Teamsters Central States Pension Fund Puts PBGC in Jeopardy

CONGRESS PORTSDecades ago, the Teamsters’ Central States Pension Fund was a project of organized crime.  In the future, it may well be a project of Pension Benefit Guaranty Corporation, the federal agency that insures pension plans against insolvency.  Ironically, this could put PBGC itself at risk.  This September, the troubled fund, which enrolls over 400,000 active and retired union members in 37 states, filed a restructuring plan with the Treasury Department proposing benefit cuts of nearly 23 percent.  The action is the first under a new law.  Central States Executive Director-General Counsel Thomas Nyhan explains:  “The longer we wait to act, the larger the benefit reductions will have to be.”  Yet the union, with help from Congress, helped bring about this dilemma.

The Rosemont, Ill.-based Central States, Southeast and Southwest Areas Pension Fund, or as it is simply known, the Central States Pension Fund, is the largest of the Teamsters-sponsored pension plans.  It also has a colorful history – and not in the good sense.  International Brotherhood of Teamsters future General President Jimmy Hoffa, father of current IBT chieftain James P. Hoffa (in photo), initiated the fund in 1955.  His management style left something to be desired.  In 1963, the elder Hoffa and six other individuals were indicted in Chicago federal court for fraudulently arranging $25 million in pension loans and diverting $1.7 million of that sum for their personal use.  The defendants all were convicted by a jury the following year.  Even after reporting to federal prison in March 1967, Hoffa was implicated in a scandal in which he allegedly received 10 percent kickbacks on highly questionable real estate loans to various Central States “consultants.”

Management of the Central States Pension Fund nominally was the responsibility of a Chicago-based insurance executive and mob associate, Allen Dorfman.  The stepson of corrupt Teamster local boss Paul “Red” Dorfman, the younger Dorfman more than once had been indicted, but managed to avoid conviction.  Eventually, in 1972, Dorfman would be convicted in a New York federal court for illegally obtaining a $55,000 kickback from a recipient of a Central States loan.  He served nine months in prison.  After his release, he again would be indicted in February 1974 for fleecing the fund out of $1.4 million.  Though forced to resign his formal position, he continued to run operations from behind the scenes.  It was a lucrative way to go.  The U.S. Labor Department estimated that by the early Eighties Dorfman had looted at least $5 million from the Central States fund.

By numerous accounts, especially investigative reporter Dan Moldea’s book, The Hoffa Wars, Hoffa’s successor, Frank Fitzsimmons, not only was aware of the corruption, but knew that his lucrative job depended on staying silent.  A source for an investigative series appearing in the Oakland Tribune in the fall of 1969 said:  “Frank [Fitzsimmons] hardly makes a move related to financial matters without consulting Dorfman.”  By staying in the mob’s good graces, Fitzsimmons also positioned himself to stay on top in the event that Jimmy Hoffa, pardoned by President Nixon in December 1971, wanted his old job back.  And Hoffa indeed did want his job back.  Unfortunately, he no longer had clout with the mob bosses.  He permanently “disappeared” on July 30, 1975 rather show up at a scheduled “business luncheon” at a Detroit-area restaurant.  Allen Dorfman would be murdered, gangland-style, on the parking lot of a suburban Chicago hotel in January 1983.  He had been free on $5 million bond awaiting sentencing for his conviction the previous month for attempting to bribe Sen. Howard Cannon, D-Nev., in return for Cannon’s vote against a trucking deregulation bill.  The case also resulted in the convictions of Teamster General President Roy Williams and Chicago mobster Joey “the Clown” Lombardo, along with two other men.  Lombardo also had been indicted with Dorfman in a separate case involving an attempt to extort $800,000 from a Chicago businessman whose home was bombed.

Like Jimmy Hoffa, Allen Dorfman took a lot of secrets to the grave. The Central States Pension Fund easily could have wound up in the graveyard as well.  That the fund had a distorted sense of priorities was confirmed in a mid-Seventies audit by Price Waterhouse.  The report concluded that nearly 90 percent of its investments were real estate-related, a figure way beyond the norm for comparable union plans.  And more than a third of all loans were in default.  A July 22, 1975 article in the Wall Street Journal summarized the results of the audit:  “Through such loans…the fund has passed millions of dollars to companies identified with Mafia members and their cronies.  It has also lent millions of dollars to employers of Teamsters; and according to…rank-and-file Teamsters, the union sometimes deserted members’ interests in favor of the employer-borrowers.”  A Justice Department official noted at the time:  “The thing that’s absolutely frightening is that through the Central States Pension Fund, the mob, quite literally, has complete access to nearly a billion dollars in union funds.”  The most infamous investment arguably was a $62.7 million loan approved by several Midwest crime families to buy the Stardust and the Fremont hotel-casinos in Las Vegas.  Front man Allen Glick understood his job was to follow Mafia orders, especially the one to look the other way while mob functionaries skimmed millions of dollars from count rooms.  The corruption and violence in that venture were amply chronicled in Nicholas Pileggi’s book, Casino:  Love and Honor in Las Vegas, the source material for Martin Scorsese’s classic 1995 movie, “Casino.”

The Central States Pension Fund still bears the scars from those mob days, even though the active association between the two worlds ended long ago.  In 1982, following a lengthy probe, the Teamsters entered into a consent decree with the U.S. Justice Department to cede control of its retirement funds to a consortium of banks.  The arrangement remains in force.  Yet it has not been sufficient to stave off a looming disaster of a different kind. Declining union membership, deregulation of the trucking industry, and longer life expectancies have combined to raise pension expense-to-income ratios to the point of being unsustainable.  At present, the Central States Pension Fund pays out $3.46 in retirement benefits for each dollar it collects from employers.  While assets have rebounded from $7.6 billion in losses during the 2008 stock market crash, growing at the rate of about 13 percent a year, liabilities have risen even faster.  Indeed, the latter now exceeds assets by more than $17.5 billion.  And the gap has been widening by around $2 billion a year.  At the current rate, the fund likely will become insolvent in about 10 years.  And that event in turn could trigger insolvency at Pension Benefit Guaranty Corporation.

The Central States Pension Fund is a multiemployer, as opposed to single-employer, retirement program.  Multiemployer plans are funded by two or more employers, typically in the same or a related industry.  If those companies are unionized, then the union(s) as well as the employers may contribute funds.  Moreover, like employers, the union appoints members to the plan’s board of trustees.  Of the roughly 41 million active and retired employees currently covered by defined-benefit (i.e., traditional) pensions in this country, about 10 million are enrolled in the multiemployer type.  Under the Employee Retirement Income Security Act of 1974 (ERISA), Pension Benefit Guaranty Corporation has the authority to assume control over a multiemployer pension only in the event of insolvency.  This is in contrast to a single-employer plan, where the sponsor is allowed to hand over management responsibility to the PBGC, whether or not insolvency looms.

Pension Benefit Guaranty Corporation is an insurance agency.  As such, its payments to beneficiaries are funded by premiums.  The rules for multiemployer, as opposed to single-employer plans, however, differ substantially.  Under a single-employer plan, the current maximum guaranteed benefit per retiree (starting at age 65) is $60,136 a year, with payments indexed for inflation.  Under a multiemployer plan, the maximum annual benefit is only $12,870, a limit in place since 2001.  Individual eligibility is keyed to years of employment service (in this case, 30 years) as opposed to age.  And payments are not indexed for inflation.  The great advantage of multiemployer plans is that they are portable; an employee may change jobs without giving up previously accumulated benefits.  The great disadvantage, payout limits aside, is that PBGC in the future might not be able to pay out.  According to the corporation’s most recent annual report, released last November, the single-employer insurance program was improving, running a $19.3 billion deficit by the close of fiscal year 2014, an $8.1 billion smaller funding gap than a year before.  By contrast, the multiemployer program ended fiscal year 2014 with a whopping deficit of $42.4 billion, a sum more than five times higher than the $8.3 billion deficit existing at the close of fiscal year 2013.

Trustees and managers of the Teamsters’ Central States Pension Fund know that as presently structured, their plan could collapse, especially in the event of another severe stock market downturn.  And they know that putting PBGC on the spot to make the beneficiaries whole could put the agency in jeopardy.  But the Central States fund has an ace in the hole that it lacked as recently as a year ago.  Last December, Congress passed and President Obama signed the Multiemployer Pension Reform Act of 2014.  Sponsored by Reps. John Kline, R-Minn., and the now-retired George Miller, D-Calif., the act authorizes pension plans of a “critical and declining” status to reduce benefits, either permanently or temporarily.  “Critical” means that a given plan’s assets are less than 65 percent of projected long-term liabilities.  “Declining” means that the plan is projected to run out of money in less than 15 years, or under special circumstances, less than 20 years.  The Kline-Miller law stipulates that benefits cannot be reduced to less than 110 percent of the sum guaranteed by PBGC.  In addition, retirees aged 80 or older, along with disabled persons, are protected from any reductions.  Retirees aged 75-80 are subject to benefit reductions, but to a more limited degree than those retirees younger than 75.

Fiduciaries of a multiemployer pension plan must receive permission from the Treasury Department in order to cut benefits.  And prior to approval, the plan must notify participants that such a plan is in the works and must demonstrate to the satisfaction of the department that all available measures have been taken to rectify the situation.  If the Treasury Department, after consulting with PBGC and the Labor Department, gives a green light, current and future beneficiaries get to vote on whether to accept or reject the proposal.  If they vote to reject, the issue isn’t necessarily over.  The Kline-Miller law stipulates that with large-scale pensions, such as the Central States fund, which the law terms “systematically important,” the Treasury Department must permit some form of reduction.  Large plans are those that require PBGC aid in amount of over $1 billion.

The Central States Pension Fund right now is looking at a deficit far higher than $1 billion.  And its trustees are in a bind.  On one hand, they are loath to tell union members that they should forgo some of their retirement benefits to preserve the plan.  On the other hand, they dread the day when they have to inform workers and retirees that the plan is completely out of money.  That’s why plan sponsors are in a state of alarm.  “I’ve told politicians many times before, if you really want to know what the 800-pound gorilla in the room is for us, it’s our pensions,” says John Bryan, chairman of the Illinois Road and Transportation Builders Association.  Executive Director Thomas Nyhan emphasizes that there is no room for delay.  He recently stated:  “What we’re asking is to let us tap the brakes a little now, and let us avoid insolvency.”

The Central States Pension Fund is the first plan to have applied for relief under the Kline-Miller law.  Letters from management informed Teamster members they face cuts in benefits of up to 60 percent.  Trustees and administrators realize they’re not popular at Teamster headquarters.  On September 22, 2015, on the eve of the filing of the petition with the Treasury Department, General President James P. Hoffa wrote a letter to Nyhan objecting to the action.  The letter stated:

I am writing to urge that the Central States Pension Fund Trustees not vote to file a petition with the United States Department of Treasury seeking to cut the pensions of thousands of Teamster members and retirees who earned them.  While the continued viability of the Fund is a concern of all of us, I urge you to focus on the impact that benefit cuts will have on the daily lives our members and retirees.

As you know, I opposed the Multiemployer Pension Reform Act of 2014 (MPRA).  I did so because I believed it unfairly shifts the consequences of unfunded pension liabilities to retirees, participants and beneficiaries by reducing their benefits.  It also creates the false illusion of participatory democracy by purporting to require a vote of retirees and other participants and beneficiaries that can then be simply ignored if a negative vote would cause significant liability to the Pension Benefit Guaranty Corporation.  In other words, participants and beneficiaries get to vote, but their vote only counts if they vote to cut their own pensions.  The people who conceived that cynical scheme should be ashamed.

This new law effectively destroys the bedrock principle enacted in 1974 with the passage of ERISA.  Instead of protecting pension benefits from impairment, as the statute was originally designed to do, it places them at risk.  It literally permits underfunded pension plans to pull the rug out from under the people the statute was originally supposed to protect.

A number of progressive lawmakers in Congress are steamed as well.  Sen. Bernie Sanders, I-Vt., and Rep. Marcy Kaptur, D-Ohio, have sponsored legislation, the Keep Our Pension Promises Act (KOPPA), that would repeal the Kline-Miller law.  The bill, strongly supported by Hoffa, makes for effective populist campaign fodder for Senator Sanders, now seeking the Democratic Party nomination for president.  But it would be a very expensive form of populism.  The Sanders-Kaptur bill, among other things, would create a 10-year, $30 billion legacy fund paid for by closing off two tax breaks ostensibly benefiting that familiar bogeyman, “the rich.”  Intentionally or not, the measure would wind up greatly expanding the role of Pension Benefit Guaranty Corporation.  By any other name, this is a federal bailout.

A Central States collapse alone could bring PBGC multiemployer operations beyond the point of no return.  Hiking annual service fees can go only so far to prevent emergencies.  According to a PBGC report released in January 2013, doubling the per-employee insurance premium from $12 to $24 a year would reduce the likelihood of insolvency in 2022 from 37 percent to 22 percent.  The PBGC responded with a slight increase in the per-person premium to $13, and indexing it as well.  The step would prove unnecessary.  A provision of the Kline-Miller law raised the premium to $26, starting in 2015.  It’s a sensible step, but it won’t come close to closing the Central States deficit.  The cumulative $14 rise, from $12 to $26, multiplied by roughly 400,000 participants, comes to about $5.6 million in extra plan revenues.  That’s roughly one-third of 1 percent of the long-term funding shortfall.

How likely is a scenario in which PBGC comes to the rescue of the Central States fund?  A report issued in March 2013 by the U.S. Government Accountability Office suggests it’s very likely.  The study, “Private Pensions:  Timely Action Needed to Address Impending Multiemployer Plan Insolvencies,” based on an employer questionnaire survey, and amplified by interviews with PBGC and multiemployer plan officials, revealed upswings in the number of cases of PBGC assistance and especially in the dollar value of per-company aid.  During fiscal years 2001-05, the number of plan takeovers rose from 22 to 29, while the dollar value of annual payouts increased from $4.5 million to $13.8 million.  That seemed manageable enough.  But during fiscal years 2006-12, the number of takeovers rose from 33 to 49 and, more tellingly, total payouts reached $70.1 million in 2006 and never got lower, reaching $115 million in fiscal 2011 before declining to $95 million the next year.  A relatively small number of large employers have caused the cost escalation.

Interviews with PBGC officials yielded this prognosis:

PBGC expects that the pension liabilities associated with current and future plan insolvencies will exhaust the multiemployer insurance fund.  Under one projection using conservative (i.e., somewhat pessimistic) assumptions for budgeting purposes, PBGC officials reported that the agency’s projected financial assistance payments for plan insolvencies that have already occurred or are considered probable in the next 10 years would exhaust the multiemployer insurance fund in or about 2023.

The authors noted, ominously, that during fiscal year 2012, just two unnamed plans for which insolvency was “reasonably possible” accounted for $26 billion of the combined $27 billion liability of all plans in that category.  Should those plans go under, noted the GAO, the number of retirees/beneficiaries would increase sixfold.

It is conceivable, then, that PBGC eventually will run out of money, and that this outcome could be triggered by the insolvency of the Central States fund or a plan of comparable size.  “There could be a complete benefit cut if PBGC has no money,” admits Josh Gotbaum, PBGC executive director during 2010-14 and currently a Brookings Institution guest scholar.  There is also a self-reinforcing process at work.  Under a 1980 federal law, the Multiemployer Pension Plan Amendments Act, a participating employer or investor in a multiemployer plan has the right to pull out.  Yet in doing so, the action would trigger a high withdrawal penalty.  All remaining participants are jointly and severally liable for the obligations of the departing entity.  Usually, if reluctantly, they will cover the employer’s liabilities rather than pay the penalty and exit.  But the temptation to leave rises during an industry or general economic downturn.  Hypothetically, if the plan has 50 employers, and 49 wind up pulling out, then the sole remaining employer must cover everyone else’s contributions.  This so-called “last man standing” clause, enacted by Congress in 1980, unwittingly has created a self-fulfilling prophecy:  Each exit heightens the possibility of future exits.  No rational employer or investor wants to be the last man standing.  Back in 2009, Union Corruption Update described this phenomenon, explaining why its repeal should be a feature of any multi-employer reform legislation.  Unfortunately, the rule is still standing.

Pulling out of Teamster pension commitments is not unknown even for the largest companies.  Back in 2007, as part of a five-year contract, United Parcel Service agreed to pay (and did pay) into the fund fully $6.1 billion in exchange for offloading its obligations on behalf of well over 40,000 participants.  If the Central States fund, with roughly 10 times the number of participants, goes under, it is difficult to see how PBGC can avoid being taken down as well.  For if PBGC cannot meet its legal commitments, then it must either appeal to taxpayers for funding or face some nasty lawsuits.

None of this should absolve the Central States Pension Fund multiemployer program of its responsibility for the rapidly escalating deficit.  As of January 2008, the plan was on track to be fully funded (i.e., assets equal or exceed liabilities) by 2029.  Yet by the end of 2008, its asset portfolio had lost $7.6 billion, the result of disastrous investment decisions.  In April of that year, Executive Director Nyhan predicted the funding ratio “should exceed 70 percent and may reach 75 percent if we meet our actuarial assumptions.”  Granted, 2008 was a bad year for everyone.  Yet the stock market has rebounded since, while the fund has fallen below the 65 percent “critical” threshold, triggering last month’s filing with the Treasury Department to cut benefits.

The Central States Pension Fund clearly has problems on the liability side that Teamster officials aren’t acknowledging.  At the same time, Teamster officials have a right to be angry over the prospect of members losing a large chunk of their benefits under the Kline-Miller law.  Until that law was passed, ERISA mandated that beneficiaries are entitled to all scheduled benefits.  But the new law supersedes that guarantee.  True, the request for a benefit cut is far from a done deal.  And if the Treasury Department rejects the request, beneficiaries would get to vote on it sometime next spring.  But the law also gives the department the authority to override a “no” vote.

Two favorable and realistic alternatives come to mind.  First, the Teamsters should convert the Central States fund to a defined-contribution plan, such as the 401(k), or hybrid defined-benefit/defined contribution plan.  Some employers, especially state and local government agencies, already have made such transitions.  These approaches promote investor flexibility and are workable.  Second, Congress should phase out Pension Benefit Guaranty Corporation’s responsibility for taking over insolvent multiemployer plans.  Those plans pose enormous potential burdens to single-employer plan participants.  Multiemployer institutional participants always have the option of acquiring private insurance.

Such measures should be considered by the appropriate parties.  Yes, Teamsters and AFL-CIO chieftains will oppose them.  But what are the alternatives?  The Central States Pension Fund is in real danger of collapse.  And such an event will reverberate throughout the pension world.  A pension plan is only as sound as its ability to deliver on its promises.  And right now the Teamster situation doesn’t look promising.

Related:

New Reports Show Severe Shortfalls in Multiemployer Union Pensions

Casey-Pomeroy Bill Would Bail Out PBGC, Union Pensions

Union Pension Bailout Bill Would Burden Employers and Taxpayers