STUMP » Articles » Why There Will Be No Bailouts » 31 May 2016, 02:22

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I get emails, and I answer them. But sometimes the answer is so long that they merit their own post.

So here is such a one.

Somebody emailed me the following [excerpted/edited for readability] in response to one of my posts on Central States Pension Fund:

The human and group dynamic I understand well. However, I don’t follow your confidence that there will be no bailouts.

Unions are inherently political organizations. They have long since stopped serving the member (whether they ever did is for another discussion), but as organizations with the primary objective of perpetuating their existence, public money seems like an obvious play. Their political influence is dwindling for certain.

However, I would expect legislation like KOPPA (a naked transfer of public funds..) to be relentlessly proposed. Is your larger point that there simply is no money, anywhere? That there is no legislative path to at least semi-solvency? That the inevitable public bankruptcies will happen before Central States gets their turn at the trough? The moral hazard would be a painful but useful lesson. However, hard to see a constituency with this history and resources getting stiffed.

I agree it sucks to have a constituency getting stiffed, and across a huge geographic swathe, meaning many politicians are there to be pressured.

However. The sympathy level is going to be fairly low from many other people.

Anyway, my nutshell answer (muuuuuch longer below):

• We ain’t got the money of
• It’s become very clear to everybody we ain’t got the money of
• If we can’t pay for all our wants, then there is going to be choosiness.
• Keeping relatively generous pension promises topped up ain’t going to be chosen

Now, to be sure, Central States may slip in before Bailouts R Us completely shuts down. But I don’t think it will.

SPECIFICS OF CENTRAL STATES

Here’s the deal with Central States: they aren’t the first pension plan to go bust.

A list of plans already taken over by the PBGC can be seen here.

Now, those are single-employer plans (as far as I can tell), which has higher guarantees than the MEPs. I found a spreadsheet from 6/30/2011 detailing how many participants were affected by all those trusteed plans. About 2 million people (and, of course, their families would be affected, not just the individuals) for more than 4200 plans.

So let’s take a look at Central States:

Total participants @ 12/31/14: 397,492 including:
Retirees: 204,151
Separated but entitled to benefits: 128,814
Still working: 64,527

And of course, there are other MEPs going bust.

Unlike many public employees, these people are eligible for Social Security benefits. Those benefits tend to be small, but they’re not zero.

And these are DB plans, which the majority of workers have never had in the U.S., in the private sector. So there’s not going to be a huge amount of solidarity in the private sector.

The Teamsters could get some sympathy from public employees, perhaps, but even they may not be feeling too pleasant. After all, there is at least some backup guarantee of benefits for the Central States people (unlike, say, the pensioners of Prichard, Alabama), and they also get Social Security! I mean, what are they whining about? Everybody’s getting cut!

PUBLIC EMPLOYEES DIDN’T GET A BAILOUT

And what has happened with public employees? Again, many of them are not eligible for Social Security.

Well, what happened in Detroit? From page 132 of Nathan Bomey’s Detroit Resurrected:

Arguably the first question Rosen needed to answer was whether a federal bailout was possible for Detroit. One big check from Washington could make a lot of debt go away.

But in the immefiate months after his appointment as emergency manager, Orr had tried and failed to persuade the White House to deliver cash for Detroit. His former University of Michigan Law School Classmate, Valerie Jarrett, a close friend and senior advisor to President Barack Obama, turned Orr down.

Or, as I wrote on my copy of Bomey’s book:

At the time the Detroit bankruptcy was getting started, I wrote the following at the Actuarial Outpost:

Yes, because money will magically appear from somewhere if only we wished reaaaaaallly hard. The EU didn’t wish hard enough, those flinty-nosed rightwingers

Speaking of takes from the left…
http://www.realclearpolitics.com/video/2013/07/21/ed_schultz_detroit_a_conservative_utopia.html

“ED SCHULTZ: Michigan used to be a symbol of industrial strength in manufacturing in this country. But thanks to a lot of Republican policies, the city is now filing for bankruptcy. Now, it’s the largest public sector bankruptcy in U.S. history, and the consequences could be devastating if you care about people. The already small force of police, firefighters and EMTs are in danger of future layoffs, that’s only going to make it worse. Roughly 30,000 retired workers are concerned about their pensions. You know, what they’re counting on.

Make no mistake, Detroit is exactly what the Republicans want. They outsourced manufacturing jobs, attack unions, cut public services, and this is the result. Now they can wipe the slate clean because now they can start privatizing city assets.”

Anyway, yes, they should be concerned. I doubt there will be a bailout.

These two posts about the judge trying to stop the bankruptcy are also amusing. Obviously, that judge failed. And there was no bailout.

Detroit was given essentially nothing from the Feds. Rhode Islanders were given nothing. Puerto Rico is getting nothing. Chicago will get nothing.

And Central States will get nothing as well. Nothing beyond the PBGC guarantee, that is.

NOTHING FOR SUFFICIENTLY SMALL DEFINITIONS OF NOTHING

Okay, maybe not completely nothing. The email-writer mentioned KOPPA. Let’s check out what that is.

It was sponsored by Bernie Sanders. In 2015. There are currently 10 sponsors in the Senate. Of those 10, three signed on soon after Sanders put it out, four more by the end of 2015, and then the final three this year, with one, Barbara Boxer, signing on one week ago.

It’s all Democrats (for now). Here’s the House bill, with 51 co-sponsors. Again, only Democrats sponsoring.

Now, this can be positioning for the election, and it’s certainly possible for the Democrats to take over both the House and Senate again. And even if not this year, perhaps two years into a Trump presidency, sure.

Let’s see what the bill supposedly does.

From the summary:

This bill repeals the elimination of the pension anti-cutback provisions under the Multiemployer Pension Reform Act of 2014. The anti-cutback provisions prohibit reductions in pension benefits to participants in multiemployer pension plans.

The bill amends the Employee Retirement Income Security Act of 1974 (ERISA) to allow a plan sponsor of an eligible multiemployer plan to petition the Pension Benefit Guaranty Corporation for a partition of a financially-troubled pension plan. PBGC is required to establish a legacy fund to cover the administrative and benefit costs resulting from a partition..

The bill amends the federal bankruptcy code to assign first claim priority to pension obligations under ERISA.

The bill amends the Internal Revenue Code to: (1) impose a limit of $1 million on the exemption of the gain from the exchange of real property in a like kind exchange, (2) prohibit the use of like kind exchanges for collectibles, (3) establish estate valuation rules for certain transfers of nonbusiness assets, and (4) limit estate tax discounts for certain individuals with minority interests in a business acquired from a decedent.

Not sure about that last paragraph.

Let’s take the first paragraph: if anything, not allowing the cutbacks of payments is not exactly providing a bailout….and it replaces with the ability to partition a plan….okay, not seeing the bailout yet.

Well, there’s no way in hell I’m reading a bill intended for Congress, so let’s check out what the bill’s supporters have to say:

How partitioning would work under the Keep Our Pension Promises Act

1. Trustees of a financially-troubled multiemployer plan that is likely to run out of money within 10 to 20 years will be able to apply to the PBGC for a partition order.

2. If the partition order is issued, the plan will not have to pay the full benefits of its “orphaned” pensioners who are retired as of the date of the partition order. (Orphaned retirees are those whose former employers went bankrupt or withdrew from the plan without fully paying what they owed.)

3. The PBGC will transfer money to the plan each year in an amount equal to the “guaranteed benefits” the PBGC would have had to pay to these orphaned retirees if the plan were “insolvent” without enough money to pay promised benefits in that year.

4. A new Legacy Fund will be created at the PBGC supported by general revenue from the U.S. Treasury. The revenue cost will be offset by money raised from closing two tax loopholes that primarily benefit high-income individuals and their estates, the “like-kind exchange” and “minority valuation discount” provisions of the Internal Revenue Code.

5. The money that the PBGC transfers to the partitioned plan will come from both its current multiemployer pension insurance fund and the new Legacy Fund.

The plan that has been partitioned will pay the difference between the guaranteed benefit amounts funded by the PBGC and the retirees’ full benefits, up to specified limits.

Plans will continue to pay full benefits for non-orphaned retirees.

Okay, the proposed bailout is in #4. Yes, it’s in #3 as well, but if there was no source of funding, there would be no bailout.

I really doubt that the “like-kind” exchange and “minority valuation discount” will be able to scrounge enough money to cover these promises. So basically, they’d get their benefit cuts still, and maybe there would be a little extra revenue to provide some of this. I’m seeing about $30 billion in deferred capital gains here so if I assume a 30% capital gains tax rate (Higher than current rates), that could be $9 billion per year!

Party time!

How much money is going out of Central States per year, again?

Payouts 2014: $2,822,248,296

Um. Hmm. Well $9 billion can cover multiple years! Wait, what’s this about all the other insolvent pensions?

This does put me in mind of the fiddling with the relatively small Laborer’s fund. Perhaps one group can get first mover benefits…. if it weren’t for the fact so many pensions are going flop at the same time.

So fine. Perhaps there will be some tinkering such that some money is thrown at Central States, but I highly doubt they will be made whole. They’re going to be cut, perhaps less, but it is entirely possible for them to ultimately end up with very, very little.

LET’S MAKE A DEAL!

When it comes to financial shenanigans, I can usually find a character and/or plot from Dickens to illustrate the concept. I can definitely find the mascot of all this pension-related “bargaining”, whether it’s busted MEPs or busted public plans.

Harold Skimpole, a character in Dickens’ Bleak House, is a nasty profile of the habitual profligate (with other people’s money).

Here is one bit I particularly remember from Mr. Skimpole, when he is being threatened with being taken for debt, and the collections agent has been capturing a whole bunch of Skimpole’s assets…or, rather, other people’s assets that happen to be in Skimpole’s house:

We made a pleasant journey down into Lincolnshire by the coach and had an entertaining companion in Mr. Skimpole. His furniture had been all cleared off, it appeared, by the person who took possession of it on his blue-eyed daughter’s birthday, but he seemed quite relieved to think that it was gone. Chairs and table, he said, were wearisome objects; they were monotonous ideas, they had no variety of expression, they looked you out of countenance, and you looked them out of countenance. How pleasant, then, to be bound to no particular chairs and tables, but to sport like a butterfly among all the furniture on hire, and to flit from rosewood to mahogany, and from mahogany to walnut, and from this shape to that, as the humour took one!

“The oddity of the thing is,” said Mr. Skimpole with a quickened sense of the ludicrous, “that my chairs and tables were not paid for, and yet my landlord walks off with them as composedly as possible. Now, that seems droll! There is something grotesque in it. The chair and table merchant never engaged to pay my landlord my rent. Why should my landlord quarrel with HIM? If I have a pimple on my nose which is disagreeable to my landlord’s peculiar ideas of beauty, my landlord has no business to scratch my chair and table merchant’s nose, which has no pimple on it. His reasoning seems defective!”

“Well,” said my guardian good-humouredly, “it’s pretty clear that whoever became security for those chairs and tables will have to pay for them.”

“Exactly!” returned Mr. Skimpole. “That’s the crowning point of unreason in the business! I said to my landlord, ‘My good man, you are not aware that my excellent friend Jarndyce will have to pay for those things that you are sweeping off in that indelicate manner. Have you no consideration for HIS property?’ He hadn’t the least.”

“And refused all proposals,” said my guardian.

“Refused all proposals,” returned Mr. Skimpole. “I made him business proposals. I had him into my room. I said, ‘You are a man of business, I believe?’ He replied, ‘I am,’ ‘Very well,’ said I, ‘now let us be business-like. Here is an inkstand, here are pens and paper, here are wafers. What do you want? I have occupied your house for a considerable period, I believe to our mutual satisfaction until this unpleasant misunderstanding arose; let us be at once friendly and business-like. What do you want?’ In reply to this, he made use of the figurative expression—which has something Eastern about it—that he had never seen the colour of my money. ‘My amiable friend,’ said I, ‘I never have any money. I never know anything about money.’ ‘Well, sir,’ said he, ‘what do you offer if I give you time?’ ‘My good fellow,’ said I, ‘I have no idea of time; but you say you are a man of business, and whatever you can suggest to be done in a business-like way with pen, and ink, and paper—and wafers—I am ready to do. Don’t pay yourself at another man’s expense (which is foolish), but be business-like!’ However, he wouldn’t be, and there was an end of it.”

So many of these “grand bargain” ideas remind me of Skimpole. They play at making a fix, but of course, it is no such thing.

Aren’t we passing laws? Aren’t we making deals? Hey, let’s take these other people’s money! That will fix it!

To politicians, writing on a piece of paper is equivalent to doing business. Why won’t Rauner play along?

In Skimpole’s case, he figures someone will always be there to bail him out. And multiple characters do bail him out, multiple times…. until he essentially causes a destitute child to die, because he hates being shown up as a legitimate target for charity. That alienates the other characters, as they see how nasty Skimpole really is. That childlike demeanor is a veneer over an extremely grasping personality.

And while most public plans, and some private plans, have been made whole through rough times, ultimately it turns out the promises made are well beyond the ability of others to pay. And hard choices will have to be made. Taxpayers are not too pleased to have to cut educational quality of teacher pay today to pay for somebody who retired in her 50s and has collected a pension longer than she ever worked.

PRAY WE DON’T ALTER THE DEALS FURTHER

Let us run down the various retiree-related promises being made in the U.S., whether from governmental or other parties:

• Medicare (including the drug benefit)
• Social Security (including disability)
• Medicaid for nursing home care
• DB plans (single employer, multiple employer, church, etc.)
• Income annuities/deferred income annuities
• Retiree health plans

Of all of these, the only one where there is a requirement that more than what was promised needs to be on hand are annuities, which are backed by insurers.

And, of course, even annuity insurers can go bust. But it’s not like insurers get a bye on their capital & reserves, deferring reserve or capital top-ups until times are better.

And then many of the items above are explicitly pay-as-they-go.

Some of these promises, such as DB plans, are inherently expensive, and I think they’re not fully recognizing the expense of the promise.

And there’s not enough rich people in the U.S. to fulfill these promises.

What I think will happen is not bailouts, but reducing these promises and to top-up people on the margins who need the help a lot more. I get into arguments with fellow actuaries about it, but there’s no “one neat trick” other than a particularly fatal pandemic that targets retirees (because if the productive part of the population is slashed, there will be worse troubles than merely not being able to pay for pensions.)

So if we’re not about to go for a Soylent Green/Logan’s Run remake, I believe the following will happen:

• People will be paying more taxes (and not just “The Rich ™” – there’s not enough of them,and don’t have enough wealth)
• Retirees will have benefits cut some
• Bondholders will get a haircut, some drastically
• The only bailout will be welfare programs for the poorest

Everyone will have to deal with having less.

Perhaps Central States will be able to wrangle out a little cash for their legacy pensions with a new Congress and a President Trump/Sanders. But I doubt they’re going to get anything out of this Congress (I still wonder about that late-date December 2014 bill… who was driving that?) or this President (who already turned down multiple pension bailout attempts for other groups.)

From Me in March 2014, talking about Detroit:

:WON’T SOMEBODY PLEEEEEEEEEEZ THINK OF THE CHILDREN:

more to the point, this sort of wailing didn’t make money magically appear in Greece, so I’m guessing a miracle will also not happen in Detroit.

Yes, everybody is going to get whacked. Perhaps some may take a lesson from this.

My guess is that few will.

I still agree with that.

Everyone will get whacked.

There will be no bailouts.