STUMP » Articles » Rumors of Pension Bailouts: MEPs and Public Pensions » 7 December 2017, 17:19

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Rumors of Pension Bailouts: MEPs and Public Pensions  

by

7 December 2017, 17:19

Before I begin, I do not believe there will be any massive bailouts of pensions, whether public or private. I detailed my reasons in a May 2016 post.

I still do not believe there will be bailouts, but today, I’m just going to put the bailout ideas out there with a minimum of comment from me. I’ll let y’all think through how workable these are — or link you to others who thought through that already.

There have been some changes since that May 2016 post (boy, have there), and the bailout proposal seen in that post is back, in a different form.

MULTIEMPLOYER PENSIONS: THOSE CUT AND THOSE YET TO BE CUT

Pension insolvency is not just an issue with public pensions. Multiemployer pension plans, often called union pensions, are suffering in many ways. Not all MEPs are in bad condition, but there are plenty in awful condition, and the number of people affected are quite large.

In 2014, a bill passed called the Multiemployer Pension Reform Act of 2014, so you’ll see the four-letter MPRA thrown around quite a lot. The nutshell version is that the MPRA allows MEPs to cut benefits before completely running out of money. There’s a whole application process to be allowed to do this, and only a few plans have made it through to the other side.

John Bury has been very good at providing updates on pensions going through the process, and various milestones they cover. You can see in his Multiemployer pensions category a variety of news items…including a bill in Congress to bail out the plans.

MEP BAILOUT PROPOSAL: WE “LOAN” MONEY AND DON’T EXPECT IT TO BE PAID BACK

The proposed bill is called the Butch Lewis Act. My opinion on it can be seen in the section heading I have here.

Here is a press release from its sponsor, Democratic Senator Sherrod Brown from Ohio:

Brown Discusses Plan to Protect Ohio Pensions, Keep Promises to Ohio Workers

Senator Outlines Solution to Secure Teamsters, Miners and Other Retiree Pension Plans under Threat, Announces Plans to Push for Pensions Fix in Congress’ Year-End Priorities

WASHINGTON, D.C. –Today, U.S. Sen. Sherrod Brown (D-OH) discussed his plan to introduce legislation that will ensure Ohio retirees can keep the pensions they have earned.

Numerous Ohio pension plans, including the massive Central States Teamsters Pension Plan, the United Mine Workers Pension Plan, the Ironworkers Local 17 Pension Plan, the Ohio Southwest Carpenters Pension Plan and the Bakers and Confectioners Pension Plan are currently on the brink of failure and threatened by massive cuts.

Brown plans to introduce legislation that will put the pension plans back on solid footing and ensure they can meet their obligations to current retirees and workers for decades to come, without cuts. Brown will name the bill after Butch Lewis, the former retired head of Teamsters Local 100 in Evendale, Ohio. Brown intends to lead the charge in Congress to include the fix for pensions in any year end legislative priorities.

…..
Brown’s Butch Lewis Act would:

1. Put failing pension plans back on solid ground to ensure they can meet their commitments to retirees today and workers for decades to come.

2. Do so without cutting a single cent from the benefits retirees have earned.

3. Put safeguards in place to encourage pensions to remain strong so they can be there for today’s workers when they retire.
…..
How does the Butch Lewis Act Work?

This legislation creates a new office within the U.S. Treasury Department, known as the Pension Rehabilitation Administration (PRA). The PRA would allow pension plans to borrow the money they need to remain solvent and continue providing retirement security for retirees and workers for decades to come.

The money for the loans and the cost of running the PRA would come from the sale of Treasury-issued bonds to financial institutions.

To ensure that the pension plans can afford to repay the loans, the PRA would lend them money for 30 years at low interest rates. The 30-year loans would buy time for the pension plans to make smart long-term investments for the future, while continuing to pay benefits owed to current retirees.

The bill would not allow any plan to borrow more than it can pay back to taxpayers. It would also prohibit any borrowed funds from being used to make risky investments. And it requires plans that borrow money to submit reports every three years to demonstrate that the plans are on track to getting back on solid footing.

The PBGC would fill the gap between money borrowed from the PRA and any additional funding needed to pay benefits owed to current retirees while the plans get back on track. The bill provides this money to the PBGC, but any money needed for the PBGC would be a tiny fraction of what it would otherwise be on the hook for if Congress fails to act.

Ha ha ha ha.

Ahem. Right, I’m not commenting.

REACTIONS TO THE BUTCH LEWIS ACT AND OTHER NEWS

I have seen a variety of reactions, as well as news coverage, and I will simply link to them below.

There are a few voices in there against the bill, like Marc Joffe and the Heritage Foundation. The last link, of Gene Kalwarski, indicates why he thinks it would work.

But what most I find are union members speaking out in support, and the Democratic legislators supporting this.

WHO ARE THE SPONSORS?

Here are the 12 co-sponsors of the Senate bill, backing Democratic sponsor Sen. Sherrod Brown of Ohio:

Sen. Stabenow, Debbie [D-MI]* 11/16/2017
Sen. Manchin, Joe, III [D-WV]* 11/16/2017
Sen. Heitkamp, Heidi [D-ND]* 11/16/2017
Sen. Baldwin, Tammy [D-WI]* 11/16/2017
Sen. McCaskill, Claire [D-MO]* 11/16/2017
Sen. Franken, Al [D-MN]* 11/16/2017
Sen. Klobuchar, Amy [D-MN]* 11/16/2017
Sen. Durbin, Richard J. [D-IL]* 11/16/2017
Sen. Peters, Gary C. [D-MI]* 11/16/2017
Sen. Donnelly, Joe [D-IN]* 11/16/2017
Sen. Duckworth, Tammy [D-IL]* 11/16/2017
Sen. Nelson, Bill [D-FL] 12/01/2017

I see Senator Bill Nelson of Florida is a latecomer, and oops, Al Franken’s name is going to have to get removed, but I’m sure his replacement will get her name on the bill, too.

Obvious observation #1: All these co-sponsors are Democratic.

Less obvious observation:

The states these senators are from:

  • Florida
  • Illinois
  • Indiana
  • Michigan
  • Minnesota
  • Missouri
  • North Dakota
  • West Virginia
  • Wisconsin

All but two of them (Illinois and Minnesota) went for Trump last year.

On top of that, in 2012, the following states were in Obama’s count:

  • Florida
  • Michigan
  • Missouri
  • Wisconsin

and flipped to Trump in 2016.

We could probably go down the list to see who is up for re-election when, but you get the idea. To be sure, they’re not getting this passed in this Congress, and this is a set up for 2018… but we’ll see if it gets passed in 2019.

Or maybe it will pop up again in 2018 as a real possibility – so far, 4 plans covering a few tens of thousands of people, have seen cuts approved. But some even larger plans are in very bad condition — with the Central States Teamsters fund being the biggest and baddest among the failing pensions. John Bury has found another candidate for a large and in-bad-condition pension fund.

The issue, though, is these plans won’t run out of money next year (probably), so it’s not necessarily going to put a fire under Congress’s butt.

PUBLIC PENSIONS BUYING PENSION INDULGENCES?

Shifting gears to public pensions now.

First, Bill Berman at Truth in Accounting has a theory for why all those green investments may buy some goodwill for public pensioners:

Here is one less-frequently-discussed but important way in which “being green” can promote risk-adjusted investment returns.

For many state and local government pension plans, the probability of any federal bailout is part of the investment calculation. If “being green” can increase the probability of a federal bailout, maybe it’s not only fashionable, but also wise to march with the crowd and not to your own drummer.

Sure, 0.1% chance of a bailout is higher than 0% chance of a bailout….

….but let’s be real here. Bill Berman isn’t trying to promote a public pension bailout. He’s just trying to think of how one could argue that it’s really in the funds’ best interest to chase politically correct investment fads — they may be buying indulgences from the politicians who could bail them out.

Until one remembers, it’s not the politicians who would be doing the bailing. Ultimately, it would be taxpayers. Who can get rid of the politicians.

DIFFERENT BAILOUT IDEA: DRAIN THE TREASURY

I am really not going to comment on this one. John Bury has allowed Tim Alexander, with the blog authorship tag of Triune, to post some of his ideas and arguments over how the federal government could bail out public pensions.

The inaugural post laying out the idea:

Do we have a national crisis? Take a map of the US and a pen. Tick off each state with a pension crisis, public and private; NY, NY, CT, KY, IL, AK, CA,… How many states need to be checked before the most critical skeptic concedes there is a national crisis – a quarter, half or two thirds of the states? Whatever level is needed to determine a national crisis we are now beyond that point.

…..
The Federal Reserve is about to sell more than $4 trillion in assets. These assets have been previously bought. The money from these sales is a windfall. I propose these be dedicated to pension resolution. This is part of my economic model and can work. There is insufficient money to make all pensions whole but with prudent reforms there is money to cure many ills; solutions without new taxes.

I think I can stop there.

Here are all of Tim Alexander’s posts at Bury Pensions thus far:

John Bury is on Wordpress, and allows comments (obviously, I do not, and I’m not about to change that. If you want to comment to me, either tweet at me: meepbobeep, or email me: marypat.campbellgmail.com). All these posts are from the last month.

AN INDICATION WHERE CONGRESS’S HEAD CURRENTLY IS

But I have saved the best for last. When we’re talking bailouts, we’re assuming these are going to come from the federal government, through some action approved by the U.S. Congress.

Would you be surprised to know that the initial form of the tax reform bill included taxing public pension returns on specific asset classes?

13 November 2017: GOP tax reform a mix of good and bad so far: 401(k) deductions OK, but endowments, public funds find rude surprise

The first chapter in the Republican tax reform effort, launched in early November, brought surprises, with the prospect of many more to come in the near future.

Some of those surprises were good, such as keeping tax preferences for retirement savings in 401(k) accounts instead of a shift to Roth accounts.

Others caught many sectors off guard, including university endowments, private equity firms, public pension funds, many types of bond issuers and highly compensated employees.
…..
Executives at public pension plans and other state and local entities were equally shocked to learn they could soon have to pay taxes on income earned from investments, as early as 2018. The House wants to expand the rules on unrelated business taxable income, or UBTI, reversing a long-held belief their status as tax-exempt public entities under another tax code section covers investment income as well.

It would also upend a preference of some state pension funds to invest directly in hedge funds, private equity funds or other taxable vehicles, with confidence in the pension fund’s tax-exempt status, which the House bill would take away.

That prospect has sent officials at public pension funds, like the $94 billion North Carolina Retirement Systems in Raleigh, scrambling to calculate how it will affect them.

In addition to worrying about how the potential compliance costs would affect portfolio construction and benefit payments, state pension officials are questioning the constitutionality of the federal government imposing taxes on state or local governments’ after a history of immunity.

I will leave the final word on this to John Bury:

It looks like it won’t be bailouts that state public pension funds can expect from Washington, but tax bills.

So…… maybe one is going to have to wait a few more years for that federal bailout.


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