Notes to the Financial Statements

Expense

In the normal operations of our business we enter into commitments for expense contracts. The contracts run for periods from one to ten years. Although these contracts contain clauses for termination by the Postal Service, we normally would have early termination costs.

Expense commitments are classified as miscellaneous, inventory and research and development. Our miscellaneous expense commitments include contracts for supplies, services, communications, repairs, research, printing and advertising. Our inventory contracts are for vehicle repair parts and mechanized equipment spare parts. These are summarized in the following table.

Expense Resources on Order 2006
(Dollars in millions)
Miscellaneous Contracts $     4,885
Inventory Contracts 253
Research and Development Contracts 39
Total Expense Resources on Order $    5,177

Note 8 – Contingent Liabilities

Our contingent liabilities consist mainly of claims and suits resulting from labor issues, equal employment opportunity issues, environmental issues, property damage claims, injuries on postal properties, issues arising from postal contracts, personal claims and traffic accidents.

Each quarter we review significant new claims and litigation for the probability of an adverse outcome. If the claim is deemed "probable" for an unfavorable outcome and the amount of settlement is estimable, we record a liability. Each quarter we also review and adjust any prior contingencies for settlements, or revisions to prior estimates. No individual claim is material to our financial statements when taken as a whole. The following table summarizes our contingent liabilities provided for in the financial statements.

Contingent Liabilities 2006 2005
(Dollars in millions)
Labor Cases $  254 $  308
Equal Employment Opportunity Cases 66 79
Tort Cases 57 49
Environmental Cases 25 25
Contractual Cases 16 8
Total Contingent Liabilities $  418 $  469

Management and General Counsel believe that adequate provision has been made for the probable amounts due from claims and suits. Amounts we expect to pay in the next year are current liabilities on the balance sheets under the heading "Trade payables and accrued expenses." The long-term portion of the liability is accrued under the heading "Other Non-Current Liabilities" in our financial statements.

We also have similar type cases which we deem reasonably possible and for which we cannot yet determine the amounts or a reasonable range of potential losses in these matters, if any.

Note 9 – Health Benefit Programs

Current Employees

Substantially all of our employees are covered by the U.S. government health plan, FEHBP. OPM administers the program and allocates the cost of the program to the various participating government agency employers. We cannot direct the costs, benefits, or funding requirements of the federally-sponsored plan and therefore are required to use multi-employer plan accounting rules.

Our portion of the cost is based upon the average premium cost of the various employee coverage choices and the specific coverage choices made by our employees. Our employees paid approximately 16% of the cost in 2006, 2005 and 2004. We paid the remainder of employee health care expense which was $5,345 million in 2006; $5,100 million in 2005 and $4,845 million in 2004.

Long term care insurance is available through the federal government at the employee's expense.

Retirees

Our employees who participate in the FEHBP for at least the five years immediately before their retirement may participate in the FEHBP during their retirement. The Omnibus Budget Reconciliation Act of 1990 requires us to pay the employer's share of health insurance premiums for all employees and their survivors who participate in the FEHBP and who retire on or after July 1, 1971. However, we do not include the costs attributable to federal civilian service before that date.

Our retiree health benefit expenses amounted to $1,637 million in 2006; $1,495 million in 2005 and $1,313 million in 2004. We include these costs in our compensation and benefits expense.