Teacher Union Pension Bailout on the Horizon?

Written by Education Action Group Foundation

Will the madness ever end? Just over two weeks ago, Congress passed a $10 billion "Education Jobs Fund" that gave money to cash-strapped states to keep teachers and other school employees on the job. It was spun as a victory for the kids, but the real winners were the teacher unions, whose members were spared from making salary and benefit concessions to avoid layoffs.

While the teacher unions won a temporary victory, we have to believe that they are paying careful attention to another, bigger prize that's lurking in the shadows – an expensive federal bailout for private companies with union-negotiated pension plans.

If this latest bailout becomes law, it will mark the first time in American history that tax dollars are used to fund the pension plans of private industries.

In late July, Sen. Dick Durbin (D – IL), the second most powerful Democrat in the U.S. Senate, announced that he is supporting the "Create Jobs and Save Benefits Act of 2010." This proposed bill that would make select labor union pension plans the "obligations of the United States."

Here's how it would work: Congress would specifically bail out troubled Multiemployer Pension Plans (MEPPs). These pension plans are used in the transportation, construction, and entertainment industries (among others) in which workers regularly change employers but stay working in the same field.

Instead of having each employer set up a unique pension plan, MEPPs establish a general pension fund that employers fund at a rate determined during collective bargaining sessions with the union. Unlike traditional pension plans that are controlled entirely by the company, the unions help manage the MEPPs.

But they haven't been managed very well, and the taxpayers could be stuck with the cost of making them whole.

Why would this be of interest to the National Education Association and American Federation of Teachers?

A recent study from the Manhattan Institute and the Foundation for Educational Choice finds that "teacher pension liabilities for all 50 states now total almost $1 trillion....almost triple the cost of what state officials have on their balance sheets." The study concludes that these unfunded public burdens "could bankrupt state budgets, including education programs."

The teachers unions know that their lavish pension plans will result in a financial tsunami for the states. Should this new bailout go through, it will pave the way for a massive bailout for the teacher pensions, the likes of which has never been seen. This is a very big deal.

Death By A Thousand Cuts

Back to the MEPP bailout.

The MEPP system may work okay when the economy is humming along, but its structural flaws quickly become evident during a recession.
Since the beginning of this current economic downturn, a large number of companies have gone out of business. As a result, fewer employers are paying into the MEPPs, and those employers are having to pay more and more into these pension funds just to keep them afloat. Employers are in danger of death by a thousand cuts.

If the unions were responsible, they would head back to the negotiating table and rework their pension agreements to make them sustainable. But why do that when there's bailout money to be had? That's where Congress enters the picture.

The bill supported by Sen. Durbin would take the pension benefits of workers whose companies have gone bankrupt and put them into a separate account. This new account would be administered by the Pension Benefit Guaranty Corporation (PBGC), a government run insurance fund for pension plans. Currently, when a pension plan goes bust, the PBGC takes it over and uses the insurance premiums paid by its members to cover the costs. But since the PBGC itself is more than $20 billion in debt, that is not a viable solution.

Under this proposed bailout, these new, separate pension accounts (called the "partitioned plan") would become the "obligations of the United States." In other words, the multiemployer pension plans would be given a clean bill of health after the taxpayers make them whole. As Yogi Berra might say, "It's deja vu all over again!"

In testimony before the U.S. Senate, Assistant Secretary of Labor Phyllis Borzi put it this way: "The proposal ultimately makes the taxpayers liable for paying the benefits of the partitioned plan. Currently, no other benefit obligations assumed by the PBGC are subject to the full faith and credit of the U.S. government."

Read that last sentence again and let it sink in. Should this bill pass, unions will realize that no matter how reckless and irresponsible their demands are during a collective bargaining showdown, the U.S. taxpayer will be forced to come to the rescue should their employer go bankrupt.

"We want ours!"

This proposed bailout needs to clear a few major hurdles before it can become law.

The first hurdle: the American people are sick of bailouts. That's why supporters are selling this as a jobs bill. They argue that if the taxpayers take responsibility for these pension plans, employers will have money freed up to spend on job creation.

This is the "Rebecca of Sunnybrook Farm" approach to economics: it's nice and simple, but it has no basis in reality. Adding more debt (which will need to be paid back in the form of higher taxes) is no way to grow the economy. Not even the bill's supporters believe this. But by labeling something as a "jobs bill" instead of a "bailout," they hope enough people will be bamboozled into supporting it. Hey, it worked for the teacher unions.

The cost is another major sticking point. Supporters of the bailout argue that it would "only" cost around $10 billion. Here's how a spokesman for the International Brotherhood of Teamsters put it: "We're not asking for trillions of dollars like the banks get. We're just looking for temporary relief for pensions that lost money in the stock market crash." Translation: "We want ours!"

The $10 billion price tag for the bailout is laughable. A 2009 analysis by Moody's Investor Services looked at some of the largest MEPPs in the nation and concluded "that these plans are collectively underfunded by upwards of $165 billion." Do they not want us to know about the $155 billion? Does anyone really think this bailout would stop at $10 billion? Anyone?

The Senate bill and its counterpart in the U.S. House of Representatives are currently hung up in committee. It looked like the union pension bailout was going nowhere until Sen. Durbin threw his weight behind it. This has fueled speculation that the Senate may try to push this bailout through later this year, after the November elections. Even though there is no appetite among the public for another bailout, organized labor might demand that Congress jam it through.

If that occurs, the two major teacher unions, plagued with their own self-inflicted pension nightmares, won't be far behind, demanding their piece of the pie.