transfers $27 billion in cost from U. S. taxpayers to our ratepayers. Without this transfer, we overfunded these obligations by $10 billion.

     However, the Act provided an opportunity to reconsider this transfer by requiring the Postal Service, Department of the U.S. Treasury and the OPM to submit proposals "detailing whether and to what extent the Department of the U.S. Treasury or the Postal Service should be responsible for the funding of benefits attributable to the military service of current and former employees of the Postal Service." We recommended that the responsibility for these costs should be returned to the U.S. Treasury. The General Accounting Office (GAO) prepared a written evaluation of each proposal and submitted its evaluation to the Committee on Government Reform of the House of Representatives and the Committee on Governmental Affairs of the Senate on November 26, 2003.

     The Act places additional requirements on the Postal Service. Specifically, the Act identifies as "savings" the difference between the contributions we would have made if the Act had not been enacted and the contributions we make under the Act. In 2003 and 2004, we must use these "savings" to reduce our outstanding debt to the U. S. Treasury. We estimated the 2003 "savings" at $3.5 billion, and we reduced our debt with the U.S. Treasury by $3.8 billion in 2003, thus exceeding the requirements of the Act. We will use the "savings" in 2005 to hold postal rates steady until at least 2006.

     Congress will consider what to do with the post-2005 "savings," but until Congress acts, any "savings" after 2005 must be placed in escrow. As required by the Act, we submitted on September 30, 2003, our proposal to the President, Congress and the GAO on how the "savings" after 2005 should be used. Based on its impact on postage rates and its effects on the mailing industry, the general public and the economy as a whole, we recommended the elimination of the escrow requirement. We believe that the "escrowed savings" requirement of the Act will result not only in increased postage rates but also more frequent postage rate increases as the

overfunding amounts escalate. From the standpoint of the postal ratepayer, there are no "savings" flowing to postage rates as long as the escrow continues in effect.

     We believe, and we have proposed to Congress, that the military service responsibility should be returned to the U.S. Treasury, with the resulting $10 billion in over-funding remaining in the Civil Service Retirement and Disability Fund in a separate account designated as the "Postal Service Retiree Health Benefit Fund." With this change, we would begin pre-funding retiree health benefits for employees and retirees. If the military service charge is not returned to the U.S. Treasury, we believe the "savings" or over-funding should be used to fund current retirees' health benefits and prefund new employees' post-retirement health care benefits, repay debt and fund productivity and cost saving capital investments.

     Separately, we have taken issue with the methodology OPM used to calculate our CSRS obligations. Specifically, we believe that OPM used an allocation methodology to attribute CSRS pension costs of the pre-July 1, 1971 service that assigns an unreasonably large share of the burden to us for payment. We requested OPM to consider an alternative allocation methodology that is consistent with the approach OPM previously used to allocate the increase in CSRS pension costs created by annual cost-of-living-adjustments granted to retirees. After OPM rejected our proposal, we recommended a different compromise to allocate between us and the federal government the pre-July 1, 1971 and post-June 30, 1971 CSRS pension costs for the former Post Office Department on a more equitable basis. Under the Act, we may request the Board of Actuaries of the Civil Service Retirement System to review and make adjustments to OPM computations. We are considering filing such an appeal.

(See Notes 6 and 7 of the Notes to the Financial Statements for additional information.)