Several actions—both by the Service and the Congress—led us to remove the Service’s transformation efforts and long-term outlook from our high- risk list. In 2001, we made this designation because the Service’s financial outlook had deteriorated significantly. The Service had a projected deficit of $2 billion to $3 billion, severe cash flow pressures, debt approaching the statutory borrowing limit, cost growth outpacing revenue increases, and limited productivity gains. Other challenges the Service faced included liabilities that exceeded assets by $3 billion at the end of fiscal year 2002 major liabilities and obligations estimated at close to $100 billion, a restructuring of the workforce due to impending retirements and operational changes, and long-standing labor-management relations problems. We raised concerns that the Service had no comprehensive plan to address its financial, operational, or human capital challenges, including its plans for reducing debt, and it did not have adequate financial reporting and transparency that would allow the public to understand changes in its financial situation. Thus, we recommended that the Service develop a comprehensive plan, in conjunction with other stakeholders, which would identify the actions needed to address its challenges and provide publicly available quarterly financial reports with sufficient information to understand the Service’s current and projected financial condition. As the Service’s financial difficulties continued in 2002, we concluded that the need for a comprehensive transformation of the Service was more urgent than ever and called for Congress to act on comprehensive postal reform legislation. The Service’s basic business model, which assumed that rising mail volume would cover rising costs and mitigate rate increases, was outmoded as First-Class Mail volumes stagnated or deteriorated in an increasingly competitive environment. Since 2001, the Service’s financial condition has improved and it has reported positive net incomes for each of the last 4 years (see fig. 1). The Service has made significant progress in addressing some of the challenges that led to its high-risk designation. For example, the Service’s management developed a Transformation Plan and has demonstrated a commitment to implementing this plan. Since our designation in 2001, the Service has: Reduced workhours and improved productivity: The Service has reported productivity gains in each year. According to the Service, its productivity increased by a cumulative 8.3 percent over that period, which generated $5.4 billion in cost savings. The Service reported eliminating over 170 million workhours over this period, with a 4.5 million workhour reduction in fiscal year 2006. Downsized its workforce: The Service has made progress in addressing some of the human capital challenges associated with its vast workforce, by managing retirements, downsizing, and expanding the use of automation. At the end of fiscal year 2006, the Service reported that it had 696,138 career employees, the lowest count since fiscal year 1993. Attrition and automation have allowed the Service to downsize its workforce by more than 95,000, or about 10 percent, since fiscal year 2001. Enhanced the reporting of its financial condition and outlook: The Service responded to recommendations we made regarding the lack of sufficient and timely periodic information on its financial condition and outlook that is publicly available between publications of its audited year-end financial statements by enhancing its financial reporting and providing regular updates to the financial statements on its Web site. The Service instituted quarterly financial reports, expanded the discussion of financial matters in its annual report, and upgraded its Web site to include these and other reports in readily accessible file formats. The 2003 pension act provided another key reason for why we removed the high-risk designation. Much of the Service’s recent financial improvement was due to the change from this law that reduced the Service’s annual pension expenses. Between fiscal years 2003 and 2005, the Service had a total of $9 billion in decreased pension expenses when compared to the annual expenses that would have been paid without the statutory change. This change enabled the Service to significantly cut its costs, achieve record net incomes, repay over $11 billion of outstanding debt, and delay rate increases until January 2006. The Service’s improved financial performance and condition during this time was also aided by increased revenue generated from growing volumes of Standard Mail (primarily advertising) and rate increases in June 2002 and January 2006. Standard Mail volumes grew by almost 14 percent from fiscal year 2001 to 2006, and Standard Mail revenues, when adjusted for inflation, increased by over 11 percent during the same time period. In June 2002, the Service implemented a rate increase (the price of a First-Class stamp increased from 34 cents to 37 cents) to offset rising costs. In January 2006, the Service implemented another rate increase (the price of a First-Class stamp increased from 37 cents to 39 cents) to generate the additional revenue needed to set aside $3.0 billion in an escrow account in fiscal year 2006 as required by the 2003 pension law. Revenues in fiscal year 2006 increased by about 4 percent from the previous year due largely to the January 2006 rate increase. The passage of the recent postal reform legislation was another reason why we removed this high-risk designation. Although noticeable improvements were being made to the Service’s financial, operational, and human capital challenges, we had continued to advocate the need for comprehensive postal reform legislation. After years of thorough discussion, Congress passed a comprehensive postal reform law in late December 2006 that provides tools and mechanisms that can be used to establish an efficient, flexible, fair, transparent, and financially sound Postal Service. Later in this statement, I will discuss how some specific tools and mechanisms can be used to address the continuing challenges facing the Service. The Service’s financial condition for fiscal year 2007 has been affected by the reform act, which, along with the May change in postal rates, will continue to affect its near- and long-term financial outlook. The Service will benefit financially from an increase in postal rates in May averaging 7.6 percent. Key steps in the rate process are provided in appendix I. The Service is estimating that it will gain an additional $2.2 billion in net income in fiscal year 2007 as a result of the new rates. The recent rate case, in addition to generating additional revenues, took significant strides in aligning postal rates with the respective mail handling costs. Some rate increases are particularly large—i.e., some catalog rates may increase by 20 to 40 percent. The new rates structure is aimed at providing the necessary incentives to encourage efficient mailing practices (e.g., shape, weight, handling, preparation, and transportation) and thereby encourage smaller rate increases and steady mail volumes in the longer run. At the beginning of fiscal year 2007 (before the enactment of the reform law), the Service expected to earn $1.7 billion in net income, which reflected the additional revenue the Service estimated it would receive from the May increase in postal rates. The Service, however, planned to increase its outstanding debt of $2.1 billion at the end of fiscal year 2006 by an additional $1.2 billion in fiscal year 2007 in order to help fund the expected $3.3 billion escrow requirement for 2007. Since enactment of the reform law, the Service has updated its expense projections. While the Service’s total expenses for fiscal year 2007 have been affected by passage of the act, those expenses not directly related to the act and total revenues have tracked closely to plan. The Service currently is estimating an overall fiscal year 2007 net loss of $5.2 billion, largely due to changes in either projected or actual Postal Service payments as a result from the act including: Accelerating funding of the Service’s retiree health benefit obligations: Beginning this fiscal year, the Postal Service must make the first of 10 annual payments into a newly created Postal Service Retiree Health Benefits Fund (PSRHBF) to help fund the Service’s significant unfunded retiree health obligations. The 2007 payment of $5.4 billion is due to be paid by September 30. The Service has accrued half of this expense— $2.7 billion—during the first 6 months of the fiscal year and will accrue $1.35 billion in each of the remaining 2 quarters. One-time expensing of funds previously set aside in escrow and eliminating future escrow payments: The act requires the Service to transfer the $3.0 billion it escrowed in fiscal year 2006 to the PSRHBF, which the Service recognized as a one-time expense in the first quarter of fiscal year 2007. The reform act also eliminated future escrow payments required under the 2003 pension law, including the $3.3 billion payment scheduled for fiscal year 2007. Transferring funding for selected military service benefits back to the Treasury: The act significantly reduced the Service’s civil service pension obligations by transferring responsibility for funding civilian pension benefits attributable to the military service of the Service’s retirees back to the Treasury Department, where it had been prior to enactment of the 2003 pension law. The reform act requires that any overfunding attributable to the military benefits as of September 30, 2006, be transferred to the PSRHBF by June 30, 2007. Eliminating certain annual Civil Service Retirement System (CSRS) pension funding requirements: The act eliminated the requirement that the Service fund the annual normal cost of its civil service employees and the amortization of the unfunded pension obligation that existed prior to transferring the military service obligations to the Treasury Department. The Service estimates that it will save $1.5 billion in fiscal year 2007 from eliminating the annual pension funding requirements and amortization payments. The result of these payments is a net increase in retirement-related expenses of $3.9 billion, which is $600 million higher than the expected $3.3 billion escrow payment for 2007 that was eliminated. Thus, the Service is planning to borrow $600 million more than initially budgeted to cover this shortfall. This increase is anticipated to result in the Service’s borrowing $1.8 billion in fiscal year 2007, which would bring its total outstanding debt to $3.9 billion by the end of the fiscal year.