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U.S. POSTAL SERVICE
The Service’s Strategy for Realigning Its Mail Processing Infrastructure Lacks Clarity, Criteria, and Accountability
Why GAO Did This Study
With declining mail volumes, increasing compensation costs, and a more competitive marketplace, the need for the U.S. Postal Service (Service) to increase efficiency and reduce expenses is a matter of increasing importance and concern. According to the Service, one area where it can become more efficient is in its mail processing and distribution infrastructure. The objectives of this report are to (1) describe major business and demographic changes and their effect on the Service’s mail processing and distribution infrastructure; (2) describe what actions the Service is taking in response to these changes, and what challenges exist; and (3) discuss the Service’s strategy for realigning its infrastructure.
What GAO Found
Several major changes have affected mail processing and distribution operations including marketplace changes, such as declines in First-Class Mail and increased competition; increased automation and mail processing by mailers; and shifts in population demographics. Effects of these changes include excess capacity in the mail processing and distribution infrastructure and variations in productivity among plants.
The Service is exploring ways to realign its infrastructure by closing annexes, consolidating operations, and employing tools to model its infrastructure needs, while at the same time attempting to increase efficiencies in its current operations by expanding automation, improving material handling operations, creating a comprehensive transportation network, and introducing standardization programs. Also, as the graph above illustrates, there is a large range in productivity among plants. Reducing this range is difficult due to the complexity of operations and differences in plant layout. In addition, the Service faces challenges in eliminating excess capacity, while maintaining service standards, due to workforce rules and resistance to plant closings.
Questions remain about how the Service intends to realign its processing and distribution infrastructure and workforce. The Service’s strategy for realigning has not been clear because the Service has outlined several seemingly different strategies over the past 3 years. None of these strategies include criteria and processes for eliminating excess capacity, which may prolong inefficiencies. Also, the strategy lacks sufficient transparency and accountability, excludes stakeholder input, and lacks performance measures for result
s.What GAO Recommends
To enhance the Service’s transparency of its decisions related to realigning its infrastructure, the Postmaster General should establish a set of criteria for evaluating realignment decisions and a mechanism for informing stakeholders as decisions are made. To enhance accountability for these decisions, the Postmaster General should develop a process for implementing these decisions that includes evaluating and measuring the results, as well as the actual costs and savings resulting from the decisions.
U.S. Postal Service: The Service's Strategy for Realigning
Its Mail Processing Infrastructure Lacks Clarity, Criteria, and
Accountability GAO-05-261, April 8, 2005
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GAO
Report (PDF)- (over 2 MB)
|
Table 3: 2004 Major Processing and Distribution Plant Types |
||
|
Plant type |
Description |
Number |
|
Processing and Distribution Centers (P&DC) |
Processes and dispatches incoming and outgoing mail for a designated service area |
318 |
|
Air Mail Centers (AMC) |
Mail plant at an airport that processes mail transported by air |
78 |
|
Bulk Mail Centers (BMC) |
Processes and distributes bulk Standard Mail and parcels |
21 |
|
Priority Mail Processing Centers (PMPC) |
Processes Priority Mail |
12 |
|
Hub and Spoke Program (HASP) |
Central point where mail from a group of plants is unloaded, combined, and sent on to destination |
13 |
|
Destination Delivery Units (DDU) |
Facility where carriers pick up mail for final delivery and some limited processing for destination may occur |
37,159 |
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GAO: Cut Postal excess
-
GAO: Postal Service Must Revamp Operations to Stay Solvent
(Govexec)
The Postal Service must revamp its operations to stay on firm
financial footing, according to a Government Accountability
Office report released Monday. In its report, GAO criticized the
Postal Service for not providing enough information about its
plans to overhaul the way it delivers and processes mail.
- Davis, McHugh Announce GAO Report Examining Postal Service Efforts to Realign Its Mail Processing Infrastructure-"Davis said, "Optimization of its network is a key area for efficiency gains and cost minimization." GAO: ".."the Service faces challenges in eliminating excess capacity, while maintaining service standards, due to workforce rules and resistance to plant closings.
GAO Report (PDF)- (Postcom.org)- GAO puts 25 programs on high-risk list (Federal Times)
In this 2005 update for the 109th Congress, GAO presents the status of high-risk areas identified in 2003 and new high-risk areas warranting attention by the Congress and the administration. Highlights-PDF|| PDF (1/25/05)
GAO: The Postal Service (the Service) has made significant progress in improving its financial situation and implementing transformation initiatives to improve its financial viability since its transformation efforts and long-term outlook was designated as high risk in 2001. Several of its key achievements in the last 2 years include debt reduction of $9.3 billion, net income of $7 billion, productivity gains of 4.2 percent, the elimination of accumulated deficits, and reductions of about 45,000 in career employees. In addition, postal pension reform legislation was enacted to address a projected overfunding of the Service’s pension obligation. The Congress also made progress in considering postal reform legislation, which, although not yet enacted, was approved by House and Senate oversight committees. However, key challenges remain, including generating revenues to offset declines in First-Class Mail volume, which generates revenues covering most of the Service’s institutional costs; addressing large financial liabilities and obligations; achieving cost savings and productivity improvements, in part by restructuring its infrastructure and workforce; and addressing human capital challenges, such as succession planning and credible performance-based compensation systems. Further, postal reform remains a challenge that will require enactment of legislation by the Congress and leadership by the Service to effectively carry out its transformation.
Why Area Is High Risk
In April 2001, GAO designated U.S. Postal Service’s transformation efforts
and long-term outlook as a high-risk area due to growing risk that the
Service would not be able to continue providing universal postal service at
reasonable rates while remaining self-supporting through postal revenues.
his inclusion on GAO’s high-risk list was intended to focus needed attention
on the dilemmas facing the Service before the situation escalates into a
crisis, where the options for action may be more limited and costly.
The Service has since taken steps to address its problems, and a presidential commission has reported on the need for far-reaching changes, including legislative reform. However, reform legislation has not yet been enacted and the underlying conditions that led to the high-risk designation continue to exist. Thus, the Service’s transformation efforts and long-term outlook remains on GAO’s high-risk list.
What GAO Found
The Postal Service’s financial viability is at risk because its business
model— which relies on mail volume growth to mitigate rate increases and
cover its costs—is not sustainable in an increasingly competitive
environment, given new and emerging technologies. Financial, operational,
governance, and human capital challenges threaten the Service’s ability to
remain self-supporting while providing affordable, high-quality, and
universal postal service. Key trends that demonstrate the need for reform
include declining mail volume, particularly for First-Class Mail; changes in
the mail mix from high-margin to lower-margin products; changing
demographics of the aging postal workforce; growing competition from private
delivery companies; and projected revenue declines while expenses increase.
The Service continues to face challenges in addressing its large financial
liabilities and obligations (e.g., retiree health obligations), as well as
in restructuring its infrastructure and workforce to become more efficient
and performance based.
The Service has recently cut costs and improved productivity, but it is not clear how the Service will realign its outdated infrastructure and modernize its workforce policies and practices to achieve additional long-term productivity gains. The Service has stated that it is using an evolutionary approach to transform its infrastructure and workforce. However, little information is available about its plans for this important effort. Many questions remain as to whether such an incremental approach will be sufficiently comprehensive, integrated, and responsive to the increasing pace of change in technology and competition affecting the Service’s core business. Without bold action and better communication, the Service risks falling short of achieving the major productivity gains needed to offset rising costs and maintain quality service and affordable rates. Further, the Congress has not yet enacted comprehensive postal reform legislation that addresses the Service’s key structural and systemic deficiencies, including its unfunded obligation for retiree health benefits and the escrow requirement. Without such action, the accessibility and affordability of postal services to the American people is at risk, which could result in dramatic increases in postal rates or a costly taxpayer bailout.
What Needs to be Done
To preserve its
mission and financial viability and meet its key challenges, the Service
needs to take bold action and better communicate how it plans to realign its
infrastructure and workforce. Also, GAO continues believe that comprehensive
postal reform legislation is needed to clarify the Service’s mission and
role; enhance governance, transparency, and accountability; improve
regulation of postal rates and oversight; address long-term financial
obligations; and make human capital reforms.
Postal Service Requests Board of Actuaries of the Civil Service Retirement System to Review, Reconsider and Adjust Actuarial Method and Computations, Pursuant to P.L. 108-18
RETIREMENT SYSTEM TO REVIEW, RECONSIDER AND ADJUST ACTUARIAL METHOD AND COMPUTATIONS, PURSUANT TO P.L. 108-18
As provided by P. L. 108-18, The Postal Civil Service Retirement Funding Reform Act (Act), on January 26, 2004, the United States Postal Service formally requested the Board of Actuaries of the Civil Service Retirement System (CSRS) to review, reconsider and make adjustments to the method and computations used by the United States Office of Personnel Management (OPM) in making determinations of Postal Service obligations to CSRS. The request was filed prior to the deadline for such a request.
The Act directs OPM, in consultation with the Postal Service, to develop an actuarial methodology for computing the determination of Postal Service CSRS obligations from the establishment of the Postal Service in July, 1971, and those of its predecessor, the Old Post Office Department, for which the Federal Government is responsible. As specified by the Act, the Postal Service has the right to appeal that method and those determinations by requesting review and reconsideration by the Board of Actuaries.
Previously, the Postal Service had asked OPM to reconsider its actuarial method and computations that place an undue burden of CSRS costs upon the Postal Service and had proposed an alternative years-of-service method for the calculation of Postal Service obligations to CSRS. OPM rejected that request on July 31, 2003. The difference between the determinations yielded by the two methods is $86 billion. The method proposed by OPM results in a Postal Service CSRS liability of $4.8 billion as of September 30, 2002. In contrast, the proposed Postal Service method, formerly also used by OPM, computes Postal Service CSRS obligations according to employees’ years-of-service and results in the Postal Service over funding its CSRS obligations by $81.2 billion as of the same date
source: USPS
- Committee on Government Reform Requests More USPS Info Before Acting on CSRS Escrow Fund (pdf)
December 19, 2003
The Honorable John E. Potter Postmaster General and CEO
United States Postal Service
475 L'Enfant Plaza, SW
Washington, DC 20260
Dear Mr. Postmaster General:
We are writing to you about the disposition of the Postal Service escrow fund. We have received and closely reviewed the Postal Service's September 30 proposal, GAO's November 26 evaluation of the proposal, and your December 8 letter responding to GAO's evaluation. As GAO recommended, we believe the Postal Service should provide Congress with "a comprehensive, integrated infrastructure and workforce rationalization plan" before Congress acts on the escrow fund.'
The concept of the escrow fund originated in our Committee as part of the Postal Civil Service Retirement System Pension Reform Act of 2003. This law relieved the Postal Service of its obligation to pay $39 billion over 10 years, and $154 billion over 25 years, into the Civil Service Retirement System (CSRS). The escrow account was added to the legislation as a mechanism for ensuring that the savings created by the Pension Reform Act would be used wisely to meet major challenges confronting the Postal Service. As GAO recognized in its report, the reduction in pension costs "has provided an opportunity for the Service to address some of its long-standing challenges" and the escrow requirement "provides Congress an opportunity to review how the Service will address a number of long-term challenges."2
The two proposals submitted by the Postal Service on September 30 contain valuable ideas. In particular, we commend you for addressing unfunded retiree health benefits. This is one of the major issues facing the Postal Service. We agree that there is merit in using savings generated by the Pension Reform Act - as well as possible new savings related to military service obligations - to address this issue.
Under both of the Postal Service's proposals, however, a large portion of the savings generated by the Pension Reform Act will go to pay current operating expenses. Indeed, for the second proposal, almost all of the savings would be used for current operating expenses. Two reasons are provided for this allocation: (1) using the savings to pay operating expenses will help keep rates low and (2) the Postal Service will be able to fund needed cost-saving and productivity initiatives without drawing on the savings under the legislation. We agree that it is important that the Postal Service keep rates low, but we do not believe the Postal Service has explained what cost-saving and productivity investments it needs to make.
In your December 8 letter, you state: "it should be emphasized that current and future postal operations are being driven by a comprehensive Transformation Plan which addresses these network and workforce issues."3 The problem as identified by GAO is that the Postal Service has not provided enough information regarding its progress on the transformation plan or its ability to finance these changes. For example, in response to the Postal Service's belief that it can finance necessary capital investments through inflation-based rate increases alone, GAO expressed concern that the Postal Service's "financing plan may not be adequate to provide for its capital investment needs, because historically, the Service has found it problematic to finance its capital needs with operating revenues."4 Furthermore, GAO pointed out that the Postal Service provided little detail on its capital investments for productivity gains and cost-saving initiatives in its proposals, the Five-Year Strategic Plan, or the Five-Year Strategic Capital Investment Plan.5 Even where the Postal Service provided some detail, it failed to give GAO sufficient backup data or description.6
Our goal is to repeal the escrow account. However, it would not be prudent for Congress to take this step until the Postal Service has demonstrated that it has a workable plan to fund the key capital investments needed to ensure the long-tern viability of the Postal Service. That is why GAO recommended that Congress consider repealing the escrow requirement only after it receives "an acceptable plan from the Service describing how it intends to rationalize its infrastructure and workforce and is confident that the Service is making satisfactory progress on transforming itself into a more efficient organization and implementing its transformation goals."7
We will be considering postal reform legislation early next year and would like to address the escrow requirement as part of that legislation. But we will not be in a position to do this without additional information from the Postal Service. For that reason, we ask that you submit to Congress by January 31, 2004, the further planning recommended by GAO.
Sincerely,
posted 11/28/03
POSTAL PENSION FUNDING REFORM
Issues Related to the Postal Service’s Proposed Use of Pension Savings
Highlights(pdf)
Why GAO Did This Study
What GAO Found
•
The Service’s report presented two proposals for how it would use the “savings,” and GAO found both to be generally consistent with P.L. 108-18. The first proposal assumes that responsibility for military service pension costs shifts to the Treasury Department and proposes prefunding retiree health benefits for retirees and current employees. The second proposal assumes that the Service retains responsibility for military service pension costs and proposes prefunding retiree health benefits only for new employees. Both proposals assume that the Service would pay down debt and fund capital investment through inflation-based rate increases.Under both proposals, the Service proposes that the escrow requirement be eliminated, so that the Service would not have to include $3 billion as a mandated incremental operating expense beginning in fiscal year 2006. The Service cannot use the escrow funds unless Congress eliminates the escrow requirement or specifies by law how these funds may be used. If no action is taken, the Service believes that it would have to raise rates higher than would otherwise be necessary. The escrow requirement provides Congress an opportunity to review how the Postal Service will address a number of long-term challenges, such as progress toward transformation and funding its retiree health benefits obligation. Once Congress is satisfied, it could repeal the escrow requirement so that an escrow account is not needed.
GAO assessed the Service’s two proposals according to their fairness, affordability, and the ability to achieve transformation goals, as follows:
Fairness: Proposal I strikes a more equitable balance of allocating costs between current and future ratepayers, because benefits earned by today’s employees will be built into the current rate base. Under Proposal II, much of the retiree health benefits obligation would remain unfunded, thereby placing the burden of the benefits being earned today on future ratepayers.
Affordability: The Service’s proposals attempt to balance short-term rate mitigation with some level of prefunding to address its long-term obligations. The first proposal would require a larger postal rate increase than the second proposal and would prefund more of the retiree health benefits. The second proposal focuses more on rate mitigation. Given the Service’s uncertain financial future, its ability to raise revenues, reduce costs, and improve productivity and efficiency is critical to affordability.
Transformation goals: Although the Service believes it can pay down debt and fund the capital investments associated with its transformation initiatives, this is not clear because the Service has not yet presented a comprehensive, integrated infrastructure and workforce rationalization plan. GAO has previously recommended that the Service provide Congress with such a plan and periodic reports on its transformation progress. The Service disagrees with GAO that the escrow repeal should be tied to a plan.
The military service of many Postal Service retirees was already creditable to a civilian pension when the Postal Service began operations in 1971. OPM’s current approach, however, allocated the years of creditable military service of these employees over their entire civilian careers. If Congress decides that the Postal Service should be responsible for military service costs applicable to its employees, then consideration of an allocation alternative reflecting the extent to which the military service of current and former employees was already creditable towards a civilian pension when the Postal Service began operating would enhance the decision-making process.
What GAO Recommends
To
POSTAL PENSION FUNDING REFORM
Review of Military Service Funding Proposals
Highlights
(pdf)
Why GAO Did This Study
What GAO Found
The positions taken by OPM and Treasury and the Postal Service were driven in part by differing views on the nature and extent of the relationship between military service and an entity’s operations. The Postal Service favors returning the responsibility for funding benefits attributable to military service to the Treasury, making arguments that include Treasury’s historic responsibility for these benefits, the legislative history surrounding the Postal Service’s funding of retirement benefits, the fact that the majority of military service by CSRS employees was rendered before the current Postal Service was created, and that military service has no connection to the Postal Service’s functions or operations. OPM and Treasury favor the recently enacted law, arguing that the Postal Service was intended to be selfsupporting, military service is a benefit like other CSRS benefits that should be allocated proportionally over an employee’s career, and the current law is one in a series that developed today’s approach to funding the Postal Service’s CSRS costs.
GAO observed that there is no direct relationship between an employee’s military service and an entity’s operations, but an indirect relationship is established once an employee is hired into a position whose retirement plan provisions credit military service when computing a civilian benefit. GAO has long held the position that federal entities should be charged the full costs of retirement benefits not covered by employee contributions in the belief that it enhances recognition of costs and budgetary discipline at the same time it promotes sounder fiscal and legislative decisions. However, our previous recommendations and matters for congressional consideration did not specifically address whether the cost of military service benefits should be included in CSRS employee benefit costs. Currently there is inconsistency in how various self-supporting government entities treat these costs.
With declining mail volumes, increasing compensation costs, and a more competitive marketplace, the need for the U.S. Postal Service (Service) to increase efficiency and reduce expenses is a matter of increasing importance and concern. According to the Service, one area where it can become more efficient is in its mail processing and distribution infrastructure. The objectives of this report are to (1) describe major business and demographic changes and their effect on the Service's mail processing and distribution infrastructure; (2) describe what actions the Service is taking in response to these changes, and what challenges exist; and (3) discuss the Service's strategy for realigning its infrastructure.
Several major changes have affected mail processing and distribution operations including marketplace changes, such as declines in First-Class Mail and increased competition; increased automation and mail processing by mailers; and shifts in population demographics. Effects of these changes include excess capacity in the mail processing and distribution infrastructure and variations in productivity among plants. The Service is exploring ways to realign its infrastructure by closing annexes, consolidating operations, and employing tools to model its infrastructure needs, while at the same time attempting to increase efficiencies in its current operations by expanding automation, improving material handling operations, creating a comprehensive transportation network, and introducing standardization programs. Also, there is a large range in productivity among plants. Reducing this range is difficult due to the complexity of operations and differences in plant layout. In addition, the Service faces challenges in eliminating excess capacity, while maintaining service standards, due to workforce rules and resistance to plant closings. Questions remain about how the Service intends to realign its processing and distribution infrastructure and workforce. The Service's strategy for realigning has not been clear because the Service has outlined several seemingly different strategies over the past 3 years. None of these strategies include criteria and processes for eliminating excess capacity, which may prolong inefficiencies. Also, the strategy lacks sufficient transparency and accountability, excludes stakeholder input, and lacks performance measures for results.
Subject Terms
Cost analysis
Mail delivery problems
Mail transportation operations
Postal facilities
Postal service
Strategic planning
Federal agency reorganization
Population statistics
Agency missions