[Senate Hearing 115-781]
[From the U.S. Government Publishing Office]
S. Hrg. 115-781
HOW THE MULTIEMPLOYER PENSION
SYSTEM AFFECTS STAKEHOLDERS
=======================================================================
HEARING
BEFORE THE
JOINT SELECT COMMITTEE
ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
UNITED STATES CONGRESS
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
JULY 25, 2018
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Joint Select Committee on
Solvency of Multiemployer Pension Plans
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-994-PDF WASHINGTON : 2020
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JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Sen. ORRIN G. HATCH, Utah, Co-Chairman
Sen. SHERROD BROWN, Ohio, Co-Chairman
Rep. VIRGINIA FOXX, North Carolina Rep. RICHARD E. NEAL,
Sen. LAMAR ALEXANDER, Tennessee Massachusetts
Rep. PHIL ROE, Tennessee Sen. JOE MANCHIN III, West
Sen. ROB PORTMAN, Ohio Virginia
Rep. VERN BUCHANAN, Florida Rep. BOBBY SCOTT, Virginia
Sen. MIKE CRAPO, Idaho Sen. HEIDI HEITKAMP, North Dakota
Rep. DAVID SCHWEIKERT, Arizona Rep. DONALD NORCROSS, New Jersey
Sen. TINA SMITH, Minnesota
Rep. DEBBIE DINGELL, Michigan
(ii)
C O N T E N T S
----------
OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, co-chairman,
Joint Select Committee on Solvency of Multiemployer Pension
Plans.......................................................... 1
Brown, Hon. Sherrod, a U.S. Senator from Ohio, co-chairman, Joint
Select Committee on Solvency of Multiemployer Pension Plans.... 2
CONGRESSIONAL WITNESSES
Johnson, Hon. Ron, a U.S. Senator from Wisconsin................. 5
Baldwin, Hon. Tammy, a U.S. Senator from Wisconsin............... 6
WITNESSES
Naughton, James P., assistant professor, Kellogg School of
Management, Northwestern University, Chicago, IL............... 7
Rauh, Joshua D., Ph.D., senior fellow and director of research,
Hoover Institution, and Ormond Family professor of finance,
Stanford University, Stanford, CA.............................. 9
Stribling, Kenneth, retired teamster, Milwaukee, WI.............. 11
Lynch, Timothy P., senior director, Government Relations Practice
Group, Morgan, Lewis, and Bockius LLP, Annapolis, MD........... 13
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baldwin, Hon. Tammy:
Testimony.................................................... 6
Brown, Hon. Sherrod:
Opening statement............................................ 2
Prepared statement........................................... 39
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 40
Johnson, Hon. Ron:
Testimony.................................................... 5
Lynch, Timothy P.:
Testimony.................................................... 13
Prepared statement........................................... 41
Manchin, Hon. Joe, III:
Letter from the United Mine Workers of America to Senators
Hatch and Brown, July 24 2018.............................. 44
Naughton, James P.:
Testimony.................................................... 7
Prepared statement........................................... 46
Rauh, Joshua D., Ph.D.:
Testimony.................................................... 9
Prepared statement........................................... 50
Responses to questions from committee members................ 73
Stribling, Kenneth:
Testimony.................................................... 11
Prepared statement........................................... 79
Communications
Bozeman, Robert.................................................. 81
Hiler, Lloyd I................................................... 81
Wroblewski, Leon S., Jr.......................................... 83
HOW THE MULTIEMPLOYER PENSION
SYSTEM AFFECTS STAKEHOLDERS
----------
WEDNESDAY, JULY 25, 2018
U.S. Congress,
Joint Select Committee on Solvency of
Multiemployer Pension Plans,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:10
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (co-chairman of the committee) presiding.
Present: Senator Brown, Senator Portman, Representative
Buchanan, Senator Crapo, Representative Schweikert,
Representative Neal, Senator Manchin, Representative Scott,
Senator Heitkamp, Representative Norcross, Senator Smith, and
Representative Dingell.
Also present: Republican staff: Chris Allen, Senior Advisor
for Benefits and Exempt Organizations for Co-Chairman Hatch.
Democratic staff: Gideon Bragin, Senior Policy Advisor for Co-
Chairman Brown; Julie Cameron, PBGC Detailee; and Constance
Markakis, PBGC Detailee.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S.
SENATOR FROM UTAH, CO-CHAIRMAN, JOINT SELECT
COMMITTEE ON SOLVENCY OF MULTIEMPLOYER PENSION PLANS
Co-Chairman Hatch. Good morning and welcome to the fifth
hearing of the Joint Select Committee on Solvency of
Multiemployer Pension Plans.
The committee has taken a rigorous approach to the issues
before it, examining in public hearings the complex range of
problems that have led to the dire financial condition of a
significant number of multiemployer pension plans, as well as
of the Pension Benefit Guaranty Corporation, or what we call
the PBGC.
According to the PBGC, here is where we stand with regard
to funding. For 2015, the plans are underfunded by a total of
638 billion--with a ``b''--dollars. Almost 75 percent of
multiemployer plan participants are in plans that are less than
50-percent funded. More than 95 percent are in plans that are
less than 60-percent funded. But if you look at them on an
actuarial basis, using the plans' proclaimed discount rates,
they are 80-percent funded, and only have a $120-billion
shortfall.
The difference between these numbers should keep us up at
night. Everyone knows the plans are in dire straits, but by
using unrealistic assumptions, the true extent of the problem
is hidden until it is too late.
Indeed, these numbers have kept this committee properly
busy. The committee and its staff have held dozens of meetings
with stakeholders, and we are continuously bringing in experts
to brief our team. This has been an intensive, time-consuming
but worthwhile exercise. And these briefings and discussions
will continue, because I believe it is important that the
committee leave no stone unturned in discussing how we may
address the conditions of the multiemployer plans.
In addition to the great deal of work that has gone into
understanding the system and its challenges, the committee
staff has started to consider a range of policy ideas to
address the challenges faced by the multiemployer system. They
have started to crunch numbers on these ideas, reviewing them,
and looking at the complex interactions of the legal
requirements of the current system and the proposals for
change. This is all complicated stuff, somewhat like playing
three-dimensional chess.
A lot of work still needs to be put into this process, but
at this point, the committee is not taking anything off the
table, nor necessarily putting anything on the table for
consideration either. But it is necessary and prudent to begin
conducting in-depth due diligence on these ideas.
During this morning's hearing, we continue to work on
understanding the current system, by hearing more from
stakeholders in the system. We have brought in four witnesses
today to help us. One is a retiree in an at-risk program, who
will share his perspective as a participant.
We have also brought in two respected academics and a
practitioner with years of experience in the system, who will
review for us some fundamentals of these plans and share their
views on what does and does not work. Their perspective is
important, because clearly the system is, in certain aspects,
flawed.
Our witnesses today will help us delve into some key
questions. What is at stake here for retirees? What is the
appropriate measurement of plan funding? Are the plans
generally healthy or not? What major structural reforms are
needed? And one issue in which I am most interested, are
Federal taxpayers responsible under current law for funding any
PBGC shortfalls?
Let me now turn to Senator Brown, whom I am very
appreciative of, for his opening statement.
[The prepared statement of Co-Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. SHERROD BROWN, A U.S. SENATOR FROM
OHIO, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Co-Chairman Brown. Thank you, Senator Hatch.
Mr. Chairman, I appreciate your continued work on this
committee. I appreciate the relationship we have built over the
years, first on the HELP Committee, then on the Finance
Committee, and the work that we are doing jointly in this.
And we all know how important it is that we succeed.
I want to thank Senator Johnson and Senator Baldwin for
joining us. They will introduce one of our witnesses, Kenny
Stribling, who sits at the table, whom Tammy introduced me to
one day in the hallway. And we have seen Mr. Stribling, as we
have seen Rita Lewis and so many others, walking the halls, and
mine workers walking the halls of Congress, fighting for
themselves, but especially fighting for their brothers and
sisters in the trade union movement.
I want to thank members of the committee, a number of you
who joined Senator Portman and me 2 weeks ago in Ohio for our
field hearing. Mike Walden, who is sitting behind Tammy, was
one of our witnesses at that hearing.
It was particularly important for us to hear the
perspectives of the workers and retirees and small-business
owners who have the most to lose if Congress does not do its
job.
Roberta Dell works at Spangler Candy Company in Bryan, OH.
She put it pretty succinctly. She said if nothing is done, a
lot of us will go belly up; that is the bottom line.
We know the same could be true for small businesses. Bill
Martin, the president of Spangler Candy in northwest Ohio,
explained, quote, ``In Central States, the vast majority of the
1,300 contributing employers are small businesses like us. This
issue hinders the success and growth of our businesses that
already struggle to be competitive.''
These businesses and their employees did everything right.
They contributed to these pensions, in many cases over decades
and decades. They are the ones whose lives and livelihoods will
be devastated if Congress does not do its job.
When I think about the responsibility the 16 of us have, I
think about the words of Larry Ward at that hearing at the
Statehouse in Columbus. He said, ``I do not understand how it
is that Congress would even consider asking us to take a cut to
my pension or see it go away entirely when it had no problem
sending billions to the Wall Street crooks who caused this
problem in the first place. They used that to pay themselves
bonuses; we use our pensions to pay for medicine and food and
heat. There is something wrong with this picture,'' he said.
If we do not find a way to compromise and come together in
a bipartisan solution, there will be something very wrong with
this picture.
I think we are going to be successful. I saw a lot of
opportunity for bipartisan cooperation at that hearing. Senator
Portman and I talked about how we are putting aside talking
points, listening to all ideas, working in good faith, not wed
to only one idea, but looking at ways to solve this. I believe
it is not just true of Rob and me. I know of conversations that
pretty much every one of you has had with other members of the
committee irrespective of party.
The staffs of all 16 members have met for more than 30
hours, as Chairman Hatch said, of briefings by stakeholders and
experts. We have met six times, we have held five public
hearings. We know this is complicated. We know it is not easy.
It is really three related issues. First and most
importantly, we all understand the threat to participants and
businesses in multiemployer plans that are currently on the
path to insolvency. Current law does not contain a remedy for
the largest of these plans.
Second, the looming failure of these plans means the
imminent failure of the PBGC. I was briefed yesterday by seven
or eight PBGC or PBGC-affiliated individuals, loosely working
with Treasury or Labor or this committee on all that this means
with the potential collapse of PBGC on the multiemployer side.
PBGC and the multiemployer system made a devil's bargain
years ago, trading vastly inadequate premiums for a vastly
inadequate benefits guarantee. Now, that bargain threatens to
bring down the entire multiemployer system.
We have heard over and over in this committee about the
$67-billion deficit of PBGC. What that means is, the moment one
of these large plans fails, it brings down not just that plan,
but the entire multiemployer system.
Third, finally, these impending crises mean that it is not
enough just to fix the crisis today for these plans. We cannot
put a Band-Aid over this; we cannot just leave the problems of
the underlying system to fester and erupt into another crisis 5
years or 10 years down the road.
We need prospective changes to make sure we never find
ourselves in this situation again. That is the jurisdiction of
this committee.
These are the three issues we have a mandate to solve for
the workers like Roberta and the businesses like Spangler Candy
and the retirees like Larry.
Failing to address all three of these issues together would
be abandoning the responsibility we have to our constituents
and the reason all 16 of us wanted to serve on this committee.
Chairman Hatch and I met last week. We are both committed
to a solution. We must begin bipartisan meetings with all the
members of the committee soon. We are aware of the challenges
that lie ahead, but I believe we are going to get there. Too
much is at stake for us to retreat back into partisan corners.
Mr. Chairman, thank you.
Co-Chairman Hatch. Well, thank you, Senator.
[The prepared statement of Co-Chairman Brown appears in the
appendix.]
Co-Chairman Hatch. I want to thank Senators Baldwin and
Johnson for being here with us. We appreciate them and their
efforts.
Our other witnesses this morning are, first, Mr. James
Naughton, who is an assistant professor in the Accounting
Information and Management Department at the Kellogg School of
Management, Northwestern University.
Mr. Naughton's research examines the economic consequences
of financial reporting practices and how regulatory and
technological changes shape a firm's information environment.
He has a particular focus on issues related to employee
benefits and pensions.
Mr. Naughton received his doctorate in business
administration from the Harvard Business School, his J.D. from
Harvard Law School, and his B.S. from Worcester Polytechnic
Institute, so he has had quite a good academic background.
Prior to graduate school, he was a credentialed actuary at
Hewitt Associates, where he worked on the design and
administration of employee benefit plans and executive
compensation agreements.
Next we have Dr. Joshua Rauh, who is a professor of finance
at the Stanford Graduate School of Business and a director of
research at the Hoover Institution.
Dr. Rauh has conducted extensive research on the financial
structure of pension funds and their sponsors and the
measurement of public-sector pension liabilities. He
specializes in empirical studies of corporate investment and
financial structure.
Dr. Rauh is a senior fellow at the Stanford Institute for
Economic Policy Research, SIEPR, and a research associate in
corporate financing, public economics, and aging at the
National Bureau of Economic Research.
He received his doctorate in economics from the
Massachusetts Institute of Technology and has a B.A. in
economics from Yale University.
We are also joined by Timothy Lynch, a senior director in
the Government Relations Practice Group of Morgan, Lewis, and
Bockius.
Mr. Lynch monitors legislative and political trends and
developments and specializes in government relations and public
policy issues. He has 25 years of management experience in
corporate and trade association government affairs.
Before joining Morgan Lewis, Mr. Lynch was senior executive
and chief lobbyist at the American Trucking Association, where
he directed and managed the association's legislative affairs
operations on pensions, labor and employee benefits, taxes, and
a range of other issues.
Mr. Lynch also served as president and CEO of the Motor
Freight Carriers Association.
Mr. Lynch received his M.B.A. and B.A. degrees from the
University of Maryland.
Well, we welcome you all to the committee.
Co-Chairman Brown. And if I could interrupt for a moment,
Senator Johnson and Senator Baldwin will introduce Mr.
Stribling.
Co-Chairman Hatch. That would be fine.
Co-Chairman Brown. Senator Johnson?
Co-Chairman Hatch. Okay. Senator Johnson?
STATEMENT OF HON. RON JOHNSON,
A U.S. SENATOR FROM WISCONSIN
Senator Johnson. Thank you, Mr. Chairman.
Co-Chairman Hatch, Co-Chairman Brown, and members of the
committee, thank you for inviting me here today to introduce a
fellow Wisconsinite who is here testifying before you today.
It is my honor and privilege to introduce Mr. Kenneth
Stribling. Kenny is a retired teamster who was born in
Milwaukee and raised in Menomonee Falls, WI.
After graduating from Sussex Hamilton High School, Kenny
began working as a teamster in 1975. Over the next 35 years,
Kenny drove trucks for multiple companies in Wisconsin before
retiring in 2010. But of course, Kenny's really not retired.
He's actually a RINO, retired in name only, because he
currently works part-time as a shuttle driver when he's not
advocating for a solution to this challenging problem.
Kenny is a dedicated family man and a member of his
community. He and his wife Beverly have five children and seven
grandchildren, with two more on the way. In his free moments
away from work and family time, Kenny has mentored young people
in his neighborhood.
I first met Kenny in 2015 when he came to my office with
his concerns about the troubled multiemployer pension system.
Kenny has been a leader on this issue since 2015. He co-chairs
the Wisconsin Committee to Protect Pensions and received an
award for his efforts last November.
As co-chair, Kenny has worked tirelessly on behalf of his
fellow workers and retirees, commuting to Washington, DC, often
on a weekly basis, with a group of dedicated advocates for
their cause. We have one of those, one of his buddies, Bernie
Anderson, here behind me. And Bob Amsden was not able to
attend. But I know they commute weekly, because we are often on
the same flight back to Milwaukee.
Before I conclude, I want to emphasize the importance of
this committee. I have met with and heard from many of my
constituents who are deeply concerned about the dismal state of
the multiemployer pension system. Like Kenny, they have
traveled around Wisconsin, to Washington, DC, and recently to
Ohio for hearings and meetings to make their concerns known.
They are asking for a transparent process and a fair
outcome. I sincerely hope this committee can work effectively
together to achieve those goals.
Thank you.
Co-Chairman Hatch. Thank you, Senator.
Senator Baldwin, we will take any statement you would care
to make at this point.
STATEMENT OF HON. TAMMY BALDWIN,
A U.S. SENATOR FROM WISCONSIN
Senator Baldwin. Thank you, Co-Chairman Hatch, Co-Chairman
Brown, and members of the committee.
I am also honored to introduce my friend Kenny Stribling,
retired Teamster from Menomonee Falls, WI.
In 2015, Kenny received a letter. After working for more
than 30 years in the trucking industry, the pension he earned
and his family depends on could be cut by 55 percent.
After getting a letter like that, Kenny and other Wisconsin
retirees have made countless trips to Washington to make sure
that families like theirs receive the full pensions that they
have worked for and depend on.
Last November, I was proud to stand with Kenny and other
Wisconsin retirees who have made countless trips to introduce
the Butch Lewis Act. I sincerely hope that this committee
considers that legislation in your work to produce a solution
to the multiemployer pension crisis that our country is facing.
After 3 years, I am guessing that there are not too many
members of Congress whom Kenny and the Wisconsin retirees have
not met with. Who knows? But I will tell you that, as Kenny
meets with members of Congress, he has held his personal story
a little closer. And I am grateful to Kenny today for sharing
his story with this committee.
This committee has been charged with a critical task. This
is a complicated issue with high stakes, but not acting is not
an option, not for Kenny or the more than 25,000 workers and
retirees in my State with Central States Pension.
I thank you for your time this morning. And I especially
want to thank the retirees who are in this room who have made
many trips to Washington for this cause.
Co-Chairman Hatch. Well, thank you so much. We appreciate
both of you Senators taking time off to be with us. We know
that you have other duties to perform, so you can leave at any
time and we will fully understand.
Mr. Naughton, we will turn to you; you will be the first to
testify.
STATEMENT OF JAMES P. NAUGHTON, ASSISTANT PROFESSOR, KELLOGG
SCHOOL OF MANAGEMENT, NORTHWESTERN UNIVERSITY, CHICAGO, IL
Mr. Naughton. Thank you. And thank you to all the members
of the committee for this opportunity. I sincerely hope that my
testimony today will help move us towards a solution to this
crisis.
To begin, I am going to state what I think is a fairly
obvious fact. If multiemployer plans collected actuarially
sound contributions and purchased annuity contracts, there
would not be a crisis. Participants would be receiving or would
be scheduled to receive the annuities that were purchased on
their behalf. Instead, multiemployer plans chose to collect
contributions that were inadequate, and they made investment
decisions that were risky.
The reason trustees pursued such a strategy is pretty
simple. Assuming that the overall cost per employee that an
employer is willing to pay is fixed, a lower pension
contribution means that employees might be able to gain higher
non-pension compensation through the collective bargaining
process.
So, one thing that is important here is that these
inadequate contributions and risky investments were a choice.
Under the current rules, trustees could just as easily collect
reasonable, adequate contributions and follow more conservative
investment strategies.
So a number of rules were developed in response to the
freedom that trustees had with regard to contributions and
investments. So most notably, employers who wish to exit a plan
have to make additional contributions called withdrawal
liability, and all employers agree to be jointly and severally
liable for all plan promises, including those for so-called
orphaned participants.
You know these rules, just to sort of reiterate my earlier
point, are not necessary if actuarially sound contributions are
collected and invested responsibly.
The rules further require that the PBGC, through a separate
multiemployer system, step in if employers cannot cover
underfunded pension promises and that participants have
benefits curtailed further if the PBGC does not have the
resources in the multiemployer system to cover unfunded
benefits to the normal guaranteed amounts.
So these rules were developed specifically to address the
discretion that the trustees had. And these rules really have
not changed in more than 35 years.
Unfortunately, these rules, which were intended to
safeguard the system, I believe have instead contributed to its
decline. So financially healthy employers avoid multiemployer
plans, because they are concerned with the possibility of
withdrawal liability or the prospect that they have to fund
benefits for orphaned participants.
I personally witnessed this during my career as a
consulting actuary. Even when the proposed cost of the
multiemployer plan was only a fraction of the cost of a single-
employer plan, employers typically stayed away from the
multiemployer plan. And this was something that was happening
20 years ago; it is not something that just started happening
recently.
In addition, because withdrawal liability calculations do
not really reflect the actual cost of settling obligations,
there was a lot of opportunistic behavior where employers would
leave these programs when it was financially advantageous to do
so, leaving behind the remaining employers to pick up the
shortfall.
So the inevitable consequence of inadequate contributions,
risky investment choices, and the withdrawal liability
provisions is the crisis that we are currently facing.
So 10 years ago when this crisis first manifested, the
underfunding on the PBGC basis was about $200 billion. More
recently, as Senator Hatch noted in his opening comments, the
system is $638 billion underfunded on the same basis. So you
can see that there has been a significant deterioration over
the past 10 years, and this has occurred because the plans have
continued to pay pensions and make promises without collecting
the necessary contributions.
You know, my testimony really focuses on providing guidance
for prospective changes. And I have three specific
recommendations.
First, the multiemployer plans have to have accurate
measurements of liabilities and strong funding rules that
eliminate the trustee discretion. That is the source of most of
the problems here.
When you look at what is done for single-employer plans, I
would argue that you need to be more conservative with
multiemployer plans, because there is an interconnectedness
with multiemployer plans that make, them much more risky.
Second, the PBGC should have broad discretion to assume
control of plans and implement necessary changes. And there
should also be triggering events so that they can step in early
to prevent plans from becoming more poorly funded over time.
And third, I strongly recommend that we would amend the
withdrawal liability provisions. So the goal of those
provisions was to essentially collect the value of the benefits
that have been promised. And so I would recommend doing
something along those lines, similar to what is done for
single-employer plans that plan to terminate: simply require
that the exiting company pay for the purchase of annuities from
a highly rated insurance company.
So in closing, I want to highlight that my suggestions
focus on improving rather than replacing the current system. A
well-run defined benefit plan is far more effective at assuring
retirement security for the types of workers who participate in
these plans.
I also want to highlight the importance of urgent action.
Delays will inevitably lead to larger deficits and choices that
will become more difficult.
Thank you for this opportunity, and I look forward to
answering any questions you may have.
Co-Chairman Hatch. Thank you.
[The prepared statement of Mr. Naughton appears in the
appendix.]
Co-Chairman Hatch. Dr. Rauh?
STATEMENT OF JOSHUA D. RAUH, Ph.D., SENIOR FELLOW AND DIRECTOR
OF RESEARCH, HOOVER INSTITUTION, AND ORMOND FAMILY PROFESSOR OF
FINANCE, STANFORD UNIVERSITY, STANFORD, CA
Dr. Rauh. Thank you, Chairman Hatch, Chairman Brown, and
members of the committee.
Multiemployer pension plans are private economy
arrangements between firms and labor unions. Employees earn
benefits through their years of work, employers make
contributions according to plan rules, and the trustees of the
pension plan have a fiduciary responsibility to steward the
plan in the interests of the beneficiaries.
Something has gone terribly wrong, and I believe much of it
can be traced back to the systematic mismeasurement by plans of
the costs of delivering on pension promises.
If the PBGC is going to guarantee multiemployer pensions,
but trustees are not going to naturally operate in a way that
ensures the solvency of plans, then Congress must impose strong
rules-based requirements that plans measure liabilities
according to sound financial principles and remedy underfunding
swiftly.
Let me illustrate the fundamental measurement problem.
Suppose a plan owes an employee an amount of money in 10 years,
say $50,000, and suppose the system has just $25,000 in assets
today. What actuarial funding ratio will the typical plan
report? A funding ratio of just slightly over 100 percent.
You see, if a participating employer contributed just
$25,000 towards this promise, that employer could, in many
cases, withdraw from the multiemployer plan without further
obligation and without the plan having any recourse to that
employer if the investment returns do not meet their target.
Basing decisions on expected returns without knowing risk
is imprudent. And the fact that the stock market has earned
high historical returns does not justify it. Past returns are
not a guarantee of future performance, and there is no sense in
which just waiting long enough will bail you out.
This logic also shows that a loan program is not what is
needed. The loan program proposals seem to be based on the idea
that if the plans can get a low-interest loan from the
government and then invest the proceeds in risky assets and
hopefully earn a high return, then the loan can be repaid in
full and somehow free money has been created. A loan program
would simply be doubling down on these kinds of investment
problems.
It should have been clear long ago to trustees that minimum
funding requirements were insufficient. Trustees had years to
take measures other than trying to force participants to take
benefit cuts.
Trustees have always had the right to gradually require
greater contributions from participating employers, to make
more reasonable assumptions about expected returns, and to make
more realistic benefit promises on a prospective basis.
Despite funding improvement plans, we have not seen much
improvement. Plan trustees have done too little until it was
too late.
So when is a multiemployer plan making sufficient
contributions? Well, one standard would be treading water,
meaning the unfunded liability is not getting larger. Another
would be actually paying your normal costs plus paying down
unfunded liabilities.
And under the actuarial measurement standard used by
multiemployer plans, most of them are contributing at least
enough to pay down this unfunded liability. But I calculate
that under much more appropriate solvency standards based on
the Treasury yield curve, that the picture looks quite
different. Only 1.4 percent of plans are contributing the costs
of new benefits plus a 30-year amortization of unfunded
liabilities, and only 17 percent are treading water.
I think a very good comparison point is the single-employer
defined benefit pension system in the U.S., which is not in
great shape, but it is in much better shape than either the
multiemployer space or the public plan space. And that is
largely a function of the contribution requirements that have
existed historically.
The legislation surrounding the single-employer system has
adhered to a key principle: if a plan cannot or does not make
required contributions, the sponsor must face an excise tax or
terminate the plan. Plans should not get to just promise more
benefits with a PBGC-enhanced, potentially, taxpayer backstop
when they are not prudently funding their existing promises.
And as you know, Congress abandoned that basic principle
for critical red-zone plans in 2006, presumably because it felt
that those funding rules were too burdensome. But this just
kicks the can down the road.
So my written testimony shows that to meet a rigorous
funding standard, contributions would have to rise very
substantially. Nonetheless, over time, we must approach this
standard for all plans. And once phased in, all plans that do
not follow funding rules should be subject to an excise tax.
And ultimately, if the plan does not meet required
contributions, there should be an automatic termination.
Furthermore, to address the incentive that this could
provide for more employers to withdraw, Congress should
immediately act to change the withdrawal liability calculation
to also reflect the true value of unfunded liabilities.
I would just like to end by pointing out that Congress
should consider carefully the impact on incentives that a loan
program or bailout of the multiemployer system would have. And
by the way, a loan program is a form of bailout.
And by incentives, I mean not only those of multiemployer
plans that take risk, but also the moral hazard that bailouts
might create for a host of other agents in the economy who
might come before Congress to ask for assistance, either
because they lost money on their own investments or generally
because private parties made flawed arrangements or trustees
did not perform their fiduciary duties.
And I think first and foremost among them are the State and
local pension systems out there that, on their own accounts,
using discount rates of 7 percent, have $1.7 trillion of
unfunded liabilities, but on a solvency standard, they are
actually $4 trillion underfunded. This is the same set of
issues that we are seeing in the multiemployer system.
And the stronger the belief by the State and local
governments that the Federal Government will bail them out, the
less discipline they are going to choose to impose upon
themselves to address these problems.
Thank you very much.
Co-Chairman Hatch. Thank you.
[The prepared statement of Dr. Rauh appears in the
appendix.]
Co-Chairman Hatch. Mr. Stribling?
STATEMENT OF KENNETH STRIBLING,
RETIRED TEAMSTER, MILWAUKEE, WI
Mr. Stribling. First of all, I would like to thank you,
Senator Hatch, Senator Brown, Senator Portman, and other
members of the Joint Select Committee, for inviting me here
today and being so supportive.
I would also like to thank my two Senators from the great
State of Wisconsin, Senator Johnson and Senator Baldwin, for
introducing me. I really appreciate their kind words and their
support. They recognize as you do that fixing the multiemployer
pension plans is a bipartisan issue.
Let me tell you my story.
I worked for 30 years for four different trucking companies
that paid into Central States Pension Fund. I retired from USF
Holland in 2010. My benefits moved with me because my employer
paid into the same plan, assuring me that I would have a secure
pension for life.
I need this pension income more than ever. I am married,
and I have five adult children, seven grandchildren, and two
more on the way. I love my family dearly. And thanks to my
pension, I have not been a burden to my family, but instead, my
wife and I have been able to help out our children, our
grandchildren with child care and support when emergencies
happen. And you know they happen.
I will never forget the day I received my letter from
Central States Pension Fund with the news that they were
applying to the Treasury Department to reduce my monthly
benefits by 55 percent.
Life changed that day for me.
You have no idea what it is like to be retired on fixed
income and suddenly be told your monthly check will be cut in
half. I was devastated and so was my family.
After receiving this shocking news, I felt I needed to do
something. I joined with other retirees to stop the cuts and
find a solution. We have been at it ever since.
I felt compelled to become involved in this movement to
find a solution for the pension crisis. Not only would this
solution radically change my retirement years, but also affect
countless households across the country.
This involvement has also changed our lives. I have been
through contract negotiations where we have sacrificed wage
increases to have better health care and pension benefits. I
believe we have done our part in shared sacrifice.
In addition to giving up wages, we have often endured tough
work conditions, long shifts, cold nights, unheated docks, and
manual labor.
And I will never forget November 17, 2017, the day my wife
learned she was terminally ill with pancreatic cancer, stage
four that had spread to her liver. My wife is a fighter and
plans to outlive her current diagnosis, bless her heart. She
also is retired after nearly 30 years as a teacher.
Fortunately, we have a close, supportive family. They put their
careers on hold, moved back to Milwaukee, spent time with her
and helped me care for her, along with her sister, who also
retired and has moved back home and been very supportive.
With the help of all our children and extended family, I
have been able to continue to remain active in this movement,
which includes a lot of travel and meetings.
My involvement has taken much of my time and energy. And at
times, I thought I could not continue. But my wife--again,
bless her heart--made me promise to stay committed until a
solution was found.
I live in a very uncertain future. My wife is dying; I know
that. We have mounting health bills, medical bills, and the
stress is impacting my health. I was recently diagnosed with an
enlarged heart. This is due to high blood pressure and stress.
My heart is working overtime just to keep up.
My wife is worried that I may end up like brother Butch
Lewis, one of the cofounders of this movement, who died,
inspiring the legislation named after him.
Let me be clear: my story is unique, but I am, like many
other retirees, impacted by the possibility of benefit
reductions. Life did not stop when our letters arrived.
We also endure life's storms: death, illness, physical and
mental health challenges. Now we also have the burden of
traveling through our golden years with an uncertain financial
future, a future that has been promised to us throughout our
working years.
I am supporting the Butch Lewis Act, which seems to be the
right solution. I am asking you to think, pray, and do what is
right for thousands of faithful, hardworking, active retirees
and many who have served our country in the military.
And also, my wife would have liked to have been here, but
she only has a few good days between chemo cycles. However, she
is my rock. She is my full supporter, supports me and my work.
And I want you to know how crucial your decision will be for
millions of Americans. Her heart is with you and always will be
with me.
In closing, I want to thank the Joint Select Committee
members in agreeing to find a solution. And remember, this is
not a partisan issue; this is an issue about fairness, keeping
promises to working Americans who did everything right and are
simply asking you to preserve what is due us now.
Thank you. I would be happy to answer any questions you may
have.
Co-Chairman Hatch. Well, thank you for coming here today.
Your testimony is very compelling, and we appreciate you taking
time to be with us.
[The prepared statement of Mr. Stribling appears in the
appendix.]
Co-Chairman Hatch. Mr. Lynch, you are the last one on the
panel.
STATEMENT OF TIMOTHY P. LYNCH, SENIOR DIRECTOR, GOVERNMENT
RELATIONS PRACTICE GROUP, MORGAN, LEWIS, AND BOCKIUS LLP,
ANNAPOLIS, MD
Mr. Lynch. Thank you. Good morning.
I would like to begin by thanking committee co-chairs
Senators Hatch and Brown and all the members of the committee
for the opportunity to participate in today's hearing.
You all volunteered, or at least I hope you all
volunteered, for this important assignment. And I applaud your
willingness to tackle one of the most important issues of the
day: retirement security.
My testimony and any answers I provide singularly reflect
my own views and not the view of Morgan Lewis or any of its
individual clients.
My name is Tim Lynch, and I am a senior director of Morgan
Lewis's Government Relations Group. Of more relevance to
today's hearing, I am a member of our Multiemployer Pension
Working Group, a group that includes attorneys who have
experience counseling both contributing employers and
multiemployer pension plans in a wide range of industries,
including trucking, construction, bakery, maritime, and
supermarkets, both wholesale and retail.
We have assisted a number of critical and declining
multiemployer plans in navigating the MPRA process, including
Road Carriers Local 707 Fund and the New York State Teamsters
Conference Pensions and Retirement Fund, the latter being the
largest fund receiving approval from the Treasury and PBGC.
It is because of that depth of experience we were asked by
the U.S. Chamber of Commerce to assist in the preparation of
two recent reports, ``The Multiemployer Pension Crisis: The
History'' and ``Businesses and Jobs at Risk.''
My background is primarily on transportation and trucking.
I have been involved in that industry since the enactment of
the Motor Carrier Act of 1980, the act that deregulated the
trucking industry.
The Motor Carrier Act transformed the entire trucking
industry. The 1980 MPPAA legislation dramatically impacted the
unionized portion of the industry.
Prior to 1980, 94 of the 100 largest freight-hauling
companies in the United States had a collective bargaining
agreement with the Teamsters under the National Master Freight
Agreement. By the mid-1990s, that number was reduced to six.
For certain, some of that reduction was due to
consolidation, but the overwhelming majority was as a result of
bankruptcy. And since the 1980s, not a single mid- to large-
size trucking company has entered the market with a collective
bargaining agreement with the Teamsters to replace all of those
other trucking companies that have exited the market; in other
words, no new contributing employers to cover an ever-
increasing number of beneficiaries.
Fast forward to 2014 and the Multiemployer Pension Reform
Act. Congress gave plan trustees some powerful tools to address
the funding crisis: the ability to adjust benefits, the ability
to seek a partitioning of beneficiaries, assistance for
facilitation of plan mergers, and financial support.
MPRA was signed into law in December 2014, and plan
trustees in critical and declining status immediately had to
begin planning for how to utilize the new tools in the toolbox
to address the funding crisis.
The Treasury website for tracking applications for benefit
suspensions identifies the Central States plan as being the
first MPRA application, filed on September 25, 2015.
Technically true; however, the first application filed was by
Road Carriers 707 on December 14, 2014, the date of enactment
of MPRA.
The filing was in the form of a letter--I believe it was
three sentences long--intended to dramatize the need for
Treasury and PBGC to move expeditiously on the process, because
time was not on the side of the Local 707 fund.
The fund formally filed on March 15th and eventually was
denied, the principal reason being the fund could not
demonstrate that the proposed actions would allow the fund to
avoid insolvency. Unfortunately, the Local 707 fund went
insolvent in February 2017.
Consider this: the very same week in December of 2016 that
the notice went out to the plan participants that the fund was
going to be terminated--or not terminated, excuse me, was
insolvent in February--the fund was also obligated to send out
the 13th check because they were not in a position to suspend
any of the benefit.
The New York State Teamsters Conference Pension and
Retirement Fund has a better ending, but the process to obtain
approval is nonetheless instructive. The New York fund withdrew
its initial application and refiled. Among the issues that the
New York fund had to deal with was a mortality table, whether
it was appropriate for the calculation of benefit
modifications.
The correspondence was time-consuming and potentially
pushed the fund into a more precarious financial position.
These funds had unique circumstances, but one constant:
time. A delay or, worse, a denial simply puts more plans and
the benefits of plan beneficiaries at risk.
That was the history, but it holds true today. Action is
necessary sooner rather than later.
The current framework for evaluating the financial status
of multiemployer pension plans utilizes five categories. As the
committee begins to consider a course of action, it might be
useful to contemplate what it hopes to accomplish with each of
the zones and the plans that are in them.
The temptation for green-zone plans, undoubtedly, is simply
to leave them alone, and that may very well be the prudent
course of action. But you should consider, are there changes
that could be made to help ensure that those plans remain
healthy?
For yellow and orange zone plans, I would suggest the goal
should be to provide as many tools as possible and as quickly
as possible to the plan trustees. This could include the
additional tool of hybrid plans as outlined in the GROW Act
legislation.
Conversely, the committee should be cautious about adopting
procedural changes that, while well-intentioned, could have the
adverse impact of pushing these plans into the red zone.
For the red-zone plans, there is no avoiding the reality
that they need a large infusion of cash to remain solvent.
Central States achieved a 12.74-percent rate of return in
2017, but it does not take a mathematician to calculate the
benefit of a 12-percent return on $15 billion in assets or $13
billion or $11 billion or less.
Finally, in my view, the tools given to the plan trustees
under MPRA have been underutilized. Only five benefit
suspension applications have been approved, only one
application for petitioning has been approved, and I am aware
of no efforts to fully utilize the merger language.
Thank you for the opportunity to testify, and I look
forward to answering any questions you may have.
Co-Chairman Hatch. Well, thanks to each of you. You have
been very helpful to us here today.
[The prepared statement of Mr. Lynch appears in the
appendix.]
Co-Chairman Hatch. And it is mindboggling what approach we
are going to need to take. But to the extent that you could
help us, you have done a pretty good job.
Let me ask you this, Mr. Naughton. I want to thank you for
your testimony. You established a compelling case for making
systematic improvements to the multiemployer system.
Now, one of the key points that you raise is that trustees
and managers of these plans have significant discretion in
setting the inputs into the plans and how they measure and
manage contributions and liabilities in the plans.
You suggest that trustees have chosen to take unique risks
in operating the plans. Given that plan trustees are drawn
equally from management and labor, what incentives can we look
to in order to remove the management risk in the system?
If you could help us to understand that, I would appreciate
it.
Mr. Naughton. When you look at sort of the starting point
for multiemployer plans, it was something that multiemployer
plans themselves were actively involved in. And so the rules
that were eventually developed, the idea, you know, pushed by
the multiemployer plans was that they were low-risk and so they
should have discretion with the funding rules, they should have
discretion with the investments, they should pay a very low and
inadequate premium to the PBGC, and it really was not necessary
to have much in the way of guarantees.
And so when you look at sort of the natural progression of
what happened, the trustees themselves determined the
contribution amounts.
You know, Senator Hatch is absolutely right. Typically, the
trustee board is made up of a combination of employers and
union officials. My personal experience was that the union
officials tended to dominate those proceedings. They were the
majority, you know, half the board. And then the employer
officials that they typically had were usually people who were
quite friendly to the union position.
And so in the end, you know, what happened was the trustees
sort of got themselves in a cycle where they wanted to promise
generous benefits, but they did not really want to pay for
them.
And so the hope that they had was that, listen, if we take
an inadequate contribution, if we invest it sort of in
aggressive securities, maybe we will get a good return, but if
not, we also have the chance that maybe the system will grow,
we will have more participants in the future, and maybe that
will help us.
And in the end, you know that type of logic is somewhat
flawed when you look just 1 or 2 years into the future. If you
look 5 years into the future, it becomes more flawed. And if
you look at this from a sustainability standpoint--so 10 or
more years into the future--it is incredibly problematic.
And what happened in terms of sort of the economic shocks--
you know the specific shocks themselves are not predictable,
but economic shocks are predictable. We know they are going to
happen, we just do not know when they are going to happen. And
so having a system that sort of relies on being able to collect
in the future for past promises is deeply flawed.
So in terms of my testimony, if there is one thing that I
would like to see going forward, it is that you just remove
that discretion from the trustees.
So, going forward, if they are going to promise somebody a
one hundred-dollar annuity, they should collect the cost of a
hundred-dollar annuity, and they should put that money in a
trust and then have that be there for their participant to
collect on.
To have a system where you can make promises and not fund
those promises is really not sustainable in the long term.
Co-Chairman Hatch. Right.
Mr. Naughton. So I truly believe that, you know, these
plans should continue. They provide valuable retirement
security. And we should simply not be in the position where
gentlemen like Mr. Stribling are worried about retirement.
These plans should have been funded. Obviously, we cannot go
back and correct that. But what we can do is make sure, at
least going forward, they are funded appropriately.
Co-Chairman Hatch. Okay. Let me just end with this.
Dr. Rauh, your written testimony documents that 72 percent
of multiemployer plan participants are in plans that are less
than 50-percent funded. But less than 1 percent of single-
employer plan participants are in plans that are less than 50-
percent funded. Now, that is quite an astonishing difference.
What, in your view, explains that difference?
Dr. Rauh. Thank you, Senator Hatch.
Co-Chairman Hatch. Sure.
Dr. Rauh. So the statistic you are citing is that the
multiemployer plans are just very, very poorly funded compared
to the
single-employer plans. Now, I believe that goes back to the
overlay of solvency standards in 1987, in the older 1987 act,
the overlay of solvency standards for funding on top of the
actuarial standards that plans were already using.
Congress recognized at the time that it was not adequate to
leave so much discretion to the plan trustees of single-
employer plans. They did not implement something similar for
multiemployer plans. And I believe that the funding differences
that we are seeing really, you know, between the multiemployer
and single-employer systems are the result of the fact that
there have just been historically much stricter funding
standards for the single-employer program, some funding relief
in the last 5 or 6 years to that single-employer program
notwithstanding.
Co-Chairman Hatch. Okay. Thank you.
Senator Brown?
Co-Chairman Brown. Thank you.
I want to be clear that no provision exists in current law
that can help Central States or the mine workers, period. And
if they fail, the PBGC fails. We know that.
Mr. Lynch, you stated that sooner or later Congress will
have to intervene. I would like to hear your case for sooner.
Why should Congress intervene now as opposed to allowing the
plans to fail and then supplying PBGC with the tens of billions
of dollars it will need to remain solvent?
Mr. Lynch. These plans are very competitive on investment
terms now. You know, the longer the time frame that delays
getting them an infusion of cash so that they can restore those
revenues makes the problem just that much more difficult to
solve.
If I could add one thing, just consider, in 1999, the
Central States fund was virtually 100-percent funded. I
negotiated a labor contract to fund that in 1997 and 1998. In
2002, we had obviously what occurred with the market. And in
2003, we had one of the largest truck companies in the United
States, Consolidated Freightways, close their doors.
No one in 1997 and 1998, when we negotiated that contract,
foresaw either of those two activities.
Co-Chairman Brown. Thank you.
A quick ``yes'' or ``no,'' Mr. Lynch. Would a low-interest,
long-term loan program with strong guardrails to protect
taxpayers be an appropriate way to intervene?
Mr. Lynch. I believe it is the only way that you will save
these red-zone critical and declining plans.
Co-Chairman Brown. Okay. Thank you.
There is no doubt, I think for most--I mean, I cannot speak
for the rest of the committee, but there is no doubt in my mind
that Congress will eventually act to address the problem. The
question is whether we are able to come together this year
before the crisis inflicts devastating damage on workers, on
retirees, on businesses, or whether Congress will put this off
until, well, simply put, lives have been ruined and family
businesses have gone bankrupt.
I want to quote one of our witnesses at the hearing that
Senator Portman and I brought to Ohio, to the Statehouse. David
Gardner, the CEO of Alfred Nickles Bakery in Congressman
Regula's hometown of Navarre, OH, said, ``Because of increasing
pension contributions, our business is in jeopardy. Every day,
we try to figure out ways to cut costs rather than invest in
our business and grow our business.'' It is an over 100-year-
old company.
Is that, Mr. Lynch, indicative of other employers all over
the country that participate in the multiemployer system? And
what happens if Congress fails to act this year? What happens
to them?
Mr. Lynch. I believe the number in Central States is
something like 9 out of 10 of the employers in Central States
have 50 employees or less. They will be devastated, in my view,
if something is not done sooner or later.
As I said in reference to Local 707, they knew they were
going insolvent, they needed help, and every day the clock
ticked on them, it made the problem worse and frankly got to
the point where the PBGC was incapable of even helping them.
Co-Chairman Brown. Okay, that is the employer side.
Mr. Stribling, tell me what happens. Explain the impact if
Congress fails this year to do anything. Tell me about the
impact it would have on retirees like you and active members
who you know are in the workplace today, but planning for the
future with this defined pension benefit.
Mr. Stribling. For me personally, if Congress does not act,
with what is happening in my personal life, the mounting
medical bills, my wife passing away, I am looking at probably
losing my house, going bankrupt, because her medical bills are
just enormous. Her medical bills, her drugs, her
prescriptions--I just barely can keep up right now. And that,
again, is--I am not the only one who is having that problem.
There are many of us who sit out here in this audience who are
facing the same crisis.
So if Congress does not act, I will be knocking on your
door some other way. I will be asking for some kind of public
assistance, because I am going to need it.
Co-Chairman Brown. Thank you.
Mr. Stribling. Thank you.
Co-Chairman Brown. Mr. Stribling, tell me about--I mean, if
you are like Teamsters I know in Ohio, you go to meetings and
you, as a retiree, go to meetings in your Teamster hall in
Milwaukee and you also rub shoulders with active workers,
Teamsters. What are they telling you about this?
Mr. Stribling. Basically the same things, Senators and
Congressmen. It is the same message. It is really hard some
days to have meetings. And my phone rings all day long with
people telling sad stories. It is going to be devastating. I
just cannot make you people understand. Well, anyway, I cannot
make you understand just how serious this really is.
We have our meetings monthly, and it is almost the same
people coming up asking us, what is going to happen? Can I make
a loan? Can I buy a car? Can I buy my home up north? Can I make
home improvements? They are all holding off; nobody wants to
make a major purchase. They are afraid. They are afraid.
Co-Chairman Brown. Thank you.
Mr. Stribling. Thank you.
Co-Chairman Hatch. Okay. Senator Portman?
Senator Portman. Thank you, Mr. Chairman. And thank you for
holding this hearing today.
We did have a good hearing in Columbus, and we got to hear
from workers and retirees and small employers. And for those of
you who were there, you know that. Those of you who could not
come, it was powerful, because you heard from not just retirees
who are seeing up to a 90-percent cut in their benefits if we
do not do something, but also small businesses that were
talking about the necessity of shutting down.
We have about 200 small businesses in Ohio, by the way,
associated with Central States alone. So it is suppressing
wages.
And, Mr. Lynch, I will not even ask you that question
because it is; we will just stipulate that. It is making it
more difficult to hire people at a time when it is tough enough
to hire people. Who wants to come and join up with a company
that has the kind of potential liabilities that these companies
are facing that have stayed in?
And in one case, we heard about a company that is paying to
the plan about 15 grand a year per active participant, and
about half of that is going for those who never worked for the
company, but are orphan liabilities. And that is just an
example of the way the system, I think, is broken.
And you know, Mr. Naughton, Mr. Lynch, Dr. Rauh, you would
agree with that, that the system itself has not worked with
regard to how we deal with withdrawal liability and orphans,
creating a disincentive for companies to stay in, which has,
you know, exacerbated the problem, in addition to the other
issues we talked about, the demographics, what happened to the
market in 2008, 2009.
So it was good to hear you all talk a little about the
future.
Senator Brown talked in his opening statement about needing
to deal with the threat to businesses and beneficiaries,
needing to deal with the PBGC, which is at risk of going under,
which has this broader contagion effect on the economy, but
also on how we put changes in place.
And Representative Schweikert has talked a lot about this
too. How do we ensure that we are not just putting a short-term
fix in place here, but actually solving the problem?
And that is going to require us looking at things like the
discount rate, Dr. Rauh, that you talked about, at least
indirectly, looking at withdrawal liability, how we deal with
orphans, and so on.
Kenny Stribling and I first met in the offices of Speaker
of the House Paul Ryan. And that was in 2016, as I recall.
Mr. Stribling. Something like that, yes.
Senator Portman. And he came in with some other Wisconsin
Teamsters to talk to their Congressman. And it was an important
meeting, because I think that changed some of the dynamics of
this issue in realizing that we are going to have to deal with
this issue one way or the other.
And it is not easy. There are no simple answers. And as I
said at the meeting we had in Columbus, there are lots of
different players here, some of whom are actively involved and
are going to see devastating results, if we do not do
something, to small businesses, the retirees, others--a big
group of taxpayers out there.
And you know, about 98 percent of taxpayers are not
directly impacted as beneficiaries, and yet they are going to
be asked to pick up some of the tab here. And I think we have
to face that. And a lot of them are people I represent, we all
represent, who may have a 401(k) that is underfunded. Almost
half of them do not have a pension or a defined contribution
plan at all. And so, you know, we are all trying to help on the
retirement system in other ways, and we should, but this is not
an easy issue to resolve. We have to acknowledge that at the
outset.
On the other hand, not dealing with it has tremendous
impacts on individuals like Mr. Stribling, but also on the
entire economy, I would argue. Small businesses are going to go
bankrupt and create a contagion effect on other businesses.
Mr. Naughton, you talked a lot about the liabilities. And
you said that the aggregate underfunding has more than tripled
since 2006 when we passed the Pension Protection Act. I was a
conferee on that. No one would have thought at the time, would
they? You know, we thought we had put in place some things that
would help to maintain the multiemployer pension plans and the
single employer plans.
You talked about the issues, including the discount rate.
Let me ask you a question. If the discount rate were changed
for critical and declining status plans like Central States, in
addition to the green zone plans, what would happen to those
that are in critical and declining status? And wouldn't that
risk putting contributing employers out of business altogether
and, therefore, increase the risk to other multiemployer plans?
Mr. Naughton. Thank you, Senator Portman. So I think, you
know, just to back up a little bit, if you look at what is
being promised, it is a very valuable benefit, right? So it is
a promise, an annuity that they are going to collect for the
rest of their life once they hit a certain age. That is a
valuable thing to provide.
And the problem here is that the funds were not set aside
for that. Okay?
If you now all of a sudden step in and say, well, listen,
we need to all of a sudden sort of fund everything, it is
simply not possible based on the resources that employers have.
So if you look at the way the system is set up, it goes
from, you know, the money in the plan. Then to the extent that
is not enough, you hit the employers up. And then to the extent
that is not sufficient, then you hit the PBGC up. And to the
extent they do not have the money, then the participants
themselves have to absorb significant cuts in their benefit. So
that is the way that the system is set up.
And where we are now is, you know, to the extent that we
all of a sudden change the funding requirements, it would be
debilitating to the employers that are currently contributing.
They are already contributing, as you mentioned, significant
amounts, more than perhaps the benefits that their employees
are actually earning. But the system that they agreed to join
is not one where they just fund their own employees.
So back when I was a consulting actuary and we discussed
with employers, okay, you have a union workforce, do you want
to have your own plan or do you want to be part of the
multiemployer plan, it was almost always the case that the
multiemployer plan was less expensive, and sometimes
dramatically so.
Senator Portman. Yes. Let me just interrupt you for a
second. And we appreciate your expert testimony and your
background and experience, but you are talking about what
happened in the past. You are talking about how we got into the
problem, you are talking about the fact that it was sort of a
moral hazard here and companies chose to go into multiemployer
plans because it seemed like they were a better deal for them,
and that is part of the reason we are in the situation we are
in with multiemployers vis-a-vis, as Dr. Rauh said, the single-
employer plans. Multiemployers were not as well-funded.
My question to you is about, what do we do now? You know,
what do we do now? And understanding, as Senator Brown has
said, we have to look forward and say, you know, we have to be
sure the discount rate works, we have to be more conservative,
probably, in our estimates.
But what would you do now for those critical and declining
plans to ensure that they do not go belly up and we do not have
an even larger problem on our hands with regard to the impact
on the broader economy?
Mr. Naughton. Fair enough. So if we just focus on the
critical and declining plans, what we can say is that they have
promised benefits that far exceed the resources that they have
available to them.
And so what it comes down to is, who is going to pick up
the difference? So that is not really my expertise, right? So
my expertise is saying, going forward, if we fix the funding
rules, at least this problem will not get worse.
As you noted in your earlier question, it has gotten worse
over the past 10 years. And the reason for that is, even over
those 10 years, we still have not required that contributions
line up with what has been promised. And so every day there is
another promise made, and every day there is a contribution
that does not meet that promise to collect it.
Senator Portman. My time is way expired. I appreciate your
indulgence, Mr. Chairman.
We will come back to this. But again, I agree with you in
terms of going forward, but our issue is, what do we do now to
avoid the problem getting worse?
Thank you, Mr. Chairman.
Co-Chairman Hatch. Representative Neal?
Representative Neal. Thank you very much, Mr. Chairman.
And I want to thank the panelists.
Senator Portman and Senator Brown would confirm that I have
worked on retirement issues in the House for much of my career
and spent a lot of time on these very issues. And Mr. Lynch
would suggest that as well, because he has known me for a long
time.
And I want to ask you a couple of questions, Mr. Naughton,
based on the testimony you offered. You left out the recession
and what that did to the retirement plans. Do you wish to
comment on that?
Mr. Naughton. Sure, I could comment on it. So, when you
look at economic events, they are predictable. And I think the
root cause of why we are in the position we are in is not, you
know, consolidations, it is not recessions, it is really the
mismanagement of the plans.
Representative Neal. Did you find any CDOs were used during
the challenges, or was there any employer that took the
retirement plan and went to Las Vegas? Did you find that?
Mr. Naughton. So let me give you an analogy. This is
something that I got from my father. So imagine there is a guy
in the ocean and, you know, he is swimming away and all of a
sudden the ocean goes out, the tide goes out, and it turns out
he is naked. That is a problem. He should not be out there. And
the question is, is he naked because the tide went out, or is
he naked because he chose to be naked?
And when you look at things like what happened here, the
trustees made the choice. The stuff that happened in
consolidations, the stuff that happened with the recession,
with returns, with investments, you know, those are all the
tide going out.
Representative Neal. But what I am trying to get at here is
that you do not find really malfeasance, and what worked 4
decades ago might not work quite as well today.
Mr. Naughton. No; I disagree with that.
Representative Neal. But part of the argument that Mr.
Stribling has offered here today is that, in good faith, he did
what he was supposed to do. And I am suggesting to the
panelists, perhaps I was not here to create the S&L problem,
but I watched the Federal Government resolve it.
I was here for the Wall Street fiasco, not having been a
participant in those decisions, but we were asked to solve it.
And I think when you hear testimony as we did today and
yesterday and at a very good get-together in Columbus, OH just
a couple of weeks ago, we are reminded that the rearview mirror
might be helpful in an academic setting to provide a correction
going forward, but the problem we have is immediate and it is
right in front of us, and if we do not act, the PBGC has all
sorts of problems going forward as well.
So, Mr. Lynch----
Mr. Naughton. Just one item. So I completely agree with
your position that the participants did not know what was going
on. That is not what I am arguing here. What I am arguing is,
the trustees knew.
Representative Neal. Okay.
Mr. Naughton. So the trustees were the ones who made the
promises. And what I would argue is, they knew, and that is not
just based on a look back, that is based on my actual
experience 20 years ago negotiating with employers and trustees
at that time.
Representative Neal. But you agree something has to be
done.
Mr. Naughton. Oh, for sure. Of course.
Representative Neal. Okay. That is the point that I am
trying--thank you.
Mr. Naughton. Yes, I agree.
Representative Neal. And I thank you for that part of the
testimony.
And, Mr. Lynch, I have known you for a long time. Are you
supportive of the concept? Because it is the legislation that I
put forward that, at the moment, seems to be the marker--the
loan.
Mr. Lynch. As I have said, both in the written statement
and in answer earlier, there is no way to save these critical
and declining plans without some infusion of cash. If that is a
loan program, some other variation of that--but there is no way
to save those plans without it.
Representative Neal. Mr. Stribling, did you use any
derivatives in your retirement plan?
Mr. Stribling. Me personally?
Representative Neal. Yes.
Mr. Stribling. No, I do not think so.
Representative Neal. How about CDOs? Did you use any
collateralized debt obligations?
Mr. Stribling. No, I did not.
Representative Neal. No, you did not.
Mr. Stribling. I did not.
Representative Neal. You did not take a journey to Vegas to
double your pension?
Mr. Stribling. I have only been to Vegas one time and that
was about 2 years ago.
Representative Neal. All right. So the point I am trying to
make is that the people who are being harmed by this did not do
anything wrong. And nobody here has suggested fraud. Nobody has
suggested across-the-board malfeasance. And I think that in the
case of the retirees who are here and have offered sufficient
testimony--and I want to say, from Columbus, I want to
congratulate Senator Brown and Senator Portman. Those witnesses
in Columbus, including the employers, were outstanding. The
employers pointed out that they did everything they were
supposed to do along the way, and the retirees, they said they
have done everything they were supposed to do along the way.
And they met the obligations that they were supposed to.
So again, I am delighted with the witnesses here.
But the point is that the rearview mirror could be helpful
in a classroom--where I have spent much of my life--but it is
not so helpful going forward on how do we do something before
the end of the year with some recommendations so that we can
get this back up and running and people like Mr. Stribling are
not taking 50-percent cuts in their pensions.
Thank you, Mr. Chairman.
Co-Chairman Hatch. Is Senator Manchin here?
You are next, Joe.
Senator Manchin. Thank you.
And thank all of you all.
And I think most of you know I come from West Virginia, a
wonderful little coal-mining State and extraction State, heavy-
lifting State, heavy-working State with a lot of people who
have given everything to this country.
They never thought at one time in 1946--the Krug-Lewis Act
at that time was saying that for every ton of coal to be mined
that there would be money set aside from that ton of coal that
would take care of their pensions and retirement because of the
difficult jobs they were doing and the need of this country to
have the energy. They did everything they could do too.
The average pension of miners is less than $600, and most
of that is going to widows, because their spouses have paid the
ultimate price. So we are not dealing with $2,000, $3,000
pensions at all, we are dealing with survivability.
We were asking--you know, we passed a bill called the
Miners Protection Act. We passed half of it, and I was asking
my colleagues and my friends on the Republican side, you know,
at that time, please, let us pass this entire bill, because we
had a fix. We were using AML, Abandoned Mine Land, monies that
we had in excess that would have taken care of the cash
infusion, and we would have been in good shape and we would not
have been here. We would have been helping our friends in UMWA
and Central States.
But we are in this now. We are the first ones to go down
the tube if ours breaks. We have basically one major employer
paying 80 percent of the cashflow coming into the system now.
If that person has one hiccup or something happens along the
way, we are in severe problems and we go down much quicker, and
then the whole thing starts to unravel.
So you all have just said--I think Mr. Lynch, and I would
think Mr. Naughton and Dr. Rauh--and I know, Mr. Stribling, you
are the end result here; you are the face of what we are
dealing with, and we have all of our miners and their families
back here.
But none of you disagrees--I do not think. Dr. Rauh, I have
not even heard you. You understand we have to have some fix. It
is going to take an infusion of cash. I think all of you have
agreed to that.
We could have fixed ours before, but we cannot now. So now
we are going to need an infusion with the mine workers for
basically a fix. So you are all in that position, right? It
takes some sort of a fix. It cannot be fixed on its own without
an infusion of cash.
Dr. Rauh. An infusion of cash from where?
Senator Manchin. I am just saying infusion of a loan. How
do you think it can be fixed with a loan?
Dr. Rauh. So, listen, as has been said thus far, there is
little that can save plans that are insolvent.
And I just want to, you know, I would like to express
actually great admiration for you, Mr. Stribling, for a life of
very hard work. And the American economic system is founded on
the idea that factors of production, capital, and labor will be
compensated when they contribute to the process of production.
And it is clear you have personally contributed a tremendous
amount and that the promises that have been made to you are in
danger of not being kept.
And I think the question is, what is the role of the
Federal Government when agreements between employers and trade
unions go wrong and people like Mr. Stribling are hurt? Is it
to provide loans which are going to be tantamount to bailouts
of the plan? Or is it primarily to ensure that the responsible
parties are held liable for the contractual obligations?
You know, I think employers entered these agreements, these
arrangements; they are responsible. And so I think as a first
pass we should be tightening the withdrawal liability rules.
Senator Manchin. Dr. Rauh, I am sorry, I only have so much
time, and you are taking all my time. And with that being said,
I can tell right now you and I are in a completely different
universe, okay, completely different.
And with that being said, there is a responsibility. We
have real people, real people's lives, families involved right
now. And as I think my good friend Congressman Neal said, we
did not hesitate, did not hesitate on the banks, did not
hesitate on the auto industry, did not hesitate on anything
else. When there were large corporate stockholders involved,
all the different things that basically happened, we came to
their aid immediately overnight.
I was not here. I understood they worked on a 24-hour
turnaround on some of this.
All we are asking for is, if they would have done what we
asked for with the mine workers, the AML money, we would have
been out of this. We are not. We cannot fix it now unless we
have some assistance.
Dr. Rauh. I believe you should have hesitated on those
corporate interests, by the way.
Senator Manchin. Should have hesitated?
Dr. Rauh. To bail out those corporate interests.
Senator Manchin. I wish you would have come and testified
at that time. I did not hear you speaking up then.
Dr. Rauh. If I had been invited, I would have gladly done
so.
Senator Manchin. Yes, you can always come; this is an open
space. Feel free.
What we are looking for is solutions right now. And I am
just saying that we have been talking here for, what, 6 months?
We were created, when? And we are talking November? We have not
gotten any closer, so we are going to have to come to agreement
somehow. Is there some infusion of money, some sacrifices to be
made?
I do not know how much of a sacrifice that anybody can I
think, in good conscience, ask the miners to say, okay, you are
making $582, can you give us something back? That is
ridiculous. So you are asking for sacrifices on that side.
And we are not asking for anything other than, basically,
stepping forward and getting this done. The quicker we get this
done, the better we are. Every month that goes by, every year
that goes by, we are in trouble.
So I am asking my friends, sooner or later, we've got to
have a bipartisan discussion, just us only, us sitting in a
room.
Co-Chairman Hatch. We will. We will. Let us get all the
facts.
Senator Manchin. Yes, I know that. And I am asking for that
as soon as we possibly can to find out what we can agree on
that we think is reasonable that we can move forward on,
because we are coming down to where we are going to have to
make a decision. We are going to run out of time and say,
``Well, I am sorry, we have no solution.''
Co-Chairman Hatch. Senator, your time is up.
Representative Scott?
Senator Manchin. Yes, I figured that would happen. Thank
you, Mr. Chairman.
Co-Chairman Hatch. Representative Scott?
Representative Scott. Thank you, Mr. Chairman.
Mr. Chairman, this select committee--this is the fifth
committee hearing, and it is focused on how multiemployer
pension systems affects various stakeholders.
I appreciate all of our witnesses' testimony and believe
they raise worthwhile points for us to consider in the weeks
ahead.
I look forward to the bipartisan meetings we are going to
have and good-faith negotiations on how to address this looming
crisis. As we proceed, we have to keep in mind what Mr.
Stribling told us today about the fundamental fairness and
keeping promises to working Americans front and center and how
we have to keep in mind what the workers and retirees and
businesses told us in Ohio 2 weeks ago. We have to keep in mind
what our constituents are telling us every day.
Through no fault of their own, hardworking Americans are at
risk of losing nearly everything they have worked for and
sacrificed for over their lifetimes.
Let me ask Mr. Lynch a question.
Mr. Lynch, can you tell us what problems the Federal
Government budget will incur if we do not do anything at all?
Mr. Lynch. Congressman, I wish I had the expertise to give
you an answer to that. I mean, I have to think it is pretty
severe. I mean, let us just play this out. At some point, if
the Mine Workers and the Central States funds end up at the
PBGC's doorstep, they do not have the resources to pay that;
they are insolvent.
At that point, I think that Congress will have a very, very
more difficult decision then than they do today, as difficult
as the decision is today.
Representative Scott. But the PBGC received premiums with a
promise to pay minimum benefits if the plans went broke. If the
PBGC runs out of money, do they not still have a moral
obligation, does not the Federal Government have a moral
obligation to make good on its promise?
Mr. Lynch. Personally, I would say yes.
Representative Scott. Okay. Well, they took the premiums;
the Federal Government took the premiums and made the promise.
Mr. Lynch. And the PBGC is a Federal agency.
Representative Scott. Okay. If some of the plans that are
presently in jeopardy go broke, what effect could that have on
other plans that are presently not in jeopardy?
Mr. Lynch. The system is very interconnected. I mean, you
have large employers, small employers as well, but you have
large employers that are typically contributing into 10, 25, 30
different plans in the same industry. I mean, that is typical
in the trucking industry. So if one of those plans goes
insolvent and if there is something that triggers a withdrawal
by one of those contributing employers, that will have the
contagion effect and a ripple effect throughout the system.
Representative Scott. Thank you.
Mr. Naughton, what problem occurs if we delay action?
Mr. Naughton. So every day----
Representative Scott. Does the problem get easier or
harder?
Mr. Naughton. So every day, the system becomes more
underfunded in its current form. If you look at it from the
government standpoint, you know, the PBGC is a separate agency;
it does cover the benefits. And to the extent that the premium
or the funds they have are insufficient, then the benefits get
reduced. That is sort of how things are set up right now.
So when you look at the decisions that will have to be
made, they will become harder because there will be more people
who would have to take larger benefit cuts.
And you know, once the PBGC is involved in making those
cuts, there is no issue of fairness, right? They just sort of
go down the line and cut everybody's benefits, so it is a very
difficult sort of situation to be in.
Representative Scott. But the situation gets better or
worse if we delay?
Mr. Naughton. It gets much worse.
Representative Scott. And why does it get worse?
Mr. Naughton. It is more money. You know, again, every day
the unfunded obligations grow, because every day contributions
are being collected that are insufficient relative to the
promised benefits. And every day, there are funds that are
paying out pensions that they do not have the resources to be
paying. And so as you delay, those things are just going to
grow over time.
And so, if you look at in the last 10 years, the $438-
billion increase in underfunding was somewhat predictable, you
know, and that is just going to continue to grow into the
future.
Representative Scott. You know, several members have
mentioned the fact that there are fewer businesses involved. If
these plans were really solvent by normal definitions of
solvency, should that make any difference at all?
Mr. Naughton. Absolutely not. If you have a system that
relies on getting more employers to join or getting new
employees, it is just an indication that you are not solvent.
So solvency means I can pay what I owe. If my credit card
bill comes in the mail and I can pay the full balance, I am
solvent. If I can only make the minimum payment, I am not. It
is as simple as that.
Representative Scott. And are you aware of how the U.S.
code defines solvency of these plans?
Mr. Naughton. From an actuarial standpoint or from a
corporate standpoint?
Representative Scott. From the statutory standpoint, where
it says that it is insolvent if it cannot make payments.
Mr. Naughton. Exactly, yes. So if you look at ERISA, the
way it is defined is a little bit counterintuitive. And it
basically says you become insolvent when you literally have no
money left to pay benefits. Which is different, right? Because
if I promise you $100,000 a year from now and that is a promise
I have to pay you, and if I literally have no money today, any
reasonable person would say you are insolvent.
Representative Scott. Today.
Mr. Naughton. Today. But what the ERISA code does is, it
says you are insolvent a year from now when you actually have
to make that payment. And yes, that is not----
Representative Scott. And that allows us to get in the mess
we are in today, and that is the fault of the Federal
Government for allowing that to happen, is it not?
Mr. Naughton. You know, I personally think that if I were a
trustee of one of these plans and I knew I had these payments,
that I would collect the payments.
And if you look at the plans--obviously, I talk in
averages--on average, the trustee did not collect sufficient
contributions. And it does not mean they all did not, it just
means on average they did not.
And so the question is, who is at fault? Is it the trustee
for not collecting the contribution, which the rules allowed?
Or is it the government for giving that trustee the discretion
to not collect the contribution?
Representative Scott. Well, I think that second one puts us
on the hook.
Thank you, Mr. Chairman.
Co-Chairman Hatch. Thank you, Representative.
Senator Manchin desires 2 extra minutes. And then I will
turn to Senator Heitkamp.
Senator Manchin. Thank you very much. And I will just--and
I meant to, first of all, introduce this letter from the
president of the United Mine Workers, Cecil Roberts, and it
concerns their concerns and also the history of how we are
where we are with UMWA.
And I had one question I just wanted to follow up on. I
talked briefly about the mine workers retirement fund dating
back to the White House, 1946. In fact, the Coal Commission led
by then Republican Secretary of Labor Elizabeth Dole found that
the UMWA fund, inasmuch a creature of government as the
collective bargaining--there is a line running from the
original report to the present system. In a way, the original
Krug-Lewis agreement predisposed, if not predetermined, the
system that evolved.
When we secured an agreement to ensure the health care of
22,600 miners last year, we made sure that everyone knew we
were not done and we had to have a pension fix.
So I would ask both Mr. Naughton and Dr. Rauh, are you
familiar with the Krug-Lewis agreement? And do you know of any
other industry-wide multiemployer health pension fund agreement
between the private sector and the government that guaranteed
pension benefits for life? Just a ``yes'' or ``no'' if you knew
about that or understood that the government had any type of an
arrangement like that.
Mr. Naughton. On the pension side, no, I am not familiar
with any particular arrangement like that.
Dr. Rauh. I am likewise not familiar.
Senator Manchin. Yes. Well, the reason why is, there is not
another one like it. That is why we are so different. And that
is why I wanted to make sure that got into the record.
Thank you, Mr. Chairman.
Co-Chairman Hatch. Thanks, Senator.
Let us go to Senator Heitkamp now.
Senator Heitkamp. Thank you, Mr. Chairman, and thanks to
the ranking member for holding our hearing.
I would like to start by making an observation. Today's
hearing is entitled ``How the Multiemployer System Affects
Stakeholders.''
So I would like to know, Mr. Naughton, will your pension be
cut if we do not solve this problem?
Mr. Naughton. I do not have a pension.
Senator Heitkamp. Yes. Well, but you do not have any
personal stake in resolution of this problem beyond being a
shareholder or a taxpayer.
Mr. Naughton. You are correct.
Senator Heitkamp. Okay.
Dr. Rauh, do you have any stake in resolution of this
beyond being a taxpayer?
Dr. Rauh. Not beyond being a taxpayer, no, I do not.
Senator Heitkamp. Yes.
Mr. Lynch?
Mr. Lynch. I do not.
Senator Heitkamp. But you are all sitting in chairs that
were supposed to be reserved for stakeholders. And so I am
going to turn my attention to Mr. Stribling.
You have worked a lot of years. You gave up wages in
exchange for economic security, did not you?
Mr. Stribling. Yes, I did.
Senator Heitkamp. Yes. You were willing to work long hours.
In fact, you have told us what a demanding job you had and four
different employers, I think you said. And you did that because
you thought you could retire with some dignity, right?
Mr. Stribling. Yes, I did.
Senator Heitkamp. Yes. And as a participant in a plan, did
you ever make decisions about the operation of the plan? Were
you sitting at the table trying to decide what the investments
should be? Did you make a decision on how the premiums or the
benefits were going to be resolved?
Mr. Stribling. No, I did not.
Senator Heitkamp. Okay. Good. So, sadly, your story is not
unique. Thousands of retirees are confronting similar
circumstances. One of my constituents, who lives in Riverdale,
ND named George Ganje, wrote a story, wrote in to tell me that
he worked for SuperValu for 35 years and the majority of his
working hours were in the middle of the night. He was unable to
attend his children's school programs, he worked hard, and now
he has been told that his pension will have to be cut. You
know, he does not think that is fair.
And I think that is what this hearing is about. It is about
the empathy and equity that we should be discussing about the
stakeholders.
And so this possibility has caused him many sleepless
nights and obviously has taken a toll on his health.
With these things in mind, I would like to ask the
witnesses here today, the academics who are here, whether they
believe that folks like Mr. Ganje and Mr. Stribling should have
to take a cut. Is that the solution here, that they should have
to have their pensions cut?
And we will start with you, Mr. Naughton.
Mr. Naughton. The agreement is----
Senator Heitkamp. No. I mean, is the only way that you see
to resolve this to cut the pensions of the people sitting at
this table and behind you?
Mr. Naughton. There is only so much money to go around. So,
the employers do not have the funds. The unions do not have the
funds. That leaves either participants or taxpayers. And so the
question is, should taxpayers bear any costs? Yes, they should.
Of course, they should. I think it is totally inappropriate
that somebody closes in on----
Senator Heitkamp. Yes. So your answer is ``maybe.''
Mr. Naughton. Yes.
Senator Heitkamp. Dr. Rauh, do you think that the only way
out of this is for these stakeholders here, these pensioners,
to take a cut?
Dr. Rauh. You know, it is not my decision to make. But if
you decide that you want to avoid benefit cuts, then my
recommendation would be to try doing that through supporting
the PBGC as opposed to a loan program. It is not my decision to
make. And there are----
Senator Heitkamp. But you have recommended no Federal
intervention.
Dr. Rauh. I recommended no loan program. And in general, I
think you have to answer the question as to when agreements
between employers and trade unions go wrong and people like Mr.
Stribling are hurt, what should the Federal Government do?
Senator Heitkamp. Well, you have answered the question for
us. You have said ``nothing,'' the Federal Government should do
nothing.
Dr. Rauh. Not through a loan program. They should consider
whether supporting the PBGC financially would be a viable way
to go if you believe that the guarantee levels of the PBGC are
too low and that it is underfunded.
Senator Heitkamp. I only have a few minutes left. So after
today's hearing, my office will be holding a Facebook Live
event for people who have been involved and impacted by the
collapse of our multi-pension system so they can tell their
stories for the record.
I invite all members of this committee and the attendees in
the audience to stop by Dirksen 534 and share your story for
the record on Facebook.
And thank you, Mr. Chairman.
Co-Chairman Hatch. Representative Norcross, you are next.
Representative Norcross. Thank you. I am glad, first of
all, to the chairs and to all 16 members of the committee who
have been dealing with this issue for a number of months, but
in particular, for the efforts that I know most of you feel.
And certainly, thank you to the panelists. We very much
appreciate you coming by today.
But the realities that we are facing are daunting. It is
not if, but when. The threats are so real, first of all to
those retirees. Wages that were earned, but deferred--or as I
call it, dreams deferred--for your golden years.
And quite frankly to the employers, because so many of the
employers that we are talking about, not the ones who have gone
into bankruptcy but the ones who continue today to employ
people who are those future retirees, face a very real reality
that they will go bankrupt, they will go out of business,
adding to this problem.
And quite frankly, the threat to America, the loss of
confidence in the retirement system. Your average person does
not know the difference between a 401, 402, multiemployer
pension. All they are going to hear is that a retirement system
is collapsing; something that we inherently as Americans trust,
is being ripped away from them.
And what is the difference between trusting that and
trusting Social Security? The loss of confidence to our country
in its retirement system, in its ability to have those dreams,
those golden years, is literally at stake here.
You know, we are the greatest country on earth. We are
viewed that way by the world, not by the way we treat those who
have the most, but by the way we treat those who have the
least, who are in trouble.
And in some of the testimony that we have heard, I would
question, why do we ever help anybody who has been in a
hurricane? Hey, you are in Texas, you are in Florida, you
should have known that is a hurricane area. You should have
lifted your house 10 feet off the ground. But we are a caring
Nation; we come to those who, through no fault of their own,
have been devastated.
But using some of the logic I hear today, you should have
moved after that last hurricane. Do you know what we do in
America, do you know what we do here in Congress? We come
together to help those people, because we are a great Nation
that understands this.
I hate to believe that if I went overboard and, God forbid,
I did not have my life jacket on, sorry, we are not going to
save you, you did not have a life jacket on, you should have
known. No, that is not America.
So when I hear some of these things--and by the way, there
are some great stories. The majority of multiemployer plans are
in the green zone. And one of the questions that I want to
bring up is, you as a trustee understand you get these figures
each and every day--equally between management and labor; there
is no majority--you suggest that somehow the unions have
control. This is about retirees, this is not about a union
issue. This is about literally the collapse of our system when
people go and try to cash in and those companies now are
dragged down by those unfunded liabilities.
Mr. Naughton, you are a trustee; put yourself in that
position. You have seen the numbers. You are a member of, let
us pick a number out, a 200-company multiemployer plan. How do
you account, how do you see bankruptcy by other companies
coming when you are making that contribution? How would you
know company number 249 is going to go bankrupt and leave you
that unfunded liability?
Mr. Naughton. So, again, the only reason they are leaving
an unfunded liability behind is because----
Representative Norcross. How do you know as a trustee----
Mr. Naughton. I do not need to know. If I collect the right
contributions----
Representative Norcross. You do not need to know----
Mr. Naughton. I do not care.
Representative Norcross. Then let me ask you this question.
Since you do not need to know and you have to fund that system,
that is going to increase the amount of money your company has
to put in, is it not? Is it not? If somebody goes bankrupt and
they leave that unfunded liability to the last man standing--
correct--why don't you need to know that? Doesn't that impact
what you have to contribute?
Mr. Naughton. Just to clarify. So you are putting me in the
position of the trustee.
Representative Norcross. And you were saying it was their
fault----
Mr. Naughton. Clearly, their fault.
Representative Norcross. So how would you know what to
contribute for a potential bankruptcy by a company unrelated to
you other than being in the system? How would you know that?
Mr. Naughton. So, again----
Representative Norcross. Would you know it, ``yes'' or
``no''?
Mr. Naughton. I do not need to know. If I collect the right
contributions, I do not need to know.
Representative Norcross. So, you do not need to know, even
though that would impact your premium that you have to pay.
Mr. Naughton. But it does not impact it. If I collect the
right amounts, it does not impact anything.
Representative Norcross. Whoa, whoa, whoa, whoa, whoa,
stop. What do you mean, it does not? You are absolutely and
factually incorrect. So the unfunded liability comes over to
the remaining companies, the last man standing, correct? So you
are part of the group that is left. That would change----
Mr. Naughton. So you are talking about a plan today where I
am already in a position where I have massive obligations----
Representative Norcross. No, I am not saying that. I did
not bring that up at all.
Mr. Naughton. Okay. If I am in a plan that I am setting up
today and I collect----
Representative Norcross. No, you are in the midst of a
plan----
Mr. Naughton. I apologize.
Representative Norcross. I am running over. We will get
back to it in maybe the second round. Think about your answer.
Mr. Naughton. Okay.
Co-Chairman Hatch. Representative Dingell?
Representative Dingell. Thank you to both of our chairmen.
I am going to express my concern, as some others have, that
this is our fifth hearing. I think we have 19 workdays, or the
House members; I do not know what the Senate is going to be
doing workwise, but all of us together. And for me, failure is
not an option. I think failure should not be an option for any
of us on this committee.
I hope we are going to get together. This hearing is to
hear from the stakeholders, but I have been hearing from the
stakeholders every single day. And I have stories. I mean, some
of the members have heard me talk about this. A man came to me
during the district work period and said he had put a gun to
his head, he did not want to live because he did not know what
his options were. The desperation of family after family--I see
them every weekend. They come to my front door at home and now
they are coming and talking to me from across the country
because they think I will listen. And I will. I never turn
anybody away.
So I got pretty mad today, Mr. Naughton, when you made it
sound, whether you meant it to sound like this or not, you made
it sound like the employees were somehow to blame or that
people were not collecting enough.
There were a lot of assumptions made on pensions. I think
one of the things that we have to study in this committee is,
how do we strengthen pension laws?
You know, many of my colleagues talk about previous
bailouts. There were Republicans and Democrats who did not want
to bail out the auto industry, but if the auto industry had not
gotten support and loans that were paid back, the entire
economy of these United States would have collapsed. And that
was why people who did not even want to ever do something like
that did.
And we are talking about what will happen to the economy,
what will happen to communities, and what will happen to human
beings across this country if we do not address this problem.
Because of this, I want to just ask Mr. Stribling questions
first so we can be very clear for everybody in this room.
Senator Heitkamp started down this way.
But have you made any investment decisions for the plan in
which you participate?
Mr. Stribling. Absolutely not.
Representative Dingell. Did you make any of the decisions
about the amount of contributions that employers make or
negotiate any withdrawal liability from employers leaving the
plan?
Mr. Stribling. Absolutely not.
Representative Dingell. As a multiemployer pension plan
participant, are you simply informed of these decisions by the
trustees of the fund?
Mr. Stribling. No, I am not.
Representative Dingell. You are not even informed?
Mr. Stribling. I am not informed.
Representative Dingell. So is there anything you could do
as a participant in a multiemployer plan to right the course of
your pension plan?
Mr. Stribling. No, there is not.
Representative Dingell. Is it correct to say the current
state of these plans is not your fault?
Mr. Stribling. Absolutely.
Representative Dingell. When your union negotiated on your
behalf, is it your understanding that you--and we talked about
this, but I do not think people understand. How many people do
you know who gave up pay raises, sacrificed compensation
increases at the time, because of the promise of a safe and
secure retirement?
Did you?
Mr. Stribling. Yes, I did.
Representative Dingell. And did many of your colleagues do
the same thing?
Mr. Stribling. Absolutely.
Representative Dingell. So while we have testimony in this
room that makes it, in a very callous way, sound like people
had something to do with it and it is people, the people who
are being impacted by this--across the country, by the way; it
is not some of us have States that are more impacted than
others--what is our human responsibility to people across the
country?
Mr. Lynch, I want to come back to you. If I pick up one
theme in your testimony, it is simply that Congress must act
now. You stated that action is necessary sooner rather than
later. Why do you believe that to be true? And do you believe
that the cost of a solution will only go up if the committee
fails to act and what the cost is if we do not act?
Mr. Lynch. The cost will absolutely go up. I think there is
no, at least in my mind, there is just no question about that.
You have an opportunity now, if you can get yourselves to a
position where there is an agreement on some kind of infusion
of cash, you can have a plan like Central States that can then
use those funds, pay back the loan, or they can use those funds
in order to generate the investment income that keeps them
alive and not go into insolvency.
Representative Dingell. Mr. Chairman, I am almost out of
time, so I am simply going to state again, failure is not an
option. We have a moral responsibility to act for the people of
this country.
Co-Chairman Brown. Ms. Dingell, thank you.
And, Mr. Chairman, I wanted to just let people know--and
Congresswoman Dingell has talked about, so have others, about
the urgency of this.
Chairman Hatch and I met last week. We are asking, because
of the House schedule and the Senate--and we are going to be, I
think, the Senate is going to be in session 2 or maybe 3 weeks
in August; you will not be. I guess you guys are out next week;
we are here then and then in August.
But we have empowered, asked, empowered our staffs,
deputized our staffs to get serious about negotiations, the
leadership staff of the committee, but also rank-and-file
member staff.
And then Chairman Hatch and I will reconvene in September a
bipartisan member meeting, and we hope to get close to real
solutions in September as we move into the fall when we know
elections come and members are all over the place.
Co-Chairman Hatch. I think that summarizes it.
Co-Chairman Brown. So that is important.
Co-Chairman Hatch. I think that summarizes it pretty well.
We still have time for Mr. Schweikert and then Senator
Smith.
Representative Dingell. Could I say to both co-chairs
before we go on, I will fly anyplace, anytime and be a member
of this committee. You can count on me between now and
November. I do not care about elections.
Co-Chairman Brown. I know you well enough to know you will.
Co-Chairman Hatch. I know you very well, and I know you
will do it. Thank you.
Representative Scott. Mr. Chairman, I think there are other
members of the committee who would be willing to come back.
Co-Chairman Hatch. That is right.
Representative Scott. Including myself.
Representative Dingell. We would. I mean, I do not want to
speak for the Republicans, but we would come back to work with
the Senate if we could get together, because I think it
matters.
Co-Chairman Hatch. We are going to solve this problem. So
we will have----
Representative Dingell. I trust you. I know you. You are
right: we have known each other a long time.
Co-Chairman Hatch. We are going to solve it. It is not
going to be easy, and it probably is not going to please
anybody, but we are going to solve it.
And let us go to Representative Schweikert, and then
Senator Smith will be the last.
Representative Schweikert. Thank you, Mr. Chairman.
And I want to be harmonious with my brothers and sisters
here on the committee and so many of the people we have met
with. But I must tell you, being someone who has tried to read
everything--it is the joy of having a 5-hour flight to get
home--I have grown to believe that we almost need to consider a
revolution of redesign, that the current model, the current
statutes, and the multiemployer system functionally, do not
work.
Even if we patch things up, there is going to be another
wave. And I think we need to be honest, because there is a
cascade effect in our society. As we are getting older very
fast, our birth rates have collapsed. This is what the future
looks like. Today it is multiemployer plans.
I mean, if we are having an intellectually honest
conversation about underfunding, can we now talk about Social
Security and Medicare? Can we now talk about so many other
things? At some point, we need to be intellectually credible
here about what is going on in our society.
Mr. Stribling, just a quick conversation.
When you are at the union hall and you are talking with
some of the younger workers, do you think they are prepared to
pay higher amounts into the pension system right now, partially
to, shall we say, deal with the unfunded liabilities of their
brothers and sisters who are moving into retirement or are in
retirement?
Mr. Stribling. I would honestly say ``yes.''
Representative Schweikert. Good. That is actually--because
that may be what society is heading towards right now.
For my two actuaries here, if I wanted to actually fix this
permanently and we open up the playbook, do we take those who
are not receiving benefits and start to build a different
model? Do we do what Boeing did years ago, take those and
create a defined contribution or, as you have written about,
almost a methodology of a built annuity system? What would
create permanent stability for the future?
Because when our net-present value calculations are so
radically different between individual plans and these
multiemployer plans, we are always going to see a systematic
underfunding, because it benefits that current negotiation but
underfunds the future. What would you do?
Mr. Naughton. Either approach is fine.
So whether it is a defined contribution plan or whether it
is a plan that sort of dictates that the contributions are
actuarially sound--an annuity-type model--what you are doing
is, you are sort of fixing in place something that will ensure
that the money will be there, okay? So the funding issues go
away with both approaches.
An annuity-type model is, in most cases, better because it
pools risk better. With defined contribution, sometimes
individual participants invest poorly, sometimes individual
participants outlive their assets. Sometimes they sort of die
before retirement and then their assets were not really needed
in the first place.
And so, when you look at sort of pooling all of the risks--
--
Representative Schweikert. So a pooled annuity model with
sort of layered entry----
Mr. Naughton. Correct.
Representative Schweikert [continuing]. And then the
blended benefit of mortality tables.
Mr. Naughton. Correct. And that sort of is what we see from
an economic efficiency standpoint. It ensures that everything
is geared towards retirement security.
Representative Schweikert. Doctor?
Dr. Rauh. The multiemployer trustees have not acted in the
interests of the beneficiaries as they should have. And
furthermore, if the PBGC backstops them and if taxpayers are
partially backing the PBGC, then to have any kind of defined
benefit system, the rules must be very, very tight. And I
wonder whether Congress has the desire to make them tight
enough.
And so that is why I believe that Congress should be
requiring systems that are not paying contributions to stop
making new promises, meaning to freeze these plans. Frozen
plans themselves should be required to stabilize their funding
levels.
Representative Schweikert. That is a similar model we use
right now with individual employer models, where it has to be a
credible rate of return, because you just all saw the CalPERS,
and those are recalculating for the future of a lower rate of
return in the coming years. But also, if they are not meeting
the actuarial soundness, they must shut the plan down.
Dr. Rauh. That is right. As you mentioned CalPERS, the
other thing that CalPERS does, by the way, on this withdrawal
liability point is that if a public agency, local government
wants to withdraw from CalPERS, CalPERS charges them a rate
based on the terminated annuity pool, which is a rate of around
3 percent. So they have a rule in place where the withdrawal
liability must be calculated, the equivalent of the withdrawal
liability must be calculated using rates that reflect the fact
that these are promised benefits.
Representative Schweikert. Mr. Chairman, I know we are up
against time.
Co-Chairman Hatch. We have one last questioner.
Representative Schweikert. But I believe, actually, we need
to be prepared to do a long list of improvements and changes so
we are never in this room again.
Co-Chairman Hatch. I agree.
Representative Schweikert. And with that, I yield back.
Co-Chairman Hatch. Thank you.
Senator Smith, you are the last one.
Senator Smith. Thank you, Chairman Hatch.
And thank you, Senator Brown, for your leadership on this
issue.
And here is what I am taking away from this. We started
with the idea that there really are no provisions in law that
are going to help this situation. Senator Brown made that point
in the very beginning.
There maybe is one place where we have consensus here, and
that is the longer we wait to solve this problem, the worse it
gets, the more expensive it gets, that we might not--our
panelists do not all agree on what the solution ought to be. I
appreciate Senator Portman making this point.
Mr. Stribling, you know, you point out that all policy is
personal. One way or another, it affects people in personal
ways. And so I want to thank you for being here and drawing our
attention to the personal impact of inaction in this situation.
And I know that behind you are dozens of others who each have a
personal story to tell. I have certainly heard many of them, so
I really appreciate that.
It seems to me, clearly, my colleagues, that we need to use
our imaginations and our brains to figure out this problem. If
it were easy to figure out, somebody would have done it
already. It is a hard problem to solve, as our panelists have
pointed out.
But we have shown that we can do this before with other
really difficult problems. We have also shown that we know how
to come together in emergencies when we need to.
I think Representative Neal pointed out that we did that
with the S&L crisis and we did that when the markets crashed in
2008; we did that with the auto industry.
So I just want to, after having all of my questions
answered by these panelists, I want to just tell you, Senator
Hatch and Senator Brown, how much I have faith in our ability
to figure this out if we work together.
I am really grateful that we are going to have a coming
together shortly with ourselves and our staffs to figure out
how we can come up with some solutions. We have one solution on
the table of a loan idea. I appreciate Mr. Lynch's comments on
this. That is what I think is the best thing, but I really look
forward to having that conversation with all of us so that we
can come up with a bipartisan solution.
Co-Chairman Hatch. Well, thank you so much.
I want to thank you all for your attendance and
participation today.
Did we get everybody? I think we did.
Co-Chairman Brown. Yes. Could I have 20 seconds, Mr.
Chairman?
Co-Chairman Hatch. Sure.
Co-Chairman Brown. Yes.
Co-Chairman Hatch. Why don't you take some time?
Co-Chairman Brown. I will just take less than half a
minute.
Thank you, Senator Smith.
And I think what she said about the loan program--there are
a lot of different views on this committee. I think we have
seen from testimony from a whole lot of employers, including
the U.S. Chamber representing employers and employers
themselves, and experts like Mr. Lynch, that a loan program is
certainly viable and can certainly work.
We are all open--I think we are all open to everything. It
seems that we are going in that direction.
I wanted to say Congressman Schweikert's comments about
never again, that we do not want to be here and do this 2
years, 5 years, 10 years from now, how important that is.
And I look forward to working with the staff, working in
August with some House members coming back, and at least the
eight Senators talking among themselves and working, but the
staff driving this, and then in November we get really serious
about putting finishing touches on this issue and absolutely
figuring it out.
So thank you, Mr. Chairman.
Co-Chairman Hatch. Well, thank you, Senator Brown. I hope
we can do it even before then.
But I want to thank everybody for their attendance today
and, of course, the participation today. This is really a
tragedy that we are faced with these problems, but we have to
solve them.
And I ask that any member who wishes to submit questions
for the record do so by the close of business on Friday, August
10th.
Now, I am grateful for the hard work of everybody on this
committee. We are going to solve these problems one way or the
other. And I hope that everybody who feels deeply about it will
weigh in and help us to do it in the very best way we can,
considering taxpayers, considering other organizations that
have not had these problems as much. We are just going to have
to face the music here and do the job.
So with that, we are learning a lot here from the
testimonies, and we appreciate each one of you for coming today
and giving us the benefit of your testimony.
With that, we will adjourn until further notice.
[Whereupon, at 12 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Sherrod Brown,
a U.S. Senator From Ohio
WASHINGTON, DC--U.S. Senator Sherrod Brown (D-OH)--co-chair of the
Joint Select Committee on Solvency of Multiemployer Pension Plans--
released the following opening statement at today's hearing.
Thank you, Senator Hatch, for your continued work on this
committee. I also want to thank my colleagues Senator Baldwin and
Senator Johnson for being here today to introduce one of our witnesses,
Kenny Stribling.
I also want to thank all of the members of the committee who joined
Rob and me 2 weeks ago in Ohio for our field hearing.
That hearing was particularly important for us to hear the
perspectives of the workers and retirees and small business owners who
have the most to lose if Congress doesn't do its job.
Roberta Dell works at Spangler Candy Company in Bryan, OH, and I
think she put it pretty succinctly. She said if nothing is done, quote,
``a lot of us will go belly up, that's the bottom line.''
We know the same could be true for small businesses. Bill Martin,
the president of Spangler, explained that, quote, ``In Central States,
the vast majority of [the] 1,335 contributing employers are small
businesses like us. This issue hinders the success and growth of our
businesses that already struggle to be competitive.''
These businesses and their employees did everything right. They
contributed to these pensions, in many cases over decades.
And they are the ones whose lives and livelihoods will be
devastated if Congress doesn't do its job.
When I think about the responsibility we have, I think about the
words of Larry Ward at that hearing. He said, ``I don't understand how
it is that Congress would even consider asking us to take a cut to my
pension, or see it go away entirely, when it had no problem sending
billions to the Wall Street crooks who caused this problem in the first
place. They used that to pay themselves bonuses. We use our pensions to
pay for medicine and food and heat. There is something wrong with this
picture.''
If we do not find a way to compromise and come together on a
bipartisan solution, he's right, there will be something very wrong
with this picture.
But I think we are going to be successful. I saw a lot of
opportunity for bipartisan cooperation at that hearing. Rob and I both
talked about how we are putting aside talking points, listening to all
ideas, and working in good faith.
And I believe that's true not just of the two of us, but of all of
us on this committee.
The staffs of all 16 members have met for more than 30 hours of
briefings by stakeholders and experts. We have met six times with five
public hearings.
We know this is a complicated problem that won't have easy answers.
It's really three related issues.
First and most importantly, we have the threat to participants and
businesses in multiemployer plans that are currently on the path to
insolvency. Current law doesn't contain a remedy for the largest of
these plans.
Second, the looming failure of these plans means the imminent
failure of the Pension Benefit Guaranty Corporation. The PBGC and the
multiemployer system made a devil's bargain years ago, trading vastly
inadequate premiums for a vastly inadequate benefits guarantee.
Now that bargain threatens to bring down the entire multiemployer
system. We have heard over and over on this committee about the $67
billion deficit at the PBGC. What that means is that the moment one of
these large plans fails, it brings down not just that plan, but the
entire multiemployer system.
Third and finally, these impending crises mean that it isn't enough
just to fix the crisis today for these individual plans. We can't just
put a Band-Aid over this, leaving the problems with the underlying
system to fester and erupt into another crisis 5 or 10 years down the
road.
We need prospective changes to make sure we never find ourselves in
this situation again.
That's the jurisdiction of this committee. These are the three
issues we have a mandate to solve for the workers like Roberta and the
businesses like Spangler Candy and the retirees like Larry. Failing to
address all three of these issues together would be abandoning the
responsibility we have to our constituents and to this country.
Chairman Hatch and I met last week, and we are both committed to a
bipartisan solution. And we must begin bipartisan meetings with all the
members of the committee soon.
We're all aware of the challenges that still lie ahead. But I
believe we are going to get there. Too much is at stake for us to
retreat back into partisan corners, as we will hear today from our
witnesses.
I look forward to hearing from them today, and to working with all
of my colleagues toward solution.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Joint Select Committee on Solvency of Multiemployer Pension
Plans Co-Chairman Orrin Hatch (R-Utah) today delivered the following
opening statement at a hearing to consider how the multiemployer
pension system affects stakeholders.
The committee has taken a rigorous approach to the issues before
it--examining in public hearings the complex range of problems that
have led to the dire financial condition of a significant number of
multiemployer pension plans, as well as of the Pension Benefit Guaranty
Corporation, or the PBGC.
According to the PBGC, here is where we stand with regard to
funding. For 2015, the plans are underfunded by a total of $638
billion. Almost 75 percent of multiemployer plan participants are in
plans that are less than 50-percent funded. More than 95 percent are in
plans that are less than 60-percent funded.
But if you look at them on an actuarial basis, using the plans'
proclaimed discount rates, they are 80-percent funded, and only have a
$120 billion shortfall. The difference between these numbers should
keep us up at night.
Everyone knows the plans are in dire straits, but by using
unrealistic assumptions, the true extent of the problem is hidden until
it's too late. Indeed, these numbers have kept this committee properly
busy.
The committee and its staff have held dozens of meetings with
stakeholders, and we are continuously bringing in experts to brief our
team. This has been an intensive, time-consuming but worthwhile
exercise.
And these briefings and discussions will continue, because I
believe it is important that the committee leave no stone unturned in
discussing how we may address the conditions of the multiemployer
plans.
In addition to the great deal of work that has gone into
understanding the system and its challenges, the committee staff has
started to consider a range of policy ideas to address the challenges
faced by the multiemployer system.
They have started to crunch numbers on these ideas, reviewing them,
and looking at the complex interactions of the legal requirements of
the current system and the proposals for change. This is complicated
stuff--somewhat like playing three-
dimensional chess.
A lot of work still needs to be put into this process. At this
point, the committee is not taking anything off the table, nor
necessarily putting anything on the table for consideration either. But
it is necessary and prudent to begin conducting in-depth due diligence
on these ideas.
During this morning's hearing, we continue to work on understanding
the current system, by hearing more from stakeholders in the system.
We have brought in four witnesses today to help us. One is a
retiree in an at-risk program, who will share his perspective as a
participant.
We have also brought in two respected academics and a practitioner
with years of experience in the system, who will review for us some
fundamentals of these plans, and share their views on what does and
does not work.
Their perspective is important, because clearly the system is, in
certain aspects, flawed. Our witnesses today will help us delve into
some key questions. What is at stake here for retirees? What is the
appropriate measurement of plan funding? Are the plans generally
healthy or not? What major structural reforms are needed? And one issue
in which I am most interested: are Federal taxpayers responsible under
current law for funding any PBGC shortfalls?
______
Prepared Statement of Timothy P. Lynch, Senior Director,
Government Relations Practice Group, Morgan, Lewis, and Bockius, LLP
Good morning. I'd like to begin by thanking the committee co-
chairs, Senators Hatch and Brown, and all the members of the committee
for the opportunity to participate in today's hearing on ``How the
Multiemployer Pension System Affects Stakeholders.'' My testimony and
any answers I provide singularly reflect my own views and not the views
of Morgan Lewis or any of its individual clients.
My name is Tim Lynch, and I am the senior director of Morgan
Lewis's Government Relations Practice Group. Of more relevance to
today's hearing, I am a member of our Multiemployer Pension Working
Group, a group that includes attorneys who have experience counseling
both contributing employers and multiemployer pension plans in a wide
range of industries, including trucking, construction, bakery,
maritime, and supermarkets (retail and wholesale). It is because of
that depth of experience we were asked by the U.S. Chamber of Commerce
to assist it in the preparation of two recent reports: ``The
Multiemployer Pension Plan Crisis: The History, Legislation, and What's
Next'' and ``The Multiemployer Pension Plan Crisis: Businesses and Jobs
at Risk.'' Hopefully I can provide a perspective on the impacts on
stakeholders of the multiemployer pension system reflecting that
experience.
I have been involved in the multiemployer pension plan issue since
1980. At that time, I was employed by one of the largest trucking
companies in the United States, ANR Freight. ANR Freight was a Less-
Than-Truckload (LTL) motor carrier that like all interstate trucking
companies was heavily regulated by the Interstate Commerce Commission
(ICC). That regulatory regime included deciding what trucking companies
could charge, what customers they could serve, what routes they could
travel and what services they could offer. In short, virtually every
aspect of a trucking company's operations. That world was about to
change dramatically by the passage of the Motor Carrier Act of 1980,
the law that effectively deregulated the trucking industry. In 1980,
the debate over the Motor Carrier Act was the all-consuming focus of
the trucking industry.
ANR Freight was also a signatory company to the National Master
Freight Agreement (NMFA), the collective bargaining agreement (CBA)
between virtually the entire interstate trucking industry and the
Teamsters Union. Because of that CBA, ANR Freight was also a
contributing employer to all of the multiemployer pension plans under
which it had operations. To this day, I vividly remember the phone call
I received from the company's general counsel asking what I knew about
the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA) and
something called ``withdrawal liability.'' I believe my response was
along the lines of, ``nothing and why should I?''
If the Motor Carrier Act of 1980 transformed the entire trucking
industry, MPPAA dramatically impacted the unionized portion of the
industry. Prior to 1980, 94 of the 100 largest freight-hauling trucking
companies in the United States were part of the NMFA. By the mid-1990s,
that number was reduced to 6. For certain, some that reduction was due
to consolidation but the overwhelming majority was as a result of
bankruptcy. And since 1980, not a single mid- to large-size trucking
company has entered the market with a CBA with the Teamsters Union to
replace all those other trucking companies who exited the market. In
other words, no new contributing employers to cover an ever-increasing
number of beneficiaries.
In 1997 I went to work for the Motor Freight Carriers Association
(MFCA) as president and CEO, where I oversaw the labor negotiations
between those remaining unionized trucking companies and the Teamsters
under the NMFA. I survived two national negotiations in 1998 and 2003.
During that time, one of the three largest trucking companies--
Consolidated Freightways--closed its doors leaving thousands of
employees without jobs and millions in uncollectable liabilities to the
various Teamster pension funds. In the end, funds like Central States
received less than 5 cents on the dollar from the CF bankruptcy.
As president of MFCA I thought I understood labor negotiations;
what I didn't understand was the relationship between negotiating a
wage and benefits package and the contribution rate to the various
multiemployer pension funds. We did not simply pick a number and inform
the funds, ``this is what we're paying.'' The funds, primarily led by
Central States, in essence became a third party to the negotiations--
``this is what we need''--and we had to determine how to balance that
with the wage and other benefits package. That situation is more
pronounced today as funds move from green zone to yellow zone to red
zone and into critical and declining status and the attendant need for
rehabilitation plans.
Our firm was an active participant during the congressional debates
over both the Pension Protection Act in 2006 and the Multiemployer
Pension Reform Act of 2014. As the committee has been told, PPA was the
first attempt by Congress to address the looming multiemployer pension
crisis. If I could pick one word to describe that effort it would be
``transparency.'' Congress wanted more information on the financial
status of the plans and introduced the concept of green, yellow, and
red zones to differentiate the healthy plans from the not-so-healthy
plans.
The Multiemployer Pension Reform Act of 2014 recognized that more
concrete steps needed to be taken to assist plans that were facing
significant financial challenges. Congress gave plan trustees some
powerful tools to address the funding crisis: the ability to adjust
benefits; the ability to seek a partitioning of beneficiaries;
assistance for facilitating plan mergers; and financial support. I'll
refer to these collectively as MPRA applications.
MPRA was signed into law in December 2014 and plan trustees in
critical and declining status immediately had to begin planning for how
to utilize the new tools in the toolbox to address the funding crisis.
I believe one of the great examples of a profile in courage is the
action taken by 19 plan trustees--management and labor--voting to
submit a MPRA application knowing that approval would result in a
benefit cut that was desperately needed to save the plans. For union
trustees, this meant a cut for family members, friends, and work
colleagues. For management trustees, this meant walking back from a
promise made to employees who contributed over the years to the success
of the company.
The Treasury website for tracking applications for benefit
suspensions identifies the Central States Plan as being the first MPRA
application filed on September 25, 2015. Technically true. The first
``application'' filed was by the Road Carriers Local 707 Pension Fund
on December 14, 2014 (the enactment date of MPRA). Throughout
congressional consideration of the MPRA legislation, the Local 707
Fund--knowing it was facing insolvency within 3 years--was a strong
supporter of all of the tools Congress was considering but particularly
needed authorization to modify the benefit. The December Local 707
filing was in the form of a letter--I believe it was three sentences
long--intended to dramatize the need for Treasury and PBGC to move
expeditiously because time was not an ally. The fund formally filed on
March 15, 2016 and eventually was denied, the principle reason being
the fund could not demonstrate the proposed actions would allow the
fund to avoid insolvency. Unfortunately, the Local 707 Fund went
insolvent in February 2017.
In his testimony before this committee several weeks ago, PBGC
Director Tom Reeder provided an explanation for why Treasury/PBGC
rejected the Local 707 application. I'd like to add one additional
point to Mr. Reeder's summary. The last request that Local 707 made to
the PBGC was to seek help for what are referred to as the ``protected
classes.'' When Congress enacted MPRA and allowed for the benefit cuts,
one of the stipulations was that there would be no benefit cuts for two
categories of beneficiaries--those over 80 and those who were receiving
a disability pension--and a third group of retirees between the ages of
75 and 80 who would have a sliding scale of reduced benefit. PBGC
determined that relief was not possible under the provisions of MPRA
and the retirees in those protected classes join all other Local 707
retirees at the PBGC guarantee. Or as Tom Reeder explained in his
testimony, ``(f)or nearly one-half of all 5,000 participants in the
plan, the guarantee covers less than 50 percent of the benefits
earned.''
Central States filed its MPRA application on September 25, 2015 and
received its rejection notification on May 6, 2016. A good argument can
be made that MPRA was developed in large measure to assist Central
States in avoiding insolvency. And without question, the language
regarding ``systemically important plans'' (plans the PBGC projects
would have payments exceeding $1 billion) was clearly developed because
of Central States. And yet, Treasury rejected the Central States
application because the ``suspension fails to satisfy the statutory
criteria for approval of benefit suspensions.'' As the committee
considers recommendations, it would be useful to understand exactly
what ``statutory criteria'' the Central States application failed to
meet. The Central States MPRA application used a 7.5 percent investment
rate of return assumption. In rejecting the application Treasury deemed
that assumption ``not reasonable'' and ``significantly optimistic.'' It
is worth noting that according to Central States filings, the 2016 rate
of return was 8.52 percent and the 2017 rate of return was 12.74
percent. Unfortunately, the damage has been done: in 2016 and 2017 the
fund withdrew $2 million-plus in both years from investment assets to
fund the cash operating deficit.
The New York State Teamsters Conference Pension and Retirement Fund
has a better ending but the process to obtain approval is nonetheless
instructive. The New York Fund withdrew its initial application and
refiled. Among the issues that the New York Fund had to deal with was
what mortality table was appropriate for the calculation of the benefit
modification. The correspondence on this was time-
consuming and potentially pushed the fund into a more precarious
financial position. If the MPRA process is to work, the timeline needs
to be addressed.
While each of these funds had unique circumstances, the one
constant is time. A delay--or worse a denial--simply puts more plans
and the benefits of plan beneficiaries at risk. That was history but it
holds true today: action is necessary sooner rather than later.
This committee has received ample testimony on the financial
position of the PBGC and its projected insolvency if several of the
more financially distressed plans become insolvent. The only additional
point I would like to make is that the PBGC is a Federal agency and is
charged with guaranteeing the benefits of multiemployer plan failures.
The Federal responsibility is already there; it's just a matter of time
when the full impact of that responsibility kicks in. It's either later
when the PBGC itself becomes insolvent or now, in the form of financial
support. If it's later, the choices will be even more difficult and
costly to the Federal Government.
These are hard decisions, but consider the hard decisions that
workers, companies, and plan trustees are making today.
A large contributing employer that is financially distressed
informs all of the plans to which it contributes that it can no
longer pay its contractual rate of contribution. It needs to
significantly reduce its contribution in order to stay in
business. The trustees can accept that knowing full well the
lower contribution rate will negatively impact cash flow. Or
they can reject the lower contribution, undoubtedly triggering
a withdrawal and likely bankruptcy of the company. And thus no
contributions coming from that company.
A small contributing employer in the Central States Fund (9
out of 10 contributing employers to Central States are small
businesses with fewer than 50 employees) knows there are
factors beyond his/her control (see above) that could trigger
significant increases in his/her contribution rate (to meet the
terms of the rehabilitation plan). Those increases likely make
the company non-competitive or he/she can consider a path out
of the fund.
Employees and their union are entering a new round of
bargaining with their employer. They understand that any
increases in the pension fund contribution likely will result
in little or no pension benefit for them going forward. They
would like to bargain for all new contributions going to a
defined contribution fund. But they also know those
contributions are needed to shore up the current defined
benefit plan.
The current framework for evaluating the financial status of
multiemployer plans utilizes five categories: (1) Not in Distress
(green zone); (2) Endangered (yellow zone); (3) Seriously Endangered
(orange zone); (4) Critical (red zone); and Critical and Declining
(more extreme red zone). As the committee begins to consider a course
of action, it might be useful to contemplate what it hopes to
accomplish with each of these zones and the plans that are in them. The
temptation for green zone plans undoubtedly is to simply leave them
alone and that very well could be the prudent course of action. But are
there changes that could be made to help ensure these plans remain
healthy?
For yellow and orange zone plans, the goal should be to provide as
many tools as possible to plan trustees to avoid falling into the red
zone. This could include the additional tool of hybrid plans outlined
in the GROW Act legislation. Conversely, the committee should be
cautious about adopting procedural changes that while well intentioned,
could have the adverse effect of pushing these plans into the red zone.
For the red zone plans (and most importantly those red zone plans
deemed to be critical and declining) there is no avoiding the reality
that they need an infusion of cash to remain solvent. As mentioned
earlier, Central States achieved a 12.74-percent return in 2017 but it
doesn't take a mathematician to calculate the benefit of a 12-percent
return on $15 billion in assets versus $13 billion, or $11 billion. I
would also urge the committee to consult with Treasury and PBGC staff
to review MPRA to determine what changes need to be made in the statute
to make it more workable.
The Local 707 Plan needed a benefit cut, a merger partner,
partitioning, and financial assistance--all of the tools provided under
MPRA--in order to survive. It got none and is now insolvent. Only one
MPRA application that included partitioning has been approved. And
while there may have been informal discussions between Treasury/PBGC
and plan applicants utilizing the MPRA provisions on facilitating
mergers, that tool remains firmly in the bottom of the tool box.
The New York State Teamster Fund needed a benefit cut and while
ultimately approved, it took almost 1 year to get that approval. Weeks,
if not months, were spent debating issues like the appropriate
mortality table to be used to calculate the benefit cut. One year may
not seem like a long time but in the multiemployer world it's the
difference between an asset base of $100 million versus something
significantly less. Or the difference between survival and insolvency.
Central States needed a benefit cut but its application was
rejected because in the view of Treasury it failed ``to satisfy the
statutory criteria for approval of benefit suspensions'' and its
proposed benefit suspensions ``not reasonably estimated to allow the
plan to avoid insolvency.'' With that rejection, Central States is now
headed toward insolvency.
In conclusion, these are not easy decisions and the options very
limited. But time is not an ally and the choices get more difficult.
Thank you for allowing me to testify, and I'm pleased to answer any
questions the committee members may have.
______
Submitted by Hon. Joe Manchin III,
a U.S. Senator From West Virginia
United Mine Workers of America
18354 Quantico Gateway Drive, Suite 200
Triangle, VA 22172-1779
Telephone (703) 291-2420
Fax (703) 291-2451
July 24, 2018
Hon. Orrin Hatch Hon. Sherrod Brown
Co-Chair Co-Chair
Joint Select Committee on Solvency Joint Select Committee on Solvency
of Multiemployer Pension Plans of Multiemployer Pension Plans
104 Hart Senate Office Building 713 Hart Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Co-Chairs Hatch and Brown:
I want to first thank you for your leadership of the Joint Select
Committee on Solvency of Multiemployer Pension Plans. You have taken on
an immense and difficult challenge, but one that must be confronted and
solved. Millions of retired American workers are counting on you and
the committee to arrive at a solution that preserves the pensions that
they earned after decades of hard work. You must not fail them.
That is especially true of the retired members of the United Mine
Workers of America who are covered by the UMWA 1974 Pension Plan. As
you know, the 1974 Plan is projected to become insolvent in the 2022
Plan year. But that projection may prove to be optimistic, as any
further shocks to the financial markets or another sudden downturn in
the coal industry will accelerate insolvency.
In December 2007, before the Wall Street crash that drove the
country into the Great Recession, the 1974 Plan was 94-percent funded
and the actuaries projected that it would become fully funded over the
coming decade. In April 2009, immediately after the Wall Street crash,
the actuaries projected that instead of being fully funded, the 1974
Plan could become insolvent in the coming decade.
Bankruptcies in the coal industry have devastated the 1974 Plan's
contribution base. In 2014 employers contributed over $120 million to
the Plan; by 2017 employer contributions had plummeted to about $20
million because of bankruptcy court actions, and about 80 percent of
that contribution now comes from just one employer group. The
bankruptcies have also increased the ratio of inactive to active
participants. In 2014 there were 10.6 inactive participants for each
active participant. Because of the withdrawal of companies in recent
bankruptcies that ratio is now about 33-1.
Adding insult to injury, bankruptcy courts also voided $3.1 billion
in withdrawal liabilities from former contributing companies.
The retirees did not create these problems. Yet here we are.
Legislation is now the only option to prevent insolvency of the 1974
Plan. We can't invest our way out of the problem, nor cut our way out,
nor contribute our way out.
Congress has had proposals before it since 2010 to bring the 1974
Plan into the Coal Act and allow it to access the same Federal
financial support as Congress has provided to these very same retirees
in the Coal Act health plans. The option to allow the 1974 Plan to
participate in Abandoned Mine Land (AML) transfers is still available
to Congress, although the AML transfers alone will no longer prevent
insolvency but merely delay it.
I am aware that there are some advising the committee to do nothing
to help pension plans, like the UMWA 1974 Plan, that are currently in
critical and declining status. ``Just let them fail,'' these advisors
say. In addition to ignoring the cruel outcome for the retirees and
their communities in this scenario, this advice will inevitably lead to
increased costs for the government than if the committee simply solved
the problem now through passing a low-interest, long-term loan program.
There are several proposals to provide low interest loans to
critical and declining pension plans. All have their merits and flaws,
but they will work, provided that Congress acts now. It is the job of
the committee to sort through those proposals and find the best way
forward.
Acting now will allow troubled plans to stop the bleeding and grow
their core assets, which can be used later to repay the loans. You will
not only preserve much needed benefits for retirees and surviving
spouses throughout the coalfields, you will help prevent the collapse
of the Pension Benefit Guaranty Corporation (PBGC), which will be a
much more expensive problem to fix. If Congress delays action, the 1974
Plan will soon reach the point of no return.
Action by Congress now will benefit millions of retired American
workers who will otherwise see their pension plans become insolvent.
These workers live in every State in America, in thousands of
communities large and small. The loss of pension income, especially in
rural areas, will be devastating to already struggling local economies.
Retirees covered by the 1974 Plan do not live in luxury. They live
in some of the most economically depressed areas of our Nation. Their
average pension is $582 per month. They earned every penny that they
receive by years of hard, dangerous work in the Nation's coal mines.
They spend their pensions in their communities, providing the
majority of whatever economic activity those communities are able to
generate. Cutting or largely eliminating these pensions will not just
devastate the retirees and widows, it will drive a stake through the
heart of hundreds of struggling communities, especially in Appalachia
and the Midwest.
It is easy to say, ``Do nothing to help these distressed pension
plans'' from the marbled halls of Washington, DC. But go to Madison,
West Virginia; Cadiz, Ohio; Price, Utah; Brookwood, Alabama; or
Carmichaels, Pennsylvania and you will see what the impact of losing
these pensions will be on real, living American senior citizens and
their communities.
The retired coal miners worked hard, in often dangerous conditions,
so that the rest of us could live in comfort. They are counting on you
and your committee to provide a way for them to live out the rest of
their lives in the dignity and security they were promised and have
earned. Please do not let them down.
Sincerely,
Cecil E. Roberts
cc: Members of the Joint Select Committee on Solvency of Multiemployer
Pension Plans
Senator Shelley Moore Capito
Representative David McKinley
______
Prepared Statement of James P. Naughton,\1\ Assistant Professor,
Kellogg School of Management, Northwestern University
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\1\ Jim Naughton is an assistant professor at the Kellogg School of
Management at Northwestern University. Jim worked as an actuary for 10
years after completing his undergraduate studies at Worcester
Polytechnic Institute. For most of that time, he was a fellow of the
Society of Actuaries, an enrolled actuary, and a member of the American
Academy of Actuaries. He consulted with a variety of clients on all
aspects of employee benefits, with a particular emphasis on defined
benefit pension plans. He left the private sector to complete a
concurrent degree program at Harvard University, whereby he earned a
J.D. from Harvard Law School in 2010 and a doctorate in business
administration from the Harvard Business School in 2011. He has been a
member of the faculty at the Kellogg School of Management since 2011.
I am very grateful for the opportunity to testify today and hope
that my testimony contributes toward a workable solution to the crisis
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facing the multiemployer plan system.
A multiemployer plan is a pension plan maintained through a
collective bargaining agreement between employers and a union. The
typical plan has numerous contributing employers, and it is quite
common for employers to participate in several different multiemployer
plans. For a particular multiemployer plan, the employers are usually
in the same or related industries. Today, there are approximately 1,400
multiemployer plans covering 10 million participants. From the
participant's perspective, multiemployer plans provide pension
portability, allowing them to accumulate benefits earned for service
with different employers throughout their careers. In addition, because
these plans offer annuity benefits, they represent an efficient source
of retirement income due to risk pooling advantages. From the
employer's perspective, the efficiencies of scale facilitates
diversified investment opportunities and lessens the administrative and
investment costs relative to the operation of numerous small single-
employer plans.
Currently, the multiemployer system is chronically underfunded and
the retirement benefits of many participants are at significant risk. I
believe that the most important factor that informs the appropriate
approach to addressing this crisis is an understanding as to whether
the current predicament is primarily attributable to bad luck or is an
inherent attribute of how plan trustees have run the plans.\2\ While
luck may play some part in which individual plans are in the most
critical condition, I firmly believe that the current crisis is a
function of trustee choices. Even though these choices may not violate
a clear numerical bright line test in the rules governing multiemployer
plans, the rules, most of which were requested by the multiemployer
plans themselves, were interpreted as leaving broad discretion over the
making and funding of pension promises. In my testimony, I am going to
explain how this broad discretion made the current crisis inevitable.
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\2\ In the case of multiemployer plans, the plan trustees are
typically a board with equal representation from contributing employers
and union officials.
To begin, I'm going to state an obvious fact. If plans were
required to collect actuarially sound contributions and purchase
annuity contracts, there would be no crisis. Participants would be
receiving or would be scheduled to receive the annuity benefits
purchased with the contributions made on their behalf. In addition, the
rules governing these plans would be far simpler. There would be little
need for PBGC premiums, calculations of plan funding requirements, and
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certainly no need for withdrawal liability provisions.
Rather than follow this type of approach, multiemployer plans
generally choose to invest in risky equity investments and to collect
contributions that are inadequate relative to the promised benefits. In
effect, the plans are hoping that growth in the number of active
participants or superior investment returns will take care of the
shortfall. The reasons trustees pursue such a strategy are relatively
simple--assuming that the overall cost per employee was fixed, a
relatively low pension contribution means that employees might be able
to receive higher non-pension compensation from their employers through
the collective bargaining process. In addition, it encourages employers
to join a multiemployer system rather than sponsor their own plan as
seemingly equivalent benefits can be promised through the multiemployer
plan at a lower cost.
Congress enacted several rules to protect the solvency of the
multiemployer system, most notably with the 1980 Multiemployer Pension
Plan Amendments Act. Starting in 1980, there were four notable aspects
of the framework governing multiemployer plans.
First, even though employer contributions are determined as part of
the collective bargaining process, the starting point for identifying
the aggregate contribution is typically the present value of benefits
determined using a discount rate based on anticipated investment
returns. Because the plans invest in equity securities, this means that
the present value of benefits calculation does not reflect the economic
value of pension promises.\3\ If plans invest in annuities or in
duration-matched bonds, there is no understatement of the plan's
present value of benefits.
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\3\ Actuaries and standard-setters have long known that this
approach understates the actual obligations of the plan. As an
illustration, Statement of Financial Accounting Standards (SFAS) No.
87, Employers' Accounting for Pensions, which was adopted in 1985,
requires that the reported pension liability for financial reporting
purposes be calculated using a discount rate that reflects the rate at
which the obligation to pay the pension benefits can be settled rather
than the expected investment return on the pension assets. In seeking
these rates, SFAS87 requires that employers look to ``rates of return
on high-quality fixed-income investments currently available and
expected to be available during the period to maturity of the pension
benefits.'' In practice, companies typically use zero-coupon duration-
matched Aa corporate bond rates to determine their pension liability
for financial reporting purposes to meet the requirements of SFAS87.
Using an Aa rate provides an estimate of the cost of extinguishing the
pension liability through the purchase of an annuity contract from a
highly rated insurance company.
Second, because sufficient contributions are not required, it is
possible for employers to withdraw from a multiemployer plan having not
contributed adequate funds to cover the benefits promised to their own
workers. This concern is addressed through ``withdrawal liability,''
whereby employers exiting a multiemployer plan are required to
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contribute funds intended to cover their share of plan underfunding.
Third, because not all exiting employers pay the withdrawal
liability (e.g., due to bankruptcy) and because plans are free to
invest in risky securities, it is possible that the plan could face a
shortfall due to poor experience. This concern is addressed by
requiring that all contributing employers be jointly and severally
liable for all plan promises, including for so-called ``orphan''
participants whose employers left the plans without paying for their
share of the plan's underfunding.\4\
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\4\ The existence of orphan plan participants can result in a
worsening funding situation for the multiemployer plan, because plan
assets are commingled in a trust and are not assigned to a particular
employer's contributions or participant's benefit. Thus, benefit
payments for all participants draw down general plan assets.
Fourth, in the event that the assessment of withdrawal liability
and the application of joint and several liability do not generate
sufficient funds to cover promised benefits, the PBGC provides benefit
guarantees.\5\ Importantly, and at the request of the multiemployer
plans themselves, PBGC coverage for multiemployer plans is separate
from that for single employer plans, so that large shortfalls in
multiemployer plans do not affect the PBGC's coverage of single
employer plans (and vice versa).\6\
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\5\ PBGC guarantees benefits up to a statutory maximum level. When
a multiemployer DB pension plan becomes insolvent, the plan must reduce
participants' benefit to the PBGC maximum amount before the plan
receives assistance. The statutory maximum benefit in multiemployer
plans that receive financial assistance from PBGC is the product of a
participant's years of service multiplied by the sum of (1) 100 percent
of the first $11 of the monthly benefit accrual rate and (2) 75 percent
of the next $33 of the accrual rate. For a participant with 40 years of
service, the statutory annual maximum benefit is $17,160.
\6\ The assets and income of PBGC's Multiemployer Program are
currently only a small fraction of the amounts PBGC will need to
support the guaranteed benefits of participants in plans expected to
become insolvent during the next decade. In its FY 2017 Projections
Report, PBGC indicated that the multiemployer insurance program has a
90-percent chance of becoming insolvent by the end of 2025.
In short, rather than collecting contributions reflecting the value
of promised benefits and investing those funds appropriately, the
trustees used the discretion in the multiemployer plan rules to provide
for insufficient contributions and to pursue risky investment choices,
with the understanding that employers would be required to bail out
insolvent plans. The rules further provided that if employers were
unable to bail out insolvent plans, the PBGC would provide benefits (up
to guaranteed levels) as long as it had the resources in its
multiemployer program to do so.\7\
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\7\ In extreme cases, participant benefits can be curtailed well
below the stated guaranteed benefit levels, as these levels are only
binding to the extent that the PBGC has the resources to pay these
amounts. This isn't necessarily an event that requires that the PBGC
run out of funds. ERISA 4022A(f) indicates that it is possible for
benefits to be curtailed immediately to the extent that the PBGC does
not have the resources necessary to meet its expected future
obligations under the multiemployer system.
It is worth noting that the problem is not that the rules prohibit
trustees from running the plans conservatively--trustees are free to
purchase annuities to fund the pension benefits that the plan promises.
Even short of purchasing annuities, the rules do not prevent trustees
from accurately measuring plan promises and investing in a more
conservative manner, concentrating on bonds matching the duration of
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the liabilities.
The trustees choose to take risk, and there is nothing necessarily
wrong with this choice in other circumstances not presented by
multiemployer pensions. In general, the assumption of risk is an
appropriate course of action to the extent that one can respond to the
inevitable volatility. Unfortunately, this is not the case with the
multiemployer system, where there is a structural inability to respond
to poor experience.
Over time, there has been an inevitable decline in the number of
participants covered by these plans, driven in part by withdrawal
liability requirements (which, again, exist because plans do not
collect contributions commensurate with promised benefits).\8\ This
decline in participation has occurred, in part, because financially
healthy employers are especially concerned with the possibility of
withdrawal liability or the prospect that they fund the benefits of
orphaned participants, and hence these employers are not interested in
participating in multiemployer plans.
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\8\ The lack of new entrants is reflected in the increasing share
of inactive members--over the past 30 years, the share of inactive
participants has increased fourfold from around 17 percent to 61
percent of total participants across multiemployer plans.
During my career as a consulting actuary, which started in the mid-
1990s, I personally observed several clients who decided to sponsor
their own defined benefit plan rather than participate in a
multiemployer plan because of the withdrawal liability provisions and
the requirement that they be joint and severally liable for plan
underfunding. The choice to forgo membership in a multiemployer plan
was not a difficult decision for these employers, even when the
proposed cost of the multiemployer plan was only one-third of the cost
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of a single employer plan.
The withdrawal liability provisions not only discourage new
employers from joining the multiemployer system, but also create
incentives for the most financially healthy employers to withdraw.
These incentives are especially strong when the withdrawal liability is
less than the anticipated cost of remaining in the plan. In the past,
this was often the case because the withdrawal liability rules were
inconsistent and oftentimes too lenient. Employer withdrawal liability
payments typically do not capture the employer's full economic
obligation because plans have the option to measure unfunded vested
benefits using the plan's funding rate, typically 7.5 percent, which is
too high for a termination liability because it doesn't reflect the
settlement value of the promised benefits. In addition, the withdrawing
employer's share of the unfunded vested benefits is further reduced
based on past contributions, or based on special rules for certain
industries.\9\
---------------------------------------------------------------------------
\9\ There are also some special rules that allow employers in the
construction and entertainment industries to avoid any withdrawal
liability. For example, in the case of plans operating in the
construction or entertainment industries, an employer is not required
to pay a withdrawal liability if the employer is no longer obligated to
contribute under the plan and ceases to operate within the jurisdiction
of the collective bargaining agreement (or plan) or does not resume
operations within 5 years without renewing its obligation to
contribute.
The inevitable consequence of inadequate contributions, risky
investment choices, and the withdrawal liability provisions is a
funding crisis. This crisis first manifested more than 10 years ago,
and the statutory response at that time has made matters worse. While
those statutory actions did marginally increase funding requirements,
in most cases contributions still do not reflect the economic value of
promised benefits. There were no changes in withdrawal liability, with
the inevitable outcome that new employers are not joining the system
and current employers continue to exit when it is advantageous to do
so. In addition, the Pension Protection Act of 2006 (``PPA'') response
included provisions that waived required contributions for the most
troubled plans, thus ensuring that the situation would almost certainly
deteriorate as these plans are able to promise additional benefits
---------------------------------------------------------------------------
without setting aside the funds needed to cover these benefits.
The system was around $200 billion underfunded at the time of the
PPA on a PBGC rate basis. For 2015, PBGC just reported that the system
is $638 billion underfunded on that basis. Almost 75 percent of
participants are in plans that are less than 50-percent funded and more
than 95 percent of participants are in plans that are less than 60-
percent funded.
With a small base of active participants, it is cost prohibitive to
increase contributions to a level that fully funds many of these plans.
Moreover, with the exit of the most financially healthy employers,
there is insufficient resources among the remaining employers to cover
the shortfalls in many plans.
So what can be done? There are several steps that I believe should
be adopted to set the system on the correct path going forward.
First and foremost, multiemployer plans need to have accurate
measurement of liabilities and strong funding rules so that they can
provide promised benefits.\10\ It is not enough to simply adopt the
single employer plan rules. Multiemployer plans need to have even
stricter rules than single employer plan because there is an
interconnectedness across plans and contributing employers (i.e., most
plans have several contributing employers, and most employers
contribute to several different plans) that exacerbates the
consequences of poor outcomes. Liabilities and contributions should
reflect the cost of annuity products from highly rated insurance
companies.
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\10\ The difference between measuring the plan liability using
anticipated investment returns versus settlement rates is startling. A
recent report prepared by Horizon Actuarial Services LLC finds that
based on current funding rules, over 60 percent of all multiemployer
plans are in the green zone (i.e., at least 80-percent funded and no
projected funding deficiency for at least 7 years). In contrast, based
solely on using corporate bond rates and assuming all other funding
rules remain unchanged, the percentage of green zone plans would fall
to just 7 percent. With corporate bond rates, 87 percent of all
multiemployer plans are in critical or critical and declining status.
Second, the PBGC should have broad discretion to assume control of
troubled plans and implement necessary changes, including reductions in
accrued benefits. Currently, the PBGC is unable to intervene, even in
those cases where the plan's condition is continuing to deteriorate and
there is no expectation that the condition of the plan will improve.
The PBGC has this authority with regard to single employer plans and
exercises it when necessary, even sometimes where a plan is meeting the
much more stringent funding rules applicable to single employer plans.
Similarly, it would be reasonable to have certain automatic triggering
events, such as a funding deficiency for 2 or 3 consecutive years, that
would require that the PBGC take control of a troubled plan. It is also
reasonable for there to be a termination premium, similar to what is
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required for single employer plans.
Third, amend the withdrawal liability provisions. One suggestion
for the withdrawal liability would be to mirror what is done in a plan
termination for single employers--that is, the withdrawing employer
should be required to cover the cost of purchasing annuities from
highly rated insurance companies for each of its participants. This
cost could be offset by prior contributions, with or without investment
returns, and could be adjusted to incorporate some portion of the costs
associated with orphaned participants. However, what is important is
that the withdrawal liability reflect the actual economic cost of
promised benefits. Congress should also consider a moratorium on
withdrawals while it is deliberating on the legislative response to
immediately end the opportunistic use of these provisions.\11\
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\11\ Even with the adjustment to withdrawal liability provisions,
the number of active participants covered by multiemployer plans is
unlikely to return to historical levels. Over the past 30 years, the
U.S. economy has shifted fundamentally away from unionized industries.
According to the Bureau of Labor Statistics, union workers made up only
12 percent of the workforce in 2009, down from 21 percent in 1983.
While these suggestions should help set the multiemployer system on
a sustainable path, they do not provide clear prescriptions for how
past underfunding should be resolved. While the union and contributing
employers almost certainly knew that contributions were insufficient
relative to promised benefits, it seems clear that neither party has
sufficient resources to address prior underfunding. Therefore, at least
part of the resolution will involve concessions on the part of plan
participants, who were unlikely to have known about the mismanagement
of their promised pensions until the crisis began to materialize, or
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taxpayers.
My suggestions also focus on improving rather than replacing the
current system, as I believe that the correct approach is to develop a
sustainable defined benefit program rather than switching to a defined
contribution plan. A conversion, by definition, will hurt those
employees closest to retirement.\12\ More importantly, a well-run
defined benefit plan is far more effective at ensuring retirement
security for the types of workers who participate in these plans.
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\12\ The rate of benefit accruals vary by age across defined
benefit and defined contribution plans, with accruals becoming much
more valuable in defined benefit plans as participants age. As a
result, the accumulation of benefits in a defined benefit plan accrue
much more rapidly in later years (sometimes referred to as ``golden
handcuffs''). Therefore, if participants are switched mid-career, then
over their full career they receive lower accumulations from the time
before the plan change (when the DB accruals are worth less than DC
accruals) and lower accumulations after the plan change (when the DC
accruals are worth less than DB accruals), which combine to ensure that
the participant has lower retirement income.
No matter how prior underfunding is addressed, I strongly advocate
for urgent changes to the rules governing multiemployer plans. I
believe the rule changes I suggest can be implemented without a final
framework for how to handle the allocation of past underfunding, and so
delays, which will inevitably lead to larger deficits and choices that
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are more difficult, can and should be avoided at all costs.
______
Prepared Statement of Joshua D. Rauh, Ph.D., Senior Fellow and Director
of Research, Hoover Institution, and Ormond Family Professor of
Finance, Stanford University \1\
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\1\ I am very grateful to Yanqiu (Alice) Wang and Rohan Sonecha for
outstanding research assistance in the preparation of this testimony.
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Chairman Hatch, Chairman Brown, and members of the committee, thank
you for the opportunity to appear before you today on the topic of the
solvency of multiemployer pension plans. I would like to begin with an
executive summary of 8 points that I will make in my testimony.
(1) The logic of financial economics is very clear that measuring
the value of a pension promise requires using the yields on bonds that
match the risk and duration of that promise. Therefore, to reflect the
present value cost of actually delivering on a benefit promise requires
the use of a default-free yield curve, such as the Treasury yield
curve. Financial economists have spoken in near unison on this point.
The fact that the stock market, whose performance drives that of most
pension plan investments, has earned high historical returns does not
justify the use of these historical returns as a discount rate for
measuring pension liabilities.
(2) Most of the justifications of a loan program to rescue the
multiemployer system are built on the false logic that plans can get
something for free if they receive low-cost subsidized government loans
and invest the money in risky assets.
(3) On an actuarial basis, which as of the 2016 plan year uses an
average discount rate of 7.3 percent, there are $155 billion of total
unfunded liabilities in the multiemployer system. Measured properly
using the appropriate Treasury yield curve, there are $722 billion of
unfunded liabilities in the multiemployer system.
(4) I emphasize two standards for when a plan is making sufficient
contributions. One standard, which I call ``treading water,'' is when
the contributions at least meet the cost of new benefits (``normal
cost'') plus interest on the unfunded liability. A more stringent
standard would be contributing the cost of new benefits, plus progress
towards paying down the unfunded liability. Under actuarial liability
measurements, the latter is what the majority (71 percent as of 2016)
of plans could claim they are doing. But under the correct risk-free
standards, the picture looks quite different: less than 2 percent of
plans are contributing service cost plus 30-year amortization, and only
17 percent are treading water.
(5) Minimum funding requirements for multiemployer plans have not
been sufficient to keep multiemployer plans in good health, as they
depend heavily on expected rates of return. Rules for single-employer
plans have been comparatively stringent, depending at least in part on
high-grade corporate or Treasury bond yields since 1987. More
generally, Congress has adhered in the
single-employer program to the basic principle of imposing strict
consequences including an excise tax and PBGC-induced termination if
plans do not contribute the normal cost plus amortization of unfunded
liabilities. In contrast, Congress relieved multiemployer red zone
plans of their obligations to continue to pay normal costs plus
amortization of unfunded liabilities in the Pension Protection Act of
2006. Furthermore, since the law treats insolvency as the insurable
event, and as a practical matter there is nothing that requires a
failing plan to terminate, the PBGC cannot under current law limit its
exposure to unfunded liabilities.
(6) Trustees had decades to undertake voluntary, remedial measures
before resorting to trying to force participants to take cuts against
promised benefits under the Multiemployer Pension Reform Act of 2014
(MPRA). Before reaching this point, they failed to use the many options
that were at their disposal to ensure the solvency of plans. They have
always had the right to gradually require greater contributions from
employers, to make more realistic assumptions about investment returns,
and to make more affordable benefit promises on a prospective basis. In
fact, statute requires the plan trustees to use reasonable assumptions,
and the trustees who budgeted to pay pensions using excessively high
discount rates violated that statute by using unreasonable assumptions.
Trustees have fiduciary obligations to plan participants, which many
have broken by making unrealistic pension promises on which the plans
had little chance of making good.
(7) As of 2016, I estimate that there were between 960,000 and
990,00 individuals in multiemployer plans with less than 5 years of
service. These individuals have accrued low levels of benefits, but
their employers are paying in substantial contributions on their behalf
and in many cases relying on their contributions to forestall
insolvency of multiemployer plans.
(8) To meet a rigorous funding standard, contributions would have
to rise substantially. Incrementally over time, the multiemployer
system must approach this standard to protect the interests of plan
participants and taxpayers. Once phased in, all plans that do not
follow funding rules should be subject to an excise tax, which was the
rule before the Pension Protection Act of 2006; the employers and union
would then be faced with the choice of funding the plan or terminating
the plan in order to avoid the excise tax. In other words, if the plan
does not meet required contributions, then termination should be
automatic. To address the incentives that employer trustees might have
to give up and terminate the plan, the rigorous funding standard should
be phased in slowly, with near-term contributions initially limited to
some measure of affordability for employers, such as by capping the
growth in their contributions. Further, Congress should act immediately
to change the withdrawal liability rules so that they reflect the true
value of unfunded liabilities.
i. measuring pension obligations: logic
The basic challenge in measuring a pension benefit is how to
convert the promise of a pre-specified stream of payments in the future
into one value today. For example, imagine a payment of $50,000 that is
to be made in 10 years. What is the present value of that payment
today? This conversion, called discounting, is critical because it
allows the consumers of financial statements, the trustees of pension
plans, and other stakeholders to understand what the promise to pay a
given pension is worth in today's dollars. That is, discounting allows
for a measurement of the cost of new benefit promises, and it allows
for a measurement of the total value of promises that have been accrued
to date. Along with information about the available resources to pay
benefits, a measurement of the total value of pension promises is vital
for establishing the financial condition of a pension plan.
When faced with this problem, there are a number of issues to be
addressed. One must first specify the goal for the measurement. One
clear goal would be to know how much money a pension plan would need
today to be certain that the promised payment would be met. If a
pension plan needs to meet a $50,000 obligation in 10 years, it can buy
a zero-coupon default-free bond, such as a 10-year Treasury STRIP. Such
a security would yield around 3 percent in today's markets, meaning
that the pension plan would need around $37,200 today to be sure of
meeting the promise, since $37,200 growing at 3 percent for 10 years
will result in a payoff of $50,000 which could then be used to pay the
pension. The Society of Actuaries (2006) Pension Actuary's Guide to
Financial Economics calls this measurement a Solvency Liability. It is
the value of a portfolio of bonds that would defease the promise.
While the Solvency Liability concept relies on the measurement of
the cost of guaranteeing the pension payments, an alternative measure
of interest is the so-called Market Liability, also described in
Society of Actuaries (2006). The Market Liability can be thought of as
what a rational and financially unconstrained individual who was
expecting to receive the $50,000 would accept today in exchange for
giving up the promise of the $50,000 in 10 years. Why might this differ
from the $37,200 calculated in the Solvency Liability? If the sponsor
of the pension plan promising the liability were at high risk of
insolvency over the next 10 years, the individual hoping to receive the
$50,000 might be willing to settle for a payment today of less than
$37,200, knowing that if they do not take the payment today, they might
end up with less than $50,000 in 10 years time due to a default by the
sponsor. The Market Liability would use a discount rate higher than the
3 percent to reflect this risk of default.
The final concept, also described in Society of Actuaries (2006),
is the Budget Liability. This is the ``traditional actuarial accrued
liability used to budget cash contributions over a period of years.''
The Budget Liability in the case of the $50,000 payment guaranteed in
10 years would use a discount rate derived from an expected return on
plan assets. If that expected return is, say, 7.3 percent, which is
what I calculate as the weighted-average discount rate that U.S.
multiemployer pension plans are using for their budgeting and planning
purposes in the latest plan year, the liability would only be marked at
around $24,700.
There is much debate about the proper way to measure a pension
obligation. Pension actuaries generally support the use of the Budget
Liability on the grounds that if actuaries are prudent and accurate in
their budgeting and forecasting, the plan will be fully funded when it
needs to be. A large number of finance economists have criticized this
approach on the grounds that the value of a pension promise should be
measured independently of the assets used to fund the promise. In the
above example, a discount rate of 10 percent would take the liability
down to below $20,000, and 12 percent would take it down to $16,000.
Giving the plan actuary or trustee discretion over the selection of the
return they believe the portfolio will earn opens up the possibility of
arbitrary selection of discount rates. In the worst case, actuaries
might tell their clients what those clients want to hear, which might
be that the cost of deferred promises is cheaper than it actually is.
Or as the late Jeremy Gold wrote:
The pension actuarial model is broken. Excessive discounting
and deferral of costs have often led to unaffordable promises.
. . . The degree to which this overhang exists has been
downplayed by vested interests, including, too often, actuaries
who, arguably, should know better. (Gold (2015))
In contrast to the actuarial view, in which the expected return is
supposed to be the actuary's best estimate of what a portfolio will
earn, finance fundamentally conceives of the future as consisting of
``states of the world.'' \2\ The finance view recognizes that past
performance is no guarantee of future performance. If past returns on
the stock market were high, it is because those investments were risky,
and not in ways that just smooth out over time. Specifically, if there
is uncertainty about the underlying drivers of stock returns, or if
there is some probability of a large stock market crash without
recovery--one that we may not have observed in the U.S. in recent
history--then the high returns we observed in recent decades were
compensation for these risks, as opposed to a free lunch. Investors
have been fortunate that good financial market outcomes (``states of
the world'') occurred, as opposed to the bad ones that could have
occurred instead.
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\2\ This idea is originally attributed to Arrow and Debreu (1954).
By discounting a fixed, promised liability at a targeted return on
a portfolio of risky assets, one is ignoring the risk that the assets
will not earn that targeted return. A chief investment officer of an
investment fund can assemble a portfolio of securities that has a
targeted return of 7 percent, or 10 percent, or even 12 percent per
year. The CIO will call that targeted return their ``expected return.''
However, the higher the targeted or ``expected'' return, the lower the
probability that that target will be met. Discounting using an expected
return ignores that probability. Furthermore, there is no sense in
which just waiting long enough ensures good performance. Otherwise
every investor with a ``long horizon'' and relatively low borrowing
costs, should be willing to borrow as much money as they can and invest
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in the stock market.
Among economists, these issues are not controversial, and in fact
the inappropriateness of the Budget Liability as a measurement standard
is widely agreed. As a Vice-Chair of the U.S. Federal Reserve said in
2008 in speaking about public pensions:
[M]ost public pension funds calculate the present value of
their liabilities using the projected rate of return on the
portfolio of assets as the discount rate. This practice makes
little sense from an economic perspective. If they shift their
portfolio into even riskier assets, does the value of the
liabilities [. . .] go down? Financial economists would say no,
but the conventional approach to pension accounting says
yes.\3\
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\3\ Kohn, Donald L. 2008. Remarks at the National Conference on
Public Employee Retirement Systems Annual Conference, New Orleans, LA.
May 20.
Evidence of the views of a range of economists on pension discount
rates came in 2012 from the IGM survey of economic experts conducted at
the University of Chicago. This survey poses weekly questions to an
invited panel of 40 senior faculty at top U.S. research universities.
While the relevant question was about public sector pensions as opposed
to multiemployer private sector pensions, the issues are very similar.
Indeed, the liability-weighted average discount rate used in public
pension plans has been around 7.5 percent during this time period, and
the liability-weighted average actuarial rate used in multiemployer
plans in 2016 was 7.3 percent. The panel was asked to express an
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opinion about the following statement:
By discounting pension liabilities at high interest rates under
government accounting standards, many U.S. State and local
governments understate their pension liabilities and the costs
of providing pensions to public-sector workers. (University of
Chicago (2012)) Strongly Agree | Agree | Uncertain | Disagree |
No Opinion
In this survey, a full 49 percent of the respondents selected
``Strongly Agree,'' including Nobel Laureate and MIT professor Bengt
Holmstrom, Nobel Laureate and University of Chicago professor Richard
Thaler, and University of Chicago professor Austan Goolsbee, who served
as the Chairman of the Council of Economic Advisors under President
Obama from September 2010 to August 2011. A further 49 percent of
respondents selected ``Agree.'' Two percent (one respondent) selected
Uncertain, and none disagreed.
The university professors in the IGM panel have displayed a wide
range of views in other IGM surveys on topics such as balanced budgets,
deficits, and tax reform. As such, it seems likely that they would have
heterogeneous views on how to pay for unfunded pension liabilities. But
on this one point, that measuring liabilities using these kinds of
rates understates pension liabilities and costs, the profession has
been nearly unanimous.
The basic point that financial economists have long argued is that
liabilities should be discounted at a rate that reflects the
fundamental risk of the liabilities that one wants to build into the
measurement. If a sponsor--whether a government or a corporation or the
trustees of a multiemployer pension plan--wants to measure the cost of
a guaranteed pension payment under the assumption that this payment
will not be raised or lowered depending on future events (a ``non-
contingent'' payment), the sponsor must discount the promised payment
using the yield on a
default-free fixed-income security (``Solvency Liability'').\4\ Put
simply: if from a policy perspective, one wants to value pension
promises as though they will be kept, the Solvency Liability should be
used.
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\4\ The primary reason to use a higher discount rate would be if
one wanted to mark down the liability to reflect a possible default
(``Market Liability''), which could be useful to employees if they want
to know the value of pension benefits being offered by different
employers, but would be inappropriate as a funding standard. Novy-Marx
and Rauh (2011) and Brown and Pennachi (2016) provide discussions of
these issues.
In contrast, the Budget Liability does not reflect the true present
value cost of delivering on pension promises. Furthermore, if used as a
funding standard, it gives trustees and actuaries very substantial
discretion over appropriate levels of funding. As I will detail below,
one of the main reasons that the corporate single employer system is in
better financial condition than both the State and local plan sector
and the multiemployer sector is that legislation (beginning with OBRA
'87) laid a partial Solvency Liability standard on top of the Budget
Liability standard selected by plan sponsors. While single-employer
plans are still free to invest in risky assets and maintain a funding
standard account based on actuarial valuations, they have also had to
measure and remedy funding shortfalls on something closer to a solvency
standard. Requiring single-employer plan sponsors to bear the costs of
shortfalls leads to more prudent decisions about benefits and
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investment strategies.
An additional complication that often arises is whether a present-
value liability is designed to measure only the pension that has been
earned through service up to the present day, or whether it is designed
to reflect some or even all of the pension that an employee expects to
earn over their entire working career. For an employee who has only
worked for an employer for several years, this could make quite a large
difference. An employee who has worked for, say, 5 years, might be
entitled to only a very small pension if he or she quit work today, yet
the employer might be expecting that the employee will likely work for
many more years and will ultimately receive a larger pension.
The selection of a so-called Actuarial Cost Method will impact how
much of the expected future liability is reflected in today's accrued
liabilities. One of the more common methods, the Entry Age Normal
standard, aims to calculate the cost of the pension as a fixed percent
of salary over the worker's lifetime. This then smoothes the earning of
pension credits, which otherwise would be low when a worker is young
and high when he or she is older. One implication of this smoothing is
that an Entry Age Normal liability reflects some costs that have not
yet been earned yet, and will only be made if some future contributions
come into the plan. In contrast, economists have long recognized that
if one considers only benefits that have been promised up to a certain
date (the ``accumulated benefit obligation'' or ABO in actuarial
language), the present value of liabilities can be directly compared to
the value of a firm's assets as a measure of funding (Bulow (1982),
Brown and Wilcox (2009)).
ii. measuring multiemployer pension obligations
In this section, I provide estimates of the total multiemployer
pension obligations, as well as their funding ratios. I examine the
most recent plan year, as well as historical years, and I consider how
these funding levels and ratios vary by plan code (green, yellow, red,
and critical/declining). The main data source is the public IRS Form
5500 datasets available from the Department of Labor for 2009-2016.
There are three main funding standards that I consider.
(1) The Actuarial funding status, defined as the market value of
plan assets minus actuarial liability from Schedule MB.\5\ This measure
uses the actuarial valuation rate to discount the benefit cash flows.
The actuarial valuation rate had a liability-weighted average of 7.3
percent in 2016, and hence is conceptually equivalent to the Budget
Liability described in Section I above. Most commonly, this liability
measurement uses an Entry Age Normal standard.
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\5\ I use the Unit Credit statement where available, otherwise the
Immediate Gain Method disclosure.
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(2) The Current Liability funding status from Schedule MB, defined
as the market value of plan assets minus the current liability form
Schedule MB. The Current Liability must be calculated using a discount
rate within a range of the 30-year Treasury rate averaged over the
previous 4 years, and must reflect accumulated benefits only (and
therefore it is close to the ABO as described in the previous
section).\6\ This rate had a liability-weighted average of 3.3 percent
in 2016. The Current Liability moves in the direction of a Solvency
Liability, but there is no specific economic reason to use a 30-year
Treasury rate, which generally has a duration substantially longer than
the duration of pension cash flows.
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\6\ Specifically, according to instructions, filers of the Schedule
MB must report a current liability using a discount rate which
``pursuant to the Pension Protection Act of 2006 (PPA), must not be
more than 5 percent above and must not be more than 10 percent below
the weighted average of the rates of interest, as set forth by the
Treasury Department, on 30-year Treasury securities during the 4-year
period ending on the last day before the beginning of the 2016 plan
year.'' Furthermore, this current liability must be computed ``taking
into account only credited service through the end of the prior plan
year. No salary scale projections should be used in these
computations.''
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(3) A funding status based on the Treasury yield curve, which is a
true Solvency Liability. To calculate this measure, I collect zero-
coupon Treasury yields from Bloomberg. According to the PBGC (2016),
the average maturity of retiree obligations in the multiemployer system
is 8 years, and the average maturity of active employee obligations is
14 years. So the reported retiree current liability is rediscounted
using an 8-year zero-coupon yield, and the reported non-retiree
liability is rediscounted using a 14-year zero-coupon yield. This
corresponds to an effective liability-weighted average rate of 2.3
percent in 2016.
How have these rates evolved over time? Figure 1 shows the
liability-weighted averages of these three rate series by year from
2009-2016. The actuarial rate (1) has fallen by 15 basis points or 0.15
percentage points, while the current liability rate (2) has fallen by
ten times as much or 1.5 percentage points. The fact that the current
liability discount rate is so much lower reflects that fact that
providing annuitized streams of income for plan participants is much
more expensive in the low interest rate environment that has taken hold
in recent years--and yet there has been essentially no movement in the
actuarial discount rate that plan sponsors are using for budgeting and
planning purposes. The solvency liability discount rate based on the
Treasury yield curve in (3) shows this decline even more starkly.
It is instructive to compare the actuarial discount rate to the
actual return earned by multiemployer plans over the past two decades.
This is possible with information on the IRS Form 5500 Schedule H and
Schedule MB for 2009-2016, plus supplemental data on Schedule H and
Schedule B for 1996-2008. I define the realized investment return for
each year generally as Investment Income divided by Beginning of Year
Assets at Market Value. However, practices may differ as to whether to
include Other Income (Schedule MB Section II, line 2(c)) as income, and
which expenses from Schedule MB Section II, line 2(i) to include as
expenses.
On average, the closest calculation to plans' own disclosures
seemed to be a broad definition of income which included line 2(c)
``Other Income,'' but a narrow definition of expenses which included
only investment management expenses. Assuming that is appropriate,
Figure 2 shows realized returns on this measure, as well as arithmetic
and geometric average returns. I focus on the geometric average, as the
use of a discount rate requires the compound annualized return on
assets to equal the discount rate for full funding. The geometric
average return is the actual annualized return an investor earns over a
multiple time periods, while the arithmetic average is not.\7\
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\7\ To give a stark example, imagine that in period 1 the stock
market fell by 50 percent and in period 2 it rose by 50 percent. The
arithmetic average return would be 0 percent (break even). But an
investor who invested, say, $100 in the market through both periods
would not break even--they would end up with $75. The geometric average
return reflects the annualized return (or loss) that the investor
actually faces.
Over 1996-2016, the geometric average returns were 6.2 percent, 6.6
percent, and 5.9 percent, for the equally weighted, asset-weighted, and
median series respectively. Excluding Other Income, on the grounds that
some of it might have only been earnable with the incursion of expenses
other than investment management expenses, would lower the geometric
average returns to 6.0 percent, 6.5 percent, and 5.8 percent for the
equally weighted, asset-weighted, and median series respectively. The
fact that the asset-weighted returns are higher reflects relatively
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better performance by larger plans.
In sum, I estimate that the average plan realized returns of 5.8-
6.2 percent over the period 1996-2016, and that the multiemployer space
overall realized returns of 6.5-6.6 percent over the period. Thus, my
analysis of the returns in the Schedule MB filings reveals that over
the past 2 decades, compound annualized returns have fallen short of
the current average level of the actuarial discount rate (7.3 percent),
despite the fact that the period in question was part of a multi-decade
bull market in stocks and other risky assets.
Unfunded liabilities are very different when measured on the
different funding standards. Table 1 shows total unfunded liabilities
for 2009-2016. Looking at the entire multiemployer space, on an
actuarial basis there was $155 billion of underfunding in 2016. On a
current liability basis, this underfunding rises to $582 billion, and
on a solvency basis it rises to $722 billion. It is notable that
underfunding on the current liability and solvency liability standards
have not improved since 2009, the near-trough of asset markets in the
financial crisis; in fact the funding condition has deteriorated.
The overall 2016 actuarial funding ratio is 74 percent, the overall
current liability funding ratio is 44 percent, and the overall solvency
standard funding ratio is 38 percent. Figure 3 illustrates this funding
ratio under the three standards, plus under an arbitrary 10 percent
discount rate and 12 percent discount rate to illustrate that given
discretion to choose the rate, funding ratios can be made arbitrarily
high. If actuaries chose a 10 percent discount rate, the funding ratio
would be 87 percent. If they chose a 12 percent discount rate, it would
be 105 percent.\8\
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\8\ In a sense, given the discrepancy between the realized and
expected returns documented above and the fact that an expected return
is simply the wrong statistic to use as a discount rate, the expected
returns that plans are using as their chosen discount rate are just as
arbitrary.
Although plans on average achieved their targeted returns during
the 2009-2016 period (one during which the S&P 500 index roughly
doubled) funding ratios did not materially improve on any of the
measures. Figure 4 shows in three separate graphs the evolution of
funding ratios for plans in the different zones under the three
different funding standards. This suggests that multiemployer plan
funding may be quite vulnerable to a period in which markets do not
continue the rapid increases seen over the sample period, and also that
neither the minimum funding requirements followed by non-critical plans
nor the funding improvement plans (FIPs) or rehabilitation plans (RPs)
implemented by the endangered and critical plans have led to tangible
progress in funding ratio improvement.
iii. funding and minimum funding requirements:
multiemployer versus single employer
Both the single and multiemployer programs were initially under
ERISA marked by requirements to maintain an annual funding standard
account in which firms were charged with paying the present value cost
of new benefits plus an amortization of unfunded liabilities. However,
Congress strengthened implementation of this principle over time in the
single-employer program (despite some recent funding relief measures),
while essentially removing it for multiemployer plans in weaker
condition in the Pension Protection Act of 2006.
The impacts of these divergent policies can be seen in the data.
The PBGC also computes a funding ratio on the basis of ``the cost to
purchase an annuity at the beginning of the plan year'' to cover vested
benefits, a measure much closer to a solvency ratio. The top panel of
Figure 5 compares the percent of employees in multiemployer versus
single employer plans covered by defined benefit plans with different
levels of this funding ratio.
As of 2015, 39 percent of employees in the multiemployer program
are covered by plans with less than a 40-percent funding ratio, and 33
percent of employees are covered by plans with a funding ratio between
40 percent and 50 percent, so that 72 percent of participants in the
multiemployer plan are covered by plans that have less than half of the
liabilities necessary to meet the PBGC's standard based on the PBGC
rate (which is essentially a solvency standard).\9\ In contrast, as of
2016, less than 1 percent of employees in single-employer DB plans are
covered by plans with less than 50-percent funding ratios on the PBGC
solvency basis and approximately three-quarters of employees in single-
employer DB plans are covered by plans with funding ratios of over 70
percent.
---------------------------------------------------------------------------
\9\ Adding participants in plans that the PBGC has taken over or
has booked but not yet taken over, this rises further to 74 percent.
By international standards, the single-employer DB pension system
in the U.S. would not be considered well-funded (see Rauh (2018)), but
the fact that it is in much better financial condition than either the
multiemployer system or the public plan system is largely a function of
contribution requirements, or at least the ones that existed
historically when Deficit Reduction Contributions (DRCs) were linked to
Treasury yields. Specifically, between 1987 and the early 2000s, firms
with underfunded pension plans operating under the PBGC's single-
employer pension program were required to make DRCs that would close
---------------------------------------------------------------------------
the funding gap in the current liability, based on 30-year bond yields.
This standard was gradually relaxed over time for single-employer
pension plans. The Pension Funding Equity Act of 2004 formally changed
the required interest rate to a weighted average of yields on a
composite of corporate bond rates for 2003-2006. The Pension Protection
Act of 2006 extended that corporate interest rate for DRCs to 2006-
2007, and then for years beginning with 2008 eliminated the dual
funding standard (funding standard account and DRC) and replaced it
with a ``segment rate'' corporate bond yield standard funding targets,
with those segment rates based on a 24-month average of investment-
grade corporate bonds. Further funding relief for single-employer plans
came in the WRERA (2009), PRA (2010), and MAP-21 (2012), the last of
which implemented 25-year smoothing of PPA segment rates.\10\
---------------------------------------------------------------------------
\10\ IRS-5500 Schedule SB Instructions: ``Generally (except for
certain plans under sections 104, 105, and 402 of the Pension
Protection Act of 2006 and CSEC plans under section 414(y)), for
funding purposes, single-employer plans are required to use the 24-
month average segment rates determined under section 430(h)(2) of the
code, as amended by the Moving Ahead for Progress in the 21st Century
Act (MAP-21), the Highway and Transportation Funding Act of 2014
(HATFA), and the Bipartisan Budget Act of 2015 (BBA).''
In addition, starting with MAP-21, Congress has significantly
increased Variable Rate Premiums for single-employer plans. These
premiums will be 4.2 percent of underfunding annually starting in 2019
and linked to inflation. This provides a further incentive for single-
---------------------------------------------------------------------------
employer plans to remain well-funded.
Nonetheless, despite this relaxation of funding rules since OBRA
'87, the legislation surrounding the single-employer program has
adhered to a key principle: if a plan cannot or does not make required
contributions, the sponsor must face an excise tax or terminate the
plan. Furthermore, a firm participating in the single-
employer DB program knows that it will bear the costs of unfunded
liabilities unless the firm goes bankrupt. The multiemployer system
began with that principle in place, at least under actuarial discount
rates, but the principle was substantially eroded over time in several
ways. In general, funding standards in the multiemployer program are
much looser and the responsibility for paying down unfunded liabilities
considerably more dispersed.
The single-employer system also has several additional built-in
protective measures limiting system-wide damage and taxpayer exposure
should plans become troubled. Notably, single employer plans are
subject to an excise tax when they fail to meet required contributions,
which forces plans that are digging themselves into a deeper hole to
terminate. This was the rule for multiemployer plans before the Pension
Protection Act legislation of 2006. The removal of this rule has led to
a situation where there is no practical way to require a failing
multiemployer plan to terminate. As such, multiemployer plans under
current law can become insolvent, receive PBGC assistance, and continue
to promise new benefits. Furthermore, the PBGC has additional
protection through its authority to terminate single-employer plans
that are meeting the normally applicable funding rules if PBGC believes
such plans pose a threat to PBGC's finances.
In a single-employer plan, benefits are both frozen and statutorily
cut to the PBGC level immediately upon termination. This was the case
for multiemployer plans before the Multiemployer Pension Plan
Amendments Act of 1980, but that legislation made insolvency (running
out of money to pay benefits) the insurable event instead of the
termination itself. So while a multiemployer plan that terminates is no
longer allowed to promise new benefits, accrued benefits in
multiemployer are not cut to the PBGC-insured level until the plan runs
out of resources, creating additional taxpayer liability even for
terminated plans.
The CBO has concluded the rules that govern how multiemployer plans
are funded expose the PBGC to the risk of large losses (CBO
(2016)).\11\ The CBO specifically highlights three sources of risk
factors in the multiemployer contribution requirements. First, the fact
that starting with the PPA of 2006, employers participating in plans
that were deemed critically underfunded were allowed to contribute less
than the minimum required contribution, with RPs that are apparently
inadequate replacements. The CBO's conclusion:
---------------------------------------------------------------------------
\11\ See page 2 of that report.
The effects of the exception to the rules governing minimum
contributions can be seen in the contribution rates of plans
with a funding ratio of less than 65 percent, almost all of
which are following rehabilitation plans. More than half of
those pension plans (weighted by liabilities) will be unable to
eliminate their underfunding if they do not increase
---------------------------------------------------------------------------
contributions or negotiate cuts in benefits. CBO (2016)
It therefore seems clear that the rehabilitation plans are not
sufficient to restore the funding to that extent that would have been
possible had it been possible to continue minimum contribution levels.
The second aspect of funding rules identified by the CBO as leading
to inadequate funding is the framework for employer withdrawals from
multiemployer plans. Some employers have testified before the Joint
Select Committee that the withdrawal liability may be quite large in
comparison to the employer's total assets or income. However, the size
of withdrawal liability for remaining employers is in part so large
because of the terms under which prior employer participants were
allowed to withdraw from the plans. The withdrawal rules are complex
(see Wolf and Spangler (2015)), but there are many ways in which they
usually underestimate the true cost of withdrawing from a plan.
Specifically:
Regardless of an employer's attributable share of plan
underfunding (and except in cases of mass withdrawal) an
employer's withdrawal liability is limited to 20 annual
payments, each of which is capped by the highest contribution
rate of the employer in the 10 years prior to withdrawal
multiplied by the average contribution base of the employer in
the three consecutive years with the highest contribution bases
over those 10 years. The 20-year limit applies regardless of
what percentage of the employer's attributable share of the
underfunding is met by the 20 annual payments.
There is no interest on these payments.
The allowable withdrawal liability is generally based on the
share of contributions an employer has made during a specified
number of previous years, not its share of the unfunded vested
liability. Employers choosing to withdraw are likely to be ones
for whom this comparison (share of recent contributions versus
share of liability) is likely to be favorable.
The total unfunded liability for purposes of computing the
employer's attributable share is calculated using a discount
rate close to the actuarial rate, and the plan has no recourse
to the employer if investment returns do not achieve their
target.\12\
---------------------------------------------------------------------------
\12\ This is an issue being litigated. A recent case ruled that the
plan in that case could not use a rate lower than the actuarial
discount rate but left open room that plans might be allowed to use a
somewhat lower rate in some circumstances. The New York Times Co. v.
Newspapers and Mail Deliverers'-Publishers' Pension Fund, No. 1:17-cv-
06178-RWS (S.D.N.Y. March 26, 2018)]
---------------------------------------------------------------------------
Regarding the last of these bullet points, the CBO explains:
Even if the withdrawing employer makes withdrawal liability
payments to cover the entire liabilities of orphan
participants, the fact of those participants' promised benefits
raises the risk of future underfunding, because a withdrawing
employer is not obligated to reimburse the plan for any
investment losses on its withdrawal liability payments. CBO
(2016)
The mismeasurement of the withdrawal liability is therefore another
channel through which understatement of the liability through actuarial
discount rates has had grave consequences for multiemployer funding. A
further issue with regard to withdrawal liability is that the
contribution rate increases as part of a funding improvement plan or
funding rehabilitation plan are disregarded for purposes of calculating
the contribution rate used in determining the 20 years of annual
payments. Many plans who wish to raise rates to deal with underfunding
must also consider whether rate increases will lead to employers
withdrawing and locking in older, lower rates.
The third factor that the CBO argues has contributed to inadequate
funding and risk of insolvency is what it deems ``Industry and
Demographic Factors,'' highlighting the decline of the manufacturing
and construction sectors. As the CBO explains, the relevance of the
industry declines for the solvency of plans is a cash flow issue.
That decline has reduced the ability of underfunded plans to
forestall insolvency because, with fewer active participants,
plans have less cash coming in from normal cost contributions
that could be used to pay current benefits. CBO (2016)
That is, the industry decline is primarily relevant only if one
believes that a pension plan should be allowed to pay retirees using
the contributions of current workers.
Despite the slowdown in these industries, there are nonetheless
many active participants who have joined multiemployer plans in the
past 5 years. This statement highlights the risks faced by these more
recent hires, whose contributions are being used to pay retirement
benefits of current retirees. I calculate that in the largest 20
multiemployer plans alone, there were 369,000 employees in 2016 with
less than 5 years of accumulated service. Extrapolating this to the
universe of multiemployer plans would imply 960,000-990,000 of these
individuals in the universe. That is, there are 1 million individuals
who have begun to participate in a multiemployer plan in the past 5
years, and on whose behalf employers are contributing to a system that
on standardized measures is in grave danger of failure. By allowing
plans at risk of insolvency--or even already insolvent plans--to
continue to take contributions from new employees, without a correction
of these funding rules, the system is placing younger plan members at
even greater risk than more senior members of the plans.
In sum, the funding rules for multiemployer plans have long been
inadequate. The sources of this inadequacy are mismeasured costs
through the use of actuarial discount rates; the failure to lay
solvency-based funding requirements on top of the actuarial standard as
was done in the single-employer plans; and the withdrawal liability
calculations which allowed employers to leave multiemployer plans
without paying the true present value of unfunded vested benefits.
iv. standards for when plans are making sufficient contributions
When is a multiemployer plan making sufficient contributions? One
standard would be when the contributions exceed the cost of new
benefits plus interest on the unfunded liability. That's essentially a
``treading water'' standard--it means that the unfunded liability isn't
getting larger. Another standard would be contributing the cost of new
benefits, plus progress towards paying down (or ``amortizing'') the
unfunded liability. Whether a plan is achieving either standard will
depend on the chosen liability measurement. Plans that appear to be
treading water or amortizing the unfunded liability under the actuarial
liability measure may not be doing so under a solvency measure.
To what extent is the system as a whole meeting these standards?
Figure 6 shows total multiemployer plan contributions relative to the
cost of new benefits, the cost of new benefits plus interest on the
unfunded liability, and the cost of new benefits plus amortization. The
three panels show these comparisons under the three different
measurements in Section II: the actuarial measurement, the current
liability measurement, and the solvency liability measurement.\13\
Contributions are the same in all three graphs--they totaled $18.20
billion in 2009 and rose to $27.41 billion in 2016. As shown in the top
graph, these are more than both the treading water standard and the
amortization standard based on actuarial measurement. The middle and
bottom graphs show that contributions are substantially below both the
treading water standard and the amortization standard on the current
liability and solvency liability measurements. Specifically:
---------------------------------------------------------------------------
\13\ Normal costs are presented in the Schedule MB of the 5,500
filings on an actuarial discounting basis. The current liability normal
cost is also provided as the plan's expected increase in current
liability during the plan year. The solvency liability normal cost is
calculated under the assumption that the duration of the newly accrued
pension promises is 17.5 years.
To meet the treading water and amortization standards under
the current liability, plans would respectively have had to
contribute $42.26 billion and $43.98 billion in 2016, increases
of 54 percent and 60 percent respectively.
To meet the treading water and amortization standards under
the current liability, plans would respectively have had to
contribute $42.23 billion and $59.15 billion in 2016, increases
of 54 percent and 216 percent respectively.
What percentage of plans are meeting these standards? Figure 7
shows for green zone, endangered, critical, and critical-declining
plans respectively the percent of plans that are contributing at least
the normal cost plus a 30-year amortization of the unfunded liability.
As of 2016, 86 percent of green zone, 77 percent of yellow/orange zone,
and 46 percent of non-declining red zone were meeting this standard on
an actuarial liability basis. These figures drop to 7 percent, 11
percent and 2 percent on the current liability basis; and 1 percent, 4
percent, and 2 percent on the solvency liability basis. Unsurprisingly,
very few plans that are critical and declining are meeting the standard
of contributing at least the normal cost plus a 30-year amortization of
the unfunded liability on any measure.
Figure 8 shows that somewhat more plans were meeting the ``treading
water'' standard as of 2016. As of 2016, 89 percent of green zone, 88
percent of yellow/
orange zone, and 55 percent of non-declining red zone were meeting this
standard on an actuarial liability basis. These figures drop to 16
percent, 34 percent and 17 percent on the current liability basis; and
they are 15 percent, 35 percent, and 15 percent on the solvency
liability basis.
Overall as of 2016, 71 percent of all multiemployer plans are
contributing at least the normal cost plus a 30-year amortization of
the unfunded liability, and 75 percent are at least ``treading water''
under the actuarial measurement. But under the much more appropriate
Treasury yield curve solvency basis, the picture looks quite different.
Only 1.4 percent of multiemployer are contributing service cost plus
30-year amortization, and only 17 percent are treading water.
v. loan programs and pension math
Several proposals have been made to create loan programs for
multiemployer plans. Notably, S. 2147 (Butch Lewis Act of 2017) would
``amend the Internal Revenue Code of 1986 to create a Pension
Rehabilitation Trust Fund, to establish a Pension Rehabilitation
Administration within the Department of the Treasury to make loans to
multiemployer defined benefit plans,'' and S. 1911 (American Miners
Pension Act of 2017) would ``transfer certain funds [from the Abandoned
Mine Reclamation Fund] and provide loans to the 1974 United Mine
Workers of America (UMWA) Pension Plan in order to provide pension
benefits for retired coal miners.''
The logic behind a loan program is generally based on the same
fallacies that underlie the measurement of pension obligations using
expected return on assets. The proposals are often sold as a win for
taxpayers under the idea that the plan will pay a low fixed rate of
interest to the Federal Government, and then invest the proceeds in its
portfolio of risk assets which it hopes will earn the actuarial
expected rate of return. But if this were clearly a good policy, then
voters would want to urge the Federal Government to borrow far greater
amounts of money and invest it in the stock market on its own behalf.
For example, consider the Federal Government's projected budget
deficit for the current fiscal year. The CBO has projected an $804-
billion budget deficit for fiscal year 2018. Federal budget deficits
generally must be covered through additional borrowing. So an FY18
budget deficit of $804 billion would add $804 billion to the Federal
debt until the time that it could be paid back. Without a plan to pay
it back, that addition to the Federal debt would be assumed to be
indefinite, and would certainly appear on the horizon of a standard 10-
year budget window.
According to the same flawed logic behind the loan program,
however, the Federal government could solve its problem of creating
debt over a 10-year budget window in the following way. Instead of
borrowing just $804 billion today, it could borrow $1.608 trillion
today (twice the budget deficit) from taxpayers. Of the $1.608 trillion
it borrowed, half of that ($804 billion) could go to pay for the
unfunded expenditures this year, and the other half ($804 billion)
could be invested in a portfolio of assets similar to that of a pension
fund.
If these funds are assumed to have a return of 7.2 percent per
year, the entire $1.608 trillion could be assumed to be paid off in 10
years, as the $804 billion growing at 7.2 percent per year would double
in 10 years, appearing to eliminate the debt. Of course, the Federal
Government would have to pay around 3 percent annual interest on the
borrowing, so this program would cost $24.1 billion per year over each
of the next 10 years--but that $241 billion spread over 10 years would
be a comparatively small price to pay for apparently ``eliminating'' an
$804 billion current budget deficit. The government would essentially
be assuming that it could book as profit the spread between the 3
percent borrowing rate and the 7.2 percent investment return.
Furthermore, the problem of the interest costs could be ``solved''
by investing more aggressively. Many institutional investors have
return targets of 8 percent or even more. If the government could
assume an 8.9 percent rate of return, the $804 billion portfolio would
grow enough to pay off the $1.608 trillion borrowing plus all accrued
interest at the end of the 10 years. Assuming the 2.9 percent June 2018
year-on-year CPI-U inflation rate persists for 10 years, this
assumption could be disclosed as a ``real return assumption'' of just 6
percent. By borrowing more than necessary to fund the deficit and
investing the balance in risky assets that it assumes will earn high
enough returns to repay all the debt, the Federal Government could
assume its budget deficit away.
The clear flaw in this logic is that it ignores the risk that the
asset pool will not achieve the expected return. Loans to multiemployer
plans, which those plans would then invest in portfolios of assets, are
analogous. The fact that the Federal Government would not undertake
such transactions on its own account reflects that fact that it would
be concerned about the inherent risk in doing so. By loaning money to
the multiemployer plans to invest in their portfolios, the Federal
Government would be acting in a way similar to the buyers of pension
obligation bonds (POBs) issued by some State and local governments. The
Federal Government would thus be placing taxpayer money at risk if the
loans were not able to be repaid in full due to investment returns that
fall short of the target.
vi. concluding remarks and policy proposals
To protect the interests of all stakeholders, it is critical in the
management and regulation of pension plans to ensure proper measurement
of costs and liabilities. While there is hardly any disagreement among
financial economists as to the appropriate way to measure pension
liabilities for the purposes of determining solvency, the pension
actuarial community has largely rejected the financial economics view.
One source of the disagreement seems to be the fact that disclosure
requirements and funding requirements are often linked (Lucas (2017)).
Simply reporting the appropriate solvency-based defeasement measure of
a pension promise reveals its true cost in today's dollars. The mere
disclosure of the number that the finance profession agrees is the
right way to measure the solvency of a pension system should not be
controversial. While multiemployer plans are required to disclose the
``current liability,'' which is considerably closer to a true solvency
standard than the actuarial rate, a true solvency number based on the
Treasury yield curve, with very limited or preferably no smoothing,
should be required for multiemployer plans.
The optimal approach to funding a pension plan, particularly one
that is already as underwater as the typical multiemployer plan is on a
solvency basis, is a more difficult challenge. In order to protect the
interests of both plan participants and taxpayers in the multiemployer
system, it is important to move (gradually) to a funding standard that
ensures that underfunded plans take real steps to remediate unfunded
liabilities as measured on an intellectually solid basis, as opposed to
one based on wishful thinking. This is the logic that supported the
introduction of deficit reduction contributions to the single-employer
system in 1987, as well as the provisions of the Pension Protection Act
of 2006 that required single-employer plan sponsors to use segment
yield curves as a funding standard measure.
To address the incentive that employer might have to withdraw, the
rigorous funding standard should be phased in slowly, with near-term
contributions initially limited to some measure of affordability for
employers, such as by capping the growth in employer contributions for
a period of years. Further, Congress should act immediately to change
the withdrawal liability to reflect the true value of unfunded
liabilities.
In sum, the approach to fixing the multiemployer system has focused
on funding relief for troubled plans and opening the door for trustee
boards to cut benefits (MPRA 2014). This has been the wrong approach,
and it hurts employees, retirees and taxpayers. The correct approach is
to stop digging the hole.
Specifically, given the risk that plan participants face, Congress
should require multiemployer systems not paying the normal cost plus
long-term amortization to stop making new promises (freeze the plan).
Frozen plans should be required to stabilize the funding level by
contributing interest on unfunded liabilities plus any additional
contributions that might be necessary to ensure that they do not run
out of money in the next several decades. Plans that do not follow
these rules should be subject to an excise tax in the amount of the
missed contributions, which was the rule before the Pension Protection
Act of 2006. Knowing that the consequences of not meeting required
contributions is the excise tax, the employers and union would then
decide on their own to either come up with the required contributions,
or if they are unable or unwilling to do so they would choose to
terminate the plan rather than pay the excise tax. Termination should
be automatic rather than discretionary so that PBGC is not subject to
political pressure not to terminate plans on a case-by-case basis.
The PBGC under current law is backed solely by the premiums paid by
the plans, not by Federal taxpayers. It is therefore important that
PBGC be shored up through risk-based premiums, so that PBGC will be
able to provide the statutory guarantee to retirees in any plans that
should fail. It is equally important that the PBGC has the authority to
protect its own financial condition by initiating terminations if plans
are putting unreasonable risk on the insurance program, and by reducing
benefits to the PBGC level upon termination. This was the rule for
multiemployer plans before the Multiemployer Pension Plan Amendments
Act of 1980, and is still the rule for single employer plans today.
These principles remain the same even if Congress were to vote to
extend funding for the PBGC, as they would be essential to protect the
interest of taxpayers as well as plan participants.
References
Arrow, K., and Debreu, G., 1954, ``Existence of an Equilibrium for a
Competitive Economy,'' Econometrica 22(3), 265-290.
CBO, 2016, ``Options to Improve the Financial Condition of the Pension
Benefit Guaranty Corporation's Multiemployer Program,'' CBO.
Bulow, J., 1982, ``What Are Corporate Pension Liabilities?'', Quarterly
Journal of Economics 97(3), 435-452.
Brown, J., and Wilcox, D., 2009, ``Discounting State and Local Pension
Liabilities,'' American Economic Review 99(2), 538-842.
Brown, J., and Pennachi, G., 2016, ``Discounting Pension Liabilities:
Funding Versus Value,'' Journal of Pension Economics and Finance 15(3),
254-284.
Gold, J., 2015, ``Public Pension Crisis: Role of the Actuarial
Profession,'' working paper.
Lucas, D., 2017, ``Towards Fair Value Accounting for Public Pensions:
The Case for Delinking Disclosure and Funding Requirements,'' MIT Sloan
working paper, 5399-17.
Novy-Marx, R., and Rauh, J., 2011, ``Public Pension Promises: How Big
Are They and What Are They Worth?'', Journal of Finance 66(4), 1211-
1249.
Pension Benefit Guaranty Corporation, 2016, ``Data Tables,'' https://
www.pbgc.gov/sites/default/files/2016_pension_data_tables.pdf.
Rauh, J., 2017, ``Hidden Debt, Hidden Deficits: 2017 Edition,'' Hoover
Institution essay.
Rauh, J., 2018, ``Fiscal Implications of Pension Underfunding,''
working paper.
Society of Actuaries, 2006, ``Pension Actuary's Guide to Financial
Economics,'' Joint AAA/SOA Task Force on Financial Economics and the
Actuarial Model.
Wolf, C., and Spangler, P., 2015, ``Withdrawal Liability to Multi-
Employer Pension Plans Under ERISA,'' Vedder Price.
[GRAPHIC] [TIFF OMITTED] T2518.001
Table 1: Total Unfunded Liabilities Under Different Standards ($ billions)
This table shows the total unfunded liabilities under three different standards--actuarial, current liability,
and solvency--as of the beginning of the plan year, from 2009 to 2016. The actuarial and current liability
measures are from the IRS 5500 Form MB datasets from the Department of Labor. The solvency liability is
calculated using duration-matched points on the Treasury yield curve.
----------------------------------------------------------------------------------------------------------------
(1) (2) (3)
-----------------------------------------------------------------------------
Actuarial Current Liability Solvency Liability
----------------------------------------------------------------------------------------------------------------
2009 (175.3) (398.9) (538.0)
2010 (154.1) (405.0) (490.6)
2011 (144.8) (406.3) (546.8)
2012 (170.0) (474.2) (719.0)
2013 (152.6) (539.7) (769.2)
2014 (129.6) (525.5) (627.0)
2015 (138.3) (561.2) (722.3)
2016 (154.6) (581.9) (721.7)
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] T2518.002
----------------------------------------------------------------------------------------------------------------
Mean Investment
Return (Equally Mean Investment Median Investment
Weighted) Return (Weighted) Return
----------------------------------------------------------------------------------------------------------------
Baseline
Arithmetic Average 6.52% 7.00% 6.31%
Geometric Average 6.17% 6.61% 5.94%
Excluding ``Other Income''
Arithmetic Average 6.34% 6.86% 6.19%
Geometric Average 6.00% 6.47% 5.83%
----------------------------------------------------------------------------------------------------------------
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______
Questions Submitted for the Record to Joshua D. Rauh, Ph.D.
Question Submitted by Hon. Orrin G. Hatch
Question. How does the condition of the multiemployer pension
system compare to the State and local pension systems? Do you believe
that the way Congress handles the multiemployer pension crisis will set
a precedent that will affect how challenges facing State and local
pension systems will be dealt with? Please provide graphical and other
data relevant to your response.
Answer. How Congress decides to address the multiemployer pension
crisis may well set a precedent for how legislators will deal with the
possibility that they will face similar calls for bailouts of State and
local pension systems. In response to your question, I present here an
update of analysis in my paper ``Hidden Debt, Hidden Deficits: 2017
Edition'' (Rauh (2017)), which calculates stated and solvency-based
measures of unfunded pension liabilities for State and local
governments for plan year 2015. The methodology is based on Novy-Marx
and Rauh (2011a). The update in this section presents statistics using
the same methodology for plan year 2016.
The study is conducted in a sample of 269 State pension plans and
387 local pension plans, for a total of 656 plans. The State plans
consist of all primary plans sponsored by U.S. States. The local plans
consisted of all municipal plans in the top 170 cities by population
according to the U.S. Census, and the top 100 counties by population. I
estimate that this covers over 95 percent of the public plan universe
by assets.
As of 2016, unfunded liabilities had reached $1.74 trillion under
recently implemented governmental accounting standards (GASB 67);
however, they amount to $3.78 trillion under solvency valuation
techniques that use the Treasury yield curve as of December 2016 to
value the liability. As I explained in my testimony, to measure the
cost of a guaranteed pension payment under the assumption that this
payment will not be raised or lowered depending on future events (a
``non-contingent'' payment), the sponsor must discount the promised
payment using the yield on a
default-free fixed-income security, as this solvency valuation
technique does. This solvency valuation considers only a narrow
definition of the liability as the present value of payments already
promised based on current service and salary levels, and it assumes
employees will not start taking benefits until their retirement date
(as opposed to the earliest advantageous date). This calculation is
known as an Accumulated Benefit Obligation (ABO). If there are legal
restrictions on changes in benefits to current employees then the ABO
understates the liability.
The GASB 67 standards first implemented for plan year 2014
preserved the basic flaw in governmental pension accounting: the
fallacy that liabilities can be measured by choosing an expected return
on plan assets. As with the multiemployer actuarial liability, this
procedure uses as inputs the forecasts of investment returns on
fundamentally risky assets and ignores the risk necessary to target
hoped-for returns. The GASB 67 accounting standards tempered the
effects of this assumption slightly by requiring some systems (58 plans
or 8 percent of the sample) to use somewhat lower rates in their
liability measurement for GASB 67 purposes.
The liability-weighted average discount rate that plans in my study
chose as of 2016 for the purposes of their GASB 67 disclosures was 7.1
percent, in contrast to a weighted-average expected return of 7.5
percent. Funding decisions are still generally made with respect to the
expected-return benchmark, not the GASB 67 rate. The solvency standard
I calculate using the Treasury yield curve selects the point on the
Treasury yield curve closest to the duration of the liabilities, which
is implied by the GASB 67 disclosure on rate sensitivity. The average
rate used for the solvency yield based on the December 2016 yield curve
is 2.7 percent.
The table below summarizes further results. Panels (I) and (II)
show assets, liabilities, and discount rates. Panel (III) shows cash
flows into and out of State and local plans. Total State and local
employer contributions were $114.2 billion in 2016, plus supplemental
State government contributions of $14.7 billion. These plus the $46.9
billion in member contributions total $175.9 billion in total
contributions against $278.6 billion in payouts. For plan asset levels
to remain stable, the difference must be made up for with investment
returns.
A better measure of stability, however, is not whether
contributions plus investment returns meet the level of payouts, but
rather whether they meet the true level of costs, which as explained in
the testimony is normal cost plus interest on the unfunded liability.
The first line of Panel (IV) shows that under the expected return
actuarial standard, State and local governments in total fell $8.4
billion short of meeting the ``treading water'' standard of normal cost
plus interest on the unfunded liability. Under the solvency standard,
$130.7 billion of additional contributions would be required to tread
water and prevent negative amortization.
As with the measures of unfunded liabilities for multiemployer
systems, the total unfunded liabilities of public systems have not
improved substantially in the past 5 years. In response to my estimate
in 2012 that public pension liabilities were approaching $4 trillion,
Robert Merton, an economics professor at MIT and Nobel Laureate was
quoted in The Financial Times: `` `This $4tn figure is a lower bound,'
argues Robert Merton, economics professor at MIT.'' This is relevant
for the multiemployer private plan discussion for several reasons.
First, many of the issues are parallel. Second, the stronger the belief
by State and local governments that the Federal Government will bail
them out, the less discipline they will choose to impose upon
themselves to address the funding problems on their own.
Table: State and Local Government Pension Funding (2016)
This table shows the 2016 summary totals for all public pension plans in
the United States, including assets, liabilities, discount rates, flows
into and out of State and local plans, and the additional contributions
necessary to meet normal cost plus interest on unfunded liability under
the expected return actuarial standard and the solvency standard.
(Amounts in billions of dollars)
------------------------------------------------------------------------
State & Local
State Pensions Local Pensions Pensions
(N=269) (N=387) (N=656)
------------------------------------------------------------------------
I. Assets and
Liabilities
GASB 67 Standards
Total Pension 4,401 841 5,242
Liability
(TPL)
Assets 2,961 547 3,508
Net Pension 1,439 294 1,733
Liability
(NPL)
GASB 67 67.3% 65.1% 66.9%
Funding
Ratio
Solvency
Standards
Solvency 6,073 1,211 7,284
Liability *
Assets 2,953 547 3,508
Unfunded 3,112 664 3,776
Solvency
Liability
Solvency 48.6% 45.2% 48.2%
Funding
Ratio
------------------------------------------------------------------------
II. Discount Rates
GASB 67 Standards
Average
Discount
Rate
Liability 7.09% 7.05% 7.11%
Weighted
Unweighte 7.01% 7.17% 7.11%
d
Expected
Return
Liability 7.47% 7.23% 7.45%
Weighted
Unweighte 7.34% 7.24% 7.28%
d
Market Value
Standards
Average
Discount
Rate
Liability 2.72% 2.73% 2.72%
Weighted
Unweighte 2.70% 2.67% 2.68%
d
Average
Duration
Liability 10.28 11.18 10.42
Weighted
Unweighte 11.33 10.60 10.91
d
------------------------------------------------------------------------
III. Flows
Benefits and 235.1 43.5 278.6
Refunds
Employer 87.3 26.9 114.2
Contributions
Member 40.5 6.4 46.9
Contributions
State 14.4 0.3 14.7
Contributions
Total 142.3 33.6 175.9
Contributions
------------------------------------------------------------------------
IV. Accrual Basis:
Necessary Additional
Contributions
Additional
Necessary
Contributions
To prevent 9.5 -1.1 8.4
rise in
unfunded
actuarial
liability
To prevent 112.7 18.0 130.7
rise in
solvency
liability
------------------------------------------------------------------------
* Accumulated Benefit Obligation using the December 2016 Treasury yield
curve.
Necessary Additional Contributions to meet normal cost plus interest
on unfunded liability.
______
Questions Submitted by Hon. Sherrod Brown
Question. In your written testimony, you observe that plan trustees
are required to use reasonable assumptions and that trustees who
budgeted to pay pensions using excessively high discount rates violated
that statute by using unreasonable assumptions. Please identify the
specific rate threshold for each of the last 10 years above which a
trustee would violate ERISA's fiduciary rules by using that rate to
value pension liabilities for minimum funding purposes.
Answer. The fiduciary obligation is generally understood to require
trustees to act using care and loyalty. These terms are open to
interpretation, but in my opinion acting with care and loyalty has a
few clear implications: trustees should only act in the best interests
of plan participants, and they should make prudent choices with respect
to contributions and investment selections. In addition, trustees must
use assumptions, each of which must be reasonable under the tax code
and ERISA, including the discount rates for liabilities.
In my view, fiduciary duties are not definable by one specific rate
threshold that prevails for all plans. Actions that satisfy the
requirements of care and loyalty may differ for a fully funded plan
versus an underfunded plan. The more underfunded a plan, the higher the
stakes are if not enough is contributed in any given year and
investments or future contributions fall short of projections, as
participants run the increasing risk of not receiving benefits.
It is indisputable that many plans are in poor financial condition.
The reason these hearings are occurring is that large numbers of
beneficiaries are at risk of not receiving their full pensions. There
are only two possible explanations. The first is that trustees
satisfied all fiduciary duties, acting with care and loyalty, but
simply suffered several strokes of bad luck. The second is that
trustees did not satisfy their fiduciary duties.
Those who favor the ``bad luck'' explanation often point to the
impact of the Great Recession on the stock market. But this cannot be
an explanation. The pre-crisis peak close of the S&P 500 index was
1,565 in October 2007. As of August 31, 2018, the S&P 500 closed above
2,901. So even an investor who had placed all their money in the stock
market on the eve of the crisis would have approximately doubled their
money between then and the present time. The investment performance of
multiemployer plans is highly correlated with that of the stock market.
As such, this period must be seen as primarily one of very good luck in
markets, not very bad. Alternatively, those who favor the ``bad luck''
explanation point to declines in the industries in which firms that
offered multiemployer plans were operating. But trustees had years to
increase contribution rates gradually and to support sustainable
benefit levels. Trustees evidently were not willing to recognize that
the price of an annuity can change over time and that the contribution
needed to provide a certain level of benefits in one year may be
woefully insufficient in another year. Pensions must be funded as the
pensions are earned. It is not reasonable to count on future workers to
pay the benefits earned by today's workers.
The discount rate used to measure liabilities must be linked to the
market price of annuities. Furthermore, to the extent plan trustees
believe that contributions cannot be significantly raised over a short
period of time in response to investment losses or other events, they
are under a fiduciary obligation to fund liabilities using a standard
that is close to this one, and to invest conservatively so that
dramatic increases in contributions are not needed to make good on the
promises the trustees made. This need to fund and invest based on more
conservative assumptions is even stronger when the plan has already
reached poor funding levels, as the plan beneficiaries are increasingly
at risk.
In sum, there is no specific rate threshold specified for each year
that would be a cutoff for all plans and could be used as a litmus test
for whether action was consistent with the care and loyalty standard.
But I cannot see how--given the many tools available at the disposal of
plan trustees--the current woeful condition of many multiemployer plans
is consistent with the idea that plan trustees acted with care and
loyalty as far as the protection of beneficiary interest is concerned.
Question. Your testimony is primarily focused on discount rates for
present value determinations. Are there other assumptions that plans
routinely make that you believe are problematic? Please explain fully.
Answer. Other key assumptions that plans routinely make include
assumptions about plan participant retirement behavior, plan
participant longevity, future employer withdrawal, and the future
contribution base. I have not conducted a study of these factors and
their effects on plan finances, but would argue that they should be
investigated. In particular, the fact that many plans currently report
that they are stressed by employer withdrawal indicates that their
prior assumptions about which employers would remain with the plan and
which would withdraw under conditions that left the plan short of
necessary resources were too optimistic.
Question. You authored a paper in 2010 (``Are State Public Pension
Plans Sustainable? Why the Federal Government Should Worry About State
Pension Liabilities''). The paper includes projections on when public
pensions might exhaust their funds, with several States running out of
funds in 2018-2020; specifically, Illinois in 2018, Connecticut,
Indiana, and New Jersey in 2019, and Hawaii, Louisiana, and Oklahoma in
2020. Have actual events to date borne out the projections in the paper
for these States? Are there particular assumptions made in the paper
that have not proved to be true, and if so, why not? Please fully
explain your answer.
Answer. A number of the States in question apparently heeded the
warning that if nothing were done many pensions would be at risk of
insolvency. State and local governments as a whole have increased
contributions to pensions from their general fund budgets very
substantially which has delayed the exhaustion of the funds.
According to Census Bureau figures, annual contributions to State
and local government pension plans were $119.6 billion in the year
2008, the latest year for which plan data was available at the time. In
2016, the latest year for which data are available, they were $191.6
billion, or a 60-percent increase over those 8 years. Those individuals
who are receiving fewer public services than they otherwise would, or
paid increased taxes or contributions to fund public employee pensions,
have paid the price of postponing the exhaustion of the pension funds.
The second factor was the stock market. In June 2010, the S&P 500
index ended the month at 1,031, while as noted above it is currently
over 2,900, an almost three-fold increase. Despite this historic bull
market, and burdensome contribution increases, the unfunded liabilities
in State and local government pension systems are no smaller than they
were in at the end of 2008 when the stock market was near a trough. The
$3.78 trillion cited above is in fact extremely close to the earliest
post-crisis estimates I gave of unfunded pension liabilities.\1\ Had
the market not had the good fortunate of generating this torrid pace of
growth in equity market valuations, many systems would indeed have
become insolvent.
---------------------------------------------------------------------------
\1\ Novy-Marx and Rauh (2009) found State unfunded liabilities of
$3.23 trillion, and Novy-Marx and Rauh (2011b) found $0.68 trillion,
for a total of $3.91 trillion.
Question. Your testimony notes that the average plan realized
returns of 5.8 percent to 6.2 percent over the period 1996-2016. Please
explain why 1996 was selected as the beginning year for this analysis
of investment returns? How does the analysis change if the beginning
---------------------------------------------------------------------------
year was 5, 10, or 20 years earlier?
Answer. It was selected as the beginning year for the analysis
because those were the years for which the data were downloadable from
the United States Department of Labor website: https://www.dol.gov/
agencies/ebsa/employers-and-advisers/plan-administration-and-
compliance/reporting-and-filing/form-5500.
I would be happy to consider further analyses of risk and return if
more data were made available.
Question. The analysis also appears to exclude returns from ``Other
Income.''
Answer. That statement is incorrect. The estimates I emphasize
(Baseline) include ``Other Income.'' Allow me to quote directly from my
report and annotate it to be very clear:
Over 1996-2016, the geometric average returns were 6.2 percent,
6.6 percent, and 5.9 percent, for the equally weighted, asset-
weighted, and median series respectively [NOTE: and these
estimates include Other Income]. Excluding Other Income, on the
grounds that some of it might have only been earnable with the
incursion of expenses other than investment management
expenses, would lower the geometric average returns to 6.0
percent, 6.5 percent, and 5.8 percent for the equally weighted,
asset-weighted, and median series respectively.
So the first point to make is that the estimates I emphasized
include ``Other Income.'' The second point is that inclusion or
exclusion of ``Other Income'' doesn't seem to matter very much in this
aggregate analysis, as it has an effect of 10-20 basis points on the
overall conclusions.
Question. Please fully explain what Other Income is and why it is
appropriate to exclude it from the analysis.
Answer. It is arguable whether it is appropriate to include it or
exclude it, and in situations where reasonable arguments can be made in
both cases, the general best practice is to show the calculations both
ways, which is what I do. And I also emphasize the results that include
Other Income, not the results that exclude Other Income.
Other Income includes plan income that is not directly related to
the investments but that may have an indirect link. For example, a fee
rebate or restorative payments (money refunded to the trust because it
was determined that a fee should not have been paid out of the trust)
might fall into Other Income.
Question. Your testimony includes a quote from an official at the
Federal Reserve who notes that ``[calculating the present value of
liabilities using the projected rate of return] makes little sense from
an economic perspective. If they shift their portfolio into even
riskier assets, does the value of the liabilities . . . go down?''
Please explain whether trustees subject to ERISA have unfettered
discretion in the selection of a plan's investment strategy or any
specific plan asset. Are there limits to the degree of risk that
trustees may undertake when investing plan assets?
Answer. Trustees are subject to ERISA's fiduciary rules. As stated
above, the fiduciary obligation is generally understood to require
trustees to act using care and loyalty. The duty of care is generally
tied to the standard of prudence, or to quote from the law: ``with the
care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character and with like aims.''
According to the principles of financial economics, the present
value of a pension liability has nothing to do with the investment
strategy implemented with the assets. This is true regardless of
whether the trustees are meeting the fiduciary standard or not with
their investment strategies.
______
Questions Submitted by Hon. Virginia Foxx,
a U.S. Representative From North Carolina
Question. For what reasons might the trustees of a multiemployer
defined benefit pension plan decide to increase investment risks, and
what consequences might these decisions have on plan participants? Do
you believe a pension plan structure that relies on large investment
returns to make up for insufficient contributions is sustainable?
Answer. Under the current law and governance of multiemployer
pension systems, the more investment risk that a plan takes, the higher
will be the actuarial discount rate and the lower will be current
contributions. This reduces the contribution burden on currently
participating employers and employees in the plan, but it increases the
burden on whoever must pay or suffer if the targeted investment returns
are not achieved. In the multiemployer context, the first ones who
suffer are the employers who do not withdraw from the plan (to the
benefit of employers who do), and the generation of employees who must
pay higher contributions (to the benefit of current retirees who are
relying more on current contributions of their younger colleagues).
Once those sources are exhausted, the next group that suffers are the
current and future retirees at risk of seeing their benefits cut, and
the taxpayers if called on to bail out the program.
The more risk plans take, the greater their reliance on future
investment returns to pay benefits. Thus, as risk increases, plan
participants who expect to receive pensions in the future are
increasingly at risk of not receiving their pensions. Any system that
relies on increasing contributions of new entrants or employers
remaining in the plan in order to meet promises to those already
retired and/or not paid for by employers remaining in the plan is
unsustainable.
Question. There has been discussion in this committee and in other
forums about which parties would be affected by multiemployer plan
insolvencies and similarly, which parties would be impacted by a loan
program to support financially unstable multiemployer plans. How might
taxpayers be affected if no action were taken by Congress to correct
the inadequate funding of multiemployer pension plans? How might
taxpayers be impacted if proposed Federal loan programs were enacted?
Answer. Without changes, funding of multiemployer plans will
continue to deteriorate and I predict that ultimately taxpayers will
find that the plans will request even larger bailouts from Congress to
prevent benefit cuts. As such, Congress must take action that both
protects Federal taxpayers against even greater liability and creates
private-sector incentives to shore up the plans. The need to achieve
these goals is the basis for the policy proposals in my written
testimony. The enactment of a Federal loan program would also likely
increase taxpayer liability over the long term, as without structural
changes to the plans, I predict that they will continue to accrue
unfunded liabilities as they have in the past. An additional effect of
a Federal loan program for multiemployer plans would likely be more
reckless behavior by public pension plans in expectation that they
would also be granted Federal loans if risky assets underperform
expectations.
References
Novy-Marx, Robert, and Joshua Rauh, 2009, ``The Liabilities and Risks
of State-Sponsored Pension Plans,'' Journal of Economics Perspectives
23(4).
Novy-Marx, Robert, and Joshua Rauh, 2011a, ``Public Pension Promises:
How Big Are They and What Are They Worth?'', Journal of Finance 66(4),
1207-1245.
Novy-Marx, Robert, and Joshua Rauh, 2011b, ``The Crisis in Local
Government Pensions in the United States,'' in Growing Old: Paying for
Retirement and Institutional Money Management After the Financial
Crisis, Robert Litan and Richard Herring, eds., Brookings Institution,
Washington DC.
Rauh, Joshua, 2017, ``Hidden Debt, Hidden Deficits: 2017 Edition,''
Hoover Institution essay.
______
Prepared Statement of Kenneth Stribling, Retired Teamster
Thank you, Senator Johnson, for your kind words. I am humbled and
appreciate your support.
Good morning. My name is Kenneth Stribling. I am a retired Teamster
from Local 200 in Milwaukee, WI. I am also co-chair of the Milwaukee
Committee to Protect Pensions, which is one of many committees across
the country that are part of the National United Committee to Protect
Pensions, the NUCPP.
First, I want to thank you, Senator Hatch and Senator Brown,
Senator Portman, Congressman Neal, and the other members of the Joint
Select Committee, for inviting me to be here today and being so
supportive. Also, I am very honored that my Senator, Ron Johnson,
introduced me. Thank you again, Senator, for those kind words. He and
Senator Baldwin from the great State of Wisconsin have been very
supportive of our efforts to save our pensions. They recognize, as you
do, that fixing underfunded pension plans is a bipartisan issue.
Let me tell you my story. I worked for 30 years for four different
trucking companies that paid into the Central States Pension Fund. I
retired from USF Holland in 2010. My benefits moved with me because my
employers paid into the same plan, ensuring that I'd have a secure
pension for life.
I need this pension income more than ever. I am married with five
adult children, seven grandchildren, and two more on the way. I love my
family dearly, and thanks to my pension, I'm not a financial burden to
them but instead my wife and I have been able to help out our kids and
grandkids with child care and support when life's emergencies happen.
I will never forget the day I received my letter from the Central
States Pension Fund with the news that they were applying to the
Treasury Department to reduce my monthly pension benefit by 55 percent.
Life changed that day. You have no idea what it's like to be retired on
a fixed income and suddenly be told your monthly check would be cut in
half. I was devastated and so was my family.
After receiving this shocking news, I felt something needed to be
done. I joined with other retirees to stop cuts and find solutions, and
we have been at it ever since. I felt compelled to become involved in
the movement to find a solution to the pension crisis. Not only would a
reduction radically change my retirement years but also affect
countless households across the country. This involvement has also
changed our lives.
I have been through contract negotiations when we have sacrificed
wage increases to have better health and pension benefits. I believe we
have done our part with shared sacrifice. In addition to giving up wage
increases, we often endured tough work conditions, long shifts and cold
nights on unheated docks, and manual labor.
Another day I will never forget is November 17, 2017, the day we
learned my wife Beverly has terminal pancreatic cancer, stage 4 cancer
that has spread to her liver. My wife is a fighter and plans on
outliving her current diagnosis. She also is retired, after working
nearly 30 years as a teacher. Fortunately we have a close and
supportive family. Beverly's son and daughter-in-law put their careers
on hold and moved back to Milwaukee to spend time with her and help
with her care. Bev's sister retired and also moved home. And with the
help of all our children and extended family I have been able to
continue to remain active in this movement, which includes travel and
meetings. My involvement has taken much of my time and energy, and at
times I thought I couldn't continue. But my wife made me promise to
stay committed until a solution was found.
I live with a very uncertain future. My wife is dying, we have
mounting medical bills, and the stress is now impacting my health. I
was recently diagnosed with an enlarged heart. This is due to high
blood pressure and stress. My heart is working overtime just to keep
up. My wife is worried I may end up like Butch Lewis, one of the co-
founders of this movement, whose death inspired the legislation named
after him.
Let me be clear: my story is unique, but I am like any other
retiree impacted by the possibility of a benefit reduction. Life didn't
stop when our letters arrived. We all endure life's storms: illness,
deaths, and physical and mental health challenges. Now we all have the
added burden of traveling through our golden years with an uncertain
financial future: a future that had been promised to us throughout our
working years.
I am supporting the Butch Lewis Act, which seems like the right
solution. I am asking you today to think and pray on what is the right
thing to do for thousands of faithful, hard-working actives and
retirees, many of whom have served our country in the military.
My wife would have liked to be here today but she only has a few
good days between chemo cycles. She is however my rock, she fully
supports me in this work, and wants you to know how crucial your
decision will be for millions of Americans. Her heart is here with me
and will be forever.
In closing, I want to thank the Joint Select Committee members for
agreeing to find a solution to this pension crisis. This is not a
partisan issue. This is an issue of fairness, of keeping promises to
working Americans who did everything right and are simply asking you to
preserve what is due to us. Thank you. I will be happy to answer any
questions you may have.
Communications
----------
Letter Submitted by Robert Bozeman
August 10, 2018
To the Committee,
I want to ask you all, please do what you can to save my pension. My
pension is with the Central States Pension Fund, and they tell us that
it will be insolvent in 8 years or less.
I have worked in the trucking industry for 41 years doing hard,
physical work. Every day I go to work in pain. The pain in my hands,
joints, and muscles is getting worse each week. I am going to try to
work one more year, but I don't believe I can go any longer. My wife is
unable to work because of her health, and the Central States Pension is
the only pension that we have.
I know that my story is the same as thousands of other men and women.
Our youth is gone. Because of our hard jobs, our bodies are broken
down. Many of us who are still working can't go on much longer, and
many of those who have retired aren't able to return to work. We have
given our lives for these companies and to help keep America strong,
prosperous, and free, especially those of us in the trucking industry.
If trucks were to stop, in a very short time, store shelves would be
empty. Because we are old now and less productive, will we be thrown
aside? Will our hard work and sacrifice be forgotten?
I am not asking for something that is not mine. I only ask for what I
was promised. I only ask for what I have worked for. This issue should
not be about politics or some group over here against some group over
there. It should be about real, live human beings, fellow American
citizens, whose health is failing and in need of a pension that they
can live on. This pension is all that we have. We have no other means
of support.
Because of our age, because of mismanagement of our pension fund,
because of things beyond our control, will we have to struggle to live
on half of a pension at a time in our life when we can't do any better,
especially when there is a solution?
I understand that there is a plan, the Butch Lewis Act, introduced by
Senator Sherrod Brown and Representative Richard Neal, that has a
solution to this pension crisis. It will save my fund, the Central
States Fund, as well as other funds. I realize that you as a committee
have to look at all sides of this issue, but if this Butch Lewis Act
will work without an increase in taxes and will save the pensions of us
real live American human beings, then why can't it be done? Please help
us!
Thank you for taking the time to read this.
Robert Bozeman
______
Letter Submitted by Lloyd I. Hiler
Joint Select Committee on Solvency of Multiemployer Pension Plans
219 Dirksen Senate Office Building
Washington, DC 20510
July 23, 2018
RE: Southwest Ohio Regional Council of Carpenter's Pension Recovery
Plan Submitted: June 29, 2018
Dear Sir or Madam:
In June 2005, I retired from the Southwest Ohio Regional Council of
Carpenters Union. At that time your years of service and age had to
equal 80 or above. I qualified for unreduced early retirement benefits
that were figured at that time. I took the joint and survivors 50-
percent benefit (see attached).
My problem is, 13 years later through the Recovery Plan, they have
refigured my benefits to be 110 percent of the PBGC Guaranteed
Benefits. At the age of 67, that is over a 57-percent cut. Being able
to go back and refigure your benefit when you met what was offered at
that time, I feel is wrong! Attached is my new proposed benefit under
the recovery plan.
The only ones being cut this drastically are the 200-plus early
retirees. Everyone else is being cut 8 percent or less. I realize we
need to make some reductions to save the plan, but you need to make it
less of a burden on the early retirees.
Another thing about the recovery plan is, if it passes the Treasury
Department, it comes back to us for a vote. There are only 200-plus
early retirees. All members are allowed to vote on the plan (active and
retired). If someone doesn't cast a vote, it becomes an automatic
``yes'' for the plan.
With these kinds of rules, the early retirees don't have a chance of
defeating the recovery plan proposed by the S.W.O.R.C.C. The early
retirees should not be singled out, but only cut 8 percent, the same as
all others.
I would appreciate any help anyone could give.
Sincerely,
Lloyd I. Hiler
______
Southwest Ohio Regional Council of Carpenters Pension Fund
33 Fitch Boulevard
Austintown, Ohio 44515
Telephone: l-800-435-2388
Fax: (330) 270-0912
December 29, 2004
Dear Mr. Hiler:
Your application for unreduced early retirement benefits has been
approved effective January 1, 2005, in the amount of $2,670.29 per
month. The enclosed check in the gross amount of $2,670.29 represents
payment for the month of January, 2005. Future payments in the amount
of $2,670.29 will be made on the first day of each month hereafter.
According to our records, you have selected the Joint and Survivor 50-
percent benefit option. This benefit is payable to you monthly during
your lifetime, and if your beneficiary is alive at the time of your
death, 50 percent of your monthly benefit will continue to be paid to
said beneficiary for her remaining lifetime. Our records indicate that
you have designated Jacqueline Jean Hiler, your wife, as your
beneficiary. Our records further indicate that her date of birth is
November 19, 1954. You have 30 days from the date of this letter to
change your benefit option.
Based upon this information, the benefit as stated above ($2,670.29) is
payable to you monthly during your lifetime, and a monthy benefit in
the amount of $1,335.15 will become payable to Jacqueline Hiler, upon
your death, for her remaining lifetime.
If you have any questions regarding this matter, please feel free to
contact me.
Sincerely.
Susan Cunningham
Pension Department
Enclosure
This estimate of the effect of the proposed reduction of benefits has
been prepared for:
Lloyd Hiler
HOW YOUR MONTHLY PAYMENTS WILL BE AFFECTED--RETIRED MEMBERS--EARLY
UNREDUCED
Your current monthly benefit is $2,599.71. Under the proposed reduction
your monthly benefit will be reduced to $1,101.10 beginning on March
31, 2019.
The proposed reduction is permanent.
This estimate is based on the following information from Plan records:
You have 28.0 years of credited service under the Plan.
You will be 67 years, 11 months as of April 30, 2019.
The portion of your benefit that is based on disability is
$0.00.
PBGC Guaranteed Benefits
If the Plan does not have enough money to pay benefits, your monthly
benefit would be no larger than the amount guaranteed by PBGC. The
amount of your monthly benefit guaranteed by PBGC is estimated to be
$1,001.00.
______
Letter Submitted by Leon S. Wroblewski, Jr.
U.S. Senate
U.S. House of Representatives
Joint Select Committee on Solvency of Multiemployer Pension Plans
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Senators Orrin Hatch, Sherrod Brown, Lamar Alexander, Mike Crapo,
Rob Portman, Heidi Heitkamp, Joe Manchin, and Tina Smith; and
Representatives Virginia Foxx, Phil Roe, Vern Buchanan, David
Schweikert, Richard E. Neal, Bobby Scott, Donald Norcross, and Debbie
Dingell:
Thank you for serving on the Joint Select Committee on Solvency of
Multiemployer Pension Plans. The work this committee performs and the
legislative solution it ultimately chooses will have an immense impact
on the lives of millions of retirees, their families, and the country.
The economic impact of cuts and/or loss of these pensions is both
personally and nationally enormous. According to a study by the
National Institute on Retirement Security, in 2015 alone the
multiemployer system provided $2.2 trillion in economic activity to the
U.S. economy, generated $158 billion in Federal taxes, supported 13.6
million American jobs, and contributed more than $1 trillion to the
U.S. GDP.
As you begin your work in considering the best plan to solve the
multiemployer pension crisis that this country is currently facing, I
urge you to give your support to the Butch Lewis Act (H.R. 4444/S.
2147). The Butch Lewis Act is the only proposed solution that will
provide a path to financial health for troubled pension plans,
alleviate pressure on the Pension Benefit Guaranty Corporation, and
ensure that retirees and active Teamster members receive all of the
benefits that they earned.
I know the committee has a difficult mission, but the Butch Lewis Act
is the best solution to the multiemployer pension crisis, and I
sincerely hope that it will be the legislation that you ultimately
adopt.
Sincerely,
Leon S. Wroblewski, Jr.
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