On May 20, Rep. Tim Ryan (D., Ohio) introduced the Prioritizing Our Workers Act of 2019, also introduced in the Senate by Sen. Joe Manchin (D., W.V.). The technical explanation of the bill is that it would classify unfunded worker pension benefits as “administrative expenses” in a Chapter 11 bankruptcy proceeding. A layman’s explanation is that the bill would require that pension benefits owed to workers be honored before other creditors of a bankrupt company are paid back. Such a change to bankruptcy law faces formidable political obstacles and would have substantial effects on financial markets. But while some critical technical aspects would need to be worked out, Ryan’s proposal moves in the right direction from the standpoints of both economics and fairness, as the following piece attempts to explain.
On March 7, I testified as a witness at a hearing on the impending solvency crisis in multiemployer pensions before a subcommittee of the House Committee on Education and Labor. Also at the witness table was a bakery worker named James Morgan, whose testimony highlighted two issues relevant here. The first was that workers often have little recourse if their employer stops making required contributions to their pension fund, and thereafter goes bankrupt. From Morgan’s testimony:
In August 2011, the CEO of Hostess Brands sent a letter to every employee saying that the company was suspending the contributions it was obligated to make to the B&C Pension Fund according to our collective bargaining agreement. He said the suspension of contributions was going to be ‘temporary.’ That was not true. The company never resumed making payments to the Fund. . . Fifteen months later, the company went out of business. Our bakery was closed and we were out of work. Not only were we out of work. We also had new fears about the future of our pension benefits. We learned shortly after the bakery closed that the federal bankruptcy court allowed Hostess just to walk away from all of its pension fund contribution obligations. That was nearly one billion dollars.
The important things to understand about this statement are that once Hostess entered bankruptcy, these workers’ pension benefits did not have a priority claim on the company’s assets as the court unfortunately, but nevertheless correctly, ruled. In this respect, pension benefits are treated differently under bankruptcy law than wages owed to workers, making another part of Mr. Morgan’s testimony especially notable:
Having a good pension was so important to us that we would often negotiate less in pay raises in favor of increasing our negotiated pension benefit level. . . It is very disturbing to me when I hear people saying that our pension was ‘GIVEN’ to us by the company. Hostess didn’t give us the pension. We bargained for it as part of a compensation package. As I said, we sacrificed wages and other benefits to secure, maintain and improve our pension benefits. Those benefits were part of our earnings.
Mr. Morgan’s words above are not simply compelling rhetoric; they are an accurate description of how pension benefits interact with other forms of compensation. Just like wages, and just like health benefits, pensions are one part of a total compensation package employers may offer to workers in exchange for their labor. To the extent that health or pension benefits increase, less can be paid in wages within the same total amount of compensation. The trade-off between wages and pension benefits described by Mr. Morgan is very real (assuming, of course, that employers actually fund the pension benefits they promise).
In many respects bankruptcy law, however, does not treat these respective forms of compensation (wages and pension benefits) equally. Worker wages earned after a company files a bankruptcy petition are treated as an “administrative expense” that has priority over other unsecured claims. Pension obligations are not so treated, even though they embody compensation equally promised by employers to their workers, and indeed are properly understood as deferred wages. The Pension Benefit Guaranty Corporation has argued this exact point in court.
Now come some unavoidable technical complexities. Somewhat lower priority in bankruptcy than administrative expenses, but still higher than general unsecured creditors, are unpaid wages earned within 180 days prior to a bankruptcy petition, a priority immediately followed by unmade contributions to an employee benefit (e.g., pension) plan, also within 180 days. No special standing is given for wages or pension benefits earned more than 180 days prior.
This adds up to unequal treatment of wages and pension benefits for several reasons. One is that while it’s rare for workers to work more than 180 days without being paid wages, the vast majority of pension benefits are earned by workers years before they receive them. A second reason is that statutorily required pension funding contributions often fall well short of what is required to pay workers’ pension benefits. For both of these reasons, it’s unlikely that pensions can receive balanced treatment in bankruptcy court unless priority is given not only to skipped pension plan contributions, but all unfunded vested pension benefits, including those earned more than 180 days prior to bankruptcy petition. This doesn’t necessarily mandate treating pension benefits as administrative expenses as in the Ryan bill, but it would require expanding the definition of pension obligations that receive priority over general unsecured creditors.
Now that we’re past those two technical paragraphs, let’s return to the bottom line. Unequal treatment of different forms of worker compensation can and does cause problems: to cite one well-known example, the federal tax preference for health benefits over wages is well known to fuel healthcare cost inflation and to cause a variety of other health policy problems. Here, bankruptcy law creates a bias in favor of wages over pension benefits. This bias is particularly problematic given that pension law is already riddled with moral hazard that incents employers to underfund their pension promises and shift the risks of that underfunding to others.
The unequal treatment of wages and pensions also distorts how potential lenders and investors evaluate companies. In a properly-functioning financial market, a creditor or investor would be deterred from putting money into a company that cannot pay its workers’ wages or fully fund its pension obligations, both of which a business should have to do with equal thoroughness before others are paid back. Instead, however, too many situations arise in which others can profit handsomely from providing financing to a business, while the business’s workers’ pensions are being stiffed.
For a classic example of how badly wrong this situation can go, consider this Washington Post article on the demise of Marsh Supermarkets. From the article:
The anger arises because although the sell-off allowed Sun Capital and its investors to recover their money and then some, the company entered bankruptcy leaving unpaid more than $80 million in debts to workers’ severance and pensions. For Sun Capital, this process of buying companies, seeking profits and leaving pensions unpaid is a familiar one. Over the past 10 years, it has taken five companies into bankruptcy while leaving behind debts of about $280 million owed to employee pensions.
Lenders and investors take financial risks, which often do not pay off, and it’s appropriate for them to profit when they do. But whether a company can meet its pension promises to its workers should be priced into that risk evaluation; those pension obligations should have the same significance as other worker compensation when determining a business’s creditworthiness or attractiveness as an investment.
Because this is not how financial markets work now, there would be significant repercussions of giving pensions a higher claim priority in bankruptcy court. Even if the principle were to gain wide acceptance, some protections for existing credit would undoubtedly have to be grandfathered in, so that no pre-existing corporate debt receives a lower priority because of such a change.
But as a straightforward matter of fairness and economics, Rep. Ryan’s proposal gets this right: Obligations to fund worker pensions should have the same status in bankruptcy court as workers’ wage compensation. And workers like Mr. Morgan should get their promised pensions funded before a corporation’s other creditors are paid.
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