Monday, October 10, 2005

Fly “Buy”

Last week, in Washington, DC, a couple of senators that most of you may never have heard of brought a rush to pension “reform” to a screeching halt – and may have killed it for this session. Senator Mike DeWine (R-Ohio), along with Senator Barbara Mikulski (D-Maryland), used a procedure that allows individual senators to stop legislation from advancing to the full Senate. The bill, co-sponsored by Senator Charles Grassley (R-Iowa), contains a number of pension reform provisions, including increasing the insurance premiums paid by defined benefit plans, expanding and enhancing funding level disclosures, changing some of the rules on how funding levels are determined, making it easier for companies to contribute more to those plans, and imposing tighter requirements on underfunded plans to address the situation.

Senators DeWine and Mikulski took issue with a particular provision in the bill – one that would have assessed higher funding requirements on pension plans based on the credit rating of the firm, rather than on the funded level of the pension plan – a determination that DeWine, at least, saw having a negative impact on steel and auto companies out of proportion to their actual commitment to their pension plans. Earlier in the week, Senator John Cornyn (R-Texas) also took steps to block consideration, though his concerns revolved around some of the special protections the bill provides airlines in bankruptcy regarding their pension funding. He was also expressing the concerns of his constituency – in this case American Airlines and Continental Airlines – who are trying to compete with airlines that would benefit financially from the law’s provisions.

Considering the number and state of the growing number of private pension plans being dumped on the Pension Benefit Guaranty Corporation these days, it is hard to argue against the need for serious reforms. It seems logical to increase insurance premiums in this environment, and if the proposal would nearly double them – well, they haven’t been increased in more than 20 years. It seems similarly evident that changes are called for in how funded status is determined, and we surely need a better system for knowing that a plan is in trouble, and responding, than is currently deployed. Given the complicated nature of these calculations (which, IMHO, are still largely projections based on assumptions predicated on best guesses about events a generation in the future), I think one could well argue that a determination based on a firm’s credit rating says more about the ability to sustain that obligation than the need to do so. Similarly, a determination based solely on the current projected funded status says more about current assumptions than it does a firm’s commitment to fulfilling those promises (this is the presumption contained in a comparable pension reform bill in the House of Representatives). Surely the best answer is a common sense evaluation that considers both funded status and credit rating – and we can certainly hope that, should the Senate bill proceed, this would be incorporated as part of the reconciliation with the House version.

There seems, however, to be this notion in the Senate that the airline industry – more accurately, certain carriers in that industry – are entitled to a special dispensation from these obligations. The Senate bill would give those troubled airlines twice as long (14 years) to fix their pension funding problems as any other industry. This concern is no doubt driven by a sense that the industry faces a unique set of challenges, that those airlines are truly committed to fixing the funding issues, and that failing sufficient time to do so, they will simply dump those massively underfunded obligations on the PBGC.

All of this may be valid – but, given these airlines’ track record, I cannot imagine how any credence can be given to the view that giving them more time does anything more than postpone the inevitable. Consider the actions of United and its unions earlier this year in trying to pull one over on the pension system (see IMHO: Left Holding the Bag?), their last (successful) attempt to buy some more time (see IMHO: Wait Loss), or even their response to the September 11 terrorist attacks (see IMHO: The Aftermath). Yet here we are again, according certain players in a specific industry a “gimme” that will no doubt come home to roost in the next 24 months – with interest.

The private pension system needs some reforms – and some help. But I, for one, am sick of being “played” by these airlines as some kind of financial patsy. The sooner the Congress stands up to this kind of financial blackmail, the better.

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