Support the Butch Lewis Act

Pensions & Investments published an editorial in its May 28 edition titled "Just say no to multiemployer plan bailout." We at KCS and Ryan ALM continue to be pleased with the fact that the multiemployer funding issue (and the Butch Lewis Act) is getting a lot of attention in Washington, but we urge less guesswork on the part of the act's critics.

Of the roughly 1,400 multiemployer defined benefit pension systems, there are 114 plans in "critical and declining" status and another approximately 200 plans that are in the "critical" category. It is estimated by the Pension Benefit Guaranty Corp. that the present value of the multiemployer program's liabilities are $65 billion, while the Congressional Budget Office estimates that liability to be $58 billion.

P&I's editorial correctly points out that "the PBGC's multiemployer plan insurance program has a 50% chance of running out of money by 2025 and a 98% probability of running out by 2035." We also agree with P&I that the longer Congress waits to address this horrific funded status the "more fiscally painful for union retirees, union workers, employers and possibly the U.S. taxpayers." So, why wait? Action needs to be taken now!

When addressing the Butch Lewis Act as one of the proposals in solving this crisis, the P&I editorial accurately describes that these critical and declining plans would receive low-interest 30-year loans. Such loan proceeds are mandated to fund 100% of the plan's retired-lives benefits. Sen. Sherrod Brown, D-Ohio, the sponsor of the BLA has stated that plans having trouble making good on the loan would be eligible for forgiveness. This is why P&I proclaims that the BLA is a bailout.

Under the BLA, multiemployer plans would make annual interest payments on the loan, and repay the principal in the 30th year. We think that this strategy makes great sense, as it buys time (extends the investing horizon) for the current assets and future annual contributions to fund future benefits (active lives) and the bond repayment. Unfortunately, the P&I editorial is assuming the Treasury will have to revise repayment terms and/or forgive the loans of any plan unable to pay full benefits. Our team's analysis of the 114 plans does not forecast any plan failures! In fact, the annual projected return on asset assumption, or ROA, to ensure solvency is only 6.5% for each of these plans. Substantially lower than their current ROA objective (7.5% to 8%).

Furthermore, the proposed legislation prohibits plans from making any reduction to accrued pension benefits, and it mandates that required contributions from employers and employees must be maintained. The BLA also requires no withdrawal liability once the loan has been accepted by a plan.

Why are we supporting so vigorously the Butch Lewis Act? Primarily because we are fearful that hardworking participants in failing multiemployer plans will not receive the benefits that they earned for years of dedicated service. In fact, they likely won't earn the minimum "guaranteed" payout should these "critical and declining" plans eventually become the responsibility of the PBGC. We find that possibility to be outrageous!

The P&I editorial suggests that an "infusion" of capital into the PBGC would "ensure the solvency" of this agency "and provide more time to address the problems of the multiemployer plans."

However, PBGC Executive Director Thomas Reeder — in testimony before the congressional Joint Select Committee on Solvency of Multiemployer Plans — claimed that the PBGC "is in such financial dire straits that members of failed multiemployer pension plans would likely receive only one-eighth of the minimum benefits they are supposed to be guaranteed."

Incredibly, participants in multiemployer plans supported by the PBGC get a protected "benefit" ($12,870 for a 30-year tenured employee) that is less than one-fifth that of a participant in a single-employer plan ($65,045 for an age 65 tenured employee). A further reduction of this potential magnitude would be devastating.

During the congressional Joint Select Committee hearing, Mr. Reeder was asked whether the PBGC would be able to provide the minimum guaranteed benefit to failed plan members without congressional action (such as passing the Butch Lewis Act); he responded, "no." He estimated the PBGC would have to cut participant benefits to about one-eighth the minimum annual benefit, or less. "If they're making $8,000 in guaranteed benefits today, they'd get less than $1,000," Mr. Reeder said.

Protecting the benefits for millions of union retirees should be a priority for this Congress. The economic impact and benefit from this group of participants is estimated to be greater than $1 trillion per year. If nothing is done at this time, it is estimated that a significant percentage of these critical and declining plans will default within 10 years, placing a greater burden on the PBGC. Supporting the Butch Lewis Act ensures that current retiree benefits will be protected for the next 30 years, at a minimum. That extended time frame gives our industry far greater time to tackle this issue than infusing some capital into the PBGC at this time that at best will partially fund benefits. We need a prudent recovery/preservation strategy and not a bailout, which the Butch Lewis Act is not!

Russell Kamp is managing partner, Kamp Consulting Solutions LLC, Midland Park, N.J., and Ronald J. Ryan is founder and CEO, Ryan ALM Inc., Palm Beach Gardens, Fla. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.