I warned about a pension bailout . . . now, guess what?

For years I've been pointing out how federal, state and local government pensions (not to mention many private pension funds, particularly those organized by trades unions) are woefully underfunded, sometimes so much so that they're effectively bankrupt already.  I've also warned that we can expect calls for a federal bailout of such funds, forcing the burden for their deficits onto the US taxpayer instead of those who are rightfully responsible for them.  Most recently, in February, I wrote:

I fully expect semi-bankrupt cities and states to demand a Federal bailout of their obligations.  I hope and trust that won't happen . . . but bear in mind that almost every city with serious debt problems is run by a Democratic Party administration.  If the Democrats take over the Senate and Presidency, in addition to their present hold on the House, you can bet your bottom dollar (literally) that such a bailout will be passed.  That'll put all US taxpayers on the hook for all that money - at least $5 trillion for all states and major cities right now, and probably higher.

Am I a prophet, or what?

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.

. . .

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.

There's more at the link.  The bill contains other (unpleasant) surprises, too, so it's worth reading the article in full.

The bill's sponsor(s) may deny that it's a bailout, but if it walks like a duck, and quacks like a duck, and swims like a duck . . . it's a duck.  This is a bailout, pure and simple, with some hastily applied camouflage to pretend that it's merely a "loan".  That's a con from beginning to end.

If this is allowed to pass, it'll open the gates to shunt $5 trillion or so of city and state pension underfunding onto US taxpayers' shoulders.  (After all, if we're helping union pension funds, how unreasonable not to do the same for government employees, no?)  If this measure doesn't pass, there'll be more.  The politicians are dependent on voters to keep their jobs, so they're very vulnerable to pressure to get them to support such schemes.  "Vote for this bailout, or we'll tell all our union members/city residents that you blocked the rescue plan for their pensions!"  Politicians are, in general, fundamentally cowardly, putting re-election over principles and ethics.  They'll cave . . . unless we are ceaselessly watchful, and protective of our own interests as taxpayers.

To shunt $5 trillion more onto the already unmanageable national (i.e. federal) deficit would increase it by almost 23%, virtually overnight.  That's madness!  Please write your congressional representative and Senators about this, objecting as vehemently as possible to being made to carry the fiscal can for the financial irresponsibility and fecklessness of others.

Peter