Representative Virginia Foxx (R-NC) was recently quoted as saying that H.R. 397 is nothing more than a “full taxpayer bailout of private-sector multiemployer pension plans”. In a blog post from yesterday, I questioned whether this particular loan program would, in fact, be described as a bailout given that the U.S. Treasury Department was actually going to make money (25 bps above the prevailing 30-year Treasury when issued) on the loans authorized to these Critical and Declining plans.

It seems to me that whether or not you believe this proposed legislation is a bailout or not, the word itself seems to carry an incredibly negative connotation, particularly among some of our politicians. I think it would be beneficial to review the history of the U.S.’s largest bailouts – those being TARP (Troubled Asset Relief Program) and Fannie and Freddie.  I suspect that many folks would guess that the U.S. taxpayer got hosed on this program, but the facts suggest otherwise.

Paul Kiel and Dan Nguyen, from ProRepublica, have been tracking the flows related to these bailout programs since their inception.  In their latest update (February 2019), they have determined that the “accounting for both the TARP and the Fannie and Freddie bailouts, shows that $632B has gone out the door—invested, loaned, or paid out—while $390B has been returned. The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $349B. When those revenues are taken into account, the government has realized a $107B profit as of Feb. 25, 2019.

The biggest beneficiaries of the government rescue programs were the banks and financial institutions at $245B, Fannie and Freddie at $191B, automakers at $79.7B and AIG at $67.8B. Mortgage modifications, toxic asset purchases, and state housing programs another roughly $48B completing the list of recipients. The U.S. has recouped assets through Warrants, returns, dividends, interest, and other proceeds. Not too shabby! Especially since there still exists more profit potential from a variety of sources.

Have all of these entities contributed to the profit total? No, of the 780 investments made by the Treasury 633 have resulted in a profit. The .812 batting average looks pretty impressive. As a reminder, of the 114 Critical and Declining plans that Cheiron reviewed, only 3 were in need of additional PBGC assistance. If however roughly 19% of the remainder needed some additional time or assistance, wouldn’t that still be a pretty good batting average and worthy of this legislation going forward. Again, Washington DC seems to be playing chicken with these critically important benefits. It isn’t fair to the participants who were promised a benefit and who contributed to those promises in lieu of salary increases. Enough is enough.

There has been an immediate and positive response to our most recent blog post titled, “Talk IS Cheap, Rep. Foxx”. One of our followers asked the following question: “If the U.S. Treasury borrows (by issuing long-term debt) the funds and then loans it to the pensions that need it (at a profit spread 25 bps > then the prevailing 30-year rate) how does this translate into a taxpayer bailout?” Good question. We are equally confused.

In the analysis conducted by Cheiron (a wonderful actuarial firm) of the 114 Critical and Declining plans that existed at that time, all but three of those plans were able to meet current benefits and future plan liabilities, the interest on the loan, and the balloon payment in year 30. To me, this translates into a loan similar to any bank transaction such as a mortgage. Why do members of Congress feel it is necessary to label this a bailout, especially when many of today’s members were quite supportive of the bank bailout in 2008 and in some other examples that pre-date the GFC.

Let’s all understand that the loss of the promised benefits will not only impact the participant who was expecting to receive their monthly retirement check, but the businesses that benefit from those checks being spent in local economies.  Furthermore, the significant loss in monthly income forces nearly 1 million additional Americans onto the social safety net. This is an outcome that I hope no one wants to witness.  The estimated cost to provide a lifeline to these struggling plans was roughly $35 billion.  As an FYI, the net interest profit for the U.S. Federal Reserve in 2018 was about $65 billion. In roughly 6 months, the pension crisis could be eradicated.

As many of you know, the “Butch Lewis Act” is back before the 116th Congress as H.R. 397: Rehabilitation for Multiemployer Pensions Act. The proposed legislation now has 177 cosponsors, including 8 Republicans. Importantly, by a vote of 26 to 18, the proposed legislation cleared the Education and Labor Committee, but only along party lines.

Rep. Virginia Foxx (R-NC), who as panel Chair, has come out aggressively opposed to this legislation saying that she doesn’t see a path to even a vote occurring in the Senate should the legislation make it out of the House.  Here are Rep. Foxx’s opening comments (in italics) and my thoughts regarding her concerns in bold and within parentheses.

“But the most stunning turn of events has been the announcement that we would, in fact, proceed with consideration of a full taxpayer bailout of private-sector multiemployer pension plans. (What is meant by a “full” taxpayer bailout? Do these plans not have significant assets accumulated to meet future liabilities?) When this markup was noticed and this particular bill, H.R. 397, was listed, I, along with every member of this Committee who understands how serious and complex this issue is, was shocked.

Lining this room are the portraits of individuals who have served as chairs of this Committee, Democrats and Republicans alike, going back several decades. All of them have managed this Committee’s vast and varied jurisdiction with an all-too-clear understanding that the issue of pension reform is one of the most difficult, high-consequence responsibilities that committee members must meet. (Pension reform is absolutely critical, but while Washington legislators fiddle, Multiemployer plans burn.) That is why, regardless of party affiliation or other pressing circumstances, they insisted that this committee proceed with extraordinary care, caution, and cooperation before touching the retirement security of so many hardworking Americans and retirees. (Sorry, but the retirement income of many Americans has already been touched through the government-sanctioned slashing of benefits under MPRA, and more than one dozen plans have “successfully” filed for such relief – appalling!)

They would be confounded by today’s markup. We’re actually about to consider a bill that is poorly drafted and outlandishly framed.

In 2014, many of us on this dais today, under the leadership of Chairman John Kline and Ranking Member George Miller, worked together to bring much-needed reforms (I don’t know about you, but draconian cuts to promised benefits that in some cases exceed 50% are tough to describe as much-needed reforms) to the multiemployer pension system, with an understanding that no amount of money would fix the structural problems in the system that put so many retirees and taxpayers at risk in the first place. The legislation before us today totally destroys that framework. (The legislation before Rep. Foxx and the others on the Committee is designed to extend a 30-year lifeline to these struggling plans and not force plan participants onto the Federal Government’s social safety net.) It is a sweeping, politically motivated ploy that is beneath the standards and the integrity of this Committee, which has historically modeled for the rest of Congress in practice and in policy how we should treat something so personal and so vital to Americans as their own hard-earned pensions. (Please stop with this rhetoric. If you honestly believed that hard-earned pensions were so personal and so vital to Americans, you would have NEVER supported MPRA in the first place and you certainly wouldn’t continue to push the pension crisis further down the road. The time to act is now.)

This isn’t just a taxpayer bailout. This is a lie. We are here to consider a bill that will meet certain death in the Senate. (That certain death is because of political bias and not the merits of this proposed legislation.) We will find ourselves back at the drawing board, and everyone here knows that’s what we can expect on an issue as complex as this one. Those of us on this Committee who were here in 2014 will recall the serious, bipartisan negotiations required to get a final product on which we could all agree. And those of us who served on the Joint Select Committee established during the last Congress to focus exclusively on this issue, know it’s not this easy—if it were, the Select Committee would have reported a bill. (The Joint Select Committee did float a test balloon, which blew up in their faces because it was so poorly thought out, including the potential to negatively impact even sound multiemployer plans).

But the workers and retirees who are going to be impacted don’t see it that way. They see Washington Democrats offering more false hope. (Should they just accept the fact that those in critical and declining plans will see a dramatic reduction in their promised benefits despite contributing significantly to this “benefit”?) They’re told by one special interest group or another that all we have to do is spend a hundred billion dollars of the taxpayers’ money and they’ll be fine, their pensions will be secure, and they can rest easy again. (Where are you getting the figure of $100 billion?)

We know that’s not true. (Correct, the proposed sum needed to extend a pension lifeline is much smaller than $100 billion.) We owe it to them to take this problem seriously. This bill is not serious. And treating unserious proposals as real solutions amounts to lying to the public. I’ve yet to see anyone who truly needs answers, who truly needs help, benefit from these empty promises. Democrats make lavish promises to students, to seniors, to hardworking mothers, to hourly workers, and here, now, to retirees. And the only people I’ve ever seen benefit from these empty promises are Democrats themselves, on Election Day.

On behalf of every American who will be left empty-handed today, we will continue to be truthful about what we are doing. We will continue to search for real solutions instead of shortcuts and paybacks to special interests. (Congress has had decades to find “real solutions” but nothing of merit has been brought forth until this proposal. H.R. 397 provides for low-interest rate loans to be extended to critical and declining plans for the purpose of ensuring that current benefits (retired lives) are paid, as promised, while also providing an extended investment horizon for future liabilities and the loan repayment to be met.  Rep. Foxx, did you support the $700 billion bank bailout in 2008? This legislation seems like a drop in the bucket given that it is designed to save those vital pensions for more than 1 million hard-working Americans!)

Talk is cheap. Bad bills are costly.” (It seems like Congress just wants to talk, and as the delay extends, more and more multiemployer pension plans fall into critical and declining status – shameful!)

Good morning. This is the last day that the KCS blog will be produced. However, you will soon be able to get similar insights from the Alan Biller website (alanbiller.com) where a new blog will begin soon.

I would like to thank everyone for your support during the last five or so years. It has been fun sharing my thoughts on OUR retirement industry while receiving from you critical feedback on the issues of the day.  We have a lot of good things to celebrate, but we have many challenges, too.  It is time to tackle those together.

We are pleased to bring to your attention the fact that Congressman Richard Neal’s proposed legislation, H.R. 397 – Rehabilitation for Multiemployer Pensions Act – is getting support from members of both parties.  In fact, there are currently 19 co-sponsors of this legislation, including 7 members from the Republican party. The legislation that will be considered seems to be getting a more favorable response this time around then those which were floated in the previous Congress (115th).

Obviously, we need to see significantly more support coming from the House, but it is a good start. We are at a point in time when further delays could be devastating to the future of many of the struggling multiemployer plans. As we’ve reported before, the universe of “Critical and Declining” (C&D) plans has already expanded from 114 to 121, and that was before the poor performance of markets during the fourth quarter.

There is no way that these C&D plans can earn their way to solvency given the significantly negative cash flow situations that these plans are in. The loan program that is once again being considered addresses the short-term liquidity needs while extending the investment horizon for the balance of the assets and future contributions to meet future liabilities, interest on the loans, and the balloon payment of the loan in year 30. They are a necessary bridge to future solvency. Please reach out to your representatives in both the House and Senate to garner their support for this critical legislation.

According to a recent article in CIO Magazine, the Dallas Police and Fire System’s new CIO, Kevin Custer, wants to both “improve fund liquidity and shift our growth engine predominantly to the public equity markets”. In order to implement the new asset allocation, the Board, Custer, and their consultant are going to dramatically reduce exposure to private markets, including “fully liquidate the plan’s private infrastructure and private debts holdings, and partially liquidate its holdings in private natural resources, as well as a host of other initiatives to help attain an average 7.25% per year.”

But, will this strategy accomplish their objective? We can certainly appreciate the need for improved liquidity given the plan’s <50% funded status and lower contributions.  However, public markets have enjoyed a long bull market for both bonds and equities. How much do they have left in the tank?

Another potential strategy that they might want to consider would be to convert their current fixed income exposure (which they are increasing) to a cash flow matching strategy to meet current and near-term benefit payments.  The cash flow matching implementation would extend the investment horizon for the balance of their assets while removing the need to liquidate the private investments, which carry a potentially enhanced return through the liquidity premium.

Finally, this alternative cash flow matching strategy will potentially stabilize the funded status of the Dallas P&F while setting it on a glide path toward full funding.

And now, the end is near
And so I face the final curtain
My friend, I’ll say it clear
I’ll state my case, of which I’m certain…

Mr. Frank Sinatra sang the above lyrics in the song “My Way”. The lyrics popped into my head this morning as I read an article from Pensions and Investments relating to a survey conducted by MetLife. The “2019 Pension and Risk Transfer Poll” revealed that 76% of corporate DB plans that have engaged in derisking activities intend to fully divest plan liabilities at some point down the road. The demise of the traditional DB pension system is moving full-steam ahead.

According to the P&I article, the “Poll” involved 102 corporate DB sponsors with derisking goals. Wayne Daniel, an SVP and Head of U.S. Pensions at MetLife was quoted as saying that “this is the strongest indication of how intentions of corporate plan sponsors have shifted”. Of the 67% of the sponsors considering a risk transfer strategy, more than three-quarters of them have evaluated the potential cost and nearly 60% have evaluated potential solutions available in the marketplace.

Mr. Daniel went on to say that “Managing a pension plan continues to be a distraction. It puts you in the pensions business…it distracts you from your core business.”  That is unfortunate because DB pensions used to be a great retention tool for companies. Furthermore, it helped move employees through their work life-cycle, encouraging a transition to retirement in a dignified way. Clearly, this is no longer the focus.

I truly appreciate all the feedback that we/I get from the posts that we produce.  Below is a response to my latest post, “So Out Of Touch!”, but it easily could have been in reference to our recent post titled, “A Developing Crisis Made Much Worse”. In any case, this is a story that must be shared. Why it hasn’t resonated at the same volume as the current plight of furloughed government workers is anyone’s guess.  Here is the reply:

Just pointing out the seriousness of comparison between the two issues or Groups NEEDS….”Furloughed Gov’t Workers” (FGW) vs “Benefit Reduced Pensioners” (BRP)… How long have we with Double the Victims 1.5 M vs 800K, for twenty times the Amount of Time near two years in some cases, have had to deal with Financial Devastation while Media screams for action NOW and gets it with S-24 in “13” days start to finish. WE have no recourse as Elderly & with Health issues prevent our Wealth Accumulation phase of Life Again… Where’s our Mortgage Forgiveness, where is our Gov’t promise of Back Pay ?? What must WE do for recognition… WE realize the Politics involved, with RESIST & OBSTRUCT but somewhere sometime these Legislators need to be doing something that benefits the Working Class Folks of this Country. Their Constituents… By speaking out, while riding the Coat Tails of these “FGW” Stories and News Articles we can highlight our own Crisis and bring these similar distressing details and facts into the Light……Here are Polling results of what WE are facing, just the ones still not “BRP” as of Yet. CSPF folks facts of life… Some of these “FGW” articles state that near 80% live check to check… WE as “BRP” know this situation all to well…86% of us live Check to Check by no fault of our own”

We have highlighted the plight of Carol, who has recently seen her benefits slashed by a very disgusting 63%, but thousands of pensioners have suffered considerable economic hardship and have had to endure for much longer. How can our august government agree, through MPRA, to slash the hard-earned benefits of these American workers with no relief in sight?  Why hasn’t this caught the attention of the American media? Whereas furloughed government workers are likely to get paid upon the opening of our government, the benefits that have been slashed for these retirees are permanent unless we can get Congress to finally act on legislation that will protect, preserve, and reinstate previously “guaranteed” monthly benefit payments.

Given that a significant majority of Americans are living paycheck to paycheck, could you endure a permanent slashing of your monthly compensation to the tune of 50% or more?  I wouldn’t think so. Let’s hope that the American media has finally awoken to the economic crisis that is afflicting most American workers and retirees. Please don’t stop letting us know about your situation. We are happy to take as many swings as we can on this issue.

Six days ago we published a post (“Hope That This Wasn’t A Surprising Revelation”) on the impact that student loan debt was having on the housing market.  Well, two days ago we got a glimpse of just how painful this debt load may be on the housing market, as the National Association of Realtors announced that existing home sales had fallen -6.4% in December and that they were down -10.3% from December 2017. OUCH!

A January 22nd WSJ article speculated as to why the weakest result since 2015 may have occurred, blaming both monetary policy (rising interest rates) and stock market volatility as the primary culprits.  Really? Our previous blog post highlighted the ever-growing mountain of student loan debt as a likely cause behind the sluggish US housing market.

Despite claims to the contrary, our employment situation is not robust, as we are still significantly behind where we were in 2007 with respect to the Labor Participation Rate (63.1%). Furthermore, the US continues to have a significant percentage of underemployed workers and those that have attached themselves to on-call jobs. Both of these categories have climbed substantially since before the GFC. In addition, wage growth, which had been muted for more than two decades, has only begun to show some life, which is one of the primary reasons that inflation has remained muzzled.

With so many Americans barely able to squeak by financially, a lack of affordable housing, modest wages, and an escalating debt burden may be too much to overcome at this time.

It would be really nice to read stories about Washington DC politicians who truly understand what is happening to every day Americans, whether they are currently being impacted by the government shutdown or just life in general. However, we get frequent stories that just highlight over and over how out of touch they are with the American worker’s reality.

I received an email that highlighted the following: “U.S. Commerce Sec. Wilbur Ross (BTW, a former partner of mine at Invesco) appeared on CNBC this morning, ostensibly to warn Americans that trade talks with China are going poorly. But he also got asked about furloughed federal workers who have been lining up at food banks, to which the billionaire said: “I know they are, and I don’t really quite understand why.””

He clearly doesn’t understand or want to know that 78% of American workers claim to be living paycheck to paycheck! That is both extraordinary and terribly frightening given that we have experienced an unprecedented stock market run. The average American is being asked to allocate their pressure compensation in more ways than they have historically, including having to fund their own retirement program. Given how little disposable income there is for these families, is it any wonder why defined contribution balances are so anemic?

It is about time that we have “leaders” who can recognize that the American dream is getting further and further from most people’s grasp.