U.S. Postal Service: Congressional Action Is Essential to Enable a Sustainable Business Model

An independent establishment of the executive branch, USPS is required to provide prompt, reliable, and efficient services to the public. While USPS is to be self-sustaining, it lost about $78 billion from fiscal years 2007 through 2019 due primarily to declining mail volumes and increased costs. Given USPS’s poor financial condition, in 2009 GAO identified USPS’s financial viability as a high-risk area, a designation it retains today.

GAO was asked to explore issues related the transformation of USPS and potential implications for stakeholders. This report (1) examines major challenges facing USPS, (2) identifies how selected domestic businesses and foreign posts reportedly have addressed serious challenges, (3) examines critical foundational elements of USPS’s current business model, and (4) identifies key previously issued GAO matters for congressional consideration regarding USPS and actions taken in response.

GAO reviewed its prior reports and related matters for congressional consideration, analyzed laws and regulations, and assessed USPS documents on financial and operational performance. It also reviewed reports by the USPS Office of Inspector General, the Postal Regulatory Commission, and other selected groups such as the 2018 Task Force on the United States Postal Service.

To identify how domestic businesses and foreign posts addressed similar serious challenges, GAO selected for review (1) six domestic organizations in the airline, automobile, and railroad industries and (2) five foreign posts in five countries—Australia, France, Germany, New Zealand, and the United Kingdom. The businesses and countries had characteristics similar to USPS, such as large unionized work forces, and had reportedly made significant changes to their business models. For each of these businesses and countries, GAO analyzed public reports on financial and operational performance, as well as institutional structure and requirements. GAO also interviewed government and postal officials from three selected countries and officials from the National Audit Offices of two of the selected countries. Because questions were raised regarding the application of the U.S. Bankruptcy Code to USPS, GAO also requested the National Bankruptcy Conference to assess whether USPS could use bankruptcy or other restructuring processes.

To examine critical USPS business model elements, GAO reviewed its prior reports and reports from numerous other organizations, and obtained the views of stakeholders.

Since GAO's 2009 high-risk designation, the U.S. Postal Service's (USPS) financial viability has progressively worsened due to declining mail volume, increased employee compensation and benefit costs, and increased unfunded liabilities and debt. First-Class Mail volume has declined 44 percent since fiscal year 2006. Additionally, employee compensation and benefits costs have been increasing. Although USPS's work force declined from about 786,000 in fiscal year 2007 to about 617,000 in fiscal year 2013, USPS's work force increased to about 630,000 in fiscal year 2019. Finally, total unfunded liabilities and debt continue their steady upward trend (see figure).

To address these challenges, USPS has taken a variety of actions such as providing increased self-service options and reducing facility hours. Statutory requirements, however, limit USPS's ability to make changes in areas such as certain service offerings, pricing, and its employee compensation and benefits.

In confronting similar types of challenges that are facing USPS, GAO selected large domestic businesses (companies) and foreign postal entities (widely known as “foreign posts”) that have seen significant change in foundational elements of their business models. Specifically, according to GAO's analysis of publicly available reports and interviews of cognizant officials, these organizations have had major changes in services and products, financial self-sustainment, and institutional structure:

Companies and foreign posts have modified services and products to focus on profitable offerings, and two countries’ posts reduced postal service levels. For example, New Zealand Post reduced its mail delivery’s frequency from 5 to 3 days per week in urban areas.

Companies have reduced their workforce, infrastructure, and operational costs, and some accepted government financial assistance to help remain financially viable. Cost reduction has also been a priority for all countries’ posts, especially in compensation and benefits, while three countries’ governments provided financial assistance to their posts.

Four of the selected companies declared bankruptcy leading to restructured corporations; some merged with other companies to increase their revenues. Two countries privatized their posts, and three others restructured their posts from government departments into government-owned corporations.

Regarding USPS, reassessing its business model should start with the level of required postal services. For example, delivery is USPS’s most costly operation; USPS officials estimate annual savings of $1.4 billion to $1.8 billion if delivery of mail were reduced to 5 days rather than 6 days per week. Second, USPS is to function as a financially self-sustaining entity; however, it does not. A reassessment could include determining whether some of USPS’s costs and liabilities should be borne by taxpayers. Third, alternative institutional structures for USPS range from a federal agency to a private company. A bankruptcy proceeding is not an effective or appropriate means to address the issues associated with a potential USPS restructuring, according to the National Bankruptcy Conference.

Prior GAO reports have included suggestions for Congress to address USPS’s financial viability. For example, GAO’s 2010 report identified strategies to reduce compensation, benefits, and operational costs. GAO stated that Congress, among other things, consider all options available to reduce costs. While bills in this area were introduced and in some cases passed congressional committees, legislation was not enacted. In 2018, GAO reported that the financial outlook for the Postal Service Retiree Health Benefits Fund was poor—the Office of Personnel Management forecasted the fund would be depleted by 2030 if USPS continued not making payments into it. Legislation has not been enacted to place postal retiree health benefits on a more sustainable financial footing. Postal reform legislation has not taken place in part because of the difficulty in obtaining compromise among various stakeholders with divergent views (see figure below). However, since GAO’s 2010 report, USPS’s financial condition has significantly worsened raising fundamental questions about key elements of USPS’s business model. Such questions warrant congressional action.

Congress should consider reassessing and determining the (1) level of postal services the nation requires, (2) extent to which USPS should be financially self-sustaining, and (3) appropriate institutional structure for USPS. Both USPS and the Postal Regulatory Commission (PRC) generally concurred with the matters.

The U.S. Postal Service (USPS) plays a critical role in the nation’s  communications and commerce. USPS is the largest postal service in the  world, delivering an estimated 47 percent of all mail sent globally. USPS’s  financial viability, however, has been on GAO’s High Risk List since 2009  due to USPS’s poor financial condition, which has worsened in recent  years due to declining mail volumes and rising costs. For example,  USPS’s net losses totaled approximately $78 billion from fiscal years  2007 through 2019, and its productivity has declined in recent years—a  trend that has contributed to its cost pressures.

USPS has been unable to make broad changes to address its financial  and other challenges because Congress, the Administration, USPS and  USPS’s stakeholders—including labor unions, mailers, and competitors— have been unable to agree on how to do so. As a result, while major  postal reform legislation was enacted in 2006, further postal reform  legislation has not been enacted.

You asked us to explore issues related to the transformation of USPS and  their potential implications for stakeholders. For purposes of this report,  we use the term “business model” to refer to three key aspects of postal  service operations: “to bind the nation together” by providing universal  postal service; to be financially self-sustaining by covering its costs,  primarily with revenues generated from its postal operations; and to be an  independent establishment of the executive branch. This report: (1)  examines major challenges facing USPS, (2) identifies how selected  domestic businesses and foreign posts reportedly have addressed  serious challenges, (3) examines critical foundational elements for  transforming USPS’s business model, and (4) identifies key previously  issued GAO matters for congressional consideration regarding USPS and  actions taken in response.

For all of our objectives, we reviewed relevant federal laws and  regulations and interviewed USPS officials. To determine key challenges  to making USPS’s business model financially sustainable, we reviewed:

USPS’s documents on financial and operational performance, our prior work, and  reports by the USPS Office of Inspector General (OIG), the Postal  Regulatory Commission (PRC), the 2003 President’s Commission on  the United States Postal Service, and the 2018 Task Force on the  United States Postal Service, among others.

To examine how selected domestic businesses and foreign posts have  transformed their business models to become more financially viable, we  selected six domestic businesses in the airline, automobile, and railroad  industries. These businesses have or had large unionized workforces and  national network operations and significantly changed their business  models through bankruptcy or other restructuring options in response to  market changes in the last 10 to 40 years. We also selected foreign  posts in five industrialized countries that made changes during the same  time period. We selected these five countries based on prior work that  identified them as having made changes to adapt to the changing use of  mail; diverse characteristics, including the extent of privatization of their  postal operators and geography with both urban and rural areas; and the  availability of information in English. We reviewed and summarized key  findings of public reports on the financial and operational performance as  well as institutional structure and requirements of the selected domestic  businesses and the selected countries’ postal operators. Our review  included private company reports filed with the Securities and Exchange  Commission (SEC), annual reports by the private companies and foreign  posts, reports by GAO and the Congressional Research Service (CRS),  books, and academic articles, among other sources. We also conducted  site visits to France, Germany, and the United Kingdom to interview  government officials and representatives of foreign posts, a labor union, a  private-sector mail delivery company, postal economists, and two former  chief executives of foreign posts, about the changes to postal operations  in their countries. We did not conduct interviews with representatives of  the selected domestic businesses.

To identify the key issues for consideration involved in transformation, we  reviewed our prior work and reports from the USPS OIG and others on  different options. We used information on how our selected domestic  industries and foreign posts made significant changes to provide  examples of how different aspects of USPS’s business model could  change and their potential effects on USPS’s stakeholders. We also  interviewed representatives from three postal labor unions, a mailer group  that represents commercial mailers, and four third-party experts on postal  policy regarding their views on how USPS can change and the potential  effects of such a transformation on mailers, postal employees,  ratepayers, and competitors. We selected the mailer group and the third- party experts based on our prior work and their differing positions on  USPS reform. While the views of the stakeholders and experts we  interviewed are not generalizable, they provide information and different  perspectives on options for USPS.

To provide expert insight into how USPS might be able to use the U.S.  Bankruptcy Code (Code) or other restructuring processes, we consulted  with the National Bankruptcy Conference (NBC). NBC is a non-partisan,  non-profit organization formed in the 1940s and today consists of  approximately 60 lawyers, law professors, and bankruptcy judges who  are leading experts in bankruptcy law. NBC’s primary purpose is to advise  Congress on the operation of bankruptcy and related laws and on any  proposed changes to those laws. NBC provided a report on whether  USPS could use the Code or other restructuring processes to address its  financial obligations and achieve a sustainable business model. We also  asked NBC what factors Congress should consider in deciding whether to  amend the Code or enact other legislation to address USPS’s financial  condition.

To describe GAO’s previously issued “Matters for Congressional  Consideration” regarding USPS, we reviewed and summarized our 2010  report on USPS’s business model, our 2018 report on Postal Retiree  Health Benefits, and our 2019 High Risk update. We also reviewed  Congressional actions since 2010 regarding our proposed matters.

We conducted this performance audit from October 2018 to May 2020 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 has the mission of providing prompt, reliable, and efficient  universal postal service, and federal law requires USPS to “provide postal  services to bind the Nation together through the personal, educational,  literary, and business correspondence of the people.” USPS is required  to serve, as nearly as practicable, the entire population of the United  States.

USPS has a number of key stakeholders, each with different interests in  USPS and its operations (see fig. 1). USPS is a key part of the mailing  industry, and over time, it has become both a competitor and partner to  private companies that also operate in the broader mail and delivery  industries. For example, although United Parcel Service (UPS) and  FedEx both pay USPS to deliver packages that they enter into USPS’s  system at local post offices where carriers pick up their mail, they also  compete with USPS for end-to-end package delivery business, such as  moving packages from the retailer to the purchaser. Similarly, FedEx is  USPS’s largest contractor, providing air transportation for Priority Mail  Express (formerly Express Mail), Priority Mail, and First-Class Mail. UPS  is also one of USPS’s largest contractors, providing long-distance mail  transportation.

Over the years, legislation has changed key aspects of the business  model used to provide the nation’s postal services. Until 1970, the federal  government provided postal services via the U.S. Post Office Department,  a government agency that received annual appropriations from  Congress. At that time, Congress was involved in many aspects of the department’s operations, such as selecting postmasters and setting  postal rates and wages. In addition, the President controlled the hiring  and firing of Postmasters General, as it was a cabinet-level position. By  the late 1960s, the department had several major problems including  financial losses, management problems, service breakdowns, and low  productivity. Because key postal business decisions were made by  Congress through the legislative process, postal management had limited  ability to plan and finance department operations and capital investments  in accordance with postal needs.

In order to improve and modernize postal services, the Postal  Reorganization Act (PRA) was enacted in 1970 and replaced the U.S.  Post Office Department with USPS, an independent establishment of the  executive branch of the government of the United States. Congress  designed USPS to be a self-sustaining, business-like entity headed by a  Board of Governors that would cover its operating costs primarily with  revenues generated through the sales of postage and postal-related  products and services.

However, by the early 2000s, USPS faced a bleak financial outlook that  put its mission of providing universal postal service at risk, according to  the 2003 Presidential Commission on the United States Postal Service.  The Commission evaluated USPS’s business model and concluded that  USPS must have greater flexibility to operate in a business-like fashion,  but that this latitude required enhanced transparency to enable effective  management and congressional oversight. The Postal Accountability and  Enhancement Act (PAEA) was enacted in 2006. PAEA provided USPS  additional pricing flexibility for mail products, but with provisions for  increased transparency, oversight, and accountability, among other  things.

Specifically, PAEA gave USPS broader latitude to change postal rates in  a more streamlined process that included review by the newly created  Postal Regulatory Commission (PRC). The PRC, which replaced the  former Postal Rate Commission, is an independent establishment of the  executive branch responsible for regulating USPS. PRC is required to  make annual determinations of USPS’s compliance with mail delivery  standards and postal rate requirements. If PRC finds noncompliance, it  is required to specify USPS actions to restore compliance.

USPS Cannot Become Financially Self-Sustaining under Its Current Business Model due to Three Key Challenges

USPS’s current business model is not financially sustainable due to  declining mail volumes, increased compensation and benefits costs, and  increased unfunded liabilities and debt. USPS’s costs continue to rise  faster than its revenues, and although USPS has made changes over the  years to address these challenges, its efforts have been limited by  stakeholder opposition and statutory requirements.

As online communication and payments have expanded, USPS continues  to face decreases in mail volume, its primary revenue source. First-Class  Mail volume has declined 44 percent since fiscal year 2006, the year that  total mail volume peaked. The long-term decline of First-Class Mail  volume, which USPS has stated was exacerbated by the Great  Recession and expects to continue for the foreseeable future, has  fundamental implications for USPS’s business model because First-Class  Mail is USPS’s most profitable class of mail. USPS Marketing Mail— which comprises most other mail volume—declined 27 percent from fiscal  year 2007 to fiscal year 2019, in part due to electronic advertising  alternatives. The volume of USPS competitive products more than tripled  since fiscal year 2007. This volume, however, began to decline in the  second half of fiscal year 2019 due to growing competition for package  delivery.

USPS has taken steps to right size its operations in response to declining  mail volumes. For example, in both 2009 and 2011, USPS announced  plans to close several thousand USPS retail facilities. However, due to  stakeholder opposition—including from members of Congress, postal  unions, and local communities, among others—USPS instead closed a  few hundred retail facilities. USPS also expanded the alternative options  for customers to access retail postal products and services outside of  USPS-operated postal facilities—such as self-service kiosks and  partnerships with other retailers such as contract postal units. According  to USPS, as a compromise effort to right size the retail network and due  in part to USPS’s efforts to expand retail alternatives, USPS began  reducing retail hours at selected post offices in 2012, ultimately  decreasing retail hours at approximately 13,000 post offices. Another  major cost-cutting effort was its 2011 Network Rationalization Initiative, a  multi-part plan to consolidate its mail processing network. USPS  consolidated more than 160 mail processing facilities, but did not fully  implement this initiative following opposition from various stakeholders.

In addition to stakeholder opposition to changing postal services, federal  laws also factor into USPS’s limited ability to respond to declining mail  volumes. For example, federal laws define the level of postal services  USPS is to provide, postal products, and pricing.

Postal services to be provided: USPS has limited ability to make  changes in the postal services it provides. Specifically, USPS is  required to provide 6-days-a-week delivery and to operate postal  facilities across the country. Federal law requires USPS to provide  the maximum degree of effective and regular postal services to rural  areas, communities, and small towns where post offices are not self- sustaining. Federal law also limits USPS’s ability to close retail  facilities. For example, USPS cannot close a small post office solely  because it is unprofitable. As of the end of fiscal year 2019, there  were approximately 34,600 postal retail outlets nationwide, including  approximately 31,300 USPS-managed post offices, branches, and  stations, and, as we recently reported, USPS’s analysis showed that  about 36 percent of its retail facilities were unprofitable in fiscal year  2018.

Postal products and pricing: USPS’s pricing flexibility is limited by a  price cap on market-dominant products that generally limits rate  increases for these products to a common measure of inflation. Each  competitive product is required to cover its attributable costs;  competitive products collectively are required to recover their  attributable costs; and competitive products collectively are required  to cover a PRC-specified minimum of USPS’s institutional costs. In  addition, USPS is prohibited from providing new nonpostal products  and services. Such requirements affect USPS’s ability to increase  revenues.

Increased Compensation and Benefits Costs

While mail volumes have decreased, USPS’s compensation and benefits  costs for current employees have been increasing since 2014, despite  USPS’s efforts to control these costs. Although USPS reduced its total  workforce (career and non-career employees) from 785,900 in fiscal year  2007, to 617,700 in fiscal year 2013, its workforce increased to about  630,000 in fiscal year 2019. Similarly, as we previously reported,  recent trends show total work hours increased from a combination of new  hiring and increased work hours for current employees. Specifically, we  reported that from fiscal years 2014 through 2018, work hours increased  by 5.4 percent. The number of work hours associated with higher costs— overtime and penalty overtime—have also been increasing. According  to USPS, total compensation and benefits costs increased by almost $1  billion in fiscal year 2019 alone.

USPS has implemented changes to help control employee compensation  and benefits costs, including lowering pay for new career employees and  increasing use of non-career employees. For example, as we previously  reported, starting about 10 years ago, USPS’s collective bargaining  agreements have included the ability to hire up to 20 percent of the  workforce as non-career employees. Non-career employees are less  costly because they generally have lower pay rates and are not entitled to  the full federal benefits received by career employees. According to  USPS officials, non-career employees are also “more flexible” because  there are fewer restrictions on their tasks and schedules. We recently  reported that our analysis estimated that USPS likely saved about $6.6  billion from fiscal years 2016 through 2018 from increased use of non- career employees. USPS has recognized trade-offs in increasing the  use of non-career employees in entry-level positions, such as a high  turnover rate, as would be expected for almost any entry-level position in  the private sector.

With respect to benefits costs for current postal employees, we have  recently reported that USPS has also achieved savings by gradually  decreasing its contribution percentage for employee health insurance  premiums over the past decade, with corresponding increases in the  contribution percentage paid by employees. These changes were  negotiated with the four major postal labor unions and were included in  successive collective bargaining agreements, each of which covered a  multi-year period. We found that the reduction in USPS health insurance  contributions generated estimated savings of about $1.4 billion for fiscal  years 2016 through 2018.

A number of restrictions limit USPS’s ability to control employee  compensation and benefits costs. As we recently reported, USPS  compensation and benefits costs—which represent about three-fourths of  its total costs—are driven by a mix of USPS contracts and policies,  including collective bargaining agreements negotiated with unions  representing 92 percent of USPS employees, and statutory requirements  governing USPS employee pay and benefits. When USPS and its  unions are unable to agree, the parties are required to enter into binding  arbitration by a third-party panel. USPS’s collective bargaining  agreements with these labor unions, some of which were established  through binding arbitration, have established salary increases and cost- of-living adjustments and, as mentioned above, have also capped the  number of non-career employees at approximately 20 percent of the  number of employees covered by the agreements. Federal law requires  USPS to participate in the Federal Employees Health Benefits Program  (FEHBP), which covers current employees and retirees, as well as federal  pension and workers’ compensation programs. Further, USPS must  provide fringe benefits that, as a whole, are no less favorable than those  in effect when the Postal Reorganization Act of 1970 was enacted.

USPS’s unfunded liabilities and debt, which consist mostly of unfunded  liabilities for retiree health and pension benefits, have become a  significant financial burden, increasing from 99 percent of USPS’s annual  revenues at the end of fiscal year 2007 to 226 percent of its fiscal year  2019 revenues. At the end of fiscal year 2019, USPS’s unfunded  liabilities and debt totaled approximately $161 billion. However, it has  begun paying down this debt in recent years, leaving a balance of $11  billion at the end of fiscal year 2019 (see fig. 2).

Total unfunded liabilities have risen in part due to USPS not making  payments to fund its retiree health and pension benefits. USPS has  stated that it prioritizes its “primary universal service mission” when it is  unable to fulfill all of its financial obligations, and that it therefore did not  make payments to fund its postal retiree health benefits and pensions to  minimize the risk of running out of cash. In doing so, USPS cited its precarious financial condition and the need to cover current and  anticipated costs and any contingencies. It has not paid $55.4 billion in  required payments for funding these benefits through fiscal year 2019,  including $47.2 billion in missed funding payments for retiree health  benefits since fiscal year 2010, and $8.2 billion for funding pension  benefits since fiscal year 2014. In addition, for many years, USPS had  been at its statutory debt limit of $15 billion; however, it has begun paying  down this debt in recent years, leaving a balance of $11 billion at the end  of fiscal year 2019.

A number of federal laws define the requirements for USPS’s retiree  health and pension benefits that comprise most of its unfunded liabilities.

Retiree health benefits: Federal law establishes certain requirements for  postal retiree health benefits, including basic requirements for coverage  eligibility and contributions. In administering the FEHBP, the Office of  Personnel Management (OPM) negotiates with the insurance providers to  establish the level of benefits provided to beneficiaries. USPS is  required to prefund its share of health benefits for its retirees. Under  PAEA, the first 10 years of prefunding payments were fixed—ranging  from $5.4 billion to $5.8 billion annually from fiscal years 2007 to 2016.  From fiscal years 2007 through 2016, USPS was also required to  continue “pay-as-you-go” payments for its share of premiums for current  retirees. The permanent schedule for USPS payments to prefund postal  retiree health benefits under PAEA required USPS to make annual  payments starting in fiscal year 2017. Currently, USPS no longer makes  payments for retiree health benefits premiums. Starting in 2016, these  premiums are paid out of the RHB Fund until it is depleted, whereupon  USPS will resume paying premiums on a pay-as-you-go basis. As we  previously reported, survey data we reviewed indicated that most  companies do not offer retiree health benefits and that the number of  companies providing such benefits is decreasing over time. Many  companies that have retained their retiree health benefits have done so  by making changes to control costs, including tightening eligibility and  restructuring benefits. However, all approaches we identified have  different potential effects and would require congressional action.

Pension benefits: Federal law also requires USPS to finance its pension  benefits under the Federal Employees Retirement System (FERS) and  the Civil Service Retirement System (CSRS) and contains specific  provisions defining USPS’s required contribution level to fund these  benefits. USPS’s payments consist of a rolling 30-year amortization  schedule to address unfunded FERS liabilities, an amortization schedule  to address unfunded CSRS liabilities by 2043, and the normal costs of  FERS benefits for current employees.

Selected Domestic Companies and Foreign Posts Took Key Steps to Address Major Challenges

The large domestic companies we selected in the airline, auto, and  railroad industries took actions over a number of years to address major  business challenges. Airlines such as Delta, American, and United faced  competition from low-cost airlines, downward pressure on airfares, and  rising compensation, benefits, and volatile fuel costs. These challenges  were exacerbated by the economic downturn that began in 2000, the  terrorist attacks of September 11, 2001, and the Great Recession that  began in December 2007, all of which temporarily depressed demand for  airline travel. Similarly, General Motors (GM) and Ford Motor Company  (Ford) faced competition from lower cost competitors, the Great  Recession, a workforce and networks too large to be supported by  smaller sales volumes, and other changes in the market. Likewise, large  U.S. railroads competed for freight and passengers from other  transportation modes, such as the trucking and airline industries that  operated over publicly provided infrastructure, while railroads had to  invest in their own infrastructure.

Based on our review of the selected companies’ annual reports and  statements to the SEC as well as selected federal laws, and GAO, CRS,  and other organizations’ reports, books, and academic articles, among  other sources, we found that selected companies made changes to (1)  products and services, (2) financial self-sustainment, and (3) use of the  bankruptcy process. While some of the selected businesses restructured  through a bankruptcy proceeding, other businesses took similar actions  outside of the bankruptcy process. Mergers also played an important  role for the airlines and railroads.

Actions Taken by Companies to Address Challenges

The selected companies made multiple changes to their products and  services. Specifically:

Airlines: Selected airlines altered pricing by changing route structure  to focus on more profitable routes and adding fees, such as for  checked baggage. In addition, all three selected airlines merged  with other major airlines, thereby broadening their routes and  revenues.

Automakers: Selected automakers focused on producing more  profitable brands and models, discontinuing some models and  introducing others. For example, during its financial difficulties about a  decade ago, GM discontinued a number of unprofitable brands. In  2018, after years of declining car sales, Ford said it would eliminate  some of its most well-known cars in North America, allowing it to  devote more resources to sport utility vehicles and trucks.

Railroads: Large railroads focused on more profitable routes and  abandoned unprofitable routes or sold them to other railroads. For  example, the federal government created a new freight railroad,  Conrail, by merging several bankrupt railroads in the Northeast and  Midwest. As we have reported previously, federal government  deregulation of railroad pricing and contracts after 1980 also helped  Conrail to reach profitability and increase capital investment.

Actions Regarding Financial Self-Sustainment

Cost reduction was a major theme for the selected businesses in the  airline, automotive, and rail industries, particularly with respect to  compensation, benefits, and infrastructure costs. Specifically:

Airlines: The three selected airlines negotiated wage cuts and work  rule changes with their unions; made workforce reductions, in part by  outsourcing work; and cut pension and retiree health benefit  programs. Wage cuts included all levels of employees, such as  management, pilots, flight attendants, and mechanics. Benefit cuts  involved reducing the level of pensions and retiree health benefits and  transitioning pension programs from defined benefits plans to defined  contribution plans that were structured to be less costly. Airlines also  reduced infrastructure costs by eliminating some hubs, reducing the  total number of aircraft, and changing the mix of aircraft in their fleet to  save on maintenance and fuel costs. The airlines further cut costs by  restructuring debt, reducing facility leasing costs, and renegotiating  aircraft leases and vendor contracts.

While in bankruptcy, the airlines took major actions to reduce their  costs. For example, United implemented steep pay cuts, cut retiree  health benefits, and terminated its defined benefit pension plans,  resulting in the Pension Benefit Guaranty Corporation (PBGC)  assuming responsibility for some of its pension payments, and a  reduction in benefits for the plan’s participants. United also cut its  workforce size by 31 percent, reduced the number of airplanes by 19  percent, and reduced the total number of flights by 13 percent. Delta  and American also reduced pay and pension benefits while in  bankruptcy, and the PBGC assumed responsibility for some of Delta’s  pension liabilities.

Automakers: The two selected automakers negotiated pay cuts, lower  wages for entry-level employees, and changes to work rules designed  to increase competitiveness; cut the workforce size in about half;  made changes to employee benefits; closed many auto plants and  dealerships; eliminated some vehicle brands and models; and  changed the production process to increase efficiency. Specifically,  The International Union, United Automobile, Aerospace and  Agricultural Implement Workers of America (UAW) agreed to cuts in  compensation for the automakers’ employees to levels paid by GM  and Ford’s competitors. UAW also agreed to move retiree health care  benefits into a private Voluntary Employee Beneficiary Association  (VEBA) for current and former UAW-represented employees in  2007; the VEBA took over health benefits for retirees starting in 2010.  The automakers also closed defined benefit pension plans to new  participants and moved to defined contribution pension plans for  eligible new employees.

Railroads: The Staggers Rail Act of 1980 was enacted to improve the  financial stability of the railroad system. Subsequently, railroads  improved their financial health through, among other things, cost  reduction measures such as reducing their workforce through layoffs  and federal buyouts agreed to by unions, and abandoned or sold off  unprofitable rail lines to reduce infrastructure and operating costs.  Overall railroad employment fell greatly as railroads consolidated,  reduced service, and changed work rules. For example, Conrail  reduced its workforce from about 82,000 employees in 1977 to about  21,000 in 1996. Congress specifically facilitated Conrail’s downsizing  by passing the Northeast Rail Service Act of 1981, which among other  things, directed a $200 million a year reduction in labor costs and  authorized Conrail to terminate employees.

The U.S. government provided assistance to selected companies in  various forms, including appropriated funds, loans, and other actions that  helped enable companies to reduce their expenses. For example:

Automakers: The federal government committed $49.5 billion in  funding to help GM continue to operate while restructuring. After the  government became the majority owner of the GM that emerged from  bankruptcy, the Administration laid out core principles that included  managing its ownership in a hands-off manner and voting as a  shareholder only on core governance issues.

Airlines: Under the 2001 Air Transportation Safety and System  Stabilization Act, the federal government provided nearly $5 billion in  compensation to airlines for losses due to the September 11, 2001  terrorist attacks, including $856 million for American, $668 million for  Delta, and $782 million for United. Additionally, under the  Emergency Wartime Supplemental Appropriations Act, $2.4 billion  was appropriated to the Transportation Security Administration to  compensate airlines for certain security expenses and fees, including  $358 million to American, $411 million to Delta, and $300 million to  United.

Railroads: The federal government spent about $8 billion creating,  subsidizing, and preparing Conrail for sale to the private sector. This  funding included $7 billion through 1988 for purchasing properties of  bankrupt railroads, operating subsidies, and capital improvements and  employee buyouts. Amtrak, the national passenger railroad, took over  money-losing intercity and commuter passenger rail services and  funded federal payments of up to $25,000 for each laid-off employee  as authorized by legislation.

Some airlines, automakers, and railroads made changes through the  bankruptcy process. Specifically:

Airlines: All three selected airlines went through bankruptcy  proceedings—United in December 2002, Delta in September 2005,  and American in November 2011. The actions these airlines took to  reduce costs while in bankruptcy are discussed above.

Automakers: GM declared bankruptcy in June 2009 to implement its  restructuring plan. The federal government became GM’s majority  shareholder and continued to provide financial assistance while GM  was in bankruptcy. The bankruptcy court approved the sale of  substantially all of old GM’s assets to a newly formed company (“new  GM”) in June 2009 as well the old GM’s amended bankruptcy plan in  March 2011, and its assets and liabilities were transferred to  liquidating trusts. These actions and the restructuring—which included  major cost reductions described above—helped enable GM to report  positive net income in every year from 2010 through 2019.

Railroads: In 1970, the Penn Central Railroad, one of the largest in  the country at the time, filed for bankruptcy. As Penn Central’s losses  continued while in bankruptcy, the value of whatever assets that might  have been available to satisfy its creditors’ claims was further eroded.  Therefore, the bankruptcy proceeding was initiated to liquidate the  railroad to meet the demands of its creditors. Faced with the potential  cessation of railroad service for an entire section of the country, the  federal government created Conrail to take over and operate specified  portions of Penn Central as well as several other bankrupt railroads in  the Northeast United States. Legislation was enacted that, combined  with Conrail actions described above, enabled Conrail to become  profitable.

Foreign Governments and Foreign Posts Took Actions to Address Challenges

In the countries we selected, foreign governments also took actions to  develop goals for their postal operators that enabled changes in the  postal operators’ institutional structures and actions to address  competitive pressures, economic downturns, and market changes. Based  on our review of the selected countries’ government reports, including  summaries of postal reform legislation, annual reports from foreign posts,  and interviews with foreign government officials and representatives of  foreign posts, we found that changes were made to foreign posts’: (1)  products and services; (2) financial self-sustainment; and (3) institutional  structure. Some of these actions were authorized by legislation that  changed the status and duties of the postal operators; others were taken  over a lengthy period that predated passage of key legislation. Some  foreign posts also diversified into nonpostal products and services;  however, postal-specific challenges and changes are the focus of this  discussion.

The selected foreign posts made multiple changes to their products and  services. We found that, when transforming their postal operations,  selected countries determined the level of postal services they deemed  necessary to adequately serve the public. The main product changes  involved expansion of their package delivery business by enhancing  service and investing in facilities and sorting equipment dedicated to  handling packages. Large increases in their package volumes and  revenues helped offset declining letter mail volume and revenues.

Two of the selected foreign posts reduced service levels to help control  costs. For example, according to New Zealand Post officials, in response  to reduced mail volume, New Zealand Post reduced its required  frequency of mail delivery in urban areas from 5 to 3 days while  maintaining 5-day delivery in rural areas with the stated goal of ensuring  that postal service remained viable without government subsidization.  Australia Post revised the service standards it provided for delivery of  letter mail in 2016, resulting in slower delivery of some mail.

In addition, the main pricing changes have involved price increases for all  mail, as well as the introduction of discounted postal rates for letter mail  entered at processing facilities that generally were closer to the final  destination of the mail. For example, Royal Mail raised postal rates above  the rate of inflation after relaxation of its price cap. In France, the postal  regulator established a price cap in 2015 of 3.5 percent per year (in  addition to inflation) and established a new cap in 2018 of 5 percent  annual rate increases (including inflation) for 2019 through 2022 for letter  mail and packages considered part of universal postal service. The 2018  price cap allows La Poste more price flexibility than the previous one.  Likewise, Australia Post implemented an above-inflation rate increase in  January 2020, citing the need to generate revenues to offset growing  financial pressures from declining letter mail volume.

Cost reduction was a major theme for the selected foreign posts,  particularly with respect to compensation, benefits, and infrastructure  costs. These actions were stimulated in part by reductions in mail volume  and the associated revenues and workload, and in part by legislative or  regulatory changes that allowed greater competition and created  incentives, such as privatization, which resulted in shareholder pressure  to enhance or encourage organizational profitability and efficiency.  Because postal operations are labor-intensive, actions to address  workforce costs were particularly important to improving financial results.  These often went hand in hand with outsourcing, network restructuring,  reductions in service levels to better align service with demand, and other  changes to increase productivity and achieve cost savings. The  governments and the postal operators of selected countries also  considered the effects on stakeholders when making postal reform  decisions. Specific changes varied from one foreign post to another.

Workforce: In Germany, Deutsche Post officials told us that its  employees hired after 1990 were designated private sector  employees with lower pay and benefits than postal employees who  were previously hired as civil servants. In France, La Poste officials  told us that La Poste likewise transitioned its workforce in the 1990s  from civil servants to private employees and ended recruitment of civil  servants in 2000. They also said that this transition provided La Poste  with a more flexible workforce and reduced its pension liability.  Australia Post closed its defined benefit pension plan to new  employees in 2012, while Royal Mail is transitioning to a defined  contribution pension plan that it introduced in 2018. Royal Mail and  New Zealand Post also have reduced the size of their workforce in  recent years.

Infrastructure: Some selected foreign posts consolidated their mail  processing networks to reduce costs. For example, following the  reunification of Germany, Deutsche Post replaced more than 320 mail  processing facilities with 82 such facilities. Royal Mail and La Poste  reduced the number of mail sorting centers by about 40 percent over  the past two decades.

In addition, all five selected postal operators have made changes to  reduce retail network costs. As we reported in 2011, some foreign  posts reduced the number of postal operator-owned and -operated  facilities and in some cases closed facilities in an effort to reduce  costs. At the same time, some minimized this disruption by  expanding retail access through alternatives such as Internet sales  and partnerships with retail businesses such as grocery stores or  pharmacies. We reported that these changes either reduced operating  and labor costs or improved customer service, in some cases  because the partner retail facility stays open longer, or both.

This trend continues. Deutsche Post, Post Office Limited in the United  Kingdom, La Poste, Australia Post, and New Zealand Post have  outsourced or franchised most of their postal retail functions to private  nonpostal operators. For example, Deutsche Post franchised its  postal retail outlets to local businesses to not only reduce expenses,  but also increase the availability of postal retail services nationwide by  putting retail counters in stores that were open longer than traditional  post offices. Deutsche Post representatives stated that while there  was some initial resistance to these changes, these concerns abated  after a few months as customers realized they received better service  and longer hours. The representatives also said the number of retail  outlets has increased in recent years in response to increased  demand for e-commerce package returns. La Poste has a substantial  and growing proportion of retail facilities operated by private providers  (in partnership with small shops, especially in rural areas) or co- located in local government-owned buildings (in partnership with local  town halls in rural areas). In addition, Australia Post combined its  letter and parcel delivery networks in 2018 to obtain efficiencies.

Productivity: All of the postal operators in the selected countries took  actions to enhance productivity, such as improving automation of mail  processing, modernizing and streamlining operations, and changing  work processes. For example, Deutsche Post officials stated they had  streamlined their parcel sorting process and went from 140 parcel  sorting centers in 1990 to 34 in 2019. Deutsche Post officials stated  that this streamlining improved service performance for parcels;  previously, most parcels were delivered within 3 or 4 days; by 2019,  93 percent of parcels were delivered within 1 day. Royal Mail officials  also stated that they increased their level of automation and  introduced new methods of parcel delivery, such as new high-capacity  equipment for mail carriers, to increase efficiency as well.

Government Assistance: The governments of some of the selected  countries provided assistance to their postal operators in various  forms, including assuming pension costs, granting tax exemptions,  and providing subsidies to postal retail operations. For example, the  governments of France and the United Kingdom assumed costs of  defined benefit pensions for postal employees who are civil servants,  while the government of Germany assumed these costs to the extent  that they exceed the costs of private sector pensions. While all new  employees are employed as private sector employees, German audit  officials stated that the government’s pension obligation for postal  employees who are or were civil servants and their dependents will  last until 2079 and cost the government about €306 billion.

The assumption of these pension plans was important in facilitating  the privatization of these postal operators, according to Royal Mail  and Deutsche Post officials, because without the reduced unfunded  pension liabilities, the stock offerings for the newly created companies  would have been much less attractive to private investors. France  also provides subsidies for certain postal activities. In addition, the  United Kingdom split off the postal retail network from Royal Mail into  Post Office Limited, a separate entity owned and subsidized by the  national government.

Actions Regarding Institutional Structure

Each of the five foreign countries we selected changed their institutional  structure following the development of goals for postal transformation that  were tailored to national needs and priorities. Each of these countries  had definitions of universal postal services including provisions for  nationwide delivery and access to postal retail services. As the following  examples illustrate, the national context of each country has been of  central importance to shaping these goals. In addition, postal  transformation in the three selected European countries—Germany, the  United Kingdom, and France—also had an international context in the  broader effort to create and promote a single European internal market.

Germany: In the 1990s, the German government changed its postal  operator, Deutsche Post, from a government agency to a government- owned corporation. In 2000, the government changed Deutsche Post  to a privately owned company so it could raise capital, modernize, and  create a sustainable infrastructure. Goals for the newly created  Deutsche Post were to maintain the high level of postal services,  increase efficiency, and enhance profit. The legislation that created  Deutsche Post also gave it more flexibility to respond to changes in  the market. Currently, Deutsche Post remains a private company with  the government holding a minority of its shares.

United Kingdom: In 1969, the government of the United Kingdom  changed the Post Office, its postal operator, from a government  department to Royal Mail, a government-owned corporation prior to  changing it to a privately owned company. It began privatizing Royal  Mail in 2013 so Royal Mail could become more modern and  competitive by raising private capital, operating with more flexibility,  and be subject to shareholder scrutiny to drive efficiency. As  mentioned above, the government of the United Kingdom also split off  postal retail units into a new government-owned entity called “Post  Office Limited” that is separate from Royal Mail.

France: In 1991, the government of France changed La Poste, the  postal service of France, from a government department to a public  industrial and commercial establishment. In 2010, the government of  France converted La Poste into a state-owned public limited  company. This step allowed La Poste to raise additional public capital  for investments to maintain and modernize its network, build a  European parcel and express network, allow acquisitions outside  Europe, and add nonpostal products and services, such as expanding  its banking services.

Australia: In 1989, the government of Australia changed its postal  operator, Australia Post, from a government department to a  government-owned corporation. It is required to earn a reasonable  rate of return on its assets, maintain its equity, pay a reasonable  dividend to the government, and be liable for the same taxes and  charges as its competitors.

New Zealand: According to a recent report, New Zealand Post began  as a government department and became a state-owned enterprise in  1987, when legislation (State-Owned Enterprises Act 1986) created  several such entities to address challenges in the national economy.  Such corporations are required to be as profitable and efficient as a  comparable business not owned by the state.

USPS’s Transformation Involves Reassessment of Three Critical Foundational Elements of Its Business Model

Congress will face difficult choices in fundamentally reassessing the three  critical foundational elements of USPS’s business model—level of  universal postal service, financial sustainability, and institutional structure.  These choices are likely to require changes in laws and will have differing  effects on postal stakeholders. While the specific impacts will depend on  the changes made, some or all of USPS’s stakeholders could be affected  and these impacts should be considered as part of any reassessment. All  three key areas are interrelated and significant changes in one area may  affect another. For example, we have testified that Congress faces a  tradeoff between the level of postal services the nation needs and the  level of postal services the nation is willing to pay for.

Level of Universal Postal Service Needed

Based on our prior work, a starting point for a fundamental reassessment  of USPS’s business model should be determining the level of postal  services the nation needs. While mail volumes have declined since fiscal  year 2006, businesses, governments, and households still pay USPS  billions of dollars annually to deliver more than 140 billion of pieces of  mail, demonstrating a continued nationwide demand for postal services.  We and others—such as USPS, PRC, and USPS OIG—have called for a  fundamental reexamination of what postal services the nation needs now  and may need in the future. In particular, we have testified that USPS’s  growing financial difficulties, combined with changing demand for postal  services, have provided Congress with an opportunity to examine and  potentially redefine what postal services should be provided on a  universal basis and how they should be provided.

As mentioned above, there are numerous federal laws and requirements  related to the provision of universal postal service. For example, 6-day  delivery has long been required by annual USPS appropriations acts.  Over the past decade, legislation has been introduced, and USPS and  others have proposed reducing the frequency of delivery. However, no  legislation has been enacted that would allow USPS to reduce delivery  frequency.

There is also no consensus on the level of postal services the nation  needs. Changes in service levels face opposition from some  stakeholders, such as labor unions, affected communities, and the  general public. Currently, legislation has been introduced that supports  the preservation of both 6-day and door-to-door delivery for addresses  that have it, and some mailer groups support one or both of these  positions. Representatives from postal labor unions we spoke with  stated that universal postal service is appropriate as currently defined and  could be expanded to provide more products and services. Stakeholders  have also expressed differing views on whether the frequency of delivery  should be reduced to help USPS address its financial problems. USPS  and PRC have estimated that eliminating Saturday delivery would reduce  USPS’s costs but also would likely affect mail volume sent by business  mailers, although USPS and PRC disagreed on the degree to which it  would do so. USPS estimated that it could save $1.4 billion to $1.8  billion a year by reducing the frequency of mail delivery to 5 days while  maintaining 7-day package delivery. To put these potential savings into  context, delivery is USPS’s most costly operation. We reported, however,  that USPS would face challenges in, among other things, how efficiently  USPS would absorb the additional volume delivered in the remaining  delivery days and its potential effect on mail volume. We also described  potential trade-offs, such as possibly reducing the demand and value of  USPS products if customers are not getting their delivery needs met.

Further, key postal stakeholders hold opposing views on many other  options that have been proposed. For example, to raise revenues, USPS  and some postal labor unions favor eliminating or raising the price cap on  market-dominant products, which would enable USPS to raise rates more  than the rate of inflation but would require changing the current regulatory  system. Mailers, however, have expressed opposition to increasing  postage rates higher than the rate of inflation.

Postal labor unions also favor increasing revenues by introducing new  postal and nonpostal products and services. We have recently found,  however, that USPS’s nonpostal revenues generated at postal retail  facilities are small and that there are limited opportunities to generate  revenues from nonpostal products and services from USPS’s delivery  network. For example, we reported that nonpostal products and  services offered through USPS’s postal retail facilities generated about  $431 million in fiscal year 2018, accounting for less than 1 percent of  USPS’s total revenue. In addition, we reported several potential  limitations to USPS adding nonpostal services to USPS’s mail carrier  activities, such as checking in on homebound and older residents and  reporting signs of blighted properties. These limitations included, among  other things, limited net revenue potential and a potential adverse effect  on mail service delivery.

A fundamental reassessment of USPS’s business model would include  determining the degree to which USPS should be financially self- sustaining, i.e., the degree to which USPS’s operating costs and liabilities  should be covered by ratepayers (such as businesses and individuals  who pay USPS to send mail). If a reassessment concluded that USPS  should be fully self-sustaining, past legislative proposals that would  change elements of USPS’s costs and revenues may be worth  congressional consideration. Stakeholders, however, have not reached  a consensus on any of these proposals and none has been enacted.

Another avenue is to focus on reducing costs. As we have also reported,  compensation and benefits costs, which comprise about three-quarters of  USPS’s operating costs, are driven by a mix of USPS contracts and  policies, including collective bargaining agreements negotiated with  unions representing 92 percent of USPS employees and statutory  requirements governing USPS employee pay and benefits. USPS  compensation and benefits costs for its active employees increased by  almost $1 billion in fiscal year 2019 despite a slight decrease in the size  of the workforce and declining workload from reduced mail volume.

While USPS has been able to make some reductions in pay and benefits,  its ability to control compensation costs is significantly inhibited by the  collective bargaining process, which results in binding arbitration if an  impasse is reached. According to USPS, all negotiations take place  against the backdrop of binding arbitration (and the arbitrators have  historically been reluctant to deviate from the status quo), resulting in only  incremental changes. We have long supported changing the laws  regarding collective bargaining to require that USPS’s financial condition  be considered in binding arbitration. We have also reported that the  collective bargaining structure, which was established many years ago,  should be reexamined considering the dramatic changes in USPS’s  competitive environment and rising personnel costs that have contributed  to USPS’s losses.

Multiple bills have been proposed changing the process and/or criteria for  collective bargaining to a different standard. The 2018 report from the  Task Force on the United States Postal System recommended that  collective bargaining over compensation should be eliminated for postal  employees. While eliminating or revising the collective bargaining  process could potentially provide USPS greater flexibility in employee  pay, there would be trade-offs. For example, we recently found that the  potential annual cost savings associated with USPS implementing cuts  for all current employee pay by 1 percent would be about $321 million; a  10 percent cut would potentially save $3.2 billion. However, we also  reported that while USPS could reduce its compensation costs through  efforts such as reducing mail delivery frequency, USPS would face  challenges in realizing these savings, such as the extent to which  workhours could be reduced. Furthermore, these savings could be offset  by other factors including service or morale issues.

With respect to benefits, we recently reported on a wide range of possible  changes that would reduce or limit costs for postal retiree health benefits,  nearly all of which would require a legislative change. Some approaches  would shift costs to the federal government; some would reduce benefits  or increase costs to postal retirees or employees; and some approaches  would change how benefits are funded. Similar types of legislative  changes could be considered with respect to postal pension benefits.

In addition, if Congress decides that USPS should be financially self- sustaining but makes no changes to improve USPS’s financial condition,  USPS will be unable to address unfunded liabilities for postal retiree  health and pension benefits, an inability that could eventually translate  into higher costs for future postal ratepayers. Ultimately, if USPS’s  expenses continue to exceed its revenues, USPS is likely to continue to  miss required payments, reduce operations, or seek federal  appropriations through the annual appropriations process to cover its  operating costs.

If Congress determines that USPS should no longer be expected to be  financially self-sustaining or if actions taken do not restore financial self- sustainability, Congress could provide financial assistance—not unlike  what happened in other countries or for selected domestic business—to  enable USPS to cover its costs, and to fulfill its obligation to provide  federal health and pension benefits to postal employees and retirees.  Federal financial assistance could be provided in various forms, such as:

Appropriating funds to help cover USPS’s operating costs, essentially  the same arrangement that was used to finance the former U.S. Post  Office Department.

Appropriating funds to supplement USPS’s payment of certain costs,  such as to help fund its capital investments. For example, the federal  government provides Amtrak, which is operated as a for-profit  corporation with annual grants to operate and make capital  investments in passenger rail service to supplement the revenues it  generates.

Assuming some or all of USPS’s unfunded liabilities for retiree health  benefits. This could take different forms, such as direct assumption of  responsibility for unfunded liabilities or, more indirectly, requiring  postal retirees to participate in Medicare which would decrease  USPS’s costs but increase Medicare’s costs.

Assuming some or all of USPS’s unfunded liabilities for pension  benefits.

Writing off some or all of USPS’s debts to the U.S. Treasury.

Options regarding the federal government providing ongoing financial  assistance to USPS could have effects on both USPS and the federal  government as a whole. Notably, this assistance would have to be funded  in some way—either through offsetting reductions in federal expenditures  in other areas, through tax increases, or through an increase in federal  deficits. Moreover, reliance on federal funding could mean that USPS  would be exposed to the uncertainty inherent in the annual appropriations  process. In addition, access to annual appropriations to cover financial  shortfalls could have an unintended consequence of reducing USPS’s  incentives to become more cost-efficient.

At present, there is no consensus on USPS’s level of financial self- sustainability should be. For example, representatives of labor unions we  spoke with stated that Congress should address issues regarding postal  retiree benefits before any reassessment of USPS’s financial self- sufficiency can occur. Increased federal financial support of USPS might  also face political opposition, due to concerns about minimizing federal  deficits and ensuring fair competition between USPS and the private  sector.

The final area of consideration in any reassessment of USPS’s business  model is identifying what institutional structure could best deliver the level  of postal services at the level of financial sustainability that Congress has  determined. As an independent establishment of the executive branch,  USPS must provide universal postal service while being expected to be  financially self-sustaining. Thus, there may be a tension between  attempting to fulfill public service missions while operating in an efficient,  business-like and financially self-sustaining manner. USPS officials told  us that as an entity of the federal government, its primary purpose is the  achievement of its statutory universal service mission, and it has no  incentive to seek to maximize profits at the expense of achieving its public  service mission over the long term.

Therefore, according to USPS, if it were maintained as an independent  establishment of the executive branch or converted into a more typical  government agency, it could continue to prioritize this public service  mission. Additionally, there is widespread support for USPS’s institutional  status as an independent establishment of the executive branch.  Congressional resolutions have been introduced stating that “Congress  should take all appropriate measures to ensure that the United States  Postal Service remains an independent establishment of the Federal  Government and is not subject to privatization.” Likewise, all four of the  largest USPS unions, both of its management organizations, and a  number of mailer groups and mailers support keeping USPS an  independent establishment of the executive branch.

Nonetheless, considering the depth of USPS’s financial problems and its  poor financial outlook, now may be an appropriate time for Congress to  reconsider what institutional structure will be most appropriate for USPS  in the 21st century. However, any substantial change to USPS’s  institutional status would require changing federal law. Based on our past  work and options identified by USPS and others, Congress has a range of  options it could consider in reassessing USPS’s structure (see table 1).

The potential advantages and disadvantages of placing USPS into  alternative institutional structures for USPS have long been debated.  Several options have been discussed:

USPS could revert to a traditional federal agency. USPS and its  governance would be more consistent with other federal activities that  are dependent on federal appropriations provided through the annual  appropriations process. Many postal stakeholders, however, do not  support such a change. For example, USPS told us that if it became a  typical government agency reliant on federal appropriations to fill any  operating gap, the political constraints that typically apply to  government agencies could reduce USPS’s adaptability. Furthermore,  changing USPS to a typical government agency could reduce its  incentives to increase revenues or reduce costs in response to  changing communication technologies and patterns. Consistent with  this point, the 1968 presidential commission found that when it  operated as a federal agency, the former U.S. Post Office Department  had a lack of innovation, cost-control, and capital investment with  major managerial decisions made through the legislative process.  These and other issues led to persistent operational deficits, low  productivity, and poor mail service.

USPS could remain an independent establishment of the federal  government with additional authority—relative to the status quo—over  certain aspects of its business model. For example, USPS could be  provided more flexibility to raise postal rates, introduce new nonpostal  products, and make various changes to reduce its costs such as  reducing the frequency of delivery or further consolidating its retail,  transportation, and processing networks. USPS has long advocated  for additional flexibility under its current institutional structure—such  as to eliminate the price cap on market-dominant products and have  greater flexibility to offer nonpostal products. Representatives from  postal unions also stated that USPS should be provided additional  flexibility, such as to expand into nonpostal products, which some  representatives stated could help preserve its public service mission  to provide universal postal services. Consensus does not, however,  exist as to what flexibility should be given to USPS. For example,  some mailer groups favor keeping the price cap unchanged, stating  the cap is sufficient and provides incentives for increased efficiency.

In addition, some stakeholders have supported further limiting USPS’s  flexibility to reduce service standards, close retail outlets, or  consolidate processing facilities, while other stakeholders noted that  greater flexibilities in these areas would reduce USPS’s costs and  enhance its efficiency.

If USPS were to become a government-owned corporation or a  government-sponsored enterprise, USPS could be incentivized to  increase efficiency as a federally chartered entity providing a public  service with a predominantly business nature. For example, three of  the four third-party experts we spoke with stated that USPS should  retain its current mission of universal postal service but become more  like a private company with greater freedom to operate in a business- like manner. The new structure could promote greater incentives  toward cost control and financial success. Government-owned  corporations are federally chartered entities that provide a public  service with a predominantly business nature. These corporations can  have a board of directors that is appointed by the President.  Government-sponsored enterprises are federally chartered entities  that are privately owned and, typically, have a board of directors  appointed by private sector owners.

If USPS were to be a private company it would become accountable  to the shareholders of that company. USPS told us that as a private  company, its primary incentive could be to maximize profits and that,  in USPS’s view, private shareholders would be most focused on  short-term financial outcomes. Thus, any such design of a private  USPS would need to balance its profit motive with the nation’s needs  for universal postal service and the affordability of that service. For  example, while Royal Mail is a private corporation owned by  shareholders, the government of the United Kingdom still mandates 6- day delivery for letter mail (and 5-day delivery for packages) with  specified delivery standards, and some mail types are subject to price  controls. In addition, the United Kingdom monitors the provision of  universal postal service and can take enforcement actions regarding  regulatory conditions and competition law. Similarly, Germany has  legal instruments to enforce the provision of universal postal services,  although according to German government officials these instruments  have not been used.

Although some of the domestic businesses we examined reduced their  costs through bankruptcy, this is likely not an option for USPS. As  detailed in its report (see appendix I), National Bankruptcy Conference  (NBC) found that USPS is not eligible to become a “debtor” under  chapters 11 or 9 of the current Bankruptcy Code. According to NBC, a  court likely would deem USPS to be a “governmental unit”—meaning it  could not file for relief under chapter 11—and a court would deem USPS  not to be a “municipality”—meaning it could not file for relief under  chapter 9. Therefore, legislation amending the Code would be required to  make USPS eligible for relief.

According to NBC, however, even if the Bankruptcy Code were amended  to allow USPS to file as a chapter 11 or 9 debtor, the Code would still not  currently authorize a bankruptcy court to discharge the ongoing statutory  obligations that have led to USPS’s current financial situation, and  amending the Code to authorize such court action could raise  constitutional (separation of powers) concerns. Moreover, NBC noted the  bankruptcy process is designed to address obligations that have already  accrued, not to override or amend statutes that apply to a debtor’s post- bankruptcy operations and obligations. In NBC’s opinion, because  USPS’s pension and health care obligations are imposed by statute  instead of by contract as in most bankruptcy reorganization proceedings,  the bankruptcy process is not an effective or appropriate mechanism to  address USPS’s obligations or potential transformation. NBC thus  concluded that “although the bankruptcy process and bankruptcy tools  raise interesting ideas for restructuring USPS’s existing and future  obligations…all roads for doing so lead back to Congress.”

Any changes that Congress makes to USPS’s business model will take  time to implement and will need to be reevaluated as market conditions  evolve. We have reported that fully implementing major transformations of  government agencies can take years, and we also found that to be the  case for the selected domestic businesses and foreign posts noted in this  report, regardless of the changes needed. For example, railroads in the  Northeast, airlines, and automakers took many years to implement a  series of changes to their businesses. It took Germany more than a  decade to fully liberalize and then privatize its postal operator, and the  United Kingdom’s effort to privatize its postal operator took about 5 years.  All of these organizations continue to adapt as they address ongoing  challenges in a changing and highly competitive business environment.  For example, GM recently stated that years after exiting bankruptcy and  restoring profitability, it is closing some factories and focusing on  developing electric and self-driving cars. Several freight railroads facing  a downturn in freight traffic have also decided to run longer trains less  frequently to reduce labor costs and increase efficiencies.

Similarly, changes in the use of postal services will continue for the  foreseeable future, necessitating continued adaptation. Some of the  countries we selected are anticipating the need to be prepared for  possible future changes. For example:  In August 2019, German government officials said they would  consider reducing postal delivery frequency from 6 to 5 days a week  as part of an ongoing review to adapt Germany’s 20-year old postal  law to changing market conditions and customer demands.

In the United Kingdom, the postal regulator assessed postal users’  needs in 2020 in light of the changes in the postal market and to  prepare for its regulatory review, which is to be concluded by 2022.

A 2018 consultant’s report to the European Union (EU) recommended  that the EU relax its universal service obligations to accommodate  future changes in the postal market. The EU is currently studying  how postal users’ needs are changing to determine if it needs to  change its framework to allow member states to change their  definitions of universal service obligations.

In November 2019, the Australian government ordered a review of  Australia Post’s long-term strategy to operate as a sustainable postal  service provider, considering market conditions such as e-commerce,  the regulatory environment and changes in business and consumer  service needs.

The government of New Zealand is scheduled to revise its  memorandum of understanding with New Zealand Post defining  universal service obligations by 2021.

GAO’s Calls for Congressional Action to Address USPS’s Solvency Remain Unaddressed

PAEA required GAO to evaluate strategies and options for the long-term  structural and operational reform of USPS by December 2011. As  USPS continued to face financial challenges, we accelerated this  evaluation, which we issued in April 2010. However, we found that  USPS’s business model, which was to provide universal postal service  through self-supporting, business-like operations as an independent  establishment of the executive branch, was not viable due to USPS’s  inability to reduce costs sufficiently to respond to continuing declines in  mail volume and revenue. In particular, we identified strategies to reduce  compensation and benefit costs, reduce other operations and network  costs, improve efficiency, and generate revenues through product and  pricing flexibility. We also stated that while USPS may be able to improve  its financial viability if it took more aggressive action to reduce costs, it  was unlikely that those actions alone would fully resolve USPS’s  problems unless Congress also took action.

Therefore, we stated that Congress should consider, among other things,  any and all options available to reduce USPS’s costs. While bills on these  issues were introduced and in some cases passed congressional  committees, postal reform legislation to address these considerations has  not been enacted. In addition, in our most recent update to our High Risk  List in 2019, we reiterated the basic elements of our 2010 matter for  congressional consideration by stating that Congress should consider  various options to better align USPS’s costs with its revenues. We stated  that Congress should consider addressing constraints and legal  restrictions that limit USPS’s ability to reduce costs and improve efficiency  through considering a comprehensive package of legislative actions. To  date, such a legislative package has not been enacted.

Furthermore, we reported in 2018 that the financial outlook for the Postal  Service’s Retiree Health Benefits Fund was poor, as USPS had not made  any payments into it since 2010. OPM then forecasted the fund would  be depleted by 2030 if USPS continued to not make payments.  Therefore, we stated that Congress should consider passing legislation to  put postal retiree health benefits on a more sustainable financial footing.  However, legislation has not yet been enacted to address this issue.

We have often reported over the past 10 years that USPS’s ability to take  actions taken under its current authority is insufficient to fully address its  financial situation. Absent congressional action on critical foundational  elements of the USPS business model, USPS’s mission and financial  solvency are increasingly in peril. USPS’s growing difficulties to provide  universal postal service in a financially self-sustaining matter provide  Congress with the need to consider fundamental reform of the entire  framework of postal services in the United States. In so doing, we  continue to believe that as we stated in 2010, Congress should consider  any and all available options. Comprehensive postal reform has not taken  place in part because of the difficulty in obtaining compromise among  various stakeholders with divergent views. Comprehensive, effective, and  successful reform cannot occur until there is leadership and clarity  around: what services should be provided, whether USPS is to be fully financially self-sustaining or the extent of  federal financial support, and what institutional structure best supports these changes.

Congressional leadership is critical in transforming USPS because  consensus on policy decisions involving value judgments, trade-offs, and  effects on postal stakeholders will be difficult to achieve. In addressing  these issues, while all stakeholders’ interests should be understood and  taken into consideration, the fundamental needs of the nation must take  precedence. Continued inaction will result in deepening financial  problems—putting USPS’s mission to provide universal postal service at  greater risk and minimizing the ability to make the most appropriate or  sustainable policy decisions.

We are making the following three matters for congressional  consideration:  Congress should consider reassessing and determining the level of  universal postal service the nation requires. (Matter for Consideration 1)

Congress should consider determining the extent to which USPS should  be financially self-sustaining and what changes to law would be  appropriate to enable USPS to meet this goal. (Matter for Consideration  2)

Congress should consider determining the most appropriate institutional  structure for USPS. (Matter for Consideration 3)

We provided a draft of this report to USPS and PRC. USPS and PRC  provided written responses which are reproduced in appendixes IV and V,  respectively.

In its response, USPS concurred with our first two matters to reassess  and determine the level of universal postal services the nation requires  and to determine the extent to which USPS should be financially self- sustaining. USPS noted that the recent COVID-19 pandemic has both  highlighted USPS’s essential role in the nation’s infrastructure and has  caused a significant and sudden decline in mail volume, leading to a  short-term liquidity crisis. USPS stated that while action by Congress is  critical to ensure its ability to operate in the short-term, its financial  situation has long been unsustainable due to statutory and regulatory  structures that limit their ability to increase revenues and decrease costs.  USPS noted that these changes require Congress to adopt reforms to  secure USPS’s long-term financial viability. In addition, USPS concurred  with the National Bankruptcy Conference’s legal analysis that Federal  bankruptcy laws do not apply to USPS and that all roads for USPS  restructuring lead back to Congress.

USPS generally agreed with our third matter, stating that determining the  institutional structure could logically be a part of a comprehensive  congressional examination of its business model. USPS stated that it  does not believe that corporatization or privatization would unlock new  efficiency potential in USPS and that sustainable postal service does not  hinge on the provider’s institutional form. However, as we and USPS  have stated, its current legal and regulatory structure does not provide  flexibility in some key areas. While our report states that a corporate or  privatized institutional structure could provide both the flexibility and a  greater incentive to operate in a more business-like manner than USPS’s  current structure, we also recognize there are advantages and  disadvantages to any institutional structure. As a result, we are not  recommending any particular institutional structure for USPS, but are  urging that Congress identify what institutional structure could best deliver  the level of postal services at the level of financial sustainability that  Congress determines.

In its response, PRC agreed with all of our matters for congressional  consideration. Particularly, PRC noted that the matter to reassess and  determine the level of universal postal service the nation requires must be  addressed as soon as possible. The PRC noted that given USPS’s  severe and worsening financial situation (even before the impacts of the  current pandemic crisis), a clear and specific definition of universal postal  service and how that obligation can be funded must be provided. The  PRC stated that Congress may want to consider mandating that PRC  define and update the universal service definition by regulation.

Both USPS and PRC provided technical comments, which we  incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Postmaster General, the Chairman of PRC, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff making key contributions to this  report are listed in appendix VI.

Appendix I: Reprint of National Bankruptcy Conference’s Report on U.S. Postal Service Bankruptcy Issues

Appendix II: Selected Legal Requirements Applicable to the U.S. Postal Service (USPS)

Appendix II: Selected Legal Requirements  Applicable to the U.S. Postal Service (USPS)

Mail delivery quality and frequency 39 U.S.C. § 101(e),(f); see, e.g., Pub. L. 116-6, 133 Stat. 180 (2019)

Legal requirements  USPS is required to provide prompt, reliable, and efficient services to patrons in all areas,  render postal services to all communities, and serve as nearly as practicable the entire  population of the United States. USPS is specifically required to receive, transmit, and deliver  written and printed matter, parcels, and like matter throughout the United States, its territories  and possessions, and pursuant to certain agreements, throughout the world.  USPS is required to provide a maximum degree of effective and regular postal services to  rural areas, communities, and small towns where post offices are not self-sustaining. No  small post office can be closed solely for operating at a deficit, it being the specific intent of  the Congress that effective postal services be insured to residents of both urban and rural  communities. Statutory and regulatory requirements specify the process and criteria for post  office closings, including appellate review by the Postal Regulatory Commission (PRC).  In determining all policies for postal services, USPS is required to give the highest  consideration to the requirement for the most expeditious collection, transportation, and  delivery of important letter mail. In selecting modes of transportation, USPS is required to  give the highest consideration to the prompt and economical delivery of all mail.

Service standards  39 U.S.C. § 3691, 39 C.F.R. Pt. 121  Letter mail monopoly  18 U.S.C. §§ 1693-99; 39 U.S.C. §§  601-06  Mailbox monopoly  18 U.S.C. § 1725  Collective bargaining  39 U.S.C. §§1004,1206-07  Benefit programs  39 U.S.C. § 1005; 5 U.S.C. §§  8348(h), 8423, 8909a  Level of benefits  39 U.S.C. § 1005(f)

Comparability  39 U.S.C. §§ 101(c), 1003(a)

Workers’ compensation  39 U.S.C. § 1005(c)

For many years, provisions in annual appropriations acts have stated “hat 6-day delivery  and rural delivery of mail shall continue at not less than the 1983 level.”  USPS is required to establish modern service standards for each market-dominant product  (e.g., delivery of First-Class Mail within the continental United States in 2-3 delivery days);  these service standards are defined in the Code of Federal Regulations.  USPS’s letter delivery monopoly is codified in criminal and civil laws known as the Private  Express Statutes. These laws generally prohibit anyone from establishing, operating, or using  a private company to carry letters for compensation on regular trips or at stated periods over  postal routes or between places where mail regularly is carried.  Restricts access to mailboxes by prohibiting anyone from knowingly and willingly placing  mailable matter without postage in any mailbox, providing USPS exclusive access to  mailboxes.   USPS negotiates collective bargaining agreements with its labor unions. If the parties are  unable to reach an agreement, binding arbitration by a third-party panel will ultimately be  used to establish agreement. USPS is also required to consult with postal supervisory and  managerial organizations concerning changes in pay, benefits, and other programs that affect  their membership.  USPS is required to participate in federal pension and health benefit programs, with specific  provisions regarding the required level of USPS’s funding of these programs. For example,  USPS is required to prefund both postal pension benefits and postal retiree health benefits,  each with payments that fully cover USPS’s share of future benefit costs.  The law requires USPS’s fringe benefits to be at least as favorable as those in effect when  the Postal Reorganization Act of 1970 was enacted, unless variation of benefits is collectively  bargained.  Compensation for USPS officers and employees is required to be comparable to the rates  and types of compensation paid in the private sector of the U.S. economy. USPS policy also  is required to maintain compensation and benefits for all officers and employees on a  standard of comparability to comparable levels of work in the private sector.   USPS is required to participate in the federal workers’ compensation program, which covers  postal and other federal employees and provides compensation to federal employees, as well  as dependents, in the event of an employee’s death.

Citation(s)  Access to facilities  39 U.S.C. § 403(b)

Legal requirements  USPS is required to establish and maintain postal facilities of such character and in such  locations, that postal patrons throughout the Nation will, consistent with reasonable  economies of postal operations, have ready access to essential postal services.  Generally, annual appropriations prohibit USPS from using funding to consolidate or close  small rural or other small post offices.

Appropriations restrictions  See, e.g., Pub. L. 116-6, 133 Stat. 180  (2019)  Processing/logistics facilities  Pub. L. 109–435 § 302(c)(5), (2006),  120 Stat. 3219, codified at 39 U.S.C. §  3691 note  Price cap  39 U.S.C. § 3622(d)

The law requires USPS to provide public information and opportunities for public input and  comment before closing or consolidating any mail processing or logistics facilities, and take  comments into account when making a final decision.

An inflation-based price cap generally limits rate increases for market-dominant products,  including First-Class Mail, USPS Marketing Mail, Periodicals and Package Services such as  Bound Printed Matter, Media Mail, and Library Mail.  The PRC, an independent establishment of the executive branch, must review USPS  proposals to change domestic postal rates and fees.

Debt limits  39 U.S.C. § 2005  Restriction on nonpostal lines of  business  39 U.S.C. §§ 404(e), 102(5)

Investment of postal retiree funds  5 U.S.C. §§ 8348(c), 8909a(c)

Whenever USPS proposes a change in the nature of postal services that will have an effect  on a substantially nationwide basis, it must request an advisory opinion from the PRC on the  proposal.  USPS has the authority to borrow up to $15 billion from the U.S. Treasury. The annual net  increase of obligations for capital improvements and defraying operating expenses is limited  to $3 billion.   USPS is limited to providing nonpostal services to those offered as of January 1, 2006 that  PRC has authorized USPS to continue. Nonpostal service is defined to mean any service that  is not a postal service. A postal service is defined as the delivery of letters, printed matter, or  mailable packages, including acceptance, collection, sorting, transportation, or other function  ancillary thereto.  Funds set aside for postal pensions and retiree health benefits are required by law to be  invested in U.S. Treasury securities.

Appendix III: U.S. Postal Service Financial Information for Fiscal Years 1972 through 2019

Appendix IV: Comments from the U.S. Postal Service

Appendix V: Comments from the Postal Regulatory Commission

Appendix VI: GAO Contact and Staff Acknowledgments

Lori Rectanus, (202) 512-2834 or rectanusl@gao.gov.

In addition to the individual named above, Derrick Collins (Assistant  Director); Greg Hanna (Analyst-in-Charge); Amy Abramowitz; Kenneth  John; Hannah Laufe; Serena Lo; Michael Mgebroff; Joshua Ormond;  Joshua Parr; Susan Sawtelle; Crystal Wesco; and Laurel Voloder made  key contributions to this report.

The U.S. Postal Service touches virtually every U.S. household and business and is critical to the national economy. However, it has lost over $78 billion in recent years due to declining mail volumes and rising costs.

Businesses and foreign postal organizations that faced similar challenges made significant changes, such as reducing less profitable products and services. However, USPS can’t make similar changes because it has been unable to reach an agreement with stakeholders, including Congress, on what actions to take.

Congress should consider reassessing what postal services the nation needs, how those services should be funded, and more.