oversight

U.S. Postal Service: A Primer on Postal Worksharing

Published by the Government Accountability Office on 2003-07-31.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to Congressional Requesters




July 2003
             U.S. POSTAL
             SERVICE
             A Primer on Postal
             Worksharing




GAO-03-927
             a
                                                July 2003


                                                U.S. POSTAL SERVICE
                                                A Primer on Postal Worksharing
Highlights of GAO-03-927, a report to
congressional requesters




The U.S. Postal Service (USPS)                  Postal worksharing activities generally involve mailers preparing, sorting, or
faces major financial, operational,             transporting mail to qualify for reduced postage rates, that is, worksharing
and human capital challenges that               rates. These rates are based on what are referred to as worksharing
call for a transformation if USPS is            discounts because the rates are reduced based on the costs that USPS is
to remain viable in the 21st century.           estimated to avoid as a result of mailer worksharing activities. Key activities
Given these challenges, the
                                                include (1) barcoding and preparing mail to be sorted by USPS automated
President established a
commission to examine the state of              equipment, which reduces manual sorting; (2) presorting mail by ZIP Code
USPS and submit a report by                     or specific delivery location, which reduces USPS sorting; and (3) entering
July 31, 2003, with a proposed                  mail at a USPS facility that generally is closer to the final destination of the
vision for USPS and                             mail. Worksharing also requires mailers to perform numerous other
recommendations to ensure the                   activities, such as updating addresses to improve their accuracy.
viability of postal services. The
presidential commission has                     USPS Domestic Mail Volume in Fiscal Year 2002
addressed worksharing (activities
that mailers perform to obtain
lower postage rates) in the course
of its work. About three-quarters
of domestic mail volume is
workshared. Worksharing is
fundamental to USPS operations,
but is not well understood by a
general audience.

To help Congress and others better
understand worksharing, GAO was
asked to provide information on
the key activities and the rationale
for worksharing and the legal basis
for worksharing rates. GAO
discusses USPS’s and the Postal                 According to USPS and the Postal Rate Commission, the rationale for
Rate Commission’s rationale for                 worksharing is that it benefits USPS, mailers and the mailing industry, and
worksharing but did not assess the              the nation. They said worksharing benefits (1) USPS by enabling it to
benefits that they claimed for                  improve its operations and thereby help minimize its workforce and
worksharing. GAO will issue a                   infrastructure, and by stimulating mail volume growth that generates
second report later this year on                revenues to cover rising costs; (2) mailers by reducing mail-related costs and
worksharing issues raised by                    improving delivery service, and the mailing industry that performs
stakeholders.                                   worksharing activities; and (3) the nation, in part by lowering business costs,
                                                and in part by the associated benefits that consumers can realize. While
In commenting on this report,                   stakeholders generally support the concept of worksharing, they have raised
USPS and the Postal Rate                        differing concerns in this area. For example, the American Postal Workers
Commission reemphasized the
benefits of worksharing.
                                                Union has asserted that worksharing discounts are too large, but some
                                                mailers and members of the mailing industry have asserted that the
                                                worksharing discounts are not large enough.
www.gao.gov/cgi-bin/getrpt?GAO-03-927.
                                                The primary legal basis for worksharing rates is the requirement in law that,
To view the full product, including the scope   when recommending postage rates, the Postal Rate Commission consider
and methodology, click on the link above.       mail preparation and its effect upon reducing USPS costs. Postal rate cases
For more information, contact Bernard L.
Ungar at (202) 512-2834 or ungarb@gao.gov.      have established precedents clarifying the basis for worksharing rates.
Contents



Letter                                                                                                    1
                             Results in Brief                                                             3
                             Background                                                                   5
                             Worksharing Involves Activities Mailers Must Perform to Qualify for
                               Lower Rates                                                               10
                             The Rationale for Worksharing Is That It Benefits USPS, Mailers, and
                               the Nation, but Some Concerns Have Been Raised                            19
                             The Legal Basis for Worksharing Rates Is Derived from Title 39 and
                               Is Implemented through Postal Rate Cases and Regulations                  36
                             Agency Comments and Our Evaluation                                          43


Appendixes
              Appendix I:    Objectives, Scope, and Methodology                                          45
             Appendix II:    Estimated USPS Avoided Costs for Automation-Compatible
                             Letters That Are Workshared and Sent via First-Class
                             Mail                                                                        47
             Appendix III:   Comments from the U.S. Postal Service                                       48
             Appendix IV:    Comments from the Postal Rate Commission                                    49
              Appendix V:    GAO Contact and Staff Acknowledgments                                       51
                             GAO Contact                                                                 51
                             Acknowledgments                                                             51


Tables                       Table 1: Selected Postage Discounts and Rates for Letters of Up to
                                      1 Ounce That Are Sent via First-Class Mail and Workshared
                                      to Be Compatible with USPS Automation Equipment                    16
                             Table 2: Highlights of Worksharing Requirements for
                                      Automation-Compatible Letters Sent via First-Class
                                      Mail                                                               17
                             Table 3: Highlights of Opposing Views on Worksharing                        36
                             Table 4: Selected USPS Worksharing Rates Adopted from Fiscal
                                      Years 1976 through 2002                                            39


Figures                      Figure 1: Illustration of How USPS Handles “Aunt Minnie’s” Letter
                                       Sent from Philadelphia to Los Angeles                              6
                             Figure 2: Sample Envelope with Mailer-Applied Barcode                       11
                             Figure 3: Example of Presorting Envelopes in Mail Trays by
                                       Five-Digit ZIP Codes                                              12




                             Page i                                     GAO-03-927 Postal Worksharing Primer
Contents




Figure 4: Illustration of How USPS Handles Destination-Entered
           Bulk Mail and Aunt Minnie’s Letter, Both of Which Are
           Sent from Philadelphia to Los Angeles                                       14
Figure 5: Percentage of USPS Domestic Mail That Is Workshared
           and Non-workshared                                                          18
Figure 6: Percentage of Workshared Mail by Class                                       19
Figure 7: Percentage of Costs That USPS Is Estimated to Avoid
           Because Mailers Perform Worksharing Activities for
           Automation-Compatible Letters Sent via First-Class Mail,
           by Type of USPS Cost                                                        23
Figure 8: Domestic Mail Volume from Fiscal Years 1972 through
           2002                                                                        25
Figure 9: Share of Domestic Mail Revenue Generated by
           Workshared and Non-workshared Mail in Fiscal
           Year 2002                                                                   27
Figure 10: Percentage of Domestic Mail Revenues Applied to Help
           Cover USPS Institutional Costs That Were Generated by
           Workshared and Non-workshared Mail in Fiscal
           Year 2002                                                                   28
Figure 11: Financial Data for Workshared and Non-workshared
           First-Class Mail in Fiscal Year 2002                                        30




 This is a work of the U.S. government and is not subject to copyright protection in the
 United States. It may be reproduced and distributed in its entirety without further
 permission from GAO. 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.




Page ii                                            GAO-03-927 Postal Worksharing Primer
A
United States General Accounting Office
Washington, D.C. 20548



                                    July 31, 2003                                                                                  Leter




                                    The Honorable Daniel K. Akaka
                                    Ranking Minority Member
                                    Subcommittee on Financial Management, the Budget,
                                      and International Security
                                    Committee on Governmental Affairs
                                    United States Senate

                                    The Honorable Henry A. Waxman
                                    Ranking Minority Member
                                    Committee on Government Reform
                                    House of Representatives

                                    The Honorable Danny K. Davis
                                    Ranking Minority Member
                                    Subcommittee on the Civil Service and Agency Reorganization
                                    Committee on Government Reform
                                    House of Representatives

                                    As you know, we have recently raised concerns that the U.S. Postal Service
                                    (USPS) faces major challenges that collectively call for a structural
                                    transformation if USPS is to remain viable in the 21st century. We have
                                    reported that USPS has experienced financial difficulties, its business
                                    model is not well suited to operate efficiently in an increasingly
                                    competitive environment, and growth in mail volume has stagnated or
                                    declined.1 About three-quarters of U.S. domestic mail volume is
                                    “workshared” by mailers that barcode, sort, or transport mail in ways
                                    estimated to reduce USPS’s costs and thus obtain lower postage rates.
                                    Although worksharing is fundamental to USPS operations, it is not well
                                    understood by a general audience because little information is available
                                    that explains its basic concepts. As Congress continues to consider how
                                    best to address USPS’s transformation challenges, Members of Congress,
                                    their staff, and other interested parties will need a basic understanding of
                                    postal worksharing.



                                    1
                                     U.S. General Accounting Office, U.S. Postal Service: Key Postal Transformation Issues, GAO-
                                    03-812T (Washington, D.C.: May 29, 2003); Major Management Challenges and Program
                                    Risks: U.S. Postal Service, GAO-03-118 (Washington, D.C.: Jan. 2003); and U.S. Postal
                                    Service: Deteriorating Financial Outlook Increases Need for Transformation, GAO-02-355
                                    (Washington, D.C.: Feb. 28, 2002).




                                    Page 1                                              GAO-03-927 Postal Worksharing Primer
Accordingly, you requested that we provide available information on
worksharing fundamentals, key issues, and stakeholder views in this area.
We agreed with your offices to provide the information in two reports. This
first report provides a primer on the fundamentals of worksharing.
Specifically, our objectives for this report are to provide summary
information on the following questions: (1) What are the key activities
included in postal worksharing? (2) What is the rationale for worksharing,
according to USPS and the Postal Rate Commission, the independent
federal establishment that reviews USPS proposals for changes in domestic
postage rates? and (3) What is the legal basis for establishing worksharing
rates?

Some postal stakeholders have expressed divergent points of view
regarding the rationale for worksharing, raising a series of related detailed
technical and policy issues that are beyond the scope of this report.
Accordingly, among other things, you requested that we issue a second
report later this year to address key worksharing issues and stakeholder
views regarding these issues. In this first report, we discuss USPS’s and the
Postal Rate Commission’s rationale for worksharing but do not assess the
benefits that they claimed are derived from worksharing.

As you requested, this first report is being issued on July 31, 2003. This date
coincides with the expected issuance date of the report by the President’s
Commission on the United States Postal Service. The commission was
mandated to report on its proposed vision for USPS and recommend
reforms to ensure the viability of postal services.

To address the three objectives, among other things, we reviewed
documents that defined worksharing rates and the rationale for these rates.
These documents included materials filed in postal rate cases—Postal Rate
Commission proceedings that consider changes to domestic postage rates
and fees—by USPS, the Postal Rate Commission, and other postal
stakeholders. In addition, we reviewed USPS requirements for mailer
worksharing activities and reviewed published papers and analyses on
worksharing. To observe the handling and preparation of workshared mail,
we visited USPS mail processing facilities in Florida and Maryland that
handle workshared mail as well as mailer facilities in Florida that prepare
workshared mail. We interviewed representatives of groups that filed
material on worksharing issues in the most recent postal rate case that
resulted in increases in most postage rates, including the rate for sending a
letter via First-Class Mail. These representatives included officials of USPS,
the Postal Rate Commission and its Office of the Consumer Advocate,



Page 2                                       GAO-03-927 Postal Worksharing Primer
                   mailer groups, and the American Postal Workers Union. We also reviewed
                   material that some of these organizations provided us on worksharing. To
                   obtain information on the legal basis for worksharing rates, we reviewed
                   pertinent laws, regulations, and the Postal Rate Commission’s
                   recommended decisions in rate cases that established worksharing rates.
                   Additional information on our objectives, scope, and methodology appears
                   in appendix I. We requested comments on a draft of this report from USPS
                   and the Postal Rate Commission, and their comments are discussed later in
                   this report and reproduced in appendixes III and IV.



Results in Brief   Postal worksharing activities generally involve mailers preparing,
                   barcoding, sorting, or transporting mail to qualify for reduced postage
                   rates, i.e., worksharing rates. Worksharing rates are based on what are
                   commonly referred to as worksharing discounts because the rates are
                   reduced based on the costs that USPS is estimated to avoid as a result of
                   mailer worksharing activities. Key worksharing activities include
                   (1) barcoding and preparing mail so it can be sorted by USPS automated
                   equipment, which reduces manual sorting and other USPS handling of the
                   mail; (2) presorting mail, such as by ZIP Code or specific delivery location,
                   to reduce the number of times USPS must sort the mail to route it to the
                   addressee; and (3) entering mail at a USPS facility that is generally closer to
                   the final destination of the mail, which is commonly referred to as entering
                   the mail deeper into USPS’s network used to move the mail. In addition,
                   mailers must perform numerous other worksharing activities, such as
                   updating and properly formatting addresses to improve their quality and
                   accuracy, thus reducing the amount of undeliverable and forwarded mail,
                   as well as improving USPS’s ability to use its automated equipment to sort
                   the mail. To qualify for worksharing rates, mailers must perform
                   worksharing activities and meet minimum volume requirements for bulk
                   mailings, such as mailings of at least 500 letters sent via First-Class Mail
                   that may include credit card bills, utility bills, advertisements, and bank
                   statements. Aside from First-Class Mail that is workshared, other
                   workshared mail may include bulk mailings of advertisements, magazines,
                   local newsletters, or packages.

                   USPS and the Postal Rate Commission have said that worksharing benefits
                   USPS, mailers and the mailing industry, and the nation. First, they credit
                   worksharing with benefiting USPS, in part because it enables USPS to
                   improve its operations and thereby helps minimize its workforce and
                   infrastructure. In addition, they said worksharing benefits USPS because it
                   stimulates mail volume growth, which helps USPS achieve economies of



                   Page 3                                       GAO-03-927 Postal Worksharing Primer
scale. Historically, mail volume growth has been critical to USPS’s business
model, which depends on mail volume growth to generate more revenues
to help cover rising USPS costs. Second, they credit worksharing with
benefiting mailers and the mailing industry. With respect to mailers, USPS
and the Postal Rate Commission credit worksharing with reducing the total
mail-related costs for mailers who workshare; helping to keep postage
rates affordable for all mailers; and improving the quality of delivery
service. Regarding the mailing industry, USPS and the Postal Rate
Commission credit worksharing with spurring the development of the
direct mail industry as well as that of other mail-related companies that
perform worksharing activities, enabling more mailers to participate in
worksharing. Third, they credit worksharing with benefiting the nation, in
part by lowering business costs, and in part by creating associated benefits
that consumers can realize. They said consumers benefit if worksharing
helps keep postage rates affordable; if mailers pass along lower prices
when their mail-related costs are reduced by worksharing; if their
workshared mail is delivered in a more expeditious and reliable manner;
and if the mail volume growth caused by worksharing results in more mail
that consumers consider useful, such as business correspondence or
catalogs that some consumers find useful.

While stakeholders generally support the concept of worksharing, they
have raised differing concerns in this area. For example, the American
Postal Workers Union has asserted that the worksharing discounts are too
large and thus worsen USPS’s financial situation. In contrast, some mailers
and members of the mailing industry have asserted that the discounts are
not large enough and thus improve USPS’s financial situation. Integral to
stakeholder differences are divergent views on technical issues relating to
the data, assumptions, and analyses used in rate cases to develop the
estimates of costs that USPS is to avoid as a result of mailer worksharing
activities. Another issue that has been raised is the extent to which USPS
has avoided costs as a result of worksharing activities performed by
mailers.

The primary legal basis for worksharing rates derives from the requirement
that the Postal Rate Commission consider “the degree of preparation of
mail for delivery into the postal system performed by the mailer and its
effect upon reducing costs” to USPS when recommending domestic
postage rates.2 Worksharing rates have been considered in successive


2
39 U.S.C. §3622(b)(6).




Page 4                                     GAO-03-927 Postal Worksharing Primer
             postal rate cases—proceedings in which the Postal Rate Commission
             considers USPS proposals for changing domestic postage rates—dating
             back to the 1970s. These proceedings have established precedents that
             have further clarified the legal basis for worksharing rates. Worksharing
             rates are implemented through federal regulations issued and updated by
             the Postal Rate Commission and USPS.

             In commenting on a draft of our report, the Postal Rate Commission said
             that worksharing rates “have provided major impetus for improved
             productive efficiency in postal services and stimulated the mail volume
             growth that has had the effect of moderating rate increases for all mail
             classes and services.” USPS commented that worksharing enhances
             efficient postal operations and stimulates mail growth and revenue for
             USPS; reduces overall mailer costs and has encouraged development of the
             presort and direct mail industries; and “benefits the entire economy
             because reduced mailing costs increase productivity and efficiency.”



Background   USPS is an independent establishment of the executive branch mandated
             to provide postal services to bind the nation together through the personal,
             educational, literary, and business correspondence of the people.
             Established by the Postal Reorganization Act of 1970,3 USPS is one of the
             largest organizations in the nation, with annual revenues of about
             $67 billion in fiscal year 2002 and a workforce of about 850,000 full-time
             and part-time employees.

             To fulfill its responsibilities, USPS has a massive infrastructure that, in
             fiscal year 2002, included about 300,000 collection boxes; 209,000 vehicles
             that transport and deliver mail; almost 38,000 post offices, post office
             stations, and post office branches; and about 350 mail processing facilities
             that sort and route mail across the country and within local areas. USPS
             delivered mail to the nation’s 139 million addresses, a number that grows
             by about 1.7 million annually. USPS carried over 40 percent of the world’s
             mail, and USPS’s total mail volume was nearly 203 billion pieces in fiscal
             year 2002. A simplified illustration of how USPS handles a single piece of
             personal correspondence that is mailed cross-country (referred to as “Aunt
             Minnie” mail) is shown in figure 1.


             3
              The Postal Reorganization Act of 1970 (Pub. L. 91-375) reorganized the U.S. Post Office
             Department into the U.S. Postal Service.




             Page 5                                              GAO-03-927 Postal Worksharing Primer
Figure 1: Illustration of How USPS Handles “Aunt Minnie’s” Letter Sent from
Philadelphia to Los Angeles




USPS handles a wide variety of mail items ranging from correspondence,
bills, and publications to payments and packages. Most mail is generated by
businesses, with households generating 11 percent of domestic mail
volume—primarily remittance mail and other mail sent to businesses and




Page 6                                        GAO-03-927 Postal Worksharing Primer
other organizations. Household-to-household mail, such as personal
correspondence, represents only 4 percent of domestic mail volume.

Postage rates vary widely, depending on the mail’s content, weight, size,
destination, and how it is prepared and presented by mailers to USPS,
among other things. Mail is organized into groupings called classes. The
four main mail classes include (1) First-Class Mail, which includes items
such as business and personal correspondence, bills, payments, and
advertisements; (2) Standard Mail, which is primarily advertising mail such
as catalogs, coupons, and solicitations; (3) Periodicals, which include
publications such as mailed newspapers and magazines; and (4) Package
Services, which is primarily packages that include merchandise as well as
large quantities of printed material.

The Postal Reorganization Act of 1970 shifted postage ratemaking authority
from Congress to two presidentially appointed bodies: the USPS Board of
Governors and the independent Postal Rate Commission (PRC). The Board
of Governors is USPS’s governing body, which, among other things, sets
policy, directs and controls expenditures, and participates in establishing
postage rates and fees. The Board consists of 11 members: (1) 9 Governors
who are appointed by the President, with the advice and consent of the
Senate, to 9-year staggered terms; (2) the Postmaster General, who is
appointed by the Governors; and (3) the Deputy Postmaster General, who
is appointed by the Governors and the Postmaster General. By law,
Governors are chosen to represent the public interest and cannot be
representatives of special interests. They serve part time and may be
removed only for cause. Not more than five of the nine Governors may
belong to the same political party. No other qualifications or restrictions
are specified in law.

PRC is an independent establishment of the executive branch that is
composed of five full-time Commissioners, who are appointed by the
President, with the advice and consent of the Senate, to 6-year staggered
terms. Among other things, PRC Commissioners review proposed changes
to domestic postage rates and fees and appeals of USPS decisions to close
post offices. By law, Commissioners shall be chosen on the basis of their
professional qualifications and may be removed only for cause. Not more
than three of the five Commissioners may belong to the same political
party. No other qualifications or restrictions are specified in law. In
addition to the five Commissioners, PRC has a staff of about 40 full-time
employees.




Page 7                                    GAO-03-927 Postal Worksharing Primer
When USPS wishes to change domestic postage rates and fees, it must
submit its proposed changes and supporting material to PRC, which
generally must render its recommended decision within 10 months. During
that time, interested parties, such as mailer groups, individual mailers,
companies that provide mail-related services, USPS competitors, postal
labor unions, PRC’s Office of the Consumer Advocate,4 and members of the
public, have the opportunity to provide evidence and comments to PRC
reflecting their respective concerns. PRC also generally holds public
hearings before issuing its recommended decision to the Governors, who
may approve, allow under protest, reject, or modify PRC’s decision.

USPS has a break-even mandate. Thus, when USPS proposes changes to
domestic postage rates and fees, USPS (1) projects its “revenue
requirement” for the “test year” (a fiscal year representative of the period of
time when the new rates will go into effect), based on the total estimated
costs plus a provision for contingencies, and a provision for the recovery of
prior years’ losses; and (2) proposes rates and fees that are estimated to
raise sufficient revenues to meet USPS’s revenue requirement. USPS also
proposes domestic postage rates and fees that are intended to fulfill the
requirement in law that each class of mail or type of service must cover the
direct and indirect postal costs that are attributable to that class or type of
service plus a portion of its other remaining “institutional” costs, which
include all “common” or “overhead” costs.5

USPS has raised postage rates several times in recent years. Although these
rate increases have contributed to the decline in mail volume, USPS credits
the rate increases with adding billions of dollars to USPS revenues. USPS
now plans to keep postage rates steady until 2006, largely because recently
enacted legislation has reduced USPS’s payments for its pension
obligations. Although USPS’s short-term financial pressures have been
alleviated, fundamental issues remain associated with USPS’s business
model, which relies on mail volume growth to help finance rising costs,
including the cost of universal postal service provided through an
expanding delivery network. USPS has recognized that its business model
is outmoded in today’s rapidly changing and increasingly competitive
business environment. As growth in mail volume has stagnated or declined,

4
 PRC’s Office of the Consumer Advocate is an office within PRC charged with independently
representing the interests of the general public in rate and classification cases, to fulfill the
statutory mandate in 39 U.S.C. §3624(a).
5
39 U.S.C. §3622(b)(3).




Page 8                                                 GAO-03-927 Postal Worksharing Primer
USPS has increasingly relied on rate increases to generate additional
revenues.

Congress has debated proposals for comprehensive legislation to address
postal transformation issues for the past decade, including USPS’s mission,
role, business model, and regulation of postage rates. None of these
proposals have been enacted to date. When legislative action was not
forthcoming, various postal stakeholders and we proposed that a
presidential commission be formed to consider postal transformation
issues and develop recommendations.

In April 2001, we put USPS’s long-term financial outlook and
transformation efforts on our high-risk list and recommended that USPS
develop a comprehensive plan to address its financial, operational, and
human capital challenges.6 In the fall of 2001, USPS's financial situation
became even more complex and critical due to the events of September
11th and the subsequent use of the mail to transmit anthrax. These events,
the economic downturn, electronic diversion of mail, and rate increases,
among other things, have led to unprecedented declines in total mail
volume and continuing declines in the volume of First-Class Mail. This mail
class generates more than half of USPS’s revenues and covers most of its
institutional costs.

USPS issued its Transformation Plan in April 2002 and has begun to
implement it. USPS’s actions are useful but cannot resolve the fundamental
and systemic challenges associated with USPS’s current business model.
These challenges threaten USPS's ability to carry out its mission of
providing affordable, high-quality, universal postal services on a self-
financing basis.

Given these challenges, on December 11, 2002, President Bush issued an
executive order that established the President’s Commission on the United
States Postal Service. The executive order stated that the commission’s
mission shall be to examine the state of USPS and submit a report to the
President by July 31, 2003, that articulates a proposed vision for USPS,
along with recommendations for the legislative and administrative reforms
needed to ensure the viability of postal services. The commission examined
many issues that are critical to postal transformation, including the


6
 U.S. General Accounting Office, U.S. Postal Service: Transformation Challenges Present
Significant Risks, GAO-01-598T (Washington D.C.: Apr. 4, 2001).




Page 9                                            GAO-03-927 Postal Worksharing Primer
                             worksharing of mail. The commission held seven public hearings during
                             which it received testimony and statements for the record from a wide
                             variety of stakeholders, including USPS, PRC, postal labor unions and
                             management associations, mailers, mailer groups, companies that provide
                             mail-related products and services, USPS competitors, subject matter
                             experts, and others.



Worksharing Involves         Postal worksharing activities generally involve mailers preparing,
                             barcoding, sorting, or transporting mail to qualify for reduced postage
Activities Mailers Must      rates, that is, worksharing rates. Worksharing rates are based on what are
Perform to Qualify for       commonly referred to as worksharing discounts because the rates are
                             reduced based on the costs that USPS is estimated to avoid as a result of
Lower Rates                  mailer worksharing activities. Key worksharing activities include
                             (1) barcoding and preparing mail so it can be sorted by USPS automated
                             equipment, which reduces manual sorting and other USPS handling of the
                             mail; (2) presorting mail, such as by ZIP Code or specific delivery location,
                             to reduce the number of times USPS must sort the mail to route it to the
                             addressee; and (3) entering mail at a USPS facility that is generally closer to
                             the final destination of the mail, which is commonly referred as entering
                             the mail deeper into USPS’s network used to move the mail. In addition,
                             mailers must perform numerous other worksharing activities, such as
                             updating and properly formatting addresses to improve their quality and
                             accuracy, thus reducing the amount of undeliverable and forwarded mail,
                             as well as improving USPS’s ability to use its automated equipment to sort
                             the mail. To qualify for worksharing rates, mailers must perform
                             worksharing activities and meet minimum volume requirements for bulk
                             mailings, such as mailings of at least 500 letters sent via First-Class Mail
                             that may include credit card bills, utility bills, advertisements, and bank
                             statements. Aside from First-Class Mail that is workshared, other
                             workshared mail may include bulk mailings of advertisements, magazines,
                             local newsletters, or packages.



Key Worksharing Activities   Three key worksharing activities performed by mailers are applying
                             barcodes to mail and preparing it so that the mail can be sorted by USPS
                             automated equipment; presorting mail, such as by ZIP Code or specific
                             delivery location; and entering mail at a USPS facility that is generally
                             closer to the final destination of the mail. Mailers must also perform
                             numerous other worksharing activities. Specifically, worksharing activities
                             include the following:



                             Page 10                                      GAO-03-927 Postal Worksharing Primer
• Applying barcodes: USPS automation equipment relies heavily on
  barcodes to sort mail. Barcodes provide machine-readable ZIP Code and
  delivery point information. When mailers apply barcodes (see fig. 2) and
  prepare the mail so it is compatible with USPS automated equipment,
  USPS avoids applying barcodes or sorting the mail manually. Mailer-
  barcoded mail can go directly to USPS automated equipment for
  processing.



Figure 2: Sample Envelope with Mailer-Applied Barcode


     Mailer-applied
     barcode




                                    JOHN DOE
                                    2121 MAIN ST NE
                                    WASHINGTON DC 20002




Source: USPS.



• Sorting mail: Mailers who sort their mail, such as by groupings of ZIP
  Codes, five-digit ZIP Codes, or specific delivery locations; place their
  mail in mail trays; and then take their mail to a USPS facility for
  processing save USPS money by reducing the number of times USPS has
  to sort the mail to route it to its final destination. Such mailer sorting is
  called “presorting” because it occurs before USPS receives the mail.
  Figure 3 illustrates an example of mail sorted by five-digit ZIP Codes.




Page 11                                      GAO-03-927 Postal Worksharing Primer
Figure 3: Example of Presorting Envelopes in Mail Trays by Five-Digit ZIP Codes


             Mailer generates mail
       1     with various ZIP Codes




             Mailer presorts the mail
       2     by ZIP Code and
             places it in separate
             mail trays
                                                             JANE DOE
                                                                                                                       JOHN DOE
                                                             1212 ANY ST NW
                                                                                                                       2121 MAIN ST NE
                                                             WASHINGTON DC 20001
                                                                                                                       WASHINGTON DC 20002




             Mailer delivers the
       3     presorted mail trays
             to USPS

                                                           ZIP Code 20001                                             ZIP Code 20002



Source: Developed by GAO based on USPS information.


                                                      Note: Figure is a simplified illustration of presorting mail.


                                                      • Destination entry of mail: Mailers can prepare and transport some
                                                        mail, such as advertisements, periodicals, and packages, from where the
                                                        mail is generated to USPS facilities that generally are closer to where
                                                        the mail will be delivered. Destination entry mail also must meet other
                                                        worksharing requirements, such as being presorted to qualify for a
                                                        lower “destination entry” rate that is discounted from the rate for mail




                                                      Page 12                                                         GAO-03-927 Postal Worksharing Primer
    that is not destination-entered.7 When destination entry mail meets the
    worksharing requirements, it is generally expected to (1) bypass the
    originating USPS mail processing facilities that initially receive and
    organize mail according to areas where it will be delivered; and (2) be
    transported by the mailers to USPS’s facilities that generally are closer
    to the final destination of the mail, including USPS’s mail processing
    and delivery unit facilities where carriers pick up their mail for delivery
    (e.g., post offices). When destination entry mail is transported by
    mailers to USPS mail processing facilities, USPS processes the mail,
    such as sorting the mail, and then transports the mail to a destination
    delivery unit for delivery.8 In addition, mailers can receive even lower
    destination entry rates when they transport destination entry mail to
    USPS delivery unit facilities. For this mail, USPS is generally expected
    to avoid handling this mail at its mail processing facilities and then
    transporting it to its delivery unit facilities.9 Figure 4 provides a
    simplified illustration of how USPS handles bulk quantities of
    destination-entered mail sent from Philadelphia to Los Angeles,
    compared with how USPS handles a single letter sent by an individual
    (“Aunt Minnie”) via First-Class Mail.




7
There are currently no destination entry rates for First-Class Mail.
8
 Delivery units include USPS facilities, such as post offices, post office stations, and
branches where USPS letter carriers pick up their mail for delivery.
9
 Concern has been expressed that USPS transports some mail that is destination-entered at
post offices to its mail processing facilities for sorting. We will address this concern in a
subsequent report.




Page 13                                               GAO-03-927 Postal Worksharing Primer
Figure 4: Illustration of How USPS Handles Destination-Entered Bulk Mail and Aunt Minnie’s Letter, Both of Which Are Sent from
Philadelphia to Los Angeles

          Aunt Minnie’s letter (First-Class Mail)
                                                                                                              Destination-entered bulk mail




                                                                                                                                                  magazines
          Aunt Minnie mails a letter
          by dropping it into a
          mailbox, or collection box,
          or by dropping it off at a
          USPS facility (e.g., post
                                                      1
                                                               USPS receives letter
          office) in Philadelphia                             (e.g., mail or collection
                                                                box or post office)


                                                                                                                    Bulk mailer drops
                                                                                                                    workshared bulk mail (e.g.,
                                                                                                                    catalogs, magazines, or
                                                                                                                    packages) off at a USPS
                                                      2                                                             facility in Los Angeles,
                                                                Originating USPS
                                                                                                                    bypassing the originating
                                                                  mail processing
                                                                                                                    facility in Philadelphia
                                                              facility in Philadelphia




                                                      3
                                                              Destinating USPS mail
                                                             processing facility in Los
                                                                                             Destination entry
                                                                     Angeles




                                                      4       USPS facility (e.g., post
                                                                office) where letter
                                                              carrier picks up mail for
                                                                       delivery
                                                                                             Destination entry (alternative)



                                                      5      Letter carrier delivers mail,
                                                               including Aunt Minnie’s
                                                            letter and the mail from the
                                                                  bulk mailer, to the
                                                                 addressee’s mailbox




                                                                 Shaded area indicates steps common to both types of mailings.
Source: Developed by GAO based on USPS information.




                                                          Page 14                                                GAO-03-927 Postal Worksharing Primer
Worksharing rates are based on what are commonly referred to as
“worksharing discounts.” For example, for First-Class Mail, the
worksharing discounts for workshared mail refer to the difference between
the rates for single-piece First-Class Mail weighing up to 1 ounce and the
corresponding rates applicable to workshared mail. First-Class Mail
discounts vary depending on the worksharing activities that are performed
and the degree of presorting, among other things. Mailers can barcode and
presort bulk mail in exchange for lower worksharing rates when they meet
minimum volume requirements for mail sent to specific areas or locations,
which reduces the number of times that USPS sorts the mail to route it to
these areas or locations.

Consider the example of letters weighing up to 1 ounce sent via First-Class
Mail that are workshared so that they will be compatible with USPS
automation equipment. The mailer worksharing activities performed for
these letters include barcoding and presorting, among other things. In this
example, which could apply to credit card bills and utility bills, the
workshared mail can qualify for different discounts and postage rates
depending on the extent of worksharing activities that are performed.
Specifically, depending on the degree of presorting of this barcoded mail, it
can qualify for varying worksharing discounts, such as discounts of either
7.8 cents, 9.2 cents, or 9.5 cents per piece from the single-piece rate of 37
cents (see table 1).




Page 15                                     GAO-03-927 Postal Worksharing Primer
Table 1: Selected Postage Discounts and Rates for Letters of Up to 1 Ounce That Are
Sent via First-Class Mail and Workshared to Be Compatible with USPS Automation
Equipment

                                                           Worksharing
                                                               discount
                                                              (per-piece
                                                         reduction from
Degree of presorting for barcoded,                    the 37-cent stamp        Worksharing rate
automation-compatible mail                                          rate)            per piece
3-Digit presorting: Mail presorted according to
ZIP Codes with the same first 3 digits, which
correspond to contiguous geographical areas
such as part of a state                                          7.8 cents             29.2 cents
5-Digit presorting: Mail presorted according to
ZIP Codes with the same first 5 digits, which
correspond to smaller geographic areas, such
as towns or parts of a city                                      9.2 cents             27.8 cents
Carrier route presorting: Mail presorted
according to delivery routes of USPS letter
carriers                                                         9.5 cents             27.5 cents
Source: USPS.

Note: Letters sent via First-Class Mail must be barcoded, presorted, and meet numerous other
requirements to qualify for worksharing rates that apply to automation-compatible mail.


Mailers must fulfill numerous requirements in addition to barcoding and/or
presorting to qualify for worksharing rates that apply to automation-
compatible mail. These requirements are intended to reduce USPS’s costs
of handling mail and can include (1) updating addresses that are intended
to reduce the amount of mail that USPS must forward or return to the
sender; (2) limiting the maximum weight of each mail piece so workshared
mail can be sorted by USPS automated equipment; (3) printing barcodes
according to USPS specifications so the barcodes can be read by USPS
automated equipment;, and (4) packaging mail, placing mail in trays,
labeling trays, and performing other activities to enhance USPS’s ability to
efficiently handle the mail. Highlights of worksharing requirements for
letters sent via First-Class Mail that qualify for automation-compatible
discounts are shown in table 2.




Page 16                                                 GAO-03-927 Postal Worksharing Primer
                            Table 2: Highlights of Worksharing Requirements for Automation-Compatible
                            Letters Sent via First-Class Mail

                            Aspect of
                            worksharing       Requirements
                            Addresses         • Each letter must have a complete address, including the ZIP Code.
                                              • ZIP Codes must be checked for accuracy at least once a year.
                                              • Addresses must be periodically checked for accuracy against the
                                                USPS address database. USPS-certified software must be used to
                                                check the addresses, such as the accuracy of the ZIP Codes and
                                                delivery point codes used to barcode the letters.
                                              • At least one of the following steps must be taken:
                                                - Before the mailing occurs, addresses and associated addressee
                                                names must be periodically updated by checking them against
                                                USPS’s change of address database.
                                                - After the mailing occurs, an automated address change service can
                                                be used to correct addresses and provide mailers with change of
                                                address information in electronic format. Alternatively, envelopes
                                                must identify how USPS is to handle undeliverable-as-addressed mail
                                                and whether USPS is to provide mailers with information about the
                                                addressee’s new address and/or reason for nondelivery.
                            Physical          • Mail must be barcoded and presorted according to USPS
                            characteristics     specifications.
                                              • Letters must be proportioned according to USPS standards.
                            Other             • Mail trays must be labeled according to USPS specifications.
                            requirements      • Documentation of each mailing must be submitted to USPS.
                                              • Each mailing must include 500 or more pieces.
                            Source: USPS.




Recipients of Worksharing   Although all mailers of bulk mail can receive worksharing rates when they
Rates                       meet the worksharing requirements, in practice, for-profit businesses
                            generate most workshared mail. For-profit businesses send about three-
                            quarters of domestic mail and frequently send enough large-volume
                            mailings that meet the minimum volume requirements to qualify for
                            worksharing rates. In addition, postage costs can represent a significant
                            cost of doing business, providing an incentive for mailers to qualify for the
                            lowest possible worksharing rates. Businesses typically use worksharing to
                            send bulk mailings, including such mail as bills, statements, periodicals,
                            newsletters, advertisements, and packages. Nonprofit entities such as
                            charitable organizations and associations also generate substantial
                            quantities of workshared mail, such as mailings to raise funds, solicit
                            members, and disseminate information. In fiscal year 2002, nearly three-
                            quarters of domestic mail received worksharing rates (see fig. 5).




                            Page 17                                            GAO-03-927 Postal Worksharing Primer
Figure 5: Percentage of USPS Domestic Mail That Is Workshared and
Non-workshared




                                   26%                   Non-workshared mail



                  74%




                                                         Workshared mail
Source: Developed by GAO based on USPS mail volume data for fiscal year 2002.




Most domestic workshared mail is either (1) First-Class Mail, primarily
business correspondence, bills, advertisements, and financial statements;
or (2) Standard Mail, primarily advertisements, such as catalogs, coupons,
flyers, and solicitations (see fig. 6).




Page 18                                                                GAO-03-927 Postal Worksharing Primer
                          Figure 6: Percentage of Workshared Mail by Class

                                                                                   1%
                                                                                   Package Services

                                                                                   Periodicals
                                                       7%

                                                             34%                   First-Class Mail



                                            59%




                                                                                   Standard Mail
                          Source: Developed by GAO based on USPS mail volume data for fiscal year 2002.


                          Note: Percentages do not add to 100 percent due to rounding.


                          By way of comparison, most non-workshared mail consists of letters
                          weighing up to 1 ounce sent via First-Class Mail with 37-cent stamps. This
                          mail includes such mail as remittance mail (e.g., checks sent through the
                          mail to pay bills); a variety of business mail (e.g., individual invoices and
                          other business correspondence); and personal correspondence.



The Rationale for         USPS and PRC have said that worksharing benefits USPS, mailers and the
                          mailing industry, and the nation. First, they credit worksharing with
Worksharing Is That It    benefiting USPS, in part because it enables USPS to improve its operations
Benefits USPS, Mailers,   and thereby helps minimize its workforce and infrastructure. In addition,
                          they said worksharing benefits USPS because it stimulates mail volume
and the Nation, but       growth, which helps USPS achieve economies of scale. Historically, mail
Some Concerns Have        volume growth has been critical to USPS’s business model, which depends
Been Raised               on mail volume growth to generate more revenues to help cover rising
                          USPS costs. Second, they credit worksharing with benefiting mailers and
                          the mailing industry. With respect to mailers, USPS and PRC credit
                          worksharing with reducing the total mail-related costs for mailers who
                          workshare, helping to keep postage rates affordable for all mailers; and
                          improving the quality of delivery service. Regarding the mailing industry,




                          Page 19                                                                GAO-03-927 Postal Worksharing Primer
                          USPS and PRC credit worksharing with spurring the development of the
                          direct mail industry, as well as that of other mail-related companies that
                          perform worksharing activities, enabling more mailers to participate in
                          worksharing. Third, they credit worksharing with benefiting the nation, in
                          part by lowering business costs, and in part by creating associated benefits
                          that consumers can realize. They said consumers benefit if worksharing
                          helps keep postage rates affordable; if mailers pass along lower prices
                          when their mail-related costs are reduced by worksharing; if their
                          workshared mail is delivered in a more expeditious and reliable manner;
                          and if the mail volume growth caused by worksharing results in more mail
                          that consumers consider useful, such as business correspondence or
                          catalogs that some consumers find useful.

                          While stakeholders generally support the concept of worksharing, they
                          have raised differing concerns in this area. For example, APWU has
                          asserted that the worksharing discounts are too large and thus worsen
                          USPS’s financial situation. In contrast, some mailers and members of the
                          mailing industry have asserted that the discounts are not large enough and
                          thus improve USPS’s financial situation. Integral to stakeholder differences
                          are divergent views on technical issues relating to the data, assumptions,
                          and analyses used in rate cases to develop the estimates of the costs that
                          USPS is to avoid incurring in the test year as a result of mailer worksharing
                          activities. In this regard, stakeholders have raised issues regarding (1) the
                          quality and accuracy of the estimates of cost avoidance; (2) the extent to
                          which USPS has avoided costs as a result of worksharing activities
                          performed by mailers; and (3) whether data can be generated on what costs
                          USPS has avoided as a result of mailer worksharing activities.

                          We recognize that stakeholders have raised detailed concerns about
                          worksharing relating to technical and policy issues that are beyond the
                          scope of this report. Among other things, we plan to address other
                          stakeholder views on worksharing in our second report.



Worksharing Is Credited   According to USPS and PRC, worksharing benefits USPS by enabling it to
with Benefiting USPS      improve its operations and help minimize its workforce and infrastructure,
                          and by stimulating mail volume growth. Historically, mail volume growth
                          has been critical to USPS’s business model, which depends on mail volume
                          growth to generate more revenues, which helps cover rising USPS costs
                          and also helps USPS achieve economies of scale.




                          Page 20                                     GAO-03-927 Postal Worksharing Primer
USPS has noted that worksharing improves its financial situation, in part
by stimulating mail volume growth, and in part by enabling USPS to
operate more efficiently, thereby helping USPS control its costs. USPS has
reported that in response to worksharing discounts, mailers performed
worksharing activities that reduced USPS’s costs. In addition, USPS
reported that worksharing requirements for automation-compatible mail,
such as requirements in the areas of address quality and mail preparation,
have enabled USPS to make more effective use of its automated equipment,
thereby reducing USPS’s costs and improving service times. Further, USPS
reported that well-prepared and easy-to-process workshared mail has
furthered the cost-effective deployment of additional automated
equipment.

Specifically, USPS reported that mailer barcoding and presorting of mail
help USPS maximize the use of its automated equipment that sorts up to
34,650 letters per hour, avoiding less efficient manual sorting. Also, some
workshared mail is presented in mail trays on pallets that can be moved by
forklifts, avoiding the need for USPS employees to separately handle each
mail tray on the loading dock. USPS has estimated that the worksharing
activities performed by mailers, such as barcoding and presorting, will
reduce its costs of handling workshared letters that are compatible with its
automation equipment and are sent via First-Class Mail. USPS refers to its
estimated cost reduction from worksharing activities as “avoided costs.”
These avoided costs (see fig. 7) were estimated to result from the reduction
in USPS’s costs associated with:

• manually sorting mail (38 percent of these avoided costs);

• USPS’s allied labor activities (22 percent), which are activities
  performed by USPS employees who prepare mail for processing or
  dispatch, either on the loading dock or inside the mail processing
  facility;

• USPS automated operations (20 percent), such as reduced USPS
  automated sorting of presorted mail; and

• applying barcodes and performing associated operations on the mail (15
  percent).10



10
     See app. II for a more detailed description of the estimated avoided costs.




Page 21                                                 GAO-03-927 Postal Worksharing Primer
To put the potential for worksharing-related cost savings into context,
USPS has reported that if it can change the processing of letters or flat-
sized mail (e.g., large envelopes, catalogs, and magazines) from manual
processing to automated processing, “there are tremendous savings
opportunities.”11 According to USPS, “while only about 8 percent of the
letter mail we receive each day is processed manually, it accounts for one-
half of letter mail processing labor costs.” 12 USPS has also estimated that
the “labor processing cost” associated with manually handling letters was
about $56 per thousand letters, which was about 11 times more costly than
for automated processing.13 Thus, even a 1 percent reduction in the
percentage of mail that USPS processes manually can result in significant
savings.




11
     USPS testimony in the 2001 rate case (PRC Docket No. R2001-1, USPS-T-39).
12
 U.S. Postal Service, United States Postal Service Annual Report 2001 (Washington, D.C.:
Nov. 9, 2001).
13
 USPS submitted this estimate in the 2001 rate case based on data from a 4-week period in
the summer of 2001. See PRC Docket No. R2001-1, USPS-T-39.




Page 22                                              GAO-03-927 Postal Worksharing Primer
Figure 7: Percentage of Costs That USPS Is Estimated to Avoid Because Mailers
Perform Worksharing Activities for Automation-Compatible Letters Sent via First-
Class Mail, by Type of USPS Cost

                                                          5%
                                                          Other


                                                          Applying barcodes
                                    15%                   and associated
                                                          operations
       38%

                                    20%                   Automated operations



                        22%
                                                          Allied operations

                                                          Manual operations
Source: GAO analysis of USPS estimates for fiscal year 2003 prepared according to PRC cost methodology.


Note: See app. II for more detail on the methods and data used to develop this figure.


According to USPS and PRC, worksharing is credited with stimulating mail
volume growth over the past three decades, which has helped USPS cover
rising costs and achieve economies of scale. USPS has reported that
worksharing has been “a primary source of growth” for mail volume, and a
PRC staff analysis concluded that mail volume growth was caused by the
successive introduction of worksharing rates for different groupings of
mail and for different worksharing activities (e.g., mailers barcoding and
presorting mail).14 Over the past three decades, workshared mail has
accounted for all of the growth in domestic mail volume. As we have
reported, USPS’s business model relies on growth in mail volume to
generate revenues to help cover rising costs. Thus, since the Postal
Reorganization Act of 1970 was enacted, USPS’s business model has relied
on growth in workshared mail volume. The volume of workshared mail
increased 365 percent from fiscal years 1972 through 2002, while the
volume of non-workshared mail declined 3 percent over the same period


14
 See Robert H. Cohen, et. al., The Impact of Using Worksharing to Liberalize a Postal
Market (Washington, D.C.: February 2001).




Page 23                                                                  GAO-03-927 Postal Worksharing Primer
(see fig. 8). However, as figure 8 shows, the volume of workshared mail
declined in fiscal years 2001 and 2002, a period when USPS incurred
growing financial difficulties that included deficits of $1.7 billion and
$676 million, respectively; a freeze on most capital investments in USPS
facilities; and rising USPS debt.

Looking back over USPS’s history, when mail volume has grown, USPS
could realize greater economies of scale, because the additional
worksharing mail revenues exceeded the marginal costs of delivering the
additional volumes of workshared mail. In fiscal year 2002, USPS employed
a letter carrier workforce of about 351,000 full-time and part-time
employees who serviced a delivery network of 139 million addresses that
operated 6 days each week. USPS’s delivery network has considerable
fixed costs. For this reason, USPS can become more efficient when the
volume of workshared mail increases and USPS realizes the associated
economies of scale. Per-piece delivery costs can go down as USPS letter
carriers deliver more mail to each address. For example, USPS can deliver
mail less expensively, per piece, if a USPS letter carrier delivers a full bag of
mail that includes the additional workshared mail volumes rather than a
bag of mail that would be partially full if the additional workshared mail
volumes were not included.




Page 24                                       GAO-03-927 Postal Worksharing Primer
Figure 8: Domestic Mail Volume from Fiscal Years 1972 through 2002

Mail volume (billions)
250




                                           Inception of USPS
200
                                           worksharing program
                                           as it is known today




150




                                                                                       Workshared mail
100




 50


                                                                                     Non-workshared mail




  0
    72



              74



                           76



                                     78



                                                   80



                                                          82



                                                                  84



                                                                            86



                                                                                      88



                                                                                               90



                                                                                                        92



                                                                                                                  94



                                                                                                                            96



                                                                                                                                     98



                                                                                                                                               00



                                                                                                                                                        02
  19



            19



                         19



                                   19



                                                 19



                                                        19



                                                                19



                                                                          19



                                                                                    19



                                                                                             19



                                                                                                      19



                                                                                                                19



                                                                                                                          19



                                                                                                                                   19



                                                                                                                                             20



                                                                                                                                                      20




  Fiscal year


  Source: Developed by GAO based on USPS data.


                                                         Note: Workshared mail receives a lower rate due to mailer activities, such as mail preparation,
                                                         barcoding, presorting, and destination entry. Worksharing rates for presorted First-Class Mail were
                                                         implemented in fiscal year 1976. The implementation of the first worksharing discount for presorted
                                                         First-Class Mail marked the inception of USPS's worksharing program as it is known today. GAO
                                                         counted most Standard Mail and Periodicals volume as workshared since fiscal year 1971 in that
                                                         USPS required presorting of this mail by ZIP Code, and the effect of this presorting on USPS’s costs
                                                         was one of several factors used to help establish rates for this mail.




                                                         Page 25                                                  GAO-03-927 Postal Worksharing Primer
A key reason that worksharing contributed to mail volume growth is that
mail volume has been sensitive to mailing costs. When worksharing
reduced mailing costs, mailers expanded their use of the mail, such as by
sending more catalogs and other advertisements to potential customers.
Thus, worksharing helped mail compete with other communication and
delivery alternatives. For example, some advertisements can be delivered
either as mail or as newspaper inserts, or they can be delivered via other
media. Also, packages can be delivered by USPS or private delivery
companies such as United Parcel Service or FedEx.

The introduction of worksharing rates for First-Class Mail, Standard Mail,
and Parcel Post reportedly stimulated growth in their mail volumes.
Statistical studies have shown that worksharing discounts resulted in
volume growth for these types of mail, in part because price increases were
kept smaller than they otherwise would have been. For example, First-
Class Mail volume growth increased after the introduction of presorting
and barcoding discounts. Further, Standard Mail growth accelerated after
the successive introduction of various presorting, barcoding, and
destination entry discounts. Standard Mail worksharing rates were the
“catalyst for increasing volumes,” according to the PRC staff analysis.

Similarly, the introduction of destination entry rates for workshared Parcel
Post mail in fiscal year 1991 reinvigorated mail volume growth for Parcel
Post. Specifically, Parcel Post volume, which had declined from 498 million
pieces in fiscal year 1972 to 128 million pieces in fiscal year 1990, increased
to 373 million pieces in fiscal year 2002. Parcel Post became “a much more
competitive product,” according to the PRC staff analysis. The growth in
Parcel Post volume generated additional USPS revenue, as well as
additional contribution to USPS’s institutional costs, even after taking into
account USPS’s costs associated with the additional Parcel Post volume.

After the introduction of destination entry discounts for Parcel Post,
companies called consolidators emerged to collect Parcel Post mail from
multiple mailers, sort their mail, and transport it to USPS’s destinating
facilities. By combining mail from multiple mailers into larger mailings,
these consolidators can qualify the mail for lower worksharing rates. Most
Parcel Post items are being entered at destinating mail processing facilities,
thus reducing “upstream” USPS handling of the parcels at USPS’s
originating mail processing facilities. This has enabled what is often
referred to as a partnership between USPS and the private sector to
provide the complementary set of activities needed to prepare, barcode,
sort, transport, and deliver Parcel Post mail.



Page 26                                      GAO-03-927 Postal Worksharing Primer
According to USPS and PRC, the growth in workshared mail volume over
the years has generated additional postage revenue to help cover rising
USPS costs. These costs include the attributable costs for USPS to process
and deliver the mail—that is, the direct and indirect costs that can be
attributed to particular groupings of mail—as well as institutional costs,
which are costs that are not attributed and are also referred to as common
or overhead costs. Institutional costs include fixed costs associated with
maintaining a national network of post offices and 6-day delivery of mail
and common costs, which are not identified with individual classes of mail.
Institutional costs represent more than one-third of all USPS costs and, like
attributable costs, have increased over time as the compensation and
benefits of USPS employees have increased and other costs have risen,
including the costs of financing universally available postal services
through an expanding delivery network.

As workshared mail volume has grown, it has accounted for a growing
share of domestic mail revenues.15 In fiscal year 2002, workshared mail
accounted for 52 percent of USPS domestic mail revenues (see fig. 9).



Figure 9: Share of Domestic Mail Revenue Generated by Workshared and
Non-workshared Mail in Fiscal Year 2002




       52%
                                  48%                  Non-workshared mail




                                                       Workshared mail
Source: Developed by GAO based on USPS mail revenue data.




15
   Domestic mail generated nearly all (94 percent) of the contribution toward USPS
institutional costs in fiscal year 2002.




Page 27                                                         GAO-03-927 Postal Worksharing Primer
Further, as workshared mail revenues have grown, these revenues have
accounted for an increasing proportion of the domestic mail revenues that
exceed the attributable costs of domestic mail and thus are applied to help
cover USPS institutional costs. In fiscal year 2002, workshared mail
accounted for 58 percent of domestic mail revenues that USPS applied to
help cover its institutional costs (see fig. 10).



Figure 10: Percentage of Domestic Mail Revenues Applied to Help Cover USPS
Institutional Costs That Were Generated by Workshared and Non-workshared Mail in
Fiscal Year 2002




       58%
                                  42%                  Non-workshared mail




                                                       Workshared mail
Source: Developed by GAO based on USPS data prepared according to PRC cost methodology.


Note: PRC cost methodology is somewhat different from USPS methodology and results in the
attribution of a somewhat greater proportion of USPS costs.


First-Class Mail is a particularly important category with respect to USPS
institutional costs because it has historically covered most of these costs.
Workshared First-Class Mail accounts for a growing proportion of all First-
Class Mail volume; revenues; and revenues applied to help cover
institutional costs, also referred to as the “contribution to institutional
costs.”16 By fiscal year 2002, workshared First-Class Mail represented 50
percent of First-Class Mail volume, 39 percent of First-Class Mail revenues,


16
 Most workshared rate reductions for First-Class Mail are based on selected cost
differences between workshared mail and bulk metered mail, which is non-workshared
First-Class Mail that does not receive a worksharing discount, is provided to USPS in bulk
quantities, and has postage applied by a postage meter.




Page 28                                                              GAO-03-927 Postal Worksharing Primer
and 52 percent of First-Class Mail contribution to institutional costs.
Workshared First-Class Mail was slightly more profitable, per piece, than
non-workshared First-Class Mail. In fiscal year 2002, USPS data compiled
according to PRC methodology showed that the average piece of
workshared First-Class Mail accounted for slightly more institutional
contribution per piece than non-workshared First-Class Mail (see fig 11).
The workshared mail was also less costly per piece for USPS to handle than
non-workshared First-Class Mail. For example, some non-workshared mail
had handwritten addresses, a portion of which could not be barcoded,
necessitating costly manual sorting by USPS employees instead of sorting
by USPS automated equipment. Other non-workshared mail had
typewritten addresses but could not be sorted by USPS automated
equipment for a variety of reasons. For example, typewritten mail cannot
be barcoded in some cases if the address is incomplete, such as missing the
street directional (e.g., North, South), or a street suffix (e.g., St, Rd, Dr).

In total, workshared First-Class Mail accounted for $9.0 billion in
contribution to cover institutional costs in fiscal year 2002, compared with
$8.4 billion for non-workshared First-Class Mail. Aside from First-Class
Mail, Standard Mail—virtually all of which has been workshared—
accounted for most domestic mail revenues and most of the contribution to
institutional costs. In fiscal year 2002, Standard Mail accounted for
$5.1 billion in contribution to institutional costs.




Page 29                                      GAO-03-927 Postal Worksharing Primer
Figure 11: Financial Data for Workshared and Non-workshared First-Class Mail in
Fiscal Year 2002
Cents per piece
50     42.5

45

40

35                    28.2
                                    26.5
30

25                                                                     17.6
                                                                16.0
20
                                                 10.6
15

10

 5

 0
        Revenue per piece          Attributable cost       Contribution per piece
                                       per piece


                  Non-workshared First-Class Mail

                  Workshared First-Class Mail

Source: USPS data prepared according to PRC cost methodology.


Note: PRC cost methodology is somewhat different from USPS methodology and results in the
attribution of a somewhat greater proportion of USPS costs. Contribution per piece is the amount by
which revenue per piece exceeds attributable cost per piece, which USPS applies as contribution to
help cover USPS institutional costs.


According to USPS and PRC, worksharing is also credited with having
important effects on USPS’s infrastructure and workforce. USPS and PRC
officials have noted that USPS requirements for the preparation of
workshared mail furthered USPS investments in automated equipment to
handle workshared mail efficiently, which meant that the combination of
worksharing and automation helped USPS handle mail in a more efficient
manner. For example, increased worksharing incentives were introduced
for mailers to barcode letter mail and perform other activities to make it
automation compatible when USPS was making major investments in
automated equipment that sorts mail by reading barcodes. These
worksharing incentives led to a sharp increase in the proportion of



Page 30                                                                GAO-03-927 Postal Worksharing Primer
                          automation-compatible letter mail with mailer-applied barcodes, which is
                          considered to have reduced the proportion of mail that USPS employees
                          manually sort.

                          According to USPS, worksharing has significantly reduced USPS
                          compensation costs and the size of the USPS workforce needed to process
                          and handle mail. A 2001 PRC staff study stated that USPS would have
                          required a much larger workforce than it currently has if USPS had to
                          perform all of the worksharing tasks performed by the private sector. The
                          study concluded that worksharing has reduced USPS’s size and likely made
                          USPS more efficient and less difficult to manage. Looking ahead, USPS
                          plans to expand automated sorting of flat-sized mail, such as large
                          envelopes, catalogs, and magazines, which is intended to reduce the need
                          for USPS employees to sort this mail manually and help USPS reduce the
                          cost of sorting flat-sized mail. If new USPS automated equipment is
                          deployed, USPS would be expected to propose modified worksharing
                          requirements for flat-sized mail so that it will be compatible with the new
                          automation equipment.



Worksharing Is Credited   USPS and PRC credit worksharing with benefiting mailers by reducing
with Benefiting Mailers   their total mail-related costs—that is, the cost to the mailer to generate
                          mail pieces and pay the postage costs. The underlying rationale is as
                          follows:

                          • When mailers obtain lower worksharing rates, their postage costs are
                            reduced.

                          • Mailers’ postage savings are partly offset by their costs of performing
                            worksharing activities. However, mailers have an economic incentive to
                            perform worksharing activities when they realize a net savings—that is,
                            the difference between their reduced postage costs and their increased
                            costs associated with performing worksharing activities.

                          In addition to economic incentives, worksharing is credited by USPS and
                          PRC with helping keep postage rates affordable for all mailers. By
                          stimulating mail volume growth, worksharing has increased the volume of
                          mail that generates revenues that exceed attributable costs and thus helps
                          cover USPS’s institutional costs. Further, according to USPS, worksharing
                          has improved the implementation of its automation program and thereby
                          improved mail processing and handling generally. Specifically, USPS stated
                          that because worksharing of bulk mail facilitated the use and further



                          Page 31                                     GAO-03-927 Postal Worksharing Primer
                             installation of automation equipment, it reduced USPS’s costs and kept rate
                             increases to a minimum for all mailers, including individuals mailing single
                             pieces of mail like the proverbial Aunt Minnie.

                             Similarly, USPS has reported that worksharing has improved the speed of
                             delivery by helping facilitate the implementation of USPS’s automation
                             program and handling of mail generally. In some cases, mailers reportedly
                             perform worksharing primarily to improve the speed of delivery, such as
                             performing destination entry for periodicals. Other mailers reportedly
                             perform destination entry of packages to improve their speed of delivery
                             and narrow the window when delivery will occur.

                             According to USPS and PRC, worksharing rates were the catalyst for the
                             development of a $900 billion mailing industry that includes USPS;
                             providers of mailing services that do worksharing tasks for mailers; and
                             companies that depend on the mail for service fulfillment, customer
                             acquisition, or customer retention, such as catalog companies, printers,
                             and magazine publishers. Worksharing has enabled the mailing industry to
                             perform tasks that USPS once performed exclusively, particularly in the
                             areas of mail preparation, presorting, and transportation. The mailing
                             industry, including USPS, employed nearly 9 million workers in 2001.17
                             Some of the companies that provide mail services are known as
                             consolidators because they combine letter mail, flat-sized mail, or parcels
                             from many mailers in order to achieve sufficient mail volumes to qualify for
                             the lowest possible worksharing rates.



Worksharing Is Credited      According to USPS and PRC, worksharing benefits the nation, in part by
with Benefiting the Nation   lowering business costs, and in part by creating associated benefits that
                             consumers can realize. USPS and PRC have concluded that total mail-
                             related costs to the economy—including costs to mailers and to USPS—are
                             reduced by worksharing. Their rationale is that some postal activities can
                             be performed less expensively by mailers who workshare than by USPS,
                             which lowers the total costs of mail. For example:

                             • Many worksharing mailers can organize mail by ZIP Code more
                               inexpensively than USPS. Mailers can prepare workshared mail by using


                             17
                              Estimated mailing industry revenues and employment were provided in Seizing
                             Opportunity: The Report of the 2001 Mailing Industry Taskforce, Oct. 15, 2001,
                             www.usps.com/strategicdirection/mitf.htm.




                             Page 32                                           GAO-03-927 Postal Worksharing Primer
   their computers to presort their mailing lists in ZIP Code order and then
   sequentially printing the addresses on each letter.

• Many worksharing mailers can use computers to barcode letters and
  print the barcodes on the letters. In comparison, when USPS processes
  non-barcoded mail, its automated equipment attempts to read the
  address and print a barcode. When these attempts are unsuccessful,
  USPS employees become involved in attempting to read the address and
  apply a barcode, and if a barcode cannot be applied, the mail is manually
  sorted.

Worksharing rates are designed to create incentives for the lowest-cost
provider to perform certain postal activities, which can be either the mailer
performing worksharing activities or USPS performing additional activities
when mailers do not workshare. The USPS and PRC rationale is as follows:

• When postage rates are set, estimates are prepared of the costs that
  USPS is to avoid incurring as a result of the mailers’ worksharing
  activities.

• PRC has a guideline for recommending worksharing discounts so that,
  as a result, the estimated reduction in USPS revenues will equal the
  estimated reduction in USPS costs. This outcome is often referred to as
  “100 percent passthrough” of the expected USPS savings to the mailer.
  That is, the full amount of whatever USPS is expected to save will be
  passed along to the mailer via the worksharing discount.

• Worksharing discounts with 100 percent passthrough create an
  incentive for the lowest-cost provider to do the work. This is because
  mailers have an incentive to workshare when they save money—which
  happens in this case when the full amount of whatever USPS is expected
  to save will be passed along to the mailers, and will be enough to fully
  offset the mailers’ cost of performing the worksharing activities.

• Worksharing discounts with less than 100 percent passthrough can still
  create an incentive for the lowest-cost provider to do the work. This is
  because some mailers would still have an incentive to save money by
  worksharing. In this case, the portion of the USPS savings passed along
  to the mailers would still be enough to fully offset some mailers’
  worksharing costs. However, some lowest-cost providers may not have
  an incentive to workshare because the portion of expected USPS




Page 33                                    GAO-03-927 Postal Worksharing Primer
                           savings passed along to mailers would not be sufficient to fully offset
                           the mailers’ worksharing costs.

                        • Worksharing discounts with greater than 100 percent passthrough can
                          create incentives for some highest-cost providers to do the work. In this
                          case, some mailers could be the highest-cost providers that have
                          worksharing costs covered only because USPS passed along more than
                          its expected savings. Moreover, mailers who are lowest-cost providers
                          would also have an incentive to workshare.

                        When the lowest-cost provider performs postal activities, the total cost of
                        mail is reduced. This can reduce the cost of doing business. The economy
                        benefits when the cost of doing business is reduced, whether that entails
                        the cost of sending out bills for merchandise and services rendered or
                        sending out advertisements to generate business. In other words, according
                        to PRC staff, reducing the cost of doing business “increases the economic
                        welfare of the nation.”

                        Consumers may benefit in several ways from USPS’s worksharing program.
                        First, consumers benefit if, as previously discussed, worksharing helps
                        keep postage rates affordable for all mailers. Second, consumers benefit to
                        the extent that lower mail costs are passed along in the form of lower
                        prices for merchandise and services. Third, consumers benefit if their
                        workshared mail is delivered in a more expeditious and reliable manner, as
                        previously discussed. Fourth, consumers benefit if lower mail costs result
                        in more workshared mail, to the extent that this increased mail volume
                        contains information that is useful to the consumer. For example,
                        additional workshared mail could include business correspondence,
                        periodicals, and newsletters that some consumers find useful; catalogs that
                        some consumers respond to; or workshared packages that USPS delivers
                        to consumers at their request.



Stakeholders Support    A broad array of postal stakeholders generally express support for the
Worksharing but Raise   concept of worksharing—that is, they express support for the concept that
                        mailers should receive worksharing discounts in exchange for performing
Concerns in this Area
                        worksharing activities that lower USPS’s costs. However, stakeholders
                        have raised differing concerns in the worksharing area. APWU has
                        generally criticized the worksharing program, while some members of the
                        mailing industry have made diametrically opposing criticisms. For
                        example, APWU has asserted that worksharing discounts are too large, but
                        some members of the mailing industry have asserted that worksharing



                        Page 34                                    GAO-03-927 Postal Worksharing Primer
discounts are not large enough (see table 3). APWU believes that
worksharing has eroded USPS’s financial position, thus threatening its
ability to support universal postal service. However, some members of the
mailing industry, USPS, and PRC disagree with APWU’s assertions. Integral
to stakeholder differences are divergent views regarding technical issues
relating to the data, assumptions, and analyses used in rate cases to
estimate the costs that USPS is to avoid incurring in the test year as a result
of mailer worksharing activities. Such cost avoidance estimates affect the
size of worksharing discounts that are established for reasons previously
described in this report. Further, stakeholders have raised issues regarding
(1) the quality and accuracy of the estimates of cost avoidance; (2) the
extent to which USPS has avoided costs as a result of worksharing
activities performed by mailers; and (3) whether data can be generated on
what costs USPS has avoided as a result of mailer worksharing activities.




Page 35                                      GAO-03-927 Postal Worksharing Primer
                        Table 3: Highlights of Opposing Views on Worksharing

                        Key aspects of                                                                      Views of some mailing
                        worksharing                                APWU views                               industry membersa
                        USPS cost savings caused                   Worksharing that mailers                 Worksharing that mailers
                        by worksharing discounts                   perform saves USPS less                  perform saves USPS more
                                                                   than the reduction in USPS               than the reduction in USPS
                                                                   revenues from the                        revenues from the
                                                                   discounted mail.                         discounted mail.
                        Effect on USPS financial                   Worksharing discounts                    Worksharing discounts
                        position                                   worsen USPS’s financial                  improve USPS’s financial
                                                                   position, thus threatening its           position, thus improving its
                                                                   ability to finance universal             ability to finance universal
                                                                   postal service.                          postal service.
                        Size of worksharing                        Worksharing discounts are                Worksharing discounts are
                        discounts                                  too large.                               not large enough.
                        USPS role vis-à-vis the                    Due to worksharing                       Due to worksharing
                        private sector                             discounts that are too large,            discounts that are not large
                                                                   the mailing industry                     enough, the mailing industry
                                                                   performs too many postal                 performs too few postal
                                                                   activities.                              activities.
                        Establishing worksharing                   Worksharing discounts                    Worksharing discounts
                        discounts                                  should never be established              should usually not be
                                                                   when the estimated                       established when the
                                                                   reduction in USPS revenues               estimated reduction in
                                                                   exceeds the estimated                    USPS revenues exceeds the
                                                                   reduction in its costs.                  estimated reduction in its
                                                                                                            costs, but some exceptions
                                                                                                            can be justified.
                        Source: Developed by GAO based on publicly available information as of June 2003.
                        a
                         The views in this table were expressed by some members of the mailing industry, such as mailing
                        groups, individual mailers, and companies that perform worksharing activities for mailers.




The Legal Basis for     The primary legal basis for worksharing rates is derived from one of the
                        nine factors cited in the Postal Reorganization Act of 1970 that PRC must
Worksharing Rates Is    consider in recommending changes to domestic postage rates proposed by
Derived from Title 39   USPS. Specifically, the act requires that, in recommending changes to
                        postage rates, PRC consider nine factors, including “the degree of
and Is Implemented      preparation of mail for delivery into the postal system performed by the
through Postal Rate     mailer and its effect upon reducing costs to USPS.”18 The nine factors that
Cases and Regulations
                        18
                             39 U.S.C. §3622(b)(6).




                        Page 36                                                                   GAO-03-927 Postal Worksharing Primer
PRC must consider when recommending domestic postage rates and fees
are as follows:

• the establishment and maintenance of a fair and equitable schedule;

• the value of mail service actually provided each class of mail or type of
  mail service to both the sender and the recipient, including, but not
  limited to, the collection, mode of transportation, and priority of
  delivery;

• the requirement that each class of mail or type of mail service bear the
  direct and indirect postal costs attributable to that class or type plus
  that portion of all other costs of USPS reasonably assignable to such
  class or type;

• the effect of rate increases upon the general public, business mail users,
  and enterprises in the private sector of the economy engaged in the
  delivery of mail matter other than letters;

• the available alternative means of sending and receiving letters and
  other mail matter at reasonable costs;

• the degree of preparation of mail for delivery into the postal system
  performed by the mailer and its effect upon reducing costs to USPS;

• simplicity of structure for the entire schedule and simple, identifiable
  relationships between the rates or fees charged the various classes of
  mail for postal services;

• the educational, cultural, scientific, and informational value to the
  recipient of mail matter; and

• such other factors as PRC deems appropriate.19

By way of background, presorting of Standard Mail and periodicals by ZIP
Code was required before the 1970 act reorganized the U.S. Post Office
Department into USPS. In the first rate case under the 1970 act, PRC cited
this presorting requirement, and the statutory factor regarding the degree
of mail preparation and its effect on reducing USPS’s costs (39 U.S.C.


19
     39 U.S.C. 3622(b).




Page 37                                    GAO-03-927 Postal Worksharing Primer
3622(b)(6)), in its 1972 recommended decision on postage rates, as one of
several reasons for recommending lower rates for Standard Mail and
Periodicals.20 In 1976, a unanimous settlement was reached in a
reclassification case that recognized the first specific worksharing
discount—a 1-cent discount for presorting First-Class Mail by ZIP Code.21
The implementation of the first worksharing discount for presorted
First-Class Mail marked the inception of USPS's worksharing program as it
is known today. Subsequent rate cases have expanded worksharing rates to
cover most types of mail (see table 4).




20
     PRC Docket No. R71-1.
21
 PRC Docket No. MC73-1. A reclassification case can alter both domestic mail
classifications (i.e., the listing that classifies domestic mail into mail classes, subclasses, and
rate categories within subclasses) and the rates applicable to these classifications.




Page 38                                                 GAO-03-927 Postal Worksharing Primer
Table 4: Selected USPS Worksharing Rates Adopted from Fiscal Years 1976 through
2002

Type of workshared mail                                                         Effective date
Presorted First-Class Mail                                                      1976
Presorted Periodicals                                                           1978
Presorted Carrier Route Standard Maila                                          1979
Destination entry of Periodicals                                                1985
Barcoded letters sent via First-Class Mail                                      1988
Barcoded letters sent via Standard Mail                                         1988
Destination entry of Standard Mail letters                                      1991
                              b
Saturation Standard Mail                                                        1991
Barcoded Periodicals                                                            1991
Destination entry of Standard Mail                                              1991
Destination entry of Parcel Postc                                               1991
                        d
Barcoded flat-sized First-Class Mail                                            1992
Barcoded flat-sized Standard Mail                                               1992
Barcoded flat-sized Periodicals                                                 1992
Barcoded Parcel Post                                                            1999
                                     e
Periodicals prepared on pallets                                                 2002
Source: USPS and PRC.

Note: Workshared mail receives a lower rate due to such mailer activities as mail preparation,
presorting, barcoding, and destination entry. Worksharing rates for First-Class Mail were introduced in
fiscal year 1976.
a
 Carrier Route Standard Mail is organized according to letter carrier routes and must meet other
worksharing requirements.
b
 Saturation Standard Mail is delivered to a minimum percentage of the addresses on a mail delivery
route.
c
 Parcel Post generally consists of packages containing merchandise.
d
    Flat-sized mail includes items such as large envelopes, catalogs, newsletters, and magazines.
e
Pallets are reusable platforms on which mail is stacked to be moved as a single unit, such as being
moved by a forklift.


In addition to the nine factors listed previously, the law specifies that PRC
is required to make a recommended decision on domestic postage rates
and fees in accordance with the policies of Title 39 of the U.S. Code, which
defines policies for USPS.22 When considering the relevance of Title 39
policies to PRC recommendations on worksharing rates, it is important to

22
     39 U.S.C. §3622.




Page 39                                                     GAO-03-927 Postal Worksharing Primer
keep in mind that these rates represent most of USPS’s entire rate structure
and generate 74 percent of its domestic mail volume and 52 percent of its
domestic mail revenues. Key Title 39 policies include the following:

• USPS shall have as its basic function the obligation to provide postal
  services to bind the nation together through the personal, educational,
  literary, and business correspondence of the people. To this end, USPS
  shall provide prompt, reliable, and efficient postal services to patrons in
  all areas.23

• USPS shall plan, develop, promote, and provide adequate and efficient
  postal services at fair and reasonable rates and fees. To this end, USPS
  has the responsibility to maintain an efficient national system of
  collecting, sorting, and delivering the mail, and to provide types of mail
  service to meet the needs of different groupings of mail and mail users.
  However, USPS shall not, except as specifically authorized in Title 39,
  make any undue or unreasonable discrimination among users of the
  mails, nor shall it grant any undue or unreasonable preferences to any
  such user.24

• Postage rates and fees shall be reasonable and equitable and sufficient
  to enable USPS under honest, efficient, and economical management to
  maintain and continue the development of postal services of the kind
  and quality adapted to the needs of the United States. To this end,
  postage rates and fees shall provide sufficient revenues so that the total
  estimated income and appropriations to USPS will equal as nearly as
  practicable total estimated costs of USPS.25

• USPS shall promote modern and efficient operations. USPS should
  refrain from expending any funds, engaging in any practice, or entering
  into any agreement or contract (other than an employee-management
  agreement or contract between USPS and a labor union representing
  postal employees) that restricts the use of new equipment or devices
  that may reduce the cost or improve the quality of postal services,


23
     39 U.S.C. §101(a).
24
     39 U.S.C. §403.
25
 39 U.S.C. §3621. This has been interpreted to mandate that (1) in a rate case, PRC will
recommend domestic postage rates that are estimated to generate USPS revenues equal to
USPS costs in the test year, and (2) USPS should break even over time.




Page 40                                           GAO-03-927 Postal Worksharing Primer
       except where such restriction is necessary to ensure safe and healthful
       employment conditions.26

Worksharing rates and classifications are implemented through federal
regulations issued and updated by PRC and USPS. After each rate and
classification case is completed, PRC updates the Domestic Mail
Classification Schedule to be consistent with the outcome of the case. This
schedule is incorporated into the Code of Federal Regulations and lists the
terms and conditions for domestic mail classes, subclasses, and rate
categories as well as for domestic special services, such as post office
boxes, registered mail, and certified mail.27 Also, after each rate and
classification case, USPS updates its Domestic Mail Manual, which is also
incorporated into the Code of Federal Regulations, to include the
worksharing rates for each specific type of workshared mail as well as the
corresponding worksharing requirements.28

Worksharing rates have been considered in successive postal rate cases—
proceedings in which PRC considers USPS proposals for changing postage
rates—dating back to the 1970s. These proceedings have established
precedents that have further clarified the legal basis for worksharing rates.
Over the years, the structure of worksharing rates has evolved. For
example, in a 1995 reclassification case, USPS proposed and PRC
recommended numerous changes to workshared rates that were intended
to provide greater incentives for mailers to barcode their workshared mail,
among other things. In addition, PRC also recommended some changes to
the structure of workshared mail classifications, such as adding a new
subclass to Standard Mail called the Enhanced Carrier Route subclass. This
subclass was distinguished from other types of Standard Mail in that
minimum volume requirements apply for each carrier route as well as
requirements for including mail preparation, barcoding, and presorting,
among other things. Enhanced Carrier Route mail receives lower rates in
part because of the estimated cost savings to USPS from worksharing.




26
     39 U.S.C. §2010.
27
     Appendix A to Subpart C of 39 C.F.R. Part 3001, following 39 C.F.R. §3001.68.
28
     39 C.F.R. §111.1.




Page 41                                                 GAO-03-927 Postal Worksharing Primer
Niche Classifications and   On a related matter, there has been long-standing and continuing debate
Negotiated Service          over whether certain types of postage rates can be offered within existing
                            law and, if so, under what circumstances. Recent debate has focused on
Agreements Also Provide     rate arrangements with reduced rates agreed to by USPS and individual
Lower Rates                 mailers that were intended to enable USPS to reduce its costs. In February
                            2002, PRC reported to Congress that rate and service adjustments agreed
                            upon by USPS and individual mailers would be legally authorized if certain
                            conditions are met, notably that the proposed agreement is submitted to
                            PRC for prior review, be made available to other mailers willing to meet the
                            same terms of service, and work to the mutual benefit of mail users and the
                            postal system as a whole.29 PRC noted that USPS had proposed and PRC
                            had subsequently recommended some “niche classifications” that were
                            specialized classifications that included reduced, but cost-justified, rates or
                            fees. Niche classifications make lower rates available to all mailers when
                            they perform the required activities and meet other requirements of the
                            niche classification. However, as a practical matter, these requirements
                            may be tailored in a way that means few mailers would generate mail that
                            would qualify for inclusion in the niche classification.

                            Recently, USPS proposed and PRC subsequently recommended a
                            negotiated service agreement (NSA) between USPS and Capital One
                            Services, Inc., the nation’s largest-volume mailer of First-Class Mail, on a 3-
                            year contractual basis. According to PRC, “negotiated service agreements
                            are targeted pricing initiatives designed to encourage greater efficiencies
                            and to take advantage of the Postal Service's existing pricing flexibility.”
                            USPS noted that “NSAs, generally, specify mutual agreements between the
                            Postal Service and customers involving the preparation, presentation,
                            acceptance, processing, transportation and delivery of mailings under
                            particular rate, classification and service conditions and restrictions that
                            go beyond those required of other mailers.” This was the first time that
                            USPS proposed and PRC recommended an NSA covering domestic mail.
                            USPS hopes to reinvigorate mail volume growth through this and other yet-
                            to-be proposed NSAs and also to reduce its costs through NSA
                            requirements applying to qualifying mailers.




                            29
                             U.S. Postal Rate Commission, Report to the Congress: Authority of the United States
                            Postal Service to Introduce New Products and Services and to Enter Into Rate and Service
                            Agreements With Individual Customers Or Groups of Customers, (Washington, D.C.:
                            Feb. 11, 2002).




                            Page 42                                           GAO-03-927 Postal Worksharing Primer
                      The Capital One NSA, which USPS’s Governors approved in June 2003,
                      specifies that Capital One is to receive lower rates for bulk First-Class Mail
                      exceeding 1.225 billion pieces of mail annually in each of the next 3 years,
                      with rate discounts increasing from 3 to 6 cents as volumes increase above
                      the annual threshold. During this period, USPS will electronically provide
                      Capital One with information about its undeliverable First-Class Mail
                      solicitations instead of physically returning the mail to Capital One. USPS
                      has stated that this change will result in USPS cost savings, estimating that
                      it will avoid returning approximately 80 million mail pieces per year to
                      Capital One during the term of the NSA. In addition, under the NSA
                      agreement, Capital One has agreed to practices intended to produce
                      accurate address lists, which relate to minimizing the quantity of
                      undeliverable and forwarded mail that USPS must handle.30 Another
                      provision of the NSA specifies that the total amount of the discounts is
                      limited to $40.6 million over the NSA’s 3-year term. This limit is intended to
                      reduce the risk that the NSA discounts could reduce USPS revenues more
                      than the costs that USPS avoids as a result of the NSA.



Agency Comments and   We received written comments on a draft of this report from the Chairman
                      of the Postal Rate Commission dated July 15, 2003, and the Chief Marketing
Our Evaluation        Officer and Senior Vice President of the Postal Service dated July 16, 2003.
                      The USPS and PRC comments are summarized below and reprinted in
                      appendices III and IV, respectively. In addition, PRC and USPS officials
                      provided technical and clarifying comments. All technical and clarifying
                      comments were incorporated where appropriate.

                      The Chairman commented that worksharing rates “have provided major
                      impetus for improved productive efficiency in postal services and
                      stimulated the mail volume growth that has had the effect of moderating
                      rate increases for all mail classes and services.” He stated that the
                      approach used to develop worksharing rates means that to the extent
                      practicable, the rates paid by mailers who do not participate in
                      worksharing do not have to increase because worksharing discounts are
                      approved. He also commented that our draft report accurately describes
                      the types of worksharing rates currently available to mailers and fairly


                      30
                       Capital One agreed to continue its practice of checking its mailing lists against USPS’s
                      National Change of Address database more frequently than is typically required. Capital One
                      also agreed to incorporate information from USPS address correction service notifications
                      within 2 days of receipt. See PRC Docket No. MC2002-2.




                      Page 43                                            GAO-03-927 Postal Worksharing Primer
characterizes the major policy reasons justifying current workshare
programs.

The Chief Marking Officer and Senior Vice President commented that USPS
believes that, overall, worksharing benefits USPS, the mailers, and the
entire economy. She stated that worksharing enhances efficient postal
operations and stimulates mail growth and revenue for USPS; reduces
overall mailer costs and has encouraged development of the presort and
direct mail industries; and “benefits the entire economy, because reduced
mailing costs increase productivity and efficiency.” She also commented
that our draft report appeared to define the scope of worksharing in a
slightly different manner than USPS does, and that, within this definition,
we seemed to encompass all of the rates within all of the bulk mail classes
as well as some NSAs and niche classifications. We clarified our report to
address USPS’s comments.


We are sending copies of this report to the Chairmen of the House
Committee on Government Reform and its Subcommittee on Civil Service
and Agency Reorganization; the Chairman and Ranking Minority Member
of the Senate Committee on Governmental Affairs; the Chairman of its
Subcommittee on Financial Management, the Budget, and International
Security; the Postmaster General; the Chairman of the Postal Rate
Commission; and other interested parties. Copies will be made available to
others on request. In addition, this report will also be available on our Web
site at http://www.gao.gov.

Key contributors to this report are listed in appendix V. If you or your staffs
have any questions about this letter or the appendixes, please contact me at
(202) 512-2834 or at ungarb@gao.gov.




Bernard L. Ungar
Director, Physical Infrastructure Issues




Page 44                                      GAO-03-927 Postal Worksharing Primer
Appendix I

Objectives, Scope, and Methodology                                                           AA
                                                                                              ppp
                                                                                                ep
                                                                                                 ned
                                                                                                   n
                                                                                                   x
                                                                                                   id
                                                                                                    e
                                                                                                    x
                                                                                                    Iis




              Our objectives for this report were to provide summary information on the
              following questions: (1) What are the key activities included in postal
              worksharing? (2) What is the rationale for worksharing, according to the
              U.S. Postal Service (USPS) and the Postal Rate Commission (PRC), the
              independent federal establishment that reviews USPS proposals for
              changes in domestic postage rates? and (3) What is the legal basis for
              establishing worksharing rates?

              To address these objectives, we reviewed documentation of federal laws
              and regulations pertinent to worksharing, including USPS and PRC
              regulations; USPS requirements for mailer worksharing activities, such as
              USPS publications describing these requirements; and documentation of
              worksharing matters addressed in rate cases, based on publicly available
              information filed in postal rate cases. The information documented, among
              other things, USPS proposals for new worksharing rates, PRC
              recommended decisions, and USPS responses to these recommended
              decisions.

              We reviewed USPS data on workshared mail that had been filed with PRC,
              such as trend data on the volumes of different types of mail. We compiled
              the total volumes of workshared mail on the basis of these data. Other data
              covered workshared mail revenues and the contribution that workshared
              mail has made to help cover USPS’s institutional costs. We compiled data
              on the estimated USPS savings from mailer worksharing activities for
              automation-compatible letters sent via First-Class Mail, using the same
              methodology used by PRC in the 2000 rate case—the most recent rate case
              in which PRC recommended a methodology for making such projections.
              We did not independently assess or verify any of the data to determine their
              accuracy, nor did we assess or evaluate differences between PRC and USPS
              costing methodologies.

              To obtain a better understanding of how USPS processes workshared mail,
              we visited USPS mail processing facilities in Orlando and Tampa, Florida,
              and Baltimore and Gaithersburg, Maryland, to observe how USPS
              processes workshared mail. These facilities were judgmentally selected on
              the basis of their characteristics and their geographic proximity to our
              headquarters and to mailer facilities that we also visited. We interviewed
              USPS officials at those facilities.

              In addition, to obtain a better understanding of how mailers prepare
              workshared mail, we visited mailer facilities in Apopka and Tampa, Florida,
              where workshared mail is prepared. Specifically, we visited the facilities of



              Page 45                                     GAO-03-927 Postal Worksharing Primer
Appendix I
Objectives, Scope, and Methodology




the Apopka facility of Sprint, where it prepares bills and statements; the
Tampa facility of Regulus, where it receives remittance mail on behalf of
other companies; and the Tampa facility of AOL/Time Warner where bills
and statements are prepared. We observed how these facilities prepare
workshared mail and interviewed representatives of these companies.
These companies and facilities were judgmentally selected, based on their
preparation and receipt of different types of workshared mail sent via First-
Class Mail, invitations from their officials for GAO to make site visits, and
their geographic proximity to each other. First-Class Mail represents a
major portion of workshared mail.

We also reviewed documentation of the rationale for worksharing,
including rate case materials; published papers and analyses; testimony in
2003 to the President’s Commission on the United States Postal Service;
and material provided to us by representatives of USPS, PRC, mailer
groups, and the American Postal Workers Union (APWU). We interviewed
representatives of groups that filed material on worksharing issues in the
most recent rate case that resulted in increases in most worksharing rates,
including representatives of USPS, PRC, PRC’s Office of the Consumer
Advocate, the American Bankers Association, APWU, the Association of
Postal Commerce, the Direct Marketing Association, the Mail Order
Association of America, the Mailing and Fulfillment Services Association,
the Major Mailers Association, the National Association of Presort Mailers,
and the Saturation Mail Coalition. Some of these groups provided us with
analyses and other material pertaining to worksharing rates and issues. In
addition, we reviewed published books, articles, and other
communications written by these groups and other postal experts on
worksharing rates and issues. We did not assess the benefits that USPS and
PRC claimed are derived from worksharing. We also did not assess any of
the documentation provided by stakeholders or any of the statements made
by stakeholders that we interviewed.

To obtain information on the legal basis for worksharing, we reviewed
pertinent laws, decisions in postal rate cases interpreting legal criteria for
worksharing rates, and pertinent USPS and PRC regulations.

We conducted our review from June 2002 through June 2003 in Apopka,
Tampa, and Orlando, Florida; Baltimore and Gaithersburg, Maryland; and
Washington, D.C., in accordance with generally accepted government
auditing standards.




Page 46                                      GAO-03-927 Postal Worksharing Primer
Appendix II

Estimated USPS Avoided Costs for
Automation-Compatible Letters That Are
Workshared and Sent via First-Class Mail                                                                                                                                        Appendx
                                                                                                                                                                                      Ii




                                                                                                                                                               Percentage of the
                                                                                                                                                            estimated costs that
                                                                                                                                                            USPS is expected to
Type of USPS worksharing-related savings                                                                                                                                  avoid
1.    Automated barcoding: If letters were not workshared, they would not be barcoded and USPS
      automated equipment would try to read the address and apply a barcode. When this is unsuccessful,
      an electronic image of the letter would be sent to a facility where a USPS clerk would try to read the
      address and key in data so that a barcode could be applied.                                                                                                             15
2.    Manual operations: If the letters were not workshared, USPS would engage in more costly manual
      processing of the mail. For example, the letters would be sorted manually when USPS automated
      equipment could not apply a barcode or sort the mail. Worksharing requirements attempt to minimize
      such problems by limiting the dimensions and thickness of letters, specifying requirements for updating
      of addresses, and mandating how the address and barcode are printed, among other things.                                                                                38
3.    Automated operations: If the letters were not workshared, they would not be presorted and thus would
      require more sorting by USPS automated equipment. Also, very large workshared mailings are
      organized on pallets with each pallet containing mail sent to only one area. In such cases, the mail
      would generally not need to be sorted by USPS automated equipment at the originating mail
      processing facility to organize it according to the area where it is to be delivered. Instead, the mail can
      be handled on the loading dock and dispatched to the area where it is to be delivered.                                                                                  20
4.    Allied operations: If the letters were not workshared, they would generate more USPS “allied labor”
      costs to prepare mail for processing or dispatch, either on the loading dock or inside the mail
      processing facility. As in the above example of very large workshared mailings organized on pallets sent
      to only one area, each pallet can be handled in the loading dock and dispatched to the destinating
      facility without having allied labor separately handle each mail tray stacked on the pallet.                                                                            22
5.    Other: If the letters were not workshared, USPS would incur more costs to distribute them to post office
      boxes and prepare them for delivery, among other things.                                                                                                                 5
Total                                                                                                                                                                        100
Source: GAO analysis of USPS estimates for fiscal year 2003, which were prepared according to PRC cost methodology used in the 2000 rate case.

                                                                   Note: PRC did not recommend cost estimation methods in the 2001 rate case because the parties
                                                                   agreed to a negotiated settlement that was subsequently approved.




                                                                   Page 47                                                                   GAO-03-927 Postal Worksharing Primer
Appendix III

Comments from the U.S. Postal Service                             Appendx
                                                                        iI




               Page 48         GAO-03-927 Postal Worksharing Primer
Appendix IV

Comments from the Postal Rate Commission                        Appendx
                                                                      iIV




              Page 49        GAO-03-927 Postal Worksharing Primer
Appendix IV
Comments from the Postal Rate Commission




Page 50                                    GAO-03-927 Postal Worksharing Primer
Appendix V

GAO Contact and Staff Acknowledgments                                                           Append
                                                                                                     x
                                                                                                     i
                                                                                                     V




GAO Contact       Gerald P. Barnes, (202) 512-2834 or barnesgp@gao.gov



Acknowledgments   Kenneth E. John, Charles W. Bausell, Jr., Alan N. Belkin, Frederick T.
                  Evans, Eric Fielding, Latesha A. Love, Mark F. Ramage, Jill P. Sayre, and
                  Walter K. Vance made key contributions to this report.




(543066)          Page 51                                    GAO-03-927 Postal Worksharing Primer
GAO’s Mission            The General Accounting Office, the audit, evaluation and investigative arm of
                         Congress, exists to support Congress in meeting its constitutional responsibilities
                         and to help improve the performance and accountability of the federal government
                         for the American people. GAO examines the use of public funds; evaluates federal
                         programs and policies; and provides analyses, recommendations, and other
                         assistance to help Congress make informed oversight, policy, and funding
                         decisions. GAO’s commitment to good government is reflected in its core values of
                         accountability, integrity, and reliability.


Obtaining Copies of      The fastest and easiest way to obtain copies of GAO documents at no cost is
                         through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail this
                         list to you every afternoon, go to www.gao.gov and select “Subscribe to
                         e-mail alerts” under the “Order GAO Products” heading.


Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A check
                         or money order should be made out to the Superintendent of Documents. GAO
                         also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single
                         address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:     Voice: (202) 512-6000
                                                TDD: (202) 512-2537
                                                Fax: (202) 512-6061


To Report Fraud,         Contact:
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470



Public Affairs           Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
                         U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548
United States                  Presorted Standard
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. GI00
Official Business
Penalty for Private Use $300
Address Service Requested