Although the Gulf Coast hurricanes have roiled the Capitol Hill agenda, they're not to blame for blowing pension reform off course--objection from two senators did that.
Spurred in part by the specter of bankrupt Delta Air Lines and Northwest Airlines dumping about $10 billion in pension obligations on the federal government, two Senate committees melded their defined-benefit pension proposals into a bill that had been headed for a vote by the full Senate in early October.
But Sens. Mike DeWine (R-Ohio) and Barbara Mikulski (D-Maryland) held up the bill when they objected to a provision that would have forced companies with junk-bond credit ratings to pay more into their pension plans.
DeWine and Mikulski offered an amendment that would have based a plan's "at risk" status on whether it is funded below 60 percent, regardless of the company's credit rating. The amendment also would have allowed companies to smooth assets and interest rates over three years instead of the one year allowed in the compromise bill.
"Corporate pension plans are in a $500 billion deficit, and the DeWine-Mikulski amendment would dig that hole deeper and put more workers' pensions at risk," Sen. Charles Grassley, chairman of the Senate Finance Committee, said in an Oct. 7 statement. "That's probably why they didn't want to vote on it today, but instead wanted to wait for big business lobbyists to drum up more support. Big businesses say they can't afford to put money in their pension plans, but they've had no problem handing out huge salaries and special retirement plans for their executives."
It's unclear whether the Senate will take up pension reform when it returns from a one-week recess on Oct. 17. The House could pass its own pension legislation by late October, predicted Rep. John Boehner, chairman of the House Education and the Workforce Committee.
The bipartisan Senate proposal is less generous than the House proposal on so-called rate smoothing. The Senate bill would establish an interest rate for valuing pension liabilities using a one-year average of investment-grade corporate bond yields. Boehner’s bill would allow smoothing over three years, while current law permits four years.
The Senate bill requires that companies fund their pension plans 100 percent starting in 2007, with a three-year transition for large companies and five years for small ones. Underfunded plans would have seven years to reach full funding.
Senate legislation also would toughen funding rules for companies with junk-bond ratings, allow the use of credit balances if the pension plan is 80 percent funded, freeze accruals if funding dips below 60 percent and increase flat-rate Pension Benefit Guaranty Corp. premiums from $19 to $30 per employee. After assuming responsibility for several costly pension plans in the past few years, the PBGC has a $23.3 billion deficit.
Boehner dismisses the Senate proposal in part because it gives airlines 14 years to shore up underfunding. “The Senate language is irresponsible,” he says. “I don’t want to get in the middle of restructuring that’s under way in the airline industry by giving some air carriers preferential treatment over others.”
But creditors are tempted to jettison pension obligations during bankruptcy. “We’re in a race against time,” says Duane Woerth, a Northwest pilot and president of the Air Line Pilots Association.
Businesses, meanwhile, are resisting attempts to curtail smoothing.
“It is the uncertainty and inability to accurately plan and budget for their financial obligations that shakes their confidence” in having pension plans, “and may result in a freezing of a plan or possibly a termination,” says James Klein, president of the American Benefits Council, which represents more than 250 large employers.
So far, none of the legislation on the Hill makes cash-balance pension plans retroactively legal. The portable plans, which cover 8.5 million workers and involve an annual employer contribution to a hypothetical account, have been subject to age-discrimination lawsuits. Traditional defined-benefit plans, based on wages and number of years of service, become more valuable later in an employee’s career.
Congress has a responsibility to protect the plans, “and we need to do it retroactively,” Boehner says. “We cannot have a comprehensive pension reform bill that doesn’t adequately cover cash balances. How we do it and (in) what manner we do it will be a subject of great debate.”