Strange Bedfellows: Labor & Capital

Posted on May 20th, 2009 by Tim Eavenson | No Comments »
Filed under: ., Labor Law |

Cat dog bed by Jon Åslund (Flickr)

Some unions in troubled companies are finding an unlikely source of salvation and partnership: private equity. 

Yesterday, the Chicago Chapter of LERA invited Steve Sleigh, a member of the private equity group Yucaipa Companies, to discuss the current state of labor and capital.  Sleigh admitted that private equity is most often associated with greedy takeovers,  where the investor comes in to sell off profitable pieces of a foundering company, instituting layoffs and forcing concessions from unions.  Increasingly, private equity is the third seat at the table of industrial relations, and disliking its interference is sometimes the only thing unions and management can agree on. 

But it doesn’t have to be that way, according to Sleigh.  Yucaipa occupies a unique position in the private equity arena: their partners come from backgrounds in all three camps – labor, management and finance, and their focus is on companies with unionized workforces and a solid product.  The investments come in large part from multi-employer pension funds, which means the private equity group essentially becomes a conduit for unions to reinvest in the labor movement.

Like most private equity investors, Yucaipa buys companies in hopes of retooling them and selling them.  But Sleigh thinks that the prevailing model of reducing payroll and benefits in order to accomplish the quick turnaround is short-sighted.  Instead, Yucaipa starts its analysis by assuming that the labor costs are fixed, and then asks what else at the company can be adjusted. 

In one example, a large, Midwestern cold storage company had each of its locations making individual contracts and operating decisions.  Every facility had its own IT contracts, its own practices and guidelines.  “They had 120 fiefdoms,” Sleigh said.  By consolidating operating decisions, the company was made profitable with no loss of employment or benefits.

The secret, according to Sleigh, is in getting labor and management to focus on the good of the company together.  “We often say that we’re mediators with money,” he said.  By the time a company is failing, though, the two sides are often either giving up or at each other’s throats.  ”My number one question is always: Who cares about the firm?”  The number one answer, Sleigh said, is usually the workers – not just because they want to keep their jobs, but because longstanding workforces develop senses of community that will be lost if a company is grossly restructured or closed.  By working with the unions – and having partners with history in labor organizations – Yucaipa can get early information on issues like cash flow and productivity that guide its investment decisions. 

Sleigh also pointed out one of the key areas where companies get into trouble with their unionized workforces: lack of transparency.  Sleigh said that, during a restructuring, they require annual presentations to both management and union representatives on the health of the company.  That way, no matter what changes are needed during the turnaround, they’re not a shock to anyone.  Putting unions and management on the same informational page also fosters cooperation between the parties, according to Sleigh. 

Here, though, Sleigh said unions presented the biggest obstacle.   Often, the union doesn’t have anyone to represent them who truly understands the financials.  He said unions needed to start thinking of themselves as partners in the process.

It seems there would be some inherent conflicts in using private equity – with union pension fund backing – to restructure unionized workforces.  First, what happens when a company won’t survive unless pension benefits are cut, or a defined benefit plan has to be changed to a contribution-based plan like a 401(k)?  It seems like robbing Peter to pay Paul.  Sleigh said that Yucaipa actively avoids those investments, and that they would ask for concessions where necessary.  But drastic measures like replacing plans are much less necessary than people think. 

“In 20 years of doing this,” Sleigh said, “I don’t think we’ve ever replaced a DB plan.”

Sleigh was also quick to dispel the notion that his work was less investment and more labor activism.  “It’s not our business model to just be nice to unions,” he said.  “It’s that being nice to unions is good for our business.” 

How good?  In the twenty or so years that Yucaipa has been doing this type of private investing, their average annual ROI sits above 40%.  In the past few years, when overall investing has seen losses of about 35%, private equity (including Yucaipa) has lost more like 5%.  That makes pension plan fiduciaries happy to invest, Sleigh said.  The benefit to unionized workforces is a happy side-effect.

So what’s the next step for this blended investment model?  Employee ownership.  Sleigh said that he’s working on a business model that would use ESOPs as an exit strategy.  So, once a company was healthy, instead of putting it up for sale on the open market, an ESOP would be put in place to turn ownership over to the employees without requiring the massive debt that’s made recent ESOP use such a disaster (think: Sam Zell’s Tribune takeover).

Administration Opposed Prepared to Sign Pension Protection Act Relief

Posted on December 15th, 2008 by Chad De Groot | No Comments »
Filed under: ., Employee Benefits, Politics, The Financial Crisis |

UPDATE (12/15/08): The House and Senate both passed the Worker, Retiree, and Employer Recovery Act this week, and according to SHRM, the President has reversed course and is expected to sign it.  From SHRM’s article:

The House introduced and circulated a similar proposal in November 2008 during the start of the congressional lame-duck session following the presidential elections. The White House voiced initial opposition to the measure because of a controversial proposal to change the tax status of pension plans sponsored and operated by Indian tribal governments.

Bush dropped his objections to the pension relief proposal after House leaders stripped the Indian tribe provision from the final bill.

Our original reporting of the Bush Administration’s opposition is below.

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Recently, a number of groups consisting of well-known corporations with collective employees numbering in the millions, and employee benefit think-tanks, have been pleading with Congress to delay the requirements set forth in the Pension Protection Act of 2006 (“PPA”). The requests had received much congressional support, and the relief was seen as a necessary move to keep many businesses afloat and keep workers employed. However, the current administration disagrees and apparently sees funding these future obligations as more important than keeping current jobs.

In an effort to close loopholes through which employers were finding ways to avoid fully funding pension obligations to employees, the PPA generally requires that employer-sponsors of defined benefit plans achieve 92% funding this year on their way to 100% funding in 7 years. If a company does not satisfy the 92% requirement, and fails to stay on track with the 7-year plan, under the PPA, it will be required to have the plan 100% funded immediately (seriously).

Defined benefit plans are funded based on actuarial asumptions that determine the amount required to be contributed today in order to fund future promises. Such assumptions take into account mathematics that are well beyond the scope of us here at CE. But, we do know that an employer bears the risk of market fluctuations under such an arrangement. Therefore, when the economy is slumping and a defined benefit plan’s assets decrease as a result, the employer is on the hook to make up the deficiency. Obviously, requiring employers to fully fund these promises is necessary to ensure employees get promised benefits, but at what cost?

Financial Week published an article yesterday explaining that the administration has made clear its opposition to such a bill. This opposition stems from a concern that relaxing PPA requirements will allow plans that are already underfunded to become even more underfunded, thus increasing the liability of the Pension Benefit Guarantee Corporation (“PBGC”), which is already operating under a $11.2 billion deficit (note, the PBGC does currently have $61.6 billion in assets). However, what the administration seems to have missed is that the PBGC, like a defined benefit plan, is funded with an eye toward the future. It does not require full funding tomorrow in order to pay benefit obligations 30 years from now. Therefore, although desirable, it is not absolutely necessary that it acheive full funding immediately.

There is, however, an immediate need for companies to have cash and for workers to keep their jobs. It is likely that if the PPA requirements are not pushed back, or eased, many companies with such obligations will fail, and those that make it may be required to cut jobs anyway in order to comply with the PPA. In passing the PPA it certainly was not Congress’s intention to require defined benefit plans be fully funded if it meant putting the employees that were accruing the benefits under these plans out of work.

Proponents of the PPA relief are not proposing that the funding requirements go away completely so as to avoid the PPA altogther, but rather are simply asking for a bit of a break in light of the current economic downturn that is making funding these obligations for many companies a near impossiblity.