Three years after its former owner siphoned off about $280 million from its pension fund, Hawaiian Telcom Inc. now says its retirement plans are underfunded.

The state's largest phone company says turmoil in the nation's financial markets coupled with recent payouts to retirees have put its pension plans underwater.

Hawaiian TelCom, which filed for bankruptcy reorganization on Dec. 1, says it can no longer provide retirees with lump-sum payouts, which can be as large as half a million dollars per worker.

Instead of a six-figure, one-time payout, new retirees must now receive their pension benefits in the form of monthly checks spread out over years.

"I think a lot of employees are deflated," said Scot Long, business manager for the International Brotherhood of Electrical Workers, Local 1357, which represents about 1,300 unionized workers.

The development could lead to higher costs for local consumers if the federal Bankruptcy Court or the state Public Utilities Commission allows Hawaiian Telcom or the company's buyers to raise rates to make up for the shortfall.

Hawaiian Telcom, which did not say how much its pension is underfunded, joins a host of companies whose pensions have been hard-hit by the meltdown in the nation's financial markets.

Standard & Poor's Inc. estimated that the pension funds of companies in the S&P 500 stock index were underfunded by a record $257 billion last year because of what it said was the worst stock market performance since 1931.

The state Employees Retirement System recently disclosed that it has an unfunded liability of $5.11 billion.

"Our company is not unique as the majority of company pension plans across the country are now underfunded due the unprecedented decline in the financial markets over the past few years," Hawaiian Telcom's CEO Eric Yeaman said in a Dec. 12 letter to employees.

VERIZON TOOK MONEY

What is unusual is that Hawaiian Telcom's pensions were overfunded by as much as $280 million three years ago when the Washington, D.C.-based Carlyle Group bought the phone company for $1.65 million.

But seller Verizon Communications Inc. took the excess money when it sold the company to Carlyle.

The sale was approved by the state Public Utilities Commission, which took no action on the transfer of the excess pension money.

Pension experts say such transfers are legal.

The pension fund — whose assets totaled about $587 million before the Carlyle buyout — was created in part by money collected from local consumers and Verizon workers.

However, much of the surplus money came from fund investments during the boom years.

Hawaiian Telcom's collective bargaining agreement gives employees the option to take a lump-sum payment when they retire or to take it in the form of an annuity, which provides monthly benefit checks.

Hawaiian Telcom said the annuity plan is unaffected by the bankruptcy.

TRANSFER CRITICIZED

Retiree George Waialeale said Verizon shouldn't have been allowed to take the excess money, which was earned by decades of hard work by the company's employees.

Waialeale, a 39-year phone company worker and former IBEW business manager, submitted testimony against the transfer in 2004 when the PUC was reviewing the sale.

He criticized the PUC for failing to review the transfer thoroughly and faulted Carlyle for not fighting for employees' benefits.

"They just flipped over not thinking that they were going to lose money in the pensions," he said.

According to Waialeale, uncertainties brought on by the 2005 sale to Carlyle prompted many employees to opt for retirement.

"Over 200 people left the phone company since Carlyle took over and less than a handful took the annuity," he said.

"That $280 million is important in case we had a bad day and this is a bad day."

Founded in 1883, Hawaiian Telcom is the state's largest telephone company, with annual operating revenues of about $500 million.

The company filed for bankruptcy protection on Dec. 1 after it failed to reach an agreement to restructure its heavy debt load. The company has lost tens of thousands of customers because of competition from wireless and other providers.

In his letter to employees, Yeaman said federal pension law prohibits the company from paying the entire amount of a worker's retirement benefits up front until the company's pension plan is fully funded.

He said the company cannot resume the lump-sum retirement payouts during the bankruptcy unless the pension plan is 100 percent funded. Yeaman said the company could also restore the plan when it comes out of bankruptcy but added a caveat:

"Creditors and other potential successful bidders for the company will have significant influence on the final outcome," he said.