Big trouble in union land: Multi-employer pension liabilities to be included in new accounting standards

There’s a must read op-ed today’s Wall Street Journal on how Senate Democrats might be fast-tracking another massive taxpayer bailout, this time for multi-employer union pension plan:

We wrote in June about this class of some 1,500 union-run retirement vehicles, in which companies across an entire industry pay into a single pension pool. Hundreds of these multi-employer pools are badly underfunded, thanks to years of labor funneling money into new pay and benefits, rather than into the funds for retirees.

The big problem with these plans is that when one company in the pool goes out of business, the other companies remain on the hook for the cost of the plan. These spiraling liabilities inspired Pennsylvania Senator and Big Labor favorite Bob Casey to introduce legislation to cordon off “orphaned” pensions—those for which an employer has stopped contributing or withdrawn from the plan—and drop them on the federal Pension Benefit Guaranty Corporation.

The PBGC is already significantly underfunded and taxpayers are its ultimate backstop. Yet the Casey bailout could dump as much as $165 billion in new liabilities on the PBGC, while multi-employer plans would get a clean bill of health. What a deal.

This cause has taken on new political urgency, and no less than Senate Majority Whip Dick Durbin has endorsed the bill. The reason for the rush is new rules that may soon be issued by the Financial Accounting Standards Board (FASB), the green-eyeshade outfit that dictates how companies keep their books. Those proposed rules would expose the multi-employer time bomb.

This is a very big deal. In many industries where unions are prevalent, such as construction and trucking, it’s almost impossible to conduct business without loans or lines of credit. But it will be impossible to get loans or credit if every company is now responsible for honestly reporting the liabilities that unions have been piling on them for years. As I wrote back in April:

Multiemployer pension liabilities kill companies. Even if your business is fiscally sound, the liability of other companies you’re linked with can severely damage your ability to get a loan or raise capital.

No wonder the unionized United Parcel Service recently shelled out a whopping $6.1 billion to get out of the multiemployer pension plan in which it was formally enrolled. Prior to UPS shelling out the money, the company’s pension liabilities were estimated to be in the neighborhood of $4 billion, but turned out to be much higher.

That’s because unions are trying to hide the severity of the problem from their own workers. The union officers know this. That’s why the Service Employees International Union has a separate pension plan for it’s officers — that from 2002 to 2005 that plan was on average funded at 123 percent.

Union pension plans need reform not bailouts. In fact, a government guarantee for union pension plans will probably just encourage further mismanagement among union leaders who always seem to benefit, regardless of how their policies harm rank-and-file union members. From the comments section on on the WSJ editorial, comes a great explanation of how multi-employer pension plans hurt the garment industry and could continue to devastate unionized businesses going forward:

MEPPA [Multiemployer Pension Plan Amendments Act, passed by Congress in 1980] is not only bad for industry and tax payers, but it is bad for the unions and their members.

Your editorial, “The Next Pension Bailout”, recalled the nightmare that we lived through in the clothing industry during the 1980s. We had for years been a privately held business, employing several hundred and fulfilling our entire contractual obligation with the union. As a small business in the industry we had negligible input into the agreement. A few large producers agreed upon a proposal. The union summoned us, gave us the agreement and ordered us to sign.

Suddenly with the passage of MEPPA, we were faced with a contingent liability greater than our entire net worth. The 80s were a period of declining clothing consumption and fearsome competition from imports. We tried to devote our attention to competing but instead our basic concern became financing. The banks were now asking to be informed of our MEPPA liability and at the same time were reducing our lines of credit. The possibility of being stuck with the liability, discouraged the entry of new companies and depressed reinvestment by others in the industry.

In addition we had thirty years of self financing at risk. Publicly traded companies had their liability limited to a percentage of net worth. Private companies were liable for everything they had. To save some portion became more important than the ultimate survival of the business. We did manage somehow to hang on for 10 years and were one of the last manufacturers in the Metropolitan NY area to liquidate.

Today the industry is gone, the union is gone, the workers are gone and the pension fund has paid almost nothing to retirees. Congress could not have legislated a worse program for all concerned.

No matter how badly Casey’s bill will hurt business and union jobs in the long run, I doubt this will concern Senate Democrats. It’s the union leaders who write campaign checks that that they’re concerned about.

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