Financial Section Part II

Operating Expenses

Operating expenses are comprised of compensation and benefits, retiree health benefits, transportation, supplies and services, depreciation and amortization, and other expenses.

In 2007 total operating expenses of $80,105 million were $8,424 million or 11.8% more than 2006. Compensation and benefits, along with retiree health benefits made up 80.2% of our operating expenses. Retiree health benefits increased $8,447 million, or 516%, in 2007, driven by requirements of P.L.109-435. See Note 4, Postal Accountability and Enhancement Act, Public Law 109-435 ( P.L.109-435), in the Notes to the Financial Statements for more information. The new law also suspended our retirement payments to the CSRS fund which, along with a reduction in the estimate of our workers’ compensation liability, led to a $479 million, or 0.9%, decrease in total compensation and benefit expenses. A $457 million, or 7.6%, increase in transportation expenses also contributed to the increase in expenses.

In 2006, operating expenses of $71,681 million were $3,400 million, or 5.0%, more than 2005. The increase was driven primarily by a 4.2% increase in compensation and benefits and an 11.2% increase in transportation expenses.

Compensation and Benefits

Personnel compensation and benefits comprised 67.6% of our total operating expenses in 2007. These costs were $479 million or 0.9% below 2006. The decrease was due primarily to elimination of the employer’s share of the CSRS contribution resulting from the enactment of the new law. Reductions in complement and workers’ compensation costs also contributed to the decrease in expenses.

Although total compensation and benefits were lower in 2007, our labor costs increased by $1,118 million or 2.8%. COLA increases alone added $871 million to our compensation expenses. These increases were offset somewhat by a decrease of 36 million labor hours. Our 2007 average hourly labor cost increased by 1.6% compared to an increase of 4.5% in 2006. Workers’ compensation decreased by $399 million. See Workers’ Compensation later in this section and Note 11, Workers’ compensation, in Notes to the Financial Statements for additional information.

In 2006, personnel compensation and benefits comprised 76.3% of our total operating expenses. These costs increased $2,216 million or 4.2% in 2006. The 2006 growth was primarily due to contractual pay increases, COLA, and health benefits payments for current employees. Our 2006 health benefits expense for current employees increased by $245 million to $5,345, or 7.5% of total operating expenses. Workers’ compensation increased $441 million over 2005. This accounted for almost 20% of the total personnel compensation and benefits growth in 2006.

In addition to labor and benefits rates, workhours are a major driver of our compensation and benefits expense. In 2007, mail processing, customer service and city delivery workhours decreased by 36 million compared to 2006, partially offsetting the higher labor rates.

Rural delivery experienced an increase of three million workhours. The rural delivery workhour growth was driven by the addition of more than one million new rural delivery points. Other workhours decreased by three million compared to 2006.

In 2006, growth in compensation and benefits was slightly tempered by a reduction of almost five million workhours or 0.3%. In 2006, mail processing, customer service and city delivery workhours decreased seven million hours compared to 2005, while rural delivery experienced an almost seven million increase in workhours. As was the case in 2007, the 2006 rural delivery workhour growth was driven by the addition of more than one million new delivery points and by increased mail volume.

Workhours have been reduced in seven of the last eight years, with only 2005 showing a slight increase. Since 2000, we have cumulatively eliminated 1,083 million workhours, which has been the single largest contributor to the ongoing achievement of our savings targets.

Collective bargaining agreements with all major postal unions expired in November 2006. Negotiations with three of four major unions resulted in new agreements. The American Postal Workers Union negotiated a four-year agreement. The National Postal Mail Handlers Union agreed to a new five-year agreement. And, the National Association of Letter Carriers also agreed to a new five-year agreement. These agreements include general salary increases; COLAs; and, starting in 2008, a reduction in the Postal Service’s share of health benefit premiums. Our negotiations with the National Rural Letter Carriers Association (NRLCA) ended without an agreement and we have entered into the binding arbitration process.

As mentioned above, COLA base changes were included in the new agreements. Our annualized COLA for 2007 was $686 per eligible employee. APWU and NPMHU members received this COLA in 2007. The agreement with NALC included a lump sum payment of $686 per eligible employee in lieu of COLA.

Our nonbargaining employees receive pay increases through a pay-forperformance program that makes meaningful distinctions in performance. These employees do not receive automatic salary increases, nor do they receive COLAs or locality pay.