Pension Perils

By: Mark Fitzgerald There's no carefree retirement ahead for newspaper companies. Instead, the next few years could bring big pension plan bills that will further strain the finances of publishers already struggling under high debt that must be paid from slumping revenue.

While the debt dragging down newspapers' financial performance is understandably getting the most attention, the pension obligations are a time bomb that few can hear ticking. Most are now underfunded, hit by losses from 2008's stock market slump. The New York

Times Co., for instance, says its plan lost 32% of its value in 2008. The McClatchy Co. Treasurer Elaine Lintecum says her company's plan dropped about 30%.

Unlike the amount of long-term debt newspapers carry, which publicly traded chains must report every quarter, pension obligations are calculated and reported only once a year. "That's why, for a lot of companies, pension under-funding is on the back burner," says Jamie Rizzo, a senior director at Fitch Ratings who specializes in analyzing the credit situations of media and entertainment companies.

Until fairly recently, the "problem" for many newspaper companies was not that they owed a lot of money to their pension plans, but that they had too much cash idling there. Now, some newspaper plans are under-funded by hundreds of millions of dollars ? and a law is kicking in that will force companies to become fully funded in the next seven years.

The Pension Protection Act of 2006 applies to all companies that offer the traditional "defined benefit" pension plan that accumulates money and pays it out in set amounts when an employee retires. These are different from the "defined contribution" 401(k) plans that have largely replaced them. The pension act does not apply to 401(k) plans.

But newspapers could be especially squeezed by the law for several reasons, according to analysts from credit ratings firms that pay the closest attention to pension obligations.

First, newspapers are suffering from the same double whammy affecting all pension plans, which typically invest in a conservative mix of stocks and bonds. Share prices plummeted in 2008 and interest rates remained low.

But on top of that, the recession hit newspapers as they were sitting on a mountain of debt amassed by buying more newspapers ? which suddenly were no longer generating the same cash flow as ad revenue plunged. "It doubles up an already complicated situation," Rizzo adds. "Now, not only is your revenue shortfall expanding, but the cash you have available to pay down debt is shrinking. Newspapers were unfortunately under-funded at exactly the time the markets blew up."

The shrinking pool
The steep cost-cutting and employee layoffs, which allowed many chains to swing back to profitability by this spring despite continued weak advertising, has had another consequence for newspapers' pension obligations. The cuts have created a situation "similar to the Social Security problem: a shrinking pool of workers supporting a large pool of retirees," Martin Langeveld, a longtime newspaper executive who co-founded technology company CircLabs Inc., wrote earlier this year for Nieman Journalism Lab.

Compared with other industries, newspapers run up bigger pension plan bills because they have large workforces with many employees represented by unions ? which have traditionally demanded pension plans and until very recently resisted changing retirement benefits to 401(k) plans, notes Gimme Credit analyst Dave Novosel. Newspaper industry pension liabilities are "not as high as automakers or steelmakers," he says ? but far greater than younger technology or service companies.

Adds Rizzo, "Unfortunately, from an operational perspective, newspapers are probably facing the biggest uphill struggle." Some newspaper companies, he has concluded, are not going to be able to meet their obligations under the law. "A lot of newspapers probably are not going to be able to fund these plans organically," he says. In analyst-speak, that means newspapers may be under more pressure to sell assets to fund the pension obligation or to borrow ? or to default and put the plan in the hands of the federal Pension Benefit Guaranty Corporation.

Is your plan funded?
At some chains, the degree to which these plans are under-funded is impressive, if not staggering.

The New York Times Co., for instance, said its plans were under-funded by $643 million. The much smaller A.H. Belo Corp. was under-funded by $575 million. McClatchy, the nation's third-largest publisher, was under-funded by $611 million at the end of 2008, but it claims that was reduced to $575 million as of the end of this year's first quarter. Gannett Co., the nation's largest newspaper chain, was under-funded by $587 million. (All the figures are taken from annual reports to the Securities and Exchange Commission and reflect under-funding as of 2008's end, unless noted otherwise.)

Ironically, some publishers that have gone into bankruptcy have far lower liabilities. Sun-Times Media Group, parent of the Chicago Sun-Times, said its five plans were under-funded by just a net of $18.4 million ? meaning that some funds were overfunded and others under-funded ? despite the fact the plans lost $116 million in 2008.

And when Tribune Co. filed for bankruptcy reorganization last December, its most recent annual report ? dating to the end of 2007 ? said its plans were actually overfunded by nearly half a billion dollars, $455.2 million. Tribune, which is private, did not file an annual report with the SEC for 2008. A spokesman declined to comment beyond the company filings.

Bankruptcy does not lift the obligation to fund pensions unless the company gets permission from the Internal Revenue Service. Sun-Times Media in July failed to make about $800,000 in payments to its five pension plans. A company spokesperson will not confirm the amounts, but adds, "We have complied with all applicable laws in connection with our failure to make pension contributions."

Show me the money
Whatever the amount of under-funding, calculating what newspapers will owe over the next seven years is not as simple as dividing the number by seven. Many companies have credits that reduce or eliminate the amount they need to pay.

Consider McClatchy's pension situation. Credit analysts Rizzo at Fitch and Novosel of Gimme Credit both say The Miami Herald's parent is in the worst shape among its newspaper peers because of its high debt ? a legacy of the 2006 blockbuster acquisition of Knight Ridder ? and all the other problems facing publishers of metro dailies, from falling revenue to reader and advertiser defections.

Fitch estimates the amount of cash media companies have typically had to pay out each year to fund pension obligations has generally been about 1.5% of its annual so-called "funds from operations" (FFO), essentially cash flow from operations. In a report analyzing the pension plans of media and entertainment companies, Fitch says McClatchy could be as high as 14% of FFO every year. That would be a huge nut for a company that will be facing substantial interest and principal payments on its debt in years to come.

But McClatchy Treasurer Elaine Lintecum tells E&P the situation is not anywhere nearly as dire. For one thing, she notes, McClatchy ? like almost all of its peers ? has frozen its pension plan, so its cost has stopped rising. And the company has no obligation to pay anything into the fund until 2010. By then, interest rates and returns from the stock market could be much more favorable ? dramatically reducing the amount of the underfunded obligation.

Just as McClatchy retains its reputation for assiduously drawing down debt even now, the company was known for its high level of pension funding, until the industry recession hit in 2007. "In the times when we did have low debt, we made a focus of making voluntary contributions to make sure the plan was well-funded," Lintecum says. "That worked to our advantage, and the combined plan [after the Knight Ridder acquisition] was better funded than the Knight Ridder plan." In fact, at the end of 2007, McClatchy's plan was under-funded by only $66 million.

Volatility, more uncertainty
That swing in McClatchy's under-funding from $66 million to nearly 10 times that amount in just one year illustrates how quickly pension obligations have shifted in these volatile times.

That uncertainty extends to interest rates as well. For instance, Media General Inc. notes that just a 1% change in the so-called "discount rate," the expected rate of return on bonds, would raise or lower its pension obligations $55 to $65 million in a single year, based on its 2008 under-funded obligation of $208.5 million.

This uncertainty has some newspaper industry CEOs wishing more people ? specifically, congressmen ? were paying more attention to the looming pension payments. "We've had a little bit of relief from Capitol Hill, but I think anyone really looking at this knows that it's not enough," A.H. Belo Chairman and CEO Robert Decherd told analysts on a conference call in mid-July.

Asked by one analyst how much Belo might tap from its credit facility to fund future pension requirements, Decherd replied, "I'm not being facetious ? but as little as possible."

McClatchy treasurer Lintecum is also hoping for more congressional relief. But in any event, she adds, McClatchy is committed to fully funding its pension plan. "We never like to see the pension funds under-funded," she says. "And it's our goal to be sure the employees have the funds for their retirement. So it's a concern."


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