Another Pension Crisis

Teamster support for Democrats in 2008 isn't going to save them from pension disaster.

Two days ago I tweeted about the newest pension issue, the underfunding of the school district pensions, documented by the U-T. In the latest Reason magazine, yet another pension debacle is documented. This problem is a little trickier to explain. In many unionized industries, multiple companies join together to fund a defined benefit plan called a multiemployer plan. There are about 1,500 such plans covering 10 million workers. However, the plans have some catches that are causing problems. First, they are defined benefit plans, so stock market or other investment losses increase the funding required. Second, they have a "last man standing" rule, that works like this. If five companies were originally in the plan and four go bankrupt, the fifth company is liable for all of the pensions in the plan. Third, withdrawing from the plan requires discharging the debt to the plan, and every major firm that has withdrawn to reduce future liabilities has had to pay in, far more than the markets predicted. For example, in 2007, UPS had to cough up $6.1 billion to withdraw from the Teamsters plan.

This is where a new accounting rule put forward by the FASB comes into play. The FASB is moving towards requiring that company exposure to liabilities under multiemployer plans be fully disclosed in financial statements. (The FASB is not a government agency, but the SEC generally enforces adherence to their standards.) The problem facing the unions is that once the rules are in place, they will wipe huge amounts of book value from company balance sheets. This will erode stock price and put participating companies under threat of bankruptcy. The threat to private sector unions is huge. From Reason magazine "Labor's Last Stand?" by Mark Hemingway (not yet available online):

First, unions will no longer have one of their most effective selling points: the promise of a stable job and a generous defined-benefit retirement plan. Second, workers who are denied their promised retirement due to gross financial mismanagement are going to get awfully litigious, awfully fast. Once aggrieved union members become fully aware of the problem, you can expect a flurry of class action lawsuits, with workers looking to recoup their lost retirements by going after the assets of the employers -- and unions -- that managed their plans.

This is why the unions have been campaigning so hard for card check, they need fresh members to start shoring up the plans with new donations contributions. Further, Senator Bob Casey introduced legislation last March, the Orwellian named Create Jobs and Save Benefits Act of 2010 to create an unlimited entitlement to have the United States assume liability for these plans, just as if they were Treasury bonds. Fortunately, the bill has not made it out of committee and did not appear to get traction in the lame duck session. Neither did card check for that matter.

Meanwhile, the FASB has put on hold the proposed change, probably at the behest of unions. But it probably doesn't matter, because investors are increasingly demanding to understand these liabilities and pricing stocks accordingly. Ultimately, these plans collapse will go a long way to destroying what remains of America's private sector unions, down to 7% of the work force, because they will take down many of the companies that are liable for funding them.