TOPICS > Economy

High Pension Costs Hurt Business

July 4, 2006 at 1:30 PM EDT

HEDRICK SMITH: Foreign imports were flooding the U.S. market in the late ’90s. Steel prices had plummeted. And companies like LTV Steel were in deep trouble.

DAVID HEIMAN, LTV Bankruptcy Attorney: The heart of the problem was the cash shortage. They could see that they were going to run out of cash.

HEDRICK SMITH: LTV’s predicament was typical of the financial bind at a slew of American steel companies.

DAVID HEIMAN: The company had the misfortune of being the first one up, if you — if you will, to have to confront legacy costs.

HEDRICK SMITH: Legacy costs, the name companies use for the expenses or liabilities they have accrued for pension and health care benefits that they have promised their workers.

DAVID HEIMAN: LTV had too much debt. Its legacy costs were a big problem. The cost of retiree benefits per ton of steel was way out of whack in order to be competitive in the marketplace.

HEDRICK SMITH: So, in December 200, LTV filed for bankruptcy, Chapter 11. That gave management protection from creditors and created a new framework for renegotiating the old social contract.

DAVID HEIMAN: This is the core of the matter. The cost to produce a ton of steel for labor and legacy costs were far greater than — than could ever be viable. We had to reduce that cost.

HEDRICK SMITH: The union made concessions, significant concessions, on wages and work rules, but it resisted reductions in retiree benefits.

Mark Granakis is president of the local steelworkers union.

MARK GRANAKIS, Local Union President: The deal is, I’m going to work here and bust my butt. I’m going to make a good wage. You’re give me health care. And at the end of the rainbow is also another ring that I can grab, which is my pension. So, that — that is the whole deal. That’s the promise that was made. And that’s what became to be expected.

HEDRICK SMITH: And the fight at LTV, when it goes into bankruptcy, is that what the fight is over, that deal?

MARK GRANAKIS: Absolutely. It’s about not only that deal. It’s about you living up to your bargain. You gave me your word you were going to do something. And I expected that and worked hard for that.

HEDRICK SMITH: LTV and the union could not reach any deal. And with LTV bleeding a million dollars a day, it looked like curtains.

MAN: It is ultimately the banks who say, we’re not going to provide you with any more capital. We advised everybody that we were shutting down.

JUDGE WILLIAM BODOH, LTV Bankruptcy Judge: The banks initially were looking toward a liquidation of LTV, because there was no — no white knight on the scene. There was no one that appeared to be ready to — to not only put up money to buy assets, but to assume some of the immense liabilities LTV had.

So, the banks are saying, let’s cut and run. Let’s take our losses and go home.

The game is "distressed investing"

HEDRICK SMITH: At the 11th hour, a white knight did show up, Wilbur Ross, representing a new breed of Wall Street investor. Their game is called distressed investing. It can be so highly profitable that some call it vulture capitalism.

WILBUR ROSS, Chairman & CEO, W.L. Ross & Company: I think a vulture is a creature that picks the flesh off a dead animal and leaves the bones there. If we had a bird, it would be the phoenix, the bird that arises again from its own ashes, because we don't buy things to liquidate them. We don't liquidate anything. We buy things to pump life back into them, to create jobs, and hopefully to make a profit out of making a viable business.

HEDRICK SMITH: In early 2002, Ross saw a way to operate a shrunken LTV by cutting a new deal with the union.

WILBUR ROSS: We were able to work out with the United Steelworkers of America a radically new labor agreement.

HEDRICK SMITH: The secret behind Ross's strategy lies in the way bankruptcy works. A central idea in the new bankruptcy law of 1978 was giving companies a chance to restructure their costs and their debts.

Harvard law professor Elizabeth Warren follows this problem closely.

ELIZABETH WARREN, Professor, Harvard Law School: And a principle part of this was designed to adjust to the new corporation, to find ways to let a corporation that had gotten into financial trouble reorganize itself.

HEDRICK SMITH: One rationale was that it would save jobs.

ELIZABETH WARREN: Go back and read the legislative history, lots of words about employees, about retirees, and how it doesn't make sense to liquidate businesses when they're in trouble. We need to save those jobs, and we need to make sure that the employees and retirees are going to be taken care of.

HEDRICK SMITH: But, in fact, the laws help companies shuck off costly old obligations to employees. In the LTV bankruptcy, Wilbur Ross was allowed to buy LTV's assets, its plants and equipment, without taking on its liabilities, pensions and health care costs.

I'm a little confused about the old pension and health care commitments.


HEDRICK SMITH: Was it a condition of your buying LTV that those commitments die with the old company, stay with the old company?

Just enough money to pay banks

WILBUR ROSS: The health and pension obligations of LTV had already been disavowed in the bankruptcy long before we came on the picture. We simply bought assets. That's the normal way that a company is sold in a bankruptcy proceeding.

HEDRICK SMITH: And Ross got a bargain. He paid $325 million for assets worth $2.5 billion.

So, it's a fire sale.

DAVID HEIMAN: It was very much a fire sale, because we were -- we had very few days left before we were going to have to shut down the furnaces.

HEDRICK SMITH: So, what happened to those liabilities?

Is there enough money to pay off the banks and anybody else, or just enough money basically to pay off the banks?

WILLIAM BODOH: Basically just enough money to pay off the banks.

HEDRICK SMITH: And the pensioners, the retirees, anybody else who has got a claim, is left with zero.

WILLIAM BODOH: To use an old Yiddish term, they get bupkis.

HEDRICK SMITH: Bupkis for retirees, because, for years, LTV, like many companies, had put little or no cash into its pension trust fund. Its pensions were $2 billion in the red.

BRADLEY BELT, Executive Director Pension Benefit Guarantee Corporation: When companies get into difficulty, then what they will look to do is say, where are all my costs? And, gee, I have a lot of costs here in these so-called legacy promises that I had made to my workers and retirees. I can no longer afford those now that I'm in financial difficulty. Perhaps I can shift those costs to other parties.

Epidemic underfunded pensions

HEDRICK SMITH: Other parties, meaning the Pension Benefit Guarantee Corporation, the PBGC, a little-known federal agency where companies in bankruptcy can dump their underfunded pension plans.

BRADLEY BELT: So, we act as the backstop.

HEDRICK SMITH: Brad Belt is executive director.

The PBGC, financed by premiums from corporations, was set up in 1974 to encourage companies to maintain their pension plans and to ensure that promises to employees were kept.

BRADLEY BELT: We also have a large number of contract staff.

HEDRICK SMITH: But those promises turned out to be flimsy, because companies were given a lot of flexibility to interpret the pension funding rules under the employee retirement law known as ERISA.

BRADLEY BELT: The funding rules under ERISA are fundamentally flawed. They're broken. They are riddled with loopholes.

HEDRICK SMITH: You mean Congress wrote a law that said fund pensions, and then, in effect, gave them a free pass?

BRADLEY BELT: I'm not sure you would characterize it as a free pass, but, nonetheless, it does not require, the way it operates, companies to fully fund their pension promise.

HEDRICK SMITH: So, the PBGC gets stuck with the bill for what has become an epidemic of underfunded corporate pensions. Workers and retirees in their 50s, like Chuck Kurilko, get slammed the hardest.

CHUCK KURILKO, Former Steel Mill Worker: I wanted to retire at 55. And it ended up I had to retire at 55, because of my health.

HEDRICK SMITH: They suffer cuts in their pensions, because the government's payout formula from the PBGC for employees who retire before age 65 is lower than the company pensions.

CHUCK KURILKO: I had two heart attacks. I was a machinist at work at LTV.

HEDRICK SMITH: Kurilko retired in 2001, after nearly four decades in the mill. He thought he had it made. He had begun collecting a $2,700 monthly pension and was paying just $200 a month for health care coverage.

WOMAN: So, you retired like a regular person would?

CHUCK KURILKO: No. I retired under a disability.

Chapter 11 helps to reoganize

HEDRICK SMITH: As LTV was sold, Kurilko and nearly all LTV retirees lost their company health insurance. Then the PBGC cut Kurilko's pension by $1,000 a month.

Your pension goes down $1,000 a month. Your health care goes up $1,100 a month.


HEDRICK SMITH: So, practically overnight, $25,000 a year poorer, bam.

CHUCK KURILKO: Gone. Right there, gone.

HEDRICK SMITH: So, what did you guys do, Carolyn?

CAROLYN KURILKO, Wife of Chuck Kurilko: I thought he was going to have some more heart attacks. I really did. I thought that was -- he was so upset, so beside himself, I -- I didn't know what he was going to do.

CHUCK KURILKO: I was sick.

HEDRICK SMITH: For 38 years, Kurilko poured his life into the mill, regularly working midnight shifts and 50-hour weeks.

CAROLYN KURILKO: Somebody mismanaged something. Why take it out on the little people, like him, to give -- that devoted his life for -- for what, for us to live from pay to pay, have all these doctor bills? That's not right to do to people at this -- at our age in this stage of our life right now.

HEDRICK SMITH: As union president, Mark Granakis was swamped with complaints from workers, retirees and widows going broke.

MARK GRANAKIS: There are thousands of people that lost their health care and had their pensions reduced. I myself lost almost two-thirds of my pension. My pension fell from $3,200 to $1,400.



HEDRICK SMITH: Today, the Cleveland mill is setting productivity records. Wilbur Ross rehired 3,000 of LTV's 7,000 former workers and gave them new kinds of benefits.

What did you do about pensions? What did you do about health care?

WILBUR ROSS: Well, we put in a new pension plan and a new health plan for the workers. We basically put in what's called a defined contribution plan, where our obligation was to pay so many cents per hour that the people actually worked.

But we did it in a mechanism sort of like a 401(k) plan, where the individual worker decides what's in the portfolio for that worker's benefit.

HEDRICK SMITH: Seen from your perspective, what was the significance of the LTV steel case?

BRADLEY BELT: The loss to the insurance program was about $2 billion, which, at the time, was the largest loss in the agency's history. The other thing it signaled was what could happen in a particular industry sector if a key player was able to off-load a significant portion of its labor costs on to the Federal Pension Insurance Program.

That put extraordinary competitive pressure on all its rivals. And we certainly saw that play out, as there became a bit of a domino effect in -- in the steel industry.

ELIZABETH WARREN: LTV was the pattern for the steel industry. LTV showed how you could lock up all the assets, so that, essentially, the company could say, we're broke, the cupboard is bare, there's nothing here, and breach all the promises then to the employees and retirees, and use those assets, put them back into operation, to create a newer, more profitable company.

HEDRICK SMITH: In fact, Wilbur Ross went on to buy four more steel companies as they went bankrupt, rolled them altogether, and then sold them off for a profit of more than $2 billion.

You're familiar with -- with what some people have said, that it looks as though there's a shift of financial burden, or gain, from the working class, that loses a billion or two of pensions and health benefits, to the investing class, which makes a billion or two of profit.

WILBUR ROSS: The real villains in the piece, if there are villains, are the old management's pre-bankruptcy, who made commitments, promises to their workers, that they couldn't keep.

HEDRICK SMITH: And didn't keep.

WILBUR ROSS: And didn't keep.

ELIZABETH WARREN: Chapter 11 has become an effective tool for reorganizing a business, for transitioning a business from those poky, old-fashioned promises of the 1950s and '60s and '70s, into that lean, mean fighting machine of 2006. Bankruptcy is a way to take legal promises and burn them.

GWEN IFILL: An update on two people featured in Rick Smith's report.

Steelworker Chuck Kurilko died shortly after the story was produced. And Bradley Belt recently left the Pension Benefit Guarantee Corporation.