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PENSION PROTECTION
PENSION PLANS PENSION FACTS SERVICES |
The huge backlog of American infrastructure maintenance, repairs and new construction may soon start shifting from government into private hands as cash- strapped local governments sell public assets to private investors. Tapping new sources of equity and credit, private companies would be allowed to take over the construction and maintenance of roads, bridges, airports, railroads and sewage systems. Such undertakings used to be common in the early days of the Republic. Today, it's becoming increasingly accepted that private firms have a much better track record of completing projects on budget and on time, while holding down costs. Other countries have already followed this route. This gradual shift toward the private sector in the United States is likely to provide a whole new impetus and structure to the construction industry. It’s a topic to watch. * * * A powerful Midwest carpenters union based in Kansas is picketing a construction site in Colorado Springs charging unfair labor practices by a subcontractor. Demonstrators claim the subcontractor is not paying by area labor standards and is shortchanging workers on pensions and health care benefits. Not officially a strike, the protestors have so far not shut down work on the project. They say they want across the board equality on wages and benefits so that contractors compete on quality and efficiency, not on whether one company can work “cheap” by not paying workers union scale. * * * The Chicago city administration is in negotiation with powerful labor leaders to hammer out a much longer term contract for members of the city’s building trades unions. Chicago is hoping the city will be selected as host for the 2016 summer Olympic games and wants to be certain labor strife won’t scare off the Olympic selection committee. The building trades unions are anxious to extend the arrangement whereby members get the same benefits as other city workers but receive a wage rate – the so-called prevailing wage – negotiated between unions and a group that represents private builders and contractors. The new contract, according to insiders, might last as long as 10 years. Possible snags are suggestions by some advisors that the city switch to a 401(k)-style defined-contribution plan from its current defined-benefit plans. Unions so far have balked, claiming that labor and other trade union plans are fairly well-funded. * * * The Philadelphia upcoming mayoral election may bring a showdown between the city’s entrenched, heavily unionized workforce and the new mayor who will be forced to confront an impending budget disaster. A recent report commissioned by the Pew Charitable Trusts states that some 22% of all city funds already go to city pension payments and health care benefits for retired city workers. In 2001 that amount was $380 million. It’s projected to jump to $842 million by 2009. The city has long “bought labor peace,” as one insider put it, by putting off paying the piper. But now even maintenance, not to mention new construction, will have to be severely curtailed if the city is to begin to cover its overhanging obligations. Astronomically high construction costs are just one of the factors that weigh down economic growth and drive corporations from the city, further eroding the tax base. As jobs vanish, the union base evaporates as well. But the contracted benefit liabilities remain. * * * New studies show the American construction industry may face a labor shortage, especially for skilled craftsmen. A report by the Home Builders Institute states that U.S. construction employed 6.7 million workers in 2001. It goes on to say that 1.5 million more skilled workers will be needed by 2010 to keep up with economic growth. But skilled workers are retiring out of construction in increasing numbers. A study by the National Center for Construction Education and Research reports that the average age of craft workers in the United States is 47 years old. * * * In recent elections, Californians approved a series of bond issues for infrastructure improvements. Now Gov. Arnold Schwarzenegger has said he is eager to get started on massive public works projects using some of that bond money. Though the new bonds would add only about $43 billion over 10 years to the state's $70 billion annual construction industry, both the Republican governor and legislative Democrats said spending the money would help the real estate sector rebound. "The Legislature must finish the job we started -- and voters approved -- this year and push the projects out the door to offset the downturn in the housing industry. Workers can move from building houses to constructing roads, levees and schools," said Senate President Pro Tem Don Perata, D-Oakland. However, with a decline in home sales driving an overall slowdown in California's economy, lawmakers say it will be "much tougher" to balance the state budget next year and cuts are expected to come in critical areas. * * * At the national level, evidence of a robust economy continues with job creation high. But for many, “good numbers” overall mask continuing job losses in manufacturing and construction, meaning more bad news for people who work with their hands. Victorious Democrats in Congress vow to push legislation to make it harder for companies to use the bankruptcy process to force concessions from workers on pensions and pay, but short of subsidies and taxpayer bailouts, there are few alternatives if companies don’t have the money to pay benefits.
On the west coast, Los Angeles Mayor Antonio Villaraigosa last week announced a $65 million commitment to create housing developments for middle-income families across the greater Los Angeles area. The announcement came on the heels of the narrow defeat of Measure H, a ballot initiative which would have allowed much-needed but debt-financed infrastructure repairs and construction.
A coalition of homeowners led the campaign against Measure H, arguing that the funding mechanism, a 30-year tax increase based on assessed property values, was unfair, because new homes are valued at a far higher rate than older homes under Prop. 13. It needed a two thirds majority to pass and failed by only a slight margin.
Mayor Villaraigosa was joined by executives from LA's largest public pension funds – Los Angeles City Employees Retirement System (LACERS); Los Angeles County Employee Retirement Association (LACERA); Los Angeles Department of Fire and Police Pensions (LAFPP) – to announce the new commitment in Genesis Workforce Housing Fund II, a private equity real estate fund managed by Phoenix Realty Group that will create workforce housing developments targeted toward middle-income families across the greater Los Angeles area. * * * Unions and management are assessing the impact on multiemployer defined-benefit pension plans (primarily in the construction and trucking industries) of pension reforms passed in August. Ostensibly, multiemployer plans which participate in federal Pension Benefit Guarantee Corporation insurance appear to be in better shape than most single-employer plans. But only sometimes.
PBGC's backstop to the two types of plans is very different: in the case of underfunded multiemployer plans, the new legislation grants the plans a longer time to “catch up” to full funding -- up to 15 years instead of the 7-year period for single-employer plans. However, the reform adds new rules for multiemployer plans deemed in either “endangered” or “critical” status based roughly on their funding level. A plan with less than 80% funding is “endangered” or “seriously endangered,” and a plan less than 65% funded is certified in “critical” condition. * * * Some building trades unions have what is known as a "30 and Out" plan. Such plans typically allow tradesmen who are at least 55 years old with 30 years in the trade to retire and take their pensions. “I’ve paid my dues and I’m out,” is the way these younger retirees phrase it. Many, however, continue to work well past their official retirements. "It's a pretty common thing," one union official said. “Experience is really hard to replace on a job site." He noted some have continued working well into their 70s. Union pension rules vary, but retirees can often work 39 “official” hours per month while collecting full pensions. * * * Some of the largest companies that contribute to multi-employer pension plans are opposing a movement among financial rating organizations like Moody’s Investors Service that could lower such companies’ investment “grade” based on full-disclosure of their long-term pension obligations. Even though many of their pension plans are underfunded, they argue that pension benefits are a short-term “cost of labor” rather than a long-term, debt-like liability. Under current accounting rules, companies treat their contributions as an annual expense and do not have to disclose projections of their long-term obligations, which can fluctuate significantly. In fact many companies do not even maintain internal projection of such obligations. Pension accounting – especially projections of future numbers that can be reasonably backed down into current financial statements -- remains a hot, negotiable issue even with the new pension legislation in place. * * * On Thursday, Aug. 17, President Bush signed into law the Pension Protection Act of 2006, which he called the "most sweeping reform" of US pension law since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. The compromise measure will have broad impact on the way future pension plans are structured and funded. It will affect pension outcomes, not only for tens of thousands of employees whose plans are currently hanging on the contents of the bill, but for millions of Americans who do not follow pension issues closely. Affected groups everywhere are weighing in with commentary. With some 44 million Americans covered by private pension plans, bipartisan support for private sector reform was made possible by not stirring up a hornet’s nest of debate about stricter funding guidelines for public employee defined-benefit plans, which remain generous and are woefully underfunded. In any case, the bill may well signal the end of the era private defined-benefit pension plans. As recently as 25 years ago, more than 80 percent of large and medium-sized companies offered such plans. Today, fewer than a third do. * * * On August 3, the Senate approved a compromise Pension Reform Bill and sent it on to the White House. It tightens rules for employers with defined-benefit pension plans and clamps down on companies that have fallen behind in meeting their funding obligations. Multiemployer plans common in the construction industry involve some 60,000 to 65,000 employers. Many have fewer than 100 employees, but some are large companies with potentially large liabilities. Underfunding of Defined Benefit plans is now estimated at $450 billion. The bill requires that companies bring their plans to 100 percent funding within seven years, although certain major Constructions are given a longer period. Plans that are seriously underfunded face restrictions, such as a ban on increasing benefits, and must make accelerated catch-up contributions. President Bush, who has taken a tough stance on forcing full funding of company promises, is expected to sign the legislation shortly. * * * Construction pension funding remained a major sticking point in Congressional proposals to strengthen the nation's employer-based pension system and ensure the retirement benefits of tens of millions of people. It’s possible that a deal may be reached soon, passing to Congress for a vote and then on to the President for signature. If passed, an agreement would likely go into effect in January of 2008 as the result of months of slow-moving talks between the House and Senate. It would impose stricter funding rules on companies that fall behind in contributions to defined-benefit pension plans, which are important source of retirement income for 44 million people in the United States.
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