Hostess Brands Shutdown Highlights Looming Pension Crisis

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Hostess Brands, the closely held maker of Twinkies, Hostess Cupcakes, Ho-Hos, Drake's Cakes and Wonder Bread, has announced that it will shut down all operations beginning today and liquidate the company's assets as soon as it receives permission from the bankruptcy court.

Hostess, which is in bankruptcy for the second time since 2004 and is now owned by a group of financial firms led by two hedge funds, had issued an ultimatum to striking bakers: Call off the strike by 5:00 p.m. Thursday or the company will be shut down. The strike persisted and the closure was announced Friday morning.

The Hostess Brands shutdown will mean the loss of 18,500 jobs nationwide. Hostess Brands operated 33 bakeries, 565 distribution centers and 570 outlet stores.

"There's no way to soften the fact that this will hurt every Hostess Brands employee," CEO Gregory Rayburn said in a letter to employees. "All Hostess Brands employees will eventually lose their jobs – some sooner than others."

But the problems at Hostess go way beyond the company and its employees.

In fact, they're part of a national issue that undermines the entire U.S. economy.

Why Hostess Brands is Shutting Down

Hostess management had been trying to reorganize the company, primarily by cutting labor costs, after filing for Chapter 11 bankruptcy for the second time in January of this year. There are two major unions at Hostess, the International Brotherhood of Teamsters, which represents about 7,000 Hostess workers, and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, which represents about 5,000 employees.

According to an article published last summer by Fortune, labor relations at Hostess have been contentious for some time. In order to allow Hostess to come out of bankruptcy, management had wanted to cut wages by 8% this year, gradually giving back half of the cut over the next five years. In addition, management wanted to reduce its contributions to employees' health care and pensions.

The biggest issue is that Hostess' union pension funds are underfunded by $2 billion. Under its agreements with the unions, Hostess is required to contribute to multi-employer pension plans (MEPPs). MEPPs provide pension benefits to workers within a particular trade, regardless of what company they work for. The concept was that all companies employing workers in a particular trade would contribute to the trade pension fund so that workers would not lose their pension benefits if they changed employers.

Fortune writes, "Trouble with MEPPs is, if some employers go out of business, the remaining companies have to pick up the shortfall in funding benefits. When there are too few employers left standing, the fund is in trouble…A third of the 40 MEPPs to which Hostess contributes are among the most underfunded plans in the country."

With Hostess gone, all of the remaining companies contributing to the MEPPs serving Hostess employees will now have to pick up the slack left by Hostess.

This legacy of the go-go years of the 1950s and 1960s is something that will have to be dealt with on a national level. There is massive underfunding of MEPPs in general and the situation only gets worse as individual companies go out of business.

This problem is not peculiar to the United States. In Japan, for example, the government has proposed eliminating all corporate pension funds to resolve underfunding issues. This follows a string of bankruptcies of otherwise healthy companies because they could not afford their increased obligations to MEPPs after other participants defaulted.

In September, Hostess presented a package of reduced wages and benefits to its unions. The Teamsters narrowly voted to accept the package but the smaller Bakers' union rejected the deal.

Following that rejection, management asked the bankruptcy court to allow it to force a new contract onto the recalcitrant bakers. In the face of this move by management, the bakers opted to strike. This angered the Teamsters, who, having agreed to the management proposal and fearing for their jobs, wanted the bakers to hold a secret ballot on whether or not to continue their strike instead of a voice vote.

What Hostess Brands Workers Are Saying

John Smith, a wrapping machine operator at the Hostess plant in Indianapolis, IN told USA Today, "You have to take a stand for what you believe in. They gave us a take-it-or-leave-it deal. We can't take the financial abuse."

A union business agent at the Indianapolis picket line told USA Today that he would rather see the plant sold. "It's definitely got to be better than what this company's trying to implement. There are other bakeries out there looking to purchase some of these locations. These employees have the opportunity to go back in (under a new owner)."

The bakers remained on the picket lines and, at 5:00 p.m. on Thursday, Hostess' fate was sealed.

Assuming that the bankruptcy court gives its permission, management will auction off the Hostess brands and facilities.

One potential buyer is Bimbo Bakeries USA, part of the Mexican baking conglomerate, Bimbo Group. Bimbo is already the top baker in the United States selling products under the Sara Lee, Entenmann's and Arnold brands, to name but a few. Bimbo had made a bid for Hostess back in 2007, before it came out of its first bankruptcy and may be willing to snap up some of Hostess' iconic brands at auction.

But a sale of Hostess assets will not resolve the outstanding issue of underfunded pensions. This is a much bigger issue than the death of the Twinkie and, if left unresolved, it will cause problems for other companies in the future.

Check out this full report by Money Morning's Shah Gilani on how dangerous unfunded pensions are to the U.S. economy.

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  1. eatingdogfood | November 17, 2012

    Democrats + Unions = Bankruptcy AKA Hostess !!!

  2. Robert | November 17, 2012

    Once again, unions have suceeded in moving toward redistribution of wealth, read everybody poor
    and on the government dole. Coincidentally, could the requirement of MEPP funding have some causal relationship?

  3. Tough Love | November 17, 2012

    While the problems of mulch-employer Plan are real, they pale in comparison to the underfunding of PUBLIC Sector pension Plans.

    With Taxpayers (supposedly) in the hook for Plan shortfalls, these Plans with provisions granted and approved by politicians with a conflict of interest because they glade accept campaign contributions and elections from the Unions upon whom they vote for member's pay, pensions and benefits.

    The upshot is grossly excessive pensions FAR FAR FAR greater than what comparable Private Sector workers get, all while Taxpayer contributions (and the investment earnings thereon) are called upon to pay for all plan costs in excess of the 10-20% typically paid for by the workers contributions. TAXPAYERS (NOT the workers) pay for 80-90% of the total costs of these grossly excessive Public Sector pensions !

    Taxpayers are getting financially raped by these greedy Unions and workers and by the politicians (in cahoots with them) that have allowed this to happen.

    Taxpayers ….. REFUSE ANY further funding of Public Sector Plans with a benefit (as a % of pay) greater than what YOU get in pension benefits from YOUR employer !

  4. eatingdogfood | November 19, 2012

    Democrats + Unions = Bankruptcy !!!

    • Vanne Metzger | November 26, 2012

      Don’t scapegoat the workers, "eatingdogfood". The unions didn’t ask for more pay or better benefits, and they’d already accepted thousands of layoffs and major concessions during Hostess’ last round in bankruptcy court, which ended in 2009. No, "Hostess was smashed by vulture capitalists" who loaded the company with debt and earned millions in fees, and by "incompetent managers" who gave themselves huge raises as the company faltered. The CEO who led the company back into bankruptcy earlier this year got a 300 percent pay raise, even as the company stopped contributing to workers’ pension funds, says Jake Blumgart at Salon. "To add insult to injury," the current CEO has asked a bankruptcy judge’s permission to pay executives $1.75 million in bonuses. And somehow the unions are to blame for this fiasco?

      • RSR | November 27, 2012

        Thanks to all who went on strike,you put over 18,000 people out of work. I hope your holidays are as miserable as mine. You could have accepted the deal and looked for other work instead of making people lose their jobs! How selfish can you be? With the economy being in the shape that it is in, do you think all of us can find a job? You people make me sick.

  5. Al Moncrief | November 19, 2012

    COLORADO COURT OF APPEALS CONFIRMS COLORADO PERA PUBLIC PENSION COLA BENEFITS AS CONTRACTUAL.

    The Colorado Court of Appeals has reversed and remanded an initial District Court ruling that denied the contractual status of public pension COLAs in Colorado. The Court of Appeals confirmed that Colorado PERA pension COLA benefits are a contractual obligation of the pension plan Colorado PERA and its affiliated public employers. A huge victory for public sector retirees in Colorado! The Colorado Legislature may not breach its contracts and push taxpayer obligations onto the backs of a small group of elderly pensioners.

    The lawsuit is continuing. Support pension rights in the U.S. by contributing at saveperacola.com. Friend Save Pera Cola on Facebook!

  6. Scott | November 21, 2012

    Once Hostess filed for bankruptcy, their obligations to their contracts ended–including union contracts. They can come back by firing (letting go kindly) all union employees and replacing then with non-union employees–there are enough Americans out of work. The Great Ronald Reagan made it happen with the air traffic controllers in the early 80s!

    • RSR | November 27, 2012

      Amen. That's what should have happened. And to all of you strikers who voted for Obama, how's that working out for you? Standing up to the "man", just put all of us out of work, and at this time of year. I hope your children understand, no Christmas this year.

  7. Karl | November 21, 2012

    "They gave us a take-it-or-leave-it deal. We can't take the financial abuse."

    Well, now you don't have to put up with it anymore.

  8. Ralph Spyer | November 23, 2012

    The owners of walmart have more wealth that poorest 30% of Americans, no unions at walmart. The 50 richest Americans have more wealth than 150 million Americans or 60 percent of us, this is what happens with out strong Unions. What to unions get and fight for ? A 40 hour work week, a pension, a safe place to work, protection from Company pimps that ask employee to work harder for less money,Americans were killed in the start of the labor movement

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