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Treasury drops a hot potato

The Department of the Treasury's rejection of the benefit reduction application of the Teamsters, Central States, Southeast and Southwest Areas Pension Plan has left participants cheering.

But there is little to cheer about. The rejection by Kenneth R. Feinberg, special master appointed by the Treasury to evaluate the application, does not mean the plan is better funded than the Central States projection in its application.

It “remains in critical and declining status and is projected to run out of money within 10 years, or even less,” according to a statement Central States posted on its website following the decision. If that happens, not only will benefit cuts for the Central States plan's beneficiaries be steeper, but the Pension Benefit Guaranty Corp. also might collapse, affecting millions of other retirees.

To try to save the plan, Central States should reapply to the Treasury for reductions, following the implicit guidance in the Feinberg rejection, addressing what Mr. Feinberg called an inequitable distribution of the proposed benefit cuts.

Treasury rejected the application for three reasons, including its 7.5% annual investment return assumption, calling it “significantly optimistic” and unreasonable and saying it would not “allow the plan to avoid insolvency.”

It is irresponsible for Mr. Feinberg and Treasury to reject the Teamster plan without suggesting a way forward by outlining a plan acceptable to Treasury. Instead, they simply handed the hot potato back to the trustees.

The Central States statement does not say whether the plan is considering submitting a new application, but the current path charts a reckless course for employers who make contributions and especially for younger participants whose retirement is years away and who risk receiving no benefits in the event the plan runs out of money.

The plan cannot count on new contributions from new employers joining a nearly insolvent plan. What employer in its right mind would do so?

Central States participants also cannot rely on the PBGC, whose multiemployer insurance fund is projected to run out of assets in 2025, and would not provide benefits up to the level of their negotiated pension benefits anyway. The PBGC has assets of $1.8 billion and liabilities of $44.2 billion for multiemployer plans such as the Central States fund. The Central States fund had $16.1 billion in assets and $35 billion in liabilities.

In its statement about the rejection, the Central States called on Congress to rescue participants through congressional legislation.

A bailout is unacceptable. It would upend the private retirement system design of funding defined benefit plans in general solely through contributions by employers and investment gains, coupled with tax exemption. A legislative move would open the door to bailouts of other distressed multiemployer and possibly public sector plans.

Activist participants refuse to concede the need for any cutbacks. They call for Congress to pass the Keep our Pension Promises Act, introduced June 18 in the Senate by Sen. Bernie Sanders, Ind.-Vt., and in the House by Rep. Marcy Kaptur, D-Ohio.

The legislation would set up a legacy fund within the PBGC to support multiemployer pension plans to continue to pay benefits. It calls on other taxpayers to finance the new fund. The bill would raise revenue in the federal estate tax and on sales of expensive art and other collectibles.

Congress should reject such legislation as setting a precedent for bailouts. Such legislation is not likely to pass a Congress controlled by Republicans generally opposed to raising taxes and union bailouts.

No one favors benefits cuts. But it appears the only way, short of a federal bailout, to stabilize the plan and try to ensure an intergenerational fairness to paying benefits, from current retirees to participants still active and not planning to retire for many years.

Many members of Congress called on the Treasury Department to reject the application. That opposition is thoughtless. Without the reduction of benefits, participants face losing all benefits within 10 years. On its present course, without benefit changes, the Central States assets would run out, leaving all participants with nothing by 2026. n

This article originally appeared in the May 16, 2016 print issue as, "Treasury drops a hot potato".