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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Subcommittee on Federal Workforce, U.S. Postal Service and 
Labor Policy, Committee on Oversight and Government Reform, House of 
Representatives: 

For Release on Delivery: 
Expected at 1:30 p.m. EST:
Wednesday, March 2, 2011: 

U.S. Postal Service: 

Modernization and Restructuring Needed to Address Financial Challenges: 

Statement of Phillip Herr, Director: 
Physical Infrastructure Issues: 

GAO-11-428T: 

GAO Highlights: 

Highlights of GAO-11-428T, a testimony before the Subcommittee on 
Federal Workforce, U.S. Postal Service and Labor Policy, Committee on 
Oversight and Government Reform, House of Representatives. 

Why GAO Did This Study: 

The U.S. Postal Serviceís (USPS) financial condition and outlook are 
deteriorating because revenues are not sufficient to cover its 
expenses and financial obligations. These challenges continue to 
threaten USPSís financial viability and GAO has therefore retained 
USPS on its high risk list issued in February 2011. USPS also faces 
cost pressures from maintaining a national network of processing, 
retail, and delivery operations. 

This testimony discusses (1) updated information on USPSís financial 
condition and outlook and (2) actions needed to modernize and 
restructure USPS. It is based primarily on GAOís past and ongoing 
work, as well as GAOís review of USPSís recent financial results and 
the Presidentís proposed budget for fiscal year 2012. 

What GAO Found: 

USPS experienced a net loss of $329 million in the first quarter of 
fiscal year 2011 and is projecting a $6.4 billion total net loss for 
fiscal year 2011. Mail volumes, USPSís main revenue source, have 
generally been decreasing as customers have shifted to electronic 
alternatives. This trend exposes weaknesses in USPSís business model, 
which has relied on mail volume growth to help cover costs. While USPS 
continues to reduce employeesí work hours, its cost reduction efforts 
have not been sufficient to offset lost revenue. Since fiscal year 
2006, USPS has relied on debt to help cover its obligations. If it 
borrows $3 billion in fiscal year 2011 as its plans indicate, USPS 
will reach its $15 billion statutory debt limit. The Presidentís 
Fiscal Year 2012 Budget Request proposes providing USPS with over $4.5 
billion in short-term financial relief in fiscal year 2011 by reducing 
its retiree health benefit payment by $4 billion and reimbursing it 
for approximately $550 million in Federal Employee Retirement System 
payments. While useful, these actions would not sufficiently address 
USPSís structural problems. 

Table: Postal Service Financial Results and Projections, Fiscal Years 
2006 through 2011: 

Fiscal year: 2006; 
Net income (loss): $0.9 billion; 
Total revenues: $72.8 billion; 
Total expenses: $71.9 billion; 
Outstanding debt: $2.1 billion. 

Fiscal year: 2007; 
Net income (loss): ($5.1) billion; 
Total revenues: $75.0 billion; 
Total expenses: $80.1 billion; 
Outstanding debt: $4.2 billion. 

Fiscal year: 2008; 
Net income (loss): ($2.8) billion; 
Total revenues: $75.0 billion; 
Total expenses: $77.8 billion; 
Outstanding debt: $7.2 billion. 

Fiscal year: 2009; 
Net income (loss): ($3.8) billion; 
Total revenues: $68.1 billion; 
Total expenses: $71.9 billion; 
Outstanding debt: $10.2 billion. 

Fiscal year: 2010; 
Net income (loss): ($8.5) billion; 
Total revenues: $67.1 billion; 
Total expenses: $75.6 billion; 
Outstanding debt: $12.0 billion. 

Fiscal year: 2011 (projected); 
Net income (loss): ($6.4) billion; 
Total revenues: $67.7 billion; 
Total expenses: $74.1 billion; 
Outstanding debt: $15.0 billion. 

Source: USPS. 

[End of table] 

As seen in the table, USPSís financial condition has reached a tipping 
point. Given USPSís role in facilitating key aspects of the U.S. 
economy, Congress, the administration, USPS, and stakeholders need to 
reach agreement on a package of actions to restore USPSís financial 
viability, facilitate progress toward modernizing its services to meet 
changing customer needs, and remove barriers restricting USPS actions. 
This would allow USPS to optimize its networks and workforce so that 
it can become more efficient and reduce costs. GAO recently reported 
on lessons learned from foreign postsí modernization efforts, 
including using outreach and communication strategies to inform public 
officials and customers of increased access to products and services 
to help gain acceptance for retail network changes. Some posts also 
developed labor transition strategies that included training, 
relocation, job search services, and financial incentives to support 
employees who were negatively affected. While USPS has taken steps to 
generate ideas for modernizing its retail and delivery networks, the 
experiences of foreign posts suggest that it will be critically 
important for USPS to fully develop and implement similar outreach, 
communication, and labor transition strategies. 

What GAO Recommends: 

While this testimony contains no new recommendations, GAO has reported 
that Congress, the administration, and USPS urgently need to reach 
agreement on a package of actions to restore USPSís financial 
viability by modernizing its operations, networks, and workforce. GAO 
has also recommended that Congress consider providing USPS with 
financial relief, and in doing so, consider all options available to 
reduce costs. In commenting on this statement, USPS generally agreed 
with its accuracy and provided technical comments that were 
incorporated as appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-11-428T] or key 
components. For more information, contact Phillip Herr at (202) 512-
2834 or herrp@gao.gov. 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to participate in this hearing on the 
U.S. Postal Service's (USPS) financial condition, a topic we have 
addressed in recent reports and testimonies. My statement will discuss 
(1) updated information on USPS's financial condition and outlook and 
(2) actions needed to modernize and restructure USPS. 

This statement is based primarily on our past and ongoing work, and 
updated financial information, including our reviews of USPS's 
business model, financial condition, networks, service, and postal 
reform issues.[Footnote 1] To perform our work, we reviewed USPS's 
financial statements for the fiscal year that ended September 30, 
2010, and for the first quarter of fiscal year 2011 that ended 
December 31, 2010; USPS's Fiscal Year 2011 Integrated Financial Plan; 
the President's Fiscal Year 2012 Budget Request; and other reports, 
testimonies, and documentation on USPS's financial condition, 
operations, and outlook. In addition, we interviewed senior USPS 
officials. We conducted this performance audit in February 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our objectives. 

USPS's Financial Condition Continues to Deteriorate, and USPS May Face 
a Cash Shortfall This Fiscal Year: 

USPS's financial condition has deteriorated significantly since fiscal 
year 2006, and its financial outlook is grim in both the short-and 
long-term. In July 2009, we added USPS's financial condition and 
outlook to our high-risk list because USPS was incurring billion-
dollar deficits and its debt was increasing as mail volumes and 
revenues declined and costs rose. USPS experienced a net loss of $329 
million in the first quarter of fiscal year 2011 and is projecting a 
$6.4 billion total net loss for fiscal year 2011. In February 2011, we 
retained USPS on our updated high-risk list and reported that USPS 
finds itself without sufficient revenues to cover its expenses and 
financial obligations (see table 1).[Footnote 2] 

Table 1: Postal Service Financial Results and Projections, Fiscal 
Years 2006 through 2011: 

Fiscal year: 2006; 
Net income (loss): $0.9 billion; 
Total revenues: $72.8 billion; 
Total expenses: $71.9 billion; 
Outstanding debt: $2.1 billion. 

Fiscal year: 2007; 
Net income (loss): ($5.1) billion; 
Total revenues: $75.0 billion; 
Total expenses: $80.1 billion; 
Outstanding debt: $4.2 billion. 

Fiscal year: 2008; 
Net income (loss): ($2.8) billion; 
Total revenues: $75.0 billion; 
Total expenses: $77.8 billion; 
Outstanding debt: $7.2 billion. 

Fiscal year: 2009; 
Net income (loss): ($3.8) billion; 
Total revenues: $68.1 billion; 
Total expenses: $71.9 billion; 
Outstanding debt: $10.2 billion. 

Fiscal year: 2010; 
Net income (loss): ($8.5) billion; 
Total revenues: $67.1 billion; 
Total expenses: $75.6 billion; 
Outstanding debt: $12.0 billion. 

Fiscal year: 2011 (projected); 
Net income (loss): ($6.4) billion; 
Total revenues: $67.7 billion; 
Total expenses: $74.1 billion; 
Outstanding debt: $15.0 billion. 

Source: USPS. 

[End of table] 

Mail volumes have generally been decreasing as customers have 
increasingly shifted to electronic communications and payment 
alternatives (see figure 1), a trend that is expected to continue. 
USPS's two major products are First-Class Mail and Standard Mail. 
[Footnote 3] These accounted for nearly 94 percent of all mail volume 
and 77 percent of USPS revenues in fiscal year 2010. One piece of 
First-Class Mail generated about three times the profitability of the 
average piece of Standard Mail. USPS expects First-Class Mail volumes 
to continue declining in both the short-and long-term, as customers 
increasingly rely on electronic alternatives. In the first quarter of 
fiscal year 2011, First-Class Mail decreased by about 6 percent 
compared to the same period last year, while Standard Mail volumes 
grew by about 9 percent. Figure 2 depicts actual and projected mail 
volume trends--which show that by fiscal year 2020 mail volume is 
projected to decline to a level not seen since fiscal year 1986. 
Additionally, USPS expects the gap between First-Class and Standard 
Mail to expand--Standard Mail volumes first exceeded those in First-
Class Mail in fiscal year 2005. 

Figure 1: Percentage of Household Bill Payments Made by Mail and 
Electronically, Fiscal Years 2000 through 2009: 

[Refer to PDF for image: multiple line graph] 

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

Fiscal year: 2001; 
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%. 

Fiscal year: 2009; 
Mail payment: 54%; 
Electronic payment: 41%. 

Source: USPS. 

[End of figure] 

Figure 2: Actual and Projected Total Mail Volume, Fiscal Years 1971 
through 2020: 

[Refer to PDF for image: line graph] 

Fiscal year: 1971: 87.0 billion pieces; 
Fiscal year: 1972: 87.2 billion pieces; 
Fiscal year: 1973: 89.7 billion pieces; 
Fiscal year: 1974: 90.1 billion pieces; 
Fiscal year: 1975: 89.3 billion pieces; 
Fiscal year: 1976: 89.8 billion pieces; 
Fiscal year: 1977: 93.2 billion pieces; 
Fiscal year: 1978: 96.9 billion pieces; 
Fiscal year: 1979: 99.8 billion pieces; 
Fiscal year: 1980: 106.3 billion pieces; 
Fiscal year: 1981: 110.1 billion pieces; 
Fiscal year: 1982: 114.0 billion pieces; 
Fiscal year: 1983: 119.4 billion pieces; 
Fiscal year: 1984: 131.5 billion pieces; 
Fiscal year: 1985: 140.1 billion pieces; 
Fiscal year: 1986: 147.4 billion pieces; 
Fiscal year: 1987: 153.9 billion pieces; 
Fiscal year: 1988: 161.0 billion pieces; 
Fiscal year: 1989: 161.6 billion pieces; 
Fiscal year: 1990: 166.3 billion pieces; 
Fiscal year: 1991: 165.9 billion pieces; 
Fiscal year: 1992: 166.4 billion pieces; 
Fiscal year: 1993: 171.2 billion pieces; 
Fiscal year: 1994: 178.0 billion pieces; 
Fiscal year: 1995: 180.7 billion pieces; 
Fiscal year: 1996: 183.4 billion pieces; 
Fiscal year: 1997: 190.9 billion pieces; 
Fiscal year: 1998: 196.9 billion pieces; 
Fiscal year: 1999: 201.6 billion pieces; 
Fiscal year: 2000: 207.9 billion pieces; 
Fiscal year: 2001: 207.5 billion pieces; 
Fiscal year: 2002: 202.8 billion pieces; 
Fiscal year: 2003: 202.2 billion pieces; 
Fiscal year: 2004: 206.1 billion pieces; 
Fiscal year: 2005: 211.7 billion pieces; 
Fiscal year: 2006: 213.0 billion pieces; 
Fiscal year: 2007: 212.2 billion pieces; 
Fiscal year: 2008: 202.7 billion pieces; 
Fiscal year: 2009: 176.7 billion pieces; 
Fiscal year: 2010: 170.6 billion pieces; 
Fiscal year: 2011: 172.5 billion pieces; 
Fiscal year: 2012: 164.6 billion pieces; 
Fiscal year: 2013: 164.6 billion pieces; 
Fiscal year: 2014: 161.6 billion pieces; 
Fiscal year: 2015: 158.6 billion pieces; 
Fiscal year: 2016: 155.5 billion pieces; 
Fiscal year: 2017: 153.3 billion pieces; 
Fiscal year: 2018: 151.4 billion pieces; 
Fiscal year: 2029: 150.0 billion pieces; 
Fiscal year: 2020: 148.9 billion pieces. 

Projected fiscal year 2020 volume: About 150 billion mail pieces, the 
lowest level since fiscal year 1986. 

Source: USPS. 

[End of figure] 

In 2010, USPS delivered mail to over 150 million addresses nationwide. 
USPS has about 670,000 full-and part-time employees, and reports that, 
when benchmarked against other large posts, it has the highest 
percentage of full-time employees--about 79 percent. USPS has reported 
achieving cost savings close to $13 billion in the last 5 years. For 
example, USPS eliminated 125,000 full-and part-time positions (about 
16 percent). Despite these achievements, USPS has had difficulty 
significantly reducing its compensation and benefits costs and has 
struggled to optimize its workforce and retail, mail processing, and 
delivery networks. For example, during the first quarter of fiscal 
year 2011 despite a reduction of 6.4 million work hours when compared 
with the same period last year, savings from this reduction were 
partially offset by wage increases and increase in total retirement 
and health benefits expenses. Further, some USPS savings during these 
years came as a result of congressional action--Congress deferred $4 
billion of USPS's $5.4 billion scheduled payment to its retiree health 
benefit fund that was due at the end of fiscal year 2009.[Footnote 4] 
Table 2 provides an overview of key components of USPS's operational 
network. 

Table 2: Key Aspects of USPS's Operational Network, Fiscal Year 2010: 

* Delivered to over 150 million business and residential addresses. 

* Nearly 740,000 new additional delivery points. 

* 6-day mail delivery to most addresses. 

* Over 32,500 post offices and other retail and delivery facilities. 

* Over 215,000 vehicles, 193,000 of which are delivery vehicles. 

* 4.1 million miles driven in an average day by letter carriers and 
truck drivers. 

* Processed about 563 million pieces, on average, of mail each day. 

* Over 670,000 full- and part-time employees. 

* $60 billion in compensation and benefits expense (80 percent of 
total expenses). 

* 528 mail processing facilities. 

* Nearly 1.2 billion staff work hours. 

* $5.9 billion in transportation expense, primarily for highway and 
air transportation. 

Source: USPS. 

[End of table] 

USPS has relied increasingly on debt to fund its operations and has 
increased its net borrowing by nearly $12 billion over the last 5 
years. USPS also ended fiscal year 2010 with about $1.2 billion in 
cash and unfunded obligations and liabilities of roughly $105 billion 
(see table 3). For fiscal year 2011, USPS has not updated its 
financial projections based on its first quarter results and it still 
plans to borrow an additional $3 billion--an increase that would place 
USPS at its $15 billion statutory limit and prevent it from further 
borrowing in fiscal year 2012 absent congressional action. USPS also 
projects a $2.7 billion cash shortfall at the end of fiscal year 2011. 

Table 3: USPS Financial Liabilities and Unfunded Obligations, Fiscal 
Years 2007 through 2010: 

Fiscal year: 2007; 
Liabilities: Outstanding debt: $4.2 billion; 
Liabilities: Workers' compensation liabilities: $7.8 billion; 
Liabilities: Other liabilities[A]: $12.7 billion; 
Liabilities: Total liabilities: $24.7 billion; 
Obligations: Unfunded obligations for retiree health benefits: $55.0 
billion; 
Obligations: Unfunded obligations (surplus) for pension benefits: 
($5.3) billion; 
Obligations: Total unfunded obligations: $49.7 billion; 
Total liabilities and obligations: $74.4 billion. 

Fiscal year: 2008; 
Liabilities: Outstanding debt: $7.2 billion; 
Liabilities: Workers' compensation liabilities: $8.0 billion; 
Liabilities: Other liabilities[A]: $12.5 billion; 
Liabilities: Total liabilities: $27.7 billion; 
Obligations: Unfunded obligations for retiree health benefits: $53.5 
billion; 
Obligations: Unfunded obligations (surplus) for pension benefits: $2.5 
billion; 
Obligations: Total unfunded obligations: $56.0 billion; 
Total liabilities and obligations: $83.7 billion. 

Fiscal year: 2009; 
Liabilities: Outstanding debt: $10.2 billion; 
Liabilities: Workers' compensation liabilities: $10.1 billion; 
Liabilities: Other liabilities[A]: $13.2 billion; 
Liabilities: Total liabilities: $33.5 billion; 
Obligations: Unfunded obligations for retiree health benefits: $52.0 
billion; 
Obligations: Unfunded obligations (surplus) for pension benefits: 
$16.7[B] billion; 
Obligations: Total unfunded obligations: $68.7 billion; 
Total liabilities and obligations: $102.2 billion. 

Fiscal year: 2010; 
Liabilities: Outstanding debt: $12.0 billion; 
Liabilities: Workers' compensation liabilities: $12.6 billion; 
Liabilities: Other liabilities[A]: $13.6 billion; 
Liabilities: Total liabilities: $38.2 billion; 
Obligations: Unfunded obligations for retiree health benefits: $48.6 
billion; 
Obligations: Unfunded obligations (surplus) for pension benefits: 
$17.9[B] billion; 
Obligations: Total unfunded obligations: $66.5 billion; 
Total liabilities and obligations: $104.7 billion. 

Source: USPS. 

Note: Data may not add exactly to totals due to rounding; workers' 
compensation liabilities include the current and non current portion 
of this liability. 

[A] Other liabilities include many items, such as operating expenses 
that USPS committed to in fiscal year 2009 but has not yet paid, the 
value of postage purchased by customers but has not yet been used, and 
the value of employees' accumulated leave. 

[B] Pension obligations for 2009 and 2010 reflect the adoption of new 
accounting principles by the plan administrator in the Office of 
Personnel Management (OPM). In fiscal year 2010, OPM adopted the 
Federal Accounting Standards Advisory Board's Statement of Federal 
Financial Accounting Standard No. 33: Pensions, Other Retirement 
Benefits, and Other Postemployment Benefits: Reporting the Gains and 
Losses from Changes in Assumptions and Selecting Discount Rates and 
Valuation Date. 

[End of table] 

The President's Fiscal Year 2012 Budget Request also proposes changes 
that, if enacted, would provide USPS with over $4.5 billion in short- 
term financial relief for fiscal year 2011. The majority of this 
relief--$4 billion--would come as a result of USPS paying $1.5 billion 
into the Postal Service Retiree Health Benefit Fund instead of the 
$5.5 billion required under current law. The remaining relief would 
come from reducing USPS's obligation for future funding of retirement 
payments to the Federal Employees Retirement System (FERS).[Footnote 
5] This relief, however, would be somewhat offset by terminating $29 
million in annual appropriations in fiscal year 2012, that reimburses 
USPS for revenue foregone from reduced rate mail.[Footnote 6] 

USPS's financial problems will not be fixed easily or quickly. USPS 
projects future mail volume declines, stagnant revenues, large 
financial losses and continued significant financial obligations. 

Actions Are Urgently Needed to Modernize and Restructure USPS to 
Achieve Financial Viability: 

Considering USPS's important role, action is urgently needed to 
facilitate its financial viability as USPS cannot support its current 
level of service and operations. Congress, USPS, the administration, 
and stakeholders need to reach agreement on a package of actions to 
restore USPS's financial viability and take steps to modernize and 
restructure it. USPS needs to become a leaner, more flexible 
organization so that it can operate more efficiently, control costs, 
keep rates affordable, and meet customers' changing needs. In 
considering proposed legislation, incentives and oversight mechanisms 
would help to ensure an appropriate balance between providing USPS 
with more flexibility and assuring sufficient transparency, oversight, 
and accountability. 

We have previously identified five key areas where action is needed to 
facilitate progress toward meeting USPS's growing fiscal challenges: 

* Realign postal service with customers' changing use of mail: As mail 
use by businesses and consumers continues to change, USPS has stated 
that it cannot afford to sustain its current level of delivery and 
retail services. For example, it has estimated that it could reduce 
its costs by about $3 billion annually if it reduced delivery 
frequency from 6 days to 5 days per week, but congressional action 
would be needed for this change. USPS filed its proposal to eliminate 
Saturday delivery with the Postal Regulatory Commission (PRC) on March 
30, 2010, and the PRC's advisory opinion is expected to be released in 
2011.[Footnote 7] Key questions to consider when evaluating this 
proposal include: 

- What aspects of universal postal service, including 6-day delivery, 
are appropriate in light of fundamental changes in customers' use of 
the mail? 

- What, if any, changes are needed to other elements of universal 
service (e.g., delivery standards)? How can USPS improve customers' 
access to postal services while modernizing its retail network to 
maximize costs savings? 

- Should USPS implement its proposal to reduce delivery frequency to 5 
days a week? How would such a change affect its operations, costs, 
workforce mix, employees, service, competition, value of mail, mail 
volume, and revenue? How would shifting to 5-day delivery affect 
business mailers and the public? 

* Realign operations, networks, and workforce: USPS's operations, 
networks, and workforce need to be realigned with the changes in mail 
usage and customer behavior, as USPS now has costly excess capacity. 
Key questions to consider when evaluating proposed actions in this 
area include: 

- How should USPS optimize its operations, networks, and workforce to 
support changes in services? How quickly can this happen? How can it 
work with its employees and customers to minimize potential 
disruptions? 

- Should USPS have greater flexibility to realign its retail networks 
and workforce, which may involve closing post offices and moving 
retail services to alternative commercial locations that are often 
open 7 days a week and keep longer hours than postal facilities? 

- What process is appropriate to assure sufficient transparency, 
oversight, and accountability? 

* Reduce compensation and benefit costs: Wages and benefits represent 
80 percent of USPS's costs (about $60 billion in fiscal year 2010). 
One of the most difficult yet critical challenges is making changes to 
USPS's compensation systems. These systems have been set in law and 
also negotiated during collective bargaining with its four largest 
employee unions. USPS also consulted with its three management 
associations. We suggested that Congress should consider revisiting 
the statutory framework for USPS's collective bargaining to ensure 
that binding arbitration takes USPS's financial condition into 
account.[Footnote 8] We also reported other possible options for 
reducing compensation and benefit costs, including implementing a two- 
tier pay system, outsourcing if it results in cost savings, or 
revising employees' share of health and life insurance premiums. Key 
questions to consider when evaluating proposals in this area include: 

- What changes, if any, should be made to USPS's compensation and 
benefits? 

- Is it appropriate that USPS pays a larger share of its employees' 
health and life insurance premiums than do most other federal 
agencies? What impact would changes to these premiums have on USPS and 
its employees? 

* Generating revenue through new or enhanced products and services: A 
key issue is whether USPS can generate sufficient new revenues using 
the pricing and product flexibility provided in the Postal 
Accountability and Enhancement Act of 2006[Footnote 9] or if changes 
are needed. In 2009, USPS asked Congress to change the law to permit 
it to diversify into nonpostal areas to find new opportunities for 
revenue growth. USPS also asked for additional pricing flexibility in 
a 2010 action plan.[Footnote 10] However, it is unclear what the 
potential impact of such changes would be and what statutory or 
regulatory changes would be needed. Key questions to consider when 
evaluating proposals in this area include: 

- New products and services: What opportunities are there to introduce 
profitable new postal products and enhancements to existing ones? 

- Should USPS engage in nonpostal areas where there are private sector 
providers? If so, under what terms? 

* Funding postal retiree health benefits: USPS has said that it cannot 
afford its required annual prefunding payments ($5.5 billion in fiscal 
year 2011 and gradually increasing to $5.8 billion by 2016), and it 
has requested that Congress reduce these payments.[Footnote 11] 
Several proposals have been put forth to revise the current statutory 
requirements and reduce or defer some of these costs, thereby 
providing USPS with financial relief.[Footnote 12] Changes to this 
structure, however, could affect the federal budget, and the 
Congressional Budget Office has raised concerns about how aggressive 
USPS's cost-cutting measures would be if these payments were 
reduced.[Footnote 13] As we reported in 2010, Congress should consider 
modifying USPS's retiree health benefit payments in a fiscally 
responsible manner. However, we also believe that it is important that 
USPS fund its retiree health benefit financial obligations--including 
prefunding these obligations--to the maximum extent that its finances 
permit. Key questions to consider when evaluating proposals in this 
area include: 

- What changes, if any, should be made to USPS pension and retiree 
health benefit obligations and payment schedules? 

- What would be the impact on the federal budget? 

The President's Fiscal Year 2012 Budget Request proposed specific 
short-term financial relief measures, that it stated are grounded in 
principles of fiscal responsibility and sound financial management. 
The budget request states that these steps are to provide USPS with 
the "breathing room" necessary to continue restructuring its 
operations without severe disruptions and notes that they must be 
coupled with meaningful business model reforms to make USPS viable for 
the medium- and long-term. To that end, the budget request outlines 
three principles to guide these reforms: (1) realigning postal 
infrastructure, including processing and delivery facilities; (2) 
adapting the postal workforce to the 21st century; and (3) enhancing 
service and accelerating the value of USPS services while respecting 
fair competition in the marketplace. However, while promoting 
realignment and modernization, the budget request would also continue 
to restrict USPS from reducing delivery from 6 days a week and closing 
small rural and other small post offices. 

Much attention has been focused on ways postal services may be 
reduced--such as USPS's proposals to move to 5-day-a week delivery or 
to close post offices. Less attention has been given to more positive 
aspects of USPS's plans to modernize its retail services, which it 
believes will improve customer access and convenience while reducing 
costs and improving efficiency. In a recently issued report on 
strategies and initiatives foreign posts have used to modernize their 
delivery and retail networks, we discussed some lessons learned that 
could inform USPS's modernization efforts.[Footnote 14] 

Although the foreign posts we reviewed reported that changing how 
postal services were provided was challenging, they also found that 
outreach and communication strategies helped to inform public 
officials and customers of increased access to products and services 
and to gain acceptance for retail network changes. For example, when 
realigning their respective retail networks, Australia Post developed 
a labor outreach strategy, and the Swedish postal operator, Posten AB, 
created a communications strategy to inform customers of its retail 
network transformation. Additionally, foreign posts modernized their 
retail networks by forming partnerships with private sector businesses 
such as grocery stores to sell postal services. According to the 
foreign posts we reviewed, retail modernization improved customer 
service, in some cases because the private sector partners stayed open 
longer, reduced operating and labor costs through closures of post-
owned and -operated facilities, or both. 

When modernizing, foreign posts also transitioned their workforce to 
have a greater percentage of part-time employees, which they reported 
afforded flexibility to adjust work to decreased mail volumes. A few 
foreign posts developed labor transition plans or strategies under 
which they provided training, relocation and job search services, and 
financial incentives to support employees who were negatively affected 
by the modernizations. 

The foreign posts we reviewed did not plan or implement changes or 
realize improvements to their networks overnight. Modernization took 
several posts 10 to 20 years to implement and was often met with 
stakeholder resistance. Among the key principles that foreign posts 
used to help modernize and restructure their organizations are the 
following: 

* Strategic outreach and coordination with governments, the public, 
mailers, small businesses, and retail customers can address political 
resistance. For example, foreign posts communicated with and reached 
out to customers to increase acceptance of changes and to better meet 
customers' needs, including providing alternatives before implementing 
major retail network changes. 

* A labor relations strategy can assist employees in making the 
necessary transition to modernization changes. For example, a few 
foreign posts provided training, relocation and job search services, 
and financial incentives to support employees who were negatively 
affected by the modernizations. 

The lesson from these experiences is that USPS needs to clarify what 
its modernization plans are, how and over what period it will 
implement them, and what improvements in customer service and cost 
savings it expects to achieve. In its efforts to modernize its retail 
network, USPS needs to assure customers that they will have 
alternative access to postal services, such as through self-service 
retail kiosks or retail partners. While USPS has taken steps in the 
past year to generate ideas for modernizing its retail and delivery 
networks, the experiences of foreign posts suggest that it will be 
critically important for USPS to fully develop and implement similar 
outreach, communication, and labor transition strategies. 

In summary, modernizing and restructuring USPS so that it can be 
viable in the future is imperative given its financial condition. 
While we recognize that this will not be easy, changes--some 
difficult--are needed to ensure that postal services remain available 
to all U.S. residents and businesses. 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. 

Contacts and Staff Acknowledgments: 

For further information about this statement, please contact Phillip 
Herr at (202) 512-2834 or herrp@gao.gov. Individuals who made key 
contributions to this statement include Susan Ragland, Director, 
Financial Management and Assurance; Teresa Anderson, Joshua Bartzen, 
Heather Frevert, Margaret McDavid, Robert Owens, and Crystal Wesco. 

[End of section] 

Related GAO Products: 

U.S. Postal Service: Foreign Posts' Strategies Could Inform U.S. 
Postal Service's Efforts to Modernize. [hyperlink, 
http://www.gao.gov/products/GAO-11-282]. Washington, D.C.: February 
16, 2011. 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-11-278]. Washington, D.C.: February 
2011. 

U.S. Postal Service: Legislation Needed to Address Key Challenges. 
[hyperlink, http://www.gao.gov/products/GAO-11-244T]. Washington, 
D.C.: December 2, 2010. 

U.S. Postal Service: Mail Processing Network Initiatives Progressing, 
and Guidance for Consolidating Area Mail Processing Operations Being 
Followed. [hyperlink, http://www.gao.gov/products/GAO-10-731]. 
Washington, D.C.: June 16, 2010. 

U.S. Postal Service: Action Needed to Facilitate Financial Viability. 
[hyperlink, http://www.gao.gov/products/GAO-10-601T]. Washington, 
D.C.: April 22, 2010. 

U.S. Postal Service: Action Needed to Facilitate Financial Viability. 
[hyperlink, http://www.gao.gov/products/GAO-10-624T]. Washington, 
D.C.: April 15, 2010. 

U.S. Postal Service: Strategies and Options to Facilitate Progress 
toward Financial Viability. [hyperlink, 
http://www.gao.gov/products/GAO-10-455]. Washington, D.C.: April 12, 
2010. 

U.S. Postal Service: Financial Crisis Demands Aggressive Action. 
[hyperlink, http://www.gao.gov/products/GAO-10-538T]. Washington, 
D.C.: March 18, 2010. 

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. 

U.S. Postal Service: Network Rightsizing Needed to Help Keep USPS 
Financially Viable. [hyperlink, 
http://www.gao.gov/products/GAO-09-674T]. Washington, D.C.: May 20, 
2009. 

U.S. Postal Service: Deteriorating Postal Finances Require Aggressive 
Actions to Reduce Costs. [hyperlink, 
http://www.gao.gov/products/GAO-09-332T]. Washington, D.C.: January 
28, 2009. 

U.S. Postal Service Facilities: Improvements in Data Would Strengthen 
Maintenance and Alignment of Access to Retail Services. [hyperlink, 
http://www.gao.gov/products/GAO-08-41]. Washington, D.C.: December 10, 
2007. 

[End of section] 

Footnotes: 

[1] A list of GAO's recent work on USPS-related issues is provided at 
the end of this testimony. We conducted our work for these reports in 
accordance with generally accepted government auditing standards or in 
accordance with our quality assurance framework. A more detailed 
discussion of our scope and methodology is available in each of the 
reports cited in the GAO Related Products list. 

[2] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: February 
2011). 

[3] First-Class Mail consists of single-piece mail (e.g., bill 
payments and letters) and bulk mail (e.g., bills, statements, and 
advertising). Standard Mail is mainly bulk advertising and direct mail 
solicitations. 

[4] USPS made its scheduled $5.5 billion payment into the Postal 
Service Retiree Health Benefit Fund that was due at the end of fiscal 
year 2010. 

[5] The proposal would reduce USPS's obligation for future funding of 
retirement payments to FERS--a change that would result in a reduction 
of this obligation totaling approximately $6.9 billion, payable over 
30 years with an estimated impact of $550 million in fiscal year 2011. 

[6] Under this appropriation, USPS receives reimbursement for 
previously provided services--free mail service for the blind and 
overseas voting. See e.g., Pub. L. No. 111-117, div. C, tit. V, 123 
Stat. 3200 (Dec. 16, 2009). 

[7] We also expect to issue a report on 5-Day delivery this spring. 

[8] About 77 percent of USPS employees are covered by collective 
bargaining agreements, and if the current collective bargaining 
process reaches binding arbitration, there is no statutory requirement 
to consider USPS's financial condition when determining pay or other 
compensation. 

[9] Pub. L. No. 109-435 (Dec. 20, 2006). 

[10] United States Postal Service, Ensuring a Viable Postal Service 
for America: An Action Plan for the Future (Washington, D.C. March 
2010). 

[11] The Postal Accountability and Enhancement Act of 2006 required 
USPS to prefund its retiree health benefit obligations with annual 
payments through 2016 to the Postal Service Retiree Health Benefits 
Fund. 

[12] See GAO, U.S. Postal Service: Strategies and Options to 
Facilitate Progress toward Financial Viability, [hyperlink, 
http://www.gao.gov/products/GAO-10-455] (Washington, D.C.: Apr. 12, 
2010) for a discussion of different approaches for funding USPS's 
retiree health benefit obligations. 

[13] Congressional Budget Office, H.R. 22: United States Postal 
Service Financial Relief Act of 2009 (Washington, D.C. July 20, 2009); 
S. 1507: Postal Service Retiree Health Benefits Funding Reform Act of 
2009 (Washington, D.C., Sept. 14, 2009). 

[14] GAO, U.S. Postal Service: Foreign Posts' Strategies Could Inform 
U.S. Postal Service's Efforts to Modernize, [hyperlink, 
http://www.gao.gov/products/GAO-11-282] (Washington, D.C.: Feb. 16, 
2011). 

[End of section] 

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