Aways.” Using this approach, Varity “would progressively introduce minor reductions and usage controls rules into the medical benefits plan.” These were “designed to be insufficient to warrant retirees incurring the legal cost and trouble to have the benefits reinstated.” A few years later, Varity could take an ax to the benefits, provoking the union to sue. In court, the company would say that because the union hadn’t objected to the earlier cuts, it tacitly agreed that the company had the right to cut their medical coverage unilaterally.
If that argument didn’t sway the judge, no problem. “There have been a number of companies that have [reduced benefits] knowing that they would lose in court if challenged,” he wrote. The company could simply drag out the case for years.
“The strategy works as follows: the employer implements a major reduction to employee benefits… retirees come together, pool resources or approach their union to fund their case and take the company to court. Financial pressure is applied to retirees during the potentially extended period leading up to the court hearing by forcing them to incur their own medical expenses, in addition to funding the legal proceedings. The next step is for the company, at a carefully chosen moment, to suggest to retirees that they agree to reinstatement of the plan, but at a much reduced level.” The longer Varity could drag out the case, Pittman noted, the better the odds that cash-strapped employees would settle for much less than they were due. Fundamentally, the company had nothing to lose.
PROJECT SUNSHINE
The human resources managers then came up with a surefire way to cut most or all of a unit’s retiree health benefits. “Organized liquidation,” Pittman dubbed it. “This action involves the transferring of all retiree medical liability into a separate or subsidiary company that is then put into receivership,” Pittman wrote. The retirees would sue, of course, but “if made to look realistic, the collapse of [the unit] could be part of a strategy leading to a negotiated reduction” of benefits. When the “financial pressure on retirees is greatest but before we appear to be losing [the] case,” the company could “agree to reinstatement at a reduced level.”
Rice and his executive team thought that was a great idea. Later that year, they organized a new corporate subsidiary, which they named Massey Combines. The bottom had fallen out of the agriculture industry, and demand for the tractors and combines had dried up. So the Varity executives loaded up this subsidiary with its money-losing farm equipment lines, plus millions of dollars in corporate debt, including benefit liabilities for four thousand retirees.
Varity executives then set about convincing active employees to transfer to the new entity, labeling the internal sales program “Project Sunshine.” With meetings, videos, and brochures, executives sought to persuade employees that the spin-off had a “bright future” and that, if they switched over to the new unit, their benefits would remain unchanged. Ultimately, fifteen hundred workers took the bait.
The new firm had a negative net worth of $46 million on its first day of business, and two years later it collapsed. The retirees’ medical coverage disappeared overnight. To celebrate, Victor Rice invited his business managers to his hotel suite in Chicago and boasted, over cognac and cigars, that he had “loaded all his losers in one wagon.”
Even as it pursued Project Sunshine, Varity had begun implementing the less dramatic suggestions presented by its human resource managers, including a series of creeping take-aways. In 1987, Varity stopped reimbursing retirees for Medicare Part B premiums; in 1989, it moved retirees into a managed-care health plan and raised their health care co-payments and deductibles.
The “pleading” strategy had also met with some success. A union bargaining unit at a facility in Racine, Wisconsin, had agreed to accept reduced benefits.
But Rice wanted more. A big motive now was FAS 106, the new accounting rule that required employers to put the liability for its retiree health benefits on its books. Varity wanted to reduce its liability by 40 percent and turned to Towers Perrin for advice. The consulting firm said it would hook them up with one of their experts who had “successfully negotiated rather dramatic decreases in postretirement welfare benefits.” The consultant projected he could cut 63 percent from the company’s estimated $344 million retiree liability by using his benefits- reduction model, which he called “Strawman.”
Accounting smoke and mirrors could take care of some of the cost reductions. The company could change some of the key assumptions it used to estimate its obligations. For one, it could assume that fewer employees and retirees were married, so the liability for spousal and survivor benefits would be lower. Towers Perrin also suggested the company could use “liberalized” turnover assumptions. For example, they could assume that job turnover would be higher, so employees wouldn’t build up significant benefits.
At the same time, it could lower mortality assumptions and assume that the people who remained would work until age seventy, which would make it look as if the company had fewer years of retirement to pay for. The consultant must have known that this latter point, for one, wasn’t true. His research showed that virtually no one at Varity worked past sixty-five.
Though these moves would lower the liabilities the company would publicly disclose, “the real reduction,” Towers Perrin concluded, “can come only if the benefits are reduced.” To facilitate Varity’s decisionmaking process, the consulting firm’s actuaries prepared charts showing which units had the highest potential retiree costs.
Rice wanted quick results, and laid down the law in a memo to managers. “The reported FAS 106 liability will be closely reviewed by analysts and it will affect the stock price and debt ratings.” Cutting benefits to reduce the costs that “will result from FAS 106 ABSOLUTE TOP PRIORITY.”
In December, Rice gathered the president, the CFO, the vice president for HR, and the company’s benefits chief and reiterated his goals: “We must reduce the liabilities, and take aggressive actions that would be reviewed favorably within the financial community.” His statement of objectives was accompanied by a checklist.
• 40% MAY be all we can get now…
• Continue to aggressively push legal counsel on risk analysis.
• I don’t believe in “show stoppers,” and won’t accept them. Give me a course of action. Keep on schedule.
• I am concerned we will run out of time. If you or the business units need more resources, get them. Let’s not be penny wise and pound-foolish.
Not long after, the company’s legal advisers prepared a “Litigation Risk assessment” listing dozens of manufacturing plants and facilities operated by the company, with estimates for retiree medical liabilities at each. Each was assigned a litigation risk number, with five having the highest risk (“virtually unavoidable commitments” with “almost certain loss” in litigation) and 1 having the lowest. Varity would go after the weakest units first. Varity sent managers a memo summing it up: “We are not averse to assuming acceptable levels of risk [of lawsuits].… No approach is too aggressive to consider.”
A few months later, in April 1993, Varity announced it would make steep cuts to the health benefits, effective January 1, 1994. Under the new accounting rules, the move allowed Varity to report reduced expense—as good as income from selling tractors.
As the company predicted, retirees sued. Hourly and salaried workers brought five suits altogether. A federal judge in one of the cases in Michigan cited “a veritable mountain of evidence” that Varity had promised lifetime medical coverage to the 3,300 retirees of Varity’s Kelsey-Hayes unit and ordered the company to restore the benefits, which it did in 2000. Cases at two other units were settled in 1997 and 1998.
But, as Varity human resources managers had predicted, the process dragged out for years, and though most of the retirees prevailed, it was too late for the many retirees who had died in the interim.
The Massey Combines employees, who had been loaded into the unit that went bankrupt, sued Varity, and the court heard the testimony about how Rice had boasted, over cognac and cigars, that he’d dumped all his losers into the doomed unit. This didn’t go over well with the Des Moines jury. They handed a victory to the Massey Combines employees and awarded them $38 million in punitive damages.
But no punitive damages are allowed under federal benefits law, so the judge threw out the award but ordered Varity to reinstate the retirees into Varity’s health care plan. (The only thing a plaintiff can win in a federal benefits case is the benefit he should have been paid. If he’s dead, there’s nothing to award, even out-of-pocket costs the retirees had incurred.) Varity appealed, and the former employees fought their case all the way to the U.S. Supreme Court. In 1996—a full decade after Pittman and Wellman had begun sketching out Varity’s plan—the
