he Wall Street Journal - August 23, 2004 – Entire Article

UAL Pension Decision Draws Scrutiny

By SUSAN CAREY and JOHN D. MCKINNON
Staff Reporters of THE WALL STREET JOURNAL
August 23, 2004; Page A3

CHICAGO -- The judge overseeing UAL Corp.'s efforts to step out of bankruptcy protection questioned but left untouched the company's decision to stop making required payments to its underfunded pension plans, a move that is increasing political pressure to strengthen and streamline pension protections.

U.S. Bankruptcy Court Judge Eugene Wedoff said in a hearing Friday that a central question in the case is whether UAL management "engaged in improper, illegal activity by not funding the pensions," but he didn't forbid UAL's decision, as many employees had hoped. Instead, he ruled in favor of the United Airlines parent on three important motions, including granting a 30-day extension, to Sept. 30, of UAL's exclusive right to offer a reorganization plan.

But he also criticized the company for a breakdown in communications with its unions and ordered it to use the next month as a "test period" to see whether cooperation with its unions "can be reconstituted." If not, he said, he would share the belief of UAL's unions that opening the process to competing reorganization plans may be unavoidable.

UAL also disclosed at the hearing that its new debtor-in-possession financing, which the judge approved, doesn't -- as UAL earlier had inferred -- preclude the company from funding its retirement plans. The company, which is coping with a surge in jet-fuel costs and tough fare competition, said it can make its pension payments if its cash flow allows such material expenditures. The plans cover about 120,000 workers and retirees.

UAL's decision -- as well as its disclosure in a court filing last week that it likely will have to terminate its four pension plans to become a viable business -- has prompted increasing interest by lawmakers in toughening contribution rules for troubled plans, while also allowing financially-healthy companies to sock away more money in their pension plans during flush times.

Some observers say a taxpayer-funded bailout for old-line industrial plans could loom, thanks to the outsized pension promises many companies have made, relative to their current size. The government-sponsored Pension Benefit Guaranty Corp., which insures pensions, faces almost $10 billion in unfunded long-term liabilities, thanks in part to its recent absorption of several steel-company plans. That deficit would grow to more than $15 billion if United's threatened termination -- which would be the largest such move in U.S. history -- becomes a reality.

Rep. John Boehner (R., Ohio), the chairman of the House Committee on Education and the Workforce, said the implications of United's announcement are "extremely troubling" and promised action on a long-discussed overhaul of pension rules. Democrats began laying the groundwork for using the United crisis as a campaign weapon. "As the nation's pension crisis has worsened, President Bush and Republican leaders in Congress have been asleep at the switch," said Rep. George Miller of California, the senior Democrat on the House Education and the Workforce Committee.

UAL missed a July payment of $72 million owed to three of its four underfunded pension plans and has said it expects it will skip a $400 million payment Sept. 15 and a smaller payment owed in October. Last week, in a court filing, UAL said it likely will terminate its plans and shift the assets, $6.9 billion, and liabilities, $12.8 billion, onto the PBGC.

The International Association of Machinists union sued three top UAL officers in federal courts in Chicago and Newark, N.J., alleging breach of fiduciary duty and unfair treatment of one class of creditors over others. Judge Wedoff on Friday granted UAL's motion to enjoin those suits from going forward for now, saying the best venue for such disputes is his court.

While federal law requires the contributions, the U.S. Bankruptcy Code holds that debts owed before a Chapter 11 bankruptcy filing don't have to be paid until after the company reorganizes or liquidates, the judge said. Those payments often represent just cents on the dollar of what was owed. The judge said that UAL is trying, for now, to avoid the choice of funding or terminating the plans by maintaining them but not making contributions. It remains to be seen, he said, if that third option is available.