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Montana Viewpoint
GOING BANKRUPT, BUT MAKING A PROFIT
[Summary: Many major corporations look at bankruptcy just to cut their labor costs.]

November 14, 2005

Picture this: for 40 years you’ve worked hard for a giant manufacturing firm, and you’re counting the days until your retirement next year. You’ve made good money so that you will enjoy a comfortable retirement, and you will be able to continue with your employer’s health insurance coverage. Life after years of hard work will be good.

Unfortunately, while you were daydreaming about retirement, your company’s executives made a disastrous decision that will take the company into bankruptcy. Your retirement pension is cut in half and you lose the company’s health insurance coverage.

That hurts, but not as much as finding out that the company’s top executives are going to get an $87 million bonus as well as a share of 10% of the net value of the reorganized company.

How is it, you wonder, that the bums who bankrupted the company get a raise and the working stiffs get to take the dive? It’s not fair.

You’ll find no comfort in learning that the head honcho agrees with you: “Some people insist that fairness requires that we slash wages across the board if we cut wages for anybody. Well, I am sorry…It may not be fair [to cut employees’ wages and give bonuses to executives], but it is reality.”

Yes, this is a true story. The CEO quoted in The Washington Post is Delphi Company’s Robert S. Miller, who has just led his company into bankruptcy court. Delphi is the world’s largest auto parts maker and was formerly a part of General Motors Company.

But is this company really in trouble? It has $1.6 billion cash in hand and has just been extended $2 billion in credit by two of the world’s largest banks. What gives?

What gives is a new way to use bankruptcy to cut operating costs while still being profitable. If a company can convince a bankruptcy judge that it cannot recover profitability if it has to maintain retiree pension and benefit plans, it is allowed to turn those pensions over to the Pension Benefits Guaranty Corporation (PGBC).

Created in 1978 by an act of Congress, the PBGC is bankrolled by congressionally set premiums from companies that sponsor traditional “defined benefit” retirement plans. Comes to be, however, that Congress had set the premiums too low, and the PCGB itself is now looking at a $23 million deficit.

The PCGB currently administers pensions for over half a million retirees. Among those company pensions assumed by the PGBC are United Airlines, U S Airways, and Bethlehem Steel.

And speaking of Bethlehem Steel, it was none other than than Delphi’s Miller, who was their CEO when Bethlehem went into bankruptcy, leaving 95,000 retirees and dependents without health benefits.

At best, the PBGC pension benefits are only 50% of what they would have been under the company’s pension plan. Furthermore, only defined benefits pension plans are covered. “Defined contribution” plans such as a 401k are not covered, so if the company requires a heavy investment in company stock, and the stock tanks because of the bankruptcy, the value of the 401k tanks, too.

Just ask the retirees of the Montana Power Company, which was reborn as the short-lived Touch America.

OK, this is just hard nosed business practice, and if you can’t stand the heat get out of the kitchen. Labor costs and costs for benefits and pensions are too high, and you have to cut costs somewhere, what with global competition and outsourcing. But wasn’t global competition and outsourcing exactly what these companies wanted when they supported NAFTA and other international trade treaties?

I don’t know what possible rationale for reneging on promises to employees on retirement benefits could be given that would pass moral muster, but the rationale for giving bonuses to upper echelon management is called a Key Employee Retention Plan, and is designed to keep high level employees from leaving the firm when it’s in trouble.

The major concerns about this dubious business practice are twofold. First, that all of the health care and some of the pension costs formerly covered by the bankrupt companies will now be paid by the American taxpayer. The bankrupt companies are able to divest themselves of a loss by passing it on to the government, but can keep the profit in company hands.

This is known as socializing the loss and privatizing the gain.

Second, that this is a tactic that will be used increasingly by companies to cut costs and improve the bottom line, all at the expense of the retiree and the taxpayer.

Ross Perot only had it half right about that “great sucking sound” being jobs leaving the country under NAFTA. The other half was the loss of retiree benefits.

(This story is based on, and uses quotes from, a story in the Washington Post Weekly Edition of October 31 entitled “Workplace Tremors,” and also from various internet sites.)

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620

jim@jimelliott.org