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Dipping into the pension fund at St. Joe…

The high drama at Florida developer St. Joe Co. (JOE) has gotten plenty of press, including the generous $7.75-million handshake that former Chief Executive William Britton Greene got on his way out the door, as Bruce Berkowitz, former Florida Gov. Charlie Crist and a couple new directors were ushered in by the flexed muscle of Berkowitz’s Fairholme Capital Management.

We also took a look at that farewell package detailed in an 8-K filed Tuesday, and note that — in addition to the $4.1 million in cash, $20,000 in outplacement services, $150,000 in legal services, 18 months of health-care premiums, and accelerated vesting for stock options and restricted stock — St. Joe is paying Greene’s IRS bill if the package should trigger federal excise taxes, a perk that can really add up. We also find it ironic — though shareholders might have another term for it — that his benefits include up to $75,000 in moving costs should he decide to leave the sunny Florida Panhandle. That’s because, as we footnoted last summer, St. Joe was on the hook to pay big bucks to move him there just a few months ago, when the company moved its headquarters.

But what really caught our attention was an apparently innocuous paragraph at the very end of St. Joe’s 8-K — a paragraph that shows St. Joe dipped into the company’s pension fund as it eased Greene out the door.

Now, ordinarily, companies aren’t supposed to fund executive perks and benefits from the pension plan. Pension funds get special federal tax breaks — sort of like a giant IRA — in order to encourage retirement benefits for the rank-and-file, and to get companies to set money aside to guarantee those benefits; there are strict rules governing how much can go to the executives and the highest-paid employees, rules intended to keep the bigwigs from making off with most of the benefits. That’s why executive benefits and pensions — over and above the benefits from the regular plans — are usually simple IOUs from the company, paid out of corporate cash-flow when they come due.

But there’s a clever way around those rules that involves gaming the federal limits to maximize what executives can get. We’ll spare you the technical details. What it amounts to is figuring out just how much money the executives could get from the regular pension plan without violating federal rules — companies usually hire benefit consultants for this — and then simply declaring that they get more than the standard pension would otherwise deliver, up to that maximum. It’s really that simple: Suddenly, a few individuals get a heck of a lot more from the pension plan, and usually no one’s the wiser. (If you want to read more on the technique, sometimes called a QSERP, and its repercussions, check out the Wall Street Journal article one of us co-wrote in 2008.)

St. Joe helpfully tells us just how much extra Greene is getting from the pension fund: $797,349. By contrast, under the usual formula that applies to St. Joe pensions, Greene had accumulated a benefit under the regular pension plan worth less than half that much, or $365,722, as of December 31, 2009. Presumably, the value rose somewhat over the last 14 months, but essentially, at the stroke of a pen, St. Joe more that doubled the money Greene could expect from the company’s pension plan. Another executive, CFO William McCalmont, saw $179,809 in pension benefits shift from a corporate IOU to the pension plan.

Greene may never notice the difference. The move doesn’t appear to have actually increased his total retirement benefit from St. Joe. But the company gets a big benefit: It can now pay Greene’s entire retirement benefit out of funds it had saved and invested with the help of those federal tax breaks. Before, most of Greene’s benefit would have had to come out of corporate cash-flow at the time of payout — some $536,925 out of a combined $902,647 at the end of 2009. For all intents and purposes, St. Joe got to dip into its pension fund to pay some annual operating expense — expenses that happened to go to the departing CEO. (The move would help Greene if St. Joe were to become insolvent before cashing him out: Creditors can claim most of a company’s cash and assets, making IOUs risky for executives, but pension assets are generally off-limits in bankruptcy.)

Some of the direst consequences of this technique — draining the pension plan that rank-and-file workers are counting on — are probably not of immediate concern at St. Joe. That’s because the company’s pension plan has more money than it needs to pay existing benefits — a lot more, if a snapshot of the end of 2009 holds true (see its last 10-K). At the time, St. Joe had $73 million socked away to pay $31 million in benefits over the lives of its current employees and retirees. A surplus, of course, helps protect workers against financial-market meltdowns and bad years that might leave the company less able to contribute to the pension plan; draining it weakens that cushion at least somewhat.

That leaves the matter of those tax breaks. In 2009, St. Joe’s plan recorded a $15.3 million return; if the $73 million it held at the end of 2008 earned the 8% annual return in 2010 that the company projected, that’s at least another $5.8 million in tax-favored returns that the company could decide to apply to its top executives.

Image source: St. Joe website