	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),    a total of $12 billion in outstanding debt due to the Treasury, 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 fig. 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. In fiscal year 2010, mail volume decreased about 6  billion pieces from the previous fiscal year to 171 billion pieces. Third, results of USPS cost savings efforts in fiscal year 2010  were insufficient to offset rising costs in other areas. 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. 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. 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. Further,  USPS has delayed buying new delivery vehicles for lack of capital  resources. Large unfunded financial obligations and liabilities: USPS’s unfunded  obligations and liabilities were roughly $100 billion at the end of fiscal year  2010. 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. 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. 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. USPS has costly excess capacity and inadequate flexibility  to quickly reduce costs in its processing and retail networks. 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. 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.
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 (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.