Bailout Shutdown

Apparently, among the non-essential government activity being shut down these days is movement on the bailout of multiemployer plans. The MPRA website has not been updated since Christmas and the Bailout Committee website since the week after Thanksgiving. But that does not stop Congress from pushing a bailout bill or Joshua Rauh from polemicizing against it.

[T]this proposed bailout of organized labor’s retirement plans would cost federal taxpayers billions — while setting a dangerous precedent that would expose taxpayers and laborers to more financial mischief.

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Mr. Neal’s plan to address “multiemployer” pension plans — private-sector arrangements between firms and labor unions such as the Teamsters or United Mine Workers — would be catastrophic to adopt. These pension plans cover around 10 million individuals, and measured properly they faced a funding hole of $722 billion as of 2016.

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The loan approach is based on the idea that if the plans get a low-interest loan from the government, and then invest the proceeds in risky assets and target a high return, the loan can be repaid in full. Mr. Neal argues that this proposal does not constitute a bailout because “the federal government is simply backstopping the risk.” But the loan program is in effect a taxpayer bailout. Ultimately, the taxpayers lose if the plans do not return to fiscal health. In fact, the proposal now in Congress is similar to disastrous pension obligation bond issues under which state and local governments went on to sell bonds to the public and put the proceeds at risk in investments that they hoped would earn high returns.

Union and employer representatives who serve as trustees of these multiemployer pension plans have chosen not to make the difficult choices. Anticipation of a federal bailout encourages this irresponsible behavior.

Rather than pass pension bailout plans, Congress needs to establish rules that require at-risk pension plans to immediately stop making new promises before any federal assistance is extended. Such rules already apply to single-employer pension plans, so that unlike unions, companies with troubled pension plans have a strong incentive to go with 401(k)’s instead.

If there is federal assistance, it should be as part of a resolution process in which troubled pension plans are wound down. In addition, union plans should be required to measure liabilities accurately.

Mr. Neal’s bailout plan does not require any of these conditions. It sets a terrible precedent for a bigger, looming problem: Underfunded state and local government pensions. These public plans cover around 30 million active and retired cops, firefighters, teachers, etc. and are run by state and local governments.

According to both my calculations and those of the Federal Reserve, these promises were underfunded by $4 trillion as of 2016. States like Illinois, New Jersey and Connecticut, where pension obligations pose a serious threat to public finances, may conclude their pension promises to school teachers and public safety officials will be bailed out, too.

While Congress understandably wants to find ways of protecting hard-working people hurt by pension defaults, the proposed legislation would only exacerbate the pension problems.

Congress should act now to protect taxpayers from the consequences of irresponsible financial behavior by unions and state officials.

I agree with one clarification. Pension Obligation Bonds are a stupid idea for public plans in that they pass costs onto future generations of taxpayers but there is logic (however demented) behind arbitraging for revenue whereas these bailout loans will be going to pay retirees and loan interest. There is no investing to be done by bankrupt plans so the smokescreen of generating  alpha is ridiculous. This would be a flat-out bailout with bells and whistles to confuse those who need (or want) to be confused and designed to blow up in 30 years, if not sooner.