Bankrupt Newspapers Leave Employee Unions and Government Corporation Holding the Pension Bills

It has not been a good month for newspaper unions at bankrupt newspaper companies or the government corporation that insures pension funds. As part of their reorganizations, a number of bankrupt newspaper firms are not paying money owed union pensions or are quietly letting the guaranty pick up the tab for retiree costs.

• Unions of Philadelphia Newspapers LLC (The Inquirer and The Philadelphia Daily News) were forced to accept 12 cents on the dollar for the $12 million the bankrupt company owned to employee pension plans as part the reorganization plan.
• The Chicago Sun-Times off-loaded $49.1 million of its underfunded pension obligations for 2300 retirees and employees to the Pension Benefit Guaranty Corp. The paper and it suburban subsidiaries were purchased out of bankruptcy without the new owners assuming the pension obligations.
• The Dayton News Journal dumped $15.4 million in underfunded pensions payments on the Pension Benefit Guaranty Corp. , which will ensure 1,100 current and former employees receive benefits owed to them. The newspaper and its assets were purchased out of bankruptcy by Halifax Media, but it did not take on the pension liability.

The Pension Benefit Guaranty Corp. is a federal corporation designed to protect pensions when company-run pension funds collapse or cannot pay agree benefits.

These types of problems occur when money due for benefits is not paid into pension funds or money is removed from company-run funds by the company. When this occurs companies use the money for other purposes: increasing liquidity, paying bills, giving executive bonuses, etc. However, this creates problems if the company ceases operating or if liabilities of underfunded pension obligations weigh too heavily on the balance sheet.

Existing laws allows employers to take money from company-run funds if they are overfunded, but do not require them to immediately fully fund them when they are underfunded. Overfunding and underfunding, however, are normal conditions caused by fluctuations in stock and bond markets in which pension funds are invested. Because overfunding and underfunding tend to even out over time, companies using the funds like a bank can create problems. Even when pension funds are not run by companies, delays in paying obligations create problems if the company closes or goes into receivership.

Newspapers across the U.S. have carried large stories about pension payment problems at other bankrupt companies, but coverage of the problems at their newspaper colleagues have drawn scant attention.

BANKRUPT NEWSPAPERS GIVE EXECUTIVE BONUSES

Failure isn’t what it used to be. Bankrupt newspaper companies are following the lead of AIG and Lehman Brothers and rewarding executives with large bonuses. The Tribune Co. is trying to pay out $13 million in bonuses, the Journal Registers Co. is trying to pay $2 million, and Philadelphia Newspapers has already given hundreds of thousands in bonuses to its corporate officers.

Company spokesmen say the bonuses make good business sense by rewarding good performance and keeping executives from leaving the companies. Both arguments are hollow. The first rationale rewards performance in running the companies into the ground and the retention rationale assumes other newspaper companies are hiring and would want to hire the tainted executives.

The issue of bonuses has emerged because newspapers filing for bankruptcy are not liquidating, but using Chapter 11 to create reorganization plans that will allow them to change the terms of the debt and union contracts. They have to seek approval from the bankruptcy court for their expenditures.

It is true that most of the papers in these bankrupt companies are making operating profits, but their corporate parents are losing money. The fact that profits exist are one of the reasons the companies have been petitioning the bankruptcy courts to allow them to pay bonuses. Not surprisingly, company debt holders—including states that are owned taxes—are not too happy with the idea and employees who have suffered layoffs and wage concessions are rightfully resentful.

The bonus debacle is yet another indication that the bankruptcies were created in the board rooms and corporate offices, not by the economic downturn. Poor corporate and management decisions are their root problem.

The newspaper business is clearly hurting because of the recession, but it is not a unique phenomenon. About once a decade for the past 50 years, recessions have played havoc with newspaper revenues, but the industry has survived them. Poor economic times, however, push companies whose managers have not paid sufficient attention to their balance sheets into financial crises and bankruptcy.

The last time we saw such wholesale problems was in 1991-1993 recession. Ingersoll fell into insolvency in 1991 and was broken up after its use of junk bonds for financing backfired. The New York Daily News went into bankruptcy that year as part of the collapse of the Robert Maxwell house of cards. United Press International went into bankruptcy in that recession as well. All three were victims to poor managerial choices made earlier and their positions became untenable in the recession.

History is repeating itself.

The bankruptcies today are the result of companies surpassing their financial capabilities and because executives have exceeded their own abilities to manage the firms. Some newspaper executives unwisely loaded their companies with enormous debt to make acquisitions and others are in trouble because the cumulative weight of poor management over a period of time has finally caught up with them.

Most newspapers, however, are surviving the downturn and will be serving their communities for many years. They are responding to the poor advertising climate with responsibility and thrift--NOT by giving executive bonuses that should be used for strengthening their businesses.

BANKRUPTCY AND NEWSPAPER FIRMS

The bankruptcy filings of the Minneapolis Star-Tribune and Tribune Co. are cast by many as a sign of the continuing decline of the newspaper market. However, it is noteworthy that neither firm is owned by a company with a newspaper heritage, but by firms in the newspaper business primarily for financial gain. The Tribune’s owner is from the real estate business and the Star Trib’s is from private equity.

There is no doubt that the newspaper business is facing a difficult time now, but the business origins of the owners are important because their perceptions of bankruptcy, how the community will react, and how the company will be seen afterwards are colored by the norms and mores of those business fields.

Newspaper companies have long played special roles in communities, exercising social and political influence, and promoting corporate responsibility, accountability, and community standards. Publishers and editors have typically sat with the other civic leaders on boards and committees of chambers of commerce, community development organizations, foundations, and local offices of the United Way and the Better Business Bureau.

The roles and influence of newspaper executives were founded on their standing in the community and of perceptions of their respectability, community interest, and fiscal dependability. Newspaper publishers and editors would loathe any hint of financial instability or impropriety that would mar those views. The reputation of the newspaper and its brand were inextricably linked.

Newspaper companies have survived depressions, recessions, war, and all kinds of economic uncertainty in the past. They did so because they were financially solid companies with equity structures and balance sheets that allowed them survive very uncomfortable financial circumstances. Companies like the Tribune Co. and Star-Tribune are based on weaker foundations and come from cultures in which bankruptcy to reduce debts or abrogate contracts—hurting local businesses and their own employees--is just another business tool.

As I have previously discussed in this blog, there are a number of companies with long newspaper histories that are carrying significant debt or struggling with investors. It will be interesting to see how they handle their economic crises and the efforts they make avoid the stigma of bankruptcy. I suspect most will find other ways of dealing with their financial predicaments--unless they feel that the Star-Tribune and Tribune Co. choices have changed the norms for the entire industry.