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Testimony before the Subcommittee on Federal Workforce, Postal Service, 
and the District of Columbia, Committee on Oversight and Government 
Reform, House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Wednesday, March 25, 2009: 

U.S. Postal Service: 

Escalating Financial Problems Require Major Cost Reductions to Limit 
Losses: 

Statement of Phillip Herr, Director: 
Physical Infrastructure Issues: 

GAO-09-475T: 

GAO Highlights: 

Highlights of GAO-09-475T, a hearing before the Subcommittee on Federal 
Workforce, Postal Service, and the District of Columbia, Committee on 
Oversight and Government Reform, House of Representatives. 

Why GAO Did This Study: 

When Congress passed the Postal Accountability and Enhancement Act in 
December 2006, the U.S. Postal Service (USPS) had just completed fiscal 
year 2006 with its largest mail volume everó213 billion pieces of mail 
and a net income of $900 million. Two years later, USPSís financial 
condition has deteriorated. Mail volume declined by a record 9.5 
billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of 
$2.8 billionóthe second largest since 1971. According to USPS, this was 
largely due to declines in the economy, especially in the financial and 
housing sectors, as well as shifts in transactions, messages, and 
advertising from mail to electronic alternatives. Declining mail volume 
flattened revenues despite rate increases, while USPSís cost-cutting 
efforts were insufficient to offset the impact of declining mail volume 
and rising costs in fuel and cost-of-living allowances for postal 
employees. USPSís initial fiscal year 2009 budget expected that the 
turmoil in the economy would result in more mail volume decline and a 
loss of $3.0 billion. 

This testimony focuses on (1) USPSís financial condition and outlook 
and (2) options and actions for USPS to remain financially viable in 
the short and long term. It is based on GAOís past work and updated 
postal financial information. We asked USPS for comments on our 
statement. USPS generally agreed with the accuracy of our statement and 
provided technical comments, which we incorporated where appropriate. 

What GAO Found: 

USPSís financial condition has continued to deteriorate in the first 5 
months of fiscal year 2009 and USPS expects its financial condition to 
continue deteriorating for the rest of the fiscal year. Key results 
include: 

* accelerating declines in mail volume after the first quarter, with a 
total decline of about 11 billion pieces, and; 

* accelerating losses after the first quarter, with a total loss of 
about $2 billion. 

USPSís updated fiscal year 2009 projections suggest the magnitude of 
the challenges it faces: 

* mail volume will decline by a record 22.7 billion pieces (11.2 
percent), 

* a record $6.4 billion net loss and an unprecedented cash shortfall of 
$1.5 billion, assuming that cost-cutting targets of $5.9 billion are 
achieved, and, 

* plans to increase outstanding debt by $3 billion (the annual 
statutory limit) to $10.2 billion, or two-thirds of the $15 billion 
statutory limit. 

In addition, USPS projects its financial difficulties will continue in 
fiscal year 2010 and result in an even greater cash shortfall. USPSís 
most immediate challenge is to dramatically reduce costs fast enough to 
meet its financial obligations. USPS has proposed that Congress give it 
financial relief of $25 billion over 8 years by changing the statutory 
mandate for funding its retiree health benefits. GAO recognizes the 
need for immediate financial relief, but prefers 2-year relief so that 
Congress can determine what further actions are needed. It is not clear 
that either option would be sufficient because USPS projects it will 
operate on a thin margin, risking a larger cash shortfall if it does 
not meet its ambitious cost-cutting goals, mail volume declines more 
than projected, or unexpected costs materialize, such as fuel cost 
increases. 

Although USPS is taking unprecedented actions to cut costs, 
comprehensive action beyond USPSís current effort is urgently needed to 
maintain financial viability. Given the growing gap between revenues 
and expenses, USPSís business model and its ability to remain self-
financing may be in jeopardy. Action is needed to streamline costs in 
two difficult areas: (1) compensation and benefits, which generate 
close to 80 percent of costs and (2) mail processing and retail 
networks, which have growing excess capacity. Closing postal facilities 
is controversial, but necessary, because the declining mail volume and 
growing deficits indicate that USPS cannot afford to maintain such an 
extensive network. Information will be critical to determine what other 
actions are needed, including options to cut costs as well as their 
impact on mail volume and mail users. It is also imperative to review 
mail use, what future postal services will be needed, and what options 
are available in many areas, including universal service, workforce 
costs, retail services, mail processing, delivery, transportation, and 
USPSís business model.  

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/products/GAO-09-475T]. For more 
information, contact Phillip Herr at (202) 512-2834 or herrp@gao.gov. 

[End of section] 

Chairman Lynch, Ranking Member Chaffetz, and Members of the 
Subcommittee: 

I am pleased to be here today to participate in this oversight hearing 
on the financial stability of the U.S. Postal Service (USPS). As 
requested, my statement addresses the following: 

1. USPS's financial condition and outlook. 

2. Options and actions to help USPS remain financially viable in the 
short and long term. 

My statement is based on our testimony in January on USPS's financial 
condition,[Footnote 1] other prior work, and updated information on 
USPS's financial condition and outlook. We reviewed USPS's budget for 
fiscal year 2009 and information on results for the fiscal year to 
date, including preliminary data for January 2009, and met with senior 
USPS officials. We conducted this performance audit 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 audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

USPS's Financial Condition and Outlook Are Deteriorating: 

USPS's financial condition has continued to deteriorate in the first 5 
months of fiscal year 2009 and USPS expects its financial condition to 
continue deteriorating for the rest of the fiscal year, including: 

* accelerating declines in mail volume after the first quarter, with a 
total decline of about 11 billion pieces; and: 

* accelerating losses after the first quarter, with a total loss of 
about $2 billion. 

USPS has updated its projections for fiscal year 2009, projecting: 

* a mail volume decline by a record 22.7 billion pieces (11.2 percent) 
from fiscal year 2008; 

* a record $6.4 billion net loss,[Footnote 2] and an unprecedented $1.5 
billion cash shortfall (i.e., insufficient cash to cover expenses and 
obligations), assuming cost-cutting targets of $5.9 billion[Footnote 3] 
are achieved; and: 

* plans to increase outstanding debt by $3 billion (the annual 
statutory limit) to $10.2 billion, or two-thirds of the total $15 
billion statutory limit. 

USPS attributes much of its net loss this fiscal year to the economic 
recession that has resulted in unprecedented declines in mail volume 
and decreased revenues. Thus far in fiscal year 2009, First-Class Mail 
volume (e.g., correspondence, bills, payments, and statements) dropped 
about 9 percent, while Standard Mail volume (primarily advertising) 
dropped about 15 percent. According to USPS, the housing market 
downturn, the credit crisis, and lower retail sales have contributed to 
these volume declines. The financial and housing sectors are major mail 
users, mailing bills, statements, and advertising such as credit card, 
mortgage, and home equity solicitations. Volume declines have 
accelerated for both First-Class Mail and Standard Mail, as shown by 
quarterly data (see figure 1) and results for January 2009 (see appendix 
I). 

Figure 1: Quarterly Changes in the Volume of First-Class Mail and 
Standard Mail, Fiscal Year 2005 through the First Quarter of Fiscal 
Year 2009: 

[Refer to PDF for image: multiple line graph] 

Q1, 2005: 
First-Class Mail volume: 2.1%; 
Standard Mail volume: 9.3%. 

Q2, 2005: 
First-Class Mail volume: -1.3%; 
Standard Mail volume: 4.1%. 

Q3, 2005: 
First-Class Mail volume: 0.3%; 	
Standard Mail volume: 4.6%. 

Q4, 2005: 
First-Class Mail volume: -0.6%; 
Standard Mail volume: 4.4%. 

Q1, 2006: 
First-Class Mail volume: -3.7%; 
Standard Mail volume: 0.5%. 

Q2, 2006: 
First-Class Mail volume: 1.7%; 
Standard Mail volume: 2.7%. 

Q3, 2006: 
First-Class Mail volume: 1.2%; 
Standard Mail volume: 2.8%. 

Q4, 2006: 
First-Class Mail volume: -0.8%; 
Standard Mail volume: 0.2%. 

Q1, 2007: 
First-Class Mail volume: -0.1%; 
Standard Mail volume: 4.9%. 

Q2, 2007: 
First-Class Mail volume: -2.5%; 
Standard Mail volume: 1.3%. 

Q3, 2007: 
First-Class Mail volume: -1.4%; 
Standard Mail volume: -0.9%. 

Q4, 2007: 
First-Class Mail volume: -2.6%; 
Standard Mail volume: -1.4%. 

Q1, 2008: 
First-Class Mail volume: -3.9%; 
Standard Mail volume: -2.7%. 

Q2, 2008: 
First-Class Mail volume: -3.1%; 
Standard Mail volume: -3.0%. 

Q3, 2008: 
First-Class Mail volume: -5.5%; 
Standard Mail volume: -5.6%. 

Q4, 2008: 
First-Class Mail volume: -7.0%; 
Standard Mail volume: -6.1%. 

Q1, 2009: 
First-Class Mail volume: -7.2%; 
Standard Mail volume: -11.0%. 

Source: USPS. 

Note: Quarterly changes are from the same quarter of the prior fiscal 
year. First-Class Mail volume does not include international First- 
Class Mail. 

[End of figure] 

In addition, USPS projects its financial difficulties will continue in 
fiscal year 2010 and result in an even greater cash shortfall at the 
end of that fiscal year, despite plans for additional cost-cutting and 
additional borrowing of $3 billion, which would bring USPS's total debt 
to $13.2 billion. Thus, USPS's immediate problem is to generate 
sufficient cash to remain financially viable in fiscal years 2009 and 
2010. 

Cost-Cutting Efforts and Rate Increases Have Not Fully Offset the 
Impact of Volume Declines and Other Factors that Increased Costs: 

USPS reports reducing expenses by $773 million in the first 5 months of 
fiscal year 2009 (compared to the first 5 months of fiscal year 2008), 
primarily through reductions of 50 million work hours that USPS made as 
it adjusted to declining mail volumes and workload. USPS reduced 
overtime and captured additional work hour savings as it reduced the 
size of its workforce through attrition and implemented other cost- 
saving initiatives. However, these savings and added revenue from rate 
increases were insufficient to fully offset the impact of declines in 
mail volume and rising costs from cost-of-living allowances (COLA) 
provided to postal employees covered by union contracts, as well as 
rising workers' compensation and retirement costs. Also, although 
almost 8,500 employees accepted USPS's early retirement offer during 
the first quarter of fiscal year 2009, the resulting savings to date 
have been limited because the effective dates for the majority of these 
retirements were December 31, 2008 or later. 

USPS has high overhead (institutional) costs that are hard to change in 
the short term, including providing 6-day delivery and retail services 
at close to 37,000 post offices and retail facilities. Compensation and 
benefits for USPS's workforce, which included about 646,000 career 
employees[Footnote 4] and about 98,000 noncareer employees in February 
2009, generate close to 80 percent of its costs. Collective bargaining 
agreements with USPS's four largest unions include layoff protections 
and work rules that constrain USPS's flexibility, as well as semiannual 
COLAs linked to the Consumer Price Index (CPI) and employee benefits 
including health and life insurance premium payments. Under these 
agreements, which expire in 2010 or 2011: 

* USPS paid 85 percent of employee health benefit premiums in fiscal 
year 2007, about 13 percent more than the share for other federal 
agencies. USPS's share is decreasing annually to 81 percent in 2011 or 
80 percent in 2012, depending on the agreement. 

* USPS pays 100 percent of employee life insurance premiums, about 67 
percent more than most other federal agencies. 

USPS pays 100 percent of both employee health benefit premiums and life 
insurance premiums for its Postal Career Executive Service, which 
included 724 executives in fiscal year 2008. Executives at comparable 
grades in most other federal agencies do not receive such benefits. 

USPS's Outlook Is Worsening, and USPS Projects a Cash Shortfall at the 
End of the Fiscal Year: 

USPS's financial outlook has continued to deteriorate during fiscal 
year 2009. USPS has increased its estimate of losses in total mail 
volume in fiscal year 2009 to 22.7 billion pieces (11.2 percent). As a 
result, USPS now projects a net loss of $6.4 billion for fiscal year 
2009, despite increasing its cost-cutting target to $5.9 billion for 
the fiscal year. Based on these projections, USPS expects cash from 
operations and borrowing will be insufficient to cover expenses at the 
end of the fiscal year, with the shortfall projected to be $1.5 
billion. This projected net loss and cash shortfall assumes USPS will 
meet its cost-cutting target and factors in USPS's plans to borrow $3 
billion. 

USPS's Chief Financial Officer told us on March 16 that achieving 
USPS's target to eliminate 100 million work hours this fiscal year will 
be critical to achieving its goal of reducing costs by $5.9 billion. He 
expressed guarded optimism that USPS can reach this ambitious cost- 
cutting target, explaining that the target is difficult, but 
achievable. He noted that USPS plans to continue efforts to reduce work 
hours as it responds to mail volume declines, including reductions in 
overtime and additional work hour savings achieved through attrition 
and other initiatives. Additional USPS cost-saving efforts include: 

* Implementing a service-wide hiring freeze and reducing staffing 
levels for managers and other employees not covered by union agreements 
by 15 percent at headquarters and 19 percent at the nine Area offices. 

* Evaluating more than 93,000 city delivery carrier routes (more than 
half of all city routes), eliminating about 2,500 city routes, and 
adjusting many other city routes, which USPS expects will result in 
saving about 3.2 million work hours in fiscal year 2009. An agreement 
between USPS and the National Association of Letter Carriers to 
expedite evaluation and adjustment of city delivery routes enabled this 
progress. 

* Consolidating excess capacity in mail processing and transportation 
networks, including consolidating operations at some mail processing 
facilities, moving some mail processing employees from the day shift to 
evening hours, and streamlining transportation. 

* Halting construction starts of new postal facilities. 

To increase its revenues, USPS has increased rates, including a January 
2009 increase for competitive products (e.g., Priority Mail and Express 
Mail), and a planned May 2009 increase for market-dominant products 
(e.g., First-Class Mail, Standard Mail, Periodicals, and some types of 
Package Services). USPS has also introduced volume discounts, 
negotiated service agreements, and added some enhancements to 
competitive products since the Postal Accountability and Enhancement 
Act of 2006 (PAEA) was enacted in 2006. However, these products 
generated only about 11 percent of USPS's revenues and covered about 6 
percent of its overhead costs in fiscal year 2008. USPS is considering 
alternatives to try to increase First-Class Mail and Standard Mail 
revenues. 

USPS Recently Reported on the Service Quality of Many Market-Dominant 
Products: 

USPS will be challenged to achieve and maintain high-quality service as 
it works to implement unprecedented cost-cutting measures. USPS 
recently reported for the first time on the service quality of many 
market-dominant postal products; thereby making important progress in 
improving transparency and meeting the requirements of PAEA. USPS has 
cautioned that limitations have affected the quality of new measurement 
data and said that it will work to improve data quality. As table 1 
shows, on-time delivery of all major types of market-dominant products 
in the first quarter of fiscal year 2009 fell short of USPS's targets 
for the full fiscal year. 

Table 1: USPS Service Results Did Not Meet Targets in the First Quarter 
of Fiscal Year 2009: 

Type of market-dominant mail: First-Class Mail: single piece[A]: 1-day 
delivery standard; 
Percentage on time: Target: 96.5; 
Percentage on time: Result: 95.6; 
Shortfall: 0.9. 

Type of market-dominant mail: First-Class Mail: single piece[A]: 2-day 
delivery standard; 
Percentage on time: Target: 94.0; 
Percentage on time: Result: 91.9; 
Shortfall: 2.1. 

Type of market-dominant mail: First-Class Mail: single piece[A]: 3-to 5-
day delivery standard; 
Percentage on time: Target: 92.7; 
Percentage on time: Result: 85.7; 
Shortfall: 7.0. 

Type of market-dominant mail: First-Class Mail: bulk[B]: 1-day delivery 
standard; 
Percentage on time: Target: 96.5; 
Percentage on time: Result: 91.2; 
Shortfall: 5.3. 

Type of market-dominant mail: First-Class Mail: bulk[B]: 2-day delivery 
standard; 
Percentage on time: Target: 94.0; 
Percentage on time: Result: 87.8; 
Shortfall: 6.2. 

Type of market-dominant mail: First-Class Mail: bulk[B]: 3-to 5-day 
delivery standard; 
Percentage on time: Target: 92.7; 
Percentage on time: Result: 84.2; 
Shortfall: 8.5. 

Type of market-dominant mail: International First-Class Mail: single 
piece[C]; 
Percentage on time: Target: 94.0; 
Percentage on time: Result: 86.2; 
Shortfall: 7.8. 

Type of market-dominant mail: Standard Mail[D]: Destination entry; 
Percentage on time: Target: 90.0; 
Percentage on time: Result: 87.4; 
Shortfall: 2.6. 

Type of market-dominant mail: Standard Mail[D]: End-to-end (i.e., not 
destination entered); 
Percentage on time: Target: 90.0; 
Percentage on time: Result: 77.2; 
Shortfall: 12.8. 

Type of market-dominant mail: Standard Mail[D]: Periodicals[E]; 
Percentage on time: Target: 91.0; 
Percentage on time: Result: 69.8; 
Shortfall: 21.2. 

Type of market-dominant mail: Standard Mail[D]: Package Services[F]; 
Percentage on time: Target: 90.0; 
Percentage on time: Result: 64.7; 
Shortfall: 25.3. 

Source: USPS. 

[A] Single-piece First-Class Mail was primarily measured by the 
External First-Class Measurement System (EXFC), administered by a USPS 
contractor. EXFC measures when test mail pieces (including letters, 
postcards, and large envelopes) are deposited in collection boxes and 
post office lobby chutes and received at various addresses. EXFC has 
been expanded to cover the entire country but does not cover remittance 
mail. 

[B] Bulk First-Class Mail (i.e., mailings of at least 500 mail pieces 
sent via First-Class Mail) was primarily measured by scanning barcodes 
on letters deposited at some USPS mail processing facilities and 
received at various addresses. 

[C] Single-piece international mail, including outbound and inbound 
mail, was primarily measured by an outside entity. 

[D] Standard Mail was primarily measured by scanning barcodes on 
letters deposited at some USPS mail processing facilities and received 
at various addresses. Destination entry mail was entered at a USPS mail 
processing facility that was generally closer to where the mail was 
delivered. 

[E] Measured periodicals included 46 publications that were mainly 
weekly publications. 

[F] Measured package services included single-piece Parcel Post, Media 
Mail, library mail, and bound printed matter. 

Note: For more information on the data and its limitations, see USPS 
targets at [hyperlink, http://ribbs.usps.gov/index.cfm?page=targets] 
and USPS results at [hyperlink, 
http://www.usps.com/serviceperformance/]. 

[End of table] 

To put these results into context, the timeliness of mail delivery is 
an important part of USPS's mission of providing affordable, high- 
quality universal postal services on a self-financing basis. USPS has 
stated that service is at the heart of its brand and the key to 
increasing its competitiveness and profitability. 

Action Is Needed on Options to Preserve USPS's Financial Viability: 

Action is needed on various options, as no single action will be 
sufficient for USPS to remain financially viable in the short and long 
term. The short-term challenge for USPS is to cut costs quickly enough 
to offset the unprecedented volume and revenue declines so that it does 
not run out of cash this fiscal year. The long-term challenge is to 
restructure USPS's entire operations and networks to reflect the 
changes in mail volume, mailer preferences, and USPS's capacity to 
cover its costs. Based on USPS's poor financial condition and outlook, 
the time to take action is relatively short, and USPS's business model 
[Footnote 5] and its ability to remain self-financing may be in 
jeopardy. 

A key factor in determining USPS's financial viability is whether mail 
volume will rebound sufficiently once the economy improves, as volume 
has done in the past, so that USPS revenues will cover costs (see 
figure 2). 

Figure 2: Quarterly Changes in Total Mail Volume, Fiscal Years 1989 
through 2009: 

[Refer to PDF for image: line graph] 

Indicated on the graph is the percentage change in total mail volume 
from fiscal year 1989 through 2009. The following recession periods are 
noted: 
1991; 
2001; 
2008-2009. 

Also noted on the graph are the following rate increases and the dates 
those increases occurred. Significant volume decreases occurred with 
each rate increase: 

Date of rate increase: 2/3/91; 
Amount of rate increase: 19.9%. 

Date of rate increase: 1/1/95; 
Amount of rate increase: 10.2%. 

Date of rate increase: 1/1/99; 
Amount of rate increase: 2.8%. 

Date of rate increase: 1/7/07; 
Amount of rate increase: 4.6%. 

Date of rate increase: 7/1/01; 
Amount of rate increase: 1.6%. 

Date of rate increase: 7/30/02; 
Amount of rate increase: 7.7%. 

Date of rate increase: 1/8/06; 
Amount of rate increase: 5.0%. 

Date of rate increase: 5/13/07; 
Amount of rate increase: 7.6%. 

Date of rate increase: 5/13/08; 
Amount of rate increase: 3.0%. 

Sources: USPS (mail volume); Postal Regulatory Commission (average rate 
increase); National Bureau of Economic Research (recession periods). 

Note: Quarterly changes are from the same quarter of the prior fiscal 
year. 

[End of figure] 

As the Postal Regulatory Commission (PRC) noted in December 2008, 
current pressures from declining volume and revenue do not appear to be 
abating, but rather, seem to be increasing. During the economic 
downturn, there has been accelerated diversion of business and 
individual mail to electronic alternatives, and some mailers have left 
the mail entirely. An economic recovery may not stimulate the same 
rebound in mail volume as in the past, because of changes in how people 
communicate and use the mail. Specifically: 

* First-Class Mail volume has declined in recent years and is expected 
to decline for the foreseeable future as businesses, nonprofit 
organizations, governments, and households continue to move to 
electronic alternatives, such as Internet bill payment, automatic 
deduction, and direct deposit. USPS's analysis has found that 
electronic diversion is associated with the growing adoption of 
broadband technology. As PRC reported, the availability of alternatives 
to mail eventually impacts mail volume. 

* It is unclear whether Standard Mail will grow with an economic 
recovery. Standard Mail now faces growing competition from electronic 
alternatives, such as Internet-based search engine marketing, e-mail 
offers, and advertisements on Web sites. The average rate increase for 
Standard Mail is limited by the price cap to the increase in the 
Consumer Price Index, but future rate increases will likely have some 
impact on volume. 

Options to Assist USPS through Its Short-Term Difficulties: 

Options to assist USPS through its short-term difficulties--some of 
which would require congressional action--include: 

* Reduce USPS payments for retiree health benefits for 8 years: USPS 
has proposed that Congress change the statutory obligation to pay 
retiree health benefits premiums for current retirees from USPS to the 
Postal Service Retiree Health Benefits Fund (Fund) for the next 8 
years. This proposal would also reduce USPS's expenses through 2016 by 
an estimated $25 billion--with $2 billion in fiscal year 2009, $2.3 
billion in fiscal year 2010, and the remaining annual expenses 
increasing from $2.6 billion to $4.2 billion over the remaining 6 
years. This proposal is poorly matched to alleviate USPS's immediate 
projected cash shortfalls. In addition, this proposal would reduce the 
Fund balance by an estimated $32 billion (including interest charges) 
by 2016,[Footnote 6] so that in 2017, the remaining current unfunded 
obligation would be an estimated $75 billion (rather than $43 billion) 
to be amortized for future payments. This large obligation would create 
the risk that USPS would have difficulty making future payments, 
particularly considering mail volume trends and the impact of payments 
on postal rates if volume declines continue. USPS's proposal also would 
shift responsibility for these benefits from current to future rate 
payers. 

* Reduce USPS payments for retiree health benefits for 2 years: Another 
option would be for Congress to revise USPS's statutory obligation so 
that the Fund, not USPS, would pay for current retiree health benefits 
for only 2 years (fiscal years 2009 and 2010), which would provide USPS 
with $4.3 billion in relief. We support this option because it would 
have much less impact on the Fund and it would allow Congress to 
revisit USPS's financial condition to determine if further relief is 
needed and review actions USPS has taken in 2009 and 2010 to improve 
its viability. Relief from retiree health premium costs is no 
substitute for aggressive USPS action--beyond current efforts--to 
dramatically reduce costs and improve efficiency. 

It is not clear that either of these options would be sufficient, 
because USPS projects it will operate on a thin margin. This means that 
even if such relief is provided, a cash shortfall could develop in 
either fiscal year 2009 and/or 2010 if USPS does not meet its ambitious 
cost-cutting goals, mail volume declines more than projected, or 
unexpected costs materialize, such as unexpected increases in fuel 
costs. 

One option that would not require congressional action would be for 
USPS and its unions to continue their dialogue and agree on ways to 
achieve additional short-term savings, such as by modifying rules to 
facilitate reducing work hours. Such labor-management cooperation is 
critical to USPS's ability to make immediate changes in order to 
achieve cost reductions. 

Other available options, based on statutory provisions, could include 
(1) seeking PRC approval for an exigent rate increase[Footnote 7] and 
(2) increasing USPS's annual borrowing limit. First, USPS could request 
PRC approval for an exigent rate increase that would increase rates for 
market-dominant classes of mail above the statutory price cap. Mailers 
have voiced strong concern about the potential impact of such a rate 
increase on their businesses. In our view, this option should be a last 
resort. It could be self-defeating for USPS in both the short and long 
term because it could increase incentives for mailers to further reduce 
their use of the mail. Second, Congress could temporarily raise the 
statutory $3 billion annual limit on increases in USPS's debt, which 
would provide USPS with funding if needed. This option would be 
preferable to an exigent rate increase. However, it is unclear when 
USPS would repay any added debt, which would quicken USPS's movement 
toward its $15 billion statutory debt limit. In our view, this option 
should be regarded only as an emergency stop-gap measure. 

Comprehensive Action Is Urgently Needed on Options to Keep USPS Viable: 

Although USPS is taking unprecedented actions to cut costs, 
comprehensive action beyond USPS's current efforts is urgently needed 
to maintain financial viability. Given the growing gap between revenues 
and expenses, USPS's business model and its ability to remain self- 
financing may be in jeopardy. Progress in many areas will be needed so 
that USPS can cover operating expenses and maintain and modernize its 
infrastructure. 

I want to emphasize that action is urgently needed to streamline USPS's 
costs in two areas where it has been particularly difficult-- 
compensation and benefits and the mail processing and retail networks. 
We have reported for many years that USPS needs to right size its 
workforce and realign its network of mail processing and retail 
facilities. USPS has made some progress, particularly by reducing its 
workforce by more than 100,000 employees since 2000 with no layoffs and 
by closing some smaller mail processing facilities. Yet, as USPS 
recognizes, more needs to be done. USPS no longer has sufficient 
revenue to cover the cost of maintaining its large network of 
processing and retail facilities. Closing postal facilities would be 
controversial, but is necessary to streamline costs. Congress 
encouraged USPS to expeditiously move forward in its streamlining 
efforts in PAEA, and its continued support would be helpful to 
facilitate progress in this area. We recommended that USPS enhance the 
transparency and strengthen the accountability of its realignment 
efforts to assure stakeholders that realignment would be implemented 
fairly, preserve access to postal services, and achieve the desired 
results. USPS has taken steps to address our recommendations and, thus, 
should be positioned to take action. 

In addition, it is imperative for USPS and Congress to take informed 
action to review mail use, what future postal services will be needed, 
and what operational and statutory options are available to provide 
those services. Key areas with options include: 

* Universal Postal Service: A recently completed PRC study identified 
options for universal service and trade-offs involving quality and 
costs.[Footnote 8] When USPS asked Congress in January 2009 to 
eliminate the long-standing statutory provision mandating 6-day 
delivery, it provided little information on where it would reduce 
delivery frequency, and the potential impact on cost, mail volume, 
revenue, and mail users. Because the number of delivery days is 
fundamental to universal service, Congress should have more complete 
information before it considers any statutory changes in this area. A 
mechanism to obtain such information would be for USPS to request an 
advisory opinion from PRC, which would lead to a public proceeding that 
could generate information on USPS's request and stakeholder input. 
[Footnote 9] 

* USPS workforce costs: USPS's ability to control wage and benefit 
costs will be critical to cost-saving efforts. One option would be for 
USPS and its unions to negotiate changes to wages and benefits that 
apply to employees covered by collective bargaining agreements. USPS 
will begin negotiating next year with two of its major unions, whose 
agreements will expire in November 2010, and the following year with 
its other two major unions, whose agreements expire in November 2011. 

* Retail postal service: USPS has alternatives to provide lower-cost 
retail services than in traditional post offices, such as contract 
postal facilities, carrier pick-up of packages, and selling stamps at 
supermarkets, drug stores, and by telephone, mail, and the Internet. 
USPS's retail network has been largely static, despite the expansion of 
alternatives, population shifts, and changes in mailing behavior. We 
have reported that USPS could close unnecessary retail facilities and 
lower its network costs.[Footnote 10] It is important to note that 
large retail facilities--generally located in large urban areas where 
more postal retail alternatives are available--generate much higher 
costs than the smallest rural facilities and may, therefore, 
potentially generate more cost savings. 

* Mail processing: USPS has several options for realigning its mail 
processing operations to eliminate growing excess capacity and 
associated costs, but has taken only limited action. In 2005, we 
reported that, according to USPS officials, declining mail volume, 
worksharing, and the evolution of mail processing operations from 
manual to automated equipment has led to excess capacity that has 
impeded efficiency gains.[Footnote 11] USPS has terminated operations 
at 58 Airport Mail Centers in recent years, but has closed only 1 of 
over 400 major mail processing facilities.[Footnote 12] As USPS 
consolidates its operations, it needs to consider how it can best use 
its facilities, if it is cost effective to retain ones that are 
underutilized, and take the actions necessary to right size its 
network. 

* Transportation: Various options exist for reducing USPS's 
transportation costs beyond its current streamlining efforts. For 
example, a joint USPS-mailer workgroup has identified a destination 
entry discount for First-Class Mail as an option that could reduce the 
need for USPS to provide long-distance transportation and some mail 
processing.[Footnote 13] USPS could publicly provide its analysis of 
the potential savings and the impact of such a discount. 

* Delivery: USPS has various options for reducing delivery costs by 
continuing to realign delivery routes, implementing efficiency 
initiatives, and making more fundamental changes to delivery 
operations, such as delivering mail to more cost-effective receptacles, 
including cluster boxes. 

* USPS's business model: We will discuss options to change USPS's 
business model in a report that PAEA requires us to issue by December 
2011. 

Given USPS's projection that it faces record losses and cash 
shortfalls, it is important for USPS to continue providing Congress and 
the public with timely and sufficiently detailed information to 
understand USPS's current financial situation and outlook. Such 
information is essential to help congressional policymakers understand 
USPS actions and plans to maintain its financial viability in both the 
short and long term, particularly in view of proposals to give USPS 
financial relief from some retiree health benefit costs. Recently USPS 
took steps in this direction by providing monthly financial information 
to the PRC, which then made this information publicly available. 

We asked USPS to comment on a draft of our testimony. USPS generally 
agreed with the accuracy of our statement and provided technical 
comments, which we incorporated where appropriate. 

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

Contact and 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, David Hooper, Kenneth John, Emily Larson, Joshua Ormond, 
Susan Ragland, and Crystal Wesco. 

[End of section] 

Appendix I: Preliminary U.S. Postal Service Mail Volume and Revenue for 
January 2009 and the First 4 Months of Fiscal Year 2009: 

(Volume and revenue data in thousands). 

First-Class Mail: Volume; 
Jan. 2009: 7,641,364; 
Jan. 2008: 8,546,159; 
Percentage change: -10.6%; 
FY 2009 through Jan. 2009: 30,350,690; 
FY 2008 through Jan. 2008: 33,030,574; 
Percentage change: -8.1%. 

First-Class Mail: Revenue; 
Jan. 2009: $3,182,690; 
Jan. 2008: $3,477,810; 
Percentage change: -8.5%; 
FY 2009 through Jan. 2009: $12,836,527; 
FY 2008 through Jan. 2008: $13,656,481; 
Percentage change: -6.0%. 

Standard Mail: Volume; 
Jan. 2009: 6,566,304; 
Jan. 2008: 8,451,862; 
Percentage change: -22.3%; 
FY 2009 through Jan. 2009: 31,174,125; 
FY 2008 through Jan. 2008: 36,086,078; 
Percentage change: -13.6%. 

Standard Mail: Revenue; 
Jan. 2009: $1,374,231; 
Jan. 2008: $1,749,154; 
Percentage change: -21.4%; 
FY 2009 through Jan. 2009: $6,501,587; 
FY 2008 through Jan. 2008: $7,493,397; 
Percentage change: -13.2%. 

Periodicals: Volume; 
Jan. 2009: 652,330; 
Jan. 2008: 753,782; 
Percentage change: -13.5%; 
FY 2009 through Jan. 2009: 2,777,442; 
FY 2008 through Jan. 2008: 2,955,817; 
Percentage change: -6.0%. 

Periodicals: Revenue; 
Jan. 2009: $160,629; 
Jan. 2008: $193,016; 
Percentage change: -16.8%; 
FY 2009 through Jan. 2009: $725,531; 
FY 2008 through Jan. 2008: $796,818; 
Percentage change: -8.9%. 

Package Services: Volume; 
Jan. 2009: 69,018; 
Jan. 2008: 80,885; 
Percentage change: -14.7%; 
FY 2009 through Jan. 2009: 284,318; 
FY 2008 through Jan. 2008: 316,020; 
Percentage change: -10.0%. 

Package Services: Revenue; 
Jan. 2009: $159,220; 
Jan. 2008: $171,474; 
Percentage change: -7.1%; 
FY 2009 through Jan. 2009: $659,364; 
FY 2008 through Jan. 2008: $697,026; 
Percentage change: -5.4%. 

Subtotal, Market-dominant products[A]: Volume; 
Jan. 2009: 14,968,479; 
Jan. 2008: 17,880,497; 
Percentage change: -16.3%; 
FY 2009 through Jan. 2009: 64,771,862; 
FY 2008 through Jan. 2008: 72,790,013; 
Percentage change: -11.0%. 

Subtotal, Market-dominant products[A]: Revenue; 
Jan. 2009: $5,167,465; 
Jan. 2008: $5,910,707; 
Percentage change: -12.6%; 
FY 2009 through Jan. 2009: $21,927,980; 
FY 2008 through Jan. 2008: $23,905,935; 
Percentage change: -8.3%. 

Competitive products[B]: Volume; 
Jan. 2009: 112,015; 
Jan. 2008: 131,041; 
Percentage change: -14.5%; 
FY 2009 through Jan. 2009: 512,535; 
FY 2008 through Jan. 2008: 578,773; 
Percentage change: -11.4%. 

Competitive products[B]: Revenue; 
Jan. 2009: $634,730; 
Jan. 2008: $668,827; 
Percentage change: -5.1%; 
FY 2009 through Jan. 2009: $2,974,829; 
FY 2008 through Jan. 2008: $3,051,239; 
Percentage change: -2.5%. 

Total: Volume; 
Jan. 2009: 15,080,494; 
Jan. 2008: 18,011,538; 
Percentage change: -16.3%; 
FY 2009 through Jan. 2009: 65,284,397; 
FY 2008 through Jan. 2008: 73,368,786; 
Percentage change: -11.0%. 

Total: Revenue; 
Jan. 2009: $5,802,195; 
Jan. 2008: $6,579,534; 
Percentage change: -11.8%; 
FY 2009 through Jan. 2009: $24,902,808; 
FY 2008 through Jan. 2008: $26,957,175; 
Percentage change: -7.6%. 

Source: U.S. Postal Service. 

Note: January 2009 data are preliminary. For data limitations, see 
[hyperlink, http://www.prc.gov/Docs/62/62499/PFI-Jan2009-MV-MR-Jan2009-
PE-Jan2009-PW-Jan2009.pdf]. Subtotals for market-dominant products are 
greater than the types of market-dominant mail in this table because 
data for some market-dominant mail (U.S. Postal Service mail and Free 
Mail for the Blind) are not shown. 

[A] Market-dominant products primarily include First-Class Mail-- 
domestic and international single-piece mail (e.g., bill payments and 
letters) and domestic bulk mail (e.g., bills and advertising); Standard 
Mail (mainly bulk advertising and direct mail solicitations), 
periodicals (mainly magazines and local newspapers), some types of 
package services (primarily single-piece Parcel Post, Media Mail, 
library mail, and bound printed matter). Market-dominant revenues also 
include revenues from services such as post office boxes and Delivery 
Confirmation. 

[B] Competitive products primarily include Express Mail; Priority Mail; 
bulk Parcel Post, which the Postal Service calls Parcel Select; and 
bulk international mail. The Postal Service did not report separate 
data for each competitive product, which the Postal Service considers 
to be proprietary. 

[End of table] 

[End of section] 

Footnotes: 

[1] GAO, 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.: Jan. 28, 
2009). 

[2] USPS lost $2.8 billion in fiscal year 2008--its second-largest 
annual loss since 1971. 

[3] USPS previously reported on Feb. 23, 2009, that it had set a cost- 
cutting target of $5.9 billion over 2 years (fiscal years 2009 and 
2010). 

[4] USPS career employees, most of whom are full-time, have permanent 
positions. 

[5] Under its current business model, USPS can earn profits to remain 
self-supporting from postal revenue, which historically has grown with 
rising mail volume to help offset rising costs and help keep postal 
rates affordable. Mail volume has declined since fiscal year 2006, 
calling into question the assumption that volume growth and 
productivity increases will help sustain USPS's business model. 

[6] USPS would continue making required annual payments of $5.4 billion 
to $5.8 billion for future retiree health benefits for fiscal years 
2009 to 2016. For the schedule of retiree health benefit payments for 
current and future retirees, see table 1 of GAO-09-332T. 

[7] An exigent rate increase is a rate increase for market-dominant 
products that exceeds the price cap due to extraordinary or exceptional 
circumstances. 

[8] PRC, Report on Universal Postal Service and the Postal Monopoly 
(Washington, D.C.: Dec. 19, 2008). 

[9] When USPS determines that there should be a change in the nature of 
postal services which will generally affect service on a nationwide or 
substantially nationwide basis, it is required to submit a proposal to 
the PRC that requests an advisory opinion on that change within a 
reasonable time period prior to the change. PRC is required to hold a 
hearing on the proposal before issuing its written opinion. 39 U.S.C. ß 
3661. 

[10] GAO, 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.: 
Dec. 10, 2007). 

[11] GAO, U.S. Postal Service: The Service's Strategy for Realigning 
Its Mail Processing Infrastructure Lacks Clarity, Criteria, and 
Accountability, [hyperlink, http://www.gao.gov/products/GAO-05-261] 
(Washington, D.C.: Apr. 8, 2005). 

[12] GAO, U.S. Postal Service: USPS Has Taken Steps to Strengthen 
Network Realignment Planning and Accountability and Improve 
Communication, [hyperlink, http://www.gao.gov/products/GAO-08-1022T] 
(Washington, D.C.: July 24, 2008). 

[13] Destination entry involves mailers depositing mail at a USPS 
facility that is generally closer to the final destination of the mail, 
bypassing some USPS transportation and processing activities. 

[End of section] 

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