U.S. Postal Service: Mail Processing Network Exceeds What Is Needed for Declining Mail Volume
Published: 2012-04-12T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: The U.S. Postal Service’s (USPS) dire financial situation has increased  the urgency for agreement on an effective strategy to better align USPS’s  postal services with its costs and revenues. USPS has noted that the  decline in First-Class Mail volume accelerated more than expected and  predicted that volume will continue to fall. By fiscal year 2020, USPS  expects to lose over 60 percent of the First-Class Mail volume that it had  in fiscal year 2006. Declining First-Class Mail volumes, development of  automated mail processing equipment, and “workshare” initiatives (e.g.,  mailers applying bar codes, presorting the mail, and entering mail into the  postal network closer to its final delivery point) have led to a mail  processing network—including postal facilities, staff, equipment, and  transportation resources—that is larger than needed to process and  distribute current and projected levels of mail.
Over the past decade, USPS has taken steps to reduce its excess capacity  to move toward optimizing its mail processing network—one where  processing facilities are located to maximize revenues, increase efficiency,  and minimize costs while meeting delivery standards. Since 2006, the gap  between USPS expenses and revenues has grown significantly (see fig. 1).  At the end of fiscal year 2011, USPS had a net loss of $5.1 billion and $2  billion remaining on its $15 billion statutory borrowing limit. In February  2012, USPS issued a 5-year plan that projected its net loss to increase to  over $21 billion by 2016 and set a goal to reduce annual costs by at least  $22.5 billion by 2016. The Postmaster General has stated that maintaining  a vast national postal infrastructure is no longer realistic. We have testified  that USPS cannot continue providing services at current levels without  dramatic changes in its cost structure. Optimizing USPS’s mail processing  network would help USPS by bringing down costs related to excess and  inefficient network resources.
You requested that we study opportunities for USPS to reduce excess  capacity in its mail processing network. This report addresses (1) past  actions USPS has taken to reduce excess capacity, (2) USPS’s plan to  consolidate its mail processing network, and (3) key stakeholder issues  and challenges USPS faces in consolidating its mail processing network.
To describe what actions USPS has taken to reduce excess capacity and  its reported results of these actions, we obtained data from USPS related  to changes in its mail processing network, workforce, and costs as well as  an updated forecast for First-Class Mail volume to 2020. To calculate the  5-year cost savings that USPS achieved, we took the difference of the  network costs for fiscal years 2006 and 2011 that USPS reported to us.  We also obtained data from USPS and USPS Office of Inspector General  (OIG) reports regarding cost savings related to USPS initiatives to reduce  excess capacity. Further, we reviewed USPS annual reports to Congress  and its network plans as section 302 of the Postal Accountability and  Enhancement Act of 2006 requires USPS to submit; related GAO and  USPS OIG reports; as well as other relevant studies relating to reducing  excess capacity in USPS’s mail processing network. To examine USPS’s  future plans to consolidate its mail processing network, we reviewed  USPS’s December 2011 plan to change delivery service standards and  consolidate its mail processing network by reducing facilities, staff,  equipment, and transportation resources. We also reviewed USPS’s 5- year business plan to profitability issued in February 2012. We  interviewed USPS senior management and local facility mangers in  Illinois about the current processing network and future plans for that  network. We also reviewed documents in the ongoing Postal Regulatory  Commission (PRC) proceeding of USPS’s proposed changes in service  standards and its plan for consolidating its mail processing network. PRC  is reviewing USPS’s estimated cost savings, service impacts, and public  input on the network consolidation plan and expects to complete its  review sometime after July 2012.
To determine key issues and challenges USPS officials face in  consolidating its mail processing network, we reviewed and summarized  concerns from postal stakeholders responding to USPS’s September  2011 Federal Register notice on its proposed changes to service  standards for First-Class Mail, Periodicals, and Standard Mail. We also  interviewed USPS officials, and reviewed stakeholder testimonies and  published letters from Members of Congress commenting on USPS plans  to change delivery service standards and close facilities. Further, we  reviewed pending legislative proposals that could affect USPS’s efforts to  address excess capacity and consolidate its mail processing network. For  more information on our scope and methodology, see appendix I.
We conducted this performance audit from April 2011 through April 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: USPS has a vast mail processing network consisting of multiple facilities  with different functions, as shown in figure 2. In fiscal year 2011,  according to USPS, it had a nationwide mail processing network that  included 461 facilities, 154,325 full-time employees, and about 8,000  pieces of mail processing equipment. This network transports mail from  where it is entered into USPS’s network, sorts it for carriers to deliver, and  distributes it to a location near its destination in accordance with specific  delivery standards. USPS receives mail into its processing network from  different sources such as mail carriers, post offices, and commercial  entities. Once USPS receives mail from the public and commercial  entities, it uses automated equipment to sort and prepare mail for  distribution. The mail is then transported between processing facilities  where it will be further processed for mail carriers to pick up for delivery.
Trends in mail use underscore the need for fundamental changes to  USPS’s business model. First-Class Mail volume peaked in fiscal year  2001 at nearly 104 billion pieces and has fallen about 29 percent, or 30  billion pieces, as of fiscal year 2011. Although First-Class Mail volume  accounted for 44 percent of total mail volume in fiscal year 2011, it  generated about 49 percent of USPS’s revenue. In comparison, Standard  Mail (primarily advertising) accounted for 51 percent of total mail volume  but generated only about 27 percent of USPS’s revenue. Further, it takes  about three pieces of Standard Mail, on average, to equal the financial  contribution from one piece of First-Class Mail. Looking forward, USPS  projects that First-Class Mail will decline significantly between now and  2020. For the first time, in 2010, less than 50 percent of all bills were paid  by mail as consumers continue to switch to electronic alternatives. USPS  projects that Standard Mail volume will remain roughly flat between now  and 2020, thereby increasing its share of revenues generated. Almost 60  percent of mail received by households in 2010 was advertising.
USPS has said that its mail processing network is configured primarily so  that it can meet the First-Class Mail delivery standards within a 1- to 5-day  window, depending on where the mail is entered into the postal system and  where it will be delivered. Most First-Class Mail is to be delivered in 1 day  when it is sent within the local area served by the destinating mail  processing center; 2 days when it is sent within reasonable driving  distance, which USPS considers within a 12-hour drive time; 3 days for  other mail, such as mail transported over long distances by air; and 4 to 5  days if delivery is from the 48 contiguous states to the noncontiguous  states, Puerto Rico, the U.S. Virgin Islands, or Guam. Delivery service  standards within the contiguous 48 states generally range from 1 to 10  days for other types of mail. Delivery service standards help USPS,  mailers, and customers set realistic expectations for the number of days  mail takes to be delivered, and to plan their activities accordingly. USPS  requires a certain level of facilities, staff, equipment, and transportation  resources to consistently meet First-Class Mail and other delivery service  standards as expected by its customers. The USPS processing and  transportation networks were developed during a time of growing mail  volume, largely to achieve service standards for First-Class Mail and  Periodicals, particularly the overnight service standards.
To revise service standards, USPS can propose changes, such as  elimination of overnight delivery for First-Class Mail, through a regulatory  proceeding that includes the consideration of public comments. Further,  whenever USPS proposes a change in the nature of postal services that  affects service on a nationwide basis, USPS must request an advisory  opinion on the change from PRC. In addition, USPS annual  appropriations have mandated 6-day delivery and rural mail delivery at  certain levels. USPS has asked Congress to allow it to change the  delivery standard from 6- to 5-day-a-week delivery.
USPS and other stakeholders have long recognized the need for USPS to  reduce excess capacity in its mail processing network.
In 2002, USPS released a Transformation Plan that provided a  comprehensive strategy to adapt the mail processing and delivery  networks to changing customer demands, eroding mail volumes, and  rising costs. One key goal cited in the plan was for USPS to become  more efficient by standardizing operations and reducing excess  capacity in its mail processing and distribution infrastructure.
In 2003, a presidential commission examining USPS’s future issued a  report recommending several actions that would facilitate USPS  efforts to consolidate its mail processing network. The commission  determined that USPS had far more facilities than it needed and those  facilities that it did require often were not used in the most efficient  manner. The commission recommended that Congress create a  Postal Network Optimization Commission modeled in part on the  Department of Defense’s Base Realignment and Closure (BRAC)  Commission, to make recommendations relating to the consolidation  and rationalization of USPS’s mail processing and distribution  infrastructure. We reported in 2010 that Congress has considered  BRAC-type approaches to assist in restructuring organizations that  are facing key financial challenges. These commissions have gained  consensus and developed proposed legislative or other changes to  address difficult public policy issues. The 2003 presidential  commission also recommended that USPS exercise discipline in its  hiring practices to “rightsize” and realign its workforce with minimal  displacement.
The Postal Accountability and Enhancement Act (PAEA), enacted in  2006, encouraged USPS to expeditiously move forward in its  streamlining efforts and required USPS to develop a network plan  describing its long-term vision for rationalizing its infrastructure and  workforce. The plan was to include a strategy to consolidate its mail  processing network by eliminating excess capacity and identifying  cost savings.Congress, which we describe in more detail later in the report.
In June 2008, USPS provided its Network Plan to  In 2009, GAO added USPS to its list of high-risk areas needing  attention by Congress and the executive branch to achieve broad- based transformation. Given the decline in mail volume and  revenue, we suggested that USPS develop and implement a broad  restructuring plan—with input from PRC and other stakeholders and  approval by Congress and the administration. We added that this plan  should address how USPS plans to realign postal services (such as  delivery frequency and delivery standards); better align its costs and  revenues; optimize its operations, network, and workforce; increase  mail volume and revenue; and retain earnings so that it can finance  needed capital investments and repay its growing debt. In 2009, we  testified that maintaining USPS’s financial viability as the provider of  affordable, high-quality universal postal services would require actions  in a number of areas, such as rightsizing its retail and mail processing  networks by consolidating operations and closing unnecessary  facilities. Furthermore, in 2010 we provided strategies and options  that Congress could consider to better align USPS costs with  revenues and address constraints and legal restrictions that limit  USPS’s ability to reduce costs and improve efficiency. We reported  that USPS could close major mail processing facilities and relax  delivery standards to facilitate consolidations and closures of mail  processing facilities as options for reducing network costs.
section_title: Past Actions to Reduce Excess Capacity
paragraphs: From fiscal years 2006 through 2011, USPS data showed that it reduced  mail processing and transportation costs by $2.4 billion—or 16 percent— by reducing the number of mail processing work hours, facilities, and  employees as shown in table 1. Specifically, USPS data show that it  eliminated about 35 percent of its total mail processing work hours, 32  percent of its mail processing facilities, and 20 percent of its full-time mail  processing employees.
USPS’s OIG report determined that a valid business case existed for 31 of the 32  implemented AMP studies (97 percent) reviewed, and that those cases were supported by  adequate capacity, increased efficiency, reduced work hours, and mail processing costs,  and improved service standards. United States Postal Service, Office of Inspector  General, U.S. Postal Service Past Network Optimization Initiatives, CI-AR-12-003  (Arlington, VA: Jan. 9, 2012). not to approve the AMP study.savings of $167 million from AMP consolidations in fiscal years 2010  and 2011.
According to USPS data, it achieved
Transformed the Bulk Mail Center network: In the past, mailers  dropped their bulk mail at a network of 21 Bulk Mail Centers. USPS  would then process and transport the bulk mail to its final destinations.  By 2007, however, a significant portion of this mail bypassed the Bulk  Mail Center network and was dropped at a processing plant closer to  its final delivery point. In fiscal year 2009, USPS reported that it had  begun transforming its 21 Bulk Mail Centers into Network Distribution  Centers and completed the transformation in fiscal year 2010.  According to USPS, this was designed to better align work hours with  workload and improve transportation utilization, resulting in cost  savings of $129 million.
Even after taking these actions to reduce excess capacity, USPS stated  that excess capacity continues and structural changes are necessary to  eliminate it. Three major reasons for continued excess capacity include  the following:
Accelerating declines in mail volume: Since 2006, declines in mail  volume have continued to worsen. For example, single-piece First- Class Mail has dropped by almost 19 billion pieces. Furthermore,  USPS’s volume forecasts to 2020 indicate that the decline in First- Class Mail volume will not abate going forward but instead will  continue—from 73 billion pieces in 2011 to 39 billion pieces in 2020— further exacerbating the problem of costly excess capacity (see fig. 3).  Declining First-Class Mail volume is primarily attributed to the  increasing number of electronic communications and transactions.  The recent recession and other economic difficulties have further  accelerated mail volume decline.
Continuing automation improvements: These improvements have  enabled USPS to sort mail faster and more efficiently. For example,  USPS’s Flats Sequencing System machines automatically sort larger  mail pieces (e.g., magazines and catalogs) into the order that they will  be delivered. At the end of fiscal year 2011, USPS reported that it had  deployed 100 flats sequencing machines to 46 sites and the Flats  Sequencing System covered nearly 43,000 delivery routes and  processed an average of almost 60 percent of flats at more than half  of those sites.
Increasing mail preparation and transportation by mailers: While most  First-Class Mail goes through USPS’s entire mail processing network,  around 83 percent of Standard Mail is destination entered—that is,  business mailers enter mail within a local area where it will be  delivered, bypassing most of USPS’s mail processing network and  long-distance transportation.destination entered has increased 16 percent over the last decade.
section_title: USPS Plan to Consolidate Its Mail Processing Network
paragraphs: On December 15, 2011, USPS asked PRC to review and provide an  advisory opinion on its proposal to change its delivery service standards,  primarily by changing its delivery standards to eliminate overnight delivery  service for most First-Class Mail and Periodicals. USPS has stated that  these changes in delivery service standards are a necessary part of its  plan to consolidate its mail processing operations, workforce, and  facilities. Under this plan, the 42 percent of First-Class Mail that is  currently delivered within 1 day would be delivered within 2 to 3 days. See  table 2 for the percentage of First-Class Mail volume that is intended to  be delivered within the current and proposed delivery service standards.
USPS’s plan included details on facilities, staff, equipment, and  transportation that USPS would eliminate as a result of the change in  delivery service standards and the estimated cost savings from these  changes. On the basis of an analysis of fiscal year 2010 costs, USPS  estimated that service standard changes centered on eliminating  overnight service for significant portions of First-Class Mail and  Periodicals could save approximately $2 billion annually when fully  implemented. To save this amount, USPS stated that it plans to use the  already established AMP study process, which was designed to achieve  cost savings through the consolidation of operations and facilities with  excess capacity. USPS has stated that the AMP process provides  opportunities for USPS to reduce costs, improve service, and operate as  a leaner, more efficient organization by making better use of resources,  space, staffing, processing equipment, and transportation. In a February  2012 press release, USPS announced that it would begin consolidating or  closing 223 processing facilities during the summer and fall of 2012— contingent on a final decision to change service standards, which it said it  expects to complete sometime in March. USPS added that it will not  close any facilities prior to May 15, 2012, as agreed upon with some  Members of Congress. PRC is currently reviewing the details of USPS’s  proposal to revise service standards, the estimated cost savings, the  potential impacts on both senders and recipients, and USPS’s justification  for the change to advise USPS and Congress on the merits of USPS’s  proposal. PRC procedures enable interested stakeholders, including the  public, to file questions and comments to PRC regarding USPS’s  proposal.after the time for obtaining public input is concluded in July 2012.
PRC expects to issue its advisory opinion on USPS’s proposal  USPS has stated that consolidating its networks is unachievable without  relaxing delivery service standards. The Postmaster General testified last  September that such a change would allow for a longer operating window  to process mail, which would enable USPS to reduce unneeded facilities,  work hours, workforce positions, and equipment. USPS identified  scenarios looking at how constraints within the mail processing network  affected excess capacity and found that if the current standard for  overnight First-Class Mail service was relaxed, plant consolidation could  occur, which would more fully maximize the use of facilities, labor, and  equipment. USPS estimates of excess capacity it wants to eliminate  based on proposed changes to its overnight delivery service standards  are shown in table 3.
USPS estimated that it could consolidate, all or in part, 223 processing  facilities based on its proposed changes in First-Class and Periodical  delivery service standards. USPS has also specified that changing  delivery service standards would enable it to remove up to 35,000 mail  processing positions as it consolidates operations into fewer facilities. The  number of employees per facility ranges from 50 to 2,000. Reducing work  hours and the size and cost of its workforce will be key for USPS, since  its workforce generates about 80 percent of its costs. In addition, USPS  entered into a collective bargaining agreement with the American Postal  Workers Union in April 2011 that established a two-tier career pay  schedule for new employees that is 10.2 percent lower than the existing  pay schedule. This labor agreement also allowed USPS to increase its  use of noncareer employees from 5.9 percent to 20 percent, thereby  enabling USPS to hire more lower-paid noncareer employees when  replacing full-time career employees.
USPS has also pointed out that it has about 8,000 pieces of equipment  used for processing mail, but could function with as few as 5,000 pieces if  it adopts the proposed delivery service standards. Declining mail volume  has resulted in a reduced need for machines that sort mail using Delivery  Point Sequencing (DPS) programs, on a national level, by approximately  one-half.Sequencing machinery use would allow for greater reliance on machinery  that incurs lower maintenance costs. In addition, much of this equipment   According to USPS, however, a reduction of Delivery Point  is currently used to sort mail only 4 to 6 hours per day. USPS plans to  optimize the use of its remaining equipment to sort mail by increasing its  maximum usage up to 20 hours per day.
USPS estimates that it makes more transportation trips than are currently  necessary. USPS’s transportation network includes the movement of mail  between origin and destination processing plants. USPS, however, has  estimated that changing its delivery service standards as proposed in  December 2011 would enable it to reduce these facility-to-facility trips by  about 25 percent, or 376 million trips.
Relaxing delivery standards and consolidating its mail processing network  is just one part of USPS’s overall strategy to achieve financial stability. On  the revenue side, USPS has noted that it cannot increase mail prices  beyond the Consumer Price Index cap, and price increases cannot remedy  the revenue loss resulting from First-Class Mail volume loss. USPS has  also reported that it faces restrictions on entering new lines of business and  does not see any revenue growth solution to its current financial problems.  In February 2012, USPS announced a 5-year business plan to achieve  financial stability that included a goal of achieving $22.5 billion in annual  cost savings by the end of fiscal year 2016. USPS’s proposed changes in  its mail processing and transportation networks are included in its 5-year  business plan, as are initiatives to save   1.  $9 billion in network operations, of which $4 billion would come from  consolidating its mail processing and transportation networks;  2.  $5 billion in compensation and benefits; and  3.  $8.5 billion through legislative changes, such as moving to a 5-day  delivery schedule, and resolving funding issues associated with  USPS’s retiree health benefits.
At the same time, USPS’s 5-year plan would also reduce the overall size  of the postal workforce by roughly 155,000 career employees, of which up  to 35,000 would come from consolidating the mail processing network,  with many of those reductions expected to result from attrition. According  to the 5-year plan, half of USPS’s career employees—283,000  employees—will be retirement eligible by 2016. In March 2010, USPS  presented a detailed proposal to PRC to move from a 6-day to a 5-day  delivery schedule to achieve its workforce and cost savings reduction  goals. USPS projected that its proposal to move to 5-day delivery by  ending Saturday delivery would save about $3 billion annually and would  reduce mail volume by less than 1 percent. However, on the basis of its  review, PRC estimated a lower annual net savings—about $1.7 billion  after a 3-year phase-in period—as it noted that higher revenue losses  were possible. In February 2012, USPS updated its projected net  savings to $2.7 billion after a 3-year implementation period. Implementing  5-day delivery would require USPS to realign its operations network to  increase efficiency, maintain service, and address operational issues.
section_title: Stakeholder Issues and USPS Challenges
subsections: section_title: Stakeholder Issues with Mail Processing Changes
paragraphs: Some business mailers have expressed concern that reducing processing  facilities as a result of eliminating overnight delivery service could  increase costs for business mailers who will have to travel farther to drop  off their mail. In addition, business mailers have expressed concern that  service could decline as USPS plans to close an unprecedented number  of processing facilities in a short period. USPS employee associations  have said that the proposed changes would reduce mail volume and  revenue, thus making USPS’s financial condition worse.
Business mailers have commented that such a change in delivery service  standards and postal facility locations could shift mail processing costs to  them and reduce the value of mail for their businesses. While many of  USPS’s customers who are business mailers indicated they would be  willing to accept the service standard changes and understood the need  for such a change, several mailers noted that it is never good when an  organization reduces services. As a result of USPS’s plan, businesses  using bulk First-Class Mail, Standard Mail, or Periodicals may have fewer  locations where mail can be entered and may therefore need to transport  it to locations different from those now in use. Furthermore, businesses  using Standard Mail may have to transport their bulk mail to other  locations to take advantage of discounts. USPS officials told business  mailers in February 2012, when it announced the facilities it planned to  close, that it did not plan immediate changes to the locations where  business mailers drop off their mail or to the associated discounts. USPS  officials told us that they plan to retain business mail locations at their  current locations or in close proximity.
Additionally, businesses that publish Periodicals, like daily or weekly  news magazines, have expressed concern over the elimination of  overnight delivery leading to deliveries not being made in a timely fashion.  Delivery delays could result in customers canceling their subscriptions,  thereby reducing the value of mail. These business mailers have  indicated that they will most likely accelerate shifting their hard copy mail  to electronic communications or otherwise stop using USPS if it is unable  to provide reliable service as a result of these changes. Business mailers  have also stated their concern that service could be significantly disrupted  as a result of closing an unprecedented number of processing facilities by  2016. If service declines, mail users stated they are likely to lose  confidence in the medium and choose to move volume and revenue from  the mail to other media. Business mailers have stressed the need for  USPS to put forward and share with stakeholders a comprehensive,  detailed plan for consolidating its network and changes in service  standards that explains to mail users what it intends to do, what changes  will occur, and milestones and timelines for measuring progress in how it  is achieving its plans. In sum, a key message from USPS customers is  that while many support efforts to consolidate the mail processing  network, it is imperative for USPS to provide consistent mail delivery and  work with mailers to keep their costs down.
Employee associations have expressed concern that USPS’s proposed  changes may result in even greater losses in mail volume and revenue,  which would further harm USPS financially. The National Association of  Letter Carriers commented that downgrading service would serve only to  drive customers away, reduce revenue and compromise potential growth.   Further, the American Postal Workers Union and the National Rural Letter  Carriers’ Association commented that USPS’s proposal would degrade  existing USPS products, limit USPS’s ability to introduce new products,  place the USPS at a distinct competitive disadvantage, and severely  hamper its ability to accommodate growth.  USPS responded to these  comments by acknowledging that its proposal would, to some degree,  reduce the value of the mail to customers, but on balance is in the long- term interests of USPS to help maintain its viability for all customers into  the future. USPS estimated that its proposal would result in additional  volume decline of almost 2 percent, revenue decline of about $1.3 billion,  with a net annual benefit of about $2 billion.
section_title: USPS Challenges to Consolidating Mail Processing
paragraphs: USPS faces major challenges in two areas related to consolidating its mail  processing network and has told Congress that it needs legislative action to  address them. Specifically, these challenges include the following:  Lack of flexibility to consolidate its workforce: USPS stated it must be able  to reduce the size of its workforce in order to ensure that its costs are less  than revenue. Action in this area is important since USPS’s workforce  accounts for about 80 percent of its costs. The Postmaster General testified  last September, however, that current collective bargaining agreements  prevent USPS from moving swiftly enough to achieve its planned workforce  reductions. In addition, USPS has requested legislative action to eliminate  the layoff protections in its collective bargaining agreements. The key  challenges in this area include the following:
No-layoff clauses: About 85 percent of USPS’s 557,000 employees  are covered by collective bargaining agreements that contain, among  other provisions, employment protections such as no-layoff  provisions. Currently, USPS’s collective bargaining agreements with  three of its major unions contain a provision stating that postal  bargaining unit employees who were employed as of September 15,  1978, or, if hired after that date, have completed 6 years of continuous  service are protected against any involuntary layoff or reduction in  force. Furthermore, USPS’s memorandum of understanding with the  American Postal Workers Union extends this no-layoff protection to  cover those employed as of November 20, 2010—even if those  employees were not otherwise eligible for no-layoff protection. The  collective bargaining agreement with its fourth major union—the  National Rural Letter Carriers’ Association—states that that no  bargaining unit employees employed in the career workforce will be  laid off on an involuntary basis during the period of the agreement.  The no-layoff clauses will be a challenge to USPS primarily if it cannot  achieve its workforce reductions through attrition. With the large  number of employees eligible for retirement, USPS has a window of  opportunity to avoid layoffs of non-bargaining unit employees who are  not eligible for no-layoff protection.
Fifty-mile limits on employee transfers: In 2011, the American Postal  Workers Union (which represents USPS clerks, maintenance  employees, and motor vehicle service workers) and USPS  management negotiated a 4-year agreement that limits transferring  employees of an installation or craft to no more than 50 miles away. If  USPS management cannot place employees within 50 miles, the  parties are to jointly determine what steps may be taken, which  includes putting postal employees on “standby,” which occurs when  workers are idled but paid their full salary because of reassignments  and reorganization efforts. USPS may face challenges in capturing  cost savings as a result of its initiatives to reduce excess capacity  because of its limited ability to move mail processing clerks from a  facility where workloads no longer support the number of clerk  positions needed to facilities with vacant positions.
Collective bargaining agreements have expired for three of the four major  postal unions, and because of impasses in negotiations, USPS has  moved to arbitration with these unions. In 2011, USPS reported that it had  no assurance that it would be able to negotiate collective bargaining  agreements with its unions that would result in a cost structure that is  sustainable within current and projected future mail revenue levels. It  noted that there is no current mandate requiring an arbitrator to consider  the financial health of USPS in its decision and an unfavorable arbitration  decision could have significant adverse consequences on its ability to  meet future financial obligations.
Resistance to facility closures: USPS is facing resistance to its plans to  consolidate or close postal facilities from Members of Congress, affected  communities, and its employees and has requested congressional action to  enable it to consolidate and close facilities. We reviewed numerous  comments from Members of Congress, affected communities, and  employee organizations that have expressed opposition to closing facilities.  Such concerns are particularly heightened for postal facilities identified for  closure that may consolidate functions to another state, causing political  leaders to oppose and potentially prevent such consolidations. For  example, Members of Congress have resisted a recent proposal to move  certain processing functions from its Rockford, Illinois, Processing and  Distribution Center to a processing facility in Madison, Wisconsin. This  proposal would eliminate the need for 82 employees (77 bargaining unit  and 5 management staff) in Rockford that USPS would need to transfer  into new roles or to another facility. The president of the Springfield  Chamber of Commerce sent a letter to PRC to protest USPS’s planned  consolidation of the Springfield, Illinois, processing facility into St. Louis,  Missouri, stating that this move would reduce service quality and increase  costs, affecting its members’ profitability and operations. He added that  Springfield would lose up to 300 jobs in an area of the community that  qualifies as an “Area of Greatest Need,” according to the U.S. Department  of Housing and Urban Development.
In contrast, however, other business mailers and Members of Congress  have expressed support for consolidating the mail processing network to  reduce costs. Some business mailers have stated that USPS needs to take  cost-saving action to reduce the need for significant postal rate increases.  A significant postal increase would have a detrimental financial impact on  mailers by decreasing mail’s return on investment and may also accelerate  mailers’ shift toward electronic communication. In addition, as we discuss  below, some Members of Congress have proposed legislation supporting  USPS efforts to consolidate its mail processing network.
Other stakeholders, including USPS’s employee associations, have  questioned whether USPS needs to make drastic changes by reducing  service and the size of its networks and workforce, since they believe that  USPS’s financial crisis is, at least in part, artificial. They point out that most of  USPS’s losses since fiscal year 2006 are due to the requirement to prefund  its future retiree health benefits. In 2006, PAEA established a 10-year  schedule of USPS payments into a fund (the Postal Service Retiree Health  Benefits Fund) that averaged $5.6 billion per year through fiscal year 2016.  Employee associations have stated that such a requirement is exceptional  and unfair, since no other federal agency is forced to prefund its employees’  health benefits at this level and no company has such a mandate. They have  suggested that instead of reducing costs, Congress should eliminate the  prefunding requirements, return surpluses in its retirement accounts, and  allow USPS to earn additional revenue by offering new services. USPS  responded that given the multibillion-dollar deficits that it has experienced in  each of the last 5 years, and given the over $14 billion loss it expects in fiscal  year 2012, capturing cost savings wherever possible will be vital to USPS’s  financial viability.
If USPS cannot increase revenues enough to eliminate its net losses, it  will have to do more to reduce costs. To address USPS prefunding  issues, we testified that deferring some prefunding of USPS’s retiree  health benefits would serve as short-term fiscal relief. However, deferrals  also increase the risk that USPS will not be able to make future payments  as its core business declines. Therefore, we concluded that it is important  for USPS to continue funding its retiree health benefit obligations— including prefunding these obligations—to the maximum extent that its  finances permit.
section_title: Pending Legislation to Address USPS Challenges
paragraphs: USPS has stated that it needs action from Congress to address  restrictions that limit its ability to consolidate its mail processing network,  including annual appropriations provisions that mandate 6-day delivery,and granting USPS authority to determine delivery frequency. Some  Members have asked USPS to postpone actions to consolidate mail  processing facilities so it would not preempt Congress on postal reform.  In response to the Members’ request, USPS agreed last December to  place a moratorium on closing facilities until May 15, 2012.
As of April 2012, the House of Representatives and Senate committees  with USPS oversight responsibility have passed bills to help USPS  achieve financial viability. These bills, as well as other postal reform bills,  include provisions that could affect USPS’s ability to consolidate its mail  processing network. Table 4 summarizes the key provisions of the House  of Representatives bill—H.R. 2309, the Postal Reform Act of 2011-—and  Senate bill—S. 1789, the 21st Century Postal Service Act.
Pending legislation originating in the Senate (S.1789) includes provisions  that would affect USPS’s ability to consolidate its networks by delaying  USPS’s move to 5-day delivery by 2 years and requiring USPS to  consider downsizing rather than closing facilities. Delaying USPS’s move  to a 5-day delivery schedule could make it difficult for USPS to save  $22.5 billion by 2016. On the other hand, the Senate bill includes a  requirement for arbitrators to consider USPS’s financial condition and  could facilitate attrition by allowing USPS to use surplus pension funds to  pay for employee buyouts of up to $25,000 for as many as 100,000  eligible postal workers. Such buyouts may make it easier to reduce  USPS’s workforce in facilities targeted for closure.
Another legislative proposal, originating in the House of Representatives,  (H.R. 2309) includes provisions that would enhance USPS’s ability to  consolidate its mail processing network by allowing changes in service  standards and using a BRAC framework to approve a consolidation plan,  address some of the political resistance to closing postal facilities, and  potentially reform the collective bargaining process. The proposed  Commission on Postal Reorganization could broaden the current focus on  individual facility closures—which are often contentious, time–consuming,  and inefficient—to a broader networkwide restructuring, similar to the  BRAC approach. In other restructuring efforts where this approach has  been used, expert panels have successfully informed and permitted  difficult restructuring decisions, helping to provide consensus on  intractable decisions. As previously noted, the 2003 Report of the  President’s Commission on the USPS also recommended such an  approach relating to the consolidation and rationalization of USPS’s mail  processing and distribution infrastructure. We also reported in 2010 that  Congress may want to consider this approach to assist in restructuring  organizations that are facing key financial challenges. In addition, the  House bill authorizes USPS to declare up to 12 non-mail delivery days  annually so long as USPS is required to deliver mail 6 days per week and  reforms the collective bargaining process, including requiring arbitrators  to consider USPS’s financial condition.
section_title: Concluding Observations
paragraphs: Developing an optimal mail processing network will require both  congressional support and USPS leadership. Moreover, we have  previously reported that Congress and USPS need to reach agreement  on a comprehensive package of actions to improve USPS’s financial  viability. In these previous reports, we provided strategies and options  that Congress could consider to better align USPS costs with revenues  and address constraints and legal restrictions that limit USPS’s ability to  reduce costs and improve efficiency. Consequently, we are not making  new recommendations or presenting a matter for Congress to consider at  this time. Without congressional action to help USPS address its financial  problems, USPS will be limited in the amount of rate increase it may seek  and may fall even further into debt.  USPS had $2 billion remaining on its  $15 billion statutory borrowing limit at the end of fiscal year 2011. It is now  abundantly clear that the postal business model must be fixed given the  dramatic and estimated decline in volume, particularly for First-Class Mail.  If Congress prefers to retain the current delivery service standards and  associated network, decisions will be needed about how USPS’s costs for  providing these services will be paid, including additional cost reductions  or revenue sources.
section_title: Agency Comments
paragraphs: We provided a draft of this report to USPS for review and comment.  USPS had no comments, but provided technical clarifications, which we  incorporated into the report as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Postmaster General, and other interested parties. In  addition, the report is available at no charge on GAO’s website at  http://www.gao.gov.
If you or your staff have any questions on this report, please contact me  at (202) 512-2834 or stjamesl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Contact information and key contributors to the report are  listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report addresses (1) past actions the U.S. Postal Service (USPS)  has taken to reduce excess capacity, (2) USPS’s plans to consolidate its  mail processing network, and (3) key stakeholder issues and challenges  USPS faces in consolidating its mail processing network.
To describe what actions USPS has taken to reduce excess capacity, we  obtained data from USPS related to changes in its mail processing  network, workforce, and costs as well as an updated 10-year volume  forecast for First-Class Mail. To calculate the 5-year cost savings that  USPS achieved, we took the difference of the network costs for fiscal  years 2006 and 2011 that USPS reported to us. We also obtained data  from USPS and USPS Office of Inspector General (OIG) reports  regarding cost savings related to USPS initiatives to reduce excess  capacity. Further, we reviewed USPS annual reports to Congress and its  network plans as section 302 of the Postal Accountability and  Enhancement Act of 2006 requires USPS to submit; related GAO and  USPS OIG reports, as well as other relevant studies relating to reducing  excess capacity in USPS’s mail processing network.
To examine USPS’s future plans to consolidate its mail processing  network, we reviewed USPS’s December 2011 proposal to change  delivery service standards and its plan to consolidate its mail processing  network by reducing facilities, staff, equipment, and transportation  resources. We also reviewed USPS’s 5-year business plan to profitability  issued in February 2012. We interviewed USPS senior management and  local facility mangers in Illinois about the current processing network and  future plans for that network. We also reviewed documents in the ongoing  Postal Regulatory Commission (PRC) review of USPS’s proposed  changes in service standards and its plan for consolidating its mail  processing network. PRC is reviewing USPS’s estimated cost savings,  service impacts, and public input on the proposed service standard  changes and expects to complete its review sometime after July 2012.
To determine key issues and challenges USPS faces in consolidating its  mail processing network, we reviewed and summarized concerns from  postal stakeholders responding to the USPS’s September 2011 Federal  Register notice on its proposed changes to service standards for First- Class Mail, Periodicals, and Standard Mail. We also interviewed USPS  officials, and reviewed stakeholder testimonies and published letters from  Members of Congress commenting on USPS plans to change delivery  service standards and close facilities. We further reviewed pending  legislative proposals that could affect USPS’s efforts to address excess  capacity and consolidate its mail processing network.
We conducted this performance audit from April 2011 through April 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Teresa Anderson (Assistant  Director), Samer Abbas, Joshua Bartzen, Erin R. Cohen, Sara Ann  Moessbauer, Amy Rosewarne, and Crystal Wesco made key  contributions to this report.