Federal Lending to Insolvent Pension Plans Is Code for Bailout

Published in Real Clear Markets.

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.”

The bill’s primary sponsor, Congressman Richard Neal (D-MA), who is Chairman of the Ways and Means Committee, has stated, “This is not a bailout.”  But a bailout by any other name is still a bailout.  “These plans would be required by law to pay back the loans they receive,” said Chairman Neal.  But the bill itself provides on pp.18-19:

          “(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.  “I’ll gladly pay you Tuesday for a hamburger today,” said the instructive cartoon character, Wimpy.  Likewise, “We’ll gladly pay in 30 years for a bailout today” is a natural human response to financial failure.

Chairman Neal said that with his bill, “The federal government is simply backstopping the risk.”  But the federal government is already backstopping the risk of these pension plans through its implicit guarantee of the Pension Benefit Guaranty Corporation (PBGC). 

How has that worked out?  The PBGC’s insurance program for multiemployer pension funds is itself broke.  Its net worth is a negative $54 billion, according to the PBGC’s 2018 annual report.  The net position of $54 billion in the hole is composed of total assets of only $2.3 billion and liabilities of $56 billion, thus the liabilities are 24 times the assets.  Since PBGC’s accounting only takes into account the budget window, its long term position is even worse.

So it is not a surprise that by the time you get to the last paragraph on the last page of the bill, you find it also includes a bailout of the PBGC’s failing multiemployer program:

     “(b) APPROPRIATIONS.—There is appropriated to the Director of the Pension Benefit Guaranty Corporation such sums as may be necessary for each fiscal year.” 

These sums are for direct financial assistance from the PBGC to “critical and declining” and “insolvent” multiemployer pension plans.  There is virtually no limit to the amount (“such sums as may be necessary”) or the time (“for each fiscal year”) of these appropriations.  They are for sending cash in addition to the loans from the bill’s proposed Pension Rehabilitation Administration.  Also on its last page, the bill provides that the PBGC “shall not require the financial assistance to be repaid before the date on which the [PRA] loan…is repaid in full.”  That may be never.  The Congressional Budget Office estimated the probable taxpayer cost of a similar previous bill at more than $100 billion.

In theory and under its Congressional charter, the PBGC was supposed to be a financially stand-alone, actuarially sound insurance company, not guaranteed by the government and never needing any appropriated funds.  As its annual report says, “PBGC receives no funds from taxpayer dollars.”  Not yet, anyway.  The PBGC has always had an implicit guaranty from the U.S. Treasury, and we can once again observe that implicit government guarantees tend to become bailouts.

In short, the bill is a convoluted way to a simple end: to have the taxpayers pay the pensions promised but not funded by the multiemployer plans.  If enacted, the bill will encourage other plans to make new unfunded promises in the very logical expectation of future additional bailouts.

To adapt a famous line of the great philosopher and economist, David Hume, “It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London than to give a politician the ability to guarantee pension plans.”