Laying Out the Reality of the United
States Postal Service
Full Senate Committee on Homeland Security and Governmental
Affairs Hearing Location: SD-342, Dirksen Senate Office Building
Megan J. Brennan, Postmaster General and Chief Executive Officer,
U.S. Postal Service
The Postal Service is
working with a business model that is not sustainable
The PAEA did not establish a business
model with sufficient flexibility to enable us to effectively respond to
these unanticipated precipitous volume declines.
Mail volume decline has
made doing business difficult
We've tried to adjust to
a changing marketplace
During the last decade, we have responded aggressively to the
challenges that confronted us.
We have rationalized our operations in response to the sharp decline
in mail volume, increased workforce flexibility, and established a more
affordable wage system.
These efforts have resulted in costs savings of approximately $15
We are proud of our achievements in significantly growing our
package business, and implementing innovations that have enhanced the
value of the mail to better serve our customers.
Despite these achievements, our efforts
have not been enough — and cannot be enough— to restore the Postal
Service to financial health, absent legislation. Our debt is at an
We have maintained adequate liquidity in order to continue achieving
our primary mission of providing universal postal services only by
defaulting on our legally mandated retiree health benefits (RHB)
payments, and by deferring needed capital investments.
We will still be subject to very sizable prefunding payments going
forward, on top of our other operating expenses and a need to begin
increasing capital expenses on items such as new delivery vehicles.
We recognize that meaningful postal reform will impact our many
constituents in different ways.
We have been working over the last year with key stakeholders,
including our labor unions and a cross-section of the mailing industry,
to discuss the business model issues that confront us, and to identify
potential key reforms about which there is broad consensus that would
make the Postal Service sustainable.
In formulating our proposal, we had numerous discussions with
stakeholders to understand their interests and concerns and to explain
Based upon these discussions, we propose a set of focused
provisions, which, if enacted into law by Congress, would make
substantial progress towards restoring the Postal Service to financial
We need legislation now.
We've been working with our employees and business stake holders
The provisions we are recommending, and
which are described below, reflect the adoption of many private sector
best practices while maintaining our public responsibilities.
Our proposal would: (1) Require
Medicare integration for postal retiree health plans; (2) Continue our
exigent price increase for market-dominant products; (3) Calculate all
retirement benefit liabilities using postal-specific salary growth and
demographic assumptions; and (4) Provide some additional product
This proposal, along with other
management initiatives, will achieve approximately $27 billion in
savings through 2020
The continuation of the exigent price
surcharge is critical to the Postal Service’s financial health.
When it expires, which is anticipated to take place in early
April of this year, the prices of market-dominant products will decline,
which will have an adverse impact on our future operating revenue and
Expiration of the surcharge would reduce
our revenue and net income by approximately $2 billion per year going
forward, which is an irrational outcome considering the Postal Service’s
We expect total mail volumes to continue to decline, particularly in
First-Class Mail, due to the existence of electronic alternatives.
The price cap that is currently imposed on
market-dominant products and services is clearly not producing the
desired financial results despite the best efforts of the
Postal Service to reduce costs.
In fact, the current price cap simply will
not work since mail volumes have rapidly declined, while the
costs necessary to maintain our network are largely fixed or are
Its replacement with a regulatory structure that enables us to
effectively respond to the challenges and opportunities presented by a
Investments in our infrastructure are needed to meet our universal
service obligation and to fully and efficiently capitalize on business
opportunities in the growing package delivery market.
We've tried to address our competitive services pricing, but
our market-dominant price freedom is more
There are many in the industry that support
making the exigent increase permanent.
The Honorable Robert G. Taub, Acting Chairman, Postal Regulatory Commission
The Postal Service has a
next deficit of $56.8 billion. This has impacted on the Postal Service's
The Postal Service still faces significant financial obstacles for
Increases in revenues and subsequent higher liquidity are almost
entirely due to the temporary Market Dominant product exigent surcharge.
The additional revenue from Competitive products is not sufficient
to offset the future revenue loss resulting from the termination of the
The Postal Service is expected to collect all of the allowable
additional revenue, $4.6 billion, from the exigent surcharge by April
2016, when it would then be removed.
At that point, in order to maintain the operating net income it is
currently achieving, the Postal Service will have to make up the loss of
that revenue, which is approximately $2.1 billion annually.
With the growing liability of retiree health benefits, the inability
to borrow for needed capital investments, and the continued loss of high
margin First-Class Mail revenues, the important task of improving the
financial condition of the Postal Service is daunting.
The Committee’s invitation letter requested that the Commission’s
testimony also address “the impact of legislative and regulatory burdens
placed on the USPS, including the Universal Service Obligation (USO),
rate caps and requirements, and limits to new business.”
Congress’ consideration of whether to allow the Postal Service to
provide nonpostal services is in many ways linked to another matter that
the Committee asked that this testimony address – the USO. Indeed, as it
deliberates on this important issue, Congress
will need to balance the existing expectations of a wholly government
run postal administration chartered to provide universal mail service to
all Americans with potential new nonpostal activities. And it
will need to carefully resolve the question of how they relate to the
obligation of universal service.
Unlike other countries, the Commission concluded that the USO in the
United States is largely undefined and instead is comprised of a broad
set of policy statements with only a few legislative proscriptions.
Aside from the annual appropriations mandate for the past 33 years to
provide 6 days of delivery, Congress has rarely established rigid,
numerical standards of minimally acceptable service for any of the
attributes identified by the Commission.
Rather, through its history, the Postal Service has been expected to
use its flexibility to meet the needs and expectations of the Nation
while balancing the delivery of service against budgetary constraints.
The cost of providing universal service in the U.S. is estimated by
the Commission to be more than $4 billion annually
Aside from the financial pressure of generating sufficient funds to
remain solvent, the Postal Service must also worry about how to fund
this $4 billion in universal service obligations.
In balancing all of these interests when assessing the current state
of the Postal Service, policymakers should look at the fundamental issue
of the USO and decide exactly what we as a Nation need from the Postal
Service and – most importantly – how those expectations are to be
Senator Carper’s bill requires an assessment of the USO like the one
completed in 2008, and I concur that further exploration of this
fundamental question is warranted.
The fundamental problem as outlined in the Commission’s testimony
today is that the Postal Service cannot currently generate sufficient
funds to cover its mandated expenses and also invest in critically
deferred capital needs, such as new delivery vehicles and package
The Commission has made recommendations on modifying the retiree
health benefits funding and the computation of the liabilities for both
retiree health benefits and pensions.
The Commission will be reviewing the impact of PAEA in its 2017
review of the law.
Director, Physical Infrastructure, U.S. Government Accountability Office
The U.S. Postal Service’s (USPS) financial condition continues to
deteriorate as a result of trends including:
Declining mail volume: First-Class Mail—USPS’s most profitable
product— continues to decline in volume as communications and payments
migrate to electronic alternatives. USPS expects this decline to
continue for the foreseeable future.
Growing expenses: Key USPS expenses continue to grow, such as salary
increases and work hours due in part to growth in shipping and packages,
which are more labor-intensive. Compensation and benefits comprise close
to 80 percent of USPS’s expenses.
USPS’s financial condition makes it unlikely it will be able to
fully make its required retiree health and pension payments in the near
USPS’s required payments will be restructured in fiscal year 2017,
with estimated payments totaling $11.3 billion— $4.6 billion more than
what USPS paid in fiscal year 2015.
USPS’s ability to make these required payments will be further
challenged due to: (1) Expiration of a temporary rate surcharge: This
surcharge on most postal rates effective January 2014, which has
generated $3.6 billion in additional annual revenues through September
2015, is expected to expire April 2016. (2) No new major cost savings
initiatives are planned.
Large unfunded liabilities for postal retiree health and pension
benefits—which were $78.9 billion at the end of fiscal year 2015—may
ultimately place taxpayers, USPS employees, retirees, and their
beneficiaries, and USPS itself at risk.
If the USPS ultimately does not adequately fund these benefits, and
if Congress wants these benefits to be maintained at current levels,
funding from the U.S. Treasury, and hence the taxpayer, would be needed
to continue the benefit levels. Alternatively, unfunded benefits could
lead to pressure for reductions in benefits or in pay.
Tension between USPS’s dual roles as an independent establishment of
the executive branch required to provide universal delivery service and
as a self-financing entity operating in a businesslike manner is
It would be a mistake to rely solely on rate increases as the
solution to the Postal Service's problems. It also needs to look at
restructuring to address needs and contain costs.
David C. Williams, Inspector General, U.S. Postal Service
There are two sharply opposing views of the reality facing the
Postal Service, and judgments are difficult to make when viewing ongoing
financial data through the distorted lens of prefunding expenses. The
first view is that the financial situation is dire and that the Postal
Service’s mission is antiquated.
The Postal Service is losing more than $5 billion every year and has
exhausted its $15 billion borrowing limit.
First-Class Mail volume, which has always supported the network, is
in decline and will never return.
The Postal Service owes nearly $100 billion in unfunded liabilities
for retiree benefits and workers’ compensation.
Technological advances are paradoxically creating new societal needs
that the Postal Service’s extensive network is uniquely positioned to
fulfill regarding 1) e-commerce, 2) e-government, and 3) coming smart
The $15 billion Treasury debt is entirely due to required payments
for distant and vacillating future retiree health obligations. It is
very difficult to decide what is actually needed to stabilize the
infrastructure when prefunding activities are commingled with actual
ongoing financial operating data. The arbitrary $5 billion prefunding
payments show up as annual losses in financial statements even if no
cash is spent.
Legislative efforts to provide relief for the Postal Service have
failed for the last 6 years, but recent legislative proposals offer some
Replacing the arbitrary retiree health prefunding schedule with
actuarially based payments will make prefunding retiree health payments
more affordable for the Postal Service and improve the transparency of
Proposed Medicare changes for postal retirees will likely eliminate
much of the remaining unfunded retiree health care liabilities.
Another useful proposal is to permit the Postal Service to explore
offering modernized services in response to changing citizen needs and
to enable private sector strategies. Collaboration between the Postal
Service and private sector partners has worked well — a good deal for
citizens and a great deal for American businesses.
Finally, a more flexible, responsive pricing regime is needed to
help ensure the Postal Service’s financial stability at a time of rapid
James E. Millstein, Former Chief Restructuring Officer at the U.S.
Department of the Treasury and Founder and Chief Executive Officer,
Millstein & Co.
I am here today because the Postal Service is in trouble, requiring
both an operational and financial restructuring to restore its ability
to meet its obligations in the ordinary course of business and to deal
with the challenges of a very rapidly changing market for its products
While it may have been debatable whether the Postal Service had
monopoly power in any of its product markets in 2006, the extent and
diversity of products and services that compete with First Class and
Standard Mail in 2016 put into serious question whether the Postal
Service has any monopoly power at all.
The entire premise of current regulation needs to be seriously
rethought, as the regulatory constraints on its product pricing and
operational flexibility may be slowly but surely choking the Postal
Service to death. Therefore, a question for further but urgent study is
whether the regulatory structure created under the PAEA has outgrown its
utility and should be replaced with a more flexible system.
Unfortunately, there is no “silver bullet” that will fix the USPS. I
believe that a staged approach is the most reasonable path towards
There is an immediate need to stabilize the business and shore up
its liquidity, and a long-term need to allow the USPS to become a
sustainable business capable of meeting the challenges of the new
marketplace in which it operates.
The first order of business to fix the USPS should be to avoid the
expiration of the existing exigent rate increase in April 2016 and
making that rate increase permanent so as to allow the Postal Service’s
revenues to cover its operating costs.
This initial reform should be followed by a
repeal of the inflation-capped pricing mechanic in favor of a
more flexible pricing system to ensure that the USPS can price its
products so as to generate enough revenue to cover its costs.
To normalize the USPS’s balance sheet, Congress must acknowledge
that the prefunding of the USPS retiree health care liability as
mandated by PAEA imposed a financial burden on the Postal Service that
it simply could not meet.
Congress should permit the Postal Service to use actuarial
assumptions for the calculation of its benefit funding and pre-funding
obligations in a way consistent with the practices employed in the
Congress should permit the USPS to fully integrate both current and
future employee health care benefits with Medicare immediately.
Congress should require that the Postal Service perform a de novo
review of its service offerings unbridled by its historical mandates and
existing regulatory constraints to develop a business plan that allows
it to generate sufficient cash flow over the long term to meet its
Universal Service Obligation without the need for taxpayer subsidies.
Developing such a business plan is an essential first step in executing
the restructuring required to ensure its long-term viability.
The Postal Service should also look to optimize its existing
national footprint and focus on profitable business lines to support its
Congress must face the reality that the
Universal Service Obligation imposes costs on the USPS that it cannot
fully recover under the current regulation of its pricing and product
In order to compete in the modern marketplace in which it operates,
the USPS must be allowed to have pricing
flexibility and to develop new lines of business to deal with
the panoply of competitors it faces both in its so-called
Market-Dominant Products and in its Competitive Products.
In developing a long-term business plan, the USPS may consider
privatization as a possible alternative. The privatization model has
been successfully employed in many countries including Germany, Japan,
A successful operational and financial restructuring could pave the
way to a privatization transaction that could give the USPS access to
public debt and equity markets, following the precedent set by Poste
Italiane and Japan Post.
Fredric V. Rolando, President, National Association of Letter
I would like to briefly share our views on the over-arching theme of
this hearing – the “reality of the Postal Service.” It is not 2008-2009
anymore when the Great Recession and the mandate to pre-fund the retiree
health fund sent mail volume plummeting, crushed the Postal Service’s
finances, and raised doubts in the minds of some about the long-term
viability of the Postal Service.
Over the past nine years, postal employees have made huge sacrifices
to help the Postal Service to become more efficient and to “right-size”
in response to the fall in mail volume. Postal employment has been
slashed by more than 200,000 jobs since 2006. Meanwhile, postal
productivity has increased dramatically and postal labor costs have been
sharply reduced through very difficult rounds of collective bargaining.
Thanks to these efforts and to the recovery from the Great
Recession, the Postal Service has been returned to operational
profitability in recent years. The USPS earned operating profits of $1.4
billion in FY 2014 and $1.2 billion in FY 2015.
The most significant burden is the legislative mandate included in
the Postal Accountability and Enhancement Act of 2006 (PAEA) that
requires the Postal Service to massively prefund future retiree health
premiums -- decades in advance.
The damage this policy has inflicted goes far beyond the adverse
Reforms to the Federal Employees Health Benefit Program (FEHBP) as
it relates to postal employees and Medicare coverage would all but
eliminate the unfunded liability for future retiree health. Maximizing
enrollment in Medicare Parts A and B and giving FEHBP plans covering
eligible postal retirees access to low-cost prescription drugs made
available by the Medicare Part D law would increase total Medicare
spending by less than two-tenths of one percent and virtually eliminate
the Postal Service’s unfunded liability – something no other public or
private sector company has achieved.
No private company in America would invest 100 percent of their
pension and post-retirement health funds in such a conservative way,
especially during a period when Treasuries are yielding 2-4% returns.
When your investment time horizon stretches out over decades, best
practice in the private sector is to invest in a well-diversified
portfolio of private sector stocks, corporate bonds and real estate, as
well as government bonds.
Such a portfolio is provided by the Thrift Savings Plan’s (TSP)
Lifecylce 2040 Fund.
If the Postal Service’s FERS and CSRS accounts could have been
invested the 2040 Fund between 2007 and 2014, their combined balance
would be $32 billion greater today – enough to cover the total combined
unfunded liability of $23 billion in 2014. Had the PSRHBF been invested
in the TSP’s 2040 Fund, it would have doubled its annual returns.
The final legislative/regulatory burden we would like to address is
the overly restrictive Consumer Price Index (CPI)-based price cap
introduced by the PAEA to regulate postage rates charged for Market
Dominant products (most letters, magazines and catalogues).
The PAEA might have worked better but for two factors. First, the
Postal Service decided not to exercise its option to hold one last
old-fashioned rate case in 2007 to ensure rates covered all the relevant
costs (including the massive cost of prefunding retiree health) before
the new CPI price index was initiated.
That turned out to be a huge mistake--it should have done the rate
case, and asked the PRC to delay implementing the results until after
The overall Consumer Price Index (All items) has no real meaning as
it relates to the costs of the postal industry.
We believe that the PRC is the appropriate venue for deciding the
future regulation of postage rates. In the meantime,
we hope Congress will soon pass a bill that
will make the exigent increase permanent and virtually eliminate the
cost of prefunding in the coming months.
Ee support: (1) The use of postal-specific assumptions in valuations
of the Postal Service’s pension plans with any surpluses returned to the
Postal Service over time; (2) Reform of the Federal Employees Health
Benefits Program as it relates to coverage of postal employees and
postal annuitants to dramatically reduce the cost of retiree health
benefits by integrating with Medicare (to which the Postal Service and
its employees have paid $29 billion in payroll taxes), and direct the
PSRHBF to be invested in index funds comprised of private sector stocks
and bonds as well as government bonds; (3) A freeze on postage rates
until January 2018 while keeping the 4.3% exigent rate increase in
effect until then (instead of letting it expire); and (4) Allowing the
Postal Service to deliver beer, wine and spirits and to provide
non-postal products in limited circumstances.
John “Chip” Hutcheson III, President, National Newspaper Association
Community newspapers have already been harmed by slower mail.
Rural America needs the mail.
We need urgent action from this committee to avoid further harm.
No legislation will be perfect, nor will any act we take this year
forever repair the Postal Service. But the iPOST bill, S. 2051, with its
mandate to integrate Medicare coverage for USPS retirees, provides a
viable foundation for this committee to move forward quickly to do what
must be done right now.
Because of its financial woes, USPS has slowed down the mail, and
that has created the problems.
The service cuts have trimmed the fat, a lot of the muscle and are
now aiming for the aorta. We greatly fear the impact of the next round
of mail processing plant closings, having seen how badly the previous
rounds have damaged our businesses and communities.
This bill would permit USPS to keep the “exigency” money that it
began to collect two years ago when it enacted a postage increase that
was approximately triple the rate of inflation. Without legislation,
USPS will lower postage rates and “roll back” the increase, under orders
of the US Court of Appeals and the Postal Regulatory Commission. Would
our members like to have a postage reduction? Absolutely.Some postage
money back into our pockets would be very welcome.
But we recognize that the exigency money was principally responsible
for USPS’s positive net earnings in 2015. Although its package business
is growing, that business does not produce the positive contribution to
the system that first-class mail once did.
Because of costs growing faster than inflation, our own Periodicals
mail class—which is supposed to operate at break-even—cannot produce a
positive contribution and in fact struggles to get back to a point where
we can cover our costs.
Yet if there are service cuts and more of our mail goes away as a
result, the problems of the Postal Service deepen and we are faced with
spiraling reductions of service, greater financial losses to the economy
and USPS, and an increasingly desperate situation where USPS is going to
need a taxpayer bailout to cover the costs of existing obligations to
its retired workforce.
Our board of directors voted last fall to
support legislation that permits the Postal Service to keep this $1
billion in its rate base, so long as further service cuts can be
Let me be clear: NNA’s support for
suspending the mandate to roll back postage rates in April is contingent
upon the Postal Service’s commitment to enact no further systematic
service cuts and to live within its means without more exigency
Kathy Collins, General Manager, Rothschild Mill, Domtar Paper Company
In addition to the market realities facing the U.S. Postal Service,
the declining financial condition of the agency is highly linked to
statutory financial obligations and growth limitations imposed on it by
Given the realities of its financial obligations and the constraints
imposed upon it, the Postal Service cannot succeed without the help of
Congress to pass comprehensive postal reform legislation that not only
alleviates unreasonable financial burdens, but preserves and attracts
customers, as well as convinces former customers to return.
We support postal reform that considers the following: (1) Aligns
labor costs, benefits, and future obligations with market competition.
The handcuffs and unreasonable burdens of the current statutory
requirements must be changed, as these obligations are the largest
contributor to USPS financial losses. (2) Postal facilities must adjust
with the evolving realities of communications and business transactions,
while ensuring the service needs of postal customers are met. Our
neighbors to the north at Canada Post have made many successful changes
that the USPS might also benefit from. (3) Rate stability and
predictability are bedrock requirements for business to stay with mail.
Congress and USPS must recognize that raising prices while reducing
service is not a successful strategy to address declining demand.
Mail must be cost competitive for business to
continue to use it. Future rate setting should include checks and
balances that provide price predictability for mailers and cost-control
incentives for USPS. (4) Reliable service is essential if
mail is to compete with other communication options. Prompt and timely
delivery must be maintained for mail to deliver its key value
proposition. Service standards changes should realistically weigh cost
savings against customer expectations or mail will become increasingly
less relevant. (5) The Postal Service should leverage its unique
infrastructure and have the flexibility to innovate and develop new
revenue sources. There is value in increasing the revenue yield of
traditional products and customers as well as diversifying into other
Senator Ron Johnson,
Chairman of the Committee on Homeland Security and Governmental Affairs.
We still don't have an
accurate and complete picture of the USPS' financial standing.
We don't yet have
sufficient stakeholder support for a direction forward.
There is much more work
that needs to be done before this bill can be passed.
Spoke at length with the
PMG about concerns over the degradation of rural mail service.
Fully a third of the
communication pape produced in Wisconsin are delivered by the Postal
There should be
consistency in postal rates and services.
The effect of the
exigency surcharge has not produced the consistency which is needed.
Again articulated her
concern over the disparities that exist between private sector and
postal delivery of packages.
We're not collecting
penalty payments when UPS and Fedex fail to meet volume minimums.