Durbin, Hutchison Introduce Amendment to Strip Unfair Language From FAA

Press Release

U.S. Senators Dick Durbin (D-IL) and Kay Bailey Hutchison (R-TX), along with a bipartisan coalition of members, today introduced an amendment to strip the FAA bill, now being considered on the floor, of an amendment that would require five top domestic air carriers to pay an additional $2 billion into their pension funds over the next five years. Cosponsors of the bill include Senators Kit Bond (R-MO), Sherrod Brown (D-OH), John Cornyn (R-TX), Tom Harkin (D-IA), James Inhofe (R-Okla), Frank Lautenberg (D-NJ), Bob Menendez (D-NJ), Bill Nelson (D-FL), and George V. Voinovich (R-OH).

"Yesterday, Senator Baucus included language in the FAA bill that asks five of our top domestic air carriers to pay an additional $2 billion into their pension funds," said Durbin. "This provision penalizes airlines that have worked the hardest to remain solvent, maintain their pension obligations and overfund their pension plans. One of the carriers impacted by this plan, American, has a pension fund that is currently overfunded at 116%. Forcing these airlines to contribute even more of their capital to their pension funds is not only unnecessary, it could potentially bankrupt them."

"If the U.S. Senate starts arbitrarily changing federal law to penalize companies who behaved in fiscally responsible way, and to reward companies who acted in fiscally irresponsible way, then this body will be harming the incentives for sound management in one of the largest sectors of the U.S. economy," said Hutchison.

In the 2006 Pension Protection Act, Congress implemented a new formula for determining whether private sector defined benefit pension plans were adequately funded and instituted stiffer penalties for companies that are underfunded, in an effort to encourage companies to fully fund their retirement obligations and thereby reduce the risk that these pensions are offloaded on to the Pension Benefit Guarantee Corporation at taxpayers expense. A special provision was unfairly included for Delta and Northwest which allowed them to assume a fixed return of 8.85%- a return that is usually much higher than what other companies will be able to assume. And, these airlines were allowed to amortize their underfunded obligations over 17 years, instead of the 7 years all other companies were given.

Airlines that have not frozen their defined benefit plans and therefore allow new workers to participate - including American, Continental, Hawaiian, and Alaskan and US Airways- were not given the same treatment. These airlines were therefore required to invest far more of their free cash into their pension plans each year than their competitors, in an industry where competitive margins are razor thin. Airlines that have avoided bankruptcy and are fighting to keep their promises to their employees were penalized for doing so.

Senators Durbin and Hutchison inserted language into the 2007 War Supplemental to help address this inequity. These airlines are now allowed to assume a rate of return of 8.25% and can spread their underfunding catch up payments over 10 years. This is still inferior to the treatment given to Delta and Northwest, but the language at least closed the gap somewhat.

Senator Baucus has included language in the FAA reauthorization that would require any airline that elects to use this 8.25% and 10 year treatment to contribute to their pension funds an amount equal to what they would owe under the normal rules for all other companies every year, even if its pension would be fully funded at a lower (8.25%) contribution rate.

Under current law American's pensions are considered overfunded, at 116% of obligations. Even without the Durbin-Hutchison 2007 language American's pensions are funded at 91%, and therefore there is little risk at this time that American will underfund its pensions such that it must drop its obligations on the American taxpayers. Under the current Baucus language, the four airlines would be required to pay an additional estimated $2 billion over the next five years, which would potentially threaten the viability of the airlines.

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