Management’s Discussion and Analysis of Financial Condition and Results of Operations 

In 2007, we entered into new agreements with our four largest labor unions. The APWU and the NRLCA agreed to new four-year contracts, while the NPMHU and NALC entered into five-year agreements. COLA-based changes were included in the agreements.

Our non-bargaining employees receive pay increases through a pay-for-performance program that makes meaningful distinctions in performance. These employees do not receive automatic salary increases, nor do they receive COLAs or locality pay.

Retirement Expense
Our employees participate in one of three retirement programs of the U.S. government, based on the starting date of their employment with the federal government. These programs are the Civil Service Retirement System (CSRS), the Dual CSRS/Social Security System (Dual CSRS), and the Federal Employees Retirement System (FERS). The programs are administered by the OPM. See Note 10, Retirement programs, in the Notes to the Financial Statements for additional information.

The expenses of all of our retirement programs, except for retiree health benefits, are included in compensation and benefits expense. These expenses represented 7.6% of our total operating expenses in 2008, 7.2% in 2007, and 9.8% in 2006. Retirement expense for current employees of $5,899 million was $162 million, or 2.8%, greater than in 2007. The 2008 increase is largely attributable to the higher employer contributions resulting from higher average wage rates in 2008, largely due to COLAs. The decrease in 2007, as compared to 2006, is mainly due to the enactment of P.L. 109-435, which suspended our CSRS retirement contribution as of October 14, 2006, but increased our contributions into the PSRHBF.

As described in Note 2, Summary of significant accounting policies, in the Notes to the Financial Statements, we account for our participation in the retirement programs of the U.S. government under multiemployer plan accounting rules, in accordance with Financial Accounting Standard Board Statement 87, Employers’ Accounting for Pensions. Although the Civil Service Retirement and Disability Fund (CSRDF) is a single fund and does not maintain separate accounts for individual agencies, P.L. 109-435 requires us to make certain disclosures regarding the obligations and changes in net assets as if the funds were separate. All of the following information is provided from OPM and represents the most recent data available (i.e., actual data as of September 30, 2007) with projections to September 30, 2008.