In addition to the 17.4% employer contribution, we make annual payments on the excess of the actuarial present value of future benefits over the actuarial present value of plan assets, future plan contributions, earnings, and other factors. This amount is referred to as the "supplemental liability" and is calculated by OPM each year. In September 2004, OPM informed us that our first supplemental payment, based on the September 30, 2003 valuation, would be $240 million. We included $125 million of this payment in our 2003 expenses and $115 million in 2004. In 2005 the "supplemental liability" payment increased to $290 million based on OPM’s valuation of the "supplemental liability" at $4.2 billion as of September 30, 2004. See note 7 of the Notes to the Financial Statements for further explanation.

Use of P.L.108-18 "Savings"

P.L.108-18 identifies as "savings" the difference between the contributions we would have made to the CSRDF had the legislation not been enacted, and the contributions we now make under the law. In 2003 and 2004 we were required to use these "savings" to reduce our debt. In 2003, OPM calculated our "savings" to be $3.5 billion, and we reduced our debt with the U.S. Treasury by $3.8 billion, thus exceeding the requirements of the law. In 2004, we used "savings" of $2.7 billion to reduce our outstanding debt to the U.S. Treasury. In addition to the required debt reduction we also reduced our debt by an additional $2.8 billion, for a total debt reduction of $5.5 billion in 2004. In 2005 we paid our remaining debt of $1.8 billion, and used the remainder of the "savings" to offset operational expenses and hold postage rates steady.

As required by P.L.108-18, on September 30, 2003, we submitted two proposals to the President, Congress, and the Government Accountability Office. The first presented our position as to how the "savings" realized after 2005 should be used; the second presented our position that the obligation to pay CSRS liabilities arising from military service be returned to the U.S. Treasury. In both proposals, we recommended eliminating the escrow requirement and proposed using a portion of the "savings" after 2005 to help finance federal retiree health benefit obligations. As discussed in the "Pending Legislation" section, two pieces of legislation addressing, among other issues, the funding of CSRS credit for military service and the escrow provisions of P.L.108-18 are currently pending before Congress.

Congress will consider what to do with the post-2005 "savings" but until Congress acts, any "savings" after 2005 must be placed in escrow. To fund the 2006 escrow requirement, in April 2005, the Board of Governors approved a request to the PRC for a recommended decision for an across-the-board increase in postage rates and fees of 5.4%. On November 14, 2005 the Governors voted to accept the Postal Rate Commission’s recommendations to increase most postal rates and fees by approximately 5.4% across-the-board to take effect January 8, 2006.

Health Benefits

We participate in the Federal Employees Health Benefits Program (FEHBP) which is administered by OPM. Eligible postal employees with at least five consecutive years participation in the FEHBP immediately preceding retirement are entitled to continue FEHBP coverage into retirement. We account for employee and retiree health benefit costs as an expense in the period our contribution is due and payable to the FEHBP.

The drivers of our active employee health care costs are the number of employees electing coverage and the premium costs of the plans they select. Premiums for each plan participating in FEHBP are determined annually by OPM. In 2005, health benefits expenses for active employees were $5,100 million, an increase of $255 million over 2004. This was 7.4% of our total expenses. The 2004 expense of $4,845 million was 7.3% of our total expenses and increased by $319 million over 2003 when employee health benefits were 7.0% of our expenses.

Retiree health benefits costs of $1,495 million in 2005 represent 2.2% of our total expenses, up from $1,313 million or 2.0% in 2004 and $1,133 million or 1.8% in 2003. This cost has risen steadily over the last two years, and has doubled since 2000, driven by increases in FEHBP premium costs, an increasing number of annuitants enrolled in the plan, and the declining number of annuitants for whom a portion of the premium cost is allocable to Post Office Department service. The combined effects of these drivers increased retiree health benefit costs by 13.9% or $182 million in 2005 and 15.9% or $180 million in 2004.

OPM recently announced a 6.6% average increase in health benefit premiums, to take effect in January 2006, following a 7.9% increase in January 2005. This is the lowest increase in average premiums in nine years and represents a very encouraging development. However, the pool of covered annuitants will continue to grow rapidly in the future, resulting in double-digit percentage increases of this expense. As of the end of 2005, there were approximately 444,000 Postal Service annuitants and survivors compared to 438,000 in 2004. We estimate that over 200,000 of our current employees will be eligible for retirement by 2008.