Clock ticking on Postal Service budget crisis

WASHINGTON (CNNMoney) -- With 120,000 post office workers facing layoffs and thousands more facing benefits changes, lawmakers will soon be required to make some tough choices -- meaning that those choices are likely to be postponed until the last minute.

With the U.S. Postal Service on the brink of insolvency, it's pitching bold plans to shrink its workforce, change benefits and cut offices.

"The Postal Service will be insolvent next month due to significant declines in first-class mail volume, the effects of a congressional mandate to prefund retiree health benefits, and increases in network costs, wages and benefits," the Postal Service said in a Friday statement. "To return to financial stability, the Postal Service seeks legislative changes."

The Postal Service wants a smaller footprint, but that depends on Congress to consider controversial measures including:

-- Voiding union contracts to lay off postal workers with more than six years of service.

-- Moving employees out of federal health and retirement plans.

-- Ending Saturday service.

-- Raiding pension surpluses to make a mandated payment on retirement benefit fund.

This year, Congress has sat on its hands until the last possible moment when it came to tough choices on the debt ceiling, federal shutdown and Federal Aviation Administration funding.

The Postal Service says it'll run out of money next month if Congress doesn't do something.

"It comes at a truly unfortunate time for the Postal Service," said Art Sackler who coordinates a lobbying group of private companies, ranging from FedEx (FDX, Fortune 500) to CNNMoney parent Time Warner (TWX, Fortune 500), that need mail service called the Coalition for a 21st Century Postal Service.

Recent months of bitter congressional stalemate could lead to "collateral damage" on efforts to help the U.S. Postal Service, Sackler said.

"There's a very, very low chance a bill will get passed by Sept. 30th," Sackler said.

The Postal Service supports itself on sales of postage and mail services, and gets no taxpayer funding. But with fewer people using mail services, revenue is free-falling. Last quarter, the U.S. Postal Service posted a loss of $2.2 billion.

On top of that, by law, the Postal Service has to make a hefty $5.5 billion payment on Sept. 30 to pre-pay future retiree health care benefits.

So the Postal Service has been taking drastic steps to cut expenses. Last month, Postmaster General Patrick Donahoe released a long-awaited "post office study" of nearly 3,700 potential closings in all 50 states and Washington, D.C.

On Thursday, the Postal Service revealed its latest plan to attack a projected $9 billion deficit this year. The post office says it needs to eliminate 220,000 positions, or more than 30% of its staff by 2015, but only 100,000 of those positions can be made through attrition. The other 120,000 must come from layoffs, the documents stated.

The Postal Service also would withdraw its 480,000 pensioners and 600,000 employees from federal benefits programs and place them in a new Postal Service benefits program.

Postal Service asks Congress to allow 120,000 layoffs

In Congress, several Democrats and Republicans have proposed bills to address Postal Service budget deficits. But, so far, none of those plans have gotten much traction. On Friday, most lawmakers said through congressional aides that they needed time to review the Postal Service's proposal before they commented on it.

The idea of breaking union contracts to lay off employees is pretty controversial and will meet resistance especially from labor groups, aides said.

"I am particularly interested in learning whether these proposals would be fair to employees and effective in reducing the Postal Service's costs," said Tom Carper, a Democrat who chairs the Senate subcommittee that oversees the post office.

Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, seemed interested in the idea, but equally cautious.

"If the postal union is standing in the way of efforts to guarantee the long-term solvency of the U.S. Postal Service, this would be a serious outrage," Hatch said in a statement. "I would have to examine any proposal to create a new benefit system in its entirety before deciding whether it is the appropriate course to take."

Labor groups protested the Postal Service proposal and said they would "vehemently oppose" a move. They're pushing lawmakers to allow the Postal Service to dip into multi-billion-dollar surpluses in the pension plan to avert insolvency this fall.

The groups also want Congress to scrub the law that requires the agency to make those pricey $5.5 billion payments to pre-pay future retirement health care benefits.

"Crushing postal workers and slashing service will not solve the Postal Service's financial crisis," said Cliff Guffey, president of the American Postal Workers Union.