U.S. Postal Service
Escalating Financial Problems Require Major Cost Reductions to Limit Losses Gao ID: GAO-09-475T March 25, 2009When Congress passed the Postal Accountability and Enhancement Act in December 2006, the U.S. Postal Service (USPS) had just completed fiscal year 2006 with its largest mail volume ever--213 billion pieces of mail and a net income of $900 million. Two years later, USPS's financial condition has deteriorated. Mail volume declined by a record 9.5 billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of $2.8 billion--the second largest since 1971. According to USPS, this was largely due to declines in the economy, especially in the financial and housing sectors, as well as shifts in transactions, messages, and advertising from mail to electronic alternatives. Declining mail volume flattened revenues despite rate increases, while USPS's cost-cutting efforts were insufficient to offset the impact of declining mail volume and rising costs in fuel and cost-of-living allowances for postal employees. USPS's initial fiscal year 2009 budget expected that the turmoil in the economy would result in more mail volume decline and a loss of $3.0 billion. This testimony focuses on (1) USPS's financial condition and outlook and (2) options and actions for USPS to remain financially viable in the short and long term. It is based on GAO's past work and updated postal financial information. We asked USPS for comments on our statement. USPS generally agreed with the accuracy of our statement and provided technical comments, which we incorporated where appropriate.
USPS's financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year. Key results include: (1) accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces, and (2) accelerating losses after the first quarter, with a total loss of about $2 billion. USPS's updated fiscal year 2009 projections suggest the magnitude of the challenges it faces: (1) mail volume will decline by a record 22.7 billion pieces (11.2 percent),(2) a record $6.4 billion net loss and an unprecedented cash shortfall of $1.5 billion, assuming that cost-cutting targets of $5.9 billion are achieved, and (3) plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the $15 billion statutory limit. In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall. USPS's most immediate challenge is to dramatically reduce costs fast enough to meet its financial obligations. USPS has proposed that Congress give it financial relief of $25 billion over 8 years by changing the statutory mandate for funding its retiree health benefits. GAO recognizes the need for immediate financial relief, but prefers 2-year relief so that Congress can determine what further actions are needed. It is not clear that either option would be sufficient because USPS projects it will operate on a thin margin, risking a larger cash shortfall if it does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as fuel cost increases. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS's current effort is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS's business model and its ability to remain self-financing may be in jeopardy. Action is needed to streamline costs in two difficult areas: (1) compensation and benefits, which generate close to 80 percent of costs and (2) mail processing and retail networks, which have growing excess capacity. Closing postal facilities is controversial, but necessary, because the declining mail volume and growing deficits indicate that USPS cannot afford to maintain such an extensive network. Information will be critical to determine what other actions are needed, including options to cut costs as well as their impact on mail volume and mail users. It is also imperative to review mail use, what future postal services will be needed, and what options are available in many areas, including universal service, workforce costs, retail services, mail processing, delivery, transportation, and USPS's business model.
GAO-09-475T, U.S. Postal Service: Escalating Problems Require Major Cost Reductions to Limit Losses
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Testimony before the Subcommittee on Federal Workforce, Postal Service,
and the District of Columbia, Committee on Oversight and Government
Reform, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Wednesday, March 25, 2009:
U.S. Postal Service:
Escalating Financial Problems Require Major Cost Reductions to Limit
Losses:
Statement of Phillip Herr, Director:
Physical Infrastructure Issues:
GAO-09-475T:
GAO Highlights:
Highlights of GAO-09-475T, a hearing before the Subcommittee on Federal
Workforce, Postal Service, and the District of Columbia, Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
When Congress passed the Postal Accountability and Enhancement Act in
December 2006, the U.S. Postal Service (USPS) had just completed fiscal
year 2006 with its largest mail volume ever”213 billion pieces of mail
and a net income of $900 million. Two years later, USPS‘s financial
condition has deteriorated. Mail volume declined by a record 9.5
billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of
$2.8 billion”the second largest since 1971. According to USPS, this was
largely due to declines in the economy, especially in the financial and
housing sectors, as well as shifts in transactions, messages, and
advertising from mail to electronic alternatives. Declining mail volume
flattened revenues despite rate increases, while USPS‘s cost-cutting
efforts were insufficient to offset the impact of declining mail volume
and rising costs in fuel and cost-of-living allowances for postal
employees. USPS‘s initial fiscal year 2009 budget expected that the
turmoil in the economy would result in more mail volume decline and a
loss of $3.0 billion.
This testimony focuses on (1) USPS‘s financial condition and outlook
and (2) options and actions for USPS to remain financially viable in
the short and long term. It is based on GAO‘s past work and updated
postal financial information. We asked USPS for comments on our
statement. USPS generally agreed with the accuracy of our statement and
provided technical comments, which we incorporated where appropriate.
What GAO Found:
USPS‘s financial condition has continued to deteriorate in the first 5
months of fiscal year 2009 and USPS expects its financial condition to
continue deteriorating for the rest of the fiscal year. Key results
include:
* accelerating declines in mail volume after the first quarter, with a
total decline of about 11 billion pieces, and;
* accelerating losses after the first quarter, with a total loss of
about $2 billion.
USPS‘s updated fiscal year 2009 projections suggest the magnitude of
the challenges it faces:
* mail volume will decline by a record 22.7 billion pieces (11.2
percent),
* a record $6.4 billion net loss and an unprecedented cash shortfall of
$1.5 billion, assuming that cost-cutting targets of $5.9 billion are
achieved, and,
* plans to increase outstanding debt by $3 billion (the annual
statutory limit) to $10.2 billion, or two-thirds of the $15 billion
statutory limit.
In addition, USPS projects its financial difficulties will continue in
fiscal year 2010 and result in an even greater cash shortfall. USPS‘s
most immediate challenge is to dramatically reduce costs fast enough to
meet its financial obligations. USPS has proposed that Congress give it
financial relief of $25 billion over 8 years by changing the statutory
mandate for funding its retiree health benefits. GAO recognizes the
need for immediate financial relief, but prefers 2-year relief so that
Congress can determine what further actions are needed. It is not clear
that either option would be sufficient because USPS projects it will
operate on a thin margin, risking a larger cash shortfall if it does
not meet its ambitious cost-cutting goals, mail volume declines more
than projected, or unexpected costs materialize, such as fuel cost
increases.
Although USPS is taking unprecedented actions to cut costs,
comprehensive action beyond USPS‘s current effort is urgently needed to
maintain financial viability. Given the growing gap between revenues
and expenses, USPS‘s business model and its ability to remain self-
financing may be in jeopardy. Action is needed to streamline costs in
two difficult areas: (1) compensation and benefits, which generate
close to 80 percent of costs and (2) mail processing and retail
networks, which have growing excess capacity. Closing postal facilities
is controversial, but necessary, because the declining mail volume and
growing deficits indicate that USPS cannot afford to maintain such an
extensive network. Information will be critical to determine what other
actions are needed, including options to cut costs as well as their
impact on mail volume and mail users. It is also imperative to review
mail use, what future postal services will be needed, and what options
are available in many areas, including universal service, workforce
costs, retail services, mail processing, delivery, transportation, and
USPS‘s business model.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/products/GAO-09-475T]. For more
information, contact Phillip Herr at (202) 512-2834 or herrp@gao.gov.
[End of section]
Chairman Lynch, Ranking Member Chaffetz, and Members of the
Subcommittee:
I am pleased to be here today to participate in this oversight hearing
on the financial stability of the U.S. Postal Service (USPS). As
requested, my statement addresses the following:
1. USPS's financial condition and outlook.
2. Options and actions to help USPS remain financially viable in the
short and long term.
My statement is based on our testimony in January on USPS's financial
condition,[Footnote 1] other prior work, and updated information on
USPS's financial condition and outlook. We reviewed USPS's budget for
fiscal year 2009 and information on results for the fiscal year to
date, including preliminary data for January 2009, and met with senior
USPS officials. We conducted this performance audit in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
USPS's Financial Condition and Outlook Are Deteriorating:
USPS's financial condition has continued to deteriorate in the first 5
months of fiscal year 2009 and USPS expects its financial condition to
continue deteriorating for the rest of the fiscal year, including:
* accelerating declines in mail volume after the first quarter, with a
total decline of about 11 billion pieces; and:
* accelerating losses after the first quarter, with a total loss of
about $2 billion.
USPS has updated its projections for fiscal year 2009, projecting:
* a mail volume decline by a record 22.7 billion pieces (11.2 percent)
from fiscal year 2008;
* a record $6.4 billion net loss,[Footnote 2] and an unprecedented $1.5
billion cash shortfall (i.e., insufficient cash to cover expenses and
obligations), assuming cost-cutting targets of $5.9 billion[Footnote 3]
are achieved; and:
* plans to increase outstanding debt by $3 billion (the annual
statutory limit) to $10.2 billion, or two-thirds of the total $15
billion statutory limit.
USPS attributes much of its net loss this fiscal year to the economic
recession that has resulted in unprecedented declines in mail volume
and decreased revenues. Thus far in fiscal year 2009, First-Class Mail
volume (e.g., correspondence, bills, payments, and statements) dropped
about 9 percent, while Standard Mail volume (primarily advertising)
dropped about 15 percent. According to USPS, the housing market
downturn, the credit crisis, and lower retail sales have contributed to
these volume declines. The financial and housing sectors are major mail
users, mailing bills, statements, and advertising such as credit card,
mortgage, and home equity solicitations. Volume declines have
accelerated for both First-Class Mail and Standard Mail, as shown by
quarterly data (see figure 1) and results for January 2009 (see appendix
I).
Figure 1: Quarterly Changes in the Volume of First-Class Mail and
Standard Mail, Fiscal Year 2005 through the First Quarter of Fiscal
Year 2009:
[Refer to PDF for image: multiple line graph]
Q1, 2005:
First-Class Mail volume: 2.1%;
Standard Mail volume: 9.3%.
Q2, 2005:
First-Class Mail volume: -1.3%;
Standard Mail volume: 4.1%.
Q3, 2005:
First-Class Mail volume: 0.3%;
Standard Mail volume: 4.6%.
Q4, 2005:
First-Class Mail volume: -0.6%;
Standard Mail volume: 4.4%.
Q1, 2006:
First-Class Mail volume: -3.7%;
Standard Mail volume: 0.5%.
Q2, 2006:
First-Class Mail volume: 1.7%;
Standard Mail volume: 2.7%.
Q3, 2006:
First-Class Mail volume: 1.2%;
Standard Mail volume: 2.8%.
Q4, 2006:
First-Class Mail volume: -0.8%;
Standard Mail volume: 0.2%.
Q1, 2007:
First-Class Mail volume: -0.1%;
Standard Mail volume: 4.9%.
Q2, 2007:
First-Class Mail volume: -2.5%;
Standard Mail volume: 1.3%.
Q3, 2007:
First-Class Mail volume: -1.4%;
Standard Mail volume: -0.9%.
Q4, 2007:
First-Class Mail volume: -2.6%;
Standard Mail volume: -1.4%.
Q1, 2008:
First-Class Mail volume: -3.9%;
Standard Mail volume: -2.7%.
Q2, 2008:
First-Class Mail volume: -3.1%;
Standard Mail volume: -3.0%.
Q3, 2008:
First-Class Mail volume: -5.5%;
Standard Mail volume: -5.6%.
Q4, 2008:
First-Class Mail volume: -7.0%;
Standard Mail volume: -6.1%.
Q1, 2009:
First-Class Mail volume: -7.2%;
Standard Mail volume: -11.0%.
Source: USPS.
Note: Quarterly changes are from the same quarter of the prior fiscal
year. First-Class Mail volume does not include international First-
Class Mail.
[End of figure]
In addition, USPS projects its financial difficulties will continue in
fiscal year 2010 and result in an even greater cash shortfall at the
end of that fiscal year, despite plans for additional cost-cutting and
additional borrowing of $3 billion, which would bring USPS's total debt
to $13.2 billion. Thus, USPS's immediate problem is to generate
sufficient cash to remain financially viable in fiscal years 2009 and
2010.
Cost-Cutting Efforts and Rate Increases Have Not Fully Offset the
Impact of Volume Declines and Other Factors that Increased Costs:
USPS reports reducing expenses by $773 million in the first 5 months of
fiscal year 2009 (compared to the first 5 months of fiscal year 2008),
primarily through reductions of 50 million work hours that USPS made as
it adjusted to declining mail volumes and workload. USPS reduced
overtime and captured additional work hour savings as it reduced the
size of its workforce through attrition and implemented other cost-
saving initiatives. However, these savings and added revenue from rate
increases were insufficient to fully offset the impact of declines in
mail volume and rising costs from cost-of-living allowances (COLA)
provided to postal employees covered by union contracts, as well as
rising workers' compensation and retirement costs. Also, although
almost 8,500 employees accepted USPS's early retirement offer during
the first quarter of fiscal year 2009, the resulting savings to date
have been limited because the effective dates for the majority of these
retirements were December 31, 2008 or later.
USPS has high overhead (institutional) costs that are hard to change in
the short term, including providing 6-day delivery and retail services
at close to 37,000 post offices and retail facilities. Compensation and
benefits for USPS's workforce, which included about 646,000 career
employees[Footnote 4] and about 98,000 noncareer employees in February
2009, generate close to 80 percent of its costs. Collective bargaining
agreements with USPS's four largest unions include layoff protections
and work rules that constrain USPS's flexibility, as well as semiannual
COLAs linked to the Consumer Price Index (CPI) and employee benefits
including health and life insurance premium payments. Under these
agreements, which expire in 2010 or 2011:
* USPS paid 85 percent of employee health benefit premiums in fiscal
year 2007, about 13 percent more than the share for other federal
agencies. USPS's share is decreasing annually to 81 percent in 2011 or
80 percent in 2012, depending on the agreement.
* USPS pays 100 percent of employee life insurance premiums, about 67
percent more than most other federal agencies.
USPS pays 100 percent of both employee health benefit premiums and life
insurance premiums for its Postal Career Executive Service, which
included 724 executives in fiscal year 2008. Executives at comparable
grades in most other federal agencies do not receive such benefits.
USPS's Outlook Is Worsening, and USPS Projects a Cash Shortfall at the
End of the Fiscal Year:
USPS's financial outlook has continued to deteriorate during fiscal
year 2009. USPS has increased its estimate of losses in total mail
volume in fiscal year 2009 to 22.7 billion pieces (11.2 percent). As a
result, USPS now projects a net loss of $6.4 billion for fiscal year
2009, despite increasing its cost-cutting target to $5.9 billion for
the fiscal year. Based on these projections, USPS expects cash from
operations and borrowing will be insufficient to cover expenses at the
end of the fiscal year, with the shortfall projected to be $1.5
billion. This projected net loss and cash shortfall assumes USPS will
meet its cost-cutting target and factors in USPS's plans to borrow $3
billion.
USPS's Chief Financial Officer told us on March 16 that achieving
USPS's target to eliminate 100 million work hours this fiscal year will
be critical to achieving its goal of reducing costs by $5.9 billion. He
expressed guarded optimism that USPS can reach this ambitious cost-
cutting target, explaining that the target is difficult, but
achievable. He noted that USPS plans to continue efforts to reduce work
hours as it responds to mail volume declines, including reductions in
overtime and additional work hour savings achieved through attrition
and other initiatives. Additional USPS cost-saving efforts include:
* Implementing a service-wide hiring freeze and reducing staffing
levels for managers and other employees not covered by union agreements
by 15 percent at headquarters and 19 percent at the nine Area offices.
* Evaluating more than 93,000 city delivery carrier routes (more than
half of all city routes), eliminating about 2,500 city routes, and
adjusting many other city routes, which USPS expects will result in
saving about 3.2 million work hours in fiscal year 2009. An agreement
between USPS and the National Association of Letter Carriers to
expedite evaluation and adjustment of city delivery routes enabled this
progress.
* Consolidating excess capacity in mail processing and transportation
networks, including consolidating operations at some mail processing
facilities, moving some mail processing employees from the day shift to
evening hours, and streamlining transportation.
* Halting construction starts of new postal facilities.
To increase its revenues, USPS has increased rates, including a January
2009 increase for competitive products (e.g., Priority Mail and Express
Mail), and a planned May 2009 increase for market-dominant products
(e.g., First-Class Mail, Standard Mail, Periodicals, and some types of
Package Services). USPS has also introduced volume discounts,
negotiated service agreements, and added some enhancements to
competitive products since the Postal Accountability and Enhancement
Act of 2006 (PAEA) was enacted in 2006. However, these products
generated only about 11 percent of USPS's revenues and covered about 6
percent of its overhead costs in fiscal year 2008. USPS is considering
alternatives to try to increase First-Class Mail and Standard Mail
revenues.
USPS Recently Reported on the Service Quality of Many Market-Dominant
Products:
USPS will be challenged to achieve and maintain high-quality service as
it works to implement unprecedented cost-cutting measures. USPS
recently reported for the first time on the service quality of many
market-dominant postal products; thereby making important progress in
improving transparency and meeting the requirements of PAEA. USPS has
cautioned that limitations have affected the quality of new measurement
data and said that it will work to improve data quality. As table 1
shows, on-time delivery of all major types of market-dominant products
in the first quarter of fiscal year 2009 fell short of USPS's targets
for the full fiscal year.
Table 1: USPS Service Results Did Not Meet Targets in the First Quarter
of Fiscal Year 2009:
Type of market-dominant mail: First-Class Mail: single piece[A]: 1-day
delivery standard;
Percentage on time: Target: 96.5;
Percentage on time: Result: 95.6;
Shortfall: 0.9.
Type of market-dominant mail: First-Class Mail: single piece[A]: 2-day
delivery standard;
Percentage on time: Target: 94.0;
Percentage on time: Result: 91.9;
Shortfall: 2.1.
Type of market-dominant mail: First-Class Mail: single piece[A]: 3-to 5-
day delivery standard;
Percentage on time: Target: 92.7;
Percentage on time: Result: 85.7;
Shortfall: 7.0.
Type of market-dominant mail: First-Class Mail: bulk[B]: 1-day delivery
standard;
Percentage on time: Target: 96.5;
Percentage on time: Result: 91.2;
Shortfall: 5.3.
Type of market-dominant mail: First-Class Mail: bulk[B]: 2-day delivery
standard;
Percentage on time: Target: 94.0;
Percentage on time: Result: 87.8;
Shortfall: 6.2.
Type of market-dominant mail: First-Class Mail: bulk[B]: 3-to 5-day
delivery standard;
Percentage on time: Target: 92.7;
Percentage on time: Result: 84.2;
Shortfall: 8.5.
Type of market-dominant mail: International First-Class Mail: single
piece[C];
Percentage on time: Target: 94.0;
Percentage on time: Result: 86.2;
Shortfall: 7.8.
Type of market-dominant mail: Standard Mail[D]: Destination entry;
Percentage on time: Target: 90.0;
Percentage on time: Result: 87.4;
Shortfall: 2.6.
Type of market-dominant mail: Standard Mail[D]: End-to-end (i.e., not
destination entered);
Percentage on time: Target: 90.0;
Percentage on time: Result: 77.2;
Shortfall: 12.8.
Type of market-dominant mail: Standard Mail[D]: Periodicals[E];
Percentage on time: Target: 91.0;
Percentage on time: Result: 69.8;
Shortfall: 21.2.
Type of market-dominant mail: Standard Mail[D]: Package Services[F];
Percentage on time: Target: 90.0;
Percentage on time: Result: 64.7;
Shortfall: 25.3.
Source: USPS.
[A] Single-piece First-Class Mail was primarily measured by the
External First-Class Measurement System (EXFC), administered by a USPS
contractor. EXFC measures when test mail pieces (including letters,
postcards, and large envelopes) are deposited in collection boxes and
post office lobby chutes and received at various addresses. EXFC has
been expanded to cover the entire country but does not cover remittance
mail.
[B] Bulk First-Class Mail (i.e., mailings of at least 500 mail pieces
sent via First-Class Mail) was primarily measured by scanning barcodes
on letters deposited at some USPS mail processing facilities and
received at various addresses.
[C] Single-piece international mail, including outbound and inbound
mail, was primarily measured by an outside entity.
[D] Standard Mail was primarily measured by scanning barcodes on
letters deposited at some USPS mail processing facilities and received
at various addresses. Destination entry mail was entered at a USPS mail
processing facility that was generally closer to where the mail was
delivered.
[E] Measured periodicals included 46 publications that were mainly
weekly publications.
[F] Measured package services included single-piece Parcel Post, Media
Mail, library mail, and bound printed matter.
Note: For more information on the data and its limitations, see USPS
targets at [hyperlink, http://ribbs.usps.gov/index.cfm?page=targets]
and USPS results at [hyperlink,
http://www.usps.com/serviceperformance/].
[End of table]
To put these results into context, the timeliness of mail delivery is
an important part of USPS's mission of providing affordable, high-
quality universal postal services on a self-financing basis. USPS has
stated that service is at the heart of its brand and the key to
increasing its competitiveness and profitability.
Action Is Needed on Options to Preserve USPS's Financial Viability:
Action is needed on various options, as no single action will be
sufficient for USPS to remain financially viable in the short and long
term. The short-term challenge for USPS is to cut costs quickly enough
to offset the unprecedented volume and revenue declines so that it does
not run out of cash this fiscal year. The long-term challenge is to
restructure USPS's entire operations and networks to reflect the
changes in mail volume, mailer preferences, and USPS's capacity to
cover its costs. Based on USPS's poor financial condition and outlook,
the time to take action is relatively short, and USPS's business model
[Footnote 5] and its ability to remain self-financing may be in
jeopardy.
A key factor in determining USPS's financial viability is whether mail
volume will rebound sufficiently once the economy improves, as volume
has done in the past, so that USPS revenues will cover costs (see
figure 2).
Figure 2: Quarterly Changes in Total Mail Volume, Fiscal Years 1989
through 2009:
[Refer to PDF for image: line graph]
Indicated on the graph is the percentage change in total mail volume
from fiscal year 1989 through 2009. The following recession periods are
noted:
1991;
2001;
2008-2009.
Also noted on the graph are the following rate increases and the dates
those increases occurred. Significant volume decreases occurred with
each rate increase:
Date of rate increase: 2/3/91;
Amount of rate increase: 19.9%.
Date of rate increase: 1/1/95;
Amount of rate increase: 10.2%.
Date of rate increase: 1/1/99;
Amount of rate increase: 2.8%.
Date of rate increase: 1/7/07;
Amount of rate increase: 4.6%.
Date of rate increase: 7/1/01;
Amount of rate increase: 1.6%.
Date of rate increase: 7/30/02;
Amount of rate increase: 7.7%.
Date of rate increase: 1/8/06;
Amount of rate increase: 5.0%.
Date of rate increase: 5/13/07;
Amount of rate increase: 7.6%.
Date of rate increase: 5/13/08;
Amount of rate increase: 3.0%.
Sources: USPS (mail volume); Postal Regulatory Commission (average rate
increase); National Bureau of Economic Research (recession periods).
Note: Quarterly changes are from the same quarter of the prior fiscal
year.
[End of figure]
As the Postal Regulatory Commission (PRC) noted in December 2008,
current pressures from declining volume and revenue do not appear to be
abating, but rather, seem to be increasing. During the economic
downturn, there has been accelerated diversion of business and
individual mail to electronic alternatives, and some mailers have left
the mail entirely. An economic recovery may not stimulate the same
rebound in mail volume as in the past, because of changes in how people
communicate and use the mail. Specifically:
* First-Class Mail volume has declined in recent years and is expected
to decline for the foreseeable future as businesses, nonprofit
organizations, governments, and households continue to move to
electronic alternatives, such as Internet bill payment, automatic
deduction, and direct deposit. USPS's analysis has found that
electronic diversion is associated with the growing adoption of
broadband technology. As PRC reported, the availability of alternatives
to mail eventually impacts mail volume.
* It is unclear whether Standard Mail will grow with an economic
recovery. Standard Mail now faces growing competition from electronic
alternatives, such as Internet-based search engine marketing, e-mail
offers, and advertisements on Web sites. The average rate increase for
Standard Mail is limited by the price cap to the increase in the
Consumer Price Index, but future rate increases will likely have some
impact on volume.
Options to Assist USPS through Its Short-Term Difficulties:
Options to assist USPS through its short-term difficulties--some of
which would require congressional action--include:
* Reduce USPS payments for retiree health benefits for 8 years: USPS
has proposed that Congress change the statutory obligation to pay
retiree health benefits premiums for current retirees from USPS to the
Postal Service Retiree Health Benefits Fund (Fund) for the next 8
years. This proposal would also reduce USPS's expenses through 2016 by
an estimated $25 billion--with $2 billion in fiscal year 2009, $2.3
billion in fiscal year 2010, and the remaining annual expenses
increasing from $2.6 billion to $4.2 billion over the remaining 6
years. This proposal is poorly matched to alleviate USPS's immediate
projected cash shortfalls. In addition, this proposal would reduce the
Fund balance by an estimated $32 billion (including interest charges)
by 2016,[Footnote 6] so that in 2017, the remaining current unfunded
obligation would be an estimated $75 billion (rather than $43 billion)
to be amortized for future payments. This large obligation would create
the risk that USPS would have difficulty making future payments,
particularly considering mail volume trends and the impact of payments
on postal rates if volume declines continue. USPS's proposal also would
shift responsibility for these benefits from current to future rate
payers.
* Reduce USPS payments for retiree health benefits for 2 years: Another
option would be for Congress to revise USPS's statutory obligation so
that the Fund, not USPS, would pay for current retiree health benefits
for only 2 years (fiscal years 2009 and 2010), which would provide USPS
with $4.3 billion in relief. We support this option because it would
have much less impact on the Fund and it would allow Congress to
revisit USPS's financial condition to determine if further relief is
needed and review actions USPS has taken in 2009 and 2010 to improve
its viability. Relief from retiree health premium costs is no
substitute for aggressive USPS action--beyond current efforts--to
dramatically reduce costs and improve efficiency.
It is not clear that either of these options would be sufficient,
because USPS projects it will operate on a thin margin. This means that
even if such relief is provided, a cash shortfall could develop in
either fiscal year 2009 and/or 2010 if USPS does not meet its ambitious
cost-cutting goals, mail volume declines more than projected, or
unexpected costs materialize, such as unexpected increases in fuel
costs.
One option that would not require congressional action would be for
USPS and its unions to continue their dialogue and agree on ways to
achieve additional short-term savings, such as by modifying rules to
facilitate reducing work hours. Such labor-management cooperation is
critical to USPS's ability to make immediate changes in order to
achieve cost reductions.
Other available options, based on statutory provisions, could include
(1) seeking PRC approval for an exigent rate increase[Footnote 7] and
(2) increasing USPS's annual borrowing limit. First, USPS could request
PRC approval for an exigent rate increase that would increase rates for
market-dominant classes of mail above the statutory price cap. Mailers
have voiced strong concern about the potential impact of such a rate
increase on their businesses. In our view, this option should be a last
resort. It could be self-defeating for USPS in both the short and long
term because it could increase incentives for mailers to further reduce
their use of the mail. Second, Congress could temporarily raise the
statutory $3 billion annual limit on increases in USPS's debt, which
would provide USPS with funding if needed. This option would be
preferable to an exigent rate increase. However, it is unclear when
USPS would repay any added debt, which would quicken USPS's movement
toward its $15 billion statutory debt limit. In our view, this option
should be regarded only as an emergency stop-gap measure.
Comprehensive Action Is Urgently Needed on Options to Keep USPS Viable:
Although USPS is taking unprecedented actions to cut costs,
comprehensive action beyond USPS's current efforts is urgently needed
to maintain financial viability. Given the growing gap between revenues
and expenses, USPS's business model and its ability to remain self-
financing may be in jeopardy. Progress in many areas will be needed so
that USPS can cover operating expenses and maintain and modernize its
infrastructure.
I want to emphasize that action is urgently needed to streamline USPS's
costs in two areas where it has been particularly difficult--
compensation and benefits and the mail processing and retail networks.
We have reported for many years that USPS needs to right size its
workforce and realign its network of mail processing and retail
facilities. USPS has made some progress, particularly by reducing its
workforce by more than 100,000 employees since 2000 with no layoffs and
by closing some smaller mail processing facilities. Yet, as USPS
recognizes, more needs to be done. USPS no longer has sufficient
revenue to cover the cost of maintaining its large network of
processing and retail facilities. Closing postal facilities would be
controversial, but is necessary to streamline costs. Congress
encouraged USPS to expeditiously move forward in its streamlining
efforts in PAEA, and its continued support would be helpful to
facilitate progress in this area. We recommended that USPS enhance the
transparency and strengthen the accountability of its realignment
efforts to assure stakeholders that realignment would be implemented
fairly, preserve access to postal services, and achieve the desired
results. USPS has taken steps to address our recommendations and, thus,
should be positioned to take action.
In addition, it is imperative for USPS and Congress to take informed
action to review mail use, what future postal services will be needed,
and what operational and statutory options are available to provide
those services. Key areas with options include:
* Universal Postal Service: A recently completed PRC study identified
options for universal service and trade-offs involving quality and
costs.[Footnote 8] When USPS asked Congress in January 2009 to
eliminate the long-standing statutory provision mandating 6-day
delivery, it provided little information on where it would reduce
delivery frequency, and the potential impact on cost, mail volume,
revenue, and mail users. Because the number of delivery days is
fundamental to universal service, Congress should have more complete
information before it considers any statutory changes in this area. A
mechanism to obtain such information would be for USPS to request an
advisory opinion from PRC, which would lead to a public proceeding that
could generate information on USPS's request and stakeholder input.
[Footnote 9]
* USPS workforce costs: USPS's ability to control wage and benefit
costs will be critical to cost-saving efforts. One option would be for
USPS and its unions to negotiate changes to wages and benefits that
apply to employees covered by collective bargaining agreements. USPS
will begin negotiating next year with two of its major unions, whose
agreements will expire in November 2010, and the following year with
its other two major unions, whose agreements expire in November 2011.
* Retail postal service: USPS has alternatives to provide lower-cost
retail services than in traditional post offices, such as contract
postal facilities, carrier pick-up of packages, and selling stamps at
supermarkets, drug stores, and by telephone, mail, and the Internet.
USPS's retail network has been largely static, despite the expansion of
alternatives, population shifts, and changes in mailing behavior. We
have reported that USPS could close unnecessary retail facilities and
lower its network costs.[Footnote 10] It is important to note that
large retail facilities--generally located in large urban areas where
more postal retail alternatives are available--generate much higher
costs than the smallest rural facilities and may, therefore,
potentially generate more cost savings.
* Mail processing: USPS has several options for realigning its mail
processing operations to eliminate growing excess capacity and
associated costs, but has taken only limited action. In 2005, we
reported that, according to USPS officials, declining mail volume,
worksharing, and the evolution of mail processing operations from
manual to automated equipment has led to excess capacity that has
impeded efficiency gains.[Footnote 11] USPS has terminated operations
at 58 Airport Mail Centers in recent years, but has closed only 1 of
over 400 major mail processing facilities.[Footnote 12] As USPS
consolidates its operations, it needs to consider how it can best use
its facilities, if it is cost effective to retain ones that are
underutilized, and take the actions necessary to right size its
network.
* Transportation: Various options exist for reducing USPS's
transportation costs beyond its current streamlining efforts. For
example, a joint USPS-mailer workgroup has identified a destination
entry discount for First-Class Mail as an option that could reduce the
need for USPS to provide long-distance transportation and some mail
processing.[Footnote 13] USPS could publicly provide its analysis of
the potential savings and the impact of such a discount.
* Delivery: USPS has various options for reducing delivery costs by
continuing to realign delivery routes, implementing efficiency
initiatives, and making more fundamental changes to delivery
operations, such as delivering mail to more cost-effective receptacles,
including cluster boxes.
* USPS's business model: We will discuss options to change USPS's
business model in a report that PAEA requires us to issue by December
2011.
Given USPS's projection that it faces record losses and cash
shortfalls, it is important for USPS to continue providing Congress and
the public with timely and sufficiently detailed information to
understand USPS's current financial situation and outlook. Such
information is essential to help congressional policymakers understand
USPS actions and plans to maintain its financial viability in both the
short and long term, particularly in view of proposals to give USPS
financial relief from some retiree health benefit costs. Recently USPS
took steps in this direction by providing monthly financial information
to the PRC, which then made this information publicly available.
We asked USPS to comment on a draft of our testimony. USPS generally
agreed with the accuracy of our statement and provided technical
comments, which we incorporated where appropriate.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to answer any questions that you or the Members of the Subcommittee may
have.
Contact and Acknowledgments:
For further information regarding this statement, please contact
Phillip Herr at (202) 512-2834 or herrp@gao.gov. Individuals who made
key contributions to this statement include Shirley Abel, Teresa
Anderson, David Hooper, Kenneth John, Emily Larson, Joshua Ormond,
Susan Ragland, and Crystal Wesco.
[End of section]
Appendix I: Preliminary U.S. Postal Service Mail Volume and Revenue for
January 2009 and the First 4 Months of Fiscal Year 2009:
(Volume and revenue data in thousands).
First-Class Mail: Volume;
Jan. 2009: 7,641,364;
Jan. 2008: 8,546,159;
Percentage change: -10.6%;
FY 2009 through Jan. 2009: 30,350,690;
FY 2008 through Jan. 2008: 33,030,574;
Percentage change: -8.1%.
First-Class Mail: Revenue;
Jan. 2009: $3,182,690;
Jan. 2008: $3,477,810;
Percentage change: -8.5%;
FY 2009 through Jan. 2009: $12,836,527;
FY 2008 through Jan. 2008: $13,656,481;
Percentage change: -6.0%.
Standard Mail: Volume;
Jan. 2009: 6,566,304;
Jan. 2008: 8,451,862;
Percentage change: -22.3%;
FY 2009 through Jan. 2009: 31,174,125;
FY 2008 through Jan. 2008: 36,086,078;
Percentage change: -13.6%.
Standard Mail: Revenue;
Jan. 2009: $1,374,231;
Jan. 2008: $1,749,154;
Percentage change: -21.4%;
FY 2009 through Jan. 2009: $6,501,587;
FY 2008 through Jan. 2008: $7,493,397;
Percentage change: -13.2%.
Periodicals: Volume;
Jan. 2009: 652,330;
Jan. 2008: 753,782;
Percentage change: -13.5%;
FY 2009 through Jan. 2009: 2,777,442;
FY 2008 through Jan. 2008: 2,955,817;
Percentage change: -6.0%.
Periodicals: Revenue;
Jan. 2009: $160,629;
Jan. 2008: $193,016;
Percentage change: -16.8%;
FY 2009 through Jan. 2009: $725,531;
FY 2008 through Jan. 2008: $796,818;
Percentage change: -8.9%.
Package Services: Volume;
Jan. 2009: 69,018;
Jan. 2008: 80,885;
Percentage change: -14.7%;
FY 2009 through Jan. 2009: 284,318;
FY 2008 through Jan. 2008: 316,020;
Percentage change: -10.0%.
Package Services: Revenue;
Jan. 2009: $159,220;
Jan. 2008: $171,474;
Percentage change: -7.1%;
FY 2009 through Jan. 2009: $659,364;
FY 2008 through Jan. 2008: $697,026;
Percentage change: -5.4%.
Subtotal, Market-dominant products[A]: Volume;
Jan. 2009: 14,968,479;
Jan. 2008: 17,880,497;
Percentage change: -16.3%;
FY 2009 through Jan. 2009: 64,771,862;
FY 2008 through Jan. 2008: 72,790,013;
Percentage change: -11.0%.
Subtotal, Market-dominant products[A]: Revenue;
Jan. 2009: $5,167,465;
Jan. 2008: $5,910,707;
Percentage change: -12.6%;
FY 2009 through Jan. 2009: $21,927,980;
FY 2008 through Jan. 2008: $23,905,935;
Percentage change: -8.3%.
Competitive products[B]: Volume;
Jan. 2009: 112,015;
Jan. 2008: 131,041;
Percentage change: -14.5%;
FY 2009 through Jan. 2009: 512,535;
FY 2008 through Jan. 2008: 578,773;
Percentage change: -11.4%.
Competitive products[B]: Revenue;
Jan. 2009: $634,730;
Jan. 2008: $668,827;
Percentage change: -5.1%;
FY 2009 through Jan. 2009: $2,974,829;
FY 2008 through Jan. 2008: $3,051,239;
Percentage change: -2.5%.
Total: Volume;
Jan. 2009: 15,080,494;
Jan. 2008: 18,011,538;
Percentage change: -16.3%;
FY 2009 through Jan. 2009: 65,284,397;
FY 2008 through Jan. 2008: 73,368,786;
Percentage change: -11.0%.
Total: Revenue;
Jan. 2009: $5,802,195;
Jan. 2008: $6,579,534;
Percentage change: -11.8%;
FY 2009 through Jan. 2009: $24,902,808;
FY 2008 through Jan. 2008: $26,957,175;
Percentage change: -7.6%.
Source: U.S. Postal Service.
Note: January 2009 data are preliminary. For data limitations, see
[hyperlink, http://www.prc.gov/Docs/62/62499/PFI-Jan2009-MV-MR-Jan2009-
PE-Jan2009-PW-Jan2009.pdf]. Subtotals for market-dominant products are
greater than the types of market-dominant mail in this table because
data for some market-dominant mail (U.S. Postal Service mail and Free
Mail for the Blind) are not shown.
[A] Market-dominant products primarily include First-Class Mail--
domestic and international single-piece mail (e.g., bill payments and
letters) and domestic bulk mail (e.g., bills and advertising); Standard
Mail (mainly bulk advertising and direct mail solicitations),
periodicals (mainly magazines and local newspapers), some types of
package services (primarily single-piece Parcel Post, Media Mail,
library mail, and bound printed matter). Market-dominant revenues also
include revenues from services such as post office boxes and Delivery
Confirmation.
[B] Competitive products primarily include Express Mail; Priority Mail;
bulk Parcel Post, which the Postal Service calls Parcel Select; and
bulk international mail. The Postal Service did not report separate
data for each competitive product, which the Postal Service considers
to be proprietary.
[End of table]
[End of section]
Footnotes:
[1] GAO, U.S. Postal Service: Deteriorating Postal Finances Require
Aggressive Actions to Reduce Costs, [hyperlink,
http://www.gao.gov/products/GAO-09-332T] (Washington, D.C.: Jan. 28,
2009).
[2] USPS lost $2.8 billion in fiscal year 2008--its second-largest
annual loss since 1971.
[3] USPS previously reported on Feb. 23, 2009, that it had set a cost-
cutting target of $5.9 billion over 2 years (fiscal years 2009 and
2010).
[4] USPS career employees, most of whom are full-time, have permanent
positions.
[5] Under its current business model, USPS can earn profits to remain
self-supporting from postal revenue, which historically has grown with
rising mail volume to help offset rising costs and help keep postal
rates affordable. Mail volume has declined since fiscal year 2006,
calling into question the assumption that volume growth and
productivity increases will help sustain USPS's business model.
[6] USPS would continue making required annual payments of $5.4 billion
to $5.8 billion for future retiree health benefits for fiscal years
2009 to 2016. For the schedule of retiree health benefit payments for
current and future retirees, see table 1 of GAO-09-332T.
[7] An exigent rate increase is a rate increase for market-dominant
products that exceeds the price cap due to extraordinary or exceptional
circumstances.
[8] PRC, Report on Universal Postal Service and the Postal Monopoly
(Washington, D.C.: Dec. 19, 2008).
[9] When USPS determines that there should be a change in the nature of
postal services which will generally affect service on a nationwide or
substantially nationwide basis, it is required to submit a proposal to
the PRC that requests an advisory opinion on that change within a
reasonable time period prior to the change. PRC is required to hold a
hearing on the proposal before issuing its written opinion. 39 U.S.C. §
3661.
[10] GAO, U.S. Postal Service Facilities: Improvements in Data Would
Strengthen Maintenance and Alignment of Access to Retail Services,
[hyperlink, http://www.gao.gov/products/GAO-08-41] (Washington, D.C.:
Dec. 10, 2007).
[11] GAO, U.S. Postal Service: The Service's Strategy for Realigning
Its Mail Processing Infrastructure Lacks Clarity, Criteria, and
Accountability, [hyperlink, http://www.gao.gov/products/GAO-05-261]
(Washington, D.C.: Apr. 8, 2005).
[12] GAO, U.S. Postal Service: USPS Has Taken Steps to Strengthen
Network Realignment Planning and Accountability and Improve
Communication, [hyperlink, http://www.gao.gov/products/GAO-08-1022T]
(Washington, D.C.: July 24, 2008).
[13] Destination entry involves mailers depositing mail at a USPS
facility that is generally closer to the final destination of the mail,
bypassing some USPS transportation and processing activities.
[End of section]
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