What’s Wrong With Buying 30 More Years?

Forbes published an article by Elizabeth Bauer on December 6, 2018, titled, “Could The Butch Lewis Act Solve The Multiemployer Solvency Crisis? The author concludes that despite the fact that “the Butch Lewis Act (BLA) is projected to have an overall positive impact, but because “it will only, on average, provide a partial solution” that it isn’t worth consideration. How troubling.

The article raises many of the same arguments that we’ve already addressed in previous blogs – impact on the deficit, as the CBO initially estimated a cost of $100 billion, declining union membership that will impact future contributions, changing investment managers “into a profit-seeking endeavor to build up profits from government loans”, and most troubling she claims is the fact that the government loans will actually become bailouts.

“Finally, the bills supporters emphasize that these are loans, not bailouts, but there’s fine print: If a plan is unable to make any payment on a loan under this section when due, the Pension Rehabilitation Administration shall negotiate with the plan sponsor revised terms for repayment reflecting the plan’s ability to make payments, which may include installment payments over a reasonable period and, if the Pension Rehabilitation Administration deems necessary to avoid any suspension of the accrued benefits of participants, forgiveness of a portion of the loan principal.”  Heavens!

The Butch Lewis Act’s loan program is designed to extend the life of these “critical and declining” plans by at least the life of the loan (30 years). As a reminder, these plans are forecasted to collapse within the next 15 years, with many expected to become insolvent before that, impacting potentially more than 1 million American retirees. The fact that the loan extends the benefits to the participants of these troubled plans for 30 years should be hailed, and not vilified. The economic benefits to local communities from the receipt of these important benefits far outweigh the potential cost.  How many times have America’s corporations had to renegotiate loan provisions because of an economic or business hardship?

When Cheiron (actuaries) did their analysis of the then 114 critical and declining plans, they determined that all but 3 of the plans would be able to repay the loan principal, interest, present retiree liabilities, and future liabilities needing only to achieve an annual return on assets (ROA) of 6.5%, which is much lower than most of the C&D plans are attempting to generate at this time. The 3 pension systems that can’t meet this goal without assistance from the PBGC will need far less in support than what the PBGC would be on the hook for should all of these plans collapse: a strong reality given their negative cash flow situation today.

The continuing delay in addressing this crisis is leading to more and more plans falling into C&D status, and that was before the dramatic events of the fourth quarter when the S&P 500 fell 9%, and other equities declined far more. The social and economic implications are grave. If you remain skeptical, may I please refer you to the blog post “The Deniers Need to Read This Post!”

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Hope That This Wasn’t A Surprising Revelation?

The WSJ recently published an article highlighting a Federal Reserve research study suggesting that student loans have negatively impacted younger Americans in their ability to buy homes.  They estimate that nearly 400,000 young Americans were impacted.  Was a research paper really necessary to understand that $1.5 trillion in student loan debt, which is now greater than revolving credit card and auto debt, would impact home ownership?

The article indicated that home ownership had fallen among 24-32 year-olds by 9% during the 2005-2014 period. They estimated that 2% of the decline was directly related to the growing student loan debt.  I am personally skeptical that ONLY 2% of the 9% was related to this burden.  New Jersey has more 18-34 year-olds living with their parents or another relative than any other U.S. state. I suspect that Mom’s cooking isn’t the only reason that this is occurring.

Student loan debt is not just negatively impacting one’s ability to buy a home, but it is also delaying family unit creation and funding for one’s retirement program, which is particularly troubling given that this burden through defined contribution plans falls mainly on the individual.

“Skylar Olsen, director of economic research and outreach at Zillow, said student loans are combining with high rents and rising home prices to make it difficult for younger households to save for down payments. “It’s a one-two punch,” she said. (WSJ)”

According to the article, the average 22-27-year-old with a Bachelors degree earned about $42,000/year in 2017.  Despite significantly greater wages than those with just a high school degree, is $42,000 really enough to manage student loan debt, a mortgage, and have disposable income for anything else? Especially if one lives in a high tax state. Since the study also suggests that many of these younger Americans are flocking to cities because of jobs and the availability of rental properties, I would suggest that most live in tax-challenged environments.

Update To Blog Post “Hopefully”

H.R.397 — 116th Congress (2019-2020) is seeking to amend the Internal Revenue Code of 1986 to create a Pension Rehabilitation Trust Fund, to establish a Pension Rehabilitation Administration within the Department of the Treasury to make loans to multiemployer defined benefit plans, and for other purposes. Importantly, this Bill, which was recently filed by Congressman Neal, has currently 9 co-sponsors, including 5 Republicans and 4 Democrats. The fact that 5 Republicans have already stepped up to support this legislation is a huge turnaround from previous attempts to provide relief for critical and declining multiemployer pension systems.

Please continue to reach out to your legislators to get them to support this critically important effort. There are millions of American workers who are in desperate need of protection for their hard-earned pensions.

A Developing Crisis Made Much Worse

It is well documented that the financial impact on the 800,000 government workers and the roughly 4 million contractors will be tangible especially for the contractors who are not likely to see any compensation for the loss of business revenue.  We are now on day 25 in the shutdown with no end in sight.  It is estimated that roughly 14% of the government pool are folks making <$50,000 annually.  They, of course, are the most vulnerable in this saga.

Concerted efforts are being made by institutions to provide temporary relief, short-term loans, expedited hardship withdrawals from retirement accounts, companies are reducing fees, banks are breaking CDs, and on and on.  That is all great, BUT we’ve had a significant crisis developing since the Great Financial Crisis (GFC) impacting a significant percentage of our workforce that are living paycheck to paycheck!

Sure, this shutdown impacts a ton of people all at once magnifying the impact, but for many Americans, this situation has been a source of great stress for some time now.  This phenomenon is impacting wide swaths of our workforce and economy from farmers to professors, accountants, real estate agents, small business owners, etc.  Furthermore, they aren’t just Millenials, but include Gen Xers and Baby Boomers, too. They are city dwellers, suburbanites, and occupants of rural communities. As described above, few are immune.

According to a recent Washington Post article which referenced a Federal Reserve report, roughly 4 in 10 Americans couldn’t come up with $400 without sliding into debt or having to sell something.  We’ve reported on this issue before, but it just keeps getting worse. “It’s astronomical what people need just to make it month to month,” said Heidi Shierholz, a former chief economist at the Department of Labor who now studies how middle-class families spend their wages at the Economic Policy Institute, a Washington think tank that is funded by foundations and unions. “Given the high cost of transportation, housing, health care … There is often no wiggle room.”

Add to Heidi’s list the cost of education, insurance, and the funding of one’s retirement today, where is the disposable income? The fact that we could have politicians making statements such as “who’s living that they’re not going to make it to the next paycheck?” speaks volume to how out of touch many of our “leaders” truly are with the economic plight of our citizens.

For many Americans, the last two decades have seen wages stagnate, full-time jobs migrate to the on-call variety, benefits cuts or eliminated, degree inflation enacted, etc. Any wonder why the “Distress Index” is ratcheting higher?

At the same time that Americans have been asked to do much more with less, we are asking them to fund, manage, and then disburse a retirement benefit. Who is kidding who? The loss of defined benefit plans for the masses is exacerbating this trend and it will only get worse. Let’s figure out quickly how to get Americans working and wages growing so that the “average” worker has a chance to survive an economic shock of much more than just $400.

Hopefully

A recent article in FreightWaves discusses the filing of legislation by Congressman Richard Neal (D, MA).  The legislation know as the Rehabilitation of Multiemployer Pensions Act was first filed by Congressman Neal in 2017, but didn’t get the necessary support from the Joint Select Committee on Solvency of Multiemployer Pension Plans.

According to John Murphy, Teamsters Union Vice President, “it’s a different world in this Congress with the Democrats now the majority party in the House.” Mr. Murphy is pleased to see a more bi-partisan effort to support this version of the Bill, as support has come equally from both Democrats and Republicans.

According to the article, the new legislation is similar to what was filed in 2017, but the new language was not available for comparison purposes. In the original Bill, a new agency, the Pension Rehabilitation Administration (PRA), was to be established for purpose of providing loans to multiemployer plans deemed to be in Critical and Declining status.  There were 114 plans with this designation in 2017, but regrettably, this universe continues to expand. Doing nothing is not an option anymore.  There are too many American workers/retirees who will suffer both social and economic consequences from the failure to act now.

We will continue to provide updates on this important legislation as more information becomes available. Please reach out to your representative in Washington to encourage their support of this critical legislation.

Ryan ALM Fourth Quarter Newsletter

We are pleased to provide you with the Ryan ALM Fourth Quarter newsletter. Each quarter Ron Ryan and his team provide plan sponsors an important view on how a generic liability stream, priced at market, would have performed relative to a plan sponsor’s representative asset allocation.

At the end of September, the representative asset allocation model had outperformed liabilities (marked-to-market) by more than 11%, with assets up 5.8%, while liabilities (U.S. Treasury STRIPS index) had declined by 5.3%.  The >11% advantage provided plan sponsors with a significant opportunity to de-risk their plans. De-risking in our view is a way to stabilize both the funded status and contribution expense.

Unfortunately, the fourth quarter’s significant drawdown for equities and a subsequent rally in interest rates completely reversed the earlier advantage. At the quarter’s end, assets were underperforming liabilities by nearly 2%: an almost 13% reversal in just 3 months. Wow!

Regrettably, most plan sponsors, especially those that follow GASB accounting rules for the discounting of pension liabilities, rarely get a view of those liabilities except once per year. As contribution expenses have risen rapidly during the last couple of decades, we think that it is becoming critically important to initiate strategies to potential slow this escalation before state and local budgets are no longer able to sustain the burden.

“Should We Just Take Our Lumps?”

Oh, my!

I’m attending the Opal Public Funds Summit in Scottsdale this week.  Opal produces this critical forum twice per year at which public fund plan sponsors, consultants, actuaries, and invesment managers gather to discuss the state of the U.S. retirement industry while considering strategies to address issues and opportunities. Given how troubled our industry is, particularly after a challenging 2018, this year’s program takes on heightened urgency.

The title above, “Should We Just Take Our Lumps?” were words uttered by a plan sponsor during their panel discussion regarding the current environment for fixed income. This plan has roughly 22% in traditional fixed income instruments, and the sponsor was concerned that a rising interest rate environment might weigh heavily on future returns for their program. Instead of exploring options for the current exposure they were considering just letting the exposure get whacked while hoping the remaining 78% could generate alpha to make up for this potential underperforming asset class.

Thinking a little outside the box. We would recommend that the plan sponsor bifurcate their portfolio into insurance and growth assets. The insurance assets would be their current fixed income exposure converted from a return generating asset to a cash flow matching portfolio designed to meet near-term liabilities. This conversion will improve liquidity to meet those benefit payments while eliminating the interest rate risk that the sponsor was concerned about.  Furthermore, by building an immunized portfolio to meet near-term payouts the investing horizon gets extended for the growth portfolio. This strategy buys time for the growth assets to capture the liquidity premium that exists in many assets outside of fixed income.

By focusing on the return on asset assumption (ROA) as the primary objective, the sponsor was fearful that a conversion of the fixed income portfolio to meet near-term benefit payments would impact their ability to meet the ROA.  However, converting the current fixed income exposure to a cash flow matching (immunized) strategy, the portfolio’s yield is likely going to be enhanced, which would actually improve the plan’s ability to exceed their return objective.

Conferences, such as Opal, are potentially great sources of knowledge provided that one attends with an open mind to new and different ideas.  For too long our industry has been walking down the same path together (return focused), and we are now at a critical intersection in which the path less traveled needs to be explored.