Sponsors of defined benefit pension plans will be allowed to defer $51 billion in pension contributions under legislation approved July 15 by the House as part of the bill extending the Highway Trust Fund, according to an analysis by Moody's Investors Service.
The Highway and Transportation Funding Act of 2014 increases tax revenue by allowing companies to use a higher interest rate when calculating liabilities, which lowers pension contributions. That will help companies with liquidity issues, but “the immediate credit positives turn into credit negatives if these companies do not address their liquidity issues or if they use the benefits derived from (the bill) in a creditor-unfriendly manner,” such as increased dividends, Wesley Smyth, Moody's vice president and senior accounting analyst, wrote. “In effect, it allows companies to borrow cash from their pension plans.”
Moody's came up with the $51 billion figure using the Congressional Budget Office estimate of $18 billion in new tax revenue through 2019 because of the pension change and an assumed tax rate of 35%.
A similar highway funding bill in 2012, MAP-21, created a rate corridor within a 25-year average, but was designed to become less generous through 2015. The House's new highway bill keeps that corridor until 2017, with diminishing advantage in later years. If companies don't address their liquidity issues by those later years, the bill's benefits “will turn negative as required contributions increase,” Mr. Smyth said.