Let’s Stop The Guess Work

The Committee for a Responsible Federal Budget (CRFB) is out with an article titled, “Multiemployer Pensions: The Next Source of Budget-Busting Legislation?” We continue to be pleased with the fact that the multiemployer funding issue (and the Butch Lewis Act) is getting a lot of attention in Washington DC, but we would truly prefer unbiased reporting and less guesswork on the part of the CRFB.

As the article correctly highlights, there are roughly 1,400 multiemployer plans. There is a subset of this universe of defined benefit pension systems that are in “Critical and Declining” status.  They report 100 plans but by our analysis, there are 114 funds presently in this category. It is estimated by the Pension Benefit Guaranty Corporation (PBGC) that the present value of the multiemployer program’s liabilities at $65 billion, while the Congressional Budget Office (CBO) estimates that liability at $58 billion. Our analysis estimates the liability at roughly $68 billion.

Here’s where the reporting gets a little dicey. The CRFB claims that the CBO has “also projected a much greater shortfall of $101 billion on a fair-value basis that accounts for the risk of an unexpected economic downturn that causes more plans to claim financial assistance.” What about an unexpected upturn? What would the liability look like under that scenario?

When addressing the Butch Lewis Act (BLA) as one of the proposals from policymakers involved in solving this crisis the CRFB accurately describes that these critical and declining plans would receive low-interest 30-year loans “large enough to enable them to pay full benefits”.  However, they scoff at the idea of ensuring benefit levels at 100%, as the PBGC only guarantees benefits at 60% for plans that have failed. Why shouldn’t these pension beneficiaries be given their full pension?

Under the BLA, multiemployer plans would make annual interest payments, but they would not need to repay the principal until the 30th year. We think that this strategy makes great sense, as it buys time (extends the investing horizon) for the current assets and future annual contributions to meet future liabilities and the bond repayment. Unfortunately, the CRFB is assuming that the Treasury will have to revise repayment terms and/or forgive the loans of any plan unable to pay full benefits. Our analysis of the 114 plans does not forecast any plan failures.

The CRFB correctly points out that the proposed BLA legislation prohibits plans from making any reduction to accrued pension benefits, but they are absolutely incorrect when they state that the bill “does not require any contributions from employers.” The BLA specifically requires current contribution levels to be maintained by employees and employers. The BLA also requires no withdrawal liability once the loan has been accepted.

Another claim by the CRFB as to why the forecasted liability is understated has to do with the claim that the CBO would likely assign a significant cost to the loan program because MANY plans would likely require partial loan forgiveness or additional financial assistance. The analysis by our team has determined that only three plans need additional assistance from the PBGC and that all remaining plans actually have a return on asset assumption (ROA) annual performance objective of only about 6.5%, which is significantly lower and less risky than their current return objective.

The CRFB claims the “lawmakers three decades from now could simply forgive all loans to distressed plans if they judged repaying the principal to be too onerous.” Why? As we’ve reported on numerous occasions, the proceeds from the Treasury’s loans must be used to defease the retiree lives.  These plans all have substantial existing assets that will now benefit from time and future contributions that will be more than enough to meet future obligations.

The article concludes by stating that “multiemployer pensions face serious funding challenges, but so does the federal government”. We agree with the first point, but it is ridiculous to state that the U.S. government is facing a funding crisis. The U.S. enjoys the benefit of having a fiat currency, and as such we NEVER face the risk of not being able to meet our debt obligations. The CRFB should stop trying to compare the federal budget to a budget for either a U.S. state or individual household.

The nearly 3.5 million pension recipients in these multiemployer plans generate a tremendous amount of economic activity each month. It is foolish to believe that our economy is not negatively impacted by any action that significantly reduces their hard-earned benefits. We currently have an opportunity to preserve and protect these plans/benefits. We cannot afford to squander this moment in time!

 

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