Devastation

It was hard to miss reports of this past week’s carnage as severe storms and tornadoes tore through sections of the country. Some communities were destroyed while others experienced less destruction. Nevertheless, most of those affected, be they individuals, neighborhoods, or whole cities used the word “devastation” in describing the effects of the storms. And appropriately so, I’d say, in light of the after-effects.

Unfortunately, such devastation occurs regularly at the hand of less unpredictable forces as Mother Nature. In these cases, the lives and expectations of individuals are dashed as their employers find it easier to abrogate than accommodate. Two of the most recent examples are American Airlines and the city of Stockton, California.

You may have heard of Stockton if you follow the foreclosure mess as it has made an inauspicious name for itself as having the second highest rate in the nation. As homes foreclosed, other home values decreased and city coffers drained quicker than they could be refilled with tax revenue. The city is now preparing for a bankruptcy filing. American Airlines (my professional alma mater) filed for Chapter 11 bankruptcy protection on November 29 of last year. (At that time, the company had more than 4 billion dollars in the bank.)

While one entity is a municipality and the other a corporation, their thinking is eerily similar: utilizing the courts to renege on promises made to their respective constituencies and customers in the past. Both signed contracts with their employees and vendors that now, apparently, are inconvenient to honor. Times are tough and there is no time left to renegotiate more affordable terms so why not go to the bankruptcy court and just throw them out?

These scenarios are just the latest of many and did not happen overnight. In some cases, contractual benefits were based upon unrealistic cash flow assumptions while others involved management teams that had so polluted the atmosphere of cooperation that negotiation was out of the question. Stockton falls into the first category while AA falls into the second.

Think back to the UAW contracts signed with the Big 3 auto manufacturers. To guarantee life-long pensions and health care to an ever growing retiree base while funding that promise by a fixed (or lesser) number of employees is bound to fail at some tipping point. Public employee unions have found similar largesse in their contracts with cities that was predicated on an ever-growing cash stream from tax revenues. With the housing crash, that money has stopped flowing.

I can’t help but think that every principal involved in these agreements knew that someday this house of cards would come crashing down, but they also knew that they’d be on a beach somewhere when it did. Politicians and union chiefs alike were rewarded with re-election and life was good. Until the train came off the tracks, that is.

In 2003 American Airlines negotiated significant reductions in pay and benefits with their unionized employees. It rallied support under the banner of “Pull Together, Win Together” and, in so doing, avoided the trip into bankruptcy. As the balance sheet improved, however, the 2003 contracts remained in force while upper management began to receive yearly bonuses. Instead of unilaterally improving the contracts, management seemed to ignore their previous mantra and concentrated in creating machinations that increased their annual “performance” payoff when, in fact, the airline’s performance was mired near the bottom of most categories. This attitude has resulted in an employee group deaf to pleas of “we need your help now” and “you’re important to us”.

As I stated earlier, these two examples are far from the first and, more than likely, far from the last. Even Social Security is threatened without tweaking due to the same tipping point in number of beneficiaries versus wage earners paying into the system. In each and every case, though, the results are the same: devastation.

Present day and future plans are thrown onto the rocks as paychecks and pensions are reduced and eliminated. Spouses return to the workforce to make up for some of the shortfall. Children find themselves leaving private schools for public ones and reconsidering their options for higher education. Retirement planning can be put off, of course, because many find that they can no longer retire at an age that once seemed affordable. Ironically, many of the perpetrators maintain their positions despite the fact that they were at the helm when the ship hit the reef. Funny how that works, huh?

While seeing my home destroyed by a tornado or earthquake or forest fire is devastating on many fronts, I’d find it infinitely harder to take a corporate or civic failure in stride. We all know that the forces of nature are whimsical and random. Our corporate and political leaders, on the other hand, should be capable of recognizing the hazards of their enterprise and avoiding them. And if they don’t, I would expect that they experience a similar fate as those under their supervision.