	USPS’s Financial Condition and Outlook Remain Challenging

USPS’s financial condition and outlook continue to be challenging despite  recent congressional action that relieved USPS of $4 billion in mandated  payments to prefund postal retiree health benefits by September 30, 2009. Preliminary results from the end of fiscal year 2009 and USPS’s outlook  include:  In fiscal year 2009, mail volume declined about 28 billion pieces, or about  14 percent, from the prior fiscal year, when volume was about 203 billion  pieces; revenue declined from about $75 billion to about $68 billion. A looming cash shortfall necessitated last-minute congressional action to  reduce USPS’s mandated payments to prefund retiree health benefits from  $5.4 billion to $1.4 billion. In the absence of this congressional action,  USPS was on track to lose about $7 billion. 1). USPS debt at the end of fiscal year 2009 increased by the annual statutory  limit of $3 billion, bringing outstanding debt to $10.2 billion. If debt  continues to increase by $3 billion annually, USPS will reach its total  statutory debt limit of $15 billion in fiscal year 2011. Looking forward, USPS has projected annual deficits exceeding $7 billion  in fiscal years 2010 and 2011, and continuing large cash shortfalls. 2). 2). Legal Changes Provided USPS with Greater Flexibility to Generate Revenues

PAEA and implementing Postal Regulatory Commission (PRC) regulations  provided USPS with greater flexibility to set prices, test new postal  products, and retain earnings so that it can finance needed capital  investments and repay its debt. Under the  new structure, USPS has broad latitude to announce rate changes that are  implemented in a streamlined process unless PRC determines these rates  would violate legal requirements. USPS Actions to Generate Revenue since PAEA Have Generally Achieved Limited Results

In the short time since PAEA was enacted, with the exception of annual  rate increases, revenue-generation actions have generally achieved limited  results compared to USPS’s deficits. We commend USPS for taking action  to use its pricing flexibility to address the pressing need for additional  revenue. Although these actions generated some revenues, their positive  impacts were overwhelmed by the recession—with its cutbacks in  consumer spending and corporate advertising—and ongoing diversion of  mail to electronic alternatives. USPS Revenue- Generation Options Involving Postal Products and Services Appear More Promising than Venturing into New Risky Areas

Looking forward, USPS has opportunities to continue pursuing the  flexibilities provided by PAEA to help generate additional revenue from  postal products and services. However, results from USPS  revenue-generation efforts will continue to be constrained by the  economic climate and by changing use of the mail. USPS has asked  Congress to change the restrictions established by PAEA so that it could  offer new nonpostal products and services such as banking and insurance. Allowing USPS to compete more  broadly with the private sector would raise risks and concerns. As with  USPS’s nonpostal ventures before PAEA was enacted, new nonpostal  ventures could lose money; and even if they were to make money, issues  related to unfair competition would need to be considered. On the other hand, increasing postal rates may provide a short-term  revenue boost but would risk depressing mail volume and revenues in the  long term, in part by accelerating diversion of payments, communications,  and advertising to electronic alternatives. In conclusion, when we recently added USPS’s financial condition to our  high-risk list, we stated that USPS urgently needs to restructure to achieve  short-term and long-term financial viability. USPS has not been able to  cut costs fast enough or generate sufficient revenue to offset the  accelerated decline in mail volume and revenue. USPS restructuring will  require aligning its costs with revenues, generating sufficient earnings to  finance capital investment, and managing its debt. Mail volume has typically returned  after past recessions, but much of the recent volume decline may not  return.
Why GAO Did This Study

The U.S. Postal Service's (USPS) financial condition and outlook deteriorated significantly during fiscal year 2009. USPS was not able to cut costs fast enough to offset declining mail volume and revenues resulting from the economic downturn and changing mail use. Facing an unprecedented cash shortfall, USPS stated that it would have insufficient cash on hand to make its mandated $5.4 billion payment to prefund postal retiree health benefits that was due by the end of the fiscal year. In July, 2009, GAO added USPS's financial condition to the list of high-risk areas needing attention by Congress and the executive branch to achieve broad-based transformation. GAO stated that USPS urgently needs to restructure to address its current and long-term financial viability. GAO also stated that USPS needs to use its flexibility to generate revenue through new or enhanced products. This testimony will (1) update USPS's financial condition and outlook, (2) describe changes made by the Postal Accountability and Enhancement Act (PAEA) of 2006 that provided USPS with greater flexibility to generate revenues, (3) outline USPS's revenue-generation actions and results using this flexibility, and (4) discuss options for USPS to generate increased revenues in the future. This testimony is based on GAO's past and ongoing work.

What GAO Found

USPS's financial condition for fiscal year 2009 and its financial outlook continue to be challenging: (1) In fiscal year 2009, mail volume declined about 28 billion pieces, or about 14 percent, from the prior fiscal year, when volume was about 203 billion pieces; revenue declined from about $75 billion to about $68 billion. (2) A looming cash shortfall necessitated last-minute congressional action to reduce USPS's mandated payments to prefund retiree health benefits by $4 billion. In the absence of congressional action, USPS was on track to lose about $7 billion. (3) USPS debt increased at the end of fiscal year 2009 by the annual statutory limit of $3 billion, bringing outstanding debt to $10.2 billion. At this rate, USPS will reach its total $15 billion statutory debt limit in fiscal year 2011. (4) USPS projects annual deficits over $7 billion in fiscal years 2010 and 2011, and continuing large cash shortfalls. PAEA and implementing regulations gave USPS more flexibility to set prices, test new postal products, and retain earnings. USPS has broad latitude to set rates that take effect unless the Postal Regulatory Commission finds the rates would violate legal requirements, such as a price cap that generally limits rate increases for most mail to the rate of inflation. Except for annual rate increases, USPS revenue-generation actions since PAEA was enacted have generally achieved limited results compared to USPS's deficits. To its credit, USPS has taken actions to use its pricing flexibility to address the pressing need for additional revenue. These actions generated some revenues, although their positive impacts were overwhelmed by the recession--with its cutbacks in consumer spending and corporate advertising--and ongoing diversion of mail to electronic alternatives. Looking forward, USPS has opportunities to continue pursuing the flexibilities provided by PAEA to help generate additional revenue from postal products and services. However, results will continue to be constrained by the economic climate and by changing use of the mail. Mail volume has typically returned after past recessions, but much of the recent volume decline may not return. Increasing postal rates may provide a short-term revenue boost but would risk depressing mail volume and revenues in the long-term, in part by accelerating diversion of mail to electronic alternatives. USPS has asked Congress to change the restrictions established by PAEA so that it could offer new nonpostal products and services such as banking and insurance. Allowing USPS to compete more broadly with the private sector could lose money, and fair competition issues would need to be considered. Thus, in addition to its revenue-generation initiatives, USPS will need to continue making significant reductions in its workforce and network costs. When we recently added USPS's financial condition to our high-risk list, we said that restructuring will require USPS to align its costs with revenues, generate sufficient earnings to finance capital investment, and manage its debt.