	USPS’s Current Financial Condition and Outlook Have Deteriorated

USPS’s financial condition deteriorated in fiscal year 2008. According to  USPS, this was due largely to declines in the economy—particularly in the  financial and housing sectors—that were reflected in a 4.5 percent decline  in total mail volumes and flattened revenues despite rate increases. In  addition, fuel prices increased costs by over $500 million, and cost-of- living allowances provided to postal employees increased costs by about  $560 million. Even after reducing over $2 billion in costs, primarily by  cutting more than 50 million work hours, USPS was not able to close the  gap between revenues and expenses. USPS debt increased by $3  billion in fiscal year 2008—the annual statutory limit—and reached $7.2  billion in total outstanding debt at the end of the fiscal year, or nearly half  of the $15 billion statutory debt limit. Rate Increases and Cost- Cutting Efforts are Insufficient to Offset the Impact of Volume Declines

As USPS has reported, it experienced the single largest volume drop in its  history in fiscal year 2008 when mail volume fell by 9.5 billion pieces (see  app. 1). Mail volume in fiscal year 2008 was also affected by  the continuing shift of mail to electronic communication and payment  alternatives. USPS’s Fiscal Year 2009 Outlook Has Become Mo Pessimistic

According to USPS officials, USPS’s financial outlook has continued to  deteriorate based on preliminary results for the first quarter of fiscal year  2009, as well as updated projections for mail volume and revenue. In light of these results and  updated projections, USPS officials told us this month that they expect  fiscal year 2009 mail volume to decline by 10 billion to 15 billion pieces. In the  long term, aggressive USPS action beyond its current cost-cutting effort urgently needed to reduce costs and improve efficiency, particularly in  light of accelerated declines in mail volume and changes in the public’s  use of mail. We agree with the Postal Regulatory Commission (PRC) that  unfavorable mail volume and revenue trends may imperil USPS’s financial  viability and that USPS must dramatically reduce its costs to remain  viable. Options to Assist USPS through Its Short Term Difficulties

Several options could assist USPS through its short-term difficulties, some  of which would require congressional action. Although we recognize the  need to provide USPS with immediate financial relief, such relief should  meet its short-term needs and is no substitute for aggressive USPS action  to preserve its long-term viability. Specifically, 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. Another option would be for Congress to provide USPS with 2-year  relief for retiree health benefits premium payments, totaling about  $4.3 billion, which would be consistent with providing immediate  financial relief, while having much less impact on the Fund than  USPS’s proposal. Therefore, we believe that the option to provide 2-year relief totaling  $4.3 billion would be preferable to USPS’s proposal. Under this short- term option Congress could revisit USPS’s financial condition to  determine whether further relief is needed and also review what  actions USPS has taken to assure its long-term financial viability. Comprehensive Action Is Needed to Help Keep USPS Financially Viable in the Long-Term

Action is urgently needed to streamline USPS costs in two areas where it  has been particularly difficult—the compensation and benefits area, which  generates close to 80 percent of its costs, and USPS’s mail processing and  retail networks. We have reported for many years that USPS  needs to rightsize its workforce and realign its network of mail processing  and retail facilities. USPS has several options for realigning its mail processing operations to  eliminate excess capacity and costs, but has taken only limited action. Another option we reported on would be for USPS to close unnecessary  retail facilities, and by reducing the number of facilities, USPS could lower  the costs of maintaining its network of facilities. Congress encouraged USPS to expeditiously move  forward in its streamlining efforts in PAEA. We recommended that USPS  enhance transparency and strengthen accountability of its realignment  efforts to assure stakeholders that realignment would be implemented  fairly and achieve the desired results. We asked USPS to comment on a draft of our testimony. USPS generally  agreed with the accuracy of our statement and provided technical  corrections and some additional perspective, which we incorporated  where appropriate.
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 mail volume dropped almost 5 percent--the largest single-year decline. The Postmaster General testified last March before this subcommittee that USPS was facing a potential net loss of over $1 billion for fiscal year 2008. He noted that USPS anticipated continued deterioration due to the economic slowdown, as the financial, credit, and housing sectors are among its key business drivers. He also said that the shifts in transactions and messages from mail to electronic communications and from advertising mail to lower-cost electronic media have affected the USPS's financial situation. 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 corrections and some additional perspective, which we incorporated where appropriate.

What GAO Found

USPS has reported that the declining economy accelerated declines in mail volume in fiscal year 2008 and flattened revenues despite postal rate increases. In fiscal year 2008, mail volume fell by 9.5 billion pieces, fuel prices increased costs by over $500 million, and cost-of-living allowances for postal employees increased costs by $560 million. Cutting costs by $2 billion--primarily by cutting over 50 million work hours--did not close the gap between revenues and expenses. Thus, USPS recorded a loss of $2.8 billion for fiscal year 2008. Its debt increased by $3 billion by the end of the year to $7.2 billion. USPS's outlook for fiscal year 2009 has become more pessimistic. USPS projects a volume decline of 10 billion to 15 billion pieces, another loss, and $3 billion more in debt. At this pace, USPS could reach its $15 billion statutory debt limit by fiscal year 2011. In the short term, several options could assist USPS through its difficulties, some of which would require congressional action. USPS has proposed that Congress give it immediate financial relief totaling about $25 billion over the next 8 years by changing the funding of its retiree health benefits. Although GAO recognizes the need to provide USPS with immediate financial relief, such relief is no substitute for aggressive USPS action to preserve its long-term viability. USPS projects an improvement in its financial condition in fiscal year 2010. Therefore, GAO believes it would be preferable to provide 2-year relief totaling $4.3 billion. This would have less impact on the retiree health benefits fund, and then Congress could revisit USPS's financial condition to determine whether additional relief is needed. In the long term, USPS action beyond its current cost-cutting efforts is urgently needed to reduce costs and improve efficiency. GAO agrees with the Postal Regulatory Commission that unfavorable mail volume and revenue trends may imperil USPS's financial viability and that USPS must dramatically reduce its costs to remain viable. Two areas for further action to reduce costs include compensation and benefits, which is close to 80 percent of its costs, and mail processing and retail networks. GAO previously reported that excess capacity in USPS's mail processing infrastructure has impeded efficiency gains. USPS has considered several options to realign its facility network, such as outsourcing operations in some mail processing facilities, but has taken only limited action. Another option would be for USPS to close unnecessary retail facilities and thereby reduce its large maintenance backlog. While it has been difficult for USPS to take action in these areas, Congress encouraged USPS to expeditiously move forward in its streamlining efforts in the postal reform act of 2006. GAO recommended that USPS enhance transparency and strengthen accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly and achieve the desired results, and it has made improvements in this area. Accelerated volume declines and changes in the public's use of mail indicate that USPS needs to move beyond incremental efforts and take aggressive action to streamline its workforce and network costs to assure its long-term viability.