Within the last year and a half, the federal government has provided hundreds of billions of dollars to prop up otherwise failing corporations and financial intermediaries. This mating of economics and politics, inevitably steeped in favoritism, justifiably has earned denunciations from many sources, including National Legal and Policy Center. Labor unions also have been among the critics. Yet their leaders and supporters in Congress habitually put high principle aside when their own hides need bailing out. Case in point: a bill introduced in late October by Rep. Earl Pomeroy, D-N.D. (see photo), the Preserve Benefits and Jobs Act of 2009 (H.R. 3936). This legislation would enlist taxpayers to support troubled union-sponsored multiemployer pension plans and impose major burdens upon employers. It's another example of how interest-group politics benefits the relative few at the expense of the great many.
On the surface, Rep. Pomeroy would seem an unlikely prime sponsor. His native ground, North Dakota, is rural and Right to Work. Yet he's frequently relied on organized labor for campaign support – fully 12 out of his top 21 recent donors have been unions. Equally to the point, the Treasury Department-arranged bailouts of such financial giants as Fannie Mae, Freddie Mac, Bank of America, Wachovia and American International Group (AIG), plus automakers General Motors and Chrysler, have lit a prairie fire under him. In March, for example, he denounced AIG, among other firms, for paying executives king-sized bonuses: "Paying lavish bonuses to the corporate executives who tanked our economy and delivered unprecedented losses is far from a wise or prudent use of taxpayer dollars. American taxpayers should not be on the hook for rewards to executives who caused the economic meltdown."
Rep. Pomeroy's sponsorship of such a bill thus has a logic to it. What ought to be controversial is that the congressman's populist anti-bailout indignation doesn't extend to organized labor. The Preserve Benefits and Jobs Act, the draft copy's entirety of which can be found on the congressman's website, would amend the Employee Retirement Income Security Act of 1974 (ERISA) and the 1986 tax reform legislation to cushion union pension managers from the consequences of unwise investment decisions. The bill has two principal components, each a departure from sound fiduciary principles.
First, the legislation would allow managers of union-controlled multiemployer pension plans to form alliances with one another in order to avoid the "last man standing" rule. Under this rule, established by Congress almost 30 years ago, if an employer pulls out of a multiemployer plan, all remaining employers must cover that firm's outstanding obligations. Even if just one employer remains, it must either make good on all liabilities of the departed firms or pay a steep withdrawal fee. This rule, though intended to keep employers in the fold, unwittingly has made the exit door attractive. UPS, for example, in January 2008 made a $6.1 billion lump-sum payment to the Teamsters' collapsing Central States Pension Fund just to get out. The move turned out to be smart as it was desperate; the fund remains in dire condition despite the emergency cash infusion.
The "alliances" envisioned by the legislation, however, are less than benign. It would allow unions, however poor their track record of asset management, to force liability upon additional companies even in unrelated industries. Under current law, remaining employers are on the hook for those who leave, but at least they know they won't have to cover liabilities beyond their plan. The Pomeroy bill would greatly magnify the risks. As labor policy experts F. Vincent Vernuccio and Jeremy Lott note:
Concrete makers in Ohio could be held responsible for the pensions of garment workers in California. Hotels in Oregon could be on the hook for truckers in Pennsylvania.
All past employers and all future employers would be liable for every employee who ever was in one of their plans and potentially any plan that would ally with it. This could add billions in pension liabilities to these companies and bankrupt even healthy businesses.
Second, the bill would set up a separate taxpayer-supported fund, known as a "fifth" fund, within Pension Benefit Guaranty Corporation (PBGC), a federally-chartered insurance company having jurisdiction over all ERISA-covered defined benefit plans. This account would prop up multiemployer union pension plans in critical condition (assets totaling less than 65 percent of liabilities). The bill is explicit in making taxpayers liable: "(O)bligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States." This provision is all the more alarming given its lack of a statutory funding limit.
Currently, multiemployer plans account for roughly 10 million workers, retirees and eligible family members, or a little over a fifth of all participants in defined-benefit plans. The majority of current and future pensioners, in other words, are covered by single-employer funds. But that's small comfort to workers paying into failing multiemployer plans. Recent studies by the Hudson Institute and Moody's Investor's Service have revealed that union-managed multiemployer funds, and across a wide range of industries, are in worse shape than nonunion funds. Currently, PBGC pays an annual maximum of $12,870 per participant in multiemployer plans coming under its control. The Pomeroy bill would raise that figure to $21,000.
Let's understand that PBGC, financed mainly by insurance premiums, is not a bottomless pit. The corporation as of this past March 31 posted a $33.5 billion operating deficit, up from an $11 billion shortfall at the end of fiscal year 2008. About half of the $22.5 billion rise was due to completed and anticipated pension plan terminations. And the balance sheets aren't likely to improve given its takeover this July of auto parts manufacturer Delphi Corp.'s pension plans, covering a combined 70,000 participants. Indeed, even in absence of the Pomeroy legislation, the agency may be in danger of a first-time-ever reliance upon general revenues. That this turn of events has occurred despite the higher premiums required by the Pension Protection Act of 2006.
Pomeroy and co-sponsors such as Rep. Pat Tiberi, R-Ohio, argue they are committed to balancing interests, protecting workers from plan termination on one hand and giving employers extra time to make good on liabilities. The measure would give troubled employers the option of: 1) an extended contribution schedule of nine years, the first two years of which would consist of interest-only payments; or 2) a 15-year payment schedule. The bill, like an alternative one put forth by House Minority Leader John Boehner, also would create a 24-month period during which companies could smooth assets within 20 percent of their fair market value. Rep. Dave Camp, R-Mich., the ranking Republican on the House Ways and Means Committee, cautions that "help" of this sort may succeed in making the inevitable worse: "While giving companies additional breathing room to meet their pension obligations may make sense on the surface, we must also recognize that too much latitude could erode the likelihood of workers receiving the full benefits they were promised and could further expose taxpayers to the costs of bailing out the PBGC."
What is needed here is a strong dose of market discipline. If lawmakers really wanted to protect taxpayers, they would privatize Pension Benefit Guaranty Corp. instead of requiring that it continue to operate as a government agency. True, PBGC isn't about to go under anytime soon. Benefits are paid out as annuities, not as lump sums. But deficits will mount further if unions have the capacity to make unsustainable demands on employers, and employers in turn have the capacity to forestall the day of reckoning. The Pomeroy bill reinforces both tendencies. In the end, it's the American public who would pay the steepest price.
Is the PBGC Next in Line to Ask for a Bailout?