Verizon pension excess: $280M
By Sean Hao
Advertiser Staff Writer
Verizon Communications Inc. could take with it as much as $280 million in excess pension money should a sale of the state's largest phone company go through this year.
Verizon Hawaii's pension has been invested skillfully in the past 15 years and built up an excess beyond what the company is required by law to maintain. That opens the door for the parent company, Verizon Communications, to pull out nearly half of the $587 million pension fund when it sells Verizon Hawaii and still leave the pension flush.
Some Verizon Hawaii workers, however, fear that taking away the extra pension money could leave employees with less of a safety net.
Siphoning off the excess funds could also increase the risk of higher phone rates. Should the pension fund decline below acceptable levels in the future, telephone rates might have to be raised to make it flush again.
"The significant increase in projected future pension costs ... represents a major detriment to consumers," according to state Public Utilities Commission consumer advocate John Cole.
The Carlyle Group, a Washington, D.C.-based investment company, offered last year to buy most of Verizon Hawaii's operations for $1.65 billion. The sale is awaiting regulatory approval, which could come as early as next month.
Under plans disclosed by Verizon Communications, the company would keep excess pension money — estimated at $280 million at the end of 2003 — once the deal closes.
This comes at a time when pension problems are escalating nationwide with companies such as United Airlines, US Airways and General Motors facing billions of dollars in pension shortfalls on stock-market losses.
"If you hit a downturn in the market or investments ... that money has to come from somebody," said Scot Long, business manager for the International Brotherhood of Electrical Workers Local 1357, which represents 1,300 of Verizon's 1,700 employees. "That risk is removed if that (entire) fund is moved over (when the company is sold)."
The drawdown on the excess pension funds is legal.
The pension fund — which totaled $587 million at the end of 2003 — was created in part by money collected from Hawai'i consumers and Verizon workers. However, much of the excess also is a result of the fund's investments performing well.
The money gained through investments has more than covered the money needed to pay about 1,300 retired and 1,300 active Verizon Hawaii workers. Verizon and its predecessor, GTE, have not had to put money into the pension plan for at least 15 years.
Any withdrawal of that excess money from the current pension plan could be subject to federal income and excise tax on pension distributions. Those taxes were created during the 1980s after several companies were bought specifically for their fat pension funds, said Norman Stein, a pension law expert at the University of Alabama School of Law.
However, Verizon likely could avoid paying taxes on excess pension money by terminating the current plan and transferring its assets to another pension plan, Stein said.
"There are ways around the taxes," Stein said.
Among the options open to Verizon is using the excess pension money to cover new groups of employees, Stein said. The company also could shift employees from other underfunded plans to the over funded plan or use the extra to offer early retirement packages or severance in the future.
"They're obviously planning to do something with the money," Stein said. "If they don't have a plan, they should have one."
Although Verizon said it had no plans to shift the Verizon Hawaii pension to a fund covering Mainland workers, the company does face escalating pension issues. Through the nine months ended Sept. 30 Verizon recorded a pretax pension settlement loss of $792 million partly from separation packages offered to more than 21,000 workers, according to a recent Securities and Exchange Commission filing.
And earlier this month Verizon warned that pension and post-retirement costs corporatewide would increase 10 cents to 14 cents a share this year.
Verizon Communications made it clear when it offered to sell Verizon Hawaii that the excess pension money would not be included in the deal, according to Carlyle.
"This is an issue that frankly we don't have a lot of control over," said Bill Kennard, managing director for Carlyle. "When we wanted to buy this company Verizon said that we will give you a fully funded pension plan for the hourly workers. It's overfunded and we're taking the overfunding back."
Kennard added that he doesn't think losing the excess pension money will lead to higher costs for consumers or employees.
"We have built into our financial model ample resources to take what we will have at closing, which is a fully funded pension, and continue to fund it going forward so the employees won't be at risk in any way and the rate payers won't be at risk," he said.
Such assurances haven't allayed concerns of Verizon workers such as George Waialeale.
"It's the Verizon employees' pension fund," said Waialeale, an outspoken critic of the sale. "It doesn't say employer's pension fund. Who put the money there? The PUC (Public Utilities Commission). It should be for all the (remaining) employees," said the 37-year Verizon employee.
Larry Frolik, a professor at the University of Pittsburgh School of Law who specializes in pension law, said he understood the concerns expressed by 1,300 or so Verizon workers who would be covered under the new pension plan.
"If you're a worker, you're much more comfortable with a surplus pension," he said. "You could end up underfunded. That's why the unions are always worried about it."
If there were a pension shortfall, "in theory you could always go back and ask for a rate increase and then that would fall on the consumer," Frolik said.
Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.
