The PBGC is expected to announce next month that its deficit has grown still bigger, when it reports a snapshot of its finances for the first half of fiscal 2005. The agency also is expected to announce that its potential liability for companies at risk of failure based on the credit rating of their bonds — a list that now includes General Motors Corp. and Ford Motor Co. — exceeds $100 billion, up from $96 billion at the end of fiscal 2004.
"The PBGC is understandably concerned about its exposure in the auto sector," said Harold Ashner, a partner in the Washington law firm of Keightley & Ashner LLP. "If there's a significant downturn, the PBGC could end up taking on pension liabilities from automakers and parts companies that would dwarf those the PBGC has assumed from the airline industry."
Top administration officials at the PBGC and elsewhere in the administration are reacting to the new legislative proposal with "openness (and) with caution," according to a senior official who did not wish to be identified.
The proposal was introduced by Sens. Johnny Isaakson, R-Ga., and John D. Rockefeller IV, D-W.Va., and by Rep. Michael Price, R-Ga. It was co-sponsored by most of the other 12 congressmen from Georgia, the home state of Delta.
It was introduced at the behest of airline executives, labor unions and employer groups, and has broad support among members of all four committees with jurisdiction over pension matters.
It would permit airlines with defined benefit pension plans to finance their underfunded pension plans over a 25-year period instead of the current four-year schedule. In return, the companies would have to freeze their pension plans — preventing them from promising benefits beyond those already accrued — and replace those plans with 401(k) plans. The bill would also protect the PBGC by freezing guaranteed benefits at the current level of $45,613.68 a year, instead it increasing each year with inflation. The legislation does not give the PBGC the authority to require the companies seeking relief to invest their pension assets in a way that would protect them from market fluctuations.
"We are open to considering ideas that would keep unfunded liabilities off the PBGC books, but we would need to make sure that there are protections in place to keep the hole from getting bigger," said Randy Clerihue, a PBGC spokesman.
He noted that while the legislation would freeze the PBGC's guaranteed benefits for employees whose companies seek help under the bill, it would not protect the federal insurer's liabilities from soaring if the plan sponsor makes the wrong bet on investing its pension fund assets, or if pension liabilities widen if interest rates drop, as they did in recent years.
The idea behind the legislation was first outlined in a Nov. 26 op-ed piece in The Wall Street Journal by former PBGC Executive Director Steven A. Kandarian; Duane E. Woerth, president of the Air Line Pilots Association International; and Douglas M. Steenland, president and chief executive of Northwest Airlines. A kernel of the idea had been floated earlier last year, but was shot down by the Bush administration in discussions that led to the enactment of temporary changes in the law in April 2004.
"All of the relevant agencies of the executive branch are studying the proposal," said Gary Ford, partner in the Washington-based Groom Law Group, who represents Northwest Airlines and American Airlines, owned by AMR Corp., two of the airlines lobbying for the Isaakson-Rockefeller legislation.
Others who support the broad outlines of the legislation, such as Ron Gebhardtsbauer, a senior fellow at the American Academy of Actuaries, Washington, suggested the legislation be fine-tuned to permit the federal insurer to decide how long a financially troubled company should be permitted to spread out its pension contributions.
Mr. Gebhardtsbauer also suggested that financially distressed companies in other industries be permitted to extend contributions, combined with freezing their plans.
The Isaakson-Rockefeller legislation is expected to become part of a pension package that would include a permanent replacement for the benchmark used by employers to determine their pension contributions and base their premiums for pension insurance.
Senate Finance Committee Chairman Charles E. Grassley, R-Iowa, is preoccupied with Social Security overhaul proposals and has not yet taken a position on the Isaakson-Rockefeller legislation, said John O'Neal, a legislative aide. Mr. O'Neal said the committee's version of the pension package may not be ready until September, after consideration of Social Security overhaul proposals.
Rep. John Boehner, R-Ohio, chairman of the Education and the Workforce Committee, is expected to be the first out the door with a House version of the pension package, possibly next month, that would include provisions of the Bush administration's proposals for changing pension funding rules and protecting the PBGC, as well as the Isaakson-Rockefeller bill.
Additionally, Reps. George Miller, D-Calif., and the ranking Democrat on the House Education and the Workforce Committee, and Jan Schakowsky, D-Ill., last week introduced legislation that would impose a moratorium on airlines — including United — dumping underfunded pension plans on to the PBGC in the next six months, in the hope that Congress will pass a comprehensive pension package by then.
The Bush administration might also have to swallow changes to its pension package contemplated by lawmakers to stop a potential exodus of employers from sponsoring defined benefit pension plans.