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Treasury Rejects Teamster Pension Compromise; Losses Mount

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The word “troubled” doesn’t begin to describe the Teamsters’ Central States Pension Fund.  “Desperate” is more like it.  Last Friday, May 6, the Treasury Department announced that it had rejected a restructuring proposal by plan trustees submitted last September to avert collapse.  The proposal, which would have cut benefits on average by 22 percent for about two-thirds of the more than 400,000 participants, seemed like a raw deal.  Teamsters President James P. Hoffa, for one, opposed it.  Yet whether he and other union officials admit as much, they are cornered by reality.  As of last fall, liabilities exceeded assets by $17.5 billion, a gap widening by $2 billion a year.  The plan is projected to go bankrupt by 2026.  A federal bailout would make things worse.  Central States Executive Director Thomas Nyhan is reviewing alternatives.

Union Corruption Update covered this issue in detail last October.  The Central States, Southeast and Southwest Areas Pension Fund, or simply the Central States Pension Fund, covers more than 400,000 active and future International Brotherhood of Teamsters retirees across 37 states.  Then-Teamster General President Dave Beck and his heir, Jimmy Hoffa, established the fund in the mid-1950s.  Though the fund always has been legally separate from the union, union officials and business associates weren’t impressed, using the plan as a personal bank.  Hoffa wound up going to federal prison on corruption charges in 1967.  In his absence, the fund functioned as a Mafia branch office.  Many investments consisted of high-risk loans, especially in the real estate sector; many were under mob control.  A Justice Department official noted in the Seventies:  “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.”  In 1982, following a lengthy federal probe, the Teamsters entered into a consent decree with the government to relinquish control of Central States to a consortium of banks.  While this arrangement remains in force, union-appointed trustees continue to set much of Central States’ policy.  And Teamsters-negotiated collective bargaining contracts have imposed unsustainable liabilities.  As of last year, the fund was paying out $3.46 in benefits for each dollar it was collecting from employers.  Even though plan assets have risen substantially since the 2008 stock market crash, liabilities have risen even faster. 

The Central States, Southeast and Southwest Areas Pension Fund, or simply the Central States Pension Fund, based in suburban Chicago, Ill., is a multiemployer plan.  That is, unlike a single-employer retirement plan, it is funded by two or more employers, typically in the same industry.  Being a defined-benefit investment, as opposed to a 401(k)-style defined-contribution investment, it is outside fiduciaries who manage portfolios.  A union and employers each appoint members to the board of trustees.  There are about 40 million active and retired U.S. employees now covered by a defined-benefit pension.  About 30 million are enrolled in a single-employer plan; the other 10 million are enrolled in a multiemployer plan.  The federal government protects each type through its Pension Benefit Guaranty Corporation (PBGC), established by Congress in 1974 under the Employee Retirement Income Security Act.  Ironically, the protector itself one day may need protection.  And Central States has plenty to do with that.

Pension Benefit Guaranty Corp. from the start has operated as an insurance fund.  As such, it used premiums, not taxpayer-funded appropriations, to cover liabilities.  If in the event estimated assets fall way short of liabilities, PBGC may raise its insurance premiums, subject to congressional approval.  PBGC recently did this for the multiemployer plans.  In face of alarming projections, the agency in 2013 raised its per-person premium from $12 to $13.  That nominal rise will be dwarfed by mandate by the Multiemployer Pension Reform Act of 2014 to phase in an increase to $26 per person.  Yet even at $26 per person, this revenue source will barely make a dent on a worsening crisis.  If 10 million participants pay $26 a year, the revenues would be $260 million.  That figure represents only one-half of 1 percent of the $52.3 billion asset-to-liability shortfall at the close of fiscal year 2015, according to the last fall’s annual PBGC report.  That’s up from $42.4 billion at the end of fiscal year 2014 and $8.3 billion at the end of fiscal year 2013.  The multiemployer deficit in fiscal 2015, in fact, accounted for more than two-thirds of the combined single-employer and multiemployer deficit of $76.3 billion.    

Multiemployer plan obligations, using present assumptions, cannot be sustained.  The deficit has become so large that no insurance premium hike can close it.  If it is any comfort, the situation would be worse if the annual PBGC payout limit for multiemployer plans was set as high as for single-employer plans.  Under a single-employer plan, the current maximum guaranteed benefit per retiree (starting at age 65) is $60,136, indexed for inflation.  By contrast, under a multiemployer plan (based on years of service rather than age), the annual maximum benefit is only $12,870.  And unlike single-employers plans, there is no indexing for inflation.    

Given its looming multi-employer commitments, PBGC itself could be headed toward a meltdown.  The growing insolvency of the Central States Pension Fund would drive a lot of that.  Teamster fiduciaries know this.  They also know they have recourse under the Multifamily Pension Reform Act of 2014.  That legislation, sponsored by Reps. John Kline, R-Minn., and George Miller, D-Calif., and signed by President Obama, authorizes plans of “critical and declining” status to reduce benefits, either permanently or temporarily.  “Critical” means that assets are less than 65 percent of projected long-term liabilities; “declining” means that a plan is projected to run out of money within 15 years, or in certain exceptional cases, 20 years.  Any proposed benefit cut must receive approval from the U.S. Treasury Department.  And the plan managers must notify participants of any such proposal in advance.  Moreover, if approved, plan participants must be given an opportunity to vote on it.  And if current and future beneficiaries reject the proposal, the Treasury Department still must permit benefit reductions for “systematically important” plans.  The Central States fund, which ran a roughly $17.5 billion deficit last year and which is only about 50 percent-funded (i.e., total assets are only about 50 percent of total liabilities), surely qualifies as that.

The Central States Pension Fund, which now pays out more than $2.8 billion in benefits a year, last September 25 applied for relief under the Kline-Miller legislation.  It was the first pension plan to do so.  Its proposal would reduce pension checks for around two-thirds of the 400,000 beneficiaries on average by 22 percent and in some cases by at least 50 percent.  Plan fiduciaries sent out letters to Teamster members informing them of potential benefit cuts.  Teamster General President James P. Hoffa and other union leaders were bitterly opposed.  Hoffa, in fact, three days earlier already had written a letter to the Treasury Department urging rejection.  The restructuring proposal, he wrote, “unfairly shifts the consequences of unfunded pension liabilities to retirees, participants and beneficiaries 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.”  Hoffa added:  “(P)articipants 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.”  The Teamsters received support in its campaign from a number of outside sources, including the American Association of Retired Persons (AARP) and the Pension Rights Center.  Sen. Elizabeth Warren, D-Mass., last month stood on the Capitol lawn and gave an emotional speech lambasting plan administrators and affiliated investment bankers.

Yet plan managers, beginning with Executive Director Tom Nyhan, had no choice but to deliver the bad news:  The Central States Pension Fund, continuing on its present course, will run out of money by 2026.  As it was, the fund was paying out $3.46 for each dollar it was collecting.  Even if the reorganization plan were adopted, the fund would stand only a 50-50 chance of surviving past 2064.  And things could have been worse.  In late 2007, United Parcel Service made a $6.1 billion lump sum contribution to Central States in exchange for opting out of further participation.  UPS management must have seen the handwriting on the wall.  

The Treasury Department, in the end, would not be swayed.  Last Friday, May 6, the department rejected the proposal.  Kenneth Feinberg, the department’s special mediator, explained:  “That specific plan submitted, pursuant to Kline-Miller, is flawed.”  Feinberg said he based his decision on a Treasury memorandum issued 10 days earlier on April 26.  The memo, more than 100 pages in length, spelled out guidelines for proposal evaluation.  In his rejection letter to Central States, Feinberg stated that he had to address three overriding questions:  Did Central States exhaust all other alternatives?  Are the benefit cuts equitable?  And will they preserve the fund?  He emphasized that Central States’

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