U.S. Postal Service: Additional Guidance Needed to Assess Effect of Changes to Employee Compensation

USPS faces major financial challenges. In the last 11 years it has lost over $69 billion; an issue for an organization that is to be self-sufficient. Significant USPS expenses are concentrated in employee compensation—72 percent of its costs in fiscal year 2018—and USPS has taken actions to decrease these costs. GAO was asked to review issues related to USPS's employee compensation.

This report examines: (1) recent trends in postal employee compensation, (2) the results of recent USPS efforts to manage compensation and (3) potential effects of proposed changes to employee compensation that would require legislative change. GAO analyzed USPS employee payroll data from fiscal years 2009 through 2018 to determine compensation trends and impacts of management efforts to manage compensation. GAO reviewed relevant legal documents, USPS policy documents and collective bargaining agreements. GAO assessed four broad reviews of USPS including recommendations for legislative change related to pay, benefits and required workhours. GAO also interviewed USPS officials, officials representing USPS employee unions, and industry and mailer stakeholders.

Compensation costs for current United States Postal Service (USPS) employees are $9 billion lower than 10 years ago, when adjusted for inflation (see fig). Most of the decline happened in fiscal years 2009 through 2014 as a result of reductions in the number of USPS employees and the hours they worked. While compensation costs have increased in recent years, USPS reports that more work hours were necessary to handle growth in delivery points and labor intensive packages. In recent years, USPS has also failed to make required payments for retiree health and pension benefits—a total unfunded liability of about $110 billion.

Compensation Costs for Current USPS Employees for Fiscal Years 2009 through 2018

USPS estimates a savings of about $9.7 billion from fiscal years 2016 through 2018 as a result of paying new employees less, among other efforts. GAO substantiated about $8 billion in savings, and found that USPS's cost savings estimates are likely overstated because they do not fully account for changes in work hours or tenure of employees. Also, USPS did not account for other costs such as increased turnover rates among lower-paid employees. USPS lacks guidance on what factors to consider in its cost savings estimates, and as a result may make future changes to employee compensation based on incomplete information.

Changes to employee compensation that would require legislative change could save USPS billions, but the amount saved is dependent on USPS overcoming implementation challenges. If USPS could reduce delivery frequency and associated work hours, GAO estimated USPS could save billions a year. However, other recent USPS reductions in service have not fully achieved planned work hour reductions due to, among other things, issues with management of work hours and lack of union agreement. Changing employee pay and benefit requirements could also achieve significant long-term savings, but saving depends on USPS overcoming challenges, such as potential increases in turnover and reduced productivity resulting from decreases in pay and benefits.

GAO recommends that USPS develop guidance that specifies that cost estimates include important factors, such as turnover. USPS accepted this recommendation stating it would formally articulate internal guidance to ensure appropriate factors are taken into account when developing cost estimates and evaluating outcomes.

The United States Postal Service (USPS) has a mission to provide  prompt, reliable, and efficient universal service to the public while  covering its expenses primarily through revenues generated from the sale  of its products and services. However, over the past 11 fiscal years,  USPS has not generated enough revenue to cover its costs, losing $69  billion, with an expected $6.6 billion net loss in fiscal year 2019. USPS’s  most profitable product—First-Class Mail—is expected to continue  declining in volume for the foreseeable future, and USPS faces increasing  competition in package shipping. Meanwhile, key costs, such as  employee pay and benefits, have been rising. According to USPS, most  of its annual costs are related to the over 634,000 employees who, on a  typical day, process and deliver 493 million pieces of mail to 159 million  delivery points. The cost of current employees is driven by a mix of  USPS policies—which include collective bargaining agreements (CBAs)  negotiated with unions representing 92 percent of USPS employees—and  statutory requirements governing USPS employee pay and benefits.

You asked us to review USPS’s management of employee compensation  and options for legislative change. This report examines (1) recent trends  in postal employee compensation, (2) results of recent actions taken by  USPS to manage employee compensation, and (3) potential effects of  changes to USPS employee compensation that would require legislative  or statutory change.

To describe recent trends in USPS employee compensation, we reviewed  compensation data published in USPS reports, such as annual reports to  Congress and financial forms filed as a result of Securities and Exchange  Commission requirements, from fiscal year 2009 through fiscal year  2018. We also requested and analyzed high-level trends in USPS payroll  data for fiscal years 2009 through 2018. We determined these data were  reliable for reporting changes in total work hours and compensation over  time by analyzing data, reviewing technical documentation of the dataset,  and speaking with USPS officials. We reviewed USPS policies and CBAs  with the four major postal employee unions. We also conducted  interviews with USPS officials, officials from USPS’s Office of Inspector  General (OIG), representatives of the four postal unions, representatives  of mailers, and academic experts, to obtain their views on recent  employee compensation trends.

To determine the results of recent actions taken by USPS to manage  employee compensation, we identified three major changes implemented  through CBAs aimed at decreasing the cost of employee compensation.  To evaluate the impact of these changes, we requested individual level  payroll data for fiscal years 2009 through 2018. USPS provided data at  the individual level for fiscal years 2016 through 2018. Data for fiscal  years 2009 through 2015 were not readily available. We determined that  the fiscal years 2016 through 2018 data were reliable to analyze the  impact of specific policy changes on employee compensation. The  individual-level payroll data included detailed information for all  employees who worked during that time period including pay, work hours,  and demographic information. With these data we evaluated the effect of  the policy changes through statistical models and other techniques. We  developed estimates for the impact of changes, identifying cost savings  as well as offsetting trends that decreased the potential for overall  savings. For more information about data sources and how we conducted  the analyses, see appendix I. We compared our results to USPS’s  estimated cost savings for these same changes. We assessed USPS’s  estimated cost savings associated with changes to employee  compensation against best practice standards from the GAO Cost  Estimating and Assessment Guide.

To examine the impact of proposed legislative changes to USPS  employee compensation, we reviewed academic literature, prior policy  reviews of USPS, and recent legislation. We then judgmentally selected  four broad reviews—two initiated by the executive branch, one by USPS’s  oversight body, the Postal Regulatory Commission (PRC), and one by  USPS—that covered USPS’s employee compensation and made  recommendations for change. From these four reviews, we identified  twelve recommendations for proposed legislative changes related to  employee compensation. For more information on the reviews and  recommendations we selected, see appendix II. Using the individual level  payroll data described above, we also developed estimates, where  possible, of potential savings of proposed legislative changes. We  supplemented this analysis with findings from other sources, including  prior GAO work, USPS OIG reports, and Congressional Budget Office  estimates to inform the potential savings and limitations of these changes.

We conducted this performance audit from September 2018 to January  2020 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

USPS is one of the largest civilian employers in the United States. In  fiscal year 2018, USPS reported that it employed approximately 634,000  people and retirement benefits were paid to over 600,000 retirees and  their survivors. According to USPS, it is one of the leading employers of  minorities, women, veterans, and disabled veterans; for example, USPS  reports on its website that it currently employs about 100,000 military  members and veterans, nearly one-sixth of its workforce.

Ninety-two percent of the USPS workforce is comprised of employees  who are represented by four unions that are roughly organized along  occupation type (see table 1 for the unions and member representation).  These employees are also divided into “career”, and “non-career”  employees. Career employees are considered permanent and are entitled  to a range of benefits (e.g., health and retirement) and privileges. Non- career employees are generally considered temporary and hired, for  example, during times of large mail volume such as holidays. As  discussed later, non-career employees receive fewer benefits and lower  pay than career employees.

Legal Requirements Related to USPS Workforce

The Postal Reorganization Act (PRA) established USPS as an  independent establishment of the executive branch of the government of  the United States. PRA also established a compensation system where  career postal employees and officers generally receive the same benefits  as federal government employees, but also authorizes employees to  collectively bargain over pay. Pay at many federal agencies is not subject  to collective bargaining. Instead, pay at those entities is set through the  General Schedule, which is developed and updated by the Office of  Personnel Management (OPM). Additionally, PRA established that USPS  should maintain compensation and benefits “on a standard of  comparability to the compensation and benefits paid for comparable  levels of work in the private sector of the economy.” Reform bills have  been introduced in Congress that would amend some of the current  compensation requirements, but none have passed.

USPS costs are concentrated in employee compensation, which  accounted for approximately 72 percent of total operational costs in fiscal  year 2018 (see fig. 1). The majority of compensation costs are payments  to current employees, which include an employee’s hourly pay and  benefits such as contributions to retirement and healthcare plans and  USPS’s share of payroll taxes for Social Security and Medicare. USPS  contributions for retirement benefits are made to OPM administered funds  that pay out USPS retiree pension and health benefits, as well as to the  Thrift Savings Plan (TSP).

USPS negotiates contracts that include terms for the compensation of the  92 percent of employees represented by unions through a collective  bargaining process. This process may entail a three-step process for  USPS: negotiation, mediation, and interest arbitration (as described  below). If USPS and its unions cannot reach agreement during initial  negotiations, a federal mediator is appointed, unless both parties waive  mediation. If no agreement is reached with the mediator, or if the parties  waive mediation, the contract goes to impasse. An impasse then  proceeds to final and binding interest arbitration. In interest arbitration, the  dispute goes before a three-member panel, which determines factors  impacting compensation, such as pay increases.

USPS Compensation Costs for Employees in 2018 Were Lower Than in 2009, Though Unfunded Liabilities for Retirement Benefits Have Increased

Adjusted for Inflation, Compensation for Current Employees in 2018 Was about $9 Billion Less Than in 2009

The total cost of compensation for current USPS employees was about  $9 billion less in fiscal year 2018 than in fiscal year 2009, when adjusted  for inflation. However, most costs decreased between fiscal year 2009  and fiscal year 2014, and costs have generally risen since (see fig. 2).  Without adjusting for inflation, USPS compensation costs for current  employees are still lower—by almost $1 billion—when compared to 2009,  but costs have been rising since 2014, and USPS has reported an  anticipated total compensation cost increase for fiscal year 2019. Over  the same time period, the number of employees followed a similar pattern  of decline from fiscal years 2009 through 2013 and then generally  increased. Overall, compared to fiscal year 2009, USPS has reduced its  total number of employees as of fiscal year 2018 by over 77,000.

One key reason for the decline in USPS compensation costs was the  decrease of 90 million work hours over this period. The largest decrease  in work hours was from fiscal years 2009 through 2013, when work hours  declined about 12 percent. We reported in 2014 that this was  accomplished in part through attrition and separation incentives. Recent  trends, however, show total work hours are increasing, from a  combination of new hiring and increased work hours for current  employees. From fiscal years 2014 through 2018, work hours increased  by 5.4 percent. Additionally, the number of work hours associated with  higher costs—overtime and penalty overtime—have also been  increasing. USPS reported that the recent increase in work hours and  overall compensation costs is a result of increases in the number of  delivery addresses and increases in more labor intensive package  volume. USPS adds about one million new delivery points each year.  Although overall mail volume declined from fiscal years 2009 through  2018, package volume increased almost 200 percent during the same  period. However, package volume growth has slowed in recent months,  largely due to significant competition among delivery providers, according  to USPS.

Generally, USPS compensation grew more slowly over the last decade  than in the private sector and federal government. Based on our review  of USPS data for fiscal years 2009 through 2018, USPS employee  compensation has increased on average by 1.0 percent per year.  According to Bureau of Labor Statistics data, average employee  compensation increased by approximately 2.3 percent per year for  workers in private industry. In a prior review of federal civilian  compensation trends, we found average compensation increased 1.2  percent per year for the federal workforce from 2004 through 2012.  Based on a review of publically available Office of Management and  Budget data, we found this trend of about a 1.2 percent annual increase  continued through 2018.

While Compensation Costs Have Decreased, USPS’s Unfunded Liabilities for Retirement Benefits Have Increased

Although USPS decreased compensation costs paid to current workers,  its unfunded liabilities for retirement benefits significantly increased during  the same time period. By law, USPS employees are entitled to participate  in the federal retirement health benefits and pension programs. USPS is  required to make annual payments into the OPM administered pension  and retiree health benefits funds that support postal employee retirement  benefits; however, USPS has failed to make a significant portion of these  payments.

Retiree Health Care Liabilities: OPM administers the Postal Service  Retiree Health Benefits Fund, which pays USPS’s share of premiums for  retired postal employee health care coverage. As of September 30,  2018, USPS had contributed $20.9 billion to the fund, and missed  payments on an additional $33.9 billion in required payments to the fund  for 2012-2016. For fiscal years 2017 and 2018, OPM billed USPS for  required payments to the fund of $3.3 billion and $3.7 billion respectively  and USPS did not make either payment. As of September 30, 2018,  USPS reported the unfunded retiree health benefit liability to be $66.5  billion.

Pension Liabilities: OPM also administers federal pension benefits  through the Civil Service Retirement System (CSRS) and the Federal  Employees Retirement System (FERS). USPS employees participate in  one or the other of these plans. Both plans are funded through the Civil  Service Retirement and Disability Fund (CSRDF). In 2018, USPS failed to  make required payments to the CSRDF totaling approximately $2.4  billion; $958 million for FERS and $1.4 billion for CSRS. USPS reported  the unfunded pension benefit liability, as of September 30, 2018, to be  $25.1 billion for CSRS and $18.4 billion for FERS.

As the total unfunded liabilities for health care and pension benefits owed  to current and future retirees are about $110 billion, we have previously  reported on the significant risk posed by these financial liabilities to  USPS’s long-term sustainability. We have also reported that Congress  should consider passing legislation to put postal retiree health benefits on  a more sustainable financial footing, and recently provided options for  proposed legislative changes related to retiree health costs in particular.  For the remainder of this report we will focus mainly on those costs USPS  incurs related to current employee services.

USPS Efforts Have Decreased Employee Compensation Costs, but USPS Has Not Fully Assessed Savings and Other Costs

USPS Estimates That Decreasing Pay Rates for New Employees and Health Insurance Contributions Have Saved Billions

In addition to decreasing the number of employees and work hours,  USPS also implemented three major changes to decrease employee  compensation: (1) lowering pay for new career employees, (2) increasing  use of non-career employees, and (3) reducing USPS contributions to  health insurance premiums for active employees. These changes were  negotiated with the four unions representing the majority of postal  employees and established in CBAs. According to USPS management  officials, these actions were intended to decrease compensation costs  and increase workforce flexibility, which were necessary responses to  declining letter mail volume and revenue, growth in more labor-intensive  package volume, and increases in the number of delivery addresses. We  report USPS’s estimates, and our estimates, of how much these changes  saved in employee compensation costs below; we further describe the  differences between the two estimates in the next section. For additional  technical details about our analysis, see appendix I.  1.  Lowering Pay for New Career Employees: Beginning in 2010,  USPS implemented a negotiated lower starting pay for new career  employees. More specifically, career employees hired after a  specified date have lower starting pay than previously hired career  employees. For example, a city carrier hired in January 2016 would  make about $37,640 a year compared to $48,406 a year if hired  before the new starting pay agreement. USPS estimated about $2.3  billion in savings for fiscal years 2016 through 2018 as a result of this  effort. We were not able to substantiate the estimated savings  because USPS could only provide individual data for fiscal years 2016  through 2018, which were not enough data to develop comparison  groups for employees hired before and after the pay rate change.  2.  Increasing Use of Non-career Employees: In 2010 and 2011, USPS  negotiated the ability to hire up to 20 percent of the workforce as non- career employees; the prior limit had been 10 percent for most  employee types. USPS officials told us they also changed some  work rules so that USPS could use non-career employees for some  tasks previously only allowed for career employees. Non-career  employees are less costly because they generally have lower pay  rates and are not entitled to the full federal benefits received by career  workers. According to USPS officials, non-career employees are  also “more flexible” because there are fewer restrictions on their tasks  and schedules. For example, USPS management officials told us that  they use non-career employees for much of the Sunday package  delivery service and to make extra trips needed to deliver packages to  meet service targets. USPS estimated that increased use of non- career employees saved about $8.2 billion in compensation costs  since fiscal year 2016, but our analysis found that USPS likely saved  about $6.6 billion from fiscal years 2016 through 2018 from this effort.  3.  Reducing Contribution for Employee Health Insurance  Premiums: USPS decreased its contribution percentage for  employee health insurance premiums from 84 and 85 percent in 2008  to 74 percent in 2018. Based on its recent agreement with NRLCA,  USPS’s contribution will decrease from 73 percent in 2019 to 72  percent in 2020. In past CBAs with the three other unions (APWU,  NALC, and NPMHU), negotiations over USPS contributions to health  insurance premiums followed those agreed to by NRLCA. USPS  officials estimated that USPS’s reduced contribution percentage to  employee health insurance premiums has saved about $1.6 billion  across the types of postal employees from fiscal years 2016 through  2018. However, our analysis found that USPS likely saved about $1.4  billion for the three-year period.

Although USPS was able to decrease its share of the health  insurance premium to achieve a larger saving in fiscal year 2018 than  in fiscal year 2017, overall USPS expenditures for its share of  employee health insurance premiums did not decrease due to annual  increases in premiums. USPS reported that employee health benefits  expenses increased from $5.0 billion in 2016 to $5.2 billion in 2018,  even as its share of premium costs decreased from 76 percent to 74  percent for employees covered by the CBAs during the same  period.

Although USPS Saved Billions, Its Estimates Potentially Overstate Savings Because USPS Did Not Account for Various Factors

Across all of its efforts, USPS estimated it saved approximately $12 billion  for fiscal years 2016 through 2018. While there are multiple valid  approaches for estimating cost savings based on policy changes, we  found that USPS did not account for some significant factors and,  therefore, potentially overstated the savings achieved. Specifically, USPS  did not account for the effects of changes in work hours or tenure of  employees. When we accounted for these additional factors, we were  able to substantiate $8 billion, of USPS’s estimated $9.7 billion, in savings  over the last three fiscal years for changes to the number of non-career  employees and health insurance contributions. As noted above, we  were not able to substantiate the estimated savings of lowering pay for  new career employees. We summarize the specific factors below and  include additional details about our review of USPS’s estimates and the  effect of each factor in appendix I.

As previously discussed, in recent years, USPS employees have worked  significantly more overtime and other “premium” pay hours. According to  USPS, use of overtime and premium hours enables it to meet irregular  work demands (for example, spikes in volume resulting from holidays) or  delivery performance targets, particularly for Sunday package delivery.  Also, to incentivize or compensate employees for working extra or  traditionally less desirable hours, USPS routinely uses overtime and other  premium pay, such as additional pay for work at night and on Sundays.  As a result, these types of work hours cost more to compensate than  regular work hours (i.e., straight time hours) on a per hour basis.

When calculating the savings it achieved from using lower-paid  employees, USPS compared what it actually paid in compensation to  estimates of what it would have paid in the absence of having non-career  or lower-paid workers, using average pay rates and not individual level  employee data. USPS’s method therefore did not fully account for the mix  of types of hours worked in its estimates. As a result, USPS  underestimated how much the lower-paid employees are compensated in  its cost estimates. Our analysis of the last three years of data found that  lower-paid employees work a different mix of hours, and overall they work  more hours and more premium hours, factors that USPS does not  capture in its estimates. For example, from our analysis of USPS payroll  data, we found that, on average: a non-career employee worked 30 more straight hours, 73 more  overtime hours, and 23 more night and Sunday hours per year than a  career employee, and a lower-paid career employee worked a higher number of straight time  hours and, depending on the craft, also may work more overtime,  night work, and Sunday hours than a higher-paid career employee.

USPS officials said it was not necessary to factor in work hours because  the amount of work hours was not changed by introducing lower-paid  employees. For example, USPS officials told us that, to meet the increase  in packages, more carrier work hours were needed in recent years, to  make deliveries on Sundays for instance. USPS officials also noted that  to save costs, it is preferable that these hours go to lower-paid  employees.

However, our analysis suggests that lower-paid employees may work  different amounts and mixes of work hours than higher paid employees.  For example, newer, lower-paid employees may be more willing to work  extra hours, and being newer, their inexperience could mean that they  take longer to complete their work on average. USPS management  officials said that they do not believe newer employees are less  productive than more experienced employees, nor do they lead to  increases in overall work hours. USPS management officials also told us  that employees cannot opt into working more hours because overtime  hours are assigned as necessary by supervisors. Our analysis did not  include information that would allow us to determine whether  management was pre-approving all overtime hours. However, in June  2019, the USPS OIG reported $136.6 million in unauthorized overtime— which occurs when an employee’s clock time exceeds eight hours without  prior approval—for mail processing alone.

USPS has saved billions by using a less costly and more flexible  workforce. Indeed, based on fiscal year 2018 data, we calculated that  USPS could potentially save up to an additional $4.4 billion a year if the  current cap on non-career employees was doubled to 40 percent.  However, USPS did not fully evaluate the impact of pay rates and work  hours by employees. Given the growth in work hours, particularly  overtime and premium pay hours, USPS risks overestimating savings and  making ill-informed changes to employee compensation by not including  information about employee work hours.

USPS employees with longer tenure generally receive higher pay than  similar employees with less tenure. Based on our analysis of USPS  payroll data for fiscal year 2018, the average pay of career employees is  driven in part by the high median tenure of those employees, which was  20 years (with a median age of 54 years old) in fiscal year 2018.

However, when calculating its savings estimates for non-career  employees, USPS did not factor in the effect of employee tenure.  Specifically, USPS’s savings estimate for non-career employees  compared what it was paying for a newly hired non-career employee  against the average pay for a career employee, rather than the starting  pay for a career employee. When we accounted for tenure in our  analysis, we found that some of the savings from hiring new employees  could be explained by the shorter tenure of the lower-paid employees.  USPS officials told us that they agreed that tenure should have been  taken into account and that they would recalculate these estimates.  Without adjusting for mix of hours worked and tenure, we found the  difference in pay between career and non-career employees to be, on  average, $25 per hour. After adjusting for tenure and mix of workhours,  we found the difference in pay to be, on average, $8.27 per hour.

There are a variety of acceptable methods for conducting cost savings  estimates, but all estimates should include all the relevant factors driving  costs and be clearly documented. The GAO Cost Estimating and  Assessment Guide—a best practices guide for developing and managing  program costs—states that estimates should include a common set of  agreed-upon estimating standards and ensure that assumptions are not  arbitrary. USPS officials said that they do not have guidance for how to  develop these estimates, including what significant factors should be  considered. Given that USPS regularly evaluates and manages  employee compensation in its labor negotiation, as well as overall budget  planning, without guidance on what factors are necessary to consider  when developing employee compensation cost estimates, USPS risks  making ill-informed decisions about whether to maintain, or make  additional, changes to compensation.

USPS Did Not Factor Other Costs into Its Savings Estimates

Based on interviews with USPS and postal employee union officials, as  well as recent research by the USPS OIG, we identified additional costs  that USPS did not factor into its cost savings estimates related to lowering  employee pay and benefits. Specifically, USPS did not include the impact  of the changes on recruitment and turnover of non-career employees in  its cost saving estimates, both of which could have a significant impact on  the overall level of savings.

Both USPS management and postal union representatives discussed the  impact of lower pay on recruitment of non-career employees. Officials  from two unions told us USPS is having a harder time recruiting and  retaining some non-career employees, especially minorities and veterans  because of the lower pay. In July 2019, USPS OIG reported that a post  office in Denver had constant challenges filling letter carrier vacancies  due in part to USPS’s inability to offer competitive compensation. The  report noted that a high number of vacancies affected carriers’ ability to  complete their routes on time, contributing to excess overtime and penalty  overtime. USPS officials stated that with very few exceptions USPS has  had little trouble attracting applicants to non-career positions. One  example of an exception USPS officials provided was that in fiscal year  2018 USPS increased pay for non-career seasonal holiday workers to  make it more competitive. USPS and postal union officials also told us  that USPS had trouble specifically hiring truck drivers at the non-career  pay scale. In addition to lower pay compared to the private sector, a high  demand for drivers and low unemployment rates across the industry has  made it challenging for USPS to find enough qualified drivers. In  addition to the lower wages, USPS and postal union officials stated that  the unpredictable non-career employee work schedules, as well as low  unemployment rates, have created additional challenges for recruiting  qualified non-career employees. In contrast, USPS officials told us that  implementing a lower pay rate for new career employees has not affected  recruitment because employees are generally recruited from the non- career employee pool, so these employees get an increase in  compensation from their current position.

USPS and postal stakeholders also raised concerns about the effect of  lower pay on retaining non-career employees and the associated costs.  USPS officials told us they expected the turnover rate among non-career  employees to increase with the reduction in starting pay, but stated that  recent turnover was higher than expected. According to USPS, the  average monthly turnover rate for non-career employees has decreased  from 3.57 percent in fiscal year 2016 to 3.08 percent in fiscal year 2017  and 3.02 percent in fiscal year 2018. USPS officials told us that USPS  strives to keep the turnover rate as low as possible and that overall,  postal employees voluntarily leave their jobs at a lower rate than in the  private sector. According to two postal union estimates, it costs USPS  about $4,000 to $7,000 to hire and train new employees. USPS OIG has  reported that turnover costs USPS about $95.1 million in fiscal year 2015,  with an additional $23.1 million in fiscal year 2016 and could be $29.8  million in fiscal year 2017.

According to USPS officials, the lower pay rate for new career employees  has not had a significant impact on employee turnover. New career  employees were converted from the pool of non-career employees, who  had a lower pay rate than the new career employees, thus getting an  equivalent of a pay raise and more benefits. However, USPS provided us  with its analysis showing that the turnover rate for career employees with  a lower pay rate (average of 4.21 percent per month) was higher than for  career employees with a higher pay rate (average of 0.36 percent per  month) in fiscal year 2018.

According to postal union officials and USPS OIG, decreases in pay and  lack of work schedule flexibility have resulted in some negative effects on  morale that increased turnover of non-career employees. Union officials  told us that some managers have abused the flexibility of non-career  employees, such as requiring them to work many consecutive days. In  addition, non-career employees do not have regular work schedules and  can be laid off for lack of work. Officials at one union told us that non- career employees would prefer being hired as career employees, but have to start as non-career employees before being converted to a career  position, and getting such a conversion can take from one to seven years.  USPS OIG reported that in exit surveys, non-career employees stated  that the lack of schedule flexibility, low pay, and lack of benefits are  among the most cited reasons for leaving their job. The report also  stated that managers realized cost benefits by using non-career  employees to provide coverage for vacation days, sick days, and  unscheduled leave for career employees because their hourly rates are  less than those of their career counterparts. Union officials also told us  that some non-career employees do not receive the necessary training  but are expected to perform their jobs correctly from the start. They also  said that these new employees are less experienced and are more likely  to make mistakes. In addition, they said that managers become upset that  new employees cannot do their jobs correctly from the start, which leads  to morale issues among employees.

USPS officials told us that when they implemented the compensation  changes discussed above, they expected higher rates of employee  turnover, especially among non-career employees. USPS officials told us  that they are developing an assessment of the cost of turnover and the  preliminary results have not been validated. Specifically, USPS officials  also told us that they have not yet determined how to accurately apply the  turnover estimates to the population of employees who leave because  some turnover is necessary and preferable. For example, there are  seasonal needs for increases in labor hours, such as major holidays or in  some vacation areas, and when these employees exit, it is often because  the season ends and their employment is not needed. In contrast, other  employees leave USPS voluntarily for higher paid, or less difficult, work  elsewhere. USPS officials told us they recently began to develop  estimates of employee turnover costs, estimates that include costs such  as training, background checks, and drug screenings for new employees,  and the estimates are preliminary.

With Additional Authority to Manage Employee Compensation, USPS Could Further Reduce Costs, but Implementation Poses Challenges

Reforms Related to Employee Compensation Are Likely Necessary to Address USPS’s Long- term Sustainability

We have reported that legislative reform and additional cost-cutting are  needed for USPS to achieve sustainable financial viability. As noted  above, compensation costs are about three-quarters of USPS’s annual  expenditures and many aspects of how USPS compensates its  employees are defined in law. As a result, changes to the current  statutory requirements for employee compensation are one way to alter  USPS’s operational costs.

A variety of reviews of USPS have also recommended legislative action  to help address USPS’s long-term sustainability. We examined four broad  reviews of USPS and found 12 recommendations that could impact  employee compensation costs by amending statutes governing three  areas: employee work hours, benefits, and pay. The four reviews we  analyzed are: (1) Task Force Review of 2018, (2) Presidential  Commission Review of 2003, (3) USPS 2010 Comprehensive Statement,  and (4) PRC 2016 Analysis. The recommendations in these four  reviews are not exhaustive of all possible statutory changes that could  impact employee compensation costs. The recommendations we  reviewed also do not include changes to the fundamental business model  of USPS, such as privatization, or a return to annual appropriations to  finance its operations. We are also not recommending or endorsing the  adoption of any of these recommendations, in part, because our cost  estimates and limitations discussed below are based on broad policy  options and do not take into account many of the specific factors that  would need to be determined when implementing any of these options.  This information is meant to describe the potential for savings from  increasing flexibility related to work hours, benefits, and pay, as well as  highlight some potential challenges of implementing those changes.

Changes to Delivery Requirements Could Have Significant Cost Savings, If USPS Can Overcome Implementation Challenges and Decrease Overall Work Hours

A major driver of USPS’s operating costs is delivering mail to nearly every  mailing address, regardless of volume, six days per week. USPS’s  mission to serve, as nearly as practicable, the entire population of the  United States, requires a significant, continual use of employee work  hours. This is particularly true of the mail carriers who visit addresses  each delivery day. Based on USPS payroll data, we found mail carrier  compensation in fiscal year 2018 was approximately $24.4 billion, or  about 50 percent of compensation costs for current employees.

Two of the twelve recommendations we reviewed suggest legislative  changes to increase USPS’s authority to determine delivery frequency,  which would enable USPS to manage work hours more closely to volume.  Specifically, the 2018 Task Force report recommended that USPS be  given more flexibility to determine delivery frequency. USPS  recommended in its 2010 Comprehensive Statement that Congress  change the current delivery requirement from six days a week to five days  a week.

Changing the frequency of USPS’s deliveries could reduce its employee  compensation costs significantly by allowing USPS to reduce work hours,  particularly for carriers. Reducing delivery by one day could potentially  reduce carrier work hours by a maximum of one sixth—or 16.7 percent.  Our analysis shows that, based on fiscal year 2018 payroll data, if USPS  decreased the current mail carrier hours by one sixth, it could save up to  $2.6 billion in compensation costs. This estimate assumes that USPS  would reduce work hours from both the career and non-career carrier  employee pools. If USPS reduced mail carrier hours from only the non- career carrier workforce by 16.7 percent, it could save approximately  $1.96 billion.

USPS officials agreed that USPS could potentially save work hours and  associated costs due to a reduction in delivery frequency. However, they  noted that, even if USPS went to 5-day delivery, it would still deliver  packages seven days a week. Under that scenario, USPS has reported  estimated savings of $1.4 to $1.8 billion a year.

The 2018 Task Force report recommended that USPS be given increased  delivery flexibility by allowing USPS to determine delivery frequency.  Additional flexibility could result in a range of alternatives. For example,  USPS could deliver to addresses every other day (three or four days a  week) with optional dynamic routing as necessary up to an additional two  days a week, and could potentially save more than 16 percent. USPS has  begun to introduce technology and other options within its package  handling that might alleviate undue burden caused by such a large  decrease in service. For example, USPS now offers informed delivery,  which is an email that is sent to mail recipients with pictures of their mail  that is to be delivered, and enables people to have better insight into what  to expect and when. In 2018, we reported that USPS was piloting keyless  parcel lockers where customers could independently pick up their  packages; it is possible similar types of backups could be provided for  letters.

Regardless of the delivery frequency, reducing mail carrier hours is more  likely to come through a decrease in non-career employee hours. USPS  reports that non-career employees are temporary in nature and can be  laid off; therefore, it would be easier to implement hour reductions in this  pool of employees. In contrast, if USPS were to reduce hours for career  employees, savings would accrue more slowly over time, because career  employees’ are usually covered by no lay-off clauses in their CBAs, and  with low turnover rates, USPS would need employees to leave voluntarily.  A large portion of the career mail carriers, however, are aging, and it is  possible that many will leave through retirement in the next five years.  Specifically, in analyzing the USPS payroll data, we found that, in fiscal  year 2018, approximately 16 percent of career city carriers are currently  60 or older, with an additional 38 percent between the ages of 50 and 59.  Approximately 21 percent of career rural carriers are 60 or older and 38  percent are between the ages of 50 and 59.

Based on our analysis of the recommendations, we identified three  potential challenges to reducing delivery frequency: (1) management of  work hours (2) redistribution of mail volume; and (3) meeting delivery  needs.

Management of work hours: Realizing cost savings from a decrease in  delivery frequency largely depends on USPS being able to reduce work  hours accordingly. Prior USPS OIG and GAO reports have found that in  two previous efforts USPS has not successfully decreased labor hours  commensurate with a decreased level of service.

Beginning in January 2015, USPS revised its First-Class Mail service  standards, eliminating single-piece overnight service and shifting  some mail from a 2-day to a 3-day service standard. According to  USPS officials, these revisions were intended to, among other things,  allow USPS to process mail on fewer machines and decrease the  need for overnight work hours, which are paid at a higher rate than  day time hours. USPS OIG, in its review of this service change, found  that mail processing overtime costs increased by $68.4 million, or 9  percent, rather than decreasing. USPS OIG conducted a follow-up  study that found USPS was not effectively managing mail processing  overtime in fiscal year 2018. USPS management’s official response  partially agreed with the recommended steps USPS OIG outlined to  better manage overtime.

In 2012, USPS implemented Post Office Structure Plan (POStPlan),  which was intended to reduce work hours at some retail facilities,  which USPS estimated would result in about $500 million in annual  cost savings. In 2016, we found that this effort likely resulted in less  savings than USPS had estimated. According to USPS officials, this  is, in part, because USPS had to revise its plan after a union  grievance and arbitrator award required it to change the way it was  staffing post offices. We also reported concerns with USPS’s  methodology for determining work hour and compensation savings.  Overall, while USPS likely achieved an overall reduction in work hours  at thousands of post offices, we found the accuracy of the saving may  have been limited by errors we identified. For example, among other  issues, we found that USPS had not included the increase in  workload, and associated costs, from increasing the number of  remotely managed post offices.

Distribution of volume: Any reduction of delivery frequency would  require USPS to re-distribute its mail volume to the remaining delivery  days. In 2010, USPS recommended eliminating Saturday delivery and re- distributing the mail volume from Saturday to the delivery days Monday  through Friday, though USPS continues to deliver mail on Saturdays.  USPS stated that the additional volume in the remaining delivery days  would result in higher mail carrier productivity. However, we reported in  2011 that USPS’s ability to efficiently absorb the cost of transferred  workload from Saturday to weekdays is a key factor in determining  potential cost savings.

Meeting Delivery Needs: Another challenge to reducing delivery  frequency is that it could reduce the demand and value of USPS products  if customers are not getting their delivery needs met. Some stakeholders  have raised concerns that a reduction in mail delivery frequency will  decrease demand from mailers because products may not reach  households in a timely manner. Other stakeholders, however, have stated  that reducing delivery frequency is worth pursuing as long as it results in  significant cost savings.

Removing Requirement to Offer Federal Retirement Benefits Could Result in Significant Long-term Savings, Depending on the Replacement Benefits

Federal law requires USPS to provide certain benefits to its employees,  which cost USPS billions each year to satisfy. Further, as noted above,  USPS is mandated to pre-fund its retiree health benefits, which USPS  has failed to do in recent years. Four of the twelve recommendations we  reviewed suggest legislative changes to the funding mechanism and  requirements for USPS retiree health benefits. In addition, in 2018, we  issued a report with options for postal retiree health benefits and noted  that it is up to Congress to consider the merits of different approaches  and determine the most appropriate action to take.

Here, we focus on the other three of the twelve recommendations we  reviewed that suggest legislative changes to other USPS retiree benefits.  USPS’s 2010 Comprehensive Statement and the 2003 Presidential  Commission Report both have broad recommendations suggesting that  USPS should be allowed to make changes to its retirement benefits  package. USPS pays toward the following retirement benefits for current  employees: contribution to retirement pension (FERS or CSRS) and  contributions to the TSP, Medicare, and Social Security. For the purposes  of estimating the impact of decreases in retirement contributions, we  estimated savings based on decreases to the cost of pensions (CSRS  and FERS) and TSP, and assume no changes to Medicare and Social  Security costs.

Decreases to Retirement Contributions: If USPS was able to decrease  its cost of retirement payments made on behalf of current employees by 1  percent, 5 percent, and 10 percent, then we estimate based on fiscal year  2018 payroll data, the potential savings would be about $35 million, $175  million, and $350 million respectively. Implementation of such decreases  could include USPS offering lower cost benefits by increasing the  employee contribution or lowering the promised benefits.

The 2018 Task Force report recommended reform for postal employees  under FERS to move away from a “defined benefit” system—where the  payment received in retirement is a specified amount—towards a defined  contribution system—where the contribution into the system is a specified  amount. There are many different ways to implement this kind of change,  and we have not outlined potentially restructuring options. However, CBO  has calculated potential savings of increasing civilian employees’  contribution for FERS and estimates it would save about $20 billion over  five years.

Decreases to Healthcare Contributions: If USPS was able to decrease  its cost of health care payments for current employee coverage by 1  percent, 5 percent, and 10 percent, we estimate, based on fiscal year  2018 payroll data, the potential savings would be about $45 million, $224  million, and $449 million, respectively. If USPS no longer had to offer  federal health care coverage for current employees, it is possible that  USPS could substitute a less costly alternative. In 2013, we conducted a  review of a specific USPS proposal for restructuring its health care  benefits, and reported that the change could result in cost savings, but  that other issues should be considered, such as exposure of health care  funding if investments are made outside of Treasury securities.

Based on our analysis of the recommendations, we identified three  challenges to achieving cost savings from changes to employee benefits:  (1) union agreement; (2) cost savings timeline; and (3) impact on federal  benefit programs.

Union Agreement: According to USPS officials, if there was a legislative  change that allowed for USPS to alter the current retirement benefits,  USPS would need to negotiate future benefits offerings with the unions.  Savings, therefore, depend on the ability of USPS and the unions to  develop alternative options that meet the needs of the current workforce,  but also cost less than the current options.

Implementation Timeline: Cost savings are not likely to be realized in  the short-term because changes likely will not apply to current career  employees. In the past, when Congress has made changes to benefits— as when Congress increased the required retirement contribution levels  for federal employees under FERS, which also applied to USPS  employees—it only applied to employees hired after the change was  implemented. Therefore, savings would only occur as new employees  replace current employees. This is also consistent with the lower pay for  new career workers that USPS negotiated with the unions we discussed  previously—it only applied to new career employees.

Federal Benefit Impact: The Presidential Commission Review of 2003  stated that USPS should work with the Department of the Treasury and  OPM to determine the impact that separating USPS’s pension and retiree  health care programs would have on the existing federal systems. With  over 600,000 USPS employees, the Presidential Commission review  stated that it had concerns about the impact of removing USPS  employees might have on the OPM administered fund, which also pays  out retirement benefits for other federal employees.

Legislative Changes to Collective Bargaining Rights Could Result in Decreased Employee Pay and Costs, But Implementation would Be Difficult

Two of the twelve recommendations we reviewed suggest legislative  changes to collective bargaining rights, which could result in decreased  pay rates. The 2018 Task Force report recommended the elimination of  the right of USPS employees to bargain over compensation and that  employee pay rates be frozen in the short term, which would lead to a  slower rate in growth over time.

If USPS was provided authority to determine pay rates for its employees  without going through collective bargaining, it could reduce employee  compensation costs through pay cuts. We estimated the potential annual  cost savings associated with USPS implementing cuts for all current  employee pay by 1 percent, 5 percent, and 10 percent across all current  employees based on fiscal year 2018 payroll data. We find the potential  savings to be about $321 million, $1.6 billion, and $3.2 billion,  respectively.

Based on our analysis of the recommendations, we identified three  challenges to obtaining savings through reductions in pay: (1) difficulty of  cutting current workers’ pay; (2) trade-offs of lower wage rates; and (3)  history of collectively bargaining pay.

Difficult to cut pay: As discussed previously, pay has been the area in  which USPS has made progress in reducing employee compensation  costs in the recent past. However, as discussed, the savings mostly  comes from implementing lower pay rates for new employees. It is difficult  to implement changes that decrease the current pay of workers below  what they have previously received. In the private sector, a company can  restructure and turnover a portion of the workforce as an effort to  decrease compensation. USPS cannot easily turnover and restructure its  workforce because of the no layoff clauses.

Trade-off effects: Pay cuts to current employees could result in a variety  of negative consequences for USPS. According to literature on labor  economics, workers who face pay cuts may exhibit behavioral responses  including adjusting worked hours, adjusting level of effort for each hour of  work, or dropping out from the workforce altogether.

Workers may adjust the hours of work from changes in pay for two  reasons. First, a pay cut may reduce the incentive for employees to work  because each hour of work generates less money than it did before,  holding income constant. Second, a pay cut that reduces the income of  the worker may induce an employee to work more hours because the  employee feels poorer.

Changes in pay rates may also change workers’ morale, and  consequently the effort workers exert during worked hours. Economic  literature has found that wage cuts can impact the effort workers provide,  and that productivity may fall. For example, workers may exert less effort  in an attempt to punish the employer for the wage cut, or they may be  less worried about job loss because the cost of losing a job is lower after  a wage cut. These consequences may be of particular concern as  USPS has reported that productivity has stagnated in recent years, and  USPS is currently not meeting its standards for on-time delivery service.

Finally, pay cuts may also induce some individuals to leave the workforce  altogether. Studies have found that the share of the population that is  working may be influenced by pay rates. As we discussed previously,  USPS has already experienced some difficulty in recruitment and  retention as a result of the lower pay for new employees.

History of Collective Bargaining: Elimination of collective bargaining  rights—which could facilitate changes to USPS employee pay—would be  a major change in management-labor relations at USPS, with possible  negative effects on employee commitment and productivity. Unions  representing USPS employees have been bargaining over pay since the  1970s. Prior to that time, USPS employees had major strikes over low  compensation levels. USPS has a high approval rating from the public,  which it attributes, in part, to its employees feeling a sense of duty related  to their work. All of the union officials we spoke with said that they would  not support the removal of collective bargaining rights over pay. One  union official stated that both parties are better served through working as  a team to meet the needs of postal customers at reasonable cost.

USPS has made changes to employee compensation and saved billions  through these efforts. USPS, however, has not achieved financial  sustainability. USPS overestimated its cost savings from the employee  compensation changes because it did not include significant factors such  as tenure and mix of work hours when developing its estimates. In  addition, USPS did not weigh the costs of tradeoffs, such as an increase  in turnover, which likely further limits cost savings. Cost estimates that  include the significant factors driving compensation costs would help  USPS make better informed decisions about how to use, and potentially change, its workforce. Quality estimates are also important for USPS to  make a business case for additional employee compensation changes,  which it does regularly as it negotiates employee contracts and will be  doing as it develops future strategic plans. Additionally, as Congress  considers USPS reform legislation, comprehensive cost estimates will  improve policymakers’ ability to fully assess savings, as well as costs  associated with any efforts and associated implications for managing  USPS compensation.

We are making the following recommendation to USPS:  The Postmaster General should direct executive leaders to develop  guidance for cost savings estimates related to employee compensation  specifying that analysis used to calculate estimates should, to the extent  possible, include significant factors, such as work hours, tenure, and  turnover. (Recommendation 1)

We provided a draft of this report to USPS for review and comment.  USPS provided written comments that are summarized below and  reprinted in appendix III. In its written comments, USPS agreed that  quality decision-making rests upon quantitative analysis using the best  available data. In that respect, it stated that it accepts the  recommendation to more formally articulate internal guidance for  developing cost savings estimates to ensure appropriate factors—such as  work hours, tenure, and turnover—are taken into account when  evaluating potential business outcomes. USPS disagreed, however, that  the lack of formal guidance adversely affected USPS’s ability to develop  appropriate cost estimates. As discussed in detail in the report, we found  that USPS’s analysis potentially overestimates savings because it did not  take certain factors into account.

Specifically, in its comments, USPS identified issues related to our  findings about their cost-estimation analysis. For example, our analysis,  which relied on USPS payroll data, showed that non-career employees  have generally worked more overtime hours when compared to career  employees. Although USPS did not dispute this finding, it said it believed  our analysis reflected erroneous assumptions about the source and  administration of overtime because we described some possible reasons  for the overtime patterns we saw based on our analysis and other  research. We did not intend to determine the full cause of overtime hours  and how they are distributed among employees, rather, our analysis  sought to identify important factors in employee compensation costs, and  found that the mix of work hours was important and varied across types of  employees. We also found that USPS estimates had not taken  differences in the mix of work hours into account and in assuming that  career and non-career employees work similar types of hours, USPS  potentially overstates the savings from non-career employees. USPS  agreed to take work hours into consideration in future cost estimates and  this may provide a more accurate assessment of costs, and better  opportunity to target future efforts to manage workforce costs.

Regarding our analysis related to recruitment and retention issues among  non-career employees, USPS stated that it disagreed with our statements  regarding wages for non-career workers and their purported impact on  recruitment of certain employees. It said that USPS has little trouble  attracting applicants to non-career positions, and we made changes to  the report to reflect this view. Regarding turnover, USPS acknowledged  that turnover among certain groups will be higher and they account for  these turnover rates in their analysis. However, we found that USPS did  not fully account for costs associated with these turnover rates in the  analysis they provided us. With a higher than expected turnover rate  among non-career employees, which have become a significantly larger  percentage of its workforce, USPS should be accounting for the additional  costs of on-boarding of employees, like recruitment and training. USPS  stated that, in response to the recommendation, it will incorporate the cost  of turnover into future analysis.

We are sending copies of this report to the appropriate congressional  committees, the Postmaster General, Chairman of PRC, and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff making key contributions to this  report are listed in appendix IV.

Appendix I: GAO Analysis of USPS National Payroll Data, Fiscal Years 2009 through 2018

To support all parts of this review, we requested and received U.S. Postal  Service (USPS) national payroll data for fiscal years 2009 through 2018.  We specifically requested individual level payroll data for all ten years;  however, individual employee level data before fiscal year 2016 were not  readily available. For fiscal years 2009 through 2015, we received  aggregate data at the post office level, and for fiscal years 2016 through  2018, we received the data at the individual level. For both sets of data,  USPS provided point-in-time data at the end of the fiscal year.

We conducted a data reliability assessment and found that, for describing  general trends, the fiscal years 2009 through 2015 payroll data provided  at the post office level was sufficient for our purposes. However, for  evaluating policy changes to employee compensation, only fiscal years  2016 through 2018 payroll data provided at the individual level were  appropriate. To assess the reliability of the payroll data for fiscal years  2009 through 2018, we reviewed technical documentation for the dataset,  related publications, and information on USPS and Bureau of Labor  Statistics websites about employee compensation. We performed several  analyses in order to validate that these data were appropriate to use for  the purposes of our work. We spoke with USPS payroll data specialists to  discuss known limitations and issues with the data. USPS officials  informed us that they do not keep a data dictionary for the entire payroll  system because it is a conglomerate data system with over 40 sub- databases. However, we were able to obtain documentation on the  variables relevant to our analysis to understand the definitions and  limitations of those variables. We found the individual level payroll data  provided for fiscal years 2016 through 2018 reliable for the purpose of  examining policy changes to manage employee compensation, and to  determine the effect of potential legislative changes to USPS employee  compensation.

To describe recent trends in USPS employee compensation, we analyzed  high-level trends in the payroll data for fiscal years 2009 through 2018.  We compared our analysis of USPS national payroll data with USPS  annual reports to Congress and financial forms filed as a result of  Securities and Exchange Commission requirements, from fiscal years  2009 through 2018. While we found that the data do not match exactly,  we found that our estimates are close to reported USPS numbers for each year, (see table 2). We had several discussions with USPS payroll  data specialists to clarify how to use the payroll data and ensure that the  payroll data were reliable for reporting on changes in hours and overall  compensation.

To examine the results of recent actions taken by USPS to manage  employee compensation costs, we identified three major changes  implemented through collective bargaining agreements aimed a  decreasing the cost of employee compensation. To evaluate the impact of  these changes, we analyzed USPS payroll data. Using these data we  developed models to determine trends in compensation based on worker  characteristics, including pay rate, participation in various benefits, and  career or non-career status. We analyzed data to determine the costs  savings accrued by USPS from having undertaken changes to  compensation in recent years. We also analyzed the data to determine  the effect of potential legislative changes to USPS employee  compensation.

We received USPS National Payroll data from fiscal years 2016 through  2018 for individual employees with a detailed summary of a worker’s pay,  benefits, and hours worked.

Pay data include pay for straight time, overtime, and other time with pay  differentials (Sundays, nights, holidays, and Christmas), and leave,  including annual, sick, holiday, military and other types of leave. See table  3 for a summary description of the types of pay and hours. For each pay  category (e.g., straight time, overtime), USPS provided information on the  number of hours worked by each worker in a given fiscal year.

Benefits include health insurance payments, pension contributions  (FERS, CSRS and Dual CSRS with Social Security) and Thrift Savings  Plan (TSP), life insurance, Social Security, and Medicare (see table 4).

The data contained detailed information on the worker’s earnings,  benefits, and hours of work and some characteristics, including age, and  the worker’s start and separation dates, if the worker has separated from  the USPS.

We examined postal employees classified as career or non-career within  each of the four main crafts based on the type of work performed. We  separated employees into their respective craft and career or non-career  status based on their Designation Activity Code. We used these  individual-level data to estimate total compensation costs based on  observable characteristics of the workers.

This section discusses the quantitative analysis methods we used to  determine the results of recent actions taken by USPS to manage  employee compensation.

Table 5 presents the numbers of employees in the postal workforce for  fiscal years 2016 through 2018, within four crafts – city carriers, rural  carriers, mail handlers, and clerks – and other employees not in the four  crafts.

Table 6 presents average pay, average benefits, average compensation,  and the median age for postal workers by craft and career status.

We examined the mix of straight and premium hours between the higher  pay (Tier-1) and new career employees hired at the lower starting pay  (Tier-2). We used USPS individual-level payroll data for fiscal years 2016  through 2018. Table 7 summarizes the effective dates for the lower  starting pay for new career employees by craft.

Table 8 summarizes differences in hours between these two groups  among full-time equivalent employees. We examined several types of  work hours. Straight time hours include all reported straight time hours in  a fiscal year. Overtime hours include overtime work, penalty overtime,  holiday work, and Christmas hours. Premium hours include hours worked  in night work and Sunday work hours. Our analysis does not adjust for  characteristics that can affect hours such as age or tenure.

Work Hours for Tier-1 and Tier-2 Career Employees

We found that Tier-2 employees worked a higher number of straight  hours. Furthermore, carriers who are Tier-2 employees also worked a  larger number of overtime hours. Among mail handlers, Tier-2 employees  worked a higher number of night work and Sunday work hours (see table  8).

To the extent that Tier-2 employees work more overtime hours, and  assuming a similar productivity between the two tiers of employees,  USPS may be miscalculating the effect of the lower pay rate on costs.

To analyze the results of hiring more non-career employees, we  examined differences in hourly compensation (pay and benefits) between  career and non-career postal employees, and estimated cost savings  from moving to a workforce with more non-career employees. The  analysis examined the entire workforce, within the four different crafts  (i.e., city carrier, clerk, mail handlers, and rural carriers) and the  remainder of the workforce excluding employee from the four crafts  (termed as “other”). 𝑦𝑦𝑖𝑖𝑖𝑖𝑖𝑖=𝛼𝛼+𝛽𝛽1𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖+𝛽𝛽𝑋𝑋𝑖𝑖𝑖𝑖𝑖𝑖+𝛾𝛾𝑁𝑁𝑖𝑖+𝛿𝛿𝐹𝐹𝐹𝐹𝑖𝑖+𝜁𝜁𝑖𝑖+𝜑𝜑𝑖𝑖+𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖 (2)

Equation (2) predicts work hours, hourly pay, benefits, and compensation  as a function of individual characteristics. All models are estimated using  Ordinary Least Squares (OLS).

(1)  We examined several types of work hours. Straight hours include  all reported straight hours in a fiscal year. Overtime hours include  overtime hours, penalty overtime, holiday work hours, and  Christmas work hours. Premium hours include hours worked in  night shift differential and Sunday premium. Total work hours  include straight time, overtime, holiday hours, Christmas work,  and penalty overtime. We do not include night shift differentials  and Sunday work in the calculations for total worked hours as  these hours are already captured under straight hours. We also  exclude from work hours any leave.  (2)  Per hour pay is defined as earnings for worked hours divided by  total worked hours. Earnings for worked hours includes payments  for straight time, overtime, holiday hours, Christmas work, penalty  overtime, and premiums for night and Sunday work.  (3)  Hourly benefits include USPS contribution to health insurance, life  insurance, retirement, TSP, Social Security and Medicare, and  dollars associated with leave (see table 4). These variables were  calculated by summing over all benefits and dividing by total work  hours.  (4)  We calculated hourly total compensation by summing over hourly  wage compensation and benefits that USPS paid to employees.  The value of total compensation is divided by total work hours  which include total work hours.

The NonCareer variable (𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 ) is a dummy taking the value of  describing the employee’s position. The parameter 𝛽𝛽1 identifies how 1 for non-career employees and zero for career employees. We were  1 for non-career employees and zero for career employees. We were  able to generate this variable based on designation activity codes  different (if at all) non-career employees’ hours, pay, benefits and  compensation are relative to career employees.

To account for other variables that could be driving differences in pay,  benefits and compensation between career and non-career employees,  we included the variables described below in the estimation.

Employee craft (𝑁𝑁𝑖𝑖,) are a series of binary indicators for city carriers,

Finance unit binary indicators (𝜁𝜁𝑖𝑖), control for level difference in  clerks, mail handlers, rural carriers, and the other employees  category. City carrier is the benchmark category. These indicators  were excluded in the results by craft, but were included in results for  the entire workforce.  demand between finance units (usually post offices), but also implicitly  account for level differences in local level unemployment rates during  the period of our study.

Age, and age squared capture differences in potential labor market  year as fiscal year minus the year of birth for the employee.

Tenure and tenure squared describe years of experience with USPS  began working for the USPS and the fiscal year in the data.

To account for time effects that could affect compensation and

The error term (𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖 ) captures differences in earnings and  experience and were included in (𝑋𝑋𝑖𝑖𝑖𝑖𝑖𝑖). We defined age in each fiscal  (𝑋𝑋𝑖𝑖𝑖𝑖𝑖𝑖). We defined tenure as the difference between the year a worker  2018( 𝐹𝐹𝐹𝐹𝑖𝑖).  earnings we included year indicators for fiscal years 2016 through  compensation that are not observed in our data.

We adjusted earnings and compensation by the Consumer Price  Index for Urban Wage and Clerical Workers (CPI-W), and present  values in 2018 constant dollars.

We cluster all errors at the finance unit level to allow for correlation in  errors between those within the same finance unit.

Indexes i, c, and t designate the individual (i), cohort of hire (c) and  time (t).

Many non-career employees work a limited number of hours each year,  because employees who work on short contracts may have different  preferences about the number of work hours that they are willing to  supply. Therefore, comparing the outcomes of those who work a limited  number of hours to those who work on a full-time basis does not generate  a valid comparison. We do not observe preferences for flexible work- schedules in our data, and as a result, analysis comparing individuals  with different work schedules would be subject to omitted variables that  could bias our estimates of cost differences between career and non- career employees. To facilitate a closer comparison between career and  non-career employees, we restricted the sample to those employees who  work more than 1,820 each year (excluding leave) which we computed by  assuming a 35 hour work week. Furthermore, we excluded those who  worked more than 80 hours a week, or the equivalent of working 4,160  hours each year. We refer to these employees as full-time equivalent  employees, because their hours are equal to or exceed the full-time  equivalent of 35 hours per week.

Our analysis relied on payroll data, and these data have not been  collected for research purposes. We limited our analysis to those with  positive benefits and compensation per hour. We excluded from the  sample those earning wages below the federal minimum wage ($7.25 per  hour) in the study period. Our data on hourly wage, benefits, and  compensation included values in the thousands of dollars. We considered  these values to be aberrations related to adjustments in the payroll  system. To address these values, we excluded observations that were  above the 99.5 percentile for hourly wages, benefits, and compensation  for a particular craft and in a fiscal year. Our final analytical sample  included 1,373,717 observations over the three years of data, from fiscal  years 2016 through 2018.

The analysis described adjusted differences in components of  compensation, but does not adjust for many characteristic differences  among the different categories of employees that may matter in  determining outcome variables (e.g., aptitude, gender, and race). The  tenure variable is likely mis-measured because non-career employees  may have previously been employed by USPS in some other capacity,  but given that our individual-level dataset goes back to fiscal year 2016,  we do not have previous USPS job experiences for these employees.

Because the analysis restricted the data to those working between 1,820  and 4,160 hours a year, we were modeling the USPS workforce that is  employed with USPS on what would be considered a full-time basis.  While non-career employees on short-term contracts are expected to  work a full-time schedule, we do not observe start and separation dates  for these non-career employees in our data. As a result, the analysis  including these employees cannot be conducted as we would be making  assumptions about unobserved preferences of individuals who work on a  full-time basis and those who do not.

Unadjusted differences in work hours and hourly pay, benefits, and  compensation can be found in table 9. We note that these differences  compare full-time equivalent employees with non-career and career  status. For the entire workforce, differences in work hours existed  between career and non-career employees. For example, the average  non-career employees worked 115 more straight time hours, 94 more  overtime hours, and 6 more night and Sunday premium hours.

Regarding differences in the hourly wage, benefits and compensation, we  observe a difference of $11 in hourly pay, $14 in benefits per hour, and  $25 in overall compensation between career and non-career employees.  While these unadjusted differences capture the overall rate differentials  between career and non-career employees, they do not account for the  differences in characteristics in the career and non-career workforce. The  majority of the USPS career workforce is comprised of employees who  have been with USPS for a long time. In contrast, the non-career  workforce, by its very function, is more flexible and comes and goes  based on demand for postal products and services. Consequently, the  non-career workforce may have less of an opportunity to accumulate on- the-job experience (tenure) with USPS. Previous literature finds that  wages rise with tenure. As such, these large unadjusted differences  between career and non-career employees can be attributed in part to the  extensive on-the-job experience of career employees. To account for  these differences, and other differences in labor market experience, we  present adjusted estimates among the career and non-career workforce  in table 10.

Work Hours for Career and Non-Career Employees

Results from the analysis that controls for differences in employee  characteristics are summarized in table 10. Differences in work hours  indicate that full-time equivalent non-career employees perform 30 more  straight time hours, 73 more overtime hours, and 23 more night and  Sunday work hours. We observe variation in these estimated effects by  craft. For example, differences in straight time hours are largest for clerks  and mail handlers, followed by others, and city carriers. In contrast, the  highest differences in overtime hours are observed for city and rural  carriers, no differences in hours worked between career and non-career  clerks. We also found that non-career mail handlers and other employees  work fewer overtime hours relative to their respective career counterparts.  The use of night and Sunday differential is higher among non-career city  carriers and clerks, while it is lower for non-career mail handlers. While  we found a small statistically significant effect for non-career rural  carriers, this effect is relatively small given that rural carriers perform a  very limited number of hours at night and on Sundays.

We found that non-career employees receive $2.10 less in pay per hour,  $6.17 less in benefits per hour and $8.27 less in compensation per hour.  Examining the differences in pay by different types of work hours reveals  that the largest difference in pay exists for overtime hours, where pay is  $3.42 less among non-career relative to career workers. The difference in  pay is $2.23 per hour, and while differences for night shift and Sunday  differential are present, they are smaller at 13 cents per hour. Examining  the effect across crafts, we find that clerks have the largest difference in  per hour compensation at $8.43, followed by $8.04 for rural carriers,  $7.72 for mail handlers, and $7.25 for city carriers. We also describe  differences for the category of employees designated as other, which  includes all other employees not designated as carriers, clerks and mail  handlers. Among these employees, non-career employees receive  $10.79 less in hourly compensation relative to career employees.

These findings contrast with the findings in table 9, where we do not  adjust for differences in characteristics between career and non-career  employees. Adjusted differences are approximately 19 percent of the  unadjusted difference in hourly pay, 43 percent of the unadjusted  difference in benefits, and 33 percent of the difference in hourly  compensation, highlighting the importance of controlling for employee  characteristics in estimating difference in pay between career and non- career employees.

Estimated Savings from Hiring Non-career Employees

We estimated savings USPS generate by hiring non-career employees,  by calculating all hours serviced by non-career employees and multiplying  this number by the difference in compensation estimate for the entire  workforce ($8.27 per hour). Our calculations indicate that USPS was able  to save $2.3 billion in fiscal year 2016, $2.1 billion in fiscal year 2017 and  $2.2 billion in fiscal year 2018 from using non-career employees.

To analyze the result of USPS reducing its contributions to health  insurance premium for active employees, we examined the differences in  cost of these contributions. We assumed that in the absence of  decreases in the contribution percentage each year, USPS would  continue to contribute health insurance premiums at the 2008 rate of 85  or 84 percent (see table 11). We examined employees with positive  health insurance premiums contributions and generated average  contributions per employee. We then calculated health insurance costs in  the absence of any contributions by dividing the cost paid by USPS by the  percentage contribution in each year (see table 11). We generated per  employee savings by comparing the dollar values between what USPS  paid each year and what it would have paid under an 85 or 84 percent  contribution. We generated total savings by multiplying the number of  employees who took up these plans by the savings per employee. We  present these results in table 12. Our results indicated that the reduction  in USPS health insurance contributions generated savings of $429.45  million in fiscal year 2016, $438.14 million in fiscal year 2017, and  $513.77 million in fiscal year 2018, or $1.38 billion for the entire three  year period.

Our analysis does not model changes in health insurance participation  arising from workers who drop insurance as a result of having to  contribute a higher percentage of their health insurance costs.

To understand the potential effects of changes to USPS employee  compensation that would require legislative or statutory change, we  conducted several analyses to estimate potential costs and savings from  these changes. We examined the impact of (1) eliminating one day of  delivery, (2) reducing benefits, such as shifting additional costs of health  insurance premium to active employees, and (3) cutting employee pay  across the board.

Eliminating some of the current mail delivery would have varied effects on  employees based on their craft. If all delivery were stopped for one day  that USPS currently delivers mail, work hours for carriers may be reduced  by a maximum of one-sixth but work hours for clerks, mail handlers, and  other employees would not be affected in the same way. We examined  two ways to reduce employee compensation costs, by cutting hours (1)  across all career and non-career carriers (city and rural) and (2) only for  non-career carriers.

Cutting work hours for career and non-career carriers by one-sixth: We  aggregated over all work hours for career and non-career city and rural  carriers for fiscal year 2018. We multiplied the number of hours under a  one-sixth hours reduction by the average pay for hours worked for city  and rural carriers. We generated yearly savings for rural and city carriers.

Our analysis suggests that cutting mail carrier hours by one-sixth, through  a reduction in delivery frequency may have saved USPS $2.6 billion in  fiscal year 2018.

Cutting work hours for non-career carriers by one-sixth: We aggregated  over all work hours for career and non-career city and rural carriers. We  then reduced this amount of work by one-sixth, to roughly approximate a  cut in hours on average equivalent to cutting one day of delivery for all  carriers regardless of career status. We multiplied the hours by the pay of  non-career carriers (i.e., rural and city carriers) and estimated savings  generated if the one-sixth cut was applied only to non-career carriers. We  expected the savings to be less than the scenario presented above, since  non-career carriers receive a lower per hour wage rate. We also  calculated the percent reduction of work hours for non-career workers  that would be necessary to eliminate one day of delivery.

Our analysis suggest that reducing non-career hours by the equivalent of  cutting one-sixth of all carrier hours may have saved USPS $1.96 billion  in fiscal year 2018. These cuts would imply a decrease in non-career  hours of 49 percent for rural carriers and 69 percent for city carriers.

This analysis does not account for substitution between hours worked.  For example, cutting Saturday delivery may shift workers to work more  overtime or premium time pay categories. The analysis assumed carrier  productivity per hour does not vary with career status, and is not affected  by cuts. Finally, it assumed that benefits do not change, but to the extent  that benefits are a function of income they may also be reduced.

We examined the overall effect of cutting benefits by 1.0 percent, 5.0  percent, and 10.0 percent for all employees. We considered the entire  workforce and examined the total payments USPS contributed to health  insurance and retirement accounts (e.g., FERS, CSRS, and TSP).

Reducing Health Insurance Premiums: We examined the effect of  reducing USPS’s contributions toward employee health insurance  premiums by 1.0 percent, 5.0 percent, and 10.0 percent, by aggregating  all health insurance contributions that USPS made on behalf of all  employees in fiscal year 2018 and applying these respective cuts. The  analysis does not account for the fact that health insurance participation  may fall because the USPS contribution cuts would shift a higher  proportion of the cost of insurance to workers. We present the results in  table 15.

Reducing Retirement Contributions: To examine the effect of cuts of 1.0  percent, 5.0 percent, and 10.0 percent in USPS retirement contributions  (FERS normal cost) and USPS TSP contributions, we aggregated over all  such USPS contributions for all USPS employees participating in these  plans, and applied these respective cuts to contributions for fiscal year  2018. One limitation of this analysis is that it does not account for the  change in work hours and, as a result, in compensation from the cut in  these benefits. We present results in tables 16 and 17.

To examine the effect of cuts of 1.0 percent, 5.0 percent, and 10.0  percent in USPS employee pay, we determined the total work hours  (straight, overtime, other hours) and average pay rates for all USPS  employees. We performed the following calculations.

Results for Direct, Indirect and Total Effect of Wage Cuts

1.0 percent reduction in pay: hours*Δwage= hours*(wage*0.01)

5.0 percent reduction in pay: hours* Δwage = hours*(wage*0.05)

10.0 percent reduction in pay: hours* Δwage= hours*(wage*0.10)

We found the cost savings associated with cuts of 1.0 percent, 5.0  percent, and 10.0 percent across all current employees are $322 million,  $1.61 billion, and $3.22 billion respectively for fiscal year 2018.

Across the board wage cuts will produce both direct and indirect effects  on overall compensation costs for USPS. In the section above, we  provided a calculation of the savings that USPS may realize from the  direct effect of a policy that cuts worker pay. The direct effect implies that  a pay cut reduces the total wages paid. For example, a 10 percent  reduction in pay should reduce the total wage paid by 10 percent, other  things constant. However, workers who face pay cuts may exhibit  responses to wage cuts that include: adjusting hours worked, adjusting  their level of effort for each hour of work. These responses may negate or  reinforce additional savings from a wage cut and are examples of indirect  effects of wage cuts.

Workers may adjust the hours of work from changes in wages, as these  wage changes produce to both substitution and income effects on hours  worked. The Substitution Effect implies that a pay cut reduces the  incentive for employees to work because each hour of work generates  less money than it did before, decreasing the opportunity cost of leisure  (the time spent not working for pay), holding income constant. Thus a  reduction in pay could lead to additional reductions in work hours that  employees are willing to supply. Consequently, the reduction in pay may  lead to additional savings for USPS in its labor costs from the substitution  effect. In contrast, the Income Effect implies that a pay cut reduces the  income of the worker; this reduction in income induces the employee to  work more hours because the employee feels poorer. The income effect  would therefore increase the hours worked, and could lead to reductions  in savings for USPS. Income and substitution effects generally run in  opposite directions, and uncertainty regarding which effect will dominate  determines the overall effect on hours worked.

A recent review of the literature from the Congressional Budget Office  finds that combined hour elasticities that incorporate both income and  substitution effects range between 0 and 0.2. These combined hours  elasticities would suggest that a 10 percent cut in wages would reduce  hours between zero and 2 percent (0.2*10%). While we are aware that  the estimates from the general population may not extend to the USPS  workforce, we provide the above example for illustrative purposes. While  the effect on workhours from a change in wages may appear small, given  the overall hours serviced by USPS each year – adjustments in hours  arising from wage cuts may produce nontrivial changes in USPS  compensation costs.

Changes in wage rates may change workers’ morale, and consequently  the effort workers exert during work hours. Economic literature finds that  wage cuts can impact on the effort workers provide, and that productivity  may fall. For example, workers may exert less effort in an attempt to  punish the employer for the wage cut, or they may be less worried about  job loss because the cost of losing a job is lower after a wage cut.

It is important to note that wage cuts may also induce some individuals to  leave the USPS workforce altogether. Estimates of participation  elasticities in the literature range between zero and 0.2. Participation  elasticities capture the percentage change in the share of the population  that is working resulting from a 1 percent change in wage rates. These  estimate elasticities would imply that a 10 percent wage cut could be met  with a reduction in the USPS workforce between 0 and 2 percent. As we  previously noted, it is not clear that these population estimates extend to  the USPS workforce, thus we believe examining these effects from USPS  workforce data may be an important step in understanding the potential  changes in workforce that wage cuts may generate.

Appendix II: Reports GAO Reviewed and their Recommendations for Legislative Changes to USPS Compensation

We reviewed four reports and identified twelve recommendations that  proposed legislative changes that relate to USPS employee  compensation (see table 19). We categorized these  recommendations as having the potential to impact wages,  benefits, or required work hours. The reports we reviewed were:  1)  2018 Task Force Report: United States Postal Service: A  Sustainable Path Forward. Report from the Task Force on the  United States Postal System, U.S. Department of the Treasury.  December 2018.  2)  2016 PRC Analysis: Section 701 Report: Analysis of the Postal  Accountability and Enhancement Act of 2006, Postal Regulatory  Commission, November 2016  3)  2010 USPS Comprehensive Statement: Foundation for the  Future: 2010 USPS Comprehensive Statement on Postal  Operations United States Postal Service.  4)  2003 Presidential Commission Report: Embracing the Future:  Making the Tough Choices to Preserve Universal Mail Service.  Report of the President’s Commission on the United States Postal  Service, July 2003.

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

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Kyle Browning (Assistant  Director); Jade Winfree (Analyst-in-Charge); Thanh Lu, Silda Nikaj; Josh  Ormond; Steven Putansu; Oliver Richard, Frank Todisco, Michelle  Weathers; Seyda Wentworth; and Crystal Wesco made key contributions  to this report.

In the past 11 years, USPS’s revenue hasn’t covered its costs. To help address this, USPS lowered its employee compensation costs—a significant part of its expenses—mostly by paying new employees less.

We found USPS overestimated its cost savings from these efforts. We substantiated $8 billion in savings and found USPS’s estimates ($9.7 billion in 2016-2018) may be overstated. Also, USPS’s estimates didn’t consider factors like training and other costs associated with increased turnover due to lower wages.

We recommended including turnover and other factors in savings estimates so USPS has information it needs to better assess its workforce.