U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

27–795—PDF 2005

S. HRG. 109–424

PREVENTING THE NEXT PENSION COLLAPSE:

LESSONS FROM THE UNITED AIRLINES CASE

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 7, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

WITNESSES

Walker, Hon. David M., Comptroller General of the United States, Government Accountability Office, Washington, DC .................................................... 4

Belt, Bradley D., Executive Director, Pension Benefit Guaranty Corporation,

Washington, DC ................................................................................................... 6

Holtz-Eakin, Dr. Douglas, Director, Congressional Budget Office, Washington,

DC .......................................................................................................................... 8

Friend, Patricia A., international president, Association of Flight Attendants—CWA, AFL-CIO, Washington, DC ............................................................ 28

Roach, Robert, Jr., general vice president, International Association of Machinists and Aerospace Workers, Upper Marlboro, MD .................................... 29

Woerth, Capt. Duane E., president, Air Line Pilots Association, International,

Washington, DC ................................................................................................... 32

Tilton, Glenn F., chairman, president and chief executive officer, United Airlines, Chicago, IL ................................................................................................. 33

Steenland, Douglas M., president and chief executive officer, Northwest Airlines, Minneapolis, MN ........................................................................................ 35

Grinstein, Gerald, chief executive officer, Delta Air Lines, Atlanta, GA ............ 37

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Belt, Bradley D.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 53

Responses to questions from committee members ......................................... 89

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 99

Friend, Patricia A.:

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 100

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Grinstein, Gerald:

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 110

Holtz-Eakin, Dr. Douglas:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 119

Responses to questions from committee members ......................................... 130

Isakson, Hon. Johnny:

Prepared statement with attachment ............................................................. 134

Kyl, Hon. Jon:

Prepared statement .......................................................................................... 187

Lott, Hon. Trent:

Prepared statement .......................................................................................... 188

Page

IV

Obama, Hon. Barack and Hon. Richard Durbin:

Joint prepared statement ................................................................................. 190

Roach, Robert, Jr.:

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 193

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 201

Steenland, Douglas M.:

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 204

Tilton, Glenn F.:

Testimony .......................................................................................................... 33

Prepared statement .......................................................................................... 208

Walker, Hon. David M.:

Testimony .......................................................................................................... 4

Prepared statement with attachment ............................................................. 212

Responses to questions from committee members ......................................... 300

Woerth, Capt. Duane E.:

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 307

COMMUNICATIONS

Aircraft Mechanics Fraternal Association (AMFA) ............................................... 321

American Airlines and affiliated unions ................................................................ 325

Brooks, JB ................................................................................................................ 327

United Retired Pilots Benefit Protection Association (URPBPA) ........................ 329

(1)

PREVENTING THE NEXT PENSION COLLAPSE:

LESSONS FROM THE UNITED AIRLINES CASE

TUESDAY, JUNE 7, 2005

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Present: Senators Hatch, Lott, Kyl, Bunning, Baucus, Rockefeller, Bingaman, Lincoln, Wyden, and Schumer.

Also present: John O’Neill and Mark Prater, Republican staff;

Bill Dauster and Judy Miller, Democrat staff.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Well, good morning, everybody. We surely appreciate the attention to this very important problem that this hearing

is about, dealing with the pensions of our major corporations.

So, specifically, today we are here to understand a tragedy, the

bankruptcy of United Airlines and the massive losses in their employee pension funds.

I think that is very clear, so we should make no mistake about

it, the losses are devastating: $9 billion dollars of under-funding in

just one company’s pension plan. If I could put it in perspective, $9 billion is how much it would

cost this committee to offset the Alternative Minimum Tax next

year for 6 million taxpayers. Nine billion dollars is how much it

would cost to send more than 1.5 million students to the University

of Iowa.

The questions that we are asking are really very, very simple

questions: how did this happen? Why did it happen? And, most importantly, how can this committee stop it from ever happening

again?

The story that 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 the

need for reform and the need to restore confidence in our economic

system.

Like Enron and the phony accounting they used to hide their

losses, we will learn that United’s pension plans used illusory investment gains, kept on their books a year after it was clear that

they would never materialize, to hide and disguise the true financial condition of their pension plans.

2

But there is a very significant difference. Unlike Enron, everything that United did was perfectly legal. In fact, what they did is

accepted practice by pension plans everywhere.

Today, we will hear about the so-called ‘‘smoothing’’ techniques

which allow pension plans to credit paper investment gains and

then carry them into the future as long as 5 years, even if those

paper investment gains have long since evaporated.

As the stock market plummeted in 2000, 2001, 2002, United used

these smoothing techniques to make their pension plans look like

the late 1990s stock market boom had never ended.

This meant that the plans were not only deteriorating rapidly, it

also meant that United was not required to make additional contributions because, on paper, everything looked all right.

The fuzzy math does not stop here. In addition to allowing plans

to book phantom investment gains, United was able to use stale,

non-market interest rates to value pension liabilities, thereby further disguising funding deficits.

In other words, our pension laws tell these companies, take off

the green eye shades and put on rose-colored glasses.

I am sure that many of you who are here today would like to be

able to ignore your own investment losses—and by the way, I hope

you did not have too many of those—but we all know that putting

blinders on does not work.

Putting blinders on is exactly what United did, not only on themselves, but also on their employees, who were left powerless to

know that their pensions were going down the drain. Unfortunately, by the time the blinders come off and anyone figures out

what is really going on, it is often way too late, $9 billion too late

in this case.

I am sure some will try to argue that United is a unique case.

In fact, the testimony we hear today will make it clear that nothing

could be further from the truth. There is nothing unique about

United. The same blinders that United put on are used by companies everywhere.

Many of those companies want to do the right thing. They ignore

the blinders and voluntarily fund their plans well. But, unfortunately, there are some that do not do that. This committee should

not turn a blind eye to the damage that has been done.

The PBGC’s deficit stands at $23 billion. More importantly, the

committee needs to have a clear view of future damages that will

result if the status quo is maintained. Without real reform, we will

hear today that the PBGC’s deficit could increase exponentially.

Pension plans of other airlines, some of whom are represented

here today, are billions and billions under-funded. These airlines

promised benefits that were too rich, and they and their unions refused to reign in those benefits even after it became painfully clear

that the companies could not afford them.

It does not end with the airlines. Across dozens of industries,

there are hundreds of billions of dollars of pension promises unfunded. The facts are alarming. The time to act is now.

Tinkering with the current rules will not do it. Another temporary Band-Aid will not take care of the problem. This committee

rose to the occasion after Enron. We worked together. We did not

3

* For more information on this topic, see also ‘‘Present Law and Background Relating to Employer-Sponsored Defined Benefit Pension Plans and the Pension Benefit Guaranty Corporation

(PBGC),’’ Joint Committee on Taxation staff report, February 28, 2005 (JCX–03–05).

shy away from tough reform. I am confident that we will rise to

the occasion again.

We must act to restore public confidence in private pensions,

with faith that the bad actors will not leave their employees high

and dry, in faith that these bad actors will not be able to continue

to pass their compensation costs onto employers, and for God’s

sake, not onto the American taxpayers.*

Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman.

This hearing, obviously, is very timely, and I appreciate you

holding it. It is timely because of the recent action by United Airlines, and also the report we are going to hear from Mr. Walker

with respect to the GAO’s findings.

The current pension funding system clearly is broken, and we

need to fix it. Employees have lost billions of dollars of pensions

that they have earned. The funding rules did not secure their retirement income. We know that the rules are broken because employees and retirees are being hurt. We need to fix those rules.

In fixing the rules, our goal should be the goal of ERISA, the

Employee Retirement Income Security Act. ERISA created PBGC

and the funding rules to protect employees. We need to fix the

funding rules so that they do protect employees as they were intended to.

Today we will hear from pilots, machinists, flight attendants who

face the loss of benefits that they have earned. One of the cardinal

rules of ERISA is that earned benefits cannot be taken away. Accrued benefits are protected, except when an employer is in financial distress and the benefits are not funded. United and U.S. Air

employees have learned about this exception the hard way.

In our current broken system, when that exception kicks in, the

employer who is responsible for funding the benefits is the only one

who does not pay. Employees and retirees pay dearly through lost

benefits.

Other, more responsible employers—that is, employers who are

funding benefits for their own employees—pay through higher

PBGC premiums, and taxpayers may ultimately pay.

Who does not pay? The company that made the promises, the

company that benefitted from the services for which compensation

was deferred. That, my friends, is a broken system.

Think about what a defined benefit plan is supposed to be. When

employees learn about the private employer-based pension system,

they hear about defined benefit plans versus defined contribution

plans.

For employees, one of the selling points for defined benefit plans

is that employers bear the risk. The plan defines the benefit and

the employer is responsible for funding that benefit. No matter how

long you live, no matter what the markets do, the employee gets

that benefit.

4

Looking at United Airlines’ plan terminations, this standard definition sounds like some sort of cruel joke. The employer did not

bear the risk. The employees bear the risk and other employers

bore it, an outcome that ERISA surely did not intend, that employees are fully bearing that risk.

So, funding rules must be changed, not to protect the PBGC, but

to protect employees. In the process, we will help assure PBGC’s

future health.

So, let us not forget our priorities. PBGC was set up to protect

employees, active and retired. Funding rules were set up to protect

employees. We need to fix this broken pension system to protect

employees.

Let us learn from the witnesses whom we have assembled here

and let us use what we learn to make the defined benefit system

a system that delivers benefits to employees when they retire,

funded by the employers that promise them. The employees worked

hard and earned those benefits and deserve no less.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Now we go to the first panel. We have with us the Comptroller

General of the United States, David Walker. That is the Government Accountability Office that he heads.

The second testimony will come from the executive director of the

Pension Benefit Guaranty Corporation, Bradley Belt. Then last on

the first panel, we welcome once again to the committee Dr. Douglas Holtz-Eakin, executive director of the Congressional Budget

Office.

We will go with Mr. Walker, Mr. Belt, and Dr. Holtz-Eakin. Is

that the understanding we had?

Mr. WALKER. That is, Mr. Chairman.

The CHAIRMAN. So go in the order you were introduced.

Senator LOTT. Mr. Chairman, could I inquire, are they being

asked to make a 5-minute statement and submit the rest of their

statements for the record?

The CHAIRMAN. Let me ask my staff. Yes, the 5-minute rule.

Then your entire statement will be put in the record.

Proceed, please.

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC

Mr. WALKER. Thank you, Mr. Chairman, Senator Baucus, other

Senators. It is a pleasure to be here with you today to discuss the

funding of defined benefit pension plans and the implication of

those rules on the PBGC’s financial integrity, the retirement security of American workers and retirees, and American taxpayers.

Because PBGC guarantees participant benefits, there is concern

that the expected continued termination by large plans of bankrupt

sponsors will push the PBGC insurance program more quickly into

insolvency, generating pressure on the Congress, and ultimately

the taxpayers, to provide financial assistance to the PBGC and

plan participants.

Given these concerns, the GAO put the PBGC on its high-risk

list for its single-employer insurance program in July of 2003.

5

The PBGC’s situation is an example of the need for Congress to

reconsider the role of government organizations, programs, and

policies in light of changes that have occurred over the years, in

this case, since PBGC’s establishment in 1974.

Importantly, Mr. Chairman, as you and I discussed, the PBGC’s

challenges bear many similarities to the challenges facing our Social Security system. Both programs have adequate current revenues and assets to pay promised benefits for a number of years, yet

both face large and growing accumulated deficits on an accrual

basis. As a result, timely action to address both private pension

and Social Security reform is critically needed.

In pursuing such reforms, consideration should be given to the

interactive effect of such reforms and how they contribute to the

Nation’s large and growing fiscal challenge, key demographic economic and workforce trends, and the economic security of Americans in their retirement years.

If I can, Mr. Chairman, with the help of your technology, I will

show you a few pictures which say a lot. The first one demonstrates that PBGC has gone from an accumulated surplus of $9.7

billion in fiscal year 2000 to an accumulated deficit of $23.3 billion

in fiscal 2004.

The next one—and by the way, all of these are in my testimony,

Mr. Chairman—demonstrates that, based upon GAO’s recently released report of pension funding from 1995 to 2002, overall funding

levels deteriorated, yet most plans are still well-funded.

However, the degree of under-funding has increased significantly

in the aggregate, and it is concentrated in a few companies and a

few industries.

Importantly, 2002 was the most recent data that we had available in order to conduct this analysis, which demonstrates that we

do not have enough timely and useful information for Congress to

make informed decisions, as well as other key policymakers.

The next one demonstrates that under-funding among all defined

benefit plans and those considered reasonably possible for termination by the PBGC has increased dramatically since the year

2000.

This one demonstrates that average contribution levels have

been modest and that cash contributions were virtually non-existent until year 2002, in part because of the way that the rules currently work.

The next one shows that for the largest 100 defined benefit pension plans, that plans that are less than 90-percent funded rarely

have to pay the additional funding contribution.

The next one—and this is very important—Bethlehem Steel and

LTV. The bottom line on this chart is that, despite the fact that

these plans had large and growing under-funded amounts, and despite the fact that they terminated, resulting in some of the largest

losses in the history of the PBGC, that the sponsors made zero

cash contributions several years before their termination—and that

was legal—and they had large credit balances still available to

them. The system is clearly broken.

This next chart demonstrates that plan sponsors that have noninvestment grade debt, or speculative grade debt, represent by far

the largest exposure to PBGC, to show that those that have had

6

that status for a number of years often result in the largest losses.

These are non-investment grade, as determined by the various rating entities.

Senator BAUCUS. Does the green represent that?

Mr. WALKER. Yes. Correct. That represents the percentage of

losses. So in other words, a vast majority of their losses do not just

relate to the funding status of the plan, which obviously would be

the case, but also the financial strength of the sponsor. One proxy

for that financial strength is whether or not they have investment

grade debt or not, as determined by the markets.

Last, and in summary, Mr. Chairman and Senators, we have

done a tremendous amount of work in this area, and additional

GAO work is going to be published within the next week or two

and in the coming months.

In summary, the evidence is clear. Reform of the current funding

rules is urgently necessary. However, it needs to be an important

part of more comprehensive pension reform. Other reforms are necessary as well.

Finally, while most plan sponsors are responsible and most plans

have decent funding levels, some have not been responsible and

have very large and growing under-funded plans.

As you know, Mr. Chairman, the law represents the floor of acceptable behavior, not the desired state. Unfortunately, when it

comes to pension funding, too many high-risk companies do what

is legally permissible rather than what is right when deciding how

much money to put in their pension plan. In addition, all too frequently employees and retirees are at risk, and they are in the

dark.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Walker.

[The prepared statement of Mr. Walker appears in the appendix.]

The CHAIRMAN. Now, Mr. Belt?

STATEMENT OF BRADLEY D. BELT, EXECUTIVE DIRECTOR,

PENSION BENEFIT GUARANTY CORPORATION, WASHINGTON, DC

Mr. BELT. Thank you, Mr. Chairman, Ranking Member Baucus,

and members of the committee. I commend you for holding this

timely hearing and for your continued leadership on retirement security policy issues. I also want to commend the GAO and the CBO

for the important work their agencies are doing on pensions.

Just a little over 3 months ago, administration colleagues joined

me before this committee to discuss the problems facing the pension system and the administration’s proposed solutions. My full

testimony addresses these issues in much greater detail.

I would like to note that much has happened just since that time

to bolster the case for enacting the administration’s reform proposal as promptly as possible. For example, the recently filed 4010

reports provided by companies with pension plan shortfalls exceeding $50 million shows that the amount of under-funding grew dramatically during the past year, from $279 billion to $354 billion, a

27-percent increase. Overall, the plans had an average funded ratio

of 69 percent.

7

Averages can be deceiving, of course. Most of these companies do

not present an imminent risk of loss to the insurance program, but

there has also been a substantial increase in the amount of underfunding in plans sponsored by weaker companies.

These risks are not limited to airlines. The insurance program

also faces substantial exposure from other industries, most notably

the automotive sector. The challenges facing this industry sector

have been well-reported.

Indeed, in addition to deterioration of the credit quality of major

industry players, eight auto parts suppliers with under-funded

plans have filed for bankruptcy in recent months, three of them

just since the last committee hearing.

As pension plan assets in this industry fall short of pension promises by $55 to $60 billion, this is a troubling trend. All this

is occurring against the backdrop of United Airlines’ pension situation, which has garnered widespread attention, and with good reason.

The United pension plans are poised to saddle the insurance pro- gram with a record claim of $6.6 billion, and cost plan participants

more than $3 billion in promised benefits. A pension default of this

scale merits closer scrutiny for the important lessons it offers about

pension reform.

The first lesson is that the current pension funding rules, as

noted by Comptroller General Walker, simply fail to ensure that

companies honor the commitments they have made to their workers and retirees. If the rules worked, the pension insurance program would not have faced 23 defaults in excess of $100 million in

just the past 3 years.

United, as you noted, Mr. Chairman, is unique only insofar as its

size and visibility have drawn needed attention to these flawed

rules.

My written testimony contains charts analyzing United’s four

main pension plans over the period 1998 to 2003. Among the findings is that, from 2000 onward, when the actual funded status of

each of the company’s pension plans was deteriorating and the financial health of the company was becoming more precarious, the

company was putting little, if any, cash into the plans, was rarely

required to make a deficit-reduction contribution, was never required to provide notices to participants of the funding shortfalls,

was almost never required to pay a variable-rate premium, and

was usually able to report that it was fully funded on a current liability basis.

This rosy picture stands in sharp contrast with what we know

to be the true status of the United plans: an aggregate funding

shortfall of $10 billion and a funded ratio of only 41 percent.

How can this be? One major flaw with the current funding rules

is the use of so-called ‘‘credit balances.’’ Just at the point in time

when contributions to United’s plans were most needed, the company was able to use credit balances built up during the 1990s’ bull

market to avoid putting cash into the plans.

Remarkably, notwithstanding the fact that the United pilots plan

is under-funded by almost $3 billion, the company has not been required to make a cash contribution to that plan for the past 5

years.

8

Another critical flaw is the ability to smooth assets and liabilities. Those who want to retain these mechanisms argue that they

are necessary to reduce volatility. But, of course, volatility is not

reduced, it is simply masked, hidden from the view of participants.

The smoothed asset and liability numbers that feed into current

liability calculations allow the company to report a distorted funded ratio, and thereby avoid the deficit-reduction contribution, the

variable-rate premium, and the notice to participants. And, as the

GAO report highlights, these problems are not unique to United.

The second principal lesson is that the operation of ERISA in the

bankruptcy context leads to bad outcomes. There is an undeniable

tension between ERISA and the Bankruptcy Code. One law is designed to ensure that benefit obligations to workers and retirees

are fulfilled. The other is designed to let companies walk away

from their obligations and make a fresh start.

In the real world, the interplay of these two laws leads to the assumption of significant liabilities by the pension insurance program. Caught in the middle are workers and retirees who risk losing promised benefits, as well as premium payers and taxpayers

who run the risk of having to pay for costly corporate pension defaults, and the government ends up subsidizing the labor costs of

weaker companies at the expense of their stronger rivals.

All of these outcomes are undesirable, but they are all too predictable, given the rules currently in place.

Mr. Chairman, the administration’s proposal attempts to balance

competing considerations while greatly reducing the chances of another United-style pension tragedy. The elements are simple: accurate measurement of plan liabilities, robust plan funding, a

strengthened insurance backstop, and meaningful disclosure to

workers and retirees.

We look forward to working with Congress over the coming

weeks to ensure that these components are part of the reform package.

Thank you for inviting me to testify. I would be pleased to answer your questions.

The CHAIRMAN. Thank you, Mr. Belt.

[The prepared statement of Mr. Belt appears in the appendix.]

The CHAIRMAN. Now, Dr. Holtz-Eakin?

STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, DIRECTOR,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Dr. HOLTZ-EAKIN. Chairman Grassley, Senator Baucus, members

of the committee, the CBO is pleased to be here today to discuss

this topic.

Let me echo the comments of Mr. Walker and Mr. Belt in discussing how one could address the key issue, which is to shape a

stronger future for the PBGC, and more importantly, defined benefit pension plans.

I put up the chart behind you, which is the future under our projection of the PBGC’s on-budget fund, to organize my remarks.

Probably the key feature of this is that, in contrast to the past

where there is 1 year in which outlays exceed receipts, the future

is one in which the ever-increasing net outlays will ultimately, if

they continue, exhaust the PBGC’s assets and place it in uncharted

9

territory. This budgetary future is a reflection—and I want to emphasize, an imperfect reflection—of the underlying challenges that

face defined benefit pension plans and the PBGC.

The general under-funding is quite large. The PBGC estimates

that the vast majority of plans are under-funded, and that the aggregate under-funding could be as much as $450 billion in singleemployer plans, maybe $600 billion for all plans.

The PBGC itself, in contrast to this fairly benign picture at the

moment, indicates that it has assets which fall short of its liabilities by $23 billion, and this is quite likely to get much larger and

not to shrink.

An important part of this picture is the distinction between those

things which have been inherited from the past and those things

which are malleable in the future. Part of these future outflows reflect things which are sunk, costs from plans that have already

been terminated, or will be, so they are over in either actuality or

in effect, and these costs cannot be avoided.

Most of the recent PBGC claims are concentrated in a few industries. Nine of the ten largest claims are from airlines or steel, and

account for nearly 70 percent of PBGC’s claims. The focus point of

this hearing, United Airlines, is only the most recent example of

this.

In all of those industries, the competitiveness of firms offering

DB plans has deteriorated significantly and made it unlikely to be

able to get new resources for pensions by raising revenues through

its customers.

As a result, the key issue in these circumstances will be who

pays. Policy changes to augment funding in these circumstances

would likely impose new costs on sponsors, the shareholders, and

increase the chances of bankruptcy reorganization or liquidation.

The PBGC’s assumption of those benefit liabilities might impose

losses on workers, either because the PBGC insurance’s maximum

benefit is below their promise, or because the PBGC itself may fall

short of assets to fund them.

Now, sponsors could try to restrain these costs and impose them

on workers by limiting benefit accruals or freezing plans, or the

final candidate in these circumstances would be the American taxpayer, to the extent that the Congress were to alter the rules and

provide more resources.

The key issue then is, looking forward, how to avoid arriving at

the same situation. DB plans are a form of employee compensation

whose key characteristic is that it is deferred, and as a result, the

elapse of time allows for the advent of adverse economic circumstances, either for the firm, for the industry, or for the economy

as a whole.

In those circumstances, there are really two ways to provide this

compensation more securely. One is for firms to self-insure, that is,

to fund more fully their promises. In that case, there are a variety

of policy options available to the Congress to strengthen pension

funding rules. The current rules are clearly too flexible. I think the

GAO’s report is a telling witness to this. As Mr. Belt mentioned,

there is too much in the way of smoothing that masks the situation

that is actually an economic reality. It would be desirable to move

10

to market values and permit a closer matching of asset and liability values, and thus allow hedges in these pension plans.

The alternative way to provide insurance is to purchase it, and

in this case that means buying pension insurance from the PBGC,

and their employers will only make sensible decisions if they are

charged prices that more appropriately represent the cost of that

insurance. And there the list of policy options has been laid out:

largely increasing premiums, having those premiums reflect the

risk of the underlying pension plans, and more closely matching

the price for event insurance to its cost.

In both circumstances, I think it would be desirable to improve

transparency, allowing market participants to more correctly evaluate the current valuation of assets and liabilities in the pension

plan. It will improve shareholder monitoring, it will improve worker monitoring, and allow better performance overall.

Improving the presentation of the PBGC itself will allow the

Congress to more carefully monitor the scale of the taxpayer commitment to this kind of an insurance system and allow the Congress to decide, in time to make these decisions, the exposure of the

taxpayer to future possible losses.

Thank you for the chance to be here today, and I look forward

to your questions.

The CHAIRMAN. Thank you.

[The prepared statement of Dr. Holtz-Eakin appears in the appendix.]

The CHAIRMAN. We will have 5-minute rounds. It is my understanding that we are going to have a vote at noon, so a couple of

things I would like to urge the members to do. Try to keep your

questions within 5 minutes. That applies to me as well.

But secondly, and more importantly, when noon comes, Senator

Baucus normally chairs when I cannot chair, and he has to be

gone. So, I would like to have a member volunteer to carry on after

12 o’clock if we are not finished by that time. So would somebody

volunteer to do that, please?

I am going to start out now with a question, and I am going to

start with Mr. Belt. We are, obviously, through this hearing, focusing a lot of attention on pension funding rules. With the situation

described, that is rightfully the right way to do it.

But as I followed some of the recent high-profile cases that have

been coming to the door of your agency, this seems like a crazy system where a company can just dump its pension plan on the government and then skate out of bankruptcy like nothing ever happened.

Are there things that we here in Congress could look at to

strengthen your hand in dealing with some of these pension terminations, and hopefully to stop plans from ever terminating in the

first place?

Now, what I need from you, Mr. Belt, is ideas that go beyond

anything the administration might suggest. So, you are here as an

expert witness to help us do our job in Congress.

I do not expect you to say anything contrary to what the administration would propose, but surely we need every idea we can get

from you that goes beyond what the administration might propose.

Mr. BELT. Thank you, Mr. Chairman.

11

Clearly, as I indicated in my oral statement, there is a tension

between ERISA and the Bankruptcy Code right now. As a practical

matter, the PBGC is often faced with a situation where the ERISA

law seems to say one thing, the Bankruptcy Code says something

else, and the Bankruptcy Code ends up trumping ERISA, at least

as interpreted by the bankruptcy judge. We have had that happen

in a number of instances.

As you know, I testified to this when I appeared about 3 months

ago when United first missed its pension contributions or failed to

make legally required pension contributions last summer of about

$74 million.

Ordinarily, outside the bankruptcy context, we could file a lien

and enforce that lien against the company, but because of the operation of the Bankruptcy Code, our ability to enforce that lien was

automatically stayed. That is one area where the Bankruptcy Code

trumped the requirements of ERISA. That is one administration

proposal that we have advanced to specifically address that situation.

There are other examples where we have encountered difficulties, quite frankly. I know one of the issues, for example, that the

flight attendants had raised, concerns the analysis of requiring

each of the pension plans in United to be looked at on a plan-byplan basis, which is exactly what we do and is exactly what, in our

view, ERISA requires.

However, there have been courts that have held that companies

are free to look at these pension plans on an aggregated basis. Another situation that typically arises is, for example, in the calculation of the PBGC claim. That is provided statutorily and by regulation under ERISA.

The bankruptcy courts have found the wherewithal to establish

their own standards, and, at least in one recent case, they actually

said that rather than discounting the liabilities of some annuitypricing market or a risk-free rate, they had to be discounted at almost 10 percent, which makes no sense whatsoever when you are

trying to defease liabilities.

So, there are a host of situations like that where certainly tools

available to the PBGC could be strengthened. Congress may want

to consider looking at some of the criteria for companies entering

the distress termination process.

It is not a slam-dunk, it is not automatic, but it is ultimately in

the discretion of the bankruptcy judge as to whether they can be

persuaded by the company whether they can exit Chapter 11 with

their pension plans intact. Of course, we would be delighted to

work with you, the members, and your staff to look at some of

those issues.

The CHAIRMAN. I am glad you offered your staff’s advice, because

we think your hearts are in the right place and we need the help.

So, I look forward to that.

My last question is to Mr. Belt and to Mr. Walker. You both

pointed to so-called smoothing techniques as a leading cause of today’s pension crisis. Those rules are complex and arcane. So could

you explain, in short detail, exactly how those rules work, or do not

work, if that is a better way for you to say it?

12

Mr. WALKER. Basically, Mr. Chairman, those rules allow plan

sponsors to be able to amortize over a number of years certain

types of experiences that they have. For example, investment gains

and losses. Also, changes in promised benefits.

The difficulty is, as you properly pointed out in your opening

statement, that in the last several years we have seen the combination of two events: 1) declines in asset values; and 2) declines in

interest rates, which means that the amount of money it takes to

buy out the liabilities has gone up. The combined effect of reduced

assets and increased liabilities means the bottom line hemorrhages.

However, these smoothing techniques allow the companies to be

able to amortize these gains over a number of years. These are past

gains which could have evaporated.

Specifically, gains could have turned into losses—and dramatically increased losses—yet plan sponsors are not required, under

current law, to consider that in determining how much money they

have to contribute to their plan.

Mr. BELT. If I might add, Mr. Chairman, the rules allow assets

to be smoothed over a 5-year period and the liabilities to be discounted using a 4-year weighted interest rate.

So as a consequence, what we are really saying is, let us take

a look at a point in time, try to understand what the current financial status of the pension plan is, and it is nowhere to be found.

PBGC can get that information, but that information is not available to workers and retirees. They are looking back 4 to 5 years

ago and pretending that what existed at that point in time in the

markets is relevant to the economic environment of today.

That is clearly what we see reflected in the charts we have in

my testimony with respect to United Airlines, and those provided

in the Comptroller General’s testimony. It is that companies are

able to report that they are, so-called, fully funded, or they meet

that so-called full-funding limitation, which is a misnomer if there

ever was one, when in fact, on a current economic market basis,

they may be deeply in the hole and getting more deeply in the hole

as every day goes by.

Not only that, because all these other rules are tied off this current liability measure, that is the reason they have not had to

make deficit-reduction contributions. They have not had to send

out notices to participants or pay the variable-rate premium.

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. Mr. Belt, I wonder if you, or any of you, can

discuss a little bit the difference between at-risk liability and ongoing liability. Some of the discussion here is based on at-risk, and

those numbers clearly are high—way too high—and some of the ongoing liability is also high, but maybe not quite as high.

If you could just tell us the distinction between the two and the

degree that that distinction, in your judgment, is important.

Mr. BELT. Ongoing and at-risk liability measures are those that

are provided under the administration’s pension reform proposal.

Essentially, the ongoing liability measure is one that tracks very

similarly with current accounting measures of liability, basically,

what are accrued benefits, measured, again, using market value of

assets and the corporate bond rate as the discount rate applied

against a yield curve.

13

So, there are meaningful funding targets, taking into consideration that that company, because of its financial health, is likely

to be around for a period of time, so we will look at that pension

plan a little bit differently than situations in which companies are

entering financial difficulty.

In that case, the at-risk liability measure takes into account

changes in behavior that happen in the real world, in the marketplace. When companies get into financial difficulty, you often start

seeing employees take early retirement subsidies.

Senator BAUCUS. I guess the main point being here, there are

differences, because some companies are at risk and some not, so

we have the different calculations. The main point being, when we

talk only about the at-risk liabilities, that is bad. But the ongoing

may not be quite so bad, but it is slightly healthier.

Mr. Walker?

Mr. WALKER. If I can, Senator. The difficulty that we have right

now is that there are a number of complex, competing and confusing calculations in connection with pension funding.

For example, the calculations that are used for funding purposes,

which allow for the smoothing, typically provide a more optimistic

view of what the funding status of the plan is.

The calculations that are required in accordance with Generally

Accepted Accounting Principles, and have to be included in the

10(k) filings for public companies, are on a different basis and typically would provide a somewhat more conservative view of the

funding status. The PBGC’s calculations, which are on a termination basis, are usually much worse, depending upon the facts

and circumstances. That is part of the problem.

Senator BAUCUS. What is the solution?

Mr. WALKER. The solution is, we need to have streamlined and

simplified rules for determining what should be used for calculating these numbers and disclosing these numbers to plan participants and beneficiaries, because right now you have inconsistent,

confusing, and competing numbers that maximize the risk to benefit security of American workers and retirees in the PBGC.

Senator BAUCUS. Do you think that the rules should be the same

as applied to each of the three different reportings?

Mr. WALKER. Not necessarily. I do, however, believe that we

clearly need to strengthen the rules that relate to transparency. In

other words, the type of funding information that would be reported to plan participants and beneficiaries—namely, current

workers and retirees, and the government—needs to be more reflective of the current reality, not these smoothing techniques that

are currently used because it leaves a huge expectation gap and results in real problems for all stakeholders.

Senator BAUCUS. How important is the yield curve here? Because

that is a little bit of a hang-up. In the whole scheme of things, as

long as there is not too much smoothing, do we need a yield curve

adjustment?

Mr. WALKER. As you know, we have issued a report concerning

the different methods that could be used in calculating the potential obligations and related plan activity, which we can again make

available to this committee. That is a very contentious issue.

14

It is interesting, because one of the reasons that the administration and others have had to consider alternative calculations is because the Federal Government is out of the business of issuing 30-

year bonds. Guess what? We are probably going to be back pretty

soon, given our current deficit situation.

Senator BAUCUS. Right.

Mr. BELT. Senator Baucus, if I might.

Senator BAUCUS. Yes.

Mr. BELT. The yield curve simply provides a more accurate way

to measure the liabilities. It is a recognition of the fact that companies are paying out benefit payments, and will pay out benefit payments, at different points in time.

If you price those liabilities on a market basis, there are different

interest rates that are charged, just as if you are buying a house,

you can get a 30-year loan at one rate, a 15-year loan at another

rate, and so on down, and you can get a completely different loan

for a 1-year ARM, a 3-year ARM, or a 5-year ARM.

Senator BAUCUS. Should there be any smoothing?

Mr. WALKER. I think the answer is potentially yes, but clearly

not to the degree that we have today. I think the other thing that

one has to keep in mind is, we need to target these rules better

to make sure that those plans and those plan sponsors that represent a true risk to benefit security and to the PBGC, and potentially, ultimately, the taxpayers, are treated appropriately.

We cannot have a one-size-fits-all approach. So, in many situations where you are dealing with a plan and a sponsor that do not

represent a true risk, that could be justified, but it would not be

justified in circumstances where we may simply be delaying the inevitable.

Senator BAUCUS. Is 90 days sufficient smoothing?

Mr. BELT. Mr. Chairman, I would perhaps tend to make the

point a little more strongly than the Comptroller General did. I

think there is a real risk in smoothing what I would characterize

as the inputs, the calculation of assets and liabilities to determine

the current financial condition of the pension plan.

If the concern is about contribution volatility, recognizing what

the assets and liabilities are at any point in time that are going

to lead to fluctuations in required contributions, then perhaps one

could talk about, in a rational way, providing some anti-volatility

mechanism on the output side.

But we live in a mark-to-market world, and are clearly trending

more in that direction. I think there is a real danger in pretending

what is a current economic reality today is not there, and we are

going to rely on something from the past.

Senator BAUCUS. My time is up, but go ahead, Mr. Walker.

Mr. WALKER. Real quickly. When I am speaking of smoothing, I

am talking about contributions. I think it is critically important

that you provide a full, fair, accurate, and timely view of the true

economic condition of the plan to the government and to the participants and beneficiaries.

Senator BAUCUS. And transparent.

Mr. WALKER. Correct.

Senator BAUCUS. Thank you.

15

The CHAIRMAN. Now we go to Senators Lott, Wyden, and Kyl,

who are the next three.

Senator LOTT. Mr. Chairman, I just want to thank the panel for

being here this morning. Since most of the testimony I am interested in hearing this morning, and the questions I would like to

ask, really, are for the last three witnesses, I am going to defer

asking any questions of this panel at this time because I am very

concerned about being able to get to the three key witnesses that

we would like to hear from this morning.

The CHAIRMAN. All right.

Then we now go to Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman. Thank all three of

you.

Mr. Belt, it seems to me that as the airlines try to work out their

financial and pension problems, the sacrifices are rarely shared.

For example, if other airlines followed the lead of United and U.S.

Air, the airline executives get to fly again with their pension benefits intact, while workers get grounded with smaller pensions.

My question to you is, how is it possible that the airline companies can, in effect, put the executives’ pension in a lock-box while

they discharge the workers’ pensions? Maybe this is the Enron accounting that the Chairman was talking about. But if you could tell

us how this is the case, that would be helpful.

Mr. BELT. Everything that has been done by the airlines, at least

as far as we can ascertain, is consistent with the laws that Congress has enacted at this point in time. We believe there are a

number of areas that the laws do need to be changed.

There are some limitations on executives being able to line their

own pension plans while not funding the rank-and-file’s pension

plans. The administration has actually recommended, as part of its

reform proposal, that that be tightened. But again, we are not

aware, in contrast to situations like Enron and other areas of corporate malfeasance, that companies are not fully complying with or

taking advantage of the rules that are allowed under current law

under ERISA, under the Bankruptcy Code.

Senator WYDEN. That is what concerns me, is they are taking advantage of the current rules. I am not accusing anybody of lawbreaking. But is this tax law? Trust fund law? What is it? It seems

that the executive pensions are intact, yet the workers’ pensions

get shellacked.

Mr. BELT. Yes. That is primarily an issue of the tax law, our Internal Revenue Code, with regard to qualified versus non-qualified

plans.

Senator WYDEN. I just want us to have on the record how it is

that we have this double standard.

Mr. WALKER. Senator Wyden, as you probably recall, I used to

be head of the PBGC, and I was Assistant Secretary of Labor for

Pensions and Health. I think what you are referring to is nonqualified plans.

You can have certain top executives and highly compensated individuals that could be covered by a plan, a deferred compensation

plan, that is not covered by the PBGC, that is not subject to the

funding rules, and that provides for lucrative and supplemental retirement benefits as compared to the normal plan.

16

There are techniques that can, and have, been used by companies in order to provide enhanced security for those benefits, including in the event of bankruptcy, such things as secular trusts

and other types of vehicles, which I would be happy to talk to you

about if you would like.

Senator WYDEN. Now, Mr. Belt, the airlines often threaten to

drop what I call the equivalent of ‘‘the bomb.’’ They say, if you do

not bail us out we are going to file for Chapter 7 bankruptcy. If

you do not let us terminate the pensions, we are going to Chapter

7 bankruptcy. Then Congress invariably gives the airlines pretty

much what they want.

Do you really think the airlines would ‘‘drop the bomb’’ without

being able to default on their pension obligation?

Mr. BELT. There is no question there is a concern, as I indicated

in my oral statement, that the interaction of ERISA and bankruptcy law, right now, leads to bad outcomes. That is likely to continue, absent a change in law. I think we do need to recognize that

there is, in fact, a statutory procedure in place before companies

are able to shed their pension liabilities onto the government.

Now, I think you could have a discussion as to whether all those

criteria are as they should be, but a policy decision has been made

that companies, in certain circumstances, should be able to shed

their pension liabilities on the government, and because there is a

maximum guarantee limit, employees inevitably may be hurt.

They can reemerge from Chapter 11, sans those pension liabilities, and fly off into the distance, having the government subsidize

their labor costs on an ongoing basis. Again, that is an operation

of the current law.

Now, what they have to prove to a bankruptcy judge, and PBGC

is not the determining entity in this case, is that they would not

be able to emerge from Chapter 11 and get a fresh start if they

maintained any of their pension plans.

Senator WYDEN. Finally, we have received reports, and heard

concerns, that the Department of Treasury and the Department of

Transportation may have encouraged United into defaulting on its

pension plan to PBGC. Do any of you three have any information

with respect to something like that?

Mr. WALKER. No.

Mr. BELT. No.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Senator Kyl had to go to a leadership meeting, so he has asked

permission to put a short statement in the record, and he will have

a couple of questions that he will submit for answer in writing.

[The prepared statement of Senator Kyl appears in the appendix.]

[The questions appear in the appendix.]

The CHAIRMAN. Now I see Senator Schumer is here. He had been

here previously, but was not able to stay, and has come back now.

So it is Schumer, then Bunning, then Rockefeller.

Senator SCHUMER. Thank you, Mr. Chairman.

I would like to, first, just ask a few questions on the overall

health of the PBGC, and then follow-up with some questions. I am

concerned about the growing problem that the PBGC is facing as

17

more and more companies face financial difficulties and drop their

pension plans in order to return to profitability. I learned recently that only half of the $450 billion of pension

under-funding, as calculated by the PBGC, has ever been disclosed

to employees and investors through their annual statements to the

SEC. There have been stories in the newspaper about that.

I understand that the publicly disclosed pensions and liability

statements submitted to the SEC by companies in general—not

these, in particular—are dramatically different than what the

PBGC requires to be submitted to them. It is difficult for workers,

stockholders, and others to get accurate information in that environment.

So, my first question is, how do we remedy this problem and

allow those who have an interest in the company that is not management to know the truth about the retirement investments, particularly the workers who will put the money in?

Mr. BELT. That is a good question, Congressman. Senator Schumer. My apologies.

Senator SCHUMER. I was a Congressman for 18 years, and I was

proud to be that.

Mr. BELT. That has been a core element of the administration’s

reform proposal, to shed a little sunlight on pension finances, because this is an area that has been cloaked in darkness for far, far

too long. There is no question about that.

The stakeholders that are most in need of information, material,

timely, and relevant information about the financial status of the

pension plans, have been effectively denied much of that information.

Even a lot of the information that the regulators get is very stale

and untimely, and that is one of the issues that GAO has looked

at, noting that the principal source of information filed by all pension plans, by the time we get it, that information is more than 2

years old. It is very difficult to make informed life, policy, or business decisions in a dynamic marketplace environment with that

kind of stale information.

So, a core element of the administration’s reform proposal is, indeed, to shed a little sunlight on pension finances and make sure

that workers and retirees, as well as shareholders and regulators,

get relevant, timely information.

Senator SCHUMER. Anyone else?

Dr. HOLTZ-EAKIN. I think this is a really important issue. We

rely, in our ongoing work, on publicly available information, and we

often find ourselves calling the staff at PBGC to try to reconcile differences because the numbers do not line up. So, it is very important to be able to get a little transparency and be able to make the

proper comparisons across these different sources.

Senator SCHUMER. Thank you.

Mr. WALKER. Senator, I think it is absolutely critical that plan

participants, beneficiaries, and appropriate government agencies

receive more timely and market-based information on the true financial condition of their pension plans. Absolutely critical.

Senator SCHUMER. Well, thank you. I believe one of the reasons

we are in such a mess here is because this information has never

been timely. It is just so outrageously unfair to employees not to

18

know the status of the money that they have put in year after year

after year.

Here is my second question. So, I have looked at some of your

testimony, and it strikes me that you cannot separate the issue of

the pension problems at the airlines from the whole issue that we

have been discussing here in hearings before, and that is Social Security.

The administration has made a proposal—I find it inadequate—

for reforming defined benefit pension plans. But at the same time,

they want to privatize and, in my judgment radically change, Social

Security, phasing out over a long period of time the basic intergenerational transfer that we have had.

Now, the airline pensions were supposed to be a promise to the

workers: you work this many years and you get a pension. You do

the same with Social Security: you work this many years and you

will get a Social Security benefit. But, of course, that depends on

how well one’s privatization is fully implemented, in good part, how

well the stock market does.

So my next question is for Mr. Belt. How do you explain the

PBGC’s sudden reversal of its position on whether or not United

could afford to continue funding the pension plan for its flight attendants?

I understand that, on April 4th, you sent a letter to the flight attendants’ lawyer saying that the AFA plan can, and should, be

maintained by the company upon emergence from Chapter 11.

Then you changed your mind and you recommended termination a

week later.

What does this say about the change, not only the dramatic

change we can see in pension plans, but the need for having a

baseline of support for people in terms of Social Security and not

making that more risky?

Mr. BELT. Senator Schumer, there are a number of issues you

raised that are very important ones. Let me, first, note that obviously the administration and the President are committed to

strengthening all retirement systems in this country, not only Social Security, but the defined benefit system, as well enhancing private savings. The administration has put forth proposals to do each

of those things.

With respect to the flight attendant situation in the United context, let me first note that that is a matter, as you know, that is

the subject of litigation right now, so I need to discuss it at a somewhat higher level.

There is no question, in PBGC’s view, in my view, that it would

be optimal for companies to fund the pension promises they make

to their workers and maintain those pension plans on an ongoing

basis.

The fact of the matter is, under current law, companies have the

legal right to pursue the distress termination, to seek to shed their

pension liabilities onto the government. That is the law, the structure and framework, that Congress has put in place. United was

taking advantage of that situation as, in my view, far too many

companies have done in recent years.

As I noted, we have had 23 corporate pension defaults in excess of $100 million claims in just the last 3 years, so it is not unique

19

to United Airlines. But the bottom line is, the company can move

to shed its pension liabilities.

PBGC uses all the tools at its disposal, but it does not ultimately

make the decision—the bankruptcy judge does—to hold the companies to account to make sure they are fully complying with their

ERISA requirements, as we have done at that.

I will also use the bully pulpit to keep the pressure on the company. I suspect you will hear management perhaps complain, in

United’s situation, that I was doing that fairly extensively last

summer and through the fall.

There is no question that, from a financial standpoint, in the interest of the overall pension insurance program, all the stakeholders would have been better off had the company been able to

maintain at least the flight attendants’ plan, also the MAPC plan,

the ground plan and the pilots’ plan. But that is not where the law

is.

We concluded that the judge would find as he did, that the company would meet the distress criteria, that they would not be able

to emerge from Chapter 11 with those pension plans intact. That

is not a determination the PBGC makes. We sat down unilaterally

with the flight attendants, we sat down unilaterally with the machinists, and all the unions.

We sat down multilaterally with the unions and the company,

trying to find resolutions to these issues, but none ultimately were

forthcoming that were satisfactory to all the participants. So, ultimately, we took the action that was necessary to protect the overall

interest of the pension insurance program.

I am responsible for looking out not only for the flight attendants

in United, as indeed I am responsible—that is a set of stakeholder

interests I am responsible for looking out for—but we are specifically supposed to make sure that we have resources available to

cut benefit checks, and that includes the flight attendants at

Braniff, TWA, Pan Am, and Eastern. We are providing their benefit checks today.

We may have to—and I hope this does not happen—provide benefit checks to flight attendants in Northwestern, Delta, American,

and Continental. I hope that never comes to pass, but we need to

look at all the system’s stakeholder interests.

I am supposed to also look out for the premium payers. That is

explicit in our statutory mandate. I am supposed to be self-financing and look out for the American taxpayers’ interests. That is explicit in the statute as well. We are in the position of having to balance often competing interests.

The CHAIRMAN. Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman. I would like permission to enter my opening statement into the record.

The CHAIRMAN. Yes. Without objection.

[The prepared statement of Senator Bunning appears in the appendix.]

Senator BUNNING. I think you all are familiar with last spring

when the Congress enacted legislation that contained some funding

relief for the airline industry. Would you all like to comment on

what impact this legislation had on the health of their pension

plans, if any?

20

Mr. BELT. It ultimately did not help. The representations, as I

understand it, at that point in time, were that, if that relief were

to be provided to the airlines, they would be able to meet their pension obligations.

Senator BUNNING. What did they do with the money?

Mr. BELT. It simply was a policy of forbearance, so they did not

have to meet minimum required contribution requirements that

otherwise would have been in place.

Senator BUNNING. In other words, they spent it on something

else. Since they did not have to contribute to the pension program,

they used it for other purposes. Is that correct?

Mr. BELT. That is correct.

Senator BUNNING. All right.

Would our government witnesses comment on the Employee Pension Preservation Act that has been introduced by Senators

Isakson and Rockefeller and is supported by much of the airline industry? If passed, is the legislation likely to help the airline industry? And what impact, if any, could it have on the PBGC if any

more of the airline pension plans end up being taken over by the

agency?

Mr. BELT. Thank you, Senator Bunning. I will start on that one.

As you know, the emphasis of the administration’s reform proposals is to strengthen the funding rules, not weaken them, and

not to provide a separate set of rules for certain companies or industry sectors, but apply the same set of rules to everybody.

Certainly from a personal standpoint, wearing the hat that I do

now, I am always delighted to look at creative solutions for dealing

with problems we are facing.

I think, in analyzing proposals like that, there need to be a couple of guideposts. One is, does it simply put off the day of reckoning

to another day down the road, and is there a potential for the problem to be worse at that point in time compared to where we are

today?

The second guidepost would be, does it lessen or exacerbate the

moral hazard that exists in the system already? That is, would it

encourage further irresponsible behavior?

My concern, at least as I understand the bill at this point in

time, is it would not satisfy either of those two guideposts. There

are a number of ways in which it limits the potential exposure to

the pension insurance program from further losses.

Contrary to the claims of some of the proponents, however, it

does not eliminate those risks or losses. There are a number of

ways in which a potential loss to the pension insurance program

could grow, and could grow substantially over time.

Second, it seems to me that you have to ask yourself the question

as to whether it sends the right message. If the way to get special

funding rules is to get in a deep hole in the first place, might that

encourage other companies, not only in the airline sector, to pursue

the same course of action?

Senator BUNNING. Mr. Walker?

Mr. WALKER. Several thoughts, Senator. Number one, I think it

is important to keep in mind who bears the risk. The risk right

now is borne by participants and beneficiaries, to the extent that

all their benefits are not guaranteed, and by the sponsors of

21

healthy defined benefit plans who, by definition under the current

law, since PBGC is supposed to be self-sustaining, ultimately over

time will have to bear larger premium payments unless the government decides to provide revenues.

As you know, the PBGC is not backed by the full faith and credit of the U.S. Government. It has the ability to borrow $100 million.

Nonetheless, there is a potential contingent liability because of

what we found in the S&L situation, where the taxpayers jumped

in in order to protect the account holders of that time.

Congress may be under pressure to do the same thing with regard to the pension system. I think it is important to keep in mind

that some relief may well be necessary from the current deficit-reduction contribution rules, but it is important to keep in mind that

they need to be targeted, they need to be risk-related, and we need

to make sure that you are not just delaying and increasing the

amount of losses that otherwise are going to be imposed on all responsible parties.

The last thing. One of the things that Congress is going to need

to consider is whether or not to treat legacy costs differently for the

airline industry and certain other industries. If you look at PBGC’s

historical losses, and also their prospective exposures, they are concentrated primarily in a relatively small number of companies.

Senator BUNNING. I want to interrupt you, because you are using

all my time.

Mr. WALKER. Sorry about that.

Senator BUNNING. I want to know why we should reward lousy

management.

Mr. WALKER. I do not think we should reward lousy anything. I

think we have some very perverse incentives under the current system.

Senator BUNNING. Over-promising benefits to people that they

cannot deliver. I have been involved in pension programs a long

time, and that has been the case, not only in steel, in coal, but in

many other companies.

But the airline industry is just recent and it is falling down, not

out of the sky, but falling down as far as delivering benefits that

have been promised by over-promising executives.

Thank you.

The CHAIRMAN. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman. I will not get

into debating with the Senator or members of the panel on what

I think is a very good bill that Senator Isakson and I have put forward.

First, I want to get something straight, because it is always important, I think, for those who watch this on C-SPAN or listen to

it. Mr. Walker, when you give your testimony, it is not cleared by

OMB or by the administration. Dr. Holtz-Eakin, when you give

your testimony, it is not cleared by the administration or by OMB.

Is that correct?

Dr. HOLTZ-EAKIN. That is correct.

Senator ROCKEFELLER. Mr. Belt, when you give your testimony,

it has to be cleared by the administration, usually OMB. Am I

right?

Mr. BELT. That is correct, Senator.

22

Senator ROCKEFELLER. That is a very important point that people need to understand, that we have witnesses. There is this sort

of instinct that there is a free exchange of ideas, and in fact there

really is not.

I mean, you were talking about the Social Security system, which

I happen to think is very inadequate in terms of the President’s

proposal, as a really good thing. That was advocacy.

So, I think that we need to understand that there are those, like

Comptroller Generals, IGs, and the rest who can speak their mind,

but there are others who cannot speak their mind. They work for

the Federal Government, they are paid by the taxpayers, but they

cannot say what they think if they happen to think differently than

what the administration thinks.

The administration has a very corporate point of view and one

does not deviate from that point of view. I will give you a chance

to respond if you want, Mr. Belt, but I think you are caught.

Mr. BELT. The one thing I have never previously been accused

of, Senator, is not speaking my mind.

Senator ROCKEFELLER. Well, that may be. But you are being at

this point, because you are not free to go beyond what the administration will allow you to say.

Mr. BELT. Everything that is in my testimony is what I very fervently, at a personal level, believe both as a policy matter, and in

the public interest as well as wearing the hat that I do as head of

the PBGC.

Senator ROCKEFELLER. Well, I congratulate you, but my point

stands.

Mr. Belt, I have very serious concerns about the pension reform

proposals that would create an incentive, from my point of view, for

employers to exit the defined benefit program, and I would like to

talk about that for a minute.

You praise what the administration is doing to make the situation of the PBGC better. My view is somewhat different. They have

focused on rules that would supposedly improve the financing of

the PBGC, but specifically they have proposed increasing employer

premiums, in this case, on an industry with which this country

cannot do without more than any other industry that I can think

of, except possibly the electric power industry. You are also imposing additional funding requirements on companies that are obviously struggling financially.

Now, I am very concerned that, in an effort to shore up the

PBGC, that in fact the administration’s proposals are doing more

harm than they are good, and by quite a strong measure.

If employers with healthy pension plans determined that the new

rules and premiums are too intrusive and too expensive, they are

going to get out. I mean, I have seen this for years, as has Senator

Bunning, on coal, steel, and other areas. They are going to get out.

They are going to leave the system.

Any insurance plan is just like that. When healthy participants

leave the system, then obviously the remaining risk is all the

greater for those who do remain. So, I would think it would set in

motion a kind of death spiral for the PBGC, the rules which the

administration is proposing to make it healthier. So how would the

23

administration encourage employers to stay in the defined benefit

pension system, or does it simply say that no longer has merit?

Mr. BELT. To that latter point, Senator Rockefeller, the administration believes very strongly that the way you stabilize the defined

benefit system and perhaps encourage new entrants into the system is, first and foremost, getting rid of the pension overhang, the

$23 billion deficit.

It is difficult for a CEO or CFO to make a decision, with that

deficit overhang hanging out there, to establish a new defined benefit plan if they are at risk of having to pay the premiums to make

up for that loss.

Senator ROCKEFELLER. But how do you do that when you increase the cost of their so doing?

Mr. BELT. I would be happy to address that, Senator.

The second point is that we want to greatly simplify the system.

As Comptroller General Walker noted and as we have testified to

before, the current regulatory system is extraordinarily complex.

The administration proposal would greatly reduce those complexities, increase simplicity in the system.

Third, we recommend having Congress reconcile the challenges

or the legal issues with respect to cash balance plans, because the

real vitality in the future for defined benefit plans is going to be

dealing with hybrid structures like cash balance plans.

I would note that there has been a steady erosion of the defined

benefit system under current law, from a peak of about 112,000

plans of about 20 years ago to fewer than 30,000 single-employer

plans today, and from 40 percent of the workforce being covered by

DB plans, to fewer than 20 percent today. Under current law, a

number of plans are being frozen, either hard freezes or soft

freezes.

So, I would respectfully disagree with the premise that maintaining the status quo is going to save the defined benefit system. We

believe you have to get rid of that overhang in a responsible and

measured way, clarify the legal status of cash balance plans and

simplify the system.

We think if you do those things, you can provide a level playing

field and make it a rational economic, legal, and regulatory decision for a company to not only maintain the defined benefit plan,

but perhaps establish new ones.

With respect to the premiums, the issue is, there are losses in

the system. There are going to be future losses. Right now, the way

the legal structure is, current law, our only source of revenues is

premiums, like any insurance system.

If you want to have premiums be lower, that is certainly fine.

But the question that Doug posed was, who pays? Who is going to

pay for those losses? That is the trade-off that I think we are facing

as a policy matter.

Senator ROCKEFELLER. Mr. Chairman, I recognize I am over my

time. But you would have, then, one of the two or three absolute

necessities of the economic survival of America go further into the

impossibility of emerging from bankruptcy, if they are already

there, by increasing what they have to pay in the name of something called equity, fairness for all?

24

Mr. BELT. It is ultimately a policy decision as to how you allocate

both the past cost, as well as future costs. It is a policy decision

that Congress is going to have to make.

With respect to the premiums issue, again, I would also doubt

that the proposed premium increase, I have not seen any analysis—and we have repeatedly requested it—that that is going to

drive anybody into Chapter 11.

The total amount of premium revenues collected by the PBGC from the flat-rate premium is about $600 million a year. That

would be another $300 million that we would get from the proposed

increase in the flat-rate premium.

That is relative to tens of billions of dollars of contributions that

need to be made into the plan, plus that flat-rate premium has not

increased since 1991. I believe that that has really been advanced

as an argument to say that the administration’s proposal has all

these counterproductive effects.

But I have not seen that analysis, and I do not believe an addi- tional $300 million a year in premium revenues paid by the entire

defined benefit system sponsor base is going to drive anybody into

bankruptcy.

The CHAIRMAN. Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman, certainly, for bringing us together to discuss such an important issue. I am grateful

that, as we on the Finance Committee continue to address the solvency of Social Security, it is a positive thing that we are finding

time also to be concerned about the other legs of that three-legged

stool, the pension plans and the personal savings.

So, I am not amazed, because the Chairman and the Ranking

Member are always incredibly thorough, but I am very pleased that

we are having the discussion today, and very pleased that you are

here to help us look through this issue.

I am hopeful that this can be the beginning of really a more comprehensive approach in dealing with the current savings crisis that

we are facing—I know Mr. Walker mentioned that—and we have

to be more comprehensive as we are focusing on these issues, not

just in Arkansas, but all across the country. So, we are grateful to

you all.

Mr. Walker, in your written testimony you did make some interesting correlations, I think, regarding the similarities between the

PBGC and Social Security. You talked about both programs having

adequate current revenues and assets to pay promised benefits for

a number of years, yet both face large and growing accumulated

deficits on an accrual basis.

I guess, thinking that maybe technically that is probably correct,

I guess I have a little bit of concern with that correlation. I do not

know. Maybe you might agree, I do not know.

But there is a drastic difference between Social Security, which

I think as a Nation we have a tremendous responsibility to provide

for our elderly and disabled, and then the PBGC, which hopefully

we would never have to pay because our private employers will live

up to their obligations and to their responsibilities to their employees.

So, I guess the current state of the pension plan funding in the

private sector is in such dire straits, that it is just a given that the

25

government is ultimately going to have to pick up the tab, to the

extent that we can, for more and more of these defined benefit

plans in the future.

Do the current rules just not allow employers the ability or flexibility to manage their plans in as responsible a manner as they

need to? Is there too much flexibility?

Mr. WALKER. The fact of the matter is, as Senator Bunning said,

if people make a promise, they should be required to deliver on

their promise, absent extraordinary conditions. The fact of the matter is, the current rules are not adequate to help ensure that people, in fact, do deliver on their promises.

When companies end up getting in trouble, there are a number

of ways in which they can legally cut back or eliminate what they

have to contribute, and divert those resources to other priorities.

The current system is not adequate.

But with regard to Social Security, what I was talking about

was, if you look at the financial condition of the PBGC insurance

system and Social Security, there are stark similarities.

In fact, if you look at the chart that Doug put up, the fact is that

right now you have a situation where you are going to cross a line

when you are going to face significantly negative cash flows that

are going to grow indefinitely into the future.

You are correct that the Federal Government has a direct responsibility for Social Security. It does not have a direct responsibility for the PBGC. But I do not think we should take comfort in

that. Based upon the trends that we are seeing, it is highly likely

that you would be faced with a possible taxpayer bail-out unless

fundamental and dramatic reform is enacted sooner rather than

later.

Senator LINCOLN. Well, where those lines criss-cross on the

PBGC actually occur sooner than they do on Social Security, so in

essence maybe there is more of an urgency to deal with, whether

it is flexibility or too much flexibility, in making sure that these

employers have the ability to provide the pension or the obligations, as Senator Bunning has mentioned, that they have made.

Mr. WALKER. It does cause it sooner. But interestingly, we have

already crossed it for Medicare.

Senator LINCOLN. Oh, I know. I guess that is for another day and

another hearing, but I am with you on that.

Dr. Holtz-Eakin, I guess I am looking at two distinct components

to the conversation we are having today and the continued viability

of the external insurance that is provided through the PBGC, and

the adequacy of the self-insurance through funding and accounting

rules.

Which, I guess, in your opinion, do you think would play the

largest role, or should play the largest role, in this discussion?

Would it be prudent to discuss one without the other?

Dr. HOLTZ-EAKIN. I think there are complements and that they

ought to be considered simultaneously. Firms can either internalize

the costs of making sure that their compensation is delivered in the

future—those are the funding rules—or they can go to external

sources like the PBGC, and, if so, it has to be priced in a way that

makes them cognizant of the promises they have made, so they

26

make adequate preparation for it. So, you have to do them at the

same time and make sure firms see what they have done.

Senator LINCOLN. So, in essence, there has to be a hammer, too.

Dr. HOLTZ-EAKIN. This is a part of labor compensation. It differs

only because of the time lag between when the compensation is

awarded and when it is received by the workers. In between, you

have to have a way to enforce that contract, and they have to have

incentives to comply. External and internal have to line up.

Senator LINCOLN. Well, thank you, gentlemen. You all have been

very helpful, and I hope we will continue this discussion.

Thanks, Mr. Chairman.

The CHAIRMAN. Senator Bingaman? Then we will call the next

panel.

Senator BINGAMAN. Thank you. Thank you all very much for

being here.

Mr. Belt, let me just ask, one part of your proposal—as I understand it—that I have difficulty with is, you limit this preferential

funding of executive compensation in cases where the sponsor has

junk bonds and is 40 percentage points below required funding, but

you do not similarly limit preferential funding of executive compensation when the sponsor is bankrupt. Why would you not do it

in both cases?

Mr. BELT. That, I believe—and I will have to check and get back

to you on that—if you are referring to that matrix that we had put

out——

Senator BINGAMAN. Right.

Mr. BELT [continuing]. That should be also in the bankrupt context as well.

Senator BINGAMAN. Oh, it should?

Mr. BELT. Yes.

Senator BINGAMAN. All right. Because the matrix does not show

that.

Mr. BELT. Currently, companies in bankruptcy cannot fund executive compensation without approval of the bankruptcy courts, so

the proposal does not specify bankruptcy as a trigger for the restriction.

Senator BINGAMAN. All right.

Mr. BELT. If I am incorrect in that regard, we will certainly let

you know as soon as possible.

Senator BINGAMAN. Thank you.

Mr. Walker, let me ask you, since you have spent much of your

career on this set of issues, you have reviewed the administration’s

defined benefit funding proposals.

Could you give us any specific suggestions? If we were to go

ahead and enact those proposals, in your view, would that resolve

the problem, or are there things that we ought to do in addition

that are not included there, or are there some things included there

that we should not do?

Mr. WALKER. I think there are a number of provisions in the administration proposal that have merit. If I can, let me summarize

what I think you need to do by category, and I would be happy to

provide more details later.

27

First, you need to strengthen the funding rules and make them

tougher for plans that represent a real risk, but provide additional

flexibility for tax-deductible contributions in good times.

You need to enhance the accuracy and timeliness of reporting the

true funding condition and contribution obligations of pension

plans to participants and to the government.

You need to place additional payment restrictions on the payment of certain types of benefits when a plan is significantly underfunded, such as lump sums, and additional restrictions on the ability to increase benefits, and potentially consider plan freezes when

a plan is significantly under-funded.

PBGC needs reforms with regard to their premium levels, and to

make it a more truly risk-based premium, as well as the nature of

their guarantees for certain types of benefits, like shut-down benefits. They also need to have a more meaningful role in high-risk situations than they have right now.

You need to consider whether or not to treat legacy costs of airline, steel, auto, and other industries differently than other situations. Last, you need to lift the cloud of uncertainty with regard to

hybrid defined benefit plans like cash balance plans, because they

represent the future hope of this system, and right now there is a

cloud over them.

I would be happy to get into more specifics. I have testified on

this before. We have done work on it. Those are the major elements

I believe that the Congress should consider as a package.

Senator BINGAMAN. Is there anything in the proposals that the

administration has given us with regard to defined benefit plans

that you disagree with?

Mr. WALKER. Senator, if you would not mind, I would like to answer that for the record rather than off the cuff.

Senator BINGAMAN. I would ask, Dr. Holtz-Eakin, if you have any

comments on this specific proposal. I do not know if you have studied it in great detail.

Dr. HOLTZ-EAKIN. To the extent we have, we put it out in our

analysis of the President’s budget in March. Those are the comments for the record, and we would be happy to talk with you in

the future.

Senator BINGAMAN. Thank you, Mr. Chairman.

The CHAIRMAN. All right. We thank this panel. I know it took a

long time, but you can see the interest that we have in this issue.

I thank each of you for participating.

It is now my privilege to call the second panel, so would you

please come while I am introducing you.

Patricia Friend, international president of the Association of

Flight Attendants will be our first speaker; Mr. Robert Roach, general vice president of transportation, International Association of

Machinists and Aerospace Workers; followed by Captain Duane

Woerth, president of the Air Line Pilots Association. Then we will

also hear from Mr. Glenn Tilton, chairman, president and chief executive officer of United Airlines; Mr. Douglas Steenland, president

and chief executive officer of Northwest Airlines; and Mr. Gerald

Grinstein, chief executive officer of Delta Air Lines.

We will start with you, Ms. Friend.

28

STATEMENT OF PATRICIA A. FRIEND, INTERNATIONAL PRESIDENT, ASSOCIATION OF FLIGHT ATTENDANTS—CWA, AFLCIO, WASHINGTON, DC

Ms. FRIEND. Thank you, Mr. Chairman. Thank you for the invitation to testify today.

I do appreciate having the opportunity to share our views with

the committee on this issue. It is an issue that has a profound impact on hundreds of thousands of working women and men in the

aviation industry.

My name is Patricia Friend, and I am the international president

of the Association of Flight Attendants-CWA, AFL-CIO. We represent 46,000 active flight attendants at 26 airlines.

Our active and retired flight attendants at United Airlines, numbering approximately 28,000, are currently the only flight attendants at a major airline represented by AFA that still have a defined benefit pension plan.

As you all know, that changed early last month when a Bankruptcy Court judge ruled, at the request of United Airlines’ management, to approve an agreement between United and the Pension Benefit Guaranty Corporation, under which the agency is expected, in exchange for a $1.5 billion payment from United Airlines, to terminate our pension plan.

We were shocked and outraged by this decision after the earlier

announcement by the PBGC that our plan can, and should be,

maintained as United emerges from bankruptcy.

I would like to take just a few moments to remind everyone here

today that this issue has a human dimension which so often gets

overlooked in the important discussion of financial facts and figures.

Many of our members are now looking at the possibility of working many years longer than they had intended, and for those recently retired, many are now trying to figure out how they can pay

for the basic necessities of life.

These are not careless people who fail to plan for their retirement. They did everything right. They worked hard, they saved as

much as they could, and they invested when possible. Their only

mistake was one of trust. They trusted the retirement promises

that United made for decades.

Our members have made repeated financial concessions over the

past several years in order to keep our airlines alive and profitable.

We, the employees, have given decades of our lives to these companies. We have much more at stake in the airlines’ survival than do

most members of upper-level management.

Management comes and goes in this industry, and often with

huge financial incentives to do so. United’s current CEO, Glenn

Tilton, for example, can leave the company at any time and still

collect his bankruptcy-proof $4.5 million pension.

We have tried repeatedly to negotiate with this company on alternatives to save our pension plan, but each proposed solution was

rejected out of hand. The company seeks only termination.

They refuse to look at each pension plan individually, but rather

insist on lumping them all together. We believe that each plan

should be judged on its own viability. Both ERISA and the Bankruptcy Code envision such an evaluation. As you heard from one

29

of the previous witnesses, we also worked with the PBGC to find

an alternative to termination that would allow our plan to survive.

There has been much discussion today about how we can achieve

a long-term fix to the pension crisis rocking the airline industry.

There have been some reasonable proposals brought forward which

deserve some serious debate and possible enactment into law.

I strongly urge each and every member of this committee to cosponsor S. 1158, the Stop Terminating Our Pensions Act, or STOP

Act. This legislation, versions of which have been introduced in

both the House and the Senate, would only cover those plans whose

plan sponsors are currently in bankruptcy and whose unfunded liability, on a termination basis, is $1 billion or more.

Passage of this legislation is needed immediately. It would give

us time to return to the bargaining table with United Airlines to

try to find a solution to this problem.

This 6-month moratorium would also give you, the distinguished

members of this committee, and the rest of your Senate colleagues

the time to debate and consider the various proposals to strengthen

and protect defined benefit pension plans in this country.

Please give us the time that we need to try to save our pensions.

I urge the U.S. Senate to consider and pass the STOP Act as quickly as possible.

In closing, and returning to the human side of this issue, I leave

you with the words of one of our members who recently wrote to

the House Education and Workforce Committee:

‘‘My name is Jaime Manley. I am a 46-year-old woman. I am a

wife. I am a mother of four young children. I am the daughter of

a proud World War II and Korean War veteran.

‘‘I am also a daughter of a liberated 1960s feminist who worked

to put food on the table for her family. I am a sister, an aunt, a

friend, and a neighbor. I am honest, hard-working, faithful.

‘‘I am college-educated, community-oriented, and family-driven. I

am the girl next door. I am exactly what United Airlines sought

when they hired me as a flight attendant 21 years ago. I am their

past, but also United Airlines’ future.

‘‘I am a promise broken. I am despair. Can you see my face yet?

I am sad, I am worried. I am the face of 20,000 flight attendants

who may lose their defined benefit pension. I am a burden to the

taxpayers. I am Jaime Manley.’’

We remain resolute in our determination to save our pension

plan at United. For me as a United flight attendant, this is also

a very personal issue. Please send a message to Jaime Manley and

all the flight attendants at United Airlines: pass the STOP Act and

work diligently to find a solution to our pension crisis.

Thank you.

The CHAIRMAN. Thank you.

[The prepared statement of Ms. Friend appears in the appendix.]

The CHAIRMAN. Mr. Roach?

STATEMENT OF ROBERT ROACH, JR., GENERAL VICE PRESIDENT, INTERNATIONAL ASSOCIATION OF MACHINISTS AND

AEROSPACE WORKERS, UPPER MARLBORO, MD

Mr. ROACH. Thank you, Mr. Chairman and members of the committee, for the opportunity to speak to you today.

30

My name is Robert Roach, Jr. I am the General Vice President

of Transportation for the International Association of Machinists

and Aerospace Workers. I am appearing on behalf of the international president, Thomas Buffenbarger.

The Machinists Union represents more than 100,000 U.S. airline

workers in almost every classification, including ramp service, mechanics, public contact, and flight attendants.

As a TWA employee myself, my pension plan and the pensions

of 36,500 other participants were terminated on January 1, 2001.

For 30 years of service, I will receive a PBGC check of approximately $205 a month, which is 50 percent less than the pension

check my father received in 1973 for 25 years of work in his industry.

The airline industry is a cyclical business. Any time the economy

slows or fuel prices temporarily decline, the transportation industry

is affected. Instead of raising ticket prices to cover these added

costs, it has become acceptable for airlines to erode employee wages

and benefits.

Current pension funding laws do not help. Companies are not required to put money into pension plans, even when they are not

100-percent funded, and in most cases when they can afford it.

Consequently, corporations must put in enormous sums to catch

up. This loophole must be closed.

This problem was identified by the IAM at United Airlines in

2000. If United heeded the IAM’s warnings 5 years ago, 30,000 people would have had their pensions protected from the airline’s failure to manage its pension plans and its business.

We advised United Airlines in 2000, the current management at

that time, that we did not believe, based on actuarial information,

that their pension plan was fully funded, as they had indicated.

We had advised and proposed that they freeze their current

plans in order to avoid further erosion and go into a well-funded,

multi-employer plan. This proposal was denied by United Airlines,

basically because it would have to fund that multi-employer plan

on a monthly basis rather than not pay, as has been previously discussed today.

Pension plans are not perks by airlines, they are deferred compensations earned through hard work, negotiated reduced wages in

exchange for retirement income. U.S. Airways, the only surviving

plan, is the multi-employer IAM national pension plan that we

have successfully negotiated for our fleet service employees or

members.

While our members enjoy the security of participating in a fully

funded pension plan, the employer has the benefit of predictable,

regular pension contributions. Multi-employer pensions are established and run only for the purpose of providing retirement benefits. Since the contributions are collectively bargained, employers

cannot simply decide to stop funding these plans in order to free

up cash for other purposes.

At Continental Airlines, where we have identified a pension

problem today, we proposed they fully fund that pension plan. That

proposal has been denied by Continental Airlines. We have now

proposed that they go into a multi-employer plan, and hopefully we

31

will be successful in negotiating that for our Continental flight attendant members.

Northwest Airlines has said without drastic legislation or reform,

it, too, will have to terminate its pension plans. Congress must find

ways to assist corporations with unfunded plans to become more

involved in multi-employer plans.

We believe that well-funded, well-managed multi-employer plans

may be the answer, if we can get some of these companies that

have single-employer plans that are not being well-managed into

multi-employer plans.

But these multi-employer plans that are well-financed and wellmanaged need to be incentivized, and the Congress needs to help

in that area, to help the PBGC think outside the box and do some

things to protect those pensions.

For example, the IAM and United Airlines had agreed to a proposal which would have saved the PBGC, in our opinion, $500 million. The cost of terminating the IAM pension plans at United is

$1.4 to $1.5 billion. We believe that we could have saved that plan

and moved into a multi-employer plan for about $1 billion. That

was denied by the PBGC, based on the current law or current

policy.

Failure to address this problem today will result in government

assisting participants in these plans either through funding the

PBGC or through welfare or other government programs at a later

date.

Congress created the PBGC to act as a safety net for companies

that could not meet their pension obligations. The pension benefits

for more than 34 million workers are now at risk because corporations that were not legally required to pay into these plans did not

do so, and can ill afford to make these payments today.

Those that can afford to pay today are considering dumping their

pension liabilities on the Federal Government and the taxpayers,

simply to be competitive. This is not acceptable to the Machinists

Union, and it should not be acceptable to this committee. And I am

sure it is not acceptable to the American people, the American taxpayer who ultimately will pay this bill.

The Machinists Union supports a moratorium on the PBGC-initiated terminations to give Congress time to examine this pressing

problem and craft a solution. Congress must make bankruptcy a

less attractive mechanism to dump pension plan obligations on the

PBGC.

Under current bankruptcy laws, a company can shed its pension

obligations and simply restructure and prosper, and the Federal

Government and taxpayers are still left with the company’s pension

liabilities.

Long-term pension reform is necessary and must protect benefits,

while making pension funding more predictable for companies. The

Machinists Union is prepared to work with Congress to protect the

earned pension benefits of the American workers.

I thank this committee for inviting us to participate in these proceedings and for listening to our concerns.

Senator LOTT. Mr. Chairman?

The CHAIRMAN. Yes?

32

Senator LOTT. I am going to have to leave. I just would like to

ask that my statement that I had for this hearing be included in

the record at the beginning of the hearing.

I would like to apologize to our remaining four witnesses. I really

wanted to hear what you had to say, but unfortunately we now are

jammed up on our schedule with a critical vote at 12 o’clock.

So, I have already read your testimony. I think you have some

suggestions on how we get out of this problem. So far, we have

heard a lot about what has happened, but I want to know what we

are going to do in the future.

So, thank you for being here. We will look forward to hearing

from you and working to try to come up with a solution.

[The prepared statement of Senator Lott appears in the appendix.]

The CHAIRMAN. Captain Woerth?

STATEMENT OF CAPT. DUANE E. WOERTH, PRESIDENT, AIR

LINE PILOTS ASSOCIATION, INTERNATIONAL, WASHINGTON,

DC

Captain WOERTH. Thank you, Mr. Chairman. I am Duane

Woerth, president of the Air Line Pilots Association.

In light, again, of your vote, I am going to be very direct, if I

may. And certainly my written testimony is lengthy, and I am sure

you will allow it to be entered into the record.

I would like to talk about the solution. I would like to thank Senator Rockefeller and Senator Isakson for introducing what I think

is a very pragmatic and timely solution to the pension problem facing the aviation industry, in particular.

I represent the pilots at U.S. Airways, and that was a tragedy.

I represent the pilots of United Airlines, and that is a tragedy. I

also represent the pilots of Northwest, Delta, and Continental Airlines, and I really believe if the framework of S. 861, introduced by

Senator Isakson and Senator Rockefeller, is adopted and embraced

in some pension legislation this year in a timely manner, that we

can do three things: we can keep those other airlines out of bankruptcy and protect the shareholders and creditors. But more importantly, we can prevent the termination and loss of that earned income, those earned benefits for all those employees. It is possible.

The third thing that comes from that bill is, because of the nonbankruptcy, non-pension plan termination, because of the freeze

element and the long-term amortization, the Pension Benefit Guaranty Corporation will not be faced with absorbing all those unfunded liabilities and those other problems that will eventually be

in front of the Congress.

So, I have plenty of blame to go around. We have learned for a

long time about the failed pension rules. We have heard these government witnesses in multiple other hearings in front of your committee, in front of the Commerce Committee.

There are plenty of things wrong with the pension funding rules.

I am trying to focus our attention and the attention of this committee. I am very, very grateful that you are having this hearing,

Mr. Chairman.

If we can focus on those elements of the aviation industry, and

one of the things that you asked in having this hearing was, what

33

are the lessons learned from, particularly United, but also the previous U.S. Air bankruptcy?

What we have learned is all these legacy carriers were on the

same path. U.S. Airways and United got there first, but I can tell

you with absolute certainty, Delta Air Lines, Continental Airlines,

Northwest Airlines, and eventually American Airlines are on that

same path. Without the action of a very pragmatic Finance Committee taking the lead and getting something to the floor of the

Senate, the same tragedy is going to occur again.

I think this committee has always acted extremely responsibly

and pragmatically and moved necessary legislation, and taken action before a tragedy. Now we certainly know the absolute, positive

outcome that is going to happen, and it cannot be prevented without your action.

I thank you for holding this hearing, Mr. Chairman, and I will

answer any questions you may have.

The CHAIRMAN. Thank you.

[The prepared statement of Captain Woerth appears in the appendix.]

The CHAIRMAN. Mr. Tilton?

STATEMENT OF GLENN F. TILTON, CHAIRMAN, PRESIDENT

AND CHIEF EXECUTIVE OFFICER, UNITED AIRLINES, CHICAGO, IL

Mr. TILTON. Mr. Chairman, Senator Baucus, and distinguished

members of the Finance Committee, thank you for inviting me and

United Airlines to testify today.

The topic of today’s hearing is, ‘‘Preventing the Next Pension Collapse: Lessons Learned from the United Airlines Case.’’ I can tell

you, as I have been the chairman and chief executive officer at

United Airlines since September of 2002, what precisely we have

learned from our case, as we have dealt with the industry’s business and its financial realities.

As my colleagues on the panel will attest, while the Nation’s retirement system is facing a significant crisis, as we have discussed

this morning, the airline industry is undergoing its own crisis.

Major carriers have massive legacy costs, as was mentioned a

moment ago. All the carriers are squeezed in a vice between lower

yields and higher fuel costs. Not surprisingly, predictions that the

U.S. airlines would return to profitability this year did not come to

pass.

United has done most of the hard work necessary to put its financial house in order and to prepare to compete as a viable, sustainable enterprise. During this time, as my colleagues on the

panel have already stated, our employees have set record operating

performance results, and it is counterintuitive for a company in our

situation.

Throughout the restructuring, as was mentioned a moment ago

by the Senator, United has worked tirelessly to preserve our employees’ defined benefit pension plans. We devoted 14 months to

constructing a business plan to secure an Air Transportation Stabilization Board loan guaranty on terms that would have allowed

our company to preserve its pension plans.

34

A year ago, the ATSB rejected United’s final loan guaranty appli- cation for a modified $1.1 billion, advising us instead to pursue exit

financing from Chapter 11 with the financial and capital markets.

When we did, it became very clear that, given continued pressures on revenue and record fuel prices, United Airlines could not

meet the financial targets necessary to be financeable without the

termination of pension plans and further labor cuts.

Even so, we worked with our unions, our actuarial experts, our

financial and legal advisors, our board of directors, our creditors

committee, and in fact every one of our stakeholders, to scrutinize

every alternative that would allow us to meet our financial targets

and keep our pensions.

Last year, we told our labor groups and other constituents that

we would examine any alternative to pension termination and replacement that was viable. By January of this year, no workable

alternatives were found. We extended the search for another 4

months and, despite everyone’s efforts, we failed to find viable alternatives to termination and replacement.

When it became clear to the management team of the company,

the board of directors, and the creditors committee that the termination and replacements of our pension plan was the only viable

option, we proceeded to court.

At the same time, we were in discussions with the Pension Benefit Guaranty Corporation. It was decided that the best route at

this time was an involuntary termination by the PBGC, whereby

the PBGC obtained securities and a stake in United’s future.

In our view, the PBGC settlement is fair and equitable to all. It

provides cost savings and stability necessary for United to exit

from bankruptcy, and it is superior to the recovery that the PBGC

would receive as a creditor. That does not change the simple fact

that this has been extremely difficult for our employees and our retirees, and is certainly not an outcome to be desired by anyone.

As the prior panel said, since United began offering pension

plans to its employees in 1941, the company has done everything

required by law and more to safeguard those plans for United’s employees.

And since the Employee Retirement Income Security Act inception in 1974, we followed fully the rules and regulations and paid

for our PBGC premiums and plan contributions, even while in

bankruptcy, until the ATSB’s final rejection of our loan guaranty

application last summer.

From the outset of the bankruptcy process, our mission has been

to enable United Airlines to succeed as an entire enterprise. Without success for the enterprise, the rest is academic for United Airlines and our employees.

Without termination and replacement of pensions, United’s future and the jobs of 62,000 employees will disappear, along with

the economic contributions to hundreds of communities, our business relationships with hundreds of suppliers and partners, and

United’s continuing wage and benefit payments, including replacement retirement plans, and the pension plans would still be terminated.

United’s unions understand the industry and economic realities

that we face, and all but one have agreed to the retirement plan

35

changes that must be made. We now have agreements in place on

long-term labor cost savings with all of our unions, ratified or in

principle, and with every union group but the Association of Flight

Attendants on pension changes. We continue to meet with the AFA

on the discussion of replacement plans. I met as recently as last

week with the president of the AFA personally.

These agreements have moved United forward significantly in

our restructuring, and they set the stage for our exit from Chapter

11. The choice we faced with United was quite simple: for our employees, it is keeping jobs and replacing their existing pension

plans with consensually negotiated replacement plans, or losing

jobs and terminating pensions.

Mr. Chairman, we at United agree with many of the policy issues

that you and House Chairmen Thomas and Baynor have identified,

and in particular, we support your commitment to having a comprehensive approach to solving these problems.

We have learned from United’s restructuring over the many

years that reform of the pension laws cannot succeed if it is done

incrementally or piecemeal. There really is no quick fix.

Thank you.

The CHAIRMAN. Thank you, Mr. Tilton.

[The prepared statement of Mr. Tilton appears in the appendix.]

Now, Mr. Steenland?

STATEMENT OF DOUGLAS M. STEENLAND, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, NORTHWEST AIRLINES, MINNEAPOLIS, MN

Mr. STEENLAND. Mr. Chairman, Senator Baucus and members of

the committee, thank you for the opportunity to testify today.

Northwest is the world’s fourth largest airline, with over 70,000

pension plan participants in our three defined benefit pension

plans.

Today, Northwest and other airlines’ defined benefit plans are in

critical condition. As you know, both United and U.S. Airways have

already terminated their defined benefit plans in bankruptcy and

transferred them to the PBGC. Absent immediate action by the

Congress, the defined benefit plans at Northwest and at other carriers may very well suffer the same fate.

Mr. Chairman, I am convinced that there is a sensible path out

of the difficulty we all find ourselves in. Let me tell you how we

got here and how we can get out.

At the end of 1999, the airline industry’s defined benefit plans

were more than 100-percent funded, on average. In 2000, Northwest plans, in the aggregate, were also more than 100-percent

funded.

Today, that same funding level for airline defined benefit pension

plans has dipped to less than 60 percent. At the end of 2004,

Northwest plans were also funded at less than 60 percent. This is

the case, even though Northwest contributed half a billion dollars

more than the minimum contribution requirements over the past

10 years.

Why has this happened? Among other things, 3 years of stock

market declines, record low interest rates, and September 11,

which began the current airline industry crisis.

36

As a result of these events, the deficit-reduction contribution, or

DRC, rules kicked in and required that Northwest and other carriers make massive additional contributions to our defined benefit

plans that we cannot afford.

It is difficult to overstate how profoundly the DRC has impacted

the funding, or more precisely the under-funding, or our defined

benefit plans. It is as if Congress had issued an edict to homeowners with 30-year mortgages that if the value of their homes

dropped below 80 percent of the purchase price for whatever reason, their loan and mortgage would be accelerated so that the balance would now be due in just 3 to 5 years.

Worse yet, that accelerated funding kicks in at a time when

homeowners cannot repay their loans because of the very same adverse circumstances that caused the value of their homes to drop.

In fact, when the DRC kicked in for the airline industry, the industry was, and remains today, in the midst of its worst financial

crisis ever. The reasons for this are well-known.

In short, the current funding rules are too volatile, unpredictable,

inflexible, and too expensive for our company to survive and compete in the modern deregulated airline industry that demands we

deliver service to our customers at a competitive price.

Northwest has concluded that defined benefit pension plans simply do not work for an industry that is as competitive as we are

and that is as vulnerable to forces ranging from terrorism to international oil prices.

Given this reality, absent legislation, Northwest could be faced

with a stark choice. We can follow United Airlines and U.S. Airways, file for bankruptcy, and apply to terminate our defined benefit plans. We all know that this is a lose-lose approach.

Our retirees’ and our workers’ pensions will be reduced to the

PBGC guaranty level, and the PBGC will be left to assert a claim

for pension under-funding that will be satisfied in the Bankruptcy

Court process for pennies on the dollar.

Alternatively, Congress can enact legislation that allows us to

fully fund our defined benefit plans and to make a gradual and orderly transition from defined benefit plans, while at the same time

protecting our employees, retirees, and the PBGC.

Working with our labor unions and other airlines, we have developed a proposal that would allow us to follow the second course. We

are grateful to Senator Isakson and Senator Rockefeller for introducing legislation that would embrace these ideas.

Specifically, the proposal would do the following: stop adding to

the under-funding of airline plans by requiring airlines and their

affected unions to freeze their plans, thereby ceasing future benefit

accruals. In that regard, Mr. Chairman, it is at least Northwest’s

intent that we would adopt a hard freeze of our pension plans.

Second, we would protect the PBGC by freezing the PBGC guaranty. Finally, we would permit airlines to refinance the frozen and

already existing pension obligation by extending the term of this

pension ‘‘mortgage’’ from its current DRC-imposed 3- to 5-year period to a longer amortization period.

Under this proposal, retirees and plan participants would receive

the benefits that they had earned to the date of the freeze. Retirees

would be protected. In addition, the PBGC will be in better shape

37

financially, since its liability will be capped and each payment that

an airline makes to the plan will reduce that liability. The alternative is pennies on the dollar that the PBGC would receive.

To summarize, Mr. Chairman, we are not seeking a subsidy or

a bail-out from the government, just the opposite. We are asking

for a responsible alternative to current law that would let us pay

our pension obligations ourselves, versus shifting those obligations

onto a government agency.

Thank you very much.

The CHAIRMAN. Thank you.

[The prepared statement of Mr. Steenland appears in the appendix.]

The CHAIRMAN. Now, Mr. Grinstein?

STATEMENT OF GERALD GRINSTEIN, CHIEF EXECUTIVE

OFFICER, DELTA AIR LINES, ATLANTA, GA

Mr. GRINSTEIN. Thank you, Mr. Chairman and Senator Baucus,

for calling this hearing. I know it is on short notice.

I am here in support of the bill introduced by Senators Isakson

and Rockefeller, S. 861, and I am representing 85,000 active and

retired employees of Delta, who in turn have 85,000 dependents.

So, I am speaking on behalf of 170,000 people who have an interest

in this legislation.

Behind me in the room—and this shows you the level of trust we

have developed at Delta that I am comfortable sitting here with

them behind me—we have representatives of the retired non-pilots.

Cathy Cone is a former flight attendant; Jim Gray is representing

the retired pilots of Delta; Bill Morey represents the active employees; and Mike Pinho, the Air Line Pilots Association. They all have

a vital interest in this.

What I would like to do is just have my written statement included in the record, and speak a little bit about the legislation.

The CHAIRMAN. It will be included.

[The prepared statement of Mr. Grinstein appears in the appendix.]

Mr. GRINSTEIN. I think it is important to know that at Delta we

have terminated our pilot pension plan, defined benefit plan, and

they are now on a defined contribution plan that was negotiated

last year.

Our non-pilot employees are on a 7-year transition, beginning in

2003, from a defined benefit plan to a cash balance plan.

The situation that we confront in our industry has grown even

more urgent since U.S. Airways and United Airlines shed approximately $15 billion in pension obligations in an effort to secure financing needed to emerge from Chapter 11. These moves place additional competitive pressure on Delta and other legacy carriers

facing large, immediate funding contributions at a time when we

can least afford them.

As a result, airlines are at a crossroads. Without changes to the

current rule, airlines will almost certainly be forced into bankruptcy and the transfer of additional pension liabilities to the

PBGC.

Alternatively, if Congress chooses to move swiftly to pass legislation that provides a manageable, affordable pension funding schedVerDate 11-MAY-2000 16:10 Jun 26, 2006 Jkt 095484 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 27795.000 SFIN1 PsN: SFIN1
38

ule, airlines will have a far greater chance to continue, out of court,

the business transformation the new marketplace requires.

The decisions made now about the pension funding crisis will be

far-reaching and profound. They will affect the future of airline employees and retirees, the Pension Benefit Guaranty Corporation,

the traveling public, and the major network airlines that, despite

financial challenges, continue to serve as the backbone of our Nation’s air transportation system.

Delta believes S. 861, the Employee Pension Preservation Act, offers a workable solution to the crisis by balancing the interests of

all parties. First, employees and retirees would have a greater

chance of receiving the full pension benefits they have earned rather than see those benefits reduced, perhaps significantly, in a

transfer of liabilities to the PBGC.

Second, S. 861 places a primary focus on protecting the PBGC.

Let me state clearly and emphatically, Delta is not seeking a subsidy. Instead, we are pursuing an opposite course, one that significantly limits additional PBGC liabilities and allows us to continue

funding the benefits our employees and retirees are counting on.

Also, by making it less likely that airlines will transfer additional unfunded liabilities, the bill decreases the risk of a taxpayerfunded bail-out of the PBGC.

Third, S. 861 would benefit the traveling public by providing a

solution that supports stability in our Nation’s air transport system

as the industry undergoes massive change.

Importantly, it is the network carriers with the heaviest pension

funding requirements that provide the vast majority of international air service, as well as the primary link between small and

rural communities and the world.

Of Delta’s 202 domestic destinations, 50 percent are small cities

with limited service options: Parkersburg, WV; Meridian, MS; St.

George, UT; Portland, ME; Twin Falls, ID; Ft. Smith, AR; Helena,

MT; Casper, WY; and Medford, OR are all examples of communities not served by the low-cost carriers whose business models

focus on the high-density markets.

Finally, S. 861 would benefit Delta and other airlines by removing an enormous barrier to our ability to access capital markets, a

key component in completing the transformation process outside of

bankruptcy.

Delta understands the need for transformation and has not been

idle. We are taking responsibility for changing our business model

to respond to a new marketplace. Compared to 2002, our company

is now one-third more productive and cost-effective.

Reaching this point required the hard work and sacrifice of Delta

people, including the loss of 23,000 jobs, or a 30-percent reduction

in staffing, as well as cuts in pay and benefits throughout the company, and at every level of the company.

Delta, Northwest and other airlines are working together to help

prevent further pension collapses and the associated hardships.

Record high fuel prices, fierce competition, and a pension funding

obligation of $2.6 billion over the next 3 years for Delta alone make

changes to current pension rules crucial to this effort.

We look forward to working with this committee to establish a

solution that avoids a disorderly, chaotic restructuring of the indusVerDate 11-MAY-2000 16:10 Jun 26, 2006 Jkt 095484 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 27795.000 SFIN1 PsN: SFIN1
39

try and instead supports a stronger, healthier air transportation

system for this Nation and the public it serves.

Thank you. I am available for any questions you may have.

Senator BAUCUS. Thank you very much. Chairman Grassley is

going to go vote and come back. He will be back in about 10, 15

minutes.

I have a question for you, Mr. Tilton. I do not understand, frankly, why United did not join in with Delta and Northwest with respect to the legislation that is now being discussed. My understanding is, United was part of the team, then bailed out, decided

not to join with the other carriers.

Mr. TILTON. Senator Baucus, very clearly, time had certainly just

moved on for United Airlines and we found ourselves in the agreement, as I mentioned in my testimony, with the PBGC seeking a

solution that is the very solution that my two colleagues have suggested that they would like to avoid by not filing for the protection

of the court, and then determining whether or not they have the

ability to sustain their pensions.

Senator BAUCUS. But I understand Delta——

Mr. TILTON. We are without objection.

Senator BAUCUS. Delta and Northwest are not in bankruptcy.

They have the same problems as United did then.

Mr. TILTON. Right.

Senator BAUCUS. Why did you not join in with Delta and Northwest and try to get Congressional relief?

Mr. TILTON. Actually, I think that was more a function of simply

timing. We had really moved well into the chronology that I described to you before the initiative that my two colleagues have——

Senator BAUCUS. But why did you not seek something like that

to avoid terminating the plans?

Mr. TILTON. Well, for the period of 14 months while we sought

to secure a loan guaranty, our view in the company was that the

most responsible fiduciary for us was to pursue the loan guaranty.

Senator BAUCUS. And that was declined.

Mr. TILTON. And that was declined.

Senator BAUCUS. So then why did you not pursue the other option?

Mr. TILTON. Well, because at that point, frankly, we were running out of options within the conduct of our restructuring and our

bankruptcy, and it was incumbent upon the company to talk to the

PBGC about the exit from bankruptcy of the company.

This, in our view, despite the fact that it is appropriate for companies that have not yet entered bankruptcy, would not be a solution to the difficulties that we have while we are in bankruptcy.

Senator BAUCUS. Well, let us say you are out of bankruptcy, just

for the sake of argument, and this legislation would have passed.

How much would that help you? Could you continue the benefits

under the pension plans?

Mr. TILTON. Well, the PBGC has already made the decision.

Senator BAUCUS. I am not talking about PBGC. This is just a

big, hypothetical question here.

Mr. TILTON. I do not know the hypothetical answer, Senator.

Senator BAUCUS. What is your best guess?

40

Mr. TILTON. My sense is, in talking to the PBGC, there is at

least the possibility that a plan could be restored, and they have

the authority to do so if indeed the funding, the reform, pension reform, were to provide the company different circumstances than

those that we face today.

Senator BAUCUS. So if the legislation were to pass, would you

seek restoration?

Mr. TILTON. It is actually the responsibility of the PBGC.

Senator BAUCUS. Would you seek it, I asked?

Mr. TILTON. We would, if, in fact, we had the opportunity with

a particular constituent group to do so to the benefit of the constituent group. We may. But at the end of the day, each one of the

unions have presented us with a plan for themselves, say the pilots

and the machinists, that we have under consideration and we are

now pursuing.

Senator BAUCUS. That is in the context of bankruptcy.

Mr. TILTON. Well, it actually works best for them now, so the

consensual negotiations that we have underway may well be preferable to seeking restoration.

I think the point that is being made is, to go back to defined benefit plans—take my colleague’s testimony to my left—it is not likely

for a company that finds itself with legacy obligations, such as network airlines. As we have negotiated defined contribution plans as

our colleagues have at Delta, it is probably a more appropriate future for our companies. Since they are consensually negotiated with

the recipients of the plans, I would say it is a better outcome, Senator.

Senator BAUCUS. Mr. Grinstein, on the legislation, a concern I

have with it, frankly, is that the stretch-out period is awfully long,

25 years. To what degree can that be shortened up?

Another question is, it assumes a certain higher interest rate

than is actually the case, because companies get to assume their

own higher rate, which lowers their contributions. There is a lot of

talk here about mark-to-market and reality, and so forth. Are those

provisions that need to be addressed in this legislation?

Mr. GRINSTEIN. Well, I think that there are some moveable

pieces. There are dials that can be worked and that we can talk

about. I mean, we have a rough idea of the kind of payments that

we can afford under the viability plan, and I suspect that this hearing is the beginning of a dialogue to see if we can work that out.

The time period that was selected reflects the long life of that

pension obligation, but if the committee feels that it has to be

shorter or if there is a change in the interest rate, then I think that

can be discussed. But as I say, under the viability plan, we have

a level of payment that we believe we can afford and meet all of

the obligations that we have.

Senator BAUCUS. What about restricting lump-sum payments?

Because right now, with lump-sum payments, I guess the pilots can

take out 50 percent in a lump sum, which clearly drained the assets of the plan, which creates more jeopardy for those that stay.

Mr. GRINSTEIN. Senator, I think there is a better solution, and

that is to adopt a plan like this. The problem with stopping the

lump sum is that you will create a run on the bank.

41

Once something like that is pending, you will have a massive

number of people trying to take their lump sums and leave, and

it would make it very difficult to run the company if that occurred.

So if we had a consistent policy and they knew that payments

were going to be made and it was affordable by the company, I

think that is a much better signal than the other one.

Could I correct one thing? I misspoke, which is why they try to

keep me on a text instead of shooting my mouth off.

Senator BAUCUS. Join the club. [Laughter.]

Mr. GRINSTEIN. I said that we had terminated the pilot pension

plan. In negotiations, we froze the defined benefit plan and transferred them to a defined contribution plan.

Senator BAUCUS. How much is the solution to the pension problems going to give significant stability to the airline industry? I

mean, particularly the hub-and-spoke guys, the network carriers.

Just generally, is this 10 percent of the problem? Is it 50 percent

of the problem? Ninety percent? I am just curious, for the foreseeable future.

Mr. STEENLAND. I think, Senator, it is the one problem we have

that we cannot resolve ourselves. This requires a legislative solution. We clearly have other challenges facing us as we transform

ourselves from legacy enterprises that had our foundations created

in a regulated environment to an unregulated environment, but

those are challenges that we can address through collective bargaining and through negotiations with vendors. This problem requires a legislative change. This is something that we cannot fix

ourselves.

Senator BAUCUS. Senator Wyden, I think you are next.

Senator WYDEN. Thank you, Mr. Chairman.

Gentlemen, what I am concerned about, and I want to ask this

of the three presidents, is the double standard with respect to pensions.

In fact, Mr. Woerth told Fortune magazine, ‘‘While thousands of

pilots will retire with only a fraction of the pension benefits they

earned and expected, airline executives can look forward to retirement knowing that their nest eggs are solid gold.’’

Now, these executives include the gentleman sitting at the middle of the witness table. I have a worker, for example, Mr. Tilton,

in Tigard, OR who is going to get $138 a month after her health

insurance premiums.

What do you all propose to do as part of this pension reform effort to eliminate the double standard so that people can say, look,

these sacrifices are truly shared? And I would like a response from

you, Mr. Tilton, Mr. Steenland, and Mr. Grinstein.

Mr. TILTON. I really, Senator, cannot speak to the legislation,

and would propose that my colleagues do that. I will tell you that

Captain Woerth will have to explain to me, in fact, what he meant,

because in the distressed termination process the most ill-affected

of employees in the distressed termination process are the senior

executives of the company in a proportionate context.

The PBGC, if you can imagine, the threshold guaranty of some

$46,000 a year, applies to a senior executive of the firm who could,

in fact, be making several hundred thousand dollars a year. So, in

42

fact, the senior executives, long-serving of the company, suffer a

greater loss than any other employee.

Senator WYDEN. Is your pension, Mr. Tilton, shielded from a default in creditors? Just a yes or no.

Mr. TILTON. I have no pension with United. I have no United

pension, nor will I have a United pension.

Senator WYDEN. I was under the impression——

Mr. TILTON. I realize that you were.

Senator WYDEN [continuing]. That you were going to receive $4.5 million in what is called a lifetime trust fund. Is that accurate?

Mr. TILTON. No, that is not a lifetime trust fund. Upon my appointment to the position in 2002, I had a value at-risk in the contract I had with my prior employer.

During the negotiations with the board of directors, the creditor

committee, and the court, I asked them to protect that value at-risk

that I had earned for 32 years with a different employer.

For the record, I have no United pension, nor, since I have not

been with United for 5 years, Senator, will I have a United pension, because I am considered by Mr. Bradley Belt to be a non-vested employee.

Senator WYDEN. But you do, in fact, as part of the agreement to come to United, have $4.5 million that will be secure. Is that correct?

Mr. TILTON. That is correct. Of the $4.5 million that was nego- tiated with the creditor committee and with the court, Senator, $3

million of that has already been dispersed to me, and $1.5 million

remains on the condition that I stay with the company for an additional year.

Senator WYDEN. The worker in Tigard is going to have $138 a

month, you are going to have $4.5 million as part of what you have

correctly said was worked out when you came to United.

Mr. TILTON. Earned elsewhere.

Senator WYDEN. My question is, what would you propose to do

to eliminate what clearly seems to be a double standard? I would

just like to have each one of you comment.

Mr. TILTON. What we have proposed at United is, upon exit, the

employee value proposition include, in large measure, components

of compensation that are usually reserved only for executives.

That includes profit-sharing and equity in the new company

upon emergence from Chapter 11. Senator, I think that is a very

compelling thing for us to propose to the employees.

Senator WYDEN. I would like to see this in the legislation. I

mean, you all are coming to Congress once again, asking for Congress to help, and I am going to do everything I can to make sure

there is no double standard written into the law.

Mr. Steenland and your colleague?

Mr. STEENLAND. At Northwest, Senator, the answer is easy:

there is no double standard. All employees are in the same boat.

In fact, the salary plan is taking the lead with respect to looking

to get frozen. We have already started the process to freeze the salaried plan as a first step in the process.

Senator WYDEN. So you would support writing into any legislation a prohibition that would shield, for example, executives when

43

the workers have their benefits cut? I mean, I guess, gentlemen,

you all are saying that this is no problem.

Fortune magazine wrote in some detail otherwise, that at U.S. Airways, Steven Wolf took his pension in lump sum of $15 million

when he stepped down in March, 2002, 6 months before the company filed for Chapter 11. You all keep saying that there is no

problem here. I want to make sure that if Congress steps in and

legislates again, that it is locked into the law that there is no double standard. I would just like a yes or no.

Mr. STEENLAND. I can only speak for Northwest. There is no double standard there.

Senator WYDEN. Mr. Grinstein?

Mr. GRINSTEIN. Well, I would say the same is true at Delta. I do

not want to pretend to be a goody two-shoes, but none of our senior

executives have contracts. I do not have a contract. I have no retirement plan, I have no bonus plan, I have no pension plan.

Senator WYDEN. I am aware that you took responsible steps before you joined the plan.

You will support legislation that there be no double standard?

Mr. GRINSTEIN. I am against double standards.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Yes.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you.

The CHAIRMAN. Senator Wyden, will you tell Senator Frist to

hold the vote for Senator Rockefeller? Because he stayed here so

I could go vote.

Senator ROCKEFELLER. Just two quick questions, and the others

I will submit for the record.

[The questions appear in the appendix.]

Senator ROCKEFELLER. First, to Duane Woerth. With respect to

this bill that Senator Isakson and I have offered, there was a similar experience with Air Canada, was there not, that you are very

familiar with?

Captain WOERTH. Yes, there was.

Senator ROCKEFELLER. The time might have been a little bit

shorter, but the stretch-out period was longer and I believe it made

a difference.

Could you explain that?

Captain WOERTH. Thank you, Senator. I can. It actually goes to

Senator Baucus’ question as well, as to how important pension amortization is to the capital markets. When Air Canada, which was

about 65 percent of the total marketplace of Canada, was in bankruptcy and was unable to secure exit financing, the single reason

was nobody would finance Air Canada’s exit from bankruptcy with

the current pension funding rules in Canada, which are similar to

ours. They just would walk away. When the parliament of Canada

understood that if they would give them a long-term amortization

of the pension funding—the defined benefit plans of Air Canada—

this would unlock the door. The capital markets would fund Air

Canada, and in fact there would be competitive bids. That is exactly what happened. The day that the parliament passed longterm amortization of the unfunded liabilities of Air Canada, four

proposals came to Air Canada. Forty-one days after that, they

44

exited bankruptcy. That is how important the capital markets

looked at the unfunded liability problem. When a solution is provided—in that case by parliament, and hopefully in this case by

our Congress—I think the results will be the same.

Senator ROCKEFELLER. Thank you very much.

Ms. Friend, this is a friendly question for you, but it has a point

to it. You are advocating, as I understand it, legislation that would

prevent the PBGC from taking over the flight attendants’ pension

plan.

But the Bankruptcy Court, which is fairly significant, has agreed

with a whole lot of experts who have determined that United Airlines cannot emerge from bankruptcy protection without terminating all of its pension plans.

So my question to you is, does your union’s position on pensions

not put at risk all of the flight attendants’ jobs? If United cannot

attract investors, we have just heard that from Captain Woerth,

and emerge from bankruptcy—and maybe it will not be 41 days,

but it would certainly be an advantage—the flight attendants, the

pilots, the machinists, and all United personnel may ultimately

lose both their pensions and their jobs.

How do you respond to that? Am I wrong?

Ms. FRIEND. Well, in fact, because of the back-room deal that

United Airlines and the PBGC made, United Airlines was never actually required to put on evidence in the Bankruptcy Court——

Senator ROCKEFELLER. Am I wrong?

Ms. FRIEND [continuing]. That failure to terminate the pensions

would, in fact, prevent them from exiting bankruptcy. The question

in front of the court was, should the agreement be approved? That

is one of our objections, that they never actually had to prove the

standard that is required.

Senator ROCKEFELLER. The Bankruptcy Court has so ruled that

all unions have to agree. Everyone has, including Mr. Roach’s. Not

the membership, but the leadership. You are holding this whole

thing up, I think.

Ms. FRIEND. The day that the flight attendants can hold up the

progress of a corporation is a day that we will certainly be——

Senator ROCKEFELLER. It is here.

Ms. FRIEND [continuing]. Finally recognized for our position in

this industry.

The Bankruptcy Court approved an agreement. That is what the

Bankruptcy Court approved.

I would like to respectfully point out that, in light of the fact that

Mr. Tilton has indicated that it is possible to have these plans restored, and that the other two CEOs and Captain Woerth, and you,

Senator, have indicated that there is a viable possible legislative

solution, that that makes the passage of the STOP Act, the 6-

month moratorium, even more important, because we can use that

period of time to pass this other, more comprehensive legislation

and perhaps prevent the kind of tragedies that Senator Wyden was

referring to.

Mr. TILTON. If I could, Senator, let me just speak to the bankruptcy judge’s comments, specifically to your point. Judge Wiedoff

said, ‘‘The least bad of the available choices for him here, for me,

45

has got to be the one that keeps an airline functioning and keeps

employees being paid.’’

As I said, United Airlines has come to the point of decision making, not to the point of stall, or of delay, or of moratoriums. We are

certainly ahead of the circumstances that my colleagues speak to,

and it really is time for us not to do, candidly, what everybody in

this industry has done in the past, which is wait for things to get

better, because frankly I do not believe they are going to get better,

Senator.

Senator ROCKEFELLER. I would agree with that.

I apologize, and I thank all of you. I have to go vote.

The CHAIRMAN. Thank you all for being patient under the circumstances of a vote and people that would like to stay and answer

questions, because I assume, as Mrs. Lincoln told me she was going

to submit some questions for answer in writing and would not be

able to come back, there are probably others of the same mind.

[The questions appear in the appendix.]

The CHAIRMAN. I am going to start with Mr. Grinstein and Mr.

Steenland. You are willing to freeze your pension plans in connection with being given more time to fund them. There is nothing in

the law preventing you from freezing your plans today.

In light of the very serious financial problems at both your companies and the severe funding deficit of your pension plans, I would

like to know why you have not moved to freeze your plans already,

or at least tried to reduce future accrual rates.

Mr. GRINSTEIN. Well, I will answer for Delta. As I indicated, with

our pilots, we negotiated last October a freezing of the defined benefit plan and it was converted to a defined contribution plan. So in

the case of the pilots, that has taken place.

In the case of our non-pilot employees, the defined benefit plan

is in the process of being frozen. There is a 7-year transition to a

cash balance plan. So, both of those steps really have been taken.

The CHAIRMAN. Mr. Steenland? I asked the question because of

the authority of you to unilaterally freeze your plans. In other

words, right now, before they get worse. Go ahead.

Mr. STEENLAND. Well, unfortunately, we do not have the unilateral authority. In the case of the salaried plan, we have an application pending in front of the IRS to get their permission to freeze

our plan, and we are hoping that they will act upon it very expeditiously.

As to our other plans, the ability to impose a freeze is subject to

collective bargaining, and we are in the middle of negotiations with

our pilot group and other unions with respect to the elements of

what a freeze would look like. If we had the unilateral right to

freeze, we would do so promptly and we would have done so already.

The CHAIRMAN. I think you used the words ‘‘cash balance plan.’’

Mr. GRINSTEIN. I was the one that used that. Yes, sir.

The CHAIRMAN. That is not a defined benefit plan.

Mr. STEENLAND. Well, I think it is, but it is different from a traditional defined benefit plan. You do not get the annuity benefit of

it.

The CHAIRMAN. Now, my variation of the question that I just

asked is, why does it take so long, considering knowledge of how

46

serious the problems are going to be? As Mr. Tilton has said, the

future does not look very good. But it has not looked good for a long

time.

In other words, it is inconceivable to me how you were not working sooner to find a solution before things reached the full-blown

crisis that they are today. Everyone has known that these pension

plans are severely under-funded. Everyone has known that these

companies are in severe financial distress. That has been the case

for some time.

I would like to ask the union leaders why you have not been

working earlier to reign in future benefit promises, at least until

the funding levels of these plans improve.

Ms. FRIEND. In our last round of concessionary bargaining with

the bankrupt United Airlines, we in fact did cap the benefit accrual. No matter how long you work at United Airlines, you cannot

accrue a benefit for more than 35 years of continuous service, so

we have done that.

The CHAIRMAN. Mr. Roach and Captain Woerth?

Mr. ROACH. As indicated, we proposed to United Airlines in 2000

to freeze that plan and go into a multi-employer plan. We made

similar proposals to Northwest Airlines and to Continental Airlines. We recognized this problem in 2000, and we were having discussions and made proposals in order to rectify the situation long

before we got here.

As I indicated, as a TWA employee, the plan was frozen for 9

years, and that is why I only get $205 as a retiree from TWA. So

this organization recognized the problem a long time ago and tried

to initiate steps to correct the problem.

But because of the fact that the correction to the problem would

require the airlines to start paying as they should have been paying, as was the testimony from the government, for the previous 5

to 7 years, they were not interested in a fix at that time.

Testimony before a presidential emergency board revealed, back

in 2002, I believe it was, or 2001, that United Airlines came to this

organization and proposed massive pension increases. We indicated

we wanted the pension plan to be frozen at that time rather than

these massive pension increases, because we recognized at that

time, upon information and belief from our actuaries, that there

was no way this was going to get paid. So, we recognized the problem. We made proposals.

We continue to make proposals to rectify the problem and hopefully, through Congress, through the Senate, and through working

with these carriers, that we will find a solution to this problem.

But we know the problem is there and we do not have our head

in the sand. We are trying to fix the problem.

The CHAIRMAN. Captain Woerth?

Captain WOERTH. Thank you, Senator. First, in two of the three

airlines that are still in the most serious jeopardy, we have already

negotiated a pension plan freeze at Delta. We have also negotiated

a pension plan freeze at Continental, and it is under discussion at

Northwest.

Prior to this, we have also, out of all these carriers, negotiated

massive pay decreases in an attempt to keep the cash flows going

47

so the airlines can continue to operate while we do negotiate. At

Delta, it was over a billion dollars a year from the pilots alone.

So, we have continued to do this kind of bargaining. As we have

worked with the Congress in looking at pension funding relief that

resulted last year, we got a deferment.

We were seeking more, but we got what we got and we are back

looking for pension funding rules that will accommodate the concessions that have already been made, and the good faith bargaining to freeze pension plans and move to another system.

S. 861 is a transition rule to a defined contribution plan, and I

want to say to Robert, we certainly have no objections to anything

that accommodates multi-employers, either.

The CHAIRMAN. Yes.

Mr. Steenland, then Mr. Grinstein, your definition of a freeze as

it applies to your company. We will start with you at Northwest.

Mr. STEENLAND. We are in the process of negotiating a freeze,

Senator. But in that regard, our intent—and we are willing and

prepared—is to operate with respect to a so-called hard freeze.

The CHAIRMAN. All right. Meaning?

Mr. STEENLAND. A hard freeze would, in essence, truly cap the

PBGC’s liability, which we think is an appropriate public policy

coming out of this bill.

The CHAIRMAN. Mr. Grinstein?

Mr. GRINSTEIN. Yes. The freeze that we have been talking about

is a freeze from the point of view of the PBGC. Ours is what is

called a soft freeze, but it limits the number of years. But we are

obligated at Delta to pay on an annual basis whatever increase is

there, so from the PBGC’s point of view, it is a freeze and the obligation going ahead is on us.

I want to make it clear, in case it is not clear, the obligation that

we are talking about is for the past, it is not for the future. Our

past liability is frozen.

The CHAIRMAN. But then future benefits can accrue under what

you just said?

Mr. GRINSTEIN. No. The company is obligated to pay, on an annual basis, any increase that occurs.

The CHAIRMAN. All right.

Go ahead, Senator Bunning.

Senator BUNNING. That is a very interesting observation, since

you are on the verge of bankruptcy. Any increase or any freeze

means a freeze, but it does not mean a freeze.

Mr. GRINSTEIN. Well, it does mean a freeze from the point of

view of the PBGC. Theirs would be frozen.

Senator BUNNING. How in the world, all of a sudden, you throw

your pension program onto the PBGC and you have increased your

benefits in the meantime? Somehow it does not make any sense.

I am going to ask you a question about the Isakson-Rockefeller

bill, which two of you seem to support. I have a number of questions.

Please explain your thinking about the decision to allow your

pension benefit plans to grow during a period when your companies

are having problems meeting your existing obligations. Why do you

feel it makes sense for Congress to allow you to increase benefits,

48

while at the same time providing your industry with relief from

payment obligations?

Mr. STEENLAND. I will speak on behalf of Northwest, Senator. We

are not proposing any benefit increases with respect to the existing

pension plan.

Senator BUNNING. You may not be, but your colleague from

Delta?

Mr. GRINSTEIN. No. I mean, all we have are agreements that we

have negotiated with our employees.

Senator BUNNING. But if you want to really get your financial

house in order, can you tell me, sir, in the last 21⁄2 years, how

many dollars has Delta Air Lines lost?

Mr. GRINSTEIN. Yes, I can tell you how much Delta Air Lines has

lost in the last several years.

Senator BUNNING. Would you like to bring it out?

Mr. GRINSTEIN. Well, we lost $5 billion last year.

Senator BUNNING. Five billion?

Mr. GRINSTEIN. Yes.

Senator BUNNING. And how long can a company operate, bleeding $5 billion out the front door? How long?

Mr. GRINSTEIN. Senator, obviously, bleeding only stops—I am

sure Dr. Frist would understand that——

Senator BUNNING. I am not sure anybody would understand how

bad management——

Mr. GRINSTEIN. But the point is——

Senator BUNNING. No. You are going to listen.

Mr. GRINSTEIN. All right.

Senator BUNNING. How bad management at Delta Air Lines has

cost the employees of Delta not only their pensions, but reduced

pensions, reduced pay, and reduced everything. You blame it on everybody but your own management group.

Now, I know you have not been there very long, but I knew your

past management group pretty well. I knew when you bought

ComAir and ComAir was operating completely profitably, to the

point where you paid—I never have figured that one out—cash for

their stock.

Now you are coming to us and you want us to allow you to do

something that I do not think is in the best interests of Delta Air

Lines. We want to freeze or reduce your costs, and we want you

to do it on your own, because we do not want to force the Federal

Government down your throat.

You are going to come to us with your pension program, like

United Airlines did, and add $6.6 billion in losses to the PBGC. We

do not want Delta to have to do that.

Now, I know you have taken some remedy steps to avoid that,

but we do not think you have taken enough.

Mr. GRINSTEIN. Let me try to answer it this way. There are certain things that we can move and certain things that we can

change, and we are working on that. As I mentioned in my direct

statement, in the last 10 months we have taken $2 billion of costs

out of the company, which is an enormous amount.

Senator BUNNING. Thanks to your employees.

Mr. GRINSTEIN. Thanks to all of us, every employee and every

person at every level in the company. That was one source of it.

49

Being smarter, more efficient, and utilizing technology better is another piece of it. Changing the business processes was another

piece of it. It is not just one level or one attack, it is going at the

problem from every possible angle, including the way you run your

system.

We had to make some very tough choices. We had to end our hub

at Dallas-Ft. Worth, which was not an easy thing to do. We had

to completely reschedule the way we flew Atlanta.

We, in 1 day, rescheduled 51 percent of the airline, and improved

dramatically customer satisfaction. So at the same time that we

are cutting the costs, we are making significant improvements in

the way we take care of our passengers.

But at the same time, fuel has moved up dramatically and has spiked, as you know, at about $58. That was something that was

not possible for us to anticipate. If we had had 1999 fuel levels, we

would have been a profitable company, but we do not have that.

So, that is something that neither you nor I, I guess, can do anything about, but we can attack the problems that we can move. We

can come to you and say, not looking at past mistakes, but what

does it take to keep you going and make it a viable airline and continue to operate?

What we want to do is be able to honor the promises that we

have made through our pension plans by having this legislation

spread those payments out over a longer period of time. But there

is probably a lot of blame that can go around for the past. The

truth of the matter is, our job—my job, our collective job—is to

focus on what we can do to make this company operate in the future.

Senator BUNNING. Well, I hope so, because I have 8,000 constituents who work for your company, and their livelihood depends on

whether you survive or whether you do not survive, and I see them

on a daily basis.

I hope that your airline is able to avoid Chapter 11, but at the

rate of losses, I do not know how that is going to be possible. I am

worried about the employees’ pension and the suggestions that all

of you, and everybody here, have made to make our laws better so

what has happened cannot happen again. That is the main thing

that this committee is holding these hearings for.

My God, it does not do any good to promise a pilot, an attendant,

a mechanic, or anybody in management a certain amount of money

if you cannot deliver it in the future. If you cannot stay current

with your benefit plans, then you have over-committed somehow.

I can give you chapter and verse on other pensions that are doing

quite well, in spite of the fact that fuel costs are very high—not

necessarily airlines, but certain other things. Thank you for your

time.

The CHAIRMAN. I have just one additional question, then I will

call on Senator Wyden.

Mr. Grinstein, you say that the PBGC is protected under the

Isakson bill, but it is my understanding that that bill allows the

airlines to pick their own interest rate for valuing pension liabilities. Is not the end result of that that if a plan terminates, the

PBGC could end up with a bigger liability?

Senator BUNNING. It would.

50

Mr. GRINSTEIN. Well, if my understanding is correct, and I think

my colleague to the right is probably a little more versed in this

than I am, we have operated for a number of years under the accrued liability interest rate.

In answer to an earlier question, I indicated that that was one

of the dials that I thought we would have a discussion about with

the committee as they consider this legislation and what changes

they want to have to it.

But the accrued liability level is the way it has been operated for

a long time. If we went to the current liability method, I am not

sure that we could afford to accommodate the payments that would

be due.

The CHAIRMAN. All right.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. Mr. Chairman,

thank you for your thoughtfulness in terms of giving me this opportunity for some additional questions.

Mr. Tilton, has United discussed its pension obligations and the

possibility of defaulting on them with the Department of Transportation, the Department of the Treasury, or any other agency other

than the PBGC?

Mr. TILTON. Yes. I think that, in all probability, Senator, what

you speak to is the fact that the Department of the Treasury, the

Department of Transportation, and the Federal Reserve are the

governing body, the governing agencies, of the ATSB Loan Guaranty process.

So in the course of the company’s multi-month—as a matter of

fact, longer than a year, 14 months—experience of applying for a

loan guarantee, which at the end of the negotiation was down to

$1.1 billion of guarantee and $900 million at-risk, we had lengthy

conversations with representatives from the Treasury and from the

Department of Transportation, and from the Federal Reserve.

Senator WYDEN. Did any of those agencies ever suggest steps or

recommend to United that your company default on its pension

plan?

Mr. TILTON. It is my understanding that, during the deliberations that took place on the occasion of our negotiated $1.1 billion

of loan guarantee, the issue of our default was discussed by that

body.

Certainly in the course of our deliberations with them, questions

were put to the company on many occasions: is your restructuring

sufficient without the termination of your defined benefit plans?

There were those certainly on staff, and those associated with

the judgment that was going to be made, about our loan guarantee

application that suggested to us that they were of a view that the

defined benefit plans would have to be terminated for us to be

financeable, and ultimately viable.

Senator WYDEN. So, several of these government agencies, on the

basis of what you said, did, in fact, recommend that United default

on its pension plan.

Mr. TILTON. I would put it another way, Senator.

Senator WYDEN. Could I have a yes or no answer to the question? Did one of the agencies——

51

Mr. TILTON. I am not them, Senator. So what I am saying is,

they begged the question of us: are you financeable and are you

viable with the current defined benefit plans?

Our view was that it was our fiduciary duty to do everything we

could to sustain them. So, obviously we were in a different place

than those who were making the judgment on the loan guarantee.

Senator WYDEN. I have a question for the three of you executives, and I hope we can get a direct answer to this one. What I

would like to know from the three of you executives is whether or

not, over the last 10 years, your company shifted funds out of the

pension plan.

Now, if you did, I would like to know how often. If you did not,

then please just inform me of that fact.

Mr. Tilton?

Mr. TILTON. No.

Mr. STEENLAND. No.

Mr. GRINSTEIN. No.

Senator WYDEN. All right.

My last question then for the three of you executives goes to

something I am very interested in in terms of the reform legislation

that might be considered.

What I would like to ask the three of you is, if you could get a

loan for your company from the government in exchange for an equity interest in the company, and this loan would allow you to

emerge from the bankruptcy process without discharging your pension obligations, would you take this loan?

Mr. Tilton?

Mr. TILTON. Well, Senator, I think I just answered the question.

We pursued that loan for 14 months and we were denied.

Senator WYDEN. All right.

But, I mean, we are going to be talking about legislation here.

As you know, we looked on the previous, after-9/11 airline legislation. It is something that I think is a tool for accountability.

That is, in effect, the government can take an equity interest, at

least in this case, with respect to the Pension Benefit Guaranty

Corporation. So, I am hearing you say that you would be agreeable

to our doing that in this legislation as well.

Mr. TILTON. Well, Senator, beyond the legislation, which is really

the appropriate purview of my two colleagues, I am about to have,

as you know, a government agency with a significant equity stake

in United Airlines to facilitate our exit.

Senator WYDEN. Right. But I am going to assume you will generally be supportive.

Mr. Steenland?

Mr. STEENLAND. I think, for Northwest, Senator, the right answer is to freeze the defined benefit plan and then transition into

the defined contribution plan. Defined benefit plans, I think from

the company’s perspective and from our employees’ perspective,

really do not work in the airline business. The business is too volatile.

The pension program works a lot better where we have a payas-you-go plan where, every month, every paycheck, the pension

contribution is made, it goes into the employee’s account or it goes

into an account that is insulated, and we are better off making the

52

transition and transitioning now from the defined benefit world to

a pay-as-you-go form of plan.

Senator WYDEN. I understand that is your preference. With respect to legislation, though, would you be supportive of legislation

that would, in effect, provide this tool that I think would ensure

some real accountability?

Mr. STEENLAND. Well, again, what we are looking to address is

the broken DRC provisions. Our goal is to come up with a way to

preserve our existing pension plans, short of having to terminate

them. So, we need DRC relief in order to do that. If there is a proposal that the committee puts forward that permits that to happen,

we will clearly look at it in good faith.

Mr. GRINSTEIN. My answer would be the same.

Senator WYDEN. Again, we would like to work with you in this

area, because I think that the Chairman and Senator Baucus have

made certainly a conciliatory effort to address the airline industry’s

concerns.

What I want to do is make sure that we do not just repeat, every

5 to 10 years, the same things that have put us in this mess before.

I will tell you, I see a remarkable resemblance to some of what you

all have said today, to what has been said repeatedly in the past.

That is why I asked you about something that we have known

to work. After 9/11, when the government said it was going to take

an equity position with respect to providing assistance to the airlines, we saw that was not abused. That is why I want to get the

same sort of approach into the Pension Benefit Guaranty Corporation legislation that we will consider shortly.

Mr. Chairman, you have been very gracious in terms of giving

me this extra time, and I thank you.

The CHAIRMAN. I have no additional questions. I just want to

thank all of you for spending this time here. Obviously, as you

know, in the case of airlines as well as a lot of other industries,

because of financial conditions, it is necessary for us to pass legislation.

But we intend to go way beyond passing just the legislation that

is necessary to keep an important industry, and an important segment of our economy, viable. Thank you all very much.

[Whereupon, at 12:49 p.m., the hearing was concluded.]

(53)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

306

307

308

309

310

311

312

313

314

315

316

317

318

319

(321)

COMMUNICATIONS

322

323

324

325

326

327

328

329

330

331

332

Æ