On March 11, President Biden signed the American Rescue Plan into law. Most of it was stimulus spending designed to rescue the economy from the coronavirus pandemic, but did you also know that it provides $86 billion for 10.7 million workers in 185 pension funds? Michael Scott, the director of the National Coordinating Committee for Multiemployer Plans, explains what this rescue means for these troubled pension plans and the retirees they serve.
Some highlights from The American Rescue Plan with NCCMP Director include:
01:22 – The Role of the NCCMP
04:14 – The Timeline of Pension Reform
10:27 – Low-Interest Loans or Partitions?
15:11 – The Purpose of the American Rescue Plan
19:34 – The Cost of Doing Nothing
If you'd like to read the PDF file of The American Rescue Plan, please visit: www.congress.gov
Or check out the NCCMP website: https://nccmp.org
This is The World of Multiemployer Benefit Funds Podcast with Traci Dority-Shanklin. If you're interested in labor and union benefit funds, well, you've landed in the right place. We are a go-to source for all things union benefit fund-related, and we are going to bring you interviews with key decision-makers and fund professionals that guide these plans. They'll share their insights, experience, unique perspectives, all of the latest developments, and tips to unlock the mysteries of multiemployer benefit funds. Time is short. So, let's get started.
Traci Shanklin 0:36
My guest on the podcast today is Michael Scott, and he is the executive director of the NCCMP, which is the National Coordinating Committee for Multiemployer Plans. He served at the US Treasury from 2001 to 2006. During the financial crisis of 2008, he also served as a principal advisor to the chairman of the Securities and Exchange Commission. In his private practice, he ran an advisory business where he consulted clients on federal credit, infrastructure, federal budget issues, public-private solutions, legislation, and regulation. Hi, Michael, thank you for joining me on the podcast today.
Michael Scott 1:20
Thank you, Traci. Glad to be here.
Traci Shanklin 1:22
So, what role or purpose does the NCCMP play?
Michael Scott 1:27
So, NCCMP is, you know, it started in 1974 after the passage of ERISA, and what its real purpose is, is to make sure that multiemployer pension, health, and welfare plans can operate in an environment that is conducive and functional. We're in a heavily regulated environment. Most of the plans, whether your pension health and welfare and apprenticeship training program, are subject to ERISA. So, there's a heavy federal involvement, and over the years, the pension side has become a much bigger issue. And it's partially because the federal government set the rules under which our pension plans operate. And they made a number of decisions that are counterproductive to the well-functioning of a pension plan.
Michael Scott 2:20
And just to give you one example is there is a excise tax on well-funded pension plans it applied to both single-employer and multiemployer. But in the single-employer world, it didn't make any difference, because if you became well-funded in a single-employer plan, the employer could skip a year of contributions to not trigger an excise tax. In the multiemployer space, you couldn't do that. Because those contributions are collectively bargain. They have to be made based on - generally based on hours work. So, it left multiemployer plans with the problem of if you're too well-funded, you're going to trigger a 40% excise tax. And the only way to get around that is to increase your liabilities.
Michael Scott 3:07
But, there's another provision in ERISA, the anti-cutback rule, which means that once you earn a benefit, you can't kind of back, so in good times, you're increasing your liabilities to make sure you don't trigger the excise tax. In bad times, you can't take it back. So, it's counterproductive. And there's other things over the years. Deregulation of the trucking industry is one example; trade policies that encourage manufacturing to move overseas which ultimately or out of the country that ultimately resulted in less unionized employment. A lot of those rules or policies were just problematic for us.
Traci Shanklin 3:44
On March 11, President Biden signed pension reform the American Rescue Plan Act into law. Because of your background with multiemployer funds, that's why I asked you to come on the podcast maybe so that we could get some background about the American Rescue Plan of 2021. But, before we get into the nuts and bolts of that, I wanted to just remind our listeners of two reasons why multiemployer pension reform is critical.
Traci Shanklin 4:14
The first is union workers in these plans sat at the negotiating table, and they gave up pay in the short-term in order to guarantee a pension 10 or 35 years later when they retire. The second reason I think these plans are critical is that they generate approximately $4.6 trillion in US GDP. So, if too many of these plans fail, it has the potential to be another economic bubble. So, Michael, if you could just kind of - you've alluded to this already, but set the stage the timeline of pension reform, sort of highlighting when critical plans and pension reform first came to the - to Congress's attention And, then I want to get into some of the things that - that the NCCMP has proposed.
Michael Scott 5:07
In 2009, Earl Pomeroy and Pat Tiberi, two congressmen, had developed a legislative proposal to fix multiemployer plans at that point. And Central States was front and center as far as a plan that needed to be fixed. And the general feeling was that after TARP and the general financial crisis, there was bailout fatigue in the country. So, at that point, when we couldn't get it passed, NCCMP moved on and created the Retirement Security Review Commission. Randy DeFrehn led that for NCCMP, and it was about self-help. And what could multiemployer plans do on their own without federal assistance because they were flatly told there's no federal money? How could we fix our plans that had suffered both the dot-com bubble and now the Great Recession?
Michael Scott 7:13
They ultimately came up with MPRA, the Multiemployer Pension Reform Act of 2014. And that was really designed to allow plans to adjust to reduce benefits, but at a higher level than what a pensioner in a insolvent plan would receive if their plan had gone insolvent and went to the PBGC. And just in general, when a plan today gets to the PBGC, the retiree is getting on average, a 53% cut over what he or she is owed from the plan. But, the problem today is when Central States goes insolvent, it's actually going to make the PBGC's multiemployer pension fund insolvent. And at that point, the PBGC can only pay out what it takes in premium income, which right now is about $320 million a year. And that will result in somewhere between a 94 and 98% reduction. So, MPRA was designed to allow cuts that would preserve more benefits for a retiree than would otherwise be possible under the current law.
Michael Scott 7:13
So, MPRA gets passed in 2014. Central States is one of the first applicants, but this was really designed around Central States. And when they received their rejection in 2016, May of 16, between the passage of time when they applied, which I believe was August of 15 and May of 16, they had burned assets to the point where they could not reapply under MPRA because they couldn't maintain the 110% requirement. Under MPRA, you couldn't cut benefits below 110% of the PBGC's guarantee. After that, in 17, 18, 19, and 20. There are a variety of different proposals out there. One became an actual bill, which was Butch-Lewis. UPS, United Parcel Service had developed a loan program, and NCCMP developed one. And we did so because my experience with federal loans is that, again, if you can pass a loan program, that's great, but in general, the institutional organs of the government. So, OMB and Treasury worked very hard to make sure these programs actually don't lend a dime. And we wanted to make sure that if there was going to be a loan program that was structured in a way that would address the federal issues that they're always concerned about, but also work with the plans. None of those loan proposals advanced.
Michael Scott 7:13
And ultimately in February of 2018 as part of the budget deal, Congress created the Joint Select Committee on Solvency and Multiemployer Pension Plans. One of the great things about the Joint Select Committee if they had reached agreement, there was fast-track authority for them to get their legislation to the floor and voted on. They couldn't get to an agreement. In November of 2019, the Senate Finance flipped from Senator Hatch to Senator Grassley, and Senator Grassley continued the work of the Joint Select Committee. They issued a white paper that would have had the special partition, but had a number of reform items as well to make sure that we don't get into this crisis again. So, between January of 20 and March of 20, you know, with the pandemic, not a lot happened.
Michael Scott 7:13
And then it went to leader Schumer and Speaker Pelosi working to get it first introduced into the CARES Act, which they were not successful in doing. But Speaker Pelosi subsequently made it part of the HEROES Act, and she grabbed two parts. She had the special partition as the solution for distressed plans, and then she included the GROW Act, which was a new plan design. They passed that in May of 20, and again, in October of 20, the Republican Senate didn't take up either version. In late November / early December, the Democrats and the Republicans started negotiating and actually had gotten pretty far as the special partition, new plan design, changes to the funding rules, which are really about allowing healthy plans more tools to make sure they stay healthy. And the Republicans walked away on December 12, which was unfortunate, but a lot of progress had been made. And we get to January 5, and the Georgia Senate races changes the landscape for multiemployer pensions dramatically by flipping control of the Senate. And the Democratic leadership ultimately decided that they would pivot from relief and reform to what can we do in a reconciliation bill. Because the rules are substantially different. And it allowed what we saw on the American Rescue Plan.
Traci Shanklin 10:27
So, there's the low-interest loan from the Democrats, and then the partitions from the Republicans. Are any of these included in the America Rescue Plan?
Michael Scott 11:59
No. And the reason is that the reconciliation would not allow spending outside the 10-year window. So, the partition was the money would go to the PBGC. They would assume liabilities for the benefits over the entire time period. And at the time, we were looking at a 40-year time frame, but a lot of the spending would be outside that - the federal government has a 10-year budget window. And so, a lot of the spending would occur outside the 10-year budget window. So, the special partition would not be available in a reconciliation bill because all the spending has to be done in the first 10 years. And so, what the American Rescue Plan was really about doing was making sure that plans had enough money to pay benefits through plan year 2051 without reduction and giving them that money on - in a lump sum. Generally, it's going to be between now and 2026.
Traci Shanklin 13:00
Gotcha. So, just for our listeners, could you explain what the Pension Benefits Guaranty Corporation is and its purpose?
Michael Scott 13:10
The PBGC is the federal insurer of both single-employer plans as well as multiemployer plans. In the single employer world, their program offers a benefit of roughly $75,000 a year today. So, if you have a pension that is 75,000 or less, and your plan is trusteed today, you're going to receive your full pension. In the multiemployer space, the guarantee is $12,000 and some change, but it's time-based. So, it's a maximum of that at 30 years of service. So generally, if you look at lost pension of somebody who is in a trusteed plan, and a single employer plan, it's roughly four and a half percent don't receive the full benefit. You end up with a four and a half percent reduction, and the vast majority of them are actually receiving the full pension. It was largely because of the airline bankruptcies that included the pilots that is for the four and a half percent reduction. In the multiemployer space, in general, a participant who in an insolvent plan would see a 53% reduction today in their benefit. So, there's enormous discrepancies and how much the PBGC insurers, but in general, the goal is to be the federal insurer.
Traci Shanklin 14:42
In August, you penned a letter to the director of the PBGC, where you pointed out some of the regulatory failures with MPRA that you mentioned earlier. So, at the time, and I know you've mentioned some of these, but what are some of these regulatory issues that the NCCMP found with the MPRA regulation?
Michael Scott 15:04
The letter you referenced was actually August of 2017.
Traci Shanklin 15:09
Michael Scott 15:11
When Treasury developed its regulations for MPRA, they effectively took a review de novo of all the actuarial assumptions that go into the application. That had never been done before. It was not contemplated that they would do that when MPRA was passed. In general, the actuaries received great deference as to their assumptions. And that wasn't happening. And that created some of the problems with the Central States application. There was another, you know, large problem is that they changed the discount rate that they would allow Central States to use. They didn't change until two weeks before - 10 days before - they gave them the rejection notice. Their MPRA applications are very time-consuming, very labor-intensive, and there's simply no way for them to have adjusted their application in a timely manner. But the passage of the American Rescue Plan ought to make MPRA an irrelevant tool going forward. And in fact, if you go back to the HEROES Act, it actually repealed MPRA. And that was certainly one of the things that was negotiated in the November / December timeframe with the Republicans is that MPRA would be repealed with the institution of the special partition that was part of that plan.
Traci Shanklin 16:44
It sounds like the American Rescue Plan does improve the chances of acceptance for critical and declining plans in terms of the MPRA benefit, or is it repealed?
Michael Scott 16:56
In general, the MPRA suspensions that were allowed would be unwound and paid back. So again, the intent of the American Rescue Plan is to unwind them, pay them back, and make MPRA a tool that doesn't need to be used anymore because we have the American Rescue Plan.
Traci Shanklin 17:21
In other words, would funds like Central States Teamsters have a better chance of having their applications accepted because of the American Rescue Plan?
Michael Scott 17:30
To be clear, there are no benefit cuts in the American Rescue Plan. It is designed to ensure to pay the plans enough money, so that we have the funds available to make benefit payments through the end of the plan year 2051. MPRA is not going to be an issue for people who are successful in applying for the special financial assistance.
Traci Shanklin 17:57
Was there anything that didn't get into the American Rescue Plan that you and NCCMP we're hoping for?
Michael Scott 18:03
Policy issues cannot be accomplished in reconciliation. So, new plan designs were not able to be taken care of; funding rule changes were not able to be taken care of. And we've had extensive discussions with leader Schumer, Speaker Pelosi on the need to get the other issues addressed after the passage of the American Rescue Plan. And we think that we're in good shape to get those taken care of. I'm not sure it's gonna be this year, but you know, in the nearer future.
Traci Shanklin 18:41
Yeah, that was gonna be my next question was, is there an appetite for additional legislation, given this, I guess, mini-victory with the American Rescue Plan?
Michael Scott 18:54
Two things on that. One - I think the Republicans ought to want to get back to the table. Because one, I think most people believe that December was a missed opportunity to get reform that would not only provide relief, but would set plans up so that this type of crisis doesn't happen again. And that has been a central part of the Republican issues on how we address multiemployer pensions, and we're fully supportive of it.
Traci Shanklin 19:34
That's good to know. I mean, it sounds like there is bipartisan support for reform, I guess the appetite is there because of the impact on the economy. I mean, can you touch a little bit on what the cost of doing nothing would be to our general economy.
Michael Scott 19:53
Actually, when I got here in 2017, one of the first things I did was I had the Segal Group look at the Form 5500 data, develop the information that we needed to understand the economic impact that multiemployer plans had on the economy in general. The Form 5500 data isn't the most timely information that's available. But in 2017, we had access to the year 2015. So, off of that, the multiemployer system was paying $158 billion in federal taxes annually to the government. We ultimately, in January, were asked by a member of Congress to participate in a updated hearing that the Committee on Education / Labor had in March of 19, which we've looked at the cost of doing nothing. And in preparation for that hearing, which ultimately became unnecessary because of the passage of the American Rescue Plan. We had Segal look at the data from 2016, 17, and 18, for Form 5500, which is all that's available at the time in January. And what we found was that in that four-year period, multiemployer --
Traci Shanklin 21:12
I have that. It's - it's 698 billion in tax - and federal taxes. Is that what you're referencing? Yes. So, there's, for our listeners, it was like 698 billion in federal taxes, 374 billion in state and local government taxes, 169 billion in pension income to retirees, and 927 billion in wages to 3.8 million workers. The multiemployer plans support 17.2 million jobs. And I referred to it earlier, when I said it in, in, I guess, in aggregate, it generated approximately 4.6 trillion in US GDP.
Michael Scott 22:03
And those are, those are phenomenal numbers. And when we were doing the economic analysis and 17, 18, 19 and then we updated it this year, we also looked at the critical and declining status participants and just using that - not critical status, that ultimately a significant number of those absent this legislation would ultimately go insolvent at some point in the future, the federal government was going to lose between 46 and $138 billion in federal revenue, federal taxes off just the critical and declining status plans. And Senator Hatch when he was ranking member of Finance back in - I forget the year, but it was the number of years ago, he was looking at the impact of state and local pensions failing. And he brought up the idea that, you know, we're going to take a hit on the federal tax revenue, but we're also going to see a large increase in safety net spending.
Michael Scott 23:08
And it's that safety net spending, which is particularly troublesome for the government because it's a mandatory. It is, you know, yes, there are some eligibility requirements and certain aspects of it. But it was still going to be quite expensive, and we estimated $138 billion. So, when you combine the lost revenue and the safety net spending that they would see if these plans were allowed to go insolvent, you have a impact on the federal budget that dwarfs either the 10-year cost of the American Rescue Plan, or the 30 to 40-year costs of a special partition. In the American Rescue Plan, everything is in that 10-year window. The American Rescue Plan was a much better deal for the taxpayer to pay for than allow these plans to fail and lose the tax revenue and have increased safety net spending.
Traci Shanklin 24:10
I touched on the PBGC and the solvency issues - in the new pension reform bill, is there any protections that have been created to address the PBGC solvency?
Michael Scott 24:22
So, CBO scored this bill at $86 billion. And what they also said was it lengthens the time period to their projection for PBGC insolvency goes from 2026 to somewhere in the mid-2040s. This will depend greatly on how the PBGC guidance or regulations that come out. If those regulations are consistent with the intent of Congress then I think the PBGC is going to be solvent for a significant period beyond the 2040s. Ultimately, if we get future legislation on new tools for trustees that will enable plans to never get to the PBGC in the first place.
Traci Shanklin 25:16
And this is primarily for the listeners, does the PBGC rely entirely on premiums for funding or for their solvency? Or do they get - is there a budget with the US Treasury or the government that helps the PBGC?
Michael Scott 25:33
Up until the American Rescue Plan, they have never gotten federal money. So, they've always relied on premiums to fund their programs.
Traci Shanklin 25:42
The NCCMP recently submitted a 30-page document regarding the guidance and recommendation for implementation of the American Rescue Plan. You even mentioned the intent, you know, behind it. So, what are some of the recommendations?
Michael Scott 26:01
The law is unclear in certain areas. And if you take certain interpretations, for instance, it could be read to suggest that the liabilities that plans are discounting, or the benefits that plans are discounted, would be discounted at the interest rate limit that is said in the legislation, which is a third segment rate plus 200 basis points. So, it's roughly five and a half percent. The problem with that is that when the PBGC gives special financial assistance to a plan, they're giving it to them, and it has to be in a fund that's segregated from the rest of their existing plan assets. And they can only invest by statute in investment-grade bonds, or the PBGC has the authority to create other permitted investments. The problem for us and for plans is that investment-grade bonds, generally are, you know, that's gonna be like a 2% yield, which on a real basis is negative, which means that, you know, if you took a 10-year investment, you're actually losing purchasing power at the end of that 10-year, while each year, but certainly by the end of the 10-year period, you're doing the same thing on 20 and 30 years of payments.
Michael Scott 27:20
So, there are a number of actuarial issues that need to get clarification on. One of the consequences of discounting at say five and a half would be, you know, you're theoretically discounting payments through 2051 at five and a half, but directing them to invest at, say two, which means that they're losing three and a half points on their investment, which ultimately means that they're not going to be able to make payments through 2051. It may be 2041, or maybe 2035. And that's not the intent of the legislation. And we're working hard to make sure that PBGC, the board of the PBGC, which is the chairman is the Secretary of Labor, Secretary of Treasury is on it, and the Secretary of Commerce is on it. And we're working hard to make sure that everybody is focused on how do we make sure this legislation is implemented with the intent of Congress and fulfills that intent for the entire period that they prescribed.
Traci Shanklin 28:25
Yeah, it's one of my frustrations with pension fund reform legislation like MPRA, that they get misinterpreted, or there's varying interpretations that end up going against what the intent was behind setting up the reform to begin with. Well, it is clear that the work that NCCMP is doing to ensure multiemployer plans is critical. And Michael, I really thank you for your leadership and helping to sustain multiemployer plans. And thank you for joining me today on the podcast.
Michael Scott 29:00
Traci, I'm glad to, and thank you very much for the opportunity to speak.
Traci Shanklin 29:03
Yes, thanks again. I really, really appreciate you taking the time to come on the podcast and provide some perspective on pension fund reform and the American Rescue Plan. Please subscribe to us on any Apple, Android, or PC platforms. You can find The World of Multiemployer Benefit Funds on Apple Podcast, Spotify, Pandora, Google Podcast, Amazon, and many others. If you like what you just heard, please give us a five-star rating and leave a review. And as always, you can find us on our website at multiemployer funds.com. That's www.multiemployerfunds.com.
Traci Shanklin 29:45
Thanks again for joining the conversation where listeners connect with leading experts throughout the financial and investment world. Be part of the change. And that's it for this week's episode of The World of Multiemployer Benefit Funds Podcast. We love to hear from you. And if you have any comments, questions, or suggestions, head over to www.multiemployerfunds.com, and let us know. Thank you for joining us, and we look forward to next time.
Transcribed by https://otter.ai