High Risk Series
Restructuring the U.S. Postal Service to Achieve Sustainable Financial Viability Gao ID: GAO-09-937SP July 28, 2009GAO is adding the U.S. Postal Service's (USPS) financial condition to the list of high-risk areas needing attention by Congress and the executive branch to achieve broad-based transformation. Amid challenging economic conditions and a changing business environment, USPS is facing a deteriorating financial situation in which it does not expect to cover its expenses and financial obligations in fiscal years 2009 and 2010. This year, USPS expects to increase its year-end debt to $10.2 billion and incur a cash shortfall of about $1 billion. Another key risk factor is the accelerated decline in mail volume. Mail volume declined by 9.5 billion pieces in fiscal year 2008 to about 203 billion pieces. As of the end of May 2009, mail volume had decreased another 18.5 billion pieces, and USPS expects to end fiscal year 2009 with mail volume of 175 billion pieces--about 28 billion pieces fewer than in fiscal year 2008. Further, it expects flat or continued volume and revenue declines over the next 5 years. These trends expose weaknesses in USPS's business model, which has relied on growth in mail volume to help cover costs and enable USPS to be self-supporting.
USPS urgently needs to restructure to address its current and long-term financial viability. USPS has not been able to cut costs fast enough to offset the accelerated decline in mail volume and revenue--particularly costs related to its workforce, retail and processing networks, and delivery services. To achieve financial viability, USPS must align its costs with revenues, generate sufficient earnings to finance capital investment, and manage its debt. Mail use has been changing over the past decade as businesses and consumers have moved to electronic communication and payment alternatives. Mail volume decline has accelerated with the recession, particularly among major users in the advertising, financial, and housing sectors. Mail volume has typically returned after recessions, but USPS's 5-year forecast suggests that much of the recent volume decline will not return. Action is needed in multiple areas, including possible action and support by Congress; no single change will be sufficient to address USPS's challenges. (1) The short-term challenge for USPS is to cut costs quickly enough to offset volume and revenue declines, so that it can cover its operating expenses. (2) The long-term challenge is to restructure USPS operations, networks, and workforce to reflect changes in mail volume, revenue, and use of mail.
GAO-09-937SP, High Risk Series: Restructuring the U.S. Postal Service to Achieve Sustainable Financial Viability (New)
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GAO-09-937SP:
July 2009:
High-Risk Series:
Restructuring the U.S. Postal Service to Achieve Sustainable Financial
Viability (New):
GAO Highlights:
Highlights of GAO-09-937SP, an addition to GAO‘s January 2009 High-Risk
Series. For additional information about this high-risk area, contact
Phillip Herr at (202) 512-2834 or herrp@gao.gov.
Why Area is Important:
GAO is adding the U.S. Postal Service's (USPS) financial condition to
the list of high-risk areas needing attention by Congress and the
executive branch to achieve broad-based transformation. Amid
challenging economic conditions and a changing business environment,
USPS is facing a deteriorating financial situation in which it does not
expect to cover its expenses and financial obligations in fiscal years
2009 and 2010. This year, USPS expects to increase its year-end debt to
$10.2 billion and incur a cash shortfall of about $1 billion (see
table).
Another key risk factor is the accelerated decline in mail volume. Mail
volume declined by 9.5 billion pieces in fiscal year 2008 to about 203
billion pieces. As of the end of May 2009, mail volume had decreased
another 18.5 billion pieces, and USPS expects to end fiscal year 2009
with mail volume of 175 billion pieces--about 28 billion pieces fewer
than in fiscal year 2008. Further, it expects flat or continued volume
and revenue declines over the next 5 years. These trends expose
weaknesses in USPS's business model, which has relied on growth in mail
volume to help cover costs and enable USPS to be self-supporting.
Addressing USPS's financial viability is critical as USPS plays a vital
role in the U.S. economy and in providing postal services to all
communities. Moreover, it is the largest civilian federal agency,
employing about 633,000 career and 94,000 noncareer employees and
operating a total of about 38,000 facilities nationwide.
What GAO Is Designating This Area as High Risk:
USPS urgently needs to restructure to address its current and long-term
financial viability. USPS has not been able to cut costs fast enough to
offset the accelerated decline in mail volume and revenue, --
particularly costs related to its workforce, retail and processing
networks, and delivery services. To achieve financial viability, USPS
must align its costs with revenues, generate sufficient earnings to
finance capital investment, and manage its debt.
Table: USPS's Financial Results and Projections, Fiscal Years 2006
through 2010:
Fiscal year: 2006;
Net income (loss): $0.9 billion;
Year-end cash: $1.0 billion;
Year-end debt: $2.1 billion.
Fiscal year: 2007;
Net income (loss): ($5.1 billion);
Year-end cash: $0.9 billion;
Year-end debt: $4.2 billion.
Fiscal year: 2008;
Net income (loss): ($2.8 billion);
Year-end cash: $1.4 billion;
Year-end debt: $7.2 billion.
Fiscal year: 2009 (projected);
Net income (loss): ($7.0 billion);
Year-end cash: ($1.0 billion);
Year-end debt: $10.2 billion.
Fiscal year: 2010 (projected);
Net income (loss): ($7.0 billion);
Year-end cash: ($4.5 billion);
Year-end debt: $13.2 billion.
Source: USPS.
Note: Cash projections assume cost savings of $5.9 billion in 2009 and
$8 billion in 2010 and no relief from retiree health benefits payments.
[End of table]
Mail use has been changing over the past decade as businesses and
consumers have moved to electronic communication and payment
alternatives. Mail volume decline has accelerated with the recession,
particularly among major users in the advertising, financial, and
housing sectors. Mail volume has typically returned after recessions
(see figure), but USPS's 5-year forecast suggests that much of the
recent volume decline will not return.
Figure: Quarterly Changes in Total Mail Volume, Fiscal Year 1989
through March 2009:
[Refer to PDF for image: line graph]
Fiscal year: 1989 Q1: 2.1%.
Fiscal year: 1989 Q2: 1.1%.
Fiscal year: 1989 Q3: 0.3%.
Fiscal year: 1989 Q4: 0.8%.
Fiscal year: 1990 Q1[A]: 0%.
Fiscal year: 1990 Q2[A]: 2.7%.
Fiscal year: 1990 Q3[A]: 3.4%.
Fiscal year: 1990 Q4[A]: 5.5%.
Fiscal year: 1991 Q1: 4.2%.
Fiscal year: 1991 Q2: 1%.
Fiscal year: 1991 Q3: -2.3%.
Fiscal year: 1991 Q4: -3.7%.
Fiscal year: 1992 Q1: -2.7%.
Fiscal year: 1992 Q2: -2.2%.
Fiscal year: 1992 Q3: 0.8%.
Fiscal year: 1992 Q4: 2.9%.
Fiscal year: 1993 Q1: 2.2%.
Fiscal year: 1993 Q2: 3.4%.
Fiscal year: 1993 Q3: 5%.
Fiscal year: 1993 Q4: 2.3%.
Fiscal year: 1994 Q1: 2.8%.
Fiscal year: 1994 Q2: 3.2%.
Fiscal year: 1994 Q3: 4%.
Fiscal year: 1994 Q4: 4.3%.
Fiscal year: 1995 Q1: 5%.
Fiscal year: 1995 Q2: 3%.
Fiscal year: 1995 Q3: 1.6%.
Fiscal year: 1995 Q4: -0.6%.
Fiscal year: 1996 Q1: 0.3%.
Fiscal year: 1996 Q2: 0.9%.
Fiscal year: 1996 Q3: 1.8%.
Fiscal year: 1996 Q4: 2.2%.
Fiscal year: 1997 Q1: 3.2%.
Fiscal year: 1997 Q2: 3.8%.
Fiscal year: 1997 Q3: 4.5%.
Fiscal year: 1997 Q4: 4.6%.
Fiscal year: 1998 Q1: 3.1%.
Fiscal year: 1998 Q2: 2.5%.
Fiscal year: 1998 Q3: 4%.
Fiscal year: 1998 Q4: 4.4%.
Fiscal year: 1999 Q1: 4.2%.
Fiscal year: 1999 Q2: 2.6%.
Fiscal year: 1999 Q3: 2.1%.
Fiscal year: 1999 Q4: 1.2%.
Fiscal year: 2000 Q1: 1.3%.
Fiscal year: 2000 Q2: 3.2%.
Fiscal year: 2000 Q3: 4.1%.
Fiscal year: 2000 Q4: 2.6%.
Fiscal year: 2001 Q1[A]: 3.3%.
Fiscal year: 2001 Q2[A]: 0.8%.
Fiscal year: 2001 Q3[A]: -0.4%.
Fiscal year: 2001 Q4[A]: 0.1%.
Fiscal year: 2002 Q1: -5.5%.
Fiscal year: 2002 Q2: -3.4%.
Fiscal year: 2002 Q3: -2.5%.
Fiscal year: 2002 Q4: -1.4%.
Fiscal year: 2003 Q1: 1.5%.
Fiscal year: 2003 Q2: 0%.
Fiscal year: 2003 Q3: -0.2%.
Fiscal year: 2003 Q4: -1.8%.
Fiscal year: 2004 Q1: -0.3%.
Fiscal year: 2004 Q2: 2.7%.
Fiscal year: 2004 Q3: 2%.
Fiscal year: 2004 Q4: 3.5%.
Fiscal year: 2005 Q1: 5.9%.
Fiscal year: 2005 Q2: 1.3%.
Fiscal year: 2005 Q3: 2.4%.
Fiscal year: 2005 Q4: 1.7%.
Fiscal year: 2006 Q1: -1.5%.
Fiscal year: 2006 Q2: 2.2%.
Fiscal year: 2006 Q3: 2.3%.
Fiscal year: 2006 Q4: -0.1%.
Fiscal year: 2007 Q1: 2.4%.
Fiscal year: 2007 Q2: -0.6%.
Fiscal year: 2007 Q3[A]: -1.3%.
Fiscal year: 2007 Q4[A]: -2.1%.
Fiscal year: 2008 Q1[A]: -3%.
Fiscal year: 2008 Q2[A]: -3.3%.
Fiscal year: 2008 Q3[A]: -5.5%.
Fiscal year: 2008 Q4[A]: -6.3%.
Fiscal year: 2009 Q1[A]: -9.3%.
Fiscal year: 2009 Q2[A]: -14.7%.
Sources: USPS (mail volume); National Bureau of Economic Research
(recession periods).
[A] Recession period.
[End of figure]
Action is needed in multiple areas, including possible action and
support by Congress; no single change will be sufficient to address
USPS's challenges.
* The short-term challenge for USPS is to cut costs quickly enough to
offset volume and revenue declines, so that it can cover its operating
expenses.
* The long-term challenge is to restructure USPS operations, networks,
and workforce to reflect changes in mail volume, revenue, and use of
mail.
USPS has had difficulty reducing costs in two areas due to limited
flexibility.
First, in regard to compensation and benefits, which compose about 80
percent of costs, USPS has a window of opportunity to reduce the cost
and size of its workforce, through attrition and the large number of
upcoming retirements, to minimize the need for layoffs. To make changes
in this area, USPS will need to negotiate with its four largest unions
on collective bargaining agreements that will expire in 2010 and 2011.
These agreements cover about 85 percent of postal employees and include
items such as cost-of-living adjustments, work rules, and layoff
protections. USPS also consults on pay and benefits with three
management associations representing most of its other employees.
Second, USPS also needs to optimize its retail, mail processing, and
delivery networks to eliminate growing excess capacity and maintenance
backlogs, reduce costs, and improve efficiency. USPS has made limited
progress in optimizing its networks.
Key actions USPS could take include the following:
1. Reduce compensation and benefit costs through:
* retirements: About 162,000 USPS employees are eligible to retire this
year, which will increase to almost 300,000 within the next 4 years.
* early retirements: About 150,000 USPS employees were recently offered
voluntary early retirement, but less than 3 percent accepted.
* lower benefit costs: USPS pays a higher percentage of employee health
benefit premiums than other federal agencies (80 percent versus 72
percent, respectively). In addition, USPS pays 100 percent of employee
life insurance premiums, while other federal agencies pay about 33
percent.
2. Consolidate retail and processing networks:
* Remove excess capacity in the 400 mail processing facilities
nationwide, where processing capacity for First-Class Mail exceeds
processing needs by 50 percent.
* Maximize use of lower-cost retail alternatives: A growing amount of
USPS retail revenue comes through alternate channels, such as stamps
bought by mail, on the Internet, and at grocery stores.
* Reduce the network of 37,000 retail facilities, where maintenance has
been underfunded for years, resulting in deteriorating facilities and a
maintenance backlog.
3. Consolidate field structure: Review need for 74 district offices and
9 area offices.
* Generate revenue through new or enhanced products: Use its pricing
and product flexibility to maximize profitable mail volume.
Other actions that USPS has proposed that would require congressional
approval include the following:
1. Change funding requirements for retiree health benefits: USPS has
asked Congress to revise the funding requirements for its retiree
health benefit obligation as it does not expect to make the full amount
of its $5.4 billion retiree health benefit payment at the end of this
fiscal year due to a cash shortage.
2. Realign delivery services with changing use of mail: USPS has asked
Congress to allow it to reduce delivery from 6 to 5 days per week as
its revenue per delivery has declined 20 percent from fiscal year 2000
to fiscal year 2009, as have pieces of mail delivered per address.
Suggested Next Steps:
To address its short-and long-term challenges, USPS should develop and
implement a broad restructuring plan--with input from the Postal
Regulatory Commission and other stakeholders and approval by Congress
and the administration--that includes key milestones and time frames
for actions, addresses key issues, and identifies what steps Congress
and other stakeholders may need to take.
USPS's restructuring plan should address how it plans to:
* realign postal services, such as delivery frequency, delivery
standards, and access to retail services, with changes in the use of
mail by consumers and businesses;
* better align costs and revenues, including compensation and benefit
costs;
* optimize its operations, networks, and workforce;
* increase mail volumes and revenues; and:
* retain earnings, so that it can finance needed capital investments
and repay its growing debt.
End of section]
Related GAO Products:
U.S. Postal Service: Network Rightsizing Needed to Help Keep USPS
Financially Viable. [hyperlink,
http://www.gao.gov/products/GAO-09-674T]. Washington, D.C.: May 20,
2009.
U.S. Postal Service: Escalating Financial Problems Require Major Cost
Reductions to Limit Losses. [hyperlink,
http://www.gao.gov/products/GAO-09-475T]. Washington, D.C.: March 25,
2009.
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.: January 28,
2009.
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.
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.: December 10, 2007.
U.S. Postal Service: Mail Processing Realignment Efforts Under Way Need
Better Integration and Explanation. [hyperlink,
http://www.gao.gov/products/GAO-07-717]. Washington, D.C.: June
21, 2007.
U.S. Postal Service: Delivery Performance Standards, Measurement, and
Reporting Need Improvement. [hyperlink,
http://www.gao.gov/products/GAO-06-733]. Washington, D.C.: July 27,
2006.
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.:
April 8, 2005.
[End of section]
