Choice  n [from Gothic kausjan to taste, test] 1:  the opportunity or privilege of choosing freely from a variety of alternatives 2:  the United States Postal Service offers more mailing and shipping choices than anyone in the business.

The Postal Reorganization Act of 1970, which created the Postal Service, required that the Postal Service either participate in the Federal Employees Health Benefits Program (FEHB), or adopt a plan that would provide equivalent benefits to our employees. The Postal Service continued to participate in FEHB. Eligible postal employees with at least five consecutive years participation in the FEHB immediately preceding retirement are entitled to continue this healthcare coverage after retirement.

Until 1987, the cost of postal retirees’ health benefits under the FEHB was paid from funds appropriated (tax dollars) directly to the federal Office of Personnel Management (or its predecessor). The Omnibus Budget Reconciliation Act (OBRA) of 1985 made us responsible for paying the government’s share of health insurance benefits under the FEHB for those postal employees who retired after September 30, 1986. The OBRAs of 1989 and 1990 retroactively extended our responsibility for paying health insurance benefits for all postal retirees and their survivors to July 1, 1971, the date of Postal Reorganization. The retroactive payments for this extended liability were assessed in those years and paid as required by law.

FEHB, which provides health benefits to federal and postal employees and retirees, treats participants as a single group. In addition, OPM and the various providers control the benefits offered in FEHB. Benefits are equally available to participants.

Each federal employing agency (via appropriations), and the Postal Service (from postal revenues), are allocated and billed the cost of the program based upon their respective number of participants and the weighted average participant medical cost. OPM negotiates rates with the insurance carriers, and the premiums charged by insurance carriers are based on the risk characteristics of the entire population of FEHB participants.

In 1990, the Financial Accounting Standards Board (FASB) issued its Statement on Financial Accounting Standards (FAS) No.106, Employers’ Accounting for Postemployment Benefits Other Than Pensions. This standard required employers who participate in either single or multiple employer programs to accrue the future post-retirement costs of its current employees. Participants in a multi-employer plan were to continue to account for these costs as expenses in the period the payment is due.

Based on analysis of FAS No.106 when the standard was issued, management determined that our participation in the FEHB for retirees most closely matched the characteristics of a multi-employer plan.

We, based on a suggestion from the General Accounting Office (GAO) in May 2002, reviewed the accounting treatment of postretirement health benefits. There have been no changes in accounting pronouncements relating to this issue, nor have there been any modifications to the structure of FEHB that would alter the original determination that recognition of these costs should follow that of a multi-employer plan.

We will be paying a portion of the health benefits of currently retired postal employees, or their survivors, for the remainder of their lives. The funds to make future payments will come from future revenue. We have planned for these payments, and our practice has been and continues to be to include them as a part of our revenue requirement in the rate-making process.

If we were not considered to be a participant of a multi-employer plan, we would be required to record and disclose our obligation for the present value of future costs under the program. Because there are several areas of judgment involved in calculating this obligation, estimates can vary widely based upon the assumptions used. An actuarial consultant we enlisted calculated the present value of future premium payments to be between $40 and $50 billion, based on Postal Service employment since 1971. The range in the estimate exists only because long term medical inflation assumptions differed by 1%. All other assumptions for health plan utilization, benefits and actuarial estimates were identical.

Under the FEHB, OPM bills us for our cost for participating in the plan related to retirees, and we record this cost as a current expense as part of our compensation and benefits expense. Our financial statements reflect expenses related to retiree health benefits of $987 million in 2002, $858 million in 2001 and $744 million in 2000. In 2002, the increase in these costs represented 0.2% of total costs.

These retiree health benefit costs are currently included in our rate base. Retiree health benefits costs represent 1.5% of our total operating expenses.

We will continue to fulfill our obligation to fund retiree health benefits according to the requirements established by OPM and Congress. Postal revenue will be used to cover these costs in the future as they have in the past.