Published: Aug 05, 2010 6:44 PM EDT
Updated: Aug 05, 2010 3:42 PM EDT

WASHINGTON (AP) - The Postal Service was $3.5 billion in the red for the third quarter and may not be able to make a required payment for future retiree health benefits, the agency said Thursday.

Losses for the April through June quarter were $1.1 billion more than the post office lost in the same period a year ago.

The post office has been rocked by declining mail volume as people and businesses continue switching to the Internet in place of letters and paper bills.

"Given current trends, we will not be able to pay all 2011 obligations," Joseph R. Corbett, the Postal Service's chief financial officer, said in a statement.

"Despite ongoing aggressive cost reductions totaling over $10 billion in the last three years, it is clear that a liquidity problem is looming and must be addressed through fundamental changes requiring legislation and changes to contracts," he said.

The Affordable Mail Alliance challenged the statement and contended that the post office will finish the fiscal year with $1.3 billion in cash.

"We're saddened to see these dubious claims by the Postal Service and would hope for a more constructive dialogue with customers," said Tony Conway, head of the coalition of high-volume mailers that is fighting the post office's plan to raise rates in January.

To stem the losses, postal officials have proposed raising rates, cutting out Saturday mail delivery and eliminating advance payments for retiree health benefits.

Some in Congress have been skeptical about the proposal to eliminate Saturday deliveries and a Senate Appropriations subcommittee voted to block the change.

On the House side, meanwhile, a subcommittee is looking at changing the requirement that the Postal Service pay more than $5 billion annually into a fund for future health benefits for its retirees.

The post office said its cash flow and the $3 billion it could borrow may not be enough to cover the $5.5 billion payment it is required to make into the benefit fund on Sept. 30.

Such payments are not required of other federal agencies, but federal budget officials have opposed eliminating them for the post office as that would - at least on paper - show up as an increase in the federal deficit.

Overall, the post office had income of $16 billion for April-June, which was down $294 million from the same period last year. At the same time expenses were $19.5 billion, an increase of $789 million.

The number of items mailed during the period was 40.9 billion pieces, down by 700 million.

The year-to-date net loss for the post office is $5.4 billion, compared to a loss in the same period last year of $4.7 billion.

The post office has cut spending and work hours in recent years but is restricted by union contracts. In addition, efforts to save money by closing or consolidating postal facilities often run into opposition from local residents and Congress.