Central States Update

This is the plan that will take down the Pension Benefit Guaranty Corporation and eventually the entire US pension system. So how much trouble is the Central States Pension Fund in after they were denied MPRA relief last year? You get a pretty good idea from their recently filed 5500 form for 2016.

With negative net cash flow of over $2 billion annually for a fund that likely has about $14 billion left in it now means depletion fairly soon considering that those benefit payouts would continue to grow as revenue sources dry up.  Assuming no revenue infusions (federal bailout) the percentage that benefits need to be cut corresponding to the years until asset depletion assuming those cuts would look something like this:

  • 0% – 8 years
  • 30% – 13 years
  • 50% – 20 years
  • 100% – infinity

Pertinent 5500 data:

Plan Name: Central States, Southeast & Southwest Areas Pension Plan

EIN/PN: 36-6044243/001

Total participants @ 12/31/16: 384,921 including:

  • Retirees: 199,126
  • Separated but entitled to benefits: 123,633
  • Still working: 62,162

Asset Value (Market) @ 1/1/16: 16,126,208,142

Value of liabilities using RPA rate (3.28%) @ 1/1/16: $55,036,288,777 including:

  • Retirees: $31,767,548,497
  • Separated but entitled to benefits: $13,570,975,581
  • Still working: $9,697,764,699

 

Funded ratio: 29.30%

Unfunded Liabilities as of 1/1/16: $38,910,080,635

Asset Value (Market) as of 12/31/16: $15,267,533,341

Contributions 2016 (MB): $781,861,963

Contributions 2016 (H): $612,388,565

Payouts 2016: $2,809,605,222

Expenses 2016: $88,102,312

17 responses to this post.

  1. Posted by MJ on October 16, 2017 at 8:10 am

    Am I understanding correctly that the plan currently has approximately 62,000 participants still working but has close to 200,000 participants receiving benefits and another approximatley 123,000 separated but entitled to benefits (whatever that means)

    So the plan has 62,000 paying into and supporting 200,000 plus the 123,000 not counting the investment returns?

    Hmmmmm………….someone please correct me if I have not read this correctly

    Reply

    • Posted by ab on October 16, 2017 at 2:45 pm

      You are reading it correctly. It shouldn’t have matter had the plan had been run correctly. If the costs of the benefits had been funded when earned then you could have a pension plan that is supported by no active employees- as long as the plan’s earnings are at least what the actuary was assuming when they came up with the funding levels that needed to be made.

      The problem is too many pension were run on a mix of setting aside assets for future retirees and pay as you go. In this case it was mostly pay as you go. Once you do that you have a problem if the number of current workers falls too low.

      And once you get a plan with the funding level this low there are only two possible out comes 1) someone with deep pockets- ie government – bails it out or 2) benefits get cut a lot and in many cases to zero.

      In this case it will fall upon the poorly funded PBGC to provide some benefits but one this large will bankrupt the PBGC.

      Reply

  2. Posted by George on October 16, 2017 at 9:10 am

    “Value of liabilities using RPA rate (3.28%) @ 1/1/16: $55,036,288,777 including:”

    $55 billion is not the huge amount you think. And it will probably be reduced by MPRA.

    Fed gov has lots of money to toss around. And the wars appear to be winding down.

    U.S. taxpayers with a $20 billion tab for fighters… that can’t fight.
    https://www.thedailybeast.com/the-air-force-just-bought-100-stealth-fighters-that-cant-fight

    Reply

  3. Posted by BCG on October 16, 2017 at 10:41 am

    The situation with Central States is really ugly, and it is difficult to imagine a palatable solution. Digging in to that Form 5500 filing you linked to and pulling out some of the valuation results and projections highlights this. While there is uncertainty surrounding actual results versus valuation assumptions, when the time scale is short, those uncertainties matter less, and for Central States the time scale is unfortunately very short.

    Segal’s projections, using valuation assumptions, show an insolvency date in 2025. The main sources of uncertainty there are going to be investment returns, benefit amounts, and contributions. The benefit amounts are stable and predictable over short time frames like this, and while there is some downside risk to contributions dropping, this is still a pretty minor source of uncertainty. The main risk is going to be the investment return. Segal’s baseline calls for a 5.5% return in the first year, gradually rising to 7.5%. With a portfolio that produces an expected return of 5.5%, I’d expect that the risk would be in the range of 7.5% to 8%. Even if you accept this as a reasonable return and risk, over a 10-year horizon, it shouldn’t be surprising if the realized returns were 3 percentage points higher or lower.

    Using the cash flow estimates from Segal’s reports and a level 5.5% return, the plan would run out of assets in 2024. If the investment experience is relatively good and they get a return of 8.5% annually, the assets would last to 2026 – only two years longer. On the downside, if the investment experience is relatively poor and they get a return of 2.5% annually the assets are still exhausted in 2024.

    So, even modestly different investment returns have little impact – a reasonable range of asset depletion dates would be 2024-2026.

    The grim part is how difficult it would be to get that depletion date to move significantly further out into the future. In a generic sense, you can achieve that by infusing more assets or by reducing benefits. If you were to somehow infuse an additional $500 million every year (picking a number for illustrative purposes only, not opining on solutions), the asset depletion dates are 2025 at 2.5% return, 2027 at 5.5% return, and 2029 at 8.5% return, adding just 1, 3 and 3 years, respectively.

    Alternatively, if you were to reduce the benefit outflow by 20% (once again picking a number for illustrative purposes only, not opining on solutions), the asset depletion dates are 2026 at 2.5% return, 2027 at 5.5% return, and 2029 at 8.5% return, adding just 2, 3, and 3 years respectively.

    Even if you were to combine both approaches, infusing an additional $500 million per year and cutting benefits by 20%, making all parties unhappy, you don’t gain all that much. Asset depletion would be projected for 2029 at 2.5%, 2032 at 5.5%, or 2038 at 8.5%.

    When the plan is too far gone, there are no palatable, painless solutions. It should never have been allowed to get to this point.

    Reply

    • Posted by Tough Lobve on October 16, 2017 at 11:25 am

      Many Public Sector Plans are financially in the same boat (if valued using the assumptions & methodology used by the Central States Plan instead of the ultra-optimistic ones used by Public Sector Plans).

      Of course Public Sector Plans still believe that their Taxpayers can endlessly be forced to fill the rapidly depleting funds. Soon enough, we’ll find out.

      Reply

    • Posted by Seesaw Junior on October 16, 2017 at 12:27 pm

      CAP all pension payments at a % of the valed gross, with a MAXIMUM CAP at $1,000/month. is it harsh, YES< but that is what has to be done.

      Reply

  4. Posted by Tough Lobve on October 16, 2017 at 12:09 pm

    Amazing that things aren’t even worse given the mindset of Elected Officials……

    http://www.theday.com/article/20171015/OP04/171019682

    Reply

  5. Posted by MJ on October 17, 2017 at 5:53 am

    Well I’m no actuary but it seems to me that the retirees are piling up and the current workers paying in are few and most if not all of these public or private plans have been mismanaged and abused so that doesn’t leave a lot of happy endings

    Here’s a thought….plan for and manage for your own retirement, live beneath your means and work for as long as you can, don’t depend on the government or unions to fund your retirement………..

    Reply

    • Posted by Tough Love on October 17, 2017 at 9:31 am

      IF the Public Sector Pension Plans had reasonable benefits (not Ludicrously excessive benefits as they routinely are today), finding the revenue to properly and fully fund them would be a great deal easier………….

      And IF there were no retroactively-applied formula or provision increases (such as reclassifying a “misc” category worker into a “Safety” category worker, or lowering the full retirement age, or increasing a subsidy such the early retirement adjustment factors, or loosening/extending the definition of “disability”, etc.) all of which create an instantaneous unfunded liability…………..

      And IF Public Sector Plans were valued using assumptions/methodology now required of PRIVATE Sector Plans (instead of the ultra-liberal/phony ones typically employed in Pubic Sector Plan valuations) …………

      And IF total annual contributions were equal to the above-described Plan actuary’s recommendations (and were not shorted by self-interested Elected Officials) ……………

      ———————————————————————————

      UNLESS we had a series of significant recessions, these Plan would VERY likely have stated quite close to “full funding”…………… and the number of actives vs retires would have no impact.

      Reply

  6. Posted by Whirled Peas on October 17, 2017 at 7:23 pm

    I’d love to know how much of this problem is due to…
    1. Making promises that they should have known they could not deliver on.
    2. Poor fund investments.
    3. Waste and FRAUD.

    The Teamsters have a long history for being less than honest citizens. The chickens are coming home to roost. And it won’t be long before the Social Security chickens will also be coming home

    Reply

  7. […] Central States Teamsters Pension Plan […]

    Reply

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