The continued deterioration in USPS’s financial condition is due primarily  to two factors. USPS reported that the most significant factor contributing to the  decline in First-Class Mail volume is the continued migration  toward electronic communication and transaction alternatives—a  migration USPS expects to continue for the foreseeable future. 2. USPS reported that its key  operating expenses grew in fiscal year 2015—notably salary  increases for unionized employees, as well as additional work  hours, in part due to a 14.1 percent growth in shipping and  packages, which are more labor intensive to process. Compensation and benefits comprise close to 80  percent of total USPS expenses. At the end of fiscal year 2015, USPS’s $125 billion in unfunded  liabilities and outstanding debt represented a $7.4 billion increase from  the previous year. USPS Will Remain Unlikely to Fully Make Required Retiree Health and Pension Payments

USPS will remain unlikely to fully make its required retiree health and  pension payments in the near future. Beginning in fiscal year 2017,  USPS’s payments will be restructured as it will no longer be required to  make fixed prefunding payments, but will be required to start making  annual payments based on actuarial determinations of the following  component costs: a 40-year amortization schedule to address the unfunded liabilities for  postal retiree health benefits,  the “normal costs” of retiree health benefits for current employees,  and a 27-year amortization schedule to address the unfunded liabilities for  postal pension benefits under the Civil Service Retirement System  (CSRS). As table 1 below shows, in fiscal year 2017, USPS  will be required to make an estimated total of $11.3 billion in payments for  retiree health and pension benefits under CSRS and FERS—about $4.6  billion more than what USPS paid in fiscal year 2015 for these benefit  programs. In addition to declining mail volumes and increased expenses, USPS’s  ability to make its required payments for these retirement programs will  be further challenged due to:
Expiration of a temporary rate surcharge: USPS reported that it  generated $2.1 billion in additional revenue during fiscal year 2015  and $1.4 billion in additional revenue in fiscal year 2014 as a result of  a 4.3 percent “exigent” surcharge that began in January 2014. No new major cost-savings initiatives planned. Large unfunded liabilities for postal retiree health and pension benefits— which were $78.9 billion at the end of fiscal year 2015—may ultimately  place taxpayers, USPS employees, retirees and their beneficiaries, and  USPS itself at risk. As we have previously reported, funded benefits  protect the future viability of an enterprise such as USPS by not saddling  it with bills later after employees have retired. Further, since USPS  retirees participate in the same health and pension benefit programs as  other federal retirees, if USPS ultimately does not adequately fund these  benefits and if Congress wants these benefits to be maintained at current  levels, funding from the U.S. Treasury, and hence the taxpayer, would be  needed to continue the benefit levels. Alternatively, unfunded benefits  could lead to pressure for reductions in benefits or in pay. Congress Faces Difficult Choices to Address USPS’s Financial Condition

USPS’s financial situation leaves Congress with difficult choices and  trade-offs to achieve the broad-based restructuring that will be necessary  for USPS to become financially sustainable. USPS’s ability to make its  required retiree health and pension payments requires a decrease in  expenses or increase in revenues, or both. The level of postal services and the affordability of those services:  USPS’s growing financial difficulties combined with vast changes in  how people communicate provide Congress with an opportunity to  consider what postal services will be needed in the 21st century. Compensation and benefits in an environment of revenue pressures:  Key compensation and benefits costs have increased and continue to  increase for USPS employees, while demand for USPS’s main  revenue source, mail and First-Class Mail in particular, has declined  and continues to decline. There is no statutory requirement for USPS’s  financial condition to be considered in arbitration. USPS’s dual role of providing affordable universal service while  remaining self-financing: As an independent establishment of the  executive branch, USPS has long been expected to provide  affordable, quality, universal delivery service to all parts of the country  while remaining self-financing. The  status quo is not sustainable. Appendix I: U.S.
Why GAO Did This Study

USPS is a critical part of the nation's communication and commerce, delivering 154 billion pieces of mail in fiscal year 2015 to 155 million delivery points. However, USPS's mission of providing prompt, reliable and efficient universal services to the public at risk due to its poor financial condition. USPS's net loss was $5.1 billion in fiscal year 2015, which was its ninth consecutive year of net losses. At the end of fiscal year 2015, USPS had $125 billion in unfunded liabilities, mostly for retiree health and pensions, and debt—an amount equal to 182 percent of USPS's revenues.
In July 2009, GAO added USPS's financial condition to its list of high-risk areas needing attention by Congress and the executive branch. USPS's financial condition remains on GAO's high-risk list. In previous reports, GAO has included strategies and options for USPS to generate revenue, reduce costs, increase the efficiency of its delivery operations, and restructure the funding of USPS pension and retiree health benefits. GAO has also previously reported that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability.
This testimony discusses (1) factors affecting USPS's deteriorating financial condition, (2) USPS's ability to make required retiree health and pension payments, and (3) choices Congress faces to address USPS's financial challenges. This testimony is based primarily on GAO's work over the past 5 years that examined USPS's financial condition—including its liabilities—and updated USPS financial information for fiscal year 2015.

What GAO Found

The U.S. Postal Service's (USPS) financial condition continues to deteriorate as a result of trends including:
Declining mail volume : First-Class Mail—USPS's most profitable product—continues to decline in volume as communications and payments migrate to electronic alternatives. USPS expects this decline to continue for the foreseeable future.
Growing expenses: Key USPS expenses continue to grow, such as salary increases and work hours due in part to growth in shipping and packages, which are more labor-intensive. Compensation and benefits comprise close to 80 percent of USPS's expenses.
USPS's financial condition makes it unlikely it will be able to fully make its required retiree health and pension payments in the near future. In fiscal year 2015, USPS was required to make $12.6 billion in retiree health and pension payments, but it only made $6.7 billion in payments as it did not make a required retiree health payment of $5.7 billion. USPS's required payments will be restructured in fiscal year 2017, with estimated payments totaling $11.3 billion—$4.6 billion more than what USPS paid in fiscal year 2015. USPS's ability to make these required payments will be further challenged due to:
Expiration of a temporary rate surcharge: This surcharge on most postal rates effective January 2014, which has generated $3.6 billion in additional annual revenues through September 2015, is expected to expire April 2016.
No new major cost savings initiatives are planned.
Large unfunded liabilities for postal retiree health and pension benefits—which were $78.9 billion at the end of fiscal year 2015—may ultimately place taxpayers, USPS employees, retirees, and their beneficiaries, and USPS itself at risk. As we have previously reported, funded benefits protect the future viability of an enterprise such as USPS by not saddling it with bills later after employees have retired. Further, since USPS retirees participate in the same health and pension benefit programs as other federal retirees, if USPS ultimately does not adequately fund these benefits, and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury, and hence the taxpayer, would be needed to continue the benefit levels. Alternatively, unfunded benefits could lead to pressure for reductions in benefits or in pay.
Congress faces difficult choices and tradeoffs to address USPS's financial challenges. The status quo is not sustainable. Considerations for Congress include the (1) level of postal services provided to the public and the affordability of those services, (2) compensation and benefits for USPS employees and retirees in an environment of revenue pressures, and (3) tension between USPS's dual roles as an independent establishment of the executive branch required to provide universal delivery service and as a self-financing entity operating in a businesslike manner.