PBGC Arranged Merger – A First

The Pension Benefit Guaranty Corporation announced on January 14, 2020, the first merger of two multiemployer plans under the Multiemployer Pension Reform Act of 2014. The two plans are the Local 1000 Pension Fund, which covers more than 400 participants, and the Local 235 Pension Plan, which has more than 1,100 participants. Local 1000’s plan is in Critical and Declining status, while 235’s plan is in the green zone. Local 1000’s plan was forecast to become insolvent by 2026.

These two unions had merged years ago, but their plans remained separate and distinct. According to PBGC’s Executive Director, Gordon Hartogensis “Through this facilitated merger, we are preventing a failing plan from going broke and preserving benefits in a financially responsible way.” The agency will commit to providing $8.9 million in each of the next three years, which they have determined is enough to maintain the benefit levels for the participants in both plans, while saving the PBGC additional financial stress should Local 1000 collapse.

“By law, PBGC may not approve a facilitated merger that harms the solvency of the agency’s Multiemployer Program. PBGC approved this merger after determining that the merger reduces PBGC’s expected long-term loss with respect to the Local 1000 Plan and that providing financial assistance to the merged plan will not impair the agency’s ability to meet its existing financial assistance obligations to other multiemployer plans.” (PBGC Website)

On the surface, this arrangement seems like a smart approach to an on-going funding issue for many struggling multiemployer plans. Congress continues to kick the pension reform can down the road, and as we learned recently from Cheiron’s updated study, the funding problem just gets worse and worse to the tune of $750 million/month.

Of course, I have not seen any actuarial studies regarding this arrangement. It has not been announced what the funded status will be following this merger nor how this impacts future negotiated contributions from both employees and employers.  In addition, I don’t know how this might change the return on asset assumption or the plan’s asset allocation. Lot’s of questions to be answered, but if benefits can be maintained for both entities, it seems like a win for all parties.

Who knows whether or not this first merger will open the floodgates to many more, but at least those participants in Local 1000’s plan can sleep better at night knowing that their benefit will be there each month as promised!

Fiscal Responsibility?

We have recently reported on the $1.02 trillion federal deficit for 2019. What amazes me is that we are constantly told that the Republican lead U.S. Senate can’t support H.R. 397 (the Butch Lewis Act) and nearly 1.4 million multiemployer pension plan participants because it wouldn’t be “fair” to the American taxpayer.  Please stop with this charade.  The total cost to save the critical and declining pensions is a drop in the bucket compared to the lost annual economic activity produced by the benefit payments and the lost revenue collected in taxes by federal, state, and municipal entities.

The CBO’s analysis found “that under H.R. 397, the government would disburse $39.7 billion in loans to certain multiemployer pension plans. (That total excludes some forms of assistance that resemble loans but do not receive FCRA treatment because they do not meet the definition of a loan under FCRA.) Under CBO’s official approach (which excludes grant assistance), the present value of loan repayments would total $7.9 billion, CBO estimated, leading to a net subsidy cost of $31.8 billion. Under the alternative approach (which includes grant assistance), the estimated net subsidy cost would be $5.8 billion because some loans would be repaid using grant assistance. The subsidy cost for all loans (regardless of the estimating approach) would be recorded as direct spending.”

The $39.7 billion would represent <4% of the current deficit, if accounted for in one year, but less than 0.1% per year if spread over the life of the loans, which is 30 years. Any claim on the part of our Washington DC leadership that the failure to address our burgeoning pension crisis is because they are trying to protect the U.S. taxpayer is a joke. As we reported, the federal deficit has and will continue to be stimulative to our economy, and shouldn’t create inflationary pressures provided the additional demand for goods and services can be met by our economy’s ability to meet that demand.

No one in DC has earned the right to call themselves fiscally conservative!

 

U.S. Budget Deficit Hits $1.02 Trillion in 2019

The U.S. Treasury released data highlighting that the fiscal budget deficit topped $1 trillion for calendar year 2019 for the first time since 2012, increasing 17.1% in 2019 from 2018’s budget deficit that had grown by more than 28.2% from the previous year. Tax receipts increased by 5%, as corporate taxes rebounded, but outlays were up 7.5% to $4.5 trillion as federal spending for both the military and healthcare increased. This trend has continued into 2020’s budget with the deficit growing by 12% through the first 3 months.

Importantly, this fiscal stimulus continues to support the U.S. stock market, as the deficit, a liability of the U.S. government, is an asset of the private sector. According to a WSJ article, “annual deficits are projected to more than double as a share of the economy over the coming decades, as a wave of retiring baby boomers pushes up federal spending on retirement and health-care benefits.” Again, this is not necessarily bad news if the demand for goods and services fueled by this incredible stimulus doesn’t exceed our economy’s ability to meet that demand through greater production.

Ryan ALM Quarterly Newsletter

We are happy to share with you the latest quarterly newsletter from Ryan ALM. As we note in our analysis, pension assets enjoyed a terrific 2019, but the advantage relative to liabilities was not nearly as great as one would think as a significant decline in longer-term interest rates propelled liability growth. In fact, a generic asset allocation inclusive of US (60%) and international equities (5%), US fixed income (30%), and cash (5%) only bested ASC 715 (formerly FAS 158) discount rates by 0.4%, while trailing PPA Spot Rates by 3.1%. Of course, a fixed discount rate of 7.5% (GASB) was easily beaten in 2019, but it isn’t a true reflection of how a public pension system’s liabilities behaved.

Furthermore, public systems with a significant funding gap would have to have dramatically outperformed liabilities to have not seen the funding deficit further increase. Unfortunately, since 2000, liability growth has dwarfed pension asset growth by 164%. Given the extended bull market run in both equities and fixed income, now is the time to consider removing some risk from traditional pension asset allocation structures.  In the Ryan ALM newsletter, we address this idea and others. Please don’t hesitate to reach out to us to discuss a path forward.

Why Fight For DB Pensions?

Very simply, we fight for DB pensions because the benefits that they produce are a significant engine to growth in the U.S.  In fact, in 2016, spending of public pension benefits generated $1.2 trillion in total economic output, supporting 7.5 million jobs across America. Importantly, this spending resulted in $202.6 billion in federal, state, and local tax revenue. The magnitude may be different, but multiemployer plans also generate significant economic activity leading to healthy tax revenue for federal and local entities.

The cavalier approach to pension reform by our august leaders will create economic hardship for not only the plan participants but the local economies in which they live. The proposed loan sum associated with the Butch Lewis Act (H.R. 397) legislation that passed the House in July is a drop in the bucket compared to the lost economic activity that will result.  We already have a significant wealth gap in this country. Let’s not exacerbate an already awful situation.

It Could Have Been Better

As the 2010’s come to a close, I should be looking back on the prior 10 years in awe of what has been achieved in the capital markets that have witnessed a tripling of stock returns using the S&P 500 as a proxy. Furthermore, I’ve often said how truly blessed I am to have found a career in the investment/retirement industry that has now spanned 38+ years, but as I reflect on the last decade I feel almost empty. The changes that I’ve witnessed in our industry have not transformed positively the lives of most plan participants.  The on-going elimination of defined benefit plans and the greater use of defined contribution plans has destabilized the retirements for many Americans.

Maybe it is the fact that the last 10-years have treated only a small percentage of Americans favorable? For the “average” American family it is the second consecutive decade that feels lost. Inflation for the bottom 99% of us is greater than that of the top 1%, especially as it relates to day-care, health-care, housing, education, etc. Until recently, there had been little wage growth in the last 20+ years, yet our employees are expected to fund their own retirement. Little legislation has been achieved that actually saves the retirements for our workers. As the legislative can is kicked down the road, more and more Americans are on the verge of losing their promised benefits after years of service and hard work.

Annie Lowrey, a staff writer at The Atlantic, has penned a wonderful article that captures my concerns and sentiments so well.  What should be a time to celebrate seems rather a hallow exercise at this time. We need to reflect on what could have been and begin to address the issues that are negatively impacting a wide swath of our population. Retirements are a small part of the equation, despite my nearly singular focus on the issue. We need true leadership emanating from our elected officials in DC. Where have all the statesmen and stateswomen gone? America is a great country with unlimited potential, but if we truly believe that 13+ years of <3% GDP growth is going to get the job done, we are just kidding ourselves! We’ve wasted enough time.

As we embark on 2020, I’d love to see the US Senate finally bring forward the House’s HR 397 Bill (the Butch Lewis Act). This is the only legislation that actually saves pensions for our workers. All other proposals basically drive pension systems into oblivion and rely on the PBGC to pay the crumbs that remain. The U.S. has the financial means to help American families meet their basic needs. It shouldn’t cost one their arm and leg to buy a home, protect their health, and achieve a level of education that would permit them the opportunity to gain employment.

As a broader vision, I want the members of my generation who find themselves with their hands on the levers of influence in our economy and government to remember their responsibility to their fellow man, the helping hands they received from individuals and common resources that propelled their good fortune and to take the steps necessary to return control of our economic growth to the common American family for the good of us all.