Pensions. This standard required employers who participate in either single or multiple employer programs to accrue the future postretirement 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 contribution is due.

     Based on analysis of FAS 106 when the standard was issued, management determined that our participation in the FEHBP for retirees most closely matches the characteristics of a multi-employer plan.

     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 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. In 2002, we estimated the present value of future premium payments to be between $40 and $50 billion, based on Postal Service employment through September 2002. The range in the estimate exists only because long-term medical inflation assumptions differed by 1%. All other economic and demographic assumptions for health plan utilization and benefits were identical.

     An estimate for 2003 was developed incorporating updated census data and higher near-term medical inflation assumptions in the optimistic (lower) estimate. The 6.25% discount rate as well as all other assumptions remained the same. The new value of future premium payments is estimated between $47 and $57 billion.

     The increase from the 2002 estimates is driven by four components. The largest component of the change is caused by an interest accrual of 6.25% on the prior year unfunded obligation. The second largest component relates to the current service cost for postal employees, representing the portion of their retiree health benefit costs earned in 2003. The current obligation estimate further increased from substitution of actual health premium inflation in 2003 for the estimate used in the 2002 calculation. Finally, updating for 2003 census data relative to plan

enrollment changes, coverage options and life expectancy changes caused actuarial losses, further increasing the new obligation estimate.

     In the Postal Civil Service Retirement System Funding Reform Act of 2003 (Act), Congress expressed its sense that a portion of the "savings" from the reduced CSRS annual

Each of our 291,015 letter carriers delivered an average of 42.7 tons of mail in 2003. That's equal to carrying over 10 average-sized male elephants.

payments be used to address unfunded obligations for postretirement health benefits. The Act requires that we submit proposals detailing how we will use any refund or reduction in future postal retirement payments ("savings") after 2005. Also, a second proposal was required stating our position on responsibility for retirement obligations related to military service. In our report submitted September 30, 2003, we proposed two alternatives for funding postretirement health benefits, both responding to the sense of Congress and involving the use of "savings" from the changes in Civil Service Retirement and Disability Fund (CSRDF) funding.

     The first proposal, our preferred approach, would return to the U.S. Treasury responsibility for retirement obligations arising from military service. Under this proposal, our CSRS pension obligation is over-funded. These funds would be transferred to a newly established "Postal Service Retiree Health Benefit Fund."

     Our second proposal would use Act "savings" to finance, in priority sequence: first, fund and prefund post-retirement health care benefits; second, to repay debt and third, to fund productivity and cost savings capital investments. Under this proposal there is an indirect benefit achieved that addresses the sense of Congress relating to delaying or moderating increases in postal rates. Beginning in 2006, this proposal would pre-