In addition to labor and benefits rates, the other major driver of our compensation and benefits expense is workhours. This year's growth in costs was tempered by a reduction of over 21 million workhours. The 2004 workhour reduction is the fifth consecutive year in which workhours have been less than the prior year. In 2003, we eliminated 54 million workhours. Approximately one-half of the reduction over the two years was in mail processing. In 2004, we experienced slight growth in workhours for city and rural delivery. This growth was driven by the addition of almost 1.8 million delivery points and by increased volume. In 2003, we reduced workhours in delivery by almost 9 million. Thus, in spite of the addition of over three million delivery points since 2002, we are operating with fewer delivery workhours. Cumulatively, beginning in 2000, we have eliminated about 510 million workhours. This is the single biggest contributor to the ongoing achievement of our Transformation Plan savings targets. In 2004, we made a change in how we track workhours for employees in limited duty or rehabilitation assignments. The workhours for these employees are now included in their functional areas.

In 2003, compensation and benefits expenses of $50,544 million were $2,614 million (4.9%) less than the prior year due to the impact of P.L.108-18, which reduced expenses by approximately $3,500 million and to a reduction of 54 million workhours, or approximately 24,000 career employees. The reduction in our retirement costs generated by P.L.108-18 and by our workhour reduction completely offset the growth in contractual wage rates, COLAs, and benefits expenses.

Almost 90% of our career workforce is covered by collective bargaining agreements. In 2002 and 2003, we reached agreements through negotiated settlements with all of the major unions and in 2004 we reached an agreement to extend an existing contract with one union through 2006. These agreements, which have expiration dates ranging from November 20, 2005 to November 20, 2006, call for annual basic pay increases and semi-annual cost-of-living adjustments (COLAs).

Our nonbargaining employees receive pay increases only through a pay-for-performance program that makes meaningful distinctions in performance. These employees do not receive automatic salary increases, nor do they receive COLAs or locality pay.

Retirement Expense

With certain exceptions, our employees participate in one of three retirement programs based on the starting date of their employment with the Postal Service. These programs are the Civil Service Retirement System (CSRS), the Dual CSRS/Social Security System, and the Federal Employees Retirement System (FERS). Each of these programs is described in further detail in note 6 to our financial statements. The programs are administered by the Office of Personnel Management (OPM). The expenses of all of our retirement programs are included in compensation and benefits expense.

The implementation of P.L.108-18 in May 2003 did not alter the fact that retirement expenses remain a significant portion of our total expenses. Retirement contributions for current employees represented 10.0% of our total expenses in 2004. They increased by $697 million compared to 2003, when these benefits represented only 9.1% of total expenses due to the one-time reduction in our retirement expenses resulting from the enactment of P.L.108-18. The impact of P.L.108-18, which is discussed below, was so significant that it resulted in an overall reduction in our benefits expenses in 2003. In 2002, prior to the enactment of P.L.108-18, retirement costs represented 13.5% of total expenses.

Public Law 108-18 and Proposed Legislation

The Postal Civil Service Retirement System Funding Reform Act of 2003, P.L.108-18, changed the way we fund our Civil Service Retirement System obligations and altered the related schedules for our payments to the CSRDF. P.L.108-18 was enacted in response to a November 2002 review of estimates and the Postal Service's payments into and returns earned by the CSRDF made by the OPM. OPM determined that at our then current rate of funding, we would pay substantially more than would be needed to cover the future benefits expected to be paid to our employees and retirees participating in CSRS.