COLUMN: American Air pension battle may spread

Wed Feb 29, 2012 1:58pm EST

(The writer is a Reuters columnist. The opinions expressed are
his own.)	
    By Mark Miller	
    CHICAGO, Feb 29 (Reuters) - American Airlines wants to
terminate the pensions of 130,000 workers as part of its
bankruptcy proceeding. The move would be good for the company's
balance sheet, but would it be good for America?	
    American's pension termination would be the largest in U.S.
history. The airline wants to end the plans and turn them over
to the Pension Benefit Guarantee Corp (PBGC), a
government-sponsored agency that insures most private-sector
defined-benefit pensions through premiums paid by plan sponsors.	
    The airline would instead offer workers a 401(k) plan with a
company match. That would have value to workers, but nothing
close to the retirement security provided by a pension's
guaranteed lifetime payments.	
    Josh Gotbaum, the PBGC's director, has mounted an unusual
public campaign against American, arguing that the airline
hasn't made the case that it needs to terminate the plans. That
question will be decided in bankruptcy court, but American's
story puts a spotlight on broader questions about the future of
traditional pensions.	
    These include whether corporations should be able to use
bankruptcy court to shed pensions; how to balance the stresses
businesses face in tough times against their retirement promises
to workers; and the future health of the PBGC itself, which
faces a record $26 billion long-range deficit accrued from
pension failures over the extended recession.	
    The American Airline pensions are just 64 percent funded.
The PBGC has estimated that taking on the plans would create a
$10.2 billion liability for the agency -- and it argues that the
plan's funding is so low mainly because of a series of
exemptions on federal funding requirements granted by Congress
to American and other airlines.	
    The Pension Protection Act of 2006 (PPA) tightened up
pension funding requirements; but it included special rules for
airlines, that allowed special exemptions on interest rates 
used to project funding levels. The exemptions were aimed at
helping airlines hit by the aftermath of recession and the
impact on travel from the 9/11 attacks in 2001.	
    American and other carriers were granted additional changes
in 2007. They had argued that the 2006 rules created an uneven
playing field in the airline industry because pension plans that
had already been frozen were given more favorable funding terms
than plans like American's, which were still operating.	
    PBGC's Gotbaum calls the 2007 changes -- which were tacked
onto a funding appropriation measure for the Iraq war at the
11th hour -- "midnight pension relief." He claims that the law
saved American Airlines $1 billion -- that has gone straight
into its "bankruptcy war chest" -- and that it constitutes 25
percent of the $4 billion in cash on hand at the company.	
    "The pension relief was very important to American
Airlines," says a spokesman for the company. "Without it, we
would have been forced to seek restructuring sooner than we did.
We've worked hard the past decade to stay out of bankruptcy
court, but we ran out of time."  	
    American filed for Chapter 11 bankruptcy protection in
November 2011.  	
    American says it made no secret of the changes it was
seeking. Pension relief proposals often get a sympathetic
hearing on Capitol Hill, where concerns often focus on
preservation of jobs. In the case of airlines, lawmakers from
small communities also worry about the economic impact of lost
service to their communities.	
    "We all supported it," says James Little, president of the
Transport Workers Union, the largest union at American. "We were
up there with the flight attendants and pilots," he says. "It
was the right thing at the time, but their attempt to terminate
the plans now is a crime -- there's just not yellow tape around
the building."	
    Little points to concessions made by American's unions in
2003 on work rules and 30 percent cuts in pay and non-pension
benefits, which were made to help the airline stay out of
bankruptcy. "Pensions and retiree medical were the pillars for
us in 2003," he says. "We agreed to gut everything else."	
    American was the last major U.S. airline fighting to keep
its head above water without bankruptcy reorganization. CEO
Gerard Arpey often described that effort as a moral battle,
because he didn't want the company to use bankruptcy to shed its
obligations to shareholders and retirees. The airline board's
decision to file for bankruptcy last November prompted Arpey to
resign.	
    "We want companies to be able to thrive in a recessionary
economy, and understand that many are facing huge challenges,"
says Karen Friedman, executive vice president of the Pension
Rights Center. "The question is, do they have to do so on the
backs of workers and retirees? Pensions are long-term
commitments to workers, who often have given up wages throughout
their working lives so that companies can keep funding the
pension plans."	
    The use of bankruptcy court to shed pensions also raises
questions about the long-term viability of the PBGC, and
potential burden on taxpayers. While the PBGC has plenty of cash
on hand to meet near-term obligations, the pressures could
become unmanageable if a succession of under-funded plans were
transferred to the agency.	
    The PBGC has asked Congress for the flexibility to raise
premiums to help close the deficit, so far without success.
Gotbaum says if premiums aren't raised and the deficit grows,
the agency would, at some point, have to stop paying benefits or
seek a taxpayer bailout from Congress.	
    Debate about pension plan health vs. jobs likely will
accelerate this year as plan sponsors begin lobbying for a new
round of relief from funding rules due to the current
environment of ultra-low interest rates. The low rates available
to pension plan managers reduce returns on portfolios, which in
turn requires them to make cash injections to maintain funding
levels required by law.	
    The changes sought by sponsors would allow plans to smooth
out rate volatility, and give them more time to meet funding
requirements -- allowing them to retain capital for non-pension
purposes.	
    	
	
	
 (Editing by Jilian Mincer and Andrea Evans)