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Additional disclosures on our organization and finances, including our Cost and Revenue Analysis reports, Revenue, Pieces, and Weight reports, Vision 2013 strategic plan and the Comprehensive Statement on Postal Operations may be found on our website at www.usps.com. Information on our website is not incorporated by reference in this document.

Postal Accountability and Enhancement Act, Public Law 109-435 (P.L.109-435)

This law was signed by President Bush on December 20, 2006. It revises a number of provisions of the Postal Service’s governing statute, codified in title 39, United States Code.

The law divides our services into two broad categories: market-dominant and competitive. Market-dominant services include, but are not limited to, First-Class Mail, Standard Mail, Periodicals, and Package Services. Price increases for these services are subject to a price cap based on the Consumer Price Index–All Urban Consumers (CPI-U). Competitive services, such as Priority Mail, Express Mail, Bulk Parcel Post, and Bulk International Mail have greater pricing flexibility. Throughout this document and in the day-to-day operation of the organization, we refer to market-dominant services as “Mailing Services” and competitive services as “Shipping Services”.

For retail customers, the law anticipates that universal service can be preserved at affordable prices. For commercial mailers, the law is intended to provide price predictability. For employees, customers, and taxpayers, the law is designed to provide assurance that the employer portion of the Postal Service’s health and retirement benefits becomes fully funded in the future.

P.L.109-435 also directs the U.S. Treasury to resume financial responsibility for the portion of the Civil Service Retirement System (CSRS) pensions of postal employees attributable to military service. This takes the financial burden added by P.L.108-18, estimated in 2003 at approximately $27 billion by the Office of Personnel Management (OPM), away from the Postal Service. P.L.109-435 also abolished a federally mandated escrow requirement and directed that the money previously held in escrow be placed into a new Postal Service Retiree Health Benefits Fund (PSRHBF). Through 2017, we are required to make payments into the PSRHBF that average $5.6 billion per year.

P.L.109-435 reconstituted the former Postal Rate Commission into a regulatory body, renamed the Postal Regulatory Commission (PRC). The regulations for the price-setting process released by the PRC on October 29, 2007, consist of three parts: (1) regulations related to price adjustments for market dominant products, including the formula for the calculation of the price cap; (2) regulations related to competitive products; and (3) establishment of a Mail Classification Schedule, which categorizes our products as either market dominant or competitive. These price-setting regulations are contained in 39 C.F.R. Parts 3001, 3010, 3015, and 3020.

The Mail Classification Schedule divides mail into Mailing Services or Shipping Services, establishes which types of mail constitute separate products, and presents a brief description of each product. The regulations allow us to make certain classification changes much more easily than under the previous system. This enhances overall pricing flexibility.

The regulations for Mailing Services, constituting almost 90% of all postal revenue, allow price changes every year with limited prior review, as long as the average increase for each class of mail is no greater than the rate of inflation as measured by CPI-U. The regulations permit price increases above the price cap in the event of extraordinary or exceptional circumstances.

The regulations for Shipping Services place no upper limit on price changes. The Governors of the Postal Service can adjust prices as necessary, as long as each product covers 100% of its attributable costs. No product may be cross-subsidized by Mailing Services. In addition, Shipping Services are required to cover 5.5% of the Postal Service’s total institutional costs.

On September 11, 2008, the PRC issued Order No. 106 proposing rules on accounting practices and taxes on competitive products income. Comments from interested parties were due to the PRC on October 20, 2008; reply comments were due November 3. A final rule must be issued by December 19, 2008, unless otherwise agreed by the PRC and the Postal Service.

The PRC now has its own Office of Inspector General (OIG). The Postal Service will continue to be required to provide the funding for our Office of Inspector General, the PRC, and the PRC’s OIG. Although the funding for these organizations is provided by the Postal Service, the amount of funding is determined by Congress. We are directed via the appropriations process, to provide funds to these organizations in specified amounts.

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