected to continue. USPS’s two major products are First-Class Mail and Standard Mail. These accounted for nearly 94 percent of all mail volume and 77 percent of USPS revenues in fiscal year 2010. One piece of First-Class Mail generated about three times the profitability of the average piece of Standard Mail. USPS expects First-Class Mail volumes to continue declining in both the short- and long- term, as customers increasingly rely on electronic alternatives. In the first quarter of fiscal year 2011, First-Class Mail decreased by about 6 percent compared to the same period last year, while Standard Mail volumes grew by about 9 percent. Figure 2 depicts actual and projected mail volume trends—which show that by fiscal year 2020 mail volume is projected to decline to a level not seen since fiscal year 1986. Additionally, USPS expects the gap between First-Class and Standard Mail to expand— Standard Mail volumes first exceeded those in First-Class Mail in fiscal year 2005. In 2010, USPS delivered mail to over 150 million addresses nationwide. USPS has about 670,000 full-and part-time employees, and reports that, when benchmarked against other large posts, it has the highest percentage of full-time employees—about 79 percent. USPS has reported achieving cost savings close to $13 billion in the last 5 years. For example, USPS eliminated 125,000 full- and part-time positions (about 16 percent). Despite these achievements, USPS has had difficulty significantly reducing its compensation and benefits costs and has struggled to optimize its workforce and retail, mail processing, and delivery networks. For example, during the first quarter of fiscal year 2011 despite a reduction of 6.4 million work hours when compared with the same period last year, savings from this reduction were partially offset by wage increases and increase in total retirement and health benefits expenses. Further, some USPS savings during these years came as a result of congressional action—Congress deferred $4 billion of USPS’s $5.4 billion scheduled payment to its retiree health benefit fund that was due at the end of fiscal year 2009. Table 2 provides an overview of key components of USPS’s operational network. USPS has relied increasingly on debt to fund its operations and has increased its net borrowing by nearly $12 billion over the last 5 years. USPS also ended fiscal year 2010 with about $1.2 billion in cash and unfunded obligations and liabilities of roughly $105 billion (see table 3). For fiscal year 2011, USPS has not updated its financial projections based on its first quarter results and it still plans to borrow an additional $3 billion—an increase that would place USPS at its $15 billion statutory limit and prevent it from further borrowing in fiscal year 2012 absent congressional action. USPS also projects a $2.7 billion cash shortfall at the end of fiscal year 2011. The President’s Fiscal Year 2012 Budget Request also proposes changes that, if enacted, would provide USPS with over $4.5 billion in short-term financial relief for fiscal year 2011. The majority of this relief—$4 billion— would come as a result of USPS paying $1.5 billion into the Postal Service Retiree Health Benefit Fund instead of the $5.5 billion required under current law. The remaining relief would come from reducing USPS’s obligation for future funding of retirement payments to the Federal Employees Retirement System (FERS). This relief, however, would be somewhat offset by terminating $29 million in annual appropriations in fiscal year 2012, that reimburses USPS for revenue foregone from reduced rate mail. USPS’s financial problems will not be fixed easily or quickly. USPS projects future mail volume declines, stagnant revenues, large financial losses and continued significant financial obligations. Considering USPS’s important role, action is urgently needed to facilitate its financial viability as USPS cannot support its current level of service and operations. Congress, USPS, the administration, and stakeholders need to reach agreement on a package of actions to restore USPS’s financial viability and take steps to modernize and restructure it. USPS needs to become a leaner, more flexible organization so that it can operate more efficiently, control costs, keep rates affordable, and meet customers’ changing needs. In considering proposed legislation, incentives and oversight mechanisms would help to ensure an appropriate balance between providing USPS with more flexibility and assuring sufficient transparency, oversight, and accountability. We have previously identified five key areas where action is needed to facilitate progress toward meeting USPS’s growing fiscal challenges: Realign postal service with customers’ changing use of mail: As mail use by businesses and consumers continues to change, USPS has stated that it cannot afford to sustain its current level of delivery and retail services. For example, it has estimated that it could reduce its costs by about $3 billion annually if it reduced delivery frequency from 6 days to 5 days per week, but congressional action would be needed for this change. USPS filed its proposal to eliminate Saturday delivery with the Postal Regulatory Commission (PRC) on March 30, 2010, and the PRC’s advisory opinion is expected to be released in 2011. Key questions to consider when evaluating this proposal include: What aspects of universal postal service, including 6-day delivery, are appropriate in light of fundamental changes in customers’ use of the mail? What, if any, changes are needed to other elements of universal service (e.g., delivery standards)? How can USPS improve customers’ access to postal services while modernizing its retail network to maximize costs savings? Should USPS implement its proposal to reduce delivery frequency to 5 days a week? How would such a change affect its operations, costs, workforce mix, employees, service, competition, value of mail, mail volume, and revenue? How would shifting to 5-day delivery affect business mailers and the public? Realign operations, networks, and workforce: USPS’s operations, networks, and workforce need to be realigned with the changes in mail usage and customer behavior, as USPS now has costly excess capacity. Key questions to consider when evaluating proposed actions in this area include: How should USPS optimize its operations, networks, and workforce to support changes in services? How quickly can this happen? How can it work with its employees and customers to minimize potential disruptions? Should USPS have greater flexibility to realign its retail networks and workforce, which may involve closing post offices and moving retail services to alternative commercial locations that are often open 7 days a week and keep longer hours than postal facilities? What process is appropriate to assure sufficient transparency, oversight, and accountability? Reduce compensation and benefit costs: Wages and benefits represent 80 percent of USPS’s costs (about $60 billion in fiscal year 2010). One of the most difficult yet critical challenges is making changes to USPS’s compensation systems. These systems have been set in law and also negotiated during collective bargaining with its four largest employee unions. USPS also consulted with its three management associations. We suggested that Congress should consider revisiting the statutory framework for USPS’s collective bargaining to ensure that binding arbitration takes USPS’s financial condition into account. We also reported other possible options for reducing compensation and benefit costs, including implementing a two-tier pay system, outsourcing if it results in cost savings, or revising employees’ share of health and life insurance premiums. Key questions to consider when evaluating proposals in this area include: What changes, if any, should be made to USPS’s compensation and benefits? Is it appropriate that USPS pays a larger share of its employees’ health and life insurance premiums than do most other federal agencies? What impact would changes to these premiums have on USPS and its employees? Generating revenue through new or enhanced products and services: A key issue is whether USPS can generate sufficient new revenues using the pricing and product flexibility provided in the Postal Accountability and Enhancement Act of 2006 or if changes are needed. In 2009, USPS asked Congress to change the law to permit it to diversify into nonpostal areas to find new opportunities for revenue growth. USPS also asked for additional pricing flexibility in a 2010 action plan. However, it is unclear what the potential impact of such changes would be and what statutory or regulatory changes would be needed. Key questions to consider when evaluating proposals in this area include: New products and services: What opportunities are there to introduce profitable new postal products and enhancements to existing ones? Should USPS engage in nonpostal areas where there are private sector providers? If so, under what terms? Funding postal retiree health benefits: USPS has said that it cannot afford its required annual prefunding payments ($5.5 billion in fiscal year 2011 and gradually increasing to $5.8 billion by 2016), and it has requested that Congress reduce these payments. Several proposals have been put forth to revise the current statutory requirements and reduce or defer some of these costs, thereby providing USPS with financial relief.