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Testimony: 

Before the Subcommittee on Federal Financial Management, Government 
Information, Federal Services, and International Security, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Thursday, August 6, 2009: 

U.S. Postal Service: 

Restructuring Urgently Needed to Achieve Financial Viability: 

Statement of Phillip Herr, Director: 
Physical Infrastructure Issues: 

GAO-09-958T: 

GAO Highlights: 

Highlights of GAO-09-958T, a testimony before the Subcommittee on 
Federal Financial Management, Government Information, Federal Services, 
and International Security, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

The U.S. Postal Serviceís (USPS) financial condition has worsened since 
GAO testified before this Subcommittee last January, with the recession 
and changing mail use causing dramatic declines in mail volume and 
revenues despite postal rate increases. USPS expects these declines to 
lead to losses and cash shortfalls even if ambitious cost-cutting is 
achieved. 

Mail use has been changing over the past decade as businesses and 
consumers have moved to electronic communication and payment 
alternatives. Mail volume peaked in 2006, and USPS expects that much of 
the lost volume will not return after the recession is over. 

USPSís business model has relied on growth in mail volume to cover 
costs, but USPS has not been able to cut costs fast enough to offset 
the accelerated decline in mail volume and revenue. Thus, GAO added 
USPSís financial condition to the High-Risk List in July 2009. 
 
This testimony (1) updates USPSís financial condition and outlook and 
explains GAOís decision to place USPSís financial condition on the High-
Risk List and (2) discusses the need for USPS to restructure and 
presents options and actions that USPS can take. It is based on GAOís 
past and ongoing work. 

What GAO Found: 

USPSís financial condition and outlook continue to deteriorate with a 
worsening outlook for mail volume and revenue. USPS now projects mail 
volume to decline to 175 billion pieces in fiscal year 2009, a 13.7 
percent decrease from fiscal year 2008. As a result, USPS projects for 
fiscal year 2009: 

* a net loss of $7 billion, even if it achieves record savings of more 
than $6 billion; 

* an increase in outstanding debt to a total of $10.2 billion; and, 

* despite this borrowing, an unprecedented $1 billion cash shortfall. 

Thus, USPS expects to generate insufficient cash to fully make its 
mandated payment of $5.4 billion for future retiree health benefits due 
by September 30, 2009. 

When GAO added USPSís financial condition to its high-risk list, it 
reported that USPS urgently needs to restructure to address its current 
and long-term financial viability. The short-term challenge for USPS is 
to cut costs quickly enough to offset the unprecedented volume and 
revenue declines, so that it can cover its operating expenses. The long-
term challenge is to restructure USPS operations, networks, and 
workforce to reflect changes in mail volume, use of the mail, and 
revenue. Accordingly, GAO called for USPS to develop and implement a 
broad restructuring planówith input from the Postal Regulatory 
Commission and other stakeholders and approval by Congress and the 
administrationóthat includes key milestones, time frames for actions, 
identifies what steps Congress and other stakeholders may need to take, 
and addresses how USPS plans to: 

* realign postal services, such as delivery frequency, delivery 
standards, and access to retail services, with changes in the use of 
mail by consumers and businesses; 

* better align costs and revenues, including compensation and benefit 
costs; 

* optimize its operations, networks, and workforce; 

* increase mail volumes and revenues; and, 

* retain earnings, so that it can finance needed capital investments 
and repay its growing debt. 

To achieve financial viability, USPS must align its costs with 
revenues, generate sufficient earnings to finance capital investment, 
and manage its debt. Key restructuring actions that USPS could take 
include the following: 

* reduce compensation and benefit costs, 

* consolidate retail and processing networks and field structure, and, 

* generate revenue through new or enhanced products. 

USPS has proposed two actions that would require congressional 
approval: 1) changing funding requirements for retiree health benefits 
and 2) reducing mail delivery from 6 to 5 days. USPSís financial 
viability is critical as it plays a vital role in the U.S. economy and 
in providing postal services to all communities. 

View [hyperlink, http://www.gao.gov/products/GAO-09-958T] or key 
components. For more information, contact Phillip Herr at (202) 512-
2834 or herrp@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to participate in this hearing on the U.S. Postal 
Service's (USPS) financial condition. My statement will (1) provide 
updated information on USPS's financial condition and outlook and 
explain our recent decision to place USPS's financial condition on our 
High-Risk List and (2) discuss the need for USPS to restructure and 
present options and actions USPS can take to address both its current 
and its long-term challenges. 

My statement is based upon on our past and ongoing work, including our 
report adding USPS to our High-Risk List,[Footnote 1] and our continued 
monitoring of USPS's financial condition and outlook. We conducted our 
work for this statement from May 2009 to August 2009 in accordance with 
all sections of GAO's quality assurance framework that are relevant to 
our objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations in our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this product. 

USPS's Financial Condition Continues to Deteriorate, and We Have Added 
Its Financial Condition to Our High-Risk List: 

USPS's financial condition and outlook have continued to deteriorate 
since I testified before this Subcommittee last January, as the 
prospects for both mail volume and revenue worsen. USPS currently 
projects fiscal year 2009 mail volumes of about 175 billion, which 
would be 28 billion fewer pieces than fiscal year 2008. This 13.7 
percent decline, triple the 4.5 percent decline for fiscal year 2008, 
would be the largest percentage decline since the Great Depression. As 
a result, USPS is projecting the following for fiscal year 2009: 

* a net loss of about $7 billion, even if USPS achieves record cost 
savings of about $6 billion; 

* an increase in outstanding debt to a total of $10.2 billion; and: 

* despite this borrowing, an unprecedented $1 billion cash shortfall. 

* USPS has reported that it does not expect to generate sufficient cash 
from operations to fully make its mandated fiscal year 2009 payment of 
$5.4 billion for future retiree health benefits that is due by 
September 30, 2009--even if it receives legislative relief from these 
payments. 

USPS also expects continued financial problems in fiscal year 2010 (see 
table 1), including a similar deficit and a larger cash shortfall, even 
if it achieves larger cost savings. Under this scenario, USPS would 
increase its outstanding debt by an additional $3 billion, which would 
bring its total debt to $13.2 billion at the end of fiscal year 2010--
only $1.8 billion less than its $15 billion statutory limit.[Footnote 
2] 

Table 1: USPS's Financial Results and Projections, Fiscal Years 2006 
through 2010: 

Fiscal year: 2006; 
Net income (loss): $0.9 billion; 
Year-end cash: $1.0 billion; 
Year-end debt: $2.1 billion. 

Fiscal year: 2007; 
Net income (loss): ($5.1) billion; 
Year-end cash: $0.9 billion; 
Year-end debt: $4.2 billion. 

Fiscal year: 2008; 
Net income (loss): ($2.8) billion; 
Year-end cash: $1.4 billion; 
Year-end debt: $7.2 billion. 

Fiscal year: 2009 (projected); 
Net income (loss): ($7.0) billion; 
Year-end cash: ($1.0) billion; 
Year-end debt: $10.2 billion. 

Fiscal year: 2010 (projected); 
Net income (loss): ($7.0) billion; 
Year-end cash: ($4.5) billion; 
Year-end debt: $13.2 billion. 

Source: USPS. 

Note: Cash projections assume cost savings of $5.9 billion in 2009 and 
$8 billion in 2010 and no relief from retiree health benefits payments. 

[End of table] 

USPS's projected cost cutting of about $6 billion for this fiscal year 
is much larger than its previous annual cost-cutting targets, which 
have ranged from nearly $900 million to $2 billion since 2001. However, 
USPS projects cash shortfalls because cost cutting and rate increases 
will not fully offset the impact of mail volume declines and other 
factors that increase costs--notably semiannual cost-of-living 
allowances (COLA) for employees covered by collective bargaining 
agreements. Compensation and benefits constitute close to 80 percent of 
USPS's costs--a percentage that has remained similar over the years 
despite major advances in technology and the automation of postal 
operations. Also, USPS continues to pay a higher share of employee 
health benefit premiums than other federal agencies. Finally, USPS has 
high overhead (institutional) costs that are hard to change in the 
short term, such as the costs of providing universal service with 6-day 
delivery, a network of 37,000 post offices and retail facilities, and a 
delivery network of more than 149 million addresses. 

Last week, we 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. We reported that USPS urgently needs to 
restructure to address its current and long-term financial viability. 
USPS has not cut its cost structure fast enough to offset accelerated 
declines in mail volume and revenue. To achieve financial viability, 
USPS must align its costs with revenues, generate sufficient earnings 
to finance capital investment, and manage its debt. 

We also noted that mail use has been changing over the past decade as 
businesses and consumers have moved to electronic communication and 
payment alternatives. For example, the percentage of household bills 
paid by mail is declining while the percentage paid electronically is 
increasing (see fig. 1). Mail volume peaked in 2006, and its decline 
has accelerated with the economic recession, particularly among major 
mail users in the advertising, financial, and housing sectors. Mail 
volume has typically returned after recessions, but USPS's 5-year 
forecast suggests that much of the lost volume will not return. 

Figure 1: Percentage of Household Bill Payments Made by Mail and 
Electronically, Fiscal Years 2000 through 2008: 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 2000; 
Mail payment: 79%; 
Electronic payment: 11%. 

Fiscal year: 20002; 
Mail payment: 80%; 
Electronic payment: 13%. 

Fiscal year: 2002; 
Mail payment: 75%; 
Electronic payment: 17%. 

Fiscal year: 2003; 
Mail payment: 74%; 
Electronic payment: 19%. 

Fiscal year: 2004; 
Mail payment: 69%; 
Electronic payment: 24%. 

Fiscal year: 2005; 
Mail payment: 67%; 
Electronic payment: 27%. 

Fiscal year: 2006; 
Mail payment: 63%; 
Electronic payment: 30%. 

Fiscal year: 2007; 
Mail payment: 62%; 
Electronic payment: 32%. 

Fiscal year: 2008; 
Mail payment: 56%; 
Electronic payment: 38%. 

Source: USPS. 

[End of figure] 

Addressing USPS's financial viability is critical because USPS plays a 
vital role in the U.S. economy and provides postal services to all 
communities. Moreover, it is the largest civilian federal agency, 
employing about 633,000 career and 94,000 noncareer employees and 
operating a total of about 38,000 facilities nationwide. 

USPS has had difficulty reducing costs in two areas because of limited 
flexibility. First, as we have testified, USPS needs to make changes to 
its compensation and benefits, which compose about 80 percent of its 
costs. To do so, USPS will need to negotiate with its four largest 
unions on collective bargaining agreements that will expire in 2010 and 
2011. These agreements cover about 85 percent of postal employees and 
include items such as cost-of-living adjustments, work rules, and 
layoff protections. USPS will also need to consult on compensation and 
benefits with three management associations representing most of its 
other employees. USPS has a window of opportunity to reduce the cost 
and size of its workforce through attrition and a large number of 
upcoming retirements, thereby also minimizing the potential for 
layoffs. 

Second, as we have also testified, USPS needs to optimize its retail, 
mail processing, and delivery networks to eliminate growing excess 
capacity and maintenance backlogs, reduce costs, and improve 
efficiency. USPS has made limited progress in optimizing its networks 
and must work with employees, local communities, and others affected by 
these changes to address resistance to closing and consolidating 
facilities. 

Broad Restructuring Needed to Help USPS Achieve Financial Viability: 

USPS needs to address weaknesses in its business model, which has 
relied on growth in mail volume to cover costs and enable USPS to be 
self-supporting. Despite increasingly ambitious cost-cutting efforts, 
USPS has not been able to cut costs fast enough to offset the 
accelerating declines in mail volume and revenue. For these reasons, we 
concluded that restructuring action is needed in multiple areas, 
including possible action and support by Congress, since no single 
change will be sufficient to address USPS's challenges. 

* The short-term challenge for USPS is to cut costs quickly enough to 
offset the unprecedented volume and revenue declines, so that it can 
cover its operating expenses. 

* The long-term challenge is to restructure USPS's operations, 
networks, and workforce to reflect changes in mail volume, use of the 
mail, and revenue. 

* We also identified key restructuring options and actions USPS could 
take, including the following: 

1. Reduce compensation and benefit costs through: 

* retirements: About 162,000 USPS employees are eligible to retire this 
year, and this number will increase to almost 300,000 within the next 4 
years. 

* early retirements: About 150,000 USPS employees were recently offered 
voluntary early retirement, but fewer than 3 percent accepted. 

* lower benefit costs: USPS pays a higher percentage of employee health 
benefit premiums than other federal agencies (80 percent versus 72 
percent, respectively). In addition, USPS pays 100 percent of employee 
life insurance premiums, while other federal agencies pay about 33 
percent. 

2. Consolidate retail and processing networks: 

* Remove excess capacity in USPS's mail processing network, where 
processing capacity for First-Class Mail exceeds needs by 50 percent. 

* Maximize use of lower-cost retail alternatives: A growing amount of 
USPS's retail revenue comes through alternative channels--for example, 
stamps are sold by mail, on the Internet, and at grocery stores. 

* Reduce the network of 37,000 retail facilities, where maintenance has 
been underfunded for years, resulting in deteriorating facilities and a 
maintenance backlog. 

3. Consolidate field structure: Review the need for 74 district offices 
and 9 area offices. 

4. Generate revenue through new or enhanced products: Use USPS's 
pricing and product flexibility to maximize profitable mail volume. 

Other options and actions that USPS has proposed that would require 
congressional approval include the following: 

1. Change funding requirements for retiree health benefits: USPS has 
asked Congress to revise the funding requirements for its retiree 
health benefit obligation as it does not expect to make the full amount 
of its $5.4 billion retiree health benefit payment at the end of this 
fiscal year because of a cash shortage. 

2. Realign delivery services with changing use of mail: USPS has asked 
Congress to allow it to reduce delivery from 6 days to 5 days per week 
as revenue and mail volume have declined. Specifically, USPS's revenue 
per delivery has declined 20 percent from fiscal year 2000 to fiscal 
year 2009, paralleling a comparable decline in the number of mail 
pieces delivered per address. 

Accordingly, we have called for USPS to develop and implement a broad 
restructuring plan--with input from the Postal Regulatory Commission 
and other stakeholders, and approval by Congress and the 
administration--that includes key milestones and time frames for 
actions, addresses key issues, and identifies what steps Congress and 
other stakeholders may need to take. We stated that the restructuring 
plan should address how USPS plans to: 

* realign postal services, such as delivery frequency, delivery 
standards, and access to retail services, with changes in the use of 
mail by consumers and businesses; 

* better align costs and revenues, including compensation and benefit 
costs; 

* optimize its operations, networks, and workforce; 

* increase mail volumes and revenues; and: 

* retain earnings, so that it can finance needed capital investments 
and repay its growing debt. 

In addition, GAO has initiated a review, as required by the Postal 
Accountability and Enhancement Act of 2006,[Footnote 3] to evaluate 
these and other options and actions for the long-term structural and 
operational reforms of USPS. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to answer any questions that you or other Members of the Subcommittee 
may have. 

GAO Contact and Staff Acknowledgments: 

For further information regarding this statement, please contact 
Phillip Herr at (202) 512-2834 or herrp@gao.gov. Individuals who made 
key contributions to this statement include Shirley Abel, Teresa 
Anderson, Gerald P. Barnes, Josh Bartzen, Elizabeth Eisenstadt, Paul 
Hobart, Kenneth E. John, Hannah Laufe, Josh Ormond, Travis Thomson, and 
Crystal Wesco. 

[End of section] 

Footnotes: 

[1] GAO, High-Risk Series: Restructuring the U.S. Postal Service to 
Achieve Sustainable Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-09-937SP] (Washington, D.C.: July 28, 
2009). 

[2] 39 U.S.C. ß 2005(a). 

[3] Pub. L. No. 109-435, ß 710 (Dec. 20, 2006). 

[End of section] 

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