U.S. Postal Service
Legislation Needed to Address Key Challenges Gao ID: GAO-11-244T December 2, 2010The U.S. Postal Service's (USPS) financial condition and outlook deteriorated sharply during fiscal years 2007 through 2009. USPS actions to cut costs and increase revenues were insufficient to offset declines in mail volume and revenues. Mail volume declined from 213 billion pieces in fiscal year 2006, to 171 billion pieces in fiscal year 2010--or about 20 percent. Volume declines resulted from the recession and changes in the use of mail as transactions and messages continued to shift to electronic alternatives. In this environment, USPS initiatives to increase revenues had limited results. USPS expects mail volume to decline further to about 150 billion pieces by 2020. This trend exposes weaknesses in USPS's business model, which has relied on growth in mail volume to help cover costs. GAO and others have reported on options for improving USPS's financial condition, including GAO's April 2010 report on USPS's business model (GAO-10-455). Recently, legislation has been introduced that addresses USPS's finances and the need for flexibility to help modernize operations. This testimony discusses (1) updated information on USPS's financial condition and outlook, (2) the need to modernize and restructure USPS, and (3) key issues that need to be addressed by postal legislation. It is based primarily on GAO's past and ongoing work. In comments on our statement, USPS generally agreed with its accuracy and provided technical comments that were incorporated as appropriate.
USPS's financial condition continued to decline in fiscal year 2010 and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key results for fiscal year 2010 included total revenue of $67.1 billion and total expenses of $75.6 billion, resulting in (1) a record loss of $8.5 billion--up $4.7 billion from fiscal year 2009, (2) a $1.8 billion increase in outstanding debt to the Treasury, thus making the total outstanding debt $12 billion, and (3) a $1.2 billion cash balance at the end of the fiscal year. USPS's budget for fiscal year 2011 projects (1) a $6.4 billion loss, (2) a $3 billion increase in debt to the $15 billion statutory limit, and (3) an end-of-year cash shortfall of $2.7 billion. USPS has reported achieving close to $13 billion in cost savings in the past 5 fiscal years. However, as its most profitable core product, First-Class Mail, continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS needs to become much leaner and more flexible. Key challenges include: changing use of the mail; compensation and benefit costs that are close to 80 percent of total costs; difficulties realigning networks to remove costly excess capacity and improve efficiency; constrained capital investment, which has declined to one of the lowest levels in two decades and led to delays in buying new vehicles; lack of borrowing capacity when USPS reaches its statutory debt limit; and large unfunded financial obligations and liabilities of roughly $100 billion at the end of fiscal year 2010. Proposed postal legislation, including S. 3831, provides a starting point for addressing key issues facing USPS and facilitating changes, such as rightsizing networks, that will take time to implement and produce results. Also, decisions on postal issues may involve trade-offs related to USPS's role as a federal entity expected to provide universal postal service while being self-financing through businesslike operations. Three key areas addressed by the bill include compensation and benefits; rightsizing USPS networks and workforce; and whether to allow USPS to expand its nonpostal activities. For example, resolving large USPS funding requirements for retiree health benefits is important, while continuing to prefund retiree health benefits to the extent USPS's finances permit. It is equally important to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Allowing USPS to expand into nonpostal activities raises issues of how to mitigate risks associated with new lines of business, assure fair competition with the private sector, and how to finance such efforts. Congress and USPS urgently need to take action to restore USPS's financial viability as business and consumer use of the mail continues to evolve.
GAO-11-244T, U.S. Postal Service: Legislation Needed to Address Key Challenges
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United States Government Accountability Office:
GAO:
Testimony:
Before the Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Committee
on Homeland Security and Governmental Affairs, U.S. Senate:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Thursday, December 2, 2010:
U.S. Postal Service:
Legislation Needed to Address Key Challenges:
Statement of Phillip Herr, Director:
Physical Infrastructure Issues:
GAO-11-244T:
GAO Highlights:
Highlights of GAO-11-244T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal
Services, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
The U.S. Postal Service‘s (USPS) financial condition and outlook
deteriorated sharply during fiscal years 2007 through 2009. USPS
actions to cut costs and increase revenues were insufficient to offset
declines in mail volume and revenues. Mail volume declined from 213
billion pieces in fiscal year 2006, to 171 billion pieces in fiscal
year 2010-”or about 20 percent. Volume declines resulted from the
recession and changes in the use of mail as transactions and messages
continued to shift to electronic alternatives. In this environment,
USPS initiatives to increase revenues had limited results.
USPS expects mail volume to decline further to about 150 billion
pieces by 2020. This trend exposes weaknesses in USPS‘s business
model, which has relied on growth in mail volume to help cover costs.
GAO and others have reported on options for improving USPS‘s financial
condition, including GAO‘s April 2010 report on USPS‘s business model
(GAO-10-455). Recently, legislation has been introduced that addresses
USPS‘s finances and the need for flexibility to help modernize
operations.
This testimony discusses (1) updated information on USPS‘s financial
condition and outlook, (2) the need to modernize and restructure USPS,
and (3) key issues that need to be addressed by postal legislation. It
is based primarily on GAO‘s past and ongoing work. In comments on our
statement, USPS generally agreed with its accuracy and provided
technical comments that were incorporated as appropriate.
What GAO Found:
USPS‘s financial condition continued to decline in fiscal year 2010
and its financial outlook is poor for fiscal year 2011 and the
foreseeable future. Key results for fiscal year 2010 included total
revenue of $67.1 billion and total expenses of $75.6 billion,
resulting in:
* a record loss of $8.5 billion”up $4.7 billion from fiscal year 2009,
* a $1.8 billion increase in outstanding debt to the Treasury, thus
making the total outstanding debt $12 billion, and,
* a $1.2 billion cash balance at the end of the fiscal year.
USPS‘s budget for fiscal year 2011 projects:
* a $6.4 billion loss,
* a $3 billion increase in debt to the $15 billion statutory limit,
and,
* an end-of-year cash shortfall of $2.7 billion.
USPS has reported achieving close to $13 billion in cost savings in
the past 5 fiscal years. However, as its most profitable core product,
First-Class Mail, continues to decline, USPS must modernize and
restructure to become more efficient, control costs, keep rates
affordable, and meet changing customer needs. To do so, USPS needs to
become much leaner and more flexible. Key challenges include: changing
use of the mail; compensation and benefit costs that are close to 80
percent of total costs; difficulties realigning networks to remove
costly excess capacity and improve efficiency; constrained capital
investment, which has declined to one of the lowest levels in two
decades and led to delays in buying new vehicles; lack of borrowing
capacity when USPS reaches its statutory debt limit; and large
unfunded financial obligations and liabilities of roughly $100 billion
at the end of fiscal year 2010.
Proposed postal legislation, including S. 3831, provides a starting
point for addressing key issues facing USPS and facilitating changes,
such as rightsizing networks, that will take time to implement and
produce results. Also, decisions on postal issues may involve trade-
offs related to USPS‘s role as a federal entity expected to provide
universal postal service while being self-financing through
businesslike operations. Three key areas addressed by the bill include
compensation and benefits; rightsizing USPS networks and workforce;
and whether to allow USPS to expand its nonpostal activities. For
example, resolving large USPS funding requirements for retiree health
benefits is important, while continuing to prefund retiree health
benefits to the extent USPS‘s finances permit. It is equally important
to address constraints and legal restrictions, such as those related
to closing facilities, so that USPS can take more aggressive action to
reduce costs. Allowing USPS to expand into nonpostal activities raises
issues of how to mitigate risks associated with new lines of business,
assure fair competition with the private sector, and how to finance
such efforts. Congress and USPS urgently need to take action to
restore USPS‘s financial viability as business and consumer use of the
mail continues to evolve.
View [hyperlink, http://www.gao.gov/products/GAO-11-244T] or key
components. For more information, contact Phillip Herr at (202) 512-
2834 or herrp@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to participate in this hearing on
proposed legislation[Footnote 1] to address the U.S. Postal Service's
(USPS) challenges to remain self-supporting while providing effective
and efficient universal postal service to the nation. My statement
will discuss (1) updated information on USPS's financial condition and
outlook, (2) the need to modernize and restructure USPS, and (3) key
issues that need to be addressed by postal legislation.
This statement is based on our past and ongoing work, including our
reviews of USPS's business model,[Footnote 2] financial condition,
networks, service, and postal reform issues. We interviewed USPS
officials and reviewed the POST Act of 2010; USPS's audited financial
statements for the fiscal year ended September 30, 2010; and other
reports, testimonies, and communications on USPS's financial
condition, operations, and outlook.[Footnote 3] We conducted this
performance audit in November 2010 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 Continues to Decline and Its Financial
Outlook Is Poor:
USPS's financial condition continued to decline over the past fiscal
year and its financial outlook is poor for fiscal year 2011 and the
foreseeable future. Key USPS results for fiscal year 2010 included a
$1.0 billion decline in total revenue to $67.1 billion, and a $3.7
billion increase in total expenses to $75.6 billion, resulting in:
* a record loss of about $8.5 billion,
* a $1.8 billion increase in outstanding debt (which left $1.2 billion
of available borrowing authority),[Footnote 4]
* a total of $12 billion in outstanding debt due to the Treasury,
[Footnote 5] and:
* a $1.2 billion cash balance at the end of the fiscal year.
* USPS has recently released its budget for fiscal year 2011,
projecting:
* a $6.4 billion loss (see figure 1)--one of the largest in USPS
history--including the impact of a $5.5 billion payment due in 2011 to
prefund retiree health benefits;
* a $3 billion increase in outstanding debt due to the Department of
the Treasury (Treasury), thereby reaching its $15 billion statutory
limit; and:
* a $2.7 billion cash shortfall at the end of the fiscal year.
Figure 1: USPS Net Income, Fiscal Years 1972 through 2011:
[Refer to PDF for image: vertical bar graph]
Dollars in billions:
Fiscal Year: 1972;
Actual Net Income (Loss): ($175).
Fiscal Year: 1973;
Actual Net Income (Loss): ($13).
Fiscal Year: 1974;
Actual Net Income (Loss): ($439).
Fiscal Year: 1975;
Actual Net Income (Loss): ($989).
Fiscal Year: 1976;
Actual Net Income (Loss): ($1,176).
Fiscal Year: 1977;
Actual Net Income (Loss): ($687).
Fiscal Year: 1978;
Actual Net Income (Loss): ($380).
Fiscal Year: 1979;
Actual Net Income (Loss): $470.
Fiscal Year: 1980;
Actual Net Income (Loss): ($306).
Fiscal Year: 1981;
Actual Net Income (Loss): ($588).
Fiscal Year: 1982;
Actual Net Income (Loss): $802.
Fiscal Year: 1983;
Actual Net Income (Loss): $616.
Fiscal Year: 1984;
Actual Net Income (Loss): $118.
Fiscal Year: 1985;
Actual Net Income (Loss): ($251).
Fiscal Year: 1986;
Actual Net Income (Loss): $304v
Fiscal Year: 1987;
Actual Net Income (Loss): ($223).
Fiscal Year: 1988;
Actual Net Income (Loss): ($597).
Fiscal Year: 1989;
Actual Net Income (Loss): $61.
Fiscal Year: 1990;
Actual Net Income (Loss): ($874).
Fiscal Year: 1991;
Actual Net Income (Loss): ($1,469).
Fiscal Year: 1992;
Actual Net Income (Loss): ($536).
Fiscal Year: 1993;
Actual Net Income (Loss): ($1,765).
Fiscal Year: 1994;
Actual Net Income (Loss): ($914).
Fiscal Year: 1995;
Actual Net Income (Loss): $1,770.
Fiscal Year: 1996;
Actual Net Income (Loss): $1,567.
Fiscal Year: 1997;
Actual Net Income (Loss): $1,264.
Fiscal Year: 1998;
Actual Net Income (Loss): $550.
Fiscal Year: 1999;
Actual Net Income (Loss): $363.
Fiscal Year: 2000;
Actual Net Income (Loss): ($199).
Fiscal Year: 2001;
Actual Net Income (Loss): ($1,680).
Fiscal Year: 2002;
Actual Net Income (Loss): ($676).
Fiscal Year: 2003;
Actual Net Income (Loss): $3,868.
Fiscal Year: 2004;
Actual Net Income (Loss): $3,065.
Fiscal Year: 2005;
Actual Net Income (Loss): $1,445.
Fiscal Year: 2006;
Actual Net Income (Loss): $900.
Fiscal Year: 2007;
Actual Net Income (Loss): ($5,142).
Fiscal Year: 2008;
Actual Net Income (Loss): ($2,806).
Fiscal Year: 2009;
Actual Net Income (Loss): ($3,794).
Fiscal Year: 2010;
Actual Net Income (Loss): ($8,500).
Fiscal Year: 2011;
Projected Net Income (Loss): ($6,400).
Source: USPS.
[End of figure]
USPS's revenue drop in fiscal year 2010 was driven by continuing
declines in total mail volume. In fiscal year 2010, mail volume
decreased about 6 billion pieces from the previous fiscal year to 171
billion pieces. This volume was about 20 percent below the peak of 213
billion pieces delivered during fiscal year 2006. Most of the volume
declines were in profitable First-Class Mail--which were particularly
significant because the average piece of First-Class Mail generated
about three times the profitability of the average piece of Standard
Mail.[Footnote 6]
USPS currently projects mail volume to increase by about 2 billion
pieces in fiscal year 2011. In this fiscal year, First-Class Mail is
expected to decrease by 3 billion pieces, but Standard Mail is
expected to increase by 5 billion pieces. With these volume changes
and expected small rate increases,[Footnote 7] USPS projects revenues
to increase $0.6 billion in fiscal year 2011.
Meanwhile, USPS's expenses increased by $3.7 billion in fiscal year
2010 compared to fiscal year 2009 for several reasons. First, in
fiscal year 2010, USPS made its statutorily required payment of $5.5
billion to prefund health benefits for its retirees, in contrast to
fiscal year 2009 when Congress deferred all but $1.4 billion of USPS's
scheduled payment of $5.4 billion.[Footnote 8] Second, USPS's workers'
compensation costs in fiscal year 2010 were $3.6 billion, up $1.3
billion from the previous fiscal year, primarily from the non-cash
effect of changes in the discount rates used to estimate the
liability. Third, results of USPS cost savings efforts in fiscal year
2010 were insufficient to offset rising costs in other areas.
According to USPS, it achieved a total of close to $13 billion in cost
savings from fiscal years 2006 through 2010 (see fig. 2), primarily by
reducing 280 million work hours and its workforce by 131,000
employees. Most savings resulted from attrition, reductions in
overtime, and changes in postal operations. USPS reported saving $3
billion in fiscal year 2010, primarily because of a reduction of 75
million work hours--half the savings achieved in fiscal year 2009.
Looking forward, USPS projects cost savings of $2 billion in fiscal
year 2011, primarily from continued attrition and associated savings.
Figure 2: Cost Savings Reported by USPS, Fiscal Years 2006 through
2011:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2006;
Actual Cost savings: $0.3 billion.
Fiscal year: 2007;
Actual Cost savings: $1.2 billion.
Fiscal year: 2008;
Actual Cost savings: $2.2 billion.
Fiscal year: 2009;
Actual Cost savings: $6.1 billion.
Fiscal year: 2010;
Actual Cost savings: $3.0 billion.
Fiscal year: 2011;
Projected Cost savings: $2.0 billion.
Source: USPS data.
[End of figure]
Further Actions Are Needed to Modernize and Restructure USPS:
As its core product--First-Class Mail--continues to decline, USPS must
modernize and restructure to become more efficient, control costs,
keep rates affordable, and meet changing customer needs. To do so,
USPS will need to become much leaner and more flexible. Key challenges
include the following:
* Mail volume and changing use of the mail: USPS projects mail volume
to continue declining to about 150 billion pieces by fiscal year 2020--
about 30 percent below its 2006 peak. Most of the declines are
projected to be in profitable First-Class Mail. Use of the mail is
changing as communications and payments continue to shift to
electronic alternatives--a shift that is being facilitated by rapid
adoption of broadband. These trends expose weaknesses in USPS's
business model, which has relied on volume growth to help cover costs.
* Postal revenues: USPS expects revenue to stagnate in the next decade
as continued declines in mail volume are offset by rate increases.
Rate increases are generally limited by the inflationary price cap on
market-dominant products that generate close to 90 percent of USPS
revenue.
* Compensation and benefit costs: Compensation and benefits, including
retiree health benefits and workers' compensation, totaled about $60
billion in fiscal year 2010, or close to 80 percent of USPS costs.
USPS pays a higher share of employee health and life insurance
premiums than other federal agencies.
* Difficulties achieving network realignment: Realigning USPS's mail
processing and retail facilities will be crucial for it to achieve
sustainable cost reductions and productivity improvements, but limited
progress has been made in rightsizing these networks to eliminate
costly excess capacity. Although USPS is working to consolidate some
mail processing operations, it has closed few large mail processing
facilities since 2005. Similarly, its network of post offices and
postal retail facilities has remained largely static despite expanded
use of retail alternatives and population shifts.
* Capital investment: Continuing losses from operations have
constrained funds for USPS capital investment. USPS's purchases of
capital property and equipment and building improvements have declined
in recent years, from $1.8 billion in fiscal year 2009 to $1.4 billion
in fiscal year 2010. The deferral of maintenance could impede
modernization and efficiency gains from optimizing mail processing,
retail, and delivery networks. Further, USPS has delayed buying new
delivery vehicles for lack of capital resources. We have an ongoing
review of USPS's delivery fleet of about 185,000 vehicles, including
about 140,000 long-life vehicles purchased in the late 1980s and early
1990s that are nearing the end of their 24-year expected operating
time frame. USPS has estimated replacing its delivery fleet will cost
about $5 billion.
* Lack of borrowing capacity: USPS expects to increase its outstanding
debt to Treasury during fiscal year 2011 by $3 billion, thereby
reaching its total statutory debt limit of $15 billion. Even with this
debt increase, USPS projects a cash shortfall at the end of this
fiscal year. Its cash outlook is uncertain, as indicated by recent
experience. USPS reported in August 2010 that it "would likely
experience a cash shortfall if legislation similar to that passed in
September 2009 is not passed."[Footnote 9] USPS ended fiscal year 2010
with cash of about $1.2 billion and remaining annual borrowing
authority of an additional $1.2 billion, or slightly more than the
funds needed for one biweekly payroll. USPS projects it will have
insufficient cash at the end of fiscal year 2011 to meet all of its
obligations.
* Large unfunded financial obligations and liabilities: USPS's
unfunded obligations and liabilities were roughly $100 billion at the
end of fiscal year 2010. Looking forward, USPS will continue to be
challenged by these financial obligations and liabilities, together
with expected large financial losses and long-term declines in First-
Class Mail volume.
Key Issues Need to Be Addressed by Postal Legislation:
Proposed postal legislation, including S. 3831, provides a starting
point for considering key issues where congressional decisions are
needed to help USPS undertake needed reforms. This bill is based on
legislative proposals USPS made this past spring. Resolving large USPS
funding requirements for pension and retiree health benefits is
important. It is equally important to USPS's future to address
constraints and legal restrictions, such as those related to closing
facilities, so that USPS can take more aggressive action to reduce
costs. Urgent action is needed as some changes, such as rightsizing
networks, will take time to implement and produce results. In
addition, including incentives and oversight mechanisms would make an
important contribution to assuring an appropriate balance between
providing USPS with more flexibility and assuring sufficient
transparency, oversight, and accountability.
Congressional decisions may involve difficult trade-offs related to
USPS's role as a federal entity expected to provide universal mail
delivery and ready access to postal retail service while being self-
financing through businesslike operations. Future USPS actions and
other stakeholder actions are expected to be informed and guided based
on congressional decisions related to public policy questions, such as:
* Benefits: What changes, if any, should be made to USPS pension and
retiree health benefit obligations and payment schedules? What would
be the impact on the federal budget?
* Delivery: Should the long-standing requirement for Saturday delivery
be dropped so USPS can implement its proposal to reduce delivery
frequency to 5 days a week? What would be the specific effects on
operations, costs, workforce mix, employees, service, competition, the
value of mail, mail volume, and revenue? How would shifting to 5-day
delivery affect customers including business mailers and the public?
* Post office closings: Should USPS have greater flexibility to
rightsize its retail networks and workforce, which may involve closing
post offices and moving retail services to alternative commercial
locations that are often open more days and longer hours than postal
facilities? Or should USPS retain its retail facilities and provide
new nonpostal products and services?
* Nonpostal products: Should USPS be allowed to offer new nonpostal
products and services that compete with private-sector firms? If so,
how should fair competition be assured? Would it need additional
capital for such initiatives? If so, how would they be financed?
* Processes for change: What role should Congress, the PRC, USPS,
employees, and customers, including business mailers and the public,
have in decisions on postal policy issues? What incentives and
oversight mechanisms are needed as part of congressional actions to
assure an appropriate balance between providing USPS with more
flexibility and assuring sufficient transparency, oversight, and
accountability?
We have discussed several options that Congress and USPS could
consider in a report we issued last April,[Footnote 10] and are
currently conducting a congressionally requested review of USPS's 5-
day delivery proposal. In this testimony, we will highlight some
options related to three areas that are also addressed by S. 3831--
compensation and benefits, rightsizing networks and workforce, and
expanding nonpostal activities.
Postal Compensation and Benefits:
S. 3831 addresses key retiree health and pension benefit issues.
Specifically, it requires OPM to recalculate USPS's CSRS pension
obligation in a way expected to make the federal government
responsible for a greater share of USPS's CSRS pension obligation. The
bill also authorizes the USPS Board of Governors to transfer any part
of a resulting pension surplus to the Postal Service Retiree Health
Benefits Fund. The sponsor of S. 3831 has estimated that these
legislative changes could result in an increase in the government's
pension obligations of approximately $50 billion. Such an increase
could impact the federal budget deficit and require funding over time.
USPS has said it cannot afford its required prefunding payments to the
retiree health benefit fund on the basis of its significant volume and
revenue declines, large losses, debt nearing its limit, and limited
cost-cutting opportunities under its current authority. We have
reported that Congress should consider providing financial relief to
USPS, including modifying its retiree health benefit cost structure in
a fiscally responsible manner.[Footnote 11] 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 benefit payments as its core business declines. Therefore, it
is important that USPS fund its retiree health benefit obligations--
including prefunding these obligations--to the maximum extent that its
finances permit. In addition to considering what is affordable and a
fair balance of payments between current and future ratepayers,
Congress would also have to address the impact of these proposals on
the federal budget. Further, the Congressional Budget Office has
raised concerns about how aggressive USPS's cost-cutting measures
would be if prefunding payments for retiree health care were reduced.
[Footnote 12]
Congress could revisit other aspects of the postal compensation and
benefits framework. USPS is required to maintain compensation and
benefits comparable to the private sector, a requirement that has been
a source of disagreement between USPS and its unions in collective
bargaining and binding arbitration. If USPS and its unions go to
arbitration, there is no statutory requirement for arbitrators to
consider USPS's financial condition. We continue to favor such an
arbitration requirement. The law also requires USPS's fringe benefits
to be at least as favorable as those in effect when the Postal
Reorganization Act of 1970[Footnote 13] was enacted. Career employees
participate in federal pension and benefit programs, and USPS covers a
higher proportion of its employees' health care and life insurance
premiums than most other federal agencies. USPS is also required by
law to participate in the federal workers' compensation program, and
some benefits paid exceed those provided in the private sector.
Furthermore, USPS employees in this program can choose not to retire
when they become eligible to retire, and they often decide to remain
on the more generous workers' compensation rolls.
Rightsizing USPS's Networks and Workforce:
Congressional action is needed to speed USPS's progress in rightsizing
its networks and workforce, and S. 3831 seeks to address these issues.
Such progress is limited by both stakeholder resistance and statutory
requirements. USPS has costly excess capacity and inadequate
flexibility to quickly reduce costs in its processing and retail
networks. USPS has faced formidable resistance to facility closures
and consolidations because of concerns about possible effects on
service, employees, and communities, particularly in small towns or
rural areas. We have suggested that Congress consider establishing a
panel similar to the military Base Realignment and Closure Commissions
to facilitate action and progress. Such panels have successfully
informed prior difficult restructuring decisions. The panel could
consider options for USPS's networks including the following:
* Mail processing: Decisions to maintain or close facilities are best
made in the context of a comprehensive, integrated approach for
optimizing the processing network. Issues include how to inform
Congress and the public, address resistance, and ensure employees will
be treated fairly. Related issues include whether to relax current
delivery standards to enable additional facility closures and
associated savings.
* Retail: USPS has retained most of its retail facilities in recent
years despite the growing use of less costly alternatives to
traditional post offices, such as self-service kiosks and stamp sales
in grocery stores, drug stores, and over the Internet. USPS has called
for statutory changes to facilitate modernizing its retail services.
Expanding USPS Nonpostal Activities:
USPS has asked Congress to change the law so it can diversify into
nonpostal areas to find new opportunities for revenue growth, and S.
3831 would authorize such action. This could involve USPS entering
into new business areas or earning revenues from partners selling
nonpostal products at USPS facilities. About 10 years ago, we reported
that USPS incurred losses on early electronic commerce and other
nonpostal initiatives, and its management of its electronic commerce
initiatives was fragmented, with inconsistent implementation and
incomplete financial information.[Footnote 14] Congress then
restricted USPS from engaging in new nonpostal activities in the
Postal Accountability and Enhancement Act of 2006.[Footnote 15]
Allowing USPS to expand into new nonpostal activities would raise
issues about the areas in which it should be allowed to compete with
the private sector, how to assure fair competition, how to mitigate
risks associated with entering new lines of business, and how to
finance such efforts. Related issues could include whether USPS's
mission and role as a government entity with a monopoly[Footnote 16]
should be changed, what transparency and accountability would apply,
whether USPS would be subject to the same regulatory entities and
regulations as its competitors, and whether losses would be borne by
postal ratepayers or taxpayers.
A senior USPS official told us that USPS is studying various
possibilities for introducing new products and services. A continued
issue is whether USPS would make money if it was allowed to compete in
new nonpostal areas. USPS has reported that if it could enter such
areas, such as banking or sales of consumer goods, its opportunities
would be limited by its high cost structure and the relatively light
customer traffic of post offices compared with commercial retailers.
(There are 600 weekly counter customers at the average post office,
compared to 20,000 at the average major supermarket, according to
USPS.) USPS has said that the possibility of building a sizable
presence in logistics, banking, integrated marketing, and document
management was currently not viable because of its net losses, high
wage and benefit costs, and limited access to cash to support
necessary investment. USPS concluded that building a sizable business
in any of these areas would require "time, resources, new capabilities
(often with the support of acquisitions or partnerships) and profound
alterations to the postal business model."[Footnote 17]
In summary, the need for postal reform continues as business and
consumer use of the mail continues to evolve. Congress and USPS
urgently need to reach agreement on a package of actions to restore
USPS's financial viability and enable it to begin making necessary
changes.
Mr. Chairman, that concludes my prepared statement. I would be pleased
to answer any questions that you or other Members of the Subcommittee
may have.
Contact and Staff Acknowledgments:
For further information about this statement, please contact Phillip
Herr at (202) 512-2834 or herrp@gao.gov. Individuals who made key
contributions to this statement include Joseph Applebaum, Chief
Actuary; Susan Ragland, Director, Financial Management and Assurance;
Amy Abramowitz; Teresa Anderson; Joshua Bartzen; Kenneth John; Hannah
Laufe; SaraAnn Moessbauer; Robert Owens; Crystal Wesco; and Jarrod
West.
[End of section]
Footnotes:
[1] Postal Operations Sustainment and Transformation Act of 2010 (POST
Act of 2010), S. 3831, 111th Cong. (2010).
[2] GAO, U.S. Postal Service: Strategies and Options to Facilitate
Progress toward Financial Viability, [hyperlink,
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12,
2010).
[3] Our review included considering information from: USPS audited
financial statements and other information in the annual reports for
the fiscal year ended September 30, 2010, including the report filed
with the Postal Regulatory Commission (PRC) on Form 10-K dated
November 15, 2010; USPS quarterly reports filed with the PRC on Form
10-Q for the periods ended June 30, 2010; March 31, 2010; and December
31, 2009; and the USPS Fiscal Year 2011 Integrated Financial Plan.
[4] The statutory limit on annual increases in USPS outstanding debt
is $3 billion. 39 U.S.C. § 2005(a).
[5] The statutory limit on total USPS outstanding debt is $15 billion.
39 U.S.C. § 2005(a).
[6] First-Class Mail consists of single-piece mail (e.g., bill
payments and letters) and bulk mail (e.g., bills, statements, and
advertising). Standard Mail is mainly bulk advertising and direct mail
solicitations.
[7] USPS projects a small average rate increase for market-dominant
products by the limit it expects under the inflation-based price cap.
These products primarily include First-Class Mail, Standard Mail,
Periodicals (mainly magazines and local newspapers), and some types of
Package Services (primarily single-piece Parcel Post, Media Mail,
library mail, and bound printed matter).
[8] Pub. L. No. 111-68, § 164(a), 123 Stat. 2023 (Oct. 1, 2009).
[9] The September 2009 legislation deferred $4 billion from USPS's
statutorily required payment to prefund retiree health benefits,
reducing it from $5.4 billion to $1.4 billion. Pub. L. No. 111-68, §
164(a), 123 Stat. 2023 (Oct. 1, 2009).
[10] [hyperlink, http://www.gao.gov/products/GAO-10-455].
[11] [hyperlink, http://www.gao.gov/products/GAO-10-455].
[12] Congressional Budget Office, H.R. 22: United States Postal
Service Financial Relief Act of 2009 (Washington, D.C.: July 20,
2009); S. 1507: Postal Service Retiree Health Benefits Funding Reform
Act of 2009 (Washington, D.C., Sept. 14, 2009).
[13] The Postal Reorganization Act eliminated the Post Office
Department and created the United States Postal Service. Pub. L. No.
91-375, 84 Stat. 719 (Aug. 12, 1970).
[14] GAO, U.S. Postal Service: Development and Inventory of New
Products, [hyperlink, http://www.gao.gov/products/GAO/GGD-99-15]
(Washington, D.C.: Nov. 24, 1998); U.S. Postal Service: Update on E-
Commerce Activities and Privacy Protections, [hyperlink,
http://www.gao.gov/products/GAO-02-79] (Washington, D.C.: Dec. 21,
2001); U.S. Postal Service: Postal Activities and Laws Related to
Electronic Commerce, [hyperlink,
http://www.gao.gov/products/GAO/GGD-00-188] (Washington, D.C.: Sept.
7, 2000).
[15] Pub. L. No. 109-435, 120 Stat. 3198 (Dec. 20, 2006).
[16] USPS has a monopoly over delivery of certain types of letter mail
and access to mail boxes.
[17] United States Postal Service, Ensuring a Viable Postal Service
for America: An Action Plan for the Future (Washington, D.C., March
2010). This plan is available at the following Web address:
[hyperlink,
http://www.usps.com/strategicplanning/_pdf/ActionPlanfortheFuture_March2
010.pdf] (accessed on Nov. 23, 2010).
[End of section]
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