A U.S. Treasury Department mediator on May 6 rejected a huge proposed cut in retirement payouts for hundreds of thousands of workers tied to the Teamsters Central States Pension Fund.
The decision by mediator Kenneth Feinberg created a great, but likely temporary, sigh of relief among beneficiaries of the 400,000-member Teamsters plan, who were girding themselves to experience cuts in their pension payouts ranging anywhere from the average of 23 percent all the way up to 90 percent. The decision also leaves pension administrators of all multiemployer plans - like those in the building trades - wondering about how they would hypothetically proceed with drastic schemes to save their pension plans should they become in a similar position, although none are nearly as bad off as the Teamsters Central States Plan.
"We worked with thousands of retirees to educate Treasury and Congress on the devastating impact of the proposed cuts,” said Teamsters General President James Hoffa. “This decision means that there won’t be any cuts to retirees’ pensions this July or the foreseeable future. We will find a solution to this problem that will allow members and retirees to continue to retire with dignity.”
The decision staves off big cuts for the retirees, who worked for companies like Kroger, and United Parcel Service, among 1,500 others. But the underlying problem remains: the Teamsters' Central States pension plan currently has $16.8 billion in assets compared to $35 billion in liabilities. The Great Recession that began in 2008 put the biggest crimp in its funding equation, with companies contributing to the plan going out of business and the stock market taking a huge bite out of the funds. On its current trajectory, the Teamsters fund is expected to be out of money in 10 years.
There is almost zero chance that the current Congress will bail out the Central States Plan, or the other handful of multiemployer pension plans that are bleeding financially. That's in good part because the federal Pension Benefit Guaranty Corporation (PBGC), which was set up to backstop financially ailing pension plans, itself only has about half as much in assets as it does in liabilities.
And in December 2014, Congress surprisingly went along with a plan backed by most (but not all) unions, titled Solutions Not Bailouts, that helped form the Multiemployer Pension Reform Act.
Under the new law, multiemployer pension trustees are now able to propose cuts to the earned benefits of participants and retirees if the plans are in “critical and declining” status. Pension trustees for plans in such poor shape may submit an application for proposed benefit cuts to the Treasury. After the Treasury, the Department of Labor, and the PBGC approve the proposed cuts, participants vote to implement the cuts or block them. But even if the participants vote down the cuts, Treasury, the Labor Department, and the PBGC can still approve the cuts for certain large plans.
In this case, mediator Feinberg said he rejected the plan on the basis that it unfairly imposed uneven cuts among retirees, sent notifications that were too technical, and depended on too-rosy assumptions about investment returns. "We at Treasury do not believe that the plan as presented will reasonably avoid insolvency," Feinberg told The Wall Street Journal and others.
John Tesija, a funds attorney for nearly a dozen multiemployer pension plans in Michigan, called the mediator's ruling "odd." He said the Teamsters Central States pension plan administrators "basically imposed the maximum cut possible" on their own beneficiaries, but it still didn't pass muster with the mediator.
The Teamsters pension administrators submitted a plan that maxxed out benefit payments to a bit more than $13,000 per participant per year, not much more than the fallback PBGC's maximum payout of $12,870 per year if a pension plan fails. "That proposal was rejected," Tesija said. "Now that question becomes, 'where's the bar?' If that cut wasn't deep enough to save the plan, what is?"
Without knowledge of the details of what was submitted, Tesija said the mediator simply may have asked for more documentation before making another ruling.
The Solutions Not Bailouts plan, which was endorsed by North America's Building Trades Unions and most of its affiliates, sought to avoid a situation where multiemployer pension plans are simply allowed to be drawn down to zero, as they were under the law before 2014. The Solutions plan incorporated into the federal law provisions to allow trustees of troubled plans to take corrective steps, such as suspending some benefits; raising plans’ retirement age closer to that of Social Security; and allowing large plans to combine with small plans but without taking on the smaller plans’ unfunded liabilities.
Without the 2014 changes, the Pension Benefit Guarantee Corp. had projected that about 200 multiemployer plans will become insolvent over the next two decades, putting the pension earnings of about 1.5 million people at risk.
A statement by Stephen E. Sandherr, CEO of the Associated General Contractors of America, blasted the Obama Treasury Department's rejection of the plan.
"Tens of thousands of retirees face the likelihood that the Central States pension funds they depend upon will soon become insolvent because the Obama administration has chosen politics over the need to protect retirees," he said. "The Multiemployer Pension Reform Act that President Obama signed into law in 2014 received overwhelming, bipartisan support in Congress because it wisely empowered the trustees of pension plans to take steps to prevent the draconian benefits cuts that come with insolvency.
"By denying a rescue plan that responsibly but regrettably employs benefit reductions, the administration creates false hope that a better deal for affected retirees is possible. The sad truth is that this is the best deal available."