In the news recently . . .
“Last week, Moody’s
“And that data will not count the knock-on effects of the economic downturn, which would short-circuit pension funds’ ability to hit up taxpayers for bigger contributions. . . .
“’The people have no money,’ said Maria Pappas, the treasurer of Cook County, Ill.
“Even before the pandemic gut-punched the economy, Ms. Pappas counted a record 57,000 delinquent property-tax payers in her county, which includes Chicago. Property taxes feed more than 400 municipal pension funds in Cook County, including some that are cash-starved and close to hitting bottom.”
The article continues by reminding readers of the pre-existing shortfalls faced by such states as California, Illinois, Kentucky, New Jersey, Connecticut, as well as many cities and counties, and the legal and (state) constitutional restrictions that prevent them from reducing benefits. Unable to reduce even future accruals, the state of Illinois “chose the path of widespread taxation to pay its retirees’ pensions, including a 3 percent compounded annual increase, a figure well above the recent rate of inflation. The state doubled its gas tax last year. It tripled a real estate transfer tax, and raised taxes on cigarettes, vaping, electricity and even dry-cleaning fluid. It made marijuana legal and taxable. It approved gambling, so casinos can be taxed, too. Tags for virtually all cars and trucks went up in January.” Chicago has also been raising taxes at a furious pace, and “Peoria recently added a yearly ‘property fee’ to raise money for police and firefighters’ pensions. (By making it a ‘fee’ instead of a ‘tax,’ the city could bill entities that are normally tax exempt, like churches and schools.)”
What happens next? The report concludes by citing Pappas again:
“Benefit cuts may be inevitable, Ms. Pappas said, and they may not be up to voters or the courts.
“She volunteered for George Papandreou, a former prime minister of Greece, when his country became a financial pariah in 2010 and had to get rescue loans from the International Monetary Fund and other European countries.
“Greece had also promised costly pensions to millions of people, but was forced to reduce benefits to receive those loans, she said.
“’They didn’t want to,’ she said. ‘They didn’t have any choice.’”
This is grim, but in a way, also surprising, as the possibility of federal bailouts of state and local pensions is not floated as an option, as Mark Glennon, writing at the Chicago Tribune, worries might happen, and writes:
“In our view, any open-ended federal assistance for state and local governments, and any direct assistance to pensions, should be conditioned on pension reforms in the states that need it. Under no circumstances should federal money go toward the futile hope of filling the bottomless pits of the worst-managed pensions in Illinois, New Jersey, Connecticut and certain other states.
“That reform condition must apply to other bailout ideas in the nature of block grants, general notions of which are now percolating.”
“House Democrats planning a new and sweeping economic relief package to respond to the coronavirus say they’ll include federal aid for troubled union pensions.
“Democrats have just begun drafting the relief bill, which they said would include enhanced family paid leave, more money for food stamps, and new worker safety requirements.
“The pension bailout, if included in the measure, could cost tens of billions of dollars if it matches a pension relief package the House passed last year.”
In fact, the House version of the $2 trillion stimulus/relief bill had included the $100 billion Butch Lewis Act previously passed by the House. However, Democrats are not wedded to that proposal.
“’Our proposal is the Butch Lewis Act, but, more importantly, we need and want multiemployer pension reform that works,’ a senior Democratic aide told the Washington Examiner. ‘We are not so committed to an approach that we can’t negotiate a solution.’”
The article recaps the Senate proposal and its opposition, then concludes:
“Democrats will have to negotiate a bipartisan solution with the Senate, which is run by Republicans. They’ll also have to convince McConnell, of Kentucky, that any pension bailout belongs in a new coronavirus relief measure.
“’I’m not going to allow this to be an opportunity for the Democrats to achieve unrelated policy items that they would not otherwise be able to pass,’ McConnell said Tuesday on the Hugh Hewitt show.
Regular readers will recall that, in my latest article on the issue, I had outlined the various sticking points between the negotiating parties: how expansive should the cash infusion be, vs. shoring up the system with more contributions and cuts from the affected parties? And how much should the funding regulations be tightened up to keep the system healthier in the future, without boosting costs so much as to make the system unaffordable to participants?
Will the need for more legislation, generally speaking, finally be the “must-pass” bill that a solution negotiated behind-the-scenes is attached to for procedural reasons? Or will an unsatisfactory bill, that doesn’t suit the needs of the system in the long run, end up being passed as a result of horse-trading around other legislative priorities?
Traditional employer pensions
Regular readers will recall that in the CARES Act economic relief/stimulus package, employers were granted a deferral of their required quarterly contributions, and the ability to pay benefits as lump sums even if post-market-crash funded status calculations would otherwise prevent this. At the same time, however, the House version included additional “funding relief” for employer pensions: the ability to make up deficits over fifteen rather than seven years, and a boost in the anticipated rock-bottom discount rates with which companies would otherwise be obliged to fund their plans.
These provisions are not “bailouts,” of course, since these plans would be obliged to continue funding, and would, at the end of the fifteen years, be expected to be fully funded. And the discount-rate funding relief is based on the expectation that today’s rates are abnormally low and will eventually increase. But, of course, in every discussion of bailouts for large corporations, pensions also come into play, indirectly: bankrupt companies don’t pay into their pensions but hand them over to the PBGC.
And church plans?
Virtually all private-sector plans are guaranteed by the PBGC. But not all of them: for “separation of church and state” reasons, plans sponsored by churches and other religious entities are not a part of the PBGC system. That doesn’t mean they leave their plans unfunded — many such plans are diligent about funding even without legal requirements — but their funding methods are at their own discretion, and every now and again, a plan makes headlines for becoming unable to pay benefits, not so much with respect to churches as with religiously-affiliated hospitals which shut down, for example, St. Clare’s Hospital in New York. The Pension Rights Center lays out some of these details, with respect to bankruptcies and other circumstances, and a recent Democrat & Chronicle article describes the situation with respect to a particular bankruptcy, that of the Diocese of Rochester.
It’s fair enough to exclude from PBGC protection those plans which don’t pay into the fund, and which aren’t subject to the same funding rules as the others. But if federal funds find their way into everyone else’s pensions, should they also go to church plans?
In fact, there is so much we don’t know, so I leave readers merely with a question: where do you draw the line between reasonable relief and bailout, and if there are pension bailouts to be had, who should get them?
As always, you’re invited to share your thoughts at JaneTheActuary.com!
— to www.forbes.com