How do you make a bailout not look like a bailout? Call it a loan.
The recently introduced Butch Lewis Act (S. 2147) would put taxpayers on the hook for billions of dollars in unfunded pension liabilities under the guise of loans from the U.S. Treasury.
The Act would create an entity within the Treasury Department called the Pension Rehabilitation Administration (PRA). As Heritage Foundation analyst Rachel Greszler explains:
The PRA would issue special bonds to provide subsidized loans to troubled multiemployer pension plans and sell those bonds to large financial institutions. Those bonds would be backed by the “full faith and credit of the U.S. government”—in other words, by taxpayers.
The PRA would then use the proceeds from those bond sales to make “loans” to troubled union pension plans. In order to qualify for the loans, the plans would have to be on track to become insolvent within the next 15 years to 20 years. This is a strange criterion for loan qualification. Borrowers usually have to prove their ability, as opposed to their inability, to repay a loan in order to qualify for one.
Worse, the borrowers—multiemployer pension plans—would pay low-interest payments for most of the life of the loan. And if a borrower becomes unable to pay—a high probability given the pension plans’ parlous finances—the PRA would have to restructure or even forgive the loan. With multiemployer pension plans facing around $600 billion in unfunded payout obligations, the liability for taxpayers would be enormous.
So what can policymakers do to help underfunded pension plans meet their payout obligations?
First, pension plan managers should estimate their annual required contributions (ARC) using discount rates based on a risk-free rate of return. Currently, many pension plans estimate their ARC using overly optimistic investment return projections.
Second, allow the Pension Benefit Guaranty Corporation (PBGC) to set premiums based on actual risk, without interference from Congress. Premiums set too low function as a subsidy to insured firms and unions that manage pension plans. The PBGC, which was created by Congress in 1974, is funded by premiums paid by insured pension plans, but given the size of its deficit—estimated at $58.8 billion at the end of fiscal year 2016—the threat of a taxpayer-funded bailout is always present.
Third, end “last man standing” liability for employers. As their name implies, multiemployer pension plans cover workers at various employers, not a single company. That may indicate better performance thanks to economies of scale. But in fact, it increases individual employers’ potential liability by orders of magnitude because of a phenomenon colloquially known as “last man standing.” In a multiemployer plan, every participating company is liable for the pension obligations owed to every other participants’ employees, a clearly unsustainable situation.
These are only first steps toward addressing the multiemployer pension funding crisis, but one has to start somewhere.