|
BROKEN
PROMISES: THE BUSINESS ASSAULT ON "LEGACY
COSTS"
By Philip
Mattera
In most
contexts, the term legacy has a
positive connotation. World leaders praised
John Paul II’s legacy after the Pope died
earlier this year. Conservatives are
promoting the Reagan Legacy Project to
ensure that the President they venerate is
adequately commemorated. At many colleges,
legacies (children of alumni) are given
preference in admissions. And the basic
meaning—a bequest of property—is something
that can transform an heir’s life.
In the
business world, however, legacy has
become a pejorative term—almost a slur. The
larger, more established airlines are no
longer called the majors; they are described
as legacy carriers, to distinguish
them from nimble upstarts such as Jet Blue.
Industrial giants in sectors such as
automobiles, steel, rubber and chemicals are
said to be weighed down by legacy costs,
especially for healthcare. The credit rating
service Fitch recently cited such costs when
downgrading General Motors bonds to junk
status. Legacy has become shorthand
for referring to corporations that are in
trouble and heading for bankruptcy, or
worse.
At the root of
that trouble, we are told, are excessive
labor costs. The legacies that are said to
be crippling the industrials are pension
liabilities, retiree healthcare commitments
and other obligations to current and former
employees. Business is no longer simply
complaining about these costs; it is
beginning to take action. The recent move by
United Airlines to terminate its pension
plans can be seen as a part of a growing
campaign by Corporate America to liberate
itself from past promises, whatever the
social consequences.
ABANDONING OLD WAYS OF DOING BUSINESS
The use of the
term legacy in the business world
used to be limited mainly to the phrase
legacy systems, which referred to
outdated computer technology. Companies
often had to keep such systems in place,
because it was prohibitively expensive to
convert the large quantities of data they
contained. But as soon as it was feasible,
the old technology was unceremoniously
junked.
Today’s
criticism of legacy costs views
labor-related obligations in the same
general way—as burdens tied to outdated ways
of doing business. And the clear message is
that corporations should try to free
themselves of those burdens in the same way
that they dumped their old mainframe
computers.
What is
obsolete, according to this way of thinking,
is the practice of providing employees with
good wages and benefits. The attack on
legacy costs thus comes down to an assault
on the improvement in living standards that
workers won over the course of decades,
usually with the aid of labor unions. What
was once seen as an enhancement of the
quality of life is now depicted as a social
evil.
Among the
various legacy costs, the ones that draw the
most fire are pension obligations. In the
period after the Second World War, it became
common practice for all but the smallest
employers to set up retirement plans for
their hourly and salaried workforce. Unions
frequently accepted smaller wage increases
in exchange for enhancements to pensions
that would benefit their members in the
future. Private pensions came to be regarded
as an essential supplement to Social
Security payments.
As was
discussed back in
E-Letter No. 38, the first business
forays against traditional pensions came
about a quarter-century ago. During the
1980s, many companies terminated retirement
plans and took possession of the “excess
assets” to finance acquisitions and
leveraged buyouts. Faced with a public
outcry, Congress effectively put a stop to
what was widely known as pension piracy.
By that time,
however, more and more employers were
ceasing to offer their employees traditional
pensions (defined-benefit plans that
provide a guaranteed amount of money each
month, based on previous pay and length of
service) and were replacing them with
defined-contribution benefits, usually
in the form of 401(k) plans. Strictly
speaking, the latter are not pensions. They
are individual retirement accounts into
which the employer makes payments. The value
of those accounts is subject to the vagaries
of the financial markets, and the employer
has no obligation to make sure that the
amount the worker ends up with is sufficient
to provide a decent standard of living after
retirement.
SHIRKING RESPONSIBILITY
This change in
the meaning of retirement benefits is now
well known; in fact, most younger workers
probably don’t realize that pensions used to
entail guarantees rather than uncertain
investments. Yet defined-benefit plans still
exist for a significant number of older
workers. About 20 percent of the U.S.
private-sector workforce participates in
such plans (and the rate jumps to 69 percent
for unionized workers).
Many
employers, unfortunately, no longer see
their remaining defined-benefit pension
commitments as a solemn obligation. Instead,
they seek ways to shirk their
responsibility. One well-established way of
doing this is through accounting
manipulation. Most private pension plans are
employer-managed, meaning that companies can
play games with the amount of money
contributed to the plans each year; for
example, by projecting an unrealistically
high rate of return on assets already in the
plan. Last year Congress enacted legislation
that made it easier for companies to reduce
their contributions legally.
Alternatively,
a firm may decide that it is not actually
responsible for a particular retiree’s
benefits. The Wall Street Journal
recently reported on a trend among companies
to deny responsibility for paying the
pensions of certain workers who had joined
their payroll as the result of a merger or
takeover. Corporate pension administrators
are being asked to do audits that
often conclude that an individual’s payments
should have been coming from some other
entity, which might now be defunct. Not only
does the company then cease sending checks;
it may also pressure the recipient to repay
past benefits.
Even more
shocking was the recent ruling by a federal
bankruptcy court judge that United Airlines
could terminate its pension plans covering
some 134,000 workers and retirees. Last
year, United stopped making contributions
into the plans, thus exacerbating an
underfunding problem that reached nearly $10
billion. The plans are being taken over by
the federal Pension Benefit Guaranty
Corporation, which itself has a
balance-sheet deficit of more than $20
billion. United’s pension participants, like
those of most other terminated plans, will
almost certainly have to accept significant
reductions in their benefits. In fact, there
is the possibility that the United
takeover—the largest in the PBGC’s
history—will prompt similar moves by other
airlines and auto companies that could
overwhelm the agency.
Another legacy
under attack involves retiree health
benefits. Starting in the late 1960s, large
employers began negotiating such benefits
with unions as a supplement to Medicare.
Many salaried workers were given similar
promises of coverage for life. Once medical
costs began escalating, business began to
look for ways to escape these obligations.
During the 1990s, many corporations
pressured unions to agree to cuts in the
benefits or the shifting of costs to
retirees. Those firms that found themselves
in Chapter 11 got permission from the
bankruptcy courts to eliminate the benefits
entirely.
Over the past
few years, companies have become even more
aggressive. Some, such as Lucent
Technologies, told retirees that they would
have to shoulder the entire cost of the
coverage. Many others used the passage of a
Medicare drug benefit as a pretext for
scrapping their own coverage. Last November
the Wall Street Journal reported that
companies were suing individual retirees
receiving health benefits under union
contracts. The aim was to find sympathetic
judges who would go along with the dubious
argument that promises of lifetime benefits
actually referred only to the life of the
contract, not the life of the worker.
The latest
onslaught is against the retirement health
benefits of public-sector employees. A
recent article in Fortune described
the commitments made to such workers as “a
time bomb quietly ticking away in the
netherlands of state and local government.”
Apparently, giving retired firefighters
access to quality health coverage is now a
form of fiscal terrorism.
CONTRACT NULLIFICATION
Whether in the
private or the public sector, the campaign
against legacy costs is at root an effort to
undo the results of collective bargaining.
It is thus no surprise that another aspect
of the campaign is a direct assault on union
rights. A number of companies in Chapter 11
have been using the bankruptcy court not
only to terminate benefit plans but also to
undo the provisions of labor contracts—a
drastic step not seen much in the past
twenty years.
Last year,
Horizon Natural Resources, a coal company,
received court permission to cancel its
contract with the United Mine Workers in
order to make the company attractive to a
potential buyer. A few months later, Ormet
Corp. was allowed to nullify two contracts
with the Steelworkers union at aluminum
plants in Ohio.
The struggling
“legacy carriers” in the airline industry
soon sought to do the same. Last November,
US Airways filed a request in bankruptcy
court for permission to terminate collective
bargaining agreements covering 20,000
workers represented by three unions. A few
weeks later, United Airlines asked to
abrogate contracts with six bargaining
units. For the airlines, the requests were
mainly a way of playing hardball in labor
negotiations on concessions. In most cases,
unions responded to the threat of
termination by agreeing to substantial wage
and benefit cuts—though the Machinists
waited until after a judge had given US
Airways permission to terminate the
contract.
Efforts by
companies to terminate collective bargaining
agreements are the clearest sign that the
corporate effort to free itself from legacy
costs is aimed at reducing the power of
workers and redistributing income from labor
to capital. The purported justification for
this is that the companies involved are in
financial distress. That may be an excuse
for layoffs or even contract concessions,
yet commitments such as pensions are another
matter. Employers had a fiduciary duty to
protect those benefits, regardless of the
ups and downs of the market. After violating
that duty by underfunding retirement plans
for years, they are now seeking to be
relieved of the obligation.
This is a
basic betrayal of trust that should not be
tolerated. Yet the idea of reneging on
commitments to workers is popular in certain
quarters these days. That is essentially
what the Bush Administration’s call for
Social Security “reform” is all about. Like
his corporate counterparts, Bush is treating
the benefit promises made to millions of
Americans as unsustainable legacy costs that
have to be abandoned. In both the public and
private sectors, obligations that were once
regarded as absolute are now being treated
as an impossible luxury. In the great
American economic inheritance, more and more
of us are being cut out of the will.
|
