There seems to be some thawing in the negotiating stances of both Republican and Democratic representatives tasked with creating a viable solution to the unfolding multiemployer pension crisis. As everyone who reads this blog knows, we have long been huge supporters of the Butch Lewis Act legislation (BLA) that was passed by the House with bipartisan support in July 2019. Regrettably, the US senate, under Republican control, has failed to advance that legislation. Isn’t it funny how a hotly contested election can get the attention of these politicians, especially when many of the important battleground states are populated with participants from these struggling plans?

I remain hopeful (maybe naively) that these plans can get the loans necessary to meet the promised benefits without having to face benefit cuts and insurance premium increases. Benefit cuts would be hugely unfair given that the participants often deferred salary increases to support their retirement programs, while doing nothing to put these plans in the precarious position that they are in today. The thought of dramatically increasing PBGC premiums seems really silly, as these plans are already struggling to meet their current funding needs. Increasing the cost on these plans makes little sense, but it also doesn’t make sense to penalize healthier plans, too, which is also part of the Republican’s plan.

The great work by Cheiron (actuarial firm) that highlighted the effectiveness of the BLA legislation in stabilizing the funded status and contribution expenses of the Critical and Declining plans (now about 130) showed that all but three of the plans would be able to repay the loan after 30 years, the on-going interest payments, and the future liabilities of the plan. Why Republican Senators feel that pensioners shouldn’t get the full benefit that was promised is beyond me.

With so much at stake in the upcoming election, perhaps we can finally get some rationality prevailing. The roughly 1.4 million Americans that would be negatively impacted by the failure to create a viable solution might just be joined by the nearly 9.5 million union workers in “healthier” plans to create a voting block in places like Michigan, Ohio, and Wisconsin, as well as others, that just might decide who occupies the White House for the next four years. It is really too bad that it took this long to get representatives from both parties to the table, but it is better late than never. Let’s hope that they do the right thing!

We are currently engaged in a project for a large city pension plan with >$3 billion in assets and a funded ratio approaching 20%. The analysis and solutions that we prepared showed that their pension system would be able to meet all future obligations (benefit payments) with significantly reduced contributions of >$10 billion, a revised return on asset assumption (ROA) of 5.8% (current ROA is 6.75%), and reduced funding costs of the Retired Lives Liability by nearly $420 million. In addition, this plan would still have roughly $570 million in assets in 2055.

The plan sponsor was quite pleased with our analysis and solutions, especially where we reduced contribution costs by 26%, but he was confused as to why assets were so reduced at the “last” liability payment date. With $3 billion currently in AUM, his questions were: “How are we going to meet future obligations and won’t this mean that we are back in the poor financial position that we are today?” Under FASB and GASB accounting rules and actuarial standards, actuarial projections of benefit payments differ depending on the type of plan.

Public pension systems operate under GASB, which uses an Accrued Benefit Obligation (ABO) methodology when forecasting future benefits. In this framework, only current staff is included with no projection of salary increases. As a result, public pensions are a zero-sum game where actuarial projections are based on investment returns on the current assets and contributions fully funding benefits and expenses (C+I=B+E). This methodology would fully exhaust all assets when the last liability is paid. Importantly, new employees would require new contributions or asset growth. Please note we provided an excess asset cushion in 2055 of nearly $600 million.

In the case of a corporate plan, they operate under FASB and the accounting is a Projected Benefit Obligation (PBO) projection of benefits that also doesn’t include new staff, but the benefits take into consideration salary increases. Actuarial projections again are a zero-sum game. Are you confused, yet? Just wait, it gets better.

Ideally, all pension systems should use an Economic Benefit Obligation (EBO) accounting for future benefits. This methodology includes forecasts for both increases in staff and salary, but this is a very difficult exercise and often creates a lot of actuarial noise around such estimates. As a result, it is seldom used. An actuarial friend of our firm added the following: “The problem of the EBO analysis lies in the lack of acceptance by the actuarial community of the economic principles of Law of One Price that lead to Cash Flow Matching and/or Risk Recognition from Asset/Liability mismatches.” Lastly, and likely most important is the fact that this methodology leads to increased contributions which is the consequence of the EBO mathematics using standard actuarial models.

Based on the above information, it isn’t too difficult to understand why the plan sponsor involved in our project was concerned about the “loss” of assets in 2055 versus their plan’s market value of assets today. He should have been thrilled with the conclusions that we presented, but he was confused instead. This isn’t surprising given the many different ways that future benefits can be estimated. Why do we have so many methodologies to calculate benefits? Worse, why do we have two different methodologies in GASB and FASB when the world uses IASB? We’ll save our thoughts on that subject for another blog post.

We’ve invested enough time on all this actuarial stuff. You are probably wondering how a public pension system could “save” significant future contributions, while reducing funding costs and the ROA necessary to fund this plan, especially given that U.S. interest rates are at historic lows and equity valuations near all-time highs. We’d be happy to speak with you about our proposal. Call us.

We’ve been speculating for a while that the economic impact from Covid-19 was going to be harsh for both states and municipalities, especially as it relates to upping annual contributions to public pension systems. Just how bad the hit is going to be is starting to become public. The National Conference of State Legislators (NCSL) has on their website a very interesting (and scary) map of just how bad the carnage is likely to be.

For instance, states known for their poor pension funding such as Illinois, New Jersey, Connecticut, and Kentucky, are projecting revenue hits in 2021 that will exceed 10% in the case of CT and IL, while NJ and KY are forecasting >15% hits to their top line. It is highly unlikely that any of these states that might have been planning to enhance their annual contributions this year or next will be able to achieve that objective. In fact, it is likely that cuts should be anticipated.

New Jersey’s legislature has just passed a bill raising state income taxes on those residents earning income in excess of $1 million / year, but that additional tax revenue, if collected, is not likely to make up for a projected 18% hit to revenue in 2021. With equity markets at near all-time highs and interest rates at all-time lows, cobbling together an asset allocation that can produce a return commensurate with the return on asset (ROA) objective will be challenging.

There are strategies that might help bridge these uncertain economic times, but it will force plan sponsors and city/state officials to think outside the box and perhaps re-tool the implementation of strategies that might have been tried in the past with less than stellar results.

I was pleased to read an Op-Ed by Congressman Baron Hill, Indiana’s 9th District, calling for support of multiemployer pension reform, which is clearly long overdue. What surprised me though was his comment about the funded status deficit for multiemployer plans being $638 billion before Covid-19 set upon us. Although technically true, the $638 billion number is reached if each plan valued their liabilities at a risk free rate (which they are under no legal obligation to do) and the legislative efforts were focused on helping every single plan. It’s not!

As a reminder, there are roughly 1,400 multiemployer plans in the US. There were 114 plans that were designated as “Critical and Declining” when the Butch Lewis Act (BLA) legislation was first contemplated. That number has since grown to roughly 130 or so. The funding deficit that existed for the original 114 was roughly $68 billion in 2018. Many of the other plans are well enough funded (>80%) that federal support is not necessary at this time.

There is a crisis unfolding for the participants (1.4 million) in those C&D plans that will result in pensioners receiving mere pennies on their broken pension promise. These are the funds/participants that we should be helping at this time. The other multiemployer plans don’t have the same solvency issues that the C&D plans do. They also enjoy the benefit of time to resolve some of their current funding shortfall.

Inaction on the part of Washington lawmakers has been present for quite some time. Could it be that they aren’t addressing this issue given the false impression that the magnitude of the crisis is far greater than what it truly is? As I wrote recently, the roughly $34 billion that the OMB calculated was needed over 10-years to “save” these plans is a minor rounding error relative to the $3.8 trillion deficit that has been created in this year’s Federal budget. The BLA is terrific legislation that has already passed the House in July 2019. It is about time that the US Senate passes this legislation that will preserve the promise that was made to these American workers when they began their careers.

Keith Jurow, an excellent real estate analyst, has published another piece on the current state of home ownership in the U.S. His latest article can be found as an opinion piece on the MarketWatch website. Titled, “The COVID-19 lockdown is squeezing real estate from all sides and threatens to burst the housing and mortgage bubble”, this article is scarier than a Steven King plot. Although things appear relatively calm on the surface, Keith points out that rough seas are about to set upon us.

I would encourage you to read his article, especially if you are a current institutional owner of real estate or more importantly, thinking about increasing your allocation. Here are some of the low lights:

In New York City, sales in July collapsed by 35% from July 2019. Even worse for New York, listings soared by 65% in July as residents continued to flee the lock-down calamity in the Big Apple.

Online apartment broker Apartment List publishes a monthly survey of roughly 4,000 renters and homeowners. The most recent survey published in early August found that 33% of those surveyed had been unable to make a full rent or mortgage payment the first week of August.

Denver — one of the hottest markets in the nation a few years ago – led the nation in August with 41% of home sellers compelled to reduce their asking price.

The latest survey published by the National Association of Independent Landlords (NAIL) revealed that the percentage of small landlords who received a full rent payment from their tenants plunged to 55% in June from 83% in February. As a point of reference, there are roughly 15 million small landlords who count on this income to support their livelihoods and properties.

These are but a few of the frightening statistics that Keith shares in his article. Covid-19 has delivered a significant blow to our economy. Likely not strong enough to knock us out, but it certainly has us staggering. Some sectors will recover nicely, but like the equity market (S&P 500 -2.1% as I write this) many will take much longer to regain their footing. Pension systems cannot just do the same old, same old, and expect a different outcome. Caveat emptor.

Why do we need pension reform? Here is another example of action being taken by a pension system as it tries to protect what little is left in the pot. The Teamsters’ Building Material Drivers Local 436 Pension Fund of Valley View, Ohio, has applied to the Treasury Department for a reduction in benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). Without these cuts, the plan is expected to deplete the fund’s assets by 2023.

Under the board of trustees’ proposed reduction plan, the benefits of plan participants would be reduced to 110% of the Pension Benefit Guaranty Corporation (PBGC) guarantee, which is the maximum reduction in benefits allowable by law (aren’t they so generous). Remember, this is a multiemployer plan, and not a single employer plan that has the PBGC protecting benefits to as much as $67,295/year for a 65-year-old. No, the benefits are protected at just $12,875 for a 30-year veteran at age 65. Shocking? Absolutely!

There are some minor exceptions to how much the benefits can be cut. For instance, excluded in the benefits reduction under federal law are disabled participants and their beneficiaries, and participants who are at least 80 years old on May 31, 2021. The benefits of participants who are at least 75 years old as of that date, and their beneficiaries, are partially protected, and the older the person is, the less the benefits can be reduced. How magnanimous!

Can you imagine investing more than 30 years in a career only to be told that your promised benefits are to be reduced despite the fact that the participant likely contributed to the plan, while also deferring salary increases? Worse, the US government is sanctioning this activity. Just how bad is the impact? Well, a member who has 32 years of credited service who will be 70 years and 5 months old as of May 31, 2021 would see their $2,148.24 monthly benefit reduced (slashed, gashed, hacked) to $1,258.40 beginning on May 1, 2021, under the proposed reduction plan.  Can you believe that a 70-year-old, who has likely been retired for years, is going to be whacked with a nearly $900/month cut. How are they to make up for that loss?

Please don’t think that this is an isolated event. As we’ve been reporting for years, there are more than 130 plans and nearly 1.5 million American workers who are on the verge of receiving draconian cuts to their promised benefits. The impact of these cuts won’t just be felt by the individual participants and their beneficiaries, but also the communities that they live in that depend on their spending to support local businesses.

Action to sure up our pension system is long overdue. A further delay is not acceptable.

I was reading a research report from Fitch related to a Prince William County bond issuance. The proceeds from the bond sale would go to support a number of school projects – great. That is fairly standard and necessary. What concerned me was the following line that appeared under the header “key rating drivers”. The last line of the analysis stated: “The county enjoys strong control over revenues given its independent legal ability to increase property taxes without limitation”. Wow, do they really believe in this difficult economic environment that residents of these various states, counties, and municipalities will provide these taxing authorities carte blanche to raise taxes “without limitation”?

We are seeing the impact of unabated tax increases on populations throughout America. States like Illinois, New Jersey, Connecticut, New York, etc. are suffering from out-migration trends that damage the long-term economic outlook. There is definitely a need to continue to invest in schools, bridges, roads, pensions, etc, but to think that there is no limitation is just silly!

All of a sudden the US Senate has reached its limit on what can be spent? We are in the midst of an estimated $3.8 trillion budget shortfall for 2020. To put that in perspective, the previous budget deficit record was $1.4 trillion set in 2009. Do Senators fear that the Butch Lewis Act (multiemployer legislation), which continues to be ignored, would be analogous to Mr. Creosote’s thin mint (Monty Python’s “The Meaning of Life”)?

The Senate refuses to address the Butch Lewis Act because it doesn’t produce shared sacrifice. This legislation was estimated to cost $31.9 billion when it was last scored in July 2019. That is a 10-year score or just under $3.2 billion / year. An annual cost of $3.2 billion on a budget deficit of $3.8 trillion seems as if it wouldn’t carry the same weight as Mr. Creosote’s aforementioned thin mint!

But, here we sit. Senator Rob Portman (R, OH) who sat on the Joint Select Committee that failed to come up with proposed legislation to improve the financial future for roughly 130 failing multiemployer systems has recently been on the Senate floor imploring his fellow Senators to pass pension reform legislation.

Senator Portman was recently asked if it was appropriate to blame Senate Majority Leader McConnell for blocking the Senate’s ability to get pension reform done, including not taking up the Butch Lewis Act or the Heroes Act (which included pension reform). His response: “In order to solve this, both parties must work together to achieve consensus in both the House and Senate. The proposal passed by House Democrats only uses taxpayer money to bail out these plans – and there is no bipartisan support for it in the Senate. Republicans have reached out to Democratic leaders in the House and Senate to try and discuss a shared responsibility approach that can gain consensus in both chambers.   We’re ready to find an acceptable compromise that works for both parties.”

So, I repeat, the Republican-led Senate was fine passing a series of stimulus packages that resulted in a massive deficit, but legislation to support nearly 1.4 million American workers, who I remind you are also taxpayers, is a no go? This rounding-error of a proposal also provides great economic stimulus to the local communities in which the plan participants live. Given the economic hit that many communities/states have endured this year, one would think that our leadership would be looking for any way possible to produce economic activity that might just create or maintain jobs.

Let’s stop playing games with the financial future for these Americans who have done nothing wrong. They showed up to work with the promise of a pension upon retirement, while often deferring salary increases to help support those pension promises. Pension reform has been kicked down the road for too many years. There is nothing left of the proverbial can at this time!

I wasn’t always a fan of pension obligation bonds (POBs), as study after study revealed in most cases that pension plan sponsors that had issued a POB failed to improve the long-term financial viability of the program. The Center for Retirement Research at Boston College has produced a couple of studies related to the success(?) of POBs. Their last update was in July 2014. Their analysis makes some of Steven King’s most frightening plots seem like little more than a fairy tale.

It would be very appropriate to ask me why the change in opinion nearly 40 years into my career. Well, you can thank my involvement in the Butch Lewis Act (BLA) for adjusting my opinion. I’ve expressed my feelings about the BLA legislation many times during the last several years, and for the record, I still believe that this legislation would accomplish the goal of securing the promised benefits for participants in critical and declining multiemployer plans. It is truly sinful that the financial well being of 1.4 million Americans, who are in these struggling plans, hangs in the balance because the US Senate has failed to act.

That said, the BLA team put together a strategy to stabilize these trouble plans by departing from the status quo of trying to maximize returns and instead focused on securing the promised benefits by defeasing the Retired Lives Liability with the loan proceeds. Brilliant! This action enabled the plan sponsor to use the fund’s current assets and future contributions to meet future liabilities and the repayment of interest and principal on the loan, because the defeasing strategy bought essential time for the plan.

Unlike that which we’ve witnessed in many public pension systems throughout the country since the Great Financial Crisis (GFC), this proposed legislation did not achieve financial security on the backs of the participants. In fact, for multiemployer plans that had already gotten approval from the DOL to reduce promised benefits, the original benefits would have to be reinstated should they wish to take a loan out to further stabilize their system. Importantly, there was no calling for increased contributions from employees, longer careers until full benefits were achieved, increased retirement age, reduced benefits, etc.

The proposed legislation worked because the “reforms” were to be adopted by the sponsor and focused on how they managed the plan’s assets.

Taking the proceeds from the POB and injecting them into a traditional asset allocation subjects those new assets to all the risks of the markets with NO guarantee of achieving success. The arbitrage that they are seeking to capture between the target ROA and the interest on the bond comes with great risk. By defeasing the Retired Lives Liability the plan is no longer engaging in a game of chance, but is instead protecting all of the entities that ultimately fund that monthly benefit payment.

Given the current financial condition for many public pension systems, significant funding gaps are not going to be closed through annual budget contributions and market returns. These significantly negative cash flow funds must receive a financial lifeline to stop the bleeding before they are nothing more than pay-as-you-go entities. The POB, long distained by me, is the best option at this time. The fact that we are in an historically low interest rate environment only makes the use of these financial instruments more appropriate. But, time is wasting.

In a blog post from yesterday, titled “Same Old Story”, I wrote the following: for those individuals who either chose to retire or were forced to retire prematurely through job losses in 2007-2008, they had no time to make up for the catastrophic decline that turned their 401(k) into a 201(k). I remain very concerned about the American worker who involuntarily “retired” following a job loss that occurred later in one’s working career. But is my fear rational? Well, yes!

The New York Times has recently published an article, “When Retirement Comes To Early”, that specifically speaks to the troubles that older Americans have when they are involuntarily removed from the labor force. There was a time that older workers were held in high regard because of the experience that they had garnered, which lead to greater compensation and generally more protection during recessions. Regrettably, that “premium” has dissipated and the protection of experience is no longer evident during difficult economic times, including our current economic crisis.

Just how bad is this trend? According to an Urban Institute study that followed 2,000 full-time employees with generally higher levels of education than that of the average 50-year old and above from 1992 to 2016, nearly half of this cohort suffered an involuntary job loss. Incredible! According to Teresa Ghilarducci, a labor economist at the New School (and some one that I know and admire for her work) the coronavirus and recession that followed have intensified job insecurity for older Americans (people like me!!).

According to the New School’s Retirement Equity Lab, 2.9 million workers age 55-70 have left the labor market since March, and they were counted as having left because they were neither working nor actively looking for employment. Worse, they are predicting another 1.1 million older Americans will suffer a similar fate by November. When a job loss occurs at an older age there is less time for the employee to recover financially, which can create a series of spiraling events from bridging the unemployment with savings, to taking Social Security prematurely, to taking on debt.

Outrageously, only 1 in 10 of those suffering an involuntary job loss ever earns as much again. At age 65, “their median household income was 14% lower than for those that were not pushed out”. Just as bad, it takes older American workers longer to get back into the workforce. For those 62-years-old or older, only 41% had found employment within 18 months of their layoff. As a comparison, for those age 25-49, 78% had been hired within the next 18-months.

With regard to the financial hit of losing a job later in one’s career, many American workers are truly only able to begin to sock away money after paying for their home, raising their children, and meeting other more immediate needs. It is great that workers over 50-years-old have a make-up contribution of $6,000 available each year, but according to Vanguard only 15% of older workers take advantage of this elevated contribution limit. That isn’t surprising since most Americans don’t come close to earning $100,000, so the thought of contributing $25,000 is a pipe dream for a vast majority.

Losing a job later in one’s career that forces workers to forgo important saving years is very challenging. Compound that experience with having to tap “retirement” funds prematurely or take on additional debt or access Social Security earlier than desired and you’ve created a formula for financial disaster. Regrettably, this is what is transpiring today.

We need to do more for our workers. Financial security won’t happen for most of us if defined contribution plans are the only game in town. We need to preserve DB plans for the masses. We also need to consider extending unemployment insurance benefits, raising Social Security benefits, and providing an enhanced healthcare benefit. We don’t have the money, you say? We’ve proven that we do through the recent Federal stimulus programs. Remember: federal deficits translate into private sector spending. We need all the economic activity that we can muster at this point.

That is enough for today.