WASHINGTON - President Bush's refusal to relieve the financially troubled steel industry of huge pension obligations could result in more than half of the Pension Benefit Guaranty Corp.'s $7.7 billion surplus being slashed.
The Bush administration recently imposed short-term tariffs on steel imports but declined to let steel producers off the hook for their retiree health care and pension obligations.
Already, the federal pension agency has committed to picking up an estimated $2 billion in pension obligations from the demise of LTV Corp. A PBGC spokesman confirmed the LTV liabilities are not included in the surplus the agency will officially report in its 2001 annual report this month. LTV had pension assets of $2.2 billion and liabilities of $4.2 billion, according to PBGC estimates.
Moreover, Bethlehem Steel Corp., Bethlehem, Pa., which filed for bankruptcy protection Oct. 15, has an estimated $2 billion pension shortfall. Although a Bethlehem spokesman said the company has no plans to shut down its pension fund, sources say it's only a matter of time before the PBGC will have to pick up that tab.
And National Steel Corp., Mishawaka, Ind., which filed for bankruptcy protection March 6, had pension assets of $2.3 billion and liabilities of $1.5 billion at the end of 2001, according to company estimates.
Meanwhile, Weirton Steel Corp., Weirton, W.Va., had pension assets of $727.1 million and liabilities of $753.9 million in 2000. Its 2001 numbers have not yet been released, but the company does not expect to contribute to its pension fund this year, said Rick Garan, assistant treasurer.
The PBGC's surplus already is down $2 billion from the $9.7 billion it reported a year ago. And in fiscal 2000, the PBGC had estimated $5 billion in "reasonably possible" costs that could come due if financially troubled companies fail; that was not taken into account in calculating its surplus.
The PBGC "is the administration's legacy costs program," said a government official who declined to be identified. "What buyer would take on these pension costs when they don't have to?"
In fact, turnaround investment banker Wilbur Ross agreed last month to buy LTV's assets in a bankruptcy-court approved transaction but did not agree to assume pension and retiree health care costs. Still, former PBGC officials and others familiar with the inner workings of the pension agency say that while the steel industry's huge obligations might chip away at its surplus, it is in no danger of sliding into the red.
For one thing, the PBGC uses conservative interest rates, so liabilities appear higher and the resulting surplus smaller. Moreover, the PBGC doesn't pay 100% of pensions promised to workers by their employers, so it typically is not liable for the entire shortfall in a terminated plan. Under current law, the maximum the PBGC will pay out in 2002 is $42,954.60 a year at age 65. The cap is reduced for benefits commencing at earlier ages. And benefit increases and benefits in place for fewer than five years when the plan terminates are guaranteed at only 20% for each year.
"The PBGC is in a much better position to weather the crisis in the steel industry because they have this surplus," said Nell Hennessy, a senior vice president at Aon Consulting, Washington, who was deputy executive director and chief negotiator at the PBGC in the Clinton administration. In the mid-1980s, when an earlier crisis in the steel industry also caused a rash of bankruptcies, "it did look like it would break the PBGC, but now it will (just) dent the surplus," she said.
But in the case of LTV, the PBGC might end up covering most of steelworkers' pensions because their pensions aren't very high. Also, the PBGC did not act to take over the plans in December 2001, when the company announced its liquidation. In 2001, the PBGC guaranteed maximum pension payments of $40,704.60 a year.
Moreover, consolidation of the industry has failed. An effort led late last year by financially stronger steel companies like United States Steel LLC had the blessing of labor unions but not the government, which would not forgive the so-called "legacy costs" for retiree health care and pension obligations. Democratic and Republican lawmakers insist they still are working on brokering a consolidation.
The legacy costs are a "major impediment to any consolidation at this point," said Mike Dixon, a spokesman for Pittsburgh-based U.S. Steel. The company was in discussions with Bethlehem and Wheeling-Pittsburgh Corp., Wheeling, W.Va., in December, but talks fell apart after the Bush administration said it wouldn't pick up the tab for retiree health care and pensions. U.S. Steel reported pension assets of $8.6 billion and liabilities of $7.4 billion at the end of the 2001 but has no plans to use its estimated $1.2 billion surplus to sop up pension and retiree medical expenses for companies it acquires, Mr. Dixon said.
"It would be more orderly if the government assumes those costs upfront and allows us to buy these companies," he said. The company is still in discussions with acquiring National, Mr. Dixon confirmed.
Sen. Barbara Mikulski, D-Md., who chaired the Senate Health, Education, Labor and Pensions Committee's hearings on the subject last week, echoed this sentiment. "Consolidation can't happen until $10 billion in health care costs are addressed," she said.
Working on legislation
Ms. Mikulski and other lawmakers on Capitol Hill are working on legislation that would require the federal government to pick up the tab for the retiree health care costs, but there are no current plans to include pension liabilities in the bailout package, sources say.
"As it stands right now, there is no need to address the pension issue at this time. The hole that needs to be plugged at this time is health care," said a spokesman for Sen. Arlen Specter, R-Pa., a member of the Senate steel caucus who is drafting legislation to address the retiree health care issue.
Sens. Jay Rockefeller, D-W.Va., and Paul Wellstone, D-Minn., as well as members of the House steel caucus, also are drafting legislation to deal with the health care issue.