By Don McIntosh
Imagine: You’re a 67-year-old retiree collecting a $1,685-a-month union pension, and you get a letter in the mail. It says that to prevent your pension plan from running out of money in 18 years, your benefits are about to be cut by $489 a month, to $1,196.
More than 5,000 current and future union retirees in the Pacific Northwest got a letter like that in February. Under a proposal submitted Feb. 15 by trustees of the Western States Office and Professional Employees Pension Fund, they would have their pension benefits permanently reduced by up to 29 percent. Those affected are current or former members of Office and Professional Employees International Union (OPEIU) in Oregon, Washington, and several other Western states.
The Western States OPEIU Pension, which today has about 7,600 participants, is a perfect example of what went wrong with some union pension plans. Begun in 1960, the plan centered on clerical support workers at large trucking firms and also at many local union offices. But an aging workforce and declining employment levels made the plan acutely vulnerable to investment losses. The plan’s biggest contributing employer, Consolidated Freightways, liquidated in a 2002 bankruptcy, and workers at another big employer, CNF Services, voted out the union in 2003.
Union-sponsored multiemployer pension plans are normally very stable. They work by pooling and investing the hourly contributions that unionized employers make on behalf of employees. The combination of employer contributions and investment returns makes it possible to provide retirees a guaranteed monthly income for life.
Even though the Western States OPEIU Pension had lost some large employers, it was healthy until 2008. But in the 2008 financial crash, its investments lost 32 percent of their value. And in the recession that followed, some participating union employers went out of business, and others dropped out because the pension plan had to greatly increase required contributions to make up for investment losses. Since 2008, as many as 100 employers have either dropped out of the Western State OPEIU Pension Fund or ceased to exist. That’s more than a third of the total. During the same period, the number of active participants (current workers whose employers are contributing) fell by 62 percent.
By the end of 2015, the Western States OPEIU Pension had 914 active participants, 3,742 retirees, and 2,936 others entitled to future benefits. Basically the plan is “upside down” — there are eight times as many retirees and inactive vested particants as there are current workers whose employers are contributing to the plan.
So even though the plan still has considerable assets — $359 million as of the end of 2015 — it’s sinking fast. The plan is currently paying out about $39 million in benefits a year while taking in $11.8 million in contributions, and it’s projected to run out of money in 2035.
If and when the plan becomes insolvent, a government-sponsored pension insurance program known as the Pension Benefit Guaranty Corporation (PBGC) is supposed to step in and pay retiree benefits. But under its formula, benefits would be greatly reduced — by as much as half in the case of a typical Western States OPEIU retiree. And it’s possible the PBGC itself could run out of money and be unable to pay.
To prevent that future insolvency, Western States pension trustees are proposing that benefit cuts of up to 29 percent take place now.
Before the cuts can take effect, they must first be approved by the U.S. Treasury Department. The department has until Sept. 28, 2017, to decide if the proposed cuts are appropriate. So far, 11 other multiemployer pension plans have applied for permission to cut benefits since the passage of the Miller-Kline law. The Treasury Department has denied four applications, and four other pensions withdrew their applications. Two others are pending a decision. Just one has been approved so far — Ohio-based Iron Workers Local 17 Pension Fund. The Western States OPEIU pension is the only pension based in Oregon and Washington to apply for cuts so far.
If the Treasury Department approves the application, plan participants will get a chance to vote on the proposal to cut benefits. But under the Miller-Kline law, in order to reject the proposed cuts, a majority of all plan participants must vote “no,” not just a majority of those who vote.
MORE: Click here or more information about the proposed benefit cuts to the Western States OPEIU Pension Fund.