When Ron Ryan and I first became involved in designing an implementation for the Butch Lewis Act (BLA) legislation, Ron recommended cash flow matching the retired lives liability with the proceeds from the low-interest loans provided to the Critical and Declining status multiemployer plans. This process would require (force) plan sponsors to defease the retired lives liability that would then allow the fund’s current assets and future contributions to meet future plan liabilities, including repayment of the loan and the semi-annual interest payments.
The economic toll from Covid-19 on many states and municipalities will be devastating, as revenue from personal income, corporate business, and sales taxes, motor fuels taxes, casino-related taxes, lottery sales, toll roads, and other fees plummet. As we’ve reported in previous blogs, many states were not prepared for a crisis of this magnitude, and as a result they don’t have the reserves to make up for this significant shortfall in revenue, while also incurring greater expenses in the fight to contain the virus. NJ was actually trying to build a $1.3 billion reserve for 2020, but those plans have recently been scrapped.
There is active debate in Washington, DC as to whether stimulus money should go to these entities. Whether you agree or disagree, public pensions need support. Contribution expenses will continue to rise at the same time that budgets can least afford. Many of these systems will not be able to generate the necessary excess returns to bridge this funding gap. These systems are critical drivers of economic activity through the benefit payments to their participants, as well as the investments that they make, such as infrastructure.
Getting back to the BLA, Ron and I have always felt that the Federal loan program that is contemplated for multiemployer plans would work for public pensions, too. Instead of a bailout that might not be palatable to some, create the Pension Rehabilitation Administration (PRA) as a new agency within the Department of the Treasury to provide BOTH C&D multiemployers and public funds with the assets necessary to defease each plan’s retired lives liability. This will secure the promised benefits, thus maintaining the economic stimulus that is so necessary for these retirees and their communities. It also buys time for the current assets to weather this storm without forcing liquidity in assets that don’t have the natural liquidity to meet monthly payments. This strategy will provide states and municipalities with the necessary resources to maintain (and perhaps expand – unemployment claims) the social safety net that is so critical at this time.
There is a solution! Let’s not permit politics to cloud our judgment. Implementing a low-interest rate Federal loan program that requires a disciplined approach to implementation is the way to go before the economic crisis gets worse.