[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
    REFORMING AND STRENGTHENING DEFINED BENEFIT PLANS: EXAMINING THE 
              HEALTH OF THE MULTIEMPLOYER PENSION SYSTEM

=======================================================================

                                HEARING

                               before the

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                                 of the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             March 18, 2004

                               __________

                           Serial No. 108-49

                               __________

  Printed for the use of the Committee on Education and the Workforce


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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director
                                 ------                                

              SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS

                      SAM JOHNSON, Texas, Chairman

Jim DeMint, South Carolina, Vice     Robert E. Andrews, New Jersey
    Chairman                         Donald M. Payne, New Jersey
John A. Boehner, Ohio                Carolyn McCarthy, New York
Cass Ballenger, North Carolina       Dale E. Kildee, Michigan
Howard P. ``Buck'' McKeon,           John F. Tierney, Massachusetts
    California                       David Wu, Oregon
Todd Russell Platts, Pennsylvania    Rush D. Holt, New Jersey
Patrick J. Tiberi, Ohio              Betty McCollum, Minnesota
Joe Wilson, South Carolina           Ed Case, Hawaii
Tom Cole, Oklahoma                   Raul M. Grijalva, Arizona
John Kline, Minnesota                George Miller, California, ex 
John R. Carter, Texas                    officio
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee

                               ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 18, 2004...................................     1

Statement of Members:
    Andrews, Hon. Robert E., Ranking Member, Subcommittee on 
      Employer-Employee Relations, Committee on Education and the 
      Workforce..................................................     4
    Johnson, Hon. Sam, Chairman, Subcommittee on Employer-
      Employee Relations, Committee on Education and the 
      Workforce..................................................     2
        Prepared statement of....................................     3
    McCollum, Hon. Betty, a Representative in Congress from the 
      State of Minnesota, Questions to John McDevitt, Submitted 
      for the record.............................................    60

Statement of Witnesses:
    Bovbjerg, Barbara, Director, Education, Workforce, and Income 
      Security Issues, U.S. General Accounting Office, 
      Washington, DC.............................................     6
        Prepared statement of....................................     8
    DeFrehn, Randy G., Executive Director, National Coordinating 
      Committee for Multiemployer Plans, Washington, DC..........    38
        Prepared statement of....................................    40
    McDevitt, John, Senior Vice President, United Parcel Service, 
      Washington, DC.............................................    30
        Prepared statement of....................................    31
        Response to questions submitted for the record...........    60
    Weicht, Scott, Executive Vice President, Adolfson and 
      Peterson Construction, Minneapolis, MN, on behalf of the 
      Associated General Contractors.............................    33
        Prepared statement of....................................    35



REFORMING AND STRENGTHENING DEFINED BENEFIT PLANS: EXAMINING THE HEALTH 
                  OF THE MULTIEMPLOYER PENSION SYSTEM

                              ----------                              


                        Thursday, March 18, 2004

                     U.S. House of Representatives

               Subcommittee on Employer-Employee Relations

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to notice, at 10:30 a.m., in 
room 2175, Rayburn House Office Building, Hon. Sam Johnson 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Johnson, Boehner, McKeon, Wilson, 
Kline, Carter, Andrews, Payne, Kildee, Tierney, Wu, Holt, and 
McCollum.
    Staff present: Stacey Dion, Professional Staff Member; 
Kevin Frank, Professional Staff Member; Ed Gilroy, Director of 
Workforce Policy; Chris Jacobs, Staff Assistant; Greg Maurer, 
Coalitions Director for Workforce Policy; Jim Paretti, 
Workforce Policy Counsel; Deborah L. Samantar, Committee Clerk/
Intern Coordinator; Kevin Smith, Senior Communications 
Counselor; Jody Calemine, Minority Counsel, Employer-Employee 
Relations; Ann Owens, Minority Clerk; and Michele Varnhagen, 
Minority Labor Counsel/Coordinator.
    Chairman Johnson. Thank you all for being here. I salute 
you for getting up this early. I mean it is 10:30. That's kind 
of early for most of us, isn't it?
    A quorum being present, the Subcommittee on Employer-
Employee Relations of the Committee on Education and the 
Workforce will come to order.
    We're holding a hearing today to hear testimony on 
reforming and strengthening defined benefit plans, examining 
the health of the multiemployer pension system. Under Committee 
Rule 12(b), opening statements are limited to the Chairman and 
Ranking Minority Member of the Subcommittee. Therefore, if 
other Members have statements, they will be included in the 
record to remain open 14 days to allow Members' statements and 
other extraneous material referred during the hearing to be 
submitted in the official hearing record. Without objection, so 
ordered.

    STATEMENT OF HON. SAM JOHNSON, SUBCOMMITTEE ON EMPLOYEE-
  EMPLOYER RELATIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE

    I want to welcome you here today to another hearing in our 
series on the defined benefit pension system. Roughly 1 year 
ago, Chairman Boehner and I requested two reports by the GAO 
regarding this system. We spent 2 years looking into the 
defined contribution retirement system and passed legislation 
dealing with that system, and now we've turned our attention to 
reforming and strengthening the defined benefit system.
    The first report by the GAO was released last summer, 
coinciding with the declaration that the single employer 
retirement system insured by Pension Benefit Guaranty 
Corporation (PBGC) is a high risk program facing record 
deficits.
    We held hearings to examine this system, and I expect us to 
propose solutions to address systemic problems that we have 
uncovered in the insurance system and with funding rules 
generally.
    The GAO is back with us today to deliver the second of two 
reports we requested, this one on multiemployer programs. The 
last time that Congress passed comprehensive reforms to the 
multiemployer system was in 1980 with the enactment of the 
Multiemployer Pension Plan Amendments Act, in its Washington 
terminology, MPPAA. You understand that.
    Believe it or not, except for the gentleman from Michigan, 
Mr. Kildee, who I hope will be here later, no one on this 
Subcommittee was even in the Congress when that law was 
enacted.
    I think that the report prepared by the GAO is helpful for 
Members to begin to understand how differently the 
multiemployer system works from the single employer system. The 
multiemployer system has had a history of financial stability. 
Due to the fact that these plans pool their risks, retiree 
benefits are not generally dependent upon the economic 
viability of just one company. However, the multiemployer 
system faces some serious long-term structural issues. I know 
our witnesses today want to talk about short-term relief for 
market losses of 2000, 2001 and 2002. But the focus of this 
hearing is long-term problems and long-term solutions.
    We must ensure the system is self-sustaining for the long 
term on behalf of the workers and employees, and I fear for the 
viability of a system that is funded by a sharply declining 
number of active workers but paying benefits to a huge and 
growing number of retirees. We are already seeing employers 
asking for relief from minimum funding rules.
    This pension funding scheme was designed in our view for a 
1940's era model of projected growth in the multiemployer labor 
base, when in reality this demographic has not been the case 
for the last 30 years. I want to ensure that taxpayers do not 
end up footing the bill for these promises in the same manner 
that we have seen the promises made for the coal miner retiree 
health plan.
    Striking differences exist between single and multiemployer 
pension systems. In many cases, it is inappropriate to expect 
these systems to address problems in exactly the same manner. 
But reforms to both systems need to be made. And as we look at 
making both systems function better, we must not lose our focus 
on two stakeholders: The taxpayer, who ultimately backs up 
those promises, and the people who count on these benefits in 
their retirement.
    Our witnesses today are Barbara Bovbjerg, the Director of 
Education, Workforce, and Income Security Issues at GAO, who 
will help us spotlight these two stakeholders and shed light on 
how this system works, hopefully; Mr. John McDevitt, Senior 
Vice President of UPS, who will provide us with insight into 
one particular company's views of how to reform the system 
long-term; Mr. Weicht--Weicht? I'm sorry. Mr. Weicht, to 
discuss reforms on behalf of the AGC with the perspective of 
small employers in multiemployer systems; Randy DeFrehn to 
discuss reforms from the perspective of the multiemployer plan 
trustees.
    I hope we can find solutions together this morning maybe to 
strengthen the entire defined benefit plan and protect the 
retirement security of millions of Americans as well as our 
taxpayers, who we represent.
    I now yield to the distinguished Ranking Member of the 
Subcommittee, Mr. Andrews, for whatever comments he wishes to 
make.
    [The prepared statement of Chairman Johnson follows:]

   Statement of Hon. Sam Johnson, Chairman, Subcommittee on Employer-
      Employee Relations, Committee on Education and the Workforce

    Good morning, I want to welcome you here today to another hearing 
in our series on the defined benefit pension system. Roughly one year 
ago, Chairman Boehner and I requested two reports by the General 
Accounting Office regarding this system.
    We spent two years looking into the defined contribution retirement 
system and passed legislation dealing with that system and now we've 
turned our attention to reforming and strengthening the defined benefit 
system.
    The first report by the GAO was released last summer, coinciding 
with the declaration that the single employer retirement system insured 
by Pension Benefit Guaranty Corporation (PBGC) is a ``High Risk'' 
program facing record deficits. We held hearings to examine this system 
and I expect us to propose solutions to address systemic problems that 
we have uncovered in the insurance system and with funding rules 
generally.
    The GAO is back with us today to deliver the second of the two 
reports we requested--this one on the multiemployer program.
    The last time that Congress passed comprehensive reforms to the 
multiemployer system was in 1980, with the enactment of the 
Multiemployer Pension Plan Amendments Act (MPPAA). Believe it or not, 
except for the Gentleman from Michigan, Mr. Kildee, no one on this 
subcommittee today was even in Congress when this law was enacted!
    I think that the report prepared by GAO is helpful for members to 
begin to understand how differently the multiemployer system works from 
the single employer system.
    The multiemployer system has had a history of financial stability--
due to the fact that these plans pool their risks. Retiree benefits are 
not generally dependent upon the economic viability of one company.
    However, the multiemployer system faces some serious long-term 
structural issues. I know that our witnesses today want to talk about 
short-term relief for market losses of 2000, 2001 and 2002. But, the 
focus of this hearing is the long-term problems and long-term 
solutions.
    We must ensure this system is self-sustaining for the long-term on 
behalf of workers and employers.
    I fear for the viability of a system that is funded by a sharply 
declining number of active workers but is paying benefits to a huge and 
growing number of retirees. We are already seeing employers asking for 
relief from minimum funding rules.
    This pension funding scheme was designed for a 1940's era model of 
projected growth in the multiemployer labor base, when in reality this 
demographic has not been the case for the last thirty years.
    I want to ensure that taxpayers do not end up footing the bill for 
these promises in the same manner as we have seen with the promises 
made for coal miner retiree health benefits.
    Striking differences exist between the single and multi-employer 
pension systems. In many cases, it is inappropriate to expect these 
systems to address problems in exactly the same manner, but reforms to 
both systems need to be made.
    As we look at making both systems function better, we must not lose 
our focus on two stakeholders--the taxpayer who ultimately backs up 
these promises and the people who count on these benefits in their 
retirement.
    Our witnesses today are:
    Ms. Barbara Bovbjerg, the Director of Education, Workforce and 
Income Security Issues at GAO, who will help us spotlight these two 
stakeholders and shed light on how this system works.
    Mr. John McDevitt, Senior Vice President of UPS, who will provide 
us with insight into one particular company's views of how to reform 
this system for the long-term.
    Mr. Scott Weicht, to discuss reforms on behalf of the AGC with the 
perspective of small employers in multiemployer systems.
    Mr. Randy DeFrehn, to discuss reforms from the perspective of 
multiemployer plan trustees.
    I hope we can find solutions together to strengthen the entire 
defined benefit system and protect the retirement security of millions 
of Americans.
                                 ______
                                 

STATEMENT OF HON. ROBERT ANDREWS, RANKING MEMBER, SUBCOMMITTEE 
ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 
                           WORKFORCE

    Mr. Andrews. Thank you. Good morning, Mr. Chairman. Good 
morning, ladies and gentlemen. Thank you for your 
participation. I want to say to my friend Mr. Kildee that 
before he came in, the Chairman pointed out that the only 
member of the Subcommittee who was present in the Congress in 
1980 when this law was last reformed was Mr. Kildee. And I 
interpret the Chairman's remarks as meaning that any 
suggestions Mr. Kildee has to reform the law further will be 
adopted by unanimous consent.
    [Laughter.]
    Mr. Andrews. So congratulations, Mr. Kildee. That may be an 
interpretation the Chairman may want to differ with. But what 
we don't differ with is the importance of having this hearing 
and our appreciation for the witnesses that are here today.
    There are two dynamics, I believe, happening with defined 
benefit plans, and it's important that we separate them 
analytically as we respond to those dynamics. The first mirrors 
the macro problem we have in our country of more retirees and 
fewer workers. It really mirrors the Social Security problem 
and Medicare problem the country is going to be facing over the 
next couple of decades. That's indisputable, and it's a serious 
issue.
    But the second dynamic also needs to be looked at, and I 
believe it is an anomalous dynamic that has not occurred at any 
other time in the history of the ERISA statute, and that is a 
series of unfortunate circumstances adversely affecting the 
financial health of these plans.
    The circumstances are the significant drop in equity values 
that we've experienced over the last couple of years. We've 
seen some modest recovery recently, but certainly the recovery 
has not brought us up to where we were three or 4 years ago.
    The second dynamic are historically how interest rates so 
that investments in debt instruments that yield income from 
interest rates are the lowest they've ever been.
    The third dynamic is softening, weakening of the economy--
layoffs of workers, which meaning fewer people paying in, fewer 
profits to pay from, and other conditions.
    I think it's important that we recognize this circumstance, 
that we recognize that it's an anomalous circumstance, and that 
we not exaggerate the long-term problem by associating these 
anomalous circumstances with the long-term problem on a 
permanent basis. I hope that the anomalous circumstances are 
soon going to evaporate. There is some evidence that the market 
has come back. I think inevitably interest rates are going to 
rise, which is a mixed blessing but one that's going to have 
some positive impact on earnings for these plans.
    So I believe that it's very important to look at the long-
term issues of defined benefit plans, but it's equally 
important not to exaggerate those long-term problems by 
importing present anomalous negative circumstances and assuming 
that they'll always be true.
    I think that the present problems of the plan result from 
some serious consequences that have not been seen before and I 
hope will not be seen again.
    Having said that, it is also important that we understand 
that the anomalous circumstances that we see today are having a 
profoundly negative effect on multiemployer defined benefit 
plans. It's one of the reasons why I support in the present 
conference negotiations the Senate provisions which would 
provide relief for the multiemployer plans from the short-term 
problems that we face.
    The Congress has debated over the last number of years any 
number of measures for economic stimulus to reduce 
unemployment. One of the worst things we could do in the area 
of economic stimulus is to require employers, both single 
employer plans and multiemployer plans, to overcontribute to 
their defined benefit plans and drain money from wages and 
benefits and purchases that would otherwise stimulate the 
economy.
    You know, we don't want to kill the goose that lays the 
golden egg. In the name of pension sanctity, it would be a huge 
mistake to require overcontributions that would cripple the 
employer that we need to make those pension contributions on 
into the future.
    So I think we have to be surgical, careful in what we're 
doing. We have to recognize that we are presently living under 
some anomalous problems that need to be addressed in the short 
run, which is why I do support the Senate provisions on the 
multiemployer plans.
    In the long run, there are clearly issues to be dealt with 
given the pending imbalance between workers and retirees, and 
we have to take a long look at that. But to exaggerate the 
scope of that problem by assuming that the present anomalous 
circumstances will continue indefinitely I think is a mistake. 
And it would be a mistake to make a law based upon that flawed 
assumption.
    So, Mr. Chairman, I'm very interested in hearing from our 
panel of witnesses this morning, and I appreciate the chance to 
ask them questions. Thank you.
    Chairman Johnson. Thank you for your comments, Mr. Andrews. 
I appreciate them. We may not agree totally, but that's what 
this Congress is all about.
    Mr. Andrews. That's what this country is all about.
    Chairman Johnson. Sir?
    Mr. Andrews. That's what this country is all about.
    Chairman Johnson. You got it. That's what makes America a 
great place to live in. We can agree to disagree and still be 
good friends.
    And with that, I would like to explain the lights. We've 
got a set of lights down there. You all may be aware of them. 
When they come on, you'll get a green. They're good for 5 
minutes. We'd like to have you limit your remarks to that if 
you can. A yellow light will come on when there's 1 minute 
left, and we appreciate you closing it off when the red light 
comes on.
    And I'd now like to recognize Ms. Bovbjerg for her 
comments. You may begin.

STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, 
    AND INCOME SECURITY ISSUES, GENERAL ACCOUNTING OFFICE, 
                         WASHINGTON, DC

    Ms. Bovbjerg. Thank you, Mr. Chairman, Congressman Andrews, 
Members of the Subcommittee. I appreciate your inviting me here 
today to discuss multiemployer pension plans and the challenges 
they face.
    Multiemployer pensions are defined benefit plans created by 
collective bargaining agreements covering more than one 
employer. These plans provide coverage for almost 10 million 
American workers and retirees, and they represent an important 
part of the nation's private pension system.
    The recent collapse of several large single employer plans 
has prompted questions about the health of multiemployer plans 
as well. In seeking to clarify some of these issues today, my 
testimony will focus on three points. First, how multiemployer 
plans differ from single employer plans. Second, trends in 
funding and worker participation in multiemployer plans. And 
finally, the potential challenges to such plans.
    My testimony is based on work we are completing for this 
Committee that will be released next week.
    First, the differences between single and multiemployer 
plans. Multiemployer plans are all collectively bargained by 
employee unions and several employers and are administered 
jointly by labor and management. Although single employer plans 
may be collectively bargained, they are not always, and are 
administered by a single sponsoring employer. Although ERISA 
funding rules apply to both types of plans, sponsors of multis 
negotiate contributions through collective bargaining and may 
not alter contributions levels in response to changing 
circumstances. In contrast, single plan sponsors may alter 
contributions annually as business conditions change, as long 
as they remain within the limit set by ERISA.
    Rules for employers seeking to end their sponsorship are 
less flexible for multis than for single. Multiemployer plan 
sponsors who wish to withdraw from the plan must pay their 
share of the plan's unfunded vested benefits. This is called 
the withdrawal liability. Further, if an employer in such a 
plan goes bankrupt, the other sponsors must assume 
responsibility for paying benefits to the bankrupt sponsor's 
participants. In contrast, a single employer plan sponsor is 
liable only for the unfunded portion of his own plan.
    These structural differences between multi and single 
employer plans result in differences in PBGC's role. PBGC 
premiums for multiemployers are significantly lower than those 
for single employers, and so are premium revenues. So too are 
PBGC benefit guarantees. PBGC guarantees benefits up to $44,000 
a year for single employer plans but only $13,000 for multis. 
Further, single employer plans are insured at termination, and 
PBGC may assume responsibility for the plan and pay benefits 
directly to retirees. Multiemployer plans are ensured as well, 
but PBGC does not take over these plans. It instead provides 
financial assistance in the form of loans.
    The net effect of these differences is the redistribution 
of risk. Most of the risk of plan underfunding is borne first 
by the company sponsoring the multiemployer plan, then by the 
participants whose benefit guarantees are relatively low.
    PBGC is unlikely to have to provide benefits at guaranteed 
levels, and even then, those levels are less costly to the 
agency than the guaranteed benefits in a single employer 
program.
    Let me turn now to trends in multiemployer plans. While 
multiemployer funding has been fairly stable in the 1980's and 
'90's, plan funding levels have deteriorated in the last 
several years. As with single employer plans, stock market 
declines coupled with low interest rates have reduced the 
assets and increased the liabilities of many multiemployer 
plans. While most plans continue to pay promised benefits, PBGC 
predicts the need for more financial assistance in the future. 
Meanwhile, the numbers of plans and plan participants have 
fallen steadily over the years and continue to do so.
    Finally, as to the long-term prospects for multiemployer 
plans, the future holds challenges for this system. Employers 
perceive these plans as financially risky and less flexible 
than others. Hence, they're not likely to join multiemployer 
plans or to remain in them if withdrawals become financially 
feasible.
    Furthermore collective bargaining itself, a necessary 
aspect of the multiemployer plan model, is in long-term decline 
and will offer fewer future opportunities for new plans to be 
created or existing ones to expand. This means the ratio of 
active workers to retirees will continue to fall.
    Finally, multiemployer plans are defined benefit plans and 
as such exist in a world where employers increasingly are 
choosing defined benefit plans. Taken together, these trends 
suggest a future of fewer, smaller and older multiemployer 
plans.
    In conclusion, although multis are not now experiencing the 
magnitude of problems plaguing single employer plans, there is 
cause for concern. Multis' financial health is deteriorating, 
and these plans cannot look to future growth for help. 
Fortunately, shared governance and the distribution of risk 
among sponsors and participants creates strong incentives for 
these parties to resolve financial situations before they 
result in plan insolvency and PBGC intervention.
    However, over time, multiemployer plans could become less 
financially viable as the unionized workforce shrinks and ages. 
Public policy will be challenged to balance the needs of 
increasingly stressed plans with those of workers, retirees and 
the public.
    And that concludes my statement, Mr. Chairman. I welcome 
your questions.
    [The prepared statement of Ms. Bovbjerg follows:]

  Statement of Barbara Bovbjerg, Director, Education, Workforce, and 
 Income Security Issues, U.S. General Accounting Office, Washington, DC
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                                ------                                

    Chairman Johnson. Thank you, ma'am.
    Mr. McDevitt, you may begin your testimony.

   STATEMENT OF JOHN McDEVITT, SENIOR VICE PRESIDENT, UNITED 
                 PARCEL SERVICE, WASHINGTON, DC

    Mr. McDevitt. Thank you, Mr. Chairman, Congressman Andrews, 
and Committee Members. My name is John McDevitt. I have been 
with UPS for 28 years and I started as a Teamster working as a 
loader in New Jersey.
    A majority of UPS's management Committee began their UPS 
careers as Teamsters as well. We know that our people work hard 
each and every day. And it has caused us great concern when the 
rewards of their efforts are jeopardized by factors outside 
their control or the company's control. For our employees in 
multiemployer pension plans, UPS pays into the plan an average 
of $8,000 a year for each employee. Stated another way, each 
year we contribute on the average nearly 12 percent of their 
wages as a retirement contribution to the multiemployer pension 
plans. Those contributions should accumulate to permit an 
employee to have a nest egg of $827,000 after 30 years, 
assuming a conservative 7.5 percent rate of return. If these 
funds were placed in a simple interest bearing account rather 
than in a multiemployer plan such as Central States, this would 
produce $70,000 annually for that employee over the next 30 
years of retirement.
    But that is not today's reality. The Central States benefit 
would only provide such a driver about $36,000 a year. We 
believe the contributions we make on behalf of our employees to 
be as much theirs as their 401(k) plan or their hard earned 
wages. That these employees are not going to see the full value 
of what's being paid by the company on their behalf is 
upsetting to me and to UPS as a whole.
    It is important to understand that the underlying problems 
are not simply caused by swings in the stock markets which 
could be cured by waiting out the downturn. Central States, for 
example, pays approximately $1 billion annually to about 
100,000 retirees who no longer have a contributing employer 
because those companies are out of business. These factors were 
in place before the market downturn. And a reversal of Wall 
Street will not solve the underlying problem.
    Many of these plans were in tenuous condition during the 
market highs. Short-term fixes dependent upon market changes 
will not correct the financial solvency problems of 
multiemployer pension plans. Therefore, real multiemployer 
pension plan reform is urgently needed. Doing nothing is not an 
option.
    We support the proposed Multiemployer Pension Security Act 
of 2003 introduced by Congressman Tiberi as H.R. 2910. That 
legislation proposes real reforms in multiemployer pension 
plans to truly protect the long-term interest of UPS employees 
and others in multiemployer plans.
    The bill is a good beginning and would for the first time 
provide a 90 percent funding standard so the plans do not make 
promises they can't keep and the plans keep the promises they 
have already made.
    All of UPS's efforts begin and end with our people's best 
interests in mind. So we stand ready to help you, Mr. Chairman 
and Members of this Committee in any way we can to ensure that 
meaningful, long-term multiemployer pension plan reforms 
becomes a reality. For that is what our people truly deserve.
    Thank you for allowing UPS to testify and for your 
willingness to face this serious issue.
    [The prepared statement of Mr. McDevitt follows:]

   Statement of John McDevitt, Senior Vice President, United Parcel 
                        Service, Washington, DC

    Mr. Chairman, I appreciate the opportunity to talk with the 
Subcommittee about UPS employees' multi-employer pension plans. The 
success or failure of our company is dependent upon our employees. 
After 97 years in business, it is the skill, energy and loyalty of our 
employees that have made UPS what it is today. Our people work hard 
each and every day for their wages and benefits, and it has caused us 
great concern when the rewards for their effort are jeopardized by 
factors outside of their control or their company's.
    For our employees in multi-employer pension plans, UPS pays into 
the plan an average of $8,000 a year for each employee. Stated another 
way, each year we contribute, on average, nearly 12% of their wages as 
a retirement contribution to their multi-employer pension plan. Those 
contributions should accumulate to permit an employee to have a nest 
egg of $827,000 after 30 years assuming a conservative 7.5% rate of 
return. If these funds were placed in a simple interest bearing account 
rather than a multi-employer plan such as the Central States, this 
would produce $70,000 annually for that employee over their next thirty 
years of retirement. But that's not today's reality.
    As a result of structural problems and significant shortfalls in 
multi-employer pensions, trustees in many plans have been forced to 
make cuts in benefit levels. The point needs to be made that a change 
of facts and circumstances has resulted in a perversion of the intent 
behind the design of multi-employer plans. Rather than creating an 
environment where inter-reliance among participating employers provided 
increased participant security, the result has been decreasing and 
potentially non-existent security for plan participants. After those 
benefit reductions were made, the gap between dollars contributed and 
benefits paid to our people widened.
    Let me give you three practical examples of what these reductions 
mean for UPSers. Today, a 50 year old UPS driver who will retire in six 
years after thirty years of service will lose $3,216 annually from the 
$36,000 he was planning on as a Central States retirement benefit. The 
second example is a 31 year old driver who also plans to retire after 
thirty years of service; this driver will lose $17,000 annually. And 
our third employee is a 21 year old driver hired today. This new driver 
will have to work 42 years in order to get to today's benefit levels; 
again not even half of what a simple interest bearing account would 
have generated. These examples highlight the unfair impact borne by 
younger workers, and does not even consider the impact of inflation 
going forward.
    We believe the contributions we make on behalf of our employees to 
be as much theirs, as their 401K plan or their hard earned wages. That 
these employees are not going to see the full value of what's been paid 
by the company on their behalf is upsetting to me and to UPS as a 
whole.
    According to a report from the Congressional Research Service 
released last week, \1\ the dire financial condition of many multi-
employer plans illustrates the need for meaningful reform. All seven 
transportation industry plans referenced in that report would fail to 
meet a minimum 90% funding standard if they were subjected to the same 
funding standards that apply to single-employer company plans today. 
The two worst plans barely cover half of their liabilities (54% and 48% 
funded, respectively). UPS has 42,000 employees in those two plans 
alone.
---------------------------------------------------------------------------
    \1\ Trucking: Structure of the Less-than-Truckload (LTL) Industry 
and Legislative Issues, Congressional Research Service Report RL32257, 
March 5, 2004.
---------------------------------------------------------------------------
    It is important to understand that the underlying problems are not 
simply caused by economic swings in the stock markets, which could be 
cured by ``waiting out'' the downturn. The problems are structural to 
the trucking industry, to the labor market in general, and to the past 
management of multiemployer pension plans. Central States, for example, 
pays approximately $1 billion annually to about 100,000 retirees who no 
longer have a contributing employer because those employers are out of 
business. The former employees continue to receive their benefits, but 
become a burden on the remaining employers in the plan and impact 
overall employee benefits.
    These forces were in place before the market downturn, and a 
reversal of Wall Street will not solve the underlying problems. Many of 
these plans were in a tenuous condition during the market highs. Short-
term fixes dependent on market changes will not correct the financial 
solvency problems of multiemployer pension plans; therefore a need for 
real multi-employer pension plan reform is urgently needed. Doing 
nothing is not an option.
    We support the proposed Multi-employer Pension Security Act of 2003 
(introduced by Congressman Tiberi as H.R. 2910). That legislation makes 
real reforms in multi-employer pension plans to truly protect the long 
term interests of UPS employees and others in the multi-employer 
pension plans. The bill would, for the first time--
    1)  give employees and beneficiaries of multi-employer pension 
plans the same 90% funding standard and discipline that single-employer 
plans must meet; thus, ensuring that reasonable funding levels exist 
before a multi-employer pension plan could promise benefit increases; 
and
    2)  increase the role of the Pension Benefit Guaranty Corporation 
so that the PBGC provides the same protection for employees who are in 
multi-employer pension plans as they currently do for single employer 
plans.
    This issue is not new to UPS. We identified multi-employer pension 
plan underfunding as a problem in the early 1990s and have attempted to 
address this issue in collective bargaining negotiations, as well as 
legislatively. We hope this subcommittee will give serious 
consideration to H.R. 2910 or any other measure that will create real 
reform for multi-employer pension plans.
    While we are convinced that the multi-employer pension plan 
underfunding problem requires long-term reform, we see value in the 
short-term relief provisions contained in H.R. 3108 to allow us to 
continue working towards long-term reform.
    As we see it, there are three simple and achievable objectives of 
reform:
      Viability--in order to ensure our employees get what they 
should reasonably expect;
      Fairness--in order that employees of a company see the 
benefits of their own labor; and
      Transparency--in order that employees and their companies 
know the true status of the funds that have been deposited in the 
multi-employer pension plans on their behalf.
    Today this is not the case and is the basic reason that supports 
the need for reform.
    All of UPS's efforts begin and end with our people's best interests 
in mind. So we stand ready to help you, Mr. Chairman, in any way we can 
to assure that meaningful, long-term multiemployer pension plan reform 
becomes a reality. Thank you Mr. Chairman for allowing UPS to testify 
and for your willingness to face the serious multi-employer pension 
plan issue.
                                 ______
                                 
    Chairman Johnson. Thank you, sir. You've got some time 
left. Don't you want to talk some more? Did UPS stifle you?
    [Laughter.]
    Mr. Andrews. See, it's part of the UPS culture. You just 
get the job done and stop. You don't have to keep going to run 
out the clock, right? You just get the job done.
    Chairman Johnson. I thought you would have said it was the 
Teamsters.
    Mr. Andrews. Absolutely. I have a UPS hub in my district. 
Where did you work in New Jersey, Mr. McDevitt?
    Mr. McDevitt. Edison, New Jersey.
    Mr. Andrews. We're a little south of there, but you guys do 
get things done quickly. We appreciate that.
    Mr. McDevitt. Thank you very much.
    Chairman Johnson. Thank you very much.
    Mr. Weicht, you may begin.

    STATEMENT OF SCOTT A. WEICHT, EXECUTIVE VICE PRESIDENT, 
ADOLFSON AND PETERSON CONSTRUCTION, MINNEAPOLIS, MN, ON BEHALF 
             OF THE ASSOCIATED GENERAL CONTRACTORS

    Mr. Weicht. Thank you, Members of the House Committee and 
Chairman Johnson. I represent the Associated General 
Contractors of America. Also I am an employer based out of 
Minnesota, and we have about 450 workers. Of that, we have 300 
workers that pay into multiemployer pension plans. We paid 
about $3 million in last year.
    I sit as the Chair and have been involved as a trustee for 
many years with the Iron Workers pension plan in the state of 
Minnesota, have about $170 million in assets, about 1,300 
employee members, and represent about 188 companies that are 
participating or contributing employers.
    We have eight trustees, four union and four management, and 
we meet once every 8 weeks. We review all the administrative 
things that come up. We review our investment performance, fund 
review and how we're handling the compliance issues that we're 
dealing with, funding status. And this plan here now we've 
actually from 1999 when we were 88 percent funded, we're now 
down to 68 percent funded in 2003. We assume that we have a 
long-term rate of return of 7.75 percent in this plan. That's 
used for all of our calculations with benefits, future 
liabilities.
    We deal with the collective bargaining process where every 
three to 5 years we determine the wage package, and in our 
region, what takes place then is that, the union in this case, 
meets with the trustees, and the trustees and union work 
together to determine what will be contributed out of that wage 
package paid annually by the employers to the pension fund. And 
the trustees are part of the negotiations and they're well 
aware of what they're looking at as far as what benefit 
contributions are needed.
    The issues that we're dealing with that we see is certainly 
what's been discussed already by Members of the Committee and 
the folks here. We're seeing demographics, the aging workforce. 
It's interesting that in the years 1996 to 1999, our plan did 
not--and many plans I'm aware of--did not increase benefits. 
They were actually going in and adjusting and changing their 
assumptions of what was taking place with the workforce that 
was living longer and aging faster in the last final years 
before they retire here now, so we were dealing with those and 
not looking at benefit increases.
    We certainly are seeing in the last few years the decrease 
in the hours worked, and that directly affects these plans 
nationwide as well as ours locally where we're just not seeing 
the contribution hours come in.
    We have many mature plans throughout the country, and I am 
on a mature plan as well, meaning that we rely on these 
contributions to pay the current benefits that are being paid 
out, and the investment returns then are what is there being 
prepared for these future workers that are retiring.
    Two issues that we see that could really help us is that 
back in the late '90's, the deductibility issue was large. We 
were concerned as we were getting close to that 100 percent 
funded level that the employers would no longer be able to 
deduct the contributions that they were putting in. So it would 
help if that had more flexibility for us.
    The other issue that we have seen is that now after 3 years 
of losses, we're looking at the minimum funding threshold, and 
there's a risk that we would have an excise tax that we'd 
paying if we were underfunded. And instead of paying this 
excise tax in, it would be much more beneficial for us to be 
able to pay these dollars in as contributions so the employers 
could actually work hard to get the funding ratios back up to 
that mid-'90's, you know, 100 percent range that we want to be 
at.
    So that's what we're looking at. And that's, in summary, 
what I would have. Open for questions. Thank you.
    [The prepared statement of Mr. Weicht follows:]

 Statement of Scott A. Weicht, Executive Vice President, Adolfson and 
  Peterson Construction, Minneapolis, MN, on behalf of the Associated 
                          General Contractors

    I am Scott A. Weicht, Executive Vice President, Chief Financial 
Officer, and a third-generation owner of Adolfson and Peterson 
Construction, a general contracting firm based in Minneapolis, 
Minnesota. I am testifying on behalf of the Associated General 
Contractors of America (AGC), a national trade association representing 
more than 33,000 companies, including 7,200 of America's leading 
general contractors and 12,000 specialty contractors. AGC is the voice 
of the construction industry.
    AGC represents both union and open-shop contractors in a network of 
100 chapters across the country, including at least one chapter in 
every state and Puerto Rico. Over half of those chapters represent 
contractors that contribute to Taft-Hartley multiemployer pension 
plans. Nearly half of AGC chapters serve as the collective bargaining 
representative of one or more multiemployer bargaining units that 
negotiate collective bargaining agreements with a construction trade 
union, such as local affiliates of the International Union of Operating 
Engineers, the Laborers' International Union of North America, the 
United Carpenters and Joiners of America, the International Association 
of Bridge, Structural, and Ornamental Reinforcing Iron Workers, the 
International Union of Bricklayers and Allied Craftworkers, 
International Brotherhood of Teamsters, and the Operative Plasterers' 
and Cement Masons' International Association. Those chapters typically 
sponsor multiemployer pension plans with each union that they bargain 
with and have responsibility for appointing management trustees to the 
jointly-trusteed plans.
    Adolfson and Peterson Construction is a member of AGC's AGC of 
Minnesota chapter. The company performs about $400 million of 
construction work per year and employs about 300 union workers. On 
behalf of those employees and in accordance with our collective 
bargaining agreements, we contribute about $2.5 to $3 million annually 
to six different multiemployer pension funds.
    I currently serve as the chairman of the Twin City Iron Workers 
Pension Fund, which is sponsored by AGC of Minnesota and Iron Workers 
Local 512. This fund covers workers in Minnesota, North Dakota, and 
western Wisconsin. I have been a management trustee for the fund since 
appointed by AGC of Minnesota in 1992, and have served as the fund's 
chairman since appointed by the trustees in 2001. In addition, I have 
served on various AGC of Minnesota collective bargaining committees 
since 1984, and presently serve on the committee that negotiates with 
the Lakes and Plains Regional Council of the United Brotherhood of 
Carpenters and Joiners. These committees are responsible for 
negotiating collective bargaining agreements with particular 
construction trade unions on behalf of member employers.
    A key term of these agreements, of course, is the amount of 
compensation increase (including pension fund contributions) that 
covered workers will receive in each year of a multi-year collective 
bargaining agreement. AGC of Minnesota committees typically negotiate a 
total wage-and-fringe benefit package and leave up to the union the 
designation of how that total increase will be allocated among wages, 
pension fund contributions, health-and-welfare fund contributions, 
training fund contributions, and any other agreed-upon benefits. Some 
AGC chapters negotiate specific increases to be allocated in specific 
ways. In either case, the amount of an employer's pension fund 
contributions is determined by the collective bargaining process and is 
normally set on a dollars-per-hour-worked basis.
    The Twin City Iron Workers Pension Fund has seen its funded ratio 
deteriorate from 89% on January 1, 2000, to an estimated 68% on 
December 31, 2003. The deterioration resulted from the decline in stock 
investment earnings, in interest rates, and in the average hours worked 
per member. The Fund provides pension benefits to 1,264 members 
employed by 188 companies. Average annual employment contribution hours 
per employee have declined from 1,897 in 1999 to an estimated 1,490 in 
2003. Currently, employers are paying into this fund $5.35 per hour 
worked.
    I would like to thank Chairman Johnson and the other members of 
this distinguished subcommittee for the opportunity to discuss both 
role as a signatory employer, collective bargaining negotiator, and 
management trustee on a multiemployer pension plan, as well as to 
suggest changes to improve the long-term outlook of these important 
plans.
    Let me say from the outset that I believe that these plans are a 
secure and viable way for construction companies like Adolfson and 
Peterson Construction to provide pension benefits to workers. In the 
construction arena, workers follow the job, not necessarily the 
company, and these plans provide the proverbial third leg of the 
retirement stool for people who would otherwise be left with only 
Social Security and whatever savings that they could muster. I know 
that Congress is extremely interested in retirement security, and I 
believe that these plans are an essential part of that discussion. At 
the end of this statement, I will suggest that one simple and immediate 
change to the system is to eliminate, or at least raise, the maximum 
deductibility limits. This limit forces plan trustees to raise benefits 
unwisely rather than allowing the plan to develop a cushion to use in 
the future.
    My duties as the Chair of the Board of Trustees for the Twin City 
Iron Workers Pension Fund are many. I review information with the fund 
consultant, review data with the actuary, perform periodic reviews with 
the investment managers, build the agenda for each board meeting, 
review the minutes after each meeting, and approve applications for 
retirement benefits. My time commitment is approximately five hours per 
week.
    I participate at each board meeting along with the other trustees. 
Like all Taft-Hartley plans, the fund has an equal number of management 
trustees and union trustees. In this case, there are eight trustees in 
total. We meet every other month for about three hours. In between 
those meetings, we also hold subcommittee meetings as needed.
    Before each board meeting, trustees receive a packet of 
information. Documents include investment guidelines, monthly financial 
statements, disbursements, applications for retirement benefits, 
reviews of both the investment manager and the financial performance of 
the investments, benefit and funding options, plan changes, audits of 
signatory employers, collections information, and requests for 
information from participants. We have access to all information about 
the plan, and we base our benefit determinations on the data.
    In general, benefit changes are made once a year on May 1. By May 
of each year, we have the preliminary actuarial data from the prior 
year. In May of 2004, we will receive the last of the plan data from 
2003, some having been sent in prior to that. We will make any plan 
changes based on this information, and, in accordance with the law, 
will notify participants of all changes 30 days ahead of time. Benefit 
changes begin in June.
    Benefit changes are made based on margin, if we have a positive or 
negative margin. Trustees watch the incoming data for one year and 
project out the next year's revenue stream. We assume a conservative 
rate of return on investments of 7.75%, participating in both fixed-
income securities and stocks. Union trustees often push for increased 
benefits when future benefit liabilities are 90% funded or more, while 
management trustees often prefer keeping benefits the same until plans 
are funded in the high 90 percentages. This natural tension ultimately 
benefits the employee, as both sides try to maintain a balance of 
funding in the plan to ensure plan continuation, as well as looking out 
for the needs of the employees.
    Most multiemployer collective bargaining agreements are negotiated 
to last for multiple years. In the construction industry, three-year to 
five-year agreements are most common. As mentioned earlier, the 
multiemployer bargaining agent (such as an AGC of Minnesota committee) 
will negotiate either (a) a total compensation increase that covers 
wages plus all fringe benefit contributions in a non-allocated package, 
or (b) a total compensation increase with specific amounts allocated to 
wages and to each benefit plan. In our case, we negotiate a non-
allocated package. For example, the parties will agree to a total wage-
and-fringe benefit increase of $1.10 an hour per year for each of the 
three years covered by the contract. The union then decides how much of 
that $1.10 will go to wages (in the paycheck) and how much will go to 
each benefit fund to which the employers have agreed to contribute. 
Each year, the union works with the various trustees to decide which 
benefit is increased and by how much. This method prevents the union 
from being locked into a specific rate increase in one plan when a 
shortfall may arise in a different plan. Meanwhile, employers are 
locked into the total increase amount. In areas where specifically-
allocated amounts are negotiated by the employers, the parties may have 
decided that $0.50 of the $1.10 total increase should go into the 
pension fund in each year. If the plan should hit a shortfall or an 
overage, it is very difficult (although not impossible) to increase or 
decrease the negotiated contribution rate until the next bargaining 
cycle is up. On the other hand, this system gives management more 
authority to determine where their increase payments will go. 
Regardless, negotiators in both situations receive information from the 
relevant plans beforehand, so that they are informed about the plans' 
fiscal status before locking in contribution rates.
    AGC of Minnesota normally negotiates with the union trades every 
three years. In fact, negotiations for a new contract are taking place 
this month. Once the compensation increase is decided on, the pension 
fund trustees communicate what changes to pension benefits are needed. 
Collective bargaining negotiators do not determine these changes; they 
determine only the pool of contributions available. Only plan trustees 
can make benefit changes. Even then, they change only the benefits that 
will be provided to future retirees; the Employee Retirement Income 
Security Act generally prohibits changes to the amount of benefits 
provided to retirees who are already receiving benefit payments.
    With that background, the plan on which I am chairman entered the 
late 1990s in a fiscally healthy situation. In 1999, like many 
construction-industry multiemployer pension funds, an issue we were 
aware of was the maximum deductibility level allowed. This means that 
contributions made into the plan by the employers would no longer be 
tax deductible. Section 404(a)(1) of the Internal Revenue Code (IRC) 
sets limits on the dollar amount of pension contributions that can be 
deducted by an employer on its income tax return. From Congress' 
perspective, this limit is important because each dollar of additional 
tax deduction represents lost revenue of up to $.38 for the government. 
This well-intentioned law generally produces the intended result, which 
is to limit the ability of employers to use their single-employer 
pension plans as tax shelters. However, it has had unintended 
consequences for multiemployer plans.
    As discussed, employer contributions to multiemployer pension plans 
are bargained based on number of hours worked. Neither unions nor 
contractors are generally desirous of re-opening a collective 
bargaining in order to reduce contributions because the plan is doing 
``too well.'' Furthermore, the completion of actuarial valuations 
following the close of a plan year would usually be too late to allow 
contribution reductions to be used as a method of ensuring 
deductibility in any event.
    Full deductibility of employer contributions under Section 404 is 
crucial to both contributing employers and to unions, and most trust 
agreements require it. However, in a multiemployer pension plan, if 
expected contributions initially exceed the deductible limit, the only 
practical way to fix the problem and obtain full deductibility is to 
improve benefits for participants. Thus, instead of reducing employer 
contributions to meet the deductible limit as Congress likely intended, 
multiemployer plans raise benefit levels, thereby raising the limit and 
making employers' bargained contributions deductible.
    The Section 404 maximum deductibility rules have also had the 
effect of limiting the amount of money multiemployer pension funds can 
put away for a rainy day. Actuarial techniques, such as asset 
``smoothing,'' can allow a certain amount of plan assets to be held in 
reserve; but the level of these reserves have, in many cases, proven to 
be insufficient. Furthermore, while many boards of trustees improved 
benefits in excess of the bare minimum required to ensure 
deductibility, the window of acceptable plan designs that ensure both 
deductibility and long-term financial viability is narrow. In 
comparison to the magnitude of recent market losses, the difference 
between a deductible plan design and a viable plan design is often de 
minimis.
    Thus, much of the asset gains experienced in the late 1990's have, 
necessarily, been ``spent'' on benefit improvements and were 
unavailable to help plans ride out the ``perfect storm'' of the early 
2000's. As mentioned, benefit improvements, once given, cannot 
typically be revoked retroactive.
    In our case, we made a increase in 2000 and 2001, funded by a 
combination of employer contributions and use of investment returns. In 
2000, the fund was at 83% because of the stock market downturn. In 
2001, the increased benefit was halted. Due to the great stock market 
decline, however, additional contributions from the total amount were 
still required in order to keep the fund healthy. In 2002, the union 
increased the allocation from the wage settlement, but did not get any 
benefit for it. Under our current funding formulas, the plan could hit 
the minimum funding level within four years, unless the plan is 
increased by an additional $1.58 per hour. This can be done either at 
the bargaining table by increasing contributions or through decreased 
future benefit plan changes. Nevertheless, we went from being 88% 
funded to projecting a possible funding deficiency over the course of 
few years. This is unprecedented.
    I understand Congress is considering a short-term relief proposal 
that would aid multiemployer pension plans facing a similar situation. 
AGC encourages passage of this legislation in order to give the plans 
more time to deal with and absorb the unprecedented investment losses 
of recent years. The negotiated contributions mandated by current 
collective bargaining agreements would continue to be made, and all 
guaranteed benefits would be provided. While the plans I work with will 
have the ability to make contribution increases or change plan benefits 
relatively quickly, many plans will not negotiate contracts for several 
more years and could reach the minimum funding requirement threshold, 
unless significant plan changes are made. In that case, employers are 
assessed additional contributions by the plan--outside of collective 
bargaining agreement--as well as fines by the Internal Revenue Service. 
Incredibly, the fines will not even go to the plans for the benefit of 
the pension; they will go to the federal government instead.
    As employers, under the current economic climate, we are working at 
the bargaining table to maintain a reasonable compensation package with 
pension benefits. Employers--especially small businesses such as ours--
can only afford to pay so much. We face slim profit margins, especially 
with the current steel crisis, and every part of the economy is trying 
to achieve more with less. We also must compete against nonunion 
companies and risk pricing ourselves out of the market. Furthermore, 
the well-known and widespread increase in health care costs creates an 
additional drain on the amount available for other uses. There are many 
moving parts to this arrangement.
    Because of these complexities, legislative action is needed. In 
particular, for the long-term betterment of the multiemployer pension 
plan system, AGC urges Congress remove, or at least raise, the maximum 
deductible contribution rules. Revision of the maximum deductible rules 
would help prevent a recurrence of the current situation in the future. 
While much-needed changes to IRC Section 404(a)(1)(D) effective in 2002 
allowed multiemployer plans to deduct their full, unfunded current 
liability, further action in this regard is needed. Specifically, 
contributions made to a multiemployer pension fund pursuant to a bona 
fide collective bargaining agreement should be exempted from the 
maximum deductible rules.
    In short, the maximum deductibility rules are ill-suited for the 
less flexible world of collectively-bargained multiemployer pension 
plans. By amending IRC Section 404(a)(1)(D) to exempt contributions to 
such plans, boards of trustees could strengthen funding during times of 
favorable investment returns without being forced to improve benefits 
unwisely. This would allow the development of a greater ``cushion'' 
that could be used to weather market downturns.
    In conclusion, I would like to thank you for the chance to testify 
today, and your willingness to listen to and hopefully address our 
concerns. AGC hopes that Congress can help strengthen multiemployer 
pension plans like the one that I chair. We recommend amending the IRC 
to allow trustees to create a cushion to face the downtimes will help 
ensure that these plans continue to operate in a fiscally healthy and 
financially responsible way. We also recognize that this is only one of 
many possible solutions and are very interested in considering other 
options. AGC and I look forward to assisting Congress in any way 
possible as those options are further developed and examined.
    I thank you and will gladly answer any questions you might have.
                                 ______
                                 
    Chairman Johnson. Thank you, sir. We appreciate your 
testimony as well.
    Mr. DeFrehn, you may begin.

  STATEMENT OF RANDY G. DeFREHN, EXECUTIVE DIRECTOR, NATIONAL 
         COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS

    Mr. DeFrehn. Thank you, Chairman Johnson. Mr. Chairman and 
Members of the Committee, I thank you for this opportunity to 
be here and discuss with you the future of the defined benefit 
pension system and particularly the multiemployer defined 
benefit system.
    As you may know, multiemployer plans cover virtually ever 
segment of the economy, although they're best known in perhaps 
the building and construction trades, and because of some 
recent discussions, in the transportation industry.
    Multiemployer plans have been a major force in the delivery 
of employee benefits for over a half a century. Although 
they've been known sometimes mistakenly as union plans, since 
1947, the law has stipulated that these plans be managed 
jointly by management and labor under equal representation, and 
that the plans be managed for the sole and exclusive benefit of 
the participants.
    For industries characterized by large numbers of medium and 
small employers, this is perhaps the best and sometimes the 
only way for employers to provide competitive, comprehensive 
pension and health benefits. There are approximately 60,000 
employers who contribute to such plans across the country, many 
of which are small to medium-sized employers, approximately 90 
percent of whom are employers of 100 or fewer employees. And 
while by definition a multiemployer plan does require 
contributions pursuant to a collective bargaining agreement 
between at least one union and more than one employer, the 
union membership is not a condition of either participation, 
eligibility or receipt of benefits.
    The multiemployer system has been an unqualified success. 
In over 50 years of existence, these plans have never been a 
problem for the government or the PBGC and is the only segment 
of the defined benefit system that has expanded coverage in 
recent years. Although the number of plans has declined since 
1980 from 2,244 to 1,661, the number of participants in those 
plans has grown from 8 to 9.5 million people.
    A hallmark of the multiemployer plans which causes them to 
be inherently more stable than single employer plans is 
something which several of our speakers have already addressed. 
That's the interrelationships between the employers. There is, 
however, a hook, and that is withdrawal liability in the event 
that an employer seeks to leave a plan after participating for 
many years and perhaps reaping the fruits of additional 
benefits for their employees, but at the same time having 
unfunded vested benefits. This withdrawal liability, which has 
been described previously, and it was implemented pursuant to 
MPPAA.
    In his opening remarks to the conference currently 
considering 3108, Chairman Boehner made the observation that 
the multiemployer pension system is basically sound and 
financially healthy. We agree with that conclusion. The average 
funded position of multiemployer plans in 2002 was 87 percent. 
While it was down from 95 percent in 2001, it still reflects a 
favorable funding position looking forward to the fund's 
ability to meet its short and long-term benefit obligations.
    In fact, as recently as the 1990's, multiemployer plans 
were so well funded that more than 75 percent of all such plans 
hit the maximum funding--maximum deductible limits. That 
required employers to make benefit improvements in order--not 
the employers. Excuse me--the trustees to make benefit 
improvements in order to maintain the current deductibility of 
contributions made by employers and to avoid excise taxes for 
contributing to a plan that was over-funded.
    While the Congress did ultimately take action to correct 
that somewhat in 2001, the corrections came too late to avoid 
these plans from having to make those additional benefit 
improvements, raising the cost of the participants of the 
benefits to a level where they can no longer be cut back under 
ERISA's anti-cutback provisions.
    Of a more immediate nature is the legislation pending under 
consideration by the conference, 3108. We strongly urge the 
passage of that legislation, including especially the short-
term, limited multiemployer relief contained in this version. 
It's estimated that approximately 30 percent of all 
multiemployer plans may experience a technical funding 
deficiency before the end of the decade due to the 3-year, 
unprecedented 3-year decline in the equity markets.
    By taking timely action, Congress has an opportunity to 
protect the thousands of small businesses from potential 
bankruptcy resulting from the imposition of taxes, excise 
taxes, and additional contributions over and above those 
required by their collective bargaining agreements, that would 
arise when a plan experiences a funding deficiency. Failing to 
do so, however, carries substantial risk that the system would 
be destabilized, therefore increasing the risk to the Pension 
Benefit Guaranty Corporation.
    Thank you very much. I welcome your questions.
    [The prepared statement of Mr. DeFrehn follows:]

      Statement of Randy G. DeFrehn, Executive Director, National 
     Coordinating Committee for Multiemployer Plans, Washington, DC

    Mr. Chairman and members of the Committee, thank you for this 
opportunity to meet with you and discuss one of the most important 
domestic policy issues facing our nation: the long-term financial 
viability of the defined benefit pension system and specifically, the 
multiemployer defined benefit pension system. I represent the National 
Coordinating Committee for Multiemployer Plans. As you might expect 
with a name like that, it will come as no surprise that we are known 
more simply by our initials: the NCCMP.
I. Background
    The NCCMP is a non-partisan membership organization comprised of 
multiemployer plans and their sponsoring employee and employer 
organizations. It is the only national organization devoted exclusively 
to protecting the interests of the plans and the approximately ten 
million workers, retirees, and their families who rely on multiemployer 
plans for retirement, health and other benefits. Our purpose is to 
assure an environment in which multiemployer plans can continue their 
vital role in providing benefits to working men and women. The NCCMP is 
a nonprofit organization, with members, plans and plan sponsors in 
every major segment of the economy, including, among others, those in 
the building and construction, retail food, trucking, service, textile, 
health care, communications, printing, steel, mining and entertainment 
industries.
    We commend the Subcommittee on its work in this matter as well as 
the Committee on Education and the Workforce. In his opening statement 
upon convening the current Conference considering HR 3108, Education 
and the Workforce Chairman Boehner stated that his overriding goal 
``...is simple: to protect the pension benefits of American workers.'' 
We find that goal to be commendable and completely consistent with the 
objectives of the NCCMP and the multiemployer funds we serve.
II. Multiemployer Plans: Often Misunderstood
    Multiemployer plans have been a major force in the delivery of 
employee benefits to active and retired American workers and their 
dependents for over half a century. Although they are often mistakenly 
referred to as ``Union'' plans, these plans have operated under a 
statutory mandate since the passage of the Labor--Management Relations 
Act of 1947 (also known as the ``Taft-Hartley Act''), under a structure 
that requires equal representation by labor and management in the 
operation and management of the funds. Furthermore, the fiduciaries who 
control the assets of the benefit plans are obligated under the Act to 
manage the plans for the sole and exclusive benefit of the fund 
participants. While this statutory requirement provides sufficient 
incentive for plan trustees (most of whom serve without compensation) 
to take these responsibilities seriously, ERISA's fiduciary 
responsibility provisions place their personal assets at risk in the 
event they violate these obligations.
    For industries characterized by large numbers of small to medium 
sized employers and / or a mobile workforce, the multiemployer 
structure is the only way that many employers are able to offer 
competitive health and pension benefits to their employees, by enabling 
them to take advantage of the economies of scale and shared 
administrative costs. It is estimated that approximately 60,000 to 
70,000 employers contribute to multiemployer plans and that upwards of 
90% of such contributing employers are small to medium sized 
businesses, employing fewer than 100 employees. Similarly, the 
portability features of multiemployer plans enable employees in such 
industries to carry credited service in defined benefit pension and 
other benefit plans with them as they move among contributing employers 
within a given industry. While by definition, a multiemployer plan 
requires contributions pursuant to a written agreement between at least 
one union and more than one employer, union membership is not a 
condition of participation, eligibility, or receipt of benefits from 
multiemployer plans.
    Operationally, contributions to multiemployer plans are usually a 
function of the hours worked by covered participants, although other 
structures permit contributions on other bases such as weekly, monthly 
or by some other measure of productivity.\1\ The amount of such 
contributions is determined by the bargaining parties or ``settlors'' 
through the collective bargaining process and is fixed for the term of 
the bargaining agreement (usually three, but five year terms are not 
unusual). There is an explicit trade-off between wages and benefits, as 
the funds from which contributions are made would otherwise be part of 
the wage package. Based on assets available and on the advice of plan 
professionals, including the enrolled actuary, the plan trustees then 
determine the level of benefits to be provided. It is important to note 
that in most situations (especially those involving national plans), 
the individuals who bargain the contribution levels (usually at the 
local level) are not the same as those who serve as trustees. A 
national plan could receive contributions pursuant to literally 
hundreds of distinct, local bargaining agreements.
---------------------------------------------------------------------------
    \1\ Early plans in the mining industry called for contributions per 
ton of coal produced.
---------------------------------------------------------------------------
    Benefits provided under these plans are not typically related to 
salary, but are based on a unit value. This could be expressed as a 
flat dollar per month per year of service or by a percentage of 
contributions. Depending on the industry and the plan, the value of 
past service may or may not be increased over time. Unlike most single-
employer plans, but consistent with their statutory obligation to 
administer these plans for the sole and exclusive benefit of plan 
participants, the majority of multiemployer plans provide periodic 
increases for retired participants.
    Under the current funding rules, plan fiduciaries must ensure that 
the required contributions are collected as owed and in a timely 
manner. To facilitate this process, most have well defined collection 
procedures, including procedures to collect interest, collection fees 
and liquidated damages, from delinquent employers. These contributions 
are held in trust for the payment of benefits, reasonable 
administrative costs and to fund future benefits when they are due. As 
these are generally mature plans, over time the contributions held for 
future benefits have evolved into the primary source of income for the 
trust. They are managed by qualified professional asset managers (know 
as QPAMs under ERISA) who are also plan fiduciaries. Under asset 
diversification policies encouraged by the Department of Labor, trust 
assets have been held in a broad variety of asset classes, including 
equities and fixed income, real estate and more recently and to a much 
lesser extent, other types of asset categories (hedge funds, 
international funds, venture capital). Multiemployer plans are 
typically more conservative than their single-employer counterparts 
with equity allocations generally averaging 50% to 55%. These 
allocations are established by the trustees in consultation with their 
professional advisors, including investment consultants, investment 
advisors and managers and actuaries.
    By design, multiemployer plans feature an interrelationship among 
contributing employers that is not found in the single-employer 
community, causing them to be inherently more stable. Because of the 
mobility and portability features, employers fund a portion of an 
employee's benefit with the remainder paid by other contributing 
employers for whom that individual may have worked during his career. 
Because they are contributing to a pooled benefit plan for a pool of 
employees, the departure or demise of a given member of the pool has 
certain consequences, both for the departing employer and for those who 
remain. Although the rules governing those consequences vary by 
industry, the general rules require that if an employer ceases to 
participate (either voluntarily, through bankruptcy, or retirement) in 
a fund that has no unfunded vested benefits, there are no consequences 
for that employer or the other employers and the employees can move on 
to a different contributing employer to continue to accrue additional 
vesting and benefit credits. If an employer voluntarily ceases to 
participate in a fund that has unfunded vested benefits it is assessed 
its proportionate share of those unfunded vested benefits, based on a 
formula that tracks its contributions over a period prior to its 
departure. This is a requirement that was added in the Multiemployer 
Pension Plan Amendments Act of 1980 (MPPAA) and is known as 
``withdrawal liability \2\.'' The trustees would file a claim, and then 
proceed to collect the amounts due in a manner similar to its 
delinquent contribution procedures.
---------------------------------------------------------------------------
    \2\ Before the enactment of the withdrawal liability provisions of 
MPPAA, a withdrawing employer could abandon its accumulated liabilities 
and effectively shift the responsibility for funding them to the 
remaining employers, many of whom were their competitors. The 
competitive edge to be gained by doing so actually provided an 
incentive to employers to do so.
---------------------------------------------------------------------------
    If the withdrawing employer has insufficient assets to pay its 
withdrawal liability, or if that liability is capped under certain 
provisions of MPPAA, the remaining liability is left with the remaining 
contributing employers, to be funded over time similar to an investment 
loss. While there are certain notable exceptions, withdrawal liability 
has proven over time to be an additional motivating factor to the 
parties to ensure that the plans' funding levels are sufficient to 
fully fund the present value of vested benefits. Although there are 
withdrawal liability methods utilized by some plans that more directly 
attribute an employer's withdrawal liability to that employer's 
contributions (with interest) offset by benefit payments and accrued 
liabilities of his own workforce, for the most part the pooled methods 
have been little more than a footnote for the vast majority of plans 
during most of the last 25 years. This has changed recently and mainly 
as a direct result of the three consecutive years of negative 
performance in the equity markets, unprecedented since the decades 
before the adoption of ERISA's funding rules in 1974.
    The concept of interconnectedness of contributing employers is an 
important element in understanding how they differ from single-employer 
plans and why these plans have posed an insignificant risk to the 
Pension Benefit Guaranty Corporation (PBGC) since the multiemployer 
fund was initiated in 1980. According to PBGC, there were 1661 
multiemployer defined benefit pension plans in 2002, down from 2,244 in 
1980, while at the same time the number of participants grew from 
approximately 8 million in 1980 to slightly more than 9.5 million in 
2002. Much of the contraction in the number of plans was related to 
significant merger activity during the 1990s. Almost none of the plans 
became the wards of the PBGC, with only 31 plans ever having received 
any financial assistance since the creation of the multiemployer 
guaranty fund in 1980. This is contrasted with the single-employer 
guaranty fund which has taken over approximately 3,100 such plans 
through the end of 2002.\3\
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    \3\ See PBGC Data Trends 2002
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    More than any other testament, this record speaks well for the 
long-term structure of this private sector system as it is currently 
constituted.
III. Historically and Still Well Funded
    In addition to commenting on the Committee on Education and the 
Workforce's objective to protect the benefits of the American worker, 
Chairman Boehner made the observation that ``the multi-employer pension 
system is basically sound and financially healthy.'' We concur with 
that conclusion. In fact, according to a recently issued survey, the 
average funded position of multiemployer pension plans in 2003 (based 
on plan years that ended in 2002) was 87% \4\. While that represented a 
decline from 95% in 2002, it still reflects a favorable funded position 
looking to the funds' ability to meet their long and short- term 
benefit payment obligations. By industry, the funded positions ranged 
from a high of 91% for retail trade and food, to a low of 85% for 
transportation. According to the latest PBGC data the funding ratio for 
multiemployer plans was 104% as of 2000. The average funding ratio of 
PBGC insured plans for the 20 year period from 1980 through 2000 
dropped below 90% only one year (1996 when it was 88%). For eight of 
those years the ratio exceeded 100% with the remainder ranging from 91% 
in 1999 to 98% in 1992 and 1993 \5\.
---------------------------------------------------------------------------
    \4\ See the Survey of the Funded Positions of Multiemployer Plans 
2003 issued by The Segal Company, an international actuarial and 
benefits consulting firm.
    \5\ See PBGC Data Trends 2002
---------------------------------------------------------------------------
    Although the latest PBGC annual report showed a deficit in the 
multiemployer fund for the first time in 20 years, when one looks 
behind the conclusion it is clear that the primary reason for this 
shift is related to the historically low long-term interest rates used 
in determining the funding levels. We are confident that the plans 
covered by the multiemployer guaranty fund present no substantial long-
term risk to the PBGC or, more importantly, to the participants of 
those plans and when the rates return to more normal levels the 
perceived deficit will disappear.
    Part of the reason why multiemployer plans have traditionally been 
so well funded is that the contributions to the funds are negotiated 
and mandated in a collective bargaining or other agreement that 
requires contributions to the plan, regardless of the performance of 
the investment markets. Unlike single-employer plan sponsors which tend 
to fund defined benefit plans at the minimum funding requirement (a 
policy that resulted in the absence of any contributions for a number 
of years to such plans when the investment markets significantly 
outperformed the assumed rates of return), multiemployer plan sponsors 
continued to make contractually mandated contributions throughout that 
period. Since they also benefited from the bull markets in the 1990s, 
however, multiemployer plans encountered a different type of problem--
the full funding limitations.
    It is estimated that upwards of 75% of all multiemployer defined 
benefit plans encountered funding limitations during the 1990s that 
would have resulted in the employers' inability to take tax deductions 
for contributions to these trusts and accompanying excise taxes. 
Because the plan trustees were generally not the same parties as the 
settlors who set contribution rates in the collective bargaining 
agreements, the trustees were forced to increase benefits to protect 
the deductibility of the employer contributions. This prevented the 
funds from accumulating a contingency reserve to offset the 
unanticipated steep and prolonged declines in the investment markets 
such as those encountered from 2000 through and including 2002. 
Although this problem was partially addressed legislatively in 2001, a 
permanent exclusion to the maximum deductible limits for multiemployer 
plans seems indicated in any comprehensive reform measure.
IV.Principles of Reform
    The preceding background describes a system that has largely 
evolved into a well conceived, self-correcting system in which private 
sector employers and employee representatives have negotiated 
contributions that have been wisely invested to provide secure 
retirement income to tens of millions of plan participants.
    In evaluating the issues that might be the subject of a reform 
initiative, we would do well to borrow a line from Hippocrates who, in 
reference to disease is reported as having said ``...make a habit of 
two things--to help, or at least, do no harm.'' The following 
recommendations for guidelines to observe when considering any reform 
proposal are offered in that vein.
    First, multiemployer plans are fundamentally different from single-
employer plans. Therefore, solutions for single-employer plans cannot 
be applied to multiemployer plans without thought, study and adaptation 
to multiemployer situations. For example, funding tests that are based 
on employers' individual business hardship are not reasonably adaptable 
to multiemployer plans, because, among other things, each employer's 
financial information must be kept confidential vis-a-vis the other 
contributing employers (including the employer trustees) who are 
competitors, and the union.
    A second tenet is that the funding requirements must be level and 
predictable, so that the trustees can set benefit levels with some 
confidence that the fund's probable investment and contribution income 
will be able to meet the statutory standards. This includes rejecting 
any proposal that would cause the fund to be subject to greater 
volatility, such as the elimination or reduction in the ability of a 
plan to use sound actuarial smoothing methods. The recent experience 
with our unprecedented declines in U. S. equity markets, compounded by 
historically low fixed income rates presents the best case for not 
making sweeping policy changes at either extreme lows or extreme highs.
    A third point to consider is that multiemployer funding 
requirements must be adaptable to the realities of the collective 
bargaining process from which the contributions arise. This underscores 
the need for level, predictable funding requirements, including the 
need to phase-in funding increases to avoid sudden demands for dramatic 
contribution increases that could disrupt the bargaining process. An 
essential element of this concept is an assurance that the bargaining 
parties will have an opportunity to address new funding demands in 
bargaining so that neither the employers nor the participants are 
penalized because contribution levels cannot be changed during the term 
of the collective bargaining agreement.
    Forth, given the wide variety of circumstances and issues affecting 
bargaining, trustees and the bargaining parties need flexibility to 
meet the funding standards using whatever approaches best match the 
economics of their industry. Therefore, the law should specify the 
funding goal, but give the parties and trustees substantial leeway in 
setting the path to reach it. Furthermore, the funding rules should 
allow for benefit designs that participants will regard as fair: to 
retirees, to those nearing retirement, and to the population of active 
employees who generate the contributions.
    Fifth, the multiemployer funding regime should aim for benefit 
security and participant satisfaction--not ``PBGC protection'' or 
``100% funding at all costs.'' Such a concept is somewhat perverse--
that the very agency that was established to provide a safety net for 
plan participants would contribute to funding policies that would 
discourage employers from continuing them. Full funding, as a goal, and 
for setting funding targets for PBGC purposes, should be measured on a 
going-concern rather than termination basis for plans that are in fact 
going concerns.
    Sixth, the funding and tax rules should not inhibit responsible 
funding through the imposition of deduction limits and penalties that 
make it impossible for plans to build up strong reserves in the good 
years as a buffer against future bad years. It should also be noted 
that ``bad years'' in the context of multiemployer plans include 
periods in which there is little work for the active participants that 
generate the contributions, as well as those in which there are 
investment market reverses.
    Seventh, funding rules need to respect intergenerational equity--do 
not ask for too much sacrifice from current actives or retirees during 
a funding crisis, but ask enough from each generation of actives so 
that its costs are not knowingly being passed on to the next group.
    Eighth, do not force multiemployer plans, even mature multiemployer 
plans, into a uniform investment mode in order to minimize financial 
risk. Recognize that defined benefit plans inherently incorporate a 
balance between promised benefits and the risk that the plan's assets 
could fall short, regardless of how sizeable the funding reserves 
appear to be at any given point. A defined benefit plan remains alive 
only to the extent its assets (invested and contributed) can grow to 
meet the growing benefit needs and expectations of its participants. 
Striving for full funding, on a mark-to-market basis, at any time would 
not only be futile, it could also end the defined benefit plan's 
ability to serve its participants as they expect and deserve.
    Finally, withdrawal liability is almost universally disliked within 
the multiemployer world by employers and unions alike, but some hedge 
is needed to prevent strong employers from abandoning plans and leaving 
liabilities to roll over onto the weaker employers or to the guarantee 
system. Even in declining industries, the withdrawal liability system 
has worked to protect the participants without shifting obligations to 
the PBGC.
V. Conclusion
    In the earlier joint hearing held with the Committee on Education 
and the Workforce, you heard a number of experts comment on the 
administrative and regulatory compliance complexities that accompany 
the sponsorship of defined benefit plans. Multiemployer plans suffer 
from many of the same problems and concerns and we urge you to continue 
your work to eliminate such obstacles to the long term health and 
survival of these plans.
    As we look forward to the coming decades in which the baby-boomers 
retire and the coming generations face an uncertain future, wondering 
how they will cope with the costs of Social Security and Medicare, all 
the while being convinced that neither of these programs will be there 
for them, we would do an even greater disservice to them by failing to 
salvage the defined benefit system that has provided those who have 
gone before us-our fathers and mothers-with a dignified retirement. The 
continued decline of the defined benefit system in favor of the empty 
promises of a defined contribution retirement system that too few low 
to moderate income workers can afford to utilize and those who do 
vastly underestimate the amount they will need in their lifetime, will 
only serve to foist ever more of a financial burden on those future 
generations.
    As future retirees outlive their money, the costs of their care, 
even at a subsistence level, will be shifted to the taxpayer.
    If the volatile market performance of the past three years has 
taught us nothing else, we should have learned that only a defined 
benefit pension will keep us from returning to the days of the County 
poor house to house our indigent elderly.
    As the Committee proceeds with its work to strengthen the defined 
benefit system, we hope that you will consider ways that some of the 
features of the multiemployer system, such as portability of service, 
could be adapted to the single-employer system to encourage greater 
participation in defined benefit plans. We are eager to assist the 
Committee in its work in any way you choose to do so.
    Thank you very much. I welcome any questions you may have.
                                 ______
                                 
    Chairman Johnson. Thank you, sir. Appreciate the testimony 
of all of you and hope that you can help us solve some of the 
problems of the day, which as you point out, don't exist just 
in this part of the pension system but all across it, and I 
think GAO would confirm that.
    Mr. Weicht, in your testimony, you say that employers can 
only afford to pay so much for labor, and then continue by 
saying that you must compete against nonunion companies and 
risk pricing yourselves out of the market; yet the only thing 
you asked for is to be allowed to contribute more to the plan 
when they are at a well-funded or over-funded status. So I 
wonder if you can explain how that makes sense.
    Mr. Weicht. Sure. What we're seeing is, is that there's--
when you're looking at a situation that we were in, we were 
hitting the 90-plus percent funded level, what happens is, is 
that the contributions are based on hours worked.
    So we can sit where we're at now with $5.35 going in per 
hour. In a robust economy in the late '90's, we actually could 
be exceeding that 100 percent level by just the hours--the 
monies being contributed by the hours worked. For example, back 
at that time we were working an average of about 1,800 hours 
per employee that was in the plan. Now, this year, we're down 
to about 1,490 hours per worker. So what happens is, is that we 
almost hit like a technical overpayment going in in these years 
when we've got full employment. In our industry you'd call it 
full employment, the 1,800 hours. So that's what takes place.
    Does that respond to the question?
    Chairman Johnson. Yeah, I guess so. It seems to me instead 
of putting the money in, the extra money in, you might want to 
put it into something that benefits your company. Why is that 
not true?
    Mr. Weicht. Say it again?
    Chairman Johnson. Because you're putting it into an over-
funded plan.
    Mr. Weicht. Well, we weren't at that position, but the risk 
was there. We were within about a dollar per hour where we 
would have been over-funded. And so then we would have either 
increased benefits, or we could have met with the union and 
said, you know what? Let's only put in $5 an hour. Let's take 
35 cents and put it back out to the employees on their check.
    Chairman Johnson. Right. And the unions didn't want to do 
that?
    Mr. Weicht. Well, we didn't hit that point. They would say 
yes.
    Chairman Johnson. OK. Thank you. GAO, you mentioned that 
more information might be helpful in more accurately assessing 
the true funding state of the multiemployer system. Can you 
list what type of information you would specifically like to 
see?
    Ms. Bovbjerg. As you know, Mr. Chairman, GAO is always in 
favor of more information.
    Chairman Johnson. You like paperwork, don't you?
    [Laughter.]
    Ms. Bovbjerg. We like more disclosure, too, and we talked 
about that at some length when we met before on the single 
employer program and PBGC. There is nearly always room to 
disclose more to participants in the pension world. I think 
that they should know what the funding for their plan looks 
like. They should know what their guarantees are.
    I would urge, though, that the disclosure be meaningful. 
It's not always true that when someone receives something from 
their plan that discloses something in accordance with ERISA 
and it complies, they necessarily understand what that 
disclosure is telling them. So I would say meaningful 
disclosure would be important.
    Chairman Johnson. By the company or the union or both?
    Ms. Bovbjerg. I'm not ready to pick. But I think that it 
would be good to have something come from the plan that talks 
about plan funding, and anything that employers or the union 
wanted to provide in addition, I'm sure that they would be 
welcome to do so.
    Chairman Johnson. Well, my understanding is the unions 
pretty well run the plans after an agreement is made with the 
company. Is that true?
    Ms. Bovbjerg. We've heard that they work together jointly 
to run the plans, the employers and the unions.
    Chairman Johnson. Theoretically, but the union determines 
how much money goes to the retirement system, don't they? As 
part of the agreement?
    Ms. Bovbjerg. This was not something that we looked at 
specifically in plans. We were looking at general plan 
structure and the macro funding levels for plans.
    Chairman Johnson. OK. Well--
    Ms. Bovbjerg. So we wouldn't have found something like 
that.
    Chairman Johnson. So all you're recommending is that the 
workers be advised with more information. Is that what you're 
saying?
    Ms. Bovbjerg. I think more information is nearly always 
helpful. It would of course have to balance the cost of 
providing that information.
    Chairman Johnson. Well, I'd bet that they all know what 
that pension plan is. Would you guys confirm that? Don't your 
workers know what they're getting into?
    Mr. Weicht. Well, yes. The benefits that they receive, they 
certainly know. The summary plan document discloses it, and you 
can ask any employee or employer and they'll know.
    Chairman Johnson. OK.
    Mr. DeFrehn. Chairman Johnson, if I could comment on your 
question?
    Chairman Johnson. Please do, yes.
    Mr. DeFrehn. It's been my experience in 30 years of working 
with these plans that the boards of trustees actually do work 
together, and it's not simply that the union runs these things, 
but the management and union trustees work together, as was 
intended in ERISA and Taft-Hartley, to make those decisions on 
behalf of the participants. So I think it's a misunderstanding 
that the unions run these plans.
    And with respect to the communications, it's always much 
simpler for the plan itself, which has access to the 
information, to provide that information than either of the two 
bargaining parties who wouldn't have that kind of information.
    Chairman Johnson. Thank you for that comment. Mr. Andrews, 
do you care to comment?
    Mr. Andrews. Thank you. I do. I'd like to thank the 
witnesses for excellent presentations. Mr. DeFrehn, I heard you 
say that with respect to the short-term relief legislation 
that's before the conference that you support extension of the 
short-term relief to the multiemployer plans. Is that correct?
    Mr. DeFrehn. Yes, that's correct.
    Mr. Andrews. And Mr. Weicht, did you also say that you 
support that?
    Mr. Weicht. The short term? Yes. But once again, that's 
short term.
    Mr. Andrews. OK. But I think I hear that each of these two 
witnesses support the Senate approach to this problem by 
including the multiemployer people.
    Mr. McDevitt, what is UPS's position on that?
    Mr. McDevitt. UPS sees value in the short-term reform, but 
we are currently stringent that we do need long-term reform for 
these plans.
    Mr. Andrews. When you say you see value, do you want to see 
us adopt the short-term reform or not?
    Mr. McDevitt. We think if it gives us an opportunity to get 
into an area where we can work toward long term, we certainly 
would be behind that.
    Mr. Andrews. Well, of course, we're either going to work or 
not work toward long term, depending upon what the Chairman and 
others decide. But we have to take a position on what's in 
front of us right now. Do you want to see the conference report 
out the Senate approach to including the multiemployer plans or 
not?
    Mr. McDevitt. Well, basically, I would have to say that if 
in fact it gets us to where we can address long-term reform, we 
would see value in that, yes sir.
    Mr. Andrews. I understand. Turning to the long term--you 
should run for office. That was pretty good.
    [Laughter.]
    Mr. Andrews. With respect to the long-term problem, Ms. 
Bovbjerg, thank you for the excellent work that the GAO has 
done on this. I read on page 8 of you testimony the section 
that says, ``Aggregate funding for multiemployer pension plans 
remained stable during the 1980's and 1990's. By 2000, the 
majority of multiemployer plans reported assets exceeding 90 
percent of total liabilities, with the average plan funded at 
105 percent of liabilities.''
    Would you characterize the financial position of 
multiemployer plans as of 2000 as generally healthy or 
generally unhealthy?
    Ms. Bovbjerg. We thought they looked pretty healthy in 
2000. It's difficult to tell, by the way, just what's happened 
since then because of the way our data come in.
    Mr. Andrews. Right.
    Ms. Bovbjerg. And we're relying nearly entirely on PBGC's 
recent reports on funding levels.
    Mr. Andrews. It's my understanding that during the period 
that you did look at, the average annual growth in assets for 
multiemployer plans was 11.7 percent, and the average annual 
growth in liabilities as 10.2 percent. If that spread were to 
continue over the next 10 years--first of all, how realistic is 
it to expect that that spread will continue over the next 10 
years?
    Ms. Bovbjerg. Sitting here today, it doesn't look that 
realistic, but--
    Mr. Andrews. And why doesn't it look that realistic? What 
are the factors that make it unrealistic?
    Ms. Bovbjerg. That's pretty high growth.
    Mr. Andrews. High growth?
    Ms. Bovbjerg. On both ends. It's higher than what we see in 
single employers. I don't remember the exact figures.
    Mr. Andrews. High growth in assets?
    Ms. Bovbjerg. And in liabilities both, higher than singles.
    Mr. Andrews. Do you anticipate--to what extent do you think 
that the problems that we've encountered since 2000 are 
attributable to decline in equity values, decline in interest 
rates, to what extent is it attributable to some other factor?
    Ms. Bovbjerg. We didn't evaluate exactly to what it's 
attributable in part because we don't really have data that are 
completely consistent with what we had through 2000. Certainly 
the interest rate and the equity prices made a huge difference, 
that we know.
    Mr. Andrews. Is it within the purview of what you've been 
asked to do to forecast what might happen if we gave you 
certain assumptions about rises in equity values and rises in 
interest rates? If the Committee were to say to you, assuming 
this level of stock market performance and this level of 
interest rate performance, what would happen, is that something 
you could do?
    Ms. Bovbjerg. It might be. If the Committee asked us, we 
would find a way to try to do it.
    Mr. Andrews. The questions are not hypothetical. They're 
really, as I said in my opening statement designed to parse out 
the analytical differences between problems in multiemployer 
plans that are inherent in the aging of the population, the 
demographic tidal wave that is coming, and problems that are 
unique to the present circumstances that we faced in the last 
couple of years.
    I think it's indisputable that the demographics are moving 
in a direction where there will be fewer workers and more 
retirees, and that's a fact. The question is, is how bad that 
problem will be and what kind of changes it requires. You know, 
I know my Chairman is a conservative, and I share with him the 
view that the first principle of government should be the 
Hippocratic Oath, that we should first do no harm. And I agree 
with what Mr. DeFrehn said that defined benefit plans are a 
success story, and I would be very leery of making changes that 
might disrupt that success story on the basis of some anomalous 
circumstances.
    Thank you.
    Chairman Johnson. Thank you, Mr. Andrews. Recognize the 
Chairman of the Full Committee, Mr. Boehner for questions.
    Mr. Boehner. Well, thank you, Mr. Johnson. Let me 
congratulate you and Mr. Andrews for having this next in a long 
series of hearings looking at defined benefit plans, and today 
specifically, multiemployer plans. I think that it's helpful 
and certainly useful considering that we have a pension bill 
that we're in conference on. And I've just got to say, I'm 
confused. And I think I'm going to follow up with the words of 
Mr. Andrews when he suggests that making changes to 
multiemployer pension rules at this time without having more 
information, you're somewhat reluctant to do. I'm damn 
reluctant to do, let me say that.
    As I understand the testimony, 2 years ago, 95 percent was 
the average funding level of multiemployer plans. Today it's 
87. Down, but certainly not the end of the world. And in the 87 
percent figure average, Ms. Bovbjerg, was from what year? What 
plan year? The calendar year 2002?
    Mr. DeFrehn. Mr. Boehner, I believe I was the one who 
commented on that.
    Mr. Boehner. Oh.
    Mr. DeFrehn. It was from actuarial valuations completed in 
2002.
    Mr. Boehner. 2002. So we've had in round numbers about 15 
months since those numbers were calculated, and over the last 
15 months, we've seen the market increase, last year over 20 
percent, and we've seen an improvement--an increase in interest 
rates, while not substantial, but we've seen an increase in 
interest rates. And between the two, those figures alone, those 
two indicators alone, should make the actuarial value of these 
plans better today than they were at the end of 2002. Would you 
agree to that?
    Mr. DeFrehn. I wouldn't agree with that completely. First 
of all, if you look at some of the interest rates used by PBGC 
in valuing long-term liabilities, they've actually, as 
reflected in their most recent report, they are lower than they 
were in the prior year.
    Secondly, the market decline, the compounding effect of the 
market declines over the last 3 years, although they have, in 
2003 there was a recovery, the actuarial procedures used 
generally involve a level of smoothing that recognizes gains 
and losses over a period of years.
    Mr. Boehner. Fifteen, I might add.
    Mr. DeFrehn. Well, in most cases--that has to do with the 
amortization of the losses it's 15. But in most cases from a 
funding standpoint, they use a 5-year smoothing method where 
they recognize a portion of the gains and losses recognized 
over--that were experienced over a period of 5 years. So over 
the next couple of years, our plans for funding purposes, we'll 
be seeing those three bad years stay with them, for funding 
purposes, for a period longer than you would have seen had the 
gains in 2003 been recognized immediately.
    Mr. Boehner. Ms. Bovbjerg, how would you answer that 
hypothetical question that I pointed out?
    Ms. Bovbjerg. About whether they're better off today than?
    Mr. Boehner. Than they were at the end of 2002.
    Ms. Bovbjerg. I don't know the answer to that question. I 
do know that in the PBGC 2003 Annual Report, they reported that 
their insurance program was in deficit for the first time in 20 
years. So--and I think that that may also relate to some of the 
things that Mr. DeFrehn was mentioning just now. So there will 
be some period of time to recover.
    Mr. Boehner. All right. Let's use the 2002 number, then, 
that on average, there's an 87 percent funding level in 
multiemployer plans. Now there's a provision in the Senate 
passed bill, the 3108, that provides an additional 2 years to 
amortize losses for all plans. That's what the provision says, 
all plans, all multiemployer plans.
    It seems to me that's overly broad, considering we're not 
doing anything like that for single employer defined benefit 
plans. And I'm trying to understand why anyone would think that 
it's fair to provide broad relief, that broad of relief for 
multiemployer plans when nobody's made the case. We don't have 
the numbers at the PBGC. We don't have the numbers at the GAO 
because the plans don't disclose enough information for us to 
even make judgments about where there's a need and where there 
may not be a need. And I'm trying to get at how could we 
determine where the need is, if there's a need, and how you 
could look at this issue in a narrower context than all 
multiemployer plans.
    I'll start with you, Ms. Bovbjerg.
    Ms. Bovbjerg. Generally, if you wanted to not have it be so 
broad, you could consider targeting in some way. I believe that 
that's the approach that is being considered with the DRC 
provision in the same bill. It's targeted in some way. You have 
narrowed it already at some level by simply deferring rather 
than forgiving the amortization.
    As for knowing, you know, which companies or which plans 
would benefit or need the relief and trying to target it, 
that's not something that's knowable with the information we 
have now. You're right.
    Mr. Boehner. We can go down the list of whoever would like 
to speak up.
    Mr. Weicht. If I may, I would like to share that as a 
trustee, the way we can adjust this of course is to reduce 
benefits with another side of what you were asking for, 
Representative Boehner, as well, is that the smoothing, 5-year 
smoothing, just to share on a practical side of our plan, is 
that we have to have a 15 percent per year return for the next 
5 years to get back to our 90-plus percent funding level with 
what's taken place in the last three. So that sheds a little 
practice light on just how one plan is working.
    And what I have seen with the plans in the Midwest is that 
a majority of plans have reduced benefits as well. So they're 
not relying on just the returns to bail them out, so to speak.
    Mr. Boehner. Mr. DeFrehn?
    Mr. DeFrehn. Mr. Boehner, well, you know, with respect to 
the question of allowing all plans to participate in that 
deferral of the amortization of the losses, there are some 
self-limiting provisions in there in that a plan that accepts 
that relief under the Senate provision would be required to 
have restrictions on the ability to make benefit improvements 
during the next--during the period of the hiatus. So plans that 
normally would not want to have those restrictions wouldn't 
adopt that.
    Similarly, I believe that there is a mechanism for trying 
to identify which plans would need the relief by having perhaps 
an actuarial certification or projection that the plan would 
experience a funding deficiency within the next 7 or 8 years. 
That would also allow the number of plans that would be 
affected by this to be narrowed significantly, and it would 
target those plans--we had approximately 30 percent of the 
plans out there would need some portion of this relief--that it 
would help narrow that down to the plans that do need the 
relief.
    Mr. Boehner. Mr. McDevitt, do you have anything to add 
here?
    Mr. McDevitt. Yes, Congressman. I did not have an 
opportunity to see those numbers that were reported earlier, 
but I can tell you from UPS's perspective, we track 21 plans, 
and less than half of them would meet the 75 percent level 
currently.
    UPS, as you know, is a forward-looking company. We do not 
look at the next quarter or the next year. This has been our 
radar screen since the late '80's and early '90's, and we think 
there is structural change required here because of some of the 
other factors, such as the demographics which was referred to 
in the GAO report that I heard here. But there is definitely a 
need for some restructuring and some long-term reform.
    Mr. Boehner. Well, there's no question that we're heading 
down a path of long-term--a project to look at the long-term 
changes that are needed both in single employer plans and 
multiemployer plans. But we've got this little 2-year, small 
pension relief bill that is being expected to carry mountains 
of other issues, and for the life of me, I'm trying to 
understand how we're going to be able to determine fairly who 
really needs help and how much help they need, because it's 
only a 2-year window that we're dealing with in this small 
bill.
    So with that, Mr. Chairman, I thank you for your 
indulgence.
    Chairman Johnson. Thank you, Mr. Chairman. I appreciate 
those comments. I think everybody knows that the PBGC, your 
multiemployer plans really are only about 3 percent of their 
commitment total. So it's something we need to look at, but 
it's not going to break the bank, if you will, if your system 
starts to default.
    I think you can increase contributions. I'm told you can 
increase contributions under the Senate plan, but the problem 
you've got is, if you increase contributions, your union 
agreement is probably going to want some more increases in 
benefits as well.
    Mr. Andrews. If the Chairman will yield, the other fact 
that I think does need to be pointed out, though, is the 
potential of a chain reaction within multiemployer plans where 
a failure of one employer triggers substantial increase in 
burdens on the rest of the employers, which could push others 
over the edge, and it could proceed like an epidemic where one 
person is sick at the beginning and a few more get sick the 
next wave, and everybody gets sick at the end.
    The explosive potential for this chain reaction within 
multiemployer plans needs to be carefully assessed.
    Chairman Johnson. Well, there's no doubt we need to look at 
it carefully. Mr. Kildee, you're recognized.
    Mr. Kildee. Thank you, Mr. Chairman.
    Chairman Johnson. And I want to thank you for being here 
when this thing first started.
    Mr. Kildee. Well, we tried anyway. That was 24 years ago. 
I've been here 28 years, so I had 4 years' experience before I 
got involved in this. But I appreciate all of you being here 
today.
    Mr. McDevitt, about twice a year I go out to the UPS center 
in Flint, Michigan and have coffee and doughnuts with the 
drivers as they peel off. Mark LeHay invites me out thee. And 
as a matter of fact, about a year ago I went up to Saginaw, 
Michigan in my district and donned the brown uniform and 
delivered packages for a morning and enjoyed that very much. 
And I have good relations with both UPS and the union.
    As I understand your testimony, Central States is currently 
paying nearly a billion dollars annually in benefits to some 
100,000 retirees whose employers have gone out of business. 
You're not suggesting that these retirees be cutoff without 
pensions after their years of having their employers contribute 
on their behalf?
    Mr. McDevitt. No, Congressman, I am not saying that. I'm 
just pointing out that that is a structural flaw in the program 
moving forward. These plans were healthy in the '80's to some 
degree. They've quickly, because of the demographics and the 
change, quite frankly, right now they are .62 active to retiree 
termed in that plan, and right now I believe they have a built 
in percent of 2 percent less members coming in on an annual 
basis going outward. So there are going to become even less 
contributions in the front door, and as we approach the baby 
boomer retirement, we're going to have more retirees. That is 
just going to make that plan that much worse.
    Mr. Kildee. I was told by some of the employees at the 
Flint facility, Flint, Michigan, that Central States had 
informed them that because of some of the problems in the plan, 
that they would have to work 32 or 33 years before they would 
qualify for the full retirement. Is that correct?
    Mr. McDevitt. Yes sir. Under, as was mentioned before from 
one of the colleagues here on the panel, there have been many 
plans that have not increased. Unfortunately, we have been in a 
case where we've seen plans have to decrease the benefits. And, 
yes, that is in fact the case with Central States.
    As a matter of fact, we have an example that we now have to 
deal with which we never had to deal with before, in Michigan, 
as a matter of fact. We have a driver who retired in January 
and has since come back to us and asked us to unretire, because 
he did not understand how much he was willing to get or about 
to get based on the plan changes. It's a very sad state of 
affairs. He's a 30-year driver with UPS. He has cancer, and he 
has now come back and asked to unretire after being retired for 
only 3 months.
    We are still trying to find ways to address that, and more 
and more of these situations--I would have to disagree with one 
of the earlier comments that our employees understand what 
their benefits are going forward. That's why I think we 
certainly need transparency. We need education, and we need our 
folks to clearly understand the impact going forward.
    And that's just one. We understand there's another similar 
situation proceeding as well, sir.
    Mr. Kildee. And I know that the Teamsters and UPS both want 
to address those problems. I work closely with both groups in 
Flint, and I know that they are concerned about addressing 
that, and both of you have a voice in that Central plan and a 
vote in that Central plan.
    And you certainly aren't proposing that the problems be 
transferred to the Federal Government to take care of that 
shortfall?
    Mr. McDevitt. No. What we are saying is, I think the crux 
of the matter comes down to how we differentiate a 
multiemployer defined benefit plan and a single employer 
defined benefit plan. And I think in our best interest of what 
we think would work is just look at a plan that's defined 
benefit and could take the best of both worlds and put some 
structural changes in there to, No. 1, shore up the plans as 
they exist right now and give them the opportunity to get back 
on better footing going forward, and hopefully keeping the 
government out of it.
    But clearly, down the road, the PBGC one way or the other 
will have to step up in some of these plans if we do not take a 
look at some long-term structural reform inside of these plans.
    Mr. Kildee. In response to Mr. Andrews' statement, you 
would be willing to take the short-term relief while waiting 
for a more long-term relief?
    Mr. McDevitt. Yes. As I said earlier, right now we see 
value in any short-term relief that will allow us the 
opportunity to continue to work toward long-term reform. But 
long-term reform is certainly a must have.
    Mr. Kildee. Appreciate your testimony. Thank you very much.
    Mr. McDevitt. Thank you, sir.
    Chairman Johnson. Thank you, sir. Appreciate your insights 
and your experience. Mr. Kline, do you care to comment?
    Mr. Kline. Yes, Mr. Chairman, thank you very much, and 
thanks to all the panelists for being here. I'm always 
delighted when somebody is here from Minnesota, by the way, Mr. 
Weicht. Great to see you. We're still in that time of year when 
Minnesotans are not reluctant to travel out of the state.
    And it's always a delight to have UPS. Like Mr. Kildee, I 
had the pleasure of putting on a brown suit and riding around 
delivering packages, and I was horrified to learn that I was 
slowing down the whole process by about 50 percent when I 
thought I was helping.
    This subject is of particular concern to me because I've 
had Minnesota employers in the trucking business, for example, 
come to me and say that they are in fact in real trouble; that 
the reason that the pension funds are funded even to 87 percent 
is because some of them are really eating into operating 
capital at an enormous rate to keep that done.
    So I'm, like all of us here, I think, looking for a way to 
make sure that these defined benefits plans, whether they're 
single employer or multiemployer, are solvent and providing the 
benefits that they're supposed to provide.
    I think in your--let's see here. I believe I've got it 
underlined properly, Mr. McDevitt. In your testimony, you said, 
``As a result of structural problems and significant shortfalls 
in multiemployer pensions,'' there are problems. And you've 
talked about some of those structural problems, but I wonder if 
you could just in sort of one encapsulated approach tell us 
what you think those structural problems are that we need to be 
addressing.
    Mr. McDevitt. Well, Congressman, the first would be, as I 
mentioned before, the clear demographics of those plans 
currently. We do not see new workers coming in the front door 
to support those folks who are approaching retirement.
    The other is we believe there's a flaw because there are no 
funding guidelines. The 21 plans that I mentioned earlier that 
we address and look after, it's safe to say that those that had 
any type of a funding guideline are in much better shape than 
those that did not, regardless of how they received those 
funding guidelines, whether they were imposed upon them or the 
trustees enacted on their own.
    Transparency, as we talked about, and the timeliness of 
information makes it hard for us and for our employees and the 
participants in these plans to clearly get an idea of where 
they stand inside of these plans. And, therefore, when they go 
to retire and they think they're going to get one thing, quite 
frankly, in the long term, the may not be able to get that. An 
example is recently right here in the Central States where 
there was a cut, and now we have to deal with some folks who 
have to reevaluate their retirement plans.
    And then certainly those that have been left behind, where 
the burden is spread out on those employers that are left to 
pick up the pieces of people who have exited the plans. And we 
understand that there is a percent that they go back after 
assets to try to recoup the liabilities that are required on 
those ones that exit, but it's right around 10 percent. So the 
90 cents on each dollar that these folks leave behind are 
spread throughout those companies that are left in those plans 
themselves. We think that there are some structural problems 
with that.
    Mr. Kline. Thank you very much. And thank you, Mr. 
Chairman. I yield back.
    Chairman Johnson. Thank you. Mr. Tierney, do you care to 
question?
    Mr. Tierney. I do. Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, sir. You're recognized.
    Mr. Tierney. It's been a while, and I was wondering why a 
package from Michigan showed up on my doorstep in 
Massachusetts, and now I know that Dale was messing up 
deliveries, and I figured that one out.
    [Laughter.]
    Mr. Tierney. I'm almost tempted, Mr. McDevitt, to ask you 
again the same question Mr. Andrews and Mr. Kildee asked you to 
see if you can again repeat exactly the same, but I trust you 
would.
    Let me ask--and I'm going to have trouble pronouncing your 
name. Would you help me, please, Barbara?
    Ms. Bovbjerg. Bovbjerg.
    Mr. Tierney. Bovbjerg. If we had an answer to our health 
care system in this country, if we were able to deal with the 
rising premiums in health care that employers face, would that 
not have a positive effect on the ability of those companies to 
better maintain their contribution levels?
    Ms. Bovbjerg. That was what we were told in talking to 
various companies in multiemployer plans is that there's a 
certain amount they feel that's on the table, and one of the 
things competing, one of the priorities competing with pension 
benefits, is the rising cost of health care benefits.
    Mr. Tierney. I say that because I think, you know, 
sometimes we can't take these issues, as important as they are, 
in a vacuum. And we were looking at so many retirees now being 
dumped out of their health plans, over 5 million in this 
country after they retire, being either decreased in their 
benefits or tossed off; employers facing incredible increases 
in premiums, and I think that we ought to perhaps sometimes 
look at these issues together to see if we can't resolve some 
of our health care issues to help in turn address this problem.
    Mr. DeFrehn, give us, if you would, a thumbnail sketch of--
because I see many good aspects of this multiemployer pension 
system. In fact, I see some serious areas where it's better 
than the single system by far, not the least of which are the 
ability of the employees and employers to work together as 
trustees to make it work. As tough as it is, they make 
decisions sometimes, even if it means decreasing some benefits 
or increasing them, and people understand that it's made in 
good faith, that are accepted. The portability aspects 
obviously. What would be a good way for us to look forward to 
short-term and long-term strengthening of this system as 
opposed to dismantling it?
    Mr. DeFrehn. Well, certainly on the short-term basis, 
consideration of the Senate version of 3108 would allow the 
plans to get through, as Mr. Andrews describe, an anomalous 
situation. Never since the beginning of the funding rules under 
ERISA have we encountered three consecutive years of negative 
performance in the markets. Therefore, it's a time--and also a 
time when the interest rates are at historical lows.
    So our plans are facing a period where they have changes of 
experiencing a technical violation in the funding rules, those 
funding rules which had never been tested under similar 
circumstances, that could result in having employers who have 
been good supporters of these plans and paid on a regular basis 
their required contributions pursuant to the bargaining 
agreements, those same employers would be subject to additional 
contributions, were the plans to trigger the funding 
deficiencies.
    So that would result in some of them being bankrupt, and a 
fundamental destabilization of the system.
    On a longer-term basis, we believe that the system has 
worked very well. And contrary to what Mr. McDevitt has said, I 
think that if you look at it in a broader context, that you 
would find that the system has worked very well. The funding 
levels have been very good, and rather than looking in 
isolation at the last 3 years, it's better to take a broader 
look at how the funding of the plans broadly has played out.
    Even the example that he has cited on a number of occasions 
here, the Central States Pension Fund, their plan was funded at 
almost 96 percent for the vested--present value of vested 
benefits as recently as 1999. And they, because of the 
leveraged nature of that plan, were severely impacted by the 
reduction in the economy here and the reduction in the markets. 
It drove their assets base down to about $14 billion from a 
high of about $26 billion. They've recovered in the last year 
to a little over $18 billion, but again, it shows that these 
mature plans are highly dependent upon investment return.
    And if you think about the way ERISA was set up, it was 
structured in a way to put many of these plans, or the mature 
plans, in a position where the benefits would ultimately be 
paid from investment earnings. I think that's an important 
concept to remember here. Unlike the Social Security system 
where we set nothing aside but operate on a pay-as-you-go 
basis, these plans have had to set money aside since 1974 to 
fund those future benefits. And in fact, while the withdrawal 
liability system is flawed and nobody likes it, the unions hate 
it, the employers hate it for a variety of different reasons, 
you have a choice to make here.
    When the government sought to guarantee defined benefit 
plans, and those guarantees were put into place both in the 
single and multiemployer side of things, there were some 
guarantees made to those participants. On the multiemployer 
side, it was a very small, modest guarantee. After 30 years of 
employment at age 65, you would get about $12,700, compared 
with $44,000 on the single employer side. Unfortunately, 
someone has to pay for those benefits. It's either going to be 
the employer or the government or the participant who loses 
those benefits. Since we've guaranteed them in the code, then 
the choices are either the employer picks it up through 
withdrawal liability, or the government picks it up through the 
PBGC.
    I would also like to just make one observation here in 
listening to Mr. McDevitt's comments about long-term reform. 
I'm reminded of the fable of the seven blind men trying to 
describe an elephant. And while UPS is one employer involved in 
one industry, which has admittedly had significant problems for 
a variety of reasons, including deregulation, over the years, 
it is one segment of the economy and one plan.
    When we talk about the bill that has been set forth, the 
Multiemployer Pension Security Act of 2003, actually if the 
issue weren't so serious, you could get the humor in the 
tongue-in-cheek name here. In fact, the multiemployer security 
act that they're talking about doesn't provide changes to the 
multiemployer system; it dismantles the multiemployer system in 
the trucking industry. It converts those plans from 
multiemployer plans to multiple employer plans.
    And I'd like to make it very clear that that shifts the 
risk from the pooled employers to the single employer guaranty 
plans under PBGC, because multiple employer plans are a 
collection of single employer plans and not multiemployer 
plans.
    So there is a significant change that's being proposed here 
that I believe does have some significant policy implications 
beyond simply talking about long-term reform. Long-term reform, 
there may be some reason to discuss some of these issues, but, 
you know, you don't fix what ain't broken. And while some minor 
tinkering might be in order here, I'm not sure that 
comprehensive reform on the multiemployer side is anywhere near 
as needed as it is on the single employer side.
    I hope that addresses your question.
    Mr. Tierney. It does. I want to thank all the witnesses. 
Thank you, Mr. Chairman.
    Chairman Johnson. Thank you for your comments. Appreciate 
that. Mr. Holt, do you care to comment? You're recognized.
    Mr. Holt. Thank you, Mr. Chairman. And I'm wondering if 
photos exist of Mr. Kildee and Mr. Kline in brown shorts.
    [Laughter.]
    Mr. Kline. I had them burn the negatives.
    Chairman Johnson. He talked about elephants, too, you know.
    Mr. Holt. When I did it, I chose not to wear the shorts. I 
thank you for coming today. Mr. McDevitt, let me start with 
you. You've mentioned some of the long-term reforms that you 
feel are essential. I guess I'm wondering whether in your 
company's case--and you're such a big company, it makes a 
difference--whether you've already made the decision, whether, 
you know, any reforms will be beside the point, that you've 
made the decision to pull out of the multi--of the plan. Do you 
maintain a commitment over the long term if certain reforms are 
made? I guess is really the question.
    Mr. McDevitt. Yes. We have not made any commitment to that 
degree, Congressman. I was referring to the Central States 
earlier. We think that there are some structural flaws in the 
Central States, but they are not limited to the Central States.
    We have agreement with folks on both sides that reform is 
in fact needed, and needed desperately, for the Central States 
Fund. The actuaries have told us that they need returns of 
better than 80 percent for several years to get back on solid 
funding.
    Now I might add, there's another plan out there, so it's 
not just to the Central States plan. We have a New England 
pension plan as well. And the fact of the matter is, the New 
England pension plan is in as bad as, if not worse, shape than 
the Central States plan. And we can throw around these 
percentage funding, what it is, what it isn't, whether it's 
including all vested benefits, whether it's taking into 
consideration the people who have termed in there, which means 
they've accrued some sort of a benefit but they have not begun 
to draw on it yet, when we look at that, that plan currently is 
right at 61 percent funded.
    I just saw these numbers right here, these numbers that 
came from the GAO showing Central States at 54 is worse than 
what we had seen before. So, obviously, the transparency issue 
we spoke to earlier, we need to look at these very closely, 
because we had Central States in the ballpark of 61 to 62 
percent.
    It's problems like that that I think we have to address, 
and I believe that if we do not leave with some long-term 
reform, there are a lot of employees, our employees and the 
employees of man other companies, who are going to pay the 
burden. And we just do not think that is fair.
    Mr. Holt. And if those are addressed, then you have a 
commitment to stay with the system?
    Mr. McDevitt. We have made a commitment to look at any and 
all options to fix these plans, absolutely.
    Mr. Holt. OK. Thanks. In the--Ms. Bovbjerg, please--some 
proposals that are floating around call for a portion of the 
unfunded liabilities to each employer, in other words, turning 
a contingent withdrawal liability into an actual liability, or 
eliminating the withdrawal liability. Would eliminating the 
withdrawal liability rule change the entire concept of the 
multiemployer plans? Wouldn't that be the undoing of the very 
nature of these plans?
    Ms. Bovbjerg. It would certainly alter the way that the 
plans work now. The Act of 1980 that Chairman Johnson referred 
to initially was the legislation that set up the multiemployer 
program at PBGC, the insurance program, and also the withdrawal 
liability.
    If an employer withdraws and is not required to compensate 
the plan for their share of an unfunded liability, then who 
will bear that? Is it left for the other employers? Is it left 
for participants to bear that, you know, in benefit cuts? Is it 
pushed over to the PBGC, which I did want to remove a 
misconception there might be about this insurance program.
    This is not like the single employer insurance program. 
This is a much smaller commitment on PBGC's part. You see it in 
the difference in the premiums that are charged. Nineteen 
dollars per participant for the single employer plan plus a 
variable premium for unfunded liability. With multis, it's 
$2.60 per participant. And a reason for that difference is the 
difference in the guaranty, the difference in the commitment.
    The way that these plans are structured certainly puts much 
less risk on the government's insurance program. So you would 
certainly, if you were to think about removing withdrawal 
liability, you would have to think about what the impact could 
be on all these other players, and most particularly the PBGC.
    Mr. Holt. OK. Thank you, Mr. Chairman, and thank you.
    Chairman Johnson. Thank you. Mr. Wu, do you care to 
comment?
    [No response.]
    Chairman Johnson. Thank you very much. Let me ask a quick 
question before we close, for Mr. McDevitt. I, you know, I 
appreciate your comments, but I wonder if you think it's 
prudent to provide all multiemployer plans with funding relief 
even though there is just a limited amount of financial data 
available for any comprehensive assessment of actual funding 
status, and why would you want relief without proof of that 
data?
    Mr. McDevitt. Mr. Chairman, I think that relief, if it is 
coupled with other structural changes that can basically 
provide us with an opportunity of working toward long-term 
reform, could be beneficial. Certainly the plans, it would be 
upon their own discretion whether or not they elect to take 
upon that relief. But we are clearly, the short-term relief is 
not the answer; it is the long term. And certainly the short-
term relief can come in various types and levels, and we think 
that if it's tied to some good levels as far as providing the 
opportunity to get long-term, we do see value in that.
    Chairman Johnson. OK. Thank you. Ms. Bovbjerg, could you 
tell me what types--you know, we talked about the information 
that you were trying to make more inclusive, and I wonder if 
you could tell us specifically what you might want and which 
government agency is going to be the one to collect the 
information from the people out there?
    Ms. Bovbjerg. The funding information. We do get funding 
information in the Department of Labor in the 5500's. It's very 
slow. It takes a very long time. So we only have funding 
information through 2001 right now. You can get it on 
individual plans, but it lags tremendously. One of the things 
that we are thinking about now at GAO is what are the things 
that could be done to ensure that this information is made 
available more quickly and it comes in more timely, because if 
you're trying to make policy in response to recent events, that 
information isn't going to be current enough to really help 
you.
    Chairman Johnson. OK.
    Ms. Bovbjerg. So we're looking at that.
    Chairman Johnson. OK. With Labor? You're working with Labor 
on that?
    Ms. Bovbjerg. Pardon me?
    Chairman Johnson. Are you working with the Department of 
Labor on that?
    Ms. Bovbjerg. We have just initiated a look at it on our 
own. We'd be happy to do it for you, Mr. Chairman, if that 
would meet your needs.
    Chairman Johnson. Yeah. Well, maybe we just need to talk to 
them and see how we can fix the system so it's more responsive. 
A couple of years behind is not the answer, I agree.
    Ms. McCollum, do you care to comment?
    Ms. McCollum. Thank you, Mr. Chair. Mr. Chair, I have some 
questions that deal with UPS. And what I would like to do is I 
probably can't get to all of them, but I'd like to start out 
with one if I may, Mr. Chair.
    Chairman Johnson. Well, do you want to submit them for the 
record? And I'm sure they'd be willing to answer us.
    Ms. McCollum. I want to submit them for the record, but I 
would like to start off with one. I'm trying to understand some 
of the issues around UPS. Now it's my understanding when 
pensions were first provided through multiemployer funds, that 
its employees were given permission to have pension credits for 
the years that they had worked for the companies prior to 
becoming participants in the fund. Is that correct?
    Mr. McDevitt. I believe you're referring to they do accrue 
time in each fund. Yes, Congresswoman.
    Ms. McCollum. OK. And did UPS not have to pay the full cost 
to the fund?
    Mr. McDevitt. No.
    Ms. McCollum. No?
    Mr. McDevitt. That is incorrect.
    Ms. McCollum. Was it able to provide employees with instant 
retirement benefits that had not been previously paid for?
    Mr. McDevitt. Instant retirement benefits? Past service 
credits?
    Ms. McCollum. Mm-hmm.
    Mr. McDevitt. I don't quite honestly know. I'd have to get 
back to you on it.
    Ms. McCollum. So, Mr. Chair, I think what I need to do is I 
need to submit these questions for the record. And with that 
caveat, Mr. Chair, I have submitted other questions on the 
record to get responses back and gosh darn it, I don't seem to 
be getting much mail coming back in my mailbox. So, Mr. Chair, 
what is the timeframe in which I should expect?
    Chairman Johnson. I would bet that if we submit questions 
to you, you'd be willing to respond to us, would you not?
    Mr. McDevitt. Yes sir, Mr. Chairman. Absolutely.
    Chairman Johnson. Thank you.
    Ms. McCollum. So, you know, 2 weeks, a month, I should 
expect a letter in the mail?
    Chairman Johnson. Well, I don't know. If we go back to the 
Labor Department it might be three or 4 years.
    [Laughter.]
    Chairman Johnson. I think UPS can respond faster than that. 
Would you agree to do that?
    Mr. Andrews. Will you give her a tracking number for her 
letter?
    [Laughter.]
    Mr. McDevitt. Absolutely.
    Ms. McCollum. Then it's a done deal, because I know that 
tracking works great.
    Chairman Johnson. Thank you very much. I want to thank the 
witnesses for your valuable time and testimony, and the Members 
for your participation. If there's no further business, the 
Subcommittee stands adjourned.
    [Whereupon, at 11:53 a.m., the Subcommittee was adjourned.]
    [Additional material supplied for the record follows:]

  Questions Submitted for the Record from Hon. Betty McCollum to John 
                                McDevitt

Questions for Mr. John McDevitt
Senior Vice President
United Parcel Service
Washington, DC

1a. When UPS first provided pension coverage through multi-employer 
pension funds, were its employees given pension credits for years they 
had worked for the company prior to becoming participants in the fund? 
Was UPS able to do this without having to pay the full cost to the 
funds, thus providing its employees with an instant retirement benefit 
that it had not previously paid for?

1b. Were other employers bearing the burden of supporting those early 
UPS retirees?

2a. UPS established a Thrift Plan for its employees. Was this plan a 
multiemployer plan, and if not, were there any union trustees involved?

2b. Did UPS make all of the investment decisions for this plan?

2c. Did the Thrift Plan that UPS established for its employees lose 
money during the 1999-2002 period? Did UPS discontinue the Thrift Plan 
rather than continue to make contributions to subsidize the rate of 
return that was promised to employees who participated?

Betty McCollum
4th District, Minnesota
                                 ______
                                 

 Response of John McDevitt to Questions Submitted for the Record from 
                          Hon. Betty McCollum

Stacey Dion
Professional Staff Member
Committee on Education and the Workforce
U.S. House of Representatives
2181 Rayburn House Office Building
Washington, DC 20515-6100

Dear Stacey,

    On behalf of UPS, I would like to thank the Committee for the 
opportunity to testify at the hearing on ``Reforming and Strengthening 
Defined Benefit Plans: Examining the Health of the Multiemployer 
Pension System.'' We appreciate the Committee's ongoing work on this 
very important issue.

    Listed below are the answers to the questions the Committee 
submitted to me on April 21st.

    Answer 1: UPS employees did not become participants in the 
multiemployer plans at one single point in time; rather, as UPS 
acquired operating rights in the various states and expanded its 
operations eastward, the company recognized the Teamsters as the 
bargaining representative of the employees, and ultimately in the 
course of negotiations, the employees became covered by multiemployer 
plans. UPS does not have any active employees or any records that would 
indicate whether these funds gave new UPS participants service credit 
for years that they were not covered by these plans, as the transition 
to these plans took place between 30 and 50 years ago.
    Today, there is no question but that UPS' contributions to the 
multiemployer pension plans are subsidizing participants from other 
contributing employers and from participants whose companies have long 
since gone out of business. The Central States Pension Fund provides a 
representative example of this subsidization. In 2003, UPS had over 
41,000 active employees in the plan and only 6,300 retirees, a stark 
contrast to the non-UPS portion of the plan (136,000 actives and 
195,000 retirees). In 2003, UPS contributed $350 million to the Central 
States Pension Fund while the fund paid only $161 million in benefits 
to retired UPSers.

    Answer 2: The UPS Thrift Plan was a voluntary single employer plan 
that began in 1961. All aspects of the plan were determined by four UPS 
trustees. The fund included management, non-management, and bargaining 
unit employees. From 1999-2002, the fund had an annual average rate of 
return of 17.4%. The Thrift Plan did not contain any promised rate of 
return.

    If I can be of further assistance to you or the Committee, please 
do not hesitate to contact me.

Sincerely,

John McDevitt
Senior Vice President
United Parcel Service

                                 
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