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The financial position of the Pension Benefit Guaranty Corp. again is rapidly deteriorating, triggering fears that a taxpayer-funded bailout may be needed to shore up the government’s pension plan insurer.

The PBGC disclosed last week that its deficit hit a record $33.5 billion at the end of its 2009 fiscal first half on March 31, compared with $11.2 billion at the close of fiscal 2008.

The deficit eclipses the prior highest deficit of $23.5 billion from 2004. Losses from completed and probable terminations, lower interest rates used to value the PBGC liabilities, and investment losses were key factors contributing to the deficit.

And the worst may be yet to come.

According to PBGC estimates, auto sector pension plans alone are underfunded by about $77 billion, $42 billion of which would be guaranteed by the PBGC if those plans failed.

But it isn’t just ailing auto companies and their massively underfunded pension plans that pose a threat to the PBGC, whose insurance programs are funded by premiums paid by employers with defined-benefit plans.

At a Senate Aging Committee hearing last week, an official of the Government Accountability Office said large pension plan terminations from employers in a variety of industries could hit the PBGC.

“While the events surrounding the automakers and their plans are clearly an area of concern for the PBGC, the recession has likely affected many industry sectors,” said Barbara D. Bovbjerg, GAO director of education, workforce and income security.

While past big claims were concentrated in industries such as steel and airlines, “there is cause for concern that future claims will come from a much broader array of industries.”

The PBGC “will be challenged as never before” due to a declining economy, Bovbjerg said.

Taxpayer bailout a possibility
Some legislators and others warn that a taxpayer-funded bailout is a potential scenario.

“We must get the PBGC back on track” or face a bailout, said Senate Aging Committee Chairman Herb Kohl, D-Wisconsin.

Bovbjerg noted that if the PBGC’s accumulated deficit continues to rise and liquidity declines, pressure could build for the federal government to provide the agency with financial assistance to prevent benefit reductions or “unsustainable increases” in PBGC premiums paid by employers with ongoing plans.

The current base annual premium of $34 per plan participant is indexed to increases in national average wages. Sponsors of underfunded plans pay an additional premium.

At the moment, there is little interest in Congress in raising employer premiums, which legislators last significantly increased in 2005 as part of a broader measure, Washington observers say.

Lawmakers understand that a premium increase would be “counterproductive” as it would accelerate the move of employers away from defined-benefit plans, said James Klein, president of the American Benefits Council in Washington.

It isn’t just the big liabilities that the PBGC takes on when companies fold underfunded pension plans that pose a threat. The PBGC also faces declining premiums as more companies freeze their plans and the number of participants declines.

Yet another threat to the agency’s premium income, which in fiscal 2008 was more than $1.4 billion, is that when interest rates rise, employers with fully funded plans might find it financially attractive to terminate the plans and purchase annuities from commercial insurers that would then provide the benefits.

The issue in the long term is whether other defined-benefit plans will exist from which the PBGC would collect premium income needed to pay benefits to participants in plans the agency has taken over, said Dallas Salisbury, president and CEO of the Employee Benefit Research Institute in Washington.

“The real problem is when the [PBGC’s] assets run out,” said Salisbury, who also testified at the hearing.

Others, though, say worries about the PBGC’s finances are overstated.

The current size of the PBGC’s deficit is not a cause for alarm, said Mark Warshawsky, former assistant secretary of tax policy at the Treasury Department and now director of retirement research at Watson Wyatt Worldwide in Arlington, Virginia.

Interest rates are cyclical, and if rates shoot up from their current low levels, the size of the PBGC’s deficit would decline significantly, he said.

The deficit figure is just “a snapshot” in time and can give a skewed perspective of the agency’s financial condition, Klein said.

In addition, the PBGC’s deficit includes losses from plan terminations that the PBGC considers “probable,” and that is based on the PBGC’s judgment, Warshawsky said.

From 1987 to 2007, 80 percent of pension plans the PBGC initially classified as probable eventually were taken over by the agency.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The Pension Benefit Guaranty Corp. has taken over the defined-benefit pension plan of Foamex, a Media, Pennsylvania-based foam products producer.

Foamex is under Chapter 11 bankruptcy protection and is preparing to sell its assets in a deal that would not include the pension plan, according to the PBGC.

The Foamex plan, which has about 5,500 participants, is about 48 percent funded, with $74 million in assets to cover about $153 million in liabilities. The PBGC expects to cover $76 million of the $79 million shortfall.

The Foamex plan was frozen as of March 16, 2005, for all participants except some hourly workers at company plants in Eddystone, Pennsylvania, and Tupelo, Mississippi, according to the PBGC.

Filed by Doug Halonen of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The United Auto Workers said that it has reached a tentative new contract with General Motors and the U.S. Treasury aimed at helping the automaker restructure.

The terms include modifications to a UAW-administered retiree health trust known as a voluntary employee beneficiary association, the union said in a statement Thursday, May 21.

Terms were not released, pending a ratification vote by rank-and-file union members at GM.

The UAW agreed to the concessions as GM faces a June 1 deadline to prove its viability to the federal government or face Chapter 11 bankruptcy protection. Along with the labor concessions, GM and the U.S. Treasury also are asking GM bondholders to forgive about 90 percent of that unsecured debt.

Treasury has kept GM operating with about $15.4 billion in bailout loans.

Filed by David Barkholz of Automotive News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com

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As part of the Troubled Asset Relief Program, the Obama administration is encouraging a number of investment companies to create “bailout funds,” or mutual funds that would buy troubled mortgage securities from banks and, if all goes well, eventually sell the investments at a profit.

But retirement benefits experts warn that letting 401(k) plans allow participants to invest money in the bailout plan might not be such a good idea.

While investment managers BlackRock and Pimco have shown interest in the program, retirement benefits experts say that 401(k) plan sponsors shouldn’t necessarily jump to these products if they are made available soon.

“Plans already have too many options and too much confusion,” says Dallas Salisbury, president of the Employee Benefit Research Institute. “If I was a 401(k) plan sponsor, I would not add one.”

Given the complexity of these funds, it doesn’t make sense to offer them to the public, says Pam Hess, director of retirement research at Hewitt Associates in Lincolnshire, Illinois.

“If we take a step back and look at the current crisis, people who were experts weren’t able to assess the risks they were taking,” she says. “I’m not sure it makes sense for the average investor.”

Even if plan sponsors would consider adding these funds to their lineups, they should wait a few years until they have a performance track record, says David Wray, president of the Profit Sharing/ 401k Council of America.

“I would suspect that this program would have to be up and running at a minimum of three years, but most likely five years, for most plans to consider it,” he says.

However, some experts believe the bailout funds might turn up in 401(k) plan lineups through other investments, such as target-date or fixed-income funds, which would invest in these products.

“This type of an investment has some good diversification potential,” says Lori Lucas, executive vice president and defined-contribution practice leader at Callan Associates. “The context that you would normally see this used is as part of a target-date fund.”

Plan sponsors should talk to the portfolio managers of their plans about these funds, says Phil Suess, principal and
defined-contribution segment leader at Mercer Investment Consulting.

“It’s a fair question to ask the portfolio manager if these are securities that they would be interested in and hear them articulate the reasons they would hold them or not hold them,” he says.

A more likely scenario than bailout funds turning up in 401(k) plans would be that defined-benefit plans invest in these funds, Suess says.

“On the defined-benefit side you are seeing more plans focus on matching assets with liabilities, and that means placing a greater emphasis on bonds,” he says. “You could see these kinds of securities having a place in that.”

—Jessica Marquez

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Following months when economists kept tearing up their job-loss forecasts and revising them upward to keep pace with deteriorating economic news, the Independent Budget Office has gone in reverse.

On Wednesday, May 20, the public agency lowered its employment-loss estimate by more than 5 percent from where it stood in March, predicting the city will shed 254,500 jobs from a peak in the third quarter of 2008 through the middle of 2010.

A better-than-expected first quarter—when the city lost 25,600 jobs, including 7,800 in financial activities, and financial institutions posted surprisingly positive earnings—prompted IBO to revisit its prediction.

“We were expecting bigger losses in the financial sector than have occurred so far,” said IBO director Ronnie Lowenstein.

IBO’s revisions in financial activities were particularly steep.

The agency lowered its estimate for sector losses by 27 percent to 56,800. Losses in the all-important securities subsector are now pegged at 32,400, more than one-third lower than the figure forecast in March.

Economists have noticed the slowing pace of job decline, but they’ve had trouble explaining the good news.

“That’s the mystery,” said Marissa Di Nitale, senior economist at Moody’s Economy.com, who has revised downward by 20 percent her estimate of financial activities losses.

She says a buffer provided by federal stimulus dollars, banks taking a “wait and see” approach to layoffs, and fired workers who are still receiving severance payments (and therefore aren’t officially counted as unemployed) may be partly responsible for the good news.

Yet total losses will still be widespread.

Professional and business services, which derive much of their revenue from financial activities, will lose 67,100 jobs, or 11 percent of their employment, according to the new IBO projections. Some 28,000 construction jobs will likely disappear. And 27,500 retail jobs could go.

Three-quarters of the 254,500 jobs projected to be lost are expected to be shed by the end of September, IBO calculates. But the bottom line is the total employment decline will be greater than that of the 2001-2003 recession, when the city lost about 230,000 jobs.

Plus, even though data on the employment front is more positive, numbers on the government-budget side of the ledger remain disastrous. IBO estimates the city will face an enormous $5.6 billion budget gap in 2011—$1 billion more than Mayor Michael Bloomberg currently estimates. By 2011, the city will no longer have substantial federal stimulus dollars or an accumulated surplus to cushion the blow.

“The budget issues,” Lowenstein said, “remain daunting.”

Filed by Daniel Massey of Crain’s New York Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The first Department of Labor budget of the Obama administration places an emphasis on workplace safety enforcement and other worker protections.

In a detailed proposal announced May 7, the agency asks Congress for $1.7 billion in funding for programs designed to ensure that employees are kept safe on the job and are paid all the wages and benefits they are due. The request represents a 10 percent increase over the previous fiscal year.

The Occupational Safety and Health Administration would receive a $51 million increase in funding and hire 160 new officers. The Wage and Hour Division would get a $35 million budget increase and add 200 investigators.

In a Web video accompanying the release of the budget, Labor Secretary Hilda Solis said that cracking down on workplace violations “is a very important part of my vision.”

Overall, 670 people will be added to the enforcement staff, which Solis said will bring it to a level it has not reached since 2001.

“This is an unprecedented achievement and carries out the president’s commitment to workers for their safety, health and protection on the job,” Solis said.

Congress, which is dominated by Democrats, is likely to approve the budget largely along the lines of the Obama request.

Democrats on Capitol Hill also are enthusiastic about strengthening OSHA.

Rep. Lynn Woolsey, D-California and chair of the workforce protections subcommittee of the House Education and Labor Committee, introduced a bill in April that would allow workers and families to be more involved in OSHA investigations.

The Protecting America’s Workers Act would extend OSHA coverage to more workers, increase civil penalties for safety violations and index them to inflation.

In addition, the measure would allow felony prosecution of employers and their corporate officers who commit willful violations that result in worker death or serious injury.

House Republicans said they favor improving workplace safety but that increasing penalties was the wrong answer because current regulations are complex and confusing.

In emotional testimony before the House workforce protections subcommittee, Rebecca Foster testified that an Arkansas sawmill was fined $2,250 after it failed to put the proper safeguards on equipment that caught her stepson Jeremy’s shirt and strangled him to death.

“Did they place a value of our only son’s life at this amount [$2,250]?” she said. “It was as if OSHA had patted Deltic Timber on the back and said, ‘Good job, guys. You only killed one person.’ ”

An AFL-CIO study indicates that the average penalty for a serious OSHA infraction is less than $1,000; for a violation involving a worker’s death, it’s $11,300. In 2007, 5,657 workers died and more than 4 million were injured on the job.

The ranking Republican on the House labor committee, Rep. Howard “Buck” McKeon of California, cited positive statistics. OSHA figures show that since 2001, deaths have declined 14 percent and injuries and illness rates have fallen 21 percent.

“The mentality should be to fix things, make things better rather than trying to punish,” McKeon said.

—Mark Schoeff Jr.

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Heidrick & Struggles International Inc. announced it signed a diversity recruiting deal with the Marsh & McLennan Cos. Inc.

Heidrick will supply Marsh & McLennan with access to a range of candidates, including women, people of color, and members of the gay, lesbian, bisexual and transgender community.

In addition, the deal calls for Heidrick to give at least 10 percent of its work for Marsh & McLennan to women- and minority-owned executive search firms. Heidrick will also offer training and other services to some of the women- and minority-owned firms.

Marsh & McLennan provides insurance, risk, human capital and other services. It has annual revenue of more than $11 billion.

—Staffing Industry Analysts

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The Pension Benefit Guaranty Corp. has taken over two pension plans sponsored by Lenox Group Inc., the Eden Prairie, Minnesota-based fine china manufacturer that is in bankruptcy.

The PBGC said Tuesday, May 19, that it stepped in because the plans would be abandoned after the sale of company assets, which is intended as part of Lenox’s bankruptcy reorganization proceeding.

New York-based private investment firm Clarion Capital Partners completed the purchase of most Lenox assets in mid-March after an auction in February.

The two plans taken over by the PBGC have combined assets of $70 million and liabilities of $200 million.

The PBGC said it expects to cover $128 million of the $130 million funding shortfall. Both plans were frozen on January 1, 2007, and have about 4,300 participants.

The loss is the PBGC’s biggest since April 2007, when the agency took over a pension plan sponsored by bankrupt auto parts manufacturer Collins & Aikman Corp. of Southfield, Michigan. At the time, the PBGC estimated it would be responsible for $161 million of the plan’s $181 million in unfunded liabilities.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Despite a landmark report a decade ago detailing the deadly nature of the U.S. health system, a consumer group said Tuesday, May 19, that little has been done to prevent the errors that still kill as many as 100,000 patients each year—a number that the group said is a conservative estimate.

Consumers Union, which publishes the magazine Consumer Reports, published what it called a “review of the scant evidence” of the health system’s efforts to reduce preventable errors that cost the country $17 billion to $29 billion annually, a cost borne by the employers that pay for shoddy care.

The group concluded that it was impossible to gauge what, if any, progress had been made since the Institute of Medicine released its 1999 report “To Err Is Human.” Efforts to reform the system are “few and fragmented” with the exception of a few state laws requiring hospitals to provide information.

“In this report we give the country a failing grade on progress on select recommendations we believe necessary to create a health care system free of preventable medical harm,” the group said.

The report follows a similar analysis by the Leapfrog Group, an employer-sponsored organization working toward reducing medical errors. In a report last month, the group said a majority of hospitals failed to meet quality standards that reduce errors.

For example, 75 percent of hospitals do not fully meet the standards for 13 evidence-based safety practices, ranging from hand-washing to competency of the nursing staff, the Leapfrog Group said.

At the time, the 1999 report by the Institute of Medicine sent shockwaves through the medical establishment. The IOM, one of the National Academies of Sciences that advise U.S. policymakers, concluded that it would be “irresponsible to expect anything less than a 50 percent reduction in errors over five years.”

The report was followed by a task force appointed by President Bill Clinton, a $50 million allocation to the Agency for Healthcare Research and Quality and several federal bills. Yet today, Congress has yet to pass a bill requiring hospitals to report medical errors.

In its report Tuesday, Consumers Union said the country has failed to:

● Reduce medication errors because hospitals have not widely adopted computerized prescribing and dispensing systems; the FDA has not done enough to help consumers and health practitioners avoid medication errors that stem from similar-sounding drug names and labels.

● Establish a national system suitable for reporting and tracking medical errors.

● Empower the Agency for Health Research and Quality to track national progress on patient safety.

● Raise professional standards and accountability of doctors, nurses and hospitals that commit preventable and widespread medical errors.

The 10-year anniversary of the IOM report comes amid the first concrete efforts to overhaul the health care system led by the Obama administration, which set aside billions of dollars in the federal budget for that task.

Additionally, the administration earmarked $19 billion in the economic stimulus bill to create a health information technology infrastructure that it says will reduce medication prescribing errors and other health system inefficiencies.

—Jeremy Smerd

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