	USPS’s Financial Crisis Has Worsened, and USPS Is Likely to Face Insolvency

As we have noted previously, USPS urgently needs to restructure its  networks and operations as its financial condition and outlook have  reached a crisis level. USPS has experienced a cumulative net loss of  nearly $20 billion over the last 5 fiscal years, including an $8.5 billion loss  in 2010; and a reported net loss of $5.7 billion in the first 9 months of  fiscal year 2011. By the end of this fiscal year, USPS projects that it will  incur a $9 billion loss, experience a substantial cash shortfall, reach its  $15 billion borrowing limit, and not make its statutorily mandated $5.5  billion retiree health benefits payment to the federal government. USPS  summarized its situation as the equivalent of facing Chapter 11  bankruptcy. USPS has said that mail volume declines and  changes in the mail mix have outpaced even its most pessimistic  forecasts. USPS does not now have—nor expects in the future to have—sufficient  revenue to cover its costs without legislative changes. Proposals to Address USPS’s Financial Crisis

We have reviewed a variety of proposals to address USPS’s ongoing  financial difficulties by reducing costs and improving operational  efficiency, but the overall effects of these proposals are uncertain  because many questions remain. In August 2011, USPS released two  discussion drafts that outline major proposals to (1) seek legislative  authority to withdraw USPS from the Federal Employee Health Benefit  (FEHB) program and sponsor its own program and change pension  benefits for new employees, and (2) seek legislative authority to eliminate  the layoff protections it negotiated with its unions in collective bargaining  to accelerate network and workforce downsizing. We also reviewed other proposals  including
USPS proposals to seek reimbursement of the surplus in its Federal  Employees Retirement System (FERS) account and reduce costs by  moving to 5-day delivery, restructuring its retail network, and reducing  excess capacity in its mail processing network; pending legislation, including bills introduced in the Senate by  Senators Carper and Collins and in the House of Representatives by  Representatives Issa and Lynch;  the President’s Fiscal Year 2012 Budget Request; our recent work, including our April 2010 report on USPS’s business  model which (1) concluded that this model is broken and that USPS  needs to take more aggressive action to better align costs with  revenues and (2) discussed a series of options that included  restructuring USPS’s retiree health prefunding payments, adjusting its  workforce mix to more part-time staff, closing unneeded retail and  mail processing facilities, and moving to 5-day delivery; and,  reports by the U.S. Proposals Related to Reducing Benefit Costs

The key considerations of the USPS benefit-related proposals include the  financial impact on USPS, its employees, future hires, retirees, the federal  budget, and benefit programs and USPS’s ability to administer its own  program. How would  such a change impact USPS health benefit contribution rates and  costs? What would be the  impact of this proposal on collective bargaining? To conserve  cash immediately, however, in June 2011, USPS discontinued making its  employer contribution payments for the defined benefit portion of FERS. USPS estimated this would  reduce its costs by about $800 million in the current fiscal year but would  not impact current or future postal retirees. Is additional  clarification needed to determine whether USPS’s pension proposal  for new employees is comparable to the private sector? Budgetary – What would be the impact on the federal budget of  transferring the $6.9 billion FERS surplus to USPS? Thus, through legislation, FERS benefits for  USPS employees could potentially be modified. In order to meet its 2015 goal, USPS has asked for  legislation to eliminate the layoff provisions it has negotiated with its  unions in collective bargaining so that it can accelerate reducing its  workforce by an additional 125,000 career positions. USPS has proposed initiatives to remove more than $11 billion in costs  from its networks and workforce. These proposals require making trade-offs among USPS cost savings,  customer convenience and costs, employee agreements, and  expectations related to the level of services USPS can afford to provide. The stark reality is that USPS’s business model is broken. The decline in  mail volumes is continuing. The gap between revenues and expenses is  growing. USPS cannot continue providing services at current levels  without dramatic changes in its cost structure. Difficult choices must be  made. Now is the time to decide USPS’s future.
Why GAO Did This Study

By the end of this fiscal year--in less than one month--the U.S. Postal Service (USPS) projects that it will incur a $9 billion loss; reach its $15 billion borrowing limit; not make its $5.5 billion retiree health benefits payment; and thus, become insolvent. USPS recently summarized this situation as the equivalent of facing Chapter 11 bankruptcy. In August 2011, USPS outlined new proposals to address the crisis. USPS seeks legislation to remove itself from the federal health benefit program and sponsor its own program; change pension benefits for new employees; and eliminate the layoff provisions it negotiated with its unions in collective bargaining to accelerate its delivery, processing, and retail network and workforce downsizing. Other USPS proposals, such as moving to 5-day delivery, and pending legislation include additional options for consideration. This statement discusses (1) updated information on USPS's financial crisis and (2) GAO's review and analysis of proposals to address this crisis, including USPS's new proposals, and options in current legislation. The testimony is based primarily on GAO's review of pending legislation, past and ongoing work related to postal issues, as well as USPS's recent financial results and GAO's discussions with senior postal officials regarding USPS's recent proposals. GAO has reported that action by Congress and USPS is urgently needed to restore USPS's financial viability. GAO provided a draft statement to USPS for comments and did not receive any suggested changes.

What GAO Found

USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years, including an $8.5 billion loss in 2010, and a net loss of $5.7 billion in the first 9 months of fiscal year 2011. USPS does not now have--nor does it expect to have--sufficient revenue to cover its costs without legislative changes. To conserve cash, USPS discontinued making its employer's contribution for the defined-benefit portion of the Federal Employees Retirement System (FERS) in June 2011, which it estimated would reduce its costs by about $800 million this fiscal year. USPS has said that mail volume decline has outpaced even its most pessimistic forecasts. USPS urgently needs to restructure its networks and workforce as its financial condition and outlook have reached a crisis level. A variety of proposals have been made to address USPS's financial crisis. These proposals affect USPS cost savings, postal rates, customer convenience, pension benefits for new employees, employee health benefits, collective bargaining agreements, and delivery and retail services. GAO has identified key issues needing consideration in determining the merits of these proposals. Examples of specific proposals and key considerations include: (1) USPS proposal to sponsor its own health benefit plan: USPS expects to save costs by increasing employee contribution rates, fully utilizing Medicare benefits, and administering its plan more efficiently than OPM. However, it is not clear whether USPS can achieve planned cost savings and what the implications are for the federal budget, as USPS has requested about $42 billion in retiree health benefit assets be transferred from Treasury to a USPS Fund. (2) USPS proposal to seek reimbursement of its $6.9 billion FERS surplus: Reimbursing the entire surplus all at once is a risk as the current FERS surplus is an estimate that could change as economic or demographic assumptions change. The President's Fiscal Year 2012 Budget Request proposed amortizing the reimbursement over 30 years, which would be consistent with the approach taken for any deficits. (3) USPS proposal on workforce optimization: USPS expects to reduce costs by closing about 300 mail processing plants and 12,000 retail facilities; reducing service; and eliminating layoff protections in collective bargaining agreements so that it can reduce its total workforce by about 125,000 career employees by 2015. This proposal accelerates the pace of USPS actions in this area, but it is not clear how USPS will address public resistance to facility closures that could lengthen the timeframes for implementation; employee resistance to making legislative changes to layoff protections; and potential loss of customers if service declines or costs increase. Little time remains to prevent USPS---the largest federal civilian employer---from insolvency. The stark reality is that USPS's business model is broken. The decline in mail volumes is continuing. The gap between revenues and expenses is growing. USPS cannot continue providing services at current levels without dramatic changes in its cost structure. Difficult choices must be made. Now is the time to decide USPS's future.