Positive Train Control: Most Passenger Railroads Expect to Request an Extension and Substantial Work Remains Beyond 2018

Forty railroads are currently required by statute to implement PTC, a communications-based system designed to slow or stop a train that is not being operated safely. Of these, 29 passenger railroads collectively provide over 500 million passenger trips annually. Although the deadline for PTC implementation is December 31, 2018, railroads may receive a maximum 2-year extension to December 31, 2020, if they meet certain statutory criteria.

GAO was asked to review passenger railroads' progress toward PTC implementation. This statement discusses (1) passenger railroads' PTC progress and FRA's steps to assist them, and (2) how passenger railroads and FRA plan to approach the 2018 and 2020 deadlines. GAO analyzed railroads' most recent quarterly reports covering activities through June 30, 2018; sent a brief questionnaire to all 40 railroads; and interviewed officials from FRA and 16 railroads, selected in part based on those identified as at-risk by FRA.

As of June 30, 2018, passenger railroads (28 commuter railroads and Amtrak) generally remained in the early stages of positive train control (PTC) implementation—including equipment installation and early field testing. However, many passenger railroads are nearing completion of the equipment installation stage. For example, two-thirds of passenger railroads reported being more than 90 percent complete with equipment installation. With regard to testing, Amtrak has reported that it has initiated both field testing and revenue service demonstration (RSD), an advanced form of field testing that is required to fully implement PTC. However, most commuter railroads reported slower progress with testing. Of the 28 commuter railroads required to implement PTC, 19 reported initiating field testing, but only eight reported initiating RSD. The Federal Railroad Administration (FRA) recently clarified the criteria railroads must meet to qualify for a 2-year extension past the December 31, 2018, PTC implementation deadline. To receive an extension, railroads must meet six statutory criteria. For the sixth criterion, commuter railroads are authorized to either initiate RSD on at least one track segment or use FRA-approved substitute criteria. FRA clarified these and other requirements at three PTC symposiums hosted for railroads in summer 2018. For example, FRA officials said that initiating field testing instead of RSD was one approach that commuter railroads could potentially take to receive FRA's approval of substitute criteria. FRA's actions are consistent with GAO's March 2018 recommendation that the agency communicate to railroads the requirements and process for an extension.

Challenges related to PTC implementation and FRA's resources raise questions as to the extent FRA and the passenger railroad industry are poised for full PTC implementation by December 31, 2020. Most passenger railroads anticipate needing an extension, leaving substantial work for both railroads and FRA to complete before the end of 2020. Almost three-quarters of passenger railroads (21 of 29) reported that they, or the railroad which owns the track on which they operate, will apply for an extension. More than half of these railroads reported planning to apply for an extension using substitute criteria, and of these, eight intend to apply for substitute criteria based on field testing. Though use of substitute criteria is authorized in law, this approach defers time-intensive RSD testing into 2019 and beyond. In addition, passenger railroads reported that they continue to face many of the same challenges GAO previously identified, such as software defects and limited industry-wide availability of vendors. Further, passenger railroads expressed concern that FRA's workload will markedly increase as railroads submit requests for extension approvals. FRA has acknowledged concerns about the pending surge of submissions and agency officials said they have taken recent steps to help manage the forthcoming influx of documentation, such as reallocating resources. However, as of September 21, 2018, only one passenger railroad had applied for an extension. It remains unclear how many extension requests FRA will receive or what FRA's enforcement strategy will be for noncompliance with the statute, such as for railroads that fail to apply for an extension by the deadline.

In March 2018, GAO recommended FRA take steps to systematically communicate extension information to railroads and to use a risk-based approach to prioritize agency resources and workload. FRA has taken some steps to address these recommendations, such as recently communicating and clarifying extension requirements to all railroads during three symposiums. GAO will continue to monitor FRA's progress.

Thank you for the opportunity to discuss our work in reviewing efforts by  passenger railroads and the Federal Railroad Administration (FRA) to  implement positive train control (PTC). In September 2008—10 years ago  last month—a commuter train and freight train collided in the Chatsworth  neighborhood of Los Angeles, California, resulting in 25 deaths and over  100 injuries. In the wake of this accident, legislation was enacted  requiring certain railroads to implement PTC—a communications-based  system designed to slow or stop a train that is not being operated safely.  Forty railroads are required to implement PTC. These railroads include  28 commuter railroads and Amtrak, which collectively provide over 500-  million passenger trips annually. Railroads that play a key role in our  nation’s freight network must also implement PTC, including the seven  largest Class I and four Class II and III freight railroads.

As we have previously reported, PTC implementation is a complex and  lengthy process, which touches almost every part of major rail lines and  almost every aspect of railroads’ train operations. Each implementing  railroad must install more than 20 major components that will ultimately  communicate trains’ locations, movements, and speed, and then slow or  stop a train that is not being operated safely. Full implementation of PTC  involves a number of steps, including but not limited to: planning and  system development, equipment installation, testing, system certification,  and achieving interoperability. Since U.S. railroads often operate some or  all of their trains as “tenants” on the track of another railroad, known as  the “host,” interoperability is intended to enable trains that operate on the  same track to be governed by the PTC system and to move seamlessly  across track owned by different railroads.

When PTC implementation was mandated in 2008, the statutory deadline  for railroads’ implementation was December 31, 2015. We reported in  September 2015 that nearly all railroads did not expect to meet this  deadline. In October 2015, Congress extended the deadline to  December 31, 2018, and established criteria that would enable FRA, the  agency responsible for overseeing PTC implementation, to grant railroads  meeting certain requirements an alternative schedule up to year-end  2020. Throughout this statement we refer to the alternative schedule as  the “extension.” My testimony today discusses the efforts of FRA and  passenger railroads—which include commuter railroads and Amtrak, an  intercity passenger railroad—to implement PTC as the December 31,  2018, deadline approaches and since we testified on PTC in March  2018. My statement today will address (1) passenger railroads’  implementation progress and the steps that FRA has taken to assist  these railroads and (2) how passenger railroads and FRA plan to  approach PTC implementation to meet the December 2018 and  December 2020 deadlines.

To describe passenger railroads’ progress, we analyzed the most recent  available quarterly PTC implementation reports that railroads submitted to  FRA, reports that reflected the progress as of June 30, 2018. We  analyzed the reports to determine the extent that each railroad has  installed PTC hardware and initiated testing. Based on our review of  these data for anomalies, outliers, or missing information and our  previous assessment of such quarterly reports for our March 2018  testimony, we determined that these data were sufficiently reliable for our  purposes of describing railroads’ progress in PTC implementation. To  describe passenger railroads’ and FRA’s progress and approaches, we  interviewed representatives from 16 railroads, including the 12 railroads  (11 commuter railroads and one Class III freight railroad) that FRA  identified in June 2018 as at risk of not having implemented PTC or  qualifying for an extension by December 31, 2018. The remaining four  railroads we interviewed were: Amtrak, which provides intercity passenger rail service; two Class I freight railroads, which were selected  based on their relationships with tenant railroads and substantial progress  toward PTC implementation; and a commuter railroad that received  approval from FRA in March 2018 for an exception from PTC system  implementation. To describe how railroads and FRA plan to approach  PTC implementation for the December 2018 and 2020 deadlines, we sent  41 railroads a semi-structured questionnaire. The questions we asked  were based on the data collection efforts from our March 2018 testimony.  We analyzed railroads’ responses and summarized their plans and  challenges into common categories. To determine the stage of PTC  implementation railroads expected to reach by December 31, 2018, we  considered railroads’ responses to our questionnaire, information  provided in interviews, and documents submitted to FRA regarding  railroads’ planned implementation approaches, among other information.  To describe railroads’ progress and FRA’s actions to assist railroads, we  interviewed the industry associations for commuter (American Public  Transportation Association) and freight (Association of American  Railroads) railroads, and two PTC vendors. We also reviewed applicable  laws and FRA regulations, presentations, reports, and guidance and  interviewed FRA officials. While our audit work included Class I, II, and III  freight railroads, commuter railroads, and intercity passenger rail, this  statement is focused on passenger railroads’—commuter and intercity— progress and approaches to meet the December 2018 and December  2020 deadlines.

We conducted this performance audit from June 2018 to October 2018 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.

PTC systems are required by law to prevent certain types of accidents or  incidents. In particular, a PTC system must be designed to prevent train- to-train collisions, derailments due to excessive speed, incursions into  work zone limits, and the movement of a train through a switch left in the  wrong position. While railroads may implement any PTC system that  meets these requirements, the majority of passenger railroads are  implementing one of four types of systems. PTC’s intended safety  benefits can be fully achieved nationwide when all required railroads have  successfully installed PTC components, tested that these components  work together and the systems function as designed, and are  interoperable with other host and tenant railroads’ PTC systems that  share track. Interoperability means the locomotives of any host railroad  and tenant railroad operating over the same track segment will  communicate with and respond to the PTC system, allowing uninterrupted  movements over property boundaries. Interoperability is critical to PTC  functioning properly given the complexity of the rail network in the United  States. In much of the country, Class I freight railroads function as hosts  for Amtrak and commuter railroads. For example, one of the seven major  Class I freight railroads reports that 24 tenant railroads operate over its  PTC-equipped tracks, including freight, Amtrak, and commuter railroads.  A notable exception to this is the Northeast Corridor, which runs from  Washington, D.C., to Boston, Massachusetts, which Amtrak  predominantly owns and over which six freight and seven commuter  railroads operate as tenants.

PTC implementation involves multiple stages to achieve full  implementation, including planning and system development, equipment  installation and testing, system certification, and full deployment, including  interoperability. Each railroad must develop an FRA-approved PTC  implementation plan that includes project schedules and milestones for  certain activities, such as equipment installation. The equipment  installation stage involves many components, including communication  systems; hardware on locomotives and along the side of the track (called  “wayside equipment”); and software in centralized office locations as well  as onboard the train and along the track. Each railroad is required to  report quarterly and annually to FRA on its PTC implementation status  relative to its implementation plan. A railroad can also revise its  implementation plan to reflect changes to the project, which then must be  reviewed and approved by FRA.

In addition, railroads must demonstrate that the PTC systems are  deployed safely and meet functional requirements through multiple stages  of testing. Before initiating testing on the general rail system, railroads  must submit a formal test request for FRA approval that includes, among  other things, the specific test procedures, dates and locations for testing,  and the effect the tests will have on current operations. The multiple  stages of PTC testing include:

Laboratory testing: locomotive and wayside equipment testing in a  lab environment to verify that individual components function as  designed.

Field testing: includes several different tests of individual  components and the overall system, such as testing of each  locomotive type to verify that it meets functional requirements and  field integration testing—a key implementation milestone to verify that  each PTC component is integrated and functioning safely as  designed.

Revenue service demonstration (RSD): an advanced form of field  testing in which the railroad operates PTC-equipped trains in regular  service under specific conditions. RSD is intended to validate the  performance of the PTC system as a whole and to test the system  under normal, real-world operations.

Interoperability testing: host and tenant railroads that operate on the  same track must work together to test interoperability to ensure each  railroad can operate seamlessly across property boundaries. Almost  all of the 40 railroads currently required to implement PTC must  demonstrate interoperability with at least one other railroad’s PTC  system.

Using results from field and RSD testing, combined with other  information, host railroads must then submit a safety plan to FRA for  approval. We have previously reported that these safety plans are about  5,000 pages in length. Once FRA approves a safety plan, the railroad  receives PTC system certification, which is required for full  implementation, and is authorized to operate the PTC system in revenue  service. According to FRA officials, the FRA may impose conditions to the  PTC safety plan approval as necessary to ensure safety, resulting in a  conditional certification.

Railroads may receive a maximum 2-year extension from FRA past the  December 31, 2018, deadline if they meet six criteria set forth in statute.  Specifically, railroads must demonstrate, to the satisfaction of FRA, that  they have: (1) installed all PTC system hardware consistent with the total  amounts identified in the railroad’s implementation plan; (2) acquired all  necessary spectrum consistent with the implementation plan; (3)  completed required employee training; (4) included in a revised  implementation plan an alternative schedule and sequence for  implementing the PTC system as soon as practicable but no later than  December 31, 2020; (5) certified to FRA that they will be in full  compliance with PTC statutory requirements by the date provided in the  alternative schedule and sequence; and (6) for Class I railroads and  Amtrak, initiated RSD or implemented a PTC system on more than 50  percent of the track they own or control that is required to have PTC. For  commuter and Class II and III railroads, the sixth statutory criterion is to  have either initiated RSD on at least one territory required to have  operations governed by a PTC system or “met any other criteria  established by the Secretary,” which FRA refers to as “substitute”  criteria.

FRA is responsible for overseeing railroads’ implementation of PTC, and  the agency monitors progress and provides direct assistance to railroads  implementing PTC. For example, FRA officials provide technical  assistance to railroads, address questions, and review railroad-submitted  documentation. FRA has a PTC Staff Director, designated PTC  specialists in the eight FRA regions, and additional engineers and test  monitors responsible for overseeing technical and engineering aspects of  implementation and reviewing railroads’ submissions and requests, as  well as programmatic support staff. In anticipation of the upcoming  implementation deadline, in May 2017, FRA began to send notification  letters to railroads it determined were at risk of both not meeting the  December 31, 2018, implementation deadline and not completing the  requirements necessary to qualify for an extension. FRA identified “at- risk” railroads by comparing a railroad’s hardware installation status to the  total hardware required for PTC implementation, according to the  railroad’s implementation plan. FRA has increased the “at-risk” threshold  percentage over time as the deadline approaches. (See Table 1).

FRA has additional oversight tools, which include use of its general civil  penalty enforcement authority for failure to meet certain statutory PTC  requirements. FRA has used this authority in 2017 and 2018 to assess  civil penalties, primarily against passenger railroads that failed to comply  with the equipment installation milestones, the spectrum acquisition  milestones, or both, that the railroads had established in their  implementation plans for the end of 2016 and 2017.

As part of our body of work on PTC, we found that railroads face  numerous PTC implementation challenges and made recommendations  to FRA to improve its oversight of implementation. Specifically, in 2013  and 2015 we found that many railroads were struggling to make progress  due to a number of complex and interrelated challenges, such as  developing system components and identifying and correcting issues  discovered during testing. For example, we found in March 2018 that FRA  had not systematically communicated information or used a risk-based  approach to help commuter railroads prepare for the 2018 deadline or to  qualify for an extension. We also found that many railroads were  concerned about FRA’s ability to review submitted documentation in a  timely manner, particularly given the length of some required  documentation such as safety plans and FRA’s limited resources for  document review. In March 2018, we recommended FRA identify and  adopt a method for systematically communicating information to railroads  and use a risk-based approach to prioritize its resources and workload.

FRA agreed with our recommendations. Most recently, in September  2018, we testified on the status of railroads’ implementation of PTC.

Many Passenger Railroads Remain in Early Stages of PTC Implementation and FRA Has Clarified Extension Requirements Passenger Railroads Continue to Install and to Test PTC Systems, and Report Previously Identified Implementation Challenges

As of June 30, 2018, many passenger railroads reported that they remain  in the equipment installation and field-testing stages, which are early  stages of PTC implementation. However, since we testified in March  2018, railroads have made progress on equipment installation. Based on  our analysis of the 40 railroads’ reported status as of June 30, 2018,  about half of the railroads have completed equipment installation, and  many others are nearing completion of this stage. Specifically, 20 of the  29 passenger railroads reported being more than 90 percent complete  with locomotive equipment installation. Nearly two-thirds of passenger  railroads that must install wayside equipment reported being more than  90 percent complete. One-third of passenger railroads are among those  designated by FRA as at-risk of both not meeting the end of 2018  implementation deadline and not completing the requirements necessary  to qualify for an extension. Specifically, in August 2018, FRA identified  nine railroads—all commuter railroads—as at-risk, fewer than the 12  railroads FRA had previously designated as at-risk in its June 2018 letters  to railroads.

Since we reported in March 2018, Amtrak reported that it has initiated  both field testing and RSD, but most commuter railroads reported slower  progress with testing, especially with RSD. For example:

Laboratory and initial field testing: 19 of 28 commuter railroads  reported having initiated this testing as of June 30, 2018; this number  represents six more commuter railroads than the 13 we previously  reported as having initiated field testing as of September 30, 2017.

RSD testing: Eight of 28 commuter railroads reported initiating RSD  testing as of June 30, 2018; this number represents two more  commuter railroads than the six we previously reported as having  entered RSD testing as of September 30, 2017. As noted earlier,  unless a commuter railroad receives approval for using substitute  criteria, the railroad must initiate RSD, a final stage of PTC testing, on  at least one territory by December 31, 2018, to qualify for an  extension.

Passenger railroad representatives reported that they continued to face  many of the same challenges we have previously identified, including  limited industry-wide availability of vendors and expertise and software  defects. For example, in response to our questionnaire, 12 of 29  passenger railroads reported challenges with PTC vendors and  contractors. One passenger railroad noted that because its contractor  manages PTC projects across the country with the same deadline and  requirements, it can be difficult for all railroads to get the resources they  need from their contractor. We previously reported that there are a limited  number of vendors available to design PTC systems, provide software  and hardware, and conduct testing. For example, we reported in 2015  that, according to railroad industry representatives, there were two  vendors for the onboard train management computer and three vendors  for the wayside equipment. One small passenger railroad recently  testified that, because a single manufacturer was providing PTC  equipment and software to many railroads across the country, it had to  wait over a year for PTC equipment to be delivered and installed. We also previously reported that railroads face software challenges, and noted  that railroads had concerns with the number of defects identified during  software testing, since these take time to address. In response to our  questionnaire, nine passenger railroads reported encountering challenges  related to maturity of the PTC software systems, such as working through  software bugs or defects during testing.

As passenger railroads work to complete PTC implementation activities,  some have made service or schedule adjustments to accommodate the  need to install equipment or perform testing. Moreover, several  passenger railroads told us that as PTC implementation schedules  become more compressed, avoiding effects on passengers becomes  more difficult. We identified 10 passenger railroads that have made  changes to their operations due, in part, to PTC implementation, including  the six largest commuter railroads in the country, which collectively  reported over 400 million passenger trips in 2017. These changes had  effects such as reduced service or longer travel times. For example, one  of the largest passenger railroads in the country reduced service on  certain routes and eliminated some express trains to accommodate  schedules enabling them to complete PTC equipment installation prior to  the December 2018 deadline. Another large passenger railroad has  shutdown weekend service—providing bus service to transport  passengers between stations—for PTC testing. Several passenger  railroads had to reduce service for equipment or track installation or  testing, resulting in fewer locomotives or less track available for service.

FRA Has Recently Clarified Extension Requirements

In June, July, and August 2018, FRA held three PTC symposiums that  were attended by representatives from all 40 railroads and that focused  on the extension process and substitute criteria, PTC testing, and safety  plans, respectively. FRA’s June 2018 symposium covered information  consistent with our March 2018 recommendation that the agency adopt a  method for systematically communicating information related to the  requirements and process for an extension to railroads. Specifically,  FRA presented information on the procedures for requesting and  obtaining FRA’s approval for an extension to implement PTC beyond the  December 2018 deadline including FRA’s review process. FRA also  clarified that for commuter railroads, initiating field testing was one  approach that could potentially qualify as substitute criteria, rather than  initiating RSD.

Representatives we interviewed from the passenger railroads that  participated in the symposiums found them to be helpful, and some  passenger railroads reported that the information presented led them to  adjust their approach to meeting the December 2018 deadline. For  example, one passenger railroad representative we spoke to said that  until the symposium, he was unaware that using field testing as substitute  criteria was a potential option. Some passenger railroads we met with  also told us they are re-evaluating what activities and documentation  need to be revised and submitted to FRA before the December 2018  deadline based on the information presented at the symposiums. For  example, representatives from one passenger railroad we met with said  that FRA officials encouraged them to update their PTC implementation  plan right away with current equipment installation totals, to ensure  consistency across all required documentation by the end of 2018. A  couple of passenger railroads noted that the information presented at the  symposiums clarified many questions and would have been beneficial to  know a year or two earlier in the implementation process.

In addition, in recent months FRA has continued to provide assistance to  railroads and has taken a series of steps to better prepare railroads for  the 2018 deadline. These steps include meeting regularly with individual  railroads and developing approaches intended to help many railroads  meet the requirements necessary for a deadline extension. For example,  representatives from one commuter railroad said agency officials have  been willing to share lessons learned, clarify requirements, and review  draft documentation to provide informal feedback.

Passenger Railroads and FRA Are Working toward Extensions, Leaving Substantial Work to Be Completed Beyond 2018 Most Passenger Railroads Anticipate Needing an Extension, and Many Plan to Start RSD Testing Beyond 2018

Almost three-quarters of passenger railroads (21 of 29) reported to us  that they plan to apply for an extension. Five passenger railroads  reported to us that they planned to submit their extension request by the  end of September 2018, but as of September 21, 2018, only one had  submitted the request and required documentation. However, FRA  officials noted that with the exception of possibly one or two railroads,  they anticipate that all passenger and freight railroads will likely need an  extension, and that railroads must submit their requests by the end of the  year to be considered in compliance with PTC requirements. A railroad  must demonstrate that it has met all of the statutory criteria necessary to  qualify before, or when, it formally requests an extension. And as  previously discussed, many railroads remain in the early stages of PTC  implementation. Of the eight passenger railroads that anticipate reaching  full implementation by December 31, 2018, six are already operating  under conditionally certified safety plans; one has submitted its safety  plan for review; one plans to submit its safety plan to FRA in fall 2018 for  certification. FRA officials stated that it is unclear whether the passenger  railroads that have obtained conditional PTC System Certification will  have achieved full implementation on all route miles by December 31,  2018.

Of the 21 passenger railroads that intend to apply for an extension, more  than half—all commuters—reported that they plan to use substitute  criteria to qualify. Moreover, two-thirds of the commuter railroads (8 of  12) that plan to use substitute criteria intend to apply to use their initiation  of field integration or functional testing as substitute criteria, and many of  these will apply to begin field testing on only a portion of their track.

Figure 1 depicts the stage of PTC implementation that passenger  railroads at least expect to reach by December 31, 2018, in order to be in  compliance with the deadline, based on railroads’ responses to our July- August 2018 questionnaire.

Although FRA has recently made clear that it is authorized to grant  extensions based on initiating field testing or other FRA-approved  substitute criteria, this approach defers time-intensive RSD testing into  2019 and beyond. For example, one commuter railroad we met with has  applied for, and was granted approval by FRA to use, the initiation of field  testing on a 16.5-mile segment of track as substitute criteria to qualify for  an extension. That railroad must ultimately implement PTC over 321  miles of track that it owns and operates over, meaning that it will need to  complete field testing, RSD, and interoperability testing on the remaining  95 percent of its track and achieve system certification prior to the 2020  deadline. In March 2018, we testified that FRA officials told us that  moving from the start of field testing to the start of RSD can take between  1 and 3 years, and has averaged about 2 years for those railroads that  have completed that stage. We also reported that FRA officials believe  that most railroads underestimate the amount of time needed for testing.  FRA officials told us that they do not consider railroads that are approved  for an extension under substitute criteria to be necessarily at a higher risk  of not completing PTC implementation by 2020. However, in light of these  time estimates and the unknown challenges that railroads may face  during testing, railroads that are in the early field-testing stage moving  into 2019 could face challenges completing PTC implementation by the  extended December 2020 deadline.

Railroads further behind in PTC implementation may need to apply for an  extension due to factors such as compressed implementation schedules,  as well as the time needed for FRA approvals. For example,  representatives from one commuter railroad said that they hope to reach  RSD before the December 31, 2018, deadline, but that it would be difficult  to meet the extension requirements, apply for, and receive an extension  given the volume of paperwork FRA will be receiving at the end of the  year. Instead, the railroad plans to submit an extension request using  substitute criteria consisting of field testing in order to be in compliance at  the end of the year. Such an approach involves first applying for and  receiving approval for substitute criteria and then formally requesting an  extension and submitting supporting documentation to FRA before the  end of the year. Entering RSD prior to the deadline could be difficult given  that FRA officials told us they have advised railroads to allow at least a  month for FRA’s review of test requests, which must be approved prior to  initiating field testing and RSD.

Some passenger railroads also reported challenges regarding host and  tenant responsibilities, including coordination and interoperability—which  are likely to continue beyond 2018. Some passenger railroads told us that  coordinating with host or tenant railroads that are in different  implementation stages as the 2018 deadline approaches poses several  challenges. For example, a few passenger railroads told us that they are  unable to conduct interoperability testing because their host or tenant  railroad has not yet reached that stage of implementation. Additionally,  officials from Amtrak—which interoperates with 21 other railroads—noted  that the host-tenant relationship can be complicated and requires a high  level of coordination to resolve issues between railroads. Amtrak officials  also told us they were conducting risk assessments to determine whether  and how to continue service in situations where their host or tenant  railroad has not completed PTC implementation or met the requirements  necessary for an extension. While few passenger railroads have reached  the interoperability stage, one railroad association stated that  interoperability is, and will continue to be, a substantial challenge for  metropolitan areas with dense and complex rail networks with several  host-tenant relationships. For example, according to one passenger  railroad, 14 different freight and passenger railroads will need to  interoperate in the Chicago area.

FRA’s Substantial Workload Remains a Concern

FRA’s already substantial workload is expected to increase as railroads  continue to submit documentation necessary for extensions and continue  PTC implementation activities. FRA is focused on ensuring railroads are  in compliance by the December 2018 deadline—whether via an extension  or by completing implementation. While FRA officials report that they  anticipate almost all railroads will likely request an extension, only one  passenger railroad had submitted an application for an extension as of  September 21, 2018. FRA will need to review and approve all related  documentation associated with each extension request and make a  determination within 90 days, meaning if a railroad were to submit its  extension request on December 31, 2018, FRA would have until the end  of March 2019 to approve or deny the railroad’s extension request. In  addition to extension requests and supporting documentation, many  passenger railroads will also be submitting to FRA: requests for substitute  criteria, test requests to initiate field testing or RSD, revisions to PTC  implementation plans, and PTC safety plans. Some of these documents  can be lengthy and require back and forth between FRA and railroads  before approval. For example, we previously reported that PTC safety  plans are about 5,000 pages in length and take between 6 and 12 months  for FRA to review.

To help manage the forthcoming influx of documentation, FRA officials  have offered to review draft documentation, such as substitute criteria  requests and test requests, and have advised railroads to take FRA’s  review times into account prior to submitting required documentation.  FRA officials told us that in trying to manage their workload, they initially  told railroads they did not have time to review draft submittals. However,  they found that taking the time to conduct draft reviews ultimately led to  higher quality formal submittals and accelerated the overall review  process. In addition, FRA officials said that their goal is to not delay any  railroad that is ready to move into testing, and that they advised railroads  to build 30 to 45 days for test request reviews into their project schedules.

Despite these efforts, some passenger railroads remain concerned about  the agency’s ability to manage the PTC workload in the coming months  and beyond 2018. For example, seven of 29 passenger railroads  identified FRA’s resources and review times as a challenge leading up to  the December 2018 deadline. In addition, three passenger railroads  reported that they would complete all the requirements for full PTC  implementation by the December 31, 2018, deadline, but planned to  apply for an extension due to concerns that FRA would not be able to  review and certify their safety plans to enable them to reach full  implementation prior to the deadline. Based on similar concerns, in March  2018, we recommended FRA develop an approach to prioritize the  allocation of resources to address areas of greatest risk as railroads work  to complete PTC implementation. FRA has acknowledged the railroads’ concern given the surge of submissions requiring FRA approval in 2018  and has reported the agency is reallocating existing expertise and  expanding the PTC workforce through training, expanding contracts with  existing support contractors, and initiating one additional contract to  provide technical support. For example, FRA officials told us that they  reallocated resources to shift PTC specialists’ responsibilities to focus  exclusively on testing-related activities because their involvement is  critical for the testing stage. Taking steps to prioritize limited resources  will only increase in importance as the amount of documentation needing  FRA review continues to grow in 2019 and 2020, as railroads move  through testing and submit complex and lengthy safety plans.

Although FRA has taken steps to provide key extension information to  railroads and to help ensure railroads’ compliance with PTC deadlines,  uncertainty remains, particularly in regard to FRA’s enforcement strategy  if railroads are noncompliant with the PTC implementation requirements,  such as if railroads were to fail to apply for an extension by the deadline.  Representatives from all railroads implementing PTC with whom we met  told us that FRA’s planned enforcement approach for any railroad that  fails to meet the requirements for an extension beyond 2018 is unclear.  FRA officials told us they have shared the range of applicable civil  penalties with railroads for years, but that any policy decision about how  potential fines will be levied for non-compliant railroads has not yet been  made. In addition, it is also unclear how the agency would approach  enforcement for railroads that have a host or tenant operating on their  tracks that has not completed implementation or met the requirements  necessary for an extension. Ten of the 13 passenger railroads we met  with told us they do not currently have or see a need to develop  contingency plans. For example, representatives from one passenger  railroad said they did not have a contingency plan because FRA has  made clear they are committed to helping railroads comply with the 2018  deadline. FRA officials said that the goal of enforcement is to help bring  all railroads into compliance and that they would look at the specific  circumstances for any host-tenant issues before assessing a fine.

In conclusion, almost all passenger railroads will likely request an  extension beyond 2018, which will require FRA approval. Many commuter  railroads plan to request substitute criteria which may result in those  railroads remaining in the early stages of PTC implementation at the start  of 2019. However, given that only one passenger railroad has submitted  an extension request, it is unlikely we will know how many railroads will  be granted an extension by the December 31, 2018 deadline. While few  passenger railroads had developed contingency plans when we met with  them, as December nears and schedules become further compressed,  additional railroads may have to make service or schedule adjustments to  help them reach compliance with the deadline. Although FRA has  reported taking some actions in response to our March 2018  recommendation that they better prioritize resources, FRA resources and  review times remain a significant concern—both for near-term efforts  such as extension requests and for the safety plans that need to be  reviewed and certified prior to the end of 2020. These issues—combined  with the ongoing implementation, testing, and interoperability challenges  that a number of railroads reported to us—raise questions as to the extent  FRA and the nation's passenger railroads are poised for full PTC  implementation by December 31, 2020.

Chairman Thune, Ranking Member Nelson, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.

If you or your staff have any questions about this testimony, please  contact Susan Fleming, Director, Physical Infrastructure at (202) 512- 2834 or FlemingS@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. GAO staff who made key contributions to this testimony  are Susan Zimmerman (Assistant Director); Katherine Blair; Greg Hanna;  Delwen Jones; Emily Larson; Joanie Lofgren; SaraAnn Moessbauer;  Maria Wallace; and Crystal Wesco.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Forty railroads, including Amtrak, commuter, and freight railroads, are required to implement positive train control (PTC)—a communications-based system designed to slow or stop a train that is not being operated safely. Although the deadline for PTC implementation is December 31, 2018, railroads that meet certain criteria may receive a maximum 2-year extension.

We testified that, as of June 30, 2018, many passenger railroads remain in the early stages of PTC implementation, such as equipment installation and early testing. Most passenger railroads anticipate needing an extension.


U.S. Postal Service: Projected Capital Spending and Processes for Addressing Uncertainties and Risks

USPS faces significant financial challenges as it continues to experience declining mail volumes and revenues. Capital spending is needed to support USPS's operations, but can be affected by various uncertainties and risks, such as those related to future business activities and revenues. In the past, USPS has reduced its capital spending in response to declining revenues.

GAO was asked to review USPS's capital-spending plans and examine how its capital-spending processes address uncertainties and risks. This report: (1) describes USPS's projected capital spending over the next 10 years and (2) assesses whether USPS's processes support its ability to address uncertainties and risks that affect its capital spending.

GAO reviewed USPS data and information on actual capital spending from fiscal years 2007 to 2017 and projected capital spending for fiscal years 2018 through 2028. GAO also reviewed USPS reports on 14 approved capital projects in fiscal years 2017 and 2018, selected to provide a mix of project type and value; examined documentation related to USPS's processes that affect capital spending and compared USPS's processes to internal control standards adopted by USPS; and interviewed USPS officials.

On a draft of this report, USPS provided technical comments, which GAO incorporated as appropriate.

The United States Postal Service (USPS) projects increased capital spending over the next 10 years. According to USPS, this spending will support its mission and improve its financial position. USPS projects average annual capital cash outlays of $2.4 billion from fiscal years 2018–2028—about 70 percent more than the $1.4 billion average from fiscal years 2007–2017 (see figure). For example, USPS plans to acquire a new fleet of delivery vehicles starting in 2019 to replace its aging existing fleet and plans to purchase new mail-processing equipment to increase efficiency. However, USPS faces a serious financial situation with insufficient revenues to cover expenses. This uncertainty may result in USPS's making capital-spending prioritization decisions that can lead to tradeoffs across planned capital projects and potentially between capital spending and other organizational needs such as operational expenses. Such prioritization could lead to USPS's undertaking less capital spending than currently projected in the absence of increased revenues or decreased expenses.

USPS has processes that help it identify the uncertainties and risks that may affect its capital spending and adjusts its capital spending accordingly, in line with internal control standards adopted by USPS. For example, USPS identifies organizational uncertainties, such as mail volumes and revenues, as part of its strategic planning process and considers them when creating its capital spending budget. It also identifies individual project risks through a project review process, and considers tradeoffs inherent in different project scenarios. USPS's processes also allow it to respond to these uncertainties and risks. Specifically, USPS sets a capital-spending budget in its overall financial plan, to help ensure that spending is in line with expected resources. USPS's process also allows it to shift funds if needed, such as to repair a facility damaged during a natural disaster. USPS also reviews individual capital projects during implementation and can change specifications or time frames based on changing circumstances.

The U.S. Postal Service (USPS) provides crucial support for the nation’s  communications and commerce. According to USPS, in fiscal year 2017,  USPS delivered 149-billion pieces of mail, generating about $70 billion in  revenues. However, USPS—which is structured to be financially self- supporting—is facing unsustainable financial challenges as First-Class  Mail volume continues to decline. Although USPS has restructured its  services and network in various ways to try to improve its financial  position, total mail volume fell 3.1 percent in fiscal year 2017, resulting in  an operating loss of $2.6 billion. Fiscal year 2017 marked USPS’s 11th  straight year of operating at a loss.

Capital spending supports USPS’s ability to meet its organizational  objectives. For USPS, capital spending includes spending on delivery  vehicles, mail-processing equipment, post offices and other buildings, and  other items USPS uses to support operations and meet its universal  service obligation. However, given its challenging financial situation,  starting in fiscal year 2009, USPS dramatically reduced its capital  spending and for a number of years, according to USPS, restricted its  spending to projects it deemed necessary to ensure the health and safety  of employees and customers or to those projects that could produce a  large and rapid return on investment. More recently, USPS began  increasing its capital spending, but its challenging financial situation and  future uncertainties remain. In addition, individual capital projects can  face their own project-specific risks. USPS’s continuing financial losses  and business uncertainties create challenges in its ability to undertake the  capital-spending needs it has identified.

You asked us to review USPS’s capital spending plans and how its  capital-spending processes address uncertainties and risks. This report:  (1) describes USPS’s projected capital spending over the next 10 years  and (2) assesses whether USPS’s processes support its ability to address  uncertainties and risks that affect its capital spending.

To describe USPS’s projected capital spending over the next 10 years,  we reviewed USPS data on actual capital spending from fiscal years 2007  through 2017 and USPS documentation on projected capital spending  from fiscal years 2018 through 2028. In both cases, we focused on fiscal  year actual or projected capital-spending cash outlays—or the amount of  cash spent on capital projects—as opposed to capital-spending  commitments made in that specific fiscal year. For historical data, we  used data from USPS’s annual budgets for fiscal years 2008 through  2018, which contain data from prior fiscal years. For information on  USPS’s projected capital spending for fiscal years 2018 through 2028, we  reviewed USPS’s 10-year capital-spending projection for those years,  which USPS created in 2017. To determine the reliability of these data,  we interviewed USPS officials, reviewed data for any obvious errors, and  reviewed relevant documentation. We determined that these data were sufficiently reliable for the purposes of reporting on USPS’s past and  projected capital spending. We also selected and reviewed a non- generalizable sample of 14 of USPS’s 66 approved fiscal year 2017 and  2018 Decision Analysis Reports (DAR)—internal USPS documents used  to justify and obtain approval for some proposed capital spending  projects. We selected DARs to provide a mix of types of capital spending  projects and total project value. We reviewed the DARs to obtain  descriptive information about the projects. While information presented  from our reviews of the DARs cannot be generalized to all DARs, the  information provides insights into USPS’s reasons for undertaking capital  spending projects. In addition, we interviewed USPS officials about the  organization’s historic and projected capital spending.

To assess whether USPS’s processes support its ability to address  uncertainties and risks that affect its capital spending, we reviewed  documentation from USPS, including USPS’s policies and procedures for  capital spending and internal guidance documents, and interviewed  USPS officials. We then compared that information against criteria for  addressing uncertainties and risks. Specifically, we identified criteria from  the Office of Management and Budget’s (OMB) Capital Programming  Guide and the Committee of Sponsoring Organizations of the Treadway  Commission’s (COSO) Internal Control-Integrated Framework—internal  control standards adopted by USPS. We evaluated how USPS’s  processes that affect capital spending are designed to address  uncertainties and risks. For more details regarding our scope and  methodology, see appendix I.

We conducted this performance audit from September 2017 to June 2018  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 undertakes capital-spending projects for a number of reasons and  more than one reason may apply to a single project. According to USPS  documentation on its capital spending processes, these reasons include:  to support USPS’s organizational objectives and strategic plan,  to help sustain existing operations and meet USPS’s universal service  obligation,  to protect the health and safety of employees and customers or meet  legal requirements, or  to generate a positive return-on-investment—such as by increasing  revenues or decreasing costs—thus improving USPS’s finances.

USPS generally categorizes its capital spending in four broad categories:  vehicles, facilities, information technology and other, and mail processing  equipment, as shown in figure 1.

USPS has processes for setting an annual capital-spending budget and  approving specific capital projects. USPS prepares an annual capital- spending budget as part of its annual organization-wide budget.  According to USPS documentation on its capital spending process, and  USPS officials the process includes the following steps:  In advance of each fiscal year, USPS’s Finance and Planning  Department reviews estimated revenues and expenses to determine  an appropriate total capital-spending budget.

Next, USPS’s Executive Leadership Team and the leadership of  relevant departments develop requests for each department’s  estimated capital-spending needs for the upcoming year, including a  ranking of desired projects. These lists provide information on  projects’ purposes, estimated capital and operating expenses,  potential return-on-investment, and relationship to USPS’s strategic  initiatives.

The Finance and Planning Department then reviews these lists in light  of the previously determined total capital-spending budget and sets a  capital spending budget for each of the broad categories of capital  spending.

The Executive Leadership Team votes on this preliminary capital  spending budget, which, if approved, is included in the organization- wide budget that is subject to approval by USPS’s Board of  Governors. The budget approved by the Board of Governors  includes the total and categorical capital-spending budget, but does  not include approvals for specific projects.

According to USPS officials, USPS also uses these capital-spending  requests, along with other information, such as historical capital-spending  data and information on already identified specific future capital-spending  projects, to annually update a 10-year projection of capital spending.  USPS uses this 10-year projection to estimate USPS’s potential future  capital spending and requirements for capital project cash outlays.

USPS also has processes for approving specific capital projects. Project  sponsors—those departments that wish to undertake a capital-spending  project—must obtain approval from different groups within USPS to  initiate capital projects. According to USPS documentation, the level of  approval required depends on the estimated total cost of the project:

Total costs over $5 million: The project sponsor must submit a DAR  to USPS’s Investment Review Committee for review. DARs contain  estimated project cost, return-on-investment, and other information  used to justify the project. If the committee approves, it makes a  recommendation to the Postmaster General for final approval. USPS’s  Office of Inspector General also reviews and assesses the adequacy  and the depth of the information in the DAR, assesses whether the  project is in USPS’s best business interest, and may provide input to  the Investment Review Committee, which may take that information  into consideration when reviewing projects.

Total costs from $1 million to $5 million: The project sponsor must  submit a DAR to USPS’s Technical Review Committee for review and  approval.

Total costs under $1 million: The project is reviewed by USPS’s  Finance and Planning department, and approval is subject to the level  of budgetary resources available. USPS does not require a DAR for  these projects, although the process involves other documents, such  as a one-page “Justification of Expense” that is required for many of  the projects.

USPS faces organization-wide uncertainty that may affect its capital  spending. We define “organizational uncertainty” as those uncertainties— such as business, budgetary, legislative or regulatory, or other  conditions—that may affect USPS’s ability to remain competitive and  achieve its mission. For example, in the absence of adequate revenues  that would cover all of USPS’ expenses, these uncertainties may affect  the extent to which USPS can undertake its identified capital-spending  plans. According to USPS, organizational uncertainties include the  following:

Business uncertainty includes potential changes to USPS’s business  and the market for its products and services. Such uncertainty may be  affected by changing customer preferences—such as continuing  diversion of First Class Mail to electronic alternatives (e.g., e-mail or  online banking)—and increased competition for package shipments.

Budgetary uncertainty includes potential uncertainty and changes to  revenues and expenses that affect USPS’s finances.

Legislative or regulatory uncertainty includes potential actions  intended to address some of USPS’s financial challenges. For  example, postal reform legislation has been introduced that, if  enacted, could improve USPS’s financial position. Both H.R. 756 and  S. 2629 propose to relieve USPS of some of its retiree health and  pension obligations and provide a reinstatement of a partial rate  surcharge. Similarly, the Postal Regulatory Commission—an  independent establishment of the executive branch that regulates  USPS— is considering providing USPS with additional flexibility on  pricing, which could also improve USPS’s finances.

According to USPS documentation on capital-spending processes as well  as DARs for individual capital-spending projects, capital-spending  projects also can face project-specific risks, such as the following:

Technological risks, which include complexity, quality, and  security concerns: For example, capital projects deploying new  technology intended to increase operational efficiency may face the  risk that the new technology could become obsolete given future  technological advances.

Operational risks, which include maintenance and performance  of projects: For example, equipment purchased as part of a capital  project could involve the risk that it may not perform as expected.

Integration risks, which include network and system integration  and user acceptance of projects: For example, a project involving  new retail technology may face the risk that USPS’s customers will  not accept the new technology, and, as a result, the project does not  meet its target for customer use.

USPS Plans to Increase Capital Spending, but Business Uncertainties Will Likely Involve Prioritization against Other Business Needs and among Capital Projects

According to USPS, the organization has critical capital-spending needs  after years of reduced capital spending. Starting in fiscal year 2009,  USPS sharply decreased its capital spending for several years, in  response to decreased volume and revenues; however, USPS now plans  to increase its spending. Specifically, USPS projects average annual  capital-spending cash outlays of $2.4 billion from fiscal years 2018  through 2028—about 70 percent more than the average of $1.4 billion  from fiscal years 2007 through 2017. (See fig. 2.) While this projected  spending is largely driven by plans to acquire a new fleet of delivery  vehicles, USPS also projects increased spending in the other categories  of facilities, information technology, and mail-processing equipment. In  addition, while some of USPS’s planned capital spending is intended  specifically to generate a return-on-investment—such as by increasing  revenues or decreasing costs—much of USPS’s planned capital spending  is to help sustain operations. Specifically, according to our analysis of  USPS data, roughly 80 percent of USPS’s projected capital spending for  fiscal year 2018 is for projects intended to help sustain operations.

Vehicles: Spending Planned to Replace Aging Fleet

In its latest projection of capital spending, covering fiscal years 2018  through 2028, USPS projects an annual average of roughly $821 million  on capital spending for vehicles, primarily driven by a multi-year  acquisition of new delivery vehicles starting in fiscal year 2019. According  to USPS officials, USPS decided a number of years ago to defer  purchasing new delivery vehicles and instead continued using and  maintaining its existing fleet. Because USPS started acquiring most of its  existing delivery fleet in 1987, the majority of its delivery vehicles are  several decades old. USPS officials said these vehicles incur high  maintenance costs, averaging about $4,500 per vehicle annually.

In acquiring new vehicles, USPS plans to take a number of steps to  ensure that the vehicles best meet the organization’s needs. According to  USPS officials, it will spread the acquisition over multiple years to avoid a  large cash outlay in any given year and to enable USPS to modify the  vehicle purchases over time to take advantage of any technological  changes, such as advances in alternative fuel technologies. Officials  added that USPS is considering vehicles that will encourage operational  efficiencies. For example, USPS is considering taller vehicles that will  better allow carriers to handle trays of mail and packages. The officials  also noted that USPS may consider different vehicle designs for different  market needs. The officials said that USPS is currently testing various  vehicle prototypes and has not decided on any one vehicle design at this  time. In total, USPS projects that its acquisition of new delivery vehicles  will require about $5.7 billion in capital-spending cash outlays distributed  over a number of years.

In addition to its planned future acquisition of delivery vehicles, USPS has  also conducted smaller acquisitions of vehicles in recent years. According  to USPS officials, in the past few years USPS has been replacing most of  its non-delivery vehicles and will have done so by 2019, while also  purchasing a small number of delivery vehicles to replace ones that have  exceeded their useful life or will serve route growth. For example, in  April 2017 USPS approved a capital spending project to purchase more  than 2,000 cargo vans used to transport large volumes of mail from postal  plants to post offices and other facilities, and about 375 spotter vehicles  used to move trailers among docks at processing facilities. In May 2017  USPS approved a capital spending project to purchase approximately  8,000 off-the-shelf delivery vehicles needed to serve route growth and  replace existing high-maintenance-cost vehicles. (See fig. 3.)

Facilities: Spending Primarily Intended for Repairs of Existing Facilities

USPS projects an annual average of about $607 million in capital  spending for facilities from fiscal years 2018 through 2028. According to  USPS officials, USPS faces little need for capital spending on new facility  construction given changes to USPS’s business such as decreasing mail  volumes. As a result, most of USPS’s projected capital spending is for  rehabilitation and repair of existing facilities, such as the replacement of  roofs or heating, ventilation, and air-conditioning systems needed to  sustain operations. For example, in December 2016, USPS approved ca  capital spending project to replace the roof at a mail processing facility in  Tulsa, Oklahoma. USPS had concluded that the roof was in a state of  failure, and there were no economically feasible repair options. In  addition, in 2017 USPS approved about a capital spending project to  repair facilities in the U.S. Virgin Islands damaged during Hurricane  Maria.

Although most facilities spending is related to rehabilitation and repair,  some USPS capital spending is on new facilities. According to USPS  officials, new facilities projects are generally approved because of the  need to completely replace an existing facility that is beyond repair or to  construct a new facility that will replace multiple existing facilities. For  example, in May 2017 USPS approved a capital spending project to  construct a mail-processing facility in Nashville, Tennessee. The facility is  intended to replace and close four existing facilities which will eliminate  space deficiencies, reduce transportation costs, and improve operating  efficiencies. In addition, according to USPS officials, USPS may need to  make capital spending investments to facilities to accommodate growth in  package volume, should that growth continue.

Information Technology and Other: Spending Intended to Support USPS’s Network and Cybersecurity Efforts

USPS projects an annual average of about $541 million in capital  spending for information technology and other capital projects, such as  customer support equipment, from fiscal years 2018 through 2028.  Information technology spending, which makes up an average of 98  percent of the projected spending in this category from fiscal years 2018  through 2028, is intended to maintain the infrastructure used to support  USPS and provide security from cyber-threats, among other things.

According to USPS officials, while it is difficult to project capital spending  on information technology because future needs are uncertain, they can  more accurately predict some future needs, such as hardware  replacement. For example, there is a baseline of projected costs to  replace servers because USPS knows the length of the technologies’  useful lives and when they will need to be replaced. According to USPS  officials, while much of its capital spending on information technology is  intended to replace outdated servers and other hardware, some spending  is for developing new information technology systems. For example, in  March 2017 USPS approved a capital spending project to purchase 67  video conferencing systems intended to increase productivity and  encourage collaboration among USPS offices. In addition, USPS officials  told us that in recent years USPS has undertaken more capital spending  than expected on cybersecurity, a trend that will likely continue for the  next few years. According to a DAR for cybersecurity investments, USPS  is undertaking such investments to proactively identify and respond to  security threats that have the potential to cause financial or other damage  to the organization’s assets or employees, including threats that could  disrupt or destroy information.

Capital spending on information technology can also support USPS  strategic goals and provide a positive return-on-investment. For example,  in January 2017 USPS approved an additional capital spending to  support development of its Informed Visibility program, which is a system  that provides tracking and reporting of mail shipments for commercial  mailers. According to the Informed Visibility DAR, these capabilities will  provide users with access to valuable business information, helping  improve operational efficiencies and marketing, among other things.  According to the DAR, Informed Visibility will also provide a positive  return-on-investment by eliminating some redundant costs and programs.

Mail-Processing Equipment: Projected Spending Intended to Increase Automation and Efficiency

USPS projects an annual average of about $464 million on capital  spending for mail-processing equipment from fiscal years 2018 through  2028. USPS intends to maintain or replace existing aging equipment  used to process mail and purchase new equipment that USPS expects  will increase efficiency and provide other business benefits. According to  USPS officials, equipment projects can also generate a positive return- on-investment in a number of ways, such as by increasing automation to  reduce costs or by improving customer service. For example, in August  2017 USPS approved a capital spending project to provide new control  systems for about 1,000 bar code sorter machines that USPS expects will  decrease mail-processing costs.

Some of USPS’s mail-processing equipment investments may also  specifically address the growing market for package shipments. For  example, in July 2017 USPS approved a capital spending project for  upgrades to automated package-processing machines—upgrades  intended to reduce package-handling costs and improve collection of data  on when and where packages are processed. USPS first deployed these  machines in 2004. According to the DAR, by 2017, the machines were  nearing the end of their useful life, resulting in reduced reliability.

USPS’s Projected Capital Spending Will Likely Involve Prioritization Decisions

Although USPS is projecting increased capital spending over the next 10  years, it has reported that it faces uncertainties, such as the level of future  revenues, that could affect its ability to undertake planned and projected  spending. USPS faces continuing declines in First Class Mail volume, and  while it has experienced increased volume in packages, future increases  in package volume are uncertain. Specifically, according to USPS,  some of its major shipping customers are now building their own delivery  capability that may enable them to divert some package shipments away  from USPS. USPS has also stated that it faces challenges in ensuring  that future operations generate sufficient revenues to support planned  capital spending and that it is constrained in its ability to reduce costs.

We have previously testified that USPS continues to face a serious  financial situation with insufficient revenues to cover its expenses.

This uncertain financial outlook may result in USPS changing its current  capital-spending plans, including setting new priorities across its planned  projects and other business needs. These prioritization decisions can  involve tradeoffs among projects and between capital and operations  spending. USPS has already faced these types of tradeoffs, as in fiscal  year 2017, when it did not make $6.9 billion in required prefunding  payments for retiree health and pension benefits, stating that it lacked  sufficient cash to make those payments while ensuring it could continue  to provide service, and stating that it required sufficient cash reserves for  capital spending. While USPS officials noted that USPS must always  make prioritization decisions regarding capital spending, its financial  future may make such decisions more critical given its currently projected  increased capital spending. For example, unless USPS increases its  revenues or decreases other expenses, such prioritization decisions may  involve USPS undertaking less future capital spending than it currently  projects over the next 10 years. Further, even if USPS’s financial situation  were to dramatically improve, USPS may not necessarily undertake more  capital spending than currently projected, because of significant other  business needs, such as funding operating expenses. Should USPS  have more resources than expected in the coming years, though, USPS  may be able to make fewer tradeoffs regarding capital spending.

Various Processes Support USPS’s Ability to Address Uncertainties and Risks That Affect Capital Spending

USPS Has Processes Designed to Identify Uncertainties and Risks That Affect Capital Spending

USPS has processes that can help it to identify uncertainties and risks  that could affect its capital spending and adjust its spending to changing  circumstances. USPS has adopted the Committee of Sponsoring  Organizations of the Treadway Commission’s (COSO) internal control  framework, which includes how organizations should address  uncertainties and risks. Specifically, this framework states that  organizations should identify uncertainties and risks to the achievement of  their objectives and analyze these uncertainties and risks to determine  how they should be managed. Additionally, COSO’s internal control  framework asserts that organizations should not only identify and analyze  uncertainties and risks but also assess any changes in conditions that  could affect the organization including its capital spending.

Identifying and Analyzing Organizational Uncertainties

USPS has processes for identifying and analyzing organizational  uncertainties, such as business and budgetary uncertainties, which can  affect capital spending. These processes align with aspects of COSO’s  internal control framework. For example, according to USPS  documentation on its strategic-planning process, USPS conducts a  business environment assessment and an enterprise risk assessment  every 3 years to identify its organizational uncertainties, such as the effect  of changes in the number of delivery points or mail volume. Additionally,  USPS has processes to analyze the effects of its organizational  uncertainties. For example, some department managers analyze the  potential effects of organizational uncertainty by modeling different  scenarios to help inform their department’s capital-spending decisions.  For example, USPS officials stated that the vehicles department models  the interactions among key variables—such as stabilizing or declining  mail volume, route structures, and vehicle cargo sizes—as it considers  various vehicle acquisition options. In addition, USPS facilities  department officials told us that they plan to develop on a model to  consider how key variables, such as mail volume, affect USPS’s facility  needs.

In addition to identifying and analyzing the potential effects of  organizational uncertainties, USPS also has processes for assessing  changes in these organizational uncertainties. For example, USPS  documentation shows that USPS leadership holds a monthly business  review meeting in which officials discuss any changes in internal  conditions, such as labor costs, or external conditions, such as mail  volume, that could affect the organization and, when applicable, how  these conditions could affect capital spending. Officials told us that USPS  also distributes a survey every 18 months to internal and external  stakeholders to obtain perspectives on changes, if any, in some of the  conditions addressed by USPS’s strategic plan. The survey also covers  other conditions such as uncertainty about the extent to which USPS will  have funds to maintain, repair, and replace infrastructure.

Individual capital projects face inherent risks—such as technological,  operational, and integration risks. We found that USPS’s capital-spending  processes align with aspects of COSO’s internal control framework by  incorporating processes to identify and analyze project-specific risks  through the use of DARs. As discussed earlier, USPS’s capital spending  processes require DARs to justify proposed capital projects with total  costs of $1 million or more. Specifically, internal USPS guidelines state  that DARs should identify the technological, operational, and integration  risks that could affect capital projects and any tradeoffs related to  potential alternatives to the proposed capital project. For example, we  reviewed one DAR for mail-processing equipment that explained that the  project has a low level of operational risk noting that the new equipment  will not require training for operators, thus avoiding potential costs and  delays associated with training. Another DAR we reviewed for a project  intending to improve the customer experience and reduce costs through  more efficient staffing at retail locations identified integration risks and  noted that the project's proposed deployment schedule might not allow  time for delays. USPS leadership may also request additional analyses to  verify, or support, information in a DAR before deciding whether to  approve a project. For example, according to documentation we  reviewed, USPS leadership recently requested that its Finance and  Planning division review economic data, such as population growth rates,  to confirm the economic growth projections used in support of a DAR for  a new facility in Bismarck, North Dakota.

USPS Has Processes Designed to Respond to Identified Uncertainties and Risks That Affect Capital Spending

We found that USPS has processes that are designed to help it respond  to identified organizational uncertainties, specifically future budgetary  uncertainty. According to OMB’s Capital Programming Guide, capital  spending “...should be consistent with the level of future budgetary  resources that will be available.” USPS officials said USPS seeks to  minimize the budgetary uncertainty that capital spending will outpace  available resources by developing its annual capital-spending budget as  part of USPS’s overall annual budget. As a result, USPS can determine  an annual capital spending budget based on the most recent conditions,  including the most recent revenue forecasts, and consider possible  tradeoffs—such as those between capital spending and other spending  needs such as operating expenses. Further, while the creation of a  capital-spending budget establishes capital-spending levels, the process  does not commit capital spending on any particular project. Instead,  USPS reviews and approves new capital projects throughout the fiscal  year, allowing USPS to make capital spending-decisions based on its  most current financial condition, which may have evolved during the fiscal  year.

After USPS has set the annual capital spending budget, USPS’s capital- spending process also allows the organization to respond to any changes  in its financial outlook, business environment, or other organizational  uncertainties that might occur during the fiscal year. As stated previously,  USPS’s capital spending budget establishes capital spending levels for  the fiscal year and does not include approvals for specific projects.  Project sponsors must obtain approval from different groups within USPS  to initiate capital projects. USPS may approve less capital spending for  capital projects than budgeted for at the start of the year. Our analysis of  capital-spending cash outlays from fiscal year 2007 through 2017 shows  that on average, USPS spent about 18 percent less than was budgeted  for at the start of each year. According to USPS officials, capital  spending can be below budgeted levels for a variety of reasons. USPS  may shift strategic priorities based on business conditions and cancel or  delay some planned projects that it determines are no longer aligned with  its priorities. For example, USPS canceled a previously approved  centralized distribution facility project in Brooklyn, New York, and decided  to look for less costly alternatives to support the area’s increased  package processing needs. Also, officials stated that projects could come  in below budget because of a reduction in project scope or because a  multi-year project falls behind schedule and has less cash outlays in a  given year than were planned.

In other instances, USPS’s capital-spending approval process provides  flexibility to re-allocate capital funds as USPS identifies and assesses  changing conditions that affect the organization, or when contingencies or  emergencies arise. For example, according to USPS officials, as USPS  monitors the economic indicators that affect its business, the indicators  may signal an increase in package volume. USPS might respond by  allocating more capital toward additional purchases of package-sorting  equipment. According to USPS officials, USPS’s capital-spending  process also allows USPS to respond to contingencies. In fiscal year  2017, USPS approved capital spending to repair facilities in the U.S.  Virgin Islands damaged during Hurricane Maria. (See fig. 4.) In the event  that such unplanned projects arise to repair damages or are required for  safety, project sponsors can expedite the capital spending approval  process, such as by submitting an advance funding request to USPS.

In addition to having processes to respond to organizational uncertainties,  we also found that USPS has processes for responding to the risks  affecting individual capital projects. According to USPS documentation,  capital projects with total costs of over $5 million are reviewed at certain  stages in their implementation to assess any changes, including changes  in the return-on-investment, timeline, and performance of the projects.  USPS may alter project specifications or time frames to respond to these  changes. During the implementation stage of some major capital projects,  such as the installation of mail-processing equipment, departments may  initially test a limited number of units with the option to request the  purchase of additional units if the tests are successful. Additionally, some  major capital projects, such as the replacement of USPS’s delivery  vehicles, require acquisitions over multiple years, which, USPS officials  told us, can be used to limit risk. As mentioned earlier, USPS is planning  to replace its fleet by purchasing vehicles over a number of years,  potentially allowing it to capitalize on technological advances that may  develop over the time period.

After a capital project is complete, USPS has a process for reviewing the  results as a way to inform and improve future capital-spending decisions,  including better addressing project risks. USPS’s capital-spending  process requires USPS to evaluate capital projects with total costs over  $25 million after project completion, reviewing the cost, schedule, and  performance results of these projects. For example, in November 2017,  USPS discussed the results of two package processing and sorting  projects that experienced delays associated with accommodating new  equipment at the facilities due to design issues. As a result, USPS  recommended that project sponsors conduct more research about any  site-specific risks before submitting a DAR for future package processing  and sorting projects. In addition, USPS’s Office of Inspector General  prepares an annual capital-project-compliance report that evaluates the  soundness of USPS’s capital spending. According to USPS officials, the  organization considers the results of these reports and seeks to address  any resulting recommendations. For example, we reviewed  documentation explaining that, in response to one recent Office of  Inspector General recommendation, USPS stated it would revise its  capital spending guidance to define review and approval procedures,  validation, and compliance report requirements for all investments.

We provided a draft of this report to USPS for review and comment.  USPS provided a written letter (see appendix II) in which USPS provided  no comments. Via email, USPS also provided technical comments, which  we incorporated as appropriate.

We are sending copies of this report to interested congressional  committees and the Postmaster General. 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 that made key contributions to this  report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives for this report were to (1) describe the U.S. Postal  Service’s (USPS) projected capital spending over the next 10 years and  (2) assess whether USPS’s processes support its ability to address  uncertainties and risks that affect its capital spending. For our second  objective, our scope was limited to assessing whether USPS had  designed processes; that is, we did not assess the quality of any analyses  that USPS conducted regarding risks or any determinations that USPS  made regarding capital-spending projects as this was beyond the scope  of our review. Such assessments are routinely conducted by the USPS  Office of Inspector General.

To address USPS’s planned capital spending over the next 10 years, we  reviewed USPS data on capital spending from fiscal years 2007 through  2017 and USPS documentation on projected capital spending from fiscal  years 2018 through 2028. In both cases, we focused on a fiscal year’s  actual or projected capital-spending cash outlays—or the amount of cash  spent on capital projects—as opposed to capital-spending commitments  made in that fiscal year. For historical data, we used data from USPS’s  annual budgets, known as Integrated Financial Plans, for fiscal years  2008 through 2018. Each annual budget contains data on actual capital  spending levels from prior fiscal years. The annual budgets generally  report capital spending in four broad categories: vehicles, facilities,  information technology and other, and mail-processing equipment.  Because the categories used in past annual budgets were not consistent,  we recategorized some years’ spending to be consistent. Specifically, we  considered “mail-processing equipment” or “equipment” as part of “mail- processing equipment.” We considered “infrastructure and support,”  “information technology and other,” and “customer service and support  equipment” as part of the “information technology and other” category.  The past budgets consistently used “facilities” and “vehicles” categories.  We obtained input from USPS officials on our recategorizations. To  determine the reliability of these data, we reviewed the data for any  obvious errors, reviewed relevant documentation, and interviewed  officials. We determined that these data were sufficiently reliable for the  purposes of reporting on USPS’s past capital spending.

For information on USPS’s projected capital spending from fiscal years  2018 through 2028 we reviewed USPS’s 10-year capital-spending  forecast for those years, which USPS created in 2017. This 10-year  forecast is a projection of capital spending, but is not a commitment for  any level of investment. The 10-year forecast categorizes capital  spending projects into the following categories: construction and building  purchases, building improvements, mail processing equipment, vehicles,  capitalized software, customer service equipment, and postal support  equipment. For our analysis, we combined “postal support equipment,”  “information technology,” and “customer service equipment” into one  overall “information technology and other” category, and “construction  and building purchases” and “building improvements” into one overall  “facilities” category. USPS officials agreed with this approach. To  determine the reliability of these data, we interviewed USPS officials,  reviewed data for any obvious errors, and reviewed relevant  documentation. We determined that these data were sufficiently reliable  for the purposes of providing information on USPS’s projected capital  spending. In addition, we interviewed four USPS vice presidents in  charge of the departments that correspond with the four broad categories  of capital-spending investments about historic, ongoing, and projected  capital spending.

We also selected and reviewed a non-generalizable sample of 14  Decision Analysis Reports (DAR)—internal USPS documents used to  justify and obtain approval for some proposed capital-spending projects— of the 66 approved by USPS for fiscal year 2017 and part of fiscal year  2018. USPS requires DARs for all proposed capital spending projects  with a total project cost of at least $1 million. The DARs contain  information on, among other things, project specifications, purpose, risks  and tradeoffs, and timeframes. We reviewed the DARs for this and other  information; we did not review the quality of the analyses contained in the  DARs. We obtained a list of all approved DARs for fiscal years 2017 and  2018 and selected DARs of the two largest and two smallest capital  projects by total value in each of the four categories (i.e., vehicles,  facilities, information technology and other, and mail processing  equipment). Because the vehicles category had only two approved  DARs at the time we received the list of approved DARs from USPS, we  reviewed 14 DARs instead of 16. While the information from our reviews  cannot be generalized to all DARs, the information provides insights into  USPS’s reasons for undertaking capital spending projects.

To assess whether USPS has processes that support its ability to  address uncertainties and risks that affect its capital spending, we  reviewed USPS documentation, including USPS’s policies and  procedures for capital spending, internal guidance documents, and others  related to processes that affect its capital spending. We identified criteria  for addressing uncertainties and risks, including those specific to capital  spending. Specifically, we identified criteria from the Committee of  Sponsoring Organizations of the Treadway Commission’s (COSO)  Internal Control-Integrated Framework (the internal control standards  adopted by USPS) and the Office of Management and Budget’s Capital  Programming Guide. COSO Principle 7 states, “The organization  identifies risks to the achievement of its objectives across the entity and  analyzes risks as a basis for determining how the risks should be  managed.” Further, COSO Principle 9 states, “The organization identifies  and assesses changes that could significantly affect the system of  control.” The Office of Management and Budget’s Capital Programming  Guide element I.1.1 states, “The plan should also be consistent with the  level of future budgetary resources that will be available.” We evaluated  USPS’s processes that affect capital spending against these criteria to  determine whether USPS had designed processes to address  uncertainties and risks related to capital spending. We did not review the  capital spending projects USPS has undertaken to determine, for  example, if USPS made appropriate decisions regarding selected  projects. We also interviewed USPS officials regarding USPS’s capital- spending processes. Specifically, we interviewed officials with USPS’s  Capital Investment and Business Analysis Department; Finance and  Planning Department; Technical Analysis, Accounting, and Finance  Department; and the four vice presidents mentioned above about how  they address uncertainties and risks related to capital spending within  their departments.

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

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact above, Kyle Browning and Faye Morrison  (Assistant Directors); Matthew Rosenberg (Analyst in Charge); Amy  Abramowitz; Sara Ann Moessbauer; Josh Ormond; Joshua Parr; Amy  Rosewarne; and Crystal Wesco made key contributions to this report.  Also contributing to this report were Carol Henn, Sabine Paul, and  Carolyn Voltz.

USPS faces unsustainable financial challenges. It was structured to be self-supporting but First-Class Mail volume continues to drop and it has seen operating losses for 11 straight years.

After years of reduced capital spending, USPS says it has critical capital spending needs. For example, to help it meet its statutory obligation for prompt, efficient and reliable services, it plans to replace delivery vehicles—most of which are decades old.

We found that USPS has processes in place to help it identify the uncertainties that may affect its capital spending plan, and flexibilities that allow it to adjust the plan accordingly.