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The post office will run out of money this year unless it gets help, Postmaster General John Potter told Congress on Wednesday as he sought permission to cut delivery to five days a week.

“We are facing losses of historic proportion. Our situation is critical,” Potter told a House panel.

The agency lost $2.8 billion last year and is looking at much larger losses this year. Reducing mail delivery from six days to five days a week could save $3.5 billion annually, Potter said.

Potter also urged changes in how the post office pre-pays for retiree health care to cut its annual costs by $2 billion.

If the Postal Service does run out of money, the lingering question, Potter told the House Oversight post office subcommittee, is which bills will be paid and which will not. Ensuring the payment of workers’ salaries comes first, he said, but other bills may have to wait.

Potter first raised the possibility of delivery cutbacks in January, but the idea has not been warmly received in Congress.

“With the Postal Service facing budget shortfalls, the subcommittee will consider a number of options to restore financial stability and examine ways for the Postal Service to continue to operate without cutting services,” subcommittee chairman Stephen F. Lynch, D-Mass., said.

Lynch said the financial stability of the Postal Service is “critical to the American expectation of affordable six-day mail delivery.”

Even if the agency succeeds in reaching its planned cost cuts of $5.9 billion, there could still be a $6 billion deficit in 2010, Potter said.

“Without a change we will exhaust our cash resources,” he said. “We can no longer afford business as usual.”

Asked if layoffs would occur, Potter said it is possible but he hopes avoidable.

Last week, the post office said it planned to offer early retirement to 150,000 workers and is eliminating 1,400 management positions and closing six of its 80 district offices in cost-cutting efforts. Potter said he expects 10,000 to 15,000 workers to accept the early retirement offer.

Dan Blair, head of the independent Postal Regulatory Commission, suggested that other savings are possible through closing small and rural post offices – something Congress has resisted in the past. He added that it may be necessary to increase the limit on the amount of debt the post office can carry.

The post office had a $384 million loss in the first quarter of the fiscal year – October through December – which is usually the busiest period because of the holidays.

Officials said the recession has contributed to a mail volume drop of 5.2 billion pieces compared to the same period last year. If there is no economic recovery, the USPS projects volume for the year will be down by 12 billion to 15 billion pieces of mail.

Over the past year the post office says it has cut 50 million work hours, stopped construction of new facilities, frozen salaries for executives, began selling unused facilities and has cut post office hours.

Last year’s high fuel prices also sapped funds from the post office, which operates more than 200,000 vehicles. Every 1-cent increase in the price of fuel costs the post office $8 million.

Blair also noted that Congress could consider appropriating money to help the post office. The agency does not receive a taxpayer subsidy for its operations, although Congress does subsidize overseas voting and free mail for the blind.

William Young, president of the National Association of Letter Carriers, stressed in his testimony that the agency is not seeking a taxpayer bailout, “but we are here to ask the Congress for help.”

“At this moment, the survival of the Postal Service – a venerable institution that  is literally older than our country – hangs in the balance,” Young added.

Lawmakers also raised questions regarding recent news reports that Potter is paid as much as $800,000 a year. That is not correct, Potter said. He said his salary, set by Congress, is $263,575. He said the news reports were counting his retirement fund, the cost of his security detail and a $135,000 bonus that would be paid over 10 years after he retires.

The bonus is based on improved delivery rates and customer satisfaction, he said. Under the current financial conditions, Potter said, he would not be eligible for a bonus this year.