A Letter from the Postmaster General, CEO and the Chairman of the Board of Governors

To the President, members of Congress, postal customers, postal employees, and the American people: Your United States Postal Service had another excellent year!

The results are a credit to postal employees across the nation who once again raised performance levels. We achieved record levels of service for First-Class Mail. Express Mail and Priority Mail remained strong, setting the stage for further advances in 2008.

How did we do it? The postal team pulled together, refocused on the basics, and concentrated on business fundamentals — getting them right every day. We analyzed the myriad of operational data produced by our equipment and pinpointed opportunities for improvement. As a result, we tightened up mail processing and delivery processes. By increasing efficiencies, we were able to hit our stride, eliminating costs and driving up total factor productivity for an unprecedented eighth straight year.

There was nothing easy about 2007. We overcame a new rate change that caused major mailers to reexamine and alter their mailing plans. Because our operations managers reacted quickly to the shift from flat mail to letter mail, we did not lose ground, and we were able to get ahead of the curve, laying the groundwork for continuous improvement next year.

Without question, 2007 had the potential to be a very contentious year. All our major labor contracts expired and had to be renegotiated. The outcome of collective bargaining was not preordained, particularly in view of the success of the Postal Service and its employees in recent years. With that in mind, we are very proud that, together with our union presidents and management association leadership, we were able to build a common understanding about the complex issues the Postal Service faces in the future.

Notably, the new negotiated contracts increase employee contributions to their health benefit programs, moving the Postal Service closer to the rest of the federal government in this area. We also achieved work rule breakthroughs that provide management with added flexibility necessary in today’s competitive environment. At the same time, the contracts provide our employees with fair pay and benefits for their commitment to continue to meet the challenges of improving service, safety, and productivity in the coming years.

Speaking of challenges, we stepped up our efforts in 2007 in research, technology, and new equipment. The Intelligent Mail Barcode will offer mailers improved service quality, visibility, and cost data about individual mailings that was never before available, while increasing efficiency for the Postal Service. Our plans call for full implementation of the Intelligent Mail Barcode in 2009. And the upcoming deployment of the automated Flats Sequencing System is another significant tool for improving service and the efficiency of our processing and delivery systems.

Beyond the challenges of negotiations, the marketplace, and technology, the most significant event of the year was enactment of the Postal Accountability and Enhancement Act, signed into law by President Bush in December 2006. Drafted to respond to the outdated Postal Service business model established in 1970, the new law attempts to provide a more modern approach to the competitive pressures of increasing Internet usage, new advertising channels, and traditional package service providers.

The new law, aimed at preserving universal service, did have a financial impact on us this year. We finished the year with an income of more than $1.6 billion, before taking the financial impact of the legislation into account. However, the new law assigned escrow funding we set aside last year, and an additional $5.4 billion payment, to a new retiree health benefits fund. Those payments changed our bottom line, which now reflects a net loss of $5.1 billion. We will make additional annual payments of $5.4 to $5.8 billion to the retiree health benefits fund until 2017. When these payments are complete, we will have substantially funded this obligation. But in the interim we will bear substantial costs that will have to be made up by revenue increases as well as operating efficiencies.

Besides annual financial payments, the new law raises the bar on how we manage our business. Ratemaking and pricing change dramatically, with price caps based on the Consumer Price Index affecting 90 percent of our products and services. There are also requirements for modern service standards and service measurement systems for each class of mail, and potential monetary penalties if we do not meet our goals. The law also calls for a new level of financial transparency, requiring compliance with the Sarbanes-Oxley Act in 2010 and granting the new Postal Regulatory Commission subpoena authority.

Many of the details that support implementation of the new law are still being developed. Throughout this process, we are working closely with the Postal Regulatory Commission and all postal stakeholders to live up to the spirit of the law and to get it in place as quickly as practical.

We are excited about options and alternatives offered by the new law. We look forward to modernizing our business model and implementing a new pricing model that will provide our customers with more predictable and consistent price adjustments in today’s dynamic economy and which will allow us more freedom to compete in the package business.

Coming off an excellent year, we approach 2008 with a strong base and the momentum to build on the success of 2007. Working with employees, the Postal Regulatory Commission, major mailers, consumers, and all of our stakeholders, we will continue our efforts to support our mission of universal service at affordable rates by seeing that United States Postal Service remains healthy and strong for many years to come.

John E. Potter
Postmaster General, Chief Executive Officer

James C. Miller III
Chairman, Board of Governors