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Budget Cuts

The retired workers of Allegheny Technologies -- and steelmakers across the country -- want to know what happened to the health-care benefits they were promised

During a career that spanned from 1964 to 1998, Stephen Smarick got more than a few raises from his bosses at specialty-steels producer Allegheny Ludlum Corp. And whenever he did so, he recalls, he'd jokingly ask, "Is that it?"

"And they would always come back with, 'Don't forget, you've got this health care,'" Smarick says.

But they weren't joking. And Smarick, at least, didn't forget.

Smarick worked for 34 years as a foreman at the Brackenridge plant of Allegheny Ludlum, a Pittsburgh-based national leader in producing stainless steel and other specialty metals. (The company is now known as Allegheny Technologies or ATI.) During that time, he says, "I paid zero dollars for my health care."

Even for the first five years after he retired in 1998, the company paid every cent of the medical bills he and his wife incurred. From what Smarick understood after all those salary reviews, that wouldn't change until the day they died.

But that was before he got the letter.

"The U.S. health-care system is the most expensive in the world," explained the June 2004 letter to ATI retirees from Patrick Hassey, the company's chairman, president and chief executive officer. "The effect of many years of double-digit health-care cost increases has resulted in retiree health-care costs that most U.S. employers can no longer afford."

And ATI, it turned out, was one of those employers. Hassey's letter outlined ATI's plans to cut back on its contributions to the retirees' health-care costs. The company would begin reducing its support in 2005, he wrote, and on New Year's Day, 2010, "ATI will no longer provide you with a health-care benefit."

"My wife almost went through the roof," recalls Smarick, 67. "[ATI] always stressed this benefits package for the rest of your life. I wouldn't say that it was an unspoken thing -- it was a spoken thing."

But as the saying goes, "That was then, and this is now."

When Smarick was entering the work force, in the 1960s, the steel industry was an economic juggernaut. And in the industrial towns strung along the Allegheny Valley, so was ATI. While companies like US Steel produced massive amounts of structural steel, ATI had pioneered the commercialization of stainless steel in the early 20th century.

"They were cutting-edge as far as the steel industry goes," says Smarick. "They paid a nice buck, and their benefits were excellent."

Back then -- say 40 or 50 years ago -- health-care costs were a mere pittance, a cheap throw-in companies used to entice employees. Not any longer.

Medicare, the federally funded health-insurance program for seniors aged 65 and older, was inaugurated in 1965, just after Smarick began work. And while Medicare didn't cover expenses like routine eye or dental care, it was relatively inexpensive for employers to supplement the government's coverage. Companies like ATI promised workers they would take care of any expenses the government wouldn't.

But in recent years, the cost of health care has gone up across the board. Most of the headlines have been devoted to the problem of covering costs for active employees. According to the Employee Benefit Research Institute (EBRI), U.S. employers in 1965 spent $42 billion on health-care benefits. Today they spend about $2.5 trillion. On a per-employee basis, the cost of providing health-care benefits jumped from $217 a year in 1965 to $8,300 today -- a 38-fold increase. Average inflation for other goods and services, meanwhile, increased by merely seven-fold in the same period of time.

And as Hassey's letter notes, ATI is just one of many companies that have been unloading health-care obligations for retirees. Between 1997 and 2005, EBRI stats show, the percentage of private-sector employers helping retirees with health care fell from more than 21 percent to less than 13 percent.

Still, that doesn't make it any easier for ATI's retirees to stomach the company's actions.

"When you're retired, it's really frustrating," says Joe George, 63, Smarick's friend and fellow ATI foreman at the Brackenridge mill from 1967-1998. "The last thing in the world that you thought was going to happen was that [ATI] was going to cut you off from health-care benefits."

City Paper placed more than a half-dozen phone calls, and provided an e-mail list of questions, to ATI spokesperson Dan Greenfield over the course of two weeks. Greenfield left a voice-mail message once -- on a Friday evening after 6 p.m. -- and did not respond to further inquiries.

But ATI can point to an escape clause in the documentation the company gave to employees like George and Smarick. On page 34 of a 37-page booklet, ATI asserts that it "reserves the right to end, suspend or amend the plan at any time, in whole or in part."

Not everyone read the fine print. Jeff Rea, who retired just two weeks before Hassey sent his letter in 2004, didn't know about the clause. Even if he had, he says, he would never have expected the company to actually use it.

"Would I have stayed a little longer knowing this was going to happen?" wonders Rea, another ATI foreman. "I don't know."

In fact, of the dozen or so ATI retirees interviewed by CP, none said they had any doubt that their health benefits were 100 percent covered for the rest of their lives. That's what the higher-ups at the company told them, they say.

Budget Cuts
Allegheny Technologies retirees Jeff Rea, Joe George and Stephen Smarick

These days, with massive corporate layoffs taken for granted, it may almost sound naïve to trust a company to look out for its retirees. But many of today's retirees grew up and spent their adult lives trusting the firm's good name. "There were always good things" being said about the company, recalls Smarick, who grew up less than a mile from an ATI plant in Natrona.

But those bonds are being strained. Rea, for example, started at the company as a union employee from 1973-1991, and is now second-guessing his decision to become a supervisor. The job paid more, but put him at the company's mercy: Managers and other salaried employees don't have the protection of a union contract, which hampers the company's ability to unilaterally terminate benefits.

"I thought about going back to the union" before retiring, Rea says. "But where I was on the pay scale, it would have taken me a long time to make up the difference in the union.

"So I stayed salary, knowing I would get these health-care benefits."

But had he known those benefits would be terminated shortly after his retirement, "it would be a whole different ballgame. I probably would have gone back to the union."

At other steel producers, though, a union contract hasn't been much protection either.

According to the United States Steelworkers of America (USW), more than 200,000 unionized steel-industry retirees and their dependants have lost their retiree health-care benefits. Most had their benefits stripped away by bankruptcy courts; some 40 domestic steelmakers went bankrupt during the late 1990s and early 2000s.

LTV, the company that acquired Pittsburgh's Jones & Laughlin Steel and later went belly-up, terminated the health-care benefits for 45,000 retirees after filing for bankruptcy in 2001. Bethlehem Steel, which also filed for bankruptcy in 2001, terminated benefits for nearly 100,000 retirees and their dependants in 2003, after the company was taken over by the International Steel Group (ISG).

"The bankruptcy process is not kind to retirees," says Cary Burnell, of the USW's corporate-research department. "The problem is that, when a company is liquidating and the bankruptcy court has literally broken the labor agreement between the company and the unions, the union has no bargaining power.

"If the company has stopped operating, there is no ability to strike, so we really don't have much strength or leverage at that point."

When companies like LTV go bankrupt, it's natural to blame fairly recent factors: increased competition at home and abroad; a failure to keep pace with modern technology; poor union/management relations.

But when it comes to the crippling cost of health care, writer Malcolm Gladwell has suggested, the crucial mistake may have been made a half-century ago -- at the very moment America's industrial might was at its pinnacle.

In a 2006 New Yorker article titled "The Risk Pool," Gladwell explained that in the 1940s, there were two prevailing theories about how to pay for workers' health care.

Union leaders suggested that benefit plans be set up on a regional basis, requiring companies in the region to contribute to a centralized fund that all their employees could draw on. But business leaders, feeling such a collective approach threatened the free market, argued instead that employers should cover costs only for their own employees.

The latter approach was the wrong one, Gladwell concludes -- largely on the basis that it's the system U.S. companies have followed, and the one that is currently failing retirees and crippling businesses as well.

The success of an employer-based plan depends on companies maintaining a favorable "dependency ratio": The number of retirees drawing benefits can't overwhelm the number of current workers covering those benefits out of their own paychecks.

But in recent years, such ratios in the steel industry have become increasingly skewed -- partly because of smart decisions the industry made. As U.S. steel makers began adopting new technologies, they became more efficient, replacing workers with machines. The problem, though, is that machines don't pay into retiree health-care funds.

"When I started in the industry, we were running at 12 man-hours per ton of steel," says Tom Danjczek, president of the Steel Manufacturers Association, which represents about 70 percent of the U.S. steel industry. "Today, we're two man-hours per ton. We're using one-sixth the number of people that we used 30-some years ago."

"In the '60s and '70s, mills would require thousands and thousands of people to make steel," agrees Carey Treado, an economics research associate at the University of Pittsburgh's Center for Industry Studies. "And as that number shrunk, those people became retirees that were being supported by fewer and fewer people."

Companies, then, are suffering partly for adapting to the marketplace -- which is of course exactly what they have to do. That's why, Gladwell writes, "it makes little sense for the burdens of insurance to be borne by one company."

Budget Cuts
Attorney John Stember, in his office

If instead the burden of benefits costs were spread throughout a group of employers, he continues, "then companies can succeed or fail based on what they do and not on the number of their retirees."

If health-care benefits have been a bomb waiting to go off since the 1940s, the fuse may have been lit in 1993, says employment attorney John Stember, of Stember, Feinstein, Doyle & Payne.

That's when corporate accounting rules changed, compelling companies to report the full burden of their future health-care promises, rather than merely document what was being spent on health care in the current year.

For example, Stember says, before the changes, a company would budget the $10,000 it spent in the prior year for the benefits of a 60-year-old retiree. But after the accounting change, the same company would have to consider the retiree's life expectancy, as well as the cost of medical inflation.

The impact on corporate balance sheets was massive. Suddenly companies that had been profitable were awash in red ink.

"If you look back to January of 1993, you'll see day after day there is one corporation after another that's trying to get rid of, or reduce, retiree health," says Stember, whose clients include union employees who have lost benefits.

"One of the drivers was that [health benefits] were getting more expensive," he adds. "But the most immediate driver" was the new accounting rules.

In any case, such factors surely hastened the collapse of companies like Bethlehem and LTV, which were already threatened by rising foreign competition and other factors. It also made it hard for other companies to adapt to changing conditions.

According to Treado's colleague Frank Giarratani, director of Pitt's Center for Industry Studies, there were simply too many small steel companies operating in the 1980s. But while U.S. industry leaders knew they had to consolidate -- and while companies in other countries were doing just that -- obligations to retirees and others made that difficult.

"When U.S. firms would consider the purchase of another firm, it had to realize it was buying all of its liabilities, too," Giarratani says. "That was putting a serious drag on their ability to consolidate. They were lagging way behind firms abroad."

Having worked for Bethlehem for seven years in the 1970s, Danjczek says he forecasted catastrophe. And, he adds, the unions and the companies should have, too.

"The union has very smart financial people," he says. "They had to know Bethlehem was signing up for things that they could never afford. Everybody was postponing the inevitable."

But to be fair to both sides, Danjczek adds, "Nobody saw that health-care costs over a 20-year period would go up 10-fold.

"The world changed. Benefits became a burden to employers. Who's to blame? ... I think everybody shares the blame. The union signed the contracts, management signed the contracts. ... The guy who got hurt was the employee."

Adding to the hurt is the fact that steel companies like ATI are "very profitable and making records on Wall Street," as Treado puts it.

That wasn't true when ATI sent its letter to retirees in 2004; the company was coming off a $314 million deficit the year before. That dismal performance was typical at the time: According to statistics from the American Iron and Steel Institute, the U.S. steel industry was recording deficits from 1999-2003.

But starting the following year, the steel business began a startling turnaround. In 2007 alone, for example, ATI recorded a profit of roughly $750 million. And the dramatic improvement has retirees wondering why the company can't restore at least some of their benefits now.

"I don't want the place to go bankrupt. I don't want to say, 'All for me and none for them,'" says Smarick. "But the idea is that the company is profitable. And I don't want to blow our horn, but I think [the retirees] had a lot to do with it."

Some of ATI's retirees are looking for ways to fight back. Fed up with their former employer's unwillingness to retract or modify its 2004 letter, they're determined to take their fight to the courtroom. Since receiving ATI's letter, roughly 50 retirees have organized a group to fight the company through the court system. A couple of dozen group members have already gone through five lawyers, dishing out more than $2,000 toward attorneys' fees.

The retirees' current lawyer, Mike Healey, of Downtown firm Healey & Hornack, P.C., would not return calls for comment. But even some angry steelworkers concede that a lawsuit is an uphill battle, thanks to the escape clause ATI inserted in its health-care documentation.

"There is nothing we can do legally," says ATI retiree Dave Warne, 72, who worked for the company for 28 years. "You're just wasting your money.

"Nobody was told" about the clause on page 34, he adds. "It wasn't in capital letters, it wasn't in red or bold print. For the most part, none of us knew that it was put in there, that [our health benefits] could cancel or change.

"When we were working down at the mill, no one was making us study some brochure."

So for non-union retirees, the problem is that no contract means no employer obligation. But even union workers aren't necessarily in the clear.

Stember, the attorney, says union contracts have often guaranteed benefits for employees, but without spelling out how long the benefits would be granted.

Across the country, some federal courts have ruled that if a contract doesn't specify an end date, the benefits stretch on even after retirement -- even if nothing in the contract says "These benefits are for life." But other courts, including those in Pennsylvania, have come to the opposite conclusion, deciding that benefits don't extend past retirement unless the contract specifically says so.

"So you have a situation where a guy in Michigan has exactly the same language in a contract as someone in Pennsylvania," Stember says. "And the guy in Michigan is getting his benefits for life, and the guy in Pennsylvania isn't."

As a union attorney, Stember says the whole situation is "a big lie. Everyone knew these benefits were for life." But he adds that the U.S. Supreme Court has repeatedly declined to take on the issue over the last 15 years. Until it does, he says, workers will end up getting different benefits based not just on who they work for, but on where they live.

"The rise in the cost of medical care is certainly not the fault of any employer," says Stember. "But our view is that the court has to make a decision of who is going to bear the brunt of this. Is it going to be the company that made these promises, or is it going to be these employees that worked their whole lives thinking they had retiree health care?"

With such complications looming in a court battle, some ATI retirees are seeking a more conciliatory approach. George wants to see ATI help its retirees set up a health-care fund, which both the company and its retirees can contribute to.

"Get us started," George pleads. "I think that would start showing that they're actually concerned about the [retirees] who are out there.

"I ain't asking for them to pay my whole health care," he continues. "I am looking for a way to reduce it. If it's only 20 percent, that's 20 percent better than what we're going to walk into on January 1, 2010," when retiree benefits are slated to end.

George's request isn't unusual. For decades, companies used Voluntary Employees' Beneficiary Associations (VEBAs) to help support their retirees. In fact, according to an April 2008 Harvard Law School report, some of the most significant VEBAs were created by steel-industry bankruptcies.

After LTV went bankrupt in 2001, the USW negotiated with investor Wilbur Ross, of the newly formed International Steel Group Incorporated (ISG) to create a VEBA for LTV and three other companies.

ISG has since been sold, but some retiree health costs are still covered to this day.

But "While such benefits are much better than nothing," the report concludes, "they're a far cry from full coverage," which was the initial promise of many companies.

In fact, as Malcolm Gladwell's New Yorker piece shows, even Wilbur Ross himself acknowledges the approach is inadequate. "Every country against which we compete has universal health care," Ross told Gladwell. "That means we face a 15-percent cost disadvantage versus foreigners for no other reason than historical accident. ... The randomness of our system is just not going to work."

Indeed, more than two dozen other industrialized countries -- including Canada, Australia and Japan -- offer universal health care to workers and retirees. The system, advocates here say, would relieve corporations of unfair burdens, and spare workers from unpleasant surprises.

"The burden wouldn't be so much on the back of the employers," says Rachel DeGolia, executive director of the Universal Health Care Action Network (UHCAN), based in Cleveland, Ohio. "You would think businesses would see this in their self-interest."

But other than a few leaders like Ross, she says there's been little lobbying by business leaders.

"That would be huge, but we haven't seen that on an organized basis yet," says DeGolia.

Ideally, she adds, a successful universal health-care system would include contributions from both individuals and businesses. But no matter what it looks like, DeGolia says anything would be better than our country's current system, which is ranked 37th in the world by the World Health Organization.

Health-care costs "are a problem for U.S. competitiveness," says Pitt labor researcher Carey Treado. "We're asking our industry to bear the cost of health care in a way that their competitors [abroad] do not.

"I'm surprised that companies don't get together and say, '[Universal health care] is what we want."

Right now, though, they seem to be saying the opposite. While the current system has few champions, Pennsylvania businesses have recently opposed even modest attempts to tinker with it. When the Democratic-controlled state House of Representatives proposed an extension of health benefits to uninsured workers, Republicans in the state Senate made clear their opposition.

At an April 30 hearing, Sen. Mike Folmer (R-Lebanon) conceded that while "American and Pennsylvania health care has many flaws ...[l]ooking to government to address these flaws is simply not the answer."

"Pennsylvanians should receive their health insurance and health care through the private sector," agreed Kevin Shivers, state director of the National Federation of Independent Business, in a written statement submitted to the hearing. "All Pennsylvanians should have access to quality care and protection against catastrophic costs. ... This does not mean a government-run, single-payer system."

Tom Danjczek, of the Steel Manufacturers Association, says he doesn't oppose universal health care -- in theory. "But it depends how it's drafted," he says. "Nobody knows what it looks like."

At the moment, Danjczek says VEBAs are coping with the retiree health-care costs well enough. "Health care is a right, but let's not cloud that with business decisions," he says. "Don't put [universal health care] on the back of the employer by itself. Don't chase the employer out of business."

Which could mean that not much has changed from the day that Stephan Smarick first walked into a mill: Corporations are still wary of any kind of collective solution to the problem ... even if they, their workers and their retirees, are struggling under the current system.

"The market cannot solve the health-care problem," DeGolia says. "There is widespread acceptance of the fact that what we have now is untenable. We need change."

Smarick himself admits he's wary of putting government in charge of a health program -- even though Medicare will be paying many of his bills in the year ahead.

"I don't know that [universal health care] is the best thing in the world," he says. "But there's got to be some kind of answer."