Southeast Michigan carpenters union is facing a pension crisis. Here’s why

Oct. 2--A private-sector pension crisis is hitting roughly 19,000 current and retired unionized skilled trades workers in southeast Michigan, another sign of the precarious nature of some pension promises made to workers years ago.

Leaders of the Michigan Regional Council of Carpenters and Millwrights are asking the federal government for permission to cut the size of their southeast Michigan members' pension checks, saying that if nothing is done, their pension fund will run dry by 2035.

The fund, called the Carpenters Pension Trust Fund -- Detroit and Vicinity, has entered a financial death spiral, due, in part, to more retirees drawing monthly checks than active workers paying in. The pension fund has $772 million and was considered 34.5% funded as of a year ago. There is a 2.4 ratio of inactive to active pension plan participants.

A separate union pension fund for retirees outside southeast Michigan -- the Michigan Carpenters Pension Fund -- is not affected.

Last week, the union submitted its application to the U.S. Treasury Department for the pension cuts, which could go into effect on July 1, 2020.

Treasury has up to 225 days to approve or deny the proposal. If approved, the proposal would then be subject to a vote by the pension fund's beneficiaries.

Yet even if a majority vote to reject the proposed cuts, Treasury could still force the proposal to take effect because of a special rule that applies to the largest pension funds in the country.

The proposed pension cuts were first reported by Crain's Detroit.

Pummeled by recessions, fewer work hours

Union leaders say that little could have been done that hasn't already been tried to avert the future pension crisis.

The pension fund suffered investment losses in the early 2000s recession and even bigger losses in the 2007-09 recession. Then, amid changes in the Michigan economy, the fund was pummeled by a reduction in total work hours by its union members that resulted in fewer employer contributions into the fund.

Work hours exceeded 14 million per year in the early 2000s, bottomed out at about 5.7 million in 2010 and are only back to about 8 million hours, according to the union.

"The decline in hours was much more severe, and the recovery much slower, than trustees had predicted," the union says in its Treasury application. "The actuary projected that this new level of hours (approximately half of the levels seen in the early 2000s) would not be sufficient to support the (pension) plan as currently in effect."

In 2013, in one attempt to avert a crisis, pension trustees raised the minimum retirement age for full pension eligibility to 62. Eligibility had been based on a point system that considered age and years of service.

"That was part of the problem. We had people retiring at 50, 51, 52 years old," said Michael Barnwell, president of the Michigan Regional Council of Carpenters and Millwrights.

Barnwell, who became a pension trustee six years ago, said he didn't know whether criminal matters that involved the pension fund in the 2000s had any effect on the fund's current trajectory.

A former chairman of the pension fund's board, Walter Ralph Mabry, pleaded guilty in 2011 to taking kickbacks in the form of $5,000 to $10,000 in hotel and entertainment reimbursements from an investment consultant and one of the fund's investment managers. He was sentenced to one year supervised release.

The investment manager was convicted of embezzling $24 million from the pension fund and other union pension funds.

And the consultant pleaded guilty to promising to give Mabry a kickback in connection to the pension fund's $70 million investment in the construction of a Hard Rock casino in Biloxi, Mississippi.

In the end, the casino proved to be a good investment, according to Barnwell.

"I believe it was actually a moneymaker for the pension fund, but I was not a trustee at the time," he said.

Managing payouts

The union is seeking to reduce its pension payouts under a relatively new process created by a 2014 law for multi-employer pension plans that are projected to go insolvent in less than 15 years.

The carpenters fund is classified as a multi-employer plan because multiple companies hire the union's workers and make contributions toward their pensions.

A Troy-administered Sheet Metal Workers Local Pension Fund, which has 1,564 participants, also applied to Treasury earlier this year to make average pension cuts of 18.7% for its retirees. Its application is still pending. That pension fund is not connected to Sheet Metal Workers Local 80.

Nationwide, 28% of all participants in pension plans are in multi-employer plans. Most pension plans are just for one employer.

To try and save their pension fund -- and comply with federal law -- the carpenters' trustees raised the fund's contribution rate for companies hiring their members to nearly $16 an hour, up from just over $3 in 2000. But that ultimately wasn't enough to avoid a future crisis. And any further increases would make it harder for union members' employers to successfully bid on construction jobs.

"The pension fund was essentially 'taxing itself out of existence' by increasing the hourly pension contribution level ever higher," the Treasury application says.

A union representative told the Free Press that they could not provide a common example of a retiree's current pension check because there is tremendous variation in the pensions.

However, in aggregate, the proposed cuts would pare the pension fund's average monthly benefit 13% to $1,273 from $1,465, according to the union's application to Treasury.

Union leaders say the proposed cuts are still less drastic than what would occur if they allowed the fund to run out of money and become eligible for a bailout from the federal Pension Benefit Guaranty Corporation.

The corporation has maximum guaranteed limits for beneficiaries of multi-employer plans, such as $12,870 per year for a retiree with 30 years of service.

But even that backstop is no longer assured.

Without a federal intervention, the Pension Benefit Guaranty Corporation's multi-employer program is expected to become insolvent by 2025. And if that happens, "it is likely that only a fraction of the 'guaranteed' benefits would be paid to plans that run out of money," the union says in its Treasury application.

Cuts would not hurt everyone

Under the proposed cuts to the carpenters fund, pension benefits earned prior to 2007 would be slashed by 16%, and the fund's deferred vested participants would see 26% cuts.

Pension benefits earned after 2007 wouldn't be affected, as that was the year the fund's monthly multiplier benefit was reduced to 1%, meaning that each $100 in new pension contributions would generate $1 in future monthly pension benefits.

Members who are 80 or older or have disability-based benefits would not see cuts. Those between ages 75 and 80 would see smaller cuts.

Unlike some public-sector workers with pensions who do not pay withholding taxes, the retired carpenters are eligible to receive Social Security in addition to their pensions.

In 1997, the pension fund's trustees boosted the monthly multiplier to 4.3% because the plan was more than 100% funded and therefore in danger of triggering Internal Revenue Service pension overfunding penalties.

Under IRS rules at the time, employer contributions to overfunded pension would no longer be considered tax deductible. A detailed article in The Daily Beast describes how other pension funds faced similar predicaments and acted to increase their benefits to stay in line with the IRS.

However, the pension fund ratcheted back the monthly multiplier after its market returns got battered in the wake of the early 2000s recession.

The carpenters union workers are among the 17% of private-sector workers in the U.S. who still have access to a pension plan for retirement, also known as a defined-benefit plan, according to Bureau of Labor Statistics data. That is down from 35% in 2005 and 88% in 1975.

About 65% of private-sector workers have access to a defined-contribution retirement plan, such as a 401(k).

Pensions are more common among unionized public-sector employees.

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Marick Masters, director of labor at Wayne State University, said private employers in the 1970s started to move away from pensions, also known as defined-benefit plans, and toward defined-contribution plans for their workers like 401(k)s.

"A big reason for the shift was to reduce the liability that companies incurred that went on their balance sheets for the defined-benefit plans," he said.

Legislation seeks to help multi-employer plans

Pensions are generally considered a more secure retirement system for workers because the money is guaranteed to come in like an annuity payment, no matter how long the retiree and his or her spouse live. By comparison, the money in defined-contribution plans can run out.

In July, the U.S. House of Representatives passed a bill that could prop up multi-employer pension plans such as the carpenters fund and the Central States Pension Plan, which covers Teamsters in Detroit and across the country.

The legislation, which was cosponsored by eight Michigan members of Congress, including both Democrats and Republicans, would establish a new federal agency that could finance loans to pension funds that are struggling and whose recipients are threatened with benefits cuts.

A version of the bill is still pending in the U.S. Senate.

"We bailed out the financial industry, we bailed out the auto companies, it's hard to say we shouldn't bail out these folks, if we follow that same sort of logic," Masters said.

Net market returns for the Carpenters Pension Trust Fund

2000: +6%

2001: -2.8%

2002: -4.4%

2003: +8.5%

2004: +14%

2005: +6%

2006: +13.6%

2007: +9%

2008: +0.6%

2009: -20%

2010: +13.4%

2011: +10.6%

2012: -3.6%

2013: +6.3%

2014: +10.5%

2015: +4.4%

2016: -0.2%

2017: +11.1%

2018: +7.9%

Sources: Pension plan trustees

Contact JC Reindl:313-222-6631 or jcreindl@freepress.com. Follow him on Twitter@jcreindl. Read more on business and sign up for our business newsletter.

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