[Federal Register Volume 68, Number 151 (Wednesday, August 6, 2003)]
[Notices]
[Pages 46668-46672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19956]


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PENSION BENEFIT GUARANTY CORPORATION


Approval of Amendment to Special Withdrawal Liability Rules for 
International Longshoremen's and Warehousemen's Union-Pacific Maritime 
Association Pension Plan

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Notice of approval.

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SUMMARY: The International Longshoremen's and Warehousemen's Union-
Pacific Maritime Association Pension Plan requested the Pension Benefit 
Guaranty Corporation (``PBGC'') to approve a second amendment to a 
special withdrawal liability rule for

[[Page 46669]]

employers that maintain the Plan. PBGC approved the original rule in 
1984 and an amended version in 1998. 49 FR 6043 (February 16, 1984); 63 
FR 27774 (May 20, 1998). PBGC published a Notice of Pendency of the 
Request for Approval of a second amendment on June 13, 2003 (68 FR 
35462) (``Notice of Pendency''). In accordance with the provisions of 
the Employee Retirement Income Security Act of 1974, PBGC is now 
advising the public that the agency has approved the requested 
amendment with certain modifications.

FOR FURTHER INFORMATION CONTACT: Gennice D. Brickhouse, Attorney, 
Office of the General Counsel, Pension Benefit Guaranty Corporation, 
1200 K Street, NW., Washington, DC 20005-4026; Telephone 202-326-4020 
(For TTY/TDD users, call the Federal Relay Service toll-free at 1-800-
877-8339 and ask to be connected to 202-326-4020).

SUPPLEMENTARY INFORMATION:

Background

    As explained in the Notice of Pendency (see 68 FR 35463-65), the 
International Longshoremen's and Warehousemen's Union-Pacific Maritime 
Association Pension Plan (``Plan'') has since 1984 operated under a 
special modification to the usual employer withdrawal liability rules 
of the Employee Retirement Income Security Act of 1974 (``ERISA''), as 
amended by the Multiemployer Pension Plan Amendments Act of 1980, 
Public Law 96-364, 94 Stat. 1208-1311. Under section 4201 of ERISA, an 
employer who incurs either a complete or partial withdrawal from a 
defined benefit multiemployer pension plan becomes liable for a 
proportional share of the plan's unfunded vested benefits. The statute 
specifies that a ``complete withdrawal'' occurs whenever an employer 
either permanently (1) ceases to have an obligation to contribute to 
the plan, or (2) ceases all operations covered under the plan. See 
ERISA section 4203(a). Under the second test, therefore, an employer 
who closes or sells its operations will incur withdrawal liability. 
Under the first test, an employer who remains in business but who no 
longer has an obligation to contribute to the plan also suffers 
liability. The ``partial withdrawal'' provisions of sections 4205 and 
4206 impose a lesser measure of liability upon employers who greatly 
reduce, but do not entirely eliminate, the operations that generate 
contributions to the plan.
    The withdrawal liability provisions of ERISA are a critical factor 
in maintaining the solvency of these pension plans and reducing claims 
made on the multiemployer plan guaranty fund maintained by PBGC, which 
is much less robustly funded than the comparable single employer 
fund.\1\ In the absence of withdrawal liability rules, an employer who 
participates in an underfunded multiemployer plan would have a powerful 
economic incentive to reduce expenses by withdrawing from the plan at 
the first convenient opportunity.
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    \1\ The PBGC multiemployer guaranty fund receives only $25 
million in annual premiums. In contrast, the single employer funds 
received premiums of $787 million in the 2002 fiscal year. PBGC 
Pension Insurance Data Book 2002 at 2.
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    Congress nevertheless allowed for the possibility that, in certain 
industries, the fact that particular employers go out of business (or 
cease operations in a specific geographic region) might not result in 
permanent damage to the pension plan's contribution base. In the case 
of the construction industry, for example, the work must necessarily 
take place at the construction site; if that work generates 
contributions to the pension plan, it does not much matter which 
employer performs the work. Put another way, if a construction employer 
goes out of business, or stops operations in a geographic area, pension 
plan contributions will not diminish if a second employer who 
contributes to the plan fills the void. The plan's contribution base is 
damaged, therefore, only if the employer stops contributing to the plan 
but continues to perform construction work in the jurisdiction of the 
collective bargaining agreement.
    This reasoning led Congress to adopt a special definition of the 
term ``withdrawal'' for construction industry plans. Section 4203(b)(2) 
of ERISA provides that a complete withdrawal occurs only if an employer 
ceases to have an obligation to contribute under a plan, but the 
employer nevertheless performs previously covered work in the 
jurisdiction of the collective bargaining agreement at any time within 
five years after the employer ceased its contributions.\2\ There is a 
parallel rule for partial withdrawals from construction plans. Under 
section 4208(d)(1) of ERISA, ``[a]n employer to whom section 4203(b) 
(relating to the building and construction industry) applies is liable 
for a partial withdrawal only if the employer's obligation to 
contribute under the plan is continued for no more than an 
insubstantial portion of its work in the craft and area jurisdiction of 
the collective bargaining agreement of the type for which contributions 
are required.''
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    \2\ Section 4203(c)(1) of ERISA applies a similar definition of 
complete withdrawal to the entertainment industry, except that the 
pertinent jurisdiction is the jurisdiction of the plan rather than 
the jurisdiction of the collective bargaining agreement. No plan has 
ever requested PBGC to determine that it shares the characteristics 
of an entertainment plan.
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    Section 4203(f) of ERISA provides that PBGC may prescribe 
regulations under which plans that are not in the construction industry 
may be amended to use special withdrawal liability rules similar to 
those that apply to construction plans. Under the statute, the 
regulations ``shall permit the use of special withdrawal liability 
rules * * * only in industries'' that PBGC determines share the 
characteristics of the construction industry. In addition, each plan 
application must demonstrate that the special rule ``will not pose a 
significant risk to the [PBGC] insurance system.'' Section 4208(e)(3) 
of ERISA provides for parallel treatment of partial withdrawal 
liability rules.
    The regulation on Extension of Special Withdrawal Liability Rules 
(29 CFR part 4203), prescribes the procedures a multiemployer plan must 
follow to request PBGC approval of a plan amendment that establishes 
special complete or partial withdrawal liability rules. Under 29 CFR 
4203.3(a), a complete withdrawal rule must be similar to the statutory 
provision that applies to construction industry plans under section 
4203(b) of ERISA. Any special rule for partial withdrawals must be 
consistent with the construction industry partial withdrawal 
provisions.
    Each request for approval of a plan amendment establishing special 
withdrawal liability rules must provide PBGC with detailed financial 
and actuarial data about the plan. In addition, the applicant must 
provide PBGC with information about the effects of withdrawals on the 
plan's contribution base. As a practical matter, the plan must 
demonstrate that the characteristics of employment and labor relations 
in its industry are sufficiently similar to those in the construction 
industry that use of the construction rule would be appropriate. 
Relevant factors include the mobility of the employees, the 
intermittent nature of the employment, the project-by-project nature of 
the work, extreme fluctuations in the level of an employer's covered 
work under the plan, the existence of a consistent pattern of entry and 
withdrawal by employers, and the local nature of the work performed.
    PBGC will approve a special withdrawal liability rule only if a 
review of the record shows that:
    (1) The industry has characteristics that would make use of the 
special construction withdrawal rules appropriate; and

[[Page 46670]]

    (2) The plan would not be aversely affected by the adoption of the 
special rule.
    After review of the application and all public comments, PBGC may 
approve the amendment in the form proposed by the plan, approve the 
application subject to conditions or revisions, or deny the 
application.

Previous Agency Action Involving This Plan

    The Notice of Pendency explained how the Plan operates under a 
modification to the employer withdrawal liability rules of ERISA, as 
amended by the Multiemployer Pension Plan Amendments Act of 1980 (see 
68 FR 35463-65). Under the initial recension of the special Plan rule-
which was approved in 1984 (see 49 FR 6043)--a complete withdrawal 
occurs if a contributing employer permanently ceases to have an 
obligation to contribute to the Plan, and: (1) Continues to perform 
work of the type for which contributions to the Plan are currently or 
were previously required at any Pacific Coast port in the United 
States; (2) resumes such work-- without renewal of the obligation to 
contribute--at any time before the end of the fifth Plan Year 
commencing after the obligation ceased; (3) sells or transfers a 
substantial portion of its business or assets to another person that 
performs such work without having an obligation to make contributions 
to the Plan; or (4) is found to have ceased Plan contributions in 
connection with the withdrawal of all, or substantially all, employers 
from the Plan as described in 4219(c)(1)(D) of ERISA. Parallel 
provisions were adopted for partial withdrawals.
    Because the Plan had a substantial shortfall between assets and 
vested liabilities, the 1984 approval was conditioned upon the 
satisfaction of twin contribution tests crafted to protect Plan 
participants and the PBGC. First, the Plan was amended to provide that 
``[c]ontributions for each Plan Year shall be not less than the total 
administrative costs and benefits to be paid by the Trustee during the 
Plan Year.'' Second, the Plan committed itself to satisfy a ``Funding 
Goal'' designed to ensure that the Plan accumulated sufficient assets 
to pay for the massive benefit promises already made-but not yet paid 
for-by the bargaining parties. The Plan was required to become 50% 
funded within 10 years, and had to achieve 80% funding in accordance 
with this schedule:

------------------------------------------------------------------------
                          Plan year                             Percent
------------------------------------------------------------------------
10...........................................................         50
11...........................................................         53
12...........................................................         56
13...........................................................         59
14...........................................................         62
15...........................................................         65
16...........................................................         68
17...........................................................         71
18...........................................................         74
19...........................................................         77
20 and over..................................................         80
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    As a result of these measures, the funded status of the Plan 
improved over the next decade, even though the bargaining parties 
instituted continuous benefit improvements under which the monthly 
benefit accruals promised under the labor contract rose by 270%, from 
$26 in 1983 to $70 in 1996. This trend is illustrated by table that the 
Plan presented to PBGC in 1997.

                              Table 1.--Summary of Actuarial Valuation Results \1\
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                                                                   Valuation date
                                   -----------------------------------------------------------------------------
                                       7/1/96       7/1/95       7/1/94       7/1/93       7/1/92       7/1/91
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Number of active participants.....        8,185        7,856        7,682        8,141        8,339        8,469
Number of retired participants....        9,049        9,236        9,244        8,979        9,132        9,214
Monthly benefit accrual rate......           70           69           69           69           39           37
Maximum monthly benefit...........        2,450        2,415        2,415        2,415        1,365        1,295
Contributions (000)...............       99,700       99,696       99,023       87,316       74,139       71,074
Benefits (000)....................       96,900       94,963       92,437       85,293       71,321       68,848
Market value assets (000).........    1,329,082    1,143,335      957,661      950,030      835,063      746,993
Net minimum funding charges w/o          79,154       85,787       81,247       80,034       47,307       43,987
 credit balance (000).............
Normal cost, including operating         20,527       19,180       17,831       18,529       12,821       12,334
 expenses (000)...................
Unfunded accrued liability (assets      534,416      637,646      710,802      664,096      341,037      360,009
 at market value) (000)...........
Unfunded liability--vested              354,821      462,132      530,092      476,168          N/A          N/A
 benefits (assets at market value)
 (000)............................
Valuation interest rate...........          6.5          6.5          6.5          6.5          6.5         6.5
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\1\ Taken from actuarial reports submitted by the Plan to PBGC in 1997.

The 1997 Amendments

    In 1997, the trustees of the Plan submitted a proposed revision of 
their special rules to the PBGC. Their submission represented that 
employer contributions that equaled benefit payments and administrative 
expenses would exceed the limits for tax-deductibility set forth in the 
Internal Revenue Code. The trustees requested PBGC allow them to 
eliminate the contribution floor requirement, and the agency approved a 
modified version of the request in 1998. 63 FR 27774. Under the 
modification, the ``annual contribution equal to annual benefit 
payments'' rule was waived unless the Plan became less than 85% funded; 
if the Plan failed the 85% Funding Goal, then employer 
``[c]ontributions in the following Plan Year shall be not less than the 
lesser of'' the Plan's benefit payments and administrative expenses or 
``the amount required to increase the Funding Percentage * * * to 
eighty-five percent (85%).'' 63 FR 27777. If the Plan failed to satisfy 
these remedial measures, the special withdrawal liability rule would 
become void.

The Background of the Proposed Second Amendment

    In autumn 2002, the Director of the Federal Mediation and 
Conciliation Service (``FMCS'') urgently requested the staff of the 
Secretary of Labor and the Executive Director of PBGC to provide 
technical comments and observations about pension-related issues to the 
International Longshoremen's and Warehousemen's Union (``ILWU'') and 
U.S. based representatives of the Pacific Maritime Association 
(``PMA''). Those parties were then negotiating a new collective 
bargaining agreement for west coast

[[Page 46671]]

ports. Under most circumstances the PBGC would not become involved in 
private sector labor negotiations. As stated in the Notice of Pendency, 
however, the 2002 negotiations were extraordinary in several respects. 
Despite the personal efforts of the Chairman of the FMCS, the parties 
reached a bargaining deadlock and a lockout was called that paralyzed 
the west coast docks. For the first time in a generation, the United 
States government invoked the provisions of the Taft-Hartley Act and 
obtained an injunction from a federal court to halt the work stoppage 
and reopen the ports. The FMCS vouched that no agreement could be 
reached unless federal pension agencies provided informal reactions to 
proposed modifications to the 1984 and 1998 recensions of the rule.
    On that basis, PBGC listened to various proposals and provided the 
FMCS and the parties with general guidance concerning benefit increases 
and temporary changes to the Funding Goal. The ILWU and PMA represented 
that compliance with the 85% Funding Goal would prevent them from 
bargaining for an increase in pension benefits to a level that was 
sufficiently attractive to convince current workers to acquiesce in 
work rule changes and employment reductions desired by the PMA shipping 
interests. They argued also that PMA ``could not afford'' to honor the 
``equal contribution and benefit payment'' rule because PMA ``needed to 
invest elsewhere in the industry.''
    The parties reached an agreement in November of 2002 but did not 
finalize their pension proposals and submit them for formal approval 
PBGC until March 29, 2003.
    Prior to the November 2002 amendments, the Plan was said to be in 
compliance with the 85% Funding Goal established under the 1998 
recension of the special rule.

                                           Table 2.--Select Financial Data Submitted by Plan on March 28, 2003
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                                 Plan year ending     Plan year ending     Plan year ending    Plan year ending    Plan year ending    Plan year ending
                                  June 30, 1997        June 30, 1998        June 30, 1999        June 30, 2000       June 30, 2001       June 30, 2002
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Assets.......................  $1.63 billion......  $1.91 billion......  $2.16 billion......  $2.40 billion.....  $2.22 billion.....  $1.93 billion.
Vested Benefits..............  $1.69 billion......  $1.66 billion......  $1.63 billion......  $1.83 billion.....  $1.99 billion.....  $1.84 billion.
Active Participants..........  8,315..............  8,859..............  9,572..............  9,395.............  10,070............  10,113.
Contributions................  $104 million.......  $35.0 million......  $28.8 million......  $32.5 million.....  $26.9 million.....  $23.5 million.
Benefit Payments.............  $101.5 million.....  $108.0 million.....  $110.6 million.....  $126.4 million....  $132.9 million....  $154 million.
Plan Assets As Multiple of     16.1...............  17.7...............  19.6...............  19.0..............  16.6..............  12.5.
 Benefits.
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    Materials that the Plan submitted to PBGC in March 2003, however, 
indicated that the cost of the 2002 benefit increases caused the Plan 
to fail the Funding Goal from July 2002 through July 2012. Thus, the 
Plan would require annual ``catch-up'' contributions equal to benefit 
payments. The ``catch up'' contributions, however, would greatly exceed 
the amount the Plan would otherwise need to satisfy the ``minimum 
funding'' provisions of the Internal Revenue Code.

       Table 3.--Segal Company Projected PBGC Funding Percentages
                  [Submitted to plan on March 10, 2003]
------------------------------------------------------------------------
                                     Funding      Benefit        Code
               Year                   level       payments     funding
                                    (percent)    (millions)   (millions)
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2002.............................           87         $154           23
2003.............................           84          167           44
2004.............................           80          179           72
2005.............................           76          192           98
2006.............................           71          211          122
2007.............................           67          230          148
2008.............................           68          238          213
2009.............................           71          247          303
2010.............................           76          253          304
2011.............................           82          259          304
2012.............................           88          264          304
------------------------------------------------------------------------

Decision on the Proposed Second Amendment

    The statute and the implementing regulation state that PBGC must 
make two factual determinations before it approves a request for an 
amendment that adopts a special withdrawal liability rule. ERISA 
section 4203(f); 29 CFR 4203.4(a). First, on the basis of a showing by 
the plan, PBGC must determine that the amendment will apply to an 
industry that has characteristics that would make use of the special 
rules appropriate. Second, PBGC must determine that the plan amendment 
will not pose a significant risk to the insurance system. PBGC's 
discussion on each of those issues follows. After review of the record 
submitted by the Plan, and having received no public comments, PBGC has 
entered the following determinations.

1. What Is the Nature of the Industry?

    In determining whether an industry has the characteristics that 
would make an amendment to special rules appropriate, an important line 
of inquiry is the extent to which the Plan's contribution base 
resembles that found in the construction industry. This threshold 
question requires consideration of the effect of employer withdrawals 
on the Plan's contribution base.

[[Page 46672]]

    The characteristics of the west coast longshore industry that 
supported approval of special withdrawal liability rules in 1984 and 
1998 apparently continue to apply today. Specifically, work covered 
under the Plan is dependent on the comings and goings of ocean-going 
vessels at west coast ports. The work must be performed at the port of 
embarkation or debarkation. Thus, the work will continue to be covered 
by the Plan unless future shipping is diverted to Canadian, Mexican or 
Central American ports.
    In addition, an employer in this industry cannot withdraw from the 
Plan while continuing to perform longshore work at Pacific ports: 
longshore work along the entire west coast of the United States for all 
ocean-going dry cargo work is covered under collective bargaining 
agreements that require contributions to the Plan. Because the entire 
coast is one bargaining unit, and all ports through which ocean-going 
dry cargo is shipped are completely organized by the ILWU, it is not 
feasible to load or unload cargo unless contributions being paid to the 
Plan. Moreover, a former employer who did resume operations on a 
noncontributory basis would incur withdrawal liability.

2. What Is the Exposure and Risk of Loss to PBGC and Participants?

    Exposure. The bargaining parties have increased benefits for active 
workers by over 50%, from $95 a month for each year of service to $150 
per month. For a participant who retires with 33 years of service (as 
is typical) the annual benefit rises from $37,620 to $59,400. Thus, 
benefit liabilities will rise substantially. It should also be noted 
that Congress raised the PBGC guarantee for multiemployer plans in 
2001: the guaranteed benefit for a participant with 33 years of service 
has risen from $6435 to $13,365. It follows that PBGC's exposure has 
increased.
    Risk of loss. When the PBGC considered this question in 1998, the 
record indicated that the Plan presented a low risk of loss to PBGC 
guaranty funds. The agency expressed this view because actuarial 
reports for the period from July 1991 through July 1996:

* * * show a stable Plan population, an increase in annual 
contributions ($71.1 million to $99.7 million), and an increase in 
Plan assets ($747 million to $1.329 billion). Plan income has also 
consistently exceeded benefit payouts. The Plan and the covered 
industry have unique characteristics that suggest that the Plan's 
contribution base is likely to remain stable. Contributions to the 
Plan are made with respect to all west coast dry cargo . * * * 
Consequently, the Plan's contribution base is secure and the 
departure of one employer from the Plan is not likely to have an 
adverse effect on the contribution base so long as the level of 
shipping does not decline.

    As noted in the tables (supra) the risk of loss has increased due 
to the funding pressure that the Plan will encounter due to a 
combination of (1) reduced contributions \3\; and (2) increased benefit 
costs spread across a fixed or declining number of employers.

    \3\ If the ``contributions must equal benefit payments'' 
provision of the 1984 amendment had been retained, this Plan would 
have received an additional $639 million in contributions between 
1997 and 2003.
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    Conclusion. The Plan should continue to resemble a construction 
plan so long as virtually all foreign-flag shipping flows into and out 
of west coast ports, and so long as U.S. labor relations law continues 
to treat the ILWU as the exclusive bargaining representative of all 
west coast dockworkers. However, if either condition should change, the 
Plan's contribution base would be at risk. In addition, the Plan will 
be less robust than it was in 1998, and the economic pressures that 
plan funding will place on contributing employers (and, indirectly, the 
workforce) will increase dramatically after 2009--which is exactly the 
point when the Plan falls to its lowest level of funding. In view of 
the foregoing, approval of the amendment should be conditioned, for 
each of the plan years commencing from July 2003 through July 2012, 
upon the Plan's compliance with the enhanced reporting, disclosure and 
certification requirements.
    Wherefore, the following amendments are approved to the enumerated 
sections of the ILWU-PMA Pension Agreement:
    In paragraph 4.4042(c)(iv), the ``Accelerated Funding Schedule'' 
shall be 65% for each plan year commencing from July 2002 through July 
2007; and rising by three percent each year thereafter until it reaches 
80% in the plan year commencing July 1, 2012, remaining at 80% for all 
years thereafter;
    In paragraph 4.4042(c)(vi), the table is amended to state a Funding 
Percentage of 65% for each plan year commencing from July 2002 through 
July 2007; and rising by three percent each year thereafter until it 
reaches 83% in the plan year commencing July 1, 2013, and then 
increasing to 85% for the plan year commencing July 1, 2014, and all 
subsequent years;
    Paragraph 4.402(c)(v) may be amended to allow for revisions of 
certain actuarial assumptions as set forth in the experience study and 
recommendation of the plan actuary in January 2003, but such revised 
assumptions may apply only to plan years commencing after June 30, 
2002; provided, however,
    That the foregoing amendments are approved subject to the following 
reporting requirements;
    (1) The Plan shall provide PBGC with copies of all actuarial 
valuation reports, as well as drafts of such reports, within 5 business 
days after the reports or drafts are received by any of the Plan, its 
trustees, the ILWU or the PMA;
    (2) The Plan shall provide PBGC with copies of all independent 
auditor's reports and financial statements, as well as drafts thereof, 
within 5 business days after the reports or drafts are received by any 
of the Plan, its trustees, the ILWU or the PMA; and
    (3) The annual actuarial certification heretofore filed by the Plan 
with PBGC shall, for all plan years that commence after July 1, 2003, 
be filed with PBGC no later than 90 days after the close of the plan 
year (unless this period is extended by PBGC for good cause shown), and 
this certification shall state whether the contributions received by 
the Plan are at least equal to the amounts listed under column 4 
(headed ``Code Funding'') of Table 3 of this Notice of Approval.
    Based on the facts of this case and the representations and 
statements made in connection with the request for approval, PBGC has 
determined that the Plan Amendment modifying special withdrawal 
liability rules (1) will apply only to an industry that has 
characteristics that would make the use of special withdrawal liability 
rules appropriate, and (2) will not pose a significant risk to the 
insurance system. Therefore, PBGC hereby grants the Plan's request for 
approval of a plan amendment modifying special withdrawal liability 
rules, as set forth herein. The Plan must agree to certify annually its 
compliance with the conditions set forth at 49 FR 6043 and 63 FR 27774, 
as modified by this Notice of Approval, with such certification to be 
filed within the deadlines established in this Notice of Approval. 
Should the Plan wish to again amend these rules at any time, PBGC 
approval of the amendment will be required. In the absence of 
extraordinary circumstances, the PBGC will not approve any amendments 
with retroactive effect.

    Issued at Washington, DC, on this 31st day of July, 2003.
Steven A. Kandarian,
Executive Director, Pension Benefit Guaranty Corporation.
[FR Doc. 03-19956 Filed 8-5-03; 8:45 am]
BILLING CODE 7708-01-P