“A good time to start liquidating”

How damaging would the so-called Employee Free Choice Act be to businesses? Enough to force some healthy companies into bankruptcy. Specificaly, EFCA’s binding arbitration provision could lead to newly unionized companies being forced to assume unsupportable new pension liabilities. Thus explained Brett McMahon of the construction firm Miller & Long, speaking to bloggers at The Heritage Foundation today.

EFCA supporters have tried to sell the legislation’s binding arbitration provision as a guarantee of first contract. In fact, it’s a recipe for a government-imposed contract. Under this provision, the company and the newly certified union have 90 days to negotiate a contract. If they have not reached a contract after that time, they must negotiate for another 30 days, at the end of which period a federally appointed arbitrator may step in and impose a contract. This creates incentives for the union negotiators to stall, and thus get a lot of what they want through arbitration.

McMahon describes this 120-day period as “a good time to start liquidating,” since newly unionized companies would then be required to enter into union pension funds, most of which are supposed to back multi-employer defined-benefit plans. “The problem’s they have no money,” said McMahon. “They were losing money hand over fist for a long time,” for various reasons, some of them demographic.

Employers who wish to back out of such plans must pay a withdrawal fee, because, unlike single employer private pension funds, multi-employer funds are insured primarily by the participating employers, not the Pension Benefit Guaranty Corporation (PBGC). This is an especially bad deal for workers, who could face huge losses when their pension funds default. Unlike single employer plans, which the PBGC insures for up to $54,000 per worker per year, the PBGC can only pay out to a miserly $12,870 per year.

For the company, it means millions (in some cases billions) in new liabilities, which must be stated under FASB 157 mark-to-market valuation rules, which as my colleague John Berlau has noted, force companies to overstate liabilities by making them price assets at what are essentially liquidation prices. Thus, otherwise healthy companies can suddenly find themselves burdened with pension obligations they cannot support. To illustrate how bad these could get, McMahon cited the example of United Parcel Service, for which the least expensive option was to pay $6.1 billion to get out of the Teamsters’ Central States pension fund.

I asked McMahon to comment on the reason so many union pension are underfunded: shareholder activism. He cited the example of the California Public Employee Retirement System (CalPERS), which, as a result of eschewing investments in politically incorrect industries, such as tobacco, has suffered opportunity losses of 17 to 18 percent. (I also referred the group to a study by Diana Furchtgott-Roth of the Hudson Institute for background on this topic.)

McMahon rightly characterized this kind of activism as a dereliction of fiduciary duty by pension fund administrators. “Their duties are fiduciary. Their duties are to the people who put their money in their trust,” he said. “They don’t act properly” by making investment decisions based on political criteria, rather than on which investments can provide the best returns. Shareholder activists often seek to promote a broad leftist ideological agenda, often in concert with other left-liberal constituencies (as a Politico article cited at the briefing today illustrates).

For more on EFCA, see here.