By Emily Stephenson
WASHINGTON (Reuters) - A fund that compensates federal employees for work-related injuries will run out of cash in the last quarter of 2012 if the U.S. Postal Service defaults on an upcoming $1.2 billion payment, according to the Labor Department.
The mail carrier, which has been losing billions of dollars each year, has more than 560,000 full-time employees and is the largest employer of workers covered by the Federal Employees' Compensation Act.
The Postal Service still plans to make the payment, due in October, to the fund, USPS spokesman David Partenheimer told Reuters. But in its third quarter financial statement this month, the agency said that without relief from Congress it could not guarantee it would have enough cash.
The Labor Department said in a letter to Congress dated August 1 that without the Postal Service's usual hefty contribution, the fund would be unable to pay any benefits in the last four months of fiscal year 2012.
"Over 2 million other federal employees are covered by FECA and ... would be directly affected, along with USPS employees," if the Postal Service fails to make its $1.2 billion payment, the Labor Department wrote to Darrell Issa, chairman of the House of Representatives Committee on Oversight and Government Reform, in a letter viewed by Reuters.
The assessment from the Labor Department could apply more pressure on Congress to provide financial relief to the Postal Service. Issa, a Republican, has been pushing legislation that would end Saturday mail delivery and set up groups to guide post office closings and overhaul the agency if it defaults on payments to the federal government.
The Postal Service is scrambling to find ways to save money. For example, in June it suspended payments to a federal retirement fund to free up cash for its operations.
Partenheimer said that is expected to save about $900 million, which could go toward the workers compensation payment. He also said the agency could consider paying less than the full $1.2 billion but enough to allow the Labor Department to meet its benefit obligations.
"At this time we do expect to make this payment in full but there is still uncertainty around it," he said in an email to Reuters. "As we get closer to the end of the fiscal year we'll have a better idea."
The Postal Service's claims represent 40 percent of the benefits paid each year by FECA for medical care and cash compensation for work-related disabilities.
The agency -- which receives no taxpayer funds for its operations -- has struggled to cope with plummeting mail volumes and skyrocketing employee costs.
The Postal Service has asked Congress for a substantial overhaul of its business and relief from several of its upcoming payments. But Congress is on recess until September 6, and partisan bickering and an upcoming deficit fight make achieving those reforms challenging.
The Labor Department said in its letter that there is no penalty facing the Postal Service if it skips the workers compensation payment.
(Editing by Eric Beech)