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entitled 'U.S. Postal Service: A Primer on Postal Worksharing' which
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Report to Congressional Requesters:
July 2003:
U.S. Postal Service:
A Primer on Postal Worksharing:
GAO-03-927:
GAO Highlights:
Highlights of GAO-03-927, a report to congressional requesters
Why GAO Did This Study:
The U.S. Postal Service (USPS) faces major financial, operational, and
human capital challenges that call for a transformation if USPS is to
remain viable in the 21st century. Given these challenges, the
President established a commission to examine the state of USPS and
submit a report by July 31, 2003, with a proposed vision for USPS and
recommendations to ensure the viability of postal services. The
presidential commission has addressed worksharing (activities that
mailers perform to obtain lower postage rates) in the course of its
work. About three-quarters of domestic mail volume is workshared.
Worksharing is fundamental to USPS operations, but is not well
understood by a general audience.
To help Congress and others better understand worksharing, GAO was
asked to provide information on the key activities and the rationale
for worksharing and the legal basis for worksharing rates. GAO
discusses USPS’s and the Postal Rate Commission’s rationale for
worksharing but did not assess the benefits that they claimed for
worksharing. GAO will issue a second report later this year on
worksharing issues raised by stakeholders.
In commenting on this report, USPS and the Postal Rate Commission
reemphasized the benefits of worksharing.
What GAO Found:
Postal worksharing activities generally involve mailers preparing,
sorting, or transporting mail to qualify for reduced postage rates,
that is, worksharing rates. These rates are based on what are referred
to as worksharing discounts because the rates are reduced based on the
costs that USPS is estimated to avoid as a result of mailer
worksharing activities. Key activities include (1) barcoding and
preparing mail to be sorted by USPS automated equipment, which reduces
manual sorting; (2) presorting mail by ZIP Code or specific delivery
location, which reduces USPS sorting; and (3) entering mail at a USPS
facility that generally is closer to the final destination of the
mail. Worksharing also requires mailers to perform numerous other
activities, such as updating addresses to improve their accuracy.
USPS Domestic Mail Volume in Fiscal Year 2002
[See PDF for image]
[End of table]
According to USPS and the Postal Rate Commission, the rationale for
worksharing is that it benefits USPS, mailers and the mailing
industry, and the nation. They said worksharing benefits (1) USPS by
enabling it to improve its operations and thereby help minimize its
workforce and infrastructure, and by stimulating mail volume growth
that generates revenues to cover rising costs; (2) mailers by reducing
mail-related costs and improving delivery service, and the mailing
industry that performs worksharing activities; and (3) the nation, in
part by lowering business costs, and in part by the associated
benefits that consumers can realize. While stakeholders generally
support the concept of worksharing, they have raised differing
concerns in this area. For example, the American Postal Workers Union
has asserted that worksharing discounts are too large, but some
mailers and members of the mailing industry have asserted that the
worksharing discounts are not large enough.
The primary legal basis for worksharing rates is the requirement in
law that, when recommending postage rates, the Postal Rate Commission
consider mail preparation and its effect upon reducing USPS costs.
Postal rate cases have established precedents clarifying the basis for
worksharing rates.
www.gao.gov/cgi-bin/getrpt?GAO-03-927.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Bernard L. Ungar at
(202) 512-2834 or ungarb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Worksharing Involves Activities Mailers Must Perform to Qualify for
Lower Rates:
The Rationale for Worksharing Is That It Benefits USPS, Mailers, and
the Nation, but Some Concerns Have Been Raised:
The Legal Basis for Worksharing Rates Is Derived from Title 39 and Is
Implemented through Postal Rate Cases and Regulations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Estimated USPS Avoided Costs for Automation-Compatible
Letters That Are Workshared and Sent via First-Class Mail:
Appendix III: Comments from the U.S. Postal Service:
Appendix IV: Comments from the Postal Rate Commission:
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Selected Postage Discounts and Rates for Letters of Up to 1
Ounce That Are Sent via First-Class Mail and Workshared to Be
Compatible with USPS Automation Equipment:
Table 2: Highlights of Worksharing Requirements for Automation-
Compatible Letters Sent via First-Class Mail:
Table 3: Highlights of Opposing Views on Worksharing:
Table 4: Selected USPS Worksharing Rates Adopted from Fiscal Years 1976
through 2002:
Figures:
Figure 1: Illustration of How USPS Handles "Aunt Minnie's" Letter Sent
from Philadelphia to Los Angeles:
Figure 2: Sample Envelope with Mailer-Applied Barcode:
Figure 3: Example of Presorting Envelopes in Mail Trays by Five-Digit
ZIP Codes:
Figure 4: Illustration of How USPS Handles Destination-Entered Bulk Mail
and Aunt Minnie's Letter, Both of Which Are Sent from Philadelphia to
Los Angeles:
Figure 5: Percentage of USPS Domestic Mail That Is Workshared and Non-
workshared:
Figure 6: Percentage of Workshared Mail by Class:
Figure 7: Percentage of Costs That USPS Is Estimated to Avoid Because
Mailers Perform Worksharing Activities for Automation-Compatible
Letters Sent via First-Class Mail, by Type of USPS Cost:
Figure 8: Domestic Mail Volume from Fiscal Years 1972 through 2002:
Figure 9: Share of Domestic Mail Revenue Generated by Workshared and
Non-workshared Mail in Fiscal Year 2002:
Figure 10: Percentage of Domestic Mail Revenues Applied to Help Cover
USPS Institutional Costs That Were Generated by Workshared and Non-
workshared Mail in Fiscal Year 2002:
Figure 11: Financial Data for Workshared and Non-workshared First-Class
Mail in Fiscal Year 2002:
Letter July 31, 2003:
The Honorable Daniel K. Akaka
Ranking Minority Member
Subcommittee on Financial Management, the Budget, and International
Security
Committee on Governmental Affairs
United States Senate:
The Honorable Henry A. Waxman
Ranking Minority Member
Committee on Government Reform
House of Representatives:
The Honorable Danny K. Davis
Ranking Minority Member
Subcommittee on the Civil Service and Agency Reorganization
Committee on Government Reform
House of Representatives:
As you know, we have recently raised concerns that the U.S. Postal
Service (USPS) faces major challenges that collectively call for a
structural transformation if USPS is to remain viable in the 21ST
century. We have reported that USPS has experienced financial
difficulties, its business model is not well suited to operate
efficiently in an increasingly competitive environment, and growth in
mail volume has stagnated or declined.[Footnote 1] About three-quarters
of U.S. domestic mail volume is "workshared" by mailers that barcode,
sort, or transport mail in ways estimated to reduce USPS's costs and
thus obtain lower postage rates. Although worksharing is fundamental to
USPS operations, it is not well understood by a general audience
because little information is available that explains its basic
concepts. As Congress continues to consider how best to address USPS's
transformation challenges, Members of Congress, their staff, and other
interested parties will need a basic understanding of postal
worksharing.
Accordingly, you requested that we provide available information on
worksharing fundamentals, key issues, and stakeholder views in this
area. We agreed with your offices to provide the information in two
reports. This first report provides a primer on the fundamentals of
worksharing. Specifically, our objectives for this report are to
provide summary information on the following questions: (1) What are
the key activities included in postal worksharing? (2) What is the
rationale for worksharing, according to USPS and the Postal Rate
Commission, the independent federal establishment that reviews USPS
proposals for changes in domestic postage rates? and (3) What is the
legal basis for establishing worksharing rates?
Some postal stakeholders have expressed divergent points of view
regarding the rationale for worksharing, raising a series of related
detailed technical and policy issues that are beyond the scope of this
report. Accordingly, among other things, you requested that we issue a
second report later this year to address key worksharing issues and
stakeholder views regarding these issues. In this first report, we
discuss USPS's and the Postal Rate Commission's rationale for
worksharing but do not assess the benefits that they claimed are
derived from worksharing.
As you requested, this first report is being issued on July 31, 2003.
This date coincides with the expected issuance date of the report by
the President's Commission on the United States Postal Service. The
commission was mandated to report on its proposed vision for USPS and
recommend reforms to ensure the viability of postal services.
To address the three objectives, among other things, we reviewed
documents that defined worksharing rates and the rationale for these
rates. These documents included materials filed in postal rate cases--
Postal Rate Commission proceedings that consider changes to domestic
postage rates and fees--by USPS, the Postal Rate Commission, and other
postal stakeholders. In addition, we reviewed USPS requirements for
mailer worksharing activities and reviewed published papers and
analyses on worksharing. To observe the handling and preparation of
workshared mail, we visited USPS mail processing facilities in Florida
and Maryland that handle workshared mail as well as mailer facilities
in Florida that prepare workshared mail. We interviewed representatives
of groups that filed material on worksharing issues in the most recent
postal rate case that resulted in increases in most postage rates,
including the rate for sending a letter via First-Class Mail. These
representatives included officials of USPS, the Postal Rate Commission
and its Office of the Consumer Advocate, mailer groups, and the
American Postal Workers Union. We also reviewed material that some of
these organizations provided us on worksharing. To obtain information
on the legal basis for worksharing rates, we reviewed pertinent laws,
regulations, and the Postal Rate Commission's recommended decisions in
rate cases that established worksharing rates. Additional information
on our objectives, scope, and methodology appears in appendix I. We
requested comments on a draft of this report from USPS and the Postal
Rate Commission, and their comments are discussed later in this report
and reproduced in appendixes III and IV.
Results in Brief:
Postal worksharing activities generally involve mailers preparing,
barcoding, sorting, or transporting mail to qualify for reduced postage
rates, i.e., worksharing rates. Worksharing rates are based on what are
commonly referred to as worksharing discounts because the rates are
reduced based on the costs that USPS is estimated to avoid as a result
of mailer worksharing activities. Key worksharing activities include
(1) barcoding and preparing mail so it can be sorted by USPS automated
equipment, which reduces manual sorting and other USPS handling of the
mail; (2) presorting mail, such as by ZIP Code or specific delivery
location, to reduce the number of times USPS must sort the mail to
route it to the addressee; and (3) entering mail at a USPS facility
that is generally closer to the final destination of the mail, which is
commonly referred to as entering the mail deeper into USPS's network
used to move the mail. In addition, mailers must perform numerous other
worksharing activities, such as updating and properly formatting
addresses to improve their quality and accuracy, thus reducing the
amount of undeliverable and forwarded mail, as well as improving USPS's
ability to use its automated equipment to sort the mail. To qualify for
worksharing rates, mailers must perform worksharing activities and meet
minimum volume requirements for bulk mailings, such as mailings of at
least 500 letters sent via First-Class Mail that may include credit
card bills, utility bills, advertisements, and bank statements. Aside
from First-Class Mail that is workshared, other workshared mail may
include bulk mailings of advertisements, magazines, local newsletters,
or packages.
USPS and the Postal Rate Commission have said that worksharing benefits
USPS, mailers and the mailing industry, and the nation. First, they
credit worksharing with benefiting USPS, in part because it enables
USPS to improve its operations and thereby helps minimize its workforce
and infrastructure. In addition, they said worksharing benefits USPS
because it stimulates mail volume growth, which helps USPS achieve
economies of scale. Historically, mail volume growth has been critical
to USPS's business model, which depends on mail volume growth to
generate more revenues to help cover rising USPS costs. Second, they
credit worksharing with benefiting mailers and the mailing industry.
With respect to mailers, USPS and the Postal Rate Commission credit
worksharing with reducing the total mail-related costs for mailers who
workshare; helping to keep postage rates affordable for all mailers;
and improving the quality of delivery service. Regarding the mailing
industry, USPS and the Postal Rate Commission credit worksharing with
spurring the development of the direct mail industry as well as that of
other mail-related companies that perform worksharing activities,
enabling more mailers to participate in worksharing. Third, they credit
worksharing with benefiting the nation, in part by lowering business
costs, and in part by creating associated benefits that consumers can
realize. They said consumers benefit if worksharing helps keep postage
rates affordable; if mailers pass along lower prices when their mail-
related costs are reduced by worksharing; if their workshared mail is
delivered in a more expeditious and reliable manner; and if the mail
volume growth caused by worksharing results in more mail that consumers
consider useful, such as business correspondence or catalogs that some
consumers find useful.
While stakeholders generally support the concept of worksharing, they
have raised differing concerns in this area. For example, the American
Postal Workers Union has asserted that the worksharing discounts are
too large and thus worsen USPS's financial situation. In contrast, some
mailers and members of the mailing industry have asserted that the
discounts are not large enough and thus improve USPS's financial
situation. Integral to stakeholder differences are divergent views on
technical issues relating to the data, assumptions, and analyses used
in rate cases to develop the estimates of costs that USPS is to avoid
as a result of mailer worksharing activities. Another issue that has
been raised is the extent to which USPS has avoided costs as a result
of worksharing activities performed by mailers.
The primary legal basis for worksharing rates derives from the
requirement that the Postal Rate Commission consider "the degree of
preparation of mail for delivery into the postal system performed by
the mailer and its effect upon reducing costs" to USPS when
recommending domestic postage rates.[Footnote 2] Worksharing rates have
been considered in successive postal rate cases--proceedings in which
the Postal Rate Commission considers USPS proposals for changing
domestic postage rates--dating back to the 1970s. These proceedings
have established precedents that have further clarified the legal basis
for worksharing rates. Worksharing rates are implemented through
federal regulations issued and updated by the Postal Rate Commission
and USPS.
In commenting on a draft of our report, the Postal Rate Commission said
that worksharing rates "have provided major impetus for improved
productive efficiency in postal services and stimulated the mail volume
growth that has had the effect of moderating rate increases for all
mail classes and services." USPS commented that worksharing enhances
efficient postal operations and stimulates mail growth and revenue for
USPS; reduces overall mailer costs and has encouraged development of
the presort and direct mail industries; and "benefits the entire
economy because reduced mailing costs increase productivity and
efficiency.":
Background:
USPS is an independent establishment of the executive branch mandated
to provide postal services to bind the nation together through the
personal, educational, literary, and business correspondence of the
people. Established by the Postal Reorganization Act of 1970,[Footnote
3] USPS is one of the largest organizations in the nation, with annual
revenues of about $67 billion in fiscal year 2002 and a workforce of
about 850,000 full-time and part-time employees.
To fulfill its responsibilities, USPS has a massive infrastructure
that, in fiscal year 2002, included about 300,000 collection boxes;
209,000 vehicles that transport and deliver mail; almost 38,000 post
offices, post office stations, and post office branches; and about 350
mail processing facilities that sort and route mail across the country
and within local areas. USPS delivered mail to the nation's 139 million
addresses, a number that grows by about 1.7 million annually. USPS
carried over 40 percent of the world's mail, and USPS's total mail
volume was nearly 203 billion pieces in fiscal year 2002. A simplified
illustration of how USPS handles a single piece of personal
correspondence that is mailed cross-country (referred to as "Aunt
Minnie" mail) is shown in figure 1.
Figure 1: Illustration of How USPS Handles "Aunt Minnie's" Letter Sent
from Philadelphia to Los Angeles:
[See PDF for image]
[End of figure]
USPS handles a wide variety of mail items ranging from correspondence,
bills, and publications to payments and packages. Most mail is
generated by businesses, with households generating 11 percent of
domestic mail volume--primarily remittance mail and other mail sent to
businesses and other organizations. Household-to-household mail, such
as personal correspondence, represents only 4 percent of domestic mail
volume.
Postage rates vary widely, depending on the mail's content, weight,
size, destination, and how it is prepared and presented by mailers to
USPS, among other things. Mail is organized into groupings called
classes. The four main mail classes include (1) First-Class Mail, which
includes items such as business and personal correspondence, bills,
payments, and advertisements; (2) Standard Mail, which is primarily
advertising mail such as catalogs, coupons, and solicitations; (3)
Periodicals, which include publications such as mailed newspapers and
magazines; and (4) Package Services, which is primarily packages that
include merchandise as well as large quantities of printed material.
The Postal Reorganization Act of 1970 shifted postage ratemaking
authority from Congress to two presidentially appointed bodies: the
USPS Board of Governors and the independent Postal Rate Commission
(PRC). The Board of Governors is USPS's governing body, which, among
other things, sets policy, directs and controls expenditures, and
participates in establishing postage rates and fees. The Board consists
of 11 members: (1) 9 Governors who are appointed by the President, with
the advice and consent of the Senate, to 9-year staggered terms; (2)
the Postmaster General, who is appointed by the Governors; and (3) the
Deputy Postmaster General, who is appointed by the Governors and the
Postmaster General. By law, Governors are chosen to represent the
public interest and cannot be representatives of special interests.
They serve part time and may be removed only for cause. Not more than
five of the nine Governors may belong to the same political party. No
other qualifications or restrictions are specified in law.
PRC is an independent establishment of the executive branch that is
composed of five full-time Commissioners, who are appointed by the
President, with the advice and consent of the Senate, to 6-year
staggered terms. Among other things, PRC Commissioners review proposed
changes to domestic postage rates and fees and appeals of USPS
decisions to close post offices. By law, Commissioners shall be chosen
on the basis of their professional qualifications and may be removed
only for cause. Not more than three of the five Commissioners may
belong to the same political party. No other qualifications or
restrictions are specified in law. In addition to the five
Commissioners, PRC has a staff of about 40 full-time employees.
When USPS wishes to change domestic postage rates and fees, it must
submit its proposed changes and supporting material to PRC, which
generally must render its recommended decision within 10 months. During
that time, interested parties, such as mailer groups, individual
mailers, companies that provide mail-related services, USPS
competitors, postal labor unions, PRC's Office of the Consumer
Advocate,[Footnote 4] and members of the public, have the opportunity
to provide evidence and comments to PRC reflecting their respective
concerns. PRC also generally holds public hearings before issuing its
recommended decision to the Governors, who may approve, allow under
protest, reject, or modify PRC's decision.
USPS has a break-even mandate. Thus, when USPS proposes changes to
domestic postage rates and fees, USPS (1) projects its "revenue
requirement" for the "test year" (a fiscal year representative of the
period of time when the new rates will go into effect), based on the
total estimated costs plus a provision for contingencies, and a
provision for the recovery of prior years' losses; and (2) proposes
rates and fees that are estimated to raise sufficient revenues to meet
USPS's revenue requirement. USPS also proposes domestic postage rates
and fees that are intended to fulfill the requirement in law that each
class of mail or type of service must cover the direct and indirect
postal costs that are attributable to that class or type of service
plus a portion of its other remaining "institutional" costs, which
include all "common" or "overhead" costs.[Footnote 5]
USPS has raised postage rates several times in recent years. Although
these rate increases have contributed to the decline in mail volume,
USPS credits the rate increases with adding billions of dollars to USPS
revenues. USPS now plans to keep postage rates steady until 2006,
largely because recently enacted legislation has reduced USPS's
payments for its pension obligations. Although USPS's short-term
financial pressures have been alleviated, fundamental issues remain
associated with USPS's business model, which relies on mail volume
growth to help finance rising costs, including the cost of universal
postal service provided through an expanding delivery network. USPS has
recognized that its business model is outmoded in today's rapidly
changing and increasingly competitive business environment. As growth
in mail volume has stagnated or declined, USPS has increasingly relied
on rate increases to generate additional revenues.
Congress has debated proposals for comprehensive legislation to address
postal transformation issues for the past decade, including USPS's
mission, role, business model, and regulation of postage rates. None of
these proposals have been enacted to date. When legislative action was
not forthcoming, various postal stakeholders and we proposed that a
presidential commission be formed to consider postal transformation
issues and develop recommendations.
In April 2001, we put USPS's long-term financial outlook and
transformation efforts on our high-risk list and recommended that USPS
develop a comprehensive plan to address its financial, operational, and
human capital challenges.[Footnote 6] In the fall of 2001, USPS's
financial situation became even more complex and critical due to the
events of September 11th and the subsequent use of the mail to transmit
anthrax. These events, the economic downturn, electronic diversion of
mail, and rate increases, among other things, have led to unprecedented
declines in total mail volume and continuing declines in the volume of
First-Class Mail. This mail class generates more than half of USPS's
revenues and covers most of its institutional costs.
USPS issued its Transformation Plan in April 2002 and has begun to
implement it. USPS's actions are useful but cannot resolve the
fundamental and systemic challenges associated with USPS's current
business model. These challenges threaten USPS's ability to carry out
its mission of providing affordable, high-quality, universal postal
services on a self-financing basis.
Given these challenges, on December 11, 2002, President Bush issued an
executive order that established the President's Commission on the
United States Postal Service. The executive order stated that the
commission's mission shall be to examine the state of USPS and submit a
report to the President by July 31, 2003, that articulates a proposed
vision for USPS, along with recommendations for the legislative and
administrative reforms needed to ensure the viability of postal
services. The commission examined many issues that are critical to
postal transformation, including the worksharing of mail. The
commission held seven public hearings during which it received
testimony and statements for the record from a wide variety of
stakeholders, including USPS, PRC, postal labor unions and management
associations, mailers, mailer groups, companies that provide mail-
related products and services, USPS competitors, subject matter
experts, and others.
Worksharing Involves Activities Mailers Must Perform to Qualify for
Lower Rates:
Postal worksharing activities generally involve mailers preparing,
barcoding, sorting, or transporting mail to qualify for reduced postage
rates, that is, worksharing rates. Worksharing rates are based on what
are commonly referred to as worksharing discounts because the rates are
reduced based on the costs that USPS is estimated to avoid as a result
of mailer worksharing activities. Key worksharing activities include
(1) barcoding and preparing mail so it can be sorted by USPS automated
equipment, which reduces manual sorting and other USPS handling of the
mail; (2) presorting mail, such as by ZIP Code or specific delivery
location, to reduce the number of times USPS must sort the mail to
route it to the addressee; and (3) entering mail at a USPS facility
that is generally closer to the final destination of the mail, which is
commonly referred as entering the mail deeper into USPS's network used
to move the mail. In addition, mailers must perform numerous other
worksharing activities, such as updating and properly formatting
addresses to improve their quality and accuracy, thus reducing the
amount of undeliverable and forwarded mail, as well as improving USPS's
ability to use its automated equipment to sort the mail. To qualify for
worksharing rates, mailers must perform worksharing activities and meet
minimum volume requirements for bulk mailings, such as mailings of at
least 500 letters sent via First-Class Mail that may include credit
card bills, utility bills, advertisements, and bank statements. Aside
from First-Class Mail that is workshared, other workshared mail may
include bulk mailings of advertisements, magazines, local newsletters,
or packages.
Key Worksharing Activities:
Three key worksharing activities performed by mailers are applying
barcodes to mail and preparing it so that the mail can be sorted by
USPS automated equipment; presorting mail, such as by ZIP Code or
specific delivery location; and entering mail at a USPS facility that
is generally closer to the final destination of the mail. Mailers must
also perform numerous other worksharing activities. Specifically,
worksharing activities include the following:
* Applying barcodes: USPS automation equipment relies heavily on
barcodes to sort mail. Barcodes provide machine-readable ZIP Code and
delivery point information. When mailers apply barcodes (see fig. 2)
and prepare the mail so it is compatible with USPS automated equipment,
USPS avoids applying barcodes or sorting the mail manually. Mailer-
barcoded mail can go directly to USPS automated equipment for
processing.
Figure 2: Sample Envelope with Mailer-Applied Barcode:
[See PDF for image]
[End of figure]
* Sorting mail: Mailers who sort their mail, such as by groupings of
ZIP Codes, five-digit ZIP Codes, or specific delivery locations; place
their mail in mail trays; and then take their mail to a USPS facility
for processing save USPS money by reducing the number of times USPS has
to sort the mail to route it to its final destination. Such mailer
sorting is called "presorting" because it occurs before USPS receives
the mail. Figure 3 illustrates an example of mail sorted by five-digit
ZIP Codes.
Figure 3: Example of Presorting Envelopes in Mail Trays by Five-Digit
ZIP Codes:
[See PDF for image]
Note: Figure is a simplified illustration of presorting mail.
[End of figure]
* Destination entry of mail: Mailers can prepare and transport some
mail, such as advertisements, periodicals, and packages, from where the
mail is generated to USPS facilities that generally are closer to where
the mail will be delivered. Destination entry mail also must meet other
worksharing requirements, such as being presorted to qualify for a
lower "destination entry" rate that is discounted from the rate for
mail:
that is not destination-entered.[Footnote 7] When destination entry
mail meets the worksharing requirements, it is generally expected to
(1) bypass the originating USPS mail processing facilities that
initially receive and organize mail according to areas where it will be
delivered; and (2) be transported by the mailers to USPS's facilities
that generally are closer to the final destination of the mail,
including USPS's mail processing and delivery unit facilities where
carriers pick up their mail for delivery (e.g., post offices). When
destination entry mail is transported by mailers to USPS mail
processing facilities, USPS processes the mail, such as sorting the
mail, and then transports the mail to a destination delivery unit for
delivery.[Footnote 8] In addition, mailers can receive even lower
destination entry rates when they transport destination entry mail to
USPS delivery unit facilities. For this mail, USPS is generally
expected to avoid handling this mail at its mail processing facilities
and then transporting it to its delivery unit facilities.[Footnote 9]
Figure 4 provides a simplified illustration of how USPS handles bulk
quantities of destination-entered mail sent from Philadelphia to Los
Angeles, compared with how USPS handles a single letter sent by an
individual ("Aunt Minnie") via First-Class Mail.
Figure 4: Illustration of How USPS Handles Destination-Entered Bulk
Mail and Aunt Minnie's Letter, Both of Which Are Sent from Philadelphia
to Los Angeles:
[See PDF for image]
[End of figure]
Worksharing rates are based on what are commonly referred to as
"worksharing discounts." For example, for First-Class Mail, the
worksharing discounts for workshared mail refer to the difference
between the rates for single-piece First-Class Mail weighing up to 1
ounce and the corresponding rates applicable to workshared mail. First-
Class Mail discounts vary depending on the worksharing activities that
are performed and the degree of presorting, among other things. Mailers
can barcode and presort bulk mail in exchange for lower worksharing
rates when they meet minimum volume requirements for mail sent to
specific areas or locations, which reduces the number of times that
USPS sorts the mail to route it to these areas or locations.
Consider the example of letters weighing up to 1 ounce sent via First-
Class Mail that are workshared so that they will be compatible with
USPS automation equipment. The mailer worksharing activities performed
for these letters include barcoding and presorting, among other things.
In this example, which could apply to credit card bills and utility
bills, the workshared mail can qualify for different discounts and
postage rates depending on the extent of worksharing activities that
are performed. Specifically, depending on the degree of presorting of
this barcoded mail, it can qualify for varying worksharing discounts,
such as discounts of either 7.8 cents, 9.2 cents, or 9.5 cents per
piece from the single-piece rate of 37 cents (see table 1).
Table 1: Selected Postage Discounts and Rates for Letters of Up to 1
Ounce That Are Sent via First-Class Mail and Workshared to Be
Compatible with USPS Automation Equipment:
Degree of presorting for barcoded, automation-compatible mail: 3-Digit
presorting: Mail presorted according to ZIP Codes with the same first 3
digits, which correspond to contiguous geographical areas such as part
of a state; Worksharing discount: (per-piece reduction from the 37-cent
stamp rate): 7.8 cents; Worksharing rate per piece: 29.2 cents.
Degree of presorting for barcoded, automation-compatible mail: 5-Digit
presorting: Mail presorted according to ZIP Codes with the same first 5
digits, which correspond to smaller geographic areas, such as towns or
parts of a city; Worksharing discount: (per-piece reduction from the
37-cent stamp rate): 9.2 cents; Worksharing rate per piece: 27.8
cents.
Degree of presorting for barcoded, automation-compatible mail: Carrier
route presorting: Mail presorted according to delivery routes of USPS
letter carriers; Worksharing discount: (per-piece reduction from the
37-cent stamp rate): 9.5 cents; Worksharing rate per piece: 27.5
cents.
Source: USPS.
Note: Letters sent via First-Class Mail must be barcoded, presorted,
and meet numerous other requirements to qualify for worksharing rates
that apply to automation-compatible mail.
[End of table]
Mailers must fulfill numerous requirements in addition to barcoding
and/or presorting to qualify for worksharing rates that apply to
automation-compatible mail. These requirements are intended to reduce
USPS's costs of handling mail and can include (1) updating addresses
that are intended to reduce the amount of mail that USPS must forward
or return to the sender; (2) limiting the maximum weight of each mail
piece so workshared mail can be sorted by USPS automated equipment; (3)
printing barcodes according to USPS specifications so the barcodes can
be read by USPS automated equipment;, and (4) packaging mail, placing
mail in trays, labeling trays, and performing other activities to
enhance USPS's ability to efficiently handle the mail. Highlights of
worksharing requirements for letters sent via First-Class Mail that
qualify for automation-compatible discounts are shown in table 2.
Table 2: Highlights of Worksharing Requirements for Automation-
Compatible Letters Sent via First-Class Mail:
Aspect of worksharing: Addresses; Requirements: * Each letter must
have a complete address, including the ZIP Code; * ZIP Codes must be
checked for accuracy at least once a year; * Addresses must be
periodically checked for accuracy against the USPS address database.
USPS-certified software must be used to check the addresses, such as
the accuracy of the ZIP Codes and delivery point codes used to barcode
the letters; * At least one of the following steps must be taken:; -
Before the mailing occurs, addresses and associated addressee names
must be periodically updated by checking them against USPS's change of
address database; - After the mailing occurs, an automated address
change service can be used to correct addresses and provide mailers
with change of address information in electronic format. Alternatively,
envelopes must identify how USPS is to handle undeliverable-as-
addressed mail and whether USPS is to provide mailers with information
about the addressee's new address and/or reason for nondelivery.
Aspect of worksharing: Physical; characteristics; Requirements: *
Mail must be barcoded and presorted according to USPS specifications;
* Letters must be proportioned according to USPS standards.
Aspect of worksharing: Other; requirements; Requirements: * Mail
trays must be labeled according to USPS specifications; *
Documentation of each mailing must be submitted to USPS; * Each
mailing must include 500 or more pieces.
Source: USPS.
[End of table]
Recipients of Worksharing Rates:
Although all mailers of bulk mail can receive worksharing rates when
they meet the worksharing requirements, in practice, for-profit
businesses generate most workshared mail. For-profit businesses send
about three-quarters of domestic mail and frequently send enough large-
volume mailings that meet the minimum volume requirements to qualify
for worksharing rates. In addition, postage costs can represent a
significant cost of doing business, providing an incentive for mailers
to qualify for the lowest possible worksharing rates. Businesses
typically use worksharing to send bulk mailings, including such mail as
bills, statements, periodicals, newsletters, advertisements, and
packages. Nonprofit entities such as charitable organizations and
associations also generate substantial quantities of workshared mail,
such as mailings to raise funds, solicit members, and disseminate
information. In fiscal year 2002, nearly three-quarters of domestic
mail received worksharing rates (see fig. 5).
Figure 5: Percentage of USPS Domestic Mail That Is Workshared and Non-
workshared:
[See PDF for image]
[End of figure]
Most domestic workshared mail is either (1) First-Class Mail, primarily
business correspondence, bills, advertisements, and financial
statements; or (2) Standard Mail, primarily advertisements, such as
catalogs, coupons, flyers, and solicitations (see fig. 6).
Figure 6: Percentage of Workshared Mail by Class:
[See PDF for image]
Note: Percentages do not add to 100 percent due to rounding.
[End of figure]
By way of comparison, most non-workshared mail consists of letters
weighing up to 1 ounce sent via First-Class Mail with 37-cent stamps.
This mail includes such mail as remittance mail (e.g., checks sent
through the mail to pay bills); a variety of business mail (e.g.,
individual invoices and other business correspondence); and personal
correspondence.
The Rationale for Worksharing Is That It Benefits USPS, Mailers, and
the Nation, but Some Concerns Have Been Raised:
USPS and PRC have said that worksharing benefits USPS, mailers and the
mailing industry, and the nation. First, they credit worksharing with
benefiting USPS, in part because it enables USPS to improve its
operations and thereby helps minimize its workforce and infrastructure.
In addition, they said worksharing benefits USPS because it stimulates
mail volume growth, which helps USPS achieve economies of scale.
Historically, mail volume growth has been critical to USPS's business
model, which depends on mail volume growth to generate more revenues to
help cover rising USPS costs. Second, they credit worksharing with
benefiting mailers and the mailing industry. With respect to mailers,
USPS and PRC credit worksharing with reducing the total mail-related
costs for mailers who workshare, helping to keep postage rates
affordable for all mailers; and improving the quality of delivery
service. Regarding the mailing industry, USPS and PRC credit
worksharing with spurring the development of the direct mail industry,
as well as that of other mail-related companies that perform
worksharing activities, enabling more mailers to participate in
worksharing. Third, they credit worksharing with benefiting the nation,
in part by lowering business costs, and in part by creating associated
benefits that consumers can realize. They said consumers benefit if
worksharing helps keep postage rates affordable; if mailers pass along
lower prices when their mail-related costs are reduced by worksharing;
if their workshared mail is delivered in a more expeditious and
reliable manner; and if the mail volume growth caused by worksharing
results in more mail that consumers consider useful, such as business
correspondence or catalogs that some consumers find useful.
While stakeholders generally support the concept of worksharing, they
have raised differing concerns in this area. For example, APWU has
asserted that the worksharing discounts are too large and thus worsen
USPS's financial situation. In contrast, some mailers and members of
the mailing industry have asserted that the discounts are not large
enough and thus improve USPS's financial situation. Integral to
stakeholder differences are divergent views on technical issues
relating to the data, assumptions, and analyses used in rate cases to
develop the estimates of the costs that USPS is to avoid incurring in
the test year as a result of mailer worksharing activities. In this
regard, stakeholders have raised issues regarding (1) the quality and
accuracy of the estimates of cost avoidance; (2) the extent to which
USPS has avoided costs as a result of worksharing activities performed
by mailers; and (3) whether data can be generated on what costs USPS
has avoided as a result of mailer worksharing activities.
We recognize that stakeholders have raised detailed concerns about
worksharing relating to technical and policy issues that are beyond the
scope of this report. Among other things, we plan to address other
stakeholder views on worksharing in our second report.
Worksharing Is Credited with Benefiting USPS:
According to USPS and PRC, worksharing benefits USPS by enabling it to
improve its operations and help minimize its workforce and
infrastructure, and by stimulating mail volume growth. Historically,
mail volume growth has been critical to USPS's business model, which
depends on mail volume growth to generate more revenues, which helps
cover rising USPS costs and also helps USPS achieve economies of scale.
USPS has noted that worksharing improves its financial situation, in
part by stimulating mail volume growth, and in part by enabling USPS to
operate more efficiently, thereby helping USPS control its costs. USPS
has reported that in response to worksharing discounts, mailers
performed worksharing activities that reduced USPS's costs. In
addition, USPS reported that worksharing requirements for automation-
compatible mail, such as requirements in the areas of address quality
and mail preparation, have enabled USPS to make more effective use of
its automated equipment, thereby reducing USPS's costs and improving
service times. Further, USPS reported that well-prepared and easy-to-
process workshared mail has furthered the cost-effective deployment of
additional automated equipment.
Specifically, USPS reported that mailer barcoding and presorting of
mail help USPS maximize the use of its automated equipment that sorts
up to 34,650 letters per hour, avoiding less efficient manual sorting.
Also, some workshared mail is presented in mail trays on pallets that
can be moved by forklifts, avoiding the need for USPS employees to
separately handle each mail tray on the loading dock. USPS has
estimated that the worksharing activities performed by mailers, such as
barcoding and presorting, will reduce its costs of handling workshared
letters that are compatible with its automation equipment and are sent
via First-Class Mail. USPS refers to its estimated cost reduction from
worksharing activities as "avoided costs." These avoided costs (see
fig. 7) were estimated to result from the reduction in USPS's costs
associated with:
* manually sorting mail (38 percent of these avoided costs);
* USPS's allied labor activities (22 percent), which are activities
performed by USPS employees who prepare mail for processing or
dispatch, either on the loading dock or inside the mail processing
facility;
* USPS automated operations (20 percent), such as reduced USPS
automated sorting of presorted mail; and:
* applying barcodes and performing associated operations on the mail
(15 percent).[Footnote 10]
To put the potential for worksharing-related cost savings into context,
USPS has reported that if it can change the processing of letters or
flat-sized mail (e.g., large envelopes, catalogs, and magazines) from
manual processing to automated processing, "there are tremendous
savings opportunities."[Footnote 11] According to USPS, "while only
about 8 percent of the letter mail we receive each day is processed
manually, it accounts for one-half of letter mail processing labor
costs."[Footnote 12] USPS has also estimated that the "labor processing
cost" associated with manually handling letters was about $56 per
thousand letters, which was about 11 times more costly than for
automated processing.[Footnote 13] Thus, even a 1 percent reduction in
the percentage of mail that USPS processes manually can result in
significant savings.
Figure 7: Percentage of Costs That USPS Is Estimated to Avoid Because
Mailers Perform Worksharing Activities for Automation-Compatible
Letters Sent via First-Class Mail, by Type of USPS Cost:
[See PDF for image]
Note: See app. II for more detail on the methods and data used to
develop this figure.
[End of figure]
According to USPS and PRC, worksharing is credited with stimulating
mail volume growth over the past three decades, which has helped USPS
cover rising costs and achieve economies of scale. USPS has reported
that worksharing has been "a primary source of growth" for mail volume,
and a PRC staff analysis concluded that mail volume growth was caused
by the successive introduction of worksharing rates for different
groupings of mail and for different worksharing activities (e.g.,
mailers barcoding and presorting mail).[Footnote 14] Over the past
three decades, workshared mail has accounted for all of the growth in
domestic mail volume. As we have reported, USPS's business model relies
on growth in mail volume to generate revenues to help cover rising
costs. Thus, since the Postal Reorganization Act of 1970 was enacted,
USPS's business model has relied on growth in workshared mail volume.
The volume of workshared mail increased 365 percent from fiscal years
1972 through 2002, while the volume of non-workshared mail declined 3
percent over the same period (see fig. 8). However, as figure 8 shows,
the volume of workshared mail declined in fiscal years 2001 and 2002, a
period when USPS incurred growing financial difficulties that included
deficits of $1.7 billion and $676 million, respectively; a freeze on
most capital investments in USPS facilities; and rising USPS debt.
Looking back over USPS's history, when mail volume has grown, USPS
could realize greater economies of scale, because the additional
worksharing mail revenues exceeded the marginal costs of delivering the
additional volumes of workshared mail. In fiscal year 2002, USPS
employed a letter carrier workforce of about 351,000 full-time and
part-time employees who serviced a delivery network of 139 million
addresses that operated 6 days each week. USPS's delivery network has
considerable fixed costs. For this reason, USPS can become more
efficient when the volume of workshared mail increases and USPS
realizes the associated economies of scale. Per-piece delivery costs
can go down as USPS letter carriers deliver more mail to each address.
For example, USPS can deliver mail less expensively, per piece, if a
USPS letter carrier delivers a full bag of mail that includes the
additional workshared mail volumes rather than a bag of mail that would
be partially full if the additional workshared mail volumes were not
included.
Figure 8: Domestic Mail Volume from Fiscal Years 1972 through 2002:
[See PDF for image]
Note: Workshared mail receives a lower rate due to mailer activities,
such as mail preparation, barcoding, presorting, and destination entry.
Worksharing rates for presorted First-Class Mail were implemented in
fiscal year 1976. The implementation of the first worksharing discount
for presorted First-Class Mail marked the inception of USPS's
worksharing program as it is known today. GAO counted most Standard
Mail and Periodicals volume as workshared since fiscal year 1971 in
that USPS required presorting of this mail by ZIP Code, and the effect
of this presorting on USPS's costs was one of several factors used to
help establish rates for this mail.
[End of figure]
A key reason that worksharing contributed to mail volume growth is that
mail volume has been sensitive to mailing costs. When worksharing
reduced mailing costs, mailers expanded their use of the mail, such as
by sending more catalogs and other advertisements to potential
customers. Thus, worksharing helped mail compete with other
communication and delivery alternatives. For example, some
advertisements can be delivered either as mail or as newspaper inserts,
or they can be delivered via other media. Also, packages can be
delivered by USPS or private delivery companies such as United Parcel
Service or FedEx.
The introduction of worksharing rates for First-Class Mail, Standard
Mail, and Parcel Post reportedly stimulated growth in their mail
volumes. Statistical studies have shown that worksharing discounts
resulted in volume growth for these types of mail, in part because
price increases were kept smaller than they otherwise would have been.
For example, First-Class Mail volume growth increased after the
introduction of presorting and barcoding discounts. Further, Standard
Mail growth accelerated after the successive introduction of various
presorting, barcoding, and destination entry discounts. Standard Mail
worksharing rates were the "catalyst for increasing volumes," according
to the PRC staff analysis.
Similarly, the introduction of destination entry rates for workshared
Parcel Post mail in fiscal year 1991 reinvigorated mail volume growth
for Parcel Post. Specifically, Parcel Post volume, which had declined
from 498 million pieces in fiscal year 1972 to 128 million pieces in
fiscal year 1990, increased to 373 million pieces in fiscal year 2002.
Parcel Post became "a much more competitive product," according to the
PRC staff analysis. The growth in Parcel Post volume generated
additional USPS revenue, as well as additional contribution to USPS's
institutional costs, even after taking into account USPS's costs
associated with the additional Parcel Post volume.
After the introduction of destination entry discounts for Parcel Post,
companies called consolidators emerged to collect Parcel Post mail from
multiple mailers, sort their mail, and transport it to USPS's
destinating facilities. By combining mail from multiple mailers into
larger mailings, these consolidators can qualify the mail for lower
worksharing rates. Most Parcel Post items are being entered at
destinating mail processing facilities, thus reducing "upstream" USPS
handling of the parcels at USPS's originating mail processing
facilities. This has enabled what is often referred to as a partnership
between USPS and the private sector to provide the complementary set of
activities needed to prepare, barcode, sort, transport, and deliver
Parcel Post mail.
According to USPS and PRC, the growth in workshared mail volume over
the years has generated additional postage revenue to help cover rising
USPS costs. These costs include the attributable costs for USPS to
process and deliver the mail--that is, the direct and indirect costs
that can be attributed to particular groupings of mail--as well as
institutional costs, which are costs that are not attributed and are
also referred to as common or overhead costs. Institutional costs
include fixed costs associated with maintaining a national network of
post offices and 6-day delivery of mail and common costs, which are not
identified with individual classes of mail. Institutional costs
represent more than one-third of all USPS costs and, like attributable
costs, have increased over time as the compensation and benefits of
USPS employees have increased and other costs have risen, including the
costs of financing universally available postal services through an
expanding delivery network.
As workshared mail volume has grown, it has accounted for a growing
share of domestic mail revenues.[Footnote 15] In fiscal year 2002,
workshared mail accounted for 52 percent of USPS domestic mail revenues
(see fig. 9).
Figure 9: Share of Domestic Mail Revenue Generated by Workshared and
Non-workshared Mail in Fiscal Year 2002:
[See PDF for image]
[End of figure]
Further, as workshared mail revenues have grown, these revenues have
accounted for an increasing proportion of the domestic mail revenues
that exceed the attributable costs of domestic mail and thus are
applied to help cover USPS institutional costs. In fiscal year 2002,
workshared mail accounted for 58 percent of domestic mail revenues that
USPS applied to help cover its institutional costs (see fig. 10).
Figure 10: Percentage of Domestic Mail Revenues Applied to Help Cover
USPS Institutional Costs That Were Generated by Workshared and Non-
workshared Mail in Fiscal Year 2002:
[See PDF for image]
Note: PRC cost methodology is somewhat different from USPS methodology
and results in the attribution of a somewhat greater proportion of USPS
costs.
[End of figure]
First-Class Mail is a particularly important category with respect to
USPS institutional costs because it has historically covered most of
these costs. Workshared First-Class Mail accounts for a growing
proportion of all First-Class Mail volume; revenues; and revenues
applied to help cover institutional costs, also referred to as the
"contribution to institutional costs."[Footnote 16] By fiscal year
2002, workshared First-Class Mail represented 50 percent of First-Class
Mail volume, 39 percent of First-Class Mail revenues, and 52 percent of
First-Class Mail contribution to institutional costs. Workshared First-
Class Mail was slightly more profitable, per piece, than non-workshared
First-Class Mail. In fiscal year 2002, USPS data compiled according to
PRC methodology showed that the average piece of workshared First-Class
Mail accounted for slightly more institutional contribution per piece
than non-workshared First-Class Mail (see fig 11). The workshared mail
was also less costly per piece for USPS to handle than non-workshared
First-Class Mail. For example, some non-workshared mail had handwritten
addresses, a portion of which could not be barcoded, necessitating
costly manual sorting by USPS employees instead of sorting by USPS
automated equipment. Other non-workshared mail had typewritten
addresses but could not be sorted by USPS automated equipment for a
variety of reasons. For example, typewritten mail cannot be barcoded in
some cases if the address is incomplete, such as missing the street
directional (e.g., North, South), or a street suffix (e.g., St, Rd,
Dr).
In total, workshared First-Class Mail accounted for $9.0 billion in
contribution to cover institutional costs in fiscal year 2002, compared
with $8.4 billion for non-workshared First-Class Mail. Aside from
First-Class Mail, Standard Mail--virtually all of which has been
workshared--accounted for most domestic mail revenues and most of the
contribution to institutional costs. In fiscal year 2002, Standard Mail
accounted for $5.1 billion in contribution to institutional costs.
Figure 11: Financial Data for Workshared and Non-workshared First-Class
Mail in Fiscal Year 2002:
[See PDF for image]
Note: PRC cost methodology is somewhat different from USPS methodology
and results in the attribution of a somewhat greater proportion of USPS
costs. Contribution per piece is the amount by which revenue per piece
exceeds attributable cost per piece, which USPS applies as contribution
to help cover USPS institutional costs.
[End of figure]
According to USPS and PRC, worksharing is also credited with having
important effects on USPS's infrastructure and workforce. USPS and PRC
officials have noted that USPS requirements for the preparation of
workshared mail furthered USPS investments in automated equipment to
handle workshared mail efficiently, which meant that the combination of
worksharing and automation helped USPS handle mail in a more efficient
manner. For example, increased worksharing incentives were introduced
for mailers to barcode letter mail and perform other activities to make
it automation compatible when USPS was making major investments in
automated equipment that sorts mail by reading barcodes. These
worksharing incentives led to a sharp increase in the proportion of
automation-compatible letter mail with mailer-applied barcodes, which
is considered to have reduced the proportion of mail that USPS
employees manually sort.
According to USPS, worksharing has significantly reduced USPS
compensation costs and the size of the USPS workforce needed to process
and handle mail. A 2001 PRC staff study stated that USPS would have
required a much larger workforce than it currently has if USPS had to
perform all of the worksharing tasks performed by the private sector.
The study concluded that worksharing has reduced USPS's size and likely
made USPS more efficient and less difficult to manage. Looking ahead,
USPS plans to expand automated sorting of flat-sized mail, such as
large envelopes, catalogs, and magazines, which is intended to reduce
the need for USPS employees to sort this mail manually and help USPS
reduce the cost of sorting flat-sized mail. If new USPS automated
equipment is deployed, USPS would be expected to propose modified
worksharing requirements for flat-sized mail so that it will be
compatible with the new automation equipment.
Worksharing Is Credited with Benefiting Mailers:
USPS and PRC credit worksharing with benefiting mailers by reducing
their total mail-related costs--that is, the cost to the mailer to
generate mail pieces and pay the postage costs. The underlying
rationale is as follows:
* When mailers obtain lower worksharing rates, their postage costs are
reduced.
* Mailers' postage savings are partly offset by their costs of
performing worksharing activities. However, mailers have an economic
incentive to perform worksharing activities when they realize a net
savings--that is, the difference between their reduced postage costs
and their increased costs associated with performing worksharing
activities.
In addition to economic incentives, worksharing is credited by USPS and
PRC with helping keep postage rates affordable for all mailers. By
stimulating mail volume growth, worksharing has increased the volume of
mail that generates revenues that exceed attributable costs and thus
helps cover USPS's institutional costs. Further, according to USPS,
worksharing has improved the implementation of its automation program
and thereby improved mail processing and handling generally.
Specifically, USPS stated that because worksharing of bulk mail
facilitated the use and further installation of automation equipment,
it reduced USPS's costs and kept rate increases to a minimum for all
mailers, including individuals mailing single pieces of mail like the
proverbial Aunt Minnie.
Similarly, USPS has reported that worksharing has improved the speed of
delivery by helping facilitate the implementation of USPS's automation
program and handling of mail generally. In some cases, mailers
reportedly perform worksharing primarily to improve the speed of
delivery, such as performing destination entry for periodicals. Other
mailers reportedly perform destination entry of packages to improve
their speed of delivery and narrow the window when delivery will occur.
According to USPS and PRC, worksharing rates were the catalyst for the
development of a $900 billion mailing industry that includes USPS;
providers of mailing services that do worksharing tasks for mailers;
and companies that depend on the mail for service fulfillment, customer
acquisition, or customer retention, such as catalog companies,
printers, and magazine publishers. Worksharing has enabled the mailing
industry to perform tasks that USPS once performed exclusively,
particularly in the areas of mail preparation, presorting, and
transportation. The mailing industry, including USPS, employed nearly 9
million workers in 2001.[Footnote 17] Some of the companies that
provide mail services are known as consolidators because they combine
letter mail, flat-sized mail, or parcels from many mailers in order to
achieve sufficient mail volumes to qualify for the lowest possible
worksharing rates.
Worksharing Is Credited with Benefiting the Nation:
According to USPS and PRC, worksharing benefits the nation, in part by
lowering business costs, and in part by creating associated benefits
that consumers can realize. USPS and PRC have concluded that total
mail-related costs to the economy--including costs to mailers and to
USPS--are reduced by worksharing. Their rationale is that some postal
activities can be performed less expensively by mailers who workshare
than by USPS, which lowers the total costs of mail. For example:
* Many worksharing mailers can organize mail by ZIP Code more
inexpensively than USPS. Mailers can prepare workshared mail by using
their computers to presort their mailing lists in ZIP Code order and
then sequentially printing the addresses on each letter.
* Many worksharing mailers can use computers to barcode letters and
print the barcodes on the letters. In comparison, when USPS processes
non-barcoded mail, its automated equipment attempts to read the address
and print a barcode. When these attempts are unsuccessful, USPS
employees become involved in attempting to read the address and apply a
barcode, and if a barcode cannot be applied, the mail is manually
sorted.
Worksharing rates are designed to create incentives for the lowest-cost
provider to perform certain postal activities, which can be either the
mailer performing worksharing activities or USPS performing additional
activities when mailers do not workshare. The USPS and PRC rationale is
as follows:
* When postage rates are set, estimates are prepared of the costs that
USPS is to avoid incurring as a result of the mailers' worksharing
activities.
* PRC has a guideline for recommending worksharing discounts so that,
as a result, the estimated reduction in USPS revenues will equal the
estimated reduction in USPS costs. This outcome is often referred to as
"100 percent passthrough" of the expected USPS savings to the mailer.
That is, the full amount of whatever USPS is expected to save will be
passed along to the mailer via the worksharing discount.
* Worksharing discounts with 100 percent passthrough create an
incentive for the lowest-cost provider to do the work. This is because
mailers have an incentive to workshare when they save money--which
happens in this case when the full amount of whatever USPS is expected
to save will be passed along to the mailers, and will be enough to
fully offset the mailers' cost of performing the worksharing
activities.
* Worksharing discounts with less than 100 percent passthrough can
still create an incentive for the lowest-cost provider to do the work.
This is because some mailers would still have an incentive to save
money by worksharing. In this case, the portion of the USPS savings
passed along to the mailers would still be enough to fully offset some
mailers' worksharing costs. However, some lowest-cost providers may not
have an incentive to workshare because the portion of expected USPS
savings passed along to mailers would not be sufficient to fully offset
the mailers' worksharing costs.
* Worksharing discounts with greater than 100 percent passthrough can
create incentives for some highest-cost providers to do the work. In
this case, some mailers could be the highest-cost providers that have
worksharing costs covered only because USPS passed along more than its
expected savings. Moreover, mailers who are lowest-cost providers would
also have an incentive to workshare.
When the lowest-cost provider performs postal activities, the total
cost of mail is reduced. This can reduce the cost of doing business.
The economy benefits when the cost of doing business is reduced,
whether that entails the cost of sending out bills for merchandise and
services rendered or sending out advertisements to generate business.
In other words, according to PRC staff, reducing the cost of doing
business "increases the economic welfare of the nation.":
Consumers may benefit in several ways from USPS's worksharing program.
First, consumers benefit if, as previously discussed, worksharing helps
keep postage rates affordable for all mailers. Second, consumers
benefit to the extent that lower mail costs are passed along in the
form of lower prices for merchandise and services. Third, consumers
benefit if their workshared mail is delivered in a more expeditious and
reliable manner, as previously discussed. Fourth, consumers benefit if
lower mail costs result in more workshared mail, to the extent that
this increased mail volume contains information that is useful to the
consumer. For example, additional workshared mail could include
business correspondence, periodicals, and newsletters that some
consumers find useful; catalogs that some consumers respond to; or
workshared packages that USPS delivers to consumers at their request.
Stakeholders Support Worksharing but Raise Concerns in this Area:
A broad array of postal stakeholders generally express support for the
concept of worksharing--that is, they express support for the concept
that mailers should receive worksharing discounts in exchange for
performing worksharing activities that lower USPS's costs. However,
stakeholders have raised differing concerns in the worksharing area.
APWU has generally criticized the worksharing program, while some
members of the mailing industry have made diametrically opposing
criticisms. For example, APWU has asserted that worksharing discounts
are too large, but some members of the mailing industry have asserted
that worksharing discounts are not large enough (see table 3). APWU
believes that worksharing has eroded USPS's financial position, thus
threatening its ability to support universal postal service. However,
some members of the mailing industry, USPS, and PRC disagree with
APWU's assertions. Integral to stakeholder differences are divergent
views regarding technical issues relating to the data, assumptions, and
analyses used in rate cases to estimate the costs that USPS is to avoid
incurring in the test year as a result of mailer worksharing
activities. Such cost avoidance estimates affect the size of
worksharing discounts that are established for reasons previously
described in this report. Further, stakeholders have raised issues
regarding (1) the quality and accuracy of the estimates of cost
avoidance; (2) the extent to which USPS has avoided costs as a result
of worksharing activities performed by mailers; and (3) whether data
can be generated on what costs USPS has avoided as a result of mailer
worksharing activities.
Table 3: Highlights of Opposing Views on Worksharing:
Key aspects of worksharing: USPS cost savings caused by worksharing
discounts; APWU views: Worksharing that mailers perform saves USPS less
than the reduction in USPS revenues from the discounted mail; Views of
some mailing industry members[A]: Worksharing that mailers perform
saves USPS more than the reduction in USPS revenues from the discounted
mail.
Key aspects of worksharing: Effect on USPS financial position; APWU
views: Worksharing discounts worsen USPS's financial position, thus
threatening its ability to finance universal postal service; Views of
some mailing industry members[A]: Worksharing discounts improve USPS's
financial position, thus improving its ability to finance universal
postal service.
Key aspects of worksharing: Size of worksharing discounts; APWU views:
Worksharing discounts are too large; Views of some mailing industry
members[A]: Worksharing discounts are not large enough.
Key aspects of worksharing: USPS role vis-à-vis the private sector;
APWU views: Due to worksharing discounts that are too large, the
mailing industry performs too many postal activities; Views of some
mailing industry members[A]: Due to worksharing discounts that are not
large enough, the mailing industry performs too few postal activities.
Key aspects of worksharing: Establishing worksharing discounts; APWU
views: Worksharing discounts should never be established when the
estimated reduction in USPS revenues exceeds the estimated reduction in
its costs; Views of some mailing industry members[A]: Worksharing
discounts should usually not be established when the estimated
reduction in USPS revenues exceeds the estimated reduction in its
costs, but some exceptions can be justified.
Source: Developed by GAO based on publicly available information as of
June 2003.
[A] The views in this table were expressed by some members of the
mailing industry, such as mailing groups, individual mailers, and
companies that perform worksharing activities for mailers.
[End of table]
The Legal Basis for Worksharing Rates Is Derived from Title 39 and Is
Implemented through Postal Rate Cases and Regulations:
The primary legal basis for worksharing rates is derived from one of
the nine factors cited in the Postal Reorganization Act of 1970 that
PRC must consider in recommending changes to domestic postage rates
proposed by USPS. Specifically, the act requires that, in recommending
changes to postage rates, PRC consider nine factors, including "the
degree of preparation of mail for delivery into the postal system
performed by the mailer and its effect upon reducing costs to
USPS."[Footnote 18] The nine factors that PRC must consider when
recommending domestic postage rates and fees are as follows:
* the establishment and maintenance of a fair and equitable schedule;
* the value of mail service actually provided each class of mail or
type of mail service to both the sender and the recipient, including,
but not limited to, the collection, mode of transportation, and
priority of delivery;
* the requirement that each class of mail or type of mail service bear
the direct and indirect postal costs attributable to that class or type
plus that portion of all other costs of USPS reasonably assignable to
such class or type;
* the effect of rate increases upon the general public, business mail
users, and enterprises in the private sector of the economy engaged in
the delivery of mail matter other than letters;
* the available alternative means of sending and receiving letters and
other mail matter at reasonable costs;
* the degree of preparation of mail for delivery into the postal system
performed by the mailer and its effect upon reducing costs to USPS;
* simplicity of structure for the entire schedule and simple,
identifiable relationships between the rates or fees charged the
various classes of mail for postal services;
* the educational, cultural, scientific, and informational value to the
recipient of mail matter; and:
* such other factors as PRC deems appropriate.[Footnote 19]
By way of background, presorting of Standard Mail and periodicals by
ZIP Code was required before the 1970 act reorganized the U.S. Post
Office Department into USPS. In the first rate case under the 1970 act,
PRC cited this presorting requirement, and the statutory factor
regarding the degree of mail preparation and its effect on reducing
USPS's costs (39 U.S.C. 3622(b)(6)), in its 1972 recommended decision
on postage rates, as one of several reasons for recommending lower
rates for Standard Mail and Periodicals.[Footnote 20] In 1976, a
unanimous settlement was reached in a reclassification case that
recognized the first specific worksharing discount--a 1-cent discount
for presorting First-Class Mail by ZIP Code.[Footnote 21] The
implementation of the first worksharing discount for presorted
First-Class Mail marked the inception of USPS's worksharing program as
it is known today. Subsequent rate cases have expanded worksharing
rates to cover most types of mail (see table 4).
Table 4: Selected USPS Worksharing Rates Adopted from Fiscal Years 1976
through 2002:
Type of workshared mail: Presorted First-Class Mail; Effective date:
1976.
Type of workshared mail: Presorted Periodicals; Effective date: 1978.
Type of workshared mail: Presorted Carrier Route Standard Mail[A];
Effective date: 1979.
Type of workshared mail: Destination entry of Periodicals; Effective
date: 1985.
Type of workshared mail: Barcoded letters sent via First-Class Mail;
Effective date: 1988.
Type of workshared mail: Barcoded letters sent via Standard Mail;
Effective date: 1988.
Type of workshared mail: Destination entry of Standard Mail letters;
Effective date: 1991.
Type of workshared mail: Saturation Standard Mail[B]; Effective date:
1991.
Type of workshared mail: Barcoded Periodicals; Effective date: 1991.
Type of workshared mail: Destination entry of Standard Mail; Effective
date: 1991.
Type of workshared mail: Destination entry of Parcel Post[C]; Effective
date: 1991.
Type of workshared mail: Barcoded flat-sized[D] First-Class Mail;
Effective date: 1992.
Type of workshared mail: Barcoded flat-sized Standard Mail; Effective
date: 1992.
Type of workshared mail: Barcoded flat-sized Periodicals; Effective
date: 1992.
Type of workshared mail: Barcoded Parcel Post; Effective date: 1999.
Type of workshared mail: Periodicals prepared on pallets[E]; Effective
date: 2002.
Source: USPS and PRC.
Note: Workshared mail receives a lower rate due to such mailer
activities as mail preparation, presorting, barcoding, and destination
entry. Worksharing rates for First-Class Mail were introduced in fiscal
year 1976.
[A] Carrier Route Standard Mail is organized according to letter
carrier routes and must meet other worksharing requirements.
[B] Saturation Standard Mail is delivered to a minimum percentage of
the addresses on a mail delivery route.
[C] Parcel Post generally consists of packages containing merchandise.
[D] Flat-sized mail includes items such as large envelopes, catalogs,
newsletters, and magazines.
[E] Pallets are reusable platforms on which mail is stacked to be moved
as a single unit, such as being moved by a forklift.
[End of table]
In addition to the nine factors listed previously, the law specifies
that PRC is required to make a recommended decision on domestic postage
rates and fees in accordance with the policies of Title 39 of the U.S.
Code, which defines policies for USPS.[Footnote 22] When considering
the relevance of Title 39 policies to PRC recommendations on
worksharing rates, it is important to keep in mind that these rates
represent most of USPS's entire rate structure and generate 74 percent
of its domestic mail volume and 52 percent of its domestic mail
revenues. Key Title 39 policies include the following:
* USPS shall have as its basic function the obligation to provide
postal services to bind the nation together through the personal,
educational, literary, and business correspondence of the people. To
this end, USPS shall provide prompt, reliable, and efficient postal
services to patrons in all areas.[Footnote 23]
* USPS shall plan, develop, promote, and provide adequate and efficient
postal services at fair and reasonable rates and fees. To this end,
USPS has the responsibility to maintain an efficient national system of
collecting, sorting, and delivering the mail, and to provide types of
mail service to meet the needs of different groupings of mail and mail
users. However, USPS shall not, except as specifically authorized in
Title 39, make any undue or unreasonable discrimination among users of
the mails, nor shall it grant any undue or unreasonable preferences to
any such user.[Footnote 24]
* Postage rates and fees shall be reasonable and equitable and
sufficient to enable USPS under honest, efficient, and economical
management to maintain and continue the development of postal services
of the kind and quality adapted to the needs of the United States. To
this end, postage rates and fees shall provide sufficient revenues so
that the total estimated income and appropriations to USPS will equal
as nearly as practicable total estimated costs of USPS.[Footnote 25]
* USPS shall promote modern and efficient operations. USPS should
refrain from expending any funds, engaging in any practice, or entering
into any agreement or contract (other than an employee-management
agreement or contract between USPS and a labor union representing
postal employees) that restricts the use of new equipment or devices
that may reduce the cost or improve the quality of postal services,
except where such restriction is necessary to ensure safe and healthful
employment conditions.[Footnote 26]
Worksharing rates and classifications are implemented through federal
regulations issued and updated by PRC and USPS. After each rate and
classification case is completed, PRC updates the Domestic Mail
Classification Schedule to be consistent with the outcome of the case.
This schedule is incorporated into the Code of Federal Regulations and
lists the terms and conditions for domestic mail classes, subclasses,
and rate categories as well as for domestic special services, such as
post office boxes, registered mail, and certified mail.[Footnote 27]
Also, after each rate and classification case, USPS updates its
Domestic Mail Manual, which is also incorporated into the Code of
Federal Regulations, to include the worksharing rates for each specific
type of workshared mail as well as the corresponding worksharing
requirements.[Footnote 28]
Worksharing rates have been considered in successive postal rate cases-
-proceedings in which PRC considers USPS proposals for changing postage
rates--dating back to the 1970s. These proceedings have established
precedents that have further clarified the legal basis for worksharing
rates. Over the years, the structure of worksharing rates has evolved.
For example, in a 1995 reclassification case, USPS proposed and PRC
recommended numerous changes to workshared rates that were intended to
provide greater incentives for mailers to barcode their workshared
mail, among other things. In addition, PRC also recommended some
changes to the structure of workshared mail classifications, such as
adding a new subclass to Standard Mail called the Enhanced Carrier
Route subclass. This subclass was distinguished from other types of
Standard Mail in that minimum volume requirements apply for each
carrier route as well as requirements for including mail preparation,
barcoding, and presorting, among other things. Enhanced Carrier Route
mail receives lower rates in part because of the estimated cost savings
to USPS from worksharing.
Niche Classifications and Negotiated Service Agreements Also Provide
Lower Rates:
On a related matter, there has been long-standing and continuing debate
over whether certain types of postage rates can be offered within
existing law and, if so, under what circumstances. Recent debate has
focused on rate arrangements with reduced rates agreed to by USPS and
individual mailers that were intended to enable USPS to reduce its
costs. In February 2002, PRC reported to Congress that rate and service
adjustments agreed upon by USPS and individual mailers would be legally
authorized if certain conditions are met, notably that the proposed
agreement is submitted to PRC for prior review, be made available to
other mailers willing to meet the same terms of service, and work to
the mutual benefit of mail users and the postal system as a
whole.[Footnote 29] PRC noted that USPS had proposed and PRC had
subsequently recommended some "niche classifications" that were
specialized classifications that included reduced, but cost-justified,
rates or fees. Niche classifications make lower rates available to all
mailers when they perform the required activities and meet other
requirements of the niche classification. However, as a practical
matter, these requirements may be tailored in a way that means few
mailers would generate mail that would qualify for inclusion in the
niche classification.
Recently, USPS proposed and PRC subsequently recommended a negotiated
service agreement (NSA) between USPS and Capital One Services, Inc.,
the nation's largest-volume mailer of First-Class Mail, on a 3-year
contractual basis. According to PRC, "negotiated service agreements are
targeted pricing initiatives designed to encourage greater efficiencies
and to take advantage of the Postal Service's existing pricing
flexibility." USPS noted that "NSAs, generally, specify mutual
agreements between the Postal Service and customers involving the
preparation, presentation, acceptance, processing, transportation and
delivery of mailings under particular rate, classification and service
conditions and restrictions that go beyond those required of other
mailers." This was the first time that USPS proposed and PRC
recommended an NSA covering domestic mail. USPS hopes to reinvigorate
mail volume growth through this and other yet-to-be proposed NSAs and
also to reduce its costs through NSA requirements applying to
qualifying mailers.
The Capital One NSA, which USPS's Governors approved in June 2003,
specifies that Capital One is to receive lower rates for bulk First-
Class Mail exceeding 1.225 billion pieces of mail annually in each of
the next 3 years, with rate discounts increasing from 3 to 6 cents as
volumes increase above the annual threshold. During this period, USPS
will electronically provide Capital One with information about its
undeliverable First-Class Mail solicitations instead of physically
returning the mail to Capital One. USPS has stated that this change
will result in USPS cost savings, estimating that it will avoid
returning approximately 80 million mail pieces per year to Capital One
during the term of the NSA. In addition, under the NSA agreement,
Capital One has agreed to practices intended to produce accurate
address lists, which relate to minimizing the quantity of undeliverable
and forwarded mail that USPS must handle.[Footnote 30] Another
provision of the NSA specifies that the total amount of the discounts
is limited to $40.6 million over the NSA's 3-year term. This limit is
intended to reduce the risk that the NSA discounts could reduce USPS
revenues more than the costs that USPS avoids as a result of the NSA.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Chairman of the Postal Rate Commission dated July 15, 2003, and the
Chief Marketing Officer and Senior Vice President of the Postal Service
dated July 16, 2003. The USPS and PRC comments are summarized below and
reprinted in appendices III and IV, respectively. In addition, PRC and
USPS officials provided technical and clarifying comments. All
technical and clarifying comments were incorporated where appropriate.
The Chairman commented that worksharing rates "have provided major
impetus for improved productive efficiency in postal services and
stimulated the mail volume growth that has had the effect of moderating
rate increases for all mail classes and services." He stated that the
approach used to develop worksharing rates means that to the extent
practicable, the rates paid by mailers who do not participate in
worksharing do not have to increase because worksharing discounts are
approved. He also commented that our draft report accurately describes
the types of worksharing rates currently available to mailers and
fairly characterizes the major policy reasons justifying current
workshare programs.
The Chief Marking Officer and Senior Vice President commented that USPS
believes that, overall, worksharing benefits USPS, the mailers, and the
entire economy. She stated that worksharing enhances efficient postal
operations and stimulates mail growth and revenue for USPS; reduces
overall mailer costs and has encouraged development of the presort and
direct mail industries; and "benefits the entire economy, because
reduced mailing costs increase productivity and efficiency." She also
commented that our draft report appeared to define the scope of
worksharing in a slightly different manner than USPS does, and that,
within this definition, we seemed to encompass all of the rates within
all of the bulk mail classes as well as some NSAs and niche
classifications. We clarified our report to address USPS's comments.
We are sending copies of this report to the Chairmen of the House
Committee on Government Reform and its Subcommittee on Civil Service
and Agency Reorganization; the Chairman and Ranking Minority Member of
the Senate Committee on Governmental Affairs; the Chairman of its
Subcommittee on Financial Management, the Budget, and International
Security; the Postmaster General; the Chairman of the Postal Rate
Commission; and other interested parties. Copies will be made available
to others on request. In addition, this report will also be available
on our Web site at http://www.gao.gov.
Key contributors to this report are listed in appendix V. If you or
your staffs have any questions about this letter or the appendixes,
please contact me at (202) 512-2834 or at ungarb@gao.gov.
Bernard L. Ungar
Director, Physical Infrastructure Issues:
Signed by Bernard L. Ungar:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our objectives for this report were to provide summary information on
the following questions: (1) What are the key activities included in
postal worksharing? (2) What is the rationale for worksharing,
according to the U.S. Postal Service (USPS) and the Postal Rate
Commission (PRC), the independent federal establishment that reviews
USPS proposals for changes in domestic postage rates? and (3) What is
the legal basis for establishing worksharing rates?
To address these objectives, we reviewed documentation of federal laws
and regulations pertinent to worksharing, including USPS and PRC
regulations; USPS requirements for mailer worksharing activities, such
as USPS publications describing these requirements; and documentation
of worksharing matters addressed in rate cases, based on publicly
available information filed in postal rate cases. The information
documented, among other things, USPS proposals for new worksharing
rates, PRC recommended decisions, and USPS responses to these
recommended decisions.
We reviewed USPS data on workshared mail that had been filed with PRC,
such as trend data on the volumes of different types of mail. We
compiled the total volumes of workshared mail on the basis of these
data. Other data covered workshared mail revenues and the contribution
that workshared mail has made to help cover USPS's institutional costs.
We compiled data on the estimated USPS savings from mailer worksharing
activities for automation-compatible letters sent via First-Class Mail,
using the same methodology used by PRC in the 2000 rate case--the most
recent rate case in which PRC recommended a methodology for making such
projections. We did not independently assess or verify any of the data
to determine their accuracy, nor did we assess or evaluate differences
between PRC and USPS costing methodologies.
To obtain a better understanding of how USPS processes workshared mail,
we visited USPS mail processing facilities in Orlando and Tampa,
Florida, and Baltimore and Gaithersburg, Maryland, to observe how USPS
processes workshared mail. These facilities were judgmentally selected
on the basis of their characteristics and their geographic proximity to
our headquarters and to mailer facilities that we also visited. We
interviewed USPS officials at those facilities.
In addition, to obtain a better understanding of how mailers prepare
workshared mail, we visited mailer facilities in Apopka and Tampa,
Florida, where workshared mail is prepared. Specifically, we visited
the facilities of the Apopka facility of Sprint, where it prepares
bills and statements; the Tampa facility of Regulus, where it receives
remittance mail on behalf of other companies; and the Tampa facility of
AOL/Time Warner where bills and statements are prepared. We observed
how these facilities prepare workshared mail and interviewed
representatives of these companies. These companies and facilities were
judgmentally selected, based on their preparation and receipt of
different types of workshared mail sent via First-Class Mail,
invitations from their officials for GAO to make site visits, and their
geographic proximity to each other. First-Class Mail represents a major
portion of workshared mail.
We also reviewed documentation of the rationale for worksharing,
including rate case materials; published papers and analyses; testimony
in 2003 to the President's Commission on the United States Postal
Service; and material provided to us by representatives of USPS, PRC,
mailer groups, and the American Postal Workers Union (APWU). We
interviewed representatives of groups that filed material on
worksharing issues in the most recent rate case that resulted in
increases in most worksharing rates, including representatives of USPS,
PRC, PRC's Office of the Consumer Advocate, the American Bankers
Association, APWU, the Association of Postal Commerce, the Direct
Marketing Association, the Mail Order Association of America, the
Mailing and Fulfillment Services Association, the Major Mailers
Association, the National Association of Presort Mailers, and the
Saturation Mail Coalition. Some of these groups provided us with
analyses and other material pertaining to worksharing rates and issues.
In addition, we reviewed published books, articles, and other
communications written by these groups and other postal experts on
worksharing rates and issues. We did not assess the benefits that USPS
and PRC claimed are derived from worksharing. We also did not assess
any of the documentation provided by stakeholders or any of the
statements made by stakeholders that we interviewed.
To obtain information on the legal basis for worksharing, we reviewed
pertinent laws, decisions in postal rate cases interpreting legal
criteria for worksharing rates, and pertinent USPS and PRC regulations.
We conducted our review from June 2002 through June 2003 in Apopka,
Tampa, and Orlando, Florida; Baltimore and Gaithersburg, Maryland; and
Washington, D.C., in accordance with generally accepted government
auditing standards.
[End of section]
Appendix II: Estimated USPS Avoided Costs for Automation-Compatible
Letters That Are Workshared and Sent via First-Class Mail:
Type of USPS worksharing-related savings: 1. Automated barcoding: If
letters were not workshared, they would not be barcoded and USPS
automated equipment would try to read the address and apply a barcode.
When this is unsuccessful, an electronic image of the letter would be
sent to a facility where a USPS clerk would try to read the address and
key in data so that a barcode could be applied; Percentage of the
estimated costs that USPS is expected to avoid: 15.
Type of USPS worksharing-related savings: 2. Manual operations: If the
letters were not workshared, USPS would engage in more costly manual
processing of the mail. For example, the letters would be sorted
manually when USPS automated equipment could not apply a barcode or
sort the mail. Worksharing requirements attempt to minimize such
problems by limiting the dimensions and thickness of letters,
specifying requirements for updating of addresses, and mandating how
the address and barcode are printed, among other things; Percentage of
the estimated costs that USPS is expected to avoid: 38.
Type of USPS worksharing-related savings: 3. Automated operations: If
the letters were not workshared, they would not be presorted and thus
would require more sorting by USPS automated equipment. Also, very
large workshared mailings are organized on pallets with each pallet
containing mail sent to only one area. In such cases, the mail would
generally not need to be sorted by USPS automated equipment at the
originating mail processing facility to organize it according to the
area where it is to be delivered. Instead, the mail can be handled on
the loading dock and dispatched to the area where it is to be
delivered; Percentage of the estimated costs that USPS is expected to
avoid: 20.
Type of USPS worksharing-related savings: 4. Allied operations: If the
letters were not workshared, they would generate more USPS "allied
labor" costs to prepare mail for processing or dispatch, either on the
loading dock or inside the mail processing facility. As in the above
example of very large workshared mailings organized on pallets sent to
only one area, each pallet can be handled in the loading dock and
dispatched to the destinating facility without having allied labor
separately handle each mail tray stacked on the pallet; Percentage of
the estimated costs that USPS is expected to avoid: 22.
Type of USPS worksharing-related savings: 5. Other: If the letters were
not workshared, USPS would incur more costs to distribute them to post
office boxes and prepare them for delivery, among other things;
Percentage of the estimated costs that USPS is expected to avoid: 5.
Type of USPS worksharing-related savings: Total; Percentage of the
estimated costs that USPS is expected to avoid: 100.
Source: GAO analysis of USPS estimates for fiscal year 2003, which were
prepared according to PRC cost methodology used in the 2000 rate case.
Note: PRC did not recommend cost estimation methods in the 2001 rate
case because the parties agreed to a negotiated settlement that was
subsequently approved.
[End of table]
[End of section]
Appendix III: Comments from the U.S. Postal Service:
ANITA J. BIZZOTTO CHIEF MARKETING OFFICER SENIOR VICE PRESIDENT:
UNITED STATES POSTAL SERVICE:
July 16, 2003:
Mr. Bernard L. Ungar:
Director, Physical Infrastructure Issues United States General
Accounting Office Washington, DC 20548-0001:
Dear Mr. Ungar:
Thank you for providing the Postal Service the opportunity to review
and comment on the GAO draft report, U.S. Postal Service: A Primer on
Postal Worksharing (GAO-03-927).
The Postal Service and GAO appear to define "worksharing" in a slightly
different manner. The draft report states, "Postal worksharing
activities generally involve mailers preparing, sorting, or
transporting mail to qualify for reduced postage rates, i.e.,
worksharing rates." Within this definition, GAO seems to encompass all
of the rates within all of the bulk mail classes as well as some
Negotiated Service Agreements (NSAs) and "niche" classifications. The
Postal Service generally uses the term "workshare" to refer
specifically to mail pieces that are assessed rates discounted from
base rates for various mail preparation, prebarcoding, sortation, or
transportation activities.
The genesis of the workshare discount is the recognition that certain
activities performed by the mailer avoid costs of the Postal Service
and, therefore, the mailer should receive a portion of that cost
avoidance. NSAs and "niche" classifications, on the other hand, can,
but may or may not, contain worksharing attributes.
The Postal Service and the Postal Rate Commission (PRC) first
recognized worksharing in 1976 with the introduction of a discount for
bulk presorted First-Class Mail. From the inception of worksharing
discounts, the Postal Service and the PRC have been concerned with both
equity and economic efficiency. Consequently, workshare discounts are
typically, but not exclusively, less than or equal to the cost
avoidance estimates measured by the Postal Service. When setting
discounts for workshare mail, however, all of the appropriate factors
contained in the Postal Reorganization Act must be considered.
Therefore, the workshare discounts may satisfy the requirements of the
Act, even if they exceed 100 percent of the cost avoidance estimates
measured by the Postal Service. Both the Postal Service and the PRC
have agreed that there are instances where passthroughs greater than
100 percent are appropriate, for example, to mitigate large increases
in adversely affected rate categories. Given the uniquely operational
aspects of workshare rates, it is not surprising that the underlying
costs change more frequently than the discounts themselves, as the
operating environment is constantly refined. The current rate-making
mechanism does not provide the flexibility to adequately address these
cost changes.
We believe that overall, worksharing benefits the Postal Service, the
mailers and the entire economy. Worksharing enhances efficient postal
operations and stimulates mail growth and revenue for the Postal
Service. Worksharing reduces overall mailer costs and has encouraged
development of the presort and direct mail industries. Worksharing
benefits the entire economy because reduced mailing costs increase
productivity and efficiency.
Sincerely,
Anita J. Bizzotto:
Signed by Anita J. Bizzotto:
1735 NORTH LYNN STREET ARLINGTON VA 22209-6000 703-292-3676:
FAX: 703-292-3753 www.usps.com:
[End of section]
Appendix IV: Comments from the Postal Rate Commission:
POSTAL RATE COMMISSION
Washington, DC 20268-0001:
George A. Omas Chairman:
July 15, 2003:
Bernard L. Ungar:
Director, Physical Infrastructure Issues United States General
Accounting Office Washington, DC 20548:
Dear Mr. Ungar:
Thank you for the opportunity to review your proposed report entitled
U.S. Postal Service: A Primer on Postal Worksharing. The report
accurately describes the types of worksharing rates currently available
to mailers, and fairly characterizes the major policy reasons
justifying current workshare programs.
Workshare rates have been available for 25 years, and during that time
they have provided major impetus for improved productive efficiency in
postal services, and stimulated the volume growth that has had the
effect of moderating rate increases for all mail classes and services.
A key element in the success of workshare initiatives has been the
adoption of efficient component pricing as the means for developing
workshare rates. Mailers are offered discounts if they present their
mail prepared so that the Postal Service avoids certain identifiable
costs. Efficient component pricing limits discounts to the costs that
the Postal Service would have incurred had it performed the avoided
functions. This means that to the extent practicable, each rate
category within a subclass provides the same unit (per piece)
contribution to offset institutional costs, and the rates paid by non-
participating mailers do not have to increase when workshare discounts
are approved. As a result, neither the Postal Service nor any
identifiable segment of the mailing public is disadvantaged by this
program.
This report does not attempt to assess the benefits of worksharing, and
you indicate that GAO plans a second, follow-up report to present other
issues and views on this general topic. In the meantime, the
descriptive material you provide in this report should greatly
facilitate understanding of current postal worksharing.
Sincerely,
George Omas:
Signed by George Omas:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gerald P. Barnes, (202) 512-2834 or barnesgp@gao.gov:
Acknowledgments:
Kenneth E. John, Charles W. Bausell, Jr., Alan N. Belkin, Frederick T.
Evans, Eric Fielding, Latesha A. Love, Mark F. Ramage, Jill P. Sayre,
and Walter K. Vance made key contributions to this report.
(543066):
FOOTNOTES
[1] U.S. General Accounting Office, U.S. Postal Service: Key Postal
Transformation Issues, GAO-03-812T (Washington, D.C.: May 29, 2003);
Major Management Challenges and Program Risks: U.S. Postal Service,
GAO-03-118 (Washington, D.C.: Jan. 2003); and U.S. Postal Service:
Deteriorating Financial Outlook Increases Need for Transformation, GAO-
02-355 (Washington, D.C.: Feb. 28, 2002).
[2] 39 U.S.C. §3622(b)(6).
[3] The Postal Reorganization Act of 1970 (Pub. L. 91-375) reorganized
the U.S. Post Office Department into the U.S. Postal Service.
[4] PRC's Office of the Consumer Advocate is an office within PRC
charged with independently representing the interests of the general
public in rate and classification cases, to fulfill the statutory
mandate in 39 U.S.C. §3624(a).
[5] 39 U.S.C. §3622(b)(3).
[6] U.S. General Accounting Office, U.S. Postal Service: Transformation
Challenges Present Significant Risks, GAO-01-598T (Washington D.C.:
Apr. 4, 2001).
[7] There are currently no destination entry rates for First-Class
Mail.
[8] Delivery units include USPS facilities, such as post offices, post
office stations, and branches where USPS letter carriers pick up their
mail for delivery.
[9] Concern has been expressed that USPS transports some mail that is
destination-entered at post offices to its mail processing facilities
for sorting. We will address this concern in a subsequent report.
[10] See app. II for a more detailed description of the estimated
avoided costs.
[11] USPS testimony in the 2001 rate case (PRC Docket No. R2001-1,
USPS-T-39).
[12] U.S. Postal Service, United States Postal Service Annual Report
2001 (Washington, D.C.: Nov. 9, 2001).
[13] USPS submitted this estimate in the 2001 rate case based on data
from a 4-week period in the summer of 2001. See PRC Docket No. R2001-1,
USPS-T-39.
[14] See Robert H. Cohen, et. al., The Impact of Using Worksharing to
Liberalize a Postal Market (Washington, D.C.: February 2001).
[15] Domestic mail generated nearly all (94 percent) of the
contribution toward USPS institutional costs in fiscal year 2002.
[16] Most workshared rate reductions for First-Class Mail are based on
selected cost differences between workshared mail and bulk metered
mail, which is non-workshared First-Class Mail that does not receive a
worksharing discount, is provided to USPS in bulk quantities, and has
postage applied by a postage meter.
[17] Estimated mailing industry revenues and employment were provided
in Seizing Opportunity: The Report of the 2001 Mailing Industry
Taskforce, Oct. 15, 2001, www.usps.com/strategicdirection/mitf.htm.
[18] 39 U.S.C. §3622(b)(6).
[19] 39 U.S.C. 3622(b).
[20] PRC Docket No. R71-1.
[21] PRC Docket No. MC73-1. A reclassification case can alter both
domestic mail classifications (i.e., the listing that classifies
domestic mail into mail classes, subclasses, and rate categories within
subclasses) and the rates applicable to these classifications.
[22] 39 U.S.C. §3622.
[23] 39 U.S.C. §101(a).
[24] 39 U.S.C. §403.
[25] 39 U.S.C. §3621. This has been interpreted to mandate that (1) in
a rate case, PRC will recommend domestic postage rates that are
estimated to generate USPS revenues equal to USPS costs in the test
year, and (2) USPS should break even over time.
[26] 39 U.S.C. §2010.
[27] Appendix A to Subpart C of 39 C.F.R. Part 3001, following 39
C.F.R. §3001.68.
[28] 39 C.F.R. §111.1.
[29] U.S. Postal Rate Commission, Report to the Congress: Authority of
the United States Postal Service to Introduce New Products and Services
and to Enter Into Rate and Service Agreements With Individual Customers
Or Groups of Customers, (Washington, D.C.: Feb. 11, 2002).
[30] Capital One agreed to continue its practice of checking its
mailing lists against USPS's National Change of Address database more
frequently than is typically required. Capital One also agreed to
incorporate information from USPS address correction service
notifications within 2 days of receipt. See PRC Docket No. MC2002-2.
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