Reforming Bankruptcy, Part II: Worker Rights

During the past three decades the rights of workers have steadily been scaled back through unfavorable laws and regulation, as well as the from the impact of global wage competition.  During the current period of financial stress on governments and business, plans are afoot to further scale back worker rights and benefits, when in fact just the opposite policies ought to be supported as an increasing number of workers face economic jeopardy.

A previous StickyFeet post, BP Oil Spill: Reforming Polluter Pays, argued for reforming bankruptcy law to give priority in liquidation to environmental contingencies, which currently rank below secured creditor claims along with all other unsecured creditors.  There is a similar argument for providing worker liabilities, such as promised pension and healthcare benefits, the most senior priority in liquidation, above secured creditors.

The current and reform bankruptcy regimes are laid out below.

Priority in Bankruptcy – Current Regime:

a) providers of financing under bankruptcy (interim creditors)

b) secured creditors

c) unsecured creditors (trade creditors, other unsecured creditors, environmental liabilities, employees)

d) shareholders

Priority in Bankruptcy – Reform Regime:

a) providers of financing under bankruptcy

b) environmental liabilities and liabilities to employees (wages, salaries, pension and healthcare benefits)

> [Environmental Liability Insurance Cushion]

c) secured creditors

d) unsecured creditors

e) shareholders

Under current law, promised pension and healthcare benefits can be extinguished or scaled back, particularly to the extent they are underfunded, which is often the case for companies that have been in a period of financial distress.  An outcome where worker benefits are extinguished or significantly reduced, leaving many close to retirement without adequate means to support themselves is inefficient.  Of course, it falls upon government to then support such workers, through government programs.  Some of these costs will be born by the social security, Medicare and Medicaid systems, but there are other explicit costs as well, such as when the federal government’s Pension Benefit Guarantee Program, (“PBGP”) assumes certain pension liabilities of bankrupt companies.  The costs to the government of assuming these worker benefits are significant and represent a corporate subsidy in the form of an externality – private companies are able to offload a significant portion of their costs onto taxpayers.  But why should this be acceptable?

An economically efficient solution would ensure that companies bear the full cost of the benefits they promised their workers by imposing a legal regime that reduces to a minimum the probability that companies are able to push costs off to taxpayers.  An elegant way to do this is to provide worker benefits priority in liquidation above secured creditors (along with environmental liabilities).

Prioritizing worker (and environmental) claims above all other claims in liquidation would represent a tectonic shift in bankruptcy law, but capitalists in good standing ought to support the measure for the effect to to remove an existing corporate subsidy.  Some will argue that such a reform regime will increase the cost of doing business, but this is balderdash.  What they really mean is that it will increase their cost of doing business, because it will force companies to internalize costs which they are currently externalizing to taxpayers.

Under a bankruptcy regime where worker and environmental liabilities receive top priority in liquidation, bondholders and other debtholders would have significant incentive to act as an additional check on management activities.  In all likelihood, bondholders would force companies to carry additional insurance to ensure worker and environmental liabilities are covered, and the management of pension and other benefits would improve.

There is a downside – prioritizing worker benefits above secured claims would likely hasten the move away from defined benefit pension plans and towards defined contribution plans.  But this trend has been underway for decades.  The more significant concern now is that companies (and municipal and state governments) entering bankruptcy in the coming years and decades will seek to extinguish worker and environmental liabilities long-established and promised.  In most cases workers should not be blamed and asked to absorb the cost of over-promised benefits and underfunding due to mismanagement.

A contract is a contract is a contract is the mantra for promised management compensation.  The same should apply to promises made to the average Joe.

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Inside the box thinking. And plotting.

StickyFeet blog – Energy Analytics: Peak Oil, Politics, Economics, Environment, Green tech, Alternative Energy, Finance and Investing

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