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GAO report notes that same challenges remain fully intact for the USPS

By Jeff Berman, Group News Editor
April 16, 2012

The financial condition of the United States Postal Service (USPS) remains in bad shape for a variety of reasons.

These reasons include the ongoing diversion of mail from paper to electronic communications and its Congressionally-mandated 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premium, among others.

In February, the USPS said it projected its net losses would hit $21 billion by 2016. That fact and others were highlighted in a recent report from the United States Government Accountability Office (GAO) entitled “U.S. Postal Service: Mail Processing Network Exceeds What is Needed for Declining Mail Volume.”

GAO officials said the objective of this report was to address actions the USPS has taken since 2006 to reduce excess capacity in facilities, staff, equipment and transportation; plans the USPS is making to consolidate its mail processing network; and key stakeholder issues and challenges related to its plans.

While GAO did not make any formal recommendations in this report, it noted that it has “previously reported to Congress on the urgent need for a comprehensive package of actions to improve “USPS’s financial viability and has provided Congress with strategies and options to consider.”
A March 2010 GAO report cited the need for the USPS to consider various restructuring steps to stem its significant revenue and volume declines that it has incurred in recent years.
The GAO report noted how USPS mail volume has declined by 35 billion pieces—or 17 percent—from fiscal years 2007 to 2009, losing $12 billion during that span. It also mentioned how the USPS does not expect total mail volume to return to its previous level when the economy recovers.

“Action is urgently needed in multiple areas by USPS and Congress to address USPS’ pressing challenges so that it can achieve financial viability, including restructuring USPS operations, networks, and workforce to reflect changes in mail volume, revenue, and use of mail,” said the March 2010 GAO report. “The longer it takes for USPS and Congress to address USPS’ challenges, the more difficult they will be to overcome.”

On several occasions in the 14 months the USPS has repeatedly that it wants to reduce annual costs by at least $20 billion by 2015.

In March, the USPS publicly released updates to this plan to reduce annual costs, which include new financial projections and suggestions for legislative reforms, too.

Along with its goal of $20 billion in annual reductions by 2015, the USPS would like to see annual savings rise to $22 billion by 2016. USPS officials said these cost reduction goals are necessary, due to its projected declines in First Class Mail volumes, which have fallen precipitously in recent years and represent 44 percent of total USPS volume, due to the aforementioned ongoing diversion of mail from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes. First Class mail volumes have decreased by 25 percent since 2006.

“The plan we have developed requires a combination of aggressive cost reduction, rethinking the way we manage our healthcare costs, and comprehensive legislation to reform the business model of the Postal Service,” said Postmaster General, Patrick Donahoe in a March statement. “If provided the flexibility to quickly implement this plan, we can return to profitability and better serve the American public. If not, we risk becoming a significant burden to the American taxpayer.”

One of the primary objectives of the USPS’s cost-cutting measures is to eliminate its Congressionally-mandated 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premiums. The USPS said last year that without government assistance it will not be able to continue to meet this obligation. The USPS has been unable to fund this obligation from operations and has used all of its retained earnings and drawn down from its $15 billion borrowing authority from the U.S. Treasury. And even with the requested increase, the USPS would not be able to meet this annual obligation in 2011 or subsequent years, according to the Postal Regulatory Commission.

The USPS said it is proposing to provide employee health benefits independent of federal programs, which it said would save the USPS $7.1 billion annually.

Other proposed changes include moving from six days per week delivery to five days per week, which would result in an annual cost reduction of $2.7 billion. And it also explained that it is pursuing the realignment of its mail processing, retail, and delivery operations, which would result in a savings of $8.1 billion annually and also seek other significant cost reductions to grow or retain revenues within its current business model.

Of the $20 billion in targeted savings within the next five years, the USPS said about $10 billion requires legislative action.

“Things like consolidating processing plants and streamlining our retail network, including post offices, and meeting our customers where they are already doing their shopping and where they work and live and offering retail products in existing stores and getting away from so much reliance on brick and mortar post offices is a goal,” said a USPS spokesman. “Those are examples of things we can do on our own without a change in legislation.”

And part of the USPS plan, said the spokesman is to take aggressive actions to cut costs and grow revenue, which it can do now and have been doing. Changes that require legislative action include shifting to five days a week delivery and the USPS administering its own health benefits program. Without both of these things happening, the spokesman said the long-term cost reduction plan is not achievable, which is why the USPS is seeking comprehensive, long-term legislative help, rather than a short-term fix which would take it back to the drawing board in a sense.

As LM has reported, among the things the USPS has proposed to become solvent are consolidating its network in the form of facilities, processing equipment, vehicles, and staff, which it said would result in a savings of $2.1 billion and serve as a big chunk of its network optimization initiative that it projects to save up to $3 billion by 2015.

In February, the USPS said it completed its Area Mail Processing consolidation studies under which it would consider closing down 252 of its 487 mail processing facilities. But in December the USPS said that it has agreed to delay the closing or consolidation of any Post Office or mail processing facility until May 15, 2012. That decision was made in response to a request made by multiple U.S. senators. According to the USPS, 264 processing facilities were studied for possible consolidation and of the 264 processing facilities studied, 6 are on hold for further internal study, 35 will remain open for now and 223 will be consolidated — all or in part.

While the USPS’s plans are ambitious in scope, the GAO report stated that stakeholder issues and other challenges could prevent the USPS from implementing its plan for consolidating its mail processing network or hitting its cost-savings goals.

The report said that while some mailers and members of Congress have expressed support for consolidating USPS mail processing facilities, other mailers and members of Congress and other concerns have pushed back, explaining that fewer facilities could increase transportation costs and hinder service levels, as well as result in a potential greater loss of volume and revenue to further negatively impact the USPS’s financial situation.

Jerry Hempstead, principal of Hempstead Consulting in Orlando, Fla., said that one way for the USPS to regain financial solvency would be for Congress to order the USPS and the Postal Regulatory Commission to do a one-time rate increase that would cover all current operating costs, which includes pre-retiree healthcare benefits, which could help it to break even and cover its obligations for servicing its debt.

This would eliminate the need to go to five day delivery or close offices, he explained.

“For First Class service items, the USPS is a monopoly,” said Hempstead in a recent interview. “How can a monopoly lose money? It is because Congress puts restraints on the USPS on what they can charge for postage and its large constituencies like Netflix and TimeWarner that use a lot of First Class mail don’t want their postage rates to go up. The USPS does not lack volume. It handles about 700 million pieces per day. It does not charge enough for the services it provides. If you look at the 50 largest industrialized countries in the world, the U.S. has the fifth lowest postal rates. The USPS charges $0.45 for a stamp and the U.S is the world’s largest country.” 

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).


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