Ef-fi-cien-cy  adj [from Latin efficientem work out, accomplish] 1:  effective operation as measured by a comparison of production with cost (as in enegry, time, and money) 2:  what the United States Postal Service brings to the job of delivering 670 million pieces of mail to 137 million homes and businesses — every day.

Our employees are covered by the Federal Employees’ Compensation Act, administered by the Department of Labor’s Office of Workers’ Compensation Programs (OWCP) which makes all decisions regarding injured workers’ eligibility for benefits. We pay all postal workers’ compensation claims out of postal funds. Thus, our bottom line is directly affected every time an employee is injured.

We record as a liability the present value of all future payments we expect to make to those employees receiving workers’ compensation. At the end of 2002, we estimate our total liability for future workers’ compensation costs at $6,525 million, an increase of $721 million or 12.4% over 2001. For 2002, we had anticipated workers’ compensation costs of $1,026 million. We based our budget on then recent trends that we expected to continue. However, in 2002, we recorded $1,511 million in workers’ compensation expense, compared to the $970 million we recorded in 2001.

A number of factors contributed to the unexpected increase in workers’ compensation expense. In addition to an increase in the number of medical claims paid, the average cost per medical claim increased 8.5% from $2,150 in 2001 to $2,332 in 2002, an increase of $298 million. There was a record increase in the number of compensation claims in 2002. These changes resulted in a $381 million increase in the liability. We expect these trends to stabilize in 2003.

In addition to the cost of workers’ compensation claims, OWCP charges us an administrative fee for processing claims. In 2002, the administrative fee was $37 million compared to $31 million in 2001.

(See Notes 2 and 3 of the Notes to Financial Statements for additional details.)