USPS’s Business Model Is Not Viable

USPS’s business model is not viable due to its inability to reduce costs  sufficiently in response to continuing declines in mail volume and revenue. Mail volume declined 36 billion pieces over the last 3 fiscal years, 2007  through 2009, due to the economic downturn and changing use of the mail,  with mail continuing to shift to electronic communications and payments. USPS lost nearly $12 billion over this period, despite achieving billions in  cost savings, reducing capital investments, and raising rates. However,  USPS had difficulty in eliminating costly excess capacity, and its revenue  initiatives had limited results. Making  the necessary progress would require (1) taking more aggressive actions to  reduce costs and increase revenues within its current authority, using the  collective bargaining process to address wages, benefits, and workforce  flexibility, and (2) congressional action to address legal restrictions and  resistance to realigning USPS operations, networks, and workforce. They also  include some provisions that allow USPS to make changes, such as  relocating employees, but other provisions limit USPS’s flexibility to  manage work efficiently and rightsize its workforce. Rising wages also increase benefit costs, such as pensions. Benefits cost USPS almost $17 billion in fiscal  year 2009, over 23 percent of its total costs. The cost would have been  nearly $21 billion if Congress had not reduced USPS payments for retiree  health benefits by $4 billion to address a looming cash shortfall. Deferrals of funding such benefits would serve as financial relief. USPS projects that its revenue will stagnate in the next decade despite  further rate increases. If USPS cannot be financially viable without reducing universal postal  service, what changes would be needed? Actions Congress and USPS Can Take to Facilitate Progress toward Financial Viability

Action by Congress and USPS is urgently needed on a number of difficult  issues to facilitate progress toward USPS’s financial viability by reducing  costs, increasing efficiency, and generating revenues. The significant  deterioration in USPS’s financial condition over the past 2 years, its  increasing debt, and the grim forecast for declining volume over the next  decade led GAO to add USPS’s financial condition to its high-risk list in  July 2009. Thus, it is unclear what statutory or regulatory changes should be  made at this time. USPS’s Action Plan says that it plans to expand access to retail  service and, as customers shift to these new services, that it will reduce  redundant retail facilities. Furthermore, Congress may want assurance through regular reports that  any financial relief it provides is met with aggressive actions to reduce  costs and increase revenues, and that progress is being made toward  addressing its financial problems. If no action is taken, the risk of USPS’s  insolvency and the need for a bailout by taxpayers and the U.S. Treasury  increases. At the same time, to facilitate making progress in difficult areas, Congress  should consider establishing (1) a panel of independent experts, similar to  a BRAC-like commission, to coordinate with USPS and stakeholders to  develop a package of proposed legislative and operational changes needed  to reduce costs and address challenges to USPS’s business model and   (2) procedures for the review and approval of these proposals by the  President and Congress. Congress also should consider requiring USPS to provide regular reports  to Congress to ensure that USPS is making progress to improve its  financial condition. First, regarding  revising USPS retiree health benefit funding, USPS said the prefunding  requirement urgently needs to be restructured and agreed that it should  continue to fund its retiree health benefits obligation to the maximum  extent that its finances permit. Appendix I: Objectives, Scope, and Methodology

The Postal Accountability and Enhancement Act (PAEA) of 2006 required  us to report on strategies and options for the long-term structural and  operational reform of the United States Postal Service (USPS). The objectives of this report are  to assess (1) the viability of USPS’s business model, (2) strategies and  options to address challenges to USPS’s current business model, and   (3) actions Congress and USPS need to take to facilitate progress toward  USPS’s financial viability. Related GAO Products

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Why GAO Did This Study

The Postal Accountability and Enhancement Act of 2006 required GAO to evaluate strategies and options for reforms of the United States Postal Service (USPS). USPS's business model is to fulfill its mission through self-supporting, businesslike operations; however, USPS has experienced increasing difficulties. Due to volume declines, losses, a cash shortage, and rising debt, GAO added USPS's financial condition to its high-risk list in July 2009. GAO's objectives were to assess (1) the viability of USPS's business model, (2) strategies and options to address challenges to its business model, and (3) actions Congress and USPS need to take to facilitate progress toward financial viability. GAO primarily drew on its past work; other studies; USPS data; interviews with USPS, unions, management associations, Postal Regulatory Commission, and mailing industry officials; and stakeholder input.

What GAO Found

USPS's business model is not viable due to USPS's inability to reduce costs sufficiently in response to continuing mail volume and revenue declines. Mail volume declined 36 billion pieces (17 percent) over the last 3 fiscal years (2007 through 2009) with the recession accelerating shifts to electronic communications and payments. USPS lost nearly $12 billion over this period, despite achieving billions in cost savings by reducing its career workforce by over 84,000 employees, reducing capital investments, and raising rates. However, USPS had difficulty in eliminating costly excess capacity, and its revenue initiatives have had limited results. USPS also is nearing its $15 billion borrowing limit with the U.S. Treasury and has unfunded pension and retiree health obligations and other liabilities of about $90 billion. In 2009, Congress reduced USPS's retiree health benefit payment by $4 billion to address a looming cash shortfall, but USPS still recorded a loss of $3.8 billion. Given its financial problems and outlook, USPS cannot support its current level of service and operations. USPS projects that volume will decline by about 27 billion pieces over the next decade, while revenues will stagnate; costs will rise; and, without major changes, cumulative losses could exceed $238 billion. This report groups strategies and options that can be taken to address challenges in USPS's business model by better aligning costs with revenues (see table on next page). USPS may be able to improve its financial viability if it takes more aggressive action to reduce costs, particularly compensation and benefit costs that comprise 80 percent of its total costs, as well as increasing revenues within its current authority. However, it is unlikely that such changes would fully resolve USPS's financial problems, unless Congress also takes actions to address constraints and legal restrictions. Action by Congress and USPS is urgently needed to (1) reach agreement on actions to achieve USPS's financial viability, (2) provide financial relief through deferral of costs by revising USPS retiree health benefit funding while continuing to fund these benefits over time to the extent that USPS's finances permit, and (3) require that any binding arbitration resulting from collective bargaining would take USPS's financial condition into account. Congress may also want assurance that any financial relief it provides is met with aggressive actions by USPS to reduce its costs and increase revenues, and that USPS is making progress toward addressing its financial problems. USPS's new business plan recognizes immediate actions are needed, but USPS has made limited progress on some options, such as closing facilities. If no action is taken, risks of larger USPS losses, rate increases, and taxpayer subsidies will increase. To facilitate progress in these difficult areas, Congress could set up a mechanism, such as one similar to the military Base Realignment and Closure Commission, where independent experts could recommend a package of actions with time frames. Key issues also need to be addressed related to what changes, if any, should be made to delivery or retail services; to allow USPS to provide new products or services in nonpostal areas; and to realign USPS operations, networks, and workforce.