Almost 90% of our career workforce is covered by collec-tive bargaining agreements. Our major collective bargaining agreements all have an expiration date of November 20, 2006, and currently require annual basic pay increases and semi-annual COLAs.

Our non-bargaining 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 Federal Government. These programs are the Civil Service Retirement System (CSRS), the Dual CSRS/Social Security System (Dual CSRS), and the Federal Employees Retirement System (FERS). Each of these programs is described in further detail in Note 6 of the Notes to the 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.

In 2005, OPM increased the contribution percentage employers pay for FERS participants, from 10.7% to 11.2%. This increase added over $100 million to our retirement expense in 2005.

The implementation of P.L.108-18 (discussed in detail below) 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 10.3% of our total expenses in 2005, 10% in 2004, and 9.1% in 2003. In 2003 we benefited from a one-time reduction in our retirement expenses resulting from the enactment of P.L.108-18.

As described in Note 6 of the Notes to the Financial Statements, we account for our involvement in these retirement programs as a participant in a multi-employer plan. However, OPM does maintain postal specific records that identify the present value of benefits, the present value of contributions and the value of the postal fund. The following table provides this information for the CSRS and FERS programs as of September 30, 2004, the most recent data provided by OPM.

(Dollars in billions)

Public Law 108-18 (P.L.108-18)

The Postal Civil Service Retirement System Funding Reform Act of 2003, Public Law (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 Civil Service Retirement and Disability Fund (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. OPM determined that at the end of 2002, we had funded more than would be needed to cover the future benefits expected to be paid to our employees and retirees participating in CSRS under then current law.

P.L.108-18 required us, in May 2003, to begin to fund our obligations to the CSRDF based on dynamic assumptions. P.L.108-18 requires that the dynamic funding assumptions include the full value of future benefits related to military or volunteer service when calculating the actuarial present value of future benefits by OPM. Under the previous existing law, military and voluntary service costs were funded by the United States Treasury Department. The recognition of military service credit effectively transferred $27 billion in obligations from U.S. taxpayers to our ratepayers. This change in funding responsibility changed our CSRS funding status at the end of 2002 from being over funded to being under funded. Use of dynamic assumptions for the valuation also increased our biweekly payroll contribution for CSRS employees’ retirement from 7.0% of basic pay to 17.4%.