What We Found
Comprehensive legislative reform and additional cost-cutting are needed for the U.S. Postal Service to achieve sustainable financial viability.
Since our 2019 High-Risk Report, ratings for four criteria remain unchanged, and the capacity criterion regressed to not met.
Progress on the U.S. Postal Service's (USPS) financial viability requires action from both Congress and USPS to address both its annual operating losses and its unfunded long-term liabilities. USPS lost $87 billion over the past 14 fiscal years—including $9.2 billion in fiscal year 2020—and expects to lose $9.7 billion in fiscal year 2021.
Leadership commitment: partially met. USPS continues to seek some legislative and regulatory changes intended to improve its financial condition. For example, USPS has supported legislation that would integrate its retiree health program with Medicare. This would reduce its total unfunded liabilities by shifting these costs to the federal government.
USPS has also called for the elimination of the price cap that statutorily limits rate increases for most mail to the rate of inflation. Further, USPS leadership has stated that it plans to pursue operational changes in fiscal year 2021 that could help address USPS's financial viability by reducing mail transportation, sorting, and delivery costs. However, the impact of these plans on USPS's financial viability are uncertain and have met stakeholder opposition including lawsuits in federal court.
Capacity: not met. Since we last reported, USPS expenses exceeded revenues by $18 billion, as its labor compensation costs continue to increase while the volume of its most profitable mail products continue to decline. We reported in May 2020 that USPS's business model is not financially sustainable and that congressional action is essential to reforming USPS's business model.
Further, the imbalance between USPS's revenues and expenses continued in fiscal year 2020. Absent legislative and regulatory change, USPS reported that it does not have the financial resources to carry out its primary mission, make certain required federal payments to fund retiree health benefits and accrued pension benefits, or meet its capital investment needs.
USPS did not make $63.2 billion in required payments to fund postal retiree health and pension benefits through fiscal year 2020. USPS reported that it did not make these payments so that it could cover current and anticipated operating costs, deal with contingencies, and make needed capital investments. USPS also has available to it an additional $10 billion in Coronavirus Disease 2019 (COVID-19)-related funding with the U.S. Department of the Treasury as authorized in the CARES Act, enacted in March 2020, as amended by the Consolidated Appropriations Act, 2021.
Even with this funding, USPS has stated that given its current business model, it anticipates that it will be able to cover its operating and other costs only by not making the required funding payments.
Defaulting on these funding payments adds to USPS's already large unfunded liabilities, affects USPS's capacity to become more financially viable, and could significantly impact USPS's postal retirees and survivors. For example, USPS reported that at the end of fiscal year 2020 approximately 500,000 retirees receive retirement health benefits. We found in August 2018 that based on Office of Personnel Management projections, the fund supporting postal retiree health benefits would be depleted in fiscal year 2030 if USPS continues to miss all payments.
Depletion of the fund, together with USPS's potential inability to pay its share of retiree health care premiums once they are no longer being paid from the fund, could result in some combination of reduced benefits for postal retirees, increased payments from retirees or current postal employees, higher postage rates, or payments from the federal government to fund these health care premiums.
USPS's financial difficulties have also affected its ability to make significant capital investments that could improve its financial viability. USPS reported that it needs to increase capital spending and modernize its infrastructure after years of deferred capital investment.
However, USPS stated that it has decreased and reprioritized its capital investments due to COVID-19. COVID-19 rapidly accelerated the long-term decline in USPS's most profitable types of mail, which, among other things, contributed to USPS's 14th straight fiscal year of net losses. USPS still plans to replace its aging fleet of delivery vehicles to increase its capacity to deliver mail and packages in a more cost-efficient manner. However, given USPS's financial uncertainty, the ability to make these investments may require additional tradeoffs with other commitments.
Action plan: partially met. USPS's most recent 5-year strategic plan—for fiscal years 2020 to 2024—outlines its strategy for making progress towards financial viability. USPS has also developed annual performance plans and reports that specify goals for each fiscal year.
Additionally, USPS officials stated that they are working on a new strategic plan to be released in 2021 that will contain cost-reduction measures, among other things. However, as we reported in May 2020, USPS's actions alone will be insufficient to restore its financial viability as statutory requirements limit USPS's ability to raise revenues and reduce costs.
Monitoring: met. USPS continues to regularly monitor its financial viability through its independently-audited financial reports. These reports provide information on financial trends, such as (1) revenues and expenses; (2) unfunded liabilities; and (3) debt obligations.
In addition, through its annual performance plans and reports, USPS measures its performance in achieving strategic initiatives intended to improve its financial viability, such as improving customers' experiences and providing high-quality service. Furthermore, these plans and reports note that aggressive management of its business operations, as well as legislative and regulatory reforms that will enable it to increase revenue and reduce costs, are all necessary to restore USPS to financial health.
Demonstrated progress: not met. USPS's overall financial condition is unsustainable and deteriorating. Savings from USPS's cost-reduction efforts have dwindled in recent years. Although the Postmaster General stated in his August 2020 congressional testimony that USPS will take steps to reduce costs in its control, further cost savings are limited under the existing statutory framework and would not be enough to close its financial gap. In addition, USPS's costs have significantly increased as a result of COVID-19 due to higher sick-leave use, among other things.
USPS has taken some actions to address employee compensation costs—which represent about 77 percent of its total operating expenses in fiscal year 2020—but we found in January 2020 that USPS had likely overestimated its cost savings. We recommended USPS develop guidance to improve the accuracy of these estimates.
Further, at the end of fiscal year 2020, USPS's total unfunded liabilities and debt were $188 billion—more than 250 percent of its annual revenue. These unfunded liabilities included about $75 billion in underfunding of retiree health care benefits, and about $61 billion in underfunding of pension benefits.
USPS's financial viability has been on our High-Risk List since 2009 due to the need for action to address USPS's poor financial condition. USPS cannot fund its current level of services and financial obligations from its revenues. As an independent establishment in the executive branch, USPS has long been expected to provide affordable, quality, and universal postal service to all parts of the country while remaining self-financing. Specifically, USPS is expected to be financially self-sufficient by covering its expenses through revenues generated from the sale of its products and services.
However, USPS is now unable to do so. The use of USPS's most profitable product—First-Class Mail—is expected to continue declining for the foreseeable future. USPS also faces increasing competition in its growing but less profitable package shipping business. Meanwhile, key costs, such as compensation and benefits, are rising.
We have long reported that USPS's financial condition needed attention by Congress and USPS to achieve broad-based restructuring. Currently there are four open Matters for Congressional Consideration and one open recommendation that are related to this high-risk area.
Although Congress and USPS took action to preserve USPS’s liquidity, these actions only address USPS’s short-term finances. Since 2010, we have stated that while USPS needs to cut its costs, congressional action is essential to restore USPS to financial viability. Continued congressional inaction will result in ever-larger annual losses and unfunded liabilities for USPS—making future reform more difficult and costly.
Congressional Actions Needed
Congress should consider (1) reassessing and determining the level of universal postal services the nation requires; (2) determining the extent to which USPS should be financially self-sustaining and what changes to federal statutes would be appropriate to meet this goal; (3) determining the most appropriate institutional structure for USPS that best supports the changes; and (4) evaluating the merits of different approaches to put postal retiree health benefits on a more sustainable financial footing, and then determining the most appropriate action to take.
We have also long reported that Congress should require that any binding arbitration in the negotiation process of USPS labor contracts take USPS’s financial condition into account.