Sen. Chuck Grassley, Committee on Finance Hearing, “Preventing the Next Pension Collapse: Lessons from the United Airlines Case”
Statement of Sen. Chuck Grassley, Committee on Finance Hearing,
“Preventing the Next Pension Collapse: Lessons from the United Airlines Case”
Tuesday, June 7, 2005
Today, we’re here to look at a tragedy – the bankruptcy of United Airlines and the massivelosses in its employee pension funds. And make no mistake about it – the losses here are devastating;$9 billion of underfunding in this one company’s pensions alone. Let me put that in perspectivebriefly. $9 billion is how much it would cost this committee to keep 6 million American taxpayersout of the AMT next year. $9 billion is how much it would cost to send more than one and a halfmillion students to the University of Iowa next year. The questions we will be asking are simple.How did this happen? Why did this happen? And most importantly, How can we stop it from everhappening again?
The story we will hear brings to mind another corporate catastrophe – the collapse of Enron.Like Enron, workers’ lives and retirements have been ruined. Like Enron, the facts scream out theneed for reform and the need to restore confidence in our economic system. Like Enron and thephony accounting the company used to hide its losses, we’ll learn that United’s pension plans usedillusory investment gains – kept on the books years after it was clear they would never materialize --to hide and disguise the true financial condition of the pension plans. Unlike Enron, however,everything United did was perfectly legal. In fact, what the company did is accepted practice bypension plans everywhere.
Today, we’ll hear about so-called “smoothing” techniques that allow pension plans to creditpaper investment gains and then carry them into the future as long as five years, even if those paperinvestment gains have long since evaporated. As the stock market plummeted in 2000, 2001, and2002, United used these smoothing techniques to make its pension plans look like the late ’90s stockmarket boom had never ended. This meant that the plans were not only deteriorating rapidly, but italso meant that United was not required to make additional contributions because on paper everythinglooked okay. The fuzzy math doesn’t stop there, however.
In addition to allowing plans to book phantominvestment gains, United was able to use stale,non-market interest rates to value pension liabilities, thereby further disguising funding deficits. Inother words, our pension laws tell companies, “Take off the green eye shades, and put on rosecoloredglasses.” I’m sure that many of you who are here today would like to be able to ignore yourown investment losses (and I hope that you don’t have too many of those, by the way!), but we allknow that putting blinders on doesn’t work. But putting blinders on is exactly what United officialsdid, not only on themselves but also on their employees who were left powerless to know that theirpensions were going down the drain. Unfortunately, by the time the blinders come off and anyonefigures out what’s really going on, it’s often way too late – $9 billion too late in this case.
I’m sure some will try to argue that United is a unique case. In fact, the testimony we heartoday will make it clear that nothing could be further from the truth. There is nothing unique aboutUnited. The same blinders that United put on are used by companies everywhere. Many of thosecompanies want to do the right thing. They ignore the blinders, and voluntarily fund their plans well.But unfortunately there are also some that do not. This committee shouldn’t turn a blind eye to thedamage that’s been done. The PBGC’s deficit stands at $23 billion.
More importantly, this committee needs to have a clear view of future damage that will resultif the status quo is maintained. Without real reform, we’ll hear today that the PBGC’s deficit couldincrease exponentially. Pension plans of other airlines, some ofwhomare represented here today, arebillions and billions underfunded. These airlines promised benefits that were too rich, and they andtheir unions refused to rein in those benefits even after it became painfully clear that the companiescould not afford them. And it doesn’t end with the airlines. Across dozens of industries, there arehundreds of billions of dollars of pension promises unfunded. The facts are alarming. The time to actis now. Tinkering with the current rules won’t do. Another temporary band-aid won’t do.
This committee rose to the occasion after Enron – we worked together and didn’t shy away fromtough reform. I’m confident we’ll rise to the occasion again. We must act to restore public faith inprivate pensions – faith that the bad actors won’t leave their employees high and dry and faith thatthese bad actors won’t be able to continue to pass their compensation costs on to other employersand the American taxpayer.
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