Now for the Reckoning

Retirement benefits promised to employees are becoming a crippling burden for a growing number of firms, especially in America.

At those firms where legacy costs are creating a genuine risk of bankruptcy there is no shortage of opportunities for headline-grabbing short-term strategies, such as strikes by the unions or threatened bankruptcy filings by management. Chapter 11 is a useful card for bosses, because the PBGC does not guarantee the full amount of most pensions. On the other hand, firms have no automatic right to dump their pension funds on the PBGC even in bankruptcy, unless it is clearly necessary in order for them to survive.

Chapter 11 has actually made matters worse in many industries — most recently, for airlines — by giving a new lease of life to the worst performing firms that allows them to hurt their solvent and better run rivals. A powerful case can be made for reforming Chapter 11 so that true basket cases can be put out of their misery before they bankrupt entire industries. Unfortunately, Congress seems more intent on finding ways to help airlines postpone their day of reckoning. For instance, it has been proposed that Delta and Northwest, which filed for bankruptcy last month, be given a 14-year grace period in which to restore their pensions to full funding.

Tough Talks Ahead

Intriguingly, one reason why Delphi entered bankruptcy when it did was to avoid modestly tougher Chapter 11 rules that take effect on October 17. Another reason suspected by many in Detroit was that GM urged Delphi to enter Chapter 11 in order to send a signal to the United Auto Workers union. The theory has it that GM would like to soften up the UAW ahead of contract negotiations that may determine its future viability.

The UAW is apparently receiving high-level advice on strategy from the Union of Steel Workers. Wilbur Ross, a financier who made an impasse-breaking deal with the USW that enabled the bankrupt steel industry to consolidate and leave Chapter 11 in good shape, notes two important lessons from that experience that the UAW — and others, too — might do well to heed. First, American firms need to be globally competitive and can no longer afford to award pay and fringe benefits solely according to American norms. Secondly, “at the end of the day, the only job worth having is one at a solvent company. What’s the point of a gold-plated contract with a firm that is going bust?”


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