$340 million in 2002. The 2003 debt transactions also provided the Postal Service with the flexibility to pay off $5.5 billion in debt in 2004, substantially more than the estimated $2.7 billion the statute requires, without concerns for paying a prepayment premium. Finally, because the interest earnings on Postal Service investments are expected to exceed the interest expense on its debt for 2005, the Postal Service will benefit from any rise in short-term interest rates.

The opportunity for debt reduction in 2005 will depend upon the ability of the Postal Service to operate at close to break even, combined with its ability to control its level of capital investment. Debt level for 2006 and beyond will be influenced by these same factors and will also be greatly influenced by the yet-to-be-specified requirements of P. L. 108–18, which requires that "savings" realized under the legislation after 2005 be considered as operating expenses, be held in escrow, and not be obligated or expended until otherwise provided for by law. An additional factor that will affect 2006 debt level is the still uncertain outcome of any rate case filings with the Postal Rate Commission. In the event that any new postage rates do not produce revenues sufficient to cover both the normal projected increases in expenses and the escrow requirement, the Postal Service will be required to cover the shortfall by increasing debt, all else remaining constant.

a. Interest Earning Investments

When the Postal Service determines that funds exceed current needs, it invests those funds with the U.S. Treasury's Bureau of Public Debt. The Postal Service invests primarily in overnight securities issued by the U.S. Treasury, but by statute may invest in any obligation of, or any obligation guaranteed by, the U.S. government, through the secretary of the Treasury. The Postal Service favors short-term investments because of the nature of its cash flow patterns, and to ensure that its investments are not unnecessarily exposed to the price risk associated with increases in interest rates. Postal Service income from investments was $5 million in 2004, versus $30 million in 2003 and $18 million in 2002. Total interest and investment income, including imputed interest on accounts receivable from the U.S. government, was $33 million in 2004 versus $58 million in 2003 and $46 million in 2002.

b. Liquidity

U.S. Postal Service liquidity is the cash in the Postal Service Fund in the U.S. Treasury and the amount of money the Postal Service can borrow on short notice

if needed. In recent years the Postal Service has relied less on cash on hand and more on the readily available cash that it can borrow as needed. The Postal Service's Note Purchase Agreement with the Federal Financing Bank, renewed this year, provides for revolving credit lines of $4 billion. These credit lines enable the Postal Service to draw up to $3.4 billion with two days' notice and up to $600 million on the same business day the funds are needed. Under this agreement the Postal Service can also use a series of other notes with varying provisions to draw upon with two days' notice. The notes provide the flexibility to borrow short-term or long-term, using fixed or floating rate debt, and can be either callable or non-callable. The Postal Service judges that its arrangement with the Federal Financing Bank provides it with adequate tools to effectively manage its interest expense and risk.

The amount of funds the Postal Service can borrow is limited by the amount of debt authorized by the Board of Governors and by certain statutory limits on borrowing. First, total Postal Service debt outstanding cannot exceed $15 billion. Second, the net increase in debt for any fiscal year cannot exceed $2 billion for capital purposes and $1 billion to defray operating expenses ($3 billion maximum annual limit). For 2005, the Postal Service does not project an increase in debt and has not asked the Board of Governors to authorize an increase.

Postal Service liquidity will be comprised of the cash that it has entering 2005 plus the cash flow that it can generate from operations. The Postal Service expects cash flow from operations not only to supply enough cash to fund its capital investments but to generate some additional cash flow that could be applied to further debt reduction. However, the amount of cash and debt that it has at the end of 2005 will be influenced by developments regarding the escrow fund requirement and a potential rate case. A less than favorable outcome of these uncertainties would cause the Postal Service to favor carrying more cash and debt into 2006 as a liquidity cushion.

5. Capital Investment

Capital investments include purchases of plant, property, and equipment with a cost generally greater than $3,000 and a useful life of more than one year. The Postal Service invests in capital projects that reduce operating costs, maintain or expand our infrastructure, or provide for the safety and well being of our customers