GAO: Airlines' Can't Afford Pension Payments
The GAO’s report on bankruptcy and pension problems in the airline industry blames the financial condition of airlines on structural problems and faults current pension rules for the pension underfunding. The report says the airline industry reported a $700 million surplus in pension funding in 1999. The industry reported a pension deficit of $21 billion in 2004, though.
The report says the deficit came about partly due to the stock market, but other factors such as management decisions and pension funding rules greatly contributed to the current airline pension crisis. Management not only entered into agreements that increased pension liabilities, but executives made decisions on payments to pension plans far less than what they could afford at times, according to the GAO. The report says the Pension Benefit Guaranty Corporation (PBGC) examined 101 cases of airline pension contributions from 1997 through 2002. In 49 cases airlines made no pension contribution when they were financially able to. In only 10 cases airlines made the maximum deductible contribution during this time.
As the GAO reports, though, the current pension funding rules made this possible. While the deficits continued to grow, companies were still in full compliance with funding rules. From 1998 through 2002, according to the report, airline pensions were consistently funded over 90% on a current liability basis, which allowed for companies to not make any pension contributions under current laws. In addition, the GAO says, the airlines have been allowed in the past five years to use prior funding credits to fulfill funding obligations. As an example, the report says US Airways used funding credits to meet minimum contribution requirements and avoid making payments to its pilots’ pension plan. At termination that plan was only 33% funded.
The $21 billion deficit in 2004 has decreased to $13.7 billion since US Airways and United Airlines terminated their plans and shifted the burden to the PBGC. According to the Associated Press, the termination of these plans has resulted in $9.6 billion in claims for the PBGC. The pension insurer has seen its liabilities grow to more than $23 billion last year, mainly due to takeovers of airline and steel industry plans, the AP notes.
Current legislation in both the US House and Senate seeks to tighten rules for pension contribution requirements, but the Senate bill includes provisions for the airline industry, giving them more time to meet pension obligations. The House version does not include such provisions. The AP reports that House Education and Workforce Committee Chairman John Boehner (R-Ohio) says the Senate language was “irresponsible” because it favors some airlines and not others and gets Congress too involved in industry restructuring.