Sunday, August 01, 2004

Pension Fund Bail-Out

In a raft of trouble due to mismanagement, United Airlines wants to bail out of its pension obligations as the first step to getting out of bankruptcy. The NYT reports that the repercussions could be devastating for the economy--and taxpayers.

Bailout Feared if Airlines Shed Their Pensions

Published: NYT, August 1, 2004

In an echo of the savings and loan industry collapse of the 1980's, the federal agency that insures company pensions is facing a possible cascade of bankruptcies and pension defaults in the airline industry that some experts fear could lead to another multibillion-dollar taxpayer bailout.

"The similarities are incredible," said George J. Benston, a finance professor at Emory University in Atlanta who has written extensively on the regulatory failures that led to the costly savings and loan bailout.

Deposits in savings institutions are, like pensions, guaranteed by a federal insurance program. The savings industry first sickened because changes in market conditions made the traditional way savings and loans operated unprofitable, but government delays and policy missteps then made the situation much worse. In the end taxpayers bailed out the industry — at a cost, according to various estimates, of $150 billion to $200 billion.

Now experts say they see similar forces gathering in the pension sector, with United Airlines perhaps the first to go down the path. Operating in bankruptcy, United is striving to attract the lenders and investors it needs to survive. It said last month that it would no longer contribute to its pension plans; United also seems intent on shedding some or all of its $13 billion in pension obligations as the only way to succeed in emerging from bankruptcy proceedings.

If United manages to cut itself loose from the costly burden of its pension plans, it might force others determined to keep their costs similarly under control to emulate its move. "Rivals may feel they are at a competitive disadvantage and follow suit, raising the specter of a domino effect in the industry," said Bradley D. Belt, the executive director of the government's Pension Benefit Guaranty Corporation, which insures pensions. If every airline with a traditional pension plan were ultimately to default, the government would be on the hook for an estimated $31 billion. Its insurance coverage is limited, so some employees would have their benefits reduced.

"The pension insurance program is there to protect workers' benefits," said Mr. Belt, who took over the agency in April. "It shouldn't be used as a piggy bank to help companies restructure."

Already, some airline employees are taking steps to protect themselves against future pension losses.

Each month, for example, about 30 pilots normally retire from Delta Air Lines. But in June, almost 300 did.

Andrew Dean, one of the new retirees, said he and his colleagues watched in dismay as the financial debacle unfolded at United. He said that he and many of his fellow pilots decided they had better grab their pensions right away - while the money was still there.

"These are very scary times right now for someone in my position," said Mr. Dean, who at 58 walked away from his job just as he was reaching the peak earning period of his career. His pension was also reduced because he retired early.

But his decision now looks prescient. On Friday, Delta asked its pilots for a 35 percent pay cut and proposed a smaller pension plan.

Foremost on the minds of the departing pilots, Mr. Dean said, were arcane pension rules that can offer advantages to workers who quit before a pension plan fails. At Delta, for example, as long as the pension plan stays afloat, pilots are allowed to take half of their benefit in a single check when they retire. But if the plan fails, the pilots lose their chance to take a big payout.

"What I've managed to do is secure half of my retirement," Mr. Dean said. He may still lose the rest if the government takes over the program and limits future payouts. "I really lose sleep over that," he said.

The Pension Benefit Guaranty Corporation is already hobbled by debt, having picked up the pieces of more than 3,200 failed pension plans in its 30-year life. The scale of the failures has risen sharply in the last three years, but the agency has few tools at its disposal to prevent the situation from becoming worse.

Now it faces a possible $5 billion default by United - which would be a record - and the possibility of more big airline defaults after that.

"The agency can't take a lot of $5 billion hits, multiple times per year, year after year, and survive," said Steven A. Kandarian, the pension agency's immediate past director. "Eventually, you'll run out of money."

It is impossible to predict the exact size of any pension bailout, although economic projections by the agency suggest that in the worst case, a bailout within the next decade involving failures beyond the airlines could cost taxpayers up to $110 billion.

But because pension obligations, unlike bank deposits, do not have to be paid off all at once, it is difficult to raise alarms about the threat.

"The real blowup doesn't happen right away; it happens over time," Mr. Kandarian said. "You've got to address it now, but it doesn't look like a crisis now. The crisis is always over the next hill."

The risk is that the longer the problems are avoided, the worse they can get.

The airlines, who have been in trouble constantly since Reagan broke PATCO and the Pubs passed de-regulation over the objections of practically everyone who knew anything about the industry, have been engaging in price wars as a way to attract consumers. The wars have been good for fliers but have prevented the airlines from making a profit without dry-gulching employees.

In the late 80's and early 90's, airline unions agreed to serious cuts in pay rates, benefits and payments into their pension funds in order to keep the airlines afloat during the First Bush Recession. The companies made empty promises in return that they would go back to the original levels as soon as things picked up. But when times got better in the mid-90's, they reneged on those promises and instead used the new money to invest in ever-tightening rounds of price cuts.

Most of what the airlines have done has been in almost total denial of reality: they've ignored rising fuel prices, discounted the impact of fewer passengers, overcrowded their routes, forced growth by competing for new routes before their core financial instability was completely under control, and so on. Now, as that reality crashes down around their heads, they want to bail out of obligations to their employees as the first line of defense against a bankruptcy they brought largely on themselves, and dump those obligations on taxpayers who will undoubtedly blame the unions for their "greed".

And why not? A lot of corporations followed the same pattern in the late 80's and early 90's, stealing from their employees' pension funds to boost their bottom lines, and even though what they did was blatantly illegal, they all got away with it--not one pension fund manager or corporate decision-maker was ever charged with the theft they engineered, let alone went to jail over it. The corporations--many of them making a healthy profit at the time--made $$hundreds of millions$$ by looting the funds and millions of workers, after 20 or 30 years of paying into an account that was supposed to protect their retirement, found that the accounts had been drained and their retirement along with them.

Belt summarizes the corporate attitude toward pension funds exactly right: they think employee funds are their own piggy bank they can draw from whenever they feel like it. Somebody needs to take them aside and explain to them patiently that the money belongs to their employees, not them. And while whoever it is is at it, they might also explain that highly-trained people won't work for minimum wage and that the airlines had better stop setting their price structure as if they will.

Unfortunately, it's probably too late at this point for a conversation like that to do any good for most of them. Well, never mind. They can always hire pilots from Calcutta and Sri Lanka cheap and run their reservation desks from Indonesia...can't they?