Taxpayers’ $36 Billion Pension-Fund Bailout Comes With One Thin String Attached

Here’s how a government bailout usually works: In exchange for a boatload of taxpayer cash, the recipients show up in front of a camera to express an appropriate amount of remorse, agree to change the way they do business, and occasionally even promise to pay the money back. It’s a script familiar to anyone who remembers the lifelines thrown to the biggest U.S. banks and automakers General MotorsGM
and Chrysler during the Great Recession 14 years ago.

The $36 billion taxpayer bailout of the 360,000-member Central States Pension Fund, which covers multiple employers from the Dakotas to Florida, breaks those rules. For what the Biden White House calls the “largest-ever award of federal financial support for worker and retiree pension security,” there’s been no remorse expressed and no intention to repay a penny. The only change in behavior the bailout requires is that employers are now prohibited from cutting their contributions going forward. The amount of taxpayer assistance does qualify as a boatload, however.

“I’m glad that they got to this solution, not because it’s the best or only solution, but because it’s the only one the Congress could get its act together to agree upon,” Josh Gotbaum, a guest scholar at the Brookings Institution and a former director of the Pension Benefit Guaranty Corporation, told Forbes. “This isn’t really about bailing out private pensions. What this is saying is that the U.S. government, which guarantees against a whole host of things like floods, hurricanes and crops, isn’t going to renege on its commitment to pensions.”

Private pension funds like Central States, which employers and unions jointly administer, have a long history of being underfunded. In a field where every fact is contested, even the extent of the problem is up for debate. Before Covid-19, the Congressional Research Service reported that multiemployer pensions were $650 billion short, and the Congressional Budget Office estimated a bailout would cost $84 billion. The pension advisory firm Milliman pegged the amount at $154 billion in June. Those numbers are dwarfed by the shortfall in public pensions, whose unfunded liabilities were around $1.4 trillion as of the end of June.

The fingers of blame point in many, mostly partisan directions. Republicans say employers promised workers money they couldn’t possibly deliver. Democrats say that banks and carmakers got a bailout so workers should, too. Republicans say the fund managers acted recklessly and used fancy accounting because they knew the government would swoop in and rescue them. Central States says declining union membership, two market meltdowns and the pesky Federal Reserve, whose dozen-year regime of near-zero interest rates punished savers, are culprits.

What’s not contested is who ends up picking up the tab. Money for the Central States’ bailout comes from an $86 billion pot created in March 2021’s Covid-19 relief bill, whose official name is the American Rescue Plan Act (ARPA). Including pension relief in ARPA was the brainchild of Senator Sherrod Brown. According to his website, Brown, an Ohio Democrat, has long pushed for what he calls “financial assistance” to be directed toward private pensions.

“When Wall Street gambled and lost, they got a bailout,” said Brown in a statement to Forbes. “And when big corporations came to Washington looking for tax cuts, they got a handout. But when working people’s pensions needed saving – pensions people worked their entire lives to earn – that’s where my Republican colleagues drew the line. But we never gave up. After years of advocacy by workers, retirees and small business owners, Democrats in Congress and this administration finally saved the pensions that union workers in Ohio earned over a lifetime, with no cuts.”

The $36 billion special financial assistance to Central States will burn about 40% of the money Congress set aside. Distributions were approved earlier this month and, according to the fund, the money will start going out in February. The lack of any quid pro quo from the pension fund is what irks Jim Naughton, an accounting professor at the University of Virginia’s Darden School of Business.

“If you look at the financial crisis, banks got money, but they had to change how they operated,” Naughton told Forbes. Banks are now required to hold more cash in reserve to make up for any shortfalls due to, say, loans going bad. “We tried to make sure what happened couldn’t happen again. What’s unique here is that money is being handed out, but there are no meaningful requirements for changing how these plans are managed.”

That’s not how Gotbaum, the former director of the Pension Benefit Guaranty Corporation, sees it. Gotbaum may not seem like a disinterested party. He’s the son of the late Victor Gotbaum, who headed the largest municipal employees’ union in the country. However, Josh Gotbaum also has a history of butting heads with powerful unions. As the bankruptcy-court-appointed trustee of Hawaiian Airlines in the early 2000s, he was tasked with revamping the pilots’ pension plan.

“What’s worth noting is that the bailouts create incentives for reform,” Gotbaum told Forbes. “This is essentially a 30-year fix. Any pension plan that thinks there’s going to be another one in 30 years is kidding themselves. They know they have to get their houses in order.”

The roots of Central States’ wipeout are nearly antique. Four decades ago, Forbes called the Central States Pension Fund “the most abused, misused pension fund in America.” It’s easy to see why. Throughout the 1950s and ’60s, it was a personal slush fund for Teamsters boss Jimmy Hoffa and his pals. With Hoffa in control, the fund bought casinos, lent money to the mob and served as a piggy bank for its trustees. All of that culminated in the IRS rescinding the pension’s tax-exempt status and a flood of Department of Justice investigations. A 2018 Government Accountability Office (GAO) report said that Central States “had less than half the estimated funds needed to cover liabilities in 1982 at the time it entered into a court-enforceable consent decree that provides for oversight of certain plan activities.”

Decades later, it was still struggling to recover. According to that same GAO report, Central States’ funding ratio – a measure of a plan’s assets to its liabilities – has rarely topped 70% over the last four decades. Even in the best of times, Central States funding ratio has never sniffed the 100% threshold recommended by the American Academy of Actuaries. The Teamsters Union didn’t respond to multiple requests for comment.

The current crisis centers around how little money Central States was able to collect from its members. That’s partially due to big employers like UPS dropping out and others going out of business. Critics, however, say there’s more to it than that.

“Like most union pension plans, Central States made promises it couldn’t keep,” the Heritage Foundation’s Rachel Greszler told Forbes. “They dug themselves into a deep hole.”

That hole was set to swallow Central States by 2025, according to a press release from the U.S. government’s Pension Benefit Guaranty Corporation.

Chantel Sheaks, U.S. Chamber of Commerce Executive Director of Retirement Policy, has a few bones to pick with critics like Greszler.

“If I hear one more time that these are union plans, I’m going to scream,” Sheaks told Forbes.

“They’re jointly administered by employers and unions. People don’t understand how they’re funded. The only contributions that go into these plans are made by employers. Unions don’t contribute to these at all.”

Arguments about nomenclature aside, Sheaks said that critics would do well to consider the broader picture.

“We could have rolled the dice and seen what happened,” Sheaks told Forbes. “If Central States hadn’t got the funding, the plan would have become insolvent. We’d have seen a lot more companies going bankrupt. That means less employees, less money going into communities. You also have employers that contribute to multiple plans. It leads to what we call the contagion effect. If a business would go bankrupt because of, say, Central States becoming insolvent, that business then can’t contribute to other plans it contributes to that are healthy.”

According to 2019 congressional testimony from Mariah Becker, the director of research and education for the advocacy group the National Coordinating Committee for Multiemployer Plans, the 10-year cost to the U.S. government of not finding a solution to the multiemployer pension crisis was between $170 billion and $240 billion. “These costs will continue for decades after the first 10-year budget window and, on a net present value basis, will cost between $332 billion and $479 billion over the 30-year period between 2019-2048,” Becker told Congress.

Charles Blahous, a senior research strategist at George Mason University’s Mercatus Center, told Forbes that rather than this being a good deal for taxpayers, “it’s the worst of all worlds from a cost perspective.”

“This is the worst course of action because it throws money at the problem without requiring multiemployer plans to reform how they operate,” Blahous said. “It does nothing to stop the bleeding. In fact it’s worse than that, because it rewards plan sponsors who failed to fund their pensions, so it incentivizes underfunding even more than doing nothing would have.”

Blahous said he knows why the bailout happened — a reward to workers who reliably vote Democrat. “It’s a political payoff,” he told Forbes. “That’s all it is. The thing that’s so dangerous is that it tells everyone who responsibly funded their pensions that they’re a sucker.”

Greszler of the Heritage Foundation said she sympathized with the workers, but there was no compelling economic reason for the bailout.

“There’s no argument for this other than we don’t want workers to lose benefits they were promised,” she told Forbes. “It’s an example of being politically too big to fail.”