The Pension Benefit Guaranty Corporation (PBGC) today announced an interim final rule implementing a new Special Financial Assistance (SFA) Program for financially troubled multiemployer defined benefit pension plans.
Pertinent excerpts coming over the weekend but, for now, it looks like the bailout number moved from $86 billion to $94 billion per the PBGC press release:
The PBGC’s decisions here are not what organizations such as the NCCMP would have liked, although, clearly, it is the PBGC’s job to interpret the law, not to try to fix a poorly-written law.
At the same time, no multiemployer pension plan is worse off with this legislation than without it, even if it isn’t as generous as they would have liked. And nothing prohibits those plans from boosting contributions and using additional contributions to fund future accruals — which would mean that pension plans which express their contributions as fixed dollar amounts, rather than a percentage of pay, will be better positioned to provide for existing employees as well as retirees. What’s more, the calculation of future contributions is based on a one-time open group projection, without being revised from year to year, so that, in principle, if more workers join a plan, the plan will be better off. (Of course, if the projection is too optimistic about the number of future workers, the opposite will be true.)
But, of course, this is $86 billion that could have been spent for other needs, or not spent at all. And, however much advocates profess that they still hope for a more comprehensive revision of funding rules for multiemployer pensions, the poorly-conceived nature of this bailout makes it less, rather than more, likely that both sides of the aisle will come together to repair multiemployer pensions and prevent future bailouts.
The ratings firm Moody’s Investors Service this week upgraded Illinois’ credit rating one notch to Baa2, a level two notches above junk. It’s a major turnaround given that just one year ago Illinois faced the prospect of becoming the first state to ever be rated junk. In mid-2020, shutdowns ravaged the state’s tax base, Sen. Don Harmon asked for a $42 billion bailout from Congress and the state projected billions in multi-year budget shortfalls.
What changed so dramatically in such a short period of time? Ignore the claims by Illinois lawmakers of their heroic acts of “balanced budgets,” “fiscal discipline” and the like. Even if those claims were true – and they are not – they couldn’t by themselves create such a swing in Illinois’ short-term fortunes.
Credit, instead, the massive $138 billion in federal funds from the multiple COVID relief and stimulus packages – as compiled by the Committee for Responsible Federal Budget – that are now flooding Illinois’ public and private sectors. Those billions have significantly reduced the probability of a bond default – which is ultimately what Moody’s really cares about.
Wirepoints calculates that retirement costs will consume 26 percent of the 2022 budget. The state is set to contribute $9.4 billion in General Funds to pensions, pay $777 million in pension bond costs, and pay an estimated $1 billion in retiree health costs.
In total, that’s $11.2 billion of the $42.3 billion budget consumed by retirement expenditures.
On top of the payments from the General Fund, another $1.2 billion in pension payments will come from other budget funds, meaning the state’s total retirement costs will be an estimated $12.4 billion in 2022.
Transparency is not just a good thing for the public. A study of the 2012 Recovery Act (ARRA) showed that the biggest users of publicly available data were government officials, who used the information to track spending. Cities that do not already issue comprehensive annual financial reports (CAFRs) should adopt them for the benefit of policymakers and the public. Meet or exceed Generally Accepted Accounting Principles (GAAP) and Government Accounting Services Board (GASB) statements in your reporting. Clearly account for liabilities such as pensions, retiree health benefits and infrastructure maintenance and replacement. Have that accounting independently verified.
According to a January 2021 report from Truth in Accounting, the top 75 US cities have a combined unfunded public pension obligation of more than $180 billion. Cities often underfund these obligations to cover budget shortcomings elsewhere, an irresponsible game of whack-a-mole.
Treasury guidance forbids using ARPA money in pension funds to cover unfunded liabilities from before the COVID emergency. It does allow spending on current payments for either defined benefit or defined contribution plans. Cities could use ARPA funds to provide additional payments to those plans to encourage employees to switch from their traditional pension to a defined contribution plan—which is a much more financially sound position for cities to be in.