As an independent establishment of the U.S. government, our participation in FEHBP is considered as a participant in a multi-employer plan. If we were not considered a participant of a multi-employer plan, we would be required to record and disclose our obligation for future costs under the program. Because there are several areas of judgment involved in calculating this obligation, estimates can vary widely based on the assumptions used. Based on September 30, 2005 data, we estimated the 2005 present value of future premium payments to be between $50 billion and $59 billion. Based on September 30, 2004 data, we estimated the 2004 value of future payments to be between $48 billion and $59 billion. In both cases, the range in the estimate exists only because long-term medical inflation assumptions differed by 1%.

In December 2003, President Bush signed into law the Medicare Prescription Drug Modernization Act of 2003 (P.L.108-173). This Act will add a voluntary prescription drug benefit to the Medicare program that could have a significant impact on future Postal Service health care costs.

Under the terms of the P.L.108-173, employers, including the federal government, are eligible to receive the Medicare employer prescription drug subsidy if their benefit plans provide prescription drug coverage at or above specified levels. We qualify for this subsidy through our direct payment of the employer’s premium to the FEHBP that is administered by OPM. Therefore, we have applied as a Medicare Part D provider which would enable us to receive the employer’s retiree prescription drug subsidy.

OPM has said that it will forego the Medicare employer prescription drug subsidy for 2006 on the basis that there is no good rationale to pay itself to continue providing drug coverage to federal retirees of agencies that are fully supported by federal tax dollars. As distinct from the federal government, we directly fund the costs of our retirees’ health benefits with revenues generated through postage rates, not taxpayer dollars. In fiscal year 2005, we paid $6.6 billion for employee and retiree health benefits and we estimate that approval as a Medicare Part D provider we could save postal ratepayers $250 million per year.

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 2005, we estimate our total liability for future workers’ compensation costs at $7,521 million, a decrease of $58 million or 0.8 % from 2004.

In 2005 we experienced a 4.4% decrease in the number of paid medical claims and a 5.5% decrease in the number of paid compensation claims. These decreases led to a reduction of $12 million for paid claims when compared to 2004. Lower paid claims led to a $58 million dollar reduction of our total workers’ compensation liability, which resulted in a decrease of our workers’ compensation expenses of $401 million. This builds on decreases of $234 million in 2004 and $51 million in 2003. These lower costs are a result of our efforts to prevent workplace injuries and our joint initiative with OWCP to increase the number of injured employees returned to work. There have been a total of 570 successful outplacement/rehabs since the program inception three years ago. It has long term impacts to the cost of workers’ compensation by reducing the base costs. The program is on pace to achieve the five year goal of 1,000 outplacements. Finally, OWCP has instituted a more rigorous review of medical bills to lower costs.

In 2004, we made changes to the discount rates we use to estimate our liability in order to improve the accuracy of our estimate. We discuss these changes in Note 3 of the Notes to the Financial Statements.

Transportation Expenses

Transportation expenses for 2005 were $5,437 million, an increase of $468 million over 2004 expenses. This increase was primarily due to increased fuel expenses of $214 million and an increase in mail volume. The increase in volume accounted for an additional $222 million in expense.

We continue to implement a number of measures to control fuel expenditures. These efforts focus on leveraging our size and buying power to obtain more favorable pricing by purchasing fuel in bulk. For example, we minimize our fuel cost for certain highway contract routes by consolidating our fuel purchases. We also purchase fuel in bulk through the Defense Energy Support Center wherever we have bulk facilities.