FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and distinguished Members of the Subcommittee

I am pleased to submit the views of the Treasury Department on the Coal Industry Retiree Health Benefit Act of 1992 ("the Coal Act"), which was enacted as part of the Energy Policy Act of 1992, P.L. 102-486. In the letter of invitation, Chairman Brownback stated that the subject of this hearing is "Agency Management of the Implementation of the Coal Act."

In previous testimony before Congress on the Coal Act (before the House Committee on Ways and Means in September 1993 and June 1995), the Administration has expressed its strong support for the goal of ensuring adequate funding of retired miners' health benefits under the Coal Act. We continue to strongly support this goal.

Background

The Coal Act requires that former employers of retired coal miners finance, in part, the health benefits that previously were negotiated for those miners and their families by the United Mine Workers of America ("UMWA").

Prior to the Coal Act, these benefits were provided for retired miners and their families either by the miner's individual employer or through one of two multiemployer funds -- the 1950 UMWA Health Benefit Fund (the "1950 Fund") or the 1974 UMWA Health Benefit Fund (the "1974 Fund"). Contributions to both Funds were required of signatories to the national wage agreements negotiated between the UMWA and the Bituminous Coal Operators Association, Inc. ("BCOA"). Employers that were not signatories to the national wage agreement also contributed to the Funds under separate wage agreements negotiated with the UMWA.


The 1950 Fund covered miners who had retired as of December 31, 1975, and their beneficiaries. Miners who retired after 1975 generally received health benefits under the single plan of their former employer. However, if the employer went out of business or left the coal industry, the employer's retirees and their beneficiaries were covered by the 1974 Fund. As a result, all of the retirees and their beneficiaries covered under the 1974 Fund were "orphans" for whom no contributions were being made by their former employers. About half of the retirees and their beneficiaries in the 1950 Fund were orphans.

Beginning in the late 1980's, the Funds began to experience serious financial difficulties. As of March 31, 1992, the combined deficit of the Funds reached $140 million and was projected to grow dramatically if no changes were made. The deficit was caused by a number of factors, including medical inflation and the trustees' inability to impose certain kinds of containment mechanisms under the Funds. Moreover, the contribution base of the Funds was eroding. In the early 1980's, for example, approximately 2,000 employers contributed to the Funds. That number had fallen to about 300 in 1992.

In March 1990, as part of a compromise that helped settle the Pittston Coal Company strike, the Coal Commission was established to study the Funds. In its report, published in November 1990, the Coal Commission agreed that the problems of the Funds could not be solved through private bargaining alone. The Coal Commission recommended establishing a statutory obligation to contribute to the Funds. Although the Coal Commission was divided as to how this obligation should be implemented, there was general agreement that it should cover all then-current signatory employers (companies that had signed the 1988 collective bargaining agreement), as well as certain other employers who had signed previous collective bargaining agreements.

In response to the Coal Commission Report, and amid growing concerns about the continued viability of the Funds and the security of the retirees' benefits, legislation to address retired miners' health benefits was introduced in Congress. Ultimately, Congress passed the Coal Act as part of the Energy Policy Act of 1992.

The Coal Act

The Coal Act created two new benefit funds: (1) the UMWA Combined Benefit Fund (the "Combined Fund"), which services beneficiaries receiving health benefits from the 1950 and 1974 Fund as of July 20, 1992; and (2) the UMWA 1992 Benefit Plan (the "1992 Plan"), which services certain employees who retired between July 20, 1992, and September 30, 1994, and whose last signatory employer is not providing them with benefits. Employees retiring after September 20, 1994, are not covered under the provisions of the Coal Act, but rather their coverage is dependent on the provisions of later bargaining agreements.

Under the Coal Act, any employer that signed a wage agreement with the UMWA since 1950 and has retirees who benefit under the Funds could be obligated to pay premiums for the health benefits of those retirees and their beneficiaries. In addition, such signatory employers are obligated to finance the health benefits of "orphans" in the Combined Fund whose former employers are no longer in business. Each signatory employer's share of orphans is proportional to the number of the employer's retirees who receive health benefits under the Combined Fund.

The Coal Act thus imposed a statutory liability for financing the retiree health benefits not only on the operators that had signed the last union wage agreement prior to the passage of the Coal Act (the 1988 wage agreement), but also operators that had signed previous agreements. The Coal Act assigned retirees to operators in a priority that distinguished between signatories to the 1978 and later wage agreements and those operators that had only signed wage agreements prior to the 1978 wage agreement. This reflects in part the liability under the "evergreen" clause of signatories to the 1978 and later agreements for contributions. The evergreen clause, which was first included under the 1978 wage agreement, was incorporated into the agreement so that signatories would be required to contribute as long as they remained in the coal business, regardless of whether they signed a subsequent agreement. Under the evergreen clause, the Funds could "reach back" to operators that were not signatories to the current union wage agreement for contributions. To the extent that the Coal Act has codified this reach back financing mechanism, signatories to 1978 and later wage agreements that are not signatories to a current union wage agreement are often referred to as "reachback" operators; signatories only to agreements before the 1978 agreement are referred to as "super reachback" operators.

In order to reduce the premiums associated with orphan beneficiaries, the Coal Act authorized three annual transfers of $70 million each from the excess assets of the UMWA 1950 pension plan. In addition, beginning October 1, 1995, annual transfers of up to $70 million have come from the interest earnings of the Abandoned Mine Land Reclamation fund ("AML fund") to cover the costs of orphans. The AML fund is financed by fees assessed on all coal mining companies.

Under the Coal Act, responsibilities for administering the Combined Fund are divided among three separate entities, as described below:

(1) The Social Security Administration (SSA) -- The SSA is responsible for assigning each coal industry retiree receiving benefits to a former employer or related party. The SSA also calculates the annual per-beneficiary premium charged to each former employer. Following assignment of beneficiaries to employers, the SSA is responsible for informing the former employers and the trustees of the Combined Fund of the assignments. Finally, the SSA is responsible for reviewing appeals raised by employers regarding assignments of retirees, and reassigning the retirees when appropriate.

(2) Trustees of the Combined Fund -- As established by the Coal Act under section 9702 of the Internal Revenue Code, the Combined Fund is a private multi-employer plan. The Coal Act provides for the Board of Trustees who are required, among other duties, to establish the Combined Fund, to determine benefits to be paid from the Combined Fund, to establish and maintain accounts of the premiums that are required to be paid to the Combined Fund, to collect the premiums, and to provide information to the SSA, as necessary, for carrying out the SSA's duties under the Coal Act.

(3) Department of the Treasury -- Section 9707 of the Internal Revenue Code imposes a penalty upon an assigned operator for failure to pay a required premium. The statute states that the penalty "shall be treated in the same manner as the tax imposed by section 4980B" and thus the IRS, as part of its general tax administration duties, is responsible for collecting the penalty.

The Coal Act does not address the reporting of delinquent operators by the Combined Fund to the IRS. The IRS has established a mechanism with the Combined Fund to ensure that information regarding delinquent payers is obtained when the Combined Fund determines that there has been willful nonpayment. To date, no referrals have been received from the Fund.

Supreme Court Decision in Eastern Enterprises v. Apfel

The United States Supreme Court issued a decision on June 25, 1998, Eastern Enterprises v. Apfel, holding the Coal Act unconstitutional as applied to Eastern Enterprises, a coal mine operator that did not sign the 1974 or 1978 wage agreements, a so-called super reachback company. We understand that the testimony of Marilyn O'Connell, Associate Commissioner for Program Benefits, SSA, discusses the effect of this decision on the Fund's operation.

Reimbursements of Overpayments of Premiums.

The statutory language of the Coal Act does not include a procedure for the United States to refund overpayments of premiums. The IRS has no role in the initial collection of the premiums, which are paid directly to the Combined Fund. Notwithstanding that, the United States District Court for the Eastern District of Virginia held in Pittston v. U.S., 1998 U.S. Dist. LEXIS 10175, Civil Action Number 3:97CV294, that the government is liable for refund of a portion of the premiums imposed under the Coal Act. (The refund claim concerned the overpayment of premiums based on a determination by the 11th Circuit in National Coal Association v. Chater that the level of premiums set by SSA exceeded the level authorized under the statutory language of the Coal Act.) The government is currently considering whether to appeal the district court's holding that the government is liable for refunding a portion of the premium. Subsequently, the court ordered that the Combined Fund indemnify the U.S. for the reimbursements of overpayments made under the prior ruling.

Conclusion

The primary policy goal of the Coal Act is to ensure that the benefits promised to retired union miners and their families continue to be paid without interruption. The Administration strongly supports this goal. In prior testimony, the Administration has expressed its concern regarding amendments that could potentially weaken or undercut the contribution base from which retiree's benefits are funded. The Supreme Court decision, by holding unconstitutional the assignment of retired miners to a single super reachback coal operator, may reduce the number of employers required to pay premiums to the Combined Fund. We understand that testimony by Kathy Karpan, Director of the Department of Interior's Office of Surface Mining, suggests that the current sources of funding may be adequate to address changes in retiree assignments and other costs charged against the Combined Fund resulting from the Eastern decision.

There are many factors that could affect the ability of the Fund to continue to provide the health benefits promised to the retired miners, including the number of employers responsible for benefit payments, the level of the statutorily determined premiums, especially any increase in the health costs for the retirees' relative to the medical inflation index factor provided under the Coal Act, and the number and health of retirees and their families. We understand that the Combined Fund continues to collect premiums from those responsible for funding retiree health benefits under the Act. We would be happy to work with Congress to ensure that the security of the funds and the health benefits for retired miners and their beneficiaries are not jeopardized.