UPDATE 2-U.S. Postal Service loss narrows to $1.3 bln in Oct-Dec
* Election mail, holiday packages help results
* Postal Service lost $3.3 billion in year ago quarter
* CFO forecasts extremely low levels of cash in 2013
By Elvina Nawaguna and Emily Stephenson
WASHINGTON, Feb 8 (Reuters) - The U.S. Postal Service cut its losses by more than half in its first quarter as mail tied to the November elections, and stronger revenue from holiday-related packages contributed to a better quarter.
The postal agency, which recently announced plans to cut back on Saturday deliveries because of financial problems, lost $1.3 billion in the October through December quarter compared with a year ago loss of $3.3 billion, officials said on Friday.
USPS Chief Financial Officer Joe Corbett said the Postal Service still expects to face extremely low levels of cash during 2013.
"The need for such cost-saving initiatives like five-day mail delivery are borne out by the continuing loss of first-class mail and the resulting deep and unsustainable financial losses," Corbett said on Friday.
"We cannot continue to operate on a precipice," he said.
The mail service has been grappling with tumbling mail volumes as Americans communicate more online, and has struggled under the weight of massive required payments for future retiree health benefits.
The October through December period, which is the first quarter of the Postal Service's fiscal year, is typically the strongest because of the holidays.
Officials said total mail volume during the quarter fell to 43.5 billion pieces from 43.6 billion a year earlier. A dip in first-class mail volume was mitigated by the 3.6 percent rise in standard volume, largely due to official election and political mail.
The Postal Service also set aside less this year for its annual payment for future retiree health benefits, which contributed to a 9.8 percent drop in operating expenses to $18.9 billion during the quarter.
A 2006 law requires the Postal Service to fund 75 years worth of its future retirees' healthcare by 2016.
The Postal Service has blamed much of its financial troubles on the massive payments into this fund. The independent government agency relies on sales of stamps and other products rather than taxpayer dollars to fund its operations.
Last year, the Postal Service had to account for two such payments after Congress delayed a payment initially due in 2011. The mail agency defaulted on both but still had to account for them in financial reports.
Officials said they expect to default again on this year's $5.6 billion contribution, which is due at the end of September.
Excluding the prefunding requirement for future retiree health benefits, the Postal Service posted $100 million in operational profits in its first quarter.
"The report makes clear that the top financial burden is the 2006 congressional mandate to pre-fund future retiree health benefits, which no other agency or company is required to do," Fredric Rolando, president of the National Association of Letter Carriers said.
The Postal Service's financial report, he said, shows the folly of making drastic cuts in service such as the plan to eliminate first-class mail delivery on Saturdays.
"The USPS should focus on urging Congress to reform the pre-funding requirement, not on a counterproductive slashing of services that would hurt the public, businesses and the Postal Service itself," Rolando said.
CALLING ON CONGRESS
Postmaster General Patrick Donahoe again called on the U.S. Congress to pass legislation alleviating the agency's woes. The agency wants to stop making the payments for future benefits and to take over its own health care plan, among other changes.
Lawmakers tried last year to pull together legislation to overhaul the agency's business model but were unable to agree on how to do it.
U.S. Senate Homeland Security and Governmental Affairs Committee Chairman Tom Carper, who has pledged to push for postal service legislation, said that despite the Postal Service's progress in trimming costs, a lot remains to be done to fix the agency's outdated business model.
"Piecemeal efforts like those announced in recent days and months will not be enough to solve the Postal Service's financial challenges for the long haul," Carper said in a written statement.
With gun control, immigration and looming federal spending cuts dominating the attention of Congress this year, it appears unlikely lawmakers will tackle postal legislation soon.
In an effort to spur Congress to act, the mail agency earlier this week announced plans to stop delivering first-class mail on Saturdays starting in the first week of August. The agency said cutting back to five-day mail delivery would save $2 billion a year.
The move prompted an outcry from postal unions and some lawmakers, who argued the Postal Service was circumventing Congress. Lawmakers for decades have prevented the Postal Service from scrapping Saturday delivery.
"My encouragement to Congress would be to please not put any restrictions on us moving ahead," Donahoe said. "We've got to make this change, we've got to get savings."
The Postal Service will continue delivering packages on Saturdays and will keep post offices on their normal schedules.
Packages have been a bright spot in a series of bleak financial reports as Americans order products from online retailers such as e-Bay Inc and Amazon.com Inc .