You are here

Killed by Pension Accounting

Think accounting rules are a boring topic? You wouldn't if the fate of your business rested on it. Indeed, a rule change may be coming soon that may expose the huge liabilities many companies face as a result of their participating in some grossly underfunded union pension funds. In a straightforward, non-boring manner, Washington Examiner columnist Mark Hemingway breaks it down.

On Nov. 1, the Financial Accounting Standards Board (FASB) ceases to take public comment on a new rule requiring that companies more accurately report liabilities they have from participation in multiemployer pension plans. Unless FASB is persuaded otherwise, the rule takes effect Dec. 15.

There are some 1,500 multiemployer pension plans in the United States, which are unique to unions. In these plans, multiple companies pay into the pension plan, but each company assumes the total liability.

Under "last man standing" accounting rules, if five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the employees of the other four companies.

What this means is that companies with union labor often have pension liabilities that are several multiples higher than the pension expenditures they report -- the Kroger grocery store chain shocked analysts last year when it disclosed its multiemployer pension liabilities more than doubled in a year to $1.2 billion.

Ratings agencies such as Moody's and Standard and Poor's have been highlighting the lack of transparency in union pension plans. Now Wall Street wants union businesses to be upfront about their liabilities.

FASB's new rule could effectively wipe out the paper worth of many companies, especially in the trucking and construction industries. Once banks and creditors are aware of these staggering pension liabilities, it will make it nearly impossible for union businesses to get loans, credit lines or bonding.

If forced to report their true liabilities, hundreds -- perhaps thousands -- of companies will scramble to get out from under their union obligations.

UPS did precisely that three years ago, opting to pay $6.1 billion to withdraw from the Teamsters Central States Fund. That's right, UPS decided that $6.1 billion was less costly than the Central States Fund's liabilities! The last-man standing rule made the situation especially bad. As Bloomberg reported at the time, "The Central States Fund has suffered as several unionized trucking companies have failed or been acquired during the past decade, leaving UPS and other remaining employers to bear greater liability for retirees covered."

As Hemingway notes, it is largely to shore up such failing pension funds that organized labor worked so hard for passage of the so-called Employee Free Choice Act -- its card-check provision would enable unions to organize new members without the hindrance of a secret ballot election, while its binding arbitration provision would make it easier to impose pension liabilities on employers. He also rightly notes that the fight over EFCA isn't quite over yet, and Republicans need to be on guard during the upcoming lame duck session of Congress.

Businesses should be even more on guard. As Brett McMahon of Miller & Long Construction (whom Hemingway also cites) described it, for a business, facing millions in new multi-employer pension liabilities would be "a good time to start liquidating."

For more on union pensions, see here.