Monday, December 26, 2005

Plans for the blog

Plans for the blog:

Well, my team lost. Life is like that at times -- you move on. I did promise to keep the blog up and running until after the new contractor takes over on June 1, and I will still do that. After July 1, though, I will shut it down. Between now and the feel free to use it to discuss transition issues that are important to you. Between now and July 1 I plan to gradually disengage from LANL, the blog, all the troubles on the Hill; the whole enchilada. It's way past time to put Los Alamos in the rear view mirror. I must say, though, it has been both a pain, and a pleasure running this beast since December 28, last year. I am more than ready to do pull the plug now.

So adios in advance, good luck to you all, see you next time around.


As Edward R Murrow said "Good Night and Good Luck".
Best wishes Doug. Your efforts in communication have been extremely valuable. I'm sorry you feel your "team lost". My support
has always been for Los Alamos, regardless of who runs it. We are mostly at the mercy of the DOE/NNSA and it is only the long term vision and expertise at the Lab that has kept the nation secure in the areas of the Lab's responsibility. I still believe the Lab is critical to the nation regardless of the manager. This doesn't mean I think that a good job has been done by the management, but the importance of the work far exceeds the difficulties and the inability of the DOE to oversee it. There will be many changes in the coming months, but these also shouldn't detract from the critical long range mission of this Laboratory that was set in motion more than 60 years ago.
For better or for worse, I'll never look at the management that runs our
beloved LANL quite the same way as I did before this blog. Thanks for
the new view, Doug. You've open the eyes of a lot of people on the Hill.
It's been painful to watch at times, but necessary. Hopefully, we're all
a bit wiser, thanks to your efforts.
As with much of your site, your post "Plans for the blog" shows your disregard for facts and details. LANS will take over the new contract on June 1st, not July 1st as you indicate. You might consider this to be a picky detail, but I think it well represents this blog's inability to acknowledge reality.
This post has been removed by a blog administrator.
I actually think July 1st is a more plausible date given DOEs innability to meet deadlines so far. Amb. Brooks is still quoting June 1 but I would expect it to move out to at least July 1st since there is still so much to do. Even if it doesn't, having the blog available during the first month under the new contractor would be very useful.
GoodShowWot: you are an ungratefull turd. There may be a mistake or two in the postings by Doug and others, but that should not detract from the efforts put forth by them. The blog has provided us with a whole lot of information that was unavailable from LANL and UC. If there is the odd mistake or typo, we can live with it.
"Reality" is indeed the issue.

David said, "The Lab is critical to the nation regardless of the manager." Sorry David, but the Lab's value is throttled by both the local and Federal management. My observation while working for the Lab was that employees over-valued their contributions and management let them.

Good2go said, "our beloved LANL..." Pahleese! Beloved?? What would Todd say? I love my country and gain benefit from being an American. I never "loved" LANL as an employee but worked there as a means to serve my beloved country. When LANL became so dysfunctional that I could no longer see success in my profession future, I decided to serve my beloved country elsewhere. Sorry, Good2go, but reality doesn't permit LANL to be "beloved;" that is just a vision of past glories.

The reality is that UC won the contract. I am saddened beyond words that the incompetent management team in place(UC & DOE) will feel as though they've been validated. It is this very team that has the potential to create a vibrant and useful organization or continue it's destruction. Sadly, I lament it will likely be more of the same - a continued long-term slide to oblivion.

So Doug is right, it is time to put LANL in the rear-view mirror of life and close the Los Alamos chapter. I made many good friends and got to serve my country. Adios Los Alamos, I wish you the best.
Dear Doug,

Pay no attention to those who claim your blog was responsible for misinformation or sometimes pointed out the thugs who run the joints, since what you gave to your community since December of last year was an avenue by which people could voice their opinions and post facts, brining to light just how those who make the big bucks are corrupt and crass. Your blog has done more for the two labs then you could ever imagine and for that the people of LLNL are grateful, since we know we're next. Believe me when I say that your blog will be responsible for more change at LANL and LLNL then you can imagine. It gave those with a brain, hopefully 32,000; time to prepare for what is to happen. My only hope is that the people who got the shaft will in fact walk off the job in masses to the point where both labs are left with a population of totally disqualified people on hand, and not enough to even open the doors or conduct business. Truthfully this is the only way the people can get the point across and make those at the top understand that the job is not their life and going to work for thirty years is all about "retirement and medical benefits", and nothing else. So with that Doug I would like say thank you on the half of all of those at LLNL for having the intestinal fortitude to do what you have done. There are very few people in the world that would do the same. Most I have found to be gutless and annelids, which is exactly what DOE and NNSA are banking on. Take care and enjoy your life. LANL and LLNL are not where it is anymore.
Coming in 2006.
A Congressional Inquiry of the contract award to UC/Bectel.
colormegone said
"Lab's value is throttled by both the local and Federal management."

If you read my post, you see that I agree with you. Your comment has nothing to say about the value of the Lab to the nation. All parties involved (particularly DOE/NNSA) seemed to be trying to destroy the Laboratory, but the nation will suffer as a result. The nation can't afford not to have a Lab like Los Alamos. I've worked at the Lab for 37 years partly because it was a good place to work and partly because I believe of the importance of the work the Lab does. Poor management at all levels doesn't diminish that, it just makes it harder. What is happening to the Lab is probably a sign of the times when integrity and truth are no longer the sina qua non of work. I can wish for better times, but the Lab is only as good as its people and management has the influence on whether good people come and stay. UC obviously made some bad judgments over the past year but they were simply heaped on top of a lot of unmerited external abuse from years earlier.

I don't believe we are in a state of continuing as before. The management change, I believe, will significantly affect the Lab. I can hope for the better, but understanding the nature of man, I think this is probably unlikely. This doesn't change the fact that this Lab is important to the nation and the nation will suffer if the Lab loses its talent.
Found on the web. I think this says it all.

A Los Alamos Christmas

Twas the night before Christmas and all through the labs came the word from Saint Bodman of the contract we have.

Employees sit quite watching the boob tube in awl, as he swears with a straight face that no politics was involved.

As he spoke to the people whom DOE just screwed, the director was given a signal, do not snooze.

By noon of the same day Michael announced he was through, then jumped on a plane in route to the new.

As we sat by and wondered why Mike's was in such a hurry, the answer was big bucks that loomed in the flurry.

We hear 1.3 million to be exact, as he licks his lips as if they were chapped.

Now say howdy to Miller, Knapp and Shotts, whose pay most likely will quadruple on the spot.

It not about good science, technical achievements or people, but all about fame that can be achieved by evil.

So say goodbye to your retirement, benefits and dreams, since those whom you once worshiped just brought you to your knees.

Is it time for payback as the deadline draws near, where the masses of intellects leave these facilities in fear.

The answer is yes and my you have no fears, for we wish you a Merry Christmas and a Happy New Years
I agree with David. I am for Los Alamos and my friends and colleagues.

In my blog, I tried to provide a place where science and programs could be discussed. I hoped that we could support each other in remaking Los Alamos to be the place we loved and the place that we would recommend to others.

I still hope that this is true. I have gotten some fairly positive information in this direction today.

So, a big thanks to Doug for everything. And a Merry Christmas to those of us who are staying. My wish is that we can help the new contractor make LANL into a place that Doug would choose to return to.

Doug, I have two measures of a man: does he have personal integrity and is he good at what he does. You're tops in both.

Thank you.
I rather suspect that Doug won't want to come back to LANL until all remnants of those you supported Nanos' shutdown are gone. Brooks' continued support of Nanos' actions probably guarantees that this will be never.

Such is life.
great job, Doug---it took guts..... best of luck to you in all future endeavors.
Doug, you did a great service for LANL even if management at LANL, UC, and DOE never give you credit for it. I heartily endorsed the blog as a way for employees to express opinions about LANL policies since postings to the Reader's Forum were censored. And I also endorsed the blog because of the postings about the CREM incident, the shutdown, safety issues, and management issues in various divisions. And I fully accept that you and Brad, along with anyone else who wanted to, used it to express opinions about which of the two teams was the "better".

However, as I believe has been discussed in many comments, the DOE was incapable of writing an RFP and is just as incapable of evaluating the responses. The limitations put on those who could submit bids clearly made it possible only for large defense contractors to be part of the "team". This is contrary to the warning from President Eisenhower about the "military industrial complex" and clearly indicates the direction that DOE plans to take based, I believe, on direction from the current administration.

Because other national laboratories are also facing the same RFP/bid process with the same expectations of being managed by a team such as UC/Bechtel or LM/UT, all taxpayers should be concerned about the fate of science in this country. Even with a dramatic change after the 2008 election, it will be years before we recover from where we are today, in part because of the tremendous deficit and the cost of the Katrina recovery. If the national laboratories are managed by large defense companies with strong ties to Washington, science will be driven by whoever is in the White House rather than by the needs of the nation and the visions of the scientists.

So, Doug, your team "lost", but the real losers are the American people because another national laboratory has become part of the military-industrial complex, forever to be at the beck and call of a for-profit company. And science will take a back seat to the bottom line.

Yes, one can leave Los Alamos, find a job elsewhere, forget the problems here, but that's not the solution when one considers the effects of these "teams" on science in America. Maybe the answer is to push the rules, to think outside the box, and to hire folks who are not afraid of taking a chance, who take the initiative rather than waiting to be told what to do, and who believe in begging forgiveness rather than asking permission. Maybe the answer is to continue to report on the good and bad at LANL and to remember that the money is not printed in Bechtel's or UC's basement but belongs to the taxpayers who deserve to have it spent wisely and to know when it is not. Maybe the answer will be more blogs, challenging the "rules", anonymous mailings to our congressional delegation, and newsletters anonymously posted on LANL bulletin boards.

I was totally disappointed in the quality of the presentations on Thursday. For several hours all I heard was talk that contained no information. It seemed to be all, "we don't know this, we don't know that". Clearly DOE/UC/Bechtel didn't realize the image that they would portray by being so uninformative. I would have thought that they would have been aiming to impress us with what they already had planned. I would have thought that after the deadline for the bid submission, both bidders would have been preparing for the announcement with the idea of really convincing LANL staff of how much better their management would be compared to what currently exists.

The one characteristic of many of the postings have been utter cynicism. It's wearing to read nothing but cynical comments. The blog has a "Running list of wasteful LANL activities". How about a "Running list of wasteful LANL activities with a suggested fix"? How about detailed postings on a complete reorganization from the employees' perspective that would make LANL work better? Here's what I suggest.

1. Elminate all COS's because they contribute nothing.
2. Return budgets to the groups, not the divisions.
3. Eliminate the CIO.
4. Rescind the last 6 months of DI's.
5. Move the property, computer support, HR, and financial people back into the divisions.

How about positive rather than negative? How about a posting that says, "Today I had problems with such-and-such so I talked to xyz who told me how to fix my problem and it worked." Let's move on positively, but at the same time let's make sure that we continue to communicate to DOE and UC that we expect them to do the right thing for Todd's family and that we will continue to remind them of their obligation to treat LANL employees honestly and fairly. And until they have done what's right for Todd's family, LANL employees will not believe that they will be treated honestly and fairly.
The New LANL Contract Documents have been posted

"New LANL Contract Documents

"On December 21, 2005, NNSA awarded Contract No. DE-AC52-06NA25396 to Los Alamos National Security, LLC,
to manage and operate Los Alamos National Laboratory. The Contract's Sections and Appendices are provided below."

Some interesting things, good and bad, depending on how you look at it....


..."The Institutional Plan highlights areas important to DOE/NNSA and aligns with critical DOE/NNSA missions. The HR Strategic Plan, which is subordinate to the Institutional Plan, will be reviewed with DOE/NNSA representatives at least annually.

Contract performance metrics and measures will be developed in partnership with DOE/NNSA. "...."

2) Compensation for Key Personnel. The Contractor shall include in the Contractor’s employment contract with each of its Key Personnel the following: (i) a requirement that the key person’s employment is for a term of not less than two years, (ii) a condition that provides for incentives for longevity of service as a key person, and (iii) a condition that provides for disincentives for early departure."...."

(2) When deemed essential to the performance of work under this Contract, an extended work week may be established at the Laboratory or any portion thereof."..."

SECTION V - PAYMENTS ON SEPARATION (a) Reduction in Force (RIF). When employees are terminated due to a RIF, the following costs are allowable: (1) Pay in lieu of notice. Any employee who is laid off or terminated due to a RIF may be given pay in lieu of the required minimum written notice of termination to the extent permitted by law. Accumulated vacation credit is also paid. (2) Severance pay benefit. The severance payment shall be made in an amount equal to one week's pay for each year of continuous full-time equivalent service (a fractional year of full-time equivalent service of six months or more is counted as one year of service) not to exceed a total of 26 weeks pay. b) Payments upon termination other than RIF. (1) Pay in lieu of notice of termination. When approved by the Laboratory Director, up to 15 calendar days' pay may be paid in lieu of notice 2) Sick leave. Accumulated sick leave is not payable upon termination and may not be used beyond a predetermined date of termination. 3) Vacation. Accumulated vacation is payable at termination or upon extended military leave at the rate in effect as of the date of termination, including any shift differential. (4) Termination upon death. ....."

And the DOE's news release had some interesting notations:

and the

DOE Los Alamos National Security LLC Selected to Manage Los Alamos National LaboratoryNews release December 21, 2005 has some interesting things....

..."Pension and benefits provisions contained in the request for proposal have been accepted and are incorporated into the new contract, such as all current lab employees (except top managers) are guaranteed jobs at the same pay and with substantially equivalent benefits;

Current employees who elect to retire under the University of California Retirement Program (UCRP) are not guaranteed employment with the new contractor, but may be considered for employment with the same pay and benefits offered to other new employees;

Current employees who are not eligible to retire but who want to freeze their benefits under UCRP are guaranteed their job with the new contractor and will receive the benefits offered to new employees; and

New employees will be offered a new benefits package and will be paid using the same guidelines that apply to existing employees under comparable circumstances.

LANL has always been a part of the military sciences, operating
under the auspices of

National Nuclear Security Administration
an arm of the U.S. Department of Energy.

Nothing has changed in that aspect

And if you see the report below from the Secretary of Energy
and the
DOE, there are even bigger plans for the three labs....especially in the way of making bombs and nuclear devices.....

"4.5 Defense Missions and Facility Consolidation at the Design Laboratories
The Task Force believes the three weapons laboratories are national assets." p 19

Report of the
Secretary of Energy Advisory Board
Nuclear Weapons Complex Infrastructure Task Force, Secretary of Energy Advisory Board
U.S. Department of Energy, July 13, 2005

"During testimony to the House Appropriations Subcommittee on Energy and Water on March
11, 2004, the Secretary of Energy agreed to conduct a comprehensive review of the nuclear
weapons complex (the Complex) in concert with changes in the stockpile, the security situation,
and the nature of the world around us, as well as limitations in resources. In January 2005, the
Secretary of Energy requested the Secretary of Energy Advisory Board (SEAB) to form the
Nuclear Weapons Complex Infrastructure Task Force (NWCITF), a Task Force reporting to the
SEAB. The objective of the Task Force was to assess the implications of Presidential decisions
on the size and composition of the stockpile; the cost and operational impacts of the new Design
Basis Threat; and the personnel, facilities, and budgetary resources required to support a smaller
stockpile. This review would entail evaluation of opportunities for the consolidation of special
nuclear materials, facilities, and operations across the Complex so as to minimize security
requirements and the environmental impacts of continuing operations."

Next excerpt

"To develop the sustainable stockpile of the future, the Task Force recommends the
immediate initiation of the modernization of the stockpile through the design of the
RRW. This should lead to a family of modern nuclear weapons, designed with greater
margin to meet military requirements while incorporating state-of-the-art surety
requirements. Within these military requirements, the RRW family of weapons will be
designed for: 1) production, 2) utilization of readily available materials that do not pose
undue hazards to the Complex workforce, and 3) reduced production, maintenance, and
disposition costs over the weapon life-cycle. The Task Force recommends that a new
version of the RRW, incorporating new design concepts and surety features, be initiated
on planned five-year cycles. This family of weapons will form the basis of the sustainable
stockpile of the future that will replace the current Cold war stockpile."


"Time did
not permit detailed analysis of these budgetary impacts. However, the Task Force used
simplified models (developed by LLNL and LANL) of near-term DOE Nuclear Weapons
Complex funding requirements and total Complex costs over the next 25 years."

"The rate of transformation to the sustainable stockpile is limited initially by
the production capacity of the interim pit facility in TA-55 at LANL, which does not have the
efficiency or the throughput capability that will be designed into the MPF and needed to meet
DoD requirements. More discussion is found in Section 4."

"The non-nuclear components will still be
testable in their final configurations, although with the smaller numbers and constrained budgets
of the future, the statistics are likely to be more limited. Certification of nuclear components
should include a formal process by both LANL and LLNL for each weapon as it enters the
stockpile, similar to the dual revalidation for the W-76. Final certification of any weapon
entering the stockpile must remain the responsibility of the lead design laboratories prior to being
accepted for the stockpile by DoD. The metrics for certification should be set early in the
development cycle when the military characteristics are set, along with a cost target."

"Fourth, consolidation would result in reduction of risk to adjacent civilian populations.
Currently, the LLNL, LANL, Y-12, and Pantex sites are sufficiently close to residential and
commercial structures such that any partially successful terrorist attack on these sites may cause
collateral damage to the surrounding civilian population and associated public and private assets.

The risk to the civilian population at Livermore, Los Alamos, White Rock, Oak Ridge, and
Amarillo (unless one of these sites becomes the location of the CNPC) owing to an SNM
associated terrorist attack is significantly reduced."

"3. High-Explosive R&D Facilities
Pantex, LANL, LLNL, and SNL all have HE research, development, and testing facilities. There
are advantages to having HE facilities at each site, but the Task Force sees no justification for the
cost of maintaining duplicate facilities. Consolidating these capabilities for research,
development, and testing activities makes sense economically and would save infrastructure
resources. The selection of a center of excellence for HE research, development, and testing
should be the responsibility of NNSA, and that selection should be made soon. One laboratory
should be responsible for leadership and management of HE research; others can play support

"4. Hydrodynamic Testing Facilities
The Task Force believes that the NTS should become the only Complex site for combined HE
and Category I and II SNM testing. The Complex should begin transferring hydrotesting
resources to the NTS to develop a robust long term hydrotesting capability. It is strongly
suggested that NNSA pursue this immediately. LANL has not yet received permission to
perform dynamic experiments, which it has been seeking for many years. The Complex of the
future is not reliable or responsive if an experiment, possibly critical to certification without
UGT, cannot be performed because of a deficient Environmental Impact Statement or a delayed
Authorization Basis approval. The Complex must have the assured capability to perform a
combined HE and SNM test when and if it is needed. Until such time as the NTS has this
capability, the Task Force suggests that both the Dual-Axis Radiographic Hydrotesting
(DARHT) Facility and Site 300 be operated as User Facilities. Consolidation of both facilities
into one Hydrodynamic Testing User Facility at the NTS, incorporating containment and
radiography (either X-rays or protons), could save significant costs."

"5. Plutonium and Highly Enriched Uranium R&D Facilities
A central theme to this report is the consolidation of all Category I and II SNM at the CNPC. The
nuclear design laboratories should be reduced to operations with research-level quantities of
SNM. This would significantly reduce the security costs. The new chemical and metallurgical
research facility at the CNPC should be set up as a SNM User Facility for the entire Complex.
This would not obviate the need for a new CMRR at LANL; rather, it would be a “CMRR lite,”
designed for only laboratory sample levels of material and amenable to commercial security."

"The LEP program for the Cold war stockpile may require the continued use of beryllium (Be)
and beryllium oxide (BeO). The production of these components should be outsourced
immediately if services can be obtained from quality commercial vendors. This would allow
manufacturing facilities at LANL and Y-12 to close with immediate cost savings at the two sites.
Assembly, disassembly and surveillance activities for weapon systems containing Be and BeO
will continue to be required tasks in the Complex, but not production. Design approaches for the
RRW family of weapons are not expected to incorporate Be and BeO materials currently used in
the Cold war stockpile."

"Immediate design of a Reliable Replacement Warhead
• Each weapon design incorporated into a block change should be the result of a formal
competition between LANL and LLNL, each supported by SNL. The criteria for
selection and certification of the winning design should be formally documented and
communicated at the beginning of the competition
NNSA should decide on the potential use of existing pits and CSAs for the 2030
stockpile prior to conceptual design for the CNPC.
• The DoD should work to relax the military characteristics of its nuclear weapons, in order
to generate the design space necessary for NNSA to develop high-margin,
manufacturable designs for the future stockpile.
• NNSA should develop cost metrics for all nuclear weapons, and use them with
appropriate tools to manage, and control costs for, warhead development, production,
operations and maintenance, and dismantlement (life-cycle cost targets)."

"Chemistry and Metallurgy Research Building Replacement (CMRR): A proposed construction
project currently planned for LANL for a new research facility that will consolidate SNM
analytical chemistry, material characterization, actinide research and development capabilities,
and SNM storage capabilities."

"Criticality Experiments Facility (CEF formerly TA-18 at LANL): An in-progress project to
relocate from LANL to NTS the equipment and SNM to perform general-purpose nuclear
materials criticality and handling experiments and related training."

"nuclear weapons complex: The collection of DOE design laboratories (LANL, LLNL, SNL),
production sites (Kansas City, Pantex, SRS, Y-12) and the Nevada Test Site involved in the
design, production, and testing of nuclear weapons."
"LANS will take over the new contract on June 1st, not July 1st as you indicate. "
GoodShowWot posted

"I did promise to keep the blog up and running until after the new contractor takes over on June 1, and I will still do that. After July 1, though, I will shut it down." Doug posted

I can't see where Doug posted or indicate anything other than exactly what he posted ---
June 1st in relation to the contract, and July 1st in relation to the blog....

Just dates and numbers -- seems straightforward to me.....

Why read more into anything than what has been presented to one?

Have a Merry Christmas Doug...

Consulting to foreign companies who wish to do business with the US is very hot right now.

Set yourself up in a consulting business for foreign companies that would wish to do business with places that offer services/industry like LANL...

Not literally, but I imagine you get the gist of what I mean.....
Groundbreaking begins new era for Y-12 Complex: December 1, 2005


"Ground was broken today for two new privately financed buildings to be built at the National Nuclear Security Administration's (NNSA's) Y-12 National Security Complex."

..."Y-12 is a key part of the national Nuclear Weapons Complex. It manufactures parts from uranium and other special materials, specializing in the second stage of warheads. Y-12 also is responsible for the disassembly of warhead components and recycling of usable materials. It is the nation's storehouse for weapons-usable special nuclear material."

BWXT Y-12, L.L.C., a BWX Technologies, Inc. and Bechtel National, Inc. enterprise, operates the Y-12 National Security Complex for the National Nuclear Security Administration.

Yes, one can leave Los Alamos, find a job elsewhere, forget the problems here, but that's not the solution when one considers the effects of these "teams" on science in America.

From this point of view everyone should just take what DOE/ NNSA has done to you on the chin, go back to work and give them 100% to the company even if it means losing your retirement or handing over your funds to the new corporation, thereby accepting the royal shaft without being upset or even wanting to get back at those who have just screwed you. Yeah that's the way to get corporate Americas attention. Give in and become a kowtow annelid again allowing them to move full speed ahead at your expense.

All this talk about doing what is good for America sounds great but that is not the way those who just got ungodly pay raises are thinking.

Upper level management is all about upper level management. They sure as hell are not crying on the way to the bank.

Does anyone out there understand that this entire two year even was all about establishing a means of how to have a RIF without fear or means of anyone bringing up a law suite. That's right. Those who developed this in mind the entire time and they pulled it off. They finally found a way to get rid of people in a manner to where they will have no choice but to retire, so that we can take the burden off the retirement system and save managements jobs. They knew if the private sevtor took over, their asses would be put out to pasture and it was a matter of you or them. Guess who lost?

Upper level management is self serving to the max. If you are with them, this move was all good. If you were not this move was all BS.

The bottom line is. Unless both labs meaning LLNL and LANL have a mass voluntary reduction because of what these clowns just pulled, all that are left well get the shaft again. This will happen over and over again until the people, meaning the real work force in the dungeons stand up and say, NOT !!! Not now , not ever.

If you think upper level management is on your side think again. The labs are adopting routine corporate America practices. They will smile in your face and tap you on the back while you are young and working hard, making them look good while they do absolutely nothing in order to get ahead, but just before retirement when they realize that they will have to pay you check or give you your benefits, they will cut you off at the knees and throw you to the wolves.

THIS IS WHAT THEY HAVE JUST DONE TO 32,00) lab employees and you are still to stupid to realize it. If you people stay and accept this type of treatment, then you deserver to get, screwed.

Do you really believe they care about you? Do you really think science is alive in America when they can go to India and China and get the same work done for 1/4 the price? If you do you had better look and see what corporation like Walmart go to get their product, then look at how much profit is made from their sales in America. Oh yeah, corporate America has your interest in mind.

Retire if you can and take the money and run, then never look back. It's your and you worked for it. Don't be a fool.
b-ohica, I completely agree that those who can retire should so they do not lose what they worked so hard for. And I also agree that corporate America stinks. It infuriates me that as a taxpayer, I am forking over $1.3 million to someone who has yet to prove that he deserves even 1/5th of that. This is why I am totally digusted with the DOE requirements regarding the structure of the bidding organization. Salaries at LANL are totally out of whack when you have COS's making over 100K simply because they generate report after report after report. Too much paper, too many rules, too many reports, too many people touching too many pieces of paper all add up to a very high overhead. Add this ridiculous salary to it, along with the gross receipts tax to help build Richardson's railroad and all the other extremely high management salaries, and you have an idea of how many people have to leave to balance the LANL budget.

That said, being angry all the time about everything burns up a lot of energy that can be better used at figuring out how to contribute to make LANL work better. Don't just say, "Get rid of EP because it sucks." Come up with a better idea. I am sure that the folks working on EP are just as unhappy about all the problems as those who use it. And some of them probably have a pretty good idea about what the problems are, but LANL management likes to bury problems rather than bringing them out in the open so folks working on this project are pretty frustrated.

A word of advice to our new director - if you are worth $1.3 million, then you better get off your duff and earn it. Start now by encouraging each division to develope a list of problem areas, put some of your highly paid staff to work looking for overlaps, tackle those problems quickly, come up with good solutions, listen to the staff's solutions, and don't treat them like bumbling idiots because they are not in management since very few good ideas come from management. Moreover it's time for LANL employees to start trusting each other again. One reason for the horrendous amount of paperwork is because the employees don't trust each other to do the job correctly so too many people make extra rules with extra paperwork.

I don't know if those with the ungodly pay raises care or don't care about what's good for America. I'm not going to try to read their minds. I don't think any of them are worth the money because I have not seen them in action, and I think when you make $1.3 million you better perform Every action of the new director is going to be examined, analyzed, and questioned, if not online then at every water cooler at LANL.

I would like to see many of those who retire by the end of May 06 form a local company to contract their services back to LANL. The expertise would still be available to LANL, and the retirees would continue to be able to contribute so it's a win-win solution for everyone.
I thought LANL's problems were unique until I read the following articles in The Washington Post about the Department of Homeland Security.

The articles are fascinating and explain the complete failure to deal with hurricaine Katrina along the Gulf Coast this past September. Moreover, they sound much like LANL with constantly shifting goals and multiple reorganizations and turf wars that I can hardly believe it.

As interesting as it was to read the article, we know the result for FEMA. What I find disturbing is what would happen if our nuclear arsenal were needed? Would the US population be like the people in the Super Dome in New Orleans?

The problem seems to be so much a part of bureaucracy -- both in government and corporations, I am not sure it is escapable.
Mediocrity is the operative word here. That seems to be the norm around the country. There is no more excellence anymore because people just do not have the will to make it happen. You get managers that speak all the buzz words but do not exhibit the leadership skills to make it happen. I have my doubts that LANS will really be able to step up to the plate. When I came to LANL 20+ years ago to work there was a real sense of pride and and belief in the mission and everyone worked together for the common good. Now we have inept management, problem after problem and no one has the will to really turn it around. I for one am just plain tired of all the BS and I have ideas to make things better but in the end no one really cares.
Thanks for the blog. You gave a lot of people the voices that they otherwise would not have had. The bitching and gripes were worth it.
Don't worry, Dave...someone else will pick up the torch. Someone else will host a blog site that's full of whiney, juvenile, snobby, effete pseudo-intellectual boors who think they know everything there is to know just because they have a PhD from an Ivy League institution.

Additionally, I predict they will turn on UC/Bechtel/BWXT/WGI with a vengeance similar to the way Nanos was turned upon. If you guys think Nanos was bad, just wait until LANS settles in. It will not be pretty at all for the "buttheads and cowboys" who still work at LANL.
I suspect that putting both labs up for bid goes a lot deeper then you think. If you nothing else read thins and realize what you and your children are in for. Then take your money and run.

October 30, 2005

The End of Pensions


When I caught up with Robert S. Miller, the chief executive of Delphi Corporation, last summer, he was still pitching the fantasy that his company, a huge auto-parts maker, would be able to cut a deal with its workers and avoid filing for bankruptcy protection. But he acknowledged that Delphi faced one perhaps insuperable hurdle - not the current conditions in the auto business so much as the legacy of the pension promises that Delphi committed to many decades ago, when it was part of General Motors. This was the same fear that had obsessed Alfred P. Sloan Jr., the storied president of G.M., who warned way back in the 1940's that pensions and like benefits would be "extravagant beyond reason." But under pressure from the United Auto Workers union, he granted them. And as future auto executives would discover, pension obligations are - outside of bankruptcy, anyway - virtually impossible to unload. Unlike wages or health benefits, pension benefits cannot be cut. Unlike other contracts, which might be renegotiated as business conditions change, pension commitments are forever. And given the exigencies of the labor market, they tend to be steadily improved upon, at least when times are good.

For the U.A.W., Miller noted forlornly, "30 and Out" - 30 years to retirement - became a rallying cry. Eventually, the union got what it wanted, and workers who started on the assembly line after high school found they could retire by their early 50's. "These pensions were created when we all used to work until age 70 and then poop out at 72," Miller told me. "Now if you live past 80, a not-uncommon demographic, you're going to be taking benefits for longer than you are working. That social contract is under severe pressure."

Earlier this month, Miller and Delphi gave in to the pressure and sought protection under the bankruptcy code - the largest such filing ever in the auto industry. It followed by a few weeks the Chapter 11 filings of Delta Air Lines and Northwest Airlines, whose pension promises to workers exceeded the assets in their pension funds by an estimated $16 billion.

The three filings have blown the lid off America's latest, if long-simmering, financial debacle. It is not hedge funds or the real-estate bubble - it is the pension system, both public and private. And it is broken.


The amount of underfunding in corporate pension plans totals a staggering $450 billion. Part of that liability is attributable to otherwise healthy corporations that will most likely, in time, make good on their obligations. But the plans of the companies that fail will become the responsibility of the government's pension insurer, the Pension Benefit Guaranty Corporation. The P.B.G.C., which collects premiums from corporations and, in theory, is supposed to be self-financing, is deeply in the hole, prompting comparisons to the savings-and-loan fiasco of the 1980's. Just as S. & L.'s of that era took foolish risks in part because their deposits were insured, the P.B.G.C.'s guarantee encouraged managements and unions to raise benefits ever higher.

In such situations, individuals are tempted to take more risk than is healthy for the group; economists, in a glum appraisal of human nature, call it "moral hazard." In effect, America's pension system has been a laboratory demonstration of moral hazard in which the insurance may end up bankrupting the system it was intended to save. Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided - or both - for the commitments they made.

The P.B.G.C. is now $23 billion in the red - a deficit that is expected to grow, significantly, as more companies go under. The balance sheet for the end of September will very likely show a deficit of more than $30 billion. If nothing is done to fix the system, the Congressional Budget Office forecasts, the deficit will mushroom to more than $100 billion within two decades. This liability will almost certainly fall back on the taxpayers, since the alternative to a bailout - letting the pension agency fail - would force aging former auto workers and other retirees onto the street.

As bad as that sounds, the problem of state and local government pensions is even worse. Public pensions, which are paid by taxpayers and thus enjoy an implicit form of insurance, are underfunded by a total of at least $300 billion and arguably much more. While governments have been winking at these deficits for years, they are now becoming intolerable burdens for taxpayers. In San Diego, pension abuse has effectively bankrupted the city. Thanks to a history of granting sweeter and sweeter pension deals that it has neglected to fund, the city has been forced to allocate $160 million, or 8 percent of the municipal budget, to the San Diego City Employees Retirement System this year, with similar allocations expected for years to come. San Diego has tabled plans for a downtown library, cut back the hours on swimming pools, gutted the parks and recreation budget, canceled needed water and sewer projects and fallen behind on potholes.

State or local governments in New Jersey, New York, Illinois, Ohio, West Virginia and elsewhere face similar budget strains aggravated by runaway pension promises. According to Carl DeMaio, director of the Performance Institute, which advocates better government accountability, "There is a San Diego brewing in every community."

Not only are taxpayers certain to suffer, but senior citizens in the future may also have to settle for less secure retirements anchored only by Social Security and whatever they've managed to put away into their 401(k) accounts. A backlash already has begun in state capitals, where the political forces that have been lobbying for Social Security reform have been rallying lawmakers to get out of the pension business altogether. Alaska's Legislature recently passed a shotgun bill to deny pensions to future employees. This mimics a trend in the private sector, in which corporations have been leaving the system, either by paying off their workers and terminating their pension plans or by "freezing" their plans, a step recently taken by Hewlett Packard, so that many current employees will no longer accrue benefits and new employees will not participate at all.

If the pension system continues to wither, it is not hard to envision a darker future in which - as was true until early in the 20th Century, before the advent of pensions - many of the elderly would be forced to keep working to stave off poverty.


Congress has been debating legislation to fix the private system, but it has been unable to resolve a basic tension: anything it does to ease the burden on failing or failed pension plans lessens the penalty for failure and enhances moral hazard. By making it easier for, say, a Delta or a Delphi to offer benefits, it raises the possible cost of a future bailout.

The tough medicine favored by the Bush administration, which would eliminate loopholes in the system as well as much of the subsidy that now exists in the insurance system, would lead to more companies freezing their plans or leaving the system outright. The number of pension plans would continue to shrink and in time all but disappear. This would strip the elderly of the future of what is still the most secure form of retirement income.

The fear of runaway pension costs plainly echoes the Social Security debate, and many suspect that the Bush administration would not much mind if pensions did disappear. "I don't think the administration is very interested in creating a future for traditional pensions," says Julia Coronado, a senior research associate at Watson Wyatt, a human-resources consulting firm. "It doesn't fit very well with their vision of the ownership society."

Bradley Belt, executive director of the P.B.G.C., shrugs off the charge. "The last thing we want to do is chase people out of the system," he says. Besides, the government doesn't need to chase. As Belt points out, the number of workers covered by pensions is shrinking without government help. In 1980, about 40 percent of the jobs in the private sector offered pensions; now only 20 percent do. The trend is probably irreversible, because it feeds on itself. Hewlett Packard, for instance, must compete with younger companies like Dell Computer that do not offer traditional pensions. Freezing its plan, which was a legacy of the company's famously employee-oriented founders, was an embarrassing step for H.P.'s present managers - but freeze it they did.

This may have made economic sense, but federal law has long recognized a social purpose to pensions as well. By allowing companies to deduct from taxes the money they contribute into their pension funds, the government encourages employers to provide a safety net for their workers. This remains a legitimate function, and if pensions were allowed to die, we would need something to take their place.


To understand why pensions are still important, you have to understand the awkward beast that benefits professionals refer to as the U.S. retirement system. It is not really one "system" but three, which complement each other in the crudest of fashions. The lowest tier is Social Security, which provides most Americans with a bare-bones living (the average payment is about $12,000 a year). The highest tier, available to the rich, is private savings. In between, for people who do not have a hedge-fund account and yet want to retire on more than mere subsistence, there are pensions and 401(k)'s. Currently, more than half of all families have at least one member who has qualified for a pension at some point in his or her career and thus will be eligible for a benefit. And among current retirees, pensions are the second-biggest source of income, trailing only Social Security.

During most of the 90's the decline in pension coverage was barely lamented. It was not that big companies were folding up their plans (for the most part, they were not) but that newer, smaller companies weren't offering them. As the small companies grew into big ones (think Dell, or Starbucks, or Home Depot), traditional pensions covered less of the private-sector landscape. This did not seem like a very big deal. Younger workers envisioned mobile careers for themselves and many did not want pension strings tying them to a single employer. And most were able to put money aside in 401(k)'s, often matched by an employer contribution.

It happened that 401(k)'s, which were authorized by a change in the tax code in 1978 and which began to blossom in the early 1980's, coincided with a great upswing in the stock market. It is possible that they helped to cause the upswing. In any case, Americans' experience with 401(k)'s in the first two decades of their existence was sufficiently rosy that few people shed tears over the slow demise of pension plans or were even aware of how significantly pensions and 401(k)'s differed. But 401(k)'s were intended to be a supplement to pensions, not a substitute.

From the beneficiary's standpoint, pensions mean unique security. The worker gets a guaranteed income, determined by the number of years of service and by his or her salary at retirement. And pensions don't run dry; workers (or their spouses) get them as long as they live. Because the employer is committed to paying a certain level of benefits, pensions are known as "defined benefit" plans. Since an individual's benefit rises with each year of service, the employer is supposed to sock money away, into a fund that it manages for all of its beneficiaries, every year. The point is that workers don't (or shouldn't) have to worry about how the benefit will get there; that's the employer's responsibility. Of course, the open-ended nature of the guarantee - the very feature that makes pensions so attractive to the individual - is precisely what has caused employers to rue the day they said yes. No profit-making enterprise can truly gauge its ability to meet such promises decades later.

A 401(k), on the other hand, promises nothing. It's merely a license to defer taxes - an individual savings plan. The employer might contribute some money, which is why 401(k)'s are known as "defined contribution" plans. Or it might not. Even if the company does contribute, it offers no assurance that the money will be enough to retire on, nor does it get involved with managing the account; that's up to the worker. These disadvantages were, in the 90's, somehow perceived (with the help of exuberant marketing pitches by mutual-fund firms) to be advantages: 401(k)'s let workers manage their own assets; they were a road map to economic freedom.

Post-bubble, the picture looks different. Various people have studied how investors perform in their 401(k)'s. According to Alicia Munnell, a pension expert at Boston College and previously a White House economist, pension funds over the long haul earn slightly more than the average 401(k) holder. Among the latter, those who do worse than average, of course, have no protection. Moreover, pensions typically annuitize - that is, they convert a worker's retirement assets into an annual stipend. They impose a budget, based on actuarial probabilities. This might seem a trivial service (some pensioners might not even realize that it is a service). But if you asked a 65-year-old man who lacked a pension but did have, say, $100,000 in savings, how much he could live on, he likely would not have the vaguest idea. The answer is $654 a month: this is the annuity that $100,000 would purchase in the private market. It is the amount (after deducting the annuity provider's costs and profit) that the average person could live on so as to exhaust his savings at the very moment that he draws his final breath.

So the question arises: what if he lives longer than average? This is the beauty of a pension or of any collectivized savings pool. The pension plan can afford to support people who live to 90, because some of its members will expire at 66. It subsidizes its more robust members from the resources of those who die young. This is why a 401(k) is not a true substitute. Jeffrey Brown, an associate finance professor at the University of Illinois at Urbana-Champaign and a staff member of the president's Social Security commission, notes that as baby boomers who have nest eggs in place of pensions begin to retire, they will be faced with a daunting question: "How do I make this last a lifetime?"


The country's first large-scale pension plan was introduced after the Civil War, when the federal government gave pensions to disabled Union Army veterans and war widows. Congress passed an act in 1890 that extended pensions to all veterans 65 and over. This converted pensions into a form of social welfare. Over the next 20 years, states and cities added pensions for police officers and firefighters. By World War I, most teachers had been granted pensions as well. Governments couldn't offer big paychecks for workers - teachers, the police, firefighters - so it offered stability and pensions instead.

In the private sector, the first pension was offered by American Express, a stagecoach delivery service, in 1875. Railroads followed suit. Employees were required to work for 30 years before they qualified for benefits, and thus pensions helped companies retain employees as well as ease older workers into retirement. These employers thought of pensions as management tools, not as employee "benefits." But in the first half of the 20th century, as the historian James Wooten put it, government policies turned pensions into a tool of social policy. First came the tax deduction. This feature was abused, as companies used pensions to shelter payments to their executives. The rules were gradually tightened, however, forcing plans to include the rank and file. World War II gave more incentives to create pensions: punitive tax rates made the pension shelter enormously attractive and a government freeze on wages meant that pensions were the only avenue for increasing compensation.

The effect of these policies was to encourage unions to bargain for pensions and to pressure employers to grant them. After the war, John L. Lewis, the legendary labor leader, staged a strike to win pensions for miners. Ford Motor capitulated to the U.A.W. in 1949. G.M., headed by the reluctant Sloan, followed in 1950. This led to a so-called pension stampede; by 1960, 40 percent of private-sector workers were covered. Meanwhile, in the auto industry, the seeds of the problem were already visible.

Companies might establish plans, but many were derelict when it came to funding them. When companies failed, the workers lost much of their promised benefit. The U.A.W. was acutely aware of the problem, because of the failing condition of several smaller car manufacturers, like Packard. The union didn't have the muscle to force full funding, and even if it did, it reckoned that if the weaker manufacturers were obliged to put more money into their pension funds, they would retaliate by cutting wages.

Thus in 1959, Studebaker, a manufacturer fallen on hard times, agreed to increase benefits - its third such increase in six years. In return, the U.A.W. let Studebaker stretch out its pension funding schedule. This bargain preserved the union's wages, as well as management's hopes for a profit, though it required each to pretend that Studebaker could afford a pension plan that was clearly beyond its means. Four years later, the company collapsed.

The Studebaker failure was a watershed. Thousands of employees, including some who had worked 40 years on the line, lost the bulk of their pensions. Stunned by the loss, which totaled $15 million, the U.A.W. changed its tactics and began to lobby in earnest for federal pension insurance. A union pension expert tellingly explained to Walter Reuther, the U.A.W. chief, that insurance would reconfigure the "incentives" of both labor and management. Though business was skeptical of the idea, a decade later, in 1974, Congress finally passed the Employee Retirement Income Security Act, or Erisa, which, among other protections, established the P.B.G.C. to insure private pensions. Erisa, according to Wooten, who wrote a history of the act, completed the transition of pensions into a part of the social safety net. It was also the birth of moral hazard.


Erisa, which would be amended several times, was supposed to ensure that corporate sponsors kept their plans funded. The act includes a Byzantine set of regulations that seemingly require companies to make timely contributions. As recently as 2000, most corporate plans were adequately funded, or at least appeared to be. Their assets took a serious hit, however, when the stock market tumbled. (In retrospect, they had been cavalier in assuming the bull market would continue.) And they were burned again when interest rates fell.

Since pension liabilities are, for the most part, future liabilities, companies calculate their present obligation by applying a discount rate to what they will owe in the future. As interest rates move lower, they have to set more money aside because it is assumed that their assets will grow more slowly. The principle is familiar to any individual saver: you need to save more if you expect, say, a 5 percent return on your investment instead of a 10 percent return. What is much in dispute is just which rate is proper for pension accounting.

Corporations have been gaming the system by using the highest rates allowable, which shrinks their reported liabilities, and thus their funding requirements. The P.B.G.C., when calculating the system's deficit, uses what is in effect a market rate; whatever it would cost to buy annuities for everyone covered in a pension plan is, it argues, the plan's true "liability." The difference between these measures can be extreme. Depending on whom you talk to, General Motors' mammoth pension fund is either fully funded or, as the P.B.G.C. maintains, it is $31 billion in the hole.

What is not in dispute is that when interest rates fell, the present value of pension liabilities (by whatever measure) soared. The confluence of falling stock prices, plunging interest rates and a recession in the beginning of this decade was the pension world's equivalent of the perfect storm. An unprecedented wave of pension sponsors failed and then dumped their obligations on the P.B.G.C. (To do so, a sponsor generally must prove that it could not re-emerge as a viable enterprise without shedding its pension plan.) By far the most costly failures were in airlines and steel, although the list ranges from Kemper Insurance and Kaiser Aluminum to Murray, a lawn-mower manufacturer.

As the P.B.G.C. assumed responsibility for more and more pensioners, it became clear that the premium it charged was way too cheap. Mispriced insurance, like mispriced anything, sends the market a distorted signal. Belt, the P.B.G.C. director, who served as counsel to the Senate Banking Committee in the late 1980's during the savings-and-loan crisis, says that cheap pension insurance gave rise to flawed incentives: namely it kept companies in the pension business who didn't deserve to be there. He also argues, rather convincingly, that lax rules allowed pension sponsors to get away with inadequate funding.

For example, United Airlines did not make contributions to any of its four employee plans between 2000 and 2002, when it was heading into Chapter 11, and made minimal contributions in 2003. Even more surprisingly, in 2002, after two of its jets had been turned into weapons in the Sept. 11 disaster, and when the airline industry was pleading for emergency relief from Congress, United granted a 40 percent increase in pension benefits for its 23,000 ground employees.

Bethlehem Steel similarly enjoyed a three-year funding holiday as it was going through hard times, letting its liabilities swell in advance of turning them over to the government. Meanwhile, in order to gain its unions' approval for plant shutdowns, it agreed to costly benefit enhancements. In 2001 Bethlehem filed for Chapter 11 bankruptcy. It was guided through its bankruptcy by none other than Miller, now the Delphi C.E.O. Miller disputes the notion that capital-scarce companies like Bethlehem intentionally game the system by shirking funding. "Companies don't like falling behind," he says. "When you have a hard choice between starving the capital base to feed the pension plan, or making capital investments to become more productive, to the extent there is permission that's what you do." The point is, they had permission.

Neither Bethlehem nor United broke any laws. Both companies made the full contributions required under Erisa. When the P.B.G.C. seized their plans, however, Bethlehem was only 45 percent funded, and United was only 42 percent funded. For companies that terminate their pension plans, such gross underfunding has become the norm. Either assets suddenly vanish when the P.B.G.C. walks in the door, or, evidently, the system for measuring "full" funding is broken. As Belt testified to the Senate Committee on Finance in June, "United, US Airways, Bethlehem Steel, LTV and National Steel would not have presented claims in excess of $1 billion each - and with funded ratios of less than 50 percent - if the rules worked."

Even leaving aside the debate over which rate to use in calculating pension liabilities, there is no doubt that Erisa permits companies to use some doubtful arithmetic. For instance, the law lets corporations "smooth" changes in their asset values. If the stocks and bonds in their pension funds take a hit (as happened to just about every fund recently), they don't have to fully report the impact. Nor do they have to ante up fresh funds to compensate for the loss for five years. A similar smoothing is permitted on the liability side. And though, in theory, Erisa discourages underfunding by requiring offenders to pay higher premiums, its various loopholes render the sanction toothless. Thanks to another loophole, companies that contribute more than the required amount get to skip future contributions even if they later become underfunded. These companies are awarded so-called "credit balances," which remain in place even if the actual balance is showing red.

Incredibly, when United's plans were terminated, earlier this year, even though they were groaning under $17 billion in pension liabilities and a mere $7 billion in assets, they still had credit "balances" according to Erisa. (By law, the P.B.G.C. will be on the hook for most, but not all, of United's shortfall. The agency guarantees pensions up to $45,000 a year; employees, mostly pilots, who were owed richer pensions are uninsured above the cap.)

Their dubious funding history notwithstanding, corporations - airlines in particular - have been lobbying for greater permissiveness for several years. And they have gotten it. Congress has twice relaxed the rules, permitting pension sponsors to use a higher rate to calculate their liabilities.


Enter the Bush administration: it has essentially declared the era of permissiveness over. Among other changes, it wants the funding rules tightened. To tackle moral hazard, it wants to stop companies with poor credit ratings from granting benefit hikes, or from doling out unfunded pension benefits to unions who agree to plant shutdowns. It even wants to prevent workers at some companies whose bonds are given a "junk" rating from accruing more years of service. This would be painful to employees at many industrial companies, possibly including G.M.

Indeed, one reading of the administration proposal is that, having seen the steel and airline industries raid the P.B.G.C., it is drawing the line at the auto industry - whose initial distress, of course, prompted the agency's founding. Asked about that before Delphi went bust, Belt admitted: "Eight auto-parts suppliers have come under Chapter 11 so far this year. No question our single largest source of exposure is the auto sector."

Since G.M.'s stock was downgraded to junk status earlier this year, the possibility that it would file for bankruptcy has been the subject of on-again, off-again debate on Wall Street. G.M.'s pension plan totals an astronomical $90 billion; a bankruptcy filing would be the P.B.G.C.'s biggest nightmare. G.M. says the notion is far-fetched. The company seems to have plenty of liquidity and, just two weeks ago, with retiree costs a major concern, it reached an agreement with the U.A.W. to trim health benefits. G.M. and other industrial companies, along with their unions, have harshly attacked the Bush pension proposal, which would force many old-economy-type corporations to put more money into their pension funds just when their basic businesses are hurting.

Alan Reuther, Walter's nephew and the U.A.W.'s legislative director, says the provisions to restrict benefits would be "totally devastating for workers and retirees." He makes no apologies for "30 and out" - a fair reward, he maintains, for hard service on the assembly line - and he wonders at the post-modern notion that blue-collar workers should be responsible for their own retirements because giant corporations can't handle it. Also, a typical G.M. pension for someone with 30 years on the job is about $18,000 a year. That is hardly to be compared with an airline pilot's. "The P.B.G.C. is focused on protecting themselves from claims and not on protecting the claims of workers," he says. "They forget why they were created." Social safety nets have their price - in this case, a little moral hazard - and that is really what the debate is about.

What has emerged from the Beltway skirmishing thus far are bills on either side of Congress that would in some ways tighten funding but give a special break to airlines. Premiums to the P.B.G.C. would rise from $19 per plan participant to $30, and variable premiums on distressed companies would be enforced. The bills would chip away (but not eliminate) gimmicks like "smoothing."

The Senate is still divided, however, on how to treat corporations with junk credit ratings - the ones most likely to wind up in the P.B.G.C.'s lap. Hard-liners like Senator Chuck Grassley insist they should be forced to strengthen their pension plans in a hurry; Senators Mike DeWine and Barbara Mikulski (both from states with blue-collar constituencies) want to give such companies lenience. So after months of lobbying, politicking and deal making, moral hazard is still alive.


The P.B.G.C. does not protect government pensions, but dynamics similar to those in the private sector have also wrecked the solvency of public plans. Even in states where budget restraint is gospel, public-service employees have found it relatively easy to get benefit hikes for the simple reason that no one else pays much attention to them. In the corporate world, stockholders, at least in theory, exert some pressure on managers to show restraint. But who are the public sector "stockholders"? The average voter doesn't take notice when the legislature debates the benefits levels of firemen, teachers and the like. On the other hand, public-employee unions exhibit a very keen interest, and legislators know it. So benefits keep rising.

As a matter of practice, those benefits are as good as insured. Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest). Thus, unions can bargain for virtually any level of benefits without regard to the state's ability, or its willingness, to fund them. This creates moral hazard indeed. At least in the private sphere, there are rules - ineffectual rules maybe, but rules - that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future. This explains how the West Virginia Teachers Retirement System has, embarrassingly, only 22 percent of the assets needed to meet its expected liabilities. It also explains how Illinois, a low-tax state, is underfunded by some $38 billion, or $3,000 per every man, woman and child in the state.

California is a good example of the political forces that have driven benefits higher. In the 90's, Gov. Gray Davis, a Democrat who was strongly supported by public-employee unions, pushed through numerous bills to increase benefits. One raised the pension of state troopers retiring at age 50 to 3 percent of final salary times the number of years served. (Previously, the formula was 2 percent at age 50, more if you were older.) Thus, a cop hired at age 20 could retire at 50, find another job and get a pension equal to 90 percent of his final salary.

The higher benefits trickled down to the local level, as counties that feared losing police officers to the state felt forced to copy the formula. Counterintuitively, as benefits were going up, the California Public Employees Retirement System (Calpers), which was boasting high returns in the stock market, allowed state agencies and local governments to reduce their contributions.

Contra Costa County, which adopted the "3 percent at 50" formula for its Police Department, got by with contributing only $55 million to retirement costs in 1999, near the market peak. When the market tanked, the county found itself with lower assets and greater obligations. Six years later, the county's retirement bill had more than tripled to $180 million. Bill Pollacek, the county treasurer-tax collector, says the excess earnings from the bull market were spent, among other things, on higher benefits; "the losses were left for the taxpayers."

This example was repeated with various twists across the country. In New Jersey, for example, Christine Whitman, the Republican governor in the 90's, ultimately relied on buoyant stock-market predictions to finance hefty tax cuts, which were the centerpiece of her administration. In 1997, New Jersey borrowed $2.8 billion, at an interest rate of 7.64 percent. The money was advanced to its pension system, on the convenient theory that its pension managers would make more in the market than the state paid out in interest. For a while, they did. The state even raised benefits.

Meanwhile, Trenton achieved a sort of transitory budget balance by contributing less to its pension system. New Jersey's contribution to the Police and Firemen's Retirement System was zero in 2001 through 2003. But during the dot-com debacle, its investments plunged. And the state came under intense budget pressure because of the recession, and so gave itself a few years more to start paying down its pension liability (which further widened the gap). This year, the last easy-funding year, New Jersey will contribute $220 million to its pension system; by 2010, the annual bill will be an impossible-seeming $2.5 billion.

I spoke to Jon Corzine and Doug Forrester, the candidates in next Tuesday's gubernatorial election, and while each expressed the proper horror with regard to past mismanagement, neither had much to say about how they would replenish New Jersey's pension system. State pension officials say that if New Jersey were a private corporation, its system would be nearly bankrupt. "In the real world this is a P.B.G.C. takeover," Fred Beaver, the head of the pension division, told me. Raising taxes is politically forbidden (Forrester has been campaigning to cut property-tax rates).

And the state's reported pension underfunding, officially $25 billion, is undoubtedly optimistic. It assumes that New Jersey's pension assets will earn 8.25 percent, a number collectively determined - some say pulled from thin air - by the state's pension council. Even Orin Kramer, a private hedge-fund manager who also is also chairman of the council, says that any assumption higher than 7.5 percent is unrealistic. "The published numbers are divorced from economic reality," Kramer says. "No one even does the math for what will happen if you only do 7 percent because it's too serious. You start firing cops and teachers."

According to Barclay's Global Investors, if you use realistic assumptions, the total underfunding in all public plans is on the order of $460 billion. If this figure is even close to true, future taxpayers will be hopelessly in hock to the police, firefighters and teachers of the past.

Cutting pensions (unlike health benefits) is simply not an option. State constitutions forbid public entities, even prospectively, from reducing the rate at which employees accrue benefits. They can tinker with, or abolish, benefits for future employees, as Alaska did, but for a worker already on the payroll, benefits - even benefits that might not be earned for many decades hence - are sacrosanct. These benefits are like headless nails; once driven in they can never be removed. This year, New York's Legislature approved 46 new bills - more headless nails - to increase pension benefits, according to E.J. McMahon, an analyst at the Manhattan Institute. New York's benefits already rank among the most generous in the country, and the new bills would expand categories of workers who can retire early, or who can qualify for higher rates. Such bracket creep is pervasive.

One of the biggest pension offenders is San Diego, where six members of the pension board, including the head of the local firefighters' union and two other union officials, have been charged with violating the state's conflict-of-interest code, a felony. What is interesting about San Diego is that, juicy details aside, its pension mess actually looks rather commonplace. The six board members are accused of making a deal to let City Hall underfund the pension system in return for agreeing to higher benefits - including special benefits for themselves. Explicitly or otherwise, this is what unions and legislators have been doing all over the country. A senior adviser on pensions to Gov. Arnold Schwarzenegger told me he fears that ever higher benefits are inescapable, given the fact that legislators control the benefits of people whose support is vital in elections.

Calpers, the country's biggest state-employee retirement system, responds that the pension system has worked well. And for Calpers's 1.4 million members, it has. The average benefit for retirees is $21,000 a year, more than most at General Motors. But at some point, the interest of the public and the interests of public employees diverge.

Earlier this year, Schwarzenegger tried to move California to a 401(k)-style defined contribution plan (for new employees), but the Legislature refused to go along. Schwarzenegger has vowed to revisit the issue in 2006. This battle is being fought from statehouse to statehouse. Michigan (mimicking Alaska) has closed its pension plan to some new employees, and various states, including Florida, Colorado, South Carolina, Arizona, Ohio and Montana, are taking a partial step of letting employees choose between defined contribution plans and traditional pensions. This compromise does not really change much. Most employees who are given the choice opt, quite naturally, to keep their pensions.

Partly for that reason, the Citizens Budget Commission, a politically neutral watchdog, concluded that only by ending pensions outright (for new employees) could New York avert a future fiscal calamity. "Changes in pension benefits for future workers would yield fiscal gains only slowly," the commission noted in a position paper, "but the service to the future fiscal health of the City and State would be enormous."

Most legislatures are not about to do that anytime soon. There is a legitimate argument for preserving public pensions, however, if only they could be put on a sound fiscal basis. Critics like Grover Norquist, the tax-cut crusader, lampoons pensions as remnants of a stodgy, Old World economy. The desire to collect a pension, he argues, keeps workers from moving to better opportunities and shackles employers to workers who are just marking time.

But while mobility is generally considered a virtue in the modern economy, it isn't appropriate everywhere. It may be desirable for a software engineer to move from job to job, notes Robert Walton, a Calpers assistant executive; "for teachers, firefighters, nurses, engineers, that isn't the type of work force you want." Stability is a virtue. The trick is to force legislatures to commit to funding with the same zeal with which they commit to benefits.

De Maio, the San Diego watchdog, is lobbying for a federal law that would impose Erisa-type rules on public plans. Another solution might be found in the Texas Municipal Retirement System, which represents 800 cities and towns in the state. It has a blended system of automatic employer and employee contributions that are managed by the system and turned into an annuity upon retirement. These sorts of remedies could avert plenty of future San Diegos. In principle they are quite simple. It is only the politics that are difficult.


On the private side, benefits professionals have been touting so-called cash-balance plans, a hybrid that in some ways looks like a 401(k), as the best hope for saving the pension industry. With a traditional pension, employees accrue benefits very slowly during their first 20 years and very rapidly during their next 10 (this is why pension plans act as retention tools; you pay a penalty for leaving early). Thus, an employee who stays at a company for 30 years gets a much bigger pension than one who works at three companies for 10 years each. Cash-balance plans were devised to appeal to younger workers, most of whom do not envision retiring at the firm that hired them out of college. In these plans, employees accrue benefits steadily, one decade to the next. There is no penalty for leaving, and workers who change jobs simply roll their accrued benefits into their next plan, as with a 401(k). Many firms converted to cash-balance plans in the 90's to attract younger and more mobile workers.

But the downside of giving more to junior employees is that senior employees get less. When I.B.M. converted, it reduced the rate at which some employees of long standing would accrue benefits, touching off a firestorm. The company was sued, I.B.M. lost and the legal status of similar plans remains in doubt. The pension industry has been lobbying Congress to clarify the status of existing cash-balance plans, but neither the administration nor anyone on Capitol Hill has done so.

To some people, this is further evidence that the Bush administration would just as soon be done with pension plans altogether. I put that recently to Elaine Chao, the secretary of labor, and while her answer was diplomatic, she made no bones about the fact that, in the administration's view, traditional pensions are losing their relevance. "Defined benefit plans have their advantages," she told me, "but in an increasingly mobile 21st-century work force, the lack of flexibility of D.B. plans is yielding to greater usage of defined contributions plans."

It's hard to argue with her, if you look at the numbers. Although 44 million people are covered by private-sector plans, half are people who have already retired and are collecting benefits or whose plans have been frozen or terminated. In other words, on-the-job employees accruing benefits - once the backbone of the system - constitute only half. At that rate, even without legislation, the private-sector pension community will mostly die off in a generation.

And pension sponsors are likely to get another jolt soon. Under current accounting standards, companies can "smooth" their earnings reports, so that each quarter's net income reflects the average assumed performance of the company's pension assets, whether up or down, but not the actual performance. (Discrepancies from the average are sifted back into the earnings stream over time.) This means that reported earnings are often wildly misleading. Robert Herz, chairman of the Financial Accounting Standards Board, has criticized this practice as "a Rube Goldberg device." If FASB follows up and disallows it, corporate pension sponsors would have to cope with a lot more volatility in their earnings. Managers hate volatility, and such a change would prompt many of them to fold their plans.

If defined benefits are on their last legs, then it would make sense to try to incorporate their best features into 401(k)'s. The drawback to 401(k)'s, remember, is that people are imperfect savers. They don't save enough, they don't invest wisely what they do save and they don't know what to do with their money once they are free to withdraw it. Quite often, they spend it.

Here there is much the government could do. For instance, it could require that a portion of 401(k) accounts be set aside in a lifelong annuity, with all the security of a pension. Behavioral economists like Richard Thaler have demonstrated that you can change people's behavior even without mandatory rules. For instance, by making a high contribution rate the "default option" for employees, they would tend to deduct (and save) more from their paychecks. If you make an annuity a prominent choice, more people will convert their accounts into annuities.

Otherwise, it's not hard to predict that as octogenarians and nonagenarians become commonplace in society, many are going to outlive their savings, which is even more scary than outliving the savings of the P.B.G.C. Promoting an annuity culture is probably the single best way to make up for the demise of pensions. Yet most companies that provide 401(k)'s don't even give the option of purchasing an annuity when people cash in their accounts. As Brown, the Illinois professor, notes, "There is no box to check that says 'annuities."' That is a minor scandal. "I wish someone in Washington were thinking bigger thoughts about what the optimal retirement package should look like," says Watson Wyatt's Coronado.

What are Secretary Chao's thoughts? She bounced the question to the Treasury Department. Mark Warshawsky, the Treasury's top economist, has written about the need for annuities, and in an interview he allowed that as 401(k)'s become the primary, or the only, source of retirement income for more people, "I think it is a concern that annuities are not being offered in those plans." When I asked what the Treasury was doing about encouraging annuities, Warshawsky merely said that it was under study. Anything that smacks of regulation (like rules to make sure employees get a particular menu of choices, whether for annuities or for their portfolios) gives the administration shivers. This is what you would expect, given the administration's strong free-market tendencies.

But the government is already deeply involved, since it shelters retirement savings - pensions, yes, but also 401(k)'s, which are similarly permitted to grow tax-free. When it passed Erisa, Congress agreed that corporations that invested tax-sheltered retirement funds - pensions - should have to live by certain rules. But in the defined contribution world - the world of 401(k)'s - there are no rules. Employers can contribute or not. Employees can diversify or blow it all on the company stock (even if it is Enron). If nothing else, the century-long experiment with pensions has proved that in the absence of the right rules, the money will not always be there. The purpose of pension reform should be not merely to avoid a fiscal disaster but to find a fiscally sound way to preserve the likelihood of secure retirements. If people are going to retire on 401(k)'s, those should be subject to rules, and guidance, as well.

It would be nice to think that reform would include a future for pensions, but on the private side at least, it is doubtful. As Delphi's Miller put it simply: "A pension plan makes no sense in today's world. It's not wise for a company to make financial promises 40 or 50 years down the road." Most American executives would agree. Miller says he has not decided what to do at Delphi. If workers grant wage concessions, he has said, the pension plan, which is $4.5 billion shy of what it needs, might even survive. This has the sound of a bargaining ploy. Knowing that the P.B.G.C.'s guarantee is in place, the unions will probably insist on keeping their wages as close to intact as they can, and Miller will probably end up handing the pension plan over to the agency, just as he did at Bethlehem. Then, Miller and other executives will get stock and dandy bonuses in a new Delphi that is happily stripped of pension obligations, and some 45,000 employees and retirees will, in time, happily collect their pensions - courtesy of the U.S. Government. Moral hazard at work.

Roger Lowenstein, a contributing writer, has written about Social Security and health care reform for the magazine.
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