IWS Documented News DAILY POSTINGS

IWS Documented News Service

_______________________________

Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

________________________________________________________________________

 

This service is supported, in part, by donations. Please consider making a donation by following the instructions at http://www.ilr.cornell.edu/iws/news-bureau/support.html

 

Congressional Research Service (CRS)

 

The Effect of Firm Bankruptcy on Retiree Benefits, with Applications to the Automotive and Coal Industries

Carol Rapaport,  Analyst in Health Care Financing

September 22, 2014

http://fas.org/sgp/crs/misc/R43732.pdf

[full-text, 28 pages]

 

Summary

Benefits for retired employees are of particular interest to policy makers because of the growing

number of retirees and forecasts indicating that some future retirees may not have the necessary

financial resources to maintain their standards of living. Part of this congressional concern is what

happens when bankrupt employers are unable to provide promised pension and health benefits to

their retired employees.

 

In chapter 11 bankruptcy reorganization, the employer receives protections against its financial

commitments in the hope that it may once again become profitable. This protection could include

not having to honor obligations concerning pensions and retiree health insurance. Its employees

may therefore be at risk of not receiving some of their promised benefits. Unionized and nonunionized

employees may be treated differently under the law because unionized workers have a

legal contract governing their terms and conditions of employment.

 

The costs to the employers for the pension, health insurance, and other benefits promised to

retired employees are known as legacy costs, and different costs are subject to different federal

laws. Although employers are required to prefund their defined benefit pension trusts, the level of

required funding may not be present as the employer enters bankruptcy. The Pension Benefit

Guaranty Corporation (PBGC), a quasi-public agency, monitors the finances of pension plans.

The PBGC becomes the trustee of and pays the benefits to participants in terminated,

underfunded single-employer pension plans. PBGC benefits are subject to a statutory maximum

that may be less than the retiree was promised by his or her employer. The PBGC has been

running deficits for several years, and the deficit for one of its two programs is at an all-time

record high. PBGC funding comes from employer premiums set by Congress, the assets of the

plans it takes over, and investment returns. There is no taxpayer funding.

 

Some retirees receive health benefits from their former employer. Retiree health benefits,

however, are not insured by any public agency, and employers are not required to prefund health

benefits. On the other hand, employees (perhaps represented by their unions) can fund health

benefits (for active and retired employees) through a tax-preferred trust fund known as a

Voluntary Employees’ Beneficiary Association (VEBA). When the employer and union agree to

form a VEBA, and it is approved by the bankruptcy court, the employer generally contributes a

collectively bargained level of funding to the VEBA. Providing the contribution usually fulfills

the employer’s total responsibility for retiree health care. All subsequent retiree health benefit

decisions are transferred to the trustees of the VEBA.

 

After a discussion of these issues, this report provides three examples of bankruptcy proceedings

where the retirees’ pensions and health insurance benefits received substantial federal attention:

the General Motors Corporation, the Delphi Corporation, and the Patriot Coal Corporation.

During bankruptcy proceedings for the General Motors Corporation (commonly known as Old

GM or pre-bankruptcy GM) bankruptcy, retiree health benefits were central and pensions,

although underfunded, were not a major issue. Old GM’s main union, the United Auto Workers

(UAW), accepted stock in the General Motors Company (commonly known as New GM or postbankruptcy

GM) as a partial funding source for its retiree health care VEBA. The VEBA has

covered retiree health benefits since 2010. It was intended to cover retiree health benefits for 80

years, but it is unclear how long its funding will last.

 

Pensions were a central source of controversy during the bankruptcy of the Delphi Corporation

(Delphi). Some (union and nonunion) employees had been promised a pension greater than the

PBGC maximum. When the various Delphi pension plans were terminated by the PBGC, most

unionized employees did not see their pensions fall because of supplemental pension coverage

originally negotiated by Old GM and the UAW. The salaried Delphi workers, however, had no

union, and some found themselves receiving lower pension benefits than had been promised by

Delphi. Salaried workers formed a labor association, the Delphi Salaried Retirees Association

(DSRA), with hopes of strengthening their position. The DSRA has been unsuccessful in its

efforts to have their members’ pensions increased, and the subsequent court case has not yet been

settled.

 

The bankruptcy of the Patriot Coal Corporation (Patriot) was also complicated and contentious,

even though federal law covering retired coal miners has been in place for many years. Both

pension and retiree health benefits were central to the negotiations. The relevant union, the United

Mine Workers of America (UMWA), is a multiemployer union where the collectively bargained

contracts cover the employees of many employers. The UMWA Pension Trust was underfunded

before the Patriot bankruptcy, and remains underfunded. In fact, some consider the potential

insolvency of the coal employers’ pension plan a threat to the overall solvency of PBGC’s

program on multiemployer pension plans. Because many Patriot retirees were employees of

another employer, Peabody Energy, when they were actively working, the bankruptcy court ruled

that Peabody, and not Patriot, was responsible for funding the VEBA newly created to cover

health benefits.

 

Contents

Introduction ...................................................................................................................................... 1

Protections for Retirees: Background Factors ................................................................................. 2

Bankruptcy ................................................................................................................................ 2

Type of Labor Organization....................................................................................................... 4

Type of Employee ...................................................................................................................... 5

Employer Agreements with its Former Subsidiaries ................................................................. 6

Protections for Retirees’ Pensions: The Pension Benefit Guaranty Corporation ............................. 6

Background................................................................................................................................ 6

Single-Employer Plans .............................................................................................................. 8

Multiemployer Plans ................................................................................................................. 8

Protections for Retirees’ Health Insurance: VEBAs ...................................................................... 10

Advantages Associated with VEBAs....................................................................................... 11

Risks Associated with VEBAs ................................................................................................ 11

Funding VEBAs ...................................................................................................................... 11

Protections for Retirees: Other Programs ...................................................................................... 12

 

Case Study 1: General Motors and the United Auto Workers ........................................................ 14

Background.............................................................................................................................. 14

Pensions ................................................................................................................................... 14

Retiree Health Insurance ......................................................................................................... 15

 

Case Study 2: Delphi and the Delphi Salaried Retirees Association ............................................. 17

Background.............................................................................................................................. 17

Pensions ................................................................................................................................... 18

Retiree Health Insurance ......................................................................................................... 19

 

Case Study 3: Patriot Coal and the United Mine Workers of America .......................................... 20

Background.............................................................................................................................. 20

Pensions ................................................................................................................................... 21

Retiree Health Insurance ......................................................................................................... 22

Recent Legislation ................................................................................................................... 23

 

Contacts

Author Contact Information........................................................................................................... 24

________________________________________________________________________

This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.