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The International Brotherhood of Teamsters thinks it has a way to fix the troubled state of pension plans for unionized workers. The union has been circulating a draft proposal for input from policy makers, but so far the proposal isn’t getting rave reviews.
Two years in the making, the draft proposal from the Teamsters is the latest attempt to prevent as many as 130 union-negotiated multiemployer plans from going insolvent in the next 20 years. More than 3.5 million workers participate in these plans.
The proposal calls for Congress to create a nonprofit private-sector corporation tasked primarily with making loans to poorly funded plans or to employers that participate in such plans. Money for the loans would come from bond purchases by investors. Payments on the bonds would be guaranteed by the full faith and credit of the U.S. Treasury.
The Teamsters proposal calls for taxpayer support for multiemployer plans and “that’s something a Republican Congress and administration won’t even consider,” Joshua Gotbaum, guest scholar at the Brookings Institution in Washington, told Bloomberg BNA May 26. He previously was the director of the Pension Benefit Guaranty Corporation.
The proposal is “complicated and the draft lacks full details, but it looks like a government bailout that isn’t being acknowledged as a bailout,” Jeremy Gold, a retired pension actuary and economist in New York, told Bloomberg BNA May 26.
This proposal is dealing with an unsolvable problem, since there aren’t sufficient resources to satisfy the promises made to plan members who worked many years to earn their pensions, Gold said. The best and cheapest economic solution is for Congress to decide how much it wants to pay to cover payments owed to retirees and to do so, he said. Gold’s 2005 paper in the Journal of Portfolio Management on transitioning to a secure pension system is listed in the draft as one of several that inspired the Teamsters’ proposal.
The Teamsters are more optimistic about the prospects for their proposal.
“We are in communication with representatives on both sides of the aisle who have indicated they would support the legislation after reviewing it in its final form,” Teamsters Vice-President John Murphy told Bloomberg BNA May 25.
Under the draft proposal, obtained by Bloomberg BNA, Congress would create the Pension Rehabilitation Corp., which would make loans to companies and financially troubled pension plans for the purpose of funding pension plan deficits. These bonds would pay an interest rate determined by a qualified financial institution based on the credit worthiness of the borrower taking into account that their payment would be backed by the U.S. Treasury, Murphy said.
Once an underfunded plan that is in serious financial trouble receives a loan, its retiree liabilities would be completely accounted for by the fund’s liability-matching investment strategy or by the purchase of an annuity from an insurance company. In the case of an annuity purchase, the insurer would take responsibility for paying the plan’s pension obligations based on those liabilities. The plan would maintain responsibility for new retirees and continue to receive employer contributions and to invest plan assets. The plan would make interest payments on the loan for 29 years. In year 30, the plan would make one final interest payment and be required to pay the full principal amount of the loan in a single balloon payment.
Although the Treasury would appoint the PRC’s chief executive officer, the new corporation wouldn’t be controlled by the government and would be separate from the PBGC. It would include a 13-member “diverse stakeholder” board of directors that would include the Treasury secretary and the head of the Small Business Administration.
If introduced in Congress, it would join the Keep Our Pension Promises Act, sponsored in the Senate by Bernie Sanders (I-Vt.) and in the House by Marcy Kaptur (R-Ohio), as a possible replacement to the Multiemployer Pension Reform Act of 2014. The MPRA, also known as the Kline-Miller Act, was designed to solve the crisis for multiemployer plans and the financially troubled PBGC. The MPRA has been seen as a failure by some as it was unable to provide a solution to the Teamsters’ 400,000-member Central States, Southeast and Southwest Areas Pension Fund, which is projected to be insolvent by 2025.
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