Tuesday, June 7, 2005

U.S. Senator Johnny Isakson (R-GA)
Testimony for Submission
Hearing on Preventing the Next Pension Collapse:
Lessons from the United Airlines Case
Finance Committee

Chairman Grassley, Sen. Baucus, and distinguished members of the Senate Finance Committee, thank you for the opportunity to submit testimony for the Committee’s hearing on the pension funding crisis in America. I applaud the Committee’s willingness to call attention to this issue, and appreciate the opportunity to express my support for your efforts. I also urge your consideration of legislation I have introduced with Sen. Rockefeller, S.861, the “Employee Pension Preservation Act of 2005”.

Airline employees face a threat to their earned pensions as a result of pension funding laws that make pension funding schedules unpredictable and volatile. At the core of the problem is the requirement for airlines to make substantial pension funding payments in a short period of time. In the 108 th Congress, temporary pension funding relief was approved that allowed some airlines to avoid a bankruptcy filing. However, these deferred payments combined with unprecedented stock market declines and historically low interest rates have triggered a dramatic and unanticipated increase in required contributions to these plans, and significantly higher funding requirements. In cases where airlines do not have the cash on hand to make these payments, the airlines are being forced to choose between eliminating their pension plans or filing bankruptcy, which leads to the employee pension plans being dissolved.

This dramatic increase in required pension contributions is occurring at a time when the airline industry can least afford it.  High fuel costs and overcapacity in the industry have drivel down profits.  Airline balance sheets are severely stretched, and airlines are struggling to meet additional pension obligations and reduce debt.  Airlines do not have the ability to seek investors on Wall Street or sell bonds to raise cash. It is not unreasonable to expect to see other airlines seek protection through bankruptcy or be forced to terminate their pension plans. In fact a recent Bear-Stearns analysis, which I will submit for the record, found that pension funding liabilities are the single greatest threat to the future viability of the legacy carriers. We do not want to see a repeat of what happened at United Airlines earlier this year and US Airways last year.  Airline employees deserve to have their earned pensions protected, while ensuring their airlines remain viable.

Airlines with defined benefit plans and their employees have come to Sen. Rockefeller and I and asked us to help them find a way to protect the interests of airline employees and their pensions by allowing their employers to make their required pension payments in a more predictable and manageable way.  S. 861 is a common-sense, industry-specific approach that is supported by airline employees, their unions, and their employers. Enactment of this proposal is crucial to protecting the earned pension benefits of thousands of airline workers, and to maintaining a healthy and viable airline industry. To give the Committee an idea of the number of airline employees that S. 861 would help, in my state of Georgia alone we estimate that nearly 40,000 earned pensions are threatened by this looming funding crisis.

Under S.861, airlines are given the ability to fund their pension obligations to their employees on a more manageable and stabilized schedule over a period of 25 years using more stable, long-term assumptions. Any airline that chooses this option must agree to limit its pension liabilities by totally freezing current benefits, or by paying for new benefits immediately. The airline cannot pursue either funding option without first winning an affirmative vote from any union representing its employees.

This legislation protects the interest of the American taxpayer by limiting the liability of the Pension Benefit Guaranty Corporation, the federal agency responsible for funding pensions when companies terminate their pension plans. The bill caps the PBGC liabilities at current limits.

Our goal is to establish a payment schedule for unfunded liability that is affordable and practical. The legislation properly balances the interests of all three stakeholders: employees, taxpayers, and airlines. A 25-year payment schedule would ensure that the short term funding requirement is responsibly spread over a period of time that is more manageable for the airlines. Airlines continue to make sizeable contributions each year to reduce their liability, and ensure benefits that the employees have accrued are paid out.

S.861 is the sensible approach. The airline industry is going through a severe, but hopefully short-term, problem caused by a “Perfect Storm” of adverse events.  I urge the Committee to consider S.861, which seeks to ensure the airline industry will recover and will continue to pay its pension obligations.  S .861 presents a solution that gives relief to the airlines and their defined benefit plans, while at the same time protecting earned employee pension benefits, the PBGC, and the taxpayer.