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The three critical accounting policies that we believe are either the most judgmental or involve the selection or application of alternative accounting policies, and are material to our financial statements, are those relating to workers’ compensation costs, deferred revenue for prepaid postage, and contingent liabilities. Workers’ compensation costs are highly sensitive to the estimates of inflation and the length of time recipients stay on the compensation rolls. Deferred revenue for prepaid postage is challenging to estimate because of the difficulty in estimating stamp postage that has been purchased but has not yet been used. Contingent liabilities require significant judgment in estimating potential losses for legal claims. In addition, retirement and health benefits costs for our employees and retirees represent a significant portion of our expenses. Any changes in laws or regulations affecting the amounts, timing, or administration of these benefits could have a material effect on our financial position and results of operations. For additional information, see Note 2, Summary of significant accounting policies, in the Notes to the Financial Statements.

We recognize revenue when services are rendered. Because we collect payment in advance of services being performed, we defer the revenue as an estimated liability. This liability is classified as deferred revenue–prepaid postage on our balance sheets. In Quarter III of the current year, we improved the model used to estimate the deferred revenue for prepaid postage for stamps. This change was made necessary because the introduction of the Forever Stamp in April 2007, combined with the May 2008 price increase, resulted in a change in consumer behavior regarding the purchase and usage of stamps that was not measurable using our prior estimation techniques. This change more accurately captures trends in stamp usage. The change to a new estimation model is considered a change in accounting estimate under Generally Accepted Accounting Principles (GAAP).

As required by GAAP, the impact of the change was recorded in Quarter III, 2008. For the year-ended 2008, we increased the stamp portion of the deferred revenue–prepaid postage liability by $477 million, $230 million of which is considered a cumulative change in estimate and $247 million of which is attributable to changes in consumer behavior during the last two quarters of the year. For further information, see Note 2 to the financial statements.

Results of Operations
In 2008, we had an operating loss of $2,806 million, as compared to a $5,327 million loss in 2007. Operating revenues of $74,932 million for 2008 were 0.2%, or $154 million greater than the $74,778 million earned in 2007. Despite the May 2007 and May 2008 price increases, revenues were negatively impacted by a decline in volume of 9.5 billion pieces. The volume drop was mainly due to the deteriorating economy, which adversely impacted almost every category of mail.

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Our 2008 expenses were impacted by high energy prices, COLAs, and the large percentage of our costs which are fixed. Operating expenses of $77,738 million were $2,367 million less than the $80,105 million incurred in 2007. As discussed later in this section, operating expenses included a decrease in retiree health benefits of $2,677 million and a decrease in compensation and benefits expense of $601 million, which were partially offset by increases in transportation expenses of $459 million and other expense, of $452 million.

The operating loss for 2007 was $5,327 million, as compared to operating income of $969 million in 2006, a decrease of $6,296 million. This change was largely due to the additional retiree health benefit expenses incurred upon the enactment of P.L.109-435. On April 6, 2007, we transferred $2,958 million, representing the entire amount of funds held in escrow, as required by P.L.108-18, to the Postal Service Retiree Health Benefits Fund (PSRHBF). Since we no longer held these funds, there was a 22% decrease in interest income for the second half of 2007 and this continued into 2008, where interest income declined 82% compared to 2007.

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