*2005 Revenue forgone includes reconciliation adjustment of $54 million for 2002, 2003, and 2004.

3. Net Income

The Postal Service’s net income in 2005 was $1.4 billion. By managing reductions in expenses and increases in productivity, the Postal Service achieved greater than planned efficiencies for the year, while revenue was substantially greater than planned, primarily in the first quarter of the year.

First-Class Mail volumes for relatively higher-contribution pieces increased slightly after a 3-year decline. Lower-contribution Standard Mail volume exceeded overall First-Class Mail volume for the first time. The unexpected increase in total mail volume contributed to the $1.6 billion in revenue over plan. Coupled with this revenue gain, net income benefited from Postal Service actions to realize the goals of its 2002 Transformation Plan through continued management of expenses. Although expenses were $2.6 billion more than in 2004, this growth was mitigated by more than $700 million in cost reductions. The Postal Service was able to manage an increased workload of more delivery points and increased mail volume with a smaller increase in resource usage. As a result of all these factors, Total Factor Productivity grew by 1.1 percent, the sixth straight year of increased productivity.

4. Financing Debt

As an independent and self-sustaining agency of the executive branch of the federal government, the Postal Service receives no federal government appropriations other than the minimal revenue foregone reimbursements for services provided, and funding for homeland security/emergency preparedness costs covered in section D. The amount the Postal Service borrows is largely determined by the difference between its cash flow from operations and capital cash outlays.

Capital cash outlays are the funds invested back into the business for capital investments in new facilities, automation equipment, and services. From 1997 through 2002, outlays for capital investment exceeded cash from operations by $5.4 billion, with most of the difference covered by borrowed funds. From 1997 to 2002, Postal Service debt outstanding with the Department of the Treasury’s Federal Financing Bank increased from $5.9 billion to $11.1 billion. In 2003 the Postal Service reduced its debt by $3.8 billion and, in 2004 by $5.5 billion. Strong cash flow from operations in 2005, fortified by the "savings" from P.L. 108–18, enabled the repayment of the remaining debt. This is the first time since postal reorganization that the Postal Service ended a year without outstanding debt obligations.

The Postal Service undertook debt refinancing actions in 2003 that laid the foundation for financial gains in 2004 and 2005. In 2003 it completely overhauled its debt portfolio, paying off all long-term debt obligations and replacing most of them with short-term debt that would be retired during the course of 2004. Although a prepayment premium was paid to effect the refinancing, it was recovered through reduced interest expense in approximately 15 months. As a result of the overhaul, the Postal Service benefited from both lower interest rates on short-term debt and also from the flexibility to repay debt with available cash on a daily basis. A major benefit was the reduction in the interest expense payable to the Federal Financing Bank. Reflecting this change, interest expense on borrowings in 2005 was the lowest since postal reorganization. The 2003 debt transactions also provided the flexibility to pay off $5.5 billion in debt in 2004, substantially more than the $2.7 billion required by P.L.108–18 without concerns for paying a prepayment premium. Finally, the Postal Service benefited from the rise in short-term interest rates throughout 2005 by earning greater investment income because it held investment balances instead of debt on most business days.