Big Labor's Multi-Billion Dollar Bailout

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WASHINGTON--It's Thanksgiving, the start of the holidays, the season of giving-and getting-and many labor union officials have a lot to be thankful for. Some members of Congress are thinking about giving the union bosses a multi-billion dollar gift-a bailout of failing, collectively-bargained multiemployer pension plans.

No matter that this would increase the federal deficit, putting even more pressure on the American taxpayer and the economy. After the $787 billion "stimulus" plan, the $700 billion Troubled Asset Relief Plan, and the potential $1 trillion health care "reform" plan, what are a few more hundreds of billions of dollars? Who's counting?

Representatives Earl Pomeroy, a North Dakota Democrat, and Patrick Tiberi, an Ohio Republican, have come to the rescue of pension plans with the proposed Preserve Benefits and Jobs Act of 2009. Even though the Pomeroy-Tiberi bill has not yet had a hearing, and has no companion bill in the Senate, the mere introduction of the bill shows how desensitized Congress has become to costly legislation.

What are multiemployer plans, and why do some members of Congress want to rescue them with money from the federal Treasury?

Multiemployer pension plans are created and sponsored by unions to generate retirement income for employees of different companies. Such plans allow workers to take their pension rights with them if they move to another participating company; they also facilitate consolidation of union pension contributions into larger investment pools.

Although these plans were created with the best of intentions, multiemployer pension plans generally have lower levels of funding than do plans sponsored by other employers for their nonunion employees. This disparity in funding adequacy is evident in Labor Department data for 2006, the latest year for which complete reporting is available. Since the 2008 stock market crash, the disparity has worsened.

While a pension plan need not be fully funded at any moment to be stable, Congress (through the Pension Protection Act of 2006) considers funds with less than 80% of needed assets to be in "endangered" status, and those with less than 65% to be in "critical" status.

Among all large plans - those with 100 or more employees - only 17% of union-negotiated plans were fully funded in 2006, compared to 35% of non-union plans. Thirteen percent of union funds had less than 65% of required assets, while only 1% of non-union plans were in critical shape.

Plans in critical status include the Central States Teamsters' plan, which has 48% of the assets needed to fund its obligations, the Service Employees International Union plan, at 65%, and the Sheet Metal Workers, at 39%.

Included in the bill's provisions is a "fifth fund," under the auspices of the government's Pension Benefit Guaranty Corporation, to rescue union-controlled multiemployer funds. The fifth fund would be used to "protect the reasonable benefit expectations of plan participants and encourage the continuation and maintenance of voluntary private pension plans for the benefit of their participants while maintaining premiums at the lowest level consistent with that objective."

Notice the emphasis on keeping contributions to the fund low. That's to permit active union members to get bigger pay raises.

The bill states that whereas the U.S. government is not responsible for the obligations of the PBGC-which is funded through contributions from employers-the government is directly liable for the fifth fund. The bill sets no upper limit to the Treasury's exposure.

This means that the underfunded union-controlled pension obligations would be shifted directly to taxpayers. You could call it another entitlement program. The Congressional Budget Office has not yet given a cost estimate for the bill, but the figure is likely to be in the hundreds of billions, because of the sizeable number of large multiemployer plans-over 300 this year-that are in critical or endangered condition.

The bill also would loosen accounting standards, allowing plans to spread recent financial losses over 10 years and in some cases over 30 years. This sleight of hand would make plans appear to be in better financial shape than they are under present rules. Unions would come under less pressure to acquiesce in a reduction of future benefits, or to shift compensation from wages to contributions.

Further, the bill would allow certain multiemployer pension funds to form alliances and merge where these mergers would reduce the PBGC's losses. Plans that have been financially prudent could lose, because they could be merged with failing plans.

The bill would scale up PBGC payouts to workers in bankrupt multiemployer plans from $13,000 a year to $20,000, placing further financial pressure on the PBGC.

The root of the problem is that union leaders prefer to seek increases in wages rather than divert available money to pension contributions, and so many pension plans are increasingly underfunded. Unions advertise solid pension plans to attract new members, but do not diligently strive to protect the rosy financial futures they advertise.

If this bill is enacted, unions will have no incentive in the future to negotiate well-funded pension plans. In the guise of helping out workers, the bill's transparent purpose is to rescue union leaders, so they can shift from negotiating higher pension contributions to negotiating higher wages. That's the way union leaders win re-election.

Congressional observers are preoccupied with the health care bill and how it might further inflate our already-bloated budget deficit. Health care isn't the only uncontrolled spending bill rolling on Capitol Hill. Walk down any congressional hallway and members seek to spend billions more on their favorite causes. Just ask Reps. Pomeroy and Tiberi.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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