Questions 1, 2, 3, and 5

Promises, Performanc Reality wally perform what was required under the contract t what constitutes "close enough" and questio offer ethical dilemmas on both sies ofthetout authorityTh ms? There are issues abo y under contract terms th e contract. Case 5.7 Pension Promises, Payments, and Bankrune Companies, Cities, Towns, and States ruptc f Detroit pays out almost $200 million per year in pension benefits to : The city o workers. The city's annual contributions to its pension plan are less than half of sum As payments out have increas ed, payments in have decreased. How is it possilk t fulv funded pension plan with these numbers? Professionas, including audhors, and actuaries, have certified that the aggressive investment policies for he day expect to be fund should make up the difference." Still, the firefighters-who one beneficiaries and in turn receive their payouts -now recognize the harsh reality that playing out with pension funds throughout the United States. Despite all the imprinat from professionals, benefits elsewhere have been cut, plans changed, and, in some cases. payments to retirees stopped altogether." With Detroit in bankruptcy, they appear to hare few rights to collection of their pensions. The issue of pension obligations is not only one for businesses, it has been front and center at all levels of government. Business Pensions and Bankruptcy: A Regulatory History When United Airlines declared bankruptcy in 2002, part of its Chapter II proceedingy relieved the company of its pension liabilities. The ability of a company to reneg on pension benefits when so many protections were built into the law under the Employet etirement Income Security Act (ERISA) has been an ongoing concern. Congresst hearings following the losses in the United case uncovered loopholes in the accoum Mi April 26, 201 M Jennings ar Business Law Journal 641 (2011). oper and Mary Williams Walsh, "Public Pensions, Once Of Limits, Face Budget Cuts, see and fund losses 11, p. Al. For more background information on pensions, actuaries, ar and Sally Gunz au Proactive Proposal for Self-Regulation of the Actuarial Professon 2011,p, 32uand David Mildenberg, "State Workers Run for the Esxits, Bloomberg Bus 2011, p. 81, Greenhouse, "States Want More in Pension Contributions, 1, 2011 "State Workers Run for the Exits," Bloomberg Businessue e March 23, 2011, p. C1 "Cooper and Walsh, supra note 36. p. A3. eanette Nann and Michael Korkery, "Public Pension Fund Squeeze Promises, Performance, and Peality nsion fund reporting that permitted United, and m Section B367 s for pe calth of the fund look better than iIt actually was. The ension numbers that made the of allowin o report re, allowing obligations to be spun off the books so sof the plan looked small and the assets very rich an holes werc Enronesque in ot Federal Regulation of Pensions teds pension bailout, Congress changed the accounting for f Uni void the problem of the rosy picture when the f Protection Act of 2006 closed the acc unds need fur pension plans to ther funding. The Pension nd provides greater assurance ounting loopholes employees that their promised pensions and the fund ees that their promised nt. The effect of the changes is to require companies to fund their mbers reported to the SEC vis-a-vis pensions are accurate, whereas the . If United had funded its plans when n would have been sufficiently funded at the time of the United ing for them would be available according to the numbers they have reported to the SEC in their financials. Apparently, the nu numbers reported for ERISA purposes are inflated its SEC numbers indicated it needed to (e.g., 1998 would was first needed), the pla bankruptcy. 2002, when it was grossly underfunded 8 would have been the year when fundin However, under ERISA guidelines, it was not required to kick in funds until The Pension Benefit Guarantee Corporation (PBGCY was created under ERISA des insurance for employees for underfunded pensions. The presence of this protection results in a moral hazard. With the presence of the PB GC as a st measure for pension plans that fail or end, there is little accountability for responsible funding and management of pension plans. The pension plan no longer represents a source of exposure so that funding decisions, especially in relation to promised benefits, are often made with inflated expectations or little regard for reality. As one commenta- tor noted Nevertheless, union leaders, who negotiate most pension agreements, often seek pension promises that even they know are excessive, in large part because the PBGC insures these promises, In constituents rarely ensure that their pensions are fully funded "As a result of federal pension insurance, emplo- ees lack the proper incentives to monitor their employers' funding levels because the employees will not bear the full costs of their inattention." In an effort to resolve this tension, the PBGC does not insure any and all pension promises, instead limiting yearly payouts to beneficiaries. Ironically, the PBGC does this to give employees ircen- tives to make sure their employer funds their plans adequately Nevertheless, many pension promises are not as on plans is that insured as most employees would believe." A conflicts issue that arises in the funding and management of pensi ing on earnings. Simultaneously, beneficiaries signal their desire for continuing pres- ent funding levels that still provide promised benefits. That tension affects the role of the actuary who determines funding levels and can result in the use of overly optimistic actu- ans failed." By 2005, uts it was making to claimants employers who hire actuaries often signal their concerns about the impact of increased arial assumptions. These conflicts and tensions have resulted in an acute criss in pe funding and structure With the market's decline and increasing retirement rates, more pl the FPGC had a deficit of $22.7 billion because of the payo due to underfunding as well as the bankruptcies of major compani "29 us..5 1302 (2000) es like Unite 83 Chicago-Kent Law Review 1409, 1417 08 The Decline of Traditional Pensions, the Impact of the Pension Protection Act of 200 and the Pe Future of America's s Defined-Benefit Pension System fety Net in a Jam," Arizona Republic, Novernber 16, 2005, p 81. See also Nicholas Marcy Gordon, "Pension Sa Pitchman for the Gray Revolution, " Fortune, July 11, 2005, p 63 (noting that the FPGC assumed the obligation to United Airlines plan members) responsibility for ts to Relieve Pension To in force (RIP) since the 1980s, with pe have had to downsize have taken an in Force and Buy-Outs to Reliove B he RIF process incorporates the pensi nificant national and reglonal retailers went out otlhe large numbers ofth There have been significant reductio emploe and 2010, with other national retallers closingt and osures are th ult The following list provides some data on som on of downshey took, as well as some general ges for RIP be followed the mar com over the years lexcations For example, Arby's 2008 market crash and has continued throu s Yel to 2001 Lucent 2001 Meril Lynch offered hnologies offered 13,000 employeos early rotiroment in Lynch offered voluntary severance packagos to a majority of f its 65,900 employm Almost 10% of the 221,000 employees of Verizon accepted an aly buyout offer benefits as part of a voluntary termination package. Safeway offered 5,800 clerks voluntary buyouts. that group) buyouts with figures ranging from $35,000 to $140 depending upon their years of employment with GM or Delph t Airlines offered 33,000 of its employoos cash, travel privilogos, anc other 2005 131,000 GM and Delphi employees (including 105,000 unior workers in per empl 2008 Thirty percent of U.S. employers laid off employees 2009 Boeing cut 10,000 jobs. Caterpillar cut 22,000 jobs Delta forced 2,000 early retirements 2010 Fifty percent of U.S. companies did some form of downsizing In 2012, 283,000 were fired with 60% dismissed because of corporate restructuring Hewlett-Packard cut 27,000 jobs. American Airlines cut 14,200 jobs. Lockheed Martin cut 10,000 jobs BM cut 9,000 jobs Pepsi cut 8,700 jobs RIM cut 5,000 jobs. 2013 JCPenney cut 15,020 jobs JPMorgan Chase 19,000 IBM 9.400 Boeing 5,800 American Express 5,400 Wells Fargo 5,236 Cisco 4,500 Metlife 3,150 Blockbuster 3,000 United Technologies 3000 2014 Amgen 2,950 Best Buy 3,000 Bank of America 4,146 Intel 5,350 UPMorgan Chase 5,500 Coldwater Creek 5,500 (Bankruptcy) United Continental 5,521 Cisco 6,000 Hewlett Packard 16,000 Microsoft 18,000 Promises, Performanco, and Reality 2015 U.S. Army 40,000 Hewlett Packard 30,000 U.S. Army (civilians) 17,000 Schlumberger 11,000 A&P 8,500 Microsoft 7,800 Baker Hughes 7,000 Halliburton 6,400 Procter & Gamble 6,000 2016 Walmart 17,500 Macy's 4,500 Hancock Fabrics 4,500 Microsoft 4700 National Oil Well Varco 6000 DuPont Pioneer 6,000 Weatherford 8,000 Bank of America 8,000 Seagate 8,100 Schlumberger 10,000 Intel 12,000 Halliburton 15.200 of the extensive benefits employees at these companies have, the average cost Because of keeping made up of pensions and health shop at GM's Pontiac plant said that he would give up his $100,000 per year salaryto spend more time with grandchildren, and get away from the paint fumes. However, one worker noted, "Where is anybody going to find a job paying $28 per hour with [only) a high-school diploma?"41 an employee is about $67 per hour, with $27 being wages and the remainder care benefits. One employee who works in the paint-repair One worker, who will receive a $140,000 payment, has a small dealership in Doraville, Georgia, where the GM plant is located, at which he sells used pickup trucks. He is not married and has no children, rents out six homes that he owns, and co-owns a beauty parlor. He will retire comfortably Following these pension buy-outs, GM was still in dire financial condition. In 2008, the U.S. government provided General Motors with $5.8 billion in funds in order to allow the company to emerge from bankruptcy. As security for the loan and for the advancement of additional billions in bailout funds to the company, the US, government held a 10% e in the auto company. As part of the deal with the government, GM had ownership stak to agree to certain management changes and promise to repay the fun to agree to provide 39% share ownership of the co pany to employe ds. GM also had GM promised to cut 40% of its car dealers and eliminate 7000jobs. Following its cmc who had been termi gence from bankruptcy, GM did cut its car dealers by 40%, butfollowing public outcry n e termination of longstanding dealers, it reinstated many of those nated. GM consolidated plants and closed its Saturn division to push towaru cutback. A aturn division to push toward the 7000 o government official said that the loss of iobs if the automaker falled was too were saved through great to risk and thus required government intervention. The pems GM. Wall Street Jounal March 23 200 enrey McCracken and Lee Hawkins Jr, "Massive Job Cuts Will Reshape GN pp. A1, A15. Promisos, Performance, and Real ected to be $1 trillion." Long-term t Scion 371 expected to be SI Lon nsion plansi The drop has been steady, not giving the funds rillion." Long-term returns have tumbled from ust keep coming. Presently, some states are allocatin to paying down untunded pension liabilitics.necticus ung pens'to 7.47 The bad year, the funding gaps. For example, in Connecticut, 10% l years. The bad years co their budgets to make up the fundin find their credit ratings tumbling. Chicago reforms ined issues1 Some refer to the coming crisis in government pen cond time in a decade, there are reviews of state of its budget goes and a junk bond rating. w Pennsylvania, New le cities and states not for example, has a $20 bil- ucky are eases, benefit curbs, pen- genuinely difficult ension deficit and a junk bond rati nfronting crises in their pension funds that w es currently paying into the plans, and some will require tax increa Jersey, and Kent sion reforms for employees "financial tsunami."2 the country.53 For the shese reviews have not and are not producing the "adequately funded" ernments had hoped to find. The reforms following the 20 rovide for adequate funding. on average, actuaries have underes. of providing the promised and often increasing government pension third. For instance, Californias public employee pension fund erfunded with 68 cents in assets for every dollar in pension lia ues to be s s The scope of that underfunding is understood better wi con bilities. ts: the underfunding costs for California en trans per have been computed as $35,700 per ss The Pew Center study on the condition of state pension funds to sehold California hous the states into three categories: solid pertormers, need improvement, and seriou PlaeThe Pew Center lists California as being in the middle category, which rais ces grave ques that reaches levels of 50%. The Role and Liability of Actuaries stions about the state of funds in those 19 states the Pew Center study placed us concerns category.sThose serious concerns translate to underfunding There were a number of lawsuits against actuaries in Alaska; Texas; San Diego, California Milwaukee, Wisconsin; Evanston, Illinois; and Fort Worth, Texas. The theory underlyin these lawsuits is that pension benefits were widely given and expanded because the actu arial methods used undervalued the benefits. The plaintiffs in these suits sought recovery Timothy W. Martin, "Pension Returns To Hit New Lows," Wall Street Journal, July 26, 2016, p. AT and Mary Williams Walsh, "Pensions and Politics Fuel Crisis in linois," New York Times, May 26, 2015, p. A9 "Ugly Truth about State Pensions Begins to Emerge," USA Today, May 3, 2010, p 8A Timothy W. Martin, "Pension Returns to Hit New Lows," p. A1 54 ld. California's Pension Funding Crisis Just Got Worse," Fortune, July 19,20t6, http/fortune.com/2016/0719 pension-underfunded/. Last visited October 25, 201 t6 er on the States (noting that "solid performer" states are Arizona, Arkansas, Delaware, Florida, Georgia Maine, Montana, Nebraska, New York, North Carolina, Ohio, South Dakota, Tennessee, Utah, and Wisconsin the 'serious concern" states Maryland, Massachusetts, ld. North improvement" states are Alabama, California, lowa, Michigan, Minnesota, Missouri, New Ntexico, akota, Oregon, Pennsylvania, Texas, Vermont, Virginia, Washington, and Wyoming; the isel aho, are Alaska, Colorado, Connecticut, Hawaii, Illinois, Indiana, Kansas, Kentucky Louisiana bers Rhode sland, South Carolina, and West Virginial. Oklahoma, Mississippi, Nevada, New Hampshire, New Jersey that San Diego's pension numbers were so off base that the C7( "See Cooper and Walsh, supra note 36, p. EC took action against the city for securities fraud)