Labor's Last Stand?

A new accounting rule will either sink private-sector unions or trigger the next major bailout.

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.

Blind Panic

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.

It's not just that companies might suddenly look to get out from under their obligations en masse. Many businesses might not even survive the new transparency rules. "It wipes out the book worth of literally hundreds of companies, in the trucking and construction industries in particular," says McMahon.

The trucking company YRC Worldwide, which employs more than 30,000 Teamsters, is already on the verge of collapse. YRC made headlines last year by asking for $1 billion in TARP funds, specifically for its foundering pension plan. (The company later decided against seeking a bailout.) If YRC went out of business, it would devastate the union.

Once banks, creditors, and potential investors are aware of the extent of these liabilities in many of these already-struggling sectors, it could become impossible for multiemployer pension participants to get loans, bonding, and lines of credit. And it would certainly erode the stock price of many publicly traded companies.

But there's next to nothing the unions can do about the root problem. More transparency in and of itself won't really cause a company with a grossly underfunded pension plan to go out of business. The new rule will just hasten the collapse.

A recent Government Accountability Office study looked at multiemployer plans from 1980 to 2006. The agency found that as of 1998 the number of people paying into the plans was equal to the number of retirees receiving benefits. Since then the plans have essentially been Ponzi schemes locked in an accounting death spiral. The Teamsters plan alone has four times as many retirees drawing benefits as employees paying into the plan.

Holdings by multiemployer pension plans make up almost one-quarter of the $2 trillion in total assets of all private pension plans. Once these plans start going under, it could have devastating consequences for unionism as a whole, for two reasons.

First, unions will no longer have one of their most effective selling points: the promise of a stable job and a generous defined-benefit retirement plan. Second, workers who are denied their promised retirement due to gross financial mismanagement are going to get awfully litigious, awfully fast. By law, the board of trustees of a multiemployer plan is evenly divided between employer and union representatives. Once aggrieved union members become fully aware of the problem, you can expect a flurry of class action lawsuits, with workers looking to recoup their lost retirements by going after the assets of the employers—and unions—that managed their plans.

Intra-union politics are notoriously acrimonious, and the last few decades have seen a growing cultural rift between rank-and-file blue-collar workers and union leaders, who have increasingly become a class of professional political organizers. It's pretty clear that union organizers are trying to hide the severity of the pension problem from their own members, even as they attempt to insulate themselves. The SEIU, for instance, has a separate pension plan for its officers. From 2002 to 2005, according to Diana Furchgott-Roth of the Hudson Institute's Center for Employment Policy, that plan was funded on average at 123 percent. Meanwhile, the pension plan of SEIU rank and file was just barely above the 80 percent funding threshold below which the government considers it "endangered." Given the downturn in the economy in the last five years, all of the SEIU plans are certainly in worse shape now, but it's a safe bet that the union officers are in better shape than the rest. 

Obligations of the United States

Naturally, union leaders would prefer to avoid fiscal annihilation. The trouble is that there is really only one creditor in the world that can cough up the $160 billion needed just to bring their plans back up to 100 percent funding levels: the taxpayer. 

Accordingly, unions have been doing everything they can to get their hands on the nation's purse strings. Democrats have outspent Republicans in the last three national election cycles. That hadn't happened in at least a generation. This surge in Democratic campaign cash is largely due to union contributions: In 2006 unions spent more than $166 million, in 2008 they coughed up an astounding $400 million, and in the recent midterms they contributed well over $200 million. 

So Democrats have a very big incentive to bail out union pension plans. Toward that end, in March 2010 Sen. Bob Casey (D-Pa.) introduced the Create Jobs and Save Benefits Act. The legislation would create a separate fund in the Pension Benefit Guarantee Corporation (PBGC), a government-sponsored enterprise set up in 1974 to pay for failed union pension plans. Under current law, when the PBGC steps in for a failed pension fund, each member of the plan is guaranteed only $12,000 a year from Uncle Sam, regardless of what they were owed. That's dog food money, and unions instead want their pensions paid in full. Casey's fund would do that.

While the Casey bill is popularly referred to as a "bailout," that's not quite accurate. It's really more of a new entitlement. Here's what the plain language of the bill says: "Notwithstanding any other provision of this title, obligations of the corporation which are financed by the fund created by this subsection shall be obligations of the United States" (emphasis added). Under this bill, unions will get their failing pension plans paid out by the U.S. taxpayer in perpetuity, no matter how much money it takes. No dollar figure is mentioned.

There is a precedent for the Casey bill. In July 2009, the PBGC—which was already running a deficit of $10 billion, against total liabilities of $72 billion—agreed to take on $6.2 billion in new pension liabilities from the bankrupt auto parts manufacturer Delphi. The PBGC is expected to assume $86 billion in total liabilities by 2015, even without placing an additional $160 billion or more from multiemployer plans on its balance sheet. Larry Smar, Casey's communications director, has told The Daily Caller that any spending from the bill would have to be offset by spending cuts or tax hikes under congressional pay-as-you-go rules, but such guidelines are already violated with brazen regularity.

Aside from the Casey bill, labor's other legislative priority is card check, which would allow labor organizers to identify and pressure workers who don't want to form a union. Unions no doubt hope card check would help them organize many workplaces quickly and, through the magic of mandatory binding arbitration, force newly unionized businesses into failing multiemployer plans, thereby shoring them up.

Sen. Tom Harkin (D-Iowa), outgoing chairman of the Health, Education, Labor and Pensions Committee, has already said he wants to bring up card check legislation in the lame-duck Congress, in session between the November 2 election and the January swearing in of the newly elected Republican House. In October, Harkin's committee also held a hearing to consider Guaranteed Retirement Accounts, a plan promoted by the AFL-CIO and SEIU that would dismantle the 401(k) system and force all Americans to pay into a national retirement plan over and above Social Security.

The bad news for unions is that they had Democrats in power in the White House and both chambers of Congress for two years and failed to get any pension-related legislation enacted. As of January, Republicans will control the House. Adding insult to injury, Rep. Earl Pomeroy (D-N.D.), who was sponsoring Casey's bill in the House, was defeated soundly in November. 

The most likely scenario is that the new accounting rules will speed up the demise of multiemployer, defined-benefit union pensions. But given the unions' political clout, they can't be dismissed so easily. Can the new Congress withstand union pressure to bail out unrealistic promises? And can the administration invent some nonlegislative rule to bail out its labor allies? Look for the union label, and get ready to pay. 

Mark Hemingway is an editorial writer for The Washington Examiner.