[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





               AIRLINE PENSIONS: AVOIDING FURTHER COLLAPSE

=======================================================================

                                (109-26)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                                AVIATION

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 22, 2005

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure


                                 _____

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                           WASHINGTON : 2006 
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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                      DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-    JAMES L. OBERSTAR, Minnesota
Chair                                NICK J. RAHALL, II, West Virginia
SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina         JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee       ELEANOR HOLMES NORTON, District of 
WAYNE T. GILCHREST, Maryland         Columbia
JOHN L. MICA, Florida                JERROLD NADLER, New York
PETER HOEKSTRA, Michigan             CORRINE BROWN, Florida
VERNON J. EHLERS, Michigan           BOB FILNER, California
SPENCER BACHUS, Alabama              EDDIE BERNICE JOHNSON, Texas
STEVEN C. LaTOURETTE, Ohio           GENE TAYLOR, Mississippi
SUE W. KELLY, New York               JUANITA MILLENDER-McDONALD, 
RICHARD H. BAKER, Louisiana          California
ROBERT W. NEY, Ohio                  ELIJAH E. CUMMINGS, Maryland
FRANK A. LoBIONDO, New Jersey        EARL BLUMENAUER, Oregon
JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
GARY G. MILLER, California           BILL PASCRELL, Jr., New Jersey
ROBIN HAYES, North Carolina          LEONARD L. BOSWELL, Iowa
ROB SIMMONS, Connecticut             TIM HOLDEN, Pennsylvania
HENRY E. BROWN, Jr., South Carolina  BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
TODD RUSSELL PLATTS, Pennsylvania    JIM MATHESON, Utah
SAM GRAVES, Missouri                 MICHAEL M. HONDA, California
MARK R. KENNEDY, Minnesota           RICK LARSEN, Washington
BILL SHUSTER, Pennsylvania           MICHAEL E. CAPUANO, Massachusetts
JOHN BOOZMAN, Arkansas               ANTHONY D. WEINER, New York
JIM GERLACH, Pennsylvania            JULIA CARSON, Indiana
MARIO DIAZ-BALART, Florida           TIMOTHY H. BISHOP, New York
JON C. PORTER, Nevada                MICHAEL H. MICHAUD, Maine
TOM OSBORNE, Nebraska                LINCOLN DAVIS, Tennessee
KENNY MARCHANT, Texas                BEN CHANDLER, Kentucky
MICHAEL E. SODREL, Indiana           BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania        RUSS CARNAHAN, Missouri
TED POE, Texas                       ALLYSON Y. SCHWARTZ, Pennsylvania
DAVID G. REICHERT, Washington        JOHN T. SALAZAR, Colorado
CONNIE MACK, Florida                 JOHN BARROW, Georgia
JOHN R. `RANDY' KUHL, Jr., New York
LUIS G. FORTUNO, Puerto Rico
LYNN A. WESTMORELAND, Georgia
CHARLES W. BOUSTANY, Jr., Louisiana
JEAN SCMIDT, Ohio

                                  (ii)



                        SUBCOMMITTEE ON AVIATION

                    JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin           JERRY F. COSTELLO, Illinois
HOWARD COBLE, North Carolina         LEONARD L. BOSWELL, Iowa
JOHN J. DUNCAN, Jr., Tennessee       PETER A. DeFAZIO, Oregon
VERNON J. EHLERS, Michigan           ELEANOR HOLMES NORTON, District of 
SPENCER BACHUS, Alabama              Columbia
SUE W. KELLY, New York               CORRINE BROWN, Florida
RICHARD H. BAKER, Louisiana          EDDIE BERNICE JOHNSON, Texas
ROBERT W. NEY, Ohio                  JUANITA MILLENDER-McDONALD, 
FRANK A. LoBIONDO, New Jersey        California
JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
ROBIN HAYES, North Carolina          BILL PASCRELL, JR., New Jersey
HENRY E. BROWN, Jr., South Carolina  TIM HOLDEN, Pennsylvania
TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
SAM GRAVES, Missouri                 JIM MATHESON, Utah
MARK R. KENNEDY, Minnesota           MICHAEL M. HONDA, California
JOHN BOOZMAN, Arkansas               RICK LARSEN, Washington
JIM GERLACH, Pennsylvania            MICHAEL E. CAPUANO, Massachusetts
MARIO DIAZ-BALART, Florida           ANTHONY D. WEINER, New York
JON C. PORTER, Nevada                BEN CHANDLER, Kentucky
KENNY MARCHANT, Texas                RUSS CARNAHAN, Missouri
CHARLES W. DENT, Pennsylvania        JOHN T. SALAZAR, Colorado
TED POE, Texas                       NICK J. RAHALL II, West Virginia
JOHN R. `RANDY' KUHL, Jr., New       BOB FILNER, California
York, Vice-Chair                     JAMES L. OBERSTAR, Minnesota
LYNN A. WESTMORELAND, Georgia          (Ex Officio)
DON YOUNG, Alaska
  (Ex Officio)

                                 (iii)



                                CONTENTS

                               TESTIMONY

                                                                   Page
 Belt, Bradley D., Executive Director, Pension Benefit Guaranty 
  Corporation....................................................     8
Friend, Patricia A., International, President, Association of 
  Flight Attendants, CWA, AFL-CIO................................    38
 Hecker, JayEtta Z., Director, Physical Infrastructure Issues, 
  Government Accountability Office, accompanied by Barbara D. 
  Bovjberg, Director, Education, Workforce, and Income Security 
  Issues, Government Accountability Office.......................     8
 Streeter, Mark S., Managing Director, JP Morgan Securities......    38
 Strine, David, Director of Equity Research, Bear Stearns & 
  Company........................................................    38
 Woerth, Captain Duane E., President, Air Line Pilots Association    38
 Yohe, Scott, Seniot Vice President, Government Affairs, Delta 
  Air Lines......................................................    38

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Boswell, Hon. Leonard, of Iowa...................................    63
Carnahan, Hon. Russ, of Missouri.................................    65
Costello, Hon. Jerry F., of Illinois.............................    66
Johnson, Hon. Eddie Bernice, of Texas............................   127
Oberstar, Hon. James L., of Minnesota............................   131
Porter, Hon. Jon, of Nevada......................................   134
Price, Hon. Tom, of Georgia......................................   136
Salazar, Hon. John T., of Colorado...............................   139

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

 Belt, Bradley D.................................................    53
Friend, Patricia A...............................................    68
 Hecker, JayEtta Z...............................................   102
 Streeter, Mark S................................................   141
 Strine, David...................................................   154
 Woerth, Captain Duane E.........................................   222
 Yohe, Scott.....................................................   236

                        ADDITIONS TO THE RECORD

Airline Pilots Against Age Discrimination, statement.............   245
Professional Pilots Federation, Bert M. Yetman, President, 
  statement......................................................   248
United Airlines, Glenn F. Tilton, Chairman, President and CEO, 
  statement......................................................   251
United Retired Pilots Benefit Protection Association. Roger D. 
  Hall, President, statement.....................................   255

 
               AIRLINE PENSIONS: AVOIDING FURTHER COLLAPSE

                              ----------                              


                        Wednesday, June 22, 2005

        House of Representatives, Subcommittee on Aviation, 
            Committee on Transportation and Infrastructure, 
            Washington, D.C.
    The subcommittee met, pursuant to call, at 2:30 p.m., in 
Room 2167, Rayburn House Office Building, Hon. John L. Mica 
[chairman of the committee] presiding.
    Mr. Mica. Good afternoon. I would like to call this hearing 
of the House Aviation Subcommittee to order. We are going to go 
ahead and get started. Most members won't want to hear my 
opening statement, anyway. But in order to keep the 
proceedings--we are already behind schedule. We will go ahead 
with opening statements. Then the order of business will be two 
panels of witnesses this afternoon. Of course, the topic is 
dealing with our airline pensions and the particular emphasis 
on looking at how we can avoid further collapse.
    So, with that, I have my opening statement, and then we 
will recognize other members as they arrive, if they have 
opening statements.
    As I said, today's hearing will focus on the crisis facing 
many of our airline pension plans and the impact of recent plan 
terminations. Loss of jobs, benefits, and pensions in the 
airline industry are nothing new, in fact. Just ask former 
employees of Eastern, Pan Am, Braniff, TWA, and other defunct 
carriers. However, the scale of recent airline plan 
terminations is much greater than in the past, both in terms of 
lost benefits and also in terms of cost to the Pension Benefit 
Guaranty Corporation.
    Over the past four years, the airline industry, as we know, 
has experienced a record $32 billion in losses, with an 
additional $5 billion in projected losses in 2005. I might just 
clarify that. It is not all airlines, it is mostly our legacy 
carriers that find themselves in this situation. Many factors 
have contributed to these losses, including the terrorist-
inflicted slowdown in our economy, a decline in business 
travels, the SARS epidemic, and also the increased competition 
from low-cost carriers, and, last but not least and continuing, 
the problem of soaring fuel prices.
    In addition to all of these difficulties, a combination of 
historically low interest rates and poor stock market returns 
have resulted in the pension plans of many airlines--and other 
companies as well--becoming significantly under-funded in a 
very short period of time. These unfavorable economic 
conditions have affected pension plans in many industries, not 
just the airline industry.
    The General Accounting Office recently studied the hundred 
largest defined benefit pension plans in the United States and 
found that, overall, reported plan funding levels were 
generally stable and stronger over the late 1990s. No more than 
9 of the 100 largest plans were less than 90 percent funded in 
any year from 1996 through 2000. However, by 2002, 
approximately one-fourth, a quarter of all the plans were less 
than 90 percent funded. Even if additional legacy airline 
pension plans go bust, our Pension Guaranty Fund should be able 
to deal with the multi-billion dollar potential shortfall.
    However, when we really get into some difficult and 
questionable territory is if we have a collapse of some our 
automotive industry corporations and their plans. That addition 
to, again, the difficulty we find ourselves in with the 
airlines is of particular concern to our Pension Guaranty Fund. 
Assets of pension plan sponsored by this industry fall short of 
liabilities by some $55 billion to $60 billion. Credit rating 
agencies recently downgraded the debt of General Motors and 
Ford to below investment grade status, signaling potential 
trouble ahead. The cost to Pension Benefit Guaranty Fund of 
pension plan terminations in this industry could well exceed 
that of the airline industry.
    By comparison, it is interesting to note that even our 
Federal Government's Defined Pension Benefit Plan--and this is 
the old CRS system, Civil Service Retirement system--is grossly 
under-funded. I chaired the Civil Service Subcommittee and 
remember trying to deal with this issue. As of the end of 2002, 
the total assets attributable to CRS amounted to some $417 
billion, but the liabilities for future benefits amounted to 
$950 billion, almost a trillion dollars, resulting in an 
unfunded liability for our own CRS Federal employees retirement 
fund of some $533 billion.
    I wanted to make those figures clear, because if you look 
at even the airlines and automotive liabilities, we have the 
potential for dumping on the taxpayers. The liability that we 
have just in our Federal retirement system is almost a half a 
trillion dollars unfunded.
    As a result of this under-funding, the assets attributable 
to CRS are expected to be depleted by the year 2023. In 
contrast, the Federal Employees Retirement System, FERS, as it 
is called, which covers employees hired since 1984, is almost 
totally funded by employees and agencies. Although pension 
funding contributions have by no means caused the airlines 
current liquidity crisis, for many old carriers they have 
exacerbated it. Cash-strapped legacy airlines are having great 
difficulty coming up with the amounts necessary to return their 
pension plans to full funding. Already two airlines in 
bankruptcy, U.S. Airways and United Airlines, have either 
terminated their plans or are in the process of doing so.
    The U.S. Airways plan had an unfunded termination liability 
of some $5 billion, of which our Pension Guaranty Fund would 
guarantee $2.9 billion. The remaining $2.1 billion in unfunded 
liability represents the value of lost benefits. U.S. Airways 
employees in the aggregate will lose about 27 percent of the 
benefits they earned under this plan.
    The situation with United Airlines' plan is similar. They 
have plans with an unfunded termination liability of some $9.8 
billion, of which the Pension Guaranty Fund will guaranty about 
$6.6 billion, and we end up with a remaining $3.2 billion, 
which is the value of lost benefits, and that translates into 
United Airline employees in the aggregate will lose about 19 
percent of the benefits they had earned.
    Pension plan terminations such as these create some real 
hardships for employees who have worked many years of their 
life and also counted on promises that certain pension benefits 
will be there to provide security in their retirement. For 
current retirees, the loss of earned benefits can be especially 
devastating because of their inability to increase earnings to 
make up for the loss of those benefits.
    The Pension Benefit Guaranty Corporation guarantees 
benefits, but only to a certain level. This level is adjusted 
annually and is currently set at some $45,614, assuming 
retirement age is at age 65. Retirement at earlier ages 
results, of course, in lower guaranteed benefit levels. For 
example, workers who retire at age 60, which is the mandatory 
retirement age currently for our pilots, the guaranteed benefit 
level is $29,649.
    While these levels of benefits may seem small, the Pension 
Guaranty Fund will eventually have trouble guaranteeing even 
these small amounts. With $62.3 billion in total liabilities 
against only $39 billion in total assets, the single employer 
pension insurance program lacks the funds to pay a significant 
portion of future benefits for which it is obligated. While the 
Pension Guaranty Fund has enough assets on hand to continue 
paying guaranteed benefits for a number of years, its unfunded 
liabilities continue to grow, and with each new plan of 
termination we get into more serious problem. At some point in 
the future the Pension Guaranty Fund will, of course, run out 
of money.
    The Center for Federal Financial Institutions has 
projected, if no pension reform legislation is enacted, our 
Pension Guaranty Fund will run out of cash by the year 2021 and 
a $78 billion bailout will be required by the Federal 
Government. So clearly it is in the interest of workers, of 
taxpayers, and certainly the Federal Government to correct 
today's systemic pension under-funding.
    The era of defined benefit pension plans may well be 
ending. The defined benefit system is under pressure not only 
from pension under-funding, but also under pressure from a 
changing workforce that requires more mobile retirement 
benefits and increased competition from many companies with 
lower cost structures that do not include these expensive 
defined benefit programs. So most airlines that offered defined 
benefit plans have either negotiated to freeze those plans and 
replace them with defined contribution plans or currently in 
negotiations to do so. We are going to see a lot more of that.
    The terminations of U.S. Airways' and United's plans are 
going to have ripple effects, and also they are going to have 
competitive implications for other airlines. The so-called 
domino effect, in which other airlines terminate their own 
defined benefit plans in order to compete, will also cause 
further strain on our existing Pension Guaranty Fund. Enactment 
of pension reform legislation will also have competitive 
implications for the airlines.
    While our Subcommittee and the Transportation Committee 
does not have specific legislative jurisdiction over pension 
laws, it is absolutely vital that this Subcommittee understand 
how these important pension issues uniquely impact our airline 
industry, their employees, and, of course, the taxpayer.
    So I look forward to hearing the views of our witnesses and 
look forward to our two panels.
    I am pleased to recognize at this time for his 
participation our ranking member, Mr. Costello.
    Mr. Costello. Mr. Chairman, thank you. Mr. Chairman, I ask 
unanimous consent that all members be allowed to submit their 
opening statements for the record.
    Mr. Mica. Without objection.
    Mr. Costello asks unanimous consent that Congressman Price 
of Georgia be permitted to participate in today's hearing. He 
is not a member, but has legislation pending relating to this 
issue as requested to the Subcommittee. So without objection, 
so ordered. And he will be, of course, last on the totem pole, 
but we welcome him.
    Mr. Costello. Mr. Chairman, as everyone in the room knows, 
we just had a series of votes and we are getting started late 
here. The witnesses and others have been here about 45 minutes, 
so I am going to submit my statement for the record.
    I do want to thank you for calling this important hearing 
today. This is an extremely important issue for all of the 
employees of the airlines and for the American people. So I 
look forward to hearing from our witnesses today. I have a 
number of questions that I have that I will be asking our 
witnesses, and I thank you again for calling the hearing.
    Mr. Mica. I thank the gentleman.
    Mr. Ehlers?
    Mr. Ehlers. Thank you, Mr. Chairman. I also will try to be 
brief, but I certainly want to thank you for calling this 
hearing, a very important topic. I am getting a double dose of 
it because not only am I on this Subcommittee, but I am also on 
the Education Workforce Committee, and tomorrow we are taking 
up the pension reform bill there, and full Committee next week.
    I also want to commend you for inviting Bradley Belt to 
this hearing. I have been in meetings with him twice now, and 
he is a very fine public servant, one of the best I have met, 
has a very good view of what is wrong, and I think has some 
very valuable advice for us as to what the Congress should be 
doing regarding pension reform. It not only needs reform, but 
also revision in a number of ways.
    But let us not forget in this whole process that there is 
another part of the puzzle that I think is needed, and that is 
reform of the bankruptcy laws. We already have reformed 
individual bankruptcy laws because we felt it was getting too 
easy for individuals to declare bankruptcy, and they were using 
it as a personal financing strategy. I have seen what is 
happening in the economy as a result of the difficult economic 
years of the last few years, particularly following a very boom 
period when everyone was possibly not making the wisest 
investment decisions.
    But I see corporations now beginning to use bankruptcy as a 
business strategy. And it affects people in my district, not in 
the aviation industry so much as in the manufacturing 
industries, where smaller suppliers to bigger manufacturers are 
being severely hurt when the larger manufacturers declare 
bankruptcy, leaving the smaller companies with two or $3 
million of unpaid bills, and their fiscal stability is 
questioned and they may end up in bankruptcy.
    In this case, also, I am not accusing any airline of using 
bankruptcy as a business strategy, but when someone goes 
through Chapter 11 and emerges as a much more viable 
corporation at the expense of the employees, and then creates 
great difficulty for those airlines which are trying to meet 
their obligations to their employees, there is something wrong. 
And I have already suggested to the Chief of Staff from the 
Judiciary Committee they should begin investigating this, and I 
also will be speaking to Mr. Sensenbrenner, the chairman of 
that committee, urging him to do the same. It is clear that we 
need the same type of reform of corporate bankruptcy laws as we 
have done for individual bankruptcy laws.
    So I look forward to the testimony we hear. I hope it will 
be fair and objective in regards to all parties concerned. And 
I, of course, have a very personal interest, being from 
Michigan. When we were talking about General Motors and some of 
their problems. And if in fact they have to go through 
bankruptcy, we are going to create such immense problems for 
Mr. Bent that even the Congress cannot save him. He will need 
help from a higher authority at that point.
    With that, I yield back. Thank you.
    Mr. Mica. I thank the gentleman.
    Ms. Norton?
    Ms. Norton. Thank you, Mr. Chairman. Just very briefly, I 
wanted to welcome Mr. Belt, one of my own constituents, and 
thank him for the extraordinary job he is doing under quite 
impossible circumstances, a problem we keep calling urgent. I 
have stopped doing that because an urgent problem is something 
you get up and do something about right away. It is one thing 
to lose a job, but it is quite another to lose a pension; it is 
kind of like losing your Social Security or having it cut. That 
is the end of your work life.
    This problem gets worse, not better. It has been there with 
the airlines. The more manufacturing has problems, the more we 
see it spreading. And now there is a triple hit here that we 
simply have to do something about. There is the Pension Benefit 
Guaranty Corporation, in this case, the airlines, and, of 
course, the workers. Everybody gets hit all around. I am not 
surprised that as companies fail, one of the first things they 
do, if we let them, is fail to make the necessary contributions 
to their pensions.
    All I want to say, Mr. Chairman, is we all ought to be 
grateful to you for keep putting this problem forward because 
if we keep putting it off, we are looking at a huge taxpayer 
bailout. That is what is going to happen. They are going to 
come, the Pension Benefit Corporation, no Federal funds now. 
Watch out, because if it all goes up in the air, guess who is 
going to pay the bill.
    Thank you very much, Mr. Chairman.
    Mr. Mica. Thank you.
    Mr. Diaz-Balart?
    Mr. Diaz-Balart. Thank you, Mr. Chairman. I actually also 
would like to thank you for holding this important hearing 
today.
    The future of employee pensions is a vital issue that we 
obviously must address before employees and taxpayers are 
overly burdened.
    Earlier today, Mr. Chairman, I had the opportunity to visit 
with a group of airline employees that represented just about 
every aspect of the airlines, including management. Their 
commitment to the industry and to their company is clearly 
unparalleled. All of them have faced huge actual pay reductions 
after 9/11 and, as much as anyone else, these employees have 
helped our airlines survive over the past few very difficult 
years.
    I look forward to working with our Chairman and with the 
members of this Committee to find appropriate ways to ensure 
that the pensions of our airlines and their employees is 
appropriately protected. In doing so, I think we need to look 
at diverse economic and financial outlooks of each individual 
airlines. As with any industry, Mr. Chairman, of course, you 
know very well, airlines have varying and different financial 
situations, and different outlooks, and also different plans as 
to how to deal with their pension future and their pension 
solutions.
    So, again, I look forward to working with the Committee and 
the Chairman. Mr. Chairman, again, thank you for bringing up to 
the forefront of this Congress I think a very important issue 
that we are going to have to deal with sooner or later.
    Mr. Mica. I thank the gentleman.
    Mr. Boswell.
    Mr. Boswell. Thank you, Mr. Chairman. I too appreciate your 
calling this meeting. I would like to associate myself with 
your remarks. And I will follow the leadership of my Ranking 
Member by submitting my remarks for the record if he will 
assure me that he will read them. I submit them. I yield back.
    Mr. Mica. I thank the gentleman.
    Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman. And I do, too, 
appreciate your having this hearing. I want to thank the 
Chairman for allowing Mr. Scott Yohe from Delta Airlines to 
come and testify. Delta Airlines is one of the reasons that 
Hartsfield-Jackson Airport is the busiest airport in the world. 
Delta has about 80,000 employees, both active and retired. 
Fifty-five hundred of those Delta employees live in my 
district, more than any other district in the United States. So 
I am very aware of what this hearing means to those folks.
    I would also like to thank the Chairman for allowing my 
colleague, Dr. Price, to come, who has introduced a pension 
bill that I have happily tried to co-sponsor with him.
    So I am anxious to hear what the witnesses have to say 
today, and I appreciate your time in waiting to be able to 
inform us of some of the things that we need to be doing.
    And again, Chairman, I want to thank you for doing this.
    Mr. Mica. I thank the gentleman. We did not have a vote, 
though, on whether or not Mr. Yohe could participate, but we 
will talk about that later.
    Mr. Pascrell?
    Mr. Pascrell. Thank you, Mr. Chairman, Mr. Ranking Member. 
There are a lot of corporations out there that are cooking the 
books, as we have read, and I am very annoyed. I came to the 
Congress in 1996 to guaranty defined benefits for Social 
Security and to guaranty defined benefits for those who work 
hard and pay into pensions. And there is no corporate person in 
this Country that should be immune, as far as I am concerned.
    That we allow companies to use legal accounting gimmicks at 
the expense of their employees is not acceptable. I think we 
have done a poor job, up here on this side of the desk, 
protecting employees who have no voice. The tentacles, for 
instance of Enron run throughout this Nation. Companies in New 
Jersey were affected by that. People lost everything. They 
worked 25, 30 years. They got screwed. And we should be darn 
angry about it.
    We should be as angry about this as we are about the 
bankruptcy laws that we proselytized on last week and the week 
before. Same thing. Same concern. Efforts to take advantage of 
those who are voiceless. I am surprised that we are not seeing 
the same harsh talk about responsibility and accountability. 
This is a place of doublespeak, I can assure you. So welcome.
    Our current system will encourage other airlines to follow 
in the path of United. To remain competitive is an obvious 
flaw. I support providing some flexibility, where needed, to 
ensure that more airlines do not have to be bailed out. But my 
father worked for 47 years for the railroads, and if you pick 
the most prominent subject matter at the supper table, when he 
was able to make his way home on time, it was his pension. He 
looked forward to that. He really did. Didn't talk about Social 
Security. He was counting on a lot of things, but he was 
counting on his pension.
    Are baby-boomers are counting on their pensions? Apparently 
they are not counting on Social Security.
    Let us be really concerned about making general statements 
about airlines dumping pensions on the PBGC. Not all airlines 
are alike, thank God. We must recognize that there are airlines 
that plan to stick to their deals. There are airlines that plan 
to uphold the commitment to their employees under current 
funding rules. Before we rush into Federal involvement, it is 
appropriate that we take a close look at how we can best 
protect airline workers. That is my commitment, and I aim to 
fulfill my commitment.
    Thank you, Mr. Chairman.
    Mr. Mica. I thank the gentleman.
    Others seek recognition? Mr. Ehlers?
    Mr. Ehlers. Thank you, Mr. Chairman. Just a very brief 
clarification of one of my comments. When I talked about 
bankruptcy as a business strategy, I was not in any way 
implying that anyone deliberately used that as a strategy.
    My point is simply that because the bankruptcy laws and 
ERISA were written at different times, and totally independent 
of each other, companies find themselves in the situation that, 
when they enter bankruptcy, one of the best choices is to 
divest themselves of the pension responsibilities. And that is 
the issue we have to clarify and correct, so that that will not 
be the best available option to a company that enters 
bankruptcy.
    Thank you.
    Mr. Mica. No further opening statements?
    Mr. Price, did you want to be recognized briefly?
    Mr. Price. If I may, Mr. Chairman. I just wanted to thank 
you and Ranking Member Costello and the members of this 
Committee for allowing me to attend this important hearing. And 
in the interest of brevity and to demonstrate my appreciation, 
I ask permission to put my opening statement in the record.
    Mr. Mica. Without objection, it will be included in the 
record.
    With those opening statements, we will now turn to our 
first panel of witnesses. The first witness is Ms. JayEtta Z. 
Hecker, and she is the Director of Physical Infrastructure 
Issues in the Government Accountability Office. She is 
accompanied by Ms. Barbara D. Bovjberg, and she is the Director 
of Education, Workforce, and Income Security Issues also at 
GAO. And then Mr. Bradley D. Belt. He is Executive Director of 
the Pension Benefit Guaranty Corporation.
    I would like to welcome our witnesses. We will go right to 
Ms. Hecker, Director of GAO, for your testimony.
    Welcome, and you are recognized.

      TESTIMONY OF JAYETTA Z. HECKER, DIRECTOR, PHYSICAL 
   INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE; 
   ACCOMPANIED BY BARBARA D. BOVJBERG, DIRECTOR, EDUCATION, 
       WORKFORCE, AND INCOME SECURITY ISSUES, GOVERNMENT 
ACCOUNTABILITY OFFICE; AND BRADLEY D. BELT, EXECUTIVE DIRECTOR, 
              PENSION BENEFIT GUARANTY CORPORATION

    Ms. Hecker. Mr. Chairman and Mr. Costello and other members 
of the Committee, I am very pleased to be here today. As you 
may know, we have been doing continuing work on the financial 
condition of the airline industry at the request of Congress, 
and our current work is actually focusing on particular issues 
of bankruptcy and pensions. This work, however, is preliminary, 
and we will have a final report in September.
    The three topics that I will cover basically address the 
ongoing debate that several of you have alluded to over the 
legacy airlines' use of Chapter 11 bankruptcy protection as a 
means to control cost, continue operations, and, in particular, 
shed pension cost. The three issues are: first, very briefly, 
some background of the financial difficulties; the second on 
the effect of bankruptcy; and the third on the effect of 
airline pension under-funding.
    Now, the first topic, about the financial condition of 
airlines, it is not news to any of you that there are sever 
financial difficulties. And as you may recall from earlier work 
that we completed, the bottom line is that legacy carriers have 
not been able to reduce their costs sufficiently to profitably 
compete with low-cost carriers. There is a fundamental 
restructuring of this industry still going on in response to 
the deregulation of the industry in 1978.
    The slide I have here was the bottom line of our review of 
the financial condition of carriers. It basically shows that 
legacy airlines, while they have worked very hard at it, have 
not sufficiently lowered their costs to be able to compete on a 
cost basis with the low-cost rivals. The blue line is the 
legacy carriers' unit costs, and you see it rising until 2001, 
and then the effort to try to control them, bringing them down 
by 2004.
    And a somewhat similar pattern, but much lower, for the 
low-cost carriers. The main story is that there is a continuing 
and somewhat growing differential in the unit cost between 
legacy airlines and low-cost carriers. Defined benefit pensions 
account for about 15 percent of that 2.7 cent difference in 
unit costs. This cost difference really is at the heart of the 
legacy airlines continuing financial losses, as many of you 
know, nearly $30 billion since 2001, with another $5 billion 
expected this year.
    The second point, then, is to look at the impact of 
bankruptcy, and the bottom line of this is that bankruptcy is 
and has been endemic to the industry for many years. It really 
reflects the longstanding structural issues and some of the 
unique characteristics of this industry. The main point, 
though, is that it is not really the cause of the industry 
ills, but, rather, reflects thoses problems.
    This next chart has data since 1984 and shows that 
bankruptcy and liquidation have been more common in this 
industry. The beige little block is the percent of failures for 
all industries in total and the blue line is the airline 
failure rate. You can see that since 1968 there have been many 
bankruptcy filings, 160, in fact, since 1978; 20 in the last 
five years.
    A key point here is that the airline industry has 
historically had the worst performance of any sector. So it is 
no surprise that bankruptcy has been endemic to this industry. 
Another point from our review of bankruptcy is that airlines 
rarely emerge successfully from bankruptcy. Of 146 Chapter 11 
filings, only 16 carriers since 1979 are still in business.
    Another key issue about bankruptcy is the argument that it 
leads to over-capacity. This chart basically examines whether 
the evidence supports that. The red line is the growth of 
industry capacity over time, and on it I have the blocks of all 
of the major bankruptcies; and the little gray bars are the 
periods of recession. Basically, the bottom line is that the 
historical growth of capacity in this industry has continued 
unaffected by major liquidations, and those slight downturns 
are more closely correlated with recessions. So you only get 
the drawback of the capacity when that overall demand decreases 
with a recession.
    The basic conclusion of our review of bankruptcy is that, 
in fact, there is no clear evidence that bankruptcy has harmed 
competitors, either keeping excess capacity in the industry or 
lowering prices. They do, however, of course, shed costs in 
bankruptcy and pensions, as we are discussing here today. But 
while bankruptcy may not harm the financial health of the 
airline industry, it is of considerable concern to the Federal 
Government, to airline employees and retirees, and as you have 
all said, really brought into light by the recent terminations.
    The bottom line here--I will have a few more slides on this 
issue--is that the legacy airlines in fact face significant 
near term liquidity pressures, and pensions are only a small 
part of that financial pressure.
    This first one is no news to anyone, that there has been a 
severe and dramatic under-funding from an over-funding in as 
early as 1999. It went down to a $23 billion under-funding in 
2002, and the only reason it picks up is not because pensions 
have now been reinvested in; those are the bankruptcies of U.S. 
Airways and, then in 2005, when the United pension plan was 
terminated that the under-funding is now approximately $13.7 
billion.
    Now, the main story I have is actually in this next chart. 
And if you don't like charts, this is one--even though it is 
busy--that I think tells the bottom line of our message today. 
The blue line in 2004 is basically the cash on hand of all of 
the legacy carriers. It is a little under $10 billion in 2004. 
The other blocks basically outline the fixed obligations of all 
the legacy carriers projected for the next four years.
    Now, the big story, as I think I have already told you, is 
that pensions, that gray bottom block, accounts for only about 
one-sixth, or 17 percent, of the fixed obligations of carriers. 
Basically, this is a daunting, overwhelming, and severe crisis 
for airlines, and it is not just pensions. This is the threat 
really driving bankruptcy and the move toward bankruptcy, in 
our view.
    Now, I might also tell you there is an interesting thing 
about the blue lines. It looks like, oh, they have got a lot of 
cash. That cash is debt-financed. That cash is being burnt. 
They are going through cash. They are losing money. So there is 
no new cash coming in. That cash is from all of the assets of 
the carriers, everything having been securitized. So this is a 
severe crisis in liquidity for all the carriers. And the 
pension crisis, which is real and is severe, is only about one-
sixth of that problem.
    I know I am running over. Oh, yes, there it is. I am 
running well over.
    I have three quick factors that I want to tell you what has 
caused the airline pension problems. The first is market 
factors. Several of you have referred to that. There was a 
perfect storm of reduced assets and increased liabilities. The 
second is management and labor decisions. Basically, we saw a 
long period of very generous contracts and airlines not funding 
plans when they could.
    This is an important slide visually showing that. The beige 
line, which you can barely see, is the actual contribution of 
legacy carriers during very profitable years. The profit is in 
the dark blue. So when you see that dark blue line above the 
line, those are very profitable years, historically profitable 
years for carriers. Airline funding was only 8.5 percent of the 
potential that they could, that was still tax deductible. So 
you have $2.4 billion in actual contributions, with a maximum 
of $29 billion. So they basically were not funding these plans 
even when they were making money.
    The third factor--and I am sure Mr. Belt will go into this 
in more detail than I need cover--the pension benefit funding 
rules have not only not prevented under-funding, they have 
really contributed to the under-funding. We have seriously 
under-funded plans, including United, that appear to be fully 
funded and in compliance with current requirements, but in fact 
were grievously under-funded.
    The next chart in fact is too complex, so I will just point 
your attention. This is looking at the pension problems and the 
pensions that have been turned over to PBGC. If you look in the 
first three lines--Eastern, Pan Am, TWA--look at the last two 
columns. The PBGC losses were $530 million, $700 million, $600 
million. Participant losses were $100 million, $55 million, $45 
million. U.S. Airways and United combined is a $9.6 billion 
loss for PBGC. Loss. That is net of the assets inherited. The 
loss to participants, again, is multiple orders of magnitude 
beyond prior bankruptcies.
    The concluding observation is that the financial condition 
of the carriers is not sustainable and some carriers are likely 
to terminate under current conditions. An important part of the 
lesson here--because everyone really wants to look for a 
solution--is that terminating pensions, or, the option being 
proposed, to amortize pensions over longer periods, will not, 
in our view, solve the long-term fundamental restructuring and 
financial problems typified by that unit cost differential. The 
cost structure problem will not be solved, given the small 
portion that pensions represent, of other major obligations.
    The other important thing is that the implications for PBGC 
are actually much broader than just the airline industry, and 
GAO has done substantial work on broad pension reform, and that 
is why I have my colleague, who has directed that work, here to 
address any issues about GAO's long-term advocacy for 
comprehensive pension reform.
    That concludes my statement, and I would be very happy to 
take questions. I apologize for going beyond.
    Mr. Mica. Thank you. You always do just a great job. And I 
guess what you showed us today is part of a larger report that 
is due out when?
    Ms. Hecker. In September.
    Mr. Mica. In September. Okay.
    Well, we are going to withhold questions, but we are going 
to go next to--well, your colleague, Ms. Bovjberg, did she have 
some comments at this stage?
    Ms. Bovjberg. No, I don't, Mr. Chairman. But thank you for 
asking.
    Mr. Mica. Okay. Thank you.
    Then we will go to Bradley Belt, Executive Director of the 
Pension Benefit Guaranty Corporation. Thank you for your 
participation today. Welcome, and you are recognized, sir.
    Mr. Belt. Thank you, Chairman Mica, Ranking Member 
Costello, members of the Subcommittee. I commend you for 
holding this timely hearing, and I very much appreciate the 
opportunity to briefly discuss the pension challenges facing 
the airline industry and the important role played by the 
Federal pension insurance program. I would also like to thank 
Mr. Ehlers and Ms. Holmes Norton for their very kind comments.
    And I want to commend you, Mr. Chairman, for your 
extraordinarily comprehensive opening statement, which you well 
outlined all the key issues we are facing, has rendered much of 
my statement somewhat superfluous. But at the risk of some 
redundancy, I will forge ahead.
    As you know, Mr. Chairman, this hearing is occurring 
against the backdrop of the largest pension default in the 
history of the United States. By the numbers, which you cited, 
United Airlines pension plans have assets of roughly $7 billion 
to cover liabilities of $16.8 billion, for a shortfall of 
almost $10 billion. The pension insurance program will be 
responsible for covering $6.6 billion of that gap, making it by 
far the largest claim in the 31-year history of the PBGC.
    But the United default also sets another dubious record: 
the largest ever loss of earned pension benefits by workers and 
retirees. Weaknesses in the pension funding rules allowed 
United Airlines to dramatically under-fund its pension 
promises. As a result, the company's more than 120,000 workers 
and retirees now stand to lose roughly $3.2 billion in 
retirement income that they were promised and were counting on.
    As tragic as these losses are, they are unique only in 
their size. As you noted, Mr. Chairman, United is merely the 
latest airline to default on obligations to its workers. In 
each round of airline bankruptcies, the pension insurance 
program has wound up responsible for benefits that companies 
promised but failed to adequately fund.
    In the early 1980s it was Braniff; in the early 1990s it 
was Pan Am and Eastern; and in this decade it has been TWA, 
U.S. Airways, and United. Claims from just these six airlines 
come to $11.7 billion, or 38 percent of the total in the 
history of the pension insurance program, even though they have 
paid only 2.6 percent of total premiums.
    There is no question that the airline industry faces 
substantial business challenges. And Congress and the 
Administration have previously acted to provide assistance to 
help deal with extraordinary events. After September 11th, 
Congress created the Air Transportation Stabilization Board to 
administer up to $10 billion in loan guarantees to help a then 
struggling industry get back on its feet.
    Today, nearly four years later, and with passenger traffic 
at record levels, some carriers are asking for a different form 
of loan guarantee, in the form of pension funding relief. In 
economic terms, that is what weaker funding rules represent, a 
loan from the pension plan from the workers to the company, co-
signed by the PBGC and underwritten by healthy companies whose 
premiums finance the insurance program.
    This funding break would come up on top of the exemption 
Congress provided just two years ago, which allowed airlines to 
skip 80 percent of their required catch-up pension 
contributions for 2004 and 2005, in the amount of $2.4 billion. 
At the time the bill was enacted, the airlines suggested that 
the two-year temporary relief would see them through a 
difficult period without the need to either terminate their 
plans or to seek additional relief from Congress. In the 
interim, U.S. Airways and United both moved to terminate their 
plans. And now that the temporary funding holiday is set to 
expire, some legacy carriers are seeking to stretch out relief 
for 25 years.
    Mr. Chairman, pension under-funding is not an accident, and 
it is not the result of forces beyond a company's control. On 
the contrary, it is the perfectly predictable and controllable 
product of decisions made by the company. In the case of the 
airlines, a series of missteps allowed pensions to become 
significantly under-funded. Companies did not contribute as 
much cash as they could in good times, as was noted by the GAO. 
In certain cases, they contributed no cash at all when it was 
most needed. And in still other cases labor and management 
agreed to generous benefit increases that are now proving 
difficult to afford.
    The tragedy is not that any of this was illegal. The 
tragedy is that it was legal under our system of flawed pension 
funding rules. United and U.S. Airways would not have presented 
claims in excess of $3 billion each, and with funded ratios of 
less than 50 percent at termination, if the rules worked. 
Consider United. From 2000 onward, when the funded status of 
the company's pension plan was deteriorating and the financial 
health of the company itself was failing, the company put 
little cash into its plans, did not provide under-funding 
notices to workers and retirees, and for most years in plans 
did not pay a variable rate premium to the PBGC.
    The Administration has proposed a sensible, balanced reform 
package to correct the flaws in the system. Key elements 
include: a more accurate measure plan liabilities that would 
reflect the financial condition of the sponsor and the risk of 
plan termination; asset and liability smoothing, which distort 
the true funded status of pension plans, would be eliminated; 
credit balances that allow companies to avoid making cash 
contributions for, in some cases, years on end, would be 
barred; companies that have failed to fund existing pension 
promises would be limited from making new unfunded promises; 
more accurate and timely plan funding information would be 
provided to plan participants, investors, and regulators; and, 
finally, PBGC premiums would be restructured to be more 
equitable, generate sufficient revenue to close the program's 
deficit and pay expected future claims. The flat-rate premium 
would be raised for the first time since 1991, an index to 
reflect wage growth and all under-funded plans would pay a 
variable rate premium.
    Mr. Chairman, the Administration is committed to 
strengthening the pension insurance program and keeping defined 
benefit plans as a viable option for employers and employees. 
We believe the Administration proposal strikes an appropriate 
balance and will best protect the pension benefits earned by 
workers and retirees, minimize the need for premium payers and 
taxpayers to subsidize the system, and reduce the chances of 
another pension tragedy like United.
    Thank you for your invitation to testify, and I would be 
pleased to answer any questions.
    Mr. Mica. Thank you. I thank GAO and the Pension Benefit 
Guaranty. Witnesses have painted a very grim picture of what we 
are facing. I think it is actually a lot worse than I had 
suspected. And I don't think we are here to cast blame on 
airlines or any other employers. Same thing that I described 
with our own Federal employee benefit program, which is a half 
a trillion unfunded for Federal employees. We have mirrored 
some of the private sector.
    Ms. Hecker, the picture you paint, I described in my 
opening statement what I thought would happen as a ripple 
effect as other carriers see what has happened with United and 
what may happen with U.S. Air. You testified, however, that 
this is only one-sixth of, really, their problem. Actually, 
what you are describing is legacy carriers in a lot more 
trouble than just the pension plan.
    Ms. Hecker. Precisely.
    Mr. Mica. That we should expect I guess a ripple effect not 
so much precipitated by their need to do something with their 
pension obligation, but much more serious issues. The charts 
you put on the cash, the liquidity, were outstanding I think in 
describing the problem, but is that an accurate depiction of 
their situation?
    Ms. Hecker. Absolutely. There is basically a fundamental 
restructuring that is occurring. There are non-sustainable cost 
disadvantages that the legacy carriers have not been able to 
overcome, and that is also reflected in these very, very high 
fixed obligations. Part of it, of course, is a balloon from the 
pension deferral that was passed in 2004, for 2004 and 2005, so 
you have
    Mr. Mica. And that expires--or has expired?
    Ms. Hecker. No, at the end of this year.
    Mr. Mica. Okay, that expires the end of this year. That was 
a reduction of 80 percent for that period of time, is that 
right?
    Mr. Belt. That is correct.
    Mr. Mica. Okay. What was even more disturbing--I had never 
seen the charts you put up--about their contributions, and I 
think that little beige line, the year 2000, when they were 
actually making money, their contributions were practically 
nothing. Did we allow that by law, they could make all the 
promises they wanted but weren't obligated to put anything in?
    Ms. Hecker. That is right. It basically was because the 
funding rules allowed them to appear to be fully funded.
    Mr. Mica. So whatever reform we adopt, we have got to have 
a real hammer and lock on what you promise, you also have to 
deliver.
    Ms. Hecker. Precisely.
    Mr. Belt. Mr. Chairman, if I can touch upon that one point.
    Mr. Mica. Yes.
    Mr. Belt. One of the key issues highlighted in the 
Administration's reform proposal are the issues related to so-
called credit balances. An illustrative example is the United 
Airlines pilots' plan, which, when we assume it, will be 
underfunded by $3 billion. The company has not put a dollar 
into that pension plan since 2000, for five years, 
notwithstanding the fact that the liability and the gap grew 
over that period of time. But that was allowed by the rules.
    And the particular rule that allowed them to avoid having 
to put in any cash was credit balances that were built up 
during the 1990s, during the boom years, when stock market 
gains were fairly good and sometimes companies did put a little 
bit of money into their plans. But they were able to use the 
availability of the credit balances to offset the otherwise 
required minimum funding contributions.
    Mr. Mica. Okay, one last question. I want to try to let Mr. 
Costello get his questions in before these votes. There are a 
couple of proposals around that allow amortizing the pension 
debt over, I guess, five to seven, or up to 25 years I guess is 
another proposal. It doesn't sound like either of those are 
really going to make this work. What is your opinion, Ms. 
Hecker, and then Mr. Belt?
    Ms. Hecker. We don't have an evaluation that is a specific 
position on the bill, but a lot of our work I think speaks to 
some points. First of all, there is an economy-wide problem 
with the defined benefit system, and singling out airlines 
really is likely to have precedence for other industries. GAO 
has really favored a comprehensive reform. The problem is, the 
way it has worked, the more under-funded you were, the less you 
paid.
    So we now have a crisis where they are more severely 
financially strained than ever. But do you perpetuate this 
fiction that, by stretching it out, somehow they will really be 
fully funding their plans? There is just no clear impact on the 
ability to actually save the carrier or to salvage the benefits 
ultimately for the employees.
    Mr. Mica. Pretty grim.
    Mr. Belt.
    Mr. Belt. Mr. Chairman, the Administration believes that 
the funding rules should be made more robust and strengthened, 
rather than weakened, and that the funding rules should apply 
to all participants in the system, and you would not have a 
separate set of funding rules for certain companies or industry 
sectors. Having said that, certainly the goals of any type of 
measure like that are laudable ones, that is, seeing if there 
is a way to maintain the pension plan for the benefit of the 
workers and retirees, and to avoid having losses incurred by 
the Federal pension insurance program.
    But I think there are several issues that are raised in 
that context, one of which is are we, as noted by Ms. Hecker, 
putting off the problem to another day and there is a potential 
for the problem to be much larger at that point in time? The 
bill, as drafted, that you may be referring to--at least I have 
seen a couple of measures--would limit the liability exposure 
to the pension insurance program, but it would not cap the 
liability to the pension insurance program. There are a number 
of ways in which liability could grow over a period of time.
    Another issue is what signal does it send. Does it 
exacerbate the moral hazards that already exist in the system? 
Does it send a message for a company that is perhaps modestly 
underfunded now, that the way to get special treatment is to 
get more underfunded, to not put in cash out of current 
resources, but use that for profit-making activities and get 
into a deeper hole and, that way, be able to more effectively 
make the case that special funding rules are needed?
    I would also note that we are facing challenges from a risk 
perspective from a whole host of companies, not just the 
airline industry. There have been eight auto part suppliers 
that have filed Chapter 11 just in the past six or seven 
months. They would probably be looking at this issue and saying 
what about us? And there are other companies just outside 
Chapter 11. And it is not unique to the auto sector as well. We 
are dealing with companies in the textile industry, grocery 
companies chains, service companies, financial services 
companies and others that are similarly situated.
    And I would also note, as I mentioned in my testimony, that 
relief was granted just two years ago in PFEA, and it was worth 
about $2.5 billion of being able to avoid pension contributions 
during that period of time. And it was represented at that time 
that the problem would then go away. In addition, some 
companies, including airlines, have taken advantage of rules 
under current law, funding waivers, to obtain additional 
funding relief.
    And, as the General Accountability Officehas stated, that 
this is not primarily a pension problem; there are a host of 
other issues. So I think we have to understand that those are 
all issues that are presented whenever we start talking about 
different kinds of relief measures.
    Mr. Mica. Mr. Belt, Ms. Hecker, we do have two votes, so 
what we are going to do is recess. I do have one question, 
though, Mr. Belt, for you. In talking to you--and I think our 
staff have talked to you--you felt that you could sustain all 
the projected or potential losses you see now for the airline 
industry. Where it gets a little bit hairier is the potential 
of other--what we do here with airlines sort of has, again, 
this ripple effect. Can you sustain the ripple effect with 
other industries following suit?
    Mr. Belt. We are already, in some respects, if we were a 
private sector insurer, technically insolvent.
    Mr. Mica. You are broke.
    Mr. Belt. Our liabilities, the commitments we have taken on 
in terminated pension plans, exceed our assets by more than $23 
billion. But from a cash flow or liquidity standpoint, we can 
continue along this path for several years, but the hole gets 
deeper each and every day. So the question is how do you fill 
the hole at some point in time, and who pays for that?
    And that is the challenge we are all facing and that we 
have got to try to resolve. I mean, in some respects--take 
United Airlines. We get $7 billion of assets in that pension 
plan. We, right now, pay out $3.5 billion a year in benefit 
payments. That gives us two years worth of benefit payments. 
The only problem is we are also taking on an additional $17 
billion of liabilities that we don't have the ability to cover. 
And premiums are far insufficient to not only fill the current 
gap, the $23 billion, but also cover future expected claims. 
The loss on United alone is six years' worth of past premiums.
    Mr. Mica. Thank you. To give everyone a fair shot at full 
questions, we will recess now for approximately 20 minutes. 
Thank you.
    [Recess.]
    Mr. Mica. The Subcommittee is back to order, and I would 
like to recognize Ranking Member Mr. Costello.
    Mr. Costello. Mr. Chairman, thank you.
    Ms. Hecker, first let me compliment you on your testimony. 
As the Chairman said, it is always very informative. A couple 
of questions. On the chart that you put up on the overhead, on 
page 16 you talk about--and I understand that the agency will 
not go on the record supporting or opposing a particular bill, 
but you indicate that terminating pensions or amortizing 
pension contributions over a longer period will not solve 
legacy airlines' long-term fundamental problems. And then on 
chart number 4 you talk about that the legacy airlines have not 
sufficiently lowered their cost. We all know that employees 
have given pay raises, they have taken reductions in benefits 
in order to help the legacy airlines.
    I wonder just how tight can you squeeze the orange to get 
more juice out of it. Give me some of your thoughts. What are 
the things that the legacy airlines should have been doing that 
they have not been doing in order to sufficiently reduce and 
lower their cost, as you indicate.
    Ms. Hecker. I don't think I have a simple answer for that. 
It is an extremely important question, and I think from the 
perspective of our work I could see about it for the record and 
see if we can supply some insights, but off the top of my head 
I don't have some specific actions
    Mr. Costello. Well, we, of course, the Chairman and I and 
members of the Subcommittee, meet with CEOs and others from the 
various legacy airlines from time to time, and we ask that 
question, but in realizing your testimony that we are talking 
about pensions is only 17 percent or one-sixth of the legacy 
airline long-term obligations. But when you say that they 
haven't sufficiently lowered their cost, that is pretty 
obvious, but where in fact can they lower costs? And I would 
ask you to maybe get back with the Subcommittee and give us 
some answers or some recommendations.
    Secondly, on number 16 again, page 16 of your chart, you 
say implications for the PBGC that you are recommending that 
the GAO supports broad pension reform that provides, and then 
one is meaningful incentives to adequately fund plans; two, 
additional transparency for participants; and, three, 
accountability for those firms that fail to match the benefit 
promises they make with the resources needed to fulfill those 
promises.
    And I realize you are asking for broad pension reform, but 
it seems like a broad recommendation. And I wonder if you might 
narrow it down and give us some more specifics as to what they 
may do for, number one, meaningful incentives to adequately 
fund plans.
    Ms. Hecker. I will have Ms. Bovjberg, who has worked on the 
summarizes, respond.
    Ms. Bovjberg. We have made those recommendations fairly 
general to give Congress some leeway. As time has gone on, we 
have also tried to make some more specific ones. For example, 
we think that the deficit reduction contribution, which we 
refer to more broadly in our report as the additional funding 
contribution, is something that really needs to be re-examined. 
That affected very few firms, and the firms it did affect 
didn't make that payment in cash. As Mr. Belt says, addressing 
the use of credit balances is urgent. Dealing with the way that 
we calculate and define funding assets and liabilities is 
crucial. This is not just for airlines, it is for all defined 
benefit pension sponsors.
    I think that you will have before you this year at least 
two, if not more, proposals for comprehensive pension reform 
that will deal with funding rules, that will deal with premium 
issues, that will deal with better disclosure and transparency. 
And those are the areas that we would urge you to consider. I 
do want to say that in a forum that we had earlier this year we 
did discuss legacy costs, legacy pension costs separately from 
comprehensive pension reform and going forward. We thought it 
was important to make changes to the pension financing system 
and the pension insurance system going forward, but understand 
that our policy might have to address legacy costs separately. 
But I would encourage Congress to think about legacy costs as 
not only airlines, but there are other industries that we would 
put in that category. And there are different ways to think 
about supporting those.
    Mr. Costello. The third point under the broad pension 
reform proposals, accountability for those firms that fail to 
match the benefit promises they make with resources needed to 
fulfill those promises. It is pretty difficult for an employee 
of a particular legacy airline to know--for instance, Mr. Belt, 
in your testimony, which I am going to ask you about in a 
minute you indicated that one legacy airline had not made a 
contribution since 2000. And I guess my question is how 
difficult is it, since every legacy airline may have different 
bookkeeping accounting procedures, to determine how much a 
pension fund of a particular airline is under-funded?
    Mr. Belt. Yes, Mr. Costello, I am happy to answer that. 
That is one of the issues that is directly addressed by the 
Administration proposal. We believe very strongly that you need 
to have accurate measures and liabilities so that all the 
system stakeholders--workers and retirees, shareholders of the 
company, as well as regulators--have an understanding of what 
the real financial condition of the pension plan is at any 
given point in time. That is not available to the system 
stakeholders under current law for a variety of reasons.
    The calculation of assets and liabilities under ERISA is a 
study in obfuscation. We use these smoothing mechanisms that 
look at the value of assets going back from the present time 
back over several years. Same thing with calculating 
liabilities. That is like driving your car down the road 
looking in the rearview mirror. What happened three or four 
years ago has no relevance to the economic reality today. So it 
is vitally important that we have accurate measures of 
liabilities and that we report that information on a timely 
basis, and that we make that information available to all the 
system participants.
    One of the issues right now is PBGC has relatively timely 
information about the financial status of pension plans under 
so-called Section 4010 that is filed with us each year. Those 
are the companies that are most underfunded. We are proscribed, 
precluded by law, from making that information publicly 
available. Workers and retirees are entitled to know that type 
of information.
    Mr. Costello. While I have you--and I will go back to Ms. 
Hecker with another question--let me ask you, Mr. Belt. You 
indicate in your testimony that two of the fundamental rules, 
in particular, the credit balances and the smoothing of assets 
and liabilities, have contributed to the pension crisis. I 
wonder if, for the record, that you might explain those two 
issues, credit balances and smoothing, and comment on what 
needs to be done with the rule.
    Mr. Belt. I would be delighted to do so. The smoothing 
issue, as I just mentioned, is how, for ERISA funding purposes, 
when companies have to calculate how much they have to put into 
their pension plan under the funding rules, they get to 
calculate that based on a measure called current liability that 
really bears really very little relationship to economic 
reality. And it is comprised of both smooth assets and smooth 
liabilities, which, again, means that you are looking at the 
value of assets averaged over a period of several years.
    So companies are still taking into account the fact that 
asset prices used to be higher than they are now, that interest 
rates used to be higher than they are now. That does not allow 
for an accurate picture of the financial status of the pension 
plan at this point in time.
    The other issue I mentioned is credit balances, which is a 
mechanism, a separate account that companies are allowed to use 
to avoid making cash contributions. That is, if there is value 
in the credit balance account, they can offset that against 
actual required cash contributions. The interesting quirk about 
that is that credit balance account is a result of a variety of 
things, but if they paid more than minimum contributions in the 
year past and they get to assume that interest is assumed on 
those assets.
    But even if, in the interim, the asset values have fallen 
substantially, so the plan has become more underfunded, that 
credit balance still remains. And that is exactly what happened 
when I mentioned United Airlines pilots' plan, which is a 
matter of public record, which was substantially underfunded in 
the year 2000 and has become substantially more underfunded. 
But because of the availability of credit balances, the company 
did not have to, legally under the ERISA rules, put any cash in 
in 2000, 2001, 2002, 2003, 2004, and will not have any monies 
owed until actually the end of 2005.
    Mr. Costello. I think, Ms. Hecker, on one of your charts--
Mr. Belt, I want you to address this, if you would--one of the 
charts you indicated in the years when the legacy airlines were 
making money, they were not making contributions to their 
pension funds. My understanding is that the current law 
prohibits prepayments for future years into the pension funds. 
Is that correct?
    Mr. Belt. Not quite correct, Mr. Costello. There are limits 
under current law on the amount of tax-deductible contributions 
that can be made into a pension plan, the maximum contribution 
limit. One of the Administration's proposals is in fact to 
raise the maximum contribution level to provide additional 
incentive for companies in good times to put additional monies 
in the pension plan to buffer against bad times.
    While we do support that additional flexibility, the fact 
of the matter is in the vast majority of instances companies 
have not bumped up against the maximum contribution limit. And 
that varies from company to company, obviously, but for the 
system as a whole that is true. And the airlines themselves are 
very differently postured in that way. Some airlines and some 
of the legacy air carriers did, for a period of years, bump up 
against the maximum contribution limit.
    If you look at a different set of years, either before or 
after that, that wasn't true, but in some years they did bump 
up against the maximum contribution limit. There were other 
legacy carriers that over the same period of time never hit the 
maximum contribution limit in any year for any plan.
    Mr. Costello. Last question--I have run out of time, but 
hopefully we will have an opportunity to come back--for you, 
Ms. Hecker. You indicate in your testimony that the very 
presence of the PBGC insurance may have created a moral hazard 
for incentives to not properly fund pensions, and I wonder if 
you might elaborate on that.
    Ms. Hecker. The very availability of this program, in our 
view, changes the incentives. There are indications, we don't 
have smoking guns. You have an example of the machinists having 
their pensions increased at United 45 percent six months before 
United declared bankruptcy. Now, it is true there is a phase-in 
and, in fact, those didn't have the effect that on their face 
they might have. There appear to be indications that when you 
know you can have certain obligations taken over by the 
government that there is less funding and less commitment to 
those obligations.
    Mr. Costello. And, hence, that is why you made reference to 
going through cash, burning money?
    Ms. Hecker. Well, the reference to burning money is that 
they are losing money through operations. They are not 
generating net cash. So that cash balance is in fact part of it 
is coming from increased borrowing and leveraging, and there is 
an end to that.
    Mr. Costello. And there are those who would suggest that 
some of the legacy airlines are attempting to get rid of 
whatever cash they have in order to file under Chapter 11. And 
you indicate in your testimony there is no clear evidence that 
the airlines use Chapter 11 bankruptcy protection that has 
harmed the industry. I wonder if you might comment on that.
    Ms. Hecker. Well, the two presumptions are that they create 
extra capacity in the industry, and the second one is that they 
lead by lowering prices because they have been able to lower 
their costs. We found no evidence of either. We did the 
analysis I showed you about the capacity, how none of the 
bankruptcies or liquidations actually led to a turn-down in 
capacity, that in fact it kept going up. It was only recessions 
that led to reductions in capacity.
    Basically, as soon as an airline fails, somebody else picks 
up the capacity. We did specific studies of specific markets 
that is in my written statement. In addition, there is a modest 
amount of academic research, and those are cited, and they 
found the opposite, that these carriers in bankruptcies are not 
price leaders, that the price leadership is coming from the 
low-cost carriers.
    So we just didn't find the evidence that in fact bankruptcy 
was ever a first choice. We consistently heard that it is a 
last resort, that you lose control and that it is not a 
preferred model, and that was our observation.
    Mr. Costello. Mr. Chairman, thank you.
    Mr. Kennedy. [Presiding] Mr. Porter?
    Mr. Porter. Yes. Thank you, Mr. Chairman. And I thank the 
panel for being here.
    I have really a three-part question for you, Mr. Belt, all 
related. It has to do with your authority and any possible 
changes. What existing authority do you have to deal with the 
situations that we have been discussing today? Is it possible 
to make changes to your authority to accomplish a similar end? 
And, if so, what specific authority would you need? So it is 
what authority do you have to deal with it today; what changes 
should we make, if necessary; and what authority would you 
need?
    Mr. Belt. I am not sure quite where to start on that issue, 
it is a fairly broad one. I think it is fair to say that the 
PBGC has a rather limited set of tools and authorities to 
respond to marketplace changes and risks posed to the pension 
insurance plan compared, for example, to a private sector 
insurer, but some of that is statutorily based.
    For example, if a company does not pay premiums or does not 
make contributions to its pension plan, I can't decline or deny 
insurance to them, I still have to cover them. Our tool sets 
are also fairly limited relative to other Federal insurers like 
the Federal Deposit Insurance Corporation that has a much 
broader range of capabilities to protect the interest of the 
banking system than does the Pension Benefit Guaranty 
corporation.
    One of the areas where we encounter great difficulty is one 
alluded to by Mr. Ehlers, which is bankruptcy. There is no 
question, an inherent tension between ERISA (the Employee 
Retirement Income Security Act) and the Bankruptcy Code. And 
where a lot of these issues actually come to a head is when 
companies are in Chapter 11. They serve very different 
purposes. The interest of the Bankruptcy Code and the judge are 
to have the company emerge successfully from Chapter 11. And to 
the extent that they are weighing equities, the stakeholders 
that they are looking at are the creditors in the company, and 
first among equals there are the secured creditors, and we are 
a general unsecured creditor.
    There are other issues that arise in the bankruptcy context 
as well. The bankruptcy judges really simply are not attuned, 
by dint of their responsibilities, to the interest of 
participants, workers and retirees, to the premium payers whom 
we are supposed to be responsible for, as well as the 
taxpayers. We are supposed to be self-financing.
    One of the proposed changes in the Administration's 
proposal is to give PBGC the authority to be able to enforce 
liens in bankruptcy. And the situation that arose was one that, 
again, using United as an illustrative example, last summer the 
company was in Chapter 11, in bankruptcy, and they failed to 
make a $74 million payment that was required by law under 
ERISA. Now, if they weren't in Chapter 11, if they weren't 
covered by the Bankruptcy Code, PBGC would be able to step in, 
the lien would arise by the operation of law, and we would be 
able to enforce that lien and have a security interest against 
the company.
    But under the Bankruptcy Code there are automatic stay 
provisions that kick in. And the lien arose, but we weren't 
able to do anything about that. It didn't give rise to a 
security interest, we stayed as a general unsecured creditor. 
So there was no practical consequence whatsoever to United 
skipping that pension payment that was required by Federal law 
under ERISA. That is another example of something that we think 
would be very useful on a go-forward basis.
    Mr. Porter. Mr. Chairman, to follow up.
    So to have that specific authority to follow up in those 
cases, that is some of the authority you think you should have 
or do you have?
    Mr. Belt. No, we do not have that authority in the 
bankruptcy context, and that is part of the Administration's 
proposal. As I understand it, it is not in the bill that is 
being marked up in the House Education and Workforce Committee.
    Mr. Porter. Now, are there some tools available to you that 
you currently have to deal with this situation?
    Mr. Belt. The principal tool is to actually step in to 
terminate a pension plan. And it is an action that PBGC has 
taken and will take in extraordinary circumstances, when such 
action is necessary to protect the interest of the pension 
insurance program as a whole, and balancing the interests of 
all the stakeholders.
    But it is obviously not a desirable option, and it is one 
that we do not take lightly because there are adverse 
consequences. If we step in to terminate an underfunded pension 
plan, then the workers and retirees lose; they stop accruing 
benefits, they may lose benefits because of the guaranty 
limitations. We take the liability on our books. Somebody has 
to pay for that, that is the other premium payers in the system 
or ultimately, potentially, the taxpayer.
    But in some cases that action is necessary when the company 
is no longer supporting the pension plan. They are not putting 
any additional assets in the pension plan, they either don't 
have the ability to do so or are not willing to do so, and the 
liabilities continue to accrue each and every day that that 
plan is still out there.
    So to protect the interests of the stakeholders as a whole, 
all the people that we are responsible for cutting benefit 
checks to in plans we have already taken over, as well as the 
premium payers and the taxpayers, we sometimes have to step in 
to terminate that pension plan, notwithstanding the fact that 
it has adverse consequences for the participants in that 
particular plan.
    Mr. Porter. And I know we were called away to a vote, but 
if I understand correctly, you stated that even in the good 
years United chose not to fund as they could have, from 2000 
through today, correct?
    Mr. Belt. That is true not only with respect to United, but 
the vast majority of companies that sponsor defined benefit 
plans could have put more money into their pension plans, above 
the minimum amounts that were required by law, and many of 
those companies, as we have talked about, took advantage of 
other loopholes in the funding rules--the way you calculate 
assets and liabilities and credit balances--to not put money in 
when they could have done so.
    Mr. Porter. I represent the community of Las Vegas and, of 
course, we feel a partnership between the airlines and their 
employees and, of course, our customers that are traveling on 
the airline industry, and I appreciate your comments today, and 
I know you are having to make some pretty decisions. But we 
appreciate what you are doing. Thank you.
    Mr. Kennedy. The gentleman's time has expired.
    Ms. Tauscher?
    Ms. Tauscher. Thank you, Mr. Chairman.
    I don't think we have to look farther than this room to 
figure out who is responsible, at least in part, for the mess 
that we are in right now. When I was a small child, I spent 14 
years on Wall Street, and prior to September 11th I think many 
of us were deeply concerned about what we considered to be 
unsustainable business models for especially the legacy 
carriers. And then after September 11th we created an airline 
stabilization board, who clearly have never scrubbed the books 
and still do not understand the ongoing practices of many of 
these airlines, and they certainly have not alerted Congress.
    If American workers are working hard and playing by the 
rules, they believe they have laws that protect them. And we 
have been asleep at the switch. As much as there was an 
intelligence failure in many different ways on September 11, 
this is an example of a major, major oversight failure by 
Congress. We have got to get this right.
    Mr. Belt, your testimony should say to anybody with a 
defined benefit plan to run not walk immediately to their 
executive row and demand that their CEO show them the books of 
their pension plan. This is not just about our friends in 
airlines industry. As you have testified, Ms. Hecker, there is 
a panoply of industries that are egregiously not only 
underfunding and not doing the right thing, but we have got 
laws that are incongruent with responsibilities, we have got 
Enron accounting. You have to have a Ph.D in accounting to 
understand ERISA to begin with and then you have got complicit 
with that a number of other basic gap rules that allow 
companies to slip the noose day in and day out.
    And what we now find when we have lifted up this rock is a 
complete nightmare. What disturbs me is that we still 
apparently are not getting it right. We should be having 
hearings day in and day out, Mr. Belt, to provide you with what 
you need so that we at least have a sense from today going 
forward that we have a PBGC that is at least breathing.
    Mr. Belt. Please do not invite me every day. I have done 
this eight times in the last two months.
    [Laughter.]
    Ms. Tauscher. Well, you are very popular, and we know why. 
I do not really have any questions for you because I am right 
now trying to control my blood pressure. I am stunned that 
knowing what we knew after September 11, many of us believed 
that we had to have a much more activist airline stabilization 
board. I have been a constant critic over what they have done 
on these bankruptcies, in and out, not supporting them, forcing 
people to write business plans day in and day out while they 
are hanging by a thread.
    Now what we find is that they did not even scrub the books 
enough to understand that it was not just the business models 
and trying to fix a few weeks of having a ground stop. There 
was an overwhelming lack of responsibility in many different 
quarters, not only bad business models and things that were not 
going to work in the long term, but that there was fundamental 
funny business going on.
    Mr. Belt, at the minimum, these plans need to mark to 
market, no more smoothing, that is crazy. At a minimum, 
everyone that is a beneficiary and paying into one of these 
plans needs to be notified by mail immediately once the company 
decides not to live up to their obligations. That I think will 
send a shock wave around the country in every boardroom.
    What I do not understand is how one of the big carriers who 
was effectively owned by their employees, whoever those board 
people were representing the pilots and everybody else that 
helped that airline stay above water for a few hours should 
basically be taken to the woodshed because they were not doing 
their fiduciary responsibility to understand that one hand was 
not doing what the other hand thought they were doing and that 
they were complicit in allowing this to go on.
    So there is a lot of blame to go around I believe in this 
room. We need to take responsibility and we need to act now, 
Mr. Chairman, to get this right. This is absolutely heinous. 
Americans need a Congress that is going to make sure that the 
laws are as responsible to them as they are responsible to 
themselves and their families and to this country to work hard 
and play by the rules. When they play by the rules, we have to 
have laws that protect them, and we obviously do not. Thank 
you, Mr. Chairman.
    Mr. Kennedy. The gentlewoman yields back her time. Mr. 
Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman. First a specific 
question before I ask a more general one. Ms. Hecker, in your 
report you have this fascinating chart: Legacy airlines could 
have contributed more to plans during profitable years. My 
first question, did any of the airlines contribute less than 
they were legally required to contribute?
    Ms. Hecker. I do not believe so. It all goes to these 
smoothing and these credit rules, so that even though most of 
them were not contributing anything for many of those years, it 
was in full compliance with the rules. I am sure Mr. Belt can 
tell you better.
    Mr. Ehlers. That is what I thought. I just wanted to check 
because I wanted to make sure you are not saying that they were 
irresponsible or violating the law. And it is clear they did 
not violate the law. Now, I noticed you just quoted the source 
for this as PBGC and DOT. Did you check with any of the 
airlines to verify the figures that you had on this to make 
sure that they were accurate?
    Ms. Hecker. No, we did not.
    Mr. Ehlers. Okay. And as far as individual airlines are 
concerned, did any of them make more than the minimum amount of 
payments during that time period? Did you check that at all to 
see which ones contributed more and which ones did not?
    Ms. Hecker. We have some information but it is actually 
summarizing a study that Mr. Belt's staff did.
    Mr. Ehlers. All right. Maybe Mr. Belt can answer. I have 
the understanding that Delta paid more than the minimum and I 
believe Northwest did too. Is that correct or incorrect?
    Mr. Belt. I do not have the figures, but we can certainly 
get them to you as to whether they paid more than a minimum. 
There are certainly some of the legacy carriers that in some 
years with respect to some plans bumped up against the maximum 
contribution limit. That is, they could not have put in any 
more on a tax deductible basis.
    It is also true, for example, with one of the legacy 
carriers, that, as far as we could ascertain, over a several 
year period with respect to each of their plans they never 
bumped up against the maximum contribution limit. There were 
some companies, for example, you mentioned one of them, that if 
you looked from the period 1997 to 2002, there were years when 
they could have put in as much as $3 billion more than they did 
in an individual year and not bumped up against the maximum 
contribution limit.
    Mr. Ehlers. All right. If you could send me that 
information, I would appreciate it. It would be interesting to 
see that.
    My point is I just want the facts. I do not want to cast 
aspersions where they should not be cast, but I am willing to 
cast them where they should be cast. But I want to have the 
facts to make sure it is clear who did what and not just lump 
them together.
    The second question is a more general one, and is again 
addressed to both of you. During my opening statement I made 
some comment about the need to rewrite bankruptcy laws at the 
same time we rewrite the pension laws. I would appreciate any 
comments that either of you could offer on that, in particular 
as to which you think we should be looking at changing in the 
bankruptcy laws to make it match better with the PBGC 
requirements and the new pension bills that are being offered 
just to make sure they mesh appropriately and we do not find 
ourselves in the same situation ten years from now because we 
reformed one and not the other.
    Mr. Belt. If I can take that first. As I just discussed 
with Mr. Porter, one of the elements in the Administration's 
reform proposal is to give the PBGC the ability to enforce a 
lien in bankruptcy for missed contributions. We think that is 
critically important so as to avoid the situation that arose 
with United last year when they failed to make a contribution 
that was required by Federal law, the Employment Retirement 
Income Security Act, but the Bankruptcy Code, the automatic 
stay provisions, ended up trumping that and there was no 
practical consequence to that. My understanding is that is not 
in the bill that is being marked up in the House Education and 
Workforce Committee, it was marked up at Subcommittee level 
today. The Administration does believe that is an important 
element of reform.
    There are a host of little but frustrating and vexing 
issues that tend to crop up all the time with respect to PBGC 
and pose an ongoing litigation risk because of the tension 
between ERISA and the Bankruptcy Code because they serve very 
different purposes. One of which is, for example, under ERISA, 
we are supposed to calculate the value of a claim in a 
particular way using a certain discount rate methodology. But 
that is not written into the Bankruptcy Code. So bankruptcy 
judges, depending on what jurisdiction they are in, will use 
very different ways for calculating liabilities.
    In a recent case where we lost, the company was able to 
argue that the prudent investor rule, and assuming that the 
participants wanted actually to invest in the debt securities 
of that company, what they would have to be compensated to do 
that, and therefore that is the appropriate discount rate to 
use. The consequence was a 9.7 percent discount rate used in 
that instance which valued our liability from 100 cents on the 
dollar to almost nothing. But that is an issue that is out 
there that is a litigation risk and depends on what 
jurisdiction you are in and it is a disconnect between what is 
in ERISA and what bankruptcy judges look at.
    Another example arose in the United Airlines context 
particularly with respect to the flight attendants. ERISA says 
that the determination of whether a plan can be off-loaded onto 
the federal pension insurance program in bankruptcy using the 
distress termination process has to be done on a plan-by-plan 
basis. At least ERISA speaks of a plan in the singular. But we 
just recently had in a Kaiser Aluminum case a court decision 
that said do not mind that, the company is able to look at the 
plans in the aggregate, can they afford all of their plans in 
the aggregate, they do not have to look at it on a plan-by-plan 
basis.
    So there are a host of things like that that tend to arise 
because of the disconnect between ERISA and the Bankruptcy 
Code. And the bottom line is if bankruptcy judges do not find 
it in the Code, then they tend to discount it even if you find 
it elsewhere in federal law.
    Mr. Ehlers. So you would agree then with my comment that we 
should be working on reforming bankruptcy law as well as the 
pension law?
    Mr. Belt. There are certainly some changes that could be 
made. But there are obviously trade-offs in a balancing of 
interests that could better protect the interests of the 
pension insurance program relative to current law.
    Mr. Ehlers. And if you would be kind enough to put that in 
writing to me and the Committee also, that would be helpful.
    Ms. Bovjberg. Mr. Ehlers, may I jump in for a moment. I 
know that the Government Accountability Office is on the record 
as saying that we should consider better aligning the 
bankruptcy law and ERISA for these purposes, this is from a 
pension perspective, where I come from, but that we also think 
that if you did that you could take some measures that would 
better protect the Government's insurance program and the 
participants it insures. I know that David Walker, the 
Comptroller General, has offered to work with Education and 
Workforce on some of these issues, and we would be happy to do 
that.
    Mr. Ehlers. And I would appreciate, you said it is on the 
record, if you could send me that as well, I would appreciate 
that.
    Mr. Kennedy. The gentleman's time has expired.
    Mr. DeFazio.
    Mr. DeFazio. Ms. Hecker, just on the legacy airlines and 
the cost chart, I would just like to refer back to that for a 
minute because your prognostication here or the conclusions one 
would draw from some of your materials is a very grim future 
for the industry, and legacy carriers in particular.
    I assume the fuel and oil advantage, I guess part of it is 
they have cash to buy hedges or futures but also some of those 
hedges and futures are going to be less advantageous given the 
current run-up in prices than they were in the last year or two 
for profits. So that one may narrow.
    Labor, I would assume that even the non-legacy carriers 
have systems of seniority and/or graduated pay scales so that 
the longer you are there the more you earn, and I would assume 
that perhaps some of that labor advantage is going to go away 
plus a lot of the give-backs that we have seen.
    Then when I look at pensions, I met recently with a legacy 
carrier with some other Members and they said that United is 
doing away with defined benefit pensions but they are going to 
defined contributions, and basically, this legacy carrier we 
talked to, their defined benefit is only one-half of one 
percent difference of payroll as opposed to the defined 
contribution, but theirs was not in as bad shape as United and 
then I do not know about others. Is there not some probability 
that 2.7 cents is going to narrow because of events?
    Ms. Hecker. Well, we have not seen it. The fuel difference 
actually has consistently had the legacy carriers having higher 
unit fuel costs. They have older planes, they are less fuel 
efficient planes, and they do not have the money to get new 
planes. On labor, low-cost carriers tend to have often a 
younger workforce, just the demographics of the workforce, they 
have far more flexibility in the rules, and so there is 
substantially greater labor productivity.
    I do not think that is naturally converging. And the 
pension issue, the low cost carriers from the get-go went with 
defined contribution. So I am not sure that our analysis would 
support that they are converging.
    Mr. DeFazio. Okay. So then absent that, you are basically 
predicting the demise of one or more of the legacy carriers 
until such a time as there is some kind of return to so-called 
pricing power and fares can go up enough and capacity is 
strained enough even with the non-legacy carriers that people 
could raise prices and they might stop hemorrhaging?
    Ms. Hecker. We do agree that it is very likely that some of 
the legacy carriers will enter bankruptcy and terminate.
    Mr. DeFazio. And what does this say about the future of a 
system of universal air transport for the United States of 
America? And what does it say about whether or not we should 
revisit the deregulation and consider whether or not, at least 
in certain markets, the only way we are going to be able to 
provide air service is with some sort of limited form of 
regulation?
    Ms. Hecker. There is absolutely a role for network 
carriers. The model that creates such efficiency for low cost 
carries, as we know, is based largely on the point-to-point 
service. Network carriers provide broader coverage, they 
provide a distinct service, and they provide online 
connectivity around the world, and they are the international 
carriers. We do not have low cost carriers for the most part 
providing any international service. So there is a distinct 
service that legacy airlines are providing.
    The problem is that they are not getting the premium that 
is covering the differential costs they have. So the 
restructuring that is still needed is not so much to converge, 
but to get the cost differentials to a level where they can 
make it up in yields.
    Mr. DeFazio. But what you are saying is the market, in a 
deregulated market, in a cut-throat market, does not value 
connectivity or a universal air transport system. It does not 
lead to that. It leads to the most efficient, cheapest way of 
providing service, which might well be something that says 
everybody in the Northwest will drive to Seattle to get on a 
plane, everybody in California will drive to Los Angeles or San 
Francisco to get on a plane because that could be really 
efficient for the carriers because they just provide point-to-
point from those areas, and so no more Fresno, no more 
Sacramento, no more Eugene, no more Tacoma, sorry, not Tacoma, 
that is Seattle, but no more whatever.
    Ms. Hecker. But it is not some objective model. These are 
consumers making decisions and that is really that so-called 
Southwest effect where people are choosing, preferring, even if 
they are near a small or community airport, they prefer to 
drive three, four, five hours for that lower cost.
    Mr. DeFazio. But not business travelers. So the business 
travelers are all going to go to microjets? How are we going to 
continue to have a universal system that serves the business 
community and the leisure traveler which can involve a four or 
five hour trip to save a hundred bucks, although with gas 
prices, who knows, it is probably going to have a bigger 
differential to save these days.
    Ms. Hecker. I do not think I have the crystal ball of how 
the market and the various segments of this market will evolve. 
But I do think we have seen tremendous innovation and 
tremendous benefits to consumers, to communities, and to 
growth.
    Mr. DeFazio. Not to communities who lose their jet service 
or regular business service. It is kind of an economic 
disadvantage. I mean, sure, if you have got a hub, take 
advantage of it. If you have got some competing airlines, 
great. But if you happen to be one of these second tier 
airports, well, too bad, you used to have air service, now, if 
you want to attract a company just tell them they have either 
got to have their own jets or their executives are going to 
drive for four hours to the nearest airport. It is not going to 
work for most of America.
    Mr. Kennedy. I would say the gentleman's time has expired.
    Mr. Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman. Ms. Hecker, let 
me get this straight in my mind. If an airline goes bankrupt, 
files Chapter 11, do they get to jettison their pensions?
    Ms. Hecker. With the approval of the bankruptcy court.
    Mr. Westmoreland. So it really depends on the bankruptcy 
court. And is that determination made about how much of that 
pension they can jettison or how much the Federal Government is 
going to be responsible for?
    Mr. Belt. If I might answer that. The discretion is 
ultimately in the bankruptcy judge's hands. The standard is 
whether the company would be able to successfully emerge from 
Chapter 11 with, and the issue we just talked about, one or 
more of its plans in tact. That is the process that exists 
under ERISA and the Bankruptcy Code right now.
    Mr. Westmoreland. Okay. Now, have any of them emerged out 
of bankruptcy and taken up the pension plans or a part of the 
pension plans?
    Mr. Belt. My apologies, I did not really finish the answer 
to your question. The process that courts use is actually an 
all or none proposition. It is a binary proposition right now. 
There is no mechanism available under current law for the 
bankruptcy judge saying, well, you can afford 50 percent of 
your pension obligation and you have to maintain the other 50 
percent. It is you terminate the pension plans and they turn 
them over to PBGC, or you maintain them. So that kind of 
slicing the baby, as it were, is an option that is available 
under current law.
    Mr. Westmoreland. So if I am hearing you correctly, if they 
file Chapter 11, get rid of their pension plans, come back out 
of Chapter 11, they have no obligation for those pension plans?
    Mr. Belt. That is correct. That is the general construct of 
bankruptcy law, which is the fresh start. Now, we talked a 
moment ago about the inherent tension between ERISA and the 
Bankruptcy Code. There is a provision in ERISA under current 
law which gives the PBGC the authority to restore a pension 
plan in changed circumstances. We have done that in one 
instance where a company was still in bankruptcy.
    The interesting question that is presented is, let us say 
an air carrier or somebody else emerges and becomes healthy 
several years down the road, can the PBGC step in and say now 
that you can afford this you have to have your plan back, you 
are supposed to restore it to the pre-termination condition. 
And it is not clear that can be done. And it is also not clear 
that that authority sets well with the basic construct of the 
bankruptcy code, which again, you expunge your debts and you 
get a fresh start.
    Mr. Westmoreland. So the basic answer is that if they file 
Chapter 11 they can jettison their pension plan and not be 
responsible. And whether they are eventually responsible or 
not, it is kind of cloudy or unclear as to what maybe our laws 
might change.
    Mr. Belt. The one thing I would note in that regard, that 
may be where you end up, that we would vigorously make the case 
to the bankruptcy court, if the facts and circumstances 
suggested this was the case, that if the pension plans were 
affordable or the company could obtain exist financing and 
still maintain those pension plans, looking at relevant cash 
flow and credit metrics, and we will hire financial advisors 
and investment banks to help us make that case, as will the 
company. But we will vigorously argue in appropriate 
circumstances in the bankruptcy court that the company does not 
meet the distress termination standards; that is, they should 
maintain one or more of their pension plans. Ultimately, we do 
not make that decision, however, we can only make our best case 
to the bankruptcy judge and we may need to make an evaluation 
as to how the judge is likely to rule at the end of the day.
    Mr. Westmoreland. Earlier when I think the Chairman asked 
you a question about extending the payments five, seven, 
twenty-five years out, you made the comment that we need to 
strengthen these and not weaken the amount and that this could 
cause bad behavior with companies. What worse behavior can you 
get somebody to do than file bankruptcy, file Chapter 11, 
jettison their pension program, and then go back in business?
    I am missing something. I know I am a little slow, but to 
me that is rewarding bad behavior and that has been kind of a 
line that we have fallen into. So rather than really honoring 
somebody who wants to do their best to keep their pension going 
and to participate and to keep money in that fund, whether they 
are doing it in two years or four years or twenty years, I 
think that is something good.
    I think that is somebody trying to do good, rather than 
doing, as Ms. Hecker talked about, when 60 days or whatever it 
was before one of the airlines filed bankruptcy they increased 
the benefits 45 percent or whatever. To me, that is rewarding 
bad behavior. I think when somebody is trying to work out their 
problems and trying to do the right thing, we need to be of 
assistance to them and not really make a comment that we are 
trying to reward bad behavior. You can answer that if you want 
to. But if not, Mr. Chairman, that is my last comment.
    Mr. Kennedy. The gentleman's time has expired. Mr. 
Pascrell.
    Mr. Belt. Mr. Chairman, if I may.
    Mr. Kennedy. You may answer. I am sorry.
    Mr. Belt. Thank you. I think a couple of points to note in 
that regard. There is no question, I want to wholeheartedly 
agree with you, that current law leads to bad outcomes. We have 
seen that manifested in what is happening to the airlines 
industry, what happened to the steel industry, and perhaps that 
could happen in other industry sectors.
    And when companies enter bankruptcy, off-load their pension 
plans, and then are able to emerge successfully, everybody 
loses--workers and retirees lose; other companies that have 
acted responsibly lose, they lose because they may have to pay 
higher premiums to cover those costs, they may lose because 
they are competing against a company that now has lower labor 
costs than they do; the system loses because the Government is 
subsidizing the ongoing labor costs of a company for as long as 
that company is around; and ultimately the taxpayer may be at 
risk. So there is no question there needs to be a better way.
    There is a better way. The better way is to make sure that 
companies fully fund their pension plans on an ongoing basis. 
There is nothing from a governmental perspective in my view 
that we can or should do to change the business cycle; 
companies' business models are going to come and go, companies 
are going to occasionally fail. I am not sure we can or should 
do something to change that.
    But what we can and should do something to change is the 
fact that if the company sponsors a defined benefit plan, 
making sure there are sufficient assets to cover the promises 
they have made so all the other stakeholders do not lose if 
that company does go into bankruptcy or it does liquidate. I 
think that is critically important.
    I am also not trying to suggest that we are rewarding bad 
behavior. The point I was trying to make is there is a lot of 
moral hazard in the pension insurance system right now. You 
have socialization of private risk-taking, the public sector 
taking over private risk-taking. That is a risk in and of 
itself.
    The concern is what message does it send to everybody else 
in the system that perhaps is 80 percent funded, 85 percent 
funded, that now has to operate under a tighter set of funding 
rules. In the Administration's proposal and in the bill marked 
up in the House Education and the Workforce Committee, they 
have seven years to make that up. Well, that is going to be an 
onerous call on cash for some of them. But that is because they 
are fairly underfunded right now.
    If we give a lot longer period of time to certain 
companies, does that suggest every company that is similarly 
situated may engage in behavior to not responsibly fund their 
pension plans so as to get the ability to stretch out their 
pension obligations over a long period of time so they can 
devote those current resources, which if I were in their hat I 
would like to do, to other uses, building widgets and making 
profits for their shareholders. And I think that is the trade-
off we have to work through.
    Mr. Kennedy. I thank you. Mr. Pascrell.
    Mr. Pascrell. I would like to start with where you just 
ended, Mr. Belt. And I want to refer to my friend from Georgia, 
I think you hit the nail right on the head. I think you were 
clear in breaking down to very elemental parts what we are 
facing. Trade-offs. You cannot trade-off somebody. You cannot 
trade off the fact that we are talking here about a defined 
benefit that is not guaranteed. Figure that one out. And you 
wonder why we have lost--well maybe you do not wonder why--we 
have lost our credibility besides we have lost our way.
    In 1974, if I interpret what you are saying, Ms. Hecker, 
correctly, ERISA set forth a pension plan and rules were 
established at that point, right, in 1974, to define how much a 
company had to put away to meet its pension obligations--1974.
    So when I hear, in response to my good friend from Michigan 
that he is not so sure whether laws were broken, most of the 
problems we face down here are irresponsibility within the law. 
There is a law, Congress establishes that law with the 
President, and then within that law people are finding all 
kinds of way to get out of their original obligations. Now, we 
want to protect and we want the airline industry to grow. And 
that industry is really an odd bird if you look back over the 
past 30 years.
    When you look at pensions, benefits, cost of oil, and 
working conditions, all of them have been blamed for every 
downturn we have ever had in the airline industry. In fact, you 
can go back to the early 1980s when the President fired all the 
air traffic controllers. The three worst years in the airline 
industry occurred after that. It obviously was not the air 
traffic controllers that were causing all the problems in the 
airline industry, was it, Ms. Hecker?
    But when I look at this, I want to ask you, if I hear you 
correctly about these defined benefits that are not being 
guaranteed within the law and now we have proposals from the 
Administration to change the pension rules, some of them, I 
want to ask you a question. What do you think are the two most 
flawed rules dealing with the very pensions we are talking 
about today? What do you think are the two most flawed rules, 
and what would you recommend we do about those two rules since 
the system is not working?
    Ms. Hecker. I will ask Ms. Bovjberg who has done this work 
to reply.
    Mr. Pascrell. Sure.
    Ms. Bovjberg. In answering your question, Mr. Pascrell, I 
want to talk a little bit about why the rules are a certain 
way.
    Mr. Pascrell. As long as you answer the question, sure.
    Ms. Bovjberg. I will be brief. They are designed for going 
concerns. They are designed for the long-run. They are designed 
to give sponsors flexibility to adjust contributions in 
response to a changing environment, to have a certain period in 
which to do that. And the presumption is that they will do that 
and 30 years down the road they will have the money to pay 
their pensioners. And if something unforeseen should occur, the 
PBGC would be there because they have paid their premiums to 
the PBGC.
    Mr. Pascrell. The pension is for the long run, too, besides 
the rule.
    Ms. Bovjberg. That is right. That is right. You want to 
protect your participants.
    Mr. Pascrell. So what are the two rules that are most 
flawed?
    Ms. Bovjberg. Credit balances, the use of credit balances. 
What we have seen is that this just does not work. When you 
have a run up in the stock market, you have assets that are 
skewed to stocks so there is a lot of risk in some of these 
plans either run up in the market and then the sudden fall off. 
The credit balances just do not work in that situation. That 
was not something foreseen in previous Congresses in writing 
these rules, and it is something that we clearly need to fix. 
That would be my number one.
    Mr. Pascrell. And what is the second one?
    Ms. Bovjberg. I think it is really a toss-up in terms of 
whether you deal with transparency and disclosure. It is very 
difficult for the PBGC and the Department of Labor to regulate 
pensions when it is difficult for them to get timely 
information and accurate measurement.
    Mr. Pascrell. Who do you get that information from?
    Ms. Bovjberg. From the sponsors.
    Mr. Pascrell. And why are they reluctant or why are they so 
slow to get the information to you?
    Ms. Bovjberg. Because we say that under the statute they 
have over 250 days to report their assets and liabilities on 
the Form 5500 to the Department of Labor. Now PBGC, as Mr. Belt 
mentioned earlier, can get better information more quickly 
through the 40-10 process. That is not even available to us at 
GAO. It is not available because it is considered proprietary 
information by law. We need better information, we need more 
accurate measurement, and we need it more quickly.
    Mr. Pascrell. One final question if I may, Mr. Chairman. Do 
you think that these pensions should be guaranteed in the same 
way that the Federal Government guarantees the dollars I put 
into a bank account up to a certain amount of money? Do you 
think that is the best way or it is a way, a good way to ensure 
credibility where there is much credibility lacking right now?
    Ms. Bovjberg. I am much less familiar with the banking 
system and the FDIC than with pensions and PBGC. But I do think 
that there is a range of approaches that the Federal Government 
has used with insurance. And the pension insurance program is 
not a real insurance program the way we operate it. I do think 
that we should look at that. Premiums really do not have very 
much to do with the risk that a company will go out of business 
and leave an underfunded plan, for example.
    Mr. Pascrell. Thank you very much. Thank you, Mr. Chairman.
    Mr. Kuhl. [Presiding] The gentleman's time has expired.
    The Chair would recognize Mr. Costello.
    Mr. Costello. Let me just quickly follow up with two quick 
questions and then I will yield the balance of my time to Mr. 
DeFazio. To follow up on the gentleman's question, when you 
talk about the 250 days that they have to report, we are 
talking about legacy airlines that use different accounting 
practices and, depending on the interest rates they are using, 
it can be very deceiving if an airline wanted, for whatever 
purposes they had, to either hide or disguise or whatever their 
underfunding of their pension fund. Is that not true? There is 
not a uniform standard that must be followed.
    Ms. Bovjberg. There is a standard but there is a lot of 
flexibility within that standard.
    Mr. Costello. And is the flexibility in the interest rate?
    Ms. Bovjberg. Oh, yes. There is a corridor of interest 
rates that you can use. One thing I do want to say. Our funding 
rules report where we looked at the 100 largest plans over time 
and their funding situation and what they contributed suggested 
that when companies begin to have financial trouble themselves 
is when you see people putting in the most minimal 
contributions and relying entirely on credit balances and 
gradually becoming underfunded.
    Mr. Costello. So the issue of the interest corridors is an 
issue that you would recommend has to be addressed as well?
    Ms. Bovjberg. Yes. And it must be addressed because the 
same law that provided the DRC clause for the airlines that 
expires at the end of the year also temporarily altered the 
interest rate for those calculations.
    Mr. Costello. Thank you.
    Mr. Belt, a final question, and then whatever time I have I 
will yield to Mr. DeFazio. I see the Chairman is back and maybe 
he will yield to him a full five minutes after I am finished. 
Mr. Belt, on the issue of the legacy airlines and the point 
that Mr. DeFazio made earlier about what we can expect in the 
future with those airlines that have not gone into bankruptcy, 
as a practical matter, if you are the CEO of airline A and I am 
the CEO of airline B, airline A files under Chapter 11, they 
are allowed to take their employees and their pension 
obligations and put them in the PBGC, and I am airline B, you 
certainly have a competitive advantage over me because I am 
still funding my defined pension plan, you no longer have the 
obligation to do that, you can set up a 401(k) or whatever you 
choose to do.
    So as a practical matter, when we take an airline, if it is 
United or whoever it may be, U.S. Air, or any other airline, 
and they go to the PBGC because the bankruptcy court allowed 
them to do so and put their pension obligations on the PBGC, it 
presents major problems to the remaining airlines who have 
defined plans. Is that not correct?
    Mr. Belt. It certainly does present a competitive pressure 
issue. Although as Ms. Hecker noted in her testimony, it is one 
of many cost elements or cost pressures facing a company.
    Mr. Costello. Sure, 17 percent, one-sixth. But all of these 
legacy airlines are very, very close to the margin. So if you 
offer them relief in the area of 16 or 17 percent of their 
revenue or somewhere in that area, it can make a difference.
    Mr. Belt. That may be the case. I might suggest, 
Congressman, that the situation is not a homogenous one; that 
is, the financial status of the pension plan as well as the 
plan sponsor is different for each of the legacy carriers. 
Certainly, I am not an expert in this, as Ms. Hecker is, but if 
you read industry analysts, Wall Street analysts and others, 
they will suggest that the condition and the issues that are 
facing Delta versus Northwest versus American versus 
Continental both with respect to their overall business 
conditions, the degree of leverage in the company, their costs, 
their revenues, as well as their pension obligations are 
distinct from one another.
    Mr. Costello. When we talk about pension obligations and we 
use the one-sixth or approximately 17 percent, whatever it may 
be, are we talking about health care benefits as well? We are 
not, are we? So if a legacy airline files bankruptcy and this 
17 percent of their overhead, so to speak, they are able to 
shed that by putting it into the PBGC, they also are getting 
rid of health care costs as well that my CEO of airline B has 
to continue with the defined benefit plan plus the health care 
for my retirees.
    So that adds an additional element onto the cost and the 
competitive advantage of the airline that goes into Chapter 11 
and dumps their obligations on the PBGC versus airline B who is 
trying to continue under the defined plan and to take care of 
their retirees with both pensions and health care. Is that not 
correct?
    Mr. Belt. Of course, we do not insure health care benefits. 
That is something that would be covered by the collective 
bargaining agreement in a unionized context, and then it is 
ultimately a matter of whether the bankruptcy judge allows them 
to abrogate the collective bargaining agreement. They usually 
try to force management and the unions to sit down and 
negotiate out solutions or resolution of issues and you often 
see that happen at the last minute before the 1113 process 
begins.
    Mr. Costello. Let us take an example of U.S. Air. They went 
through the bankruptcy process. No longer do they have 
obligations to their defined benefit plan. Do they have 
obligations to their retired employees for health care costs? 
The point that I am trying to make is when we say that we are 
only talking about 16 percent of the operating cost or the 
fixed obligations, you have got a health care component here as 
well that is a substantial obligation that they are able to 
shift and get away from as well.
    Mr. Belt. I simply do not know, perhaps GAO does, as to 
whether or not part of the agreements they have reached with 
their various unions whether they are paying health care 
benefits. I think clearly to have a workforce, to have people 
be willing to come to work, you have to provide at least some 
level of wages, you have to provide some level of benefits 
whether it is a DB or a DC, and probably some level of health 
care benefits. But that is something that is ultimately 
negotiated between the management and the workforce, and I 
simply do not know in the U.S. Airways context what level of 
health care coverage they provide.
    Ms. Hecker. Perhaps we can supply something for the record 
to clarify that.
    Mr. Costello. The only point I am trying to make is that 
the 17 percent or the one-sixth is misleading. There are other 
obligations that they are able to walk away from in the area of 
health care. Mr. Chairman, thank you.
    Mr. Mica. [Presiding] Thank you. Mr. DeFazio.
    Mr. DeFazio. Thank you, Mr. Chairman. To Mr. Belt, on the 
previous line of questioning about companies emerging from 
bankruptcy becoming subsequently healthy, or the fact that you 
adjusted a settlement with a company because of conditions in 
bankruptcy. As I understand it, you have got some sort of 
equity basis negotiated with United in order to sign off on 
accepting the obligations of United.
    Could you have a contingency that would say should this 
company emerge in the future they would be required to restore 
something beyond your guarantees and/or, on the other side of 
the equation, that they would be required to replace some of 
your guarantees?
    Mr. Belt. Theoretically, yes. I think the practical 
question, Congressman, would be whether to put such an 
agreement in place the company would enter into such an 
agreement, or if such an agreement was in place they would be 
able to obtain exit financing and be able to emerge from the 
Chapter 11 process. That is the thorny issue in all of these 
situations.
    Mr. DeFazio. Right. So basically the employees are always 
going to get screwed. Because when you go for exit financing 
they will say, oh, wait a minute, we will pay for your planes, 
we will give you some money to buy fuel, we will give you some 
money for the CEO's golden parachute, but I am sorry, we are 
not going to give you any exit financing to meet your pension 
obligations for your employees. Is that not basically the way 
it is working?
    Mr. Belt. That was an issue that actually arose before. 
Earlier on in the United process we actually objected to a 
provision of the debtor in possession financing agreement, this 
was going back last year, that could have been read to say, and 
this is what the company said was imposed upon them by the 
debtor in possession lenders, do not put any of the money we 
are giving to you into the pension plan. And the company used 
the word it would be ``irrational'' from our standpoint, and 
this was in the information brief filed by the company, to put 
money into the pension plan. And I guess from a pure business 
financing perspective, that is perhaps the case.
    Mr. DeFazio. Right. So basically the employees and PBGC are 
going to be the losers in every one of these bankruptcies.
    Mr. Belt. That is why I suggest that there are bad outcomes 
given the way the current law works.
    Mr. DeFazio. But you do have that theoretical negotiating 
authority. Would that need to be strengthened? Could we put a 
requirement on you that you attempt to negotiate those kinds of 
provisions? Could we put some sort of requirement on a 
bankruptcy judge that those things be looked upon favorably in 
order to provide future Federal bailouts of PBGC?
    Mr. Belt. Along the spectrum right now you kind of have the 
binary outcomes, it is either an all or none proposition. And 
it seems to me that there might be some way to look at some 
possible middle ground. I mean, certainly any other lender, GE 
or anybody else, is willing to have a conversation with the 
debtor about restructuring an obligation on certain kinds of 
terms.
    But I think one would need to be careful about how much is 
mandated or imposed, whether you actually throw the baby out 
with the bath water because you may forestall the ability to 
ever emerge and obtain exit financing. Again, that is part of 
the consideration of what is the Bankruptcy Code intended to 
do, which is outside my bailiwick.
    Mr. DeFazio. For average consumers now or at least some 
consumers, we have said you cannot discharge your debts, you 
are going to pay forever to the credit card companies. 
Companies get a different leeway here when it comes to their 
pensions I guess.
    Just one other question, and I know this is a policy area. 
Do you have any numbers on what it would cost if the pilots did 
not take a hit because of the fact that they cannot work past 
age 60 and they have to take a mandatory hit in their 
guarantees? You are going to reduce your guarantee because they 
cannot work to age 65, which is the point at which you would 
give your maximum guarantee, and/or have you ever looked at say 
a flight attendant who has got 30 years, who is fully vested, 
who is 53 years old, now you are going to have to say you have 
got to work to 65.
    Has there ever been any review, discussion, or numbers on 
the fact that this is kind of a bad system where you are saying 
to people who have 30 years and they are in a stressful and 
difficult job, well, you have got to work until you are 65, or 
someone who has to retire at age 60 that you have got to work 
to 65 or reduce your guarantee?
    Mr. Belt. We have our chief policy actuary here, Dave 
Gustafson. I do not know if he thinks those numbers can 
actually be calculated, and I invite him to answer that, as to 
whether it could be calculated so we can provide information 
for the record.
    Mr. DeFazio. Yes. There are some issues of equity there.
    Mr. Belt. I would note again, everything is ultimately a 
set of trade-offs. Our losses are
    Mr. DeFazio. Right. I understand. But it is people's lives. 
Is there anything available now?
    Mr. Gustafson. We have not done anything so far. But it is 
something that we could provide an estimate for.
    Mr. Mica. Someone is going to have to repeat that into the 
record.
    Mr. Belt. Our policy actuary just noted that is he believes 
information that could be provided for the record that we could 
estimate.
    Mr. DeFazio. Okay. Thank you. Thank you, Mr. Chairman.
    Mr. Mica. Thank you. Long-waiting Mr. Price, you are 
recognized.
    Mr. Price. Thank you, Mr. Chairman, and I once again want 
to thank you and the Ranking Member and the entire Committee 
for the opportunity to be with you. I just want to ask a couple 
of quick questions of Mr. Belt. The pension funding act of 2004 
provided temporary reduction in the deficit reduction 
contribution schedule for the airline industry. That expires at 
the end of this year, as was stated. That was meant to be 
temporary, was it not, to allow time for a permanent solution 
to be found? It was not meant to be a permanent solution, was 
it?
    Mr. Belt. That is correct. The anticipation, and I was not 
at the helm of the PBGC at the time, was that that relief would 
be temporary, would expire at the end of this year. And I think 
the expectation of all parties was that there would need to be 
comprehensive pension reform and that would allow sufficient 
time to
    Mr. Price. If we would figure out what the solution is. 
When the relief expires though the airlines will face 
tremendous liquidity and cash flow problems, I do not think 
anybody would disagree with that, and many of them may find it 
difficult to operate and move them toward the bankruptcy that 
has been talked about. So I have a couple of very specific 
questions. One is, do you have a handle on what the expected 
fallout would be in the funding contributions of the airlines 
if the relief expires and nothing is done?
    Mr. Belt. I believe they have made public statements as to 
what under current law would be their required pension 
contributions over the next few years, and they are substantial 
sums. I do not know whether in the numbers that they have used 
they are contemplating the continuation of the corporate bond 
rate, essentially the relief that was provided in PFEA, the 
2004 Act, or snap back to the Treasury discount rate. In either 
event, it is a substantial number because they are within the 
DRC contribution rules at this point in time.
    But I would note that that issue, as to what happens at the 
end of this year, is not unique to the airlines. That would in 
fact affect everybody that is in the defined benefit system. 
And again, there are eight or ten auto parts suppliers that 
have filed Chapter 11 recently that sponsor underfunded pension 
plans, and there are a host of other companies similarly 
situated. So it is not at all unique to the airlines. What is 
only perhaps unique is the size of the funding gap, the total 
dollars involved with respect to the legacy carriers.
    Mr. Price. Do you all have a ``what if'' strategy, what the 
potential impact for the PBGC if another airline were to 
declare bankruptcy?
    Mr. Belt. We certainly know our potential loss exposure 
from the remaining carriers, which is about $22 billion.
    Mr. Price. You are currently underfunded at $23 billion, 
correct?
    Mr. Belt. Correct.
    Mr. Price. Just one final question. I know that PBGC has an 
opportunity to speak confidentially with airlines or with any 
company if there are problems. Can you say whether or not you 
are having any discussions right now with any airline company?
    Mr. Belt. We have had meetings with all our best customers 
on a regular basis, including airline companies. We share 
information, we try to get a better of understanding of what 
the issues are, what the level of underfunding is, what the 
minimum contribution requirements are, what the plan of action 
is for meeting those.
    We not only have conversations with airline executives, but 
any company that poses a potential risk of loss to the pension 
insurance program whether they are a high default risk and/or 
substantially underfunded. We get information from a variety of 
sources. We talk to industry analysts, investment bankers, and 
others about trend lines in industries, issues with respect to 
particular companies.
    Mr. Price. Thank you. I want to thank the other panel 
members. And again, I appreciate the opportunity to join you 
today. Thank you.
    Mr. Mica. Well, I certainly want to thank our panelists. It 
has been a long afternoon. But you can see that there is very 
serious interest in this critical issue. We will probably have 
additional questions, I have some myself, that we will submit 
to you for the record. So we will leave the record open for 
your responses. But I do want to thank you, all of you, for the 
outstanding information you provided our Subcommittee.
    With that, we will excuse you. Thank you again for your 
participation.
    As they are retiring, I will call our second panel.
    Our second panel consists of Captain Duane E. Woerth, 
President of the Air Line Pilots Association; Mrs. Patricia A. 
Friend, International President of the Association of Flight 
Attendants, CWA, AFL-CIO; Mr. Mark S. Streeter, Managing 
Director of JP Morgan Securities; Mr. David Strine, he is 
Managing Director of Equity Research of Bear Stearns and 
Company, and we also have Scott Yohe, Senior Vice President, 
Government Affairs, also a communications specialist in 
distributing information about measures the Chairman does not 
like, and he is from Delta Air Line.
    I would like to welcome all of our witnesses. Some of you 
have been here before, some of you have not. We appreciate your 
being available to the Subcommittee today.
    With those introductions, I think everyone is ready. I will 
go ahead and recognize first Captain Duane Woerth, president of 
the Air Line Pilots Association. Welcome, and you are 
recognized.

   TESTIMONY OF CAPTAIN DUANE E. WOERTH, PRESIDENT, AIR LINE 
     PILOTS ASSOCIATION; PATRICIA A. FRIEND, INTERNATIONAL 
PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS, CWA, AFL-CIO; MARK 
  S. STREETER, MANAGING DIRECTOR, JP MORGAN SECURITIES; DAVID 
 STRINE, DIRECTOR OF EQUITY RESEARCH, BEAR STEARNS & COMPANY; 
  AND SCOTT YOHE, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, 
                        DELTA AIR LINES

    Mr. Woerth. Thank you, Mr. Chairman. Thank you for holding 
this hearing. What I would like to focus on is solutions. I 
have heard an awful lot about how we got here and all the 
problems with the rules, and I would like to focus on solutions 
and consequences of not getting the solutions.
    Certainly the Air Line Pilots Association supports the bill 
that was introduced by Congressman Price. It is equivalent to 
the bill introduced in the Senate by Senators Isakson and 
Rockefeller. We believe that bill, which provides a pension 
freeze, long-term amortization, new interest rates, is the 
solution that does the three things we would want to do.
    It protects worker's pensions, the pensions will not be 
lost; it can keep the airline out of bankruptcy so further 
damage to shareholders and creditors does not occur; and just 
as importantly I know for the interests of this Congress, it is 
probably the only solution that can stop another United or U.S. 
Airways where billions of dollars more end up being terminated 
and put on the Pension Benefit Guarantee Corporation. This bill 
will do all those things and prevent that. So that is the 
number one thing I would like to advocate.
    I would like to also comment in this regard. Previous 
testimony, portrayed this legislation as doing something 
radical or something controversial. The very fact of the matter 
is that it is doing the common sense thing that has been part 
of ERISA since 1974. Long-term pension obligations need to be 
funded and amortized over a long period of time. All that money 
is not due next week, it is not all due next year.
    Mr. Chairman, I think you made a very pertinent comment 
about the public sector, where if the public sector lived under 
the same problems, the Federal Government, State, 
municipalities and counties would have an awful serious problem 
and I do not think we want those going into bankruptcy. But I 
want to emphasize that point. This is not unreasonable long-
term amortization. In fact, ERISA when it was formed in 1974 
anticipated 30 year amortization in all of these things. So I 
think it is a very reasonable approach.
    Another thing that must be addressed is the sheer numbers 
that we are talking about. At United Airlines it was 125,000 
workers, with U.S. Airways it was nearly 80,000, Delta and 
Northwest would be another 200,000 combined, if downstream 
there was competitive problems for other legacy carriers, there 
would be another couple hundred thousand. We are talking over 
half a million workers exposed just in the airline industry 
with legacy carriers. I think that should be plenty of 
motivation to do something and do it in the near term.
    I would mention this as well. We have an example just north 
of the border where the Canadians had a similar problem. Air 
Canada was in bankruptcy. Air Canada could not get exit 
financing, the things that Mr. DeFazio talked about. The credit 
markets, and we have people here from the capital markets who 
can speak to it, when they looked at these defined benefit plan 
amortization schedules and how much money was due over a very 
near period of time in Canada, Air Canada could not get its 
financing until the parliament acted.
    When the parliament acted and gave them long-term 
amortization, they had competitive bids and they got their 
financing and exited bankruptcy within 41 days. Now, I am not 
predicting an exit in 41 days if somebody stumbles in, but I 
think I am going to leave it to Mr. Streeter and his colleagues 
to talk about what the capital markets think about the 
amortization schedule and why airlines are financeable either 
to get out of bankruptcy or to stay out of bankruptcy if we 
have long-term amortization at a new interest rate.
    In the interest of time, Mr. Chairman, I would like to move 
on. I will take any questions you or your colleagues may have. 
Thank you.
    Mr. Mica. Thank you for your points. We will hear from all 
the witnesses and then go to questions.
    I will now recognize Patricia Friend, International 
President of the Association of Flight Attendants. Welcome 
back. You are recognized.
    Ms. Friend. Thank you, Chairman Mica, and thank the 
Committee for the invitation to testify today on this pension 
crisis. The crisis in the airline industry is of particular 
importance to the people I represent, to the women and men who 
serve as flight attendants. We represent 46,000 active flight 
attendants at 24 airlines. Our active and retired flight 
attendants at United Airlines number approximately 28,000.
    Over the past several weeks and again here today, we have 
heard some thoughtful and well-informed testimony on the 
financial status of pension plans in the airline industry and 
on the long-term viability of those plans. We have also heard 
about the ramifications of the United pension terminations, and 
potentially other pension terminations, on the financial health 
of the PBGC.
    But I would like to remind the Committee that issue has a 
human dimension. To get a feel for how these individuals will 
be affected, I urge you to read just some of the thousands of 
testimonials that were submitted to Congressman George Miller's 
online hearing.
    Some Members of the Congress have asked me if we really 
think that liquidation of our company would be better for us in 
the long run. That question implies that by seeking to save our 
pensions we will cause the eventual failure and liquidation of 
our employer. The fact is that the employees of this industry 
have made repeated financial concessions over the past several 
years just to keep our airlines alive and profitable.
    We have much more at stake in the airline's survival than 
do most members of upper level management. In this industry 
management comes and goes, often with a huge financial 
incentive to do so. In fact, United's current CEO, Glenn 
Tilton, can leave the company and still collect his bankruptcy-
proof $4.5 million pension.
    Over the past several months AFA has worked with the PBGC 
and with United Airlines to find a solution to the termination 
of our pension plan. During this time the PBGC maintained that 
the flight attendant plan was affordable and that it could be 
retained in a successful reorganization. At the same time, we 
attempted in vain to engage United management in negotiations 
over alternatives to plan termination. United Airlines 
management demonstrated very little real willingness to engage 
in meaningful negotiations with us about saving our plan.
    During February and March of this year, we regularly 
consulted with the PBGC as we developed a proposal that 
identified sufficient alternative funding to save our pension 
plan. On April 14th, the PBGC filed an emergency motion to 
postpone consideration of United's motion for distress 
terminations of its defined benefit plans, calling United's 
motion premature and arguing that United Airlines had failed to 
show that the plans were not salvageable.
    Then, on April 22, United announced that it had reached an 
agreement with the PBGC, an agreement in which United agreed to 
provide $1.5 billion to the PBGC and the PBGC would agree to 
terminate all four employee pension plans.
    Our concerns with United's termination of the flight 
attendant pension plan and the PBGC's decision to withdraw 
their challenge to the termination are numerous. However, 
simply put, we do not believe that the termination of our 
pension plan is necessary for the survival of United Airlines. 
We have tried repeatedly to negotiate with the company on 
alternatives. In fact, we are the only work group that has 
offered to pay for part of the plan ourselves.
    If United management is successful in their efforts to 
terminate our pension plans, no one should be under any 
illusion--the other so-called legacy carriers will attempt to 
dump their pension plans as well. And if you, the distinguished 
members of this Committee, allow this to go forward, it is 
probable that there will soon be a need for a massive taxpayer 
bailout of the PBGC.
    If something is not done now, it will be too late for the 
United employees. I am strongly urging each and every member of 
this Committee to cosponsor H.R. 2327, the Stop Terminating Our 
Pensions Act, or the STOP Act. This bill would put in place a 
six month moratorium for any termination of covered plans 
initiated by the PBGC under ERISA 4042. this would give the 
Congress valuable time to explore further solutions to the 
crisis at United, and it would also allow time for the employer 
and the unions to develop and agree on alternatives to plan 
termination.
    We strongly believe that the United flight attendant 
pension plan is viable and can be saved, but we need your help 
in providing the time and the incentive for management to work 
with us to find the solution. United's pension termination is 
not the first nor will it be the last domino to fall on the 
path to the destruction of retirement security.
    But you can help put a stop to it today and help prevent 
hundreds of thousands of other workers from losing their 
pension and prevent billions of dollars from being dumped on 
the taxpayers if you allow this moratorium to pass and if you 
find a legislative solution to halt the demise of the define 
benefit pension plans in this country.
    I urge the Committee to please give us the time that we 
need to try to save our pension. I urge you to consider and 
pass H.R. 2327 as quickly as possible. Thank you.
    Mr. Mica. Thank you for your testimony.
    We will now hear from Scott Yohe, Senior Vice President for 
Delta Air Lines. Welcome, and you are recognized.
    Mr. Yohe. Thank you, Chairman Mica, Congressman Costello, 
Congressmen Price and Westmoreland. Thank you for the 
opportunity to address the pension funding crisis threatening 
Delta's ability to honor the pension benefits our active 
employees and retirees have already earned.
    A sensible resolution of this crisis is absolutely 
essential if Delta is to successfully restructure its business 
outside of bankruptcy. As a son of a Delta pilot and a 26 year 
employee of Delta, it is a real privilege for me to be here 
today to appear before you on behalf of 80,000 active and 
retired employees as well as another 80,000 dependents who are 
all members of the Delta family and who support very much the 
testimony that I am providing today.
    We have also worked very closely with our employees and 
retirees in addition with Northwest and the Air Line Pilots 
Association to develop a response to what Congress did last 
year in providing a two-year moratorium, and that is to develop 
a sound and sensible solution to this pension funding crisis. 
Our shared goal is very sensible. It is a transition funding 
rule that helps us to meet our obligations and avoid 
transferring the liabilities to the Pension Benefit Guarantee 
Corporation and avoiding the tragedy that has already befallen 
the workers at U.S. Air and United.
    Simply stated, without changes to the current funding rule, 
the prospects for restructuring outside of the bankruptcy 
process are poor. Delta wants to avoid bankruptcy for all the 
reasons that have been discussed here today, including, and not 
the least of which, is to avoid termination of our pension 
plans.
    At this point, I would like to offer a brief explanation as 
to why Delta requires unique pension funding rules. Delta's two 
traditional defined benefit pension plans were actually 
overfunded as recently as 2000. But pension rules, as you have 
heard, discouraged us from making additional contributions. 
Since that time, a combination of historically low interest 
rates and significant declines in the equity market have 
created large funding deficits in the plan and they have 
triggered accelerated payments known as deficit reduction 
contributions. This has also coincided with the massive losses 
that we have incurred since 9-11 and our worst fiscal crisis in 
the 75 years of Delta, making access to capital markets 
absolutely impossible.
    Contrary to what was implied and perhaps suggested earlier 
today, Delta has not neglected funding its plans. We have made 
payments above the minimum requirement during the 2001-2003 
period, and we have made payments of $440 million in 2004. We 
have already made payments this year of over $200 million and 
additional contributions of $60 million will be made during the 
balance of 2005. However, without changes in the funding rules 
as they exist today, our contributions over the next three 
years are projected at $2.6 billion, a level that we simply 
cannot afford given our precarious financial liquidity 
condition.
    The new rules proposed by the Administration and House 
Republicans in H.R. 2830 are not helpful to companies like 
Delta. It would only worsen the situation and make bankruptcy a 
probable outcome.
    Delta recognized in 2003 that the traditional benefit plans 
that we had been offering our employees for over 20 years were 
no longer affordable and we set about to replace them with more 
affordable, manageable plans that more reflected the 
competitive cost structure that we found in the industry. We 
created a cash balance plan for our non-pilot workers in 2003, 
and last fall we concluded an agreement with our pilots to 
replace our defined benefit plan with a defined contribution 
plan. Fortunately, Congressmen Price and Westmoreland and 21 
other cosponsors have introduced H.R. 2106 which we believes 
provides a pragmatic airline-specific rule that properly 
balances the interests of all stakeholders.
    H.R. 2106 would allow airlines to fund outstanding pension 
obligations on a more affordable 25 year schedule using stable, 
long-term interest rates. It offers a solution to the crisis in 
the following ways:
    First, employees and retirees would have a greater chance 
to receive their full pension benefits rather than see those 
benefits significantly reduced in a transfer of liabilities to 
the PBGC.
    Second, the bill is designed to protect the PBGC from 
increased future liabilities by capping the agency's guaranteed 
payments at current levels. This decreases the risk of taxpayer 
bailout in the future.
    Thirdly, we think it benefits the travelling public by 
providing stability in the aviation system as the industry 
undergoes massive change and restructuring.
    Lastly, and certainly most importantly for us in the near 
term and why this is so urgently needed now, it would allow 
Delta to remove this pension benefit cloud which inhibits our 
ability to access capital markets, a key component in 
completing the transformation process outside of bankruptcy.
    Let me state clearly and emphatically that Delta is not 
seeking a subsidy. Instead, we are pursing a course that 
significantly limits additional PBGC liability and allows us to 
meet our obligations. I would also point out that Delta and 
other network carriers that are carrying this heavy pension 
benefit provide the vast majority of international service and 
are the primary links to small, rural communities. To 
Congressman DeFazio's point earlier, 50 percent of Delta's 202 
domestic destinations are small cities with very limited 
service options.
    We certainly understand the need for transformation of our 
business and we have not been idle. We have taken 
responsibility for changing our business model to respond to 
the new marketplace. We have made tough but necessary changes 
starting in 2002, such that by the end of 2004 will achieve 
$2.3 billion in annual revenue and cost benefits. However, 
these changes really are inadequate and we have set on a course 
with our transformation plan to take out $5 billion by the end 
of 2006. We believe that with those changes we stand a very 
good chance of becoming a viable airline in the future and 
meeting our obligations.
    We look forward to working with Congress to establish a 
solution that offers a more orderly restructuring of the 
industry and a stronger, healthier airline system. Thank you, 
Mr. Chairman, and I certainly look forward to answering any 
questions you or other members of the Subcommittee may have.
    Mr. Mica. Thank you.
    We will hear now from our two financial and securities 
experts. We will hear first from Mark Streeter with JP Morgan 
Securities. Welcome, sir, and you are recognized.
    Mr. Streeter. Chairman Mica and members of the Committee, 
thank you for inviting me to speak this afternoon. My name is 
Mark Streeter and I am responsible for airline credit research 
at JP Morgan. Please note that my statements do not represent 
the official position of my employer. I will summarize my 
detailed statement which was submitted for the record.
    Unfortunately for the airlines, the credit markets are very 
concerned about the airline industry's fundamental situation 
and looming pension obligations, particularly at Delta and 
Northwest. Based on current prices, the market implies 43 
percent and 55 percent one year bankruptcy probability for 
Northwest and Delta, respectively. For AMR and Continental, 
implied default risk over the next four years is greater than 
50 percent. Delta and Northwest bonds due in only four years 
offer annualized yields near 40 percent and trade at prices 
well below fifty cents to the dollar.
    There are several reasons why the credit markets are 
worried. You have heard others testify about the disconnect 
between industry revenue and overall economic growth since the 
attacks of September 11. I estimate that the fare increases 
this year have thus far, at best, offset only half of the oil 
price increase. Counter-parties are not willing to engage the 
legacy airlines in fuel hedging without cash collateral, making 
it impossible for the legacy carriers to hedge fuel costs.
    The legacy majors have not stood still and have increased 
their unit revenue premium relative to the low cost carriers 
while narrowing their cost disadvantage. But there is obviously 
more work to do. Nevertheless, legacy airline liquidity could 
decline significantly this year. We estimate that Delta and 
Northwest will burn more than $1 billion in 2005, inclusive of 
capital raised year to date unless cash reserves are 
replenished further.
    The industry's ability to add incremental debt, although 
seemingly never quite exhausted, is rapidly diminishing. Since 
2000, airlines have borrowed more than $27 billion. Delta 
credit ratings have fallen 10 notches since the day before the 
September 11 attacks. Northwest ratings have fallen seven 
notches, including yesterday's Moody's downgrade.
    In order to raise capital, the legacy airlines have turned 
to non-traditional lenders such as hedge funds and vendors. The 
legacy airlines could perhaps tap some of these same sources 
for further additional liquidity if pension reform positively 
impacts their credit standing. Delta has disclosed that its 
projected minimum pension funding under the current rules will 
increase to $600 million in 2006, and to more than $1.5 billion 
in 2008. Our estimates for Northwest are similarly dire.
    In my opinion, Delta and Northwest will be forced to seek 
Chapter 11 protection and the termination of defined benefit 
plans unless reform allowing for a longer term amortization of 
deficits for sponsors that agree to freeze plan liabilities is 
passed into law. Legacy Chapter 11 filings are not necessarily 
inevitable. I believe that Delta and Northwest would prefer to 
avoid the Chapter 11 process.
    Most airline and industry observers believe, as I do, that 
too many legacy carriers exist today and that further 
consolidation is inevitable. But further rationalization does 
not necessarily need to occur in Chapter 11 if the Government 
allows the legacy airlines to pursue mergers that make economic 
sense.
    For example, if the Government affords the flexibility to 
stretch payments out over a period of several years, the 
sponsors must be forced to maintain fiscal discipline in my 
opinion. I believe that airlines or other sponsors opting into 
a longer term deficit amortization payment option should not be 
allowed to repurchase stock, should not be allowed to pay 
dividends, and should not be allowed to offer increased defined 
benefits even if they are funded with cash.
    Members of the Committee, if the proposed legislation not 
supported by the airlines is passed into law, I believe, as do 
the credit markets, that Delta and Northwest will likely file 
for Chapter 11 protection within the next 12 months. Nothing is 
guaranteed, but the ability of the legacy airlines to 
successfully structure outside the courts is almost directly 
tied to pension reform that does not result in onerous near-
term deficit reduction contributions at this point.
    The Government has one of two choices in my opinion. Either 
pension reform legislation will add to the already high level 
of cash flow uncertainty, or pension reform will provide some 
degree of comfort to creditors willing to participate in out-
of-court restructuring solutions.
    Thank you once again for allowing me to speak to you today.
    Mr. Mica. Thank you.
    I want to apologize to you, Mr. Strine, you are the last 
witness and I understand you were going to leave earlier and 
changed your plans. So we do appreciate your being with us and 
testifying before the Subcommittee. You are recognized.
    Mr. Strine. Thank you. I am honored to be here. Good 
afternoon Chairman Mica, Representative Costello, and other 
members of the Committee. Thanks for the invitation to testify 
today on the U.S. airline pension issue. I am responsible for 
airline equity research at Bear Stearns. But throughout my 
testimony I will be presenting my personal views, which are not 
necessarily those of my employer.
    The airline industry is certainly in miserable financial 
condition and it is destroying shareholder value. Since 2000, 
the ten largest publicly traded airlines have lost $10 billion 
in market capitalization, and the market index is down 64 
percent versus 20 percent for the S&P 500.
    The airlines have evolved into what is virtually a 
commodity-equivalent business with little to no pricing power. 
The growth of low cost carrier market share has driven 
structural changes in the airlines' ability to price 
discriminate, and the legacy cost carriers have simply not 
moved fast enough to change their high fixed cost structures. 
Through the Darwinian forces of the free market, the industry 
appears ripe for a period of consolidation. If oil prices 
remain high, that may eventually occur regardless of whether or 
not there is a change in pension funding standards for the 
airline industry.
    While there are many reasons for the airline industry's 
financial weakness, the defined benefit pension plan funding 
problem is the focus of my comments this afternoon. My 
conclusion is that the longer the period of amortization of 
pension funding requirements and the higher the interest rate 
benchmark the airlines are permitted to use in discounting plan 
obligations, the more access the legacy cost airlines will have 
to the capital markets in the near term.
    I will cover three basic questions:
    One, what are the financial implications of the existing 
pension funding deficits? Two, how would more lenient pension 
funding standards affect the airlines? Three, what would a 
change in pension funding standards for the airline industry 
mean for shareholders?
    First question. Under ERISA, we estimate that the airlines' 
$14 billion defined benefit pension funding shortfall will 
require $1.2 billion in cash contributions in 2005. This is a 
significant number, but it is only meaningful when considered 
in light of the airlines' ability to make the contributions 
based on their operating cash flows and unrestricted cash 
balances. Keep in mind that cash flow can be quite volatile as 
it is dependent on oil prices, labor costs, as well as the 
revenue environment.
    In the report I have submitted as part of my testimony I 
provide a sensitivity analysis with different assumptions for 
oil prices. Each $1 move in oil costs the airlines about $450 
million annually. For 2005, the $1.2 billion in cash 
contributions represent about 90 percent of our operating cash 
flow forecast with oil at $50 a barrel, and 13 percent of the 
combined unrestricted cash balances of the legacy cost 
carriers.
    This is troublesome, but matters do not improve next year. 
With the expiration of the Pension Funding Equity Act of 2004 
at the end of the year, I estimate that the required cash 
contributions could increase 100 percent, to $2.4 billion in 
2006, representing 60 percent of operating cash flow and 30 
percent of our projected unrestricted cash balances with oil at 
$50 a barrel.
    When examining the airlines individually, my analysis 
suggests that pension related risk among the legacy cost 
carriers operating outside of Chapter 11 differs substantially. 
Considering their ability to make the required pension 
contributions, in descending order, I rank the risks as 
follows: Delta Airlines, Northwest, Continental, American, and 
then Alaska.
    All told, if fares do not increase and oil remains at 
current levels, without more lenient pension funding 
requirements, I believe both Delta Air Lines and Northwest 
Airlines face near-term bankruptcy risk and others could be at 
risk longer-term.
    On the second question, how would more lenient pension 
funding standards affect the airlines? The longer the period of 
the amortization of pension funding requirements, and the 
higher the interest rate benchmark the airlines are permitted 
to use in discounting plan obligations, the lower the cash burn 
rates and the lower the probability of bankruptcies.
    I estimate that pension cash contributions for the legacy 
airlines would fall 87 percent to about $300 million from $2.4 
billion in 2006 if the amortization period for funding pension 
obligations were to change from four years to the twenty-five 
years which has been proposed in Representative Price's bill. 
Under this scenario, I believe bankruptcy risk declines 
significantly, even for the weakest legacy cost airlines, Delta 
and Northwest.
    On the other hand, even excluding the potential increases 
in the funding requirements due to interest rate benchmark 
changes, using the seven year amortization periods that appear 
in the Bush Administration proposal and Representative 
Boehner's bill, I estimate that pension cash contributions 
would fall just 32 percent to $1.6 billion from $2.4 billion. 
Under this scenario, my cash-burn analysis suggests that Delta 
and Northwest have a very high risk of bankruptcy over the next 
year. Certainly the current equity market valuations reflect 
this risk.
    The final question, what would the change in pension 
funding standards for the airline industry mean for 
shareholders? An exception to the funding requirements under 
ERISA for the airlines is not enough in itself to cure the ills 
of the airline industry and halt the destruction of shareholder 
value. Although shareholders and creditors of the airlines that 
face the most severe liquidity problems could benefit in the 
near term from more lenient pension funding requirements, such 
a change only extends the window of opportunity for these 
companies to remedy the inefficiencies in their businesses and 
reduce their operating costs so they can begin the hard work of 
repairing their terribly distressed balance sheets. Even 
excluding the pension issue, the operating cost structures of 
these companies remain uncompetitive.
    What is more, if extending a life line in the form of 
pension relief serves to delay the reduction of other costs or 
keeps companies afloat that would otherwise shrink in Chapter 
11 or by way of Chapter 7, thereby ringing some capacity out of 
the system, the result may well be disadvantageous to airlines 
that already have defined contribution plans or have enough 
operating cash flow to cover their required defined benefit 
plans. Of course, such an outcome is not probable given that 
Chapter 11 itself has been harmful to the overall welfare of 
the airline industry because it sets up a lopsided playing 
field and does not necessarily result in consolidation or 
reduction of supply.
    Ultimately, I believe shareholders will benefit most if the 
natural forces of the free market determine the fate of the 
airline industry. Under such conditions, making decisions on 
how to invest is an easier process. However, without a change 
to the bankruptcy laws and antitrust hurdles that allow for 
easier consolidation of weak businesses, a laissez faire policy 
on pensions will do little to improve conditions for 
shareholders.
    Accordingly, barring changes in other areas of law that 
would provide for swifter consolidation, I believe shareholders 
will benefit in the near term from a change in pension law that 
allows airlines to amortize their required contributions over a 
period well beyond the seven years noted in the Boehner bill 
and closer to the twenty-five year period noted in the Isakson 
bill. Of course, no measure of pension help will solve the 
structural operating cost and balance sheet problems facing the 
legacy carriers. Thanks very much for the opportunity.
    Mr. Mica. Thank you again or your patience, and all of you 
for your testimony.
    A couple of quick questions. I saw the charts that the 
General Accounting Office put up and the small amount of money 
that was being put into these pension plans. We have got a 
couple of employee representatives here, the Flight Attendants 
and the Pilots, were you all aware that they were putting in 
that little money? Did you have access to records, Mr. Woerth?
    Mr. Woerth. First of all, besides my duties as a union 
officer and now president for the last seven years, I was even 
on the Northwest Airlines board of directors from the period of 
1993 to 1999, where they were making pension contributions, but 
also where, like Delta, they did in that period of time run up 
against the maximum legal amount that they could put in without 
incurring a tax penalty. And one of the proposals going forward 
is to eliminate that. But right now, that is water under the 
bridge where are companies are today. One of the things about 
that chart
    Mr. Mica. My question was, were you aware, did you have 
access? I thought someone told me that the employees groups did 
not have access to contribution information.
    Mr. Woerth. I understood the problem.
    Mr. Mica. You understood what was going on?
    Mr. Woerth. Yes, I did.
    Mr. Mica. And what about you, Ms. Friend?
    Ms. Friend. We have a process for a regular accounting on 
the report on the defined benefit plan. The fact is that the 
way the funding rules work, they did not have to put in any 
more. So, yes, we knew.
    Mr. Mica. Did your folks look at it?
    Ms. Friend. We knew what they were putting in. But that 
little amount made it a fully funded plan under the rules.
    Mr. Mica. Did someone actuarially look at this and say this 
is not going to float in the future? They were just putting in 
the minimum that they could under the rules. They had promised 
both of your groups certain pension benefits and what I wanted 
to do was make certain that you had access. If we revise the 
law and you did not have access in the past, what can we do to 
make certain in the future that everything is done to protect 
your interest and the employees' interest. That is the purpose 
for that question.
    Mr. Yohe, you said you were doing 260 this year, Sterns and 
Morgan representatives. We heard GAO say that this only 
accounts for about one-sixth of their costs I guess, and that 
even if we eliminated that, it looked pretty grim anyway. You 
did not have that take. You said the longer you could stretch 
it out, of course, the less they have to put in. So if we 
stretch it out and they still are filing for bankruptcy, do you 
think that will occur, that we putting off the inevitable?
    Mr. Yohe. I think that what extending it over a longer 
period of time does is that it gives them the opportunity to 
rectify the structural problems they have with their cost 
structures. Ultimately, they need to be competitive with the 
folks out there who are setting the prices, and that is the low 
cost carriers. They need to get within their range on their 
unit costs that allows them to have parity in operating monies.
    Mr. Mica. So the longer you stretch it out, the better shot 
they have got at some possibility of survival.
    Mr. Streeter, do you think they will survive even if we 
stretch it out?
    Mr. Streeter. Mr. Chairman, it would give the airlines and 
give the Government an option and an option of time for the 
airlines to continue lowering labor costs, to getting labor 
costs in line with the low cost carriers, to equitizing their 
balance sheets. Delta, for instance, has been pursuing a path 
of exchanging debt for equity and has indicated a desire to do 
so going forward. So asset sales, time to sell assets and to 
use proceeds to try to address the debt burden. But depending 
on your oil price forecast, bankruptcies may be inevitable.
    Mr. Mica. Yes, I just saw that. A dollar is four hundred 
and fifty million. That is pretty substantial. If you do not 
increase prices, you are not going to stay in business.
    Mr. Costello.
    Mr. Costello. Mr. Chairman, thank you. Ms. Friend, you 
mention in your testimony that your organization is seeking a 
six month moratorium on the United pension plan termination. I 
wonder if you might kind of tell us what the rationale and 
reasoning is for that, what you hope to accomplish if you get a 
six month moratorium.
    Ms. Friend. Essentially, what we are hoping to do is stop 
the clock on the process that has been started at United. That 
would give us, the employees, the opportunity and hopefully 
give United management the incentive to work out an alternative 
to plan termination. It would also give the Congress the time 
that they need to review all the various proposals about 
funding rule changes, longer term or amortization of the debt. 
It would simply, as I said, stop the clock on this process that 
has started in the airline industry.
    Mr. Costello. I understand that you are saying that the 
moratorium would give Congress and others time to kind of work 
through all of this. Is that the goal here?
    Ms. Friend. Exactly. That is the goal.
    Mr. Costello. Okay. Mr. Strine, if Delta and Northwest were 
to file bankruptcy and terminate their pension plans, what 
would the likely response be by American and Continental?
    Mr. Strine. Representative Costello, I think that if both 
Northwest and Delta were to file and then terminate their 
pension plans, the risk of Chapter 11 at American Airlines and 
Continental would increase substantially because ultimately 
they would be operating at a significant cash flow disadvantage 
and operating cost disadvantage to those other two companies.
    Let me put it this way. If both of those companies were to 
file for bankruptcy, you would have 45 percent of the capacity 
out there in the industry operating without disadvantage of 
having a defined benefit pension plan. That is going to be 
tough to compete with for the remaining guys with it.
    Mr. Costello. What changes do the legacy airlines need to 
make in order to become competitive?
    Mr. Strine. That is the ultimate question.
    Mr. Costello. You heard me ask it earlier of the GAO. They 
said they had recommendations to reduce cost. It seems to me 
that the legacy airlines have; you have been through it, 
everyone at the table has, we have seen pay cuts, we have seen 
benefits given back. What else can be done in order to save 
money?
    Mr. Strine. I think there are two things. Other than 
continuing to lower wage rates, they can improve productivity. 
That does not mean just having people work more hours and 
changing work rules. It also means simplifying the businesses, 
increasing utilization rates of aircraft, having fewer types of 
aircraft so pilot training costs go down and maintenance 
expenditures go down, getting to a situation where there is 
enough operating cash flow to begin to pull down debt and 
therefore reduce interest expenses. Only through those types of 
measures will they ultimately be able to survive and compete 
with the likes of Southwest and Jet Blue and AirTran.
    Mr. Costello. Mr. Chairman, thank you.
    Mr. Mica. I thank you. Mr. Westmoreland.
    Mr. Westmoreland. Yes, sir. Thank you, Mr. Chairman. I know 
the hour is late and I will try to be brief.
    Mr. Yohe, you mentioned, and Mr. Woerth also mentioned 
about Northwest, that those two airlines I guess in 1999 or 
2000 were bumping the maximum that they could contribute. Did 
the Government set this maximum rate that could be put into the 
pension plans, Mr. Yohe?
    Mr. Yohe. Yes. There is a maximum amount that is allowable 
in order to get tax deduction for those contributions. In the 
year 2000, our plan was at 114 percent funded at that point. I 
would just like to make a general comment too. There was a lot 
of conversation today about how carriers and companies' plan 
sponsors have funded their plans or not funded their plans in 
terms of the minimum or whatever. I think what is important to 
look at here is that we did not have a funding problem at all 
until 2002 when we saw this phenomena occur which was the 
deficit reduction contribution kick in because of low interest 
rates and the market.
    Over a very long period of time Delta really never had a 
problem because, as Mr. Woerth said and others have said, you 
are talking about a pension program where you earn benefits 
over a long period of time, you pay them out over a long period 
of time. So there never really was a problem until 2002. The 
deficit reduction contribution requirement was written into law 
in 1987, and neither prior to that time nor subsequent to that 
time did we have the kind of bow wave of payments and 
obligations that is staring us in the face today.
    Mr. Westmoreland. I know the director of education and 
workforce had given out a chart that showed that the airlines 
did not put in but just a very, very small amount. And from 
what I am hearing, during that period of time you were putting 
in what the law would allow you to put in. And from what I am 
hearing your liability is now, was that one reason you gave as 
the total reason that you are that short now? And the other 
part of the question is, what kicks in to tell you how much you 
have now got to pay? I mean the Government set the maximum, do 
they set the minimum also?
    Mr. Yohe. Yes, there is a minimum and a maximum. But 
essentially the way the law works is that if you go below 90 
percent or 80 percent in terms of total fundedness of the plan 
within any two to three year period, then these accelerated 
catch up payments kick in. So then in a very short period of 
time you have a very large payment to make in addition to the 
normal minimum payment as well as the premiums that you would 
be paying.
    So that is really what we are confronted with right now is 
how to deal with those accelerated payments where essentially 
it is like a balloon payment on a mortgage where suddenly you 
owe the entire amount of the mortgage. What we are saying is we 
do not have that money to pay off the full amount, so let us 
amortize that over a payment schedule that is more manageable 
and practicable for us.
    Mr. Westmoreland. And one last question. Mr. Yohe, is it 
not true that Delta really does not want to file Chapter 11 and 
put more responsibility on the taxpayers or on the Government 
retirement system, and that you all would really rather work 
out your problems and all you are asking for is a fair shot to 
do the right thing?
    Mr. Yohe. Well, I appreciate the question. We have made a 
conscious effort and have established a transformation plan to 
try to restructure our company out of bankruptcy. And the 
reason is quite simple. When you go into bankruptcy there is a 
lot of bad outcomes associated with that over and above 
possible termination of your pension plan.
    As was discussed here earlier today, the track record of 
airlines successfully reorganizing in bankruptcy is not very 
good. In addition to that, the creditors and lenders and the 
judge exercise enormous influence and control over a whole lot 
of business decisions of the company affecting pay of 
employees, how you fly your airline and where you fly, how many 
airplanes you have, what hubs you have, et cetera. So you lose 
control to a large degree over a lot of those kinds of issues.
    So we felt that for a lot of different reasons, most 
importantly because we believe that the pension benefits in 
Delta for 75 years is a moral obligation that we have to pay 
what our employees have earned, we want to do everything we 
possibly can to avoid that.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Mr. Mica. Thank you. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman, I appreciate that. And 
I want to thank each of you for coming as well and for your 
patience today. It has been a long day. I had a number of 
questions, but I will just ask one of Mr. Strine and Mr. 
Streeter if I may, and that is to address, if you would, the 
need for industry-specific reform and whether or not you feel 
that is appropriate, whether that is necessary in this 
instance. Just your comments on industry-specific reform.
    Mr. Strine. Just as it pertains to the pension issue?
    Mr. Price. Yes.
    Mr. Strine. Well, I think without it, we are looking at a 
much higher probability of bankruptcy at two of the big legacy 
carriers, Northwest and Delta, which, unless oil prices were to 
decline precipitously, could then result in a higher chance of 
bankruptcy at both American and Continental. So there is 
certainly a risk to the industry and then the rest of the 
industry because you will have such a big portion of it 
operating within Chapter 11 under that protection if action is 
not taken. But by no means is this a guarantee that there will 
not be bankruptcies because oil prices have been climbing every 
day.
    Mr. Streeter. I would say that I cannot speak to the need 
for pension reform outside of the airline industry and whether 
or not the Government and the PBGC should be in the business of 
insuring defined benefit plans. That is a much broader policy 
issue. But I will tell you that for the airlines, without 
pension reform that allows for a longer term amortization of 
these deficits, Delta and Northwest, almost a fairly clear 
certainty, will file for Chapter 11 protection within the next 
12 months, and others, namely, American and Continental, could 
follow depending on certain oil and revenue assumptions.
    Mr. Price. So without that longer amortization, the 
exposure of the taxpayer to liability is significantly 
increased. Is that an accurate statement?
    Mr. Streeter. Absolutely.
    Mr. Price. Thank you, Mr. Chairman.
    Mr. Mica. I want to thank all of our witnesses. Time has 
really run out because we did have about five votes pending on 
the floor. But as I told the first panel, we do have a whole 
host of additional questions which we are going to submit to 
you which will be made part of the record.
    But certainly we want to thank each and every one of you. 
Your testimony has been a great contribution, and the previous 
panel. I think our whole Subcommittee learned a great deal and 
you have educated some of the Members of Congress on the very 
serious challenge facing Congress and really our entire 
american economy at this juncture. So we appreciate your 
participation. We will let you go at this time. Thank you 
again.
    There being no further business before the Aviation 
Subcommittee, this hearing is adjourned.
    [Whereupon, at 6:05 p.m., the committee was adjourned.]
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