Another Labor Day, Little Labor Cheer
WASHINGTON-Another Labor Day is about to arrive, and once again, organized labor in the United States has little to cheer about.
Unemployment is high, union membership has fallen to 7 percent of the private sector labor force (down from 15% a quarter century earlier). Despite Democratic majorities in both houses of Congress, labor is unlikely to win passage of the Employee Free Choice Act, its heavily-lobbied bill to take away the secret ballot in elections for union representation. EFCA would also impose compulsory arbitration resulting in a mandatory two-year contract if the newly-unionized firm and the union cannot agree on compensation.
And now a new problem looms for some of the larger unions. The Financial Accounting Standards Board, a private entity that is widely respected in the business community, is considering adopting detailed disclosure standards for companies with multiemployer pensions.
The new standards would require employers to publish financial data annually that show the potential future liabilities of pension plans that cover employees of multiemployer plans, including expected contributions and liabilities, number of employees participating, and funding improvements.
Because some of these plans - for example, in transportation, food, and construction - are woefully underfunded, the new data will make it more difficult for unions to woo new members by holding out the prospect of generous retirement pensions.
Throwing a spotlight on underfunding may also force unions to modify future wage demands in favor of having employers make larger contributions to the pension plans.
The accounting board, which is based in Norwalk, Connecticut, has invited the public to comment on the proposed new disclosure criteria through November 1. Yesterday, FASB issued a bulletin discussing the proposed rule, which can be found here. The new standards are expected to be adopted in final form before the year ends and take effect in late December.
Investors and taxpayers should take an interest in how well funded these pension plans are. Underfunding implies additional contributions from employers, a drag on earnings.
Meanwhile, a few members of Congress have introduced bills that would have the government - that is, the taxpayers - rescue some plans. And there is the eventuality that employees of companies that go under will expect the government's Pension Benefit Guaranty Corporation to pay their pensions over and above the $12,870 per year maximum allowable amount for multiemployer plans.
Multiemployer plans have the virtue of allowing employees to take their pension rights with them if they leave one employer in a group to work for another.
Although these plans were created with the best of intentions, it is a fact that multiemployer pension plans generally have lower levels of funding than do plans sponsored by of nonunion labor. This disparity in funding adequacy is evident in Labor Department data for 2005, 2006, and 2007, the latest year for which complete reporting is available. Since the 2008 stock market crash, the plans are likely in worse shape.
Congress 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. The Labor Department lists critical and endangered plans on a Web site at http://www.dol.gov/ebsa/criticalstatusnotices.html.
In a new study by the Hudson Institute published Wednesday, my associates and I examined the funding status of all 2007 pension plans, using Labor Department data.
Among all large plans - those with 100 or more employees - 18% of union-negotiated plans were fully funded in 2007, compared to 39% of non-union plans. Twenty-four percent of union plans were in endangered status - less than 80% funded - compared to 9% of non-union plans. And while 12.5% of union funds were in critical shape with less than 65% of required assets, 1.5% of non-union plans were in critical shape.
If the federal government were to bail out the pension funds, taxpayers would take a substantial hit. In 2009 Moody's estimated that multiemployer plans were underfunded by at least $165 billion, and concluded that "The ballooning of the under funded status of these funds has substantially increased the implied liability for contributing companies in the industries affected." Some companies risk having their credit ratings downgraded, especially if weaker companies go out of business and leave the pension plans.
Under current law, if a company drops out of a pension plan, the other companies may be responsible for the pensions of the dropout's employees and retirees. This contingent liability is known as "last man standing," because the last surviving company in the multiemployer plan would theoretically be responsible for the obligations of all the other employers, as well as its own.
According to Moody's, investment grade companies are the most vulnerable, because they have the capacity to hold out after other companies have gone under. If these companies were the last in the industry, their financial health might be impaired.
Information about such contingent liabilities is not now reflected on companies' balance sheets. FASB wants to remedy that omission.
The new FASB regulation may persuade more companies to stand behind a federal bailout of multiemployer pension funds. Representatives Earl Pomeroy, a North Dakota Democrat, and Patrick Tiberi, an Ohio Republican, would rescue multiemployer pension plans with their proposed Preserve Benefits and Jobs Act. It would grant the PBGC unlimited funds to bail out the multiemployer plans.
A companion bill pending in the Senate, the Create Jobs and Save Benefits Act of 2010, is sponsored by Senator Robert Casey, a Pennsylvania Democrat.
Enactment would potentially increase future federal deficits by $165 billion. That is obviously undesirable. According to the White House's latest budget review, the deficit as a percent of GDP is projected to be 10% this fiscal year, which ends September 30, and 9.2% next year. It is not forecast to fall below 3.5% until 2017. And that decline is based on optimistic assumptions. Then, the deficit is forecast to rise again in 2019 and 2020.
The FASB proposal, if implemented, would shine a light on the inadequacies of multiemployer pension plans. A double-edged sword, let's hope that the rule would prompt employers and unions to favor remedial measures-but not act as a catalyst for a congressional bailout, possibly in a lame-duck session after Election Day.