Bankruptcy: Beyond Failure : Pension Insurer Falls Victim to Law
Sixteen lawyers were in the Pittsburgh courtroom to discuss Wheeling-Pittsburgh Steel Corp.’s bankruptcy when a matter of great importance to an obscure government agency and the nation’s taxpayers arose: how much money Wheeling-Pittsburgh owed its pension funds.
The question was important to the government agency, the Pension Benefit Guaranty Corp., because the sum would almost certainly become the agency’s problem under the law. The PBGC could be forgiven its feeling of being a sitting duck for ailing steelmakers after a Wheeling-Pittsburgh lawyer described the debt as $354 million, give or take a few million.
Added the attorney: “Plus or minus $40 million is not important to the issue here when it is that many million dollars.”
Just so. For PBGC labors today under a deficit of roughly $4.2 billion. As the government insurer of most industrial pension plans, the agency pays out $640 million a year to retirees of failed or distressed corporations, while its income from premiums charged to healthy companies comes to only $276 million a year. The agency recently won Congress’ approval to begin charging companies a floating premium based on the odds of their pension plans being transferred to PBGC, just like conventional insurance policies, but even the new scale won’t materially affect its deficit.
Contributing significantly to the agency’s insolvency are bankruptcies among steel companies and other employers in the declining industries of the Rust Belt.
Because bankruptcy law allows businesses to shed such debts as unpaid pension contributions despite other federal laws mandating a minimum level of funding for all pensions, PBGC has inherited the responsibility of covering pension payments promised to workers as long ago as the 1950s and not adequately funded by employers.
How Laws Conflict
The fight over Wheeling-Pittsburgh’s pension funds reflects one of several ways in which bankruptcy law conflicts with other federal laws.
Over the years, companies have been permitted under bankruptcy to shed their hazardous waste site cleanup duties despite environmental protection laws, to unilaterally reject labor contracts reached under the federally protected union bargaining process and to disregard court judgments imposed by judges and juries.
But the right to shed pension liabilities may have particular importance for the bankruptcy system, corporate competitiveness and the federal budget.
Pension-fund contributions by ailing companies in declining industries typically fall off as their finances deteriorate. This is because the tax deductions derived from pension contributions are not needed by companies showing losses. Thus, the scale of under-funded pension obligations is likely to mushroom among steel companies and those in other heavy industries with continuing problems.
But a system that invites under-funding also penalizes companies that meet their legal responsibilities by complying with funding requirements.
When LTV Corp., a major steelmaker, declared bankruptcy in 1986, its four pension plans were under-funded by about $2.5 billion; shedding those obligations helped LTV’s metamorphosis from one of the least cost-effective domestic producers of steel into one of the most competitive.
Finally, the growth of obligations assumed by PBGC has rendered the agency itself technically bankrupt, even as it has become the largest creditor in major steel company bankruptcies.
“In our system, we almost encourage companies to cut back on (pension) funding because it’s free,” said Kathleen Utgoff, PBGC’s executive director. “There’s no real interest charged on it, and in effect, you’re borrowing money from your own workers and paying back just what you owe them. If business doesn’t recover, the PBGC picks it up.”
Federal law requires through the Employee Retirement Income Security Act, or ERISA, that companies adequately fund their pension plans. But ERISA imposes no penalties for violations and the law cannot be enforced when a company is under the protection of the bankruptcy court.
That means PBGC is virtually powerless to fight the costly terminations of pension plans by companies in bankruptcy. “Congress didn’t make ERISA comply with the bankruptcy law,” remarked one attorney for Wheeling-Pittsburgh’s banks, which strongly encouraged the bankrupt company to shift its pension liabilities to the agency. “The PBGC’s argument is that this just can’t be right, that it’s just not fair.”
Pension Agency’s Quandary
The PBGC finds itself in this quandary because its interests traditionally have been neglected when pension regulations have been drafted. ERISA, for instance, gives the Internal Revenue Service the authority to grant companies temporary waivers of their contribution obligations--but does not require that the IRS consult with the pension insurer.
In Wheeling-Pittsburgh’s case, the IRS allowed the company to waive $80.2 million in contributions for 1983 and 1984. But the company had to agree to partially make up the amount by paying $6.2 million a month, beginning in July, 1985.
But three months before that date, Wheeling-Pittsburgh declared bankruptcy, absolving itself of responsibility for the monthly payments as well as the overall pension liability estimated to be at least $354 million and potentially more than $440 million. Once Wheeling declared bankruptcy, its obligations were transferred to PBGC.
Under the law, the agency does have certain priority rights as a creditor in bankruptcy cases. It has a claim on 30% of the net worth of any bankrupt company with under-funded pension obligations, as well as a general unsecured creditor’s right to up to 75% of the company’s under-funding. (The remaining 25% is treated as having been paid for by the company’s insurance premiums to PBGC.)
Those rights don’t amount to much more than 15 cents on the dollar, in Utgoff’s estimate. A truly distressed company in bankruptcy is not likely to have any net worth; PBGC’s standing as an unsecured creditor means it simply stands in line with all other creditors.
Of course, PBGC’s loss is a gain for the governing principle of corporate bankruptcy, which is that all considerations take a back seat to the goal of reorganizing a company and allowing it to emerge from bankruptcy in a stronger financial condition. That means the law takes a dim view of any individual creditor asserting a stronger claim than any other to a debtor company’s resources.
“You have to assume there’s not enough money to go around,” said Ronald S. Orr, Wheeling-Pittsburgh’s bankruptcy attorney at the time of its filing. “If you give a priority to the PBGC, you’re taking it away from other creditors. It’s a question of who is going to take the biggest hit.”
THE STRAIN ON THE PENSION SYSTEM
(Financial condition of the Pension Benefit Guaranty Corp.)
Year Assets Liabilities Deficit in millions of dollars 1986 $1,740.3 $5,491.8 -$3,862.4 ’85 1,154.6 2,447.0 -1,325.3 ’84 1,063.3 1,496.6 -462.0 ’83 1,084.9 1,570.0 -523.3 ’82 772.8 1,076.0 -332.8 ’81 467.4 637.0 -188.8 ’80 429.5 506.0 -94.6
Source: Pension Benefit Guaranty Corp.
