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Thomas Nyhan’s job keeps getting tougher. As executive director of the Central States Southeast and Southwest Areas Pension Fund, Nyhan is responsible for making sure that 454,000 retired Teamster truck drivers receive their monthly pension checks. Last year, Nyhan paid out a whopping $2.7 billion in benefits due to Central States’ retirees and their beneficiaries. The problem is, with only 65,000 active truck drivers contributing to the pension plan and only $19.1 billion in its coffers — down from a high of $26.8 billion in 2007 — it is just a matter of time before the Rosemount, Illinois–based fund executive can no longer write those checks.

“It’s like a tsunami coming off the shore — you can see it,” says Nyhan.

But shrinking assets tell only half the story at Central States. On the other side of the collectively bargained plan sit the employers, mostly small trucking companies — about 2,000 at last count — as well as two very large ones, YRC Worldwide and ABF Freight System. Trucking companies both large and small that signed on to Central States to provide benefits for their drivers are being reamed by cutthroat competition, mostly from nonunionized employers that do not offer a union’s generous array of benefits. Escalating pension contributions threaten to put already suffering companies like YRC, which has been teetering on the brink of bankruptcy since 2007, over the edge. Last August, during negotiations with the International Brotherhood of Teamsters, the union granted the Overland Park, Kansas–based trucking company an 18-month reprieve from paying into Central States. According to trucking industry experts, ABF Freight, the biggest unit of Arkansas Best Corp., has requested similar treatment.

Hitchhiker's Guide to Taft-Hartley The Central States fund is not alone in its struggle to provide retiree benefits. In mid-2009, after the previous year’s devastating market rout, the 385 largest multiemployer pension plans, including Central States, represented an estimated $250 billion in assets, down from $392 billion at the end of 2006, according to the Washington-based National Coordinating Committee for Multiemployer Plans. But there are also hundreds of smaller plans. In total, the Pension Benefit Guaranty Corp. counts 1,500 multiemployer plans and 10.1 million union member retirees and participants in its insurance program.

A devastating confluence of events — economic, sociological and regulatory — is threatening the retirement security of millions of union workers while creating financial hardship for tens of thousands of employers. Market losses, growing unemployment, diminished union membership, pension regulation that backfired and rich benefits negotiated in halcyon times are creating a potent mix that is choking the viability of hundreds of multiemployer plans, the name given to union-sponsored pension funds, also called Taft-Hartley plans. Labor industry leaders warn that unless drastic measures are put into place — a painful blend of benefit cuts, increased employer contributions and legislative action — the unionized labor force, which represents 20 percent of all defined benefit participants, is on the fast track to becoming a colossal taxpayer burden.

“The events of 2008 shattered the illusion of safety,” says Richard Epstein, a law professor at the University of Chicago. “You’re looking at a catastrophe in 2020.”

Part of the problem has been the steady decline in union membership. Central States, for example, had 8,000 participating employers in 1980, before industry deregulation passed that year made it easier for nonunion trucking companies to compete. Nyhan says that by the time he took on the role of director in 1985, the fund was already in trouble. Although the bull markets of the 1990s helped the fund offset the loss in contributions as companies left the plan, the bursting of the tech stock bubble in the early 2000s delivered a near-fatal blow. After experiencing a $6 billion drop in total assets as a result of those market losses, operating expenses and benefit payments, the fund saw a further $6 billion eviscerated by the 2008 market meltdown. As it stands today, the Central States plan has almost no hope of funding all of its Teamster members’ defined benefits down the road.

“We’ve been acting in the shoes of the PBGC for the past 30 years,” says Nyhan of his fund’s role providing benefits to retirees whose employers have gone bankrupt. “The plan and the remaining employers can no longer afford it.”

Even as calls mount for public pension reform, the plight of multiemployer pension plans has gone largely unnoticed outside of union halls — in part because union officials and pension executives tend to be even more secretive than hedge fund managers. But the main reason is that there simply isn’t a lot of readily available data about Taft-Hartley plans, because of the large number of very small funds. According to Segal Co., a New York–headquartered consulting firm with deep roots in the union world, “multi” funds range from the tiny, with perhaps 50 to 100 workers and two to four contributing employers in a local plan, to megaplans like the 33-state Central States. The average plan has 1,000 to 5,000 participants and assets of between $100 million and $250 million.

Big or small, most plans have suffered huge losses in assets during the recent financial crisis, and rebuilding them will take a long time. One way to measure pension fund health is by comparing current assets with future liabilities, or the amount of assets needed today to pay retirement benefits sometime down the road. For example, if a plan has 100 percent of the assets needed to pay off its future liabilities, it is said to be fully funded. If a plan has 80 percent of the assets needed for future benefit payments, it is termed 80 percent funded, or 20 percent underfunded. In a September 2009 report, Moody’s Investors Service estimated that the 126 largest multiemployer pension funds were only 56 percent funded. This is equal to a staggering $165 billion in unfunded liabilities.

Multiemployer funds face unique challenges in rebuilding their assets. Once an underfunded plan begins a regimen of remedies mandated by the Pension Protection Act of 2006 — increased employer contributions, benefit cuts or both — they cannot be undone until the plan recovers. Such long-term, inflexible fixes can threaten an industry and cause years of unnecessary losses to both employers and participants, warned Judith Mazo, Segal’s director of research, in her testimony before the U.S. House of Representatives’ Ways and Means Committee last October.

Mazo explains that the shrinkage of union penetration in the U.S. is another threat to multi funds. For example, according to the American Trucking Associations, before industry deregulation in 1980, 75 percent of trucking companies were unionized. Today fewer than 25 percent are union shops. Union workers made up 12.3 percent of all employed wage and salary workers in 2009, down from 21 percent in 1983, according to the Department of Labor’s Bureau of Labor Statistics.

“The vast majority of liabilities are attributable to employees who aren’t working anymore,” asserts James Dexter, a pension expert in the Princeton, New Jersey, office of consulting firm Mercer.

An influx of new workers is needed to help pay current retiree benefits. In fact, some observers see the necessity of continually bringing new members into multiemployer plans as their biggest flaw. “Multiemployer pension plans are like a pyramid scheme,” says Ken Margolies, director of organizing programs at the Cornell University School of Industrial and Labor Relations. Diana Furchtgott-Roth, senior fellow at the Hudson Institute in Washington, likens multiemployer plans to a “Ponzi scheme” that puts newly unionized workers into an underfunded pension plan. Margolies, who has worked with unions like the Teamsters and the Communications Workers of America, is pro-union, while Furchtgott-Roth, a former chief economist at the Department of Labor, is decidedly not. Still, the point is clear.

“This is a snowball that’s going downhill, and the only way to stop it is to throw live bodies of current workers in front of it,” asserts University of Chicago’s Epstein.

The threat of a downward spiral of ever-increasing contributions and diminished employee benefits in the Central States pension fund prompted the management of United Parcel Service to make a bold move. Every five or six years, UPS negotiates a full plate of benefits — health and welfare, pensions and wages — in a master contract with the Washington-based International Brotherhood of Teamsters that covers 240,000 of its brown-garbed drivers, who participate in 21 multiemployer plans. When national contract negotiations opened in 2007, the company decided to buy its way out of beleaguered Central States. “We realized the pension levels and benefits due these drivers were in jeopardy because of the application of a new law [the PPA] and the need to maintain a certain level of financial stability,” explains Norman Black, spokesman for the package delivery company, long the largest employer in Central States, with 44,000 participating drivers.

But there was a bigger problem. Over two decades, as 6,000 contributing employers exited the Central States plan, UPS management was compelled by multiemployer laws to pick up the pension tab for employees who had never worked a day for the shipping giant. By 2007, UPS had had enough. As part of its negotiations with the Teamsters, the company agreed to pay $6.1 billion to exit the Central States fund. The one-time payment allowed UPS to withdraw all 44,000 employees, while remaining in 20 other Teamster funds.

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