Analysts say a federal bankruptcy court's recent ruling permitting United Airlines to walk away from its pension plan may set a dangerous precedent.
Douglas Elliott, president of the nonprofit, nonpartisan public policy institute Center On Federal Financial Institutions, said this could mean workers at other airlines could see a similar fate.
"There is no right answer, it's really a difficult balancing act," Elliott said.
The problem stems from the fact that United Airlines' terminated pension plans are guaranteed by the federal government under the Pension Benefit Guarantee Corp. The agency insures pensions like the Federal Deposit Insurance Corp. insures banks.
The Pension Benefit Guarantee Corp. is funded through premium payments from companies that have pension plans guaranteed through the agency. The agency now covers more than 34 million workers in more than 29,000 pension plans.
However, the Pension Benefit Guarantee Corp. is running at a $23 billion deficit. The new settlement with United Airlines gives the Pension Benefit Guarantee Corp. up to $1.5 billion in the airline's securities, but the agency is now liable for billions of dollars.
United Airlines' pension fund is currently underfunded by $9.8 billion and only $5 billion is covered by the Pension Benefit Guarantee Corp. That is $5 billion in new debt in exchange for $1.5 billion in the airline's securities.
"It will take extraordinary stock performance for those securities to increase in value so that they cover the $5 billion (Pension Benefit Guarantee Corp.) payout," Elliott said. "If the value of the stock stays steady or decreases, it will not begin to meet the financial obligations the (Pension Benefit Guarantee Corp.) has now assumed."
Chris Weller, a senior economist for the Washington, D.C.-based progressive policies think tank Center for American Progress, said this is setting a bad precedent for the airline industry.
"United Airlines (now) has a cost advantage over competitors, so that may lead other companies to end their plans," Weller said. "The situation affects all plans. It's not like the companies squandered money."
Elliott thinks this increases chances that Delta, Northwest and American will follow suit. He said American is seeking pension reform, and Delta has announced it may end up in bankruptcy due to $3 billion in pension payments to be paid over the next three years.
"Struggling companies will likely petition bankruptcy courts to rid themselves of their pension obligations, despite the legal requirement that they negotiate in a good faith effort to keep them," he said.
The Center On Federal Financial Institutions has been tracking the issue and estimates that the agency could run out of cash by 2021 if conditions remain unchanged.
Closer to home, Fairview Heights financial adviser Mark Burgdorf believes the federal court's ruling could eventually strike as many as 20 percent of all private sector workers who have pension plans backed by the Pension Benefit Guarantee Corp.
He said that in addition to those working within the airline industry, those in the automotive, auto parts, aerospace and defense industries also could be affected.
"I've got a few clients with utility companies concerned," said Burgdorf, of Burgdorf & Associates Inc. "But I think this is so new, most of my clients have not thought of the ramifications."
Elliott said the Bush administration proposes to raise the level of premiums the Pension Benefit Guarantee Corp. charges to companies offering pension plans. He said this would make administrators sharply tighten pension funding rules and force some to put more into those underfunded pension plans.
"Industry and labor claim that the administration's proposal is so tough that it will cause companies to get out of the business of offering traditional pensions," Elliott said. "It's really a difficult balancing act. There is a problem, and there is a right answer somewhere. It's just hard to know what it is."
