Senator Bob Casey (D-PA), as reported in the Wall Street Journal, has introduced legislation that would put the burden of underfunded union pension plans on the Pension Benefit Guaranty Corporation (PBGC), the equivalent of the FDIC, and have taxpayers pick up the tab. However, Casey and the others missed the multiple negative impacts—if passed.

Taxpayers will feel pain from the bailout because the cost could be upwards of $10 billion dollars to bail out the teachers union pension funds alone. The problem is what is the alternative? If the pension funds are not bailed out, unfunded liability could deprive workers of pension benefits and prevent owners of unionized companies from selling their businesses because of pension withdrawal liability. In addition, family run businesses will face the ugly prospect of personal liability if/when the business closes down due to the death of the owner. The burden will fall on the family when it is least affordable.

Retired union members will feel pain. While the Casey bill is supposed to help unions, it doesn’t. Rather, the bill could cripple already-retired union pensioners. If the PBGC takes over, pensioners could find annual payments capped at $21,000, because there is only finite amount of money to go around. The PBGC could reduce existing pensions down to $21,000 a year. Not bad you say? Tell that to the retired Laborers and Machinists who currently are getting $60,000 a year in retirement benefits. How do they now live with a $39,000 year pay cut, while they are retired and living on a fixed income for the rest of their life while everything is going up in cost?

How bad the bite this might be will depend on the industry from which retiree came. For example, a 62 year old retiree with 32 years on the job with a particular auto mechanics local will be face a 32.5% reduction in his or her pension based on how much the PBGC has to play with and how much is left in the company’s pension fund. If this is help, they might not want it. “Thank you, Congress,” said one nationally known labor attorney. “Thank you for what?”

It will be interesting to watch how Congress treats this issue. Few companies facing the prospect of unfunded liability have the wherewithal of UPS, to pay its $6.1 billion liability to get out of the Teamsters underfunded pension plan. Smaller employers need to be aware of their potential liability if they are contemplating a sale of their business or even a reduction in force. While generally, absent certain circumstances there is no personal liability for business owners, nonetheless, union pension plans often accuse the union shops of committing a fraud to avoid withdrawal liability when they sell their assets and not their businesses. Consequently, business owners in this position should select their counsel carefully.

Business owners with union contracts, pay attention. Companies that lay off workers and have partial withdrawal liability may find themselves faced with a new but old weapon being resurrected by union pension fund counsel.

There is a little known provision in ERISA that allows a union pension fund to seek injunctive relief for the nonpayment of benefits. Some aggressive fund counsels are using this provision to get federal judges to shut down businesses that don’t pay partial withdrawal liability. They also are using it in fringe benefit delinquency cases.

In the past year there have been no fewer than six court orders of this sort issued by judges in the Chicago District Court alone.

Union auto dealers beware. In the last year in Chicago alone, Federal Judges Pallmeyer, St. Eve, and Norgle have all granted injunctions to union fringe benefit funds shutting down business or escrowing proceeds from asset auctions of businesses involved in fringe benefit fund litigation.

No one is bullet proof. In one case, Judge Norgle was about to shut down an armored car business that was a government contractor and did work for the CIA. The company and a related contractor protested that the judge was delaying delivery of vehicles needed for national security. The judge noted he was not afraid of the CIA, but that the company should be afraid of him. They paid the claimed amount owed in 48 hours.

The problem is not going away soon. The stock market plunge and the slowdown in the economy hit union pension funds very hard in their investment portfolios. As a result, many previously solvent pension funds now have what is called “unfunded liability.” That means they technically don’t have enough money to pay all the people to whom they owe pensions. Of course things could (and likely will) change over the coming years when the markets recover and when work returns to normal. However, job estimates are bleak. Some economists forecast that it will take until 2013 to get back to 2007 job levels. And, because of the way the liabilities are calculated, it could take another 5-10 year before business owners are in the clear. As a business owner, do you have the time to wait?

When a union shop closes down or tries to sell to another company it has to pay the union pension fund its share of withdrawal liability. The liability for a small company, such as an auto dealership, these days is averaging in the $1– 2 million plus range. If the company is trying to get itself sold, that kind of liability can kill the deal. Besides, in the retail auto industry and others, there is such a thing as the “control group” theory, which assesses withdrawal liability against the entire control group, so all of a car dealer’s related enterprises are involved.

Contractors and employers need to be wary of this new tactic. It is devastating to be shut down by court order for any period of time. If some companies are shut down long enough, when the stay is lifted there may not be a company left to reopen.

The Meyers Report got it right again. Just as we had predicted in our June 14th, 2010 newsletter, Rod Blagojevich was convicted on only one minor count out of a 24 count indictment; his brother was convicted of none. The jury was hung on all other counts. Score yet another victory for jury consultants. They were successful in the rape trial of William Kennedy Smith, they got OJ off (”if it doesn’t fit you must acquit”) and they convinced the Blagojevich jury that being a braggart, a blabbermouth and a sociopath are not criminal offenses.

As far as the offense he was convicted of, lying to the FBI, everyone lies to the FBI. That’s not unusual.

But here’s the rub. A hung jury is not an acquittal. The prosecutor can retry this case as many times as he wants unless the judge stops him or unless the Justice Department stops him.  Judge Zagel could but is unlikely to throw out the counts where the jury hung and acquit Blagojevich on his own.  He is unlikely to do that because Zagel was the head of the Illinois Bureau of Investigations before becoming a federal judge.  He regularly takes target practice on the FBI firing range in the basement of the Federal Building.  This is not a judge who is likely to acquit anybody let alone a governor who escaped conviction by a hung jury.  The Justice Department is unlikely to stop Fitzgerald because the political implications would be enormous. Fitzgerald is unlikely to be able to restrain himself. He recently tried a criminal case three times in Brooklyn until he got a conviction so he is not going to stop at one trial here.

The problem is that the second time around, since Blagojevich is now broke, the taxpayers will pay not only for the prosecution of the former governor and his brother but also we will pick up the tab for Blagojevich’s defense. Is that fair?

And, is it fair that the government has unlimited resources to continue to prosecute someone when it is clear the evidence against them is circumstantial and weak?

In recent memory this is the closest anyone has come to an acquittal in federal court since the one acquittal that was obtained in the Graylord cases back in the early 1990s. Other than that the U.S. Attorney’s office is batting 1000. How is it possible that so many people are guilty. Could it be that the average citizen doesn’t have the resources to fight the government?

Perhaps what has happened to Blagojevich is a good thing for all of us. Perhaps the U.S. Attorney’s office needs a little humility.

Home prices are still 28% or more from their peak in April of 2006, according to the HPI (Home Price Index) of San Francisco-based CoreLogic. However, prices in some states are showing a modest increase over the past four months.

Of the major metro areas, the most significant improvement came in greater Los Angeles, the scene of some of the largest declines and does not necessarily mean great gains everywhere. Other major metro  areas, such as Philadelphia and Chicago are still seeing price declines.

12-month HPI Change for

June 2010

Single-family Excluding

Distressed                All

Major metro areas           

Philadelphia PA                             -2.2%                -2.8%

Chicago-Joliet-Naperville IL         -1.3%                -3.2%

Phoenix-Mesa-Glendale, AZ         0.1%                 -4.7%

Dallas-Plano-Irving, TX           0.5%                 0.9%

NYC-White Plains-Wayne, NY-NJ   1.8%                 2.8%

Houston-Sugar Land-Baytown, TX  3.7%                 0.7%

Atlanta-SandySprings-Marietta,GA   3.9%                 -0.4%

LA-Long Beach-Glendale, CA   4.6%                 4.7%

D.C.Arlington-Alexandria-VA-MD-WV4.9%                 4.8%

Riverside-SanBernardino-Ontario,CA 8.0%                 4.1%

The Illinois legislature recently increased the remedies available to employees under the Illinois Wage Payment and Collection Act (WPCA). The amendment, which takes effect January 1, 2011, strengthens an employee’s ability to bring claims against employers who fail to timely pay an employee’s wages, final compensation or wage supplements.

Specifically, the amendment allows the Illinois Department of Labor (IDOL) to establish administrative procedures to adjudicate smaller claims ($3,000 or less per individual employee) filed with IDOL. These procedures may address instances where an employer fails to timely respond to a notice of claim issued by IDOL.

The amendment allows an employee to recover 2% of the amount owed each month that the underpayments remain unpaid. This is a significant departure from previous law where: (a) the 2% penalty previously was payable only to the State, not to the employee; and (b) the employer was required to pay the penalty amount only if IDOL formally determined that the underpayment was owed and the employer failed to pay it in a timely manner.

Employees may now proceed directly to circuit court to obtain relief under the WPCA. If an employee prevails in such a suit, employers will be subject to paying the employee’s costs and reasonable attorneys’ fees as well.

The preceding amendments to the WPCA provide employees who believe they are owed wages with new incentives to assert claims against employers. The incentives increase the potential for claims and enhance employers’ potential exposure. Other  changes include: (1) making both first and repeat wage theft violations more serious crimes; (2) increasing civil and criminal penalties for violations; and (3) allowing employees to file class action lawsuits against employers for alleged WPCA violations.

Also, Illinois employers cannot force their employees to accept the employer’s method of payment of wages. For example. they cannot force their employees to accept direct deposit.

Under state law, the Illinois Wage Payment and Collection Act, an Illinois employer must pay each of its employees his/her wages in a form that the employee may readily convert into cash (without the need of a personal bank account), unless an employee freely volunteers to be paid by direct deposit in an account at a bank or financial institution of his/her choice.

This law means that in Illinois, an employer cannot force (by means of a company policy) employees to accept “direct deposit” as a method of payment. In Illinois, no employer can designate a particular financial institution, bank, savings bank, savings & loan, or currency exchange for the exclusive payment or deposit of a check for wages. Illinois employers cannot arrange for payment of wages by direct deposit unless the employee freely designates a bank or a financial institution.

Under Illinois law the employee, not the employer, is the decision maker as to whether the employee will accept payment through a direct deposit system. If an Illinois employer violates the law in this regard, the IDOL may issue a notice of violation to the employer with potential legal consequences.

There is a case pending against an employer who pays his employees with a debit card. The issue is the use of ATMs. If the employee uses his/her own bank, there would be no charges. However, if the employee uses an ATM from another bank, there could be a charge of $1.50 to $3.00 per such transaction. The lawsuit is charging that the employer is choosing the method of payment, not the employees so that is one violation of the Act; and, that because the employees are getting ATM charges they are not getting their full wages. The lawsuit would hold the employer liable for these losses, even though the employer has no control over the employee’s spending habits. Multiply this by the company’s 10,000 employees and you have a potential disaster. The key is the employer chose the method of payment. The employees did not agree.

Bottom line Employers need to consult with their labor law experts to avoid getting themselves into liability situations that could cost millions.

By force of habit, people tend to think that trends must always continue, even when we all know that change is inevitable. That’s why when home prices and the real estate market were rocketing skyward, investors thought it would never end—and then it did.

The same may be true today, but in the reverse. There is an enormous amount of money being held by stock investment funds that continue to bet on a declining economy and are short selling everything from stocks to real estate. Then there are the corporations and real estate investment funds that are holding cash waiting for a recovery and doing nothing in the interim. In the end, while these folks cannot stop a recovery, maybe they are delaying it.

We are getting reports of increased construction orders coming in from around the country. We also are hearing about increased business-to-business activity that is looking for financing and finding some relief from asset based lending and other non-bank sources.

The new home building market is showing no improvement. “The guys who were hoarding cash are now showing up to buy finished land. There still is no economic reason to buy raw land, because finished land is cheaper than the cost of improving raw land, even if you got it for free,” said housing expert Steve Hovany of Schaumburg, IL-based Strategy Planning Associates. The average new home project is still doing 0.1 sale per week, though last week it was 0.2 units sold.

In the meantime, almost half of home sales in Illinois are foreclosure and short sales. Until that works its way through the system it will be rough on the new homebuilders. The entire national new industry is shifting to a smaller, more affordable product for new homebuyers.

The federal government has pumped almost two trillion dollars into the economy and yet unemployment is roughly at 10%. Job losses have been so severe that it would take us until 2012, or later, to recover the jobs lost in the last year even if the economy fully recovered today.

During this great recession, entire sectors of the economy have been almost wholly wiped out. The new home construction industry has been virtually dead for three years with no hope in sight. Most of the major companies, especially those on the regional level have gone out of business with 90% or more of the subdivisions being shuttered. Only now are a few back in business, but primarily as bank liquidation sales. The stock market occasionally rallies but seems stuck in the mid-10,000 range. And banks aren’t lending.

What “is” going on?

Some are calling the lack of economic activity a “capital strike” by big business. The large companies are sitting on the sidelines with cash reserves and they are not spending. They don’t like the trend toward closer government scrutiny of business practices, such as in the banking reform bill. They are worried about deficit spending. They have no confidence in the Administration and think we are heading in the wrong direction. So, they continue to sit on the sidelines and not spend their money.

What will it take to end this capital strike?

Some have suggested that the Administration get a handle on deficit spending. The Administration is trying to do that, but it is hard to cut the budget when people are out of work and need unemployment benefits extended.

One place the government hasn’t looked, which is drawing the attention of some conservative Republicans and progressive Democrats, is the defense budget.

The Republican Party, before World War II, was against foreign entanglements. The party traditionally was isolationist. Even after World War II, the biggest slasher of the defense budget was President (General) Eisenhower who mothballed and took more ships out of service than any President in history. As he left office he warned of the military industrial complex, which we now have learned from his granddaughter, was meant to be the military, industrial, congressional complex. Ike left Congress out of his speech because he had success working with some members of Congress in cutting the defense budget.

Do we really need a naval base in Okinawa when the Japanese people want us out of there? That “Cold War” need is over. During this time the Japanese rebuilt their economy without having a defense budget—because we covered it.

Do we have to have troops in Europe to defend against a Russian threat? And, if the Russians are a threat, why can’t the European nations deal with them? Our help would still be only a plane ride away.

Do we need to create more government agencies, such as those called for under the Financial Institution Reform Act? Why not skip the addition of new bloated agency executive administrations. Rather, we should make our existing agencies more effective, with more resources?

There are a lot of ways we could balance the budget and accomplish the goals both parties in Congress are interested in.

The Bottomline

Isn’t it time we gave it some consideration?

Good news. Steel sales are good and they are going for domestic manufacturing of automobiles for export to China. GM is the beneficiary of this large increase in Chinese buys. The hot brands that the Chinese want are the Chevy Malibu and Buick Regal.

These export sales are enabling GM to keep open a large plant in Fairfield, Kansas, plus a large number of suppliers supporting those product lines.

Industrial infrastructure in trouble. Everyone is aware that our infrastructures need to be replaced. We have old roads, highways, water and electric systems generally past their prime. The same is true of a major portion of our industrial infrastructure.

A majority of the existing oil pipelines are at the end of their industrial lives as natural corrosion and wear from extended use occurs. The problem is that accidents are going unreported or under reported which is allowing management to use band aids to keep things running and costs down while ignoring possibilities of inevitable catastrophe.

Insiders say that U.S. steel companies are having, but not reporting, mishap after mishap. Thus far there has been no loss of life. However, a serious problem is just a matter of time.

The reason: Upper management is putting meeting budgets ahead of safety. Their plant managers are given strict budgets and are doing things cheaply rather than with quality and safety in mind. The budget system forces the locals to make decisions that upper management wants while shielding the “suits” from responsibility. This is happening in plants all over the country and is symptomatic of a dangerous thought and management process that is crossing state and industry lines.