Expense Components

The following table lists the components of our total retirement expenses that are included in our compensation and benefits expense and related interest expense in the Statements of Operations for 2004, 2003 and 2002.

* Estimated by P.L. 108-18
+ Required by P.L. 108-18

Employer cash contributions to retirement plans were $4,827 million in 2004, $4,031 million in 2003 and $6,013 million in 2002. These amounts do not include Social Security contributions and interest expense on deferred retirement liabilities.

Note 7 - The Postal Civil Service
Retirement System Funding Reform Act of
2003 — P.L.108-18

On April 23, 2003, the President signed into law the Postal Civil Service Retirement System Funding Reform Act of 2003 - P.L.108-18, which changed the way we contribute to the CSRS retirement plan. Although the law changed the funding of the plan, we determined that we are still a participant in a multi-employer pension plan. The parent-subsidiary relationship that we have as an "independent establishment" of the executive branch of the United States government allows for this accounting treatment under FAS 87. As a subsidiary we cannot direct the costs, benefits or funding requirements of the federally-sponsored plan.

We are required by P.L.108-18 to pay an additional annual amount, if necessary, each September, beginning in 2004, as determined by OPM. The additional amount is based on a calculation of any potential "supplemental liability", if one

exists. The "supplemental liability", represents the excess of the actuarial present value of future benefits over the actuarial present value of plan assets, future contributions, earnings, and other actuarial factors related to postal participants in the CSRS plan.

During 2004, OPM estimated the present value of benefits at $191.1 billion, contributions at $15.9 billion, and plan assets at $171.7 billion. This resulted in a "supplemental liability" of $3.5 billion as of September 2003. This calculation assumed general salary increases of 4.0%, COLAs of 3.25% and interest of 6.25%, and is intended to provide for the "supplemental liability" over a 40-year period ending in September 30, 2043. Under the law OPM is not required to furnish the final actuarial calculation of the September 30, 2004, liability until June 30, 2005. OPM's calculation of the September 30, 2004, "supplemental liability" payment was $240 million.

OPM will recalculate the "supplemental liability", if any, on an annual basis. Each September 30, we will make any required payment resulting from this calculation.

Because the law went into effect in May 2003, we estimated the portion of the amount payable on September 30, 2004, attributable to 2003 and expensed that amount in 2003. This amounted to $125 million, of which $116 million was included as interest expense on our 2003 income statement. The 2004 portion of the supplemental retirement obligation was $115 million, of which $103 million is included as interest expense.

Note 8 - revenue forgone

Our operating revenue includes accruals for revenue forgone. Revenue is forgone when Congress mandates that we provide free mail for certain mailers. Congress appropriates money to reimburse us for the revenue that we have forgone in providing these services. We have included as operating revenue the amounts appropriated by Congress for revenue forgone of $36 million for 2004, $31 million for 2003 and $48 million for 2002. Legislation enacted in 2003 and 2002 delayed payment of the amount authorized for 2004 and 2003 until the first day of 2005 and 2004, respectively. Accordingly, we have recorded these amounts as a receivable at year end.

Under the Revenue Forgone Reform Act of 1993, Congress is required to reimburse us $29 million annually through 2035 (42 years). This reimbursement is for two purposes: services we performed in 1991, 1992 and 1993 for which we have not yet been paid; and for shortfalls in the reimbursement for the costs we incurred for processing and delivering certain nonprofit mail from 1994 through 1998.