If you measured the strength of an organization by the size of its political donations, private-sector labor unions would be some of the most robust organizations in American society. The nation’s two most influential private unions, the Service Employees International Union (SEIU) and the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), spent $88 million between them trying to get Democrats elected in 2010. Seven of the top 20 most generous political action committees in the last election cycle were private-sector unions, with virtually all of that money going to support Democrats, according to Opensecrets.org. Over all, nine of the top 21 biggest political donors in the last two decades have come from organized labor’s nonpublic wing.
Yet unions in the private sector have been careening toward extinction. As recently as the 1950s, they comprised almost a third of the American workforce. Now they make up just 7 percent. So what is Big Labor getting for its political support?
So far, Barack Obama, arguably the most union-friendly president since John F. Kennedy, has rolled back transparency requirements for union financial disclosure forms and recess-appointed the former AFL-CIO and SEIU lawyer Craig Becker to the National Labor Relations Board after the Senate rejected him in a bipartisan vote. During the long, bloody struggle to enact ObamaCare, labor prevailed upon the Democratic Congress to exempt union-provided health care plans from a “Cadillac tax” on high-end insurance policies. After public opinion rebelled against the special-interest carve-out, Congress delayed any Cadillac tax until 2018, giving unions eight more years to negotiate a favorable deal.
Still, unions didn’t spend hundreds of millions in the last three election cycles helping Democrats win the White House and both legislative chambers (however fleetingly) just so they could avoid tax hikes and transparency requirements. The most headline-grabbing item on Big Labor’s wish list has been “card check”—a voting rule change allowing businesses to be unionized if most workers sign authorization forms. This change would effectively eliminate secret ballots in union elections, thereby exposing anti-union workers to outside pressure. So far card check has failed, and with the GOP’s landslide victory in November its only real prospect was that a lame-duck Democratic Congress would manage to push it through.
But a less discussed potential payoff is looming. A scheduled change in an accounting rule threatens to expose union pension plans as significantly more expensive than they previously appeared, thereby jeopardizing the financial health of unionized companies. Some Democrats think they have a solution: a bailout costing at least $160 billion. Only a lame-duck Congress stands in the way of what might be the final implosion of private-sector unionism in the United States.
Last Man Standing
Unbeknownst to most people, there are about 1,500 multiemployer pension plans in the United States covering about 10 million unionized workers. In these plans, different companies—usually but not always in the same sector—come together to form a single pension plan that covers all the employees at each business. While in the rest of the economy most nonunion employees now have a 401(k) or other plan that emphasizes portability and does not guarantee specified results, multiemployer plans were designed so that union members could switch jobs while still reaping the benefits of a more traditional defined-benefit pension.
The catch is that each company participating in a multiemployer (or “last man standing”) plan assumes the liability for all the other employees’ pensions. If five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the four failed enterprises.
For the last three decades, businesses in multiemployer plans have only had to report their annual pension fund contributions. They have not been required to report their withdrawal liabilities—that is, the amount a company would have to pay to cover its pension obligations to the other participants and exit the plan. These unreported liabilities dwarf annual pension expenditures. But the accounting fiction didn’t mean the companies themselves had any illusions about their liabilities and associated risk. In 2007, for example, the shipping giant UPS coughed up $6.1 billion to withdraw from the Teamsters Central States Fund, even though analysts had previously estimated that the company’s multiemployer liabilities amounted to just $4 billion.
On September 1, 2010, the Financial Accounting Standards Board (FASB) tried to narrow the reality gap by issuing a draft of a new regulation requiring companies to more accurately report liabilities from multiemployer pension plans. (The FASB is a private entity that sets guidelines for all businesses, but the Securities and Exchange Commission, which has the statutory authority to set rules for publicly traded companies, officially recognizes the organization’s rules as “authoritative.”) “Investors and other financial statement users have expressed concern that current financial statements do not provide enough information about the commitments and potential risk related to multiemployer pension arrangements,” the board noted in a press release announcing the rule. It added that a “recent study of over 100 multiemployer plans, including the largest plans in the country (as measured by assets), indicated that in 2008 those plans were collectively underfunded by over $160 billion (approximately 44 percent of their collective plan liabilities).”
In other words, multiemployer pension plans have only 56 percent of the money they have promised to pay out when employees retire. And even that figure might be too optimistic, considering that multiemployer liabilities have often been underestimated in the past. The Kroger grocery chain shocked analysts last year when it disclosed that its pension plan was underfunded by $550 million and its liabilities were $1.2 billion.
At press time, the FASB expects to implement the rule in the second quarter of 2011. But even if the new standard wasn’t there to formalize the disclosure of pension liabilities, the genie is already out of the bottle, because the financial industry now knows about the problem. Indeed, it took a flurry of Wall Street reports during the last several years—from Moody’s, Standard & Poor’s, and Goldman Sachs, among others—to finally force the FASB to do something. It is impossible for investors to accurately value a company without knowing their pension liabilities.
So how are the unions reacting to the new rule?
“The blind panic is un-frickin’-believable,” says Brett McMahon, a spokesman for Associated Builders and Contractors (an organization that advocates for “open shop” workplaces) and vice president of Miller & Long Concrete Construction. The comments from unions posted on the FASB website read like cries of desperation buried in polite legalese. A member of an Iron Workers union in Maryland wrote that the “additional requirements and costs associated will have the effect of having sponsoring organizations leave the multiemployer plans, which has a far reaching social economic impact.” Translation: Unions are screwed, and they know it.