STUMP » Articles » Central States, the Teamsters, and MEPs: Cuts to Begin » 11 October 2015, 10:20

Central States pension plan, which is a Teamsters multiemployer pension (meaning it covers Teamsters members in a certain area, and they’ve worked for multiple employers — think UAW pensions here, as well — union members theoretically could switch between employers and be covered by the same pension) has sent out letters telling current retirees and pension plan participants that they have to cut payments.

A lot.

SYMPATHY DOESN’T PAY THE PENSIONS

Many of the stories center on reactions of pensioners:

WASHINGTON — Retired truck driver Don Ziemba of Missouri Valley, Iowa, knew the letter was coming, but it still arrived last week like a punch to the gut.

Proposed pension cuts would reduce his monthly payment by more than half, from $2,800 to $1,281.

“It was very devastating,” said Ziemba, 69. “I was glad I was sitting down when it happened. It was a real shock to see that it came to this point.”
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Those over 80 or disabled are shielded from cuts, but others — like Ziemba, who hauled freight for various companies for many years before retiring in 2002 — are getting hit hard.

He seemed at a loss for how he will change his budget to deal with the reductions.

“I don’t know where you start looking to do cuts,” Ziemba said.

Also among those affected is 76-year-old Fred Lowry. His daughter, Mary Packett of Omaha, has taken up the cause for those facing cuts and took a group to Washington last month to protest at a federal hearing on the implementation of cuts.

“This is a house and a car payment for some of these men,” she said of those whose pensions are getting cut.
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In an interview, Tom Nyhan, executive director and general counsel at Central States Pension Fund, said he understands that people are frustrated and angry at the situation, but he said the alternative to the cuts is even worse.

“The biggest concern I have is that if we don’t take any action, the fund is going to become insolvent and the benefits are going to go to zero,” Nyhan said.

He said pension funds tried to get the federal government to help them out several years ago when Democrats had majorities in both the House and Senate, but were unsuccessful.
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Nyhan said that the fund has produced returns that compare favorably with trusts of similar size over the years and that the real crux of the issue is that there is simply no way to make up for the fund’s $2 billion annual gap between contributions and payouts.

“Look, nobody likes this,” he said. “Don’t think for a minute that our trustees had some kind of secret agenda or took pleasure in doing this. This was very difficult, complicated and gut-wrenching. We don’t want to do this. We don’t see an alternative.”

Here’s one Hoffa’s take:

James P. Hoffa, president of the International Brotherhood of Teamsters, has written a letter to the Central States leadership arguing that such cuts should not be made. Hoffa acknowledged he has no authority over the operations of the Central States fund.

Hoffa wants Congress to pass a “Keep Our Pension Promises Act.” He maintains that the Multiemployer Pension Reform Act unfairly shifts the consequences of unfunded pension liabilities to retirees and participants.

And exactly where does he think the money will come from?

There’s a reason the sponsors can’t really increase contributions. Maybe the participants could increase their contributions…. any takers? No?

By the way, Hoffa, it’s because of your daddy that this plan was under a consent decree so that the fund had to be independently (independent of the Teamsters, that is) managed.

TEAMSTERS AND CENTRAL STATES HISTORY: MOB CORRUPTION

Well, your daddy and the Mob:

The Central States fund had been linked to organized crime since the 1950s, when some of its assets helped finance the early hotels and casinos in Las Vegas.

The questionable investments given to equally questionable characters continued into the 1970s, especially during the reign of Jimmy Hoffa as president of the union.

After Frank Fitzsimmons replaced Mr. Hoffa as president in 1967, the fund hired five external investment managers to supplement the in-house asset management. In February 1974, seven trustees were indicted on charges of making unauthorized loans of $1.4 million from the then $1.2 billion fund.

But a year later, in an apparent resurgence of Mr. Hoffa’s influence within the union and the fund, four of the outside managers were fired. Fund officials claimed the trustees had lost faith in the equity markets.

Just a few months later, Alvin Baron, asset manager of the fund, resigned his post and became a “consultant” in Las Vegas to Allen R. Glick, owner of several casinos and past recipient of loans from the fund totaling more than $80 million.

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In the fall of 1982, as the first contract with Equitable was coming to an end, the Teamsters agreed to a consent decree with the Labor Department that required independent asset management — and other restrictions — for at least 10 years.

In late 1983, seeking a “fresh approach” to the management of its assets, the union hired Morgan Stanley (MS) Inc. as named fiduciary of the pension fund. At the time, Morgan officials hoped to also manage some of the union’s then $4.7 billion in assets, but that was not allowed under the consent decree with the Labor Department.

Four years later, Central States trustees sought approval for hiring a second named fiduciary. By that time, the fund had $18.2 billion managed by 35 managers in 60 portfolios.

The trustees initially filed a motion in U.S. District Court in Chicago in May 1997 for approval to hire two named fiduciaries and to allow the named fiduciary to manage up to $1 billion of the fund.

That was published in 1998. If you look at the history of the Teamsters and the Central States pension in specific, you’ll see a lot of federal intervention to prevent the return of corruption.

Many have pointed out that it’s been about as long as I’ve been alive that the Hoffa corruption has been removed from the pension management, and I don’t disagree. The trouble is from undercontributions over the decades more than corruption.

But where are the funds going to come from?

QUOTING MYSELF

I figure I might as well quote myself from prior posts:

November 2014:

You start working at the age of 25 for the state of Illinois, your pension benefits are baked in for life, even if there’s deflation instead of inflation, even if a medical miracle cure comes through and life expectancy is 100 years old, and even if we end up having a negative interest rate environment. The only changes allowed are ratcheting the benefits higher.

Until the money runs out.

And don’t doubt that the money can run out.

February 2015:

Yeah, one finds out that a group is not “untouchable” once the money runs out. Funny that.

June 2015:

Thing is, when the money runs out, you can try to get rich folks to cough up to make up the gap, but they may feel like fleeing the Silicon Prairie for less onerous climes.

July 2015:

I am not a lawyer nor a law-talking/understanding person. All I know is that if you don’t pre-fund the pension, and try to match the cost accrued by that service that year, the pensioners come into increasingly precarious situations.

Because it doesn’t much matter what the law says when the money runs out.

August 2015:

Okay, let’s do bottomline: when the money runs out, as per Stockton, the state constitution does bullpuckey for making sure those pensions get paid.

People may say “oh, but the money isn’t running out yet….there’s plenty of assets in the fund!”

Take a look at this:

The Central States Pension Fund, which covers Michigan truckers and others elsewhere, said its pays $3.46 for every dollar taken in through employer contributions. Fund says: “That math will never work.”

Now, this isn’t necessarily a problem… it depends on if there are enough assets and investment income thrown out.

Think about your own retirement savings/fund. There’s a period where you’re putting in lots, but not taking anything out; when you retire, you stop putting money in and only take money out.

Not necessarily a problem.

But I have a feeling that they were looking at an “asset death spiral”.

ASSET DEATH SPIRAL: EXPLANATION

My previous explanation on the asset death spiral:

Let me explain the asset death spiral, which is when balance sheet weakness manifests itself in something really serious: a lack of cash flow to cover promised benefits.

Having to liquidate assets to cover cash flows is not necessarily a bad sign — if one has a decreasing liability (which means decreasing cash flow needs in the future).

This is not the case for Chicago. Nor Illinois.

One has to sell off assets when investment returns and pension contributions are too low to cover current cash flow needs. This reduces the asset amount for the pension funds…and if cash flow needs are increasing, you find that one has to liquidate more and more assets… until the fund is exhausted.

I also have a graph showing an asset death spiral for Kentucky:

I haven’t looked at whether the Central States plan is in such an asset death spiral yet, but I assume they are looking at a projection of unavoidable running out of funds, unless they cut the liability cash flows.

I looked around for proposals to avoid these cuts, and other than weeping and/or raging at politicians, little came up, except for what pension actuary Jeremy Gold says:

My testimony last year pointed out that this problem cannot be solved without limiting the continued underfunding of currently accruing benefits. In other words, while trying to deal with the giant hole in the ground, MEPs are still digging.

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I have suggested that there is another approach that, as a taxpayer, I think may be a bargain for me and a better deal for the plans. It contains two parts: (1) get the liability measurement on a market basis and insist that all newly accrued benefits be fully paid for as earned (hedging would be nice too). This would reduce future accruals and increase funding. (2) In exchange for a much more disciplined process and market measurement (i.e., we stop digging immediately), Congress can provide a fractional bailout on our collective behalf. As a taxpayer, I think this tradeoff will cost less in the long run than failure to properly constrain future accruals and funding.

In my testimony, I claimed agnosticism with respect to how much to cut benefits versus increase funding and I was silent on a partial bailout. I focused on proper measurement. This should surprise no one on the [Actuarial Outpost].

More on that congressional hearing from last year:

Additional testimony was presented by Dale Hall, the Society of Actuaries’ Managing Director of Research, primarily regarding the development of new mortality tables; and by Jeremy Gold of Jeremy Gold Pensions, whose central message was that liabilities are understated by as much as 50% and annual costs are underestimated by as much as 100%. “Good policies cannot be based on bad numbers,” Gold said. The final witness was Diane Oakley, Executive Director of the National Institute on Retirement Security (NIRS), who focused on the role of DB plans.

This has indeed been Jeremy’s focus, and I agree with him.

But I also think that there is another piece missing: the recognition that there are trade-offs. This is particularly bad with public pensions, because they know what can make it all better….

SEARCHING FOR THE MAGIC MONEY TREE

Yes, that magic money tree that fulfills all desires, without having to cut anything.

I agree with the Central States retirees and participants that they are not at fault for the pension underfunding.

But the “plan”, such as it was, before the law got passed, was that you had to wait until the pension really was in a hideous situation, and if the plan got dumped onto the PBGC, the cuts would be even worse for retirees.

So there is a trade-off: take a smaller (but still big) cut now to avoid getting hit with catastrophic cuts later.

I know they would rather take the choice not on offer: no cuts at all.

The money will come! The taxpayers will bail us out! After all, Wall Street got bailed out! Why not us?

Sorry, no.

LEARN THE LESSON, DAMMIT

NYPost editorialists agree, and note this extends beyond the Central States plan:

When pension funds go empty, all bets are off

Some 407,000 Teamsters are learning a painful lesson: Their private-sector pensions aren’t as safe as they once thought.

Pay attention, government workers — and taxpayers — in New York and New Jersey.

Last week, letters informed these Teamsters they’re facing cuts in benefits of up to 60 percent. Why? Because their pension fund is going broke.
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Government pensions aren’t immune. Yes, many state constitutions bar pension cuts — and if the funds sink, politicians would find it easier to hit up taxpayers in a crunch than anger unions and their members by trimming benefits.

Easier at first, anyway. But when the well runs dry, what’ll happen?

That’s the nut New Jersey governments have been grappling with in recent years. New York’s situation is better — but it, too, faces a reckoning.

That’s even though Jersey’s funds need a whopping $200 billion to make good on their pension promises, while Empire State funds need $308 billion. Driving the shortfalls: Too many retirees for each current worker, as with Central States; overly generous pension promises pols made to please unions — and governments’ habit of not paying what they should into the funds.

Look, I think a partial bailout of some sort could be on offer for MEPs and public plans… but it would require the plans giving something up. And even then, it’s politically iffy right now.

And the biggest thing they have to give up is the idea that they have the ability to get whatever money necessary, like magic.

Because expecting people who had nothing to do with your pension plan failing to pony up, and you don’t have to compromise one whit…. yeah, that’s not a winner.

Yelling at these people that they’re meanies for not dishing out the dough is also not persuasive.

The problem is that this has to be fought every time this issue comes up. Prichard, Alabama actually ran out of funds — people weren’t paid their pensions for over a year — and then they had to negotiate something. Detroit retirees got cut in the bankruptcy. Calpers keeps fighting bankrupt California cities from cutting their pensions… we’ll see how long that can last.

Then there’s Chicago. And Illinois. and New Jersey.

My question is: how big of a disaster do you want?

Because if you pretend that iceberg isn’t there, you’re sure to hit it.