Workers' Compensation

     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. However, we pay all workers' compensation claims out of postal funds.

     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 2003, we estimate our total liability for future workers' compensation costs at $7,114 million, an increase of $589 million or 9.0%. In 2003, we recorded $1,457 million in workers' compensation expense, compared to the $1,511 million we recorded in 2002. These amounts exclude Post Office Department workers' compensation costs, of $17 million in 2003 and $13 million in 2002.

     In the past, workers' compensation expenses tended to increase every year as more and more employees received benefits. With medical costs rising as they have in the past several years, it remains imperative that we reduce workplace injuries, manage current claims and eliminate fraudulent claims.

     We expect costs related to workers' compensation to remain stable in 2004 as a result of initiatives that will help to minimize the impact of rising medical costs. These initiatives include actions to increase the rigor of medical bill reviews, increase the recovery of expenses related to injuries sustained by employees as a result of their own actions and a joint initiative with the Office of Workers' Compensation Programs to increase the number of injured employees returned to work.

     In addition to the cost of workers' compensation claims, OWCP charges us an administrative fee for processing claims. In 2003, the administrative fee was $45 million compared to $37 million in 2002 and $31 million in 2001.

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

Productivity

     We use two indicators to measure our efficiency. First, we use Output per Work Hour, which measures the change in the relationship between workload (mail volume and deliveries) and the labor resources used to do the work. Second, we use Total Factor Productivity (TFP), which measures the change in the relationship between outputs, or workload and all the resources used in producing these outputs. Our main outputs are mail and special services and carrier services to an expanding delivery network. TFP calculations include inputs for all resources including labor, materials, transportation and capital investments.

     During 2003, our Output per Work Hour grew by 2.3% and our TFP improved by 1.8%. This TFP growth is equivalent to $1,196 million in expense reductions. This marks our fourth consecutive year of positive TFP growth, with equivalent expense reductions totaling over $4.4 billion over this time. Our productivity growth continues to be driven by substantial restraints on the resources we use to produce our outputs. Again in 2003 we were able to achieve positive TFP growth as our workload declined for the third consecutive