oversight

Financial Performance of the United States Postal Service

Published by the Government Accountability Office on 1990-02-07.

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

                    United States General Accounting   OIlIce   If/   o.s-5-J

                    Testimony
’ GAO


 For Release         Financial  Performance      of the
 on Delivery         United States:,Postal      Service
 Expected at
 1O:OO a.m. EST
 Wednesday
 February 7, 1990




                     Statement of L. Nye Stevens
                     Director,     Government Business
                        Operations    Issues
                     General Government Division
                     Before the Committee on
                     Post Office & Civil  Service
                     U.S. House of Representatives




 GAO/T-GGD-90-16
                         FINANCIAL PERFORMANCEOF THE
                         UNITED STATES POSTAL SERVICE
                    Summary of Statement by L. Nye Stevens
              Director,   Government Business Operations  Issues
                        U.S. General Accounting Office
During fiscal    year 1989, postal revenues reached the level
anticipated    when the present    rates were set in April         1988.  costs,
however, exceeded the anticipated         level by about $1.6 billion.          The
major cause of the overrun .    was   the   Service's    failure   to accomplish
workforce   reductions  as anticipated.         Overall,    workyears used during
1989 exceeded the prediction      by about 38,000 at a cost of about $1.34
billion.
The Service's      cost savings estimatesand         assumptions   were not
examined during the rate making process.              Postal Rate Commission
officials    said they could not legally         question   such estimates    unless
they were contradicted         by other data or challenged       by other parties
to the rate case.         Postal customers,     however, have little     incentive
to challenge      predicted    cost reductions    because they produce a lower
revenue requirement         and lower postage rates.       Under such
circumstances,       the Postal Service must ensure that predicted           cost
reductions     are realistic      and accomplished.
In its estimate     of 1989 costs,    the Service expected that it would
save about $748 million       in reduced clerk and mailhandler   workhours by
installing   labor saving equipment such as automated sorting
machinery.     Although   the equipment was put in place, clerk and
mailhandler    costs exceeded the planned level by $761 million.        The
Service's   savings estimates     were not backed up with actions   to
achieve them.      Workhours that might have been replaced by automation
were not put to effective       use elsewhere.
The productivity          potential    of automated equipment is critical           to the
Service's       ability     to control    future   costs.   GAO's analysis      of 1989
processing        costs indicates      that productivity     gains were insufficient
to offset       the cost of increased         mail volume, and were dwarfed by the
increase      in per hour labor costs.            Unless productivity     improves
substantially          or the growth in labor costs is restrained,            the cost of
mail service         in the future     is likely    to become increasingly       less
competitive        with other forms of communication          and delivering
information.
The Postal Service's        financial  performance   during 1989--a profit      of
$61 million--     was well below the level anticipated        at the beginning     of
the year-- a profit       of about $600 million.     The disappointing
financial     performance     of 1989 will  continue  into 1990, during which
the Postal Service expects to have a deficit            of $1.6 billion,    the
largest    in history.
     w
Mr. Chairman               and Members of the Committee:


I am pleased               to be here                    today      to discuss                 the     Postal          Service
financial            results             in     1989       compared             to the          forecast           that        was the
basis       for      the      April           1988 postal                rate      increase.


As you know , general                           rate       increases             are       requested             by the Postal
Service           and reviewed                  by the           Postal         Rate Commission,                       which makes a
recommendation                 to the              Board of Governors                          of the          Postal         Service.
The Postal             Service             filed          the     request          for         the     1988 increase                      in May
of    1987.          The Commission                       reviewed         the      request             and issued                  its
recommended decision                            the       following             March.           The      estimate             of Postal
Service           revenues           and costs                  in support          of the             rate      increase                 was
for      fiscal        year         1989.           The     estimates             were projections                           based on
actual        1986 amounts.                     Some adjustments                    were made during                          the         review
process           based on experience                            in fiscal          year         1987.           The total
revenue           requirement                 of about            $38.78         billion             was comprised                   of
$37.21       billion           in estimated                     costs      and $1.57                 billion           for
contingencies                 (a 3.5 percent                      allowance              for     unforeseen                  cost
increases            and revenue                  shortfalls)              and recovery                   of prior             year
losses        (0.7      percent).


Attachment             I to         my     statement              is a schedule                  of estimated                  and
actual       revenue           and costs                  in each of the                  segments              into         which        data
is*aggregated                 for        rate      case purposes.                        The first              column         is the
Postal       Service's               estimate,              followed            by the           Commission's
recommendation,                     1989        actual          costs,       and the difference                              between            the
recommendation              and actual.             As you can see,                 the     estimates        of the
Postal       Service       and the        Rate Commission                   were not       significantly
different.


REVENUES WERE ACCURATELY PREDICTED,
BUT COSTS WERE NOT


Revenues actually                 collected         in     1989      slightly        exceeded         the
Service       and Commission              projections.                  Operating         receipts         of about
$38 billion          nearly        coincided         with         the    estimates,          indicating          that
mail     volume had been accurately                         predicted.              Appropriations            to
compensate          for    subsidies          in certain             mail     categories,            and
investment          income were about                $200 million               more than        the
Commission          projection.            Overall          revenues          and receipts            were within
half     of one percent             of the         amount projected.


On the       cost    side,        however,         there        was an overrun             of 4.4 percent               or
about     $1.65      billion        above the            projected           amounts.         This
essentially          consumed the             contingency               amount and the           provision           for
recovery       of prior           year    losses.


To identify          the major           factors         contributing              to the     cost     overrun          we
focused       on the       cost     segments         with         the    largest      overruns.             We
looked       at the       supporting          estimates            and records            and interviewed
Postal       Service       and Commission                officials          to determine             the    causes
of'the       differences.

                                                            2
The major          cause of the overrun                   was the           Service's          failure         to
accomplish             the     workforce       reductions             anticipated             in the        rate
case.          Overall,          the Postal          Service     used about             38,000        more
workyears          in     1989     than     were predicted.                  Most of this             occurred               in
cost      segments           covering       clerks      and mailhandlers                 and rural
carriers.              Other      large     dollar      overruns            occurred          in segments
covering         administration              and regional              operations,             and
depreciation              and servicewide              costs.          I would       like        to elaborate                 on
what we found                in these       areas.


NOT MANAGING THE WORK-
FORCE AS PREDICTED


The predicted                workforce       level      for     1989 was 797,000                  workyears.
Utilization             during      the     year,      however,         totaled         835,000            workyears,
about       5 percent            more than      predicted.              At an average                pay and
benefit         cost      of     $35,348     per workyear              in    1989,      the      overrun           of
38,000         workyears          cost     the Postal          Service,         and ultimately                 will
cost      postal        customers,          about      $1.34     billion.            Since        mail       volume           in
the     test     year        was very       close      to the projected                 level,        it     appears
that      a major         cause of the deficit                  was the         Service's            failure            to
realize         various          workyear      reduction         goals        that      were built             into          the
estimates.              The cost          segment      with     the     largest         anticipated
reduction          was clerks             and mailhandlers.
CLERK AND MAILHANDLER
COSTS - $761 MILLION OVERRUN


This     segment          covers         the salaries               and benefits              of clerks          and
mailhandlers              who process              mail,       tend      windows,           and work in
administrative                  and support            positions.              This       is the      largest          of
all     the    cost       segments,           amounting             to about        a third        of the
Service's         total          costs.


Actual        costs       for     clerks          and mailhandlers                ($12.61        billion)
exceeded        the     projected             amounts          ($11.85         billion)         by 6.4 percent.
The totals            can be broken                down into           components             representing             cost
per workyear              (employee           pay and benefits)                   and workyears.                  Actual
pay and benefits                  per work year                in     1989     were slightly              less     than
was projected;                  thus    the       overrun       in this         cost        segment       was due to
using      more clerk             and mailhandler                   workyears          than     anticipated.
Specifically,              about         24,400       more were used than                      projected.


In projecting              1989        costs,       the Postal               Service        anticipated           that
cost     reduction              programs          would have the               cumulative          effect        of
reducing        the     clerk          and mailhandler                 cost     segment         by about          36,000
workyears        or     $1.19          billion.             Most of the           savings         (22,000

workyears,            $748 million)                were expected               to come from the
deployment            of labor          saving        equipment              such as optical              character
readers,        sorting           machinery,               and electronic              terminals          at retail
windows.

                                                                4
We reviewed            the documentation                    that         was still              available              in
support         of various             cost        reductions            anticipated               from the
utilization            of equipment.                    Generally          the estimates                       were based on
engineering            and financial                   analyses        of the performance
capabilities              of the           equipment        rather         than          proven         reductions                 in
operating            costs.           For example,           savings             of      412      clerk         workyears               or
$13.9       million        were attributed                  to the          introduction                   of electronic
terminals            at retail             windows.         The terminals                      do not          actually
replace         clerks,         but        allow       them to do their                    work more quickly.                            It
was assumed that                 each terminal               would         save 15 minutes                       a day of
clerks'         time      and that              operating        costs         would decrease
correspondingly.                      In    a    working     environment                   where most employees
are guaranteed                8 hours            of work per day,                  it      can be extremely
difficult            to capture             actual       savings          of     15      minutes           a    day.


Over $400 million                     in projected           cost         savings              was attributed                     to
the     introduction             of optical              character             readers            which
automatically              read        and barcode           letter            mail.            This       is a key
component            in the      Service's              long-range             automation               program             to
handle        growing         mail         volume and control                    labor          costs.           Since            the
early       1980’s        the    Service            has spent          about            $1.2     billion           on
automated            equipment.                 Last    March,        in response                 to a request                    from
the     Chairman          of the           Senate       Governmental               Affairs             Committee,                 the
Postal        Rate Commission                    reported        that,         based on            1987         data,        it
could       not detect           any improvement                     in postal             cost        containment

                                                                 5
since       the     inception            of the            automated              equipment.                The Commission
concluded           that      it       was possible                    that     the      savings       goals       from this
equipment           were being             met,        but        if        so they       were being             more than
offset       by cost         growth            in other                areas.


In December of                1989,        the Postal                   Inspection              Service       reported         the
results        of a national                   audit        of the optical                      character         reader       and
bar      code sorter               automation              program.               The review           covered        one
month's        experience               early         in     1989           at 23 post           offices.          The
Inspection           Service            concluded             that            while     the      equipment         was
functioning           well          and producing                      some savings,              it   was not capturing
nearly       the     savings            that     were possible.


At 22 sites            reviewed,               only        about            a third       of the       workhour          savings
forecast           from the            equipment            was being                 attained.           This     shortfall
in savings           was attributed                    to poor management and utilization                                       of
automated          equipment.                  For example,                    at 20 sites,            mail       which     should
have been processed                      by automated                       equipment         was diverted           to less
efficient          mechanized              and manual                   processing            to keep employees
busy.        The inspectors                    said        that         managers          did     not or were unable,
because        of work rules,                   to     reduce               staffing       levels           in mechanized
or manual          operations.                  The Inspection                        Service      made several
recommendations                   to    improve            the      utilization               of the         workforce,         but
noted       that     the     Postal            Service            needed to obtain,                    through
negotiations               with        labor , more flexibility                            in its         use of
employees.

                                                                        6
MORE MANAGEMENTATTENTION
GIVEN TO CAPTURING SAVINGS


The Service        seems to be giving                        more attention              to gaining           savings
from automation.               The Service                  recently       implemented            a uniform
system-wide        tracking          system           to     identify          savings     from the
automation      program.             Past performance                    measurement            by local        and
regional      management            stressed           the      number of pieces                of mail
processed      rather        than     costs,           and was not comprehensive                         or
uniform.       Site     review        teams were established                          to identify
successes      and opportunities                      for     improving          automated         processing.
Equipment      utilization            is,    according                 to the     Service,         being       guided
by a systematic           planning          process.               A new Department                of
Automation      Implementation               Management,                 headed by an Assistant
Postmaster      General,          was also             created          last     month to coordinate                   the
overall      automation         effort.


We believe      the Postal            Service               needs to devote              the highest
priority      to the      issue       of what to do with                        the   workhours          and
employees      that     are made surplus                      by an automated              mail     processing
and distribution             system.             If    managers          are not         able     to put       these
resources      to effective               use,        the     financial          performance            of the
Postal     Service      will      continue             to be disappointing.
RATEMAKING PROCESS DID NOT
QUESTION SAVINGS


Rate proposals               necessarily                 are based on data                     developed           before
the     case is considered.                        When the              rate        case was being              considered
various           information          was available                     or trends            were occurring               that
would       put     the     Service's             cost        reduction              estimates          into     question.
For example,              the      Service's             May     1987         rate     proposal          anticipated              the
use of       798,000         workyears             during            fiscal          year     1988      (October       1987        to
September           1988).          By October                1987,       halfway           through        the     ratemaking
process,           the    Service          had a         1988        internal          operating           plan,      and it
anticipated              822,000       workyears,               or 24,000              more than           being      used for
ratemaking            purposes.


The Service's               cost      reduction               estimates,              which      impacted          heavily         on
clerk       and mailhandler                 costs            and the          revenue         requirement,            was not
examined           during       the       rate     making            process.           Postal          Rate Commission
officials           pointed         out     that         a    1981       court        decision          interpreted
postal       legislation              as giving               prime       responsibility                 for     deciding
the     Service's           revenue         requirement                  to the        Board of Governors,                    not
the     Commission.                Further,         while            postal          customers          involved       in the
rate     setting          process          may challenge                  predicted            cost      reductions,
they     have little               incentive             to do so because                     such a challenge
would       produce         a higher             revenue        requirement,                  and therefore            higher
postal       rates.          Rate Commission                    officials              also      told      us that      the
Coimission           cannot         legally         make determinations                          of     fact     without

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    .

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        record       evidence          to support            its       findings,           and no evidence
        challenging            the      Service's           figures          was offered             in this      case.
        Under       such circumstances,                     to have postal                 rates      based on authentic
        information            the     Postal         Service         must ensure             that      predicted         cost
        reductions            are realistic                and subsequently                  accomplished            by having
        specific           operating          objectives.


        RURAL CARRIERS - $181.9                        MILLION OVER


        This      segment          covers      the     salaries,             benefits,         and related            costs      of
        rural       carriers          who serve            about      46,000         rural     routes        nationwide.
        It   also         includes       reimbursement                for     the     use of private             vehicles.


        As with       the      clerks         and mailhandlers,                     the    difference          is due to
        more work hours                being         used than          were anticipated.                    Postal       Service,
        officials           said      that     part        of the difference                  was due to an
        unanticipated               growth          in routes        and boxes             served       in   1989.        The
        growth,       about          3.5 percent            actual          versus        2.6 percent          estimated,
        would       not     appear      to fully            account          for     the     9.6 percent         overrun         in
        costs.        Officials              also     speculated             that     a change          in the       mix of
        classes       of mail          carried         may also          'nave had an impact,                   and has
        undertaken           an analysis              to    identify          the     cause of the             variance.
OTHER MAJOR VARIANCES


Large     overruns             also        occurred           in cost           segments              called
administration                 and regional              operations                   ($447 million                  over)      and
depreciation                 and servicewide                 expenses            ($105 million                      over).        These
segments           include           a variety          of significant                       expenses             which      accrue
at the       national            level,        such as workers                        compensation,                  unfunded
retirement             liabilities,                 and depreciation.                         As shown in
attachment             II,     we can tie             overruns             to specific                    cost      accounts,
but     we did         not corroborate                  the     reasons            offered                for     the      variance
since     that         would         require         significant                analysis          to verify.                   In some
cases     the       workpapers              supporting             the      estimates             are no longer
available.                                                                                            \


IMPLICATIONS FOR 1990 AND BEYOND


The Postal           Service's              financial           performance                   during             1989--a      profit
of $61 million--                was well             below      the        level        anticipated                  as late          as
the beginning                 of the        year--      a profit            of about             $600 million.                   The
disappointing                 financial          performance                of        1989     will             continue       into
1990,     during             which     the     Postal         Service            expects          to have a deficit
of $1.6       billion,            the       largest          in history.                     Controls             on the       size        of
the     workforce             were instituted                 in        1989,      and financial                     performance
started       to       improve         late         in the year.                 This         trend             seems to be
continuing           so far           in    1990.        However,               the     Postmaster                 General
inf'ormed        the         Board of Governors                    last         month that                 cost      reductions

                                                                   10
could       be hurting          service,             and that           the       Service         is monitoring                  the
situation           closely.


As you are aware,                 rates           are expected               to     increase          early         in     1991,

and the        Postmaster           General            has acknowledged                    that       the        increase
will      exceed       inflation.                 To offset           this        increase,           he has set                for
the      Service      an objective                 of holding               average        yearly           cost         increases
to two percent             below           inflation            through           1995.



The Postmaster             General               believes        that        this      will       require           higher
productivity            gains       than          have been achieved                      in recent              times      and
restraint           of growth           in workhour               costs.            We certainly                 agree.          To
gain      insight       into      the        factors           that     influence             postal         costs,         we are
analyzing           the change             in operating               costs         from      1988         and     1989.

Specifically,             using       increases                in mail         processing             and distribution
costs,       we have developed                     a method           for      apportioning                 the change
among three           factors:             (I)     increased            mail        volume,          (2)     increased                per
hour      labor      costs,       and (3)            productivity,                  whether          improving             or
declining.            While       not       complete,            the        analysis          so far         indicates
that      savings       from      improved             productivity                 are not          nearly         enough to
offset       cost     increases             due to          volume          growth        and labor              cost
increases,           especially             the      latter.


We analyzed           selected          mail.        processing              and distribution                      costs        at
114      of the      largest        mail          processing            facilities.                  Mail        processing
anh distribution                costs            at these        facilities               increased              a net $444.9

                                                                 11
million        from     1988     to   1989.          We estimate         that     $138.2          million         was
saved due to            improvements           in mail         processing         and distribution;
however      this       savings       was dwarfed             by higher         costs         associated          with
increased        mail     volume and labor.                    Specifically,              costs        increased
$148.6      million       because           of higher         volume     and $434.5             million          due to
the    increase         in per hour           labor      cost.         In terms          of    1988     levels,
productivity            improvement           resulted         in a savings              of 2.1 percent,
higher      volume       increased           costs     2.2 percent,             and the          per hour
increase        in labor         raised       costs      by 6.5 percent.                  This        analysis          is
admittedly          a simplification                 of many cost         interactions                 in a
complex      operating           environment.             Nevertheless,             it        indicates          that
the    Postmaster         General         has selected           the     right     targets             for
financial        improvement           --     productivity          gains        and restrained                  growth
in labor       costs.


That      concludes       my prepared            statement,         Mr. Chairman.                     I would      be
happy to answer                any questions           you may have.




                                                         12
    .

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    Attachment        I                                                                                          Attachment            I

                      Comparison         of Rate Case Amounts With Actual                              Cost
                                            1989 -  in $OOOs
                                                            Rate Case                                              Difference-
                                               ---------------------                                                   Actual
                                                   Postal                Rate                                        Less Rate
            Segment Description                    Service          Commission                   Actual            Commission
    --------------------___                    ----------           ----------               ----------            ,,'-,,,----
    Mail                                       38,027,976               38,037,657           37,978,674                   (58,983)
    Appropriations                                     461,966                  348,042              436,417                  88,375
    Investment           Income                        336,600                  388,577              504,513               115,936
                                               ----------               ----------           ----------            ----------
    Total       Revenue b Receipts             38,826,542               38,774,276           38,919,605                    145,329

    Postmasters                                   1,298,664                1,264,557            1,240,409                  (24,148)
    Supervisors                                   2,858,229                2,795,713            2,787,466                     (8,247)
    Clerks & Mailhandlers                      11,899,712               11,854,005           12,614,722                   760,717
    Clerks,    small   offices                            30,394                  29,825                19,635             (10,190)
    City Delivery,                               81463,611                 8,414,548            8,505,103                    90,555
    Vehicle    Service Drivers                        283,836                  279,203              273,202                   (6,001)
    Special Del. Messengers                            107,657,                 103,084              103,989                       905
    Rural Carriers                                1,938,508                1,901,620            2,083,523                  181,903
    Custodial     Maint. Service                  1,528,872                1,497,739            1,393,688               (104,051)
    Motor Vehicle      Service                        484,677                  490,904              455,868                (35,036)
    Misc. Operating        Costs                       145,130                  145,427              205,603                 60,176
    Transportation                                2,403,408                2,451,458            2‘471,348                     19,890
    Building     Occupancy                             847,106                  865,621              893,382                  27,761
    Supplies     6 Services                            808,236                 838,049               931,637                  93,588
    Research & Development                                19,209                   19,209               63,631                44,422
    Admin. & Regional Operations                  3,531,134                31566,513            4,014,247                 447,734
    General Management Systems                            16,775                   16,712               17,860                  1,148
    Depreciation      & Servicewide                    681,338                 678,318               783,572               105,254
                                               ----------               ----------           ----------            ----------
        Total     Costs                        37,346,496               37,212,505           38,858,886               1,646,381

        Contingency                               1,307,127                1,302,438                               (1,302,438)
        Recovery of Prior           Losses             191,300                 265,410                                  (265,410)
                                               -.m--------              ----------           ----------            ----------
    Total       Costs/Cant/Recovery            38,844,923               38,780,353           38,858,886                       78,533
                                               ----------               ----------           ----------            ----------
    Net Surplus           (Deficiency)                 (18,381)                    (6,077)              60,719                66,796
                                               ===z======               ==s=======           ===x====';=           =z========




                                                                   13
ATTACHMENT II                                                      ATTACHMENT II


               Accounts'With     Large Overruns in Segments for
                  Administrative      and Regional Operations
                  and Depreciation      and Servicewide  Costs

           Segment and Account

Administration       and Regional     Operations
      Health     Benefits   for   Retired        Annuitants      $270 million
      A $270 million      payment was made to the Federal Employees
      Health Benefits       fund in 1989, as required        by the Omnibus
      Reconciliation      Act of 1987.       The requirement     to make the
      payment occurred        after   the rate case was prepared,         thus the
      payment was not provided           for in the Service's      estimate.
      Although ,operating        costs were also required      to be reduced by
      an equal amount thus offsetting           this expense, most of these
      reductions     occurred      in other cost segments while the payment
      was drawn on this account.

      Workers'     Compensation                                  $133 million
      According     to Postal Service officials,            it is extremely
      difficult     to estimate   the annual adjustment             to the Postal
      Service's     workers'   compensation     liability.          Many
      uncontrollable      and unpredictable       factors       impact the actual
      cost each year, such as the number of paid cases, the cost
      of each case, and the length of time an employee receives
      medical attention/compensation.             The 1989 workers'
      compensation      expense was projected        to increase       by $37
      million    (7.1 percent),     and actually        increased     by $171.4
      million    (33 percent).      Correspondingly,          total   paid cases
      increased     by 13.6 percent     in 1989,     compared to a historical
      increase    of 1.3 percent     from 1984 to 1988.




                                            14
ATTACHMENT II                                                                ATTACHMENT II


      Capitalized       interest                                          $59 million
      This account represents                the interest        cost on the cost of
      capital     projects       during the period they are under
      construction.          It reduces current              year interest       expense and
      is added to the cost of each project.                         The account is
      affected     by a variety          of factors        such as interest          rates,
      the level of construction                  activity,      and the time taken to
      put projects        into service.             Capitalized       interest     for 1989
      was $59 million          less than planned.               Service officials
      attribute      the difference            to completing        and transferring
      construction        projects       to in-service          status     sooner than
      expected,     more favorable             interest      rates than forecasted,
      and/or fewer expenditures                  for facilities         than planned.       They
      also acknowledge that,               like workers'         compensation,
      capitalized       interest       is difficult          to estimate       beyond a year
      or so into the future.

Depreciation      and Servicewide
      Depreciation                                                        $76 million
      Depreciation        for buildings,     equipment,     and vehicles        was $76
      million.higher          in 1989 than estimated      in the rate case.
      The difference         appears to be due to several          factors.
      Beginning      in 1988, the scheduled service           life    for some
      equipment was reduced, which in turn increased                   the annual
      depreciation        charges.     During the same year, construction
      projects     began being classified          to an in-service       status
      according      to an automated process.           In addition,      there has
      been an effort         to shorten the time frame of projects               from
      construction        to occupancy.       Both of these actions         tended to
      accelerate       the acquisition      of assets for financial           reporting
      purposes and thereby          increase    actual depreciation         expenses
      above the amount estimated.




                                              15