Senate Appropriations Subcommittee on Labor, Health and Human Services and Education Holds Hearing on Effect of Airline Bankruptcy on Employee Pension

FDCH TRANSCRIPTS
Congressional Hearings
Jan. 14, 2003

Senate Appropriations Subcommittee on Labor, Health and Human Services and Education Holds Hearing on Effect of Airline Bankrupty on Employee Pension Plans

SANTORUM:

Thank you. Thank you, Mr. Chairman. Can I use that term, Mr. Chairman?

SPECTER:

There was a long colloquy on that before you arrived, Senator Santorum. The answer to that is about as vague as Mr. Kandarian's testimony.

SANTORUM:

We've been working on that. I apologize for being late, but I have been working on several issues trying to get us moving here in the Senate and I have—I will dispense with my opening statement and ask for it to be placed in the record and just say I want to thank Senators Harkin and Specter for calling this meeting. This is a very important hearing, obviously of grave importance to the people in my state and I would argue all travelers in the—particularly in the Eastern seaboard.

I just want to follow up with maybe Senator Specter's line of questioning here. Let me understand this that US Airways was meeting their obligations under law. They were funding at the level that they were required to under law. Is that correct?

KANDARIAN:

That's correct.

SANTORUM:

And that the concerns from what I read from your documents that the Congress had and that you had was that companies would deliberately underfund their pensions, not meet their obligations and then go into this situation where they would seek waivers or they would seek relief.

KANDARIAN:

I don't think we said that, Senator.

SANTORUM:

OK. I thought I read that.

KANDARIAN:

Which are you referring to?

SANTORUM:

I don't know whose testimony I was reading. I was trying to catch up here real quick. Well, that was the impression I got from reading this that that was what the Congress was concerned about and as soon as I—page three here and find that.

I think it was—let me see, where was it? Yes, the Senate finance committee believed that these tighter waiver rules were necessary because of the use for funding waivers in the past and minimized plan contributions and that 30 percent of the claims against (inaudible) resulted from failure of employees to make required claim contributions to (inaudible) termination. I mean, this is what is in your testimony, is it not?

KANDARIAN:

I thought you were referring to my comments.

SANTORUM:

No, I said your testimony.

KANDARIAN:

On US Airways.

SANTORUM:

It's in your testimony; I think I mentioned the finance committee's concern.

KANDARIAN:

We were quoting the finance committee's deliberations at that time.

SANTORUM:

I think I said that.

OK. My point was that that was Congress' concern that there would be some deliberate attempt here for people to game the system. Are you suggesting that US Airways was gaming the system here before they asked for this.

KANDARIAN:

No, but those were for waivers in US Airways can/still apply for waivers.

SANTORUM:

I understand.

KANDARIAN:

And we don't object to US Airways applying for waivers under the existing rules.

SANTORUM:

I understand that. But I guess the point I think is illustrative is that Congress was concerned and I know I as a Congressman was concerned as a member of the ways and means committee when we dealt with this issue of the PBGC, was concerned about systematically underfunded plans and the resultant impact of that on the taxpayer. And that obviously if that was the case here, coming in and trying to get a reorganization or restructuring, I would not be particularly sympathetic to.

That is not the case here. That is clear, correct?

KANDARIAN:

We're not suggesting that US Airways deliberately underfunded their plans, but their plans are highly underfunded. They had flexibility at points of their history to better fund these plans. They did not take that avenue.

SANTORUM:

OK. Here's the other point that—I'm a little bit concerned about it and again, just speaking from the standpoint of a member of Congress and looking at what the actions are certainly seem to be in the offing here.

We have a situation where if we proceed with US Airways terminating their plan and PBGC picking it up, did you already testify as to what the cost associated with that would be for the taxpayers?

KANDARIAN:

We did not testify to that yet.

SANTORUM:

Do you have a figure on that what the cost...

KANDARIAN:

Are you referring to all plans or one plan or how many plans?

SANTORUM:

Let's just assume that they, for purposes of this discussion, since the biggest, obviously, the biggest plan here is the pilots' plan, let's just look at the pilots' plan. What would that be if they terminated that plan?

KANDARIAN:

Based upon the data we've been given to date, we think it is about $500 million.

SANTORUM:

$500 million over how long a period of time.

KANDARIAN:

They'd be paid out over a number of years, based on the lives (ph) of the people who are receiving the pension.

SANTORUM:

And if they were to terminate all the plans, what would that be, do you know?

KANDARIAN:

Excuse me; the $500 million number is a present value number. It's discounting back those payments. It's worth today $500 million.

SANTORUM:

OK. And if they were to terminate all the plans?

KANDARIAN:

We think it would be just over $2 billion in terms of our guarantee.

SANTORUM:

OK. Now, my question to you is again, just from a public policy point of view, I am trying to figure out why it makes sense from a public policy point of view to take on that liability when there is an opportunity to defray that liability potentially indefinitely, potentially forever and why that makes good public policy sense.

KANDARIAN:

For two reasons. One I mentioned perhaps before you entered the room, Senator, in the late '80s, there were funding waivers that were much more liberally granted than today. They were given to, for example...

SANTORUM:

We're not asking for a funding waiver here, are we?

KANDARIAN:

No, but it would be similar in its impact of stretching out the funding to a company, to fund the existing underfunded part of their plan.

SANTORUM:

Well, then why does my question about waivers count and yours analogizing waivers doesn't count or the other way around. Why, when I analogize this issue to waivers, you say its not valid and now you are analogizing the situation where a waiver is valid.

KANDARIAN:

I don't know, Senator, exactly what you are referring to, but let me...

SANTORUM:

Well, I analogized—I made the comments that the finance committee said that we have these deliberate underfundings and you said, well, that only gives us waivers. That doesn't deal with plan terminations and restarts. I said, OK, I'll accept that it deals with waivers and now you are answering my question answering it with a waiver.

KANDARIAN:

We characterize the restoration proposal by US Airways as a super waiver, in a sense. It stretches out over 30 years, payments that normally be made over five or seven years. So, the answer to your question is two fold. Number one, the hole may get larger over time and if the plans are terminated at some point down the road, it could be a much larger hit to the system.

SANTORUM:

Can't you restructure—from a negotiating standpoint, can't you require certain payments from US Airways to make sure that that doesn't occur. I mean, isn't there a way to avoid that problem down the road?

KANDARIAN:

It literally cannot be done. It cannot be done because there's factors out of our control and US Airways' control related to the value of the assets in their plan, the stock market, interest rates, experience with people retiring, at what age they retire, a number of lump sums, people taking lump sums out of the plan, which would be significant.

If you are a worker at US Airways and you are worried about this plan because it is so underfunded and you have an option to take a lump sum out, you might just take that money out with you rather than be a creditor, if you will, to the plan.

SANTORUM:

I understand that. But can't you put something in a negotiated settlement that would require increased funding of a plan if such an occurrence happened in the future? To make sure that there was a certain level.

KEIGHTLEY:

If they don't have the money to do it, knowing what is going on in the bankruptcy, it's all driven by a limited resource pool and a limited income stream.

KANDARIAN:

If they could do that, they wouldn't need what they are asking for. So, they are saying is, as we understand it, unless we can get our pension obligation down to this fixed amount—they are using, I think, $285 million, we can't get our loan, we can't get this, we can't get that.

We can't turn around PBGC and say, now give us the monies we need to fill our hole, because now their lenders, their equity players will say, wait a minute. If that goes out the door for the same reasons we are saying no to you right now about giving you a loan...

SANTORUM:

Well, this is post to restructuring of their plan, though. So, assuming they've restructured their plan to anticipate these things, I mean, I assume that no one is going to sign off—that the union and that the creditors aren't going to sign off on a plan that is a pie in the sky kind of pay out plan.

I mean, I would make that assumption. These are solid—this is an arm's length transaction with business people who are going to look at this, is this a reasonable amount to anticipate as far as payout over the next x number of years on these pension plans and what you are saying is, are you saying that you don't believe that those numbers are a reasonable approximation of what would be anticipated?

KANDARIAN:

I was trying to answer your question, can we limit our liability from growing, I thought was your question.

SANTORUM:

That is my question, but your answer to that question was, no you can't because you anticipate that there are contingencies would develop that would cause a bigger hole. That is what you said.

KANDARIAN:

We don't know whether that will cause it or not.

SANTORUM:

I know you don't know, but what I am asking you is, are you suggesting that what they have done is not taken into account those contingencies in laying out this plan?

KANDARIAN:

Yes. They've not taken that into account.

SANTORUM:

OK. And you think that the lenders have gone along with what you would argue as a rather tight, non-contingent kind of arrangement.

KANDARIAN:

The lenders don't care about PBGC's fortunes. They care about their fortunes. So, if the hole gets bigger for us, that's not a concern to the lenders or to the equity players. We're an unsecured creditor. We're behind the secure creditors. That doesn't affect them.

SANTORUM:

I would think that they would be concerned if they get into the position where they have a situation where they can't meet their pension obligations and end up with a lot of problems with their unions. I would think that that draw into their concern, but again, I could be wrong on that.

BREAK IN TRANSCRIPT

SANTORUM:

Have you ever had something like this brought to the PBGC before, where management and labor came in and offered to do a restructuring like this?

KEIGHTLEY:

I've been there seven years and I have never seen it done formally. We at least once before had somebody come it sort of, what do you think and we went, no, this is not going to work.

So, we haven't seen any—and the point I was making earlier, it's not purely a matter of the employees. There might be some cases where that kind of arrangement could be used by a strong employer to really extort inappropriate changes in the pension funding.

I'm just saying that is a decent policy reason why you want a tightly structured funding system and even at that, companies have some discretion as to how they fund and what assumptions they put in there. There is some judgment in there, being done by actuaries and outside people. So, there is some discretion in the process.

SANTORUM:

I understand, but in this case, aren't we looking at what the renegotiated—well, the plan presented by US Airways would actually be better for their employees than if the plan were terminated. Is that accurate?

KEIGHTLEY:

It depends on—some people it would—I don't know. You would have to look at everybody to see who wins and who loses.

SANTORUM:

I'm not going to go down and ask every individual.

KEIGHTLEY:

No, but some people keep their jobs, other people—you have to still look at that. If some young employee and you terminate the plan, the company may stay there a long time and they do better by having accruals under some other pension plans. You know, there are winners and losers whenever a plan terminates.

KANDARIAN:

There are 60,000 participants approximately in the USAir plan and about 35,000 active workers. The vast majority of the people will get over 90 percent of their benefits based upon today's cut off. If any of these plans came into us today. The pilots' plan, because it is so highly compensated, is where the guarantee limits really cut in. The vast majority of workers in this plan will get over 90 percent of their benefits paid by us.

SANTORUM:

And so, basically you are saying other than the pilots, by in large, you are talking most of the folks are going to get basically what they would under any kind of renegotiation that has already occurred with US Airways.

KANDARIAN:

To date, in other words. If time stopped today, our payments would be 90 percent or more for the other plans other than the pilots' plans. Now, if US Airways they distress termination of other plans and they came to us today, of course they wouldn't get accruals for future work. So, I can't say they wouldn't be hurt in that sense, but I don't think I've heard of any discussion of distressed terminations for the other plans.

SANTORUM:

I see. OK. Thank you, Mr. Chairman. I appreciate it.