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Feb. 12, 2009, 7:41 a.m.

Pension funding gap looms as another newspaper problem

Get ready for something else to hit the fan: underfunded pension plans at newspaper companies.  In general, this won’t have an immediate impact on cash flow, but it’s another looming liability for publishers, meaning their bankers won’t be buying them lunch, or writing loans for them, anytime soon.

Pension plan funding hasn’t been an issue for most companies in the last couple of decades, because most of the time the plan investments have done so well that required company contributions to pension plans have had little impact on cash flow.  But pension plan funding becomes an issue particularly when (a) the market value of plan investments take a dive, as has happened during 2008, and (b) the size of the company shrinks, creating a situation similar to the Social Security problem: a shrinking pool of workers supporting a large pool of retirees. Newspaper publishers have both of those problems.

We’re talking here about defined-benefit plans — old fashioned pensions — not 401(k) defined-contribution plans.  In a defined-benefit plan, employers fund an investment pool designed to pay benefits to retirees in proportion to their earnings and years of service.  In theory, they make contributions every year to keep the value of the pool equal to the actuarially-determined present value of the benefit liabilities.  In practice, permissible funding delays and market fluctuations can create underfunding situations.   Many companies have frozen their defined-benefit plans, but even such plans can become underfunded in market declines.  Typically, companies are required to make up underfunding caused by market declines over a seven-year period (so the market, itself, might help the fund catch up); underfunding due to other causes, like plan changes, must be remedied on a shorter timeline.

Pension funds are usually invested in a conservative mix of stocks and bonds.  So, although the Dow Jones Industrials were off 38 percent for the year, a decently-balanced fund should be down just 20 percent or so.  The basic rule is that plans with insufficient assets need to make up the difference over seven years; a gap at the end of 2008 needs to be funded starting in 2010.  That doesn’t seem too onerous, but when the plan’s benefit obligation is measured in billions, a small shortfall has a real impact on cash flow.  And if the next seven years turn out to be like the 1930s, the market might not help much.

Not all the year-end 2008 figures are available (or I haven’t tracked them down yet), but let’s look at some of the pension issues we know something about:

  • Gannett: In the 4th quarter earnings call, CFO Gracia Martore was asked about the pension issue, and managed to talk around the issue somewhat by mentioning just that the U. S. domestic pension plan would be underfunded by $575 to $590 million.  (At year-end 2007, the funding gap on the $3.4 billion plan was $144 million, so this means the 2008 losses were just $446 million or 13 percent, a remarkable result.)   In addition, the company has a SERP (Supplemental Executive Retirement Plan), which is unfunded, but a liability nevertheless, and some foreign pension obligations.  Most likely all this will create funding obligations of around $100 million starting in 2010.  That’s about 5.5 percent of 2008 cash flow, but if revenue continues to slide during 2009, it could turn into 10 percent of cash flow —  enough to be a nuisance, but certainly not enough to sink the ship.
  • Media General at the end of 2007 reported $96 million in pension obligations against funding of $70 million, a fairly serious 27 percent shorffall.  Media General’s annual pension funding cost was running at around $7 million.   In the earnings call for year-end 2008, CFO John Schauss was asked about the pension plan and mentioned underfunding of $160 million — which can’t be right, relative to the 2007 numbers, because it clearly exceeds their pension obligation.  We’ll have to await clarification of that one.  If their investments took a hypothetical 20 percent hit, then Media General would now have a $40 million gap to deal with, or 35 percent of 2008 cash flow.
  • McClatchy hasn’t specified the level of its funding gap, so we need to await the 10K report for the real numbers.  But at the end of 2007, McClatchy reported pension obligations of $1.55 billion, and plan assets of $1.38 billion, for an underfunded status of $172 million.  Assuming an assets decline of 20 percent, that underfunding will have risen to $448 million at the end of 2008, which could require funding of about $65 million starting next year.  That would be 18 percent of 2008 cash flow, and could become as much as 25% with a little more erosion in ad revenue.  So it’s no wonder McClatchy clamped a benefits freeze on its pension plan as of the end of March.
  • New York Times reported a pension obligation of $625 million, up from just $48 million a year earlier.  Its pension assets at year-end 2007 stood at $1.55 billion, so the increase in the funding gap translates to an investment loss of about 37 percent.  (Time for the Times to talk with Gannett’s broker, perhaps.)  Those figures are for the qualified plan only; in addition, the Times has a non-qualified, unfunded plan with obligations of $227 million.  (In a liquidation, an unfunded plan goes away; it’s for executives who would get nothing.  Short of liquidation, unfunded plan obligations stretch over a fairly long period of time.)  Starting in 2010, the qualified plan will require some $90 million in annual funding; that’s 30 percent of 2008 actual cash flow and could be 40 or 50 percent of 2009’s in the event of double-digit revenue declines.

So if I lost you in the numbers, here’s the rundown:

  • Gannett is in relatively good shape in this department.
  • The Times is in terrible shape with regard to pensions, and has other performance issues, besides.  Its  shortfall was trumpeted in the New York Post, and for good reason: relative to current cash flow, it’s the worst of the bunch.* No wonder Mr. Slim is in the picture and the Times is seeking buyers for part of its building and its Red Sox stake.
  • McClatchy is not far behind the Times, relative to cash flow, but that’s based on my assumption of a 20 percent drop in investment value.  The picture there could be worse.
  • Media General needs to clarify its statement before we can draw a conclusion.

Beyond the individual results, there’s the problem that looming pension funding requirements are just another constraint that prevents newspaper companies from investing as they should in people and systems to move their digital transformations forward.

__________

*Other newspaper companies have yet to report, or I have yet to track them down, but they’re all smaller than the above, except for Tribune, which is in bankruptcy, and News Corporation which has a lot of non-newspaper assets and multinational operations.

POSTED     Feb. 12, 2009, 7:41 a.m.
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