US Postal Service 2005 Annual Report Download - page 58

48 | 2005 Annual Report United States Postal Service
Notes to the financial statements
efits as defined and administered by OPM and, therefore,
have a parent-subsidiary type relationship. We cannot
direct the costs, benefits, or funding requirements of the
federally-sponsored plan. We account for our participation
in the U.S. government sponsored retirement plans as a
participant in a multi-employer plan arrangement in ac-
cordance with FAS 87, Employers’ Accounting For Pension
Costs. See notes 6 and 7 for additional information.
Retiree Health Benefits
We are required to pay a portion of the health insurance
premiums of those retirees and their survivors who par-
ticipate in the Federal Employees Health Benefits Program
(FEHBP). FEHBP is sponsored by the U.S. government.
We cannot direct the costs, benefits, or funding require-
ments of the federally-sponsored plan. We account for our
participation in FEHBP as a participant in a multi-employer
plan arrangement in accordance with FAS 106, Employers’
Accounting for Postretirement Benefits Other Than
Pensions. Therefore, the costs of retiree health benefits
are expensed as we incur them. See note 4 for additional
information.
Workers’ Compensation Cost
We are self-insured for workers’ compensation costs
under a program administered by the Department of Labor
(DOL). These costs include employees’ medical expenses
and payment for continuation of wages. We record these
costs as an operating expense.
Our liability at September 30, 2005 represents the esti-
mated present value of the total amount we expect to pay
in the future for postal workers injured through the end of
2005. The estimated total cost of a claim is based upon
the severity of the injury, the age of the injured employee,
the assumed life expectancy of the employee, the trend of
our experience with such an injury, and other factors. In
our calculation of present value for 2005 and 2004, a net
discount rate of -0.8% for medical expenses and 3.3% for
compensation claims is used. During 2004 we changed
these discount rates in order to more accurately reflect our
liability. See note 3 for additional information.
Emergency Preparedness Appropriations
Emergency preparedness appropriations are the funds we
receive from the federal government to help pay the costs
to keep the mail, postal employees and postal customers
safe and are restricted to such use. Upon receipt of the
funds, we established a liability. Through 2003 we recog-
nized these funds as non-operating revenue to the extent
of the qualifying non-operating expenditure. In 2004 we
began recognizing these funds as operating revenue to the
extent they offset operating expenses. The appropriations
we use to purchase capital equipment will be offset against
the depreciation expense over the life of the equipment.
See note 11 for additional information.
Reclassifications
Certain comparative prior year amounts in the financial
statements and accompanying notes have been reclas-
sified to conform to the current year presentation. These
reclassifications had no effect on previously reported
operating income and net income.
Note 3 – Workers’ Compensation
At the end of 2005, we estimate our total liability for future
workers’ compensation costs at $7,521 million. At the end
of 2004 this liability was $7,579 million. 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 $655 million. A decrease of 1%
would increase our estimate of the liability by approxi-
mately $801 million.
In 2005, we recorded $838 million in workers’ compensa-
tion expense, compared to the $1,239 million we recorded
in 2004 and the $1,473 million we recorded in 2003.
In 2004, we changed the net discount rates used to
determine the present value of estimated future workers’
compensation payments, in consultation with an inde-
pendent actuary. Our net discount rate is the estimated
difference between what we expect to earn on investments
compared to what we assume the inflation rate will be
for medical costs and wage increases. Our net discount
rate of -0.8% for medical claims means that our assump-
tions show that the average rate of inflation for medical
claims (5.5%) will exceed our investment returns (4.7%)
by 0.8% per year over the expected life of the medical
claims. Conversely we believe that our assumed invest-
ment returns (5.5%) will exceed the rate of inflation on the
consumer wages index (2.2%) by 3.3% over the expected
life of the compensation claims.
In 2004, we reduced the medical claims net discount
rate from 1.4% to -0.8% resulting in an increase in our
medical claims liability and expense of $362 million. We
increased the compensation claims net discount rate from
3.0% to 3.3%, thereby reducing that liability and expense
by $148 million. These combined changes increased