YRC Worldwide Inc (YRCW)

[califax]

Statement of YRC WORLDWIDE, INC.

http://waysandmeans.house.gov/hearings/Testimony.aspx?TID=8256

YRC Worldwide, Inc. is one of the nation’s largest trucking companies. We employ approximately 45,000 men and women in the United States, the majority of whom are members of the International Brotherhood of Teamsters. We provide good middle class jobs with strong wages, health care, and a pension. YRCW has approximately 700,000 customers, including the Department of Defense and FEMA. In 2008, YRCW generated $22.1 billion in total output, employment for 141,158 workers, and $2.8 billion in total tax revenues for federal, state, and local governments. The Company transported goods valued at approximately $202 billion or 1.4 percent of GDP. In addition, YRCW contributed approximately $540 million to 36 multiemployer pension plans to provide pension benefits to more than 1.2 million active and retired Teamster members.

In the hearing notice, the Chairman pointed out that many companies that sponsor defined benefit plans “may find themselves simultaneously struggling to navigate an economy during a severe downturn with decreased cash flow and less access to credit while having to make up for significant losses incurred in the pension trusts that fund their workers’ pension benefits.” For companies that are part of the trucking and grocery industries, the problems are even more acute.

Prior to the start of the recession, the Company had delivered record earnings and operating margins. Since the freight recession began in the second half of 2006, however, the Company has gone from producing strong earnings to significant losses. In this exceptionally difficult business environment, YRCW now faces three inter-related problems in meeting its pension obligations: The Company funds the benefits of, and effectively acts an insurer or guarantor for, hundreds of thousands of workers who never have worked for YRCW (“non-sponsored retirees”); the multiemployer plans to which we have been contributing have suffered significant investment losses; and we face a worsening demographic challenge as fewer workers support the pension obligations of more and more retirees. Given our significant pension obligations, the downturn in business volume in the current economic environment has had especially adverse consequences for the Company. In short, our contribution burden has now grown to an unsustainable level as our business continues to suffer from the global economic meltdown.

Working with the Teamsters, we are doing what we can through self-help measures to address the challenges we face. Since the beginning of the year, for example, our union and non-union employees have agreed to a 15% reduction in wages. Management has done so as well. In addition, YRCW has taken other steps to improve the company’s cash flow and liquidity, including selling off excess property, consolidating back-office functions, and reducing overhead. In addition, we have temporarily terminated our participation in our largest plans for 18 months in order to preserve our cash flow. At the same time, the multiemployer plans to which the Company has contributed also have taken self-help measures to address the solvency challenges they face.

But unless Congress provides legislative relief this year, many of the pension plans to which YRCW has been contributing will eventually become insolvent. When that occurs, the Pension Benefit Guaranty Corporation (PBGC) will be responsible for the pension obligations of the hundreds of thousands of participants in the plans.

How did we get here? In 1980, Congress enacted two bills that, albeit seemingly unrelated, have together over time created unsustainable pension plan obligations for YRCW and other successful freight carriers. The Motor Carrier Act deregulated the trucking industry, while the Multiemployer Pension Plan Amendments Act (MPPAA) imposed an exit penalty on companies upon their withdrawal from multiemployer pension plans, including companies in the trucking industry. As a result of MPPAA, a company that withdraws from a multiemployer plan must pay its fair share of liability to fund the plan’s unfunded vested benefits.

Although seemingly similar, “termination” liability and “withdrawal” liability are fundamentally different legal concepts, and have had fundamentally different impacts in the real world. Prior to the enactment of MPPAA, if a multiemployer plan had a declining base of contributing employers, the remaining employers were required to absorb a greater share of the funding costs of benefits for non-sponsored participants, i.e., plan participants previously employed by former contributing employers. Similarly, if a multiemployer plan terminated because of a substantial decline in its contribution base, only the companies remaining in the plan at the time of termination were required to pay termination liability to the PBGC. This often resulted in a race to the exits by companies wishing to avoid termination liability upon the plan’s termination.

By substituting “withdrawal liability” for “termination liability” in MPPAA, Congress sought to provide some measure of protection for companies remaining in multiemployer plans. The rationale for the change was that, if a company had to pay a fee upon withdrawal, remaining employers would be less exposed and less inclined to race to exit the plan. But the legislation had a perverse effect instead: by imposing an exit penalty upon withdrawing companies, MPPAA acted as a deterrent to new companies entering into multiemployer agreements. The impact was particularly dramatic in a contracting industry such as the freight carrier industry.

As a result of the interplay of the two statutes, of the thousands of carriers in business in 1979, only a few are left to principally fund multiemployer pension plans today. This has created a crippling financial obligation that could lead to massive job losses and health care and pension benefits losses for hundreds of thousands of active and retired workers. To put the impact of the legislation in perspective, we have appended to our statement a list of the top 50 LTL carriers that were in business in 1979 and the handful left in business today, two of which are now part of YRCW and two of which have dropped out of the top 50.

In short, as an unintended consequence of the 1980 legislation, YRCW now supports hundreds of thousands of workers who never worked for YRCW. In fact, we have contributed more than $3 billion towards their benefits. Employer bankruptcies and recent investment losses are crippling the multiemployer plans to which YRCW has been contributing. As a result, YRCW’s contribution burden has become unsustainable and many pension funds are headed for insolvency.

Many plans have been forced to implement both benefit reductions and contribution increases as a result of the collapse in equities and the requirements of the Pension Protection Act. Many plans are “mature” plans in which retirees receiving benefits heavily outnumber participating active employees and where contributions already fall well short of paying benefits, requiring significant investment earnings each year to maintain their funding level. By themselves, these circumstances likely will require every multiemployer plan to make some kind of draconian adjustment for 2009 and beyond. Plans that are fully funded or nearly fully funded will likely be required to reduce the level of benefits they provide. Plans that are operating under an amortization extension, funding improvement plan or rehabilitation plan likely will be required to further reduce benefits or increase contributions or both for 2009 and beyond.

The failure of a major employer, such as YRCW, will exacerbate these problems. When a contributing employer fails, the plan loses the contributions attributable to the employer both for the current year and for the purposes of its actuarial calculations. Only a small percentage of withdrawal liability--the amount the defunct contributors owe for prior year benefits--is ever recovered in bankruptcy. The plan suffers an immediate reduction in actives and often a substantial and immediate increase in retirees, increasing its annual benefit payments and making it more dependent on investment income. Required adjustments become correspondingly greater. Contributions will need to be higher. Cuts will need to be deeper.

In a multiemployer plan, when one employer fails, the benefit obligations are shifted to the surviving employers, who must bear the burden not only for current participants but also for the new non-sponsored retirees. For members of the Teamsters, the remaining employers include not just industrial employers but also participating local unions and affiliated health and welfare and pension plans. At a minimum, these remaining employers will bear the added burden of the vested benefits of the failed employer’s employees. Depending on required adjustments, their employees may suffer reduced future accruals, and the employers will likely be required to pay even higher contributions. If the failure creates an immediate funding deficiency, the remaining employers, even if they have an existing collective bargaining agreement, will likely be required to pay an excise tax on top of the increased contributions.

Higher contributions and reduced benefits may prompt other employers to leave the plan, further reducing the number of active members and the contribution base, increasing the number of retirees and terminated vested members, and making the plan even more dependent on future investment returns and more unstable. In some situations, higher contributions will likely force remaining employers into bankruptcy, resulting in even more lost jobs. In the worst case, the failure of the primary plan will have a domino effect, leading to the failure of other plans in which these employers contribute and even more job losses.

Having made roughly $3 billion in contributions to fund the pension benefits of retirees not affiliated with YRCW, the Company can no longer afford to continue to serve in its role as an involuntary surrogate for the PBGC. Self-help measures will not be enough. For the sake of our Teamster employees and retirees, we need help from the Congress this year to address the challenges facing the company and the multiemployer plans to which we have long provided support.

Proposed Legislative Solution

We very much appreciate the efforts by Representative Pomeroy and other Members to address the challenges faced by multiemployer plans and companies such as YRCW. In drafting legislation this year, we urge the Ways and Means Committee to--

* Update the “partitioning rules” of current law so that the PBGC would assume the pension obligations for non-sponsored retirees while the plans continue to support the participants of current employers;

* Provide a “fresh start” for multiemployer pension plans suffering from recent investment losses; and

* Provide tax relief to offset the financial burden that employers like YRCW have borne by acting as a surrogate PBGC in funding the pension obligations of non-sponsored retirees.

Thank you for your consideration.