Severely underfunded private-sector union pension plans are hurting companies
Think loan sharks charge predatory rates? Compared with what it costs to get out of union pension funds, those guys are cheap.
When he was forced to downsize his last, part-time unionized trucker, George Kerver said he was charged nearly half a million dollars to help bail out the Teamsters union pension fund.
"We got the bill and it was for $465,774," said Kerver, president of Fastdecks Inc., a concrete forming company in Walled Lake. "We have made three payments so far. The first one was due five days after our receipt of their demand. Three sets of lawyers have all warned us that this law is pay now and ask questions later."
Teamsters Central States Pension Fund sent the bill to Fastdecks. Although the company had employed hundreds of union workers since its founding in 1964, the $465,774 bill resulted from just one employee being laid off.
"By the end of 2011, business had been so bad that we had laid off almost every person in the company," Kerver said. "Fastdecks has had one Teamster truck driver for most of the years we have been in business. When we had so little work, he had to look for another job. He was laid off in December of 2011. We ceased paying into the pension fund at that time because legally, even if you want to, you can't contribute to the fund if you do not have an employee working."
Kerver said the company was "lucky" its liability was assessed as of 2011. If it had been assessed as of 2012, he said the bill would have been well over $550,000 because the cost of withdrawing from these union pension funds is skyrocketing.
Pension funds across the nation are underfunded and struggling.
In part, that's because companies and some governments are moving away from offering traditional pensions. However, the regulations surrounding pensions have not kept pace with the changes.
For example, the Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for pension plans in private industry. ERISA was designed so that the retirement assets would be protected. However, those who devised the ERISA system nearly 40 years ago apparently never envisioned virtually all of the union pension funds being severely underfunded at the same time.
"As companies leave the pool of contributors each remaining company's percentage of the growing shortage gets larger," Kerver said.
In other words, the $465,774 that Fastdecks owes the Teamster Central States Pension Fund is not based on what is owed by the company for the former truck driver's benefits. It is based on the fact that the pension fund is about $25 billion in the hole.
"That means, theoretically, that the withdrawal liability for the last company that stays in the pool will be $25 billion, or however much the entire fund is underfunded," Kerver said.
Fastdecks and similar businesses contribute to the pensions of those who work for them through multi-employer pension plans. These plans are designed for workers in industries where it is common to move from employer to employer. Often the employers are small private sector businesses, especially those in the construction industry.
In addition to construction, other industries that tend to have workers covered by multi-employer pension plans include trucking, garment manufacturing, and grocery stores. Among the largest multi-employer pension plans in the country are the Teamsters’ National Master Freight Agreement for the Central States, Southeast, and Southwest areas; the United Food and Commercial Workers' pension plan; several construction trades' plans (such as carpenters, electricians, and plumbers); and the Union of Needletrades, Industrial and Textile Employees' plan.
A little more than five years ago, the increasing costs associated with withdrawing from pension plans caused one large company, UPS Inc. (United Parcel Service), to buy its way out. In December 2007, UPS paid $6.1 billion to withdraw from the Teamsters Central States fund. At the time, UPS was large enough to cut a deal. Under the arrangement, UPS was still liable for its own employees' retirement, but was excused from having to pay for the retirement of other Teamsters who never worked for it.
"Mr. Kerver's story is sad but not unique," said Vincent Vernuccio, director of labor policy for the Mackinac Center for Public Policy. "Multi-employer union pension underfunding can have a real effect on businesses, large and small.
“Whether it was the structure of multi-employer plans, bad investments, businesses going bankrupt, malfeasance, or just bad luck, many of these plans around the country are in dire straits," Vernuccio said. "The plans put a strain on businesses' bottom lines and can make them less competitive and harm their ability to support their retirees. Unions need to step up to the plate and take responsibility for the retirement they promised their members and for the funds they helped manage."
Kerver said Fastdecks is a small business that can employ from 20 to 100 workers but employing as many as 100 would be unusual. Its annual earnings are from $3 million to $7 million, but Kerver said $7 million would be in an unusually good year.
"We're supposed to pay $2,466 a month to the Central States fund for 20 years," Kerver said. "With interest, it will add up to about $580,000.
"Over the years we've been generous with our employees. But now the money we could have used to continue that policy is being sent to the pension fund," Kerver continued. "I'm one of three owners of the company and we're experiencing a lot of angst. All these years we've been working hard and making sure our employees were covered. But we don't have any pensions ourselves. All we have is our savings."