The odds of a multibillion-dollar rescue package went way up this week when Postal Service management reported a $2.2 billion loss for the first quarter, more than 25% higher than last year despite the economic recovery. It now appears that the $15 billion line of credit the feds have offered USPS will be used up by the end of this year, with low odds on ever being paid back.

If that isn’t ugly enough, the Postal Service expects $42 billion in additional losses over the next four years. Mail volume and revenues have suffered what Postmaster General Patrick Donahoe concedes are “unprecedented declines” since 2006, with projections of another drop of 20 billion letters mailed by the end of the decade, down from 171 million this year, thanks to competition from electronic mail.

If this were a private business, the obvious response to these losses would be urgent cost-cutting to avoid insolvency. Instead, Postal Service management recently concluded negotiations offering the 205,000-member American Postal Workers Union a new four-and-a-half-year contract that will provide a 3.5% pay raise over three years, dole out automatic cost of living wage hikes after 2012, and expand no-layoff protections.

Postal officials say this is the best deal they could get and that, had they not agreed to it, an arbitrator would have been even more generous to the union. But given that 80% of postal costs are for wages and benefits, this contract is unhinged from all fiscal reality.

That is, unless the real play here is a bet on a taxpayer bailout. With their $15 billion line of credit from Treasury about to be exhausted, postal workers and management are now asking Congress to let them take a pass on $5.4 billion in legally required annual contributions to prepay for retirement health benefits.

While there is honest disagreement about how much should be set aside, the Postal Service and unions essentially want to operate the fund on a pay-as-you go basis—i.e., the same model that has got states like California into fiscal trouble. As funding falls but benefits don’t, pressure will rise to dump those health costs on taxpayers—as General Motors and Chrysler did two years ago.

Even worse is a bill co-sponsored by Senators Tom Carper of Delaware and Susan Collins of Maine, the Chairman and ranking Member on the postal oversight committee. They want to toss a $50 billion to $75 billion life raft to USPS by having the feds underwrite pension obligations for currently retired postal workers. We hope the tea party folks are paying attention because this bailout would cost about three times the first-year savings from the just-completed 2011 federal budget deal.

Postal unions say this is justified because it would cover retirees who earned pensions prior to the 1970 law that reorganized the postal system. That measure converted the old government-run Post Office into the current government-sponsored enterprise that is supposed to operate like a business. That deal handed assets worth tens of billions of dollars to the Postal Service, and the historical record is clear that in return the retirement costs were to be borne by USPS—not by taxpayers. Given that there are well-organized postal workers in every Congressional district, a Carper-Collins bailout may be coming.

This giveaway would be especially infuriating because postal workers already enjoy a 30% to 40% edge in pay and benefits over comparably skilled private workers, according to the Postal Service’s own economic analysis. Bureau of Labor Statistics data indicate the average hourly compensation for postal union members is $41 versus $28 for private industry. Postal workers also contribute far less than private workers and even less than other federal workers to cover health-care costs.

One indication of this pay advantage is that the historical quit rate at USPS has been estimated at less than 1.5%—as low as any industry we’ve heard about. Moving to pay parity—as well as shutting down thousands of outdated post offices and ending Saturday mail delivery—would do a lot to lower USPS losses.

Thanks to the digital revolution, mail can be delivered with the click of a mouse and snail mail will continue to slowly fade away. The obligation of postal management is to negotiate this inevitable transition while protecting taxpayers from another union raid. If Republicans don’t start paying attention, the raid is going to arrive on their doorstep.

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