NEW YORK (CNNMoney) -- The U.S. Postal Service continues to hemorrhage money, with a loss of $2.2 billion in the most recent quarter.
The national mail service said Tuesday that it expects to have a cash shortfall and reach its statutory borrowing limit by the time its fiscal year ends in September. That means the agency could be forced to default on some of its payments to the federal government.
Patrick Donahoe, the Postmaster General, said the service is still seeking changes to federal laws that would allow it to change its business model and potentially save enough money to avoid a default.
"The Postal Service may return to financial stability only through significant changes to the laws that limit flexibility and impose undue financial burdens," Donahoe said in a statement.
At issue is a 2006 law requiring the service to pay between $5.4 and $5.8 billion into its prepaid retiree health benefits each year. In addition, the agency is seeking Congressional approval to eliminate Saturday mail service.
The postal service has estimated that moving to five day service could save $3.1 billion. But the Postal Regulatory Commission, which oversees the agency, issued an advisory in March that put the savings at a much more modest $1.7 billion.
While the Postal Service is not strictly a government agency, it is not exactly a private business either.
The service funds its operations through the sale of postage, products and services. But it does receive some taxpayer support and is only required to make enough money to break even.
The service has been struggling with a prolonged slump in mail volume as email and other electronic forms of communication have supplanted 'snail mail,' as the practice of sending letters is now known.
In addition, the service has been hit hard by the weak economy as businesses cut back on direct mail marketing, traditionally a big source of revenue for USPS.
"Sluggish economic growth and diversion of First-Class Mail to electronic alternatives continue to cause record losses," said Joseph Corbett, the chief financial officer at USPS.
That's despite ongoing cost cutting measures, including a reduction of over 130,000 full-time workers over the last three years, he added.
Meanwhile, the recent spike in gas prices could make the situation even worse.
The service said it expects to save up to $1.6 billion this fiscal year as a result of its efforts to reduce expenses and reorganize its operations. But the benefit of those measures "may be offset by rising fuel prices," the service said.
In its fiscal second quarter, which ended in March, the Postal Service said it lost $2.2 billion, up from $1.3 billion in the same period in 2010.
Operating revenue dropped 2.8% to $16.2 billion in the quarter.
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