Highly publicized recent attempts to contain costs were stymied by labor roadblocks for Wal-Mart, Delphi and New York City Mass Transit Authority. The Aircraft Mechanics Fraternal Association is exploring ways to protect employee pensions, focusing as much on plan management as on employers.
NEW WRINKLE ON WAL-MART
A leaked Wal-Mart internal memo about cost-cutting strategies made headlines last fall, boosting a campaign to force the jumbo retailer to increase its health benefits.
Most of the strategies in the leaked memo were typical corporate due-diligence: health-care education, best-practice care management and high-performance provider networks. But a proposal to create barriers to employment for heavier people by including physical work in cashier jobs stirred controversy.
Thus far unable to organize collective bargaining at Wal-Mart, the AFL-CIO is campaigning for state legislatures to establish requirements for Wal-Mart's health benefits. Some states may side with the AFL-CIO because 46 percent of Wal-Mart employees' children either use Medicaid or are uninsured, creating significant costs for states.
With 1.3 million employees, Wal-Mart is one of the largest private employers in most states. The AFL-CIO claims legislators in as many as 30 states are preparing to introduce bills that don't target Wal-Mart by name, but regulate the largest private employers. The bills generally require a state's largest private employers to devote 8 percent to 11 percent of payroll to health insurance, or contribute a fee to a state fund.
Maryland's legislature passed the first such law in 2005, Governor Ehrlich vetoed it and the General Assembly voted to override the veto in early 2006. Other states targeted by the AFL-CIO include Connecticut, Kansas, Florida, Colorado and Tennessee.
"We faced several of these bills last year, and all were voted down except for the Maryland bill," says Nate Hurst, Wal-Mart's senior public affairs manager in Washington, D.C. To increase health-care access--fewer than half of its employees have coverage--Wal-Mart recently added more affordable benefits to its roster of 18 health plans, including one plan with $11 monthly premiums.
Delphi CEO Robert S. "Steve" Miller announced plans to slash two-thirds off the average $65 per hour total compensation of their U.S. employees, and filed for Chapter 11.
To stake out a bold opening position in negotiations with the United Auto Workers, Miller talked tough in the news media. "Paying $65 an hour for someone mowing the lawn . . . is just not going to cut it," he said. Labor contracts were forcing American business to "burn the furniture" to pay pensions and health care. Workers with only a high-school diploma would have to reduce their expectations.
But after paying rich severance packages for senior managers to complete a management transition, Miller and his tough talk only lit a fire under the UAW to prepare for a strike. Strikes at Delphi could hamstring General Motors production, and GM could absorb billions in additional costs if Delphi shuts many plants or cancels pensions. It's hard to imagine a scenario in which Delphi could make massive cuts without triggering a strike, or if a strike occurs, without putting GM at risk of bankruptcy.
The threat of strikes at Delphi moved GM to give Delphi a break on negotiated price reductions on 2006 production contracts, at least temporarily. Delphi came back to the table with the unions, delaying until at least Jan. 20 its earlier plans to petition for rejection of its union contracts and retiree health plans by Dec. 16.
Delphi's hasty retreat suggests there's a limit to how much an employer can trim costs in a single round of negotiations, especially with a wobbly business partner (GM) at risk in the process.
GAME OF INCREMENTS
Compared to Delphi, New York City's MTA had a tame proposal to increase cost-sharing of future hires only: triple the pension contribution (compared to current employees) and pay a first-ever health insurance premium of 1 percent of wages.
To the Transport Workers Union, that would drive a wedge between current employees and future hires, and open a whole new category of paycheck deductions that will only increase over time. To MTA, it was imperative to get cost-containment controls in place to cap soaring pension and medical costs.
When negotiations deadlocked, the union gambled on an unauthorized strike. Negotiations went into overdrive, driven by pressure from the city's commercial interests that were losing their peak shopping days of the holiday season. Although the union was fined $1 million a day for the strike, many people declared the union the victor in the contest. MTA entered the fray with aggressive pension demands, but in the end surrendered them and even agreed to reimburse some "excess" pension contributions.
But while the union was looking at the contract's cash value, MTA was playing the game of increments to claim a strong hand in the next negotiations 37 months away:
* Adding one month to the three-year cycle puts the next negotiations in mid-January 2009, outside the holiday shopping season, eliminating much of the economic punch behind a strike.
* The union agreed to contribute 1.5 percent of all employees' wages toward health premiums. Although that was offset in this contract by pay increases, the union also agreed to accept increased contributions if the authority's health costs climbed, putting at least a partial cap on this important cost category.
* Negotiations showcased the cost impact of pensions to the public, stirring some of the strike's most acrimonious exchanges. That could generate public demand for a solution by the state legislature, or improve MTA's position in the next negotiations.
So far, United Airlines and Northwest Airlines haven't been eager for any help to recover part of defined-benefit pensions that may have been lost through mismanagement, although the Aircraft Mechanics Fraternal Association has offered.
In fact, both airlines have ignored AMFA's requests for a forensic audit that could help recover losses, says Maryanne DeMarco, AMFA national legislative liaison.
Perhaps that's understandable. Although third-party firms perform most financial management tasks for pensions, audits could also uncover employer failures to exercise oversight of the firms, or to fund pensions appropriately.
Add to this that accounting rules and venerable tradition have encouraged employers to treat defined-benefit plans as their own money. Some pensions have been managed and funded to maximize their leverage for improving corporate credit ratings, stock values and tax payables.
Venerable tradition may change when Congress' pension reforms become law. The new laws put a sharp focus on managing defined-benefit pensions against their ultimate objective of paying guaranteed benefits.
The Pension Benefit Guaranty Corporation estimates that U.S. defined-benefit plans are underfunded by a combined $450 billion.
Some of that must result from malfeasance by money managers that causes pensions to underperform, says AMFA Region III director, Mark Taylor.
"These funds are not there for the money managers or advisors or anybody else with a special relationship to skim off of. This isn't their little cookie jar," Taylor says.
DeMarco adds that some pension documents she has seen suggest hedge funds and limited real-estate partnerships may be involved, which she called "red flags."
With United emerging from Chapter 11 reorganization in February, and Northwest locked in a bitter dispute with AMFA, this help may be too hot to handle.
PBGC and the Department of Labor have also responded slowly to audit requests, DeMarco says, so the AMFA sought support for an investigation by the Government Accountability Office.
Time will tell if unions and management develop a shared interest to investigate underperforming pensions under the new laws.
PETER MEAD is a writer living in Oregon who writes regularly about benefits issues.
April 15, 2006
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