Financial Section Part II

In addition to labor and benefits rates, workhours are a major driver of our compensation and benefits expense. This year’s growth in costs was slightly tempered by a reduction of almost 5 million workhours or 0.3%. The 2006 workhour reduction is the sixth year out of seven in which workhours have been reduced. In 2006, mail processing, customer service and city delivery workhours decreased 7 million compared to 2005, while rural delivery experienced an almost 7 million increase in workhours. The rural delivery workhour growth was driven by the addition of over one million new delivery points and by increased mail volume.

Since 2000, we have cumulatively eliminated 867 million workhours, which has been the single largest contributor to the ongoing achievement of our savings targets.

Workhours by Funtion 2006 2005 2004
(Workhours in thousands)
City Delivery
468,918
471,071
464,683
Mail Processing
332,269
336,210
336,737
Customer Services & Retail *
246,538
247,512
248,097
Rural Delivery
186,164
179,549
171,628
Plant & Equipment Maintenance
81,366
80,867
81,302
Vehicle Services
32,116
31,880
31,947
Operations Support
9,882
9,606
9,077
Limited Duty & Rehabilitation
375
3,604
6,356
Postmasters, Managers, Supervisors, Administration,and Other * 101,101 102,954 102,494
Total Workhours 1,458,729 1,463,253 1,452,321
*Due to a change in calculating customer service hours we have adjusted hours to be presented on a comparable basis. Total workhours are not changed.

More than 85% of our career employees are covered by collective bargaining agreements. Our major collective bargaining agreements all expire on 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

Our employees participate in one of three retirement programs of the U.S. government 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). See Note 10,

Retirement Programs in Notes to the Financial Statements for additional information.

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, did not alter the fact that retirement expenses remain a significant portion of our total expenses. Retirement expenses for current employees, including interest on deferred retirement obligations, represented 10.1% of our total expenses in 2006 and 10.3% in 2005.

As described in the Notes to the Financial Statements, Note 2, Summary of Significant Accounting Policies, we account for our participation in the retirement programs of the U.S. Government under multi-employer plan accounting rules, in accordance with Financial Accounting Standard Board Statement 87, Employers’ Accounting for Pension Costs. Although the Civil Service Retirement and Disability Fund (CSRDF) is a single fund and does not maintain separate accounts for individual agencies, the following table provides OPM’s estimation of the funding status of the CSRS and FERS programs for Postal Service participants as of September 30, 2005. This is the most recent data provided by OPM.

Present Value Analysis of Retirement Programs CSRS FERS Total
(Dollars in billions as of 09/30/05)
Present Value of Benefits
$196.9
$81.2
$278.1
Present Value of Contributions*
12.3
36.6
$48.9
Current Fund Balance 180.9 52.9 $233.8
Surplus (Deficit)
$(3.7)
$8.3
$4.6
*Expected employer and employee contributions

Public Law 108-18

The Postal Civil Service Retirement System Funding Reform Act of 2003, P.L.108-18, changed the way we fund our CSRS obligations and altered the related schedules for our payments to the CSRDF. The law was enacted in response to a November 2002 review of funding estimates, including Postal Service payments 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 the current law through 2002. P.L.108-18 required as of May 2003, that we begin to fund our obligations to the CSRDF based on dynamic assumptions. The dynamic funding assumptions include the full value of future benefits to our employees related to military or volunteer service when calculating the actuarial present value of future benefits by OPM. Under the previously existing law, military and voluntary service costs were funded by the United States Treasury Department.