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updated 3/2/2011 4:42:49 PM ET 2011-03-02T21:42:49

The Republican-controlled House opened the envelope of postal finances on Wednesday and what it pulled out wasn't pretty.

Unless things change, the post office will run out of money by the end of the fiscal year in October, Postmaster General Patrick R. Donahoe told the House Oversight subcommittee on the postal service.

Donahoe said that as of Sept. 30 his agency will owe the federal government a payment of $5.5 billion to fund medical costs, in advance, for future retirees, and in November it will need to make a $1.3 billion payment for worker's compensation.

"The Postal Service will not have the cash available to make both of these payments. We need legislation this year to address that fact," he said.

If it does come down to crunch time, said Donahoe: "We will deliver the mail." Employees will be paid, as will suppliers, he said. "The thing we will not do is pay the federal government."

Without some important changes to the law the post office "cannot survive as a self-financing entity," Donahoe said.

While the post office has been battered by the recession and the movement of mail to the Internet, it has also cut costs sharply by reducing its workforce by 240,000 people in recent years. Last year it cut costs by $3 billion and expects to reduce spending by another $2 billion this year, Donahoe said.

But, alone among federal agencies, the post office is required to pay about $5.5 billion annually into an account to fund future retiree medical benefits.

The requirement was imposed in 2006, and since then the post office has paid $21 billion into the fund and, during the same period, has had a net loss of $20 billion, explained Ruth Goldway, head of the independent Postal Regulatory Commission.

"Prefunding health benefits is an incredible burden," Donahoe said. "In 2007 and 2008 we would have had net profits except for the prefunding."

The problem has come before Congress in the past, with proposals to reduce or eliminate the prepayments.

However, since the post office is not part of the federal budget, but the accounts that receive its retirement payments are, that money counts as income for the federal government. That means that reducing or eliminating the payments would appear to increase the federal budget deficit.

The dire finances notwithstanding, Donahoe also sought to be upbeat, saying that challenges can be recast as opportunities to make the post office more market-responsive.

"We think there is plenty of growth available in standard mail, in the package market" and other new products, he said. In addition the agency is exploring electronic opportunities, he said.

The agency is also seeking to cut costs by closing or consolidating offices and has proposed eliminating deliveries on Saturdays, while offices would remain open six days.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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