The Postal Service posted a net income of $3,868 million in 2003, well above the planned income of $600 million. The principal drivers behind the achievement of this net income were increased efficiencies and the change in retirement funding legislated in April 2003.

     In response to a 2003 mail volume shortfall and the resulting revenue below plan of $1.7 billion, the Postal Service managed expenses through its Flexible Budget process and increased productivity for an unprecedented fourth consecutive year. Supporting the goals of the Transformation Plan, the Postal Service reduced planned costs by a total of $2.0 billion in 2003, which included the workload savings associated with reduced volume. This resulted in a $300 million improvement to the $600 million budgeted net income. The legislated change in retirement funding produced a $3.4 billion positive impact on the bottom line and also prompted refinancing of the debt, at a cost of $0.4 billion, to better position the Postal Service to retire debt in the accordance with Public Law 108-18.

     The combined impact of these actions allowed the Postal Service to hold expenses to $64.9 billion, almost $2.5 billion less than 2002 expenses. This is only the second time since the establishment of the Postal Service in 1971 that expenses have decreased from the prior year.

     The amount that the Postal Service borrows over time is largely determined by the difference between cash flow from operations and its capital cash outlays. From 1997 through 2002, capital cash outlays exceeded cash from operations by $5.4 billion, so the Postal Service covered the difference with borrowed funds. The Postal Service's debt outstanding with the Department of the Treasury's Federal Financing Bank increased from $5.9 billion at the end of 1997 to $11.1 billion at the end of 2002.

     Postal Service debt management strategy, based on the recognition that it would most likely always have a core amount of debt outstanding, has been to maintain a mixture of fixed- and floating-rate debt and to strike a balance between short- and long-term debt. As interest rates declined to historically low levels during 2002, the Postal Service shifted the balance of its debt portfolio toward more fixed-rate long-term debt to reduce exposure to increases in future interest rates. The Postal Service began 2003 with $7.3 billion in long-term debt that carried a weighted average interest rate of 5 percent.

     The enactment in April of Public Law 108-18, the Postal Civil Service Retirement System Funding Reform Act of 2003 (the Act), caused the Postal Service to reconsider this debt management strategy. The Act provided that the Postal Service apply all savings it realized under the Act in 2003 to debt reduction. The Act will have a similar, though somewhat smaller, impact on cash flow from operations and debt reduction in 2004. In 2005, savings will be used to maintain rates and to reduce debt. The Act's requirements for use of savings realized after 2005 are yet to be specified by Congress. Acting first on its previously established strategy and then in response to the new provisions of Public Law 108-18, the Postal Service conducted multiple debt refinancing transactions throughout 2003. The statutory debt reduction for 2003 could easily have been accomplished by paying off short-term debt. Meeting the debt reduction requirement for 2004 however, would have been a challenge as only $750 million of debt was scheduled to mature that year. In other words, in order to be consistent with the terms of the Act, some long-term debt would need to be repaid before maturity, at an unknown price, prior to the end of the year. Ultimately, the Postal Service refinanced all of its long-term debt during 2003.

     In January, with a market opportunity to prepay some debt without a net penalty, the Postal Service paid off $777 million of long term debt. In July, following enactment of Public Law 108-18, the Postal Service responded to another such market opportunity and prepaid an additional $547 million,