oversight

Contract Postal Units: Analysis of Location, Service, and Financial Characteristics

Published by the Government Accountability Office on 2012-11-14.

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

                United States Government Accountability Office

GAO             Report to the Chairman, Committee on
                Oversight and Government Reform,
                House of Representatives


November 2012
                CONTRACT POSTAL
                UNITS
                Analysis of Location,
                Service, and Financial
                Characteristics




GAO-13-41
                                                 November 2012

                                                 CONTRACT POSTAL UNITS
                                                 Analysis of Location, Service, and Financial
                                                 Characteristics
Highlights of GAO-13-41, a report to the
Chairman, Committee on Oversight and
Government Reform, House of
Representatives



Why GAO Did This Study                           What GAO Found
USPS’s declining revenues have                   Although contract postal units (CPUs) have declined in number, their nationwide
become insufficient to cover its costs.          presence in urban and rural areas supplements the U.S. Postal Service’s (USPS)
Its strategies to address losses include         network of post offices by providing additional locations and hours of service.
reducing hours of service at many post           More than 60 percent of CPUs are in urban areas where they can provide
offices and expanding the use of post            customers nearby alternatives for postal services when they face long lines at
office alternatives, including CPUs.             local post offices. Over one-half of CPUs are located less than 2 miles from the
CPUs are independent businesses                  nearest post office. Urban CPUs are, on average, closer to post offices than rural
compensated by USPS to sell most of              CPUs. CPUs are also sometimes located in remote or fast-growing areas where
the same products and services as
                                                 post offices are not conveniently located or may not be cost effective. CPUs
post offices at the same price.
                                                 further supplement post offices by providing expanded hours of service. On
Although CPUs can provide important
benefits, the number of CPUs has
                                                 average, CPUs are open 54 hours per week, compared to 41 hours for post
fallen from 5,290 in fiscal year 2002 to         offices. In addition, a greater proportion of CPUs than post offices are open after
3,619 in fiscal year 2011. As                    6 p.m. and on Sundays. These factors are important as USPS considers
requested, this report discusses:                expanding the use of post office alternatives to cut costs and maintain access to
(1) how CPUs supplement USPS’s                   its products and services.
post office network, (2) USPS’s                  Total USPS revenues from CPUs fell from fiscal years 2007 to 2011, while
revenue from CPUs and compensation               USPS’s compensation to them increased during this period; nonetheless, CPUs
to them from fiscal years 2007 to 2011,
                                                 generated high revenues relative to USPS’s compensation to CPUs. Declines in
and (3) challenges USPS might face if
                                                 mail volumes and the number of CPUs drove revenues down 9 percent, from
it increases its use of CPUs. GAO
analyzed USPS data on CPU                        $672 million to $611 million from fiscal years 2007 to 2011. USPS total
locations, revenues, compensation,               compensation to CPUs increased 6 percent during this period, from $76 million to
and hours of operation as well as on             $80 million; however, after increasing from fiscal year 2007 to 2008,
post office locations and hours of               compensation decreased every fiscal year from 2008 to 2011. According to
operation. GAO interviewed CPU                   USPS officials, the overall increase was because of increased compensation to
owners and USPS staff in charge of               individual CPUs and decreasing numbers of less expensive CPUs. In fiscal year
managing CPUs.                                   2011, after compensating CPUs, USPS retained 87 cents of every dollar of CPU
                                                 revenue. USPS has a target to retain 80 cents for every dollar in revenue for
                                                 individual CPUs. USPS did not meet this target at many individual CPUs—
What GAO Recommends                              especially ones in rural areas. In fact, 49 percent of CPUs that USPS
                                                 compensates a fixed amount regardless of their sales in small-town rural areas—
GAO previously recommended that                  where CPUs may serve as the de facto post office—generated less postal
USPS develop and implement a plan                revenue than the CPUs received in compensation from USPS. CPU revenues
to modernize its retail network. GAO is          and compensation are important factors as USPS seeks a more sustainable cost
not making any new recommendations               structure.
at this time, but believes that it is
important for USPS to consider the               Limited interest from potential partners, competing demands on USPS staff
role of CPUs as USPS works to                    resources, and changes to USPS’s retail network may pose challenges to
develop and implement its retail                 USPS’s use of CPUs. USPS has no current plans to strategically increase the
network plan and control costs. In               number of CPUs as part of its retail network transformation. However, a number
commenting on a draft of this report,            of district USPS staff charged with identifying the need for CPUs told us they see
USPS provided information on its                 a larger role for CPUs. Nevertheless, USPS may face limited interest from
efforts to provide convenient access to          potential partners as many may not want to operate CPUs because of concerns
its products and services.                       over CPU contract requirements such as space requirements and prohibitions on
                                                 selling products and services that compete with USPS. Many USPS district retail
                                                 managers we spoke with in charge of opening CPUs said that finding partners to
View GAO-13-41. For more information,
contact Lorelei St. James at (202) 512-2834 or   operate CPUs could be difficult. Furthermore, many of these managers said that
stjamesl@gao.gov.                                they now have fewer staff and less time and, as a result, do not have the
                                                 resources to manage opening CPUs to meet the need they have identified.
                                                                                         United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   4
               USPS Uses CPUs to Provide Retail Services at Additional Locations
                 and Hours                                                                10
               Trends in CPU Contract Types, Revenues, and Compensation                   17
               USPS’s Future Use of CPUs May Pose Challenges                              24
               Concluding Observations                                                    26
               Agency Comments                                                            27

Appendix I     Scope and Methodology                                                      28



Appendix II    Number of Contract Postal Units and Post Offices by State                  32



Appendix III   Comments from the U.S. Postal Service                                      34



Appendix IV    GAO Contact and Staff Acknowledgments                                      37



Tables
               Table 1: New and Closed CPUs, Fiscal Years 2007 to 2011                    11
               Table 2: Distribution of CPUs by Distance to Closest Post Office, as
                        of March 30, 2012                                                 12
               Table 3: Distribution of Post Offices Being Considered for Reduced
                        Hours of Service by Distance to Closest CPU, as of March
                        30, 2012                                                          15
               Table 4: Hours and Days of Service for CPUs and Post Offices               17
               Table 5: Number of CPUs and Post Offices by State                          32


Figures
               Figure 1: USPS Retail and Retail Alternatives’ Revenues, Fiscal
                        Years 2007 to 2011                                                  5
               Figure 2: Products and Services Available at Post Offices and CPUs           6
               Figure 3: CPU Window in a Dallas, Texas, Medical Center                      7




               Page i                                     GAO-13-41 USPS Contract Postal Units
Figure 4: Percentage of CPUs by Location Type, as of March 30,
         2012                                                                             13
Figure 5: Average Distance from CPU to Closest Post Office by
         Location Type, as of March 30, 2012                                              14
Figure 6: CPU Locations, as of March 30, 2012                                             16
Figure 7: Number of CPUs by Contract Type, 2002 and 2011                                  18
Figure 8: Total USPS Revenues from CPUs, Fiscal Years 2007 to
         2011                                                                             19
Figure 9: Distribution of CPU Revenues, Fiscal Year 2011                                  20
Figure 10: Total USPS Compensation to CPUs, Fiscal Years 2007 to
         2011                                                                             21
Figure 11: Distribution of USPS Compensation to CPUs, Fiscal
         Year 2011                                                                        22
Figure 12: Distribution of Revenue Retained by USPS per Dollar of
         Revenue for CPUs with Fixed-Price Contracts, Fiscal Year
         2011                                                                             24




Abbreviations

CAMS Contract Authoring Management System
CPU contract postal unit
CPUT contract postal unit technology
FDB facilities database
RUCA Rural-Urban Commuting Area
USPS U.S. Postal Service




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Page ii                                             GAO-13-41 USPS Contract Postal Units
United States Government Accountability Office
Washington, DC 20548




                                   November 14, 2012

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

                                   Dear Mr. Chairman:

                                   The U.S. Postal Service’s (USPS) cost structure has become
                                   unsustainable in part because its declining revenue is insufficient to cover
                                   the costs of operating USPS’s vast network of post offices and mail-
                                   processing centers. USPS reached its statutory $15 billion borrowing limit
                                   in September, 2012, 1 and USPS’s cash resources are so low that it is
                                   unable to meet all of its retiree health care prefunding obligations. 2 To
                                   reverse this course, USPS has stated that it must better align its
                                   operational network with the realities of declining mail volume through a
                                   number of actions, including reducing the costs of operating post offices. 3
                                   Over the past year, GAO has issued a series of reports examining how
                                   aspects of USPS’s current operations and financial obligations affect its
                                   costs and financial condition. 4 This report addresses USPS’s use of
                                   contract postal units (CPUs)—independent retailers that, under contract
                                   with USPS, provide customers with a broad range of the same products
                                   and services as post offices at the same prices, but at a potentially lower


                                   1
                                    USPS is authorized to borrow $3 billion annually and a maximum of $15 billion. 39 U.S.C.
                                   § 2005(a).
                                   2
                                    Originally due at the end of fiscal year 2011, USPS’s $5.5 billion prefunding payment to
                                   the Postal Service Retiree Health Benefit Fund was delayed until August 1, 2012. Pub. L.
                                   No. 112-74 (Dec. 23, 2011). However, USPS missed that payment as well as the $5.6
                                   billion prefunding payment that was due by September 30, 2012.
                                   3
                                    See United States Postal Service, Plan to Profitability: 5 Year Business Plan, (Feb. 16,
                                   2012).
                                   4
                                    See GAO, U.S. Postal Service: Field Offices’ Role in Cost-Reduction and Revenue-
                                   Generation Efforts, GAO-12-506, (Washington, D.C.: Apr. 25, 2012); GAO, U.S. Postal
                                   Service: Challenges Related to Restructuring the Postal Service’s Retail Network,
                                   GAO-12-433 (Washington, D.C.: Apr. 17, 2012); GAO, U.S. Postal Service: Mail
                                   Processing network Exceeds What is Needed for Declining Mail Volume, GAO-12-470
                                   (Washington, D.C.: Apr. 12, 2012); and GAO, U.S. Postal Service: Allocation of
                                   Responsibility for Pension Benefits between the Postal Service and the Federal
                                   Government, GAO-12-146 (Washington, D.C.: Oct. 13, 2011).




                                   Page 1                                               GAO-13-41 USPS Contract Postal Units
cost to USPS. CPUs are one component of USPS’s broader efforts to
expand access to USPS products and services outside of traditional post
offices.

USPS has reported that many of its roughly 32,000 post offices 5 do not
generate sufficient revenue to cover their costs. To better control retail
costs, USPS has examined expanding retail access to postal services in
locations other than post offices, including CPUs. 6 Our past work has
shown that replacing postal-owned and -operated facilities with privately
owned and operated facilities is a strategy some foreign posts have used
to restructure their retail networks to reduce facility and labor costs. 7
Despite these potential benefits, the number of CPUs in the United States
has declined, from 5,290 in 2002 to 3,619 in 2011. In a recent effort to
reduce costs, USPS announced plans in May 2012 to reduce the hours of
service to as little as 2 hours a day at over 13,000 underutilized post
offices. USPS estimates potential savings of $500 million a year from
these reduced hours. Given the potential for service reductions at post
offices, expanding access through retail alternatives such as CPUs takes
on increased relevance.

The role of CPUs is also addressed in postal reform legislation pending in
both chambers of Congress. A bill passed in the Senate would require
USPS to consider CPUs as a replacement for post offices as it makes
post office closure decisions. 8 A bill passed by the House of
Representatives Committee on Oversight and Government Reform would




5
 USPS retail facilities include post offices, stations, and branches. While they have
different classification meanings to USPS, they are all brick-and-mortar retail locations
operated by USPS where customers can access postal products and services by
conducting transactions with a USPS window clerk. In this report, we refer to these
traditional places of access to USPS retail products and service simply as post offices.
USPS also operates facilities known as carrier annexes that have delivery, but not retail,
operations.
6
 USPS, Ensuring a Viable Postal Service for America: An Action Plan for the Future
(Washington, D.C.: March 2010).
7
 GAO, U.S. Postal Service: Foreign Posts’ Strategies Could Inform U.S. Postal Service’s
Efforts to Modernize, GAO-11-282 (Washington, D.C.: Feb. 16, 2011)
8                                                       th
21st Century Postal Service Act of 2011, S. 1789, 112 Cong. (2011).




Page 2                                               GAO-13-41 USPS Contract Postal Units
prohibit appeals of certain post office closures when a CPU is located
within 2 miles. 9

Given the retail service decisions facing USPS and the potential USPS
reforms that Congress is considering, you asked us to provide you with
information on CPUs. This report describes:

1. how CPUs supplement USPS’s post office network,
2. USPS revenue from CPUs and compensation to them from fiscal
   years 2007 to 2011, and
3. challenges USPS might face if it increases its use of CPUs.

To answer these objectives, we reviewed relevant laws and USPS
documents related to CPUs. We analyzed data from fiscal years 2007 to
2011 on CPU locations, dates of CPU closures, and CPU revenues and
USPS compensation to CPUs. This data comes from USPS’s contract
postal unit technology (CPUT) database. We analyzed data from USPS’s
Contract Authoring Management System (CAMS) on dates of CPU
openings from fiscal years 2007 to 2011. 10 We classified CPU locations
as urban, suburban, large-town rural, or small-town rural based on Rural-
Urban Commuting Area codes. 11 We used data on post office locations
from USPS’s facilities database (FDB) to determine CPU locations
relative to post offices. We also analyzed FDB data on CPU and post
office hours of service. We interviewed USPS officials and reviewed
documentation regarding the procedures and controls used to ensure the
reliability of data contained in CPUT, FDB, and CAMS and determined
that they were sufficiently reliable for our purposes. 12 In addition, we


9                                           th
Postal Reform Act of 2011, H.R. 2309, 112 Cong. (2011).
10
  We used data on CPU contract start dates. According to USPS officials, there is usually
a 4 to 6 month lag between the start of soliciting for a new CPU and the CPU’s opening
date. We determined CPU contract start dates to be a reasonable approximation for CPU
openings.
11
  The Rural-Urban Commuting Area (RUCA) codes developed by the Department of
Agriculture’s Economic Research Service are based on patterns of urbanization,
population density, and daily commuting patterns. For more information on RUCAs, see
http://www.ers.usda.gov/data-products/rural-urban-commuting-area-codes.aspx.
12
  However, as noted in our report, we found some inconsistencies between the number of
CPU records in CPUT and FDB, as well as some duplicate records in CPUT. We do not
believe that these problems affected the reliability of the data for our intended purposes.




Page 3                                               GAO-13-41 USPS Contract Postal Units
             interviewed CPU operators at 10 CPUs in the Chicago, Illinois; Dallas-
             Fort Worth, Texas; Southern California; and Washington, D.C., regions.
             We selected CPUs to achieve diversity in the location type, the type of
             CPU contract, and the level of revenues. We also interviewed USPS
             officials in headquarters who manage the CPU program and staff in
             USPS districts responsible for managing the CPUs that we visited. See
             appendix I for a more detailed description of our scope and methodology.

             We conducted this performance audit from January 2012 to November
             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 universal service obligation, part of which requires it to
Background   provide access to retail services. 13 It is required to serve the public and
             provide a maximum degree of effective and regular postal services to
             rural areas, communities, and small towns where post offices are not self-
             sustaining. 14 USPS is intended to be a financially self-sufficient entity that
             covers its expenses almost entirely through postal revenues. 15 USPS
             receives virtually no annual appropriations 16 but instead generates
             revenue through selling postage and other postal products and services.



             13
              39 U.S.C. § 101(a).
             14
               39 U.S.C. § 101(b). In addition, no small post office shall be closed solely for operating
             at a deficit, §101(b), and USPS’s annual appropriations acts has provided that none of the
             appropriated funds provided by the act may be used to consolidate or close small rural
             and other small post offices.
             15
               The Postal Reorganization Act of 1970 stated that “[p]ostal rates and fees shall provide
             sufficient revenue so that the total estimated income and appropriations to the Postal
             Service will equal as nearly as practicable total estimated costs of the Postal Service.”
             Pub. L. No. 91-375, 84 Stat. 760 (Aug. 12, 1970) (formerly U.S.C. 39 § 3621). See also,
             Payments on Unfunded Liability by the U.S. Postal Service to Civil Service Retirement
             Fund: Hearing Before the Committee on Post Office and Civil Service, United States
             Senate, on H.R. 29, 93rd Cong. 73-74 (statement by Post Office and Civil Service
             Committee Chairman Gale McGee).
             16
               USPS does receive an annual appropriation for revenue foregone on free and reduced
             rate mail.




             Page 4                                               GAO-13-41 USPS Contract Postal Units
Retail alternatives are increasingly important to USPS; revenues from all
retail alternatives—including self-service kiosks in post offices, USPS’s
website, and CPUs, among others—increased by about $1.6 billion from
fiscal years 2007 to 2011 while post office revenues decreased by $3
billion. (See fig. 1.) During this same period, USPS’s share of total retail
revenues from all retail alternatives increased from about 24 percent to 35
percent. USPS projects that by 2020, retail alternatives will account for 60
percent of its retail revenues. Given this growing importance and USPS’s
planned-retail-network restructuring, we recommended in November 2011
that USPS implement a strategy to guide efforts to modernize its retail
network that addresses both post offices and retail alternatives. 17
According to USPS officials, USPS is currently in the process of finalizing
its retail strategy.

Figure 1: USPS Retail and Retail Alternatives’ Revenues, Fiscal Years 2007 to 2011




17
  GAO, U.S. Postal Service: Action Needed to Maximize Cost-Saving Potential of
Alternatives to Post Offices, GAO-12-100, (Washington, D.C.: November 2011).




Page 5                                            GAO-13-41 USPS Contract Postal Units
                                        The retail alternatives most similar to post offices are CPUs. They are
                                        privately owned, operated, and staffed and are usually colocated with a
                                        primary business, such as a convenience store or supermarket. They
                                        provide most of the same products and services as post offices (see fig.
                                        2) at the same prices. 18

Figure 2: Products and Services Available at Post Offices and CPUs




                                        CPUs typically have a counter with prominently displayed official USPS
                                        signage, provided by USPS, giving the CPU the look of a post office. (See
                                        fig. 3.)




                                        18
                                          Other USPS retail alternatives, however, do not necessarily sell postal products and
                                        services at the same prices as post offices. For example, USPS does not place any
                                        restrictions on what Approved Shippers—retailers that offer shipping services from
                                        multiple providers including USPS—are allowed to charge for USPS products and
                                        services.




                                        Page 6                                              GAO-13-41 USPS Contract Postal Units
Figure 3: CPU Window in a Dallas, Texas, Medical Center




According to USPS, CPUs offer potential service and financial benefits,
and, as we have previously reported, some foreign posts have
successfully used private partnerships similar to CPUs to realize such
benefits. 19 CPUs can enhance service by being located closer to
customers’ homes and workplaces and operating at hours when post
offices may not be open. They can alleviate long lines at existing post
offices and provide postal services to areas with rapid population growth




19
 GAO-11-282.




Page 7                                         GAO-13-41 USPS Contract Postal Units
or where opening new post offices may be cost prohibitive. 20 Regarding
financial benefits, USPS has reported that the costs it incurs for CPUs are
less than those it incurs for post offices, relative to revenue earned. USPS
estimated that in fiscal year 2011, it incurred $0.17 in costs for each dollar
of revenue at CPUs and $0.51 in costs for each dollar of revenue at post
offices. 21 Costs are lower, in part because CPU operators, and not USPS,
are responsible for their operating costs, such as rent, utilities, and wages
for their employees.

CPUs provide all their revenues from postal products and services to
USPS, and USPS compensates CPUs for providing postal services under
the terms of their contracts. The amount of compensation USPS pays to a
CPU operator depends in large part on the type of contract the CPU
operates under. Currently there are two basic types of contracts:

•    fixed-price, under which USPS compensates the CPU a contractually
     determined amount regardless of sales, and
•    performance-based, under which USPS compensates the CPU a
     contractually determined percentage of sales.
USPS’s compensation to CPUs—either the amount under a fixed-price
contract or the percentage under a performance-based contract—is
specific for each CPU contract and the result of negotiation between
USPS and the CPU operator. CPU hours of service are also negotiated
for each contract, although USPS guidance on CPUs, in line with USPS’s
goal for CPUs to provide increased access and convenience, states that
their days and hours of service should exceed those at post offices. Other
terms and conditions are standardized in all contracts. For example, all
CPUs are required to offer the same basic set of products and services
such as stamps, Priority Mail, Express Mail, and Certified Mail. 22 In
addition, all CPUs are contractually prohibited from selling services,



20
  When considering placement of a new CPU, USPS assesses the needs of an area to
determine the demand for and viability of a potential CPU. Some factors that USPS uses
in this assessment include projected growth in an area and feedback from customers
suggesting that access to services should be expanded.
21
  According to USPS, cost per revenue dollar of post offices is not a perfect comparison to
cost per revenue dollar for CPUs, because it does not reflect certain other costs
associated with CPUs such as the costs of package pick-up by postal carriers.
22
  There are a limited number of products and services—such as post office boxes and
global express guaranteed service—not available at all CPUs.




Page 8                                              GAO-13-41 USPS Contract Postal Units
including private mailboxes and others, that are competitive with USPS’s
products, 23 and all CPU contracts specify USPS’s rights to inspect the
CPU at any time during operating hours. CPU contracts are valid for an
indefinite period, but CPU contracts specify that the CPU operator or
USPS can terminate a contract and close the CPU at any time with 120
days notice. 24

USPS management and oversight of CPUs, including identifying and
justifying the need for new CPUs, is done at the district 25 and local levels.
Staff at the district and local levels oversee day-to-day operations of
CPUs and identify the need for new CPUs. When a district identifies the
need for a new CPU, it approaches local businesses in the targeted area
as potential partners and engages in a competitive application process. 26

USPS has other partnerships with private entities to provide retail postal
services, similar to CPUs. USPS launched a retail partnership called the
Village Post Office in July 2011 in which existing small businesses
provide a limited range of postal products and services in small
communities where underutilized yet costly post offices may close, be
consolidated with another nearby post office, or have their hours of
service reduced. 27 In addition, USPS is in the early stages of planning for
partnerships with national and regional retailers to provide postal
services. These partnerships differ from CPUs in that they will not be
subject to the same prohibitions as CPUs on selling competing services,
and with them, USPS is attempting to expand access at a national or
regional level as opposed to addressing specific local needs as CPUs do.



23
  Some CPUs that predate this requirement sell such services even though new CPU
contracts forbid them.
24
  This is the case with all contracts that USPS now enters into. Some older contracts may
allow for less than 120 days notice.
25
  District offices are responsible for overseeing post offices and other facilities in their
districts. There are currently 67 USPS district offices. District offices report to USPS’s
seven area offices, which report to headquarters.
26
  In rare cases, such as when there is a strong documented need for a CPU and limited
potential partners, USPS may enter into a noncompetitive solicitation for a new CPU.
27
  Village Post Offices sell a more limited range of USPS products and services than CPUs
do. Local USPS staff solicit a local business for a Village Post Office opportunity and a
USPS contracting officer agrees to enter into a contract if they believe that the terms and
conditions of that Village Post Office present a best value to USPS.




Page 9                                                  GAO-13-41 USPS Contract Postal Units
                         USPS plans to launch these partnerships in test markets in early 2013
                         and will evaluate the effectiveness of these partnerships before making
                         decisions whether to expand the program.


                         Although total number of CPUs has decreased in recent years, USPS
USPS Uses CPUs to        continues to use CPUs to provide customers with access to postal
Provide Retail           services at additional locations and for more hours of service. CPUs are
                         located in a variety of locations, both urban and rural, and range from
Services at Additional   very close to far from post offices, demonstrating how USPS uses CPUs
Locations and Hours      to provide customers with alternatives located near crowded post
                         offices—which are often found in urban areas— and to provide service
                         where post offices are not conveniently located or may not be cost
                         effective for USPS, often in rural areas. In addition, CPUs allow USPS to
                         provide customer access at times often beyond the hours of service at
                         post offices.


Decrease in Number of    According to USPS data, the number of CPUs fell from 5,290 in 2002 to
CPUs                     3,619 in 2011. During the past 5 fiscal years, USPS has opened new
                         CPUs, but a higher number of CPUs have closed. (See table 1.)
                         According to USPS headquarters officials who manage the CPU program,
                         economic conditions forced many businesses that operated CPUs to
                         close and declining mail volume and sales of postal products have been
                         the primary factors behind the decrease in the number of CPUs. Although
                         USPS does not track specific reasons for CPU closures in its contract
                         postal unit technology (CPUT) database, retail managers in eight USPS
                         districts that we met with cited specific local issues resulting in CPU
                         closures, including the following:

                         •   The CPU operator retired or otherwise stopped working. For example,
                             an Indiana CPU operator closed his primary business and moved out
                             of the area.
                         •   The CPU operator moved the primary business to a new location and
                             did not retain the CPU. For example, the operator of a CPU in Texas
                             moved his primary business across the street, but the new space was
                             too small to host a CPU.
                         •   The CPU operator sold the primary business. For example, a
                             California CPU operator sold his self-storage business, and the new
                             operators were not interested in maintaining the CPU.
                         •   The CPU operator chose to close for financial considerations. For
                             example, a CPU operator in Virginia closed the CPU because he felt it
                             did not help his primary business.



                         Page 10                                    GAO-13-41 USPS Contract Postal Units
                           •     USPS initiated the closure because the CPU failed to meet the terms
                                 of the contract or USPS determined that the CPU was not cost
                                 effective. For example, USPS determined that a Maryland CPU that
                                 operated out of a private residence no longer brought in enough
                                 revenue to justify USPS’s compensation to the CPU, so USPS closed
                                 the CPU.


                           Table 1: New and Closed CPUs, Fiscal Years 2007 to 2011

                                                                2007           2008          2009          2010          2011
                                           a
                               New CPUs                           283           308           154           139            101
                               Closed CPUs                        415           374           399           282            202
                           Source: GAO analysis of USPS data.
                           a
                            We identified “new” CPUs using USPS data on the dates CPU contracts. According to USPS
                           officials, there is, on average, about a 4 to 6 month time lag from when USPS initiates a CPU
                           solicitation to when a CPU opens for business. We determined that the data on contract start dates
                           provided an approximate estimation of when CPUs opened.




CPUs Are Concentrated in   Consistent with USPS’s goal to use CPUs to absorb excess demand at
Urban Areas and Close to   post offices, our analysis of the distance between CPUs and post offices
Post Offices               shows that more than 56 percent of CPUs are less than 2 miles from the
                           nearest post office and 26 percent are less than 1 mile. (See table 2.) For
                           example, USPS opened a CPU in Frederick, Maryland, to better meet
                           demand and reduce customer wait times in lines at the local post office
                           about one-half mile away. Conversely, about 14 percent of CPUs are
                           located 5 miles or more from the nearest post office, showing how CPUs
                           can be used to provide services where post offices are not conveniently
                           located, such as a CPU in rural Vigo Park, Texas, that is located 16 miles
                           from the nearest post office. Similarly, USPS opened a CPU in Aubrey,
                           Texas, located about 5 miles from the nearest post office, in order to
                           serve customers in a fast growing area.




                           Page 11                                                    GAO-13-41 USPS Contract Postal Units
Table 2: Distribution of CPUs by Distance to Closest Post Office, as of March 30,
2012

 Distance to nearest post office (in miles)                                    Percentage of CPUs
 10 or more                                                                                              4
 5 to <10                                                                                            10
 3 to <5                                                                                             13
 2 to <3                                                                                             17
 1 to <2                                                                                             30
 Less than 1                                                                                         26
Source: GAO analysis of USPS data.

Note: This analysis uses straight-line calculation of distances between two points resulting in actual
driving distances that could be longer.


Consistent with the majority of CPUs’ being within 2 miles of a post office,
CPUs are also more likely to be in urban than rural areas, and recent
CPU openings further demonstrate this pattern. As shown in figure 4,
more than 60 percent of CPUs active as of March 30, 2012, were in urban
areas, as defined by the Rural-Urban Commuting Area codes we used for
this analysis. 28 This pattern is consistent with USPS’s intention to use
CPUs to reduce the time customers have to wait in line at a post office,
more often in urban areas. Furthermore, more than three-fourths of new
CPUs in fiscal year 2011 were in urban locations. This suggests that
CPUs may be most viable in urban areas with higher populations and
customer traffic. Our analysis shows that CPUs are rarer in suburban,
large-town rural, and small-town rural locations.




28
  We used the Rural-Urban Commuting Area (RUCA) codes developed by the
Department of Agriculture’s Economic Research Service to classify CPU locations as
urban, suburban, large-town rural, and small-town rural. RUCA classifications are based
on patterns of urbanization, population density, and daily commuting patterns. For more
information on RUCAs, see http://www.ers.usda.gov/data-products/rural-urban-
commuting-area-codes.aspx.




Page 12                                                     GAO-13-41 USPS Contract Postal Units
Figure 4: Percentage of CPUs by Location Type, as of March 30, 2012




Note: Because of data limitations, we could not determine the location types for 138 CPUs. As a
result, the percentages in the figure do not sum to 100.


When considering both CPU location type and distance from the nearest
post office, on average, urban CPUs are located closer to post offices
than rural CPUs. (See fig. 5.) This is consistent with USPS’s use of CPUs
in urban areas to alleviate crowds at existing post offices and in rural
areas to provide access where post offices are not conveniently located
and may be cost prohibitive to operate.




Page 13                                                   GAO-13-41 USPS Contract Postal Units
Figure 5: Average Distance from CPU to Closest Post Office by Location Type, as of
March 30, 2012




Note: Distances are straight-line calculations between two points. Driving distances could be longer.
We were unable to determine location type for 138 CPUs and, as a result, they were not included in
this analysis.


The relatively limited number of CPUs in rural areas could limit access to
postal services for rural customers as USPS also reduces hours at
underutilized post offices. As mentioned earlier, to reduce expenses,
USPS is planning to reduce the hours of service at more than 13,000
underutilized post offices—which are primarily in rural areas. However, as
stated by USPS officials and as shown in table 3, almost 80 percent of
these post offices are at least 10 miles from the nearest CPU. As a result,
existing CPUs may not provide alternate access to customers of these
post offices.




Page 14                                                    GAO-13-41 USPS Contract Postal Units
Table 3: Distribution of Post Offices Being Considered for Reduced Hours of
Service by Distance to Closest CPU, as of March 30, 2012

 Distance to closest CPU (in              Percentage of post offices being considered for
 miles)                                   hours-of-service reduction
 10 or more                               79
 5 to <10                                 16
 3 to <5                                  3
 2 to <3                                  1
 Less than 2                              1
Source: GAO analysis of USPS data.

Note: Distances are straight-line calculations between two points. Driving distances could be longer.
This data includes the 13,000 post offices at which USPS is planning to reduce hours of service.


Changes that USPS makes to its CPU program, such as any that may
arise out of its retail network restructuring, could affect certain states
more than others. Although CPUs are in all 50 states, the District of
Columbia, and 4 territories, they are concentrated in certain parts of the
country, as shown in figure 6. 29 Some states rely more on CPUs for
providing access to USPS’s products and services than others. USPS
has opened many CPUs in states like Arizona, where the existing post
office network may not be adequate to meet rapid population growth and
where opening new post offices would be cost prohibitive. As a result,
there are 141 CPUs in Arizona and 276 post offices. By contrast, states
with limited population growth and a large existing network of post offices
are generally less reliant on CPUs. For example, Pennsylvania has 90
CPUs supplementing its 1,786 post offices. Appendix II provides data on
the number of CPUs and post offices in each state.




29
  Based on CPUs that were active on March 30, 2012.




Page 15                                                    GAO-13-41 USPS Contract Postal Units
Figure 6: CPU Locations, as of March 30, 2012




CPUs Provide, on Average,               CPUs currently provide more hours of service, on average, than post
More Hours of Service                   offices do, consistent with USPS’s goal for CPUs to expand access to
than Post Offices Do                    postal services. On average, CPUs operate more hours per day and per
                                        week than post offices and more are open at night and on Sundays. (See
                                        table 4.) However, slightly fewer CPUs are open on Saturdays than post
                                        offices.




                                        Page 16                                  GAO-13-41 USPS Contract Postal Units
                          Table 4: Hours and Days of Service for CPUs and Post Offices
                                                                                                       a
                                                                                                CPUs             Post offices
                              Average hours of service per week                                      54                         41
                              Average hours of service per weekday                                  9.1                     7.7
                                                                         b
                              Average hours of service on Saturdays                                 7.6                     3.4
                                                                     b
                              Average hours of service on Sundays                                  12.5                   12.1
                              Open on Sundays                                                    22.3%                    1.7%
                              Open on Saturdays                                                    76%                    83%
                              Open after 6 pm                                                      29%                      4%
                              Open 24 hours a day                                                   1%                    0.1%
                          Source: GAO analysis of USPS data.

                          Note: For the purposes of this analysis, hours of service are those during which a post office’s or
                          CPU’s windows or counters are open to customers. This analysis includes 25,660 post offices with
                          window hours as listed in USPS’s facility database (FDB) on June 27, 2012.
                          a
                           We found that USPS’s facilities database, which tracks hours of service for both CPUs and post
                          offices, included hours of service data for 3,328 CPUs as of June 7, 2012. However, our analysis of
                          USPS’s contract postal unit technology database (CPUT), which USPS uses to track data on CPU
                          locations and finances, indicated that there were 3,542 CPUs as of March 30, 2012. According to
                          USPS officials, this difference is because field staff responsible for entering CPU data into FDB do
                          not always do so. However, officials added that USPS is planning to request in early fiscal year 2013
                          that all relevant staff review FDB records to ensure completeness of CPUs and input any CPUs not
                          already in FDB.
                          b
                           Average only includes those CPUs or post offices open on those days. While about 3 percent of
                          CPUs open on Sundays are open for 24 hours, about 5 percent of post offices open on Sundays are
                          open for 24 hours, according to FDB.




Trends in CPU
Contract Types,
Revenues, and
Compensation
Use of the Performance-   In recent years, USPS has intentionally shifted its means of
Based Contract Type       compensating CPUs from fixed-price contracts—in which compensation
Increased                 to CPUs is a fixed amount regardless of sales—to performance-based
                          contracts—under which compensation to CPUs is a percentage of the
                          CPU’s postal sales—resulting in potentially greater revenue and less
                          financial exposure to USPS. (See fig. 7.) According to USPS officials,
                          since 2002, USPS has entered into performance-based contracts for
                          most new CPUs and has converted many fixed-price contracts to
                          performance-based. The purpose of the shift is to incentivize CPU
                          operators to market postal products and services to increase postal


                          Page 17                                                    GAO-13-41 USPS Contract Postal Units
                            revenues. CPUs with fixed-price contracts have limited incentive to sell
                            more postal products, since their compensation is the same regardless of
                            their sales. Furthermore, since USPS compensates CPUs with
                            performance-based contracts a percentage of the CPU’s sales, USPS
                            does not compensate these CPUs more than it receives in revenues, a
                            situation that can happen with CPUs with fixed-price contracts.

                            Figure 7: Number of CPUs by Contract Type, 2002 and 2011




USPS Revenues from          The total revenues USPS received from sales of postal products and
CPUs Decreased from         services at CPUs 30 declined about 9 percent from $672 million in fiscal
Fiscal Years 2007 to 2011   year 2007 to $611 million in fiscal year 2011, as shown in figure 8.
                            However, as mentioned earlier, USPS’s revenues from post offices
                            declined about 22 percent during this period. The decline in CPU
                            revenues is part because of the decrease in the number of CPUs, as
                            average CPU revenues decreased only 2 percent during this time. The
                            downward trend in mail volume was also a factor, according to USPS
                            officials. Several CPUs we visited experienced declining sales in recent
                            years. For example, a CPU in Cedar Lake, Indiana, saw CPU revenues
                            decline 17 percent from fiscal year 2007 to 2011. Several USPS district
                            retail managers cited CPUs that closed because of low sales. For
                            example, a CPU in Texas closed because neither the CPU nor the
                            primary business generated sufficient revenue for the operator to stay in
                            business. Our analysis of USPS data found that CPUs with lower than



                            30
                              As mentioned earlier, CPUs provide all revenues from their postal sales to USPS.
                            USPS, in turn, provides compensation to the CPU as dictated by the terms of that CPU’s
                            contract.




                            Page 18                                           GAO-13-41 USPS Contract Postal Units
average revenues were more likely to close than were those with higher
revenues. On average, CPUs that closed from fiscal years 2008 to 2011
generated roughly 26 percent less revenue on average in the year prior to
closure than the average CPU revenue for that year.

Figure 8: Total USPS Revenues from CPUs, Fiscal Years 2007 to 2011




Individual CPU revenues vary widely, as shown in figure 9. On average,
USPS’s revenue from individual CPUs averaged about $160,000 in
revenue in fiscal year 2011, but a substantial number (41 percent)
generated less than $50,000. Moreover, low revenue CPUs are more
likely to be located in rural areas where population is sparse and demand
for services is lower; 22 percent of small-town rural and large-town rural
CPUs had revenues under $5,000 in fiscal year 2011. High-revenue
CPUs—such as the 7 percent that earned $500,000 or more in fiscal year
2011—are mostly located in urban areas where demand is likely higher
and post offices are more likely to have long wait times. For instance, we
visited one CPU in downtown Los Angeles with $1.8 million in revenues in
fiscal year 2011. The ability to generate high revenues at this CPU led it




Page 19                                       GAO-13-41 USPS Contract Postal Units
to increase capacity by adding postal windows to keep pace with
demand. 31

Figure 9: Distribution of CPU Revenues, Fiscal Year 2011




Note: This data includes all CPUs that reported any financial data for any part of the fiscal year.




31
  The CPU started with one service window as a supplement to the owner’s primary
business, an independent cellular phone store in a downtown area strip mall with free
parking. According to the CPU operator, the postal business grew so much that the
operator and USPS agreed to add windows to increase capacity, crowding out the
operator’s primary business. The CPU is now a standalone CPU with three windows and,
according to the operator, USPS dedicates a large truck to picking up this one CPU’s mail
and packages each day.




Page 20                                                      GAO-13-41 USPS Contract Postal Units
USPS Compensation to        USPS compensation to CPUs increased about 6 percent from $75.4
CPUs Increased from         million in fiscal year 2007 to $79.9 million in fiscal year 2011. 32 However,
Fiscal Years 2007 To 2011   USPS compensation to CPUs has decreased every fiscal year from 2008
                            to 2011. (See fig. 10). According to USPS officials, the increase in
                            compensation from fiscal years 2007 and 2008 was because of larger
                            numbers of performance-based contracts, fewer public service contracts,
                            which are generally less expensive, individual CPUs’ petitions for
                            increased compensation because of increased cost of doing business,
                            and economic conditions. The subsequent decline in USPS
                            compensation to CPUs from fiscal years 2008 to 2011 was because of
                            declining numbers of CPUs during the time.

                            Figure 10: Total USPS Compensation to CPUs, Fiscal Years 2007 to 2011




                            As with CPU revenues, USPS compensation to individual CPUs varies
                            widely. (See fig. 11.) For example, 326 CPUs received no more than


                            32
                              In addition to compensating CPUs, USPS incurs other expenses for managing the CPU
                            program. According to USPS, other CPU expenses such as CPU oversight and
                            management and the costs of providing the contract access retail system—a device that
                            weighs mail and reports transactions to USPS—for certain CPUs totaled about $9.5
                            million in fiscal year 2011.




                            Page 21                                          GAO-13-41 USPS Contract Postal Units
                           $100 in annual compensation in fiscal year 2011. On the other hand, that
                           same year, 55 high-revenue CPUs with performance-based contracts
                           received over $100,000 in compensation. In fiscal year 2011, USPS
                           compensated CPUs an average of about $21,000, but compensated
                           more than a quarter of CPUs less than $5,000.

                           Figure 11: Distribution of USPS Compensation to CPUs, Fiscal Year 2011




                           Note: This data includes all CPUs that reported any financial data for any part of the fiscal year.


After Compensating CPUs,   As USPS undertakes actions to achieve a sustainable cost structure, it
USPS Retains Most CPU      will be important to understand the implications of CPUs for USPS’s costs
Revenues                   and revenues. Currently, USPS retains most of the revenues generated
                           by CPUs, its major expense being compensation payments to CPU
                           operators. As we described previously, in fiscal year 2011, USPS earned
                           a total of $610.5 million in revenues from CPUs and, in return,
                           compensated CPUs a total of $79.9 million, allowing USPS to retain
                           $530.6 million in CPU revenues. 33 Measured in another way, after




                           33
                              USPS incurred about $9.5 million of other expenses in managing the CPU program in
                           fiscal year 2011.




                           Page 22                                                      GAO-13-41 USPS Contract Postal Units
compensating CPUs, USPS retained $0.87 of every dollar of CPU
revenues. 34

However, for individual CPUs, the amount of revenues USPS retains after
compensating the CPU varies significantly. USPS’s target for individual
CPUs is to retain, after compensation, $0.80 for every dollar in
revenues. 35 In fiscal year 2011, USPS did not meet that target for 55
percent of the roughly half of CPUs that have fixed-price contracts. (See
fig. 12.) Moreover, for 23 percent of CPUs with fixed-price contracts in
fiscal year 2011, USPS did not retain any revenues as it compensated the
CPU an amount greater than the revenue USPS received from the CPU.
Most of these CPUs were in rural areas. Forty-nine percent of small-town
rural CPUs with fixed-price contracts generated less revenue for USPS
than the compensation USPS provided in fiscal year 2011. According to
USPS officials, while USPS does not retain any revenue from these
CPUs after compensating them, operating a post office in the same
locations would be more onerous from a cost perspective. Because
USPS compensates the roughly 45 percent of CPUs with performance-
based contracts with a percentage of their sales—usually between 9 and
12 percent—USPS’s revenues from CPUs with performance-based
contracts will, by definition, always be greater than the amount of USPS
compensation to them. 36




34
  By contrast, the ratio of revenues retained after compensating CPUs per dollar of
revenue in fiscal year 2007—when CPU revenues were higher and USPS compensation
to CPUs was lower—was about $0.89.
35
  USPS officials said that they review CPUs in which USPS retains less than $0.80 per
dollar of revenue and attempts to take action to decrease CPU compensation or terminate
the CPU if necessary.
36
  In rare cases where there is a very strong need for the CPU, USPS will compensate
performance-based CPUs at a higher rate than 12 percent. As a result, in fiscal year 2011,
USPS met its target of retaining $0.80 or more per dollar of revenue at 98 percent of
performance-based CPUs.




Page 23                                             GAO-13-41 USPS Contract Postal Units
                       Figure 12: Distribution of Revenue Retained by USPS per Dollar of Revenue for
                       CPUs with Fixed-Price Contracts, Fiscal Year 2011




                       Note: This data includes all CPUs that reported any financial data for any part of the fiscal year.


                       According to USPS officials, USPS compensation to a CPU in excess of
                       revenues is to be expected in some cases, especially in small towns,
                       where demand for service may be low but USPS contracts with a CPU to
                       help fulfill its universal service obligation. For example, the CPU in Fields,
                       Oregon, which operates under a fixed-price contract, received $4,800 in
                       compensation from USPS in fiscal year 2011, but had revenues of
                       $1,521. However, the nearest post office to the CPU in Fields is over 40
                       miles away, demonstrating how USPS uses this CPU to provide service
                       to an area where traditional retail access is not conveniently located.


                       USPS is embarking on a substantial makeover of its retail network,
USPS’s Future Use of   including reducing hours of service at thousands of underutilized post
CPUs May Pose          offices and expanding the use of retail alternatives through partnerships
                       with national and regional retailers. According to USPS officials, at this
Challenges             time there are no plans to strategically increase the number of CPUs to
                       help enhance service in the changing postal retail landscape. USPS
                       officials said that they plan to continue to use CPUs to meet specific local
                       needs identified by local and district officials. At the same time, pending
                       legislation in the Senate would require USPS to consider opening CPUs


                       Page 24                                                      GAO-13-41 USPS Contract Postal Units
as replacements for post offices that it closes. 37 Although USPS has
pared down its plans to close post offices by instead reducing their hours,
to the extent that USPS closes post offices in the future, this requirement
may put more pressure on USPS to open more CPUs. Furthermore,
some district retail managers we spoke with said that they see a
potentially larger role for CPUs in the future as USPS transforms its
traditional retail network. However, we identified a number of challenges
USPS might face in its future use of CPUs:

•     Limited Potential Business Partners. USPS may face limited
      private interest in opening CPUs in certain areas. USPS planned to
      open thousands of Village Post Offices, which, similar to CPUs,
      involve partnerships with private businesses, by the end of 2012.
      However, as of August 20, 2012, USPS has opened only 41 Village
      Post Offices in part because of a lack of interested private parties.
      USPS officials said that this lack of interested parties is because in
      some rural areas, there may not be any businesses to host a Village
      Post Offices and in other rural areas, businesses may not want to
      partner with USPS in what some communities may perceive as a
      reduction in services they receive. In addition, some district retail
      managers told us there are a number of reasons that some interested
      businesses do not become CPUs, including financial instability and
      not wanting to meet the conditions of new CPU contracts, such as
      space requirements or prohibiting sales of competitors’ products and
      services. As a result, district staff are not always able to open as
      many new CPUs as they would like.
•     Limited Staff Resources in USPS Districts. As we have previously
      mentioned, local and district-level USPS officials identify and justify
      the need for new CPUs, determining when and where to approach
      businesses as potential CPU partners. Some USPS district retail
      managers we spoke with told us that although there are unmet needs
      for CPUs in their districts, compared to prior years, they now have
      fewer staff and less time to seek out opportunities for new CPUs.
      Given the resources required to seek opportunities and open new
      CPUs, USPS may be unable to meet all local needs for CPUs with
      existing resources.
•     Risk of Service Disruptions from CPU Closures. Because CPUs
      can close at any time—unlike post offices, which must undergo a
      lengthy review process including a public comment period prior to


37
    S. 1789.




Page 25                                       GAO-13-41 USPS Contract Postal Units
                    closure—there is a risk in relying on CPUs to provide service,
                    especially in underserved areas where there may be a limited number
                    of potential CPU partners and other post office alternatives. As
                    discussed earlier, CPU operators can decide to close their CPUs for a
                    variety of reasons. Although CPU contracts require CPUs to provide
                    120 days notice to USPS before closing, some district retail managers
                    we spoke with said that CPU operators often provide much less
                    notice, often as little as one week. Given the other challenges in
                    opening new CPUs, USPS may have trouble replacing the lost service
                    from unexpectedly closed CPUs.

               CPUs can play an important role in helping USPS provide universal
Concluding     service as it cuts costs to improve its financial condition—at times two
Observations   conflicting goals. CPUs can help USPS reach customers in convenient
               locations during convenient hours at a potentially lower cost than through
               post offices. USPS data show that an increasing proportion of retail
               revenue is generated through channels other than post offices, which
               indicates a growing level of customer acceptance of these non-traditional
               means of accessing postal services.

               While USPS plans to continue to use CPUs as one alternative to post
               offices to fill local needs for postal services, it is exploring planned
               national and regional partnerships to more broadly expand access to
               convenient retail alternatives nation-wide. As USPS develops these
               regional and national partnerships, reduces hours of service at many post
               offices, and continues to use CPUs to fill specific local needs, it is
               important for USPS to consider CPUs’ continuing role in USPS’s evolving
               national retail network. We recommended in November 2011 that USPS
               develop and implement a retail network strategy that would address
               customer access to both post offices and retail alternatives. 38 USPS
               officials told us that as of July 2012, the agency is in the process of
               finalizing this retail strategy. We continue to believe, as we stated in
               November 2011, that it is important that such a strategy discuss how
               USPS plans to increase its use of retail alternatives—including CPUs—
               while considering significant changes to its network of post offices and the
               means through which it provides access to USPS’s customers. As USPS
               continues to develop this retail strategy, we believe that USPS can
               capitalize on growing acceptance of retail alternatives by using


               38
                GAO-12-100.




               Page 26                                     GAO-13-41 USPS Contract Postal Units
                  information about CPUs to inform its decisions. For example, by
                  considering factors, such as the distance of CPUs to existing post offices,
                  CPU hours and days of service, and USPS’s costs of compensating
                  CPUs, USPS could better inform its retail strategy in order to make better
                  strategic use of CPUs in its future retail network, which will likely include
                  reduced hours at thousands of post offices.


                  We provided a draft of this report to USPS for review and comment.
Agency Comments   USPS provided a written response (see appendix III) in which they
                  discussed USPS’s efforts beyond CPUs to provide customers with
                  sufficient and convenient access to its products and services through
                  other types of partnerships and alternatives to post offices.

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

                  If you or your staffs have any questions regarding 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. GAO staff who made key contributions to
                  this report are listed in appendix IV.

                  Sincerely yours,




                  Lorelei St. James
                  Director, Physical Infrastructure Issues




                  Page 27                                      GAO-13-41 USPS Contract Postal Units
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             To determine how contract postal units (CPUs) supplement the U.S.
             Postal Service’s (USPS’s) network of post offices, we analyzed data from
             USPS’s contract postal unit technology (CPUT) database. This database
             contains information for individual CPUs, including location, contract
             number, revenues, compensation, CPU contract type (fixed-price or
             performance-based), contract termination dates, and if the CPU is in
             active service. Location data for each CPU in CPUT includes a physical
             address including city, state, 1 and ZIP+4 code. USPS provided us these
             data on March 30, 2012. In determining the number of active CPUs, we
             encountered some duplicate CPU records. To avoid double counting, we
             used the CPU contract number to keep the record for only the oldest
             contact associated with each CPU. Based on the physical address,
             including ZIP+4 code, we determined the location type for each CPU by
             using the Department of Agriculture’s Economic Research Service’s
             Rural-Urban Commuting Area (RUCA) codes. RUCA codes classify a
             given location based on patterns of urbanization, population density, and
             daily commuting patterns. We classified CPU locations as one of four
             types: urban, suburban, large-town rural, and small-town rural. We also
             determined how many CPUs were located in each state using the state
             data in CPUT.

             Based on data from CPUT, we identified which CPUs closed from fiscal
             years 2007 to 2011. We identified which CPUs opened during this time
             period based on contract start dates from USPS’s Contract Authoring
             Management System (CAMS). Contract start dates generally do not
             match the date that a CPU opens because, according to USPS officials, it
             usually takes 4 to 6 months for a CPU to open after USPS initiates a
             solicitation. We determined this date to be a reasonable approximation of
             when a CPU opens. We determined the number of CPUs that opened or
             closed in each fiscal year by counting the number of contract start dates
             and closure dates for each year.

             In addition, we obtained data from USPS’s facilities database (FDB) on all
             post office locations including physical street address, city, state, and
             ZIP+4. USPS provided us these data on December 19, 2011. We
             determined the distance between the list of active CPUs as of March 30,
             2012, and post offices as of December 19, 2011, using the latitude and



             1
              For the purposes of our analysis, the term “state” includes all 50 states, the District of
             Columbia, American Samoa, Guam, the Northern Mariana Islands, and Puerto Rico.




             Page 28                                                GAO-13-41 USPS Contract Postal Units
Appendix I: Scope and Methodology




longitude for each CPU and each post office and measuring the straight-
line distance between the two points. We then determined which post
office was closest to each CPU and by what distance. We also counted
the number of post offices in each state and, along with using data on the
number of CPUs in each state, to determine the number of CPUs per 100
post offices in each state.

We analyzed FDB data to determine the number of hours of service per
day and per week for each CPU and post office, and how many locations
are open at certain times, such as on Sundays. USPS provided these
data for CPUs on June 7, 2012, and for post offices on June 27, 2012. 2

We also visited 10 CPUs in the following regions: Chicago, Illinois; Dallas-
Fort Worth, Texas; Southern California; and Washington, D.C. We
selected those regions and the 10 CPUs to ensure diversity in geographic
location, location type (urban, suburban, and rural), CPU revenue levels,
and type of CPU contract (fixed-price and performance-based). We also
selected locations close to GAO office locations in order to minimize the
use of travel funds by GAO staff on this engagement. During our visits,
we interviewed each CPU operator. We also interviewed district retail
managers in each of the USPS districts responsible for managing these
CPUs. During these interviews as well as interviews with USPS
headquarters staff in charge of managing the CPU program, we
discussed the reasons for and benefits from using CPUs, the reasons
why CPUs have closed, and factors that affect CPU revenues and
compensation. We also reviewed GAO reports and USPS documents
detailing the CPU program, including USPS guidance on CPUs and
standard CPU contracts.

To determine USPS revenue from CPUs and USPS’s compensation to
them from fiscal years 2007 to 2011, we analyzed data from CPUT. We
encountered numerous duplicate records for a single CPU address. To


2
 We found that FDB included hours of service data for 3,320 CPUs as of June 7, 2012.
However, our analysis of USPS’s Contract Postal Unit Technology database (CPUT),
which USPS uses to track data on CPU locations and finances, indicated that there were
3,542 CPUs as of March 30, 2012. According to USPS officials, this difference is because
field staff responsible for entering CPU data into FDB do not always do so. However, the
officials added that USPS is planning to request in early fiscal year 2013 that all relevant
staff review FDB records to ensure completeness of CPUs and input any CPUs not
already in FDB. We determined that given that there was no indication that this set of
CPUs not included in FDB is unique, that the data were reliable for our purposes.




Page 29                                              GAO-13-41 USPS Contract Postal Units
Appendix I: Scope and Methodology




avoid double counting, we merged all financial data for a given contract
number into a single record by summing up data for each unique contract
number. As CPUT stores CPU revenue and compensation data on a
monthly basis, we summed monthly data to determine the total revenues
and USPS compensation for each CPU for each fiscal year. We
determined the amount of revenues USPS retains after compensating
CPUs in each fiscal year by subtracting CPU compensation from CPU
revenues and dividing that by CPU revenues. Finally, we linked data from
CAMS on contract start dates to this financial data from CPUT by using
the contract number for each CPU. As a result, we were able to
determine the revenues and USPS compensation to each CPU for CPUs
that opened in each fiscal year. We did the same for closed CPUs by
using CPU closure dates included in CPUT.

We assessed the reliability of each of the data sources we used by
interviewing responsible USPS officials about procedures for entering and
maintaining the data and verifying their accuracy. We manually reviewed
all data provided by USPS for any obvious outlying data. After reviewing
this information, we determined that the CPUT data were sufficiently
reliable for evaluating revenue and compensation trends, closure dates,
and CPU locations. We did find that CPUT reported outlying data on
revenues in certain months for four CPUs in fiscal year 2007. To address
these outlying data, we averaged the revenues for each of the four CPU
in the other months, where reported revenues seemed normal, and
assumed that the CPU earned the average level of revenue in the
outlying months. We determined that the CAMS data were sufficiently
reliable for evaluating CPU start dates. We determined that the FDB post
office and CPU hours-of-service data were sufficiently reliable for overall
comparison purposes. As previously stated, the FDB included hours-of-
service data for 3,320 CPUs as of June 27, 2012, 6.3 percent less than
3,542 CPUs indicated by our analysis of CPUT as of March 30, 2012. In
discussing the discrepancy with USPS officials, we determined that there
was no indication that the CPU records missing from the FDB differed
from the general population and were therefore unlikely to affect the
outcome of our analysis. 3




3
 According to USPS officials, this difference is because field staff responsible for entering
CPU data into FDB do not always do so. However, officials added that USPS is planning
to request, in early fiscal year 2013, that all relevant staff review FDB records to ensure
completeness of CPUs and input any CPUs not already in FDB.




Page 30                                               GAO-13-41 USPS Contract Postal Units
Appendix I: Scope and Methodology




To determine challenges USPS might face if it increases its use of CPUs,
we reviewed relevant legislation, USPS documents related to managing
CPUs, prior GAO reports, and USPS Office of Inspector General reports.
We also interviewed USPS officials responsible for implementing the CPU
program, CPU operators, and USPS district retail managers at the sites
and districts discussed earlier regarding current CPU operations and
challenges the CPU program might face going forward.




Page 31                                  GAO-13-41 USPS Contract Postal Units
Appendix II: Number of Contract Postal Units
              Appendix II: Number of Contract Postal Units
              and Post Offices by State



and Post Offices by State

              Table 5 provides the number of Contract Postal Units (CPUs) and post
              offices in each state, as well as the number of CPUs per 100 post offices
              in each state as a measure of how reliant each state is on CPUs for
              providing access to postal services.

              Table 5: Number of CPUs and Post Offices by State

                                                                           Post   Number of CPUs per
                                                                a             b
                                                             CPU       Offices       100 Post Offices
              Alaska                                           75           200                    37.5
              Alabama                                          30           601                     5.0
              American Samoa                                   3              1                   300.0
              Arkansas                                         40           615                     6.5
              Arizona                                         141           276                    51.1
              California                                      285         1667                     17.1
              Colorado                                         63           444                    14.2
              Connecticut                                      24           302                     7.9
              Delaware                                         3             63                     4.8
              District of Columbia                             6             45                    13.3
              Florida                                         241           798                    30.2
              Georgia                                          54           744                     7.3
              Guam                                             6              6                   100.0
              Hawaii                                           22           103                    21.4
              Iowa                                            104           864                    12.0
              Idaho                                            32           235                    13.6
              Illinois                                         64         1352                      4.7
              Indiana                                          62           743                     8.3
              Kansas                                           88           592                    14.9
              Kentucky                                         71           710                    10.0
              Louisiana                                        34           486                     7.0
              Massachusetts                                    35           605                     5.8
              Maryland                                         37           471                     7.9
              Maine                                            32           438                     7.3
              Michigan                                        219           929                    23.6
              Minnesota                                       100           799                    12.5
              Missouri                                         90           912                     9.9
              Mississippi                                      30           423                     7.1
              Montana                                          42           311                    13.5
              North Carolina                                   86           824                    10.4




              Page 32                                               GAO-13-41 USPS Contract Postal Units
Appendix II: Number of Contract Postal Units
and Post Offices by State




                                                                 Post     Number of CPUs per
                                                      a             b
                                                CPU          Offices         100 Post Offices
    North Dakota                                   36               309                  11.7
    Northern Mariana Islands                          3              2                  150.0
    Nebraska                                       58               482                  12.0
    New Hampshire                                  17               241                   7.1
    New Jersey                                     23               708                   3.2
    New Mexico                                     51               305                  16.7
    Nevada                                         39               127                  30.7
    New York                                      105              1838                   5.7
    Ohio                                          131              1144                  11.5
    Oklahoma                                       35               595                   5.9
    Oregon                                         65               374                  17.4
    Pennsylvania                                   90              1786                   5.0
    Puerto Rico                                    19               120                  15.8
    Rhode Island                                      7              78                   9.0
    South Carolina                                 59               397                  14.9
    South Dakota                                   44               317                  13.9
    Tennessee                                      66               578                  11.4
    Texas                                         229              1666                  13.7
    Utah                                           69               195                  35.4
    Virginia                                       59               880                   6.7
    Vermont                                        13               272                   4.8
    Washington                                     74               523                  14.1
    Wisconsin                                      90               743                  12.1
    West Virginia                                  26               672                   3.9
    Wyoming                                        15               139                  10.8
Source: GAO analysis of USPS data.
a
Includes CPUs that were actively operating as of March 30, 2012.
b
Includes post offices open as of December 19, 2011.




Page 33                                                   GAO-13-41 USPS Contract Postal Units
Appendix III: Comments from the U.S. Postal
              Appendix III: Comments from the U.S. Postal
              Service



Service




              Page 34                                       GAO-13-41 USPS Contract Postal Units
Appendix III: Comments from the U.S. Postal
Service




Page 35                                       GAO-13-41 USPS Contract Postal Units
Appendix III: Comments from the U.S. Postal
Service




Page 36                                       GAO-13-41 USPS Contract Postal Units
Appendix IV: GAO Contact and Staff
                  Appendix IV: 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, Heather Halliwell, Assistant
Acknowledgments   Director; Patrick Dudley; John Mingus; Jaclyn Nelson; Joshua Ormond;
                  Matthew Rosenberg; Amy Rosewarne; Kelly Rubin; and Crystal Wesco
                  made key contributions to this report.




(544176)
                  Page 37                                   GAO-13-41 USPS Contract Postal Units
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