	Introduction

Benefits for retired employees are of particular interest to policymakers, who often are concerned with the income security of retirees, a large and fast-growing population. One aspect of this congressional concern is what happens when bankrupt employers are unable to provide promised pension and health benefits to their retired employees. The bankruptcy of the General Motors Corporation (Old GM) in 2009 was the fourth-largest bankruptcy in U.S. history, and it was accompanied by a period of federal aid to the automotive industry. To facilitate increasing their benefits, salaried retirees formed their own labor association, the Delphi Salaried Workers Association (DSRA). Various proposals dealing with pensions and health benefits provided by bankrupt coal employers have been advanced over the last several years. These proposals were influenced by the July 2012 bankruptcy of the Patriot Coal Corporation, an employer with coal mines in West Virginia. Certain types of pensions are guaranteed by a quasi-public agency, but no such guarantee exists for retiree health insurance. In short, employers in chapter 7 bankruptcy usually are unable to fund any retiree health benefits and are able to pay pension benefits only if their pension trust fund has sufficient assets. The relationship between labor and management in bankruptcies involving collective negotiations depends on whether the union is a single-employer union (such as the UAW), a multiemployer union (such as the UMWA), or an association (such as the DSRA). Most unions are single- employer unions in which representatives of one employer's management and the union (on behalf of the employer's employees) bargain over the terms and conditions of employment. (These categories are related because active employees may someday become retired employees.) Pension plan sponsors generally may not reduce workers' vested pension benefits. To fund its benefit obligations, the PBGC collects insurance premiums from employers that sponsor insured pension plans, receives funds from the pension plans it takes over, and earns money from investments. The insurance premiums are set by Congress. If a participant in a terminated pension plan had been promised a pension greater than that amount per month from the employer, he or she would receive a lower monthly pension from the PBGC than had been promised by the employer. The PBGC never becomes the trustee of a multiemployer plan. Two multiemployer pension plans are thought to be a particular threat to the multiemployer trust's overall solvency. The original pension plan must meet five conditions to be eligible for partitioning: 
1. the plan must be in critical and declining status; 2. the plan sponsor must have taken all reasonable measures to avoid insolvency; 3. the PBGC must reasonably expect that the partition will reduce its expected long-term loss from the plan and that the partition is necessary for the plan to remain solvent; 4. the partition must not impair the PBGC's ability to meet existing financial assistance obligations; and 5. the cost of the partition must come from the PBGC's multiemployer fund. Protections for Retirees' Health Insurance: VEBAs

ERISA does not require retiree health insurance benefits to be prefunded. One way to guarantee at least some funding for health insurance benefits is for the (active and/or retired) employees to form a Voluntary Employees' Beneficiary Association (VEBA). Nevertheless, the creation of a VEBA cannot be characterized across-the-board as a victory for either the employer or the employees; each individual VEBA differs with respect to funding levels and other terms, and the funding levels and other terms themselves depend on the relative bargaining power of the employer and employees. For current and future retirees to receive promised benefits there must be sufficient funds in the VEBA to cover the cost of benefits. The calculation of the level of funding needed to meet such a guarantee typically involves forecasting the following variables:
the expected date of retirement for each employee working on December 31, 2014; each employee's (and his or her covered family's) life expectancy; each employee's (and his or her covered family's) health care utilization over time; the rate of medical inflation over time; the return on the VEBA trust's assets over time; and changes in the tax code affecting the value of the VEBA. Some VEBAs are created as part of the course of doing business, and others are created during chapter 11 bankruptcy proceedings. Financial negotiations can be contentious. The remainder of this report provides three examples of bankruptcy proceedings in unionized entities where the retirees' pensions and health insurance benefits received substantial federal attention. The first example is Old General Motors and the United Auto Workers, the second example is Delphi and the Delphi Salaried Retirees Association, and the final example is Patriot and the United Mine Workers of America. Despite this underfunding, pensions were not a central bargaining issue in the late 2000s. Pension controversies did emerge after the bankruptcy. During the 2007 contract negotiations, Old GM agreed to contribute a percentage of its projected retiree health liabilities to an independent VEBA intended to fund retiree health benefits for 80 years. Because Old GM had a large debt load and no cash flow when it entered bankruptcy, the UAW accepted a contribution of stock in New GM. These retirees did not receive the same pension and retiree health benefits as the unionized retirees. Once the PBGC assumed responsibility for the remaining Delphi pensions, some Delphi salaried retirees (who were not union members) saw their pension benefits reduced because their monthly benefit (as previously promised by Delphi) was larger than the statutory maximum benefit. Patriot was formed in 2007 as a spin-off company from Peabody Energy. It provides retiree health benefits for UMWA employees (and their surviving spouses and dependents) who retired on or before July 20, 1992, and did not have another source of retiree health benefits because they were orphan retirees.
Benefits for retired employees are of particular interest to policymakers, who often are concerned with the income security of retirees, a large and fast-growing population. One aspect of this congressional concern is what happens when bankrupt employers are unable to provide promised pension and health benefits to their retired employees.
In chapter 11 bankruptcy reorganization, the employer receives protections against its financial commitments in the hope that it may once again become profitable. This protection could include not having to honor obligations concerning pensions and retiree health insurance. Its employees may therefore be at risk of not receiving some of their promised benefits. Unionized and nonunionized employees may be treated differently under the law because unionized workers have a legal contract governing their terms and conditions of employment.
The costs to employers for the pension, health insurance, and other benefits promised to retired employees are known as legacy costs, and different costs are subject to different federal laws. Although employers are required to prefund their defined benefit pension trusts, the level of required funding may not be present as the employer enters bankruptcy. The Pension Benefit Guaranty Corporation (PBGC), a quasi-public agency, monitors the finances of pension plans. The PBGC becomes the trustee of and pays benefits to participants in terminated, underfunded single-employer pension plans. PBGC benefits are subject to a statutory maximum that may be less than the retiree was promised by his or her employer. The PBGC has been running deficits for several years, and the deficit for one of its two programs is at an all-time record high. PBGC funding comes from employer premiums set by Congress, the assets of the plans it takes over, and investment returns. There is no taxpayer funding.
Some retirees receive health benefits from their former employer. Retiree health benefits, however, are not insured by any public agency, and employers are not required to prefund health benefits. However, health benefits (for active and retired employees) can be funded through a tax-preferred trust fund known as a Voluntary Employees' Beneficiary Association (VEBA). When an employer and union agree to form a VEBA, and it is approved by a bankruptcy court, the employer generally contributes a collectively bargained level of funding to the VEBA. Providing this contribution usually fulfills the employer's total responsibility for retiree health care. All subsequent retiree health benefit decisions are transferred to the trustees of the VEBA. (VEBAs often are created outside of bankruptcy and are not restricted to unionized work places. In addition, VEBAs may be funded by employers only, by employees only, or jointly by both employers and employees.)
After a discussion of these issues, this report provides three examples of bankruptcy proceedings in which the retirees' pensions and health insurance benefits received substantial federal attention: the General Motors Corporation, the Delphi Corporation, and the Patriot Coal Corporation.
During bankruptcy proceedings for the General Motors Corporation (commonly known as Old GM or pre-bankruptcy GM), retiree health benefits were central and pensions, although underfunded, were not a major issue. Old GM's main union, the United Auto Workers (UAW), accepted stock in the General Motors Company (commonly known as New GM or post-bankruptcy GM) as a partial funding source for its retiree health care VEBA, which has covered retiree health benefits since 2010. The VEBA was intended to cover retiree health benefits for 80 years, but it is unclear how long its funding will last.
Pensions were a central source of controversy during the Delphi Corporation's bankruptcy. Some (union and nonunion) employees had been promised a pension greater than the PBGC maximum. When the various Delphi pension plans were terminated by the PBGC, most unionized employees did not see their pensions fall because of supplemental pension coverage originally negotiated by Old GM and the UAW. The salaried Delphi workers, however, had no union, and some found themselves receiving lower pension benefits than had been promised by Delphi. Salaried workers formed a labor association, the Delphi Salaried Retirees Association (DSRA), with hopes of strengthening their position. The DSRA has been unsuccessful in its efforts to have its members' pensions increased, and a subsequent court case has not yet been settled.
Both pension and retiree health benefits were central to the complicated and contentious negotiations during the bankruptcy of the Patriot Coal Corporation. The relevant union, the United Mine Workers of America (UMWA), is a multiemployer union in which the collectively bargained contracts cover the employees of many employers. The UMWA Pension Trust was underfunded before the Patriot bankruptcy, and it remains underfunded today. In fact, some consider the potential insolvency of the coal employers' pension plan a threat to the overall solvency of PBGC's program on multiemployer pension plans. Because many Patriot retirees were employees of another employer, Peabody Energy, when they were actively working, the bankruptcy court ruled that Peabody, and not Patriot, was responsible for funding the VEBA created to cover health benefits.