[Senate Hearing 108-153]
[From the U.S. Government Publishing Office]
S. Hrg. 108-153
PENSION PLANS REGARDING
US AIRWAYS
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
JANUARY 14, 2003--WASHINGTON, DC
__________
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COMMITTEE ON APPROPRIATIONS
ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii TED STEVENS, Alaska
ERNEST F. HOLLINGS, South Carolina THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont ARLEN SPECTER, Pennsylvania
TOM HARKIN, Iowa PETE V. DOMENICI, New Mexico
BARBARA A. MIKULSKI, Maryland CHRISTOPHER S. BOND, Missouri
HARRY REID, Nevada MITCH McCONNELL, Kentucky
HERB KOHL, Wisconsin CONRAD BURNS, Montana
PATTY MURRAY, Washington RICHARD C. SHELBY, Alabama
BYRON L. DORGAN, North Dakota JUDD GREGG, New Hampshire
DIANNE FEINSTEIN, California ROBERT F. BENNETT, Utah
RICHARD J. DURBIN, Illinois BEN NIGHTHORSE CAMPBELL, Colorado
TIM JOHNSON, South Dakota LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island MIKE DeWINE, Ohio
Terrence E. Sauvain, Staff Director
Charles Kieffer, Deputy Staff Director
Steven J. Cortese, Minority Staff Director
Lisa Sutherland, Minority Deputy Staff Director
------
Subcommittee on Departments of Labor, Health and Human Services, and
Education, and Related Agencies
TOM HARKIN, Iowa, Chairman
ERNEST F. HOLLINGS, South Carolina ARLEN SPECTER, Pennsylvania
DANIEL K. INOUYE, Hawaii THAD COCHRAN, Mississippi
HARRY REID, Nevada JUDD GREGG, New Hampshire
HERB KOHL, Wisconsin LARRY CRAIG, Idaho
PATTY MURRAY, Washington KAY BAILEY HUTCHISON, Texas
MARY L. LANDRIEU, Louisiana TED STEVENS, Alaska
ROBERT C. BYRD, West Virginia MIKE DeWINE, Ohio
Professional Staff
Ellen Murray
Jim Sourwine
Mark Laisch
Adrienne Hallett
Erik Fatemi
Bettilou Taylor (Minority)
Mary Dietrich (Minority)
Sudip Shrikant Parikh (Minority)
Candice Rogers (Minority)
Administrative Support
Carole Geagley
C O N T E N T S
----------
Page
Opening statement of Senator Tom Harkin.......................... 1
Opening statement of Senator Arlen Specter....................... 1
Statement of Steven A. Kandarian, Executive Director, Pension
Benefit Guaranty Corporation, Department of Labor.............. 4
Prepared statement........................................... 6
Opening statement of Senator Rick Santorum....................... 17
Prepared statement........................................... 17
Statement of Hon. James C. Roddey, chief executive, Allegheny
County, PA..................................................... 30
Prepared statement........................................... 32
Statement of David N. Siegel, president and CEO, US AIRWAYS...... 33
Prepared statement........................................... 36
Statement of Captain Duane E. Woerth, president, Air Line Pilots
Association.................................................... 37
Prepared statement........................................... 40
Statement of Captain Bill Pollock, chairman, US Airways Master
Executive Council, Air Line Pilots Association................. 42
PENSION PLANS REGARDING US AIRWAYS
----------
TUESDAY, JANUARY 14, 2003
U.S. Senate,
Subcommittee on Labor, Health and Human
Services, and Education, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 3:13 p.m., in room SD-124, Dirksen
Senate Office Building, Hon. Tom Harkin (chairman) presiding.
Present: Senators Harkin and Specter.
Also present: Senator Santorum.
OPENING STATEMENT OF SENATOR TOM HARKIN
Senator Harkin. The subcommittee of the Appropriations
Committee, will come to order, on Labor, Health and Human
Services appropriations.
This hearing was called at the request of Senator Specter.
But because of the rules of the Senate and the way we are sort
of operating right now, it falls to me to have to call the
committee to order, and I will soon turn the gavel over to
Senator Specter.
But that is in keeping with the way that this subcommittee
has operated now for--I think it has been 13 years. I was
chairman, and Senator Specter was ranking member; then he was
chairman, and I was ranking member; then I was chairman again,
and he was ranking member; and now he is going to be chairman,
and I will be ranking member again. So we just do this back and
forth. But during all that time, this subcommittee has operated
on a strictly bipartisan basis--many times when I was Chair
that Senator Specter had his own hearings, and vice versa--and
I think that is the way that these committees ought to be run.
This is a vitally important hearing dealing with pensions
and the Pension Benefit Guaranty Corporation. I compliment
Senator Specter for bringing this hearing together, and I look
forward to the testimony. I, myself, cannot stay for the whole
thing, but, again, I just again want to compliment Senator
Specter. I look forward to working with you, Senator Specter,
in this Congress, and hopefully we will get all this thing
worked out so we will not have to engage in this kind of a
little kind of a maneuver any time in the future.
And with that, I would turn the gavel over to Senator
Specter.
OPENING STATEMENT OF SENATOR ARLEN SPECTER
Senator Specter. Thank you very much, Senator Harkin--Mr.
Chairman, I think.
What you have just seen, ladies and gentlemen, and those
who may be watching on C-SPAN, has a number of levels of
complexity. Republicans took control of the Senate on a 51-to-
49 majority after the last election, but there has not been a
resolution on reorganization.
When the issues arose with US Airways and the pilots'
pensions, it seemed to me--and I conferred with Senator Harkin,
and he agreed--that this was an appropriate matter for a
hearing by this subcommittee, which has jurisdiction over the
Department of Labor. And we have proceeded as if I was the
chairman, or would be the chairman by Tuesday, but the majority
leader, Senator Frist, and the Democratic leader, Senator
Daschle, have not been able to agree on reorganization, and
there is, therefore, an issue as to whether any Republican can
preside at a hearing.
So Senator Harkin and I have conferred for the last 2 days,
and we have decided that, in accordance with our longstanding
practice, that we would work on a bipartisan basis. Tom Harkin
and I are two of the advocates who have learned a long time ago
that if you want to get anything done in Washington, you have
to be willing to cross party lines. And as we have traded the
chairmanship and ranking-member status, as the gavel has passed
back and forth, it has been seamless, and that is in the
interest of the health system, which our subcommittee funds,
and education, which our subcommittee funds, and labor, which
our subcommittee funds, to the tune of about $130 billion a
year, which is obviously very, very substantial.
Now, on to the issues at hand. It is well known in the
public domain about the problems of the airlines in America and
the difficulties which US Airways has had. And there has been
an herculean effort made by the company and the employees to
keep the airline going. It is a very vital matter for the
United States, for national and international travel, that the
sixth largest airliner continues to operate.
And a new chief executive officer, David Siegel, has taken
over. He has come forward with a bold plan. He is met with
great cooperation by the labor unions, making enormous
concessions, and suppliers, all in line to get a Federal
guarantee, which the Congress has legislated. But to get the
guarantee, there have to be certain changes made. And for a
time, it appeared that the issue of pilots' pension benefits
might be a stumbling block for the financing to go forward from
the Alabama lender. But that obstacle has been overcome, and US
Airways is moving ahead to continue in its operation. But left
in its wake is an issue about the pilots' pension benefits.
Last Thursday, Senator Santorum and I introduced
legislation to try to clarify the situation. Earlier today, I
met with the airline pilots in Pittsburgh to go over the
issues. This is a matter of great concern to the entire Nation
because US Airways serves the entire country in addition to
international routes, but it is especially important to
Pennsylvania, which has 17,000 employees, major hubs in
Pittsburgh and Philadelphia, and 11,000 employees in
Pittsburgh. And what we are looking at here is a very severe
potential disadvantage on the pilots pensions, which could be
reduced by as much as 75 percent. And you have 4,300 active
pilots and 2,000 more retired pilots, and those pilots have
already made concessions of $650 million a year.
So what we are searching for is a way to see to it that
fairness is done. And what the company and the pilots have
agreed to is a program to terminate the existing pension plan,
and then to reinstate the pension plan, but with a different
contribution schedule, which would enable US Airways to make
the contributions without defaulting on its other obligation,
or without jeopardizing the Alabama loan or the other plans in
the US Airways reorganization.
Now, what the matter really turns on, and it is yet my hope
and the hope of Senator Santorum and others who have studied
this issue, is that we will find a way within the existing
legislation to solve the problem or, if not, to proceed with a
legislative correction.
I have examined the legal memorandum submitted by PBGC
General Counsel, James J. Keightley, who is with us today, to
PBGC Executive Director Steven A. Kandarian, and it is my legal
judgment--lawyers have been known to differ on just about
everything under the sun; it's not too hard to get a second
opinion, a different opinion; it's not too hard to get a third
opinion, also a different opinion or successive opinions--but
what we are really trying to do is take a look at the
underlying statute in the public policy. And in looking at the
legal memorandum submitted by Mr. Keightley, on page 5, he
notes: ``In sum, while PBGC has broad discretion to determine
whether restoring a plan would be appropriate and consistent
with its duties under Title IV of ERISA, we believe that a
purposeful effort to achieve an objective not permitted by the
Agency's governing statute--granting funding relief--would be
overturned as exceeding our statutory authority.''
But as I read the statute, this is an objective permitted
by the statute. The opinion of Mr. Keightley says, on page 1, a
situation where a plan `` `is to be terminated,' or `is in the
process of being terminated,' . . . . In such a case, PBGC is
authorized to `cease' termination activities and restore the
plan to its prior status if PBGC determines that the plan
should not be terminated `as a result of such circumstances as
[PBGC] determines to be relevant.' ''
Well, it seems to me that the language in Mr. Keightley's
opinion gives latitude to accomplish what we seek here. On page
2, Mr. Keightley's opinion says: ``The second sentence of
section 4047 addresses the situation where a plan `has been
terminated' under section 4041 or 4042 of ERISA. It empowers
PBGC, `in any such case in which [PBGC] determines such action
to be appropriate and consistent with its duties under [Title
IV], to take such as may be necessary to restore the plan to
its pre-termination status,' . . . .''
Well, it seems to me that when you talk about a standard of
``appropriate and consistent,'' and where you have a plan which
is agreed to by the company and the pilots, and if the plan is
not adopted, the pilots lose 75 percent of their pensions, and
the Pension Benefit Guaranty Corporation--taxpayers have to
pick up the tab and pay the pension benefits--that it is a win-
win-win situation, win for the company, win for the pilots, and
win for the Government and the taxpayers to have that approved.
And the essential issue is whether there is sufficient
flexibility under existing legislation, which we are going to
examine. But while it is hyper-technical to read statutes, this
matter turns on statutory construction, and it is necessary to
lay that kind of a foundation.
STATEMENT OF STEVEN A. KANDARIAN, EXECUTIVE DIRECTOR,
PENSION BENEFIT GUARANTY CORPORATION,
DEPARTMENT OF LABOR
ACCOMPANIED BY JAMES J. KEIGHTLEY, GENERAL COUNSEL
Senator Specter. At this point, let us turn to our
witnesses. Mr. Steven Kandarian is Executive Director of the
Pension Benefit Guaranty Corporation, and prior to joining the
corporation, he was founder and managing director of Orion
Partners, an asset management group, and was also an investment
banker. Earlier in his career, he served as an economist with
the U.S. Civil Aeronautics Board, and he holds a bachelor's
degree in economics from Clark University, a J.D. from
Georgetown University Law Center, and an M.B.A. from Harvard
Business School.
Mr. Kandarian, we thank you for arranging your schedule to
join us, and we look forward to your testimony.
The time limits established by the committee, as a general
rule, are 5 minutes. We appreciate it if you would adhere to
that to the maximum extent possible so we have time left for
question-and-answer.
Since the last committee hearing, I attended a memorial
service for Ambassador Annenberg, Walter Annenberg, and the
time limit was set at 3 minutes. And former President Ford was
held to 3 minutes, and Secretary of State Colin Powell was held
to 3 minutes, and it was sort of an inconsequential factor that
I was held to 3 minutes. So I want you to know what a generous
time allocation there is in 5 minutes.
Mr. Kandarian. Thank you.
Senator Specter. Mr. Kandarian.
Mr. Kandarian. Mr. Chairman and members of the
subcommittee, I am Steve Kandarian, Executive Director, Pension
Benefit Guaranty Corporation. With me today is PBGC's General
Counsel, Jim Keightley. We want to thank you, Mr. Chairman, for
the opportunity to testify in this very important matter.
You have asked me to address our legal opinion that we
could not terminate and immediately restore US Airways' pension
plans in order to provide the company with a longer period over
which to fund its pensions and whether the law should be
changed.
By way of background, PBGC receives no taxpayer dollars.
Rather, it is funded by the premiums paid by companies as
sponsors of defined benefit plans. It is important to note this
is a voluntary pension system. No employer is required to
establish or maintain a pension plan.
PBGC was in a deficit position for the first 21 years of
its existence. To address the causes of these deficits,
Congress amended the pension laws in 1986, 1987, and 1994 to
increase premiums and strengthen funding rules. Companies with
significantly underfunded plans were required to fund pension
liabilities over 5 to 7 years, rather than over 30 to 40 years.
In 1987, Congress also limited the use of funding waivers,
which it felt had been abused. The key restriction was to
require employers to pay any amount waived in 5 years, rather
than 15. These safeguards were enacted because Congress
recognized that faster funding and limited waivers protect both
participants and the pension insurance system.
US Airways is currently undergoing reorganization in
bankruptcy and has applied for a loan guarantee from the ATSB.
US Airways believes it cannot satisfy the board's conditions
for a loan guarantee while also making its required pension
contributions. It believes this is true even if it obtains the
funding waivers available under existing law. Thus, it came up
with a proposal for a super funding waiver. US Airways asked
PBGC to terminate the plans and then use its authority under
section 4047 of ERISA to immediately undo the terminations,
restore the plans, and provide 30 years to fund them.
However, the 1974 conference report on ERISA made clear
that the purpose of section 4047 was to allow PBGC to restore a
plan: ``if the employer and plan enjoyed a favorable reversal
of business trends or if some other factor made termination no
longer advisable.''
The prepackaged termination restoration proposal by US
Airways is inconsistent with this congressional intent. There
is nothing in section 4047 or anywhere else in Title IV of
ERISA that gives PBGC the power to grant funding relief in
order to assist an ailing company. In fact, IRS----
Senator Specter. Is there anything which precludes the
corporation from granting funding relief?
Mr. Kandarian. There is no specific language that
precludes.
Senator Specter. So the statute is neutral on that key
point.
Mr. Kandarian. We do not think so.
Senator Specter. Well, there is no statutory language which
precludes funding relief, as you have just testified.
Mr. Kandarian. Right. But, in fact, the IRS, not PBGC, has
statutory authority for plan funding; and the IRS, not PBGC,
has authority to waive funding requirements for corporations in
temporary financial difficulty. US Airways also cites as
precedent PBGC's termination and restoration of three LTV Steel
plans with a modified funding schedule.
Mr. Chairman, the LTV situation was very different. PBGC
used section 4047 to restore the plans after it found that
LTV's follow-on benefit arrangements were abusive to the
insurance system. After 3 years of litigation, the Supreme
Court upheld our restoration decision. By the time LTV emerged
from bankruptcy and began funding its plans based upon the
modified funding schedule, more than 6 years had elapsed. The
LTV case provides no precedent for a prepackage termination
restoration as proposed by US Airways.
Mr. Chairman, you also asked me to address the question of
whether the Agency should have expanded authority under section
4047 to terminate and then restore the plans with a new,
substantially lengthened funding schedule. PBGC does not desire
such expanded authority. We believe that terminating and
restoring plans of companies in financial distress would
undercut the funding requirements enacted by Congress and
jeopardize the solvency of the insurance system. Moreover, it
would be a dangerous precedent. We are sympathetic to workers
who would suffer significant cutbacks if their plans are
terminated, but providing this special relief to US Airways
would give it a competitive advantage over other airlines. It
would also give other financially distressed companies a
blueprint for how to borrow from their pension plans at the
expense of the pension insurance system and the 44 million
Americans it protects.
If US Airways----
Senator Specter. Has there been any evidence that US
Airways has undertaken a borrowing program to create this
current problem?
Mr. Kandarian. What do you mean by borrowing program?
Senator Specter. Well, that is language you just used, that
they might set a precedent to give other airlines ideas about
how to institute a borrowing program from their pension plans.
Has US Airways borrowed from the pension plan here?
Mr. Kandarian. If they go forward with a restoration
proposal, that could well happen.
Senator Specter. That could well happen but has not
happened.
Mr. Kandarian. Well, it will not happen until there is
restoration funding.
Senator Specter. But the question is, has US Airways used
its pension plan to borrow money? You say that you are
concerned about a precedent here which would give airlines a
way to borrow from the pension plan----
Mr. Kandarian. The way I was using----
Senator Specter [continuing]. So I asked you, has US
Airways borrowed from the pension plan?
Mr. Kandarian [continuing]. The way I was using that
terminology was that, going forward, if they did not put the
funding in, under current law, they would in effect be taking
monies that otherwise they would be contributing under law,
under ERISA, to the plan and keeping that for other business
purposes.
Senator Specter. Well, that is hardly borrowing, Mr.
Kandarian. Go ahead.
Mr. Kandarian. If US Airways, why not other financially
troubled airlines? If airlines, why not companies in other
industries?
prepared statement
In closing, I would like to repeat a point that the Senate
Finance Committee made in 1987, when it limited funding
waivers: ``The integrity of the plan termination insurance
program will be jeopardized if employers have the opportunity
to avoid liability for their pension promises at the expense of
other employers who moderated their promises or are more
financially secure and remain in the defined benefit system, .
. .''. That was a sound observation then, and is a sound
observation today.
Mr. Chairman, I thank you again for this opportunity to
appear before the subcommittee. I will be happy to answer
questions.
[The statement follows:]
Prepared Statement of Steven A. Kandarian
Mr. Chairman and Members of the Subcommittee: Good afternoon. I am
Steven A. Kandarian, Executive Director of the Pension Benefit Guaranty
Corporation (PBGC). With me today is PBGC's General Counsel, James
Keightley. We want to thank you, Mr. Chairman, for holding this hearing
and for the opportunity to testify on this very important matter.
You have asked me to address the PBGC General Counsel's legal
opinion that PBGC may not terminate and immediately restore US Airways'
pension plans in order to provide the company with a longer period over
which to fund its plans. You have also asked me to address whether the
law should be changed.
Before turning to those issues, I would like to provide some
background on the role PBGC plays in ensuring a secure retirement for
American workers, and on the relevant pension funding rules.
STRUCTURE OF PBGC
PBGC was created as a federal corporation by the Employee
Retirement Income Security Act of 1974 (ERISA). PBGC protects the
pensions of about 44 million workers and retirees in about 35,000
private defined benefit pension plans. PBGC has a three-person Board of
Directors--the Secretaries of Commerce and the Treasury and the
Secretary of Labor, who is the chair.
It is important to note that PBGC receives no taxpayer dollars.
PBGC is funded by premiums paid by sponsors of defined benefit plans.
Every company that sponsors a defined benefit plan pays to PBGC an
annual flat-rate premium of $19 per participant. In addition, sponsors
of certain underfunded plans, which pose a greater risk to the
insurance system, pay an additional variable-rate premium based on the
degree of their underfunding.
PAST CONGRESSIONAL ACTION TO TIGHTEN FUNDING RULES
PBGC was in a deficit position for its first 21 years of existence.
To address the causes of the deficit, Congress amended PBGC's governing
law in 1986, 1987, and 1994 to increase premiums, to tie premiums more
to exposure, to prevent ongoing companies from ``dumping'' their
underfunded plans on PBGC, and to tighten the funding requirements for
underfunded plans. Two key elements of the tighter funding requirements
were:
--Accelerated funding for plans that were generally less than 90
percent funded, and
--Stricter limits on the granting of waivers from the funding
requirements.
Accelerated funding requirements
When ERISA was enacted in 1974, Congress allowed employers with
existing pension plans 40 years to pay unfunded past service
liabilities, and new plans were allowed 30 years to pay these
liabilities. At that time, Congress viewed the funding rules and PBGC
insurance as closely linked. As the Finance Committee stated:
``The termination insurance program is intended to work hand-in-
hand with the minimum funding standards imposed by the bill, since the
latter will limit the losses due to plan termination by requiring more
adequate funding of pension plans.''----Report of the Committee on
Finance on S. 1170, S. Rep. No. 93-383 at 26 (1973).
Since 1974, Congress has acted repeatedly to tighten the funding
rules to require faster funding and greater protections for
participants and the pension insurance system. In 1987, Congress added
accelerated funding rules for certain underfunded plans. These rules
require employers to fund pension liabilities over 5 to 7 years rather
than over 30 to 40 years.
When Congress strengthened the funding requirements in 1987, the
Finance Committee concluded:
``An employer should not have the opportunity to make pension
promises that exceed its financial capacity to meet its promises. In
order to reduce the financial risk to plan participants and the PBGC,
the amendment requires certain plans to be funded more rapidly
depending on the funded status of the plan.''----Omnibus Budget
Reconciliation Act of 1987, 100th Cong., 1st Sess., ``Explanation of
Provisions Approved by the Committee on December 3, 1987 for inclusion
in leadership Deficit Reduction Amendment,'' p. 170.
Funding waivers
In addition to strengthening the funding requirements, Congress
also placed stricter limits on the IRS's granting of waivers from the
funding requirements. A funding waiver allows a company to defer
payment of funding contributions in the event of temporary business
hardship. When ERISA was enacted, the IRS was granted authority to give
a funding waiver to an employer suffering from ``substantial business
hardship.''
In 1985 and again in 1987, Congress acted to tighten the
requirements for funding waivers because of concern that funding
waivers were being misused. As a result, Congress limited waivers to no
more than 3 waivers in a 15-year period, reduced the 15-year waiver
repayment period to a 5-year period, and required the IRS to consult
with PBGC over proper security for any waiver over $1 million.
The Senate Finance Committee explained that these tighter waiver
rules were necessary and appropriate because:
``It is believed that employers have used funding waivers in the
past to minimize plan contributions during the period immediately
preceding the termination of a plan. The GAO report found that 30
percent of the claims against the PBGC arising during the period 1983-
1985 resulted from the failure of employers to make required plan
contributions prior to plan termination. The GAO concluded that
significant percentages of the large claims represented required
contributions that were overdue or had been waived by the IRS.
``Under present law, funding waivers are equivalent to an extension
of credit from a plan to the employer that normally would be treated as
a prohibited transaction. It is believed that such an extension of
credit is not appropriate unless adequate safeguards apply to protect
participants' benefits. Plan participants should not be required to
finance the continuing operations of an employer by placing their
retirement benefits at risk.
``Further it is believed that the integrity of the plan termination
insurance program will be jeopardized if employers have the opportunity
to avoid liability for their pension promises at the expense of other
employers who moderated their promises or are more financially secure
and remain in the defined benefit system.'' [Emphasis added.]----
Omnibus Budget Reconciliation Act of 1987, 100th Cong., 1st Sess.,
``Explanation of Provisions Approved by the Committee on December 3,
1987 for inclusion in leadership Deficit Reduction Amendment,'' p. 181.
US AIRWAYS' REQUEST
US Airways is currently undergoing reorganization in bankruptcy
court. It has applied for a loan guarantee from the Air Transportation
Stabilization Board. To obtain a loan guarantee, US Airways must
present a business plan that demonstrates that it can repay the loan
based upon reasonable financial assumptions.
US Airways has asserted that it cannot satisfy the Board's
conditions and also make required pension contributions. US Airways
also has asserted that the existing funding waiver process would not
provide sufficient financial relief. Consequently, US Airways came up
with a creative solution: the functional equivalent of a ``super
waiver.'' US Airways asked PBGC to terminate the company's pension
plans, immediately restore those plans, and provide 30 years to fund
them. US Airways asserts that PBGC has the authority to do this under
section 4047 of ERISA.
Section 4047 authorizes PBGC to restore a plan to its
``pretermination status'' whenever PBGC determines that restoration of
the plan is ``appropriate and consistent with its duties'' under Title
IV of ERISA. The PBGC's General Counsel concluded that this authority
is not broad enough to justify restoration solely for the purpose of
giving an employer a liberalized funding schedule.
The 1974 Conference Report on ERISA made clear that the purpose of
section 4047 was to allow PBGC to restore a plan ``if the employer and
plan enjoyed a favorable reversal of business trends, or if some other
factor made termination no longer advisable.'' This concept is
inconsistent with the ``pre-packaged'' termination/restoration proposal
by US Airways.
There is nothing in the statute, the legislative history, or the
regulations that would give PBGC the power to terminate a plan and then
immediately restore the plan with easier funding rules in order to
assist an ailing corporation. In fact, IRS, not PBGC, has statutory
authority for plan funding under ERISA, including waiving funding
requirements for corporations in temporary financial difficulty.
US Airways also cites as precedent PBGC's restoration of three LTV
steel plans with a modified funding schedule. Mr. Chairman, the LTV
situation was very different.
PBGC terminated the LTV plans in January 1987. Immediately after
PBGC terminated the plans, however, LTV set up follow-on benefit
arrangements. In other words, an ongoing corporation dumped its pension
liabilities on the insurance system and then attempted to provide its
workers with substantially the same benefits (in combination with
PBGC's guaranteed benefits) as if the plans had never terminated.
Almost a year later, PBGC used section 4047 to restore the plans to
LTV because it found that the follow-on benefit arrangements were
abusive to the pension insurance system. After three years of
litigation, the Supreme Court upheld PBGC's restoration decision.
In October 1990, the IRS issued special funding regulations to
address the problems of the LTV restoration, where the plans had been
terminated for some time before being restored. The IRS provided these
special funding rules because it concluded that, ``[u]nderfunding will
be significantly increased if the plan has been administered as a
terminated plan for an extended period of time.'' In no way do the
regulations suggest that the usual funding rules should be disregarded,
that the IRS's authority over plan funding should be transferred to
PBGC, or that PBGC should terminate plans solely for the purpose of
then restoring them with eased funding requirements.
EXPANDED AUTHORITY
Mr. Chairman, you also asked me to address the question of whether
the PBGC should have expanded authority under section 4047 to terminate
and then restore plans with a new, substantially lengthened funding
schedule. The PBGC does not desire such expanded authority because it
would put at risk the retirement security of 44 million Americans whose
pensions are insured by PBGC. PBGC believes that terminating and
restoring plans of corporations in financial distress would set a
dangerous precedent for the pension insurance system. Moreover, the
termination/restoration process proposed by US Airways would be
inconsistent with Congress' enactment of strengthened funding
schedules.
The US Airways proposal would in effect make the PBGC and the other
workers and plan sponsors in the defined benefit system lenders to an
ailing company. Providing this special relief to US Airways would give
other financially distressed companies a blueprint for how to
``borrow'' from their pension plans at the expense of the pension
insurance system. If US Airways, why not other financially troubled
airlines? If airlines, why not companies in other industries?
In closing, I would like to repeat the point that the Senate
Finance Committee made in 1987 when it limited waivers of the funding
rules.
``The integrity of the plan termination insurance program will be
jeopardized if employers have the opportunity to avoid liability for
their pension promises at the expense of other employers who moderated
their promises or are more financially secure and remain in the defined
benefit system.''
That was a sound observation then, and it is a sound observation
today.
Mr. Chairman, I thank you again for the opportunity to appear
before the subcommittee today. I will be happy to answer your
questions.
Senator Specter. Well, Mr. Kandarian, when you talk about
other airlines relying upon this as a precedent, or other
companies relying on this as a precedent, where you have a
situation where a pension plan is designed for the benefit of
the pilots and the plan is modified to defer contributions, the
pilots are at risk, but the pilots have agreed to the proposal.
They are the real party in interest, where they may be
disadvantaged if the contributions are not made, and they have
agreed to it. So why should the real party in interest not have
a dominant voice in determining what will be done here? If they
are willing to take the risk, why should the bureaucrats stand
in their way?
Mr. Kandarian. There are other stakeholders who have a risk
here, Senator.
Senator Specter. Who?
Mr. Kandarian. The other 44 million Americans who rely upon
our system, our insurance system, and the integrity of that
system and the solvency of that system. So----
Senator Specter. The other--who else who relies upon the
integrity of the system----
Mr. Kandarian. Yes.
Senator Specter [continuing]. Has an interest here?
Mr. Kandarian. Yes.
Senator Specter. Who?
Mr. Kandarian. The 44 million Americans who have defined
benefit plans or who rely upon them.
Senator Specter. Well, those 44 million Americans may find
themselves in the same situation. They may be working for an
employer which has been struck very hard by the terrorist
attacks of September 11. Now, I do not know to what extent the
pension benefits of US Airways have been affected by the
deteriorating stock market, but the values have gone down
everywhere. So that if you have some of those 44 million
Americans who are beneficiaries of a pension plan, and they are
looking at a consequence where they may have their pension
benefits cut 25 percent unless there can be some flexibility by
the Pension Benefit Guaranty Corporation, why should they not
have the advantage of that flexibility? What principle is
involved here which would be harmful to those 44 million
Americans?
Mr. Kandarian. The pension promises made by US Airways to
the pilots among other union groups were underfunded
dramatically. In the case of the pilots plan, it was less than
40 percent funded.
Now, you keep mentioning a 75 percent cut in pensions for
pilots. I do not know about specific pilots, but the plan is
funded better than that. So the cut would be closer to 50
percent overall for the pilots plan if it were to be terminated
based upon the most current available information that we have.
Senator Specter. When you say it is 40 percent
underfunded----
Mr. Kandarian. No, it is 60 percent underfunded.
Senator Specter [continuing]. Sixty percent underfunded,
that is not news to the PBGC, is it? If you find a pension plan
is underfunded, are you authorized to take some action to see
that that is corrected?
Mr. Kandarian. The funding rules control, which is really
IRS. We do not get involved in telling people what level of
funding, within the existing rules, to make. So US Airways
could have better funded these plans themselves. They had that
flexibility at different points in the past.
I would just return to one of the things you said. You seem
to believe that this is merely between the company and the
pilots themselves. In the 1980s, Eastern Airlines and Pan
American came in for a number of waivers to the IRS. Those
waivers were granted. Numerous waivers. In fact, the waiver
rules were changed probably because of that. When the plans
finally hit the PBGC, the whole--the underfunding grew
dramatically from the time those waivers were initially granted
to the time the plans were terminated by the Agency. So in a
sense, all those accruals, all those things that happened over
those years, the larger underfunding got transferred to the
system.
Again, the system does not have the full faith and credit
of the U.S. Government. The system does not have taxpayer
dollars. The system has premiums paid by other private-sector
companies who pick up that difference.
Senator Specter. Is your salary paid by the Federal
Government?
Mr. Kandarian. It is.
Senator Specter. Are all the administrative costs of PBGC
paid by the Federal Government?
Mr. Kandarian. Yes.
Senator Specter. Has there been no situation ever where
there was a suggestion for some help from Congress for, in
effect, a bailout where the PBGC had insufficient funds to take
care of its obligations?
Mr. Kandarian. A bailout of PBGC? I do not know, Senator.
Senator Specter. Federal funding?
Mr. Kandarian. Of PBGC? I do not know the answer to that
question.
Mr. Keightley. Senator, other than a $100 million line of
credit that we could draw from Treasury in 1974, we have not
drawn any Federal funds.
Senator Specter. But there was a line of credit in----
Mr. Keightley. It was available----
Senator Specter. [continuing]. 1974?
Mr. Keightley. I do not believe it was drawn on in 1974. It
was a start-up, you know----
Senator Specter. But it was available.
Mr. Keightley. It was available, but not used. Now, this is
using pension assets and premiums.
Senator Specter. Well, the Federal funding was available at
that time, and it would be an extraordinary Federal entity
which never came to the Congress for money. Sort of unheard of
in these legislative halls not to come to the Congress for
money. Every time we turn around, somebody is doing just that.
The term ``bailout'' is one of the most popular expressions in
the Senate chamber.
Mr. Kandarian. I understand that, Senator, but we are
trying very hard to not have this Agency come to the point of
needing a bailout.
Senator Specter. Well, when you make a point about not
wanting to have a bailout, I certainly agree with you. And when
you make a point about the extent of the taxpayers' money being
involved, that is a relevant consideration. But if the US
Airways proposal is not accepted, is it not true, Mr.
Kandarian, that the PBGC is going to be left to pay the reduced
pensions to the pilots?
Mr. Kandarian. That may happen, Senator, but that is not
totally within PBGC's control. In other words, US Airways and
its lenders in the ATSB will decide ultimately whether this
company gets money, whether it stays in business, whether it
operates with all the pension plans intact or not.
Senator Specter. Well, that is not entirely so. There may
be factors beyond their control where the pension plan does not
continue and the PBGC is going to end up paying the reduced
pensions. Is that not true?
Mr. Kandarian. We recognize that as a possibility, yes, and
we accept that.
Senator Specter. Well, okay. I am not going to get into a
discussion with you as to possibility, probability, likelihood.
It is a possibility that the PBGC can end up paying the
pensions.
Mr. Kandarian. Yes.
Senator Specter. Wouldn't you rather not have the PBGC pay
these pilots' pensions?
Mr. Kandarian. All else being equal, yes. But if the answer
is to stretch out the funding and possibly pay much more down
the road if the plan comes to us then--as occurred with Pan Am,
as occurred with Eastern--I would have to say no.
Senator Specter. Well, you might not pay anything down the
road with the plan going forward with a stretch-out on the
contributions. But in what way would you end up paying more?
Are you going to end up paying more than the pension benefits
which go to these pilots in the absence of US Airways' plan
going forward?
Mr. Kandarian. Yes, the underfunding could grow. That is
correct.
Senator Specter. Well a lot of things could happen, but
that could be curtailed by a variety of governmental agencies.
If not the PBGC, the IRS, right?
Mr. Kandarian. No, not totally, Senator. The assets of the
plan will be determined by the company itself, how they invest
them, what happens in the stock market. Interest rates which
affect liabilities is out of our control. Actual retirement
patterns that occur at the company are out of our control.
There are a number of factors that we cannot control at PBGC in
terms of our exposure.
Senator Specter. Well, Mr. Kandarian, that may or may not
happen. Those are a lot of contingencies on the economy and may
occur, which may affect millions of people. But the fact is
that if the US Airways plan is not adopted now, the PBGC is
going to be paying the pilots' pensions which it would not have
to now if the program was accepted. That is true, is it not?
Mr. Kandarian. Well, again, Senator, I do not want to parse
words, but I do not want to be in a position of saying which of
these plans should be terminated or not terminated. That is why
I am staying away from that question. There are four plans.
Senator Specter. Well, Mr. Kandarian, parsing words is your
business and my business. The question is: Will the PBGC not be
paying these pilots' pensions if the US Airways plan is not
adopted?
Mr. Kandarian. If the US Airways plan is not adopted and
there is no other relief and the company decides it is the
pilots' plan they wish to terminate for their financial
reasons, then, yes, we will.
Senator Specter. Okay, that is the point. That is the
point.
Mr. Keightley, thank you for joining us.
Mr. Keightley. Senator, it is nice to be here.
Senator Specter. We look forward to your testimony.
Mr. Kandarian. Mr. Keightley is not testifying, Senator.
Mr. Keightley. I do not have a fixed presentation, but if
you would like me to say a little bit about the legal position,
I will be glad to.
Senator Specter. Proceed.
Mr. Keightley. We have looked at 4047, which is the
Restoration of Plan Provision, which gives us authority to
restore plans. The conclusion I came to was that the
termination restoration would exceed our statutory authority.
Going to that question you raised a little earlier, we have
to find authority to do the things we do. We are a creature of
congressional statute. And we have not been identified as
having the authority to waive funding.
In doing the analysis, I looked first at 4047, the
statutory language. In there, in a number places where it says
``restore,'' it says ``restore the plan to pretermination
status.'' In my judgment, and I think in the judgment of many
people, restoring a plan with a promise to pay over 30 years is
not restoring the plan as it was prior to termination.
Second, we looked at the legislative history. As was, to
some extent, quoted in the opening testimony, we found language
that suggested that restoration was appropriate when something
had happened, such as a reversal of business trends, and it
gives us some authority to undo something if there was, for
example, a mistake of fact or law. But we do not think it goes
so far as to allow us to alter the funding requirements.
Third, we looked at the entire structure of the ERISA
provisions.
Senator Specter. When you talk about reversal of business
trends, Mr. Keightley, why would that not provide at least some
discretion for the PBGC in a situation like this?
Mr. Keightley. It would have to--the termination would have
to happen, and then the reversal of the business trends would
have to take place, and then that decision would be made. I am
not aware of any suggestion that there would be a reversal of
business trend.
Senator Specter. Are----
Mr. Keightley. In point of fact, the opinion of counsel for
the US Airways suggested the sole purpose was to adjust the
funding requirements, and had no other real purpose behind the
termination restoration.
Let me do one final point?
Senator Specter. Well, just a minute.
Mr. Keightley. Okay.
Senator Specter. Focusing for another moment here on your--
--
Mr. Keightley. Certainly.
Senator Specter [continuing]. Language of reversal of
business trends, would the reversal of business trends for US
Airways caused by the terrorist attack of September 11 be a
factor to be considered?
Mr. Keightley. It is--``a favorable reversal of business
trends,'' is the language in the legislative history, so I do
not think they were intending that it be a negative trend in
business. It would be a favorable trend in business that they
were trying to suggest----
Senator Specter. Well----
Mr. Keightley [continuing]. Where a company could then
afford to fund the plan.
Senator Specter. Well, how about a favorable reversal of
business trends when US Airways is able to get concessions from
all its employees and its suppliers and move forward with a new
plan?
Mr. Keightley. I would not normally----
Senator Specter. That is a reversal of business trends in a
favorable direction.
Mr. Keightley. Well, I do not know that I would
characterize that as a favorable reversal of business trends. I
would suggest, more normally, you would think of it as
increased business, or greater profitability, an ability to
have more income to pay your bills and credit. So I am really
trying to analyze how we got to our position.
Finally, we looked at the statutory structure. The three
points I am making is----
Senator Specter. Well, Mr. Keightley, in addition to
analyzing how you got to your position, I would like you to
analyze how you might change from your position if you say that
there is a standard here on a reversal of business trends in a
favorable direction. Although what has happened to US Airways
does not fit into some of the categories which you have
described, is there not a little flexibility here as to what
constitutes a reversal of business trends in a favorable
direction?
Mr. Keightley. I thought I was trying to be responsive to
that. I do not think renegotiating and going through bankruptcy
constitutes a favorable trend in your business. Now, I do not--
I really did not research or do an opinion on that, but I would
not normally characterize it that way.
Let me move on to my final point, which is that we looked
at the statutory structure of ERISA when it was created. The
IRS was clearly given the waiver authority. And going back to
your point about what says we cannot do something, I would
suggest you can infer from--that Congress gave waiver authority
to the IRS and the absence of any language in our implementing
provisions, that we were not given any waiver authority.
Finally--the waiver authority really deals with short-term
business problems. And so Congress, in its wisdom, said short-
term business problems would have waivers; long-term business
problems, you will have a distress situation. And that is the--
that is how it all ties together as a statutory matter and how
I come to the conclusion that the corporation is without
statutory authority to agree to a termination restoration with
a 30-year funding.
Senator Specter. Mr. Keightley, picking up on your opinion
on page 2, the last sentence, the second paragraph: ``While
section 4047 broadly authorizes restoration of a terminated
plan whenever PBGC determines that a restoration is,
`appropriate and consistent' with its Title IV duties, we do
not believe it would be appropriate and consistent with PBGC's
duties to use restoration in this manner.''
Now, I understand what you are saying about the IRS
authority, but the IRS authority is interwoven with the PBGC
authority where you really have a much broader range of
responsibilities on pension plans. And where you pick up this
language, ``appropriate and consistent,'' is that language not
really the broad authorization that you referred to in the
early part of the sentence, which could give you the sufficient
flexibility if, as a matter of your discretion, you chose to do
so?
Mr. Keightley. I do not think that it is a matter of
discretion. I believe, in light of the waiver authority
provided to the IRS, for us to interpret that provision as we
have characterized it, a super-waiver provision, would be
essentially ultra vires for the corporation.
Senator Specter. On page 2 in your first full paragraph, in
the second sentence, you are referencing, again, section 4047,
and you say: ``It empowers PBGC, `in any such case in which
[PBGC] determines such action to be appropriate and consistent
with its duties under [Title IV], to take such action as may be
necessary to restore the plan to its pre-termination status.''
While the US Airways plan which was approved by the pilots
is different as to funding schedule, could it not really be
regarded as bringing restoration to its pre-termination status,
which would, under your own analysis, give the PBGC the
discretion as to what is appropriate and consistent with the
underlying purpose of the statute?
Mr. Keightley. I do not believe that allowing them to
restore the plan with 30-year funding, contrary to the current
statutory funding requirements, would be returning the plan to
its current status or its pre-termination status. Funding is
critical to the survival of these pension plans.
A point to be made is that the funding--my view, although I
cannot cite legislative history--was intentionally structured
very specifically and objectively so that employees could not
be sort of manipulated into saying: ``Oh, you don't have to put
my money in there.'' So when we talk about if all the employees
agree that: ``I don't have to put money in,'' that would be a
difficult, I think, precedent for Congress even to endorse,
because of, in some cases, the strong leverage that an employer
would have over the employees to extort, essentially, funding
waivers.
So I think there is a good policy behind very tightly
structured, objective funding requirements.
Senator Specter. As I had referenced before Senator
Santorum arrived at the hearing, he and I had introduced
legislation last Thursday. Have you had a chance to examine
that, Mr. Kandarian?
Mr. Kandarian. I have seen the legislation, yes.
Senator Specter. Would you render a negative view as to
discouraging Congress from adopting that?
Mr. Kandarian. Yes, Senator. Our concern is basically the
slippery slope argument, so that if we give it for US Airways,
where do we draw the line? A lot of companies right now are
highly underfunded in their pension plans, and a number of
companies in the economy today are not doing well. They have
financial problems.
Senator Specter. If we level the slope by specifying a very
narrow range of circumstances applicable to this case so that
it does not become a precedent for other cases, would you
withdraw that objection?
Mr. Kandarian. I do not see how we can do that, Senator. I
do not see how we can say this company gets one set of funding
rules but other like companies do not. We think that will be
unfair in terms of the competitive environment in the
marketplace as well.
We also think that the funding-rule tightening that
occurred in those other years I mentioned in my testimony was
important to try to limit underfunding, to limit things like
this in terms of plans being highly underfunded. And currently
within the administration we are looking at ways to further
tighten these rules. For us to endorse something as stretched-
out funding at a time when we are looking at ways to make
funding stronger would be inconsistent, Senator, which is why
it is hard for us to support something like this.
Senator Specter. What are you looking at to make the rules,
as you say it, stronger?
Mr. Kandarian. There are a number of proposals that are
being discussed within the administration. Nothing has been
endorsed at this time that I can really state publicly. But
basically, to make funding more stringent, to not allow plans
to get as underfunded as these plans are.
Senator Specter. Well, does the IRS have the authority
under existing law to step in and look at underfunded plans and
require corrective action?
Mr. Kandarian. If there is missed minimum funding. But, for
example, these plans, as you point out, are underfunded and
there was no missed minimum funding. So that goes to the issue
of the funding laws themselves. Are they adequate?
Senator Specter. Well, should there be modifications of the
funding laws?
Mr. Kandarian. Again, we are discussing that internally
within the administration. I have put together some thoughts on
that, and it is still being considered.
Senator Specter. Do you have any reason to believe that US
Airways could not carry forward the plan which they have
proposed on the 30-year funding and make a success of the
revised funding proposals?
Mr. Kandarian. In terms of their ultimate success as a
company?
Senator Specter. Correct.
Mr. Kandarian. I do not know whether they will be
successful. There are a number of factors that we cannot
predict here today, in terms of war in Iraq and business
travel----
Senator Specter. I know----
Mr. Kandarian [continuing]. And all the rest.
Senator Specter [continuing]. I know you do not know, and I
know that there are a lot of contingencies. But the question
is, Do you have any factual reason to believe that US Airways
would not be successful in its proposed plan for the extended
funding?
Mr. Kandarian. Well, I have seen their numbers, and I have
seen their business plan, and it is a tight plan, even with all
the things they are doing. And I applaud their efforts. But
still, it is very tight financially.
Senator Specter. Okay. I will take that, tight, but no
factual reason to believe it could not work. Correct?
Mr. Kandarian. I think I will stand by my answer, Senator.
Senator Specter. Well, that would be fine if I knew what
your answer was, Mr. Kandarian.
That would be fine, Mr. Kandarian. Do you have any reason
to think US Airways cannot succeed, except for the various
contingencies like the Iraq war? We are trying to find an
answer here, Mr. Kandarian. If you have some reason to doubt
it, say so. And if you do not have some factual reason to doubt
it, say that.
Mr. Kandarian. Well, I am not expressing an opinion about
whether US Airways will or it will not be successful with its--
their business plan. What I am discussing is the integrity of
the defined benefit insurance system that protects 44 million
working Americans, and that is what I am focused on.
I think this effort would, in the long-run, be detrimental
to the overall system. That is my position.
Senator Specter. Senator Santorum, would you care to
question?
OPENING STATEMENT OF SENATOR RICK SANTORUM
Senator Santorum. Thank you, Mr. Chairman. Can I use that
term? ``Chairman''?
Senator Specter. There was a long colloquy on that before
you arrived, Senator Santorum, and----
Senator Santorum. Well, Mr. Chairman, slash, ranking
member----
Senator Specter [continuing]. The answer to that is about
as vague as Mr. Kandarian's testimony.
Senator Santorum. We have been working on that. And I
apologize for being late, but I have been working on several
issues and trying to get us moving here in the Senate, and I
will dispense with my opening statement and ask for it to be
placed in the record.
[The statement follows:]
Prepared Statement of Senator Rick Santorum
Chairman Harkin and Ranking Member Specter, I appreciate you
holding this important hearing today on the status of the US Airways'
pension plan. US Airways employs more than 17,000 people in the
Commonwealth of Pennsylvania through two hubs in Pittsburgh and
Philadelphia. Without a doubt, the airline is a major presence in the
Commonwealth, and it's been an honor to work closely with their
employees and management team over the past several years on a variety
of issues. I am pleased that we are joined today by Allegheny County
Chief Executive Jim Roddey who has been an effective partner in the
Pittsburgh region.
The status of US Airways' pension plan is pivotal to the successful
restructuring of the airline. In July 2002, the airline was granted
conditional approval by the Air Transportation Stabilization Board
(ATSB) for a $1 billion loan guarantee. A condition of that loan was
presenting a solid financial plan proving the airline could meet its
financial obligations over a seven-year period throughout all segments
of its operations. Currently, US Airways' obligation to its pilots'
pension fund--along with other obligations--compromise the ability to
make required payments to both the pilots' pension fund and a potential
loan guaranteed by the ATSB.
Last week, Senator Specter and I spearheaded an effort that would
have paved the way for US Airways to restructure their pilots' pension
plan. In an unprecedented effort, the pilots and the airline management
came together in late 2002 to forge a revised pilot pension plan that
would significantly help the airline in the reorganization efforts. The
plan would spread the funding payments over a schedule of 30 years. The
airline would fully honor its obligations to pay pension benefits to
its pilots, and the extension would not interfere in the payment of
those benefits. That proposal was then presented to the Pension Benefit
Guaranty Corporation (PBGC) for their approval.
In late 2002, the plan was considered by the PBGC, and the result
was that there is no legal authority in pension law to grant the
request. Last week, I introduced S. 119 with Senator Specter. This bill
would have provided a change in ERISA law allowing for the PBGC to
approve the 30-year pension payment schedule. S. 119 was considered on
the Senate floor last week. Members of the Finance Committee objected,
however, on the grounds that it should be considered in the realm of
overall pension reform.
While I was certainly disappointed with the outcome of considering
S. 119, I look forward to working with my fellow Finance Committee
members in the near-term as the committee focuses on the important
issue of pension reform. Further, I trust this hearing will result in a
constructive dialogue with the PBGC who is testifying today. I look
forward to hearing from them regarding viable options as the airline
continues to pursue a financial restructuring that is sound for the
employees and ultimately the longevity of the airline.
I appreciate having the opportunity to share my thoughts with you
on this issue of importance to the Commonwealth and the thousands of
employees and families who are affected by these decisions. Thank you,
Mr. Chairman and Senator Specter for holding this hearing, and I look
forward to our continued work and cooperation on this matter.
Senator Santorum. I want to thank Senators Harkin and
Specter for calling this meeting. This is a very important
hearing, obviously of great importance to the people in my
State and, I would argue, all travelers in the--particularly in
the eastern seaboard.
I just want to follow up with, maybe, Senator Specter's
line of questioning here. Let me understand this, that US
Airways was meeting their obligations under law. They were
funding at the level that they were required to under law. Is
that correct?
Mr. Kandarian. That is correct.
Senator Santorum. Okay. And that the concerns, from what I
read from your document, that the Congress had and that you had
was that companies would deliberately underfund their pensions,
not meet their obligations, and then go into this situation
where they would seek waivers, or they would seek relief. That
was----
Mr. Kandarian. I do not think we said that, Senator.
Senator Santorum. Okay. I thought I read that.
Mr. Kandarian. I am not sure who you are referring to.
Senator Santorum. I do not know whose testimony I was
reading. I was trying to catch up here real quick.
Well, that is my--that was the impression I got from
reading this, that that was what the Congress was concerned
about. And as soon as I page through here and find that--I
think it was--let me see, where is it? Yes, ``The Senate
Finance Committee believed that these tighter waiver rules were
necessary because of--they used, for funding waivers in the
past, to minimize plan contributions and that, you know, GAO
found that 30 percent of the claims against PBGC during the
period resulted from failure of employees to make required plan
contributions prior to plan termination.''
I mean, this is in your testimony, is it not?
Mr. Kandarian. I thought you were referring to my
comments----
Senator Santorum. No, I said your testimony.
Mr. Kandarian [continuing]. About US Airways.
Senator Santorum. No, in your testimony----
Mr. Kandarian. Yes.
Senator Santorum [continuing]. I think I mentioned ``the
Finance Committee's concern.''
Mr. Kandarian. Right. We were quoting the Finance
Committee's----
Senator Santorum. I think I said that.
Mr. Kandarian [continuing]. Deliberations at that time.
Senator Santorum. Okay. My point was that that is what is
Congress' concern, that there would be some deliberate attempt
here for people to game the system. Are you suggesting that US
Airways was gaming the system here and--before they asked for
this?
Mr. Kandarian. No, but those were for waivers. And US
Airways can still----
Senator Santorum. I understand.
Mr. Kandarian [continuing]. Apply for waivers.
Senator Santorum. I understand.
Mr. Kandarian. And we do not object to US Airways applying
for waivers under the existing rules.
Senator Santorum. I understand that. But I guess the point
I tried--I think is illustrative is that Congress was
concerned--and I know I, as a Congressman, was concerned, as a
member of the Ways and Means Committee, when we dealt with this
issue at the PBGC--was concerned about systematically
underfunded plans and the result and impact of that on the
taxpayer and that obviously, if that was the case here, coming
in and trying to get a reorganization or restructuring, I would
not be particularly sympathetic to. That is not the case here.
That is clear, correct?
Mr. Kandarian. We are not suggesting that US Airways
deliberately underfunded their plans, but their plans are
highly underfunded. They had flexibility at points in their
history to better fund these plans. They did not take that
avenue.
Senator Santorum. Okay. Here is the other point that I am a
little bit concerned about. And again, just speaking from the
standpoint of a Member of Congress, and looking at what actions
are--or certainly seem to be in the offing here, we have a
situation where if we proceed with US Airways terminating their
plan and PBGC picking it up--did you already testify as to what
the cost associated with that would be for the taxpayers?
Mr. Kandarian. We did not testify to that yet.
Senator Santorum. Do you have a figure on that, what the
cost----
Mr. Kandarian. Are you referring to all plans, or one plan,
or how many plans?
Senator Santorum. Well, let us just assume that they--for
purposes of this discussion, since the biggest--obviously, the
biggest plan is the pilots' plan, let us just look at the
pilots' plan. What would that be if they terminated that plan?
Mr. Kandarian. Based upon the data we have been given to
date, we think it is about $500 million.
Senator Santorum. $500 million over how long a period of
time?
Mr. Kandarian. That would be paid out over a number of
years, based upon the lives of the people who are receiving the
pensions.
Senator Santorum. Okay. And if we were to--if they were to
terminate all the plans, what would that be? Do you know?
Mr. Kandarian. Excuse me, the $500 million number is a
present-value number. Okay? So it is discounting back those
payments.
Senator Santorum. Okay.
Mr. Kandarian. It is worth, today, $500 million.
Senator Santorum. Okay. And if they were to terminate all
the plans, do you----
Mr. Kandarian. We think----
Senator Santorum [continuing]. Have that?
Mr. Kandarian [continuing]. It would be just over $2
billion, in terms of our guarantee.
Senator Santorum. Okay. Now, my question to you is, again,
I--just from a public-policy point of view--I am trying to
figure out why it makes sense, from a public-policy point of
view, to take on that liability when there is an opportunity to
defray that liability--potentially indefinitely, potentially
forever--and why that makes good public-policy sense.
Mr. Kandarian. For two reasons. One I mentioned, perhaps,
before you entered the room, Senator. In the late 1980s, there
were funding waivers that were much more liberally granted than
today, and they were given to, for example----
Senator Santorum. But we are not asking for a funding
waiver here, are we?
Mr. Kandarian. No, but it would be similar in its impact in
stretching out the funding by a company, to fund the existing
underfunded part of their plan.
Senator Santorum. Then why does my question about waivers
count, and yours, analogizing waivers, does not count? I mean--
or the other way around--why, when I analogize this issue to
waivers, you say it is not valid, and now you are analogizing
this situation to waiver, and it is valid?
Mr. Kandarian. I do not know, Senator, exactly what you are
referring to, but let me----
Senator Santorum. Well, I analogized that you--I made the
comments that the Finance Committee said that we had these
deliberate underfundings----
Mr. Kandarian. Right.
Senator Santorum [continuing]. And you said: ``Well, that
only deals with waivers; that does not deal with plan
terminations and restarts.'' And I said: ``Okay, I will accept
that, that it deals with waivers,'' and now you are answering
my question--answering it with a waiver.
Mr. Kandarian. We characterize the restoration proposal by
US Airways as a super waiver, in a sense. It stretches out,
over 30 years, payments that would normally be made over 5 or 7
years. So the answer to your question is two-fold. Number one,
the hole may get larger over time. And if the plans are
terminated at some point down the road, there could be a much
larger hit to the system.
Senator Santorum. Can you not restructure--I mean, from a
negotiating standpoint, can you not require certain payments
from US Airways to make sure that that does not occur? I mean,
is there not a way to avoid that problem down the road?
Mr. Kandarian. It literally cannot be done. And it cannot
be done because there are factors out of our control and US
Airways' control that relate to the value of the assets in
their plan, the stock market interest rates, experience with
people retiring, at what age they retire, a number of lump
sums--people taking lump sums out of the plan, which could be
significant.
If you are a worker at US Airways and you are worried about
this plan because it is so underfunded and you have an option
to take a lump sum out, you might just well take that money out
with you rather than be a creditor, if you will, to the plan.
Senator Santorum. I understand that, but can you not put
something in a negotiated settlement that would require
increased funding of a plan if such an occurrence happened in
the future to make sure that there was a certain level----
Mr. Keightley. I was just going to say, they do not have
the money to do it. I mean, being--knowing what is going on in
the bankruptcy, it is all driven by a limited resource pool and
a limited income stream. And so there is really no----
Mr. Kandarian. If they could do that, they would not need
what they are asking for. So what they are saying is, as we
understand it: ``Unless we can get our pension obligation down
to this fixed amount''--they are using, I think, $285 million--
``we cannot get our loan, we cannot get this, we cannot get
that.''
Mr. Keightley. Right.
Mr. Kandarian. PBGC cannot turn around and say: ``Now give
us the monies we need to fill our hole,'' because now there are
lenders--there are equity players who will say: ``Wait a
minute, if that goes out the door for the same reasons we are
saying no to you right now about giving you a loan or
equity''----
Senator Santorum. Well, this is post the restructuring of
their plan, though. So assuming they have restructured their
plan to anticipate these things--I mean, I assume that--no one
is going to sign off--that the union and that creditors are not
going to sign off on a plan that is a pie-in-the-sky kind of
payout plan--I mean, I would make that assumption. I mean,
these are solid--this is an arm's-length transaction with
business people who are going to look at this: ``Is this a
reasonable amount to anticipate, as far as payout, over the
next x-number of years to--on these pension plans?'' And what
you are saying is--are you saying that you do not believe that
those numbers are a reasonable approximation of what would be
anticipated?
Mr. Kandarian. I was trying to answer your question--``Can
we limit our liability from growing?'' I thought was your
question.
Senator Santorum. It is my question. But what you are
saying----
Mr. Kandarian. And my----
Senator Santorum [continuing]. Your answer to that question
was, no, you cannot, because you anticipate that there are
contingencies that will develop that will cause a bigger hole.
That is what you said.
Mr. Kandarian. We do not know whether that will occur or
not.
Senator Santorum. Well, I know you do not know, but what I
am asking you is: Are you suggesting that what they have done
is not taken into account those contingencies in laying out
this plan?
Mr. Kandarian. Yes, they have not taken that into account.
Senator Santorum. Okay. And you think that the lenders have
gone along with what you would argue is a rather tight non-
contingent kind of arrangement?
Mr. Kandarian. The lenders do not care about PBGC's
fortunes. They care about their fortunes. So if the hole gets
bigger for us, that is not a concern to the lenders or to the
equity players. We are an unsecured creditor. We are behind the
secured creditors. That does not affect them.
Senator Santorum. Yes, well, I would think they would be
concerned if they get in a position where they have a situation
where they cannot meet their pension obligations and end up
with a lot of problems with their unions. I would think that
that might draw into their concern. But again, I could be wrong
on that.
Mr. Kandarian. Well, let me say that the second reason why
we are concerned--not just that there may be a bigger hit down
the road to us--is the integrity of the overall system and the
slippery slope. How do we say no to the next air carrier that
has a problem today? How do we say no to other industries that
have difficulties today with highly underfunded plans? I think
all of us have been reading in the press recently the extent to
which underfunding has now been created based upon lower
interest rates and lower stock-market values. If we start
breaking down the integrity of that funding system on a case-
by-case basis, I do not know how we say yes to one and no to
the others.
Then we are back to a situation where--we began with in
ERISA in 1974, when the funding rules were very loose and plans
came in highly underfunded, and we got bitter letters and
complaints from constituents and from Members of Congress
about: ``I had no idea my plan was so underfunded. I had no
idea that PBGC limits that are set by Congress were going to
haircut me in this way or that way.''
So we are trying to look at the entire system, the
integrity of the system, for the 44 million Americans who count
on us for their retirement security.
Senator Santorum. Have you ever had something like this
brought to the PBGC before, where management and labor came in
and offered to do a restructuring like this?
Mr. Keightley. I have been there 7 years, and I have never
seen it done formally. We, at least once before, had somebody
come in, sort of: What do you think? And we went: No, that is
not going to work. So we have not seen any.
The point I was making earlier, it is not purely a matter
of the employees. There might be some cases where that kind of
arrangement would--could be used by a strong employer to really
extort inappropriate changes in the pension funding. I am just
saying that is a decent policy reason why you want a tightly
structured funding system. And even at that, companies have
some discretion as to how they fund and what assumptions they
put in there. And there is some judgment in there being done by
actuaries and outside people, but--so there is some discretion
in the process.
Senator Santorum. Yes, I understand. But in this case, are
we not looking at what the renegotiated--well, the plan
presented by US Airways would actually be better for their
employees than if the plan were terminated? Is that accurate?
Mr. Keightley. It depends on--some people, it would. I do
not know the--you know, you have to look at everybody to see
who wins and who loses.
Senator Santorum. Well, I am not going to go down and ask
every individual----
Mr. Keightley. No, no, but I mean, they--some people keep
their jobs; other people--you have to, sort of, look at that.
If some--a young employee--and you terminate the plan, the
company may stay there a long time and may do better by having
accruals under some other pension plans. You know there are
winners and losers whenever a plan terminates.
Mr. Kandarian. Senator, there are 60,000 participants,
approximately, in the US Airways plan, and about 35,000 active
workers. The vast majority of the people will get over 90
percent of their benefits based upon today's cut-off if any of
these plans came in to us today. The pilots' plan, because it
is so highly compensated, is where the guarantee limits really
cut in. So the vast majority of the workers in this plan will
get over 90 percent of their benefits paid by us.
Senator Santorum. So basically, you are saying, other than
the pilots, by and large----
Mr. Kandarian. Yes.
Senator Santorum [continuing]. You are talking most of the
folks are going to get, basically, what they would under any
kind of renegotiation that has already occurred with US
Airways.
Mr. Kandarian. To date, in other words. I mean, if time
stopped today, our payments would be 90 percent or more for the
other plans, other than the pilots' plans. Now, if US Airways
did a distress termination on the other plans and they came to
us today, of course they would not get accruals for future
work. So I cannot say they would not be hurt in that sense, but
I do not think I have heard of any discussion of distress
terminations for the other plans.
Senator Santorum. Thank you, Mr. Chairman, I appreciate it.
Senator Specter. Thank you very much, Senator Santorum.
I would like to have Mr. Kilberg step forward before Mr.
Kandarian and Mr. Keightley are excused.
Mr. Kilberg, would you step forward?
As I had referenced earlier, there is an opinion from Mr.
William Kilberg and Mr. Gary M. Ford on the same issue, and
before Mr. Keightley and Mr. Kandarian leave, I would like to
ask Mr. Kilberg a question or two.
This opinion letter was rendered by Mr. Ford--Gary M. Ford
and William J. Kilberg to US Airways, and may the record show
that Mr. Ford, who could not be here today, served as General
Counsel to the Pension Benefit Guaranty Corporation; same
position that you hold, Mr. Keightley. And the opinion
registered by Mr. Ford and Mr. Kilberg, the conclusion I will
read briefly, is contrary to what you have testified to.
They concluded: ``PBGC has broad authority to restore a
terminated plan and, once the plan is restored, PBGC can issue
a restoration funding order that complies with the regulation
funding regulations. The PBGC has discretion regarding
restoration and an appropriate restoration funding schedule. As
applied here, termination/restoration could be made available
only in the rare circumstance where plan termination is the
only other option and the plan sponsor is in bankruptcy, can
not meet minimum funding standards even with funding waivers,
wishes to continue funding its plans, has taken all other
reasonable steps to reduce benefit costs and permit
continuation of the plans and has the resources to meet
restoration funding requirements.''
Mr. Keightley, do you disagree with that?
Mr. Keightley. Clearly.
Senator Specter. Mr. Kilberg, you have heard the testimony
of Mr. Keightley. What is your analysis and conclusion of it?
Mr. Kilberg. I have a great deal of respect for Mr.
Keightley, but both Mr. Ford and I disagree with his opinion.
The restoration or the authority to restore a plan is stated in
ERISA in section 4047. And while Mr. Ford was General Counsel
at the PBGC, I have had the honor of being Solicitor of the
Department of Labor, and I was Solicitor in 1974, when the
statute was passed and the initial restoration authority
language was put in. It is very, very broad. It allows the PBGC
to restore a plan when it is to be terminated or is in the
process of termination. So a plan does not actually have to
have been terminated in order to have it restored.
The Supreme Court has had an opportunity to look at this
language in one case--the LTV case, the only instance where
there has been a plan restoration--and in that decision, the
court said that a plan can be restored when restoration would
further the interest that Title IV of ERISA is designed to
protect.
When we look at the interest as set forth in the statute,
the preamble to the statute, it really--just three--it is to
keep premiums at a reasonable level and to keep plans going and
paying benefits. And it was our conclusion that, in this
instance, a plan termination and a restoration funding schedule
which allowed a 30-year period of amortization would do
precisely that.
The PBGC and Mr. Keightley, in his opinion, says that
funding relief is not a proper purpose. I cannot disagree with
that, but I would assert, respectfully, that it is a proper
method permitted by the statute in order to achieve the
statutory objectives of maintenance of plans and their benefits
and to keep PBGC premiums at a reasonable level.
That is basically the sum and substance of our
disagreement. There is relatively little case law. You will
note Mr. Keightley's opinion does not cite any. There is just
the LTV decision. But we believe that that, combined with the
language of the statute and its purposes, would support the
argument that the PBGC has discretion to work out a restoration
funding schedule if it chose to do so with an employer like US
Airways that is in bankruptcy, where there is no question but
that a distress termination would be appropriate, where it is
able to fund those benefits over time, and, frankly, where it
has received unprecedented concessions from its unions, giving
up going-forward benefits that make the ability to fund this
plan over time a great likelihood.
Senator Specter. Would you amplify your analysis of the one
decision by the Supreme Court of the United States on this
general area, which signifies to you the Supreme Court's
interpretation of legislative intent and public policy in this
matter?
Mr. Kilberg. Well, in LTV, it was LTV's decision to create
a follow-on plan which mirrored the plan that it had terminated
that caused the PBGC to first take the position that the
termination was a sham and then to insist that it could restore
the plan to LTV and create a new funding schedule.
That case was hotly litigated. It went to the Supreme
Court, and the Supreme Court interpreted the statute to give
the PBGC an extraordinarily broad grant of discretion, as I
indicated, to restore a plan when restoration would further the
interest that Title IV of ERISA is designed to protect.
The court went further and said that in carrying out this
specific and what it called an ``unambiguous statute mandatory
mandate,'' the PBGC is not required to focus on the policies
and goals of other statutes. In other words, one of the
arguments that LTV was making was that because of the Internal
Revenue code and other statutes, the PBGC could not exercise
its authority to restore the plan and to impose a funding
requirement upon LTV. The court said that PBGC, in fact, has
that very, very broad authority.
Senator Specter. Mr. Keightley, would you care to comment
on Mr. Kilberg's testimony?
Mr. Keightley. First, I would like to comment that the
Supreme Court, contrary to the trial court as well as the Court
of Appeals, deferred to the interpretation of the PBGC as to
what a statutory authority was in that particular case. And
that particular case was not at all analogous to the situation.
In that case, the LTV plans had been terminated in order to
avoid shut-down benefits. After that took place, the unions and
management agreed to, basically, pension plans that made
retirees, as I understand and read the opinions, 100 percent
whole and many of the others substantially whole, with the PBGC
paying the basic benefits, and then they made up the rest in
this what we would call an ``abusive follow-on plan.'' So they
were letting us absorb their pension costs; and, to the extent
that you view that as a labor cost, that is completely. And the
court said we had the authority to construe the restoration
authority in that context.
In my view, that has no connection with the current
situation at all. I would say that they said we had broad
authority in interpreting our statute in order to come to that
result, but they deferred to our interpretation and agreed with
us. And, as I say, I just do not see taking that language.
There are limits to what I think we can do under that statute,
and I think you folks are, you know, US Airways folks are
asking us to go beyond that.
I might point out that there is no question that the
purpose, reading from the joint opinion of the termination
restoration, is to provide funding relief for US Airways and
pension plans. There is just no question about that. And so,
again, we think Congress addressed that issue, told everybody
who had that authority, limited the waivers. If you remember
the waivers in the IRS context are, you get to waive it and
spread the funding over, say, 5 years, I believe. Much shorter
period of time.
So Congress has addressed that issue and built that limited
waiver provision into ERISA, and that is how I get to the
conclusion that PBGC does not have that statutory authority,
and other government agencies only have a very limited
statutory authority, which US Airways has advised us does not
meet their needs, financial needs.
Senator Specter. While there is no doubt that the LTV case
is very different factually, your response does not really go
to the basic point that Mr. Kilberg made with respect to the
Supreme Court's determination that the PBGC has broad authority
and broad discretion to interpret the statute. Do you disagree
with Mr. Kilberg's statement as to the Supreme Court's decision
in that respect?
Mr. Keightley. We have broad authority within the statutory
limits.
Senator Specter. Do you think if you made a finding, as Mr.
Kilberg says you have the authority to do, if that was your
decision within your broad discretion, that that would be
upheld by the Supreme Court?
Mr. Keightley. I do not believe--if the purpose was the
termination, to provide funding relief for US Airways, I do not
believe the Supreme Court, or, for that matter, any other
court, would uphold that position.
Senator Specter. Mr. Kilberg, do you think the rationale of
the Supreme Court is broad enough to uphold that position?
Mr. Kilberg. I do.
Senator Specter. Senator Santorum, anything further?
Mr. Keightley. One last point. I might point out that in
the bankruptcy proceedings in response to our opposition to
their termination restoration, they have abandoned that
position and are now pursuing legislative relief plus a
termination, and we intend to be working with them on some
other solution. But at this time, they are not pushing that,
and litigating it in the bankruptcy court is the point.
Mr. Kilberg. With all due respect to Mr. Keightley, no one
questions that the PBGC has discretion. The PBGC does not have
to agree to terminate a plan. The PBGC does not have to agree
to restore a plan. It certainly does not have to agree to a
particular restoration funding schedule if it does decide to
restore a plan. So this is all within the Agency's discretion,
and we respect the Agency's decision in this regard. Not much
choice about it. We would not have standing to raise a
complaint in a bankruptcy court or anywhere else.
Senator Santorum. Because what you would raise is that they
have the discretion.
Mr. Kilberg. Exactly.
Senator Santorum. You certainly cannot litigate something
where you are saying they have discretion and then argue that--
I guess you could argue they abused the discretion.
Mr. Kilberg. That would be a very difficult argument.
Certainly the PBGC has policy reasons. We may not agree with
them, but that does not mean that they abuse discretion for
them to assert them.
Mr. Keightley. I continue to say we do not believe it is a
discretionary area when the sole purpose is altering the
funding. That is the purpose--that is the reason we are being
asked for this, and that is beyond our statutory authority.
There may be other areas where we have discretion that is
within that authority, but it does not extend this far.
Senator Santorum. Do you agree that is the purpose?
Mr. Kilberg. No. That is the method, obviously. And I had
the same point, Senator, that you had earlier, the confusion
between a restoration funding schedule and a waiver of funding.
A waiver of funding is a term of art. It does go to the
Internal Revenue Service. There are very, very strict
limitations. They would not help US Airways in this instance.
They are really not for this purpose. What we are looking for,
clearly, is something far more creative, but something we
believe that, if it could be achieved, would help US Airways to
come out of bankruptcy and would serve the interest of its
employees as well as the company.
Mr. Keightley. May I read one sentence for the record from
the December 13 memorandum signed by Mr. Kilberg? ``The
purpose''----
Senator Specter. Where are you reading from?
Mr. Keightley. I am reading from the December 13 memo of
Mr. Kilberg and Mr. Ford.
Senator Specter. I understand that, but where from the
memo?
Mr. Keightley. In the first paragraph. ``The purpose of the
termination/restoration''--I underscore ``purpose''--``is to
provide funding relief for US Airways' pension plans.''
Senator Santorum. Mr. Kilberg.
Senator Specter. Well, there is no doubt about that, is
there?
Mr. Kilberg. There is no doubt. There is no about that, but
that is our purpose. The question earlier was ``purpose under
the statute.'' They said that that was not a purpose under the
statute. When we use the term ``purpose,'' we are using it as a
method. That is the method that we thought would best----
Senator Santorum. To accomplish what purpose under the
statute?
Mr. Kilberg. To accomplish the purpose under the statute
that would--from the PBGC's standpoint, that would maintain
premiums, and from the company employees' standpoint, that
would restore the plan and would allow the employees to obtain
the benefits under the plan. Those are the statutory purposes.
We used the term ``purpose'' here--we were not talking
about statutory purpose, we were talking about our purpose.
Senator Santorum. Mr. Keightley, is the method by which Mr.
Kilberg has suggested US Airways wants to achieve its purposes
proscribed by the statute?
Mr. Keightley. Yes, it is beyond our statutory authority--
--
Senator Santorum. But is it proscribed?
Mr. Keightley [continuing]. Whether it is a method or a
purpose.
Senator Santorum. Is it proscribed by the statute?
Mr. Keightley. Is it specifically proscribed?
Senator Santorum. Is it proscribed----
Mr. Keightley. There is no statutory language that says we
cannot do this. But it--my earlier position, as I have
articulated, is we have to find statutory authority to take the
actions that we take. There is no statutory to do this. The IRS
has been given the statutory authority.
Senator Santorum. Well, is it--are you suggesting that Mr.
Kilberg's assertion that the purposes that he has outlined are
invalid, that that is not what is going on here----
Mr. Keightley. They----
Senator Santorum [continuing]. Or you do not believe that
those are--I mean, there may be--let us put it this way. Let us
assume that you are right, that the purpose is to relieve their
funding. But that is not prescribed under the statute. But
additional purposes may be----
Mr. Keightley. Or authorized.
Senator Santorum. Pardon?
Mr. Keightley. Nor authorized.
Senator Santorum. Let me follow through.
Mr. Keightley. Okay.
Senator Santorum. It is not prescribed by the statute. Do
we all agree that there may be more than one purpose to this
request?
Mr. Keightley. Let me address the purposes. The purposes
are the purposes of ERISA, in general. You can--they do not
authorize specific acts by the PBGC corporation. So you could
find all sorts of things that someone might do saying--and
argue----
Senator Santorum. But do those purposes not--are those not
the things that give you the discretion to act?
Mr. Keightley. No, they do not, in my opinion.
Senator Santorum. Now, what gives----
Mr. Keightley. They are----
Senator Santorum [continuing]. The discretion to act?
Mr. Keightley. The specific implementing statutory
authority, the--that we went through earlier. I mean, I can--
let me pull it back out again.
We are dealing with 4047. That is the authority for
restoration of plans. I mean, do you want my little spiel?
Senator Santorum. Yes, I would love to hear you. I am
sorry. I----
Mr. Keightley. Okay. That is----
Senator Santorum [continuing]. Do not want everybody----
Mr. Keightley. I am sorry.
Senator Santorum [continuing]. To hear it again, but I have
not heard it.
Mr. Keightley. I did not recall whether you were here for
that or not. Anyway----
Senator Santorum. I was not.
Mr. Keightley [continuing]. That is the authority, 4047,
for the restoration of plans. We looked at the statutory
authority. In there, there is some specific language which says
that--to restore the plans to their pre-termination status. In
our view, restoring the plans with drastically altered funding
requirement is not returning them to the pre-termination
status.
Senator Santorum. It is also a drastic----
Mr. Keightley. Okay.
Senator Santorum [continuing]. It is also a drastically
altered benefit.
Mr. Keightley. I do not disagree with that, but I am trying
to get to what I think this corporation has been authorized to
do under 4047.
So anyway, we looked at that piece. We also looked at the
legislative history, which suggests that we could restore a
plan if favorable reversal of business trends or some other
factor made termination no longer advisable. In our view, as I
said earlier, a mistake of fact, a dramatic improvement in the
business climate, they discover oil on a piece of property that
is in the pension plan and suddenly they have got enough money
to pay everybody off--we think that is the kind of authority
that we were being given with that particular language.
Finally, the point we looked at was the overall statutory
structure of ERISA, which really has dealt with the problem of
plans--companies and plans not having the ability to pay. They
have a short-term waiver provision which they have put into the
statute, and they gave that authority to the IRS. For longer
terms, they can go into bankruptcy and show the bankruptcy
court that they are unable to carry these plans and function as
a successful business, and they can shed that liability. That
is the way Congress structured it. And they did not provide us
any statutory authority to enter into this kind of arrangement.
And that is my analysis of where we are, and I think, you
know----
Senator Santorum. Mr. Kilberg, can you deal with the 4047
issue?
Mr. Kilberg. Sure. I am not sure anybody is really enjoying
this debate between lawyers, but sure. When 4047 talks----
Senator Santorum. Well, this is a serious issue to us, so I
am enjoying it greatly, actually.
Mr. Kilberg. When 4047 talks in terms of restoring a plan
to the status it had, you have to look at how that term,
``status,'' is used in ERISA. That means a non-terminated
status. In other words, return it to its active status. It does
not mean return it exactly as it was before.
Indeed, the PBGC's regulations do not talk about returning
it to its precise mirror-image plan or terms; it says: ``to
ongoing status and to help ensure that the restored plan will
continue to be ongoing consistent with the best interest of the
plan's participants and beneficiaries.''
Senator Santorum. So pre-termination status does not mean
identical to----
Mr. Kilberg. No.
Senator Santorum [continuing]. What it was prior to
termination.
Mr. Kilberg. I do not believe it does. I do not believe
that is the way it was supposed----
Senator Santorum. Well, I understand you do not believe it
does, but what does--what do the statute and the regs say?
Mr. Kilberg. Well, the regulations--the language of the
regulations would be consistent with our interpretation, I
believe; inconsistent with the corporation's interpretation.
Senator Santorum. Can you stop there? Can you please
address that?
Mr. Keightley. It is pretty clear that you have to look at
the whole statutory structure here to see where the waiver
authority is located. And we are taking some broad language and
sort of inferring the ability to enter into these waiver
arrangements. And that is not what those regulations cover, and
that is not what they were intended. We have to deal with the
statutory limits on what we can do.
Senator Specter. Well, if you deal with the statutory
language under 4047--and we will put this language as part of
this record, together with the opinions of both sets of
lawyers--if you take a look at this language, it has broad
articulation of restoration, termination, and reinstitution.
I think what it really boils down to is your concession,
Mr. Keightley, that the PBGC is not prohibited from doing--let
me finish now--is not prohibited from doing what US Airways
asks. And you come back to say that the PBGC is not
specifically authorized to do what US Airways asks. But in the
course of your many decisions, you do many things for which you
cannot find a specific statutory authorization. But in the
absence of a prohibition, you take a look at the purpose of the
statute, of the broad discretion which the Supreme Court said
you had in LTV, and you exercise that discretion.
One final question, Mr. Kilberg. We are going to have to
move on. We have quite a few others----
Mr. Keightley. I would like to strike ``the concession'' on
my part----
Senator Specter. Just a minute.
Mr. Keightley [continuing]. Senator, any conceding----
Senator Specter. Just a minute.
Mr. Keightley [continuing]. On my part.
Senator Specter. Just a minute, Mr. Keightley. We will give
you a chance to make a concluding comment.
What is your evaluation of the last statement I just made,
Mr. Kilberg?
Mr. Kilberg. Well, I--obviously, Senator, I am in agreement
with you. We think the PBGC does have discretionary authority.
As I said earlier, even if we are right, that does not mean
that they have to exercise it in the way in which we would--we
would ask them to exercise it. We happen to believe that US
Airways' situation is somewhat sui generis. That is to say, it
is unique. We do not believe it would open floodgates for
others to walk through or to flow through.
Senator Specter. Well, that is the follow-up question,
whether--what do you make of Mr. Keightley's articulation, Mr.
Kandarian's articulation, of the horrors which would follow if
others use this as a precedent?
Mr. Kilberg. Well, we respectfully----
Senator Specter. Is there anything to that?
Mr. Kilberg [continuing]. We respectfully disagree.
Senator Specter. Okay, Mr. Keightley, if you have something
to say, we will give you an opportunity to say it.
Mr. Keightley. I would only like to say I continue to stick
by my opinion and I do not view myself as having made any
concessions in terms of what we are doing here. We lack the
statutory authority to allow, as they have requested, a
termination restoration to provide funding relief for US
Airways' pension plans.
Senator Specter. We are not saying you made any
concessions. You have not made any concessions at all.
If you said that you were making this judgment as a matter
of your discretion, or because you think it is a bad plan which
is coming forward, we could see that. When you say that the
statute prohibits it, we cannot see that.
Mr. Keightley. Well----
Senator Specter. Do you want the last word, Mr. Keightley?
Mr. Keightley. I just respectfully disagree with that.
Senator Specter. Oh, I understand that.
Next panel.
Thank you all very much.
STATEMENT OF HON. JAMES C. RODDEY, CHIEF EXECUTIVE,
ALLEGHENY COUNTY, PA
Senator Specter. Our first witness is the chief executive
of Allegheny County, Hon. James C. Roddey. Prior to becoming
the chief executive of the second biggest county in
Pennsylvania, in Pittsburgh, he had a distinguished career in
business as chairman of Turner Communications Corporation, very
active in civic affairs, a member of many boards including the
Pittsburgh Regional Alliance, once named Pittsburgh Man of the
Year, a graduate of Texas Christian University and a former
captain of the U.S. Marines.
Mr. Roddey, we appreciate your being here. We thank you for
all the work that you are doing on so many, many lines and
following so closely all of the activities of US Airways, which
is so important to your city, your county, your State, and your
country.
The floor is yours, Mr. Roddey.
Mr. Roddey. Thank you, Mr. Chairman and Senator Santorum.
Good afternoon.
I shall practice my latest Beatitude, and that is: Blessed
are those that are brief, for they shall be invited back.
I am pleased today to speak about the issue of US Airways.
First, I want to publicly applaud the pilots, the machinists,
the flight attendants, fleet service, simulator captains,
dispatchers, reservation and gate attendant unions for agreeing
to another $82 million in concessions. All of these unions have
played an instrumental role in assisting the airline with their
financial situation.
US Airways continues to be a vital economic force in
Allegheny County and Southwestern Pennsylvania. They generate
approximately $1.6 billion in economic impact in the Pittsburgh
region and over $2.3 billion to the Commonwealth of
Pennsylvania.
I am here today to ensure that they remain a strong part of
our community by requesting your support for immediate
assistance to US Airways' bankruptcy plan. If the plan is to
succeed, the Air Transportation Stabilization Board must
approve the $1 billion loan guarantee, labor give-backs must be
realized, and pension-fund issues must be solved.
The Retirement System of Alabama, which will hold 36.6
percent of the stock of the post-bankruptcy carrier, must come
through with the additional investments to which it has agreed.
Allegheny County has led a regional effort, along with the
State, to assist US Airways with a new maintenance training
facility. We were out front in support of the United Airlines
and US Airways merger.
I applaud the efforts made by Senators Specter and Santorum
to permit US Airways to extend the $3.1 billion in payments to
its employees' pension plan over 30 years. This amount
represents a gap over the next 7 years between what it will owe
in pension benefits and how much US Airways' pension fund is
expected to earn.
As you are aware, this legislation would have assisted US
Airways tremendously and would have eliminated the need to pass
the cost on to the Pension Benefit Guaranty Corporation.
Unfortunately, last week, passage was prevented because of an
objection by the Senate Finance Committee. Unless US Airways
lowers its pension obligation over the next few years, its
chances of obtaining the $1 billion Federal loan guarantee and
securing $240 million in new equity financing from the
Retirement System of Alabama is in serious jeopardy. Therefore,
if the Retirement System should pull its financing or the
Transportation Stabilization Board should reject the airline's
loan application, US Airways would be forced to liquidate.
Unfortunately, without this legislation, US Airways is down
to two options for dealing with the underfunded pension
obligations. They can either go back to the employee unions and
ask for further benefit cuts or terminate the pension plan,
which would then be taken over by the Federal Pension Benefit
Guaranty Corporation, or PBGC.
I urge the committee to work with the PBGC to resolve this
problem. I cannot stress enough how important it is to
Allegheny County and Southwestern Pennsylvania.
It is imperative that the U.S. Government participate in US
Airways' reorganization to help ensure a financial turnaround.
It is important that they sign off on final approval of the US
Airways loan guarantee and urge the Pension Benefit Guaranty
Corporation to work with US Airways and their unions to reach a
solution to the pension issue. Failure to act on these matters
now will only result in catastrophe if US Airways is forced to
suspend operations and/or liquidate.
Please consider that US Airways is the main air connection
for most of the East Coast, from Maine to Florida, and west to
the Mississippi River, with no other airline in good enough
financial condition to be able to step in and fill the gap in
any reasonable time frame. This would have a negative effect to
our national economy as well as a devastating impact in the
Pennsylvania region--in the Pittsburgh region, Pennsylvania,
and other regions and States served by US Airways. We have
already lost 20 percent of the US Airways local workforce and
25 percent of our flights. And shareholders, of course, have
lost everything. I urge the Federal Government to assist US
Airways before any further loss to the Pittsburgh region and
other regions throughout the United States occurs.
PREPARED STATEMENT
I understand that there is risk for the Federal Government.
However, the loss of US Airways may facilitate even greater
impact, a domino effect through the airline industry. Either
the Federal Government takes a risk, a little risk now, to save
the airline or face paying more later with a greater chance of
significant negative consequences.
Mr. Chairman, I appreciate you allowing me to make this
testimony.
[The statement follows:]
Prepared Statement of James C. Roddey
Good Afternoon Honorable members of the Appropriations Sub-
Committee on Labor, Health and Human Services, Education, and Related
Agencies. I am pleased to speak before you today on the issue of US
Airways.
First, I want to publicly applaud the machinists, flight
attendants, reservation, and gate attendant unions for agreeing to
another $82 million in concessions. All of these unions have played an
instrumental role in assisting the airline with their financial
situation.
US Airways continues to be a vital presence to Allegheny County and
Southwestern Pennsylvania. They generate close to $1.6 billion in
economic impact to the Pittsburgh region and over $2.3 billion to the
Commonwealth of Pennsylvania. I am here to ensure that they remain a
strong part of our community by requesting your support for immediate
assistance to US Airways bankruptcy plan. If the plan is to succeed,
the Air Transportation Stabilization Board must approve a $900 million
loan guarantee; labor givebacks and pension fund issues must be
rationalized; and the Retirement System of Alabama (RSA), which will
hold 36.6 percent of the stock in the post-bankruptcy carrier, must
come through with the additional investments to which it has agreed.
Allegheny County has led the regional effort with the state to
assist US Airways with a new maintenance and training facilities and
was out front in support for the United Airlines/US Airways merger.
Now, Allegheny County urges the Senate to support Senators Santorum and
Specter's efforts to permit US Airways to stretch out $3.1 billion in
payments to its employee pension plan over 30 years. As you are aware,
this legislation would assist US Airways tremendously in addition to
the cost to the Pension Benefit Guaranty Corp. Specifically, this Bill
would permit US Airways to stretch out its pension obligations from the
current seven years to 30 years. The airline is estimated to have $3.1
billion in under-funded pension obligations. This represents a gap over
the next seven years between what it will owe in pension benefits and
how much the US Airways pension fund is expected to earn.
Unless US Airways lowers its pension obligations by $1 billion over
the next few years, its chances of obtaining a $900 million federal
loan guarantee and securing $240 million in new equity financing from
the Retirement Systems of Alabama is in serious jeopardy. Furthermore,
if the Alabama pension fund should pull its financing or the Federal
Air Transportation Stabilization Board should reject the airline's loan
application, US Airways could be forced to liquidate.
Unfortunately, without this legislation, US Airways will be down to
two major options for dealing with the under-funded pension fund
obligations. They can either go back to the employee unions and ask for
further benefit cuts or terminate the pension plan, which would then be
taken over by the federal Pension Benefit Guaranty Corp., or PBGC. In
that case, pilots could face up to a 75 percent cut in their benefits.
I urge the committee to work with Senators Specter and Santorum to
make this legislation work. I cannot stress enough how important it is
to Allegheny County, Southwestern Pennsylvania.
It is imperative that the U.S. Government participate in US Airways
reorganization to help ensure a fiscal turn-around. It is important
that the Senate revisit the proposed merger with United Airlines, sign
off on final approval of US Airways' loan guarantee, and urge the
Pension Benefit Guarantee Corp. to allow US Airways to spread their
pension liability out over the next few years. Failure to act on these
matters now will only result in catastrophe if US Airways is forced to
suspend operations and/or liquidate. Remember this it the main air
connection for most of the East Coast from Maine to Florida and west to
the Mississippi River with no other airline in good enough financial
shape to be able to step in and fill the gap in any reasonable
timeframe. This would continue to have a devastating effect to our
national economy, as well as the tremendous negative impacts it would
have in the Pittsburgh region, PA, and other regions and states served
by US Airways. We have already lost 20 percent of the US Airways local
workforce. There are 25 percent fewer flights and shareholders and
local stakeholders have already lost everything.
I urge the Federal Government to assist US Airways before any
further loss to the Pittsburgh region and other regions throughout the
United States is affected. I understand that there is considerable risk
for the federal government; however, the loss of US Airways may
facilitate greater impact and a domino effect throughout the airline
industry. Either the Federal Government pays a little now to save the
airline or risk paying more later with a greater chance of significant
and negative consequences.
Thank you for your time.
Senator Specter. Thank you very much, Mr. Roddey.
STATEMENT OF DAVID N. SIEGEL, PRESIDENT AND CEO, US
AIRWAYS
Senator Specter. We turn now to Mr. David N. Siegel,
president and chief executive officer of US Airways. Prior to
joining US Airways, he was chairman and CEO of Avis Rent A Car
System, president of Continental Express, received his bachelor
of arts degree in applied mathematics and economics from Brown
University and an M.B.A. from Harvard Business School.
Thank you for joining us, Mr. Siegel, and we look forward
to your testimony.
Mr. Siegel. Thank you, Senator Specter and Senator Santorum
and members of the subcommittee.
I am David Siegel, president and chief executive officer of
US Airways. I appreciate the interest of the subcommittee in
our company's restructuring efforts, and, in particular, the
restructuring of our employee pension plans, which is the
specific subject of today's hearing.
Since joining US Airways in March, the efforts of our new
management team have been focused on executing a successful
restructuring that would position our airline for short-term
survival----
Senator Specter. Mr. Siegel, let me interrupt you just long
enough to say that we will not be asking any questions which go
to propriety interests or any confidential information of US
Airways in this hearing.
Mr. Siegel. I appreciate that. That would position our
airline for short-term survival and long-term success and
profitability.
The cornerstone of the restructuring was the Federal
guarantee of a $1 billion loan from the Airline Transportation
Stabilization Board, ATSB, created by Congress to respond to
the industry's financial crisis following the September 11
attacks. As the subcommittee is aware, US Airways has been
granted conditional approval of a loan guarantee whose funds
will be made available after we emerge from Chapter 11.
The fact that we have $1 billion in new capital available
to us as exit financing has been invaluable in attracting
Retirement Systems of Alabama as our new equity partner and
achieving success with our major lenders, lessors, and
financial partners. We have committed to a restructuring in
which we would work closely with all of our labor groups to
reach consensus on the cost savings and efficiencies that were
necessary to make our company competitive in a fast-changing
industry.
To that end, we have worked to complete a successful
restructuring that will save as many jobs as possible, preserve
as much pension and benefit compensation as possible in
combination with competitive wages and competitive work rules,
and, most importantly, create a vibrant and viable competitor
on the east coast.
That commitment did not mean that this would be a painless
process. In fact, we have negotiated two rounds of concessions,
with nine different labor groups, over the past 8 months, an
achievement most industry executives and analysts would have
viewed as impossible 1 year ago. But as difficult as this
process has been, our unions and our employees, to their
credit, have stepped up and delivered when the company said the
savings were necessary in order to save the company.
Of the remaining issues to be resolved is the approximately
$3.1 billion in pension obligations the company faces over the
next 7 years as a result of the dramatic drop in both the stock
market and the interest rates.
The majority of this obligation is related to the pension
program for our pilots. In fact, we have committed to the
unions representing our flight attendants and our mechanics
that we can work out the funding issues for their respective
members and will not consider any plan to terminate those
pension programs. At this point, the pilot pension plan is the
one at risk of being terminated.
To their credit, the Air Line Pilots Association has agreed
to two rounds of significant changes to the pension plan which
lowers the accrual rates, company contributions, and benefit
payouts on a go-forward basis. In our initial restructuring
agreement last summer, pay reductions up to 37 percent allowed
us to reduce go-forward pension expenses by nearly $600 million
during the term of the ATSB loan. This, however, was not
enough. So last month, we reached a second agreement with our
ALPA group to further reduce labor costs and restructure our
pilot pension program.
In spite of the substantial reduction in our go-forward
pension costs, we must still face the problem of funding
obligations of the current plan. Unfortunately for us, under
ERISA, an employee cannot do anything about obligations that
have already been accrued, and it is the 2004 and 2005 pension
contributions that are the most troubling for the company.
The typical way an employer might deal with this problem is
through a waiver request with the IRS which allows the company
to postpone the pension-plan payment. In our case, such a
tactic would only postpone the problem and do nothing to solve
it. We therefore propose to the PBGC a restoration funding plan
by which we would amortize and smooth out the $3.1 billion,
making $300 million per year in contributions in each of the
next 7 years and then a payment plan for the remaining $1
billion.
Unfortunately, after several weeks of negotiations, the
PBGC has concluded it does not have the legal authority to
implement this alternative. Accepting our responsibility while
being fair to our pilots is very important to us and was the
basis for our proposal to the PBGC. To that end, I have
personally met with members of the President's Cabinet and
senior advisors at the White House on this very matter.
While I respect the PBGC's decision, I cannot say that I
agree with it. But I have advised ALPA that, for the sake of
our company's future, we must begin to consider the
alternatives and work constructively with the PBGC on that
effort.
Recognizing that our plan of reorganization and disclosure
statement is hopefully to be approved by the bankruptcy court
on January 16, the time we have to resolve this is very short.
This date cannot be delayed and still allow us to emerge from
bankruptcy by the end of March. This time line is set by
requirements of our debtor-in-possession financing as well as
our credit card processing agreements.
Last week, our pilots asked us to assist them in getting
legislative relief to expand the authority of the PBGC. And as
you know, Mr. Chairman, we willingly agreed to do so. You and
other Republican Senators introduced S. 119 on January 9, and
that very evening took it to the Senate floor and sought
unanimous consent for its consideration. Although an objection
was heard preventing further action on that measure, I want to
applaud you and the other sponsors for taking such swift and
positive steps to protect the pensions of our employees.
PREPARED STATEMENT
While the chairman and ranking member of the Senate Finance
Committee agreed to hold a hearing before the end of January to
examine the funding problems U.S. industry has with its
pensions, any protracted legislative process will simply be too
late to accommodate the very tight timeline of our emergence
plan. Our equity sponsor and DIP lender, the Retirement Systems
of Alabama, as well as the ATSB, expect a resolution to this
matter within days, not weeks or months.
Mr. Chairman, I appreciate your interest and support of our
company's efforts to complete a successful restructuring.
[The statement follows:]
Prepared Statement of David N. Siegel
Chairman Specter and members of the subcommittee: I am David
Siegel, president and chief executive officer of US Airways. I
appreciate the interest of the subcommittee in our company's
restructuring efforts, and in particular, the restructuring of our
employee pension plans, which is the specific subject of today's
hearing.
Since joining US Airways in March, the efforts of our new
management team have been focused on executing a successful
restructuring that would position our airline for short-term survival
and long-term success and profitability. The cornerstone of the
restructuring was the federal guarantee of a $1 billion loan from the
Air Transportation Stabilization Board (ATSB), created by Congress to
respond to the industry's financial crisis following the September 11
attacks. As the subcommittee is aware, US Airways has been granted
conditional approval of the loan guarantee, whose funds will be made
available after we emerge from Chapter 11 protection this spring. But
the fact that we have $1 billion in new capital available to us as exit
financing has been invaluable in attracting the Retirement Systems of
Alabama as our new equity partner, and achieving success with our major
lenders, lessors and financial partners.
We have committed to a restructuring in which we would work closely
with all of our labor groups to reach consensus on the cost savings and
efficiencies that were necessary to make our company competitive in a
fast-changing industry. To that end, we have worked to complete a
successful restructuring that will:
--Provide for long-term success
--Save as many jobs as possible
--Preserve as much pension and benefit compensation as possible, in
combination with competitive wages.
That commitment did not mean that it would be a painless process.
In fact, we have negotiated two rounds of concessions with nine
different labor groups over the past eight months--an achievement most
industry executives and analysts would have viewed as impossible a year
ago. But as difficult as that process has been, our unions and our
employees--to their credit--have stepped up and delivered when the
company said the savings were necessary in order to save the airline.
One of the remaining issues to be resolved is the approximately
$3.1 billion in pension obligations the company faces over the next
seven years, as the result of the dramatic drop in both the stock
market and interest rates. The majority of this obligation is related
to the pension program for our pilots. In fact, we have committed to
the unions representing our flight attendants and mechanics that we can
work out the funding issues for their respective members and will not
consider any plan to terminate those pension programs. At this point,
the pilot pension plan is the one at risk of being terminated.
To their credit, the Air Line Pilots Association has agreed to two
rounds of significant changes to the pilots' pension plan, which lowers
the accrual rates, company contributions, and benefit payouts on a go-
forward basis. In our initial restructuring agreement last summer, pay
reductions of up to 37 percent allowed us to reduce go-forward pension
expenses by $575 million during the term of the ATSB loan. This,
however, was not enough. So, last month, we reached a second agreement
with ALPA to further reduce labor costs and restructure the pilot
pension program.
In spite of a substantial reduction in our go-forward pension
costs, we still must face the problem of funding the obligations of the
current plan. Unfortunately for us, under ERISA, an employer cannot do
anything about obligations that have already been accrued, and it is
the 2004 and 2005 pension contributions that are the most troubling for
the company.
The typical way an employer might deal with this problem is through
a waiver request to the Internal Revenue Service, which allows a
company to postpone the pension plan payment. In our case, such a
tactic would only postpone the problem and do nothing to solve it. We
therefore proposed to the Pension Benefit Guaranty Corporation (PBGC) a
``restoration funding'' plan, by which we would amortize and smooth out
the $3.1 billion--making a $300 million contribution in each of the
next seven years, and then a payment plan for the remaining $1 billion.
Unfortunately, after several weeks of negotiations, the PBGC has
concluded that it does not have the legal authority to implement this
alternative.
Accepting our responsibility while being fair to our pilots is very
important to us, and was the basis for our proposal to the PBGC. To
that end, I have personally met with members of the President's cabinet
and senior advisers at the White House on this matter. While I respect
the PBGC's decision, I cannot say that I agree with it. But I have
advised ALPA that for the sake of our company's future, we must begin
to consider the alternatives, and to work constructively with the PBGC
on that effort.
Recognizing that our plan of reorganization and disclosure
statement is hopefully to be approved by the Bankruptcy Court at a
January 16 hearing, the time we have to resolve this is very short.
This date cannot be delayed and still allow us to emerge from
bankruptcy by the end of March. This timeline is set by requirements of
our Debtor-in-Possession (DIP) financing and credit card processing
agreements.
Last week our pilots asked us to assist them in gaining legislative
relief to expand the authority of the PBGC and as you know, Mr.
Chairman, we willingly agreed to do so. You and other Republican
Senators introduced S. 119 on January 9 and that very evening took it
to the Senate floor under the unanimous consent calendar. Although an
objection was heard preventing passage of the measure, I want to
applaud you and the other sponsors for taking such swift and positive
steps to protect the pensions of our employees.
While the Chairman and Ranking Member of the Senate Finance
Committee agreed to hold a hearing before the end of January to examine
the funding problems U.S. industry has with its pensions, any
protracted legislative process will simply be too late to accommodate
the very tight timeline of our emergence plan. Our equity sponsor and
DIP-lender--the Retirement Systems of Alabama--as well as the ATSB
expect a resolution to this matter within days, not weeks or months.
Mr. Chairman, I appreciate your interest and support of our
company's efforts to complete a successful restructuring.
Senator Specter. Thank you very much, Mr. Siegel.
STATEMENT OF CAPTAIN DUANE E. WOERTH, PRESIDENT, AIR
LINE PILOTS ASSOCIATION
Senator Specter. We now turn to Captain Duane Woerth, a
pilot with Northwest Airlines for 17 years and now president of
the Air Line Pilots Association. For 5 years, he was a board
member under Northwest employees stock ownership plan as a
Boeing 747 captain. Captain Woerth served for 6 years in the
U.S. Air Force, accumulated over 20 years of active and reserve
duty, primarily with the Strategic Air Command, and is a
graduate of the University of Nebraska and holds a master's
degree from the University of Oklahoma.
What kind of schizophrenia does that give you on game day?
Captain Woerth. As long as I have a red sweater on, I am
okay.
Senator Specter. I went to the University of Oklahoma for a
year, Captain Woerth, so I am a little distressed to say that
you are from Nebraska, too.
Captain Woerth. We tried to make it up to this year,
Senator.
I am Duane Woerth, president of the Air Line Pilots
Associations, and we represent 66,000 airline pilots who fly
for 42 airlines in the United States and Canada. And I am
accompanied by Captain Bill Pollock, chairman of the US Airways
Pilots in ALPA. And the US Airways pilot group in particular,
appreciate the opportunity to present this statement in this
very critical pension-plan funding situation that currently
exists at US Airways.
I also want to express ALPA's strong support for S. 119
that you, Senator Specter and Senators Santorum, Warren, and
Dole, introduced last week that would provide a special funding
rule for US Airways.
Now, ALPA firmly believes that passage of this bill is the
only solution remaining to prevent termination of the pilots'
defined benefit retirement plan. Without this relief, the plan
will terminate and the pilots will lose significant retirement
benefits. In addition, significant liabilities in the plan will
be transferred to the Pension Benefit Guaranty Corporation. And
last and most important, plan termination would also create new
doubts and uncertainties surrounding the airline's effort to
reorganize despite the enormous reductions in pay and benefits
and employment that all of the unions at US Airways have
reached voluntarily in negotiation with management.
Now, among these concessions, US Airways pilots have agreed
to a 33 percent pay cut and significant reductions in their
work rules, retirement plans, and other benefits, resulting in
a savings of $643 million per year. As a part of the
restructuring, the US Airways pilots have also agreed to
significant reductions in the accrual benefits under the
retirement plan, which effectively freezes the plan for most
pilots. This means that a significant percentage of pilots will
not accrue any additional retirement benefits while they work
for US Airways.
Now, in order to retain the loan guarantee from the ATSB
and to emerge from bankruptcy, US Airways must restructure the
pension contributions that would otherwise be required over the
next 7 years under ERISA and the Internal Revenue Code. If it
cannot do so, it will seek plan termination. The plan
termination will result in pilots losing up to 75 percent of
their anticipated retirement benefits because they exceed the
PBGC guarantees.
Now, US Airways is facing estimated pension contributions
of $1 billion in 2004 and $800 million in 2005 for its defined
benefit plans. Now, the pilot pension obligation, alone, is
estimated to be $575 million in 2004 and $333 million in 2005.
Now, these large obligations did not result from the company's
failure to fund the plan in accordance with the minimal legal
requirements nor have these enormous obligations resulted from
increases in retirement benefits. As I just mentioned, the
pilots have agreed to substantial reductions in their benefit
accruals. And the large pay cuts they have agreed to also
reduce their benefits under the defined benefit plan.
Now, in 1999, the US Airways pilots'--or retirement plan
had enough assets to cover approximately 97 percent of the
pension benefit liabilities under the plan. And in 2000, the
plan was more than fully funded, with assets covering 104
percent. That was just in 2000. But by 2002, however, the level
of funded benefits dropped to 74 percent, and it is estimated--
that is, as of January 1, 2003--the plan is only around 50
percent funded.
Because the benefit funding level is less than 80 percent,
so-called deficit reduction funding laws kick in, requiring the
company to make extraordinary additional pension contributions.
The company cannot make these large pension payments, at least
not on the schedule required by current law; hence, our efforts
here.
US Airways is not alone in facing astronomical increases in
pension contributions this year. In 1999 and 2000, defined
benefit plans sponsored by other airlines were also at or in
excess of 100 percent funding. But by the end of 2002, they saw
their funding levels drop significantly.
It is important to point out that all of these plans met
the minimum funding requirements. In fact, many of these plans,
including US Airways' pilot plans, had significant credit
balances in their funding standards at the beginning of 2002.
However, several factors--namely, low interest rates and
abysmal market performance--have contributed to create pension
funding crises in our country, as reported in The New York
Times yesterday. Interest rates are at levels not seen since
the 1960s, and stocks are experiencing their longest and
deepest bear market since the Great Depression. Employers, and,
in particular, airline carriers, are now required to contribute
additional funding to pension plans when they cannot--when they
can least afford to pay them.
There has been much discussion lately about whether
traditional defined benefit plans are the best vehicles for
American workers. Well, in a country where most workers' jobs
change on a regular basis, airline employees are somewhat
unique. For them, seniority, pensions, and other benefits are
not portable, so they tend to work for the same employer for
their entire career. And that makes traditional defined benefit
plans the ideal mechanism for providing a major portion of
these retirement benefits.
I would like to kind of cut to the chase and answer some of
the questions that were raised in other testimony.
I really believe that what we are faced with right here was
a perfect storm. US Airways got caught in a perfect storm. Who
was going to predict the events of September 11? Who was going
to predict that National Airport was going to get closed down,
which drastically affected US Airways, infinitely more than any
other airline. Those circumstances, combined with the economic
conditions we just described--a stock market that has not been
like this for decades and decades, interest rates that have not
been this low for 40 years--these circumstances are not
forever. And I think that is very important in the
determination, certainly of the PBGC, but certainly, if they
will not, of Congress.
It was described as a slippery slope. I see our industry,
but this company in particular, at a temporary cliff that can
be fixed. These are--the reversal of fortune is upon us, and it
is in the hands of those assembled around here. If US Airways
emerges from bankruptcy, there has never been a better reversal
of fortune in the airline industry. This amount of concessions,
a loan guarantee, this is a reversal of fortune people would
dream about. So I am--really was lost in some of this debate
why we cannot go forward here.
PREPARED STATEMENT
I want this airline to restructure. It has done everything
it can, and I think the pilots deserve to have this pension
plan preserved and restored. And I am certainly hopeful and
very respectful of you, Senators Specter and Santorum, for
willing to support this legislation.
[The statement follows:]
Prepared Statement of Duane E. Woerth
I am Captain Duane Woerth and I am President of the Air Line Pilots
Association, International (ALPA) that represents 66,000 airline pilots
who fly for 42 United States and Canadian airlines. I am accompanied by
Captain Bill Pollock, Chairman of the US Airways Master Executive
Council. ALPA, and the US Airways pilot group in particular, appreciate
the opportunity to present this statement on the critical pension plan
funding situation that currently exists at US Airways. I also want to
express ALPA's strong support for S. 119 that you, Mr. Chairman, and
Senators Santorum (R-PA), Warner (R-VA) and Dole (R-NC) introduced last
week that would provide a special pension funding rule for US Airways.
ALPA firmly believes that passage of this bill is the only solution
remaining to prevent termination of the pilots' defined benefit
retirement plan. Without this relief, the plan will terminate, and the
pilots will lose significant retirement benefits. In addition,
significant liabilities under the plan will be transferred to the
Pension Benefit Guaranty Corporation (the ``PBGC''). Plan termination
would also create new doubts and uncertainty surrounding this airline's
effort to reorganize, despite the enormous reductions in pay, benefits,
and employment that all the unions at US Airways have reached
voluntarily in negotiations with management.
THE US AIRWAYS PENSION FUNDING PROBLEM
Having achieved unprecedented contract concessions by ALPA and the
other labor groups, US Airways is in the final stage of obtaining
approval of a $1 billion seven year loan guarantee from the Air
Transportation Stabilization Board (``ATSB'') and approval of a plan of
reorganization under which US Airways would emerge from Chapter 11
bankruptcy. A hearing on the adequacy of the disclosure statement
accompanying the Company's plan of reorganization is scheduled for this
Thursday. Further action by the ATSB is expected shortly.
As a result of the unions' concessions and management's efforts, US
Airways is in a position to emerge from bankruptcy by the end of March
2003, following confirmation of its plan of reorganization, but only if
the issue that brings us here today can be resolved. The US Airways
pilots have agreed to a 33 percent pay cut and significant reductions
in their work rules, retirement plan and other benefits, all of which
save the Company $643 million per year. These concessions actually have
reduced the cost of employing a US Airways pilot by nearly 46 percent.
Despite this, fourteen hundred US Airways pilots are out-of-work, with
another 400 expected to be furloughed this year. This actually includes
pilots who are far from being new hires, and who have up to 15 years of
service with the Company.
As part of the restructuring, the US Airways pilots have also
agreed to significant reductions in the accrual of benefits under the
pilots' retirement plan, which effectively freezes the plan for most
pilots. This means that a significant percentage of pilots will not
accrue any additional retirement benefits while they continue to work
for US Airways. The danger now is that even benefits that pilots have
already earned over many years of service will be slashed dramatically
due to a potential plan termination. A plan termination would result in
pilots losing up to 75 percent of their anticipated retirement
benefits, because they exceed the PBGC guarantees. We are here today
asking your help to protect the US Airways pilots' retirement benefits
that have already been earned.
In order to obtain the loan guarantee from the ATSB and to emerge
from bankruptcy, US Airways must restructure the pension contributions
that would otherwise be required over the next seven years under ERISA
and the Internal Revenue Code. If it cannot do so, it will seek plan
termination. US Airways sponsors defined benefit plans for its pilots,
flight attendants, mechanics and other employees. The Company is facing
estimated pension contributions of $1.0 billion in 2004 and $800
million in 2005 for its defined benefit plans. The pilot pension
obligation alone is estimated to be $575 million for 2004 and $333
million for 2005. These large obligations did not result from the
Company's failure to fund the plan in accordance with minimum legal
requirements. Rather, the precipitous decline in the equity markets
combined with the very low current interest rates have driven up the
Company's funding obligations to unacceptable levels. Nor have these
enormous obligations resulted from increases in retirement benefits. As
stated, the pilots have agreed to substantial reductions in their
benefit accruals, and the large pay cuts they have agreed to also
reduce their benefits under the defined benefit plan. The Company can
not make these large pension payments, at least not on the schedule
required by current law. Additionally, the ATSB has advised the Company
that it will not approve the loan guarantee if the Company cannot
restructure these large pension funding obligations coming due over the
seven year loan guarantee period. Without the loan guarantee, US
Airways cannot continue to operate.
Present law contains two methods of allowing employers to
restructure their pension obligations. However, neither of these
methods will help US Airways. The traditional funding waiver permitted
under the Internal Revenue Code and the Employee Retirement Income
Security Act (ERISA) will not solve the pension funding problem for US
Airways. The extension of the amortization period for certain unfunded
liabilities permitted under the Internal Revenue Code and ERISA
likewise will not help US Airways. Both the PBGC and the IRS have said
that they do not have the authority to help US Airways in restructuring
the pension obligation in a manner that would provide adequate relief
short of plan termination.
In 1999, the US Airways pilots' retirement plan had enough assets
to cover approximately 97 percent of the pension benefit liabilities
under the plan. In 2000, the plan was more than fully funded, with
assets covering 104 percent of benefit liabilities. By 2002, however,
the level of funded benefits dropped to 74 percent and it is estimated
that, as of January 1, 2003, the plan is only 50 percent funded.
Because the benefit funding level is less than 80 percent, so-called
``deficit reduction'' funding laws kick in, requiring the Company to
make extraordinary additional pension contributions.
US Airways is not alone in facing astronomical increases in pension
contributions this year. In 1999 and 2000, the defined benefit plans
sponsored by other airlines were also at or in excess of 100 percent
funding, but by the end of 2002, saw their funding levels drop
significantly. In one plan, for example, the funding level exceeded 140
percent in the year 2000, but is now less than 80 percent. It is
important to point out that all of these plans, including the US
Airways pilots plan, met the minimum funding requirements set forth in
ERISA and Internal Revenue Code. In fact many of these plans, including
the US Airways pilots plan, had significant credit balances in their
funding standard accounts at the beginning of 2002. This is an
indication that they had been funded in excess of the minimum funding
requirements in prior years. However, current low interest rates and
abysmal market performance have combined to create a pension funding
crisis in our country, as reported in the lead story on the front page
of the New York Times yesterday, January 13, 2003. Interest rates are
at levels not seen since the 1960s, and stocks are experiencing their
longest and deepest bear market since the Great Depression. Employers,
and in particular airline carriers, are now required to contribute
additional funding to pension plans when they can least afford to pay.
We are confident that Congress ultimately will enact long-term
relief. However, U.S. Airways does not have time to wait for such long-
term relief. Given the time constraints of the ATSB and the bankruptcy
proceeding, the pension funding issue at US Airways must be resolved
within a matter of a few weeks.
There has been much discussion lately about whether traditional
defined benefit plans are the best retirement vehicles from many of
America's workers. In a country where most workers change jobs on a
regular basis, airline employees are somewhat unique. They tend to work
for the same employer their entire careers, making traditional defined
benefit plans the ideal mechanism for providing a major portion of
their retirement benefits. While other workers need portability, most
airline employees need a pension promise they can count on from their
one and only employer.
ALPA'S RECOMMENDATIONS
ALPA strongly encourages the Senate to pass S. 119. Congress has
historically recognized the unique circumstances of certain employers
and has enacted special funding rules for certain employers and certain
plans. This has been done in the past for LTV, for Greyhound and for
TWA due to the unique circumstances involved in each case. We feel that
US Airways is in a unique and deserving situation also. US Airways is
the largest air carrier east of the Mississippi. It was significantly
impacted by the events on 9/11 and the resulting extended closure of
Reagan National Airport. US Airways has successfully positioned itself
to emerge from bankruptcy within weeks. The ATSB is requiring US
Airways to resolve its pension funding problem prior to loan approval,
which would permit the Company to emerge from bankruptcy. Although
other airlines face high pension contributions in the coming year or
years, US Airways does not have enough time to wait for a long-term
solution to this national crisis.
S. 119 would provide a special minimum pension funding rule for US
Airways. Under S. 119, the US Airways defined benefit plans would be
treated as if they had been terminated and then restored as of January
1, 2003, with the plans' unfunded accrued liability and unfunded
current liability amortized over a 30-year period. The 30-year
amortization period is the period currently allowed in the law for
plans that are terminated and later restored to their sponsors. Such a
30-year amortization would permit the Company to, in effect, refinance,
not eliminate, its funding obligations to the plans. This would allow
US Airways to continue to maintain and fund a significantly less
expensive retirement plan for its employees. Enactment of S. 119 would
protect the retirement benefits of US Airways pilots, who would lose
hundred of millions of dollars in pension benefits that are not
guaranteed by the PBGC if the plan is terminated. It also protects the
solvency of the PBGC by providing substantial funding for a plan that
if terminated, would leave the PBGC with billions of dollars in
liabilities that will not be recovered in bankruptcy. ALPA strongly
urges the Senate to enact S. 119.
In conclusion, Mr. Chairman, I want to thank you for holding this
hearing on this critical and current topic and for inviting me and
Captain Pollock to present the views of ALPA and the US Airways MEC. We
will be pleased to answer any questions that you or other members of
the Subcommittee might have.
Senator Specter. Thank you very much, Captain Woerth.
STATEMENT OF CAPTAIN BILL POLLOCK, CHAIRMAN, US AIRWAYS
MASTER EXECUTIVE COUNCIL, AIR LINE PILOTS
ASSOCIATION
Senator Specter. Captain Bill Pollock is here, available
for questions. A US Airways pilot, he serves as chairman of the
US Airways Air Line Pilots Association Master Executive
Council, a 17-year veteran of US Airways, holds a captain
position on the A-320, and flew the P-3 Orion in the U.S. Navy,
where he served for 21 years in combined active and reserve
duty. He is a graduate of Norwich University.
Now, Captain Pollock, of course, we were together earlier
today in Pittsburgh, and I think the subcommittee would benefit
from hearing your testimony, so we will ask you to proceed.
Captain Pollock. Thank you, Senator.
I do believe that the US Airways pilots do deserve to have
their day in court, and I am thankful for you and Senator
Santorum for affording us this opportunity.
US Airways and its employees have been involved in major
restructuring efforts to gain ATSB approval for a $1 billion
Federal loan guarantee. The company and its employees have
participated in the US Airways restructuring plan to meet the
conditions for cost savings and revenue enhancement. Now,
through no fault of labor or the company, the ATSB loan is in
jeopardy because of what I would call these out-of-the-ordinary
Federal pension funding requirements.
The US Airways pilot pension plan is currently underfunded
due to a combination of events--the effects of September 11,
2001, the general economy, and the aviation industry, in
particular, as well as a decline in the stock market and 41-
year-low interest rates. These actions and financial events
have rapidly created a funding shortfall, and based on US
Airways' estimate, it must pay over $3.1 billion in retirement
plans over the next 8 years, or over $1 billion more than would
be required if not for the precipitous decline in equity
markets and interest rates.
US Airways is still working to emerge from reorganization,
and requires the ATSB loan to provide necessary exit financing.
US Airways states that it meets--if it meets its current
pension funding obligations, then that very business plan
submitted to the ATSB would no longer qualify US Airways for
that loan.
The ATSB is requiring that the pension funding issue be
resolved with the PBGC, which is taking the arguable position
that we have discussed today, that it does not have the
authority to help. The PBGC's mission statement says that it
protects the retirement incomes of American workers' private
defined pension benefit plans and encourages the continuation
and maintenance of defined benefit pension plans.
To help US Airways obtain a 30-year deferred funding
schedule from the PBGC, our pilots agreed to modify pension
plan benefits, including reducing the maximum earnings benefit
by 15 percent. Unfortunately, the PBGC refused US Airways'
deferred restoration funding solution. And without the PBGC's
authorization for restoration funding, US Airways employees, on
top of tremendous job losses in pay and workrule concessions,
could now be stripped of nearly all their pension benefit, the
benefit they have spent decades working to earn and often the
sole basis for their retirement.
In an industry that has weathered the worst of September
11's impact, US Airways was impacted the most. One of our
domicile airports, Reagan National, was closed for a protracted
period and only gradually reopened. US Airways suffered
millions of dollars of lost revenue at that fiscally critical
time. US Airways' restructuring has cost employees thousands of
jobs, including the jobs of nearly 1,900 pilots.
US Airways was the first major airline to file for
reorganization after September 11. US Airways employees have
provided billions of dollars worth of concessions to win
conditional approval for an ATSB loan that would be used upon
emergence from reorganization. Recently, with the industry
still depressed and the ATSB asking for further cost savings,
US Airways employees authorized even more concessions.
US Airways employees have sacrificed a great deal to ensure
that US Airways would survive and already participated in two
rounds of concessionary negotiations. During these
negotiations, the pilots provided the company with the bulk of
the concessions that are needed to allow US Airways to receive
approval of the ATSB loan.
Until our pension issue is solved, however, the ATSB will
not provide the billion-dollar loan guarantee for which US
Airways applied and already received unanimous conditional
approval during the summer. Although our pension benefits are
insured by the PBGC, that is little consolation to the pilots,
many of whom have spent their entire flying career at US
Airways. The PBGC can only pay a limited amount of monthly
benefits to workers whose plans have been terminated.
Following the leadership of Captain Woerth, to my right, I
would like to go right to the chase, as well, on a couple of
points that were raised earlier. And if you would permit me, I
would just----
Senator Specter. Proceed, Captain Pollock.
Captain Pollock [continuing]. Like the opportunity to jump
right in.
Based on a previous speaker, who had recognized that the
funding laws will need to be changed, I would observe that the
funding laws have failed. And the very people that the PBGC was
intended to protect, among the 4,300 pilots of US Airways, the
horse has left the barn, and that failure, you know, could very
well come home to roost with this pilot group with a failed
pension plan.
Second, another speaker from a previous panel mentioned
that short-term solutions were the fix to short-term problems.
And I would submit that this short-term problem of the funding
of the pension plans in 2004 and 2005 is exclusively, or near
exclusively, the result of conditions beyond the control of the
company, Congress, or anyone else. It is a precipitous decline
in equity markets, values, the asset base of the fund, and
interest rates.
What is being contemplated here is a termination of a plan
with permanent ramifications--more than long-term
ramifications--permanent ramifications to the pilots that we
represent for what, in all likelihood, is a short-term problem
that will be corrected with an improvement in equity markets,
interest rates, and the general economy.
Third, there was a question as to the integrity of the plan
and the precedent-setting potential of some special
dispensation. And the rhetorical question was raised, How do we
differentiate? And I would suggest that differentiation could
be done very much the same way the ATSB differentiates
different companies or airlines that step before it to get a
Federal guaranteed loan which assumes risk. That is what we are
asking the PBGC to do, assume risk. That is what the ATSB has
to do under their charge. And so, in much the same way the ATSB
evaluates a business plan and determines whether it is worthy,
the PBGC could differentiate between different corporations, as
well. That is a thought.
Finally, I might have misunderstood the speaker, but early
on in testimony, there was an assertion that if US Airways was
to be allowed to defer payments, that there might be some
competitive advantage to the company. To the contrary, if the
plan was terminated, there would be a competitive advantage to
the corporation because the funding requirement would be wiped
out.
Now, as much as I want US Airways to be competitive and as
much as we have contributed a great deal to that very end, I
would like to see US Airways be left on the hook for our
pensions, something that they have agreed to do and something
that would provide the win-win-win solution that we had talked
about earlier.
Thank you very much.
Senator Specter. Thank you, Captain Pollock.
Mr. Siegel, Senator Santorum and I intend to pursue this
matter. We had made the unanimous consent request, as you
noted, on Thursday, and it may be possible for us to bring this
bill up under so-called rule XIV. And we will be consulting and
considering the alternatives which we have. And we understand
the tight timeline that you have.
If the PBGC adheres to its position, notwithstanding what I
think is very positive testimony that they have the discretion
to do differently, and we cannot get a legislative correction,
does US Airways have any alternative but to terminate the
pension plan?
Mr. Siegel. No, we do not. And let me just say that, again,
it is the position of the company that the PBGC has the
discretion to grant the relief that we are requesting. We also
understand it is within their discretion not to do it. So we
continue to have that difference.
It is still our preference to have the legislative solution
to restoration funding, because, as I said earlier, the company
is not trying to walk away from this obligation. We think that
the taxpayers of this country win by not having to, either
directly or indirectly, fund that deficit through the PBGC. We
think our employees win, because we can preserve our plan. And
we think that our business plan enables us to, contrary to Mr.
Kandarian's testimony, not have a solution--a situation where
the hole gets bigger, but, in fact, closes the gap.
So I am in agreement with Captain Pollock's testimony, with
the exception of--I do not think we are asking the PBGC to take
on risk. I think our plan reduces the risk.
That said, if we cannot get legislative relief, we have to
be able to demonstrate to the ATSB, in order to get the
guarantee and emerge successfully from bankruptcy, that there
is a funding solution to our pension, and so the company will
have no alternative but to pursue a distress termination of the
plan. We are proceeding on that basis as a backup, if you will,
and working together with our ALPA pilot group and the PBGC on
some kind of follow-on plan that is----
Senator Specter. On a distress termination plan, then, does
US Airways have no further obligations to the pension plan?
Mr. Siegel. Not to that plan, no. PBGC----
Senator Specter. But to a new plan which may be instituted?
Mr. Siegel. Well, the company has, we believe, at least a
moral obligation, if not a legal obligation, to our pilot group
to make good on the substantially reduced pension benefits that
they have agreed to that are unprecedented in our industry. And
so we would seek to put in place a follow-on plan that was
acceptable to both the IRS and PBGC that would certainly be
within their guidelines and limits but also seek to provide a
benefit to our pilot group. And we have to remember that----
Senator Specter. So that would call for a contribution from
US Airways?
Mr. Siegel. Absolutely. We are absolutely committed to
doing that.
Senator Specter. And what would the benefits then be to the
pilots?
Mr. Siegel. Well, it is unclear. It depends on the plan
that is accepted. We would--you have to remember that the--if
you look at the pilot plan, it has been substantially reduced
twice. When I mentioned that we had pay cuts up to 37 percent,
our pilots, specifically in the first round, agreed to that
kind of dramatic cut on the pay rate on which our pilot group
retires.
Senator Specter. So you are saying that there would be a
pension plan, but it would be a reduced plan, and you cannot
say exactly now what it would be.
Mr. Siegel. We would seek to try and put in place a plan,
when you took it--took the PBGC guarantee, in combination with
the new follow-on plan, it would seek to replicate the
economics, not of the original plan, not of the reduced plan
after the first round of concessions, but the substantially,
dramatically unprecedented new plan that our pilot group agreed
to with us in the second round of negotiations.
Senator Specter. Well, are you saying, then, that the plan
which was finally agreed to is something that you would
duplicate by the PBGC's contributions and by the contributions
which you would make to a new plan?
Mr. Siegel. The company could not guarantee that we could
do that. We believe that we could come up with a plan that
would substantially replicate the economics of that second
round of concessions that we agreed to with our pilot group,
when you take the follow-on plan, in combination with the PBGC
guarantee. And we think that that would--that should be
acceptable to the PBGC because it is substantially different
from the original plan.
Senator Specter. Have you discussed that with the Pilots
Association?
Mr. Siegel. We are in discussions with the pilots and the
PBGC, and we are working on a joint solution to the problem.
Senator Specter. Captain Woerth or Captain Pollock, would
you care to comment on the satisfactory or unsatisfactory
nature of that proposal?
Captain Woerth. When you are in active negotiations, you
are trying to reach the answer. But I think we both have good-
faith effort that we will do so, but we have to have--when we
are asking for the legislative help here if we cannot get PBGC,
we are not going to use the Nebraska term of ``buying a pig in
a poke.'' We are going to--we want to negotiate this under
collective bargaining, and we do not want to agree to a plan
termination without knowing what a substitute is.
We are perfectly willing to bargain. We are very pragmatic
about the situation at US Airways and want it to survive. What
we are trying to do is negotiate up front, in the open, with
good faith so nobody is--feels like they are being used or
tricked here.
Senator Specter. Captain Pollock, do you have anything to
add to that?
Captain Pollock. I would only add just this one thing. Any
substitute plan will be inferior to the plan we have now.
Well, two things. The other thing is that, if I am not
mistaken, the PBGC has oversight of the follow-on plan. So the
panelist we heard from earlier may have sentiments about the
nature of the follow-on plan that could very well conflict with
what we think might be a adequate follow-on plan.
Senator Specter. Senator Santorum.
Senator Santorum. I am just trying to understand what looks
to be--what is happening. Instead of the PBGC taking your plan,
as you submitted it to them, and not incurring any cost as a
result of that to the taxpayer, but potentially incurring some
cost if there are problems down the road with funding your plan
and there be a future termination.
In place of that--in place of that scenario, they have
terminated--they are going to terminate the plan--the plan will
be terminated. They will incur roughly a half billion dollars
in current liabilities. There will be a follow-on plan that
would be acceptable to the PBGC that they will incur some
responsibility for if there is a problem with that plan in the
future. Or will they not have that responsibility? Do you know
the answer to that?
Mr. Siegel. Yes. The kind of plan that would be acceptable
to the PBGC is likely to be a defined contribution plan.
Senator Santorum. So they would not have any liabilities--
PBGC would not have any liabilities?
Mr. Siegel. Not with respect to the follow-on plan.
Senator Santorum. Not with respect to the follow-on plan.
So they are basically taking it--just, again, sort of, looking
at it, sort of, in a cold way, they are taking the one-time hit
of a half billion dollars and, without any risk of any future
liability, in place of taking what they would consider an
unreasonable risk of future liabilities in the plan that you
have submitted. That is the way they are seeing it.
Mr. Siegel. Right. In the restoration plan that we
proposed, we believe that 50 percent over the 7-year period of
underfunding--which, again, to Captain Woerth's point, was
fully funded in 2000 before the stock market implosion and the
change in interest rates--that 50 percent number would grow to
70 percent over the 7-year period. So we do not believe, as Mr.
Kandarian testified, that the hole gets bigger. We think that
the--we narrow the gap over the 7 years, which is one of many
reasons we believe that, you know, it is a win-win.
Senator Santorum. Thank you, Mr. Chairman.
Senator Specter. Well, thank you very much, gentlemen. I
think that this has been a very illuminating hearing. I believe
that when you analyze all of the testimony which has been given
here, it is plain that there is broad discretion in the PBGC,
that essentially, when Mr. Keightley comes to the conclusion
that there is no specific authorization and concedes or says
that there is no prohibition, there is broad discretion as you
read that statute, and they have chosen not to exercise that
discretion. And the one Supreme Court decision supports the
broad discretion which the corporation has. And that is the
only deviation in the 20-some years that the PBGC has been in
operation, so that what you really have here is bureaucratic
intransigence. That is it, pure and simple.
There have been massive efforts made, really herculean
efforts made, by the employees and by the company, by US
Airways, to solve the problem, and you are continuing to work
on it as best you can. And there are those of us in Congress--
Senator Santorum and I have been in the lead on it, and others
will be pursuing it, and we will explore other options to bring
this testimony to the attention of our colleagues.
I think the testimony of Mr. Kilberg was very impressive,
his background, and another prior counsel, Mr. Ford, General
Counsel of the corporation. And we will proceed.
But we are determined to do our utmost to see to it that
the employees of US Airways are treated fairly and that the
pilots are treated fairly. And we applaud what you have done,
Captain Woerth and Captain Pollock, and what you are trying to
do, Mr. Siegel, and what Mr. Roddey is doing.
CONCLUSION OF HEARING
Thank you all very much for being here. That concludes our
hearing.
[Whereupon, at 5:17 p.m., Tuesday, January 14, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]