New Report Shows Union Pension Shortfall in the St. Louis Area

Employees covered by union-sponsored pension plans have had little to cheer about lately. Those living in and around St. Louis are no exception. A study released this past December has concluded that current assets of several area labor-sponsored funds are insufficient to meet total liabilities. Worse yet, the situation has deteriorated since the start of the stock market crash in the fall of 2007. The report, titled, “The Financial Health of Defined-Benefit Pension Plans: An Analysis of Certain Trade Unions’ Pension Plans,” and co-authored by John R. McGowan, a professor of accounting at St. Louis University, and a graduate student, Catherine Donovan, concludes that as of around two years ago the pension funds of five major construction unions had only about 70 percent of the assets necessary to cover long-term obligations. Moreover, the study estimates that by the close of 2008 this figure had declined to less than 55 percent. Union leaders understandably are critical of the study. Yet the findings merely mirror nationwide trends.


America’s defined-benefit pension system has been approaching a state of peril for years. Thousands of private-sector employers since the early Nineties have chosen to terminate their plans. While most cancellations have been of a “standard” variety in which the sponsor has enough funds to fully compensate beneficiaries, many, including those of some of the nation’s largest employers, are of the “distressed” variety; i.e., those whose assets fall well short of liabilities. Delta, United and U.S. Airways (airlines) and Bethlehem, LTV and Weirton (steel) have been dramatic examples of this latter type, accompanied in each case by Chapter 11 bankruptcy. In either case, a federal insurance agency, Pension Benefit Guaranty Corporation, takes over management of terminated accounts. Protection has a high price. PBGC, funded mainly through premiums and residual assets, closed out fiscal 2008 with an operating deficit of $11.2 billion. That’s actually down from $23.5 billion four years earlier. But don’t break out the champagne just yet. The corporation estimated that in 2018 the shortfall would be $26.3 billion (in present value). And the Congressional Budget Office in 2005 projected present-value deficits of $86.7 billion in 2015 and $141.9 billion in 2025. The bailout agency itself one day might need a bailout.


Union-sponsored plans, if anything, are in even worse shape than nonunion ones. A study released last year by Hudson Institute Senior Fellow Diana Furchtgott-Roth concluded that only about 60 percent of union-sponsored plans had asset-to-liability ratios of at least 80 percent. This compared to around 90 percent of all nonunion plans. Labor organization pensions in St. Louis fare even worse. McGowan and Donovan, examining IRS Form 5500 tax returns, looked at the balance sheets of five large-scale pension funds: the Carpenters Pension Trust Fund of St. Louis, the Construction Laborers Fund of Greater St. Louis, and multi-employer funds of the International Brotherhood of Electrical Workers, the Plumbers & Pipefitters, and the Sheet Metal Workers. In each case, they found substantial underfunding. For fiscal years ending anywhere from December 31, 2006 through May 31, 2007, the plans had a combined $2.19 billion in current assets and $3.12 billion in total liabilities – a combined asset-to-liability level of 70.2 percent. The figure for the Carpenters fund, which comprised two-thirds of the assets, was 70.65 percent. The respective funding levels for the Laborers, Electrical Workers, Plumbers and Sheet Metal Workers funds were 75.34 percent, 64.96 percent, 67.29 percent and 64.13 percent. 


Ominous as those figures are, they’ve probably gotten worse since. McGowan and Donovan updated net assets to reflect changes in value through December 2008. The authors assumed that liabilities grew at a rate of 3 percent for all plans; union fiduciaries invested two-thirds of assets in the stock market; and the Dow Jones Industrial Index was an appropriate benchmark for restating asset values. Current assets, they estimated, dropped to $1.71 billion, while total liabilities rose to $3.21 billion, making for an aggregate asset-to-liability rate of 53.3 percent. Individually, the rates were: Carpenters, 53 percent; Laborers, 57 percent; Electrical Workers, 48 percent; Plumbers, 52 percent; and Sheet Metal Workers, 49 percent. The Pension Protection Act of 2006 requires all pension funds falling below the 60 percent threshold to make up shortfalls based on new “at-risk” liability targets with phased-in payments. In lieu of raising contributions or cutting benefits, a PBGC takeover may be almost inevitable. 


Exacerbating the dilemma is that each of the five pension plans studied was of the multi-employer rather than single-employer type. Currently, PBGC uses a formula to guarantee only up to $12,870 in annual payments payable to each individual member of a multi-employer pension plan. By contrast, the agency guarantees up to $54,000 annually to a worker who retires at age 65 and enrolls in a single-employer plan (the maximum benefit is lower for those who retire early or for a surviving beneficiary). Workers won’t see too much money in the event of a federal takeover. Some of these plans nationwide already are in dangerous straits. The Teamsters’ Central States Pension Fund, which provides benefits for around a half-million current and former members, has only $21 billion in assets and $39 billion in liabilities. And with employer contributions now down to only 30 percent of the fund’s income, the union may have to ask more from rank and file to maintain plan viability.


The St. Louis University study has elicited a strongly negative response from at least one union leader. Terry Nelson, secretary-treasurer of the Carpenters District Council for the St. Louis area, argues that the numbers are way off. “He’s an idiot,” he said of Professor McGowan. “Whatever he’s reading, he’s reading something he doesn’t understand.” Yet it is indisputable that the study reflects a loss of solvency in the nation’s defined-benefit pension system. Many workers face the real possibility of their sponsors terminating benefits or moving to defined-contribution arrangements such as 401(k) plans. There’s something to be said for unions controlling their fates, as the recent auto industry-United Auto Workers retiree health plan agreements attest. But organized labor may get more than it bargained for if it ignores the numbers. (St. Louis University School of Business, 12/08; Business Week, 12/4/08; St. Louis Post-Dispatch, 1/16/09; other sources.)