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Pre-1999 - Duke Energy Employee Advocate

News - August 2000

"Some men rob you with a six-gun--others rob you with a fountain pen." - Woody Guthrie

Union Membership Easier for Temps
The New York Times - by Steven Greenhouse - August 31, 2000

NEW YORK -- For years it was nearly impossible for temporary workers to join unions, but the National Labor Relations Board issued a ruling on Wednesday that opened the door for many temps to join unions at their workplaces.

The Washington-based labor board, in a 3-1 decision that took effect immediately, authorized temporary workers at a business to join the same union as the company's permanent workers without first obtaining permission from the employment agency that assigned the temps to the business.

In its previous rulings, the board stated that temporary workers sent by an employment agency to a company could vote to join a union at the company only if the employment agency agreed. Temporary help agencies rarely gave the workers they sent to a company the go-ahead to join a union at the company. Officials with the AFL-CIO hailed the ruling, saying it would help improve wages, benefits and working conditions for many of the 1.2 million people employed by temporary agencies -- one of the fastest growing segments of the work force.

The labor board ruled that in many cases temporary workers are in effect the employees of the user company and not of the agency and that, because of their similar circumstances, they should be treated as part of the same bargaining unit as the user company's permanent employees.

The labor board wrote, "A growing number of employees who are part of what is commonly described as the 'contingent work force' are being effectively denied representational rights guaranteed them under the National Labor Relations Act."

Under the decision, labor unions might simply petition the labor board to rule that several dozen temporary employees at a unionized work site should be added to the union bargaining unit, even without a vote by the temporary workers.

At a time when the union movement is straining to add workers, the decision was important for labor because the number of people working for temporary help agencies soared more than sixfold from 1982 to 1998, while jobs over all grew by 41 percent.

John Sweeney, the AFL-CIO's president, said the ruling "is an important step in addressing the rights of contingent work force employees, who have too often been relegated to second-class status and rights, if any."

Management vs. Shareholders
USA Today - by Nell Minow - August 31, 2000

Republican vice-presidential nominee Richard Cheney, who left as CEO of the energy services company Halliburton to join the George W. Bush team, said this week that "very bright people" would help him figure out how he could get the most out of his millions of dollars in Halliburton stock options without creating a conflict of interest should he and Bush win.

I never understood why Cheney should be paid options set aside to give him an incentive to stay in the CEO's job when he wasn't staying in the job, no matter how exciting the opportunity that enticed him away from it. The real shame is that Cheney's financial package will be resolved in the political arena. That wouldn't have been necessary if only Halliburton's board had been willing to engage in some clear thinking and make some tough calls.

A board's single most important job is to say "no" when necessary. When the departing CEO says he wants to have his retention incentive without actually being retained, that's just the time for it.

Although it is too bad that it required the scrutiny of the political process to raise the questions the Halliburton board should have, I only wish that shareholders of other firms had a chance to bring political pressure to bear on the CEOs who, rather than running for national office, are running from shareholders. Corporate executives are taking extreme measures to evade questions from shareholders. At this spring's annual meeting, IBM CEO Lou Gerstner cut off questions ahead of schedule. This left shareholders, employees and a congressman unable to ask about his decision to cut benefits out of the employee pension plan. And defense contractor Northrop Grumman refused to print a shareholder proposal in its proxy. Its stated reason? The proposal was one word more than the 500-word limit. But I suspect the fact that 64% of the shareholders voted in favor of that proposal last year might have had something to do with it, too.

The heirs of Henry Ford recapitalized this summer to sell off some of their equity ownership, but they held on to the same hefty voting rights, despite objections of major shareholders like the California Public Employees Retirement System. The Ford heirs now have less of a financial interest in the company but retain control of its direction, no matter what the people with the real capital at risk think about it. Major corporations are getting closer to not having to face pesky shareholders at all. Delaware may be the second-smallest state, but it has the largest allocation of corporate tax revenues, and it keeps it that way by making sure that it has the most accommodating corporate laws. In June, without a single hearing or opportunity for comment, Delaware enacted a law permitting corporations to do away with the in-person annual meeting and have it completely online.

Non-U.S. law is even more management-friendly than Delaware. Some formerly American companies, such as Amoco and Chrysler, are hiding from shareholders by merging with non-U.S. companies so that they are no longer covered by the world's most extensive disclosure requirements.

Clearly, there is a correlation between this extraordinary effort to insulate corporate directors and managers from shareholders and the unprecedented abuses in CEO compensation. Sometimes boards don't even wait to see if there is any performance to reward. Financial services company Conseco's board gave a $45 million signing bonus to new CEO Gary Wendt. Some directors even pay big bucks for failing. Conseco gave a goodbye package worth tens of millions of dollars to departing CEO Stephen Hilbert. Mattel's board got into a similar financial stratosphere for ex-CEO Jill Barad, despite a disastrous record. These boards might as well say, "Let the shareholders eat dividends!"

If only we could persuade other CEOs to run for vice president, maybe they'd answer to shareholders, too.

Pension bill's benevolence falls short
CBS MarketWatch - by Kristen Gerencher - August 31, 2000

WASHINGTON (CBS.MW) -- A U.S. pension reform bill that would raise 401(k) contribution limits to $15,000 a year includes little-noted provisions that reduce incentives for companies to encourage middle- and low-income workers to participate.

The bill passed the House in July on an overwhelming vote and was celebrated for boosting the amount of tax-deferred savings that people can accumulate. But proposed technical revisions in the legislation "pose a real threat to pension coverage for rank-and-file workers," said Ellen Nissenbaum, legislative director for the Center on Budget and Policy Priorities.

Proposed adjustments that reward small business owners in particular with greater pension allowances also may depress the savings potential of their workers, critics say. A handful of redefinitions of seemingly minor terms is whittling away many improvements the bill otherwise offers, they say.

The CBPP, the American Association for Retired Persons (AARP) and 24 other groups are calling on the Senate to take a closer look at the bill's so-called take-aways when it reconvenes next week.

Encouraged by federal legislation that created 401(k)s in 1979, many companies unburdened themselves of the cost of traditional pension plans by switching to employee-controlled -- and financed -- retirement programs.

The shift prompted additional rules that limited 401(k) contributions of "highly compensated" workers if those below a certain earnings threshold didn't participate to a significant degree. That pressured top executives to encourage employees to save for retirement, through such means as improved matching contributions by the company.

Critics charge that subtle changes in a series of complicated "non-discrimination" tests would jeopardize the savings of low and middle-income workers at the expense of more opportunity for the rich. Almost 80 percent of benefits the legislation would go to the wealthiest 20 percent of Americans, while the bottom 60 percent of the workforce would receive less than 5 percent of benefits, according to the CBPP.

"The danger is that a lot of these reforms could backfire and undermine pension security for the lower and moderate income workers who are the ostensible beneficiaries of the legislation, and who have the lowest rates of pension coverage under current law," said Peter Orszag, president of Sebago Associates, an economics and public-policy consulting firm in Belmont, Calif.

The national savings rate, already at historic lows, may decrease further because of related contribution-limit increases for IRAs, Nissenbaum said. Higher income people are most likely to up their contribution from $2,000 a year to the proposed $5,000. Those who could afford to make the new limit probably would simply shift money from other savings vehicles and contribute to less demand for employer-sponsored plans that benefit more workers, she said.

"The bulk of the benefits accrue to higher-income people who already probably have adequate if not generous pension coverage," Nissenbaum said.

The U.S. Treasury and other administrative offices strongly oppose the bill, condemning it as the wrong approach to helping the 70 million Americans, or 40 percent of the workforce, not covered by an employer-sponsored retirement plan.

Maximum limits and money purchase plans
Critics contend highly paid executives could maintain or increase their compensation while cutting retirement benefits for lower-earning workers.

Under current law, the maximum income that a worker can count when computing pension benefits is $170,000, but that figure would increase to $200,000 if the bill passes. The difference would be insignificant to those at the top of a company, but the trickle down effect could deprive the middle class, the groups say.

Only the richest 1 percent of workers is now constrained by the maximum considered compensation limit of $170,000, according to the CBPP.

In another provision, the bill would reduce incentives for a type of defined contribution plan called money purchase plans, which are particularly beneficial to lower and moderate income workers because they are automatic employer contributions rather than employer matches. As it stands now, workers are allowed to have only 15 percent as a total contribution to a 401(k) plan. But a separate rule allows a 25 percent maximum beyond a 401(k) or profit-sharing plan by setting up a money purchase plan to fill that gap. While an employer doesn't have to put in any money if a worker doesn't contribute to a 401(k) plan, that's not the case with a money purchase plan, which is often the only source of pension benefits a low-income worker may have, Orszag said. The legislation in essence would raise the 15 percent limitation, undermining the need for money purchase plans.

At the heart of the debate is another test known as the "top heavy" rule that says if 60 percent or more of the assets in a company's retirement plan belong to its key employees, it must contribute 3 percent of pay to lower scale workers to even out the distribution.

By raising the income levels so that far fewer people would qualify as "key" employees or allowing key employees to route pension contributions through their spouses, higher-income workers could be excluded from the pool and weaken the stipulation's effect, critics say.

"The top heavy rules are unnecessarily complicated, but this is not the way to reform them," Orszag said. "This doesn't make them any less complicated, it just makes them looser."

Duke Energy Investigated for Price Gouging

The L. A. Times - By CHRIS KRAUL - August 28, 2000

With Southern Californians reeling from skyrocketing electric bills, critics charge that fewer than a dozen power suppliers are reaping far greater profits than are justified by the recent surge in wholesale prices of the natural gas they use to create electricity.

Their behavior is a major focus of a formal investigation announced last week by federal regulators. Among those under scrutiny are power merchants including Duke Energy , Dynegy, Reliant Energy, Calpine, Southern Co. and the Los Angeles Department of Water and Power. Critics say the companies are earning huge windfalls selling energy to the two state agencies charged with distributing power in California…

But the problem goes beyond a supply-and-demand imbalance. The so-called merchant power companies' ability to bend the market to their advantage--using what appear to be legal strategies--illustrates what many say are serious flaws in the state's deregulated energy market.

One major flaw is that sellers do not have to participate in the state's main electricity auction--the so-called "day forward" sale held one day before electricity is delivered to the state's residences and businesses. Instead, generators are withholding power until the day of delivery, when desperate state agencies are willing to pay steep prices to keep the power flowing.

The upshot has been a doubling of electric bills for the 1.2 million customers in San Diego Gas & Electric's coverage area, and Southern California Edison and Pacific Gas & Electric customers may be facing higher prices once their rates are unfrozen in 2002.

In pointing the finger at the power merchants, Gov. Gray Davis, some academics and utility executives charge that California consumers are being victimized by sophisticated trading techniques that take advantage of the market system to extract huge profits.

Deregulation "only works if people act responsibly. It won't work if people say their only goal is to make as much money as humanly possible," Davis said last week…

Coalition Fights Flaws in Pension Reform
L. A. Times - by KATHY M. KRISTOF - August 27, 2000

A grass-roots coalition of retirees and pension and retirement advocacy groups is fighting a popular pension reform bill, contending that there's more to the Comprehensive Retirement Security and Pension Reform Act of 2000 than meets the eye--and some of it is bad.

"It is fairly obvious to us that very few legislators or their aides have taken a hard look at this, and it really needs to be scrutinized," says Paul R. Edwards, chairman of the Coalition for Retirement Security in Washington.

The bill, which the House passed overwhelmingly last month, would boost allowable contributions to individual retirement accounts and 401(k) plans and allow even larger "catch-up" contributions by workers age 50 or older, both popular notions.

However, the proposal also includes dozens of technical revisions to pension law. Opponents say some of those provisions could have a negative effect on rank-and-file retirees by allowing companies to cut them out of their 401(k) plans or eliminate certain benefits for early retirees. The legislation, HR 1102, will be taken up in the Senate in September when Congress returns from its summer recess.

"This is a big bill with a lot of provisions, some of which we like a lot," says David Certner, senior coordinator for economic issues at the AARP in Washington. "The problem is that some of the lesser-known provisions in the bill would actually work against retirement security."

The biggest bone of contention appears to be proposed changes in so-called nondiscrimination rules that cover a simplified type of 401(k) plan that became available last year, known as the "safe-harbor" 401(k). To understand the fuss, it's important to have a little background on nondiscrimination rules. These rules are designed to ensure that companies do not create pensions that enrich only top-level officers. They do that by imposing a series of mathematical tests that measure how much of a plan's assets are owned by highly paid employees versus lower-paid workers. With most types of pensions, including most 401(k) plans, these tests are complex.

To reduce red tape for businesses, if a company offers to match all of the first 3% of worker contributions and 50% of the next 2% of worker contributions, a safe-harbor 401(k) plan is exempt from all but one nondiscrimination test. The remaining one, sometimes called the top-heavy test, stipulates that if 60% or more of the 401(k) assets belong to company owners or officers, the company must make a contribution equal to 3% of annual pay for all other employees.

The proposal would do away with this 60% test for all 401(k)s. That doesn't pose a problem with traditional 401(k)s, because they're still covered by the other nondiscrimination tests, but those who opened safe-harbor 401(k)s would get virtual carte blanche to create plans that are open to no one but top managers, says Karen Ferguson, director of the Pension Rights Center in Washington.

"This has a real dollars-and-cents impact on those employees who are affected by the top-heavy plan rules," Ferguson says, referring to the 60% test. "I'm willing to bet that very few of the congressmen who voted for this bill had any idea what the impact of this might be."

Another provision could allow companies to eliminate subsidized early-retirement benefits, which can include cash payments and credits for additional years of service. The bill says the Treasury Department, whose rules must be followed for a company to maintain its 401(k)-related tax deductions, must allow companies to eliminate these subsidies if such a move would not "adversely affect the rights of participants in a material manner."

Opponents of the bill are concerned that this could be interpreted to allow cutbacks that don't substantially hurt employees in the aggregate but dramatically hurt individual workers. In other words, they worry that if five employees out of 1,000 lost benefits worth $10,000, that could be considered insignificant in light of the total benefits provided to all the workers in the plan.

The Coalition for Retirement Security, which includes retirees from the likes of IBM Corp., AT&T Corp., Verizon Communications and General Electric Co., is also incensed by the bill's failure to address so-called cash-balance plans.

Over the last year, several bills have been introduced either to restrict conversions to cash-balance systems or at least to require clear disclosure of the impact on a participant-by-participant basis. The Comprehensive Retirement Security and Pension Reform Act would do little to further either goal, Edwards says. In fact, all it does is ask the Treasury Department to prepare a report on how cash-balance plans affect long-term employees, while providing "incomplete, bare-bones disclosure to employees," Edwards complained in a letter to Senate Finance Committee chairman William Roth (R-Del.), who is likely to shepherd the bill through the Senate.

The coalition, the AARP, the Pension Rights Center and other groups plan to assault legislators with letters and phone calls when they return to Washington in an effort either to change or to kill the bill. "We are not trying to say that there are no good parts of this bill; we are saying let's get rid of these take-aways and let the merits of the rest of the bill take care of themselves," Edwards says.

Treasury Wants to Yank Tax-Exempt Status
Bloomberg News - August 25, 2000

Washington, Aug. 25 (Bloomberg) -- The U.S. Treasury Department has offered a plan to Congress that would protect workers from losing some pension rights when employers switch retirement plans. The proposal would revoke the tax-exempt status of new so- called cash-balance pension programs that replace conventional plans if employees lose their current status in the switch. The plan would not protect older workers' claims to higher pensions.

The proposal is part of the Clinton administration's attempt to add protections for workers to a larger pension bill pending in Congress that would more than double the cap on individual retirement account contributions.

``It's good they're finally recognizing and understanding the problem'' of employees whose pension plans are converted, said Janet Krueger, founder of the IBM Employee Benefits Action Coalition. She'd like the administration to go further, however.

Treasury Secretary Lawrence Summers described the proposal in an Aug. 23 letter to Senate Finance Committee Chairman Bill Roth. The Republican from Delaware had requested ideas that could lead Clinton to back a bill Roth will try to move in September. A companion bill passed the House in July, over administration opposition, on a 401-25 vote.

Clinton is pushing for other major changes that could diminish its chances for enactment, including government-supported retirement accounts for middle- and lower-income people that have become a plank in Democrat Al Gore's presidential campaign.

Cash-balance plans tend to hurt older employees, who can earn half of their pension rights in the last five years of their jobs.

Standing Still
The proposal outlined in Summers' letter is concerned with employees who lose money when they don't receive an increase in their benefit until their new cash-balance sum rises above what they had earned in their old plan. In addition to forbidding tax- exempt status for some plans, it would let employees sue companies if they lost ground in the switch.

Krueger said that the proposal, by trying to solve one problem with the plans, may overlook other inequities. That may derail suits employees have filed against IBM and AT&T that charge the plans discriminate on the basis of age, she said. ``It may imply other parts of cash balance are legitimate. Our feeling is they're not legitimate,'' she said.

The proposal also isn't likely to cover current plans, only prospective ones, because of problems in retroactively changing tax law.

``It does not address the serious issue of workers who have already seen their pensions slashed,'' said Warren Gunnels, an aide to Representative Bernard Sanders of Vermont. Sanders has proposed a bill that would let workers choose their pension plans.

Norman Stein, a law professor at the University of Alabama, said the administration's proposal would go ``a long way'' toward protecting workers' retirement benefits, although he wants more.

As currently drafted, according to Stein, the proposal would prevent benefits only from eroding below what they would have been when a worker changes plans. Stein said workers should be protected to prevent benefits from dropping below the levels that account for growth in the original benefits plan.

The Clinton administration opposed the bill when it went through the House, saying the measure would not do enough for low- and middle-income workers who are enrolled in traditional, employer-sponsored pension plans rather than 401(k) and other newer plans in which employees invest their own money. The administration backed an alternative proposal that the House defeated that would have added tax-advantaged retirement savings accounts for low-income workers. Summers reiterated the administration's support for such accounts in his letter.

Roth said he hopes to get the bill through Congress in its last weeks. The senator, who is in a tough re-election race against the state's Democratic governor, Tom Carper, has made changes to the retirement program a hallmark of his career.

Treasury Proposes To Ban "Wear Away"
Dow Jones - by Fowler Martin - August 24, 2000

WASHINGTON -(Dow Jones)- U.S. Treasury Secretary Lawrence Summers, in a letter dated Aug. 23, provided the Senate Finance Committee with a specific proposal aimed at banning "wear-away" in pension plan conversions.

The letter, which said the prohibition should apply to early as well as normal retirement benefits, was released by the Senate committee Thursday.

"The concerns workers have expressed regarding cash balance conversions and the troubling reports of their adverse impact on workers -- particularly older, longer-service employees -- are based in large part on cash balance wear-aways affecting early retirement benefits and their disruptive effect on workers' plans to retire early," Summers said.

Wear-away occurs when a worker's starting balance under a new plan is lower than his or her accrued benefits under a prior arrangement. In such situations, a worker generally doesn't earn any additional retirement income, sometimes for several years, until his or her balance under the new plan gradually rises to the level provided under the prior plan.

Wear-away mainly impacts long-serving employees because under most traditional plans, benefits ramp up sharply in the years just preceding retirement. In contrast, benefits accrue at a steady rate under cash-balance plans.

Because those adversely affected typically tend to be older workers, critics claim conversions violate age discrimination laws. Some also claim cash-balance plans are illegal in and of themselves.

"We believe cash balance plans are illegal under current law," said Dave Certner, an official who follows such matters for AARP, an organization that represents retirees and persons nearing retirement. The Treasury submitted the proposed wear-away ban in response to a request from Roth, who noted in a July 28 letter to Summers that his panel plans to draft a retirement security reform bill Sept. 7, shortly after Congress returns from its current recess.

The House of Representatives passed a companion measure 401 to 25 in mid July. Among other things, the House initiative would sharply increase annual contribution limits for Individual Retirement Accounts and 401(k) plans.

The Clinton administration, in a July 19 official policy statement, strongly objected to the House bill, in part because it lacked a wear-away ban. Noting that stance, Roth asked Summers to draft specific legislative language addressing the issue "for possible inclusion" in the Senate version of the pension-reform initiative.

Under the Treasury proposal, pension plan participants would always receive the combined total of all benefits already accrued under an existing plan plus any benefits that would accrue from a new plan's formula. In other words, a worker's benefit buildup couldn't be frozen.

In putting forward his proposal, the Treasury Secretary didn't offer an effective date, leaving open the question of whether the proposed ban should apply retroactively.

"It's been important to us that any effective dates on pension legislation be prospective," Delaplane said. In contrast, critics of cash balance plans want a law that will force companies that have already carried out conversions to make whole those adversely impacted by wear-aways.

Ameritech Ordered To Pay
ABC News - August 24, 2000

Payout of $175.7M Is Among Largest Pension Settlements

A federal court has ordered Ameritech to pay $175.7 million to 17,000 retired workers because the company miscalculated their benefits.

The workers, all retired since 1994, and Ameritech apparently underestimated how long they would live after retirement. The U.S. Court for the Southern District of Illinois in Belleville ordered Ameritech to recalculate the retirees' benefits.

The payments to retirees will start this fall and will range from a few hundred dollars to as much at $30,000. The payments include interest earned at the rate of 5 percent.

Not an Uncommon Mistake
Steven A. Katz, a Belleville trial lawyer, and his colleagues who represented the retirees were awarded almost $51 million by the federal court.

The payments will be taken out of Ameritech's pension plan, which is overfunded. No current workers' benefits will be affected.

Katz said that while pension miscalculations are not uncommon, they are difficult for an individual retiree to catch.

Ameritech spokesman David Pacholczyk said the utility settled the case so that it could move on and focus its attention on serving customers.

Companies Pad Profits From Pension Funds
Bloomberg News - August 23 2000

Irving, Texas, Aug. 23 (Bloomberg) -- Workers who gathered at the former GTE Corp. headquarters near Dallas in early July were celebrating the company's $75-billion acquisition by Bell Atlantic Corp.

They ate 50 sheet cakes and watched the raising of a flag bearing the combined company's new, red and black, V-shaped logo, celebrating the new corporate name: Verizon Communications. Verizon is now the biggest U.S. local phone company.

It has another distinction: It inflates its earnings more than any other U.S. company by using gains from its employee pension fund.

Neither of the predecessor phone companies has advertised these gains, which are discovered only by digging deeply into annual reports. In March, Bell Atlantic's showed that its pension fund accounted for $846 million, or about 13 percent, of its 1999 pretax income. At GTE, the gains were even bigger: $1.08 billion, almost 17 percent of its pretax income for the year. The number was listed on page 63 of GTE's annual report, in the footnotes to its financial statements.

Ballooned by rising stock prices in recent years, pension funds have become a significant -- though misleading -- source of reported corporate earnings.

``It's magic money,'' says Robert Monks, a principal at Lens Investment Management and a former federal official who administered the Employee Retirement Income Security Act of 1974, the principal law governing pensions. ``This fiction of earnings is being built into the expectations of a number of companies. If the stock market were to go down dramatically and the surpluses were to disappear, the impact of reported earnings would be very dramatic and very adverse.''

Locked Up
In practice, companies can't use this money. It's earmarked for employees after they retire, and surpluses could be captured by the companies only if they took the unusual action of closing the funds. Still, corporations count investment gains from pensions just as they do earnings from operations, which they can use.

Among those with the biggest pension income in 1999 were General Electric Co. ($1.38 billion), SBC Communications Inc. ($844 million), and Lucent Technologies Inc. ($614 million).

Almost one-quarter of the companies whose shares are included in the Standard & Poor's 500 Index reported gains from pensions last year, according to a Bloomberg survey of company annual reports filed with the U.S. Securities and Exchange Commission. Of those, 42 reported that pension income boosted pretax earnings by more than 5 percent.

``You're taking something that's an expense and turning it into a contribution to the bottom line,'' says Wayne Shaw, an accounting professor with the Cox School of Business at Southern Methodist University in Dallas. ``It's just wiping out one of your costs because the stock market happened to go up.''

Lowering expenses, though, frees up more income for other investments such as new technology, says Verizon spokesman David Frail.

Just as pension income can make company earnings look bigger, it can make losses look smaller. PG&E Corp., a San Francisco-based utility, reported a pension benefit of $252 million last year, which helped trim its pretax loss to $440 million. Packaging company Pactiv Corp. reported a pretax loss of $159 million after booking pension income of $86 million.

Accounting experts say companies should break out pension gains more clearly so that shareholders don't confuse them with operating profit. ``It's highly misleading to think that a company is fundamentally healthy because it has a lot of earnings that are coming from its pension plan,'' says Neil Stein, a law professor at the University of Alabama who specializes in pension issues.

By the Book
Companies say they're only following the rules of the Financial Accounting Standards Board, the independent group that sets reporting standards for U.S. corporations. What's more, they say, the information is there for any investors interested enough to look. ``The information is disclosed, and people can do the math,'' Verizon's Frail says.

The question of whether companies are adequately disclosing their pension gains has caught the attention of the SEC. In December, the agency sent a letter to the American Institute of Certified Public Accountants. The SEC wanted accountants to urge companies with large pension profits to more fully discuss the impact in the management discussion section of their annual reports, rather than simply listing it in footnotes.

``We thought this could be an issue for a lot of companies,'' says Scott Taub of the SEC's Office of the Chief Accountant. However, the agency stopped short of forcing a change. ``The footnotes on pensions are really pretty detailed,'' Taub says. ``If an investor was looking for the information, they would be able to find it.'' For that reason, FASB spokeswoman Deborah Harrington says, the board has no plans to review its pension accounting rules.

Don't Touch It
Under the current rules, adopted in 1985, companies whose investment returns on pension assets exceed the plan's costs can book the difference as a profit. While surplus pension earnings theoretically belong to the companies and their shareholders -- employees' benefits having been covered -- there's little chance earnings will be tapped to increase cash flow.

Taking money out smacks of past corporate raiders like Ronald Perelman and Charles Hurwitz, who took surpluses from pension funds to pay for their takeovers of Revlon Inc. and Pacific Lumber Co., respectively.

In any case, if times go bad and the stock market slumps, the surpluses will come in handy. As recently as the mid-1980s, many pension funds didn't have enough money to cover anticipated benefits. The U.S. government's Pension Benefit Guaranty Corp. then produced a list of the 50 companies with the largest unfunded pension liabilities. PBGC, a watchdog created in the 1970s to safeguard employee retirement funds, stopped publishing its list in 1995.

Kmart Corp., which was on the last list, had a pension expense of $80 million in 1994. Last year the discount store chain reported $68 million in pension income. At least five other companies that had underfunded pensions in 1995 reported pension income last year.

Ready Cash
Many companies have found another way pension funds can boost earnings -- and in this case, it is money they can use in their day-to-day businesses.

They are slashing their pension costs by shifting from the traditional defined-benefit pension plan to a cash balance plan. In defined-benefit plans, workers typically gained most of their benefits in the last five years before retirement. Cash balance plans base retirement earnings over a longer period, usually reducing benefits.

International Business Machines Corp., the world's biggest computer maker, drew the ire of many of its workers when it switched to a cash balance pension plan in July 1999, predicting it would save $200 million a year in pension expense. At the company's annual meeting in April, 28 percent of IBM shareholders voted to repeal the cash balance plan. The vote garnered enough support to ensure it will appear on IBM's proxy again next year.

Claims that cash balance plans discriminate against older workers already have drawn Senate hearings and reviews by the Internal Revenue Service. The IRS oversees pension plans because the plans offer tax benefits to companies that make contributions on behalf of employees.

The computer company isn't alone. Of the 10 biggest gains from pension income among S&P 500 companies last year, half were in cash balance plans. Pension plans clearly are a means for increasing profits these days -- even if some of the gains aren't what they seem.

Victory For Verizon Employees
Duke Energy Employee Advocate - August 23, 2000

What did the Verizon employees gain from walking off the job for about two weeks? According to "The New York Times'" article "Labor Accord Hits New-Economy Notes" (8/22/00) - PLENTY!

The Verizon employees gained:

  • Wage increases
  • Greater pension benefits
  • Stock options
  • Profit sharing
  • Less forced overtime
  • A contract - so the employer cannot just take everything back on a whim.

The benefits that Duke Energy employees still have left have the disclaimer that Duke can take them all away at any time! Remember the pension plan that you used to have? Duke gutted it. With no contract, they can always do the same thing with any benefit.

As long as employees are content with scraps, employers have zero incentive to throw them anything else.

Staying in business is an incentive that has prompted many employers to "do the right thing."

Click the link below to read "Labor Accord Hits New-Economy Notes." (Free registration required.)

Verizon, unions cut a deal
CNN - August 21, 2000

NEW YORK (CNNfn) - Most of the strikers at Verizon Communications returned to work early Monday just hours after a late-night agreement, although about 35,000 employees remain on strike in the company's mid-Atlantic region.

The settlement between the largest U.S. local phone company and two unions, the Communications Workers of America and the International Brotherhood of Electrical Engineers, covers more than 50,000 employees in New England and New York -- the area once served by the former Nynex phone company before it merged with Bell Atlantic in 1997.

Health Benefits Under The Knife
Washington Post - August 20, 2000

In a decision that could cause major disruptions in retirees' health insurance, a federal appellate court has ruled that plans that provide different levels of coverage to younger retirees and those eligible for Medicare are violating a federal age-discrimination law.

The ruling by the 3rd U.S. Circuit Court of Appeals came as a major surprise to employers and benefits experts, who have long operated on the assumption that the Age Discrimination in Employment Act (ADEA) applied only to active workers, not to retirees.

"It's a very significant case, partly because it's contrary to the general consensus as to what the rules were," said Richard Ostuw, a consultant in the Stamford, Conn., office of Watson Wyatt Worldwide. "A large number of companies would be in violation" if the court's interpretation of the statute is sustained, he said.

The case before the court involved retired employees of Erie County, Pa.

During the 1990s, in an attempt to control health-care costs, the county introduced a plan that provided retired workers under age 65 with a "point of service" insurance plan that allowed them to choose their health-care providers. But the plan required workers 65 and older--those eligible for Medicare, the federal government's health insurance program for the elderly--to use a health maintenance organization, which required them to use the HMO's providers.

The older retirees sued, accusing the county of giving the younger ones a better deal based on age. A federal district court dismissed their claim under the ADEA, and the older retirees appealed to the circuit court.

Earlier this month, a three-judge panel of that court ruled, 2 to 1, that the ADEA does apply. (The dissent was based on procedural matters and did not address the merits of the case.)

The ruling is binding only on the states in the 3rd Circuit--Pennsylvania, New Jersey and Delaware--but since many companies treat Medicare-eligible retirees and younger retirees differently, it is attracting widespread attention.

"For multistate employers with retiree medical plans, this could have a pretty big impact," said John Piro, a lawyer with Hewitt Associates, another benefits consulting firm.

One common arrangement, which consultants said seems especially vulnerable to the ruling, is for the employer to continue to provide health insurance to retirees under 65 but to terminate it when the retiree become eligible for Medicare.

Such arrangements are "obviously in violation," Ostuw said. The ruling would make it very difficult to meet the equality tests in the law.

Likewise, some other employers, like Erie County, have a point-of-service plan or preferred provider organization for retirees under age 65 and some other arrangement integrated with Medicare after 65. Those plans, too, would have compliance problems.

If the ruling stands, these employers would face the choice of reducing benefits for younger retirees or increasing them for older ones.

Since the 1980s, when accounting rules began requiring corporations to compute the value of post-retirement benefits and carry that figure on their books, the trend has been toward elimination of medical insurance in retirement.

Experts doubt that many would want to start boosting costs again.

On the other hand, elimination of pre-65 medical coverage would undermine early-retirement plans, which companies often use to prune their work forces and to get rid of problem employees, as well as to accommodate workers who want to retire at a younger age.

Ostuw said that while it would not be difficult technically to design a plan that would comply with the ADEA, employers could end up between a rock and a hard place.

"Unless companies are willing to increase their expenses, which is not very common, it will be a matter of reducing benefits for pre-65 and increasing them for post-65s," he said. "It's difficult politically and emotionally to reduce benefits for current retirees."

Piro said the decision could lead companies to abandon retiree health coverage altogether. "It's another set of disincentives to setting up these types of plans," he said.

The case rests on a long and complicated legislative and litigation history involving the original ADEA and a Supreme Court decision that limited the statute to pay and to hiring and firing decisions, excluding fringe benefits.

Congress quickly enacted a measure to include benefits under the ADEA, and during debate on that bill a number of legislators made it clear they understood that the law would not apply to retirees. But the court brushed that aside, saying that regardless of what the lawmakers might have thought they were enacting, the court had to be guided by what they did in fact pass.

"We recognize that there are statements in the legislative history . . . which indicate that certain members of Congress viewed the ADEA as inapplicable to retirees" except in narrow circumstances, the majority opinion said. "But we see nothing in the language of the ADEA to indicate these statements are accurate and we do not find them persuasive."

The court also rejected the argument that the differential treatment of the retirees resulted from "something other than age," which would be permissible. Though the difference was determined by Medicare eligibility, not age in itself, that eligibility is specifically tied to reaching age 65. "Thus, Medicare status is a direct proxy for age," the court reasoned.

Finally, the court examined a "safe harbor" provision of the law that makes a plan legal if the employer can show that the plan provides either equal benefits for retirees or results in equal cost to the employer. That provision was included in the bill to account for the fact that health insurance for older people is typically more expensive than it is for younger ones.

The judges concluded that this safe harbor "is applicable if the county can meet the equal benefit or equal cost standard," and it sent the case back to the lower court for trial on that issue.

But the court also ruled that costs incurred by the government for Medicare cannot be counted as an employer cost for the purposes of this test. And it added: "We recognize that our conclusion" on that issue "may eliminate the possibility of an employer satisfying the equal cost safe harbor in situations where classes of individuals are divided depending upon the presence of Medicare eligibility."

Why a sick day may be worth $10 million
CNET News - August 8, 2000

A fired executive's nearly $10 million worth of options is the subject of a lawsuit filed by software maker Oracle

Just four days before Pier Carlo Falotti's nearly $10 million in options were about to vest, the Oracle executive vice president was fired for undisclosed reasons, according to court documents. Falotti ran Oracle's Europe, Middle East and Africa operations out of an office in Geneva, Switzerland, and was a member of Oracle's executive management committee.

Falotti says that the 125,000 options are legally his, as he was unable to work on the day of his scheduled termination, according to the suit. Under Swiss law, a company cannot terminate an employee while that person is too ill to work. Falotti has a note from his doctor that states the executive "was ill and unable to work as of May 30 for an indefinite period of time."

According to the suit, Falotti was paid $600,000 per year, plus an incentive compensation of $400,000 per year. He was granted 600,000 Oracle options at the time of his hire, in July 1996.

A Thirst-Quenching Pension Package
Reuters - August 8, 2000

ERFURT, Germany (Reuters) - A German court ruled on Tuesday that two retired brewery workers should receive 264 pints of free beer a year as part of their pension package and get back pay for three unpaid years worth of brew.

The brewery had promised workers and retirees 422 pints of free beer a year, but then held back after falling into financial difficulty and changing ownership.

The two former workers fought for three years and appealed to the highest labor court before the compromise decision for 264 pints a year was reached.

Derivative Losses in Pension Funds
Dow Jones - by Fowler W. Martin - August 4, 2000

Dow Jones Online News via Dow Jones

WASHINGTON -(Dow Jones)- The U.S. Department of Labor announced Friday that two pension funds benefiting electrical workers should recoup about $2.1 million in losses stemming from inappropriate investments in financial derivatives as a result of a federal enforcement action.

A group of fund trustees, through their insurer, has agreed to repay $1.54 million to funds jointly sponsored by Local 35 of the International Brotherhood of Electrical Workers and the National Electrical Contractors Association. The amount represents losses resulting from the plans' investments in what the labor department termed highly risky mortgage derivatives.

The court-ordered settlement also anticipates payments of another $93,000 by the funds' own insurer, a press release issued by the department's Pension and Welfare Benefits Administration (PWBA) said. Ultimately, the funds anticipate recouping approximately $2.1 million, it said.

The consent order and judgment obtained by the Labor Department resolved a 1997 lawsuit alleging that the trustees imprudently permitted securities broker Steven G. Hassenmiller to purchase and sell for the pension funds collateralized mortgage obligations. Such activity, the department said, didn't comply with the funds' investment guidelines.

Hassenmiller carried out the transactions while in the employ of three different companies - Paine Webber, Westcap Government Securities and Arbour Financial Corp. He had in 1996 been barred for three years for any involvement with all plans covered by the Employee Retirement Income Security Act as a result of a separate consent judgment involving purchases of mortgage derivatives for the Connecticut Plumbers and Pipefitters Pension Funds, the labor department noted.

Under the settlement, the trustees of the electrical workers' funds were also required to delegate future investment decisions to professional managers.

The funds are located in Wallingford, Conn., and had combined assets of about $46 million in 1994, the labor department said. The case was prosecuted by the PWBA's Boston office.

News - July 2000