Wednesday, May 26, 2010

Bailing Out Union Pension Funds?

Megan McArdle of the Atlantic asks, Should the Government Bail Out Union Pension Funds?:
Fox Business has made something of a splash claiming that Senator Casey has introduced a bill to bail out union pensions that will cost $165 billion. Media Matters lashes back, arguing that the bill will only cost $8-10 billion and isn't a bailout. Who's right?

As so often with these things, the truth is somewhere in between.

The bill in question will essentially let multi-employer union pension plans, like the Teamster's plan that is currently causing UPS so much trouble, segregate out the workers of defunct companies and get the Pension Benefit Guarantee Corp to pony up for their benefits. Media Matters says that the bailout won't cost $165 billion, and they're right; that's the total liabilities of the plan. Theoretically, it could cost $165 billion if every single employer went bankrupt, but that's not a very likely scenario.

However, Media Matters also says it's not a bailout, which is silly. When you give someone money because they've gotten their finances into an untenable state, that's a bailout. $8-10 billion is double the current level of underfunding in the PBGC, and that's just the undoubtedly rosy number cited by Senator Casey. If the funding levels of the MEPs get worse (as is possible, even likely) it will cost more.

More to the point, the multi-employer plans have not paid any premiums for the benefits Senator Casey now wants to give them. The PBGC provides insurance (for which it does not charge adequate premiums, but that is another rant.) It is not a charitable institution.

The whole point of a multi-employer plan is to pool the risk, and ensure that workers do not lose benefits merely because they have transferred around. It is true that there are now big shortfalls in these plans, and the bankrupt employers are (definitionally) not around to help the going concerns make up their losses. That makes it difficult to convince firms that they should, say, employ teamsters.

But while there's a certain amount of unfairness to this, I don't see why it's more fair to get the taxpayers to suck up the bill. The employers knew what they were getting into. So did the unions. The PBGC exists to shelter workers from total destitution in the event that their pension fund does not have resources to meet its obligations, and there is no going concern behind the fund able to make up the shortfall. It does not exist to make UPS more profitable, or more competitive with UPS.
F. Vincent Vernuccio and Jeremy Lott examined this further in the Washington Post, Look for the union fable:

Flanked by representatives from the International Brotherhood of Teamsters, YRC Transportation and ABF Freight Systems, Sen. Bob Casey, Pennsylvania Democrat, proposed a massive bailout for the Teamsters' and other union pension funds on March 22. The deceptively named Create Jobs and Save Benefits Act of 2010 (the Save Adorable Fluffy Bunnies Act was taken, apparently) should really be called the Bail Out Irresponsible Unions Act. That is exactly what the bill would do.

After denying for years that their pension funds were in trouble, labor unions of late have been forced to admit that union-managed multi-employer pension funds are in wretched shape. Moody's Investor Services estimated multi-employer pensions were underfunded by $165 billion in 2009. Because of labor mismanagement, millions of current and former workers' retirements are in real danger. Labor is doing everything it can to buy time and shift the blame elsewhere.

The Teamsters' Central States Fund has been woefully underfunded for years. It had only 47 cents on every dollar owed in 2007 and likely is much worse today in light of the recent economic downturn. United Parcel Service understood the severity of this problem and paid an astounding $6.1 billion in withdrawal fees in 2007 just for permission to back away from that actuarial ticking time bomb.

When Reps. Earl Pomeroy, North Dakota Democrat, and Pat Tiberi, Ohio Republican, introduced a similar bill last fall, Teamster President James Hoffa Jr. blamed the Pension Protection Act (PPA) of 2006 for "greatly and unnecessarily accelerated funding requirements for many plans," which "hastened the [pension] crisis." What it did really was finally force the unions to come clean about the crisis. The PPA required the Teamsters to send letters to thousands of workers telling them their pensions were in critical status - less than 65 percent funded - meaning that future retirees might not get as much as promised and even current retirees could be in trouble. Many union leaders were against the PPA because it meant they could no longer tell members that their pensions were in good shape.

Mr. Hoffa asserted, incredibly, that multi-employer plans are "not controlled by unions" because they are "operated by management-labor boards" and legally "independent of unions and companies." Multi-employer pension boards, in fact, consist of several companies that contribute half of the trustees and generally a single union that contributes the other half. The deck is heavily stacked for labor control.

When pension funds prove unable to pay their obligations, the Pension Benefits Guarantee Corp. (PBGC) steps in to provide relief for workers. PBGC is financed by insurance premiums on private pension plans. Union pension plans pay a much lower premium, and their workers are insured at a much lower rate than retirees in single-employer plans. Retirees in union pension plans are insured only up to $12,870 per year. The House and Senate bills would increase this coverage to $21,000 and put taxpayers on the hook for the pensions of union workers.

The bills would create a special "fifth" fund to help pre-emptively bail out struggling multi-employer pension funds. The fund would apply to so-called "orphans" - workers of companies that had to leave the plan because of bankruptcy - in union pension funds that have twice as many retirees as workers and owe two times the amount of benefits that they receive in contributions. PBGC would take retirees in the plans that worked for bankrupt companies and put them in special segregated plans.

According to Mr. Casey's summary, the legislation would be targeted to the Teamsters' "Central States Pension Fund, a few other Teamster-based pension funds and one other union-based large multi-employer plan (subject to the approval of the PBGC.)" But that's far from the whole of what the bill might allow.

To start, it would reward unions for past bad behavior by leaving them in charge. When a PBGC has to fund an insolvent plan, it controls the benefits and payments. The segregated plans in the fifth fund - known as a partition - would be controlled by the same trustees who failed to adequately fund the original plan. According to Mr. Casey's own office, "PBGC [would] not provide notices, calculate benefits or in any other form administer the plan."

Retirees in partitioned plans would receive their full benefits courtesy of the U.S. taxpayer. The bill states that obligations of this "fifth" fund would be "obligations of the United States" - and no longer just by PBGC insurance premiums. Taxpayers could be on the hook for even more, too. A provision in both bills would allow the fifth fund to transfer money to other parts of PBGC. That means that the fifth fund could be the camel's nose under the tent, using taxpayer dollars to shore up the deficit-ridden PBGC. According to the corporation's own report released earlier this month, it had a deficit of almost $22 billion in September 2009. By 2019, the shortfall is expected to balloon to $34 billion.

The Senate Committee on Health, Education, Labor and Pensions will debate the bill on May 27.

As things stand now, either businesses or taxpayers are going to pay billions for union mismanagement of these funds. Mr. Hoffa sermonizes that this is "about living up to the responsibility to provide the retirement security promised to employees."

Taxpayers, however, didn't make those promises to workers. Many unions did. In fact, they used the promise of reliable union pensions to lure skeptical new workers to become dues-paying members. They told prospective members not to trust 401(k) plans and instead to rely on solid union-bargained plans. Those plans, they claimed, are more secure and guaranteed by the government. Of course, they left out the inconvenient and potentially devastating truth that the guarantee is less than $13,000 and applies to current retirees. Isn't it about time the unions told the truth and lived up to their responsibility?

I agree with the authors. It's about time unions told the truth and lived up to their responsibility. They can't abdicate their fiduciary duties and then ask taxpayers to make up the shortfall. If anything, these multi-employer plans have proven to be a miserable failure, and I wonder if union corruption had anything to do with the mismanagement of the plans.

And now Senator Casey wants to bail out this mess? Tread carefully dear senator, tread very carefully. You don't know what you're getting involved with; this bill is going to come back and bite you in the ass.

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