More on Why We Shouldn't Bail Out the Multi-Employer Plans

Something I meant to write yesterday, but forgot, is that there's considerable moral hazard if we allow multi-employer plans to segregate the employees of now-defunct companies.  As one of my commenters wrote:

The multi-employer plans are treated differently from the single-company plans precisely because there is an expectation of the births and deaths of employers in the marketplace. They are common in industries like the garment industry, the construction industry and the trucking industry,where companies come and go frequently.

There are a whole bunch of reasons for this birth and death cycle which aren't particularly germane to our discussion.  But one thing that is worth noting is that it's not uncommon for owners to serially start companies, or have three or four companies operating under the control of a single owner.  If you segregate the pensions of defunct firms, it seems to me that you may get a whole bunch of creative corporate bankruptcies so that the government can take over all the old pensions.

It's also important to note that this is not simply a disaster created by corporate bankruptcies or other market exit.  As the same commenter notes:

The pension laws that govern the multi-employer plans already provide very specific guidance on how pension fund deficits are to be handled. In the non-construction multi-employer plans ( construction plans are treated somewhat differently),the unfunded liability actually belongs to the employer in proportion to his percentage of the fund's hours over the last five years. That liability should actually be booked each year and becomes a clear balance sheet liability if there is ever a transfer of ownership. Since the companies have equal representation on the plan management boards, the rules were devised to give the companies a very direct stake in the state of the fund and to discourage excess pension awards.

In the non-construction world,when a company withdraws from the marketplace or goes bankrupt,its share of the unfunded liability is immediately due and payable. And the fund trustees have a fiduciary responsibility to see that what is owed is paid.

So what is the problem that Senator Casey is trying to solve? Did the trustees of the plans fail to collect what is owed or assert claims in bankruptcy? Did they allow the failing companies to avoid paying their routine contributions? Did the trustees fail to keep an eye on what companies are getting themselves in trouble? Did the company auditors ignore this liability? Did the company executives conceal it from their auditors and bankers? Were the executives negligent in even asking about it? Many people may be liable, but that is no excuse for a bail out. And if this is a bill just to solve the problems of one giant employer, why did they let things get so bad that the problem arose in the first place? Why wasn't this problem sorted out in collective bargaining?

There is no question that a lot of multi-employer plans have seen a growth in unfunded liabilities since the stock market crashed. But they have also seen substantial recovery since. And now they have to tell companies what each has as a share of unfunded liabilities,to further reinforce attention to the issue.

Now it may be that companies have left the marketplace. If new union employers have come into the marketplace there is no problem,since the contribution base hasn't changed. If the marketplace has gone open shop, then the plans have to either get more money in the door from each remaining company and employee or cut the pensions to fit the money available.

The problem, in other words, is that the pension funds did not accrue adequate assets to cover their liabilities, a problem which in some cases seems to rise to gross negligence.  Now those long deficiencies have to be made up by the companies that are still in business, including those that weren't around when the worst of the underfunding occurred.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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