Punting to the PBGC
With their retirement liabilities pushed off on the government, the companies are suddenly attractive acquisition targets. It’s a strategy that makes Wall Street happy but costs taxpayers billions--and sometimes leaves workers feeling betrayed.
One of Miller’s former companies, Bethlehem Steel, is cited as a prime example. In fairness, Bethlehem was a disaster waiting to happen long before Miller took over as chairman and CEO in September 2001. He quickly ushered the struggling company into bankruptcy.
In the era before federal pension regulation, the steel-making giant neglected to put aside enough assets for its pension fund, instead investing in modernizing its plants. In those days, companies had a lot of latitude about putting money into their pension and health plans, says John Hinshaw, a labor historian at Lebanon Valley College in Annville, Pennsylvania.
"Bethlehem was probably only the most extreme example," Hinshaw says. "If the company eventually failed, the retirees went down with the ship."
When the steel industry encountered hard times in the mid-1970s and 1980s, Bethlehem was hit with a double whammy. As the company was forced to cut its workforce from 90,000 in 1980 to 13,000 in 2002, it found itself with seven retirees for each active employee, and was $2 billion short of what it would need to pay the pension benefits owed them, Miller testified to Congress in 2002.
In addition, the company had $3 billion a year in health care costs, most of it going to retirees and their dependents. In 2003, Bethlehem terminated retirees’ health benefits, which Miller said at the time was necessary because the bankrupt company could no longer afford them.
Hinshaw recalls that the move stirred a lot of anger among the company’s former workers. "The way they saw it, they’d given up pay increases in order to get those benefits. They figured the benefits were permanent, not just until they no longer were cost-efficient."
In his congressional testimony, Miller made no secret of his expectation that the federal Pension Benefit Guaranty Corp. eventually would have to bail out Bethlehem’s retirement plan. And in December 2002, while Bethlehem was in negotiations to be acquired by the International Steel Group in Cleveland, the PBGC terminated Bethlehem’s pension plan and assumed responsibility for retirees’ benefits.
The $3.7 billion cost to PBGC was the biggest in the agency’s history up to that time (it has since been eclipsed by the $6.6 billion hit from United Airlines’ failed pension plan). PBGC spokesman Jeffrey Speicher says the agency needed to move quickly because Bethlehem’s sale would have triggered additional early retirement benefits to employees who lost their jobs.
"Those benefits weren’t funded or insured, and the PBGC would have ended up taking an even bigger loss," Speicher says.
Ultimately, Bethlehem went out of existence when ISG bought its assets for $1.5 billion in 2003.
"I don’t think that Miller really altered Bethlehem’s trajectory," Hinshaw says. "When you’ve got a company that had decades of inertia, you can’t expect that one man is going to come in at the last second and save it." Or shut it down without at least some turmoil.
Workforce Management, November 7, 2005, p. 28 -- Subscribe Now!