updated 9/27/2005 1:00:22 PM ET 2005-09-27T17:00:22

Even with a planned postage rate increase, the Postal Service expects to go nearly $2 billion in the red next year.

Postal Chief Financial Officer Richard J. Strasser told the agency’s board of governors on Tuesday that rising costs will result in a $1.8 billion deficiency in 2006.

The agency plans a 5.4 percent rate increase in January, which would raise the cost of sending a first-class letter by two cents — to 39 cents.

“We project revenue of $72.3 billion, an increase of 3.4 percent, to be offset by a like percentage increase in expenses,” he said.

Strasser said the agency plans cost reductions of $1.1 billion, including reductions of 42 million work hours. But, he noted, the post office also faces a congressionally imposed requirement to place $3.1 billion in an escrow account.

Strasser also noted that costs are now expected to be higher than originally planned when the rate increase was approved by the board

The postal fiscal year begins Oct. 1.

At the meeting the board also approved a transformation plan for the agency through 2010.

“We will continue to reduce costs by improving efficiency in all our operational and business processes,” said Postmaster General John E. Potter. “We will bring service performance to even higher levels. We will use the best technology to make the mail a rich source of information both for our customers and our operations managers. We will achieve all this with an energized, customer-focused work force.”

Board Chairman Jim Miller noted that the constantly changing business world affects the post office.

“We cannot predict how events halfway around the world, or in our own backyard, will affect our costs. We cannot predict the final form of postal reform legislation — or even if it will occur,” he said. “But we can do our best to prepare for the impact of these external factors. We understand that our plan must be dynamic and adaptable. It must help us manage and succeed through periods of uncertainty.”

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