Wednesday, October 7, 2009

Rep. Earl Pomeroy, North Dakota Democrat, is drafting legislation that would amount to a massive, employer-crippling bailout for struggling union pensions. The congressman is trying to spin this as a cheap, proactive way to shore up said pensions. He claims that his bill is a response to an “urgent plea [from employers] for manageable and predictable pension funding rules as the nation works [its] way back to recovery.”

In reality, the bill as currently drafted would be a costly sop to unions, which have done so much to get Mr. Pomeroy elected. (Twelve out of his top 21 donors are unions, according to It would allow the unions, which have badly mismanaged pension funds in the past, to make new companies liable for the pension obligations of workers at other companies, in other industries. It also would create an explicit taxpayer guarantee if it all comes crashing down.

The devil is in the details of the draft, the text of which can be found on the congressman’s Web site. The changes it introduces are chilling.

The draft would allow union-controlled multiemployer pension plans to form alliances with one another. It also would create something known as a fifth fund that the Pension Benefit Guarantee Corp., with taxpayer help, would use to prop up failing union pension plans.

Multiemployer union pension alliances might sound innocent enough, but consider what that actually means. Moody’s Investors Service recently warned of a vast underfunding problem with multiemployer pensions. Many employers fear being shackled into them. Even though the funds are controlled by unions, employers are liable not just for their own employees, but for every worker in the plan regardless of how the plan is managed or mismanaged.

The so-called last-man-standing rule holds that if every other company in a multiemployer pension plan goes bankrupt, closes or pulls out of the plan, the one survivor is responsible for every single employee covered by the plan, even those who never worked for him. UPS paid $6.1 billion in withdrawal fees just to escape the Teamsters Central States pension fund.

Earlier this year the Teamsters were required to send out a letter to participants of the Central States pension alerting them that the plan was in “critical status” - funded at 65 percent or less.

The current multiemployer scheme may be bad, but at least employers know the liabilities cover just the workers in one industry in one plan. The Pomeroy bill would change that. It would take current vague, vast and dangerous liabilities and multiply them by, well, pick a number. Concrete makers in Ohio could be held responsible for the pensions of garment workers in California. Hotels in Oregon could be on the hook for truckers in Pennsylvania.

All past employers and all future employers would be liable for every employee who ever was in one of their plans and potentially any plan that would ally with it. This could add billions in pension liabilities to these companies and bankrupt even healthy businesses.

Right now, when pension plans fail, the Pension Benefit Guarantee Corp. steps in. PBGC is an independent government-created entity, like Fannie Mae and Freddie Mac, that insures pension plans through private premiums. Its ability to cover losses is real but limited. If a multiemployer plan becomes insolvent, the most PBGC will cover per pensioner is $12,870 annually.

Mr. Pomeroy wants to increase that number to $20,000 annually. That’s a problem because, like Fannie and Freddie, PBGC’s resources are finite. This year, PBGC already has assumed massive liability from companies like Delphi and is likely to be responsible for other large pension losses. It is conceivable PBGC itself will not be able to meet its responsibilities and may seek government assistance.

Not wanting to wait for a PBGC bailout, Mr. Pomeroy proposes putting the taxpayer on the hook now. In a stark departure from the traditional role of PBGC, the draft bill states that “obligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States.” For the first time, PBGC liabilities will be borne by taxpayers. The fifth fund could make available billions of dollars to prop up union pensions. The bill does not include a statutory limit for how much taxpayer money could be shoveled into failing funds.

In August, Mr. Pomeroy planned to propose the bill this month, but he is said to be waiting until after the health care debate concludes. He thinks his bill is the right medicine for what ails union pensions; many critics will have a different diagnosis.

F. Vincent Vernuccio is a former official of the labor department and editor of Jeremy Lott is editor of Capital Research Center’s Labor Watch newsletter.

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