The Washington Post - October 12, 2004
 Donaldson Expects Rule Changes on Executive Pay

By Ben White
 Washington Post Staff Writer
 
 In the flood of corporate reform unleashed by recent business scandals, one issue has been largely ignored, shareholder activists say: the stratospheric level of executive pay and the nearly impossible task investors face in trying to figure out who is getting how much.

 Now that may be changing, according to Securities and Exchange Commission Chairman William H. Donaldson and others who follow the issue.

In a recent interview, Donaldson criticized both the level of executive pay in the United States and the clarity with which businesses disclose compensation to shareholders, especially the lavish retirement packages that often hide in the small print of SEC filings, if they are disclosed at all.

 "I believe in people being well paid for really doing something," Donaldson said. "[But] as far as salaries and compensation are concerned, there remains obfuscation about who's being paid what. . . . We have to think through what new rules we want to make things more clear than they are now."

Shareholder groups say it has been over a decade since significant changes were made to compensation disclosure requirements.

 In that period, they say, corporate managers have become increasingly adept at camouflaging pay and benefits and reporting the smallest numbers possible in the charts they are required to file with the SEC. The media and investors rely on those filings for summary pay information.

 "I started hearing about disclosure changes several years ago," said Carol M. Bowie, director of the corporate governance service at the Investor Responsibility Research Center, which advises institutional investors and others on governance issues.

 "But I think the SEC got sidetracked after Enron and now [pay disclosure] is really the last remaining area for reform that has not been addressed," Bowie said, referring to the implosion of energy trader Enron Corp.

 Donaldson said in the interview that SEC commissioners and staff are still in the early stages of considering possible new rules that would require greater disclosure -- in plain English -- of the true costs of retirement packages and other forms of executive compensation.

 SEC spokesman Matthew Well said it was too soon to speculate about what new disclosure rules might entail. The new rules probably will not be in place until sometime next year at the earliest.

Alan L. Beller, director of the division of corporate finance at the SEC, is scheduled to give a speech at a conference later this month on what the agency expects in terms of compensation disclosure and actions it plans to take when it does not consider disclosure sufficient.

 Those who closely follow executive pay say a handful of changes being discussed inside the SEC could strongly discourage boards from awarding enormous compensation packages that might result in shareholder backlash and a drop in their firms' stock prices.

Perhaps foremost among the possible changes would be to require more precise and easier-to-understand disclosure of executive pensions and supplemental executive retirement plans, or SERPs. Experts say companies can hide large SERP payments, in part because they are not required to disclose the yearly increase in value of such plans in compensation tables.

In addition, firms generally calculate pension plan payments based on an executive's years of service. But in many cases, executives are given credit for many more years than they actually were on the job, something it can be hard for shareholders to figure out without wading through fine print or reading executive biographies to determine how long an individual actually has worked at a company.

For example, Delta Air Lines Inc.'s Leo F. Mullin received credit for an additional 22 years of service toward his executive pension plan when he retired as chief executive this year. US Airways' Stephen M. Wolf took a $15 million lump-sum pension payment when he stepped down as chief executive before the firm filed for bankruptcy protection the first time in 2002. The payment rewarded Wolf for an extra two decades of service to the airline.

Complicated retirement plans that even some board members who approved them said they did not understand helped former New York Stock Exchange chairman Dick Grasso pocket $139.5 million in 2003. The payment led to widespread outrage and Grasso's ouster from the NYSE, which is not a publicly traded company. New York Attorney General Eliot L. Spitzer is suing Grasso in attempt to get much of the money back.

Another factor that makes handsome retirement packages easy to hide is that firms are not required to include pay to former executives in compensation tables, corporate governance experts said.

In the interview, Donaldson also complained that big retirement payouts generally are unrelated to performance measures, meaning retired executives usually are entitled to every penny even if their companies performed poorly or collapsed after they left due to decisions they made on the job.

"I've always felt there ought to be more attention paid to the immediate years after a CEO goes out to pasture," Donaldson said. "A big part of compensation should be tied to that period. You have this big game that everyone plays where a new person comes in and you write everything off and start over."

Another area in which stronger disclosure could be required is the real value of non-cash perks to current and former executives, such as the use of corporate jets, limousines and apartments.

 The SEC already has begun to show its enforcement teeth on this issue, most prominently in a September settlement with General Electric Co. that accused the company of failing to "fully and accurately disclose" sumptuous benefits given to former chairman John F. Welch Jr.

 Those perks, which did not become public knowledge until they were disclosed in Welch's divorce proceedings, included use of corporate aircraft, a New York apartment, laundry, flower arrangements, sports tickets and much more.

 The GE settlement did not include a fine. But many shareholder watchdog groups and advisers to corporate boards viewed it as a signal of the SEC's resolve to address the issue. Tyson Foods Inc. also recently disclosed that the SEC may file civil charges over perks given to former chairman Donald J. Tyson.

 Brandon Rees, a research analyst in the investment office of the AFL-CIO, said companies should be required to be much more forthcoming about the dollar value of all perks and benefits afforded to current and former executives. "Right now there is pretty wide latitude and a lot of gray area," he said.

 Paul Hodgson, a senior researcher at the Corporate Library, an investor advocacy group, said corporate boards are increasingly asking for "tally sheets" that total up the value of all pay, perks and benefits given to current and former executives.

 "For those boards that have requested and been given the total cost, most have had what is being called a 'holy cow moment,' as in 'Holy cow, we're paying them that much?' " Hodgson said. "There is also a growing awareness that if boards haven't figured this out, they will be open to breach of fiduciary duty charges for not doing their job properly."

Hodgson and others said one reform could be to require companies to disclose these tally sheets so investors have an easier time assessing exactly how their money is being used to pay executives.

Executive compensation is under scrutiny in Congress as well. For example, Andrew C. Liazos, an attorney at McDermott Will & Emery LLP, said the corporate tax bill passed by Congress yesterday would put new restrictions on executives' ability both to defer and to accelerate payment of retirement benefits.

Starting in 2005, the bill would make it harder for executives to defer payment of certain retirement money until they are in a lower tax bracket. It would also make it harder for them to take big lump-sum retirement payments right away, a practice that has been criticized because it can allow executives to cash out before their companies file for bankruptcy protection.

Meanwhile, even as shareholder groups embrace the possibility of stronger compensation disclosure, many say the most significant change to address the pay issue is one the SEC is already struggling with: giving shareholders a stronger hand in selecting corporate directors.

Donaldson has expressed his desire to reach some kind of agreement that would allow shareholders to nominate board candidates under certain limited circumstances. But business groups are adamantly opposed to the idea, and it could still fail. Investor advocates say this could mean compensation will continue to escalate no matter what happens with disclosure rules.

 "There is no shareholder response or possibility of shareholder response and certainly no regulatory response that will make anywhere near the difference that an end to the 'Let me put you on my board and you can show your gratitude by hiking my pay' system will," said Nell Minow, co-founder of the Corporate Library.

 © 2004 The Washington Post Company  
 
 

 

Reuters - October 7, 2004

US pension agency chief warns of solvency risk

By Susan Cornwell

 WASHINGTON, Oct 7 (Reuters) - The longer-term solvency of the U.S. agency that insures pensions is at risk, threatened by troubled airlines and other companies failing to fund their retirement plans, the agency's director said on Thursday.

 Pension Benefit Guaranty Corp. Director Bradley Belt said he expects to report a significantly increased deficit for fiscal 2004, which ended Sept. 30, eclipsing 2003's record $11.2 billion deficit for the single employer insurance fund.

 "The longer-term solvency of the pension insurance program ... is at risk," Belt told lawmakers in a Senate Commerce Committee hearing.

 The pension agency slipped into a deficit in 2002 after having to bail out failed pension plans in the steel industry.

 Since then, troubled airlines have been straining the safety net for traditional pensions that guarantee a set payout at retirement.

 US Airways Group Inc. (UAIRQ.OB: Quote, Profile, Research) was due in bankruptcy court Thursday to argue its case for suspending pension payments after saddling the PBGC with $2.2 billion in liabilities from its previous bankruptcy that ended in 2003.

 Bankrupt UAL Corp. (UALAQ.OB: Quote, Profile, Research) , parent of United Airlines, has said it is weighing terminating its pension plans.

 The pension agency, currently paying monthly benefits to nearly half a million people, can keep paying benefits for "a number of years" but needs reforms to sustain it, Belt said.

 His agency faces $31 billion in exposure to struggling airlines, but he declined to lay all the blame on the aviation sector for the state of the pension fund, saying the industry's woes are symptomatic of broader pension problems.

 "It seems to me that there is a possibility of a looming train wreck here that could cost the taxpayers of America untold billions of dollars," said Arizona Republican Sen. John McCain, chairman of the Commerce Committee.

 McCain asked why Washington policymakers had not paid more attention to the problem before now, noting that over a year ago, congressional auditors at the Government Accountability Office (GAO) had listed the PBGC as a high-risk program.

 Illinois Republican Sen. Peter Fitzgerald said Belt's predecessor at the PBGC, Steven Kandarian, had been "apoplectic" with warnings, but Congress reacted earlier this year by approving even more pension relief for companies.

 Belt said pension rules must be strengthened so that liabilities are better measured, and so companies do not make pension promises they cannot keep. He also said his agency would like to have power to put a lien on a company's assets in bankruptcy proceedings.

 "No amount of tinkering will achieve a lasting solution," Belt said.
 

 

USA TODAY - October 4, 2004

The looming national benefit crisis

By Dennis Cauchon and John Waggoner, USA TODAY

The long-term economic health of the United States is threatened by $53 trillion in government debts and liabilities that start to come due in four years when baby boomers begin to retire. (Related graphic: U.S. economy threatened by aging of America)

The "Greatest Generation" and its baby-boom children have promised themselves benefits unprecedented in size and scope. Many leading economists say that even the world's most prosperous economy cannot fulfill these promises without a crushing increase in taxes — and perhaps not even then.

Neither President Bush nor John Kerry is addressing the issue in detail as they campaign for the White House.

A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.

This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.

The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.

"As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill," Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month. (Related story: Americans' views on the benefit quandary)
 

Greenspan and economists from both political parties warn that the nation's economy is at risk from these fast-approaching costs. If action isn't taken soon — when baby boomers are still working and contributing payroll taxes— the consequences may be catastrophic, some economists say.

The worst-case scenario is a sudden crisis — perhaps a major terrorist attack or a shutoff of oil from the Middle East — that triggers a loss of confidence by investors in the U.S. economy. Foreign investors refuse to lend more money to the government to finance its deficits; drastic tax increases and benefit cuts occur suddenly; the dollar's value plummets, which raises the cost of imported goods; and a severe recession or depression results from falling incomes.

A softer landing: The USA acts swiftly and becomes more like Europe. Taxes are higher, retirement benefits are less generous but widely distributed; health care costs are controlled; and the economy is sound but less productive.

Big payments on the debt start coming due in 2008, when the first of 78 million baby boomers — the generation born from 1946 to 1964 —qualify at age 62 for early retirement benefits from Social Security. The costs start mushrooming in 2011, when the first boomers turn 65 and qualify for taxpayer-funded Medicare.

 

Early warning signs

But Americans needn't wait until 2008 or 2011 to see firsthand the escalating costs of these benefit programs. Medicare last month announced the largest premium increase in the program's 39-year history. In 2004 alone, federal spending on Medicare and Social Security will increase $45 billion, to $789 billion. That one-year increase is more than the $28 billion budget of the Department of Homeland Security.

Many economists say a failure to confront the nation's debt promptly will only delay the inevitable.

"The baby boomers and the Greatest Generation are delivering an economic disaster to their children," says Laurence Kotlikoff, a Boston University economist and co-author of The Coming Generational Storm, a book about the national debt. "We should be ashamed of ourselves."

USA TODAY used official government numbers to compute what the burden means to the average American household. To pay the obligations of federal, state and local government:

€All federal taxes would have to double immediately and permanently. A household earning $100,000 a year would see its federal taxes double from an average of about $20,000 to $40,000 a year. All state taxes would have to increase 20% immediately and permanently.

€Or, benefits for Social Security, Medicare and government pensions would have to be slashed in half immediately and permanently. Social Security checks would be cut from an average of $1,500 per month for couples to $750. Military pensions would drop from an average of $1,782 per month to $891. Medicare spending would fall from $7,500 to $3,750 annually per senior. The Medicare prescription-drug benefit enacted last year would be canceled.

€Or, a combination of tax hikes and benefit cuts — such as a 50% increase in taxes and a 25% reduction in benefits — would avoid the extremes but still require painful changes that are outside the scope of today's political debate. Savings also could come in the form of price controls on prescription drugs, raising retirement ages and limiting benefits to the affluent.

Every solution has the potential to damage the economy by reducing disposable income or diverting economic resources.

The estimates computed by USA TODAY are similar to ones by government watchdog agencies such as the Congressional Budget Office and the Government Accountability Office and respected think tanks such as the conservative American Enterprise Institute, the liberal Brookings Institution and the non-partisan Urban Institute.

"Political leaders know this is a big problem," says Glenn Hubbard, chairman of the Council of Economic Advisers for President Bush from 2001 to 2003. "I know the president is keenly aware. But in an election year, it's not easy to talk about. The solutions may be very painful. If he is re-elected, I think he will make this a top priority next year. I hope so."

"Economists agree this cannot go on," says Joseph Stiglitz, President Clinton's chief economic adviser from 1995 to 1997. "We can borrow and borrow, but eventually there will be a day of reckoning."

Economist James Galbraith of the University of Texas in Austin is a rare optimist in this debate. "I'm not at all concerned about Medicare or Social Security," Galbraith says. "Unless the government goes broke, Medicare isn't going to go broke, and the U.S. government isn't going to go broke because it can print money."

Galbraith says the country can handle higher tax rates, as Europeans do, and can save money by cutting spending elsewhere, such as on defense, and by implementing a Canadian-style health care system that uses private doctors and hospitals but has the government set prices and pay the bills.

"We are an enormously rich country," he says. "Providing health care and a modest living for our elderly is certainly something we can afford."

 

An aging population

 

Social Security was created in 1935 to help the elderly avoid poverty during the Great Depression. Medicare was established in 1965 to provide health care for the elderly, who were finding it increasingly difficult to afford medical care. But the aging of America and a declining birth rate have put these programs on a collision course with financial reality.

When the government set 65 as the retirement age in the 1930s, most people didn't live that long. But life expectancy for women has increased from 66 to 80 since 1940 and for men from 61 to 75.

Meanwhile, the birth rate has dropped from 25 births per 1,000 residents in the 1950s to just 15 today. The lower birth rate ultimately means fewer workers paying taxes to finance Social Security and Medicare benefits for the rapidly growing population of people 65 and over.

Medicare has had about 3.3 workers paying taxes for every recipient for the past 30 years. Baby boomer retirements will reduce that to just two workers supporting every Medicare recipient in 2040.

Immigration has helped offset some of the decline in birth rates. But immigration rates would have to increase by five or 10 times — above the recent peak of 1.2 million in 2001, legal and illegal — to provide enough workers and their payroll taxes to boost Medicare.

Medicare recipients are growing older and more expensive, too. Annual medical costs for an 85-year-old are double those of a 65-year-old. Federal spending per Medicare recipient will average $7,500 this year. The official projection for 2050: $26,683 per recipient in 2004 dollars.

 

A problem in plain view

 

The scope of the problem is no secret in Washington.

Medicare and Social Security trustees report the obvious every year: The system has no way to pay for itself, even under the rosiest scenarios. The Congressional Budget Office regularly updates Congress on the liabilities.

Bush's budget for the fiscal year that began Friday spells out the numbers in detail and concludes, "These long-term budget projections show clearly that the budget is on an unsustainable path."

Comptroller General David Walker, the government's chief accountant, travels the nation warning of the impending crisis. "I am desperately trying to get people to understand the significance of this for our country, our children, our grandchildren," Walker says. "How this is resolved could affect not only our economic security but our national security. We're heading to a future where we'll have to double federal taxes or cut federal spending by 50%."

But documentation of the problem hasn't prompted political action to address it. The $4.2 trillion national debt has generated some debate in Congress and the presidential campaign. But the government's obligations for Medicare and Social Security are 10 times the size of the national debt.

"We have instructed our politicians not to tell us about this problem," says Boston University economist Kotlikoff. "If they even mention cuts to Social Security, we vote them out of office."

 

Grim financial statement

 

To bring attention to the problem, USA TODAY prepared a consolidated financial statement for taxpayers, similar to what corporations give shareholders. The newspaper totaled federal, state and local government liabilities, taken from official documents.

Key findings:

€Total hidden debt. Federal, state and local governments today have debts and "unfunded liabilities" of $53 trillion, or $473,456 per household. An unfunded liability is the difference, valued in today's dollars, between what current law requires the government to pay and what current law provides in projected tax revenue.

€Social Security. The retirement program has $12.7 trillion in obligations it cannot meet for current workers and retirees at the current Social Security tax rate.

€Medicare. The health care program has a $30 trillion unfunded liability for people now in the system as workers or beneficiaries. The $30 trillion reflects the value today of the more than $200 trillion in deficits over 75 years to cover current workers and retirees at existing levels of benefits, tax rates and premiums. Medicare's new prescription-drug benefit, which starts in 2006, accounts for $6.9 trillion of the program's financial ill health.

How much is $30 trillion? The gross domestic product, the entire economic output of the USA, was $11 trillion last year.

"These numbers are staggering in their magnitude," says economist Thomas Saving, whom Bush appointed as a public trustee on the Medicare and Social Security board. "But when I testify before Congress, I'm the only one saying, 'We have a funding problem.' Everyone else is testifying for more benefits."

 

Like a home mortgage

 

The $53 trillion in liabilities is like a mortgage balance: That's what it would cost to pay off the debt now. The actual cost would be higher because of interest payments. A $100,000 mortgage at 5% interest, for example, actually requires $193,000 in income to repay over 30 years.

Under corporate accounting rules, a corporation would record a $100,000 liability on its books if it promised to pay $193,000 in medical benefits over 30 years. That liability would reduce profits immediately, when the promise was made, although the money would be paid over 30 years. Otherwise, shareholders could be fooled into thinking that the company was better off than it really was.

In fact, the company had committed $193,000 in future revenue — worth $100,000 today — to a retiree and couldn't use the money for shareholder profits.

Government doesn't follow this accounting rule. If it did, the federal deficit in 2004 would be $8 trillion, not $422 billion. The $8 trillion reflects the value of new financial obligations Congress approved without any way to pay for them,plus the year's operating deficit.

Government accounting rules are more lenient because, unlike a business, Congress can take whatever money it needs through taxes and renege on promises by passing new laws. Theoretically, the president and Congress could end all health care for the elderly tomorrow and cease Social Security payments the next day — or double or triple tax rates to pay the bills.

That's why AARP, a non-partisan lobbying group for people over 50, says the unfunded promises of Medicare and Social Security are less worrisome than they appear.

"The reason we make companies fund their pension liabilities is because it's uncertain they'll be around in the future. That doesn't apply to government," says John Rother, AARP's research director. "The size of the liabilities isn't relevant, nor is how much we put aside today. What matters is how healthy will the economy be in the future."

He agrees that Medicare has a long-term funding problem but says the nation's entire health system is the issue, not Medicare.

Alan Auerbach, director of the Burch Center for Tax Policy and Public Finance at the University of California-Berkeley, says people are understandably skeptical about gloomy predictions. But he says these numbers are not guesses.

"We can't predict major wars or major inventions," he says. "But we do know the baby boomers aren't going to disappear. We know pretty well that health care costs will rise because of new technology. I wish these were worst-case scenarios, but they're rather cautious best guesses. It could be much worse."

 

A bill coming due

 

The heart of the problem is that the Greatest Generation and baby boomers have promised themselves retirement benefits so generous — and have contributed so little to financing them — that even the most prosperous economy in history cannot pay the bill.

Consider a married couple who throughout their lives earned the median income — the amount at which half of Americans make more and half make less — and who will retire at age 65 next year. They earned $46,400 in their final year of work.

Mr. and Mrs. Median would get a joint Medicare benefit valued at $283,500, the Urban Institute estimates. That's the present value of the benefit — what it's worth today — not the larger amount the government will actually pay over the years. But the couple would have paid only $43,300 in Medicare taxes (valued in 2004 dollars). Taxpayers lose $240,200 on the deal.

But the Medians' good fortune doesn't end there. They also qualify for $22,900 in annual Social Security benefits, which rise annually with inflation.

Present value of the Social Security benefit: $326,000. Present value of Social Security taxes paid over a lifetime: $198,000.

Net loss to taxpayers: $128,000.

And the situation is worse than that. The federal government didn't save the money that the Medians paid in Medicare and Social Security taxes. It spent that money as it came in on other things — defense, education, past Medicare costs, etc. So the Social Security and Medicare taxes paid by Mr. and Mrs. Median won't help offset the cost of their benefits. The Social Security and Medicare trust funds have no money, only IOUs that other taxpayers must repay.

"These mythical trust funds are a financial oxymoron — they can't be trusted and they aren't funded," says Peter Peterson, a businessman and Commerce secretary under President Nixon who wrote the best seller Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.

 Because the trust funds have been spent, taxpayers must come up with the full $609,500 that Mr. and Mrs. Median are entitled to under Medicare and Social Security. And the Medians are a bargain compared with what their 45-year-old children will cost.

Social Security is structured so that future generations get increasingly large benefits. And Medicare benefits rise with soaring health care costs.

The Medians' children would receive Social Security and Medicare benefits with a present value of $884,000 in 2004 dollars when they turn 65, according to the Urban Institute. That's 45% more than their parents would get.

For Hubbard, now dean of the Columbia Business School in New York, the stakes are clear: "The question is whether the political process will make gradual changes or we'll wait for a crisis."

Contributing: Paul Overberg, Bruce Rosenstein
 

 

The New York Times - October 1, 2004
OP-ED CONTRIBUTOR
Retiring Minds Want to Know
 

By AUSTAN GOOLSBEE

Chicago — Even as I.B.M.'s pension difficulties make headlines - the company has agreed to pay current and former employees $320 million to settle some charges that changes to its plan discriminated against older workers - a more serious financial disaster looms for the pension system. Taxpayers could face an even larger bill from corporations' failure to put enough money into their pension funds.

Yet neither candidate for president even mentions the problem, and Congress has actually made it worse. The crisis concerns the Pension Benefit Guaranty Corporation, the federal agency that insures workers' pensions in case their employer defaults. The agency charges employers a premium for the insurance, and that money is supposed to cover its costs. The system is not supposed to cost taxpayers anything. But a dreadful lack of judgment, coupled with a new federal law, could leave the public with a $100 billion bill.

In the past two years, the agency has watched its net financial position deteriorate by $20 billion. Overall, corporate pension plans have some $450 billion less than they need to meet their commitments. While corporations are legally required to make these payments unless they declare bankruptcy and can prove they are under "severe financial distress," as much as $100 billion of this bill is owed by companies that are in financial trouble. Just this month, for example, United and US Airways, both of which are already in bankruptcy, announced plans to renege on their pension requirements.

Why doesn't the agency have the money to cover this shortfall? Fundamentally, it is an insurance company. Higher risk ought to mean higher prices; a regular sky diver, for example, pays higher life insurance premiums. But the pension agency doesn't work that way.

The agency's fees are unrelated to investment risk. It charges a fixed amount per corporation and an additional fee based on the amount its pension fund is underfinanced. United had about two-thirds of its pension fund in risky investments, including junk bonds and a Ghanaian gold-mining company. Yet if United had invested every dollar in United States Treasury bonds, it would have paid exactly the same premium to the pension agency.

Thus corporations have little incentive to invest workers' retirement savings wisely. If a bet wins big, a corporation can add that money to the pension plan and keep the funds it would otherwise have been required to contribute. If it loses big, the government will bail it out.

 Congress is doing its best to make financial catastrophe more likely. In April, it passed a law that changed accounting rules to make it easier for companies to underfinance pensions. It also gave some companies in the two industries with the worst pension problems - airlines and steel - a two-year waiver from the usual requirement that they close their pension gaps with their own money and allowed them to defer some payments.

Unsurprisingly, they are taking advantage of the opportunity. Continental Airlines, for example, recently announced it would not make a contribution this year to its employees' pension plan. If these corporations declare bankruptcy and default on their pensions, the government bailout will need to be that much larger. According to the pension agency, this law could reduce company contributions by more than $80 billion.

Congress should not be making it easier for corporations to shirk their pension obligations - and neither President Bush nor Senator John Kerry should remain silent when they do. (While Mr. Bush signed the bill into law, neither Mr. Kerry nor his running mate, John Edwards, were present the day the bill passed in the Senate.) If Washington were truly concerned about workers, it would ensure that the pension agency remains solvent. One step in the right direction would be to have the agency charge higher premiums for corporations that make risky investments.

In the meantime, workers with old-style pensions should know that they are at risk of losing a great deal - a prospect that has become all too real for many employees in the airline industry, who frequently gave up wage increases in part for the promise of more generous pensions. Those pensions will be greatly reduced if the pension agency takes over.

 It may be too late for many such employees to rescue their pensions. But it's not too late for Congress to act to ensure that employers, not taxpayers, pay more to protect the retirement of working Americans.

 Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business.

 Copyright 2004 The New York Times Company

 

LIGHTREADING - September 30, 2004
PREVIOUS NEWS ANALYSIS

 Lucent's Russo Fights Back
 

Lucent Technologies Inc. (NYSE: LU - message board) has strongly rebutted a Light Reading news article saying that Lucent's staff reductions and product portfolio continues to be trimmed.

The long memo from Lucent chairman and CEO Pat Russo, published this week in an internal Lucent newsletter, was in response to an article published on Monday about more layoffs coming at Lucent, and a possible reduction – and possibility of elimination – of the staff supporting its CBX 3500 and CBX 500 multiservice switching products (see  Lucent Cuts Target INS ).

In short, Russo is fighting the labeling of layoffs as "restructuring" and denying that Lucent has any plans to cut its CBX 3500 product line.

Below is the full text of the memo Russo wrote to Lucent employees. Light Reading has confirmed the authenticity of this memo, which ran in a company newsletter, through multiple Lucent sources.
"[NOTE TO LUCENT EMPLOYEES – This story concerns me because it is inaccurate and I want to make sure we're on the same page regarding the issues it raises. First, our restructuring is behind us – that means the plans we put in place and announced when we announced our restructuring charges are in fact complete. We have always said that we would manage the business based upon the realities of the market, which means there will be additions in some areas and reductions in other areas of the business. In fact the reductions referred to in the story were tied to the circuit switching business – a business that while very important is a business in decline and as a result needs fewer people. It's important that everyone understand that we will continue to add and reduce headcount based on the needs of the business and market dynamics. I've said that on employee broadcasts and most recently I said it last Tuesday on CNBC. This is how we must run the business going forward.

Finally, it's misleading and incorrect to speculate that we are backing away from the CBX 3500. It is a key piece of our portfolio going forward based on the opportunities we see in the market and conversations we are having with our customers. This product is targeted at customers who are enhancing their edge networks to support profitable Frame Relay and ATM services as well as new Ethernet and IP/MPLS services. Our partnership with Juniper Networks lets us sell their edge routers to carriers who are tuning their networks primarily to support IP services. There's room for both products in our portfolio because they address different customer needs to evolve edge networks to suit their different business models. – Pat Russo]"

Light Reading has since obtained more details about Lucent's staffing plans, and an update has been published as  Lucent Offshoring Wave Hits Hard .

— R. Scott Raynovich, US Editor, Light Reading
 

 
LIGHTREADING - September 30, 2004

NEWS ANALYSIS

 Lucent Offshoring Wave Hits Hard
 

Lucent Technologies Inc. (NYSE: LU - message board) chairman and CEO Pat Russo doesn't want you to call it "restructuring," but can you call it "offshoring"?

Lucent is in the midst of a steady reduction in headcount, and it's shipping hundreds of development jobs overseas to India and China – as well as reseller partners – according to a wide range of sources both in and around Lucent. Much of this is focused on Lucent's Integrated Network Services (INS) division, the wireline networking group that was once the company's heart and soul.

"The company is moving all development to India – no ifs, ands, or buts," says one senior Lucent employee. "We're starting to drop like flies."

The senior Lucent source said he knows of at least two product divisions in INS where the reduce-and-offshore approach has been implemented in the last few months, and he says the strategy is accelerating. "They are hiring 15 people in India to replace 150 people [that they lay off here]," he said of the pattern of reduce-and-outsource.

So far in 2004, Lucent has hired 400 people in China; 320 people in the United States; 200 people in the Asia/Pac region, including India; 190 people in Latin American/Caribbean; and 100 people in Europe/EMEA, according to numbers provided to Light Reading by the company today.

But these new hires are being countered by layoffs at the same time, mostly in North America. Analysts say the new rounds of layoffs will total in the thousands, and could slash as much as much as 10 percent of Lucent's workforce from staffing levels this summer.

Lucent executives say that they continue to look at "puts and takes" and that they are hiring overseas in an effort to cut costs and improve quality.

"We are a global company," says Lucent spokesman Bill Price. "There are talented people throughout the world. To remain competitive as a global company, we look at all of our options to make the most efficient and cost-effective use of a global team – inside and outside the U.S. – and to help the company meet its business needs and remain a leading provider of telecommunications equipment for service providers.

"Outsourcing and offshoring are now ways of life for a lot of U.S. institutions," said Price.

As of June, Lucent's headcount stood at about 32,300. It had 35,000 employees at the beginning of the year, according to the company. At its peak, Lucent had more than 100,000 employees.

Russo recently addressed an earlier Light Reading article on the headcount reductions in a company memo (see  Lucent Cuts Target INS  and  Lucent's Russo Fights Back ). Russo continues to maintain that the company is largely done with restructuring, and that current staffing changes are part "normal business operations."

So, if headcount continues to decline, where are the cuts coming? Sources say they're happening across the board, but they appear to be focused on INS rather than the more-profitable Mobility and Worldwide Services divisions. Light Reading also reported that more cuts are underway for Lucent's CBX 500 and CBX 3500 products. Several sources now say that although this product unit has had its engineering headcount reduced substantially over time, the new round of cuts have not yet hit; however employees are negotiating exit packages now. Expect these layoffs to unfold over the next month or so, say the sources.

Based on information supplied to Light Reading by at least half a dozen sources working either at or close to Lucent, here's an update on what's happened in the last few weeks and what's in the works in the near future.

    €     Sources say Lucent is in the process of streamlining the staff of its Landover, Md., business unit that works on the PacketStar PSAX access concentrator products, a product Lucent acquired in 1998 when it purchased Yurie Systems for $1 billion. This could result in the loss of as many as 100 jobs, although much of the maintenance of this product being moved to new engineers in Bangalore, India. Sources say that some of the engineering jobs may be taken over by employees in Lucent's Westford, Mass. facility. Many of the U.S. employees have already negotiated their exit packages, known in Lucent parlance as a Forced Management Plan, or "FMB."

    €     Lucent has all but eliminated a Naperville, Ill. business unit, consisting of at least 50 people that were working on voice switching and its 5ESS circuit-switching products. It has outsourced most of the engineering work to India, sources say.

    €     Lucent recently laid off about 20-40 employees in a Columbus, Ohio, facility that has employees of both Bell Labs and INS. One source says the facility is in the process of being dismantled, and that hundreds more expect to lose their jobs. "They're taking a wrecking ball to it," said the source, a former Lucent employee.

    €     Lucent has plans underway to make further cuts to U.S.-based engineers working on its CBX 500 and CBX 3500 product lines, a legacy of its acquisitions of products from the former Ascend Communications and Cascade Communications, say multiple sources. Although the numbers in this case aren't known, one source close to the company said the unit is already down to a few dozen engineers. Lucent executives have denied that this product is in jeopardy of being cut and say it's fully supported (see  Lucent's Russo Fights Back ).

    €     Lucent appears to be leaning heavily on its development partners, most notably Juniper Networks Inc. (Nasdaq: JNPR - message board), to help it in areas in which it's cutting U.S. engineering talent, several sources say. "The partnership with Juniper is the nail in the coffin for anything inside Lucent," the ex-employee source says. "Lucent will stop investment."

Judging from the feelings expressed in emails and phone calls to Light Reading, the outsourcing moves aren't exactly boosting employee morale. In fact, some employees are furious that Russo continues to publicly say restructuring is over, while internally it's clear what's going on.

"It's all politics," says an ex-Lucent employee who spoke with Light Reading at length. "They're leaving the products to be supported with the VPs and a few staff. They deceive with numbers, but all the folks in the trenches are getting axed."

Many analysts are saying Lucent has no choice in further cutting staff and outsourcing development. It's a matter of cost-cutting to generate profits, they say.

"They are surgical layoffs," says Frank Dzubeck, president of Communications Network Architects. "They are happening in areas where there is no longer growth."
Morgan Keegan & Company Inc. analyst Simon Leopold was one of the first Wall Street analysts to see more cost-cutting coming, when he wrote, in an research note issued in August, that he expected the employment reductions to pick up in the second half of 2004 (see  Report: More Lucent Cuts Ahead? ).

"We believe Lucent will make unanticipated cost cuts that lead to higher-than-expected FY05 earnings," wrote Leopold.

More recently, Leopold estimated in a research note that Lucent is in the process of cutting another 3,250 jobs, which would put the global corporation under 30,000 employees for the first time.

The bottom line is that Lucent continues to shrink as a company, and it appears to be moving quietly into more outsourcing and reselling relationships. Meanwhile, Lucent's move to outsource development could benefit one of its largest partners – Juniper – which could take over much of the heavy lifting in the multiservice edge portion of the network.

Adding further evidence that Lucent is moving quickly to move to a reseller strategy, it announced today that it has inked a deal with Riverstone Networks Inc. (OTC: RSTN.PK) to resell Ethernet networking gear to service providers (see  Lucent Adds Riverstone to Roster ).

Of course, Lucent is not alone in a move to further reduce headcount and ship some jobs overseas. Nortel is doing similar things, and as announced this morning, the scale of the staff reductions are similar (see  Nortel Details Layoff Plans ). Likewise, Lucent's cousin Agere Systems Inc. (NYSE: AGR.A) announced major new layoffs yesterday (see  Agere Wields Jobs Axe ).

— R. Scott Raynovich, US Editor, Light Reading
 

 
Chicago Daily Herald - September 28, 2004

Lucent retirees demand audits
By Anna Marie Kukec Daily Herald Business Writer
 
The Lucent Retirees Organization Monday demanded audited reports of trust funds at Lucent Technologies after the association exchanged heated e-mails with a former Lucent executive.

The exchange began last Wednesday when former CEO Henry Schacht, a board member spearheading the cuts to retiree benefits, sent an e-mail to LRO President Ken Raschke. It was posted on the LRO Web site.

Schacht said he was "troubled" about Raschke's public comments about the millions of dollars being cut from retiree benefits while Lucent executives were being paid millions. Lucent has maintained the compensation packages have been in line with retaining top talent to help turn around the telecom equipment maker.

An article in Forbes magazine last May said Lucent CEO Patricia Russo received total compensation worth about $44 million, including the estimated value of stock options, and four other executives received retention payments totaling about $10 million.

Lucent officials have said the retiree benefits have soared to $800 million, or about 10 percent of total revenue.

Only a third of the $800 million is from Lucent cash, said Raschke. "The remaining two-thirds either comes from the Voluntary Employees Beneficiary Association trust funds transferred from AT&T to Lucent, which Lucent has never contributed to, or directly out of the pockets of retirees," Raschke said.

Schacht's e-mail said the management compensation is based on performance. "For the company to be successful we need to pay competitive compensation at all levels and continue to invest in the company's operations," wrote Schacht.

Raschke also said retirees are worried about their pensions, based on losses detailed in Lucent's federal filings. A 2001 report said the loss on plan assets was $6.8 billion, followed in 2002 with another $2.5 billion, said Raschke.

As a result, the LRO has sought a review of health care and pension trust funds. A consultant to the LRO has found the Trust Owned Life Insurance in the health care management trusts has not been audited and believes the assets could have been commingled with other trust assets, Raschke said.

Schacht did not respond to Raschke's fund charges Monday and did not respond to requests for an interview.

In addition, LRO officials have asked the group's 125,000 members, including 10,900 in Illinois, to write to legislators to seek an independent audit of Lucent's trust funds.

U.S. Senators Evan Bayh of Indiana and John E. Sununu of New Hampshire, U.S. Representative Barney Frank of Massachusetts, and presidential candidate John Kerry have forwarded those requests to the U.S. Department of Labor and the Pension and Welfare Benefits Administration.

 
The Wall Street Journal
 
TELECOMMUNICATIONS

Lucent Again Cuts Retiree Benefits

Telecom Firm Says Paring Expenses
For Health-Care Is Necessary to Compete

By CHRISTOPHER RHOADS
Staff Reporter of THE WALL STREET JOURNAL
September 22, 2004; Page A26

Lucent Technologies Inc. said it plans to make additional cuts in its retiree health-care benefits, in a step that will affect thousands of former employees.

In a letter to retirees, the Murray Hill, N.J., telecommunications equipment maker said that the rising costs and the company's need to remain competitive made the step necessary.

"Given the impact of health-care costs on our business, we have no choice but to take this step," Lucent said in its letter. "Even as the market for products and services improves, we must compete against companies that do not have to build retiree benefits into their cost structures."

Pensions and health-care benefits at some of Lucent's big competitors, such as Siemens AG of Germany and Alcatel SA of France, are at least partly paid by federal taxes.

The problems facing Lucent are hitting other companies, particularly those with a large number of retirees. A growing number of companies are responding by cutting retiree benefits. UAL Corp.'s United Airlines said during its bankruptcy proceeding that it will no longer pay into its retirement account.

"This will snowball" for many companies, said Daniel Berninger, an analyst in the Washington office of Tier1 Research, a Minneapolis research firm.

The move by Lucent was the second reduction announced by the company within the past year. The latest change, which goes into effect in January, means that dependents of workers who retired after March 1, 1990, with a salary of at least $65,000, will no longer be covered. Dependents include spouses, children under 23 who are students, and disabled children.

That reduction will affect 5,400 employees and 7,400 dependents, a company spokesman said. It would save about $16 million. Dependents would still have access to the benefits at the group rate, which is lower than the market rate, the spokesman said.

"This action is not pleasant but is necessary in order to make sure Lucent remains a competitive player," said Bill Price, the Lucent spokesman. The costs of retiree benefits have soared to $800 million, or about 10% of total revenue, an unsustainable level, Mr. Price added. The first reduction was made last fall, slicing costs by about $75 million. That cut eliminated benefits of dependants of workers who had a base salary of at least $87,000, retiring on or after March 1, 1990. It affected 9,000 dependants of 7,300 retirees.

Lucent, after suffering big losses in recent years, posted net income of $387 million in the quarter that ended June 30, compared with a year-earlier loss of $254 million.

Lucent's changes affect retired managers, rather than unionized retirees.

Part of the problem stems from the company's swelling ranks of retirees in recent years, as a result of early retirement offers made during the telecom bust. Lucent reduced its work force to 32,300 from as high as 157,000 in 2000. Some of that reduction came from spin-offs and layoffs.

But as it cuts its payroll, the number of Lucent retirees has grown by 18% since the end of 2000, to 125,000, the company said.

Those retirees affected have argued that the company is making the cuts while it continues to pay high salaries for its top management. The company's "lack of compassion for retirees and their dependants while simultaneously defending their own excessive and unwarranted compensation is absurd," said Ken Raschke, president of the Lucent Retiree Organization in a statement.

Write to Christopher Rhoads at christopher.rhoads@wsj.com

 
The Columbus Dispatch - September 22, 2004
Lucent to cut health benefits for more retirees
 
Tom Matthews
THE COLUMBUS DISPATCH
Lucent Technologies’ retired managers say their expectations of further health-care cuts were true.
Lucent has sent them notices of a new round of benefit reductions on Jan. 1. Managers who earned $65,000 or more annually and retired on or after March 1, 1990, will lose dependent coverage for spouses or children.

Retirees can buy the coverage at monthly premiums of $220 to $386 a person, Lucent said. Lucent also is cutting dental benefits for the group.

These latest cuts follow similar reductions this year for managers at higher salary levels.

Lucent said 12,800 people — 5,400 retirees and 7,400 dependents — are affected by the new cuts, projected to save $16 million a year. The earlier cuts affected 16,300 retirees and their dependents.

"The challenge we have here is our healthcare costs continue to increase," Lucent spokesman John Skalko said. "It is a cost we cannot absorb and remain a sustainable company. We have no choice but to take this step."

But the Lucent Retirees Organization in New York criticized the company for paying what it says is excessive compensation to top executives at the expense of retirees. The group said Chief Executive Patricia Russo received more than $44 million in compensation since 2002, a period during which Lucent shares fell in price.

Ken Raschke, retiree-group president, said Lucent’s leaders "don’t have a moral compass. How can they justify breaking promises to retirees and their dependents while extravagantly rewarding themselves for running a company whose share price has dropped by more than 40 percent?"

Skalko said Lucent compensates executives based on the marketplace.

"We have to maintain a level of compensation that is competitive," he said. "Our executive compensation has been reduced significantly" as Lucent’s work force has dropped.

This month, Lucent said it will seek cuts for retired union employees during labor negotiations in October. The company did not provide details.

Lucent has 125,000 retirees, 70,000 former union members and 55,000 former managers.

 

tmatthews@dispatch.com 
 

 

The New Jersey Star-Ledger - September 22, 2004

Lucent cuts health-care for retiree families

 
Wednesday, September 22, 2004
BY JEFF MAY
Star-Ledger Staff

Lucent Technologies has notified thousands of retirees it will no longer pick up health-care costs for their dependents, and warned more benefits cuts are coming down the road.

The cost-cutting move affects 5,400 retirees and their 7,400 dependents, the company said. The change will save about $16 million a year. The Murray Hill-based telecom equipment company has said it cannot continue to offer health- care benefits that amount to $800 million a year, or almost 10 percent of its annual sales.

Some of those costs have been absorbed by trust funds the company set aside for retirees before its split from AT&T, but those pools of money are expected to be depleted by 2007. In the current year, Lucent has said it will use $220 million of operating funds to pay for management retiree health care, a number that is expected to grow in coming years without further cutbacks.

Last year, Lucent cut $75 million worth of benefits, in part through the elimination of dependent care subsidies for management employees who made $87,000 or more at the time of their retirement. The new change, which will go into effect Jan. 1, lowers the threshold to workers who made $65,000 or more at retirement.

Employees who retired before March 1, 1990, are unaffected by the dependent care changes, as are former union workers. Lucent has said, however, that it will seek health-care reductions from union- represented retirees when it negotiates a new labor contract next month.

Retirees still qualify for reduced group rates from Lucent if they decide to pay for dependent health care on their own, spokesman Bill Price said.

Lucent has roughly 125,000 retirees. The company has shrunk dramatically in recent years, however, and now has some 32,000 employees, about 20,000 of whom work in the United States.

Retirees criticized Lucent's leadership for cutting benefits while receiving hefty bonuses in the past year.

"Lucent executives are once again showing a total disregard for the commitments the company made to retirees and their dependents," Ken Raschke, president of the Lucent Retirees Organization, a group that represents management retirees, said in a statement.

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