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Bush Signs Bankruptcy Bill

President Bush signed legislation today that marks the biggest overhaul of our bankruptcy system in a quarter century.

The bankruptcy bill signed by President Bush will go into effect in six months. The major change under the bill is that debtors seeking to file bankruptcy will be subject to a means test. Debtors with incomes above their state’s median and who can pay back at least $6,000 over five years will have to file a Chapter 13 bankruptcy. These debtors will be required to enter into a payment plan to pay back some of their debt over time.

Currently, the court has discretion to determine whether an individual is required to file Chapter 13 rather than Chapter 7.  Chapter 7 allows debtors to discharge their debts by liquidating certain assets and paying what they are able from the money generated.

President Bush has long supported this bill. He stated, "Bankruptcy should always be a last resort in our legal system. If someone does not pay his or her debts the rest of society ends up paying them."

Opponents of the bill feel that its impact will fall the hardest on low-income individuals, minorities, the elderly, and single mothers. It will be especially hard on those who suffer a medical crisis or lose their job.

Supporters of the bill see it as a long awaited change. The bill has been around in varied forms for the past eight years. Supporters feel that it will prevent abuse of the system by individuals seeking a way out of gambling debt, child support, bills resulting from compulsive shopping, and other abuse of the bankruptcy shelter provisions.

House Passes Bankruptcy Bill

The bankruptcy bill passed in the House of Representatives yesterday by a 302-126 vote.

Congressional approval of the bill was much expected this session, especially after the bill passed in the Senate last month by a 74-25 vote. The bill has come up but failed to pass in previous sessions largely due to a controversial abortion-related amendment that was not included in this bill this session. While largely a republican-supported bill, it has also gained the support of many democrats. Seventy-three democrats from the House voted for the bill.

The bill will make significant changes to our bankruptcy system, many people will be unable to completely discharge their debts under Chapter 7. Instead, individuals will be subject to a means test. Those with incomes above their state’s median will have to enter into a repayment plan under chapter 13. Opponents of the bill feel that it will punish consumers while aiding the credit industry.

President Bush has long been a supporter of the bill. Shortly after the House passed the bill President Bush stated, "I look forward to signing the bill into law." It may be presented to President Bush as early as next week.

FTC Settles with Fraudulent Debt-Counseling Agencies

U.S. regulators settled with three debt-counseling agencies accused of scamming consumers out of millions of dollars.

The three agencies involved in the settlement were National Consumer Council, Debt Management Foundation Services Inc. and Better Budget Financial Services Inc. Lydia Parnes, head of the Federal Trade Commission's consumer protection division stated that "All three companies lied about who they were, what they could do for consumers and how much they charged."

According to the FTC, there have been an increasing number of scams involving debt-counseling agencies. Although many agencies are legitimate, it has been an increasingly common problem that some agencies promise to help consumers reduce monthly payments and manage debts, but they only succeed in making matters worse for the consumer.

Better Budget Financial Services Inc. instructed clients to pay their monthly bills to Better Budget rather than creditors while the agency claimed to be negotiating with creditors. However, Better Budget was not negotiating with creditors as the consumers expected. As a result, interest would mount forcing consumers further into debt and often resulting in bankruptcy.

National Consumer Council promised consumers free debt-counseling services. Instead of offering credit-counseling they were using their non-profit status to act as telemarketers. They would place unsolicited calls to consumers to direct them to other debt-counseling services that would charge them fees and rarely reduce their debt problems.

Debt Management Foundation Services Inc. also violated telemarketing laws to solicit business from consumers. They would then charge consumers up to $1,000 for their services.

The companies involved must repay consumers more than $25 million. Debt Management Foundation Services Inc. and National Consumer Council are in the process of being shut down.

House Judiciary Committee Approves Bankruptcy Bill

The House Judiciary Committee approved the bankruptcy bill today in a 22 to 13 vote.

Democratic efforts to amend the bill were rejected by House Republicans who want to keep the bill as written to ensure its speedy passage. The only Democrat to support the legislation was Rep. Rick Boucher of Virginia. The bill may be addressed by the full House in April. It is expected to pass quickly.

House Committee May Introduce Legislation on Subprime Lending

The House Committee on Financial Services may introduce a bill today that would address predatory-pricing tactics in the lending industry.

The legislation would trump state laws regulating the lending practices of banks, thrifts, and mortgage lenders. The purpose of the legislation is to prevent abusive lending practices aimed at low-income or risky borrowers. Such practices include charging risky borrowers extremely high interest rates, pre-payment penalties, and other exorbitant fees. Many states and cities already have laws to address these issues but some consumer advocates and individuals in the lending industry feel that more must be done. Federal legislation would create uniformity and increased protection for consumers, especially those consumers in states that do not have laws to protect against these abuses. (washingtonpost.com)

Mark Pearce, president of the Center for Responsible Lending, a borrower-rights group, is concerned that federal legislation may take away from the protections some states have already put in place for consumers. "The states have shown that it's possible to pass a strong law that still protects a vibrant, responsible subprime market,"  Pearce said.  "When we look at federal legislation, one big question is, would anything at the federal level undo what the states have done, because the states have been the leaders on this issue." (washingtonpost.com)

Industry lobbyists stated yesterday that the House is likely to draft a passable bill, especially considering the recent passage of the bankruptcy bill in the Senate.

Senate Passes Bankruptcy Bill

The U.S. Senate passed the bankruptcy bill in a 74-25 vote on Thursday.

Eighteen Democrats joined Republicans in passing the bill. It will move to the House of Representatives next month where it is expected to easily pass.

If the bill becomes law it will mark the biggest overhaul in our bankruptcy system in a quarter century. The bill sets up an income-based test for consumers in bankruptcy. Those with incomes above the state’s median would be required to file under chapter 13 rather than chapter 7 and repay some of their debts.

Democrats have tried to soften the bill’s impacts on groups such as the elderly, single parents, and minorities. They feel that the bill favors the credit industry at the expense of the poor. Democratic efforts to add amendments or alter the bill were unsuccessful under the Republican majority. Leaders in the House of Representatives have stated that if the bill reached the House essentially unchanged they will pass it quickly.

Senate Closer to Passage of Bankruptcy Bill

The bankruptcy bill is closer to passage in the Senate as the Republican majority defeats Democratic efforts to soften the bill.

The bankruptcy bill’s speedy passage through the Senate was slowed a bit today by discussions regarding a Democratic proposal aimed at preventing conflicts of interest in the securities industry.

The proposed amendment would have prevented investment banks from representing a company or defrauded creditors in bankruptcy when the investment bank had previously advised or financed securities offerings by the company. The proposal was sponsored by Sen. Patrick Leahy, D-Vt. and is said to be in response to recent corporate scandals. The proposal seemed to have the support of some Republicans; however, it was defeated today in a 55-44 vote.

Democratic Senators feel that the bankruptcy bill is aimed in favor of the credit industry at the expense of low-income workers, minorities, single-mothers, and the elderly. In spite of Democratic efforts to soften the bankruptcy bill, the Republican majority has thus far remained successful assuring that the bill remains as written.

Bankruptcy Bill Closer to Passage

After today’s vote in the U.S. Senate it seems more likely that the bankruptcy bill, which would make it harder for consumers to discharge their debts in bankruptcy, will pass in the Senate.

Two votes in the Senate today pushed the bankruptcy bill closer to passage. First, the Senate voted 46-53 against an amendment that would prevent abortion protestors from filing bankruptcy to escape paying court-ordered fines. The rejection of this amendment is significant since it is said to be the “poison pill” of a similar bankruptcy bill that failed to pass in the last Congress.

The Senate also voted 69-31 today to limit further debate on the bankruptcy bill to 30 hours. Only amendments relating to the bill may be debated. With this limit in effect, the bill will likely reach the House of Representatives essentially unchanged. Leaders in the House of Representatives have stated that they will move the bill quickly if it is not significantly altered.

Senator Charles Grassley, an Iowa Republican and the bill’s chief sponsor, stated that "It is the (Senate Republican) leadership's intention to complete action on this bill during Wednesday's session." The bill is largely supported by credit card companies, retailers and auto lenders. It will require individuals with incomes above their state’s mean to file bankruptcy under Chapter 13 rather than Chapter 7 and repay some of their debt.

Senate Votes Down Minimum Wage Amendment to Bankruptcy Bill

The Senate voted down an amendment to the Bankruptcy Bill today that would increase the minimum wage by $2.10.

The amendment was proposed by Massachusetts Democrat Sen. Edward Kennedy who stated that "raising the minimum wage is critical to preventing the economic freefall that often leads to bankruptcy."

The amendment was voted down mainly because Republican Senators want to see the bill remain essentially unchanged.  Last week, leaders in the House of Representatives stated that they would move the Bill quickly if it remains fundamentally the same as written. 

Debate on the bill is expected to come to an end this week. However, a familiar amendment Republicans have called the “poison pill” is still expected to come up. This amendment would prohibit abortion clinic protestors from filing bankruptcy to get out of court-ordered fines.  It was tacked onto a similar bankruptcy bill last session and is said to be the cause of the bill’s failure to pass.

Senate to Debate Bankruptcy Bill

The Senate is to begin debates today on legislation that would significantly change the bankruptcy code. 

The bankruptcy bill, sponsored by Sen. Charles Grassley, R-Iowa, would make it more difficult for consumers to file Chapter 7.  The bill would set up a means test to determine whether the individual earned more than their state's median income and could repay some of their debts. If the individual’s income was above a set level they would fall under Chapter 13 and would have to repay some of their debt.

The bill is supported by credit card companies, retailers, and other lenders who feel that consumers abuse the current system by discharging their debt under Chapter 7 when they have the means to pay some of it back.  Opponents of the bill, including consumer advocate groups, feel that the bill would harm low-income families and reward businesses that aggressively market consumer loans.

This bill is much like the one that came up last session. However, it does not currently include a provision aimed at preventing anti-abortion protestors from filing bankruptcy to get out of court-ordered fines.  This provision, included in last session’s bill, was cited as the cause of the bill failing.  Sen. Charles Schumer, D-N.Y., plans to reintroduce the amendment.  Republicans in both houses feel that the bill will easily pass if the amendment is not added.

Krispy Kreme Bankruptcy Fears

Krispy Kreme Doughnuts is planning cost-cutting measures which include reducing its staff by 25 percent and selling corporate jets in an effort to avoid bankruptcy. 

In the past year alone Krispy Kreme’s stock has lost 80 percent of its value.  The value of shares is at an all time low after dropping 14 percent on Thursday. 

Krispy Kreme needs to secure additional funding by March to avoid financial crisis. They were able to avoid defaulting on a $150 million debt last month when lenders agreed to give them until the end of March to prepare financial statements.  The additional funding Krispy Kreme will need at this time will be used to fund operations.  A difficulty Krispy Kreme will face in securing financing is that investors are unsure how much the organization will have to pay to cover bad loans to franchisees. 

Krispy Kreme plans to hire Kroll Zolfo Cooper LLC to turn the company around at $400,000 a month to take on the task.  They will also be paid an amount that is yet to be determined if they are successful in their efforts. 

United Pilots to Vote on Revised Contract

The Airlines Pilots Association released a tentative agreement yesterday reflecting negotiations between United and its pilots union.

The agreement would result in an 11.8 percent pay cut for the pilots and the future of their pensions would be left unresolved.  The union did agree not to contest the airline potentially scrapping pension plans and replacing them with less-generous defined-contribution plans as long as certain conditions regarding the timing of termination were met.  Under the agreement wages will increase 1.5 percent each year for the remainder of the contract, which expires in 2009.  This agreement is revised from the version thrown out by Judge Eugene Wedoff on January 7.  The tentative agreement was sent to United’s 6,400 pilots for a ratification vote that lasts until January 31. 

Social Security Administration to publicize financial problems

Social Security Administration officials are planning to announce financial concerns and their conclusion that Social Security is in jeopardy.  The agency will also announce its support for President Bush’s privatization agenda over the objection of numerous agency employees.

Objectors state that the agency should not be using money from the Social Security trust fund to advocate Bush’s agenda.  Bush stated on Saturday that he has a moral obligation to fix the problems Social Security is currently facing despite economic challenges. 

There is some speculation that Bush’s plan to partially privatize the program will only increase the deficit and cause the program to go from secure to risky. U.S. Sen. Debbie Stabenow of Michigan is opposed to the privatization plan.  She stated that “taking out even more debt could destabilize financial markets, drive up interest rates and stifle economic growth." However, Social Security trustees warn that by 2018 Social Security will pay more benefits than it collects in revenue and by 2042 the program will only be able to pay 73 percent of scheduled benefits.

United seeks financing

United Airlines is seeking potential investors to help finance its exit from chapter 11 bankruptcy, stating that it has established a framework for presenting its business plan to capital markets

The airline filed bankruptcy in December 2002, but has achieved significant cost cuts in the past two years. These savings are attributed mainly to union concessions which saved United $2.56 billion.  United is still seeking to reduce labor costs by $725 million a year. Consulting firm Bridge Associates LLC reviewed airline's business plan and found it feasible, noting that the cost cuts will probably be enough to attract investors.

United continues to work with the unions to further reduce labor costs.  Just yesterday United Airlines pilots union approved a new five-year contract which will reduce their wages and pensions.  The concessions from the union will save the airline $180 million a year for the next five years and hopefully help to allow the airline to emerge from chapter 11 bankruptcy in 2005. 

U.S. Bankruptcy Filings Down

Bankruptcy filings by U.S. busninesses decreased 3.8 percent in fiscal year 2004 according to a report from the Administrative Office of the U.S. Courts in Washington.

Last year, business bankruptcies totaled 36,183.  This year the number decreased to 34,817.  Samuel Gerdano, executive director of the American Bankruptcy Institute, attributes the drop in bankruptcy filings to improved economic conditions, low interest rates, and easier access to credit. 

There has also been a drop in personal bankruptcy filings in the 2004 fiscal year. Filings dropped from 1.63 million to 1.58 million, a 2.6 percent decrease.  "The drop in consumer cases reflects recent declines in consumer credit delinquencies and credit card defaults," Gerdano said.

Trump's casino operations file for bankruptcy

Donald Trump’s casino operations filed for Chapter 11 bankruptcy yesterday with the U.S. Bankruptcy Court for the District of New Jersey. 

Trump Atlantic City Associates listed $1.3 billion in debt and $1.5 million in assets. A major cause of the bankruptcy was competition from newer casinos such as the Borgata Hotel Casino & Spa. The Chapter 11 restructuring will allow Trump to maintain his position as chairman and CEO, but his stake in the company will be reduced from 56 percent to 27 percent. 

Under a restructuring agreement reached last month Morgan Stanley will provide a $500 million line of credit for the upgrade of the casinos and Beal Bank will provide $100 million in interim financing. 

U.S. Pension Benefit Guarantee Corp. Deficit

The U.S. Pension Benefit Guarantee Corp.’s deficit more than doubled in 2004, rising to $23.3 billion this year from $11.2 billion the previous year.

The U.S. Pension Benefit Guarantee Corp. (PBGC) is a United States agency that insures pension benefits for 44 million workers.  The agency's deficit is widening due to expected costs that would be incurred in taking over pension obligations which include United Airlines and US Airways Group, Inc.  United Airlines would be the biggest obligation the PBGC has ever dealt with, the company’s pension plans were under funded by about $8.3 billion. 

Since the agency’s creation in 1974, the airline and steel industries have been the main industries collecting from the PBGC.  These industries total only about 5% of the insured, however they also total about 70% of the claims. 

With record corporate bankruptcies in 2000 and 2001, there has been increasing concern that the government may have to step in and help the PBGC.  The PBGC wants to address the problem by imposing strict requirements on companies seeking to avoid pension payments in bankruptcy.  First, the PBGC wants authority from Congress to enforce liens in bankruptcy court on companies that owe pension benefits.  Second, the PBGC wants companies seeking to restructure in bankruptcy to inform workers how their pension benefits would be affected by the plan to restructure. 

Agency executive director Bradley Belt expressed confidence in the PBGC while also urging Congress to take action, "The PBGC is committed to protecting pension benefits, and with $39 billion in assets we can continue to meet our obligations.” "But with more than $62 billion in liabilities it is imperative that Congress act expeditiously so that the problem doesn't spiral out of control."

US Airways Files to Reject Labor Agreements

US Airways filed a motion in bankruptcy court on Friday to reject labor agreements with its flight attendants, communications workers, machinists and aerospace workers. 

Retiree benefits and health benefits would also be substantially reduced or eliminated if the airline’s motion is granted.  However, filing this motion will not preclude US Airways from negotiating potential agreements with the labor unions and other parties. US Airways President and CEO Bruce R. Lakefield stated, "Our overwhelming preference is that we continue to negotiate and reach agreements with all of our unions. We would also like to avoid litigation concerning our retiree and pension benefits, but in light of the financial issues facing the company early in 2005, this filing is an unfortunate but necessary step to keep our restructuring on track and allow us to implement permanent cost reductions quickly."

Just last month US Airways negotiated a deal with the pilots union which included $300 million in concessions and pay cuts of eighteen percent. 

This is the airline’s second bankruptcy filing in two years.  US Airways attributes the bankruptcy to rising fuel costs, competition, and failure to win give-backs from unions. 

Delta to Cut Jobs

In an effort to avoid bankruptcy, Atlanta-based Delta Airlines announced today that it plans to cut between 6,000 and 6,900 jobs.

These staff reductions will take place over the next 18 months.  Delta also plans to cut pay by 10% for all employees as well as reduce benefits.  However, the airline intends to implement new employee incentive programs which include the issuance of 75 million shares of common stock. 

Shareholder approval will not be sought before implementing these changes.  According to Delta, the delay required to obtain shareholder approval could “seriously jeopardize” financial viability.  Shareholders will simply be notified of the plan by mail. 

Former Enron CEO Seeks to Move Trial

Former Enron CEO Jeffery Skilling is asking a federal court that his trial for fraud, insider trading, and conspiracy related to the collapse of Enron be moved out of Houston

. 

Skilling will stand trial together with former Enron Chairman Ken Lay and former Chief Accounting Officer Richard Causey for their actions which contributed to Enron’s December 2001 bankruptcy.  Skilling and his attorneys feel that any jury selected in Houston, which was Enron’s hometown, would be biased and that the trial therefore should be transferred to another metropolitan city.  Enron’s collapse had a negative effect on Houston’s economy, it resulted in the loss of many jobs and pensions and lowered real estate prices.  As a result, Skilling’s attorneys feel that he could not get a fair trial in Houston.

In the first case connected to Enron’s bankruptcy, a Houston jury found five individuals guilty of conspiracy and fraud.  One was a mid-level executive for Enron, and four were former Merrill Lynch bankers.  However, the same jury also acquitted an Enron accountant of fraud.

Delta Pilots to Vote Today

Delta pilots are expected to vote today on a contract that will cut their pay by as much as one-third and provide no raises for the five-year contract.

This new contract is an effort to help the struggling airline avoid bankruptcy. Delta pilots are among the highest paid pilots in the nation. Their salaries currently range from $100,000 to $300,000 per year. In addition to pay cuts, the airline is seeking to cut other benefits such as pensions and also to revise work rules. However, the agreement will allow the pilots options to purchase up the fifteen percent of the company’s stock. The pay cut would be effective December 1st. A majority vote is needed to approve the new contract.

Non-union employees such as flight attendants and gate and ticket agents have already had their pay cut, as have executives. In addition to pay cuts, 16,000 employees have lost their jobs and another 7,000 jobs are expected to be cut in the next eighteen months.

Even if Delta’s pilots do agree to the new contract, there is no assurance that this will save the airline from bankruptcy. Delta is currently about $20.6 billion in debt and avoid bankruptcy the airline must also convince creditors to accept its restructuring plan.

US Airways Sets Deadline for Employee Negotiations

US Airways Group, Inc. has set a deadline for unions to reach long-term concession agreements.

The unions have until mid-November to do so or the airline has said that it will seek court approval to throw out their contracts. The company has been negotiating with the Association of Flight Attendants, the International Association of Machinists, and the Communications Workers of America. So far, no long-term agreement has been reached.

The airline seeks to cut retiree benefits, and if the unions to not voluntarily concede the airline will seek to force the cuts. US Airways position is that it needs to concessions of $1 billion per year. On October 15, a bankruptcy court approved 21 percent wage cuts and other reductions in benefits for thousands of workers. However, this agreement ends mid-February. The company stated that of the $69 million and $72 million it expects to spend on retiree benefits in 2005 and 2006 respectively, most goes to retired pilots.

Delta and Pilots Resume Talks

Delta and their pilots’ union will resume discussions today regarding possible pay concessions the union will accept.

Negotiations broke off Sunday night when an agreement could not be reached. Delta Airlines says that concessions totaling $1 billion, one-third coming from pay cuts, are necessary for the airline to avoid bankruptcy. The pilots union has already offered $705 million in savings.

While the exact amount of concessions currently being offered by the union is unclear, a Delta spokesperson reported that it is substantially less than the $1 billion Delta claims it needs. The company also said that the pilots union is seeking a stock option program which includes substantially more equity than the airline has proposed.

Wisconsin Bankruptcy Filings Down

Wisconsin is on pace to end a streak of three straight years of record bankruptcy filings this year, according to the Milwaukee Journal Sentinel. Some people attribute this to a growing economy (3.3% expanision in the second quarter, 4.5% in the first), but more pessimistic types have given other reasons. Some say that the cause of less filings is that more people are using home equity loans and second jobs to stave off bankruptcy for a while. Others claim that because the overhaul of bankruptcy laws died in Congress last year, lawyers advertising on television telling people to file immediately have gone away, resulting in the decrease.

Through the first three quarters of the year, bankruptcy filings decreased about 3.9% in Wisconsin - to 21,226 from 22,080 last year. The numbers are similar nationally. After a record 1.6 million filings in 2003, the numbers are down 4.3% over the first half of this year.

Finance Extension for US Airways

U.S. Airways was allowed to extend financing on Thursday based on an agreement between the government, lenders and US Airways.

Judge Stephen Mitchell approved the agreement, which will allow U.S. Airways to continue to draw from the nearly $1 billion in loans it secured after its last bankruptcy in 2003. The extended financing will be used to keep the airline in operation until mid-January.

US Airways Plans to Eliminate Hundreds of Jobs

Employees of US Airways Group, Inc. learned yesterday that the airline plans to cut hundreds of jobs and reduce executive pay by 5-10 percent as a result of its Chapter 11 reorganization.

The airline filed for bankruptcy last month for the second time in only two years. Currently, the organization has a $201 million management payroll, a number it plans to reduce by $45 million. This will be done through a 5-10 percent reduction in executive pay, reducing paid holidays by 20 percent, and replacing sick and holiday leave with paid time off based on seniority. Contributions to management retirement plans will be reduced from 13 percent to 3 percent. Also, retiree benefits will be reduced and retirees will have to pay a higher deductible.

The airline says that these cuts are an attempt to save $950 million from labor unions. US Airways has reached agreements with some employees, but has been unable to come to an agreement with some labor groups. US Airways will ask a bankruptcy judge on Thursday to impose a temporary 23 percent pay cut on these employees, stating that the airline could be forced to liquidate by February without the pay cut.

Delta to Cut Employee Pay 10%

In an effort avoid bankruptcy, Delta Airlines announced on Tuesday that it will cut pay by 10% for all employees. Executives are also subject to the pay cut, in fact, Delta’s CEO will not be paid the rest of the year.

Delta pilots agreed to allow Delta to contract with retired pilots if needed. Their agreement was in exchange for Delta’s assurance that they will not cancel the pension plans of their pilots before February 1, regardless of the company’s bankruptcy status. Delta is also going to increase the amount it pays into employee shared health costs while offering two voluntary exit packages to employees. Chief Executive Gerald Grinstein is seeking the cooperation of all employees. In a memo to employees, Grinstein stated ``We have a small window of opportunity available to us to avoid Chapter 11 that some other carriers do not have. It is in everyone's best interest that we protect Delta's future by taking these steps together now.''

Lawmakers Petition United Opposing Termination of Pension Plans

Over 100 lawmakers signed a petition to United Airlines in opposition to United’s plans to scrap its pension obligations in bankruptcy. It was signed by 104 house members and eight senators and will be sent to United Airlines’ chief later this week.

The letter, written by Democratic Representatives George Miller of California and Jan Schakowsky of Illinois, asks that United consider the concessions already made by United employees as well as the promises United made to its employees and their families. Jean Medina, a spokeswoman for United, responded to questions about the letter by stating that United will continue to work with all stakeholders to explore alternatives to terminating the pensions.

United will not make a final decision on the matter until late this year. However, lawmakers have been increasingly concerned about the airline industry. Delta Airlines is currently struggling and just last week US Airways requested a bankruptcy court allow it to avoid some of its pension obligations when it filed for bankruptcy protection. If United and US Airways are allowed to abandon their pension obligations the Pension Benefit Guarantee Corp., which is already facing a $9.7 billion deficit, will be forced to take over payments.

Pension Benefit Guarantee Corporation Future Uncertain

According to a study conduced by Douglas J. Elliot, president of the Center on Federal Financial Institutions, if the current economic situation does not improve, the Pension Benefit Guarantee Corporation (PBGC) will be bankrupt by the year 2020.

The PBGC is the United States government agency that insures corporate pensions. Referring to the PBGC, the report stated “if it functioned as a private insurer, the pension agency would already be deemed “insolvent.” This information fuels concern regarding corporate pensions, especially since US Airways Group Inc. filed bankruptcy on Sunday (this was their second bankruptcy in two years). US Airways is asking a bankruptcy court to allow it to avoid $100 million in pension contributions. This is not the first airline to attempt to scrap its pension obligations in bankruptcy, a similar request was recently made to a bankruptcy court by United Airlines. (see Aug. 26 post)

If US Airways is allowed to abandon its pension obligations to employees, the PBGC will be obligated to take over the payments. The PBGC has been strapped with increasing obligations as many organizations in the airline and steel industries have abandoned pension payments and forced the PBGC to take over. 70 percent of the claims the PBGC has faced since its inception in 1974 have come from the airline and steel industries.

The PBGC now covers the pensions of more than $1 million employees. There has been a 35% increase in the number of American’s whose pension plans are covered by the PBGC in the past two years. And it owes more than $9 billion in pension obligations that it will not be able to cover given its assets. To make matters worse, if United is allowed to scrap its pension obligations, the PBCG would be liable for an additional $6.4 billion.

The report goes on to say that to fix the problems the PBGC is now facing would take a $14 billion rescue.

House Votes to Allow Access to Pension Info

The U.S. House of Representatives voted 268-148 on Wednesday to allow individuals access to information regarding their companies’ pension plans. Information now provided confidentially to the Pension Benefit Guarantee Corporation (PBGC) by companies would be accessible to workers and retirees whose pension plans are insured by the PBGC.

The PBGC is a federal corporation created by the Employee Retirement Income Security act of 1974 (ERISA). The PBGC’s goal is to allow pension plans to operate smoothly by providing insurance of pension benefits to covered plans. However, government concern about the increasing amount of under-funded pension plans, and the affect these under-funded plans will have on the PBGC, has been growing recently. This concern came to the forefront after United Airlines decided to suspend pension payments during restructuring. (see Aug. 26 post) United’s decision prompted questions about the PBGC’s ability to finance the increasing amount of payments it is forced to take over as a result of under-funded pension programs, especially if United’s actions are imitated by other organizations facing bankruptcy.

The amendment, sponsored by California Democrat Rep. George Miller, was added to a bill regarding funding for education, labor, and health care programs. Miller supports the amendment arguing that the workers who are most affected by under funded pension plans should have the same access to information about pension shortfalls as does the PBGC. Miller further argues that the information is needed to understand what should be done to reform the pension system. Opponents to the amendment argue that it would allow the disclosure of sensitive financial data, especially for private companies.

Kroll Zolfo Cooper LLC seeks $25 million "success fee" from Enron

Kroll Zolfo Cooper LLC, the risk consulting company driving Enron’s restructuring efforts, filed a 28-page motion on Thursday requesting a $25 million “success fee” in addition to the $63.4 million the firm has already collected from Enron through June 30 for its role in Enron’s reorganization. The amount requested would be paid by Enron in four $6.25 million payments upon Enron’s emergence from Chapter 11.

The chairman of Kroll Zolfo Cooper LLC is also Enron’s acting CEO, Stephen Cooper, who has held this role since early 2002. Cooper’s agreement to accept the role of acting CEO allowed Kroll Zolfo Cooper LLC to seek a success fee if warranted. The motion filed on Thursday with the U.S. Bankruptcy Court in Manhattan states that Kroll Zolfo Cooper LLC has provided value to Enron’s creditors which “exceeded any reasonable expectations” by saving about $7.4 billion through effective management as well as saving 22,000 of the 24,000 jobs which existed in February 2002. The motion was filed by Stephen Forbes Cooper LLC, but states that Kroll Zolfo Cooper LLC will receive any proceeds collected. Objections to the success fee may still be raised before an amount is set.

Enron’s bankruptcy plan, which was approved in July, provides about $12 billion for creditors, with a recovery rate of 19 cents on the dollar. Enron faced about 24,000 claims from various creditors.

Decrease in Bankruptcy Filings

According to the American Bankruptcy Institute, data released by the Administrative Office of the U.S. Courts indicates that total bankruptcy filings have gone down 0.9 percent in the 12-month period ending June 30, 2004, which was the first annual decline in total filings since 2000.

Bankruptcy.com reports that the number of public companies filing under chapter 11 has fallen this year from 99 new bankruptcies filed by August 5 of last year to 51 filed by that date this year. Personal bankruptcy filings have also decreased, breaking the trend of increased filings in recent years. Personal bankruptcies are down 0.8 percent from the 12-month period ending June 30, 2003.

Although the economy has been improving, the number of bankruptcies had been increasing in recent years. Experts attribute this continued rise in bankruptcies in the face of an improving economy to the lingering effects of increased consumer spending in the 1990’s and increased borrowing as a result of historically low interest rates. The 0.8 percent decline marks a shift that economists expect to continue due to the improved economy as well as tighter credit-granting standards.

Government Concern About United Pensions

In the latest news regarding United Airlines bankruptcy situation, U.S. government officials and leaders of the International Association of Machinists (the union which represents over 20,000 active and retired United employees) met on Wednesday to discuss their concerns about United’s decision to suspend pension payments during restructuring. White House Spokeswoman Claire Buchan expressed further concern that United Airlines may abandon employee pension responsibilities.

If United abandons pension responsibilities the federal government’s pension insurance agency, the Pension Benefit Guarantee Corp., will be forced to take over the payments. The ultimate concern is that United Airline’s actions will have a domino effect on the actions of similarly situated organizations facing bankruptcy. If other organizations also abandon their pension obligations and force the government to assume the responsibility it could potentially bankrupt the PBGC. In the event of United’s default the PBGC would be liable for $6.4 billion, the largest default the agency has ever seen. Although there is nothing the PBGC can do to stop United from abandoning its pension obligations, it was reported that the agency is looking at other (unspecified) means of holding United accountable.

If the federal PBGC takes over benefit payments the impact on United’s employees would be substantial. The PBGC limits pension benefits to $44,000 a year at age 65. This may be substantially lower than the amount many individuals were expecting to receive. Another concern with abandoning pension responsibilities is that doing so may alienate employees, making it difficult for management to implement restructuring plans.

A spokeswoman for United Airlines, Jean Medina, stated that United has still made no decision about the future of its pension programs. United will continue to meet with union leaders to discuss the situation.