Retirement Heist

by Ellen E. Schultz

  He began by calling those he had numbers for, sometimes letting the phone ring twenty times to give them time to totter to the phone. “By the end of the conversation, some of them couldn’t remember what I was calling about. ‘What was it you wanted?’ they’d say.” Equipped with printouts from MapQuest, McClow went door to door in some of the desolate neighborhoods of Detroit, where some of the retirees were too nervous to come to the door. In one case, he was able to get a neighbor to persuade one elderly woman to let McClow pass the papers through the bars on her door.

  Some were in nursing homes or had moved in with their families. Several others died while McClow was on the hunt. As of March 2011, McClow had located all the missing retirees. Their coverage was safe. Until the next audit.

  Chapter 10

  TWILIGHT ZONE

  How Employers Use Pension Law to Thwart Retirees

  UNTIL RECENTLY, someone pausing at the Wal-Mart in Delmont, Pennsylvania, might have been greeted by Ed Peksa, who had retired years before from GenCorp, the former General Tire and Rubber Co., whose well-known jingle goes, “Sooner or later, you’ll own General.”

  Peksa, a former marine, hadn’t planned on working at Wal-Mart in retirement, or traveling. But he ended up doing both. He needed the greeter job because he was no longer receiving the $320-a-month pension he’d earned after working a quarter-century in the tennis ball department at GenCorp. His former employer was keeping it all to pay for Peksa’s share of his retiree health coverage. The coverage had been company-paid when he retired, but the company had unilaterally begun charging very steep premiums. Peksa couldn’t drop the coverage, because he needed it to help cover his wife’s prescription drugs, so he began working thirty hours a week at Wal-Mart. He thought the job was pretty decent, since he got an hour for lunch and two fifteen-minute breaks a day.

  He also ended up traveling to court, over and over, as the retirees tried to reverse the company’s decision. Though he didn’t know it, he was living out a process that the Varity human resources managers had so candidly discussed behind closed doors years ago: Companies had little to lose by unilaterally cutting benefits they had promised retirees in written contracts. The retirees might pass the hat and try to raise funds to file a suit, but even if they got that far, it would be easy for an employer to drag out a case until the employees died. And whatever the outcome, the company saves money in the meantime.

  Such was the legal odyssey of the GenCorp retirees. In January 2000, the company, by then a manufacturer of aerospace products, began charging 2,063 hourly retirees health care premiums, despite a labor contract that promised them free coverage for life. John Van Dyke, a retired millwright, thought fighting back in court was the answer. “I was sure that once the judge saw the contract, it would be over,” he said. “How long could it take?”

  Longer than many of them would be around. Frank Palumbo was one of the oldest. Born in 1914, he went to work for the General Tire and Rubber Co. when he was sixteen years old. In 1934, at age nineteen, he participated in the first sit-down strike to organize the rubber workers at the Akron, Ohio, plant. Always active in the union, he worked at the company for forty-four years until he retired in 1975, with a promise of lifetime medical coverage.

  By the early 1990s, most of the retirees, like him, were on Medicare, so their company-paid benefits covered only prescription drugs and Medicare premiums and deductibles. Not a huge amount for the company, but critical for the retirees, most of whom had pensions in the low three digits.

  In the mid-1990s, the company used a trick the Varity managers hadn’t thought of: It sent the retirees enrollment forms giving them a choice between remaining in their no-cost plan or switching to one with significant cost sharing.

  Elderly but not demented, Palumbo and the other retirees of course chose to remain in their current plan. But perhaps with their failing eyesight, they didn’t notice, at the bottom of the form, a sentence in microscopic print. It said that the retiree acknowledged that the “benefits elected… replace benefits under the prior GenCorp/URN retiree medical plans.”

  About five years after Palumbo returned the form, his January pension check arrived. It was smaller. A mistake? No. The company said it was beginning to deduct some of their pensions to help pay for their health coverage. The retirees pointed out that the contract said the company would provide lifetime coverage. GenCorp didn’t dispute that, but said “lifetime” didn’t mean “at no cost.”

  Their union couldn’t help them because, when it negotiated a contract in 1994, the United Rubber Workers had agreed not to represent retirees in any future lawsuit in exchange for delaying an increase in benefits. Some unions have less noble reasons for not backing retirees. When negotiating compensation for current workers, some are tempted to toss the retirees, who don’t vote, overboard. Without a union to back them in court, the retirees face almost impossible odds. There are few attorneys who handle ERISA cases for plaintiffs. One reason is that an individual employee or retiree can’t afford the fees, and class actions can be hard to bring for a variety of reasons. Courts have interpreted ERISA as disallowing any punitive or pain-and-suffering damages, so there are no potential damages of this sort that attorneys can use to finance cases. All a plaintiff can win is restoration of the disputed benefit, if he’s still alive. The plaintiff’s attorney takes a risk, too: Thanks to the way in which courts have interpreted ERISA’s attorneys’ fee provision, it’s up to a judge to decide whether the plaintiff’s lawyer will be reimbursed for any of his time and expense.

  Still, the retirees who had worked at the Jeannette plant passed a hat and chipped in: $100 per couple. Mabel Kramer, a widow, chipped in $50. She’d begun working at the company in 1944, making gas masks for World War II soldiers. She was no longer receiving her pension of $179 a month, based on her husband’s thirty-four years with the company, because GenCorp deducted every cent to use for her health coverage, for which it was charging her $284 a month. She had to pay the company the remaining $105 from her $810 Social Security check.

  The $12,000 the retirees collected would cover only a fraction of the cost of mounting a suit, but the retirees found a lawyer who was willing to take the case anyway: William Payne, a Pittsburgh attorney who had represented retirees over the years in more than sixty cases. One of the first cases he worked on, soon after getting out of law school in the late 1970s, was the now infamous Continental Can case, in which company managers had used a secret program with the code name “BELL,” which is a reverse acronym for “Let’s Limit Employee Benefits.” The can company used the system to identify older workers who were about to lock in bigger pensions and targeted those plants for closing. The case was a rare win for workers. It has been mostly downhill since. Payne has spent the rest of his career watching ERISA protections get eroded in the courts.

  Payne and his law partner, John Stember, met the retirees at Dick’s Diner, a popular fuel stop just off the highway between Pittsburgh and Jeannette, and over coffee and cheesesteaks he cautioned them that the case could take a long time. The retirees were undaunted. Three, John Van Dyke, Stanley Wotus, and Ed Peksa, all veterans who had served in the Pacific during or after World War II, volunteered to be plaintiffs. Nor were Payne and Stember daunted by the cardboard boxes the retirees hauled with them, filled with decades-old documents they’d dredged out of basements, closets, and garages. They filed suit in October, and the first meeting with the judge was scheduled the following May. In the seventeen months since GenCorp had started charging them for health coverage, the retirees’ costs had doubled.

  ROAD TRIP

  The first court conference was in Akron, Ohio, 110 miles away. Van Dyke, who had the best eyesight, drove the other guys in the predawn darkness to rendezvous with Payne, who drove them the rest of the way in the minivan he usually used to take his sons to hockey practice. They had to pull over numerous times. Van Dyke had had part of his stomach removed following a bout of cancer in the 1990s and needed small, frequent m
eals. Others had prostate problems, and Wotus was taking several medications for blood pressure and heart problems. Peksa, who misjudged the insulin shots he was taking for his diabetes, at one point passed out in the backseat, prompting a quick pit stop at a gas station mini-mart for orange juice.

  Despite their various pit stops, the retirees made it to the 9 A.M. court session on time. There, the eager retirees cited labor contracts promising lifetime coverage. But GenCorp, in court documents, maintained that “lifetime” didn’t mean “at no cost.” This kind of semantic game had become common. Another popular one was to say that “lifetime” referred not to the life of the retiree but to the life of the contract.

  GenCorp argued that the retirees had knowingly released the company from its obligation to pay, and pointed to the enrollment forms retirees had filled out years earlier, saying coverage was “replaced.” In short, the retirees, not GenCorp, were trying to renege on a written agreement, company lawyers maintained.

  The judge could have decided the case on the merits or sent it to trial. Instead, he insisted that the parties work it out. But when neither side budged, the judge scheduled a mediation meeting in Cleveland—a year later. A year passed. GenCorp then insisted that the retirees should include people from other locations, so several retirees traveled from Kentucky and Ohio, booking senior-discount rooms at the Holiday Inn. Kenneth Bottolfs, then in his eighties, came the farthest. His threeconnecting-flight trip from Waco, Texas, took eight hours.

  When neither side backed down in this second mediation hearing, the judge ordered a third meeting. Eight months later, the retirees traveled to this third meeting, minus Wotus, who’d had a stroke. This meeting failed, too, so the judge finally ordered depositions and document production to proceed. This meant the retirees had to travel to Cleveland to be deposed by GenCorp lawyers. The May 2003 sessions took several hours each. The retirees whiled away their waits playing cards and trading war stories about their times at Okinawa and Iwo Jima.

  END OF THE ROAD

  The following August, the retirees’ lawyers filed to have the suit certified as a class action. Without this, even if the named plaintiffs won, no others would get their benefits restored. GenCorp opposed this. It said that the plaintiffs were too befuddled to represent the class. As was clear from their depositions, some had forgotten what they were thinking when they signed enrollment forms. One didn’t remember what was in GenCorp’s slide presentation explaining the benefit options eight years earlier.

  GenCorp also accused the retirees of destroying evidence. The reason: They’d commingled their paperwork when they pooled their brochures in a cardboard box while searching for a lawyer. That constituted “spoliation,” GenCorp said, adding that it would “seek appropriate remedies at a later date.” Remedies in these situations can include charging retirees for a company’s legal fees.

  Finally, GenCorp said the retirees should be denied class status because they were too dispersed, so that different legal standards governing different parts of the country would apply, and because the named plaintiffs were too sick to adequately represent everybody. The plaintiffs were, in fact, sick. Shortly after, in October 2003, Robert Berger, age sixty-nine, died. Polumbo died the next month, at eighty-nine. His widow, Mary Elizabeth, eighty-eight, volunteered to take his place. In December, the judge sided with GenCorp and denied the retirees’ request to be certified as a class.

  The retirees had discovered another harsh reality: If he is so inclined, a judge can keep a case from ever reaching a trial. Judge Dan Polster had badgered the parties to settle and the retirees had to travel, time and again, to court hundreds of miles away, in some cases to attend incremental hearings that took only a short time.

  The retirees figured that by denying the class action, the judge was just trying to get them to give up. But after this setback, the retirees rallied and signed up an additional 294 plaintiffs. They filed another suit in July 2004, in time to beat a statute of limitations that the company said was about to expire. The next month, the judge dismissed that case, telling the roughly four hundred retirees, mostly in their eighties, that each would have to file an individual case and pay the $150 filing fee for each one.

  The retirees called the judge’s bluff. Payne and Stember filed four hundred individual suits, paying $60,000 in filing fees, rather than the $350 it would have cost if the judge hadn’t insisted on separate individual cases. They had to act fast: “They were dropping like flies,” Payne says. He told the judge that the average age of the retirees was eighty-two.

  The judge’s reaction: He said he would grant each of the 342 retirees a trial. One at a time. Hearing one case individually, each month, minus vacation and holidays, would take years, and few of the retirees, whose average age was 82, would live long enough to see it be resolved.

  The retirees were backed into a corner. They couldn’t appeal because an appeal can’t be made until a final judgment and there’s no final judgment until the end of a trial. They agreed to settle, and would pay a portion of their coverage. They did not, of course, get reimbursed for what they’d spent for the coverage over the prior six years.

  The terms of the late 2005 settlement are confidential, but securities filings make one thing very clear: GenCorp accomplished exactly what the Varity HR managers had predicted would happen in these situations: It saved money. From 2000 to 2008, the company’s liabilities for retiree health care fell almost 70 percent, to $76 million, thanks to the number of retiree dropouts and deaths. And even with the settlement, the plan’s costs have continued to fall steadily. Every year after 2005, the retiree health plan actually contributed a total of $8.4 million to GenCorp’s quarterly earnings. Regardless of whether a company wins or loses its case, it always wins the game.

  PREEMPTIVE STRIKE

  As companies grew increasingly eager to cannibalize their retiree benefits over the past decade, they realized just how important it is to get their cases heard by the right court.

  The first legal hurdle for many was that, like Varity, they had promised the benefits, often in writing. Ironically, one of their most powerful tools was federal pension law, which had been enacted in 1974 to protect employees and retirees. The ERISA law was intended to thwart employers who promised retiree benefits and then refused to pay them. Until then, pension and benefits agreements fell under state contract and trust laws. ERISA was supposed to be an improvement, because it overrode a patchwork of state laws.

  The problem was that the law was written for pensions, so it had rules about funding and vesting. If someone had a vested right to a pension, the company couldn’t just decide not to pay it. But ERISA didn’t explicitly mention vesting of medical pensions. So employers argued that retiree health benefits weren’t vested but were merely the equivalent of a gratuity.

  Until the early 1970s, all retiree benefits—pensions and medical coverage—fell loosely under state contract laws. If there was a dispute about benefits, the courts would examine the plan documents and handouts given to employees to see whether pensions and retiree health coverage were promised benefits, which must be paid, or, indeed, as employers later insisted, the equivalent of tips.

  Employers attacked the problem of written promises by introducing ambiguity into the equation. They began inserting clauses, or sometimes a single sentence, into the technical documents that described the rules and workings of the benefits plans. These reservation-of-rights clauses state that the employer has reserved the right to change the benefits.

  General Motors, which figures so prominently in discussions about troubled pension plans, has played a big, largely unsung role in the dismantling of retiree health benefits, for both union and salaried employees, across all industries. In the 1980s, GM promised lifetime health coverage as an incentive to get employees to retire. A total of 84,000 salaried employees ultimately took the bait.

  When GM later cut the benefits, retirees sued for breach of contract, pointing to the written promises: “Your basic health car
e coverage will be provided at GM’s expense for your lifetime.” You’d think a sixyear-old could decipher that. A contract, after all, is a contract. Without contracts, the U.S. economy would fall apart. Think how this would play out in a small claims court. Judge Judy would ask the plaintiffs, “Do you have a written agreement?” She’d then ask GM to explain why it reneged on the deal. “Your honor,” GM would say, “Sure, we promised, in writing, to pay for health coverage, but costs have gone up, and now we don’t want to pay.” Judge Judy would say, “I’m not interested in your problems. You’re an idiot. Judgment for the plaintiff.” Not so under ERISA.

  A lower court ruled for the retirees. GM appealed, and the Sixth Circuit Court of Appeals in Cincinnati ruled in 1998 that it didn’t matter what the company had told people verbally, and it didn’t matter that the company gave prospective retirees brochures that advised them that health coverage would be provided “at GM’s expense for your lifetime.”

  What mattered, the appeals court said, in Sprague v. General Motors, was that GM had added an escape clause to the summary of the plan documents (SPD) it gave the first group of retirees. The clause, included in the documents that few employees read, and even fewer understand, stated that GM “reserved the right” to make changes to the plan. “We see no ambiguity in a summary plan description that tells participants both that the terms of the current plan entitle them to health insurance at no cost throughout retirement and that the terms of the current plan are subject to change,” the court said.