Postal Service Oversight

Published by the Government Accountability Office on 1990-04-27.

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


                           ’ Unbd     States General Accounting Of&e   /d/       dq      q
     * GAO

         For Release         Postal     Service   Oversight,
         on Delivery
         Expected at
         9:30 a.m. EDT
         April  27, 1990

                             Statement of L. Nye Stevens
                             Director,     Government Business
                                Operations    Issues
                             General Government Division
                             Before the Subcommittee on Federal              Services,
                             Post'Office  & Civil Service
                             United States Senate

         GAO/T-GGD-90-36                                                       GAO Form 160 (12/87)
                            POSTAL SERVICE OVERSIGHT

                            SUMMARY OF STATEMENT BY
                                L. NYE STEVENS
                        DIRECTOR, GOVERNMENTBUSINESS
                               OPERATIONS ISSUES
                          GENERAL GOVERNMENTDIVISION
                        U.S. GENERAL ACCOUNTING OFFICE

The Postal Service's          financial     performance     in 1989 was
disappointing,        largely    because the Service        failed  to accomplish
workforce      reductions     it anticipated       when it filed    for the April
1988 rate increase.           The overrrun      of 38,000 workyears,      mostly     in
mail processing,         cost the Service       about $1.3 billion.       Although
controls      on the size of the workforce           have slowed cost growth,         a
deficit     from $1.4 billion        to $1.6 billion      is still   expected    this
GAO agrees with the Postmaster           General that meeting his
objective    of holding     annual cost increases         to 1 percent       below the
inflation     rate through     1995 will    require    higher   productivity        and
restraint    in the growth of labor costs.             GAO's analysis        of 19880
89 costs at 114 of the largest           mail processing      facilities        showed
that productivity       improvement    savings      of $138 million       were
dwarfed by an increase         in costs attributable        to volume growth
 ($147 million)    and to growth in per hour labor costs                 ($435
The outcome of the Postal          Service's    1990 labor negotiations           and
the rate changes requested          for early    1991 will,      in GAO's
opinion,    be critical     for determining      whether the Service          can
remain competitive       with other      forms of information        transmission
as it enters     its third     decade as an independent          public
enterprise.      Rate concessions        and incentives     for mailers       to help
automate the mail will         be of no benefit       to financial      performance
unless the Postal       Service    can manage a timely       and comprehensive
transition    from manual and mechanical           sorting.
Mr. Chairman               and Members of the                   Subcommittee:

We are          pleased       to be here          today         to contribute                   to your       oversight
of the          Postal      Service.           While      the          past      year       has been one of
challenge           and controversy               for     the          Postal         Service,         the    Service
faces       a critical             juncture       in     1990 as it                  addresses         disappointing
financial           performance,              a newly          filed          rate      case,       and a new round
of bargaining               with      its     unions.

Today       T would         like      to summarize              our      work at the                Postal     Service
over      the      past     year,      describe          the      Service's                recent      financial
performance,               and comment briefly                    on the             competitive          challenge         the
Service          faces      in coming          years.


The past           year     has witnessed               a burgeoning                  of    congressional
interest           in and scrutiny              of postal               matters            as befits         a $40
billion          public      enterprise           that     touches              most Americans                nearly
every       day.          To respond          to that          interest              and the        growing        number    of
congressional               requests,          we issued               10 reports            on postal         matters
over      the      past     year     and these           are      listed             in Appendix          I to my
statement.                They fall         broadly       under          the         categories         of labor
relations,           real      estate,         and operations.

                                                                                                                             :”   ,,.
Labor       Relations

We issued           reports           on labor/management                     relations             at post        offices
in Oklahoma             City        and Indianapolis.                      In both        of these          cases,         we
found       that       increased             attention           from      top management               and perhaps
the      presence           of our       auditors           improved          the      climate         by the       time         our
review        was completed.

Roth of these                reports          stemmed from               employee         complaints            to their
members of             Congress         about       local         work conditions.                     While       this      work
contributes             to     improved          labor/management                     relations,           we would
prefer        to work          with     the      oversight              committees          to      identify        broader
problems           and potential               solutions               to them.

An example             of    this      broader           focus         was our        May 1989         report       on
postal        disciplinary              practices,               showing         a wide        variation           among
divisions           in penalties                imposed          for     similar         infractions            with       the
same history                of prior          discipline.                We found         that       supervisors             had
not     been provided                 with     clear        guidance          on how they              should       consider
a number of             factors          inherent           to deciding               on the        application           of
discipline.                 We concluded            that         clarification             of       instructions             on
which       infractions               are major           or minor,           when to hold
predisciplinary                 discussions,                how to consider                 prior       infractions,
and responsibilities                         of concurring               officials,            should      enhance           the
consistency             of disciplinary                   actions.

In a congressional                       hearing          last        September,              we summarized                   a
review          of     Service          management             of work-related                      injuries           based         on
work      at four             postal       divisions               which       showed a wide                   range         of
performance                  in controlling               lost        work days              due to accidents.                           We
recommended                  several       ways to expand                    controls          over       lost         workdays
and continuation                      of pay during                  injury-related                  absences,
strengthen              the      management             of        limited-duty               assignments,                   and
improve          the         accuracy       and comprehensiveness                             of accident                   reporting.

Real      Estate

In September                  1989,      we reported                that       sites         acquired           for         new post
offices          may be larger                  than      needed.             We found           that      the         Service
projected              its     site      size      requirements                 for      10    years       out,             then
routinely             added          a standard           50-percent                growth       factor          for         another
10     years,         advertised            for        sites        still       larger         than       the         combined            20-
year      land        requirements,                and then               usually       purchased               sites         that
exceeded             both      its     projected             needs          and advertised                size
requirements.                   When alternative                      sites         were available                    for
purchaset             the      Service          generally             selected          the      larger,          more costly
sites       without            requiring           site        selection              committees           to document                    why
less      expensive              alternative              sites           were less           desirable.

The Postal              Service's           response               to this          report       was very              positive.
Directives              have been           issued           to     stop      the      use     of     a standard                   50-
percent          growth          factor,          to not           advertise           for     sites       larger             than

requirements,                   and to          require         that        the      basis      for      selection
decisions              be documented.

We also           issued            a report          to this          Subcommittee                in December             on the
process           by which                the   Service         estimated             construction               costs      and on
actions           by the            Board       of Governors                in questioning                   costs    of    10 of
the      larger          construction                 projects.               We found          that         in the      aggregate
the      cost      estimates                 were a reasonable                     approximation               of final

Service           and Administrative                         Operations

Of local           interest,                we reported            in June            1989 to Congressman                    Frank
Wolf      that         the     Postal           Service         allowed            mail      delivery          services          at
post      offices             in northern               Virginia            to become a major                    management
problem          before             taking       corrective                action.

In October               1989,        we completed                reporting               required     by the <d'
Budget          Reconciliation                   Act of         1987.          The Act          required    the Postal
Service          to      reduce            budgeted          operating             costs      by $160 million                in
fiscal          year         1988     and $270 million                      in fiscal          year          1989,    and make
corresponding                  payments              to the       Employees               Health       Benefits          Fund.
While      we could                 not     verify       savings            expected          from       reductions          in
operational               workhours,                 other      initiatives--mainly                          in the
transportation                      and administrative                      area      and not          all     of them a
direct          reeult         of the           Reconciliation                 Act--produced                  documented

operating          cost         reductions                 in the            requisite             amounts.            The Service
overspent           its       reduced             budget          but        the        Reconciliation                Act did        not
specify          a starting                figure          or place                a ceiling            on expenditures.
Thus,          we concluded            that          the      Service               was in compliance                   with        the
Act      for     both        years.

In October              1989 and March                     1990,         we provided                   you information               on
travel          expenses         incurred              by postal                   managers.              In October           we
reported          on the         use of             first-class                    travel         by top      postal
management.                  There     were no written                             guidelines             on such travel               at
that      time.           Our March               report          covered               'costs     of meetings           and
conferences,                 some of which                  were held                   in    resort       areas       and
involved          high        costs         for      food         and beverages.                        Postal        management
has taken          action            to tighten               up internal                     spending        guidelines,
apparently              in    recognition                  that     the            public         wants      assurance          that
postage          revenues            are     treated              with         a degree            of     frugality
comparable           to their               expectations                     for        tax      revenues.

In December               1989 we reported                        on a deterioration                         in the
relationship                 between         the       Postal            Service              and its        primary         supplier
of     postage          stamps,        the          U.S.      Bureau               of     Engraving          and Printing.
The relationship                     remains           a tenuous                   one,       and the        Postal      Service            is
evaluating           an expanded                    role      for        the        private         sector         in postage
stamp      production.


The seeds            for      the        disappointing                  performance                 in    1989     were sown by
the     forecast             that        was     t.he basis             for      the        April        1988     postal        rate
increase           to      a 25-cent             first          class         postage           stamp.          Although          the
Service         accurately                estimated              revenues             and volume,               there        was an
overrun         of      4.4       percent          or about             $1.65         billion            above     the       projected
amounts         on the            cost      side.              The major          cause          of the         overrun        was the
Service's            failure             to accomplish                  the      workforce               reductions
anticipated                when the             rate      increase             was requested.                     Most of the
reductions              were expected                    to come from                 the      deployment              of labor
saving         equipment             such as optical                        character            readers.              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 a average                pay and
benefit         cost         of     about        $35,000          per         work year             in    1989,        the    overrun
of     38,000        workyears              cost         the     Postal         Service,             and ultimately                will
cost      postal         customers,                about         $1.34         billion.

The disappointing                        financial              performance               of     1989      will        continue
into      1990.            Controls            on the           size        of the        workforce             were
instituted              in    1989.            Financial               performance               started          to    improve
late      in the         year        and is continuing                         into       this       year.         As of March
9,     1990,      both        expenses             and workhours                  are        slightly           below        budgeted

amounts.                The number                  of workhours                   used        is      less          (1.3    percent)              than
the       amount            used       for     the         same period                  last        year.

Despite            improving                 financial              performance                  in 1990,              a significant
net       loss         is     projected              ($1.4         to       $1.6        billion)              and current              postal
rates,           set        in April               1988,      are        scheduled              to      increase             early          in
1991.            The Postmaster                      General             has acknowledged                        that        the      increase,
which       will            exceed           inflation,               is     "too        much, too               soon."

To offset               this         increase,              the       Postmaster                General              has set          for        the
Service           an objective                      of holding               average            yearly           co.st       increases                 to
1 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
work       hour         costs.              We agree              that       low productivity                          and growth                in
labor       costs             are      major         obstacles               to the            level        of        financial
improvement                   the      Postmaster              General              is aiming                 for.

Labor       Productivity                      and Costs

About       83 cents                 of every          dollar               spent        by the Postal                      Service          is        for
labor.            For the              past         5 years           the        average            annual           growth        in the
cost       of     salaries                 and benefits                  was about              $2 billion--from                       $22.2
billion           in        1984 to           $32.4         billion              last      year.              Salary         costs
accounted               for     about          $6 billion                   of this            (a 32 percent                   increase)
while+the               increased              cost         of benefits                  accounted               for        $4 billion.

The average              postal         salary.       increased                by     16     percent              from     1984      to

1989      (from         $24,738         to     $28,689).                During         the     same          period,          average
benefits          for     postal           employees             grew by 88 percent,                          or      from        $3,381

in      1984    to      $6,356        in     1989,        bringing             the     total      pay and benefits
package         to an average                  of $35,045               per      employee             last         year.

To gain         insight          into        the     factors            that         influence           postal            costs,          we
analyzed          the     change           in operating                 costs         from      1988         to     1989      at     114
of the         largest         mail        processing              facilities.                 Specifically,                      using
increases             in mail         processing                and distribution                      costs,         we
apportioned              the     change            among three                factors:           (1)         increased              mail
volume,         (2)      increased             per    hour         labor         costs,        and       (3)        productivity,
whether         improving             or declining.

Mail      processing             and distribution                       costs         at these           facilities
increased             a net      $444.9         million            from        1988 to         1989.              We estimate
that      $138.2         million           was saved             due to          improvements                  in mail
processing             and distribution,                     but        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.

An impediment                   to    increased            productivity                   is that      postal          managers
do not           or are         unable        to,      because            of current           work     rules,
effectively                match        staffing           levels           with     work      load.         The
introduction                of automated                 equipment             has made this             mismatch           more

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.                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               to,     because
of work           rules,           reduce       staffing             levels         in mechanized               or manual

Such situations                      occur      in part         because             mail     processing            operations
are       not     yet      fully        automated           and the            Service         must operate              dual
systems --mechanized                         (letter        sorting            machines)            and automated
(optical           character                readers).           If        there      is not         enough       work      for.
both       systems,             managers            have too          many employees                 working           a fixed        8-
hour       schedule             because         of the        "90-10"              work     rule.       At post          offices
which           use more than                200 work        years           the     workforce          split          between

full-time           regular          employees             and part-time                   employees              must be at
least       90 percent             full-time              and no more than                     10 percent                 part-time.

The transition                from        a mechanized                 system            to automation               is      also
creating         other        dilemmas              for    the      Postal          Service.               To keep the
mechanized             system        operational              there           is    a constant               need for
operators           of    letter          sorting          machines.                But the         employees               hired
today       as operators              of letter              sorting           machines            may not           be needed
when the         Service           completes              system-wide               implementation                   of      letter
mail      automation,              which       is expected               to        start      during          1994.           Also,
the     Service's           rate      structure              proposed              for     1991     contains               a number
of     incentives           for      business             mailers        to prepare                their          mail       for
automated           processing.                These have              a cost.              Whatever              final       form
these       concessions              take,          the    future        financial                performance               of the
Postal         Service        is dependent                 on its        ability            to actively                  manage
and capture              pr.oductivity               savings         that          automation              will      only
theoretically              make possible.


The Postal             Service        will          soon mark           its        twentieth          anniversary
under       reorganization.                    It     has lost           most of the                parcel           post
business         and competitors                     now dominate                  the     overnight              delivery
market.          On the           other      hand,         volume        has grown             and postage                  rates
remain         lower      than       in other             industrialized                   countries.                We believe
that     the     labor       negotiations                  this      year          and the         outcome           of the           rate

case     will        be of critical        importance         in determining           the
competitiveness             of the      Postal      Service      in a rapidly          changing
information            transmission       environment.               We also'believe         Congress
will   eventually           have      to take     stock      of the      overall     competitiveness
of the      Postal        Service      and we'stand          ready     to assist       you in such       an

That   concludes           my prepared          statement,      Mr.      Chairman.       We would       be
pleased         to    respond   to any questions              you may have.

APPENDIX I                                                               APPENDIX I
                           May 1989        --    April     1990

 ,DATE                    REPORT TITLE                                 REPORT NO2
S/19/89      Discipline       Practices          Vary                GAOjGGD-89-79
6/16/89      Progress,Made       in Restoring
             Deteriorated       Northern   Virginia
             Mail   Service                                          GAO/GGD-89-88
g/28/89      Postal  Service        Management           of Work-    GAO/T-GGD-89-41
             Related  Injuries
g/29/89      Sites for New Post Offices                   May Be
             Larger Than Needed                                      GAO/GGD-89-130
1 O/20/89    First-Class    Air Travel             by Top
             Postal    Management                                    GAO/GGD-90-22FS
10/27/89     Improved Labor/Management
             Relations   at the Oklahoma                 City
             Post Office                                             GAO/GGD-90-02
10/31/89     Final    Report on Compliance  With
             1989    Budget Reduction  Mandate                       GAO/GGD-90-26
12/12/89     Postage Stamp Production:                    Bureau
             of Engraving and Printing's
             Future Role                                             GAO/GGD-90-25
12/19/89     Estimating       the   Cost        of Construction
             Projects                                                GAO/GGD-90-28BR
3/g/90       Postal Service:          Cost        of Meetings
             and Conferences                                         GAO/GGD-90-66FS
4/l   6/90   Employee-Management     Relations                  At
             The Indianapolis    Post Office
             Are Strained                                            GAO/GGD-90-63