Contract Postal Units: Analysis of Location, Service, and Financial Characteristics
Published: 2012-11-14T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: 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, and USPS’s cash resources are so low that it is  unable to meet all of its retiree health care prefunding obligations. 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.  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. 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  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 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. 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.  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. A bill passed by the House of Representatives Committee on Oversight and Government Reform would  prohibit appeals of certain post office closures when a CPU is located  within 2 miles.
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. We classified CPU locations  as urban, suburban, large-town rural, or small-town rural based on Rural- Urban Commuting Area codes. 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. In addition, we  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.
subsections: section_title: Background
paragraphs: USPS has a universal service obligation, part of which requires it to  provide access to retail services. 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. USPS is intended to be a financially self-sufficient entity that  covers its expenses almost entirely through postal revenues. USPS  receives virtually no annual appropriations but instead generates  revenue through selling postage and other postal products and services.
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.  According to USPS officials, USPS is currently in the process of finalizing  its retail strategy.
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.
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.)
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. 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  or where opening new post offices may be cost prohibitive. 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   Costs are lower, in part because CPU operators, and not USPS,  offices.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. In  addition, all CPUs are contractually prohibited from selling services,  including private mailboxes and others, that are competitive with USPS’s  products, 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.
USPS management and oversight of CPUs, including identifying and  justifying the need for new CPUs, is done at the district 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.
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. 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.
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.
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.
section_title: USPS Uses CPUs to Provide Retail Services at Additional Locations and Hours
paragraphs: Although total number of CPUs has decreased in recent years, USPS  continues to use CPUs to provide customers with access to postal  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  very close to far from post offices, demonstrating how USPS uses CPUs  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.
subsections: section_title: Decrease in Number of CPUs
paragraphs: According to USPS data, the number of CPUs fell from 5,290 in 2002 to  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.
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.
Consistent with USPS’s goal to use CPUs to absorb excess demand at  post offices, our analysis of the distance between CPUs and 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.
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.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.
section_title: Trends in CPU Contract Types, Revenues, and Compensation
subsections: section_title: Use of the Performance- Based Contract Type Increased
paragraphs: In recent years, USPS has intentionally shifted its means of  compensating CPUs from fixed-price contracts—in which compensation  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  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.
The total revenues USPS received from sales of postal products and  services at CPUsyear 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   declined about 9 percent from $672 million in fiscal  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.
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  to increase capacity by adding postal windows to keep pace with  demand.
USPS compensation to CPUs increased about 6 percent from $75.4  million in fiscal year 2007 to $79.9 million in fiscal year 2011. However,  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.
As with CPU revenues, USPS compensation to individual CPUs varies  widely. (See fig. 11.) For example, 326 CPUs received no more than  $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.
As USPS undertakes actions to achieve a sustainable cost structure, it  will be important to understand the implications of CPUs for USPS’s costs  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. Measured in another way, after  compensating CPUs, USPS retained $0.87 of every dollar of CPU  revenues.
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. 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.
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.
section_title: USPS’s Future Use of CPUs May Pose Challenges
paragraphs: USPS is embarking on a substantial makeover of its retail network,  including reducing hours of service at thousands of underutilized post  offices and expanding the use of retail alternatives through partnerships  with national and regional retailers. According to USPS officials, at this  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  as replacements for post offices that it closes.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  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.
section_title: Concluding Observations
paragraphs: CPUs can play an important role in helping USPS provide universal  service as it cuts costs to improve its financial condition—at times two  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   USPS  customer access to both post offices and retail alternatives.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  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.
section_title: Agency Comments
paragraphs: We provided a draft of this report to USPS for review and comment.  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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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, 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  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.
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  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.
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.
section_title: Appendix II: Number of Contract Postal Units and Post Offices by State
paragraphs: 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.
section_title: Appendix III: Comments from the U.S. Postal Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov.
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Heather Halliwell, Assistant  Director; Patrick Dudley; John Mingus; Jaclyn Nelson; Joshua Ormond;  Matthew Rosenberg; Amy Rosewarne; Kelly Rubin; and Crystal Wesco  made key contributions to this report.