Will Insolvent Union Pensions Get Bailed Out by the Government?

Despite the accumulation of nearly ten years worth of evidence that the U.S. government cannot make money from its student loan business despite having a near monopoly in it, it may soon get into a whole new lending racket.

Despite the accumulation of nearly ten years worth of evidence that the U.S. government cannot make money from its student loan business despite having a near monopoly in it, it may soon get into a whole new lending racket.

Disguised Taxpayer Bailout

But what makes this lending racket different is that what they would offer their political crony clients is little more than a taxpayer bailout by another name. Writing at RealClearMarkets, Alex Pollack explains the business model being advanced by the legislative authors of H.R. 397:

Here’s a remarkable lending opportunity to consider: Let’s make billions of dollars in loans to borrowers which “are insolvent” or in “critical or declining status.” These loans would be unsecured and no payments of principal would be due for 30 years. At that point, in case of default, the loans would be forgiven. Would you make such a loan? Obviously not, and neither would anybody else—except maybe the government. This idea is one only politicians could love, since it gives them a way to spend the taxpayers’ money without calling it spending.

Making such loans is proposed in a bill before the House Ways and Means Committee, entitled “Rehabilitation for Multiemployer Pensions Act” (HR 397). The borrowers would be multiemployer (union) pension funds which are deeply underfunded, insolvent in the sense of having obligations much greater than their assets, and won’t have the money to pay the benefits they have promised. A more forthright title for the bill would be the “Taxpayer Bailout of Multiemployer Pension Funds Act.”

What the U.S. government would offer these insolvent multiemployer pension plans, being run jointly by labor unions and multiple employers within the same industry, is nearly unlimited upfront cash they can use to keep pension benefits flowing out to retired union members without addressing any of the mismanagement that put them in such dire financial straits, to begin with. Then, under the generous lending terms of the bill, they would make payments they can afford for up to 30 years, after which, a large balloon payment would come due, which if these were real loans, would mean the U.S. government would finally be fully repaid.

Politicians Are Masking the Problem 

Except the bill makes it possible for the politically connected operators of multiemployer pension plans to welch on their obligations to U.S. taxpayers and have part or all of the loan forgiven in a way that Americans who are stuck for life in paying their student loan bills back to the government cannot. Pollock quotes the section of the bill that makes it possible and describes the likely consequences:

“(e) LOAN DEFAULT.—If a plan is unable to make any payment on a loan under this section when due, the Pension Rehabilitation Administration [PRA] shall negotiate with the plan sponsor revised terms for repayment, which may include...forgiveness of a portion of the loan principal.”

No limit is set on how big the “portion” may be. Why not 100%? Of course, all loans of all kinds are in principle required to be repaid, but are nonetheless not repaid if the borrower becomes insolvent, and pension funds demonstrably can go broke like anybody else. As one actuary recently observed, “It seems very likely that the default rate on PRA loans will be significant.” Indeed it does.

It is highly convenient for the politicians that under the bill no default on principal repayment could occur by definition until the balloon payment in 30 years. Assuming defaults start to occur in 2050, a member of Congress who is now 60 years old would be 91, if still living.

Hide the problem, kick the can down the road, and skip town before anybody discovers you fleeced them. That’s the job description of a con artist, which is not supposed to be the same as that for a member of Congress. Is it?

This article is reprinted with permission from the Independent Institute. 

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