U.S. Postal Service: A Primer on Postal Worksharing (31-JUL-03,  
GAO-03-927).							 
                                                                 
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.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-927 					        
    ACCNO:   A07827						        
  TITLE:     U.S. Postal Service: A Primer on Postal Worksharing      
     DATE:   07/31/2003 
  SUBJECT:   Postal rates					 
	     Postal service					 
	     Work measurement					 
	     Cost control					 

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GAO-03-927

                                       A

Report to Congressional Requesters

July 2003 U. S. POSTAL SERVICE A Primer on Postal Worksharing

GAO- 03- 927

Contents Letter 1

Results in Brief 3 Background 5 Worksharing Involves Activities Mailers
Must Perform to Qualify for

Lower Rates 10 The Rationale for Worksharing Is That It Benefits USPS,
Mailers, and

the Nation, but Some Concerns Have Been Raised 19 The Legal Basis for
Worksharing Rates Is Derived from Title 39 and

Is Implemented through Postal Rate Cases and Regulations 36 Agency
Comments and Our Evaluation 43

Appendixes

Appendix I: Objectives, Scope, and Methodology 45

Appendix II: Estimated USPS Avoided Costs for Automation- Compatible
Letters That Are Workshared and Sent via First- Class Mail 47

Appendix III: Comments from the U. S. Postal Service 48

Appendix IV: Comments from the Postal Rate Commission 49

Appendix V: GAO Contact and Staff Acknowledgments 51 GAO Contact 51
Acknowledgments 51

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 16 Table 2: Highlights of
Worksharing Requirements for

Automation- Compatible Letters Sent via First- Class Mail 17 Table 3:
Highlights of Opposing Views on Worksharing 36 Table 4: Selected USPS
Worksharing Rates Adopted from Fiscal

Years 1976 through 2002 39 Figures Figure 1: Illustration of How USPS
Handles *Aunt Minnie*s* Letter

Sent from Philadelphia to Los Angeles 6 Figure 2: Sample Envelope with
Mailer- Applied Barcode 11 Figure 3: Example of Presorting Envelopes in
Mail Trays by

Five- Digit ZIP Codes 12

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 14 Figure 5: Percentage of USPS Domestic Mail That Is Workshared
and Non- workshared 18

Figure 6: Percentage of Workshared Mail by Class 19 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 23 Figure 8:
Domestic Mail Volume from Fiscal Years 1972 through 2002 25

Figure 9: Share of Domestic Mail Revenue Generated by Workshared and Non-
workshared Mail in Fiscal Year 2002 27

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 28

Figure 11: Financial Data for Workshared and Non- workshared First- Class
Mail in Fiscal Year 2002 30

This is a work of the U. S. government and is not subject to copyright
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separately.

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 21 st 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. 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. 1 U. S. General Accounting Office, U. S. Postal
Service: Key Postal Transformation Issues, GAO03-

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).

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. 2 Worksharing rates have been considered in successive 2 39 U. S.
C. S:3622( b)( 6).

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, 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.

3 The Postal Reorganization Act of 1970 (Pub. L. 91- 375) reorganized the
U. S. Post Office Department into the U. S. Postal Service.

Figure 1: Illustration of How USPS Handles *Aunt Minnie*s* Letter Sent
from Philadelphia to Los Angeles

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, 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. 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,
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. S:3624( a).

5 39 U. S. C. S:3622( b)( 3).

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. 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 selffinancing 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 6 U.
S. General Accounting Office, U. S. Postal Service: Transformation
Challenges Present Significant Risks, GAO- 01- 598T (Washington D. C.:
Apr. 4, 2001).

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 Postal worksharing activities generally involve
mailers preparing,

Activities Mailers Must barcoding, sorting, or transporting mail to
qualify for reduced postage

rates, that is, worksharing rates. Worksharing rates are based on what are
Perform to Qualify for

commonly referred to as worksharing discounts because the rates are Lower
Rates

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. Mailerbarcoded mail can go
directly to USPS automated equipment for processing.

Figure 2: Sample Envelope with Mailer- Applied Barcode

Mailer- applied barcode

JOHN DOE 2121 MAIN ST NE WASHINGTON DC 20002

Source: USPS.

 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 1

Mailer generates mail with various ZIP Codes

2

Mailer presorts the mail by ZIP Code and places it in separate mail trays

JANE DOE JOHN DOE

1212 ANY ST NW 2121 MAIN ST NE

WASHINGTON DC 20001 WASHINGTON DC 20002

3

Mailer delivers the presorted mail trays to USPS

ZIP Code 20001 ZIP Code 20002

Source: Developed by GAO based on USPS information. Note: Figure is a
simplified illustration of presorting mail.

 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. 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. 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. 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.

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.

magazines

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 Aunt Minnie*s letter (First- Class Mail) Destination- entered bulk
mail

Aunt Minnie mails a letter by dropping it into a mailbox, or collection
box, or by dropping it off at a

1

USPS facility (e. g., post USPS receives letter

office) in Philadelphia (e. g., mail or collection box or post office)

Bulk mailer drops workshared bulk mail (e. g., catalogs, magazines, or

2

packages) off at a USPS Originating USPS

facility in Los Angeles, mail processing

bypassing the originating facility in Philadelphia

facility in Philadelphia

3

Destinating USPS mail

Destination entry

processing facility in Los Angeles

4

USPS facility (e. g., post office) where letter carrier picks up mail for

delivery

Destination entry (alternative) 5

Letter carrier delivers mail, including Aunt Minnie*s letter and the mail
from the

bulk mailer, to the addressee*s mailbox

Shaded area indicates steps common to both types of mailings. Source:
Developed by GAO based on USPS information.

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).

Tabl e 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

Worksharing discount (per- piece reduction from Degree of presorting for
barcoded, the 37- cent stamp

Worksharing rate automation- compatible mail

rate) per piece

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 7.8 cents 29.2 cents

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 9.2 cents 27.8 cents

Carrier route presorting: Mail presorted according to delivery routes of
USPS letter carriers 9.5 cents 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.

Mailers must fulfill numerous requirements in addition to barcoding and/
or presorting to qualify for worksharing rates that apply to
automationcompatible 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.

Tabl e 2: Highlights of Worksharing Requirements for Automation-
Compatible Letters Sent via First- Class Mail Aspect of worksharing
Requirements

Addresses  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. Physical

 Mail must be barcoded and presorted according to USPS characteristics
specifications.

 Letters must be proportioned according to USPS standards. Other

 Mail trays must be labeled according to USPS specifications.
requirements  Documentation of each mailing must be submitted to USPS.

 Each mailing must include 500 or more pieces. Source: USPS.

Recipients of Worksharing Although all mailers of bulk mail can receive
worksharing rates when they Rates

meet the worksharing requirements, in practice, for- profit businesses
generate most workshared mail. For- profit businesses send about
threequarters 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 threequarters of domestic mail received worksharing rates
(see fig. 5).

Figure 5: Percentage of USPS Domestic Mail That Is Workshared and Non-
workshared 26%

Non- workshared mail

74%

Workshared mail Source: Developed by GAO based on USPS mail volume data
for fiscal year 2002.

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 1%

Package Services Periodicals

7% 34%

First- Class Mail

59%

Standard Mail Source: Developed by GAO based on USPS mail volume data for
fiscal year 2002.

Note: Percentages do not add to 100 percent due to rounding.

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 USPS and PRC have said that worksharing benefits USPS,
mailers and the

Worksharing Is That It mailing industry, and the nation. First, they
credit worksharing with

benefiting USPS, in part because it enables USPS to improve its operations
Benefits USPS, Mailers,

and thereby helps minimize its workforce and infrastructure. In addition,
and the Nation, but

they said worksharing benefits USPS because it stimulates mail volume Some
Concerns Have

growth, which helps USPS achieve economies of scale. Historically, mail
volume growth has been critical to USPS*s business model, which depends

Been Raised 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

According to USPS and PRC, worksharing benefits USPS by enabling it to
with Benefiting USPS 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). 10 10 See app. II for a more detailed description of the
estimated avoided costs.

To put the potential for worksharing- related cost savings into context,
USPS has reported that if it can change the processing of letters or
flatsized mail (e. g., large envelopes, catalogs, and magazines) from
manual processing to automated processing, *there are tremendous savings
opportunities.* 11 According to USPS, *while only about 8 percent of the
letter mail we receive each day is processed manually, it accounts for
onehalf of letter mail processing labor costs.* 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. 13 Thus, even a 1 percent reduction in the
percentage of mail that USPS processes manually can result in significant
savings.

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.

Figure 7: Percentage of Costs That USPS Is Estimated to Avoid Because
Mailers Perform Worksharing Activities for Automation- Compatible Letters
Sent via FirstClass Mail, by Type of USPS Cost 5%

Other Applying barcodes

15%

and associated operations

38% 20%

Automated operations

22%

Allied operations Manual operations Source: GAO analysis of USPS estimates
for fiscal year 2003 prepared according to PRC cost methodology.

Note: See app. II for more detail on the methods and data used to develop
this 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). 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

14 See Robert H. Cohen, et. al., The Impact of Using Worksharing to
Liberalize a Postal Market (Washington, D. C.: February 2001).

(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 Mail
volume (billions) 250

200 Inception of USPS

worksharing program as it is known today

150 Workshared mail 100

50 Non- workshared mail

0 1972

1974 1976

1978 1980

1982 1984

1986 1988

1990 1992

1994 1996

1998 2000

2002 Fiscal year

Source: Developed by GAO based on USPS data. 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.

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,
FirstClass 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. 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 52%

48%

Non- workshared mail Workshared mail Source: Developed by GAO based on
USPS mail revenue data.

15 Domestic mail generated nearly all (94 percent) of the contribution
toward USPS institutional costs in fiscal year 2002.

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 58%

42%

Non- workshared mail Workshared mail Source: Developed by GAO based on
USPS data prepared according to PRC cost methodology.

Note: PRC cost methodology is somewhat different from USPS methodology and
results in the attribution of a somewhat greater proportion of USPS costs.

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 FirstClass Mail volume; revenues; and revenues applied to help cover
institutional costs, also referred to as the *contribution to
institutional costs.* 16 By fiscal year 2002, workshared First- Class Mail
represented 50 percent of First- Class Mail volume, 39 percent of First-
Class Mail revenues,

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.

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

Cents per piece 50

42.5

45 40 35

28.2 26.5

30 25

17.6 16.0

20

10.6

15 10

5 0

Revenue per piece Attributable cost

Contribution per piece per piece

Non- workshared First- Class Mail Workshared First- Class Mail

Source: USPS data prepared according to PRC cost methodology. 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.

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 USPS and PRC credit worksharing with benefiting
mailers by reducing

with Benefiting Mailers 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. 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 According to USPS and PRC, worksharing benefits
the nation, in part by

with Benefiting the Nation lowering business costs, and in part by
creating associated benefits that

consumers can realize. USPS and PRC have concluded that total mailrelated
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

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.

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 A broad array of postal stakeholders generally
express support for the

Worksharing but Raise concept of worksharing* that is, they express
support for the concept that

Concerns in this Area 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.

Tabl e 3: Highlights of Opposing Views on Worksharing Key aspects of Views
of some mailing worksharing APWU views industry members a

USPS cost savings caused Worksharing that mailers

Worksharing that mailers by worksharing discounts perform saves USPS less
perform saves USPS more than the reduction in USPS

than the reduction in USPS revenues from the

revenues from the discounted mail.

discounted mail. Effect on USPS financial

Worksharing discounts Worksharing discounts position worsen USPS*s
financial

improve USPS*s financial position, thus threatening its position, thus
improving its ability to finance universal

ability to finance universal postal service.

postal service. Size of worksharing

Worksharing discounts are Worksharing discounts are discounts too large.
not large enough.

USPS role vis- `a- vis the Due to worksharing

Due to worksharing private sector discounts that are too large,

discounts that are not large

the mailing industry enough, the mailing industry performs too many postal
performs too few postal activities. activities. Establishing worksharing

Worksharing discounts Worksharing discounts discounts should never be
established should usually not be when the estimated

established when the reduction in USPS revenues

estimated reduction in exceeds the estimated

USPS revenues exceeds the reduction in its costs.

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. The Legal Basis for The primary legal basis for
worksharing rates is derived from one of the Worksharing Rates Is

nine factors cited in the Postal Reorganization Act of 1970 that PRC must
consider in recommending changes to domestic postage rates proposed by
Derived from Title 39

USPS. Specifically, the act requires that, in recommending changes to and
Is Implemented

postage rates, PRC consider nine factors, including *the degree of
preparation of mail for delivery into the postal system performed by the
through Postal Rate

mailer and its effect upon reducing costs to USPS.* 18 The nine factors
that Cases and Regulations

18 39 U. S. C. S:3622( b)( 6).

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. 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.

19 39 U. S. C. 3622( b).

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. 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.
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).

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.

Tabl e 4: Selected USPS Worksharing Rates Adopted from Fiscal Years 1976
through 2002

Type of workshared mail Effective date

Presorted First- Class Mail 1976 Presorted Periodicals 1978 Presorted
Carrier Route Standard Mail a 1979 Destination entry of Periodicals 1985
Barcoded letters sent via First- Class Mail 1988 Barcoded letters sent via
Standard Mail 1988 Destination entry of Standard Mail letters 1991
Saturation Standard Mail b 1991 Barcoded Periodicals 1991 Destination
entry of Standard Mail 1991 Destination entry of Parcel Post c 1991
Barcoded flat- sized d First- Class Mail 1992 Barcoded flat- sized
Standard Mail 1992 Barcoded flat- sized Periodicals 1992 Barcoded Parcel
Post 1999 Periodicals prepared on pallets e 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.

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. 22 When considering the relevance of
Title 39 policies to PRC recommendations on worksharing rates, it is
important to

22 39 U. S. C. S:3622.

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. 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.
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. 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,

23 39 U. S. C. S:101( a). 24 39 U. S. C. S:403. 25 39 U. S. C. S: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.

except where such restriction is necessary to ensure safe and healthful
employment conditions. 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. 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. 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. 26 39
U. S. C. S:2010. 27 Appendix A to Subpart C of 39 C. F. R. Part 3001,
following 39 C. F. R. S:3001.68. 28 39 C. F. R. S:111.1.

Niche Classifications and On a related matter, there has been long-
standing and continuing debate Negotiated Service

over whether certain types of postage rates can be offered within existing
Agreements Also Provide

law and, if so, under what circumstances. Recent debate has focused on
Lower Rates

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. 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 yetto-

be proposed NSAs and also to reduce its costs through NSA requirements
applying to qualifying mailers.

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).

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. 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 We received written comments on a draft of this report
from the Chairman

Our Evaluation 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

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.

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

Appendi Appendi xes x 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
FirstClass 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.

Estimated USPS Avoided Costs for Automation- Compatible Letters That Are

Appendi x II

Workshared and Sent via First- Class Mail Percentage of the estimated
costs that USPS is expected to Type of USPS worksharing- related savings

avoid

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. 15

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. 38

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. 20

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. 22

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. 5

Total 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.

Appendi x III Comments from the U. S. Postal Service

Appendi x IV Comments from the Postal Rate Commission

Appendi x 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)

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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 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. 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 21 st 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.

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. Highlights of GAO- 03- 927, a report to

congressional requesters

July 2003

U. S. POSTAL SERVICE

A Primer on Postal Worksharing

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Contents

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Page 1 GAO- 03- 927 Postal Worksharing Primer United States General
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Appendix I

Appendix I Objectives, Scope, and Methodology

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Appendix II

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Appendix III

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Appendix IV

Appendix IV Comments from the Postal Rate Commission Page 50 GAO- 03- 927
Postal Worksharing Primer

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Appendix V

United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested

Presorted Standard Postage & Fees Paid

GAO Permit No. GI00
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