A recent court ruling may affect the ways corporate America and
the University of California deal with their pension plans.
United Airlines won a May 10 court ruling allowing it to default
on its four pension programs. The default, worth $6.6 billion, is
the largest ever.
While the UC is not under any pressure to default on its
pensions, the role they will play in the future may be up for
debate in Sacramento.
United Airlines, the United States’ second-largest
airline, is currently under Chapter 11 bankruptcy, for which it
filed in December 2002.
The carrier made the case in court that defaulting on the plans
was necessary for the airline to emerge out of bankruptcy and
become competitive in the market.
“It’s not a good outcome. It’s unfortunately a
necessary outcome,” said United Chief Financial Officer Jake
Brace. “It is an important step in our restructuring and in
making our airline successful and viable for the long
term.”
Unions, on the other hand, argued that terminating the plans
would encourage other corporations to follow suit.
“We’re going to look to replace this management team
with a team that can lead our airline out of bankruptcy,”
said Sara Nelson Della Cruz, spokeswoman for the Association of
Flight Attendants. “Either they go, or we go.”
The unions also contended that reduced benefits would make it
harder for workers to save for retirement.
Currently, 44 million Americans are covered by pension plans,
which are underfunded by $450 billion, according to Pension Benefit
Guaranty Corp., the government insurer of private pensions.
The agency is designed to provide pension benefits when
corporations default on their plans.
During the recent recession, companies began to cut benefits and
some went out of business. United was one of the companies that has
been granted aid from this insurer as a result of the court
ruling.
Due to a sluggish economy that led to a series of pension
defaults, the insurance program compiled a deficit of $23.3
billion. Employees are likely to see reductions in benefits because
federal law sets a cap over how much the insurer can
distribute.
These factors still continue to hurt United, as the airline
reported a quarterly loss of $1.1 billion on Wednesday.
UC employees are also funded by pension plans, but local
economists say the UC’s plans are not in jeopardy and will
not be affected by the recent United ruling.
UC workers are covered under the University of California
Retirement System, and while it is fairly secure, certain
government officials are proposing changes.
Recently, Gov. Arnold Schwarzenegger proposed reforming the
retirement system for state employees.
In January, he introduced a plan to institute private retirement
accounts, similar to what President Bush has advocated.
With private accounts, individuals can choose to invest their
money in mutual funds and bonds.
Supporters of the private accounts contend they will give
workers a bigger nest egg during retirement. But critics of the
governor argue there is no need to change the current pension
system.
“California’s pension plans are stable,” said
Barbara Maynard, a member of Californians Against Privatizing
Retirement, a group working against the governor’s
proposal.
The governor’s supporters argue that the state’s
retirement system needs to be reformed. Those against changes to
the pension system say the current system is financially sound.
“There is no crisis,” Maynard said.
Maynard also believes that the stock market is too volatile to
invest retirement money.
“Private retirement accounts are too risky,” she
said.
Though Schwarzenegger pushed for his proposal earlier this year,
it was not approved by the legislature.
There were “mistakes in the language of the
proposal,” said Larry Frank, staff director at the downtown
office of the UCLA Labor Center.
One major criticism of the legislation regarding private
accounts was that it did not provide death or disability
benefits.
If no solution can be reached on the issue, the governor plans
to take the measure to Californians with a ballot initiative in
June 2006, Maynard said.
The UC has been collaborate with the governor on a compromise
and has voiced its appreciation for taking the time to address the
issue thoroughly, it said in a statement released by the UC Office
of the President in April.
“The university has been working closely with the
governor’s office on this issue these past several months and
greatly appreciates his sensitivity to UC’s concerns and
needs,” the statement read.