UAL Terminates Pension Plans–Update (House Attempts to Intervene)

I blogged at length on this about 6 weeks ago.

Now The House is saying “not so fast” to having the government in effect take on the bankrupt company’s pension obligations:

WASHINGTON (Reuters) - The U.S. House of Representatives on Friday voted to block bankrupt United Airlines (UALAQ) from defaulting on its pension plans and shifting them to the Pension Benefit Guaranty Corp. (PBGC)

The provision was attached to a government spending bill expected to pass the chamber later in the day. The bill would still have to pass the Senate before it could take effect.

However, even then its impact would be unclear, as the PBGC does not spend government-appropriated funds. In any case the agency has already taken over one of United’s four “defined benefit” pension plans.

More than 30 Republicans joined the proposal’s Democratic sponsors in supporting the measure by a vote of 219-185. It said the PBGC could not spend government funds to carry out a court-approved agreement to take over four pension plans from the bankrupt airline.

California Rep. George Miller, the amendment’s sponsor, and other Democrats warned more airlines could follow United’s lead, inundating the PBGC and forcing a taxpayer bailout of the agency.

“This amendment is absolutely necessary if we are going to stop the dumping of pension obligations on the taxpayers of the United States,” said Rep. David Obey, a Wisconsin Democrat. “Without this amendment, Uncle Sam is being Uncle Sucker.”

A PBGC spokesman said the agency was examining the amendment.

My immediate reactions and questions:

• What if the company decides to totally liquidate in response? The employees would almost certainly get nothing from their pension plans, and it’s possible that even current benefit recipients would see their benefits disappear.
• Somebody should have thought about the “Uncle Sucker” implications a long time ago, like before legislating PBGC into existence, and if not then, during the 1980s when it became clear that companies, largely in the steel industry at the time, were beginning to use PBGC as a guarantor of last resort before emerging from bankruptcy.
• What employer in their right mind would want to start up a new defined-benefit pension plan in this environment?
• If United sets a precedent by liquidating and leaving employees and beneficiaries out in the cold, what employee of a company in serious financial trouble but not yet bankrupt is going to stick around when leaving and cashing out accumulated benefits enables them to at least get something out of the plan?
• If the skeptics about the bill, which is far from being law, correct in claiming that Congress essentially has no jurisdiction over the “independent” PBGC? If so, maybe it should be turned into a publicly-traded company after a limited and one-time government bailout. Then market discipline would be forced into PBGC’s pricing (e.g., seriously underfunded plans would have to pay higher premiums) and even into its decisions on continuation of coverage. The ultimate market discipline would be the possibility that PBGC itself could actually go broke with no conceivable recourse to Uncle Sam. This would have to be crystal-clear from the start, or we’d end up with a pension entity that has the problems that Fannie Mae and Freddie Mac, with their implicit government bailout, have today. Taking this step now would also shake some sense into General Motors, Ford, and the United Auto Workers union.
• Finally, if the possibility that UAL will simply liquidate if the legislation ultimately passes is real, I can’t help but notice the irony, in light of the Kelo property-rights/eminent domain case yesterday at the Supreme Court, that this primarily a Democrat-driven bill. Or maybe they’re being consistent. After all, Democrats are usually hostile to property rights, so perhaps extending that hostility to totally annihilating property rights UAL employees had built up over the years (if UAL opts to liquidate) isn’t that much of a stretch.

I haven’t run the numbers, but I get the sense that trying the PBGC spinoff idea 10 years from now, or maybe even 5, won’t work. It will simply be too late because the bailout cost will be too high.

It appears at the moment that Congress is playing a high-stakes game of chicken with PBGC and UAL. But if this legislation passes, there won’t be any winners, and maybe no survivors.
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UPDATE: A brilliant entry from Von Mises on the long-term consequences of public and yes, even “private” (in quotes because of the existence of The PBGC) pensions.