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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5 thoughts on “What’s Wrong With Buying 30 More Years?

  1. Russ, I believe that the companies should be liable, not the government. Also, bankruptcy laws should be changed. Additionally, there could possibly be some assistance for orphans since their companies can no longer make up any difference for inadequate contributions.

    • Hi Tom – Good to hear from you. If we go after the businesses, we are likely to harm current and future employment. The government has the capacity to address this issue, which includes orphans. We need to act now. We can always try to tackle bankruptcy issues later on. Have a great day.

  2. Buying more time in which many pensioners won’t be alive sounds logical. Orphans should be covered by the PBGC as well as pensioners who paid into the fund. Pensions were allowed to stay in business on our dime. Doesn’t anyone think they had a plan B if MPRA 0f 2014 didn’t fly? Of course.But we will never know what that plan was.

    • Hi Joseph – I hope that you are well today. Thank you for sharing your thoughts with me. There is no reason to not include Orphans in PBGC coverage or through a plan like the Butch Lewis Act. MPRA is a disaster. I don’t know why anyone thought that it was good policy to “rescue” pensions on the backs of the participants! Please don’t hesitate to reach out to me if I can be of any assistance to you and your colleagues. I can always be reached at kamprussell@gmail.com or rkamp@alanbiller.com. My personal mission is to try and protect and preserve DB pensions. We need to avoid the social and economic crisis that will unfold should we fail.

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