Financial Section Part II

Retiree Health Benefits

Eligible postal employees, those with at least five consecutive years participation in the FEHBP immediately preceding retirement, are entitled to continue to participate in FEHBP postretirement. As outlined in FAS 106, the amount we pay into the PSRHBF, plus our portion of the current premium expense is recognized as an expense when due. See Note 4, Postal Accountability and Enhancement Act, Public Law 109-435 (P.L.109-435) and Note 9, Health benefit programs, in Notes to the Financial Statements, for further discussion of this accounting treatment.

P.L.109-435 made several changes to the way we fund and report our obligations for postretirement health benefits. The new law established the PSRHBF and directed OPM to determine any Postal Service surplus in the Civil Service Retirement and Disability Fund as of September 30, 2006 and to deposit the surplus into the PSRHBF by June 30, 2007. OPM attributed to the Postal Service, a surplus of $17.1 billion in the CSRS fund as of September 30, 2006 and transferred the funds as required on June 29, 2007. P.L.109-435 also required that we begin to fund the OPM-determined obligation for retiree health benefits by paying into the PSRHBF the 2006 escrow resulting from P.L.108-18 ($2.958 billion) and by making additional annual payments averaging $5.6 billion per year through 2016. Beginning in 2017, the PSRHBF will begin to pay our portion of the premium payments. The 2007 payment to the PSRHBF was $5.4 billion.

Under P.L.109-435, OPM will continue to charge us for our portion of the premiums for postal retirees currently participating in FEHBP and we will continue to expense these payments as they become due until 2017. The major drivers of our retiree health benefits premium costs are the number of current participants on the rolls, the mix of plans selected by retirees, the premium costs of those plans, and the apportionment of premium costs to the federal government for retiree service prior to 1971. Retiree health benefit premium expense, exclusive of the expense for the PSRHBF, has increased every year. The 5.4% increase in 2007 was smaller than in prior years due to lower premium costs and the application of plan reserves to lower premiums. In 2006, retiree health benefit expenses increased 9.5%. The number of Postal Service annuitants and survivors has grown to approximately 450,000 in 2007 compared to 448,000 in 2006 and 444,000 in 2005. The average monthly apportionment, the percentage of retiree premiums charged to the Postal Service, has increased from 64.7% in 2005 to 69.1% in 2007.

A summary of the retiree health benefits expense for 2007, 2006, and 2005 is included in the table below.

Beginning in 2008, P.L.109-435 also requires that OPM provide, and that we report, certain information concerning the obligations, costs, and funding status of the PSRHBF. The OPM estimate was prepared in accordance with Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) 5. SFFAS 5 requires the use of the aggregate Entry Age Normal actuarial cost method. As discussed below, this method is different from the one we used in calculating our obligation in 2006. The following table provides some of the required P.L.109-435 disclosures.

* OPM calculated the beginning obligation as of 9/30/06.

** Contributions and transfers of $2,958 million, $17,100 million and $5,400 million were made April 6, 2007, June 29, 2007, and September 28, 2007, respectively.

Because there are several areas of judgment involved in calculating this obligation, estimates can vary widely depending on the assumptions used. Utilizing the same underlying data that was used in preparing the estimate in the chart above, the September 30, 2007 obligation could range from $49 billion to $69 billion, solely by varying the inflation rate by plus or minus 1%.

As an “independent establishment of the executive branch of the Government of the United States,” we are required to account for our participation in FEHBP using multiemployer plan accounting rules. If we were not a participant in the federal government plan and not subject to the provisions of P.L.109-435, we would be required to record and disclose our obligation for future health benefit obligations under FAS 106. In 2006, we contracted with an independent actuarial firm to estimate our future retiree health benefit obligations under FAS 106. The FAS 106 methodology is different from the one used by OPM to calculate our estimated 2007 obligation. Because there are several areas of judgment involved in calculating this obligation, estimates can vary widely based on the assumptions used. Our assumptions used for long-term medical inflation premiums in calculating our liability ranged from 5% to 6%. Based on September 30, 2006 data, we estimated that if we sponsored our own plan with costs and benefits similar to the federal plans, the 2006 value of future payments would be between $50 billion and $58 billion. The range in the estimate exists only because long-term medical inflation assumptions differed by 1%.