This is the accessible text file for GAO report number GAO-12-159SP entitled 'U.S. Postal Service: Mail Trends Highlight Need to Fundamentally Change Business Model' which was released on October 20, 2011. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. GAO-12-159SP: United States Government Accountability Office: Washington, DC 20548: October 14, 2011: The Honorable Joseph I. Lieberman: Chairman: The Honorable Susan M. Collins: Ranking Member: Committee on Homeland Security and Governmental Affairs: United States Senate: Subject: U.S. Postal Service: Mail Trends Highlight Need to Fundamentally Change Business Model: This report formally transmits a summary of our findings regarding changing mail trends and the actions and decisions needed to restructure USPS’s business model (see attachment). Our report is in response to your September 21, 2011 request letter and it contains information that was used to brief your staff on October 7, 2011. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Postmaster General, other congressional committees, and interested parties. In addition, this report will be available at no charge on the GAO website at [hyperlink, http://www.gao.gov]. If you or your staffs have any questions regarding this report, please contact me at (202) 512-2834 or herrp@gao.gov. Key contributors to this report were Teresa Anderson (Assistant Director), Tida Barakat, Erin Cohen, Bess Eisenstadt, Colin Fallon, Aaron Kaminsky, and Crystal Wesco. Signed by: Phillip R. Herr: Director, Physical Infrastructure Issues: Attachment: [End of section] GAO Highlights: Highlights of GAO-12-159SP, a report to the Committee on Homeland Security and Governmental Affairs, U.S. Senate. Why GAO Did This Study: By the end of fiscal year 2011, with a projected net loss of about $10 billion, the U.S. Postal Service (USPS) was expected to become insolvent. To mitigate this, Congress temporarily deferred USPS’s required $5.5 billion retiree health benefit payment. Over the previous 4 years, USPS experienced a cumulative net loss of just over $20 billion. USPS expects its revenue to decline further as First- Class Mail is projected to decline nearly 7 percent annually through 2020. Consequently, decisions need to be made to determine how USPS should be restructured to put it on a path to financial viability. GAO was asked to summarize (1) long-term trends related to the demand for and use of mail, and (2) options for restructuring USPS’s business model to adjust to changing mail trends. This summary is based on GAO’s past work, including GAO-11-278 (High-Risk Series: An Update) and GAO-10-455 (USPS: Strategies and Options to Facilitate Progress toward Financial Viability), both of which found that USPS urgently needs to restructure its networks and workforce to achieve and sustain financial viability. In addition, GAO also used data and related studies from USPS. GAO performed this work from September 2011 to October 2011 in accordance with generally accepted government auditing standards. GAO provided a draft of this report to USPS for comment and incorporated technical comments provided by USPS as appropriate. What GAO Found: Long-term trends-—highlighted in the data below-—strongly suggest that the use of mail will continue to diminish as online communication and e-commerce expand. By 2020, USPS projects mail volume will decline to levels not seen since the 1980s: Total mail volume is projected to decrease by 25 percent, First-Class Mail is expected to decrease by 50 percent, and Standard Mail volume is projected to remain flat. While dire, USPS’s projections could prove optimistic if communication continues to move to digital technologies as quickly as in the recent past. For the first time, in 2010, fewer than 50 percent of all bills were paid by mail. These trends underscore the need for USPS’s business model to undergo fundamental changes to reduce personnel and network-related costs. Table 1: Key Statistics on USPS’s Operations from Fiscal Years 1980 through 2020: Total mail volume (billions of pieces): 1980: 106; 1990: 166; 2000: 208; 2010: 171; 2020 (projected): 127. Total revenue (dollars in billions): 1980: $19; 1990: $40; 2000: $65; 2010: $67; 2020 (projected): $59. Total employees: 1980: 667,000; 1990: 843,000; 2000: 901,000; 2010: 672,000; 2020 (projected): 425,000. Total facilities: 1980: 39,486; 1990: 40,067; 2000: 38,060; 2010: 36,750; 2020 (projected): 20,200. Source: USPS. [End of table] As shown in the chart, almost 60 percent of mail received by households in 2010 was advertising, while bills and financial statements comprised 22 percent. Figure: USPS Mail Volume and Mix: [Refer to PDF for image: stacked vertical bar graph and pie-chart] Volume in billions: Fiscal year: 1980; First-class mail: 60 billion; Standard mail: 30 billion; All other: 15 billion; Total: 106 billion. Fiscal year: 1990; First-class mail: 89 billion; Standard mail: 64 billion; All other: 13 billion; Total: 166 billion. Fiscal year: 2000; First-class mail: 104 billion; Standard mail: 91 billion; All other: 13 billion; Total: 208 billion. Fiscal year: 2010; First-class mail: 78 billion; Standard mail: 83 billion; All other: 10 billion; Total: 171 billion. Fiscal year: 2020 projected; First-class mail: 39 billion; Standard mail: 81 billion; All other: 7 billion; Total: 127 billion. Mix: Advertising: 59%; Bills/Financial: 22%; Correspondence: 9%; Other: 10%. Source: GAO analysis of USPS data. [End of figure] Restructuring USPS’s business model to adapt to decreased mail use could follow one of three primary models: a government-subsidized federal agency, the current structure with additional flexibility, or a private-sector business. See table 2 for key actions and decisions associated with each model. Table 2: Actions and Decisions Needed to Restructure USPS’s Business Model: Universal service obligation: Government-subsidized federal agency: Determine whether or not the universal service obligation should be revised to reflect changing mail use, affordability, access to services, and the level of subsidy needed; Current structure with additional flexibility: Determine whether or not the universal service obligation should be revised to reflect changing mail use, affordability, and access to services; Private-sector business(es): Determine how to ensure, and in what form, universal service would be provided. Role in providing delivery and retail services: Government-subsidized federal agency: Determine the level of federal subsidy needed to provide agreed-on delivery and retail services; Current structure with additional flexibility: Give USPS greater flexibility to partner and compete with private firms in providing delivery and retail services; Private-sector business(es): Allow private firms to provide delivery and retail services while preserving the universal service obligation. Governance and regulation: Government-subsidized federal agency: Revise governance and regulatory structures to be consistent with administration and congressional oversight, and related changes; Current structure with additional flexibility: Revise governance, regulatory oversight, and reporting requirements to be consistent with other changes made, such as pricing flexibility and network changes; Private-sector business(es): Revise governance, regulatory oversight structures, and reporting requirements to reflect those applicable to industries, subject to universal service provisions. Monopolies: Government-subsidized federal agency: Continue the letter and mailbox monopolies; Current structure with additional flexibility: Determine whether the letter or mailbox monopoly should be changed; Private-sector business(es): Phase out or eliminate the letter and mailbox monopolies. Pricing and products: Government-subsidized federal agency: Determine whether to retain price caps and subsidies for certain mail classes, and how much pricing and product flexibility USPS should have to develop new products and services; Current structure with additional flexibility: Determine whether to retain price caps and subsidies for certain mail classes, product flexibility, and ensure products cover their costs; Private-sector business(es): Provide flexibility to develop new products and base prices on market conditions; eliminate price caps and subsidies. Borrowing authority: Government-subsidized federal agency: Determine how the current $15 billion debt to the U.S. Treasury will be repaid and whether the $15 billion debt limit should be changed; Current structure with additional flexibility: Determine how the current $15 billion debt to the U.S. Treasury will be repaid and whether the $15 billion debt limit should be changed; Private-sector business(es): Eliminate borrowing from the U.S. Treasury, repay debt to the U.S. Treasury, and require capital to be raised in private equity markets. Financial obligations: Government-subsidized federal agency: Allow USPS to fund its obligations like other federal agencies and eliminate prefunding for retiree health benefit obligations; Current structure with additional flexibility: Restructure funding for retiree health benefit obligations in a fiscally responsible manner; Private-sector business(es): Establish new pension, retiree health, and workers’ compensation programs and determine obligations, in accordance with applicable laws and regulations. Networks and workforce: Government-subsidized federal agency: Optimize networks and workforce in accordance with service levels and subsidy; Current structure with additional flexibility: Optimize networks and workforce to match costs with declining volume and revenue; Private-sector business(es): Optimize networks and workforce in accordance with service obligations. Compensation and benefits: Government-subsidized federal agency: Revise compensation and benefit requirements to reflect those applicable to other federal employees; Current structure with additional flexibility: Revise compensation and benefit requirements to reflect either private-or public-sector standards, but not a hybrid of both; Private-sector business(es): Revise compensation and benefit structure to reflect private-sector practices. Labor-related requirements: Government-subsidized federal agency: Revise requirements to reflect those used by federal agencies; Current structure with additional flexibility: Require binding arbitration for labor contracts to consider USPS’s financial condition; Private-sector business(es): Revise requirements to reflect those applicable to private firms. Source: Analysis of prior GAO work and USPS documents. 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