Companies Dump Pension Obligations on Taxpayers

Here's a great Jeopardy question for any blue-collar union worker:

It was the biggest corporate entity for its industry in the nation and lost huge amounts of revenue to rivals who used low-wage, non-union labor in the United States to provide a cheaper product. A revolving door of top executives squandered billions by acquiring and investing in business ventures that fell flat.

It was wracked with industry over-capacity, decreased demand amid a sluggish U.S. economy, and depressed prices. Its union capitulated to billions of dollars worth of concessions and to massive layoffs in an effort to save it.

Is it Goodyear Tire & Rubber, or United Airlines? Actually, it's both.

At Goodyear, the Steel Workers (USWA) took the added step of hiring Wall Street firm Lazard Frères to devise a long-term plan resulting in an even more aggressive restructuring than the company originally proposed.

At United, the Machinists (IAM) simply gave up language in their contract protecting mechanics from the outsourcing of labor-intensive heavy maintenance. The move by the IAM allowed United to close two of its three maintenance overhaul bases, resulting in the loss of over half its mechanics post-September 11.

To save the oldest commercial airline in the country, unions for United's mechanics, pilots, flight attendants, baggage handlers, and customer service agents agreed to give away $5.2 billion in concessions over five and a half years under the threat of possible bankruptcy. In the end, rank-and-file mechanics at United were the only group to vote against the cuts.

United still went bankrupt in December 2002.


So did steelmaker LTV Corporation, first in 1987 and again in 2003.

LTV led the way in steel in wiping out retiree health benefits through bankruptcy and turning its pension obligations over to the Pension Benefit Guarantee Corporation, the government agency that insures workers' pensions. The PBGC cut retirees' benefits drastically while LTV replaced its defined benefit plans with defined contribution plans for continuing workers.

After LTV emerged from its first bankruptcy in 1993, the PBGC successfully argued in a Supreme Court case that LTV should assume fiscal responsibility for the funds because it was financially solvent enough to do so. The Supreme Court sided with the government and returned three of LTV's four pension funds to the employer.

Last year LTV liquidated during its second bankruptcy and the PBGC took over its defined benefit plans, which were under-funded by some $2.3 billion.


Testing the waters in the airline industry, US Airways, also operating with bankruptcy protection, terminated its pilots' pension plan and turned it over to the PBGC last year. Pilots saw their retirement incomes go from a maximum $130,000 to a cap of $28,585 a year.

United, however-with its 35,000 retirees and pensions under-funded by an industry-leading $8.3 billion-appears to be at the forefront of transforming the entire airline industry.

In mid-July the company announced it would skip its pension payments for the rest of the year-some $568 million-leading many to speculate that United would completely eliminate its defined benefit plans for current employees and dump the rest of its obligations on the PBGC.

If United doesn't pay up, the PBGC will be liable for $6.4 billion-the largest default in the PBGC's history.



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The PBGC protested United's move, claiming it was illegal. Of particular concern to the PBGC are the airline industry's estimated $31 billion pension liabilities, and the potential for a domino effect with other airlines as the industry restructures.

In late July, United received $1 billion in additional financing. While the mainstream media reported that the cash came with the caveat that United jettison its pension debt, it was actually United that presented the idea to its financiers.

Earlier in the summer, United gave notice to its retirees that it would need to cut health benefits and worked out deals with all of its unions in advance of petitioning the bankruptcy court.


When all is said and done, retirees at United stand to lose more than $2 billion in pension benefits should the airline hand them over to the government. The IAM, the largest union at United, filed a lawsuit on behalf of its 37,000 active and retired members against United's attempt to dump its pension obligations.

Along with the IAM, the Association of Flight Attendants is petitioning for a Chapter 11 Trustee.

The pilots issued a statement saying they will do whatever is necessary to defend their pensions. The Air Line Pilots Association points out that United's pilots have taken a 45 percent cut in pay, a 20 percent cut in benefits, and a 15 percent increase in work hours over the past 18 months.

The Aircraft Mechanics Fraternal Association (AMFA), which won representation of United's mechanics from the IAM in July 2003, has met with the PBGC and is organizing informational protests at airports across the country.

Since mechanics at United have been disproportionately hit with layoffs and cuts, the anger there runs deep. Since many jobs may be completely eliminated in the next few years, there is much talk on the shop floor of organized work action.

The last time United mechanics tried to fight cuts, during contract negotiations in 2000-2002, United had a judge issue a Temporary Restraining Order preventing any kind of organized resistance. Mechanics at that time were still in the IAM, and IAM Local 1781 President Ray Perry was famous for saying he would not go to jail for mechanics who violated the TRO.

In response to questions at a union meeting in July about a possible independent work action by mechanics today, AMFA Local 9 President Joe Prisco said, "If the company told me to tell mechanics to stop whatever it is they do, then my response would be, 'I did not tell them to do anything, therefore I will not tell them to stop what they decided to do.'"

He continued, "And if it came to the same threats the IAM was given, my response would be, 'Lock me up.'"


All pension programs are at risk, including ones sponsored by unions. In fact, programs like the Teamsters' Central States Pension Fund and the IAM's National Pension Fund have loopholes that suspend or eliminate all pension payments to retirees who go back to work-something more and more older Americans will be forced to do as their health care costs increase with cuts.

Twenty years ago, the ratio of worker to retiree was three to one. Today it is one to one and set to grow exponentially as baby boomers begin to retire.

The airlines will not be the last stop in this transformation. In 2003 pension and health care costs at General Motors amounted to $6.2 billion. That's $1,784 per vehicle. Largely non-union Toyota's pension costs amount to $200 per vehicle in the U.S.

While these industries are changing, they are not dying. In fact, they are growing. For example, Boeing projects a $5.2 trillion market for new commercial aircraft and aviation services over the next 20 years.

Sadly, it seems the generation born after 1938-who benefited from the passage that year of the Fair Labor Standards Act, which all but eliminated child labor-will have to work through what were promised to be their golden years.

Jennifer Biddle is an aircraft mechanic at Alaska Airlines and a furloughed mechanic from United, both AMFA-represented carriers. Richard Turk is the Communications Officer for AMFA Local 9 in San Francisco.