A (Non-Satirical) Proposal For Multi-Employer Pensions: The Grand Bargain
Readers, I have written repeatedly (e.g., “A Tale Of Two Multi-Employer Plan (Systems)” and subsequent follow-up articles) that the federal government’s regulation of multi-employer pension plans, as specified in legislation defining funding methods, funding limitations, anti-cutback rules and other regulations, means that it bears at least partial responsibility for the situation the PBGC Multi-Employer Program and troubled multi-employer plans like Central States, find themselves in today.
Which means that, yes, in contemplating the funds needed to produce an effective solution to the crisis, it is entirely appropriate for the federal government to kick in its share, however skittish one might otherwise be about bailout programs. But it’s also not credible to claim that, if only the federal government had allowed unions the ability to overfund in good years and cut back in lean times, we would be facing no crisis.
I like to say that, however much people call 401(k) plans a “failed experiment,” in reality is that it was the employer-sponsored defined benefit plan itself that was the “failed experiment,” even though it really did seem to hang on for a very long time. This is doubly true of multi-employer plans. In addition to all the usual risks of mismanagement (or, yes, corruption), market timing, and the like, the structure of union-sponsored plans for a single industry, though reasonable enough when meant to accommodate workers changing jobs often within a given industry, inevitably leads to, if not insolvencies, than unhappiness of various kinds when industries themselves experience radical change — not to mention the temptation, as a union-sponsored plan, to overpromise benefits to gain members’ support for the union.
All of which is to say that the net should be cast widely with respect to who shares the pain needed to bring multiemployer plans back to health (and under a new regulatory structure). Not just the government. Not just participating employers. Not just employees and retirees. But also the unions themselves, from their general funds and warchests rather than the pension fund itself. And foundations have a role to play, too.
In other words, to provide a satisfactory outcome to the crisis, we need a Grand Bargain, for which we need to revisit the Detroit bankruptcy, where city leaders sought a way to save the pensions of city employees and retirees from drastic cuts while at the same time preserving the largest asset of the city, the city-owned Detroit Institute of Art (the DIA). Nathan Bomey recounts the efforts in his 2016 book, Detroit Resurrected: To Bankruptcy and Back.
Bomey recounts the genesis of the Grand Bargain: six weeks after the July 18, 2013 bankruptcy filing, chief mediator Judge Gerald Rosen and fellow mediator Eugene Driker met with Mariam Noland, president of the Community Foundation for Southeast Michigan.
“Rosen and Driker spelled out their proposal. They wanted to raise hundreds of millions of dollars from foundations to help resolve the bankruptcy by reducing pension cuts and saving the DIA from a sell-off.”
From such major local foundations as the Ford Foundation, the Kresge Foundation, Kelogg, and others, came a total of $350 million in philanthropic pledges. The state pledged an equal sum. The DIA was called upon to find a further $100 million in donations, which came from the automakers’ foundations, among other sources.
City retirees were offered the choice: receive steep benefit cuts (but the possibility of a lawsuit demanding the liquidation of the DIA to unwind the cuts), or accept the Grand Bargain cash and relinquish the right to sue, and receive mitigated cuts. The initial demand of the retiree groups was to “sell the art,” but upon pressure by Judge Stephen Rhodes, and with further negotiations on the scale of the cuts, they relented and accepted the bargain. In the end, the police and fire employees, whose pension fund was relatively better funded, saw no cuts to pensions, but a drop in the COLA from 2.25% to 1%. City pensioners, with a worse-off pension fund, received 4.5% cuts to pensions, a complete elimination of the COLA, and a partial claw-back of excessive bonus payments from prior years. Each class of pensioners was obliged to accept the terms of the agreement by a vote, and when the votes were cast and counted in spring and summer of 2014, 82% of police and firefighter and 73% of general city voters accepted the cuts.
Now, it may appear that there are scant parallels between these two cases. Certainly, there is no equivalent to the DIA to be saved to motivate foundations to pledge cash, and the funding deficits of the most imperiled plans are so large that these foundations’ pledges would appear to be a drop in the bucket — but nonetheless, a partnering with private organizations, even if only in a barely-more-than-symbolic manner, would go a long ways towards creating goodwill for whatever government spending/bailout/bailout-in-disguise does eventually take shape.
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