oversight

U.S. Postal Service: Mail Processing Network Exceeds What Is Needed for Declining Mail Volume

Published by the Government Accountability Office on 2012-04-12.

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

             United States Government Accountability Office

GAO          Report to Congressional Requesters




April 2012
             U.S. POSTAL
             SERVICE
             Mail Processing
             Network Exceeds
             What Is Needed for
             Declining Mail Volume




GAO-12-470
                                                 April 2012

                                                 U.S. POSTAL SERVICE
                                                 Mail Processing Network Exceeds What Is Needed
                                                 for Declining Mail Volume
Highlights of GAO-12-470, a report to
congressional requesters




Why GAO Did This Study                           What GAO Found
Since 2006, the U.S. Postal Service              Since 2006, the U.S. Postal Service (USPS) has closed redundant facilities and
has taken actions to reduce its excess           consolidated mail processing operations and transportation to reduce excess
capacity. Such actions have made                 capacity in its network, resulting in reported cost savings of about $2.4 billion.
progress toward consolidating the mail           Excess capacity remains, however, because of continuing and accelerating
processing network to increase                   declines in First-Class Mail volume, automation improvements that sort mail
efficiency and reduce costs while                faster and more efficiently, and increasing mail preparation and transportation by
meeting delivery standards. However,             business mailers, much of whose mail now bypasses most of USPS’s processing
since 2006, the gap between USPS                 network.
expenses and revenues has grown
significantly. In February 2012, USPS            In December 2011, USPS issued a proposal for consolidating its mail processing
projected that its net losses would              network, which is based on proposed changes to overnight delivery service
reach $21 billion by 2016.                       standards for First-Class Mail and Periodicals. Consolidating its network is one
As requested, this report addresses              of several initiatives, including moving from a 6-day to a 5-day delivery schedule
(1) actions USPS has taken since 2006            and reducing compensation and benefits, that USPS has proposed to meet a
to reduce excess capacity—                       savings goal of $22.5 billion by 2016. This goal includes saving $4 billion by
in facilities, staff, equipment, and             consolidating its mail processing and transportation network and reducing excess
transportation; (2) USPS plans to                capacity as indicated in the table below. The Postal Regulatory Commission is
consolidate its mail processing                  currently reviewing USPS’s proposal to change delivery service standards.
network; and (3) key stakeholder
issues and challenges related to                 2011 USPS Estimate of Mail Processing Excess Capacity to Be Eliminated by Proposed
                                                 Changes in First-Class and Periodical Delivery Standards
USPS’s plans. GAO reviewed relevant
documents and data, interviewed                                         2011 processing network                  Excess capacity
USPS officials, reviewed proposed                 Facilities            461 processing facilities                223 processing facilities
legislation, and reviewed stakeholder             Workforce             154,325 positions                        Up to 35,000 positions
comments to USPS plans for changing               Equipment             About 8,000 pieces of mail               3,000 pieces of mail processing
delivery service standards.                                             processing equipment                     equipment
                                                  Transportation        1.5 billion trips between processing     376 million trips between
                                                                        facilities                               processing facilities
What GAO Recommends
                                                 Source: USPS.
GAO is not making new
recommendations in this report, as it            Stakeholder issues and other challenges could prevent USPS from implementing
has previously reported to Congress              its plan for consolidating its mail processing network or achieving its cost savings
on the urgent need for a                         goals. Although some business mailers and Members of Congress have
comprehensive package of actions to              expressed support for consolidating mail processing facilities, other mailers,
improve USPS’s financial viability and
                                                 Members of Congress, affected communities, and employee organizations have
has provided Congress with strategies
                                                 raised issues. Key issues raised by business mailers are that closing facilities
and options to consider. USPS had no
comments on a draft of this report.
                                                 could increase their transportation costs and decrease service. Employee
                                                 associations are concerned that reducing service could result in a greater loss of
                                                 mail volume and revenue that could worsen USPS’s financial condition. USPS
                                                 has said that given its huge deficits, capturing cost savings wherever possible will
                                                 be vital. USPS has asked Congress to address its challenges, and Congress is
                                                 considering legislation that would include different approaches to addressing
                                                 USPS’s financial problems. A bill originating in the Senate provides for employee
                                                 buyouts but delays moving to 5-day delivery, while a House bill creates a
                                                 commission to make operational decisions such as facility closures and permits
View GAO-12-470. For more information,
                                                 USPS to reduce delivery days. If Congress prefers to retain the current delivery
contact Lorelei St. James at (202) 512-2834 or   service standards and associated network, decisions will need to be made about
stjamesl@gao.gov.                                how USPS’s costs for providing these services will be paid, including additional
                                                 cost reductions or revenue sources.
                                                                                                United States Government Accountability Office
Contents


Letter                                                                                     1
              Background                                                                  4
              Past Actions to Reduce Excess Capacity                                      9
              USPS Plan to Consolidate Its Mail Processing Network                       13
              Stakeholder Issues and USPS Challenges                                     17
              Concluding Observations                                                    24
              Agency Comments                                                            25

Appendix I    Objectives, Scope, and Methodology                                         26



Appendix II   GAO Contact and Staff Acknowledgments                                      28



Tables
              Table 1: Reported Decrease in Mail Processing Work Hours,
                       Facilities, Employees, and Costs, from Fiscal Years 2006 to
                       2011                                                                9
              Table 2: Proportion of First-Class Mail Volume by Delivery Service
                       Standard as Proposed by USPS                                      13
              Table 3: 2011 USPS Estimate of Mail Processing Excess Capacity
                       Based on Proposed Changes in First-Class and Periodical
                       Delivery Standards                                                15
              Table 4: Summary of Key Pending Legislation Related to
                       Optimizing Mail Processing Network                                23


Figures
              Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to
                       2011                                                                2
              Figure 2: Mail Flow through the National Infrastructure                      5
              Figure 3: USPS First-Class Mail Volume Data and Forecast, Billions
                       of Pieces, Fiscal Years 2010-2020                                 12




              Page i                                           GAO-12-470 U.S. Postal Service
Abbreviations
AMP       Area Mail Processing
BRAC      Base Realignment and Closure
DPS       Delivery Point Sequencing
OIG       Office of Inspector General
PAEA      Postal Accountability and Enhancement Act
PRC       Postal Regulatory Commission
USPS      U.S. Postal Service



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Page ii                                                     GAO-12-470 U.S. Postal Service
United States Government Accountability Office
Washington, DC 20548




                                   April 12, 2012

                                   The Honorable Susan M. Collins
                                   Ranking Member
                                   Committee on Homeland Security and Governmental Affairs
                                   United States Senate

                                   The Honorable Thomas R. Carper
                                   Chairman
                                   Subcommittee on Federal Financial Management, Government
                                     Information, Federal Services, and International Security
                                   Committee on Homeland Security and Governmental Affairs
                                   United States Senate

                                   The Honorable Darrell E. Issa
                                   Chairman
                                   Committee on Oversight and Government Reform
                                   House of Representatives

                                   The U.S. Postal Service’s (USPS) dire financial situation has increased
                                   the urgency for agreement on an effective strategy to better align USPS’s
                                   postal services with its costs and revenues. USPS has noted that the
                                   decline in First-Class Mail volume accelerated more than expected and
                                   predicted that volume will continue to fall. By fiscal year 2020, USPS
                                   expects to lose over 60 percent of the First-Class Mail volume that it had
                                   in fiscal year 2006. 1 Declining First-Class Mail volumes, development of
                                   automated mail processing equipment, and “workshare” initiatives (e.g.,
                                   mailers applying bar codes, presorting the mail, and entering mail into the
                                   postal network closer to its final delivery point) have led to a mail
                                   processing network—including postal facilities, staff, equipment, and
                                   transportation resources—that is larger than needed to process and
                                   distribute current and projected levels of mail.


                                   1
                                    Mail that is processed in USPS’s network includes two broad categories: market-
                                   dominant and competitive. Market-dominant products primarily include First-Class Mail
                                   (e.g., correspondence, bills, payments, and statements), Standard Mail (mainly bulk
                                   advertising and direct mail solicitations), Periodicals (mainly magazines and local
                                   newspapers), and some types of Package Services (primarily single-piece Parcel Post,
                                   Media Mail, library mail, and bound printed matter). Market-dominant mail and services
                                   represent about 86 percent of USPS’s revenue. Competitive mail refers to Priority Mail
                                   and Express Mail that compete with delivery services offered by private businesses.




                                   Page 1                                                     GAO-12-470 U.S. Postal Service
Over the past decade, USPS has taken steps to reduce its excess capacity
to move toward optimizing its mail processing network—one where
processing facilities are located to maximize revenues, increase efficiency,
and minimize costs while meeting delivery standards. Since 2006, the gap
between USPS expenses and revenues has grown significantly (see fig. 1).
At the end of fiscal year 2011, USPS had a net loss of $5.1 billion and $2
billion remaining on its $15 billion statutory borrowing limit. 2 In February
2012, USPS issued a 5-year plan that projected its net loss to increase to
over $21 billion by 2016 and set a goal to reduce annual costs by at least
$22.5 billion by 2016. The Postmaster General has stated that maintaining
a vast national postal infrastructure is no longer realistic. We have testified
that USPS cannot continue providing services at current levels without
dramatic changes in its cost structure. 3 Optimizing USPS’s mail processing
network would help USPS by bringing down costs related to excess and
inefficient network resources.

Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to 2011




2
39 U.S.C. § 2005(a)(2).
3
 GAO, U.S. Postal Service: Actions Needed to Stave Off Financial Insolvency,
GAO-11-926T (Washington, D.C.: Sept. 6, 2011).




Page 2                                                   GAO-12-470 U.S. Postal Service
You requested that we study opportunities for USPS to reduce excess
capacity in its mail processing network. This report addresses (1) past
actions USPS has taken to reduce excess capacity, (2) USPS’s plan to
consolidate its mail processing network, and (3) key stakeholder issues
and challenges USPS faces in consolidating its mail processing network.

To describe what actions USPS has taken to reduce excess capacity and
its reported results of these actions, we obtained data from USPS related
to changes in its mail processing network, workforce, and costs as well as
an updated forecast for First-Class Mail volume to 2020. To calculate the
5-year cost savings that USPS achieved, we took the difference of the
network costs for fiscal years 2006 and 2011 that USPS reported to us.
We also obtained data from USPS and USPS Office of Inspector General
(OIG) reports regarding cost savings related to USPS initiatives to reduce
excess capacity. Further, we reviewed USPS annual reports to Congress
and its network plans as section 302 of the Postal Accountability and
Enhancement Act of 2006 requires USPS to submit; related GAO and
USPS OIG reports; as well as other relevant studies relating to reducing
excess capacity in USPS’s mail processing network. To examine USPS’s
future plans to consolidate its mail processing network, we reviewed
USPS’s December 2011 plan to change delivery service standards and
consolidate its mail processing network by reducing facilities, staff,
equipment, and transportation resources. We also reviewed USPS’s 5-
year business plan to profitability issued in February 2012. We
interviewed USPS senior management and local facility mangers in
Illinois about the current processing network and future plans for that
network. We also reviewed documents in the ongoing Postal Regulatory
Commission (PRC) proceeding of USPS’s proposed changes in service
standards and its plan for consolidating its mail processing network. PRC
is reviewing USPS’s estimated cost savings, service impacts, and public
input on the network consolidation plan and expects to complete its
review sometime after July 2012.

To determine key issues and challenges USPS officials face in
consolidating its mail processing network, we reviewed and summarized
concerns from postal stakeholders responding to USPS’s September
2011 Federal Register notice on its proposed changes to service
standards for First-Class Mail, Periodicals, and Standard Mail. We also
interviewed USPS officials, and reviewed stakeholder testimonies and
published letters from Members of Congress commenting on USPS plans
to change delivery service standards and close facilities. Further, we
reviewed pending legislative proposals that could affect USPS’s efforts to



Page 3                                           GAO-12-470 U.S. Postal Service
             address excess capacity and consolidate its mail processing network. For
             more information on our scope and methodology, see appendix I.

             We conducted this performance audit from April 2011 through April 2012
             in accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             USPS has a vast mail processing network consisting of multiple facilities
Background   with different functions, as shown in figure 2. In fiscal year 2011,
             according to USPS, it had a nationwide mail processing network that
             included 461 facilities, 154,325 full-time employees, and about 8,000
             pieces of mail processing equipment. This network transports mail from
             where it is entered into USPS’s network, sorts it for carriers to deliver, and
             distributes it to a location near its destination in accordance with specific
             delivery standards. USPS receives mail into its processing network from
             different sources such as mail carriers, post offices, and commercial
             entities. Once USPS receives mail from the public and commercial
             entities, it uses automated equipment to sort and prepare mail for
             distribution. The mail is then transported between processing facilities
             where it will be further processed for mail carriers to pick up for delivery.




             Page 4                                             GAO-12-470 U.S. Postal Service
Figure 2: Mail Flow through the National Infrastructure




                                          Note: Originating mail refers to outgoing and local mail that enters the point of origin for mail
                                          processing. Local mail remains within the facility and is combined with destinating mail from other
                                          origin facilities. Destinating mail refers to mail arriving at the point of entry for distribution and dispatch
                                          to a post office for delivery. Some mail moves from one Processing Distribution Center to another
                                          without going through the Network Distribution Center, Surface Transfer Center, or Logistics and
                                          Distribution Center.


                                          Trends in mail use underscore the need for fundamental changes to
                                          USPS’s business model. First-Class Mail volume peaked in fiscal year
                                          2001 at nearly 104 billion pieces and has fallen about 29 percent, or 30
                                          billion pieces, as of fiscal year 2011. Although First-Class Mail volume
                                          accounted for 44 percent of total mail volume in fiscal year 2011, it
                                          generated about 49 percent of USPS’s revenue. In comparison, Standard
                                          Mail (primarily advertising) accounted for 51 percent of total mail volume



                                          Page 5                                                                   GAO-12-470 U.S. Postal Service
but generated only about 27 percent of USPS’s revenue. Further, it takes
about three pieces of Standard Mail, on average, to equal the financial
contribution from one piece of First-Class Mail. Looking forward, USPS
projects that First-Class Mail will decline significantly between now and
2020. For the first time, in 2010, less than 50 percent of all bills were paid
by mail as consumers continue to switch to electronic alternatives. USPS
projects that Standard Mail volume will remain roughly flat between now
and 2020, thereby increasing its share of revenues generated. Almost 60
percent of mail received by households in 2010 was advertising.

USPS has said that its mail processing network is configured primarily so
that it can meet the First-Class Mail delivery standards within a 1- to 5-day
window, depending on where the mail is entered into the postal system and
where it will be delivered. Most First-Class Mail is to be delivered in 1 day
when it is sent within the local area served by the destinating mail
processing center; 2 days when it is sent within reasonable driving
distance, which USPS considers within a 12-hour drive time; 3 days for
other mail, such as mail transported over long distances by air; and 4 to 5
days if delivery is from the 48 contiguous states to the noncontiguous
states, Puerto Rico, the U.S. Virgin Islands, or Guam. Delivery service
standards within the contiguous 48 states generally range from 1 to 10
days for other types of mail. Delivery service standards help USPS,
mailers, and customers set realistic expectations for the number of days
mail takes to be delivered, and to plan their activities accordingly. USPS
requires a certain level of facilities, staff, equipment, and transportation
resources to consistently meet First-Class Mail and other delivery service
standards as expected by its customers. The USPS processing and
transportation networks were developed during a time of growing mail
volume, largely to achieve service standards for First-Class Mail and
Periodicals, particularly the overnight service standards.

To revise service standards, USPS can propose changes, such as
elimination of overnight delivery for First-Class Mail, through a regulatory
proceeding that includes the consideration of public comments. 4 Further,


4
  The Postal Accountability and Enhancement Act of 2006 (PAEA) required USPS to
establish a set of modern service standards for its market-dominant products by regulation
in consultation with PRC. Pub. L. No. 109-435, § 301 (Dec. 20, 2006). Once these
standards were established, PAEA directed USPS to begin to measure and publicly report
on its service performance for all market-dominant products. In December 2007, USPS
finalized regulations establishing service standards for market-dominant products. 72
Fed. Reg. 72216 (Dec. 19, 2007).




Page 6                                                     GAO-12-470 U.S. Postal Service
whenever USPS proposes a change in the nature of postal services that
affects service on a nationwide basis, USPS must request an advisory
opinion on the change from PRC. 5 In addition, USPS annual
appropriations have mandated 6-day delivery and rural mail delivery at
certain levels. 6 USPS has asked Congress to allow it to change the
delivery standard from 6- to 5-day-a-week delivery.

USPS and other stakeholders have long recognized the need for USPS to
reduce excess capacity in its mail processing network.

•   In 2002, USPS released a Transformation Plan that provided a
    comprehensive strategy to adapt the mail processing and delivery
    networks to changing customer demands, eroding mail volumes, and
    rising costs. 7 One key goal cited in the plan was for USPS to become
    more efficient by standardizing operations and reducing excess
    capacity in its mail processing and distribution infrastructure.

•   In 2003, a presidential commission examining USPS’s future issued a
    report recommending several actions that would facilitate USPS
    efforts to consolidate its mail processing network. 8 The commission
    determined that USPS had far more facilities than it needed and those
    facilities that it did require often were not used in the most efficient
    manner. The commission recommended that Congress create a
    Postal Network Optimization Commission modeled in part on the
    Department of Defense’s Base Realignment and Closure (BRAC)
    Commission, to make recommendations relating to the consolidation
    and rationalization of USPS’s mail processing and distribution
    infrastructure. We reported in 2010 that Congress has considered
    BRAC-type approaches to assist in restructuring organizations that
    are facing key financial challenges. 9 These commissions have gained


5
 39 U.S.C. § 3661(b).
6
 These provisions have specified that “6-day delivery and rural delivery of mail shall
continue at not less than the 1983 level.” See, e.g., Pub. L. No. 112-74, 125 Stat. 786
(Dec. 23, 2011).
7
 USPS, United States Postal Service Transformation Plan (April 2002).
8
 President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service (Washington, D.C.: July 31,
2003).
9
 GAO, U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial
Viability, GAO-10-455 (Washington, D.C.: Apr. 12, 2010).




Page 7                                                      GAO-12-470 U.S. Postal Service
      consensus and developed proposed legislative or other changes to
      address difficult public policy issues. The 2003 presidential
      commission also recommended that USPS exercise discipline in its
      hiring practices to “rightsize” and realign its workforce with minimal
      displacement.

•     The Postal Accountability and Enhancement Act (PAEA), enacted in
      2006, encouraged USPS to expeditiously move forward in its
      streamlining efforts and required USPS to develop a network plan
      describing its long-term vision for rationalizing its infrastructure and
      workforce. The plan was to include a strategy to consolidate its mail
      processing network by eliminating excess capacity and identifying
      cost savings. 10 In June 2008, USPS provided its Network Plan to
      Congress, which we describe in more detail later in the report.

•     In 2009, GAO added USPS to its list of high-risk areas needing
      attention by Congress and the executive branch to achieve broad-
      based transformation. 11 Given the decline in mail volume and
      revenue, we suggested that USPS develop and implement a broad
      restructuring plan—with input from PRC and other stakeholders and
      approval by Congress and the administration. We added that this plan
      should address how USPS plans to realign postal services (such as
      delivery frequency and delivery standards); better align its costs and
      revenues; optimize its operations, network, and workforce; increase
      mail volume and revenue; and retain earnings so that it can finance
      needed capital investments and repay its growing debt. In 2009, we
      testified that maintaining USPS’s financial viability as the provider of
      affordable, high-quality universal postal services would require actions
      in a number of areas, such as rightsizing its retail and mail processing
      networks by consolidating operations and closing unnecessary
      facilities. 12 Furthermore, in 2010 we provided strategies and options
      that Congress could consider to better align USPS costs with
      revenues and address constraints and legal restrictions that limit
      USPS’s ability to reduce costs and improve efficiency. 13 We reported


10
    Pub. L. No. 109-435, § 302.
11
  GAO, High-Risk Series: Restructuring the U.S. Postal Service to Achieve Sustainable
Financial Viability, GAO-09-937SP (Washington, D.C.: July 2009).
12
  GAO, U.S. Postal Service: Network Rightsizing Needed to Help Keep USPS Financially
Viable, GAO-09-674T (Washington, D.C.: May 20, 2009).
13
    GAO-10-455.




Page 8                                                    GAO-12-470 U.S. Postal Service
                          that USPS could close major mail processing facilities and relax
                          delivery standards to facilitate consolidations and closures of mail
                          processing facilities as options for reducing network costs.


                  From fiscal years 2006 through 2011, USPS data showed that it reduced
Past Actions to   mail processing and transportation costs by $2.4 billion—or 16 percent—
Reduce Excess     by reducing the number of mail processing work hours, facilities, and
                  employees as shown in table 1. Specifically, USPS data show that it
Capacity          eliminated about 35 percent of its total mail processing work hours, 32
                  percent of its mail processing facilities, and 20 percent of its full-time mail
                  processing employees.

                  Table 1: Reported Decrease in Mail Processing Work Hours, Facilities, Employees,
                  and Costs, from Fiscal Years 2006 to 2011

                                                                             Change from Percentage change
                                                     2006         2011       2006 to 2011 from 2006 to 2011
                      Mail processing work        332,269      215,283             -116,986                    -35
                      hours (thousands)
                      Facilities                      673           461                 -212                   -32
                      Full-time employees        192,411       154,325              -38,086                    -20
                      Mail processing and           $15.6        $13.2                 -$2.4                   -16
                      transportation-related
                            a
                      costs
                      (dollars in billions)
                  Source: USPS data.
                  a
                  Mail processing costs include facility-, employee-, and transportation-related expenses.


                  Although most of USPS’s cost savings during fiscal years 2006 through
                  2011 came from reducing its work hours and workforce, USPS also took
                  some actions to consolidate or close facilities and realign its
                  transportation network. During this period, USPS reported that it focused
                  on three core initiatives that together saved about $414 million. 14




                  14
                    USPS is required to prepare and submit to Congress a report on how postal decisions
                  have affected or will affect its rationalization plans no later than 90 days after the end of
                  each fiscal year. Pub. L. No. 109-435, § 302(c)(4) (Dec. 20, 2006). USPS has submitted
                  these annual reports for fiscal years 2008 through 2011.




                  Page 9                                                             GAO-12-470 U.S. Postal Service
•     Closed excess Remote Encoding Centers and Airport Mail Centers:
      USPS established Remote Encoding Centers to apply address bar
      codes to letters that the automated equipment in mail processing
      plants could not read. As automated equipment improved, USPS
      relied less on Remote Encoding Centers. In fiscal year 2006, USPS
      reported that it had 12 Remote Encoding Centers, but only 2 by fiscal
      year 2011, resulting in savings of $10.3 million. 15 USPS established
      Airport Mail Centers to expedite the transfer of mail to and from
      commercial air carriers. Excess capacity existed in these facilities
      because of declining mail volumes and because USPS transferred
      some mail from air transportation to its surface transportation network.
      To reduce excess capacity, USPS began transferring Airport Mail
      Center operations to processing and distribution facilities. This
      enabled USPS to reduce costs at Airport Mail Centers by closing or
      outsourcing operations and repurposing facilities. In fiscal year 2006,
      USPS reported that it had 77 Airport Mail Centers, but only 1 remains.
      These closures resulted in savings of $108 million according to USPS.

•     Consolidated Area Mail Processing (AMP) operations: According to a
      January 2012, USPS OIG report, USPS used its AMP study process
      to complete 100 consolidations from fiscal years 2006 through 2011. 16
      An AMP study examines the feasibility of consolidating some mail
      processing operations from one or more postal facilities to other
      facilities to improve operational efficiency. An AMP study that has
      been implemented may involve consolidating origination mail, or
      destinating mail, or both, to increase mail processing efficiency and
      reduce excess capacity on equipment, facilities, and work hours.
      USPS officials at headquarters used a nationwide model to identify
      opportunities for consolidating operations and used input from local
      area and district officials for an in-depth analysis of the feasibility of
      such consolidations, which informed the final decision on whether or




15
    Data from USPS fiscal year 2006 and 2011 annual reports.
16
  USPS’s OIG report determined that a valid business case existed for 31 of the 32
implemented AMP studies (97 percent) reviewed, and that those cases were supported by
adequate capacity, increased efficiency, reduced work hours, and mail processing costs,
and improved service standards. United States Postal Service, Office of Inspector
General, U.S. Postal Service Past Network Optimization Initiatives, CI-AR-12-003
(Arlington, VA: Jan. 9, 2012).




Page 10                                                   GAO-12-470 U.S. Postal Service
     not to approve the AMP study. 17 According to USPS data, it achieved
     savings of $167 million from AMP consolidations in fiscal years 2010
     and 2011.

•    Transformed the Bulk Mail Center network: In the past, mailers
     dropped their bulk mail at a network of 21 Bulk Mail Centers. USPS
     would then process and transport the bulk mail to its final destinations.
     By 2007, however, a significant portion of this mail bypassed the Bulk
     Mail Center network and was dropped at a processing plant closer to
     its final delivery point. In fiscal year 2009, USPS reported that it had
     begun transforming its 21 Bulk Mail Centers into Network Distribution
     Centers and completed the transformation in fiscal year 2010. 18
     According to USPS, this was designed to better align work hours with
     workload and improve transportation utilization, resulting in cost
     savings of $129 million.

Even after taking these actions to reduce excess capacity, USPS stated
that excess capacity continues and structural changes are necessary to
eliminate it. Three major reasons for continued excess capacity include
the following:

•    Accelerating declines in mail volume: Since 2006, declines in mail
     volume have continued to worsen. For example, single-piece First-
     Class Mail has dropped by almost 19 billion pieces. Furthermore,
     USPS’s volume forecasts to 2020 indicate that the decline in First-
     Class Mail volume will not abate going forward but instead will
     continue—from 73 billion pieces in 2011 to 39 billion pieces in 2020—
     further exacerbating the problem of costly excess capacity (see fig. 3).
     Declining First-Class Mail volume is primarily attributed to the
     increasing number of electronic communications and transactions.
     The recent recession and other economic difficulties have further
     accelerated mail volume decline.



17
   In 2010, we analyzed 32 AMP studies that were implemented, approved, or not
approved since the beginning of fiscal year 2009, and determined that USPS had followed
its realignment guidance by completing each step of the process and consistently applying
its criteria in its reviews. GAO, Mail Processing Network Initiatives Progressing, and
Guidance for Consolidating Area Mail Processing Operations Being Followed,
GAO-10-731 (Washington, D.C.: June 16, 2010).
18
  United States Postal Service, Meeting the Challenge: The Power of the Mail, fiscal year
2009 annual report.




Page 11                                                    GAO-12-470 U.S. Postal Service
Figure 3: USPS First-Class Mail Volume Data and Forecast, Billions of Pieces,
Fiscal Years 2010-2020




•   Continuing automation improvements: These improvements have
    enabled USPS to sort mail faster and more efficiently. For example,
    USPS’s Flats Sequencing System machines automatically sort larger
    mail pieces (e.g., magazines and catalogs) into the order that they will
    be delivered. At the end of fiscal year 2011, USPS reported that it had
    deployed 100 flats sequencing machines to 46 sites and the Flats
    Sequencing System covered nearly 43,000 delivery routes and
    processed an average of almost 60 percent of flats at more than half
    of those sites.

•   Increasing mail preparation and transportation by mailers: While most
    First-Class Mail goes through USPS’s entire mail processing network,
    around 83 percent of Standard Mail is destination entered—that is,
    business mailers enter mail within a local area where it will be
    delivered, bypassing most of USPS’s mail processing network and




Page 12                                                GAO-12-470 U.S. Postal Service
                            long-distance transportation. 19 The percentage of mail that is
                            destination entered has increased 16 percent over the last decade.


                       On December 15, 2011, USPS asked PRC to review and provide an
USPS Plan to           advisory opinion on its proposal to change its delivery service standards,
Consolidate Its Mail   primarily by changing its delivery standards to eliminate overnight delivery
                       service for most First-Class Mail and Periodicals. 20 USPS has stated that
Processing Network     these changes in delivery service standards are a necessary part of its
                       plan to consolidate its mail processing operations, workforce, and
                       facilities. Under this plan, the 42 percent of First-Class Mail that is
                       currently delivered within 1 day would be delivered within 2 to 3 days. See
                       table 2 for the percentage of First-Class Mail volume that is intended to
                       be delivered within the current and proposed delivery service standards.

                       Table 2: Proportion of First-Class Mail Volume by Delivery Service Standard as
                       Proposed by USPS

                        Service standard                      Current percentage                Proposed percentage
                        1-day                                                        42                               0
                        2-day                                                        27                              51
                        3-day                                                        32                              49
                        4-day                                                    0.3                                0.3
                       Source: USPS.

                       Note: Totals do not add to 100 percent because of rounding.


                       USPS’s plan included details on facilities, staff, equipment, and
                       transportation that USPS would eliminate as a result of the change in
                       delivery service standards and the estimated cost savings from these
                       changes. On the basis of an analysis of fiscal year 2010 costs, USPS
                       estimated that service standard changes centered on eliminating
                       overnight service for significant portions of First-Class Mail and



                       19
                         Mail that is destination entered is sorted and transported by mailers to USPS facilities
                       that are generally closer to the final destination where the mail will be delivered.
                       20
                         Whenever USPS proposes a change in the nature of postal services that affects service
                       on a nationwide basis, USPS must request a nonbinding advisory opinion on the change
                       from PRC. 39 U.S.C. § 3661(b). First-Class Mail and Periodicals that meet specified mail
                       preparation requirements and originate and destinate within designated areas may still be
                       eligible for overnight service.




                       Page 13                                                            GAO-12-470 U.S. Postal Service
Periodicals could save approximately $2 billion annually when fully
implemented. To save this amount, USPS stated that it plans to use the
already established AMP study process, which was designed to achieve
cost savings through the consolidation of operations and facilities with
excess capacity. USPS has stated that the AMP process provides
opportunities for USPS to reduce costs, improve service, and operate as
a leaner, more efficient organization by making better use of resources,
space, staffing, processing equipment, and transportation. In a February
2012 press release, USPS announced that it would begin consolidating or
closing 223 processing facilities during the summer and fall of 2012—
contingent on a final decision to change service standards, which it said it
expects to complete sometime in March. 21 USPS added that it will not
close any facilities prior to May 15, 2012, as agreed upon with some
Members of Congress. PRC is currently reviewing the details of USPS’s
proposal to revise service standards, the estimated cost savings, the
potential impacts on both senders and recipients, and USPS’s justification
for the change to advise USPS and Congress on the merits of USPS’s
proposal. PRC procedures enable interested stakeholders, including the
public, to file questions and comments to PRC regarding USPS’s
proposal. 22 PRC expects to issue its advisory opinion on USPS’s proposal
after the time for obtaining public input is concluded in July 2012.

USPS has stated that consolidating its networks is unachievable without
relaxing delivery service standards. The Postmaster General testified last
September that such a change would allow for a longer operating window
to process mail, which would enable USPS to reduce unneeded facilities,
work hours, workforce positions, and equipment. USPS identified
scenarios looking at how constraints within the mail processing network
affected excess capacity and found that if the current standard for
overnight First-Class Mail service was relaxed, plant consolidation could
occur, which would more fully maximize the use of facilities, labor, and
equipment. USPS estimates of excess capacity it wants to eliminate
based on proposed changes to its overnight delivery service standards
are shown in table 3.


21
  USPS’s website lists these specific processing facilities. See
http://about.usps.com/what-we-are-doing/our-future-network/assets/pdf/communications-li
st-022212.pdf.
22
  Since PRC is examining USPS’s proposal and cost estimates for revising its delivery
service standards, we did not assess the reliability of USPS’s database used for
estimating the cost savings.




Page 14                                                   GAO-12-470 U.S. Postal Service
                           Table 3: 2011 USPS Estimate of Mail Processing Excess Capacity Based on
                           Proposed Changes in First-Class and Periodical Delivery Standards

                            Processing network
                            element                    2011 network                    Excess capacity
                            Facilities                 461 processing facilities       223 processing facilities
                            Workforce                  154,325 positions               Up to 35,000 positions
                            Equipment                  About 8,000 pieces of mail      3,000 pieces of mail
                                                       processing equipment            processing equipment
                            Transportation             1.5 billion trips between       376 million trips between
                                                       processing facilities           processing facilities
                           Source: USPS.



Facilities and Workforce   USPS estimated that it could consolidate, all or in part, 223 processing
                           facilities based on its proposed changes in First-Class and Periodical
                           delivery service standards. USPS has also specified that changing
                           delivery service standards would enable it to remove up to 35,000 mail
                           processing positions as it consolidates operations into fewer facilities. The
                           number of employees per facility ranges from 50 to 2,000. Reducing work
                           hours and the size and cost of its workforce will be key for USPS, since
                           its workforce generates about 80 percent of its costs. In addition, USPS
                           entered into a collective bargaining agreement with the American Postal
                           Workers Union in April 2011 that established a two-tier career pay
                           schedule for new employees that is 10.2 percent lower than the existing
                           pay schedule. This labor agreement also allowed USPS to increase its
                           use of noncareer employees from 5.9 percent to 20 percent, thereby
                           enabling USPS to hire more lower-paid noncareer employees when
                           replacing full-time career employees.

Equipment                  USPS has also pointed out that it has about 8,000 pieces of equipment
                           used for processing mail, but could function with as few as 5,000 pieces if
                           it adopts the proposed delivery service standards. Declining mail volume
                           has resulted in a reduced need for machines that sort mail using Delivery
                           Point Sequencing (DPS) programs, on a national level, by approximately
                           one-half. 23 According to USPS, however, a reduction of Delivery Point
                           Sequencing machinery use would allow for greater reliance on machinery
                           that incurs lower maintenance costs. In addition, much of this equipment


                           23
                             DPS enables USPS to sort the next day’s destination letter- and flat-shaped mail pieces
                           into the precise order in which they will be delivered on carrier routes. After mail is run
                           through DPS, it is transported to delivery units, where carriers take it for delivery.




                           Page 15                                                     GAO-12-470 U.S. Postal Service
                 is currently used to sort mail only 4 to 6 hours per day. USPS plans to
                 optimize the use of its remaining equipment to sort mail by increasing its
                 maximum usage up to 20 hours per day.

Transportation   USPS estimates that it makes more transportation trips than are currently
                 necessary. USPS’s transportation network includes the movement of mail
                 between origin and destination processing plants. USPS, however, has
                 estimated that changing its delivery service standards as proposed in
                 December 2011 would enable it to reduce these facility-to-facility trips by
                 about 25 percent, or 376 million trips.

                 Relaxing delivery standards and consolidating its mail processing network
                 is just one part of USPS’s overall strategy to achieve financial stability. On
                 the revenue side, USPS has noted that it cannot increase mail prices
                 beyond the Consumer Price Index cap, and price increases cannot remedy
                 the revenue loss resulting from First-Class Mail volume loss. USPS has
                 also reported that it faces restrictions on entering new lines of business and
                 does not see any revenue growth solution to its current financial problems.
                 In February 2012, USPS announced a 5-year business plan to achieve
                 financial stability that included a goal of achieving $22.5 billion in annual
                 cost savings by the end of fiscal year 2016. USPS’s proposed changes in
                 its mail processing and transportation networks are included in its 5-year
                 business plan, as are initiatives to save

                 1. $9 billion in network operations, of which $4 billion would come from
                    consolidating its mail processing and transportation networks;

                 2. $5 billion in compensation and benefits; and

                 3. $8.5 billion through legislative changes, such as moving to a 5-day
                    delivery schedule, and resolving funding issues associated with
                    USPS’s retiree health benefits.

                 At the same time, USPS’s 5-year plan would also reduce the overall size
                 of the postal workforce by roughly 155,000 career employees, of which up
                 to 35,000 would come from consolidating the mail processing network,
                 with many of those reductions expected to result from attrition. According
                 to the 5-year plan, half of USPS’s career employees—283,000
                 employees—will be retirement eligible by 2016. In March 2010, USPS
                 presented a detailed proposal to PRC to move from a 6-day to a 5-day




                 Page 16                                            GAO-12-470 U.S. Postal Service
                                delivery schedule to achieve its workforce and cost savings reduction
                                goals. 24 USPS projected that its proposal to move to 5-day delivery by
                                ending Saturday delivery would save about $3 billion annually and would
                                reduce mail volume by less than 1 percent. However, on the basis of its
                                review, PRC estimated a lower annual net savings—about $1.7 billion
                                after a 3-year phase-in period—as it noted that higher revenue losses
                                were possible. 25 In February 2012, USPS updated its projected net
                                savings to $2.7 billion after a 3-year implementation period. Implementing
                                5-day delivery would require USPS to realign its operations network to
                                increase efficiency, maintain service, and address operational issues.



Stakeholder Issues
and USPS Challenges

Stakeholder Issues with         Some business mailers have expressed concern that reducing processing
Mail Processing Changes         facilities as a result of eliminating overnight delivery service could
                                increase costs for business mailers who will have to travel farther to drop
                                off their mail. In addition, business mailers have expressed concern that
                                service could decline as USPS plans to close an unprecedented number
                                of processing facilities in a short period. USPS employee associations
                                have said that the proposed changes would reduce mail volume and
                                revenue, thus making USPS’s financial condition worse.

Potential Increased Costs and   Business mailers have commented that such a change in delivery service
Service Decline for Business    standards and postal facility locations could shift mail processing costs to
Mailers                         them and reduce the value of mail for their businesses. While many of
                                USPS’s customers who are business mailers indicated they would be
                                willing to accept the service standard changes and understood the need
                                for such a change, several mailers noted that it is never good when an



                                24
                                  Implementing 5-day delivery would require congressional approval, since USPS’s
                                annual appropriations have required USPS to provide 6-day delivery at 1983 levels.
                                25
                                  PRC noted USPS improperly deflated mailers’ reported volume decline projections and
                                that the reported declines should not have been reduced, and determined, based on
                                USPS’s survey data, that it is likely to lose almost $600 million in net revenue because of
                                mailer response to the proposal. See Postal Regulatory Commission, Advisory Opinion on
                                Elimination of Saturday Delivery, Docket No. N2010-1 (Washington, D.C.: March 24,
                                2011).




                                Page 17                                                     GAO-12-470 U.S. Postal Service
                                organization reduces services. As a result of USPS’s plan, businesses
                                using bulk First-Class Mail, Standard Mail, or Periodicals may have fewer
                                locations where mail can be entered and may therefore need to transport
                                it to locations different from those now in use. Furthermore, businesses
                                using Standard Mail may have to transport their bulk mail to other
                                locations to take advantage of discounts. USPS officials told business
                                mailers in February 2012, when it announced the facilities it planned to
                                close, that it did not plan immediate changes to the locations where
                                business mailers drop off their mail or to the associated discounts. USPS
                                officials told us that they plan to retain business mail locations at their
                                current locations or in close proximity.

                                Additionally, businesses that publish Periodicals, like daily or weekly
                                news magazines, have expressed concern over the elimination of
                                overnight delivery leading to deliveries not being made in a timely fashion.
                                Delivery delays could result in customers canceling their subscriptions,
                                thereby reducing the value of mail. These business mailers have
                                indicated that they will most likely accelerate shifting their hard copy mail
                                to electronic communications or otherwise stop using USPS if it is unable
                                to provide reliable service as a result of these changes. Business mailers
                                have also stated their concern that service could be significantly disrupted
                                as a result of closing an unprecedented number of processing facilities by
                                2016. If service declines, mail users stated they are likely to lose
                                confidence in the medium and choose to move volume and revenue from
                                the mail to other media. Business mailers have stressed the need for
                                USPS to put forward and share with stakeholders a comprehensive,
                                detailed plan for consolidating its network and changes in service
                                standards that explains to mail users what it intends to do, what changes
                                will occur, and milestones and timelines for measuring progress in how it
                                is achieving its plans. In sum, a key message from USPS customers is
                                that while many support efforts to consolidate the mail processing
                                network, it is imperative for USPS to provide consistent mail delivery and
                                work with mailers to keep their costs down.

Employee Concern That           Employee associations have expressed concern that USPS’s proposed
Proposed Changes May            changes may result in even greater losses in mail volume and revenue,
Exacerbate Financial Problems   which would further harm USPS financially. The National Association of
                                Letter Carriers commented that downgrading service would serve only to
                                drive customers away, reduce revenue and compromise potential growth.
                                Further, the American Postal Workers Union and the National Rural Letter
                                Carriers’ Association commented that USPS’s proposal would degrade
                                existing USPS products, limit USPS’s ability to introduce new products,
                                place the USPS at a distinct competitive disadvantage, and severely



                                Page 18                                           GAO-12-470 U.S. Postal Service
                     hamper its ability to accommodate growth. USPS responded to these
                     comments by acknowledging that its proposal would, to some degree,
                     reduce the value of the mail to customers, but on balance is in the long-
                     term interests of USPS to help maintain its viability for all customers into
                     the future. USPS estimated that its proposal would result in additional
                     volume decline of almost 2 percent, revenue decline of about $1.3 billion,
                     with a net annual benefit of about $2 billion.


USPS Challenges to   USPS faces major challenges in two areas related to consolidating its mail
Consolidating Mail   processing network and has told Congress that it needs legislative action to
Processing           address them. Specifically, these challenges include the following:

                     Lack of flexibility to consolidate its workforce: USPS stated it must be able
                     to reduce the size of its workforce in order to ensure that its costs are less
                     than revenue. Action in this area is important since USPS’s workforce
                     accounts for about 80 percent of its costs. The Postmaster General testified
                     last September, however, that current collective bargaining agreements
                     prevent USPS from moving swiftly enough to achieve its planned workforce
                     reductions. In addition, USPS has requested legislative action to eliminate
                     the layoff protections in its collective bargaining agreements. The key
                     challenges in this area include the following:

                     •    No-layoff clauses: About 85 percent of USPS’s 557,000 employees
                          are covered by collective bargaining agreements that contain, among
                          other provisions, employment protections such as no-layoff
                          provisions. Currently, USPS’s collective bargaining agreements with
                          three of its major unions contain a provision stating that postal
                          bargaining unit employees who were employed as of September 15,
                          1978, or, if hired after that date, have completed 6 years of continuous
                          service are protected against any involuntary layoff or reduction in
                          force. 26 Furthermore, USPS’s memorandum of understanding with the
                          American Postal Workers Union extends this no-layoff protection to
                          cover those employed as of November 20, 2010—even if those
                          employees were not otherwise eligible for no-layoff protection. The
                          collective bargaining agreement with its fourth major union—the



                     26
                       USPS’s labor force is primarily represented by the American Postal Workers Union
                     (about 222,000 members), National Association of Letter Carriers (about 286,000
                     members), National Postal Mail Handlers Union (about 50,000 members), and National
                     Rural Letter Carriers’ Association (about 110,000 members).




                     Page 19                                                 GAO-12-470 U.S. Postal Service
    National Rural Letter Carriers’ Association—states that that no
    bargaining unit employees employed in the career workforce will be
    laid off on an involuntary basis during the period of the agreement.
    The no-layoff clauses will be a challenge to USPS primarily if it cannot
    achieve its workforce reductions through attrition. With the large
    number of employees eligible for retirement, USPS has a window of
    opportunity to avoid layoffs of non-bargaining unit employees who are
    not eligible for no-layoff protection.

•   Fifty-mile limits on employee transfers: In 2011, the American Postal
    Workers Union (which represents USPS clerks, maintenance
    employees, and motor vehicle service workers) and USPS
    management negotiated a 4-year agreement that limits transferring
    employees of an installation or craft to no more than 50 miles away. If
    USPS management cannot place employees within 50 miles, the
    parties are to jointly determine what steps may be taken, which
    includes putting postal employees on “standby,” which occurs when
    workers are idled but paid their full salary because of reassignments
    and reorganization efforts. USPS may face challenges in capturing
    cost savings as a result of its initiatives to reduce excess capacity
    because of its limited ability to move mail processing clerks from a
    facility where workloads no longer support the number of clerk
    positions needed to facilities with vacant positions.

Collective bargaining agreements have expired for three of the four major
postal unions, and because of impasses in negotiations, USPS has
moved to arbitration with these unions. In 2011, USPS reported that it had
no assurance that it would be able to negotiate collective bargaining
agreements with its unions that would result in a cost structure that is
sustainable within current and projected future mail revenue levels. It
noted that there is no current mandate requiring an arbitrator to consider
the financial health of USPS in its decision and an unfavorable arbitration
decision could have significant adverse consequences on its ability to
meet future financial obligations.

Resistance to facility closures: USPS is facing resistance to its plans to
consolidate or close postal facilities from Members of Congress, affected
communities, and its employees and has requested congressional action to
enable it to consolidate and close facilities. We reviewed numerous
comments from Members of Congress, affected communities, and
employee organizations that have expressed opposition to closing facilities.
Such concerns are particularly heightened for postal facilities identified for
closure that may consolidate functions to another state, causing political



Page 20                                            GAO-12-470 U.S. Postal Service
leaders to oppose and potentially prevent such consolidations. For
example, Members of Congress have resisted a recent proposal to move
certain processing functions from its Rockford, Illinois, Processing and
Distribution Center to a processing facility in Madison, Wisconsin. This
proposal would eliminate the need for 82 employees (77 bargaining unit
and 5 management staff) in Rockford that USPS would need to transfer
into new roles or to another facility. The president of the Springfield
Chamber of Commerce sent a letter to PRC to protest USPS’s planned
consolidation of the Springfield, Illinois, processing facility into St. Louis,
Missouri, stating that this move would reduce service quality and increase
costs, affecting its members’ profitability and operations. He added that
Springfield would lose up to 300 jobs in an area of the community that
qualifies as an “Area of Greatest Need,” according to the U.S. Department
of Housing and Urban Development.

In contrast, however, other business mailers and Members of Congress
have expressed support for consolidating the mail processing network to
reduce costs. Some business mailers have stated that USPS needs to take
cost-saving action to reduce the need for significant postal rate increases.
A significant postal increase would have a detrimental financial impact on
mailers by decreasing mail’s return on investment and may also accelerate
mailers’ shift toward electronic communication. In addition, as we discuss
below, some Members of Congress have proposed legislation supporting
USPS efforts to consolidate its mail processing network.

Other stakeholders, including USPS’s employee associations, have
questioned whether USPS needs to make drastic changes by reducing
service and the size of its networks and workforce, since they believe that
USPS’s financial crisis is, at least in part, artificial. They point out that most of
USPS’s losses since fiscal year 2006 are due to the requirement to prefund
its future retiree health benefits. In 2006, PAEA established a 10-year
schedule of USPS payments into a fund (the Postal Service Retiree Health
Benefits Fund) that averaged $5.6 billion per year through fiscal year 2016.27
Employee associations have stated that such a requirement is exceptional
and unfair, since no other federal agency is forced to prefund its employees’
health benefits at this level and no company has such a mandate. They have
suggested that instead of reducing costs, Congress should eliminate the
prefunding requirements, return surpluses in its retirement accounts, and



27
 Pub. L. No. 109-435, § 803(a).




Page 21                                                 GAO-12-470 U.S. Postal Service
                          allow USPS to earn additional revenue by offering new services. USPS
                          responded that given the multibillion-dollar deficits that it has experienced in
                          each of the last 5 years, and given the over $14 billion loss it expects in fiscal
                          year 2012, capturing cost savings wherever possible will be vital to USPS’s
                          financial viability.

                          If USPS cannot increase revenues enough to eliminate its net losses, it
                          will have to do more to reduce costs. To address USPS prefunding
                          issues, we testified that deferring some prefunding of USPS’s retiree
                          health benefits would serve as short-term fiscal relief. However, deferrals
                          also increase the risk that USPS will not be able to make future payments
                          as its core business declines. Therefore, we concluded that it is important
                          for USPS to continue funding its retiree health benefit obligations—
                          including prefunding these obligations—to the maximum extent that its
                          finances permit. 28


Pending Legislation to    USPS has stated that it needs action from Congress to address
Address USPS Challenges   restrictions that limit its ability to consolidate its mail processing network,
                          including annual appropriations provisions that mandate 6-day delivery, 29
                          and granting USPS authority to determine delivery frequency. Some
                          Members have asked USPS to postpone actions to consolidate mail
                          processing facilities so it would not preempt Congress on postal reform.
                          In response to the Members’ request, USPS agreed last December to
                          place a moratorium on closing facilities until May 15, 2012.

                          As of April 2012, the House of Representatives and Senate committees
                          with USPS oversight responsibility have passed bills to help USPS
                          achieve financial viability. These bills, as well as other postal reform bills,
                          include provisions that could affect USPS’s ability to consolidate its mail
                          processing network. Table 4 summarizes the key provisions of the House
                          of Representatives bill—H.R. 2309, the Postal Reform Act of 2011-—and
                          Senate bill—S. 1789, the 21st Century Postal Service Act.




                          28
                           GAO-11-926T.
                          29
                            These provisions have specified that “6-day delivery and rural delivery of mail shall
                          continue at not less than the 1983 level.” See e.g., Pub. L. No. 112-74, 125 Stat. 786.




                          Page 22                                                     GAO-12-470 U.S. Postal Service
Table 4: Summary of Key Pending Legislation Related to Optimizing Mail
Processing Network

                            Legislative provisions on USPS processing network
    Pending legislation     optimization effort
    21st Century Postal     • Requires USPS to complete a study prior to the closure of a
    Service Act, S. 1789,     processing facility, which evaluates the option of downsizing
    112th Cong. (2011)        rather than closing the facility.
                            • Prohibits USPS from implementing its plan to eliminate
                              Saturday delivery for at least 2 years. The implementation
                              could move forward only if certain conditions are met,
                              including developing remedies for affected customers,
                              making full use of its authority to increase revenue and
                              reduce costs, and requiring GAO to evaluate the financial
                              need for such change.
                            • Requires that arbitrators deciding a contract dispute between
                              USPS and its labor organizations take into consideration
                              USPS’s financial condition, among other considerations.
                            • Authorizes use of surplus funding from retirement accounts
                              to offer buyouts of up to $25,000 for eligible employees.
    Postal Reform Act of    •   Creates the Commission on Postal Reorganization, which
    2011,                       would be tasked with recommending facility closures.
    H.R. 2309, 112th        •   Requires USPS to develop and submit a plan to the
    Cong. (2011)                Commission on Postal Reorganization for the closure of mail
                                processing and other facilities and offices. Requires the
                                commission to transmit the plan to Congress, publish the
                                report containing the commission’s findings in the Federal
                                Register, and hold public hearings. Requires USPS to
                                implement the closure or consolidation of postal facilities and
                                offices recommended by the commission unless Congress
                                enacts a joint resolution disapproving the commission’s
                                recommendations.
                            •   Authorizes USPS to declare up to 12 non-mail delivery days
                                annually so long as it is required to deliver mail 6 days per
                                       a
                                week.
                            •   Reforms the collective bargaining process to contain a
                                mediation-arbitration process. Requires any arbitration
                                decision to take into account both pay comparability with the
                                private sector and USPS’s financial condition. Prohibits
                                collective bargaining agreements from containing provisions
                                that restrict the use of reduction-in-force procedures, which
                                could include no-layoff clauses.
Source: GAO analysis.
a
 Within 6 months of enactment, USPS would be allowed to submit a proposal to move to a 5-day
delivery schedule and can implement such a delivery schedule 90 days after PRC renders an
advisory opinion, notwithstanding any other provision of law.


Pending legislation originating in the Senate (S.1789) includes provisions
that would affect USPS’s ability to consolidate its networks by delaying
USPS’s move to 5-day delivery by 2 years and requiring USPS to



Page 23                                                         GAO-12-470 U.S. Postal Service
               consider downsizing rather than closing facilities. Delaying USPS’s move
               to a 5-day delivery schedule could make it difficult for USPS to save
               $22.5 billion by 2016. On the other hand, the Senate bill includes a
               requirement for arbitrators to consider USPS’s financial condition and
               could facilitate attrition by allowing USPS to use surplus pension funds to
               pay for employee buyouts of up to $25,000 for as many as 100,000
               eligible postal workers. Such buyouts may make it easier to reduce
               USPS’s workforce in facilities targeted for closure.

               Another legislative proposal, originating in the House of Representatives,
               (H.R. 2309) includes provisions that would enhance USPS’s ability to
               consolidate its mail processing network by allowing changes in service
               standards and using a BRAC framework to approve a consolidation plan,
               address some of the political resistance to closing postal facilities, and
               potentially reform the collective bargaining process. The proposed
               Commission on Postal Reorganization could broaden the current focus on
               individual facility closures—which are often contentious, time–consuming,
               and inefficient—to a broader networkwide restructuring, similar to the
               BRAC approach. In other restructuring efforts where this approach has
               been used, expert panels have successfully informed and permitted
               difficult restructuring decisions, helping to provide consensus on
               intractable decisions. As previously noted, the 2003 Report of the
               President’s Commission on the USPS also recommended such an
               approach relating to the consolidation and rationalization of USPS’s mail
               processing and distribution infrastructure. We also reported in 2010 that
               Congress may want to consider this approach to assist in restructuring
               organizations that are facing key financial challenges. 30 In addition, the
               House bill authorizes USPS to declare up to 12 non-mail delivery days
               annually so long as USPS is required to deliver mail 6 days per week and
               reforms the collective bargaining process, including requiring arbitrators
               to consider USPS’s financial condition.


               Developing an optimal mail processing network will require both
Concluding     congressional support and USPS leadership. Moreover, we have
Observations   previously reported that Congress and USPS need to reach agreement
               on a comprehensive package of actions to improve USPS’s financial
               viability. In these previous reports, we provided strategies and options



               30
                GAO-10-455.




               Page 24                                           GAO-12-470 U.S. Postal Service
                  that Congress could consider to better align USPS costs with revenues
                  and address constraints and legal restrictions that limit USPS’s ability to
                  reduce costs and improve efficiency. Consequently, we are not making
                  new recommendations or presenting a matter for Congress to consider at
                  this time. Without congressional action to help USPS address its financial
                  problems, USPS will be limited in the amount of rate increase it may seek
                  and may fall even further into debt. USPS had $2 billion remaining on its
                  $15 billion statutory borrowing limit at the end of fiscal year 2011. It is now
                  abundantly clear that the postal business model must be fixed given the
                  dramatic and estimated decline in volume, particularly for First-Class Mail.
                  If Congress prefers to retain the current delivery service standards and
                  associated network, decisions will be needed about how USPS’s costs for
                  providing these services will be paid, including additional cost reductions
                  or revenue sources.


                  We provided a draft of this report to USPS for review and comment.
Agency Comments   USPS had no comments, but provided technical clarifications, which we
                  incorporated into the report as appropriate.


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

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




                  Lorelei St. James
                  Director
                  Physical Infrastructure Issues




                  Page 25                                             GAO-12-470 U.S. Postal Service
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              This report addresses (1) past actions the U.S. Postal Service (USPS)
              has taken to reduce excess capacity, (2) USPS’s plans to consolidate its
              mail processing network, and (3) key stakeholder issues and challenges
              USPS faces in consolidating its mail processing network.

              To describe what actions USPS has taken to reduce excess capacity, we
              obtained data from USPS related to changes in its mail processing
              network, workforce, and costs as well as an updated 10-year volume
              forecast for First-Class Mail. To calculate the 5-year cost savings that
              USPS achieved, we took the difference of the network costs for fiscal
              years 2006 and 2011 that USPS reported to us. We also obtained data
              from USPS and USPS Office of Inspector General (OIG) reports
              regarding cost savings related to USPS initiatives to reduce excess
              capacity. Further, we reviewed USPS annual reports to Congress and its
              network plans as section 302 of the Postal Accountability and
              Enhancement Act of 2006 requires USPS to submit; related GAO and
              USPS OIG reports, as well as other relevant studies relating to reducing
              excess capacity in USPS’s mail processing network.

              To examine USPS’s future plans to consolidate its mail processing
              network, we reviewed USPS’s December 2011 proposal to change
              delivery service standards and its plan to consolidate its mail processing
              network by reducing facilities, staff, equipment, and transportation
              resources. We also reviewed USPS’s 5-year business plan to profitability
              issued in February 2012. We interviewed USPS senior management and
              local facility mangers in Illinois about the current processing network and
              future plans for that network. We also reviewed documents in the ongoing
              Postal Regulatory Commission (PRC) review of USPS’s proposed
              changes in service standards and its plan for consolidating its mail
              processing network. PRC is reviewing USPS’s estimated cost savings,
              service impacts, and public input on the proposed service standard
              changes and expects to complete its review sometime after July 2012.

              To determine key issues and challenges USPS faces in consolidating its
              mail processing network, we reviewed and summarized concerns from
              postal stakeholders responding to the USPS’s September 2011 Federal
              Register notice on its proposed changes to service standards for First-
              Class Mail, Periodicals, and Standard Mail. We also interviewed USPS
              officials, and reviewed stakeholder testimonies and published letters from
              Members of Congress commenting on USPS plans to change delivery
              service standards and close facilities. We further reviewed pending
              legislative proposals that could affect USPS’s efforts to address excess
              capacity and consolidate its mail processing network.


              Page 26                                          GAO-12-470 U.S. Postal Service
Appendix I: Objectives, Scope, and
Methodology




We conducted this performance audit from April 2011 through April 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 27                                        GAO-12-470 U.S. Postal Service
Appendix II: GAO Contact and Staff
                  Appendix II: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov
GAO Contact
                  In addition to the individual named above, Teresa Anderson (Assistant
Staff             Director), Samer Abbas, Joshua Bartzen, Erin R. Cohen, Sara Ann
Acknowledgments   Moessbauer, Amy Rosewarne, and Crystal Wesco made key
                  contributions to this report.




(546050)
                  Page 28                                        GAO-12-470 U.S. Postal Service
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