Federal Taxpayer Bailout Likely For Big Union Pension Funds

Dingell: Government action required ‘to put food on the table’ for covered retirees

By Evan Carter | July 30, 2018

A pension fund administered by the Teamsters union, with more than 43,000 participants in Michigan, expects to run out of the money it needs to pay its beneficiaries by 2025.

Due to the size of this fund and the benefits it has promised to pay out, some experts project that its insolvency will single-handedly bankrupt the federal body created to insure private pension funds, the Pension Benefit Guarantee Corporation.

The Teamsters fund is among the largest union-sponsored multiemployer retirement plans that are underfunded and in danger of not being able to meet their obligations in the next decade. This fund, called the Central States Pension Fund, is estimated to have assets sufficient to cover only 33 percent of its promises. It has $36 billion in unfunded liabilities, according to a recent filing with the federal government.

When this and similar multiemployer pension plans fail to meet their pension obligations, the PBGC is supposed to pay a portion of the benefits promised to retired workers. But the PBGC itself projects that it will no longer have enough money to pay retirees by 2025.

To avoid reduced benefit payments to their members — or seeing no benefit payments at all — labor groups are lobbying Congress for a bailout. Earlier this year, congressional leaders created a committee of senators and representatives to look at the multiemployer pension problem.

The PBGC estimates that as of 2015, multiemployer pension plans in the United States had a combined $638 billion in unfunded liabilities. Further, 96 percent of the more than 10 million workers and retirees affected are in multiemployer pension plans that have less than 60 percent of the funding needed to pay benefits.

The only legislative proposal introduced so far is a bill called the Butch Lewis Act. According to Rachel Greszler, a fiscal policy expert at The Heritage Foundation, the bill is essentially a taxpayer bailout of the underfunded plans.

“The Butch Lewis Act is to just stand behind these plans 100 percent and that would, of course, create the incentive for any defined benefit plan that’s out there today to not [make proper funding assumptions] because they know there’s no consequences,” Greszler said. “Congress needs to be careful because whatever they do for the private sector is going to set the precedent for what they do with state and local plans.”

To put the magnitude of the issue in context, the debt of multiemployer pension plans is a fraction of that accumulated by states and municipalities across the nation. That amount was around $6 trillion as of 2017, according to a report from the American Legislative Exchange Council.

U.S. Rep. Debbie Dingell, D-Dearborn, pushed back against the claim that the Butch Lewis Act is a bailout but also said she doesn’t want to take a “single penny” from the retirement pay workers were promised. Dingell is a member of the bipartisan, bicameral group of federal lawmakers investigating the issue.

“The bill calls for long-term, low-interest loans to critical and declining plans that will be paid back over time. This is not a union bailout. The collapse of these pensions will have repercussions across the whole economy,” Dingell said in an emailed statement. “If we do not act now to provide a loan and Central States goes under, the retirees who have lost their pensions will have to turn to the government to put food on the table and keep the lights on in their homes, which will increase government spending.”

Dingell said she would be open to solutions other than the Butch Lewis Act that “protect benefits people earned over a lifetime of work, and prevent the failure of a large pension plan which could take down the PBGC.”

Richard Dreyfuss is an actuary and consultant who serves as an adjunct scholar with the Mackinac Center for Public Policy. He said that while some steps could be taken to mitigate the pension fund’s insolvency, he doesn’t believe a bailout can be avoided, though he is opposed to one.

According to Dreyfuss, when the number of pension plans seeking insurance from the PBGC overwhelms it, Congress will be forced to come up with additional cash to avoid cuts to promised benefits. Currently, the PBGC is funded by annual premiums paid by pension plans. As of 2016, the PBGC was projected to be $79.4 billion short of what it should have on hand to pay promised benefits, according to a 2017 report from the Government Accountability Office.

Dreyfuss said the underfunded pension funds should cut benefits, and the PBGC should raise the yearly premiums it charges the plans.

In May 2016 the U.S. Department of Treasury rejected an application Central States made to reduce benefits, saying the proposal it received would not prevent the plan from becoming insolvent.

Zachary Christensen, a policy analyst with the Reason Foundation, added that trends in the investment market have increased the pressure on pension funds.

“The trend in lower investment returns — often called the ‘new normal’ — is creating pressures for public and private pension funds. To fulfill promised retirement benefits, contributions must be higher than previously estimated. Simply put, pension funds won’t have as much available as previously projected, and plan managers are struggling to adjust to the need for more funding,” Christensen said in an email.

While Greszler said that the Central States is no longer eligible to apply for benefit reductions, she believes other reforms could prevent taxpayers from picking up the tab for private sector union promises.

“Look, you have to start reducing benefits, even for people that are receiving them today, so that future workers don’t get zero and everyone before gets 100 percent,” Greszler said.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

Gov. Rick Snyder’s Fiscal Policy Legacy

A review

By James M. Hohman | July 28, 2018

Unless Gov. Rick Snyder gets a proposed “trash tax” on landfill use through the Legislature this fall, the $56.8 billion budget he signed on July 14 is probably his last fiscal policy statement. So it’s a good time to review what the governor has done on fiscal policy through his two four-year terms.

Budget Trends

Total spending is up. The state’s most recent budget authorizes $56.8 billion in spending, up from the $45.9 billion authorized by his predecessor’s last budget, making for a 9 percent increase when adjusted for inflation. During the Granholm administration, the state budget increased from $39.6 billion to $45.9 billion, which was a 5 percent decrease when adjusted for inflation.

Federal transfers were a major part of state budget increases. They went up by 28.6 percent during the Granholm administration and 2.8 percent during the Snyder administration. Excluding federal dollars and looking at just money from state taxes and fees, Michigan’s state budget increased from $26.3 billion to $33.1 billion during the Snyder administration, an 11 percent increase when adjusted for inflation. In contrast, spending from state revenue sources declined 17.2 percent during the Granholm administration.

The different trends are more a statement on the state economy during the terms of each governor than a reflection of their policy preferences. Michigan lost 575,000 jobs during the Granholm administration and added 532,000 jobs in the Snyder administration.

School funding, a point of contention in every election, increased from $13.0 billion to $14.8 billion on Snyder’s watch. The amount of state taxpayer money in the K-12 education budget (not counting local and federal taxpayer dollars) is up 20 percent when adjusted for inflation. The increase more than makes up for a long-gone surge of federal stimulus money that rolled in toward the end of Granholm’s tenure.

There is also around $1 billion in the state’s rainy day fund.

During Snyder’s time in office, there was never a state government shut down, in part due to there being a Republican House and Senate, a case of single-party control (a “trifecta”) his predecessor never enjoyed.

Tax Policy

The overall state of the economy drives year-to-year budget changes, but major fiscal policy decisions are made outside the budget process. Tax policy decisions made in one year can affect budgets for years to come, for example, and the same is true with other laws that influence how much governments have to spend.

Snyder’s major tax policy reform happened in 2011 when he eliminated the Michigan Business Tax — a complex and burdensome business tax — and replaced it with a flat, low corporate income tax. The move was a simplification and a tax reduction that also eliminated a number of business tax credits and exemptions.

The same measure also revised the personal income tax levied on individuals, repealing a number of credits and tightening the eligibility rules for a homestead property tax credit program that reduces the tax burden on low- and middle-class residents.

Snyder restructured the state’s exemptions of pension income. The tax reform the governor signed eliminated that specific exemption and replaced it with a limited exemption on all income, not just pension income, received by people of retirement age. Since the new exemption amount is lower than the one it replaced, some pensioners became subjected to paying more income tax.

The 2011 reforms also canceled already-scheduled reductions in the personal income tax rate. In 2007, Granholm and the Legislature imposed a temporary 11.5 percent increase in the income tax rate. At the same time, they enacted a statutory promise to roll back tax the rate from 4.35 percent to 3.9 percent over time. But only a single rollback of 0.1 percentage point was allowed before Snyder and the Legislature scrapped future ones. In 2017, he opposed an effort by House Republican leaders to reduce the rate.

The net effect of the 2011 tax changes was a large reduction in business tax revenue and a net increase in income tax revenue collected from individuals.

Snyder also took on the challenge of reforming the personal property tax. Michigan businesses are subject to property taxes levied on real property, which are assessed on the value of land and structures. But they also pay property tax on the value of their tools and equipment, which can include everything from heavy equipment to paper clips. The governor called for a statewide referendum that would create exemptions from this tax and give them to manufacturers and small businesses that have less than $80,000 in business equipment. Local governments were the main beneficiaries of these taxes, and under the referendum, the revenue they would lose to the reform would be reimbursed with money from the state. This change required voter approval, and voters gave it, 69 percent to 31 percent.

The governor ended extra fines on certain traffic violations authorized in 2003 to solve temporary budget problems. The fines were hard to collect and the unpaid tickets hurt many low-income state residents.

In 2014 Snyder called for a legislative ballot initiative that would have authorized increases in sales and fuel taxes, with the money allocated to schools and roads. Voters rejected this proposal 80 percent to 20 percent. Subsequently, legislative leaders were able, in 2015, to garner sufficient votes to increase fuel and vehicle registration taxes for road repairs and also earmark some state income tax revenue to the transportation budget.

Other fiscal policy reforms

Snyder presided over some other important changes in fiscal policy. The largest was to limit public officials’ ability to underfund the state-run school pension system, which is Michigan’s largest government retirement system. The reform did this by offering new employees a choice between a 401(k)-style plan, or participation in a defined benefit pension plan with cost-containment measures. Under the new law, employees themselves are responsible for half the costs if state contributions to the pension fund are insufficient to pay for promised benefits. The full effects of this reform will be felt only over decades, but it can save billions, considering how past actions had led to the system being underfunded by $29.4 billion.

Michigan also began to move away from pay-as-you-go funding for its rescindable pledge to provide health insurance to state and school retirees. It started to fund the promises by putting money into individual accounts.

In addition, active school employees are required to contribute to the costs of their health insurance as the result of a 2012 law.

The Snyder administration pressed legislators to accept the Obamacare Medicaid expansion that made families and childless adults with incomes of up to 138 percent of the federal poverty level eligible for benefits. The federal government picked up the entire cost at first, but the state share is rising to an eventual 10 percent.

Snyder also approved eligibility limits for other social assistance programs like food stamps and unemployment insurance.

Candidate Rick Snyder was critical of business subsidy programs when he ran for office in 2010, and as part of his 2011 business tax overhaul as governor, he suspended a program that delivered subsidies through the tax code. But at the same time, he created new business subsidy programs that require annual appropriations in the state budget. In 2017 he partially reversed course by championing two new off-budget business subsidy programs that may cost taxpayers up to $1.2 billion.

Snyder also pledged to use something he called Value For Money budgeting. If he is using it, he’s doing so quietly.

The governor insisted upon maintaining a public website, or dashboard, of state government performance. It’s still around and provides information about the state of the economy, public school performance, the condition of current infrastructure and more.

Where the Snyder administration lands

Rick Snyder is no small government conservative and did not govern as one. But neither is he a big spender. If anything, his fiscal policy has largely been that of the status quo. He has had priorities, which have shaped where state government is today: There is more money for roads, Medicaid, schools and for a rainy day, too.

There were both tax increases and tax cuts over Snyder’s two terms. The governor championed two tax cuts for businesses, and he advocated fuel and vehicle registration tax hikes that went to road maintenance. He canceled income tax rate cuts that were already prescribed in state statute and clamped down on granting various income certain exemptions, credits and deductions — even for politically favored groups like pensioners. Overall, Snyder’s tax changes slightly increased state revenue, though improvements in the state economy generated more revenue than the policy changes did.

Snyder ushered retirement system reforms that can prevent the state from bankrupting itself through promising pensions now and kicking their costs onto future generations. Pension funding is a big problem all over the country, and it can only be fixed with long-term solutions. If his pension reforms stick, they should be his most significant legacy for Michigan’s long-term fiscal future.