Teamsters Central States Pension Fund Puts PBGC in Jeopardy
Four decades ago, the International Brotherhood of Teamsters’ Central States Pension Fund was a project of organized crime. In the future, it may well be a project of a federal agency, Pension Benefit Guaranty Corporation, itself one day possibly in need of a bailout. Late this September, the troubled Rosemont, Ill.-based pension fund, which currently enrolls more than 400,000 active and retired Teamsters in 37 states, filed a restructuring plan with the Treasury Department proposing benefit cuts averaging around 23 percent. The action is the first taken under a new law. Central States Executive Director-General Counsel Thomas Nyhan explains the situation: “The longer we wait to act, the larger the benefit reductions will have to be.” Yet the union bears major responsibility for its dilemma.
The Central States, Southeast and Southwest Areas Pension Fund, or as it is simply known, the Central States Pension Fund, is the largest of Teamsters-sponsored pension plans. It also has a colorful history – and not in the good sense. Teamster General President Jimmy Hoffa, father of current Teamsters 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 were convicted by a jury the following year. Even after reporting to federal prison in 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 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 avoided conviction. Eventually, in February 1972, Dorfman would be convicted in New York for illegally obtaining a $55,000 kickback from a recipient of a Central States Pension Fund loan. After his December 1973 release from prison, he would be indicted in February 1974 for fleecing the fund of $1.4 million. Though forced to resign his formal position as “consultant,” he continued to run operations from the background – and steal. The U.S. Labor Department estimated by the early Eighties that Dorfman had looted the Central States Pension Fund of at least $5 million.
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 materially benefited from it. 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 good stead with the mob, Fitzsimmons also had positioned himself to keep his job in Jimmy Hoffa, pardoned by President Nixon in December 1971, wanted it again. Hoffa’s reach eventually exceeded his grasp, and he permanently “disappeared” on July 30, 1975, a day when he was supposed to have lunch at a Detroit-area restaurant with a number of persons to discuss union “business.” 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, in fact, had been indicted with Dorfman in a separate case involving an attempt to extort $800,000 from a Chicago-based 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 joined them. 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 related to real estate, 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 that told him to look the other way while mob functionaries skimmed millions of dollars from counting 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 association between the two worlds formally ended long ago. In 1982, following a federal investigation, the Teamsters entered into a consent decree with the Justice Department to cede control of its retirement funds to a consortium of banks. The arrangement remains in force. Unfortunately, it has not been sufficient to stave off another looming disaster. Declining union membership, deregulation of the trucking industry, and longer life expectancies have combined to raise expense-to-income ratios to the point where they are not sustainable. At present, the Central States Pension Fund pays out $3.46 in retirement benefits for each dollar it collects from employers. It’s true that assets have rebounded from $7.6 billion in losses during the 2008 stock market crash at the rate of about 13 percent a year. Yet liabilities have risen even faster and now exceed 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 within 10 years. If that event occurs, it could trigger insolvency at a Washington, D.C. institution: Pension Benefit Guaranty Corporation.
Let us understand that at issue here is the Central States Pension Fund’s multi-employer, as opposed to a single-employer, retirement program. Multi-employer plans are funded by two or more employers, typically in the same or a related industry. If those companies are unionized, then the union typically contributes some funds. Moreover, like employers, they make appointments to the plan’s board of trustees. Of the roughly 41 million active and retired employees currently covered by traditional, defined-benefit pension plans in this country, about 10 million are enrolled in the multi-employer type. Under the Employee Retirement Income Security Act (ERISA) of 1974, Pension Benefit Guaranty Corporation (PBGC) takes over a multifamily only in the event of insolvency. This is contrast to a single-employer plan, where the sponsor is allowed to hand over management responsibility to the PBGC even in lieu of insolvency.
Pension Benefit Guaranty Corporation, like Federal Deposit Insurance Corporation, is an insurance agency. As such, its payments to beneficiaries are funded by premiums. The rules for multi-employer, as opposed to single-employer plans, however, differ substantially. Under a single-employer plan, the current benefit per retiree (starting at age 65) can be as high as $57,477.24 a year, and is indexed for inflation. Under a multiemployer plan, the maximum guaranteed annual benefit is only $12,870, and 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. Yet despite a smaller maximum benefit and fewer retirees to cover, multiemployer operations have become the bane of PBGC’s existence. According to the corporation’s most recent annual report, released last November, the single-employer insurance program ran a $19.3 billion deficit by the close of fiscal year 2014. That represented an $8.1 billion reduction from the year before. By contrast, the multiemployer program ended fiscal year 2014 with a whopping deficit of $42.4 billion, a more than fivefold increase from the $8.3 billion deficit at the close of fiscal year 2013.
Trustees and managers of the Teamsters’ Central States Pension Fund know that as presently structured, the plan could collapse, especially in the event of another severe stock market downturn. And they know that by outing PBGC on the spot to make beneficiaries whole, PBGC itself could collapse. But the fund also has an ace in the hole that it did not have even as recently as one year ago. Last December, Congress passed and President Obama signed the Multiemployer Pension Reform Act of 2014.
Source: http://nlpc.org/stories/2015/10/19/teamsters-multiemployer-pension-fund-pbgc-jeopardy
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