The Senate Homeland Security and Government Affairs Committee held a hearing this week on the U.S. Postal Service’s dire financial situation. The USPS is facing a $10 billion loss this year, is about to max out its $15 billion line of credit with the U.S. Treasury, and doesn’t have the money to make a required $5.5 billion payment for retiree health care benefits due at the end of the month. The USPS is projecting insolvency in 2012 if Congress doesn’t step in to provide relief.

Congress hasn’t been able to bring itself to allow the USPS to close 3,000 of its 30,000+ retail locations, so it’s hard to imagine that it will allow operations to come to a halt. Therefore, the important question is what sort of relief will Congress ultimately provide?

Let’s start with what it won’t do: consider privatization. “Consider privatization” means authorizing studies or a commission to examine what it would take to prepare the USPS for sale to the private sector. In its current form, it’s unlikely that anyone would touch the USPS with a 10-foot pole. The reluctance to even consider privatization is unfortunate, especially since European nations have been liberalizing their postal markets for two decades. Getting the privatization ball rolling would probably require leadership from the White House, and that won’t happen with this administration. (See this Cato essay on privatizing the USPS for more information.)

Interestingly, U.S. Postmaster General Patrick Donahoe is asking Congress to let the USPS operate more like a private business by allowing it to reopen collective bargaining agreements, eliminate Saturday mail delivery, manage its own employee benefit programs, and have more freedom to close down excess postal facilities. Donahoe understands what Congress either doesn’t or is unwilling to recognize: if the USPS is to operate solely on the revenues that it generates, then it needs the flexibility that comes with private ownership.

Based on several pieces of postal legislation that have already been introduced in Congress, the most likely scenarios are a band-aid and/or bailout.

The band-aid solution would be to allow the USPS to decrease or defer its statutory requirement to fund retiree health care benefits. Currently, only 47 percent of the future liabilities for retiree health care benefits are funded. Therefore, while decreasing or deferring the payments will free up money now, it will increase the unfunded liability going forward. That’s a problem because mail volume — the USPS’s lifeblood — is projected to continue plummeting as people turn to electronic forms of communication. Thus, the band-aid solution would increase the chances of a taxpayer bailout in the future.

The bailout solution would be to transfer to USPS approximately $50-$75 billion in employee pension “overpayments” to the Civil Service Retirement System that the USPS is alleged to have made over the years. The postal employee unions are pushing this solution. The question of whether or not the USPS is “owed” money is a very complicated matter and beyond the scope of this blog post. The USPS’s inspector general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector general have concluded otherwise. Regardless of whether the USPS paid more than its fair share, the transfer of funds from the federal government to the USPS would be a hit on taxpayers. (I recommend that interested readers take a look at a paper on the controversy produced by the Institute for Research on the Economics of Taxation’s Michael Schuyler.)

I’ll conclude by noting that the Senate hearing offered another example of why putting Congress in ultimate control of a commercial operation is bound to fail. Here’s a solution that Sen. Claire McCaskill (D-MO) offered up to Postmaster Donahoe as reported by the Washington Post:

In addition to structural reforms, Sen. Claire McCaskill (D-Mo.) suggested that USPS should mount a national advertising campaign promoting the value of printed mail. “You cannot get money by text message,” McCaskill said. “I really think that there is a longing out there right now, especially in these uncertain times, for some of the things that have provided stability over the years.”

I’ll forgo any wisecracks and just let Comedy Central’s Jon Stewart take it away: