USPS is the single largest federal civilian agency, with a mission vital to the nation’s communication and commerce. Compared with private U.S. companies, USPS is the second largest employer with its nearly 900,000 full-time and part-time employees. Four major unions represent the interest of bargaining unit employees; and three management associations represent USPS supervisors, postmasters, and other managerial, nonbargaining personnel. USPS currently maintains a massive infrastructure, developed incrementally over many years, consisting of more than 38,000 post offices, branches, and stations and 350 major mail- processing and distribution facilities. USPS is the focal point of a $900 billion mailing industry that employs 9 million people and accounts for 8 percent of the U.S. gross domestic product, according to a recent report. The Postal Reorganization Act of 1970 (P.L. 91-375) reorganized the former U.S. Post Office Department into the U.S. Postal Service, an independent establishment of the executive branch with a mandate to provide prompt, reliable, and efficient mail services to all areas of the country. USPS is intended to be self-supporting from postal operations and is mandated to break even over time. To change domestic postal rates, USPS must first obtain a prior review from the independent PRC before it can finalize new rates. In general, the complex process for USPS to change rates can take about 18 months—4 to 6 months for USPS to prepare its filing for a rate case, up to 10 months for the PRC to review proposed rate increases and make its recommended decision, and about 2 months or longer for USPS to make its final decisions and implement the new rates. USPS has an 11-member Board of Governors, which is responsible for directing the organization. Board members include (1) nine presidential appointees who serve on a part-time basis with 9-year staggered terms; (2) the PMG, who is appointed by the governors; and (3) the deputy postmaster general (DPMG), who is appointed by the governors and the PMG. The nine presidential appointees are chosen to represent the public interest generally, cannot be representatives of specific interests, are subject to Senate confirmation, and may be removed only for cause. No more than five of these appointees may belong to the same political party. No other qualifications or restrictions are specified in law. Overall, USPS’s financial condition has continued to deteriorate. Although USPS is mandated to break even over time, it is not generating sufficient revenues to cover both its operating expenses and capital needs, which continue to grow. From fiscal year 1995 to fiscal year 2001, USPS’s net income has continually declined (see fig. 1). Further, since fiscal year 2000, USPS has been incurring net losses, and losses are projected for fiscal year 2002. Since its inception, USPS has accumulated losses from deficits in prior years, and its debt balance with the U.S. Treasury continues to grow. At the end of fiscal year 2001, USPS’s mail volumes declined for the second time in 25 years and expense growth continued to outpace USPS’s revenue growth. Following the terrorist and anthrax incidents in the fall of 2001, USPS has experienced lower mail volumes and revenues than expected and may incur higher expenses for safety and security. Historically, USPS has had difficulty cutting costs related to its large workforce and infrastructure. The continuing recession and recent terrorist incidents have negatively affected USPS’s mail volumes; and despite USPS’s cost-cutting efforts, revenues decreased while costs continued to rise, thus decreasing net income. USPS’s dire financial situation, coupled with increased competition and the availability of alternatives to the mail, threatens the viability of USPS’s basic business model for the 21st century. USPS reported a deficit of $1.68 billion for fiscal year 2001 and has budgeted a deficit of $1.35 billion for fiscal year 2002. However, this budget estimate was forecast before the occurrence of the September 11 terrorist attacks and anthrax incidents. In the first postal quarter of fiscal year 2002, mail volumes were 4.9 percent below estimates that were included in USPS’s approved budget, and revenues were $876 million less than budgeted; costs were held to $355 million below budget. This resulted in net income being $521 million less than planned. However, USPS’s deficit for fiscal year 2002 could be mitigated by the expected settlement and implementation of its pending request for a rate increase. Continuing deficits have resulted in insufficient cash to finance capital project needs and repay debt. In addition, USPS’s debt continues to grow and is nearing its $15 billion statutory limit. USPS’s debt is budgeted to reach $12.9 billion by the end of fiscal year 2002. Currently, USPS’s liabilities exceed its assets. USPS’s substantial and growing liabilities will require increasing amounts of funds in the future. USPS’s financial outlook is likely to continue deteriorating unless it can find ways to stimulate revenue growth and significantly cut costs. Even if USPS raises rates and achieves positive net income in a given year, that will not resolve its fundamental financial problems, including those relating to declining mail volumes, because rate increases are likely to encourage the shift of more mail to electronic and other alternatives. Some costs, notably for pensions and retiree health benefits, are difficult to control and are expected to increase substantially in the coming decade. Similarly, USPS delivery costs increase annually, that is, nearly 2 million new delivery points were added last year. To improve its financial outlook, USPS needs to concentrate its current efforts on cutting costs, improving productivity, and adding value to the mail as well as overhauling its basic business model, as described in the final section of this report. The following table summarizes the key aspects of USPS’s declining financial outlook. A further discussion of fiscal year 2001 results is included in appendix 1. In fiscal year 2001, overall mail volume fell 0.2 percent, which was only the second annual decline since fiscal year 1975. Growth in mail volumes for USPS’s largest revenue source, First-Class Mail, has slowed in recent years (see fig. 2). In fiscal year 2001, First-Class Mail volume grew only 0.1 percent, which was the smallest growth rate in the last 25 years. First-Class Mail is a particularly important category of mail because it generated 54 percent of USPS revenues and covered two-thirds of institutional expenses in fiscal year 2000. Additionally, Standard Mail volumes—that is, primarily advertising mail—which account for most of the remaining revenues, decreased by 0.1 percent in fiscal year 2001, the first decline in 10 years. In contrast, Standard Mail volume on average had grown nearly 5.0 percent in the previous 5 years. USPS officials attribute the changes in mail volumes primarily to the slowing economy and also to the diversion by mailers of First-Class Mail, and to a lesser degree, Standard Mail, to the Internet. Recent declines in mail volume growth are depressing revenues at a time when expenses are growing and cash flow is needed to fund capital expenditures and debt repayment. Since fiscal year 1996, operating expenses have grown faster than operating revenues and grew 4.2 percent in fiscal year 2001, which was twice as fast as the 2.0-percent growth in operating revenue (see fig. 3). USPS’s poor financial outlook for fiscal year 2002 has been exacerbated by the continuing recession and terrorist incidents. Mail volume and revenues declined after September 11, while costs continued to rise, despite cost- cutting efforts. As shown in table 2, during the first quarter of fiscal year 2002, mail revenue was 5.4 percent below budget. This shortfall resulted in $876 million revenue less than budgeted, while expenses were $355 million under budget. USPS achieved a net income of only $108 million, which was $521 million less than budgeted. Typically, the first quarter is USPS’s most profitable of the fiscal year. USPS will be challenged to meet its net income targets for the remainder of the year. Uncertainties surrounding USPS’s net income targets include future mail volumes, the extent to which USPS can cut costs, and the potential for other added costs. In its fiscal year 2002 budget, USPS projected that its expenses would increase 3.2 percent. Budgeted expense increases included increases in salaries and benefits, pensions, retiree health care, and workers’ compensation, among other items. To help offset these expense increases, USPS’s budget called for reductions of 13,000 work years, or a 1.9-percent reduction, to be achieved in part by reducing the number of employees in field operations. Compensation and benefits covering personnel-related expenses, including interest expenses on deferred retirement liabilities, totaled approximately $53 billion, or about 78 percent of the total expenses in fiscal year 2001. A key component, USPS’s retirement-related expenses, have grown as a percentage of total expenses from 3.9 percent in fiscal year 1972 to 14.4 percent in fiscal year 2001. Budgeted retirement-related expenses for fiscal year 2002 are $10.3 billion, including an interest expense of $1.6 billion. USPS’s expenses for the remainder of fiscal year 2002 may be affected by fluctuations in mail volumes. Further, USPS health care premium costs are budgeted to increase 10 percent; however, this target may be exceeded as general health insurance premium costs are expected to grow 13 percent, according to an Office of Personnel Management (OPM) announcement in September 2001. Adding to financial pressures, the recent incidents of anthrax in the mail have heightened the need to improve mail safety and security, which will likely entail USPS’s incurring additional unplanned expenses.