Notes to the Financial Statements

Note 11 – Workers’ compensation

We pay for workers’ compensation costs under a program administered by DOL. These costs, recorded as an operating expense, include employees’ medical expenses, payments for continuation of wages, and DOL administrative fees.

Our liability at September 30, 2007, represents the estimated present value of the total amount we expect to pay in the future for postal workers injured through the end of 2007. The estimated total cost of a claim is based upon the severity of the injury, the age of the injured employee, the estimated duration of payments to the employee, the trend of our experience with such an injury, and other factors.

We estimated our total liability for future workers’ compensation costs to be to be $7,771 million at the end of 2007 and $7,863 million at the end of 2006. The payout period for this liability will, for some claimants currently on the rolls, be for the rest of their lives.

The liability is sensitive to changes in inflation and discount rates. An increase of 1% in the assumptions would decrease our estimate of the liability by approximately $603 million. A decrease of 1% would increase our estimate of the liability by approximately $904 million.

In 2007, we engaged an independent actuarial consulting firm to perform an actuarial valuation of our workers’ compensation liability at September 30, 2007. They are also assisting us in developing our own model, which we plan to implement in 2008. The methodology employed in the actuary’s model is similar to that which will be employed in our new model.

The standard actuarial valuation techniques used in estimating the workers compensation liability at September 30, 2007 included the paid loss development and the incremental frequency / severity methods. The paid loss development method estimates the liability based on the historical pattern of payments observed over many years. The frequency / severity method estimates liability by considering not only the cost, but the number of claims payments over many years. The frequency / severity method requires that we make explicit assumptions about future changes in the average payment amounts due to inflation or other cost increases. Both methods used in calculating the 2007 workers’ compensation liability are generally accepted actuarial techniques and are equally valid for estimating a liability such as ours. Accordingly, we used an average of the results of the two methods in determining our liability as of September 30, 2007.

During 2007, we also conducted a review of the inflation and discount rates used to determine the present value of estimated future workers’ compensation payments. Separate analyses of the appropriate inflation rates for medical and compensation portions of the liability were performed, utilizing forecasts of medical inflation and inflation in the general economy. Due to the differences between medical and compensation claims in the average length of time that claimants stay on the rolls, we validated our assumptions and methodology with an independent actuarial firm. Appropriate discount rates were determined using forecasted rates of return on baskets of Treasury securities of varying durations.

The workers’ compensation liability estimation technique used in 2006 and prior years utilized a net discount rate, which was the estimated difference between the expected return on investments in a basket of Treasury securities offset by the estimated inflation rate for medical costs and wages. The net discount rate in 2006 was 3.3% for compensation claims and -0.8% for medical claims. The new model uses separate calculations for returns on investments and inflation factors rather than a net discount rate. The rates used in the new model are returns on investments for compensation claims of 5.6% and wage inflation of 3.0%. For medical claims the new model uses 5.4% for returns on investments and 5.0% for medical future inflation.

The total change to our liability as a result of the changes in actuarial valuation techniques, including various individually insignificant underlying assumptions, and inflation and discount rates was $685 million. This is shown is the table below.

In 2007, we recorded $880 million in workers’ compensation expense, compared to the $1,279 million in 2006, and $838 million recorded in 2005. The effect of the changes discussed above is accounted for as a change in accounting estimate, as defined by GAAP.

In addition to the cost of workers’ compensation claims, OWCP charges us an administrative fee for processing claims. In 2007, the administrative fee, which is included in the expense above, was $49 million, compared to $45 million in 2006 and $56 million in 2005.

Note 12 – Revenue forgone

Our operating revenue includes accruals for revenue forgone. Revenue is forgone when Congress mandates that we provide mail services for designated mailers at free or reduced rates. Congress then appropriates money to reimburse us for the revenue that we have forgone in providing these services.

We estimate the amount of services that will be provided during a given year and forward a funding request to Congress. At the end of the year we reconcile this request with the actual usage. Depending upon whether actual usage is higher or lower than our estimate, we will request additional funding or return the excess funding via a reduction to our next revenue forgone funding request.

In 2007 we included $63 million of revenue forgone as operating revenue, $99 million in 2006, and $109 million in 2005. We record requested amounts as government receivables until the appropriations are received.

The Revenue Forgone Reform Act of 1993 authorized Congress to make 42 annual payments of $29 million each, beginning in 1994 through 2035. These payments are reimbursement for two purposes: services we performed in 1991, 1992, and 1993 for which we have not yet been fully paid; and for shortfalls in the reimbursement for the costs we incurred for processing and delivering certain nonprofit mail entitled to statutorily reduced costs from 1994 through 1998.

The future payments authorized by the Revenue Forgone Reform Act of 1993 total $1,218 million for which we calculated the present value, at 7% interest, to be approximately $390 million and recognized the $390 million as revenue during fiscal years 1991 through 1998. The discounted present value of the remaining future payments as of the years ended September 30 was $353 million in 2007 and $357 million in 2006.

The total receivable for revenue forgone as of the years ended September 30 was $476 million in 2007 and $490 million in 2006.