The Truth About Project Labor Agreements

Construction unions attempt to entice merit shop craftspeople and new industry entrants into joining a union with promises of generous pension plans. They also convince elected officials in charge of procuring taxpayer-funded projects why union contractors and union workers deserve special treatment through various schemes like government-mandated project labor agreements (PLAs) because of the public good provided by union pension plans.

However, data continues to show that construction union multiemployer pension plans (MEPPs) are in serious financial trouble, which calls into question the wisdom of elected officials pushing MEPPs onto qualified contractors and craft professionals through PLA mandates.

A new report shining light on the dreadful health of MEPPs for U.S. union workers and retirees estimates such plans are only 52 percent funded, with a $369 billion shortfall (Dan McCrum & Ajay Makan, “US Union Pensions Hole Deepens To $369 Billion,” Financial Times, 4/8/12 and “The Multiheaded Pension Monster,” WSJ, 4/23/12 ).

The March 26, 2012, Credit Suisse report paints a grim financial picture for firms, workers and retirees participating in MEPPs, concluding the deficit in these plans could more than triple if participating companies calculate their funding levels using fair market values.

Construction Industry MEPPs Are Troubled
While the report does not measure the specific exposure of construction industry MEPPs to underfunding, data from the Pension Benefit Guaranty Corporation (PBGC)—the federal agency created in 1974 to monitor and insure pension benefits in private sector defined benefit plans—indicates the construction industry is a key contributor to the drastic overall underfunding of MEPPs.

Fifty-five percent of the 1,488 MEPPs insured by the PBGC are in the construction industry, according to the most recent PBGC report using 2009 data (see table M-8: PBGC-Insured Plans and Participants by Industry (2009) Multiemployer Program).

The largest number of employees from any industry, about 3.885 million or 37.4 percent of all PBGC-insured MEPP participants (workers and retirees), are from the construction industry.

Construction MEPPs are responsible for about $167 billion (or 47 percent) worth of PBGC-insured MEPP underfunding (see Table M-14: Funding of PBGC-Insured Plans by Industry (2009, estimated) Multiemployer Program).

In 2009, the PBGC reported the construction industry was responsible for about $87.8 billion (or 45 percent) worth of PBGC-insured MEPP underfunding (see Table M-14: Funding of PBGC-Insured Plans by Industry (2007) Multiemployer Program).

The construction industry MEPP underfunding doubled in a few years, and it is likely to get worse. Yet, the public won’t know the real-time financial implications because there is a two-year lag in the public reporting of the health of MEPPs. The public does not yet know the health of MEPPs for the 2010 and 2011.

Will the MEPP Crisis Result in a Taxpayer Bailout?
The PBGC has publicly raised concerns about the simmering funding crisis because its balance sheet is impacted by the health of MEPPs. MEPP insolvency triggers the PBGC’s guarantee and loans are provided to the MEPP (those loans are rarely repaid by the MEPP) to help it pay guaranteed benefits (up to $12,870 per year per individual beneficiary), according to the Credit Suisse report. PBGC financing comes from insurance premiums paid by companies insured by the PBGC, as well as other sources such as investment income, plan assets and other recoveries. Taxes do not fund the PBGC plans…yet.

Engineering News-Record reported that PBGC’s fiscal 2011 report estimates the number of insolvent MEPPs would more than double in five years. (“Pension Agency Sees Rise in Aid to Ailing Multiemployer Plans,” 12/5/11):

PBGC estimates its “reasonably possible” obligations to multiemployer plan participants were $23 billion at the end of fiscal 2011, up from $20 billion a year earlier and $326 million in 2009. PBGC says the main reason for the increase in potential obligations to multiemployer plans is that two large plans were added to the “reasonably possible” inventory.

[snip]

PBGC reports it provided $115 million in aid to 49 multiemployer plans in 2011, up from $97 million in aid to 50 plans in 2010. Because added plans failed, PBGC says its multiemployer plan insurance program’s deficit jumped to $2.8 billion in 2011 from a $1.4-billion shortfall in 2010.

That’s right. The PBGC’s MEPP insurance program deficit doubled in one year. If this deficit continues to climb, expect calls from Big Labor and its beltway pals to orchestrate a backroom-deal PBGC bailout. Caps on annual monetary contributions from the PBGC to insolvent MEPPs and participants could be raised significantly because taxpayers would foot the bill instead of private revenue generated by the PBGC.

Sen. Robert Casey (D-Pa.) tried to execute a similar bailout in 2010, described in this Aug. 15, 2010, Wall Street Journal editorial. So did Reps. Patrick Tiberi (R-Ohio) and Earl Pomeroy (D-N.D.), according to this RealClearMarkets column by Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor.

If re-elected, President Obama and Democrats in Congress may consider a bailout of the union MEPPs through the PBGC. The current maximum of $12,870 per year MEPP beneficiaries are guaranteed through the PBGC is possible only if the PBGC has the money. If Democrats use the PBGC to bail out the union MEPPs, they first have to bail out the PBGC.

MEPPs in the Construction Industry
All MEPPs are defined by the Taft-Hartley Act of 1947. They cover workers from more than one employer. Employer contributions, determined by collective bargaining with a labor union, fund the plan. These plans exist to provide benefits to unionized workers in businesses characterized by frequent job and employer switching, such as union craftspeople in the construction industry. They do so by considering service with multiple employers under the same plan as if the worker had worked for the same employer during the life of their career.

Unionized contractors receive craft labor from union hiring halls composed of tradespeople who specialize in a specific craft (e.g., IBEW dispatches electricians and LiUNA dispatches laborers).  During their career, union workers may be dispatched by union halls to dozens of union-signatory contractor employers. Designated union bosses and union contractors administer pension plans that multiple union-signatory employers must pay into on behalf of employed trade union members in accordance with their respective collective bargaining agreement(s) with a construction union.

In contrast, quality merit shop contractors typically hire, train and invest resources in tradespeople who work exclusively for the company in a traditional employee/employer relationship. These contractors provide common benefits packages including a portable 401(k), paid time off, training and profit sharing to attract and retain skilled, experienced employees.

MEPPs Opposed by Merit Shop for Decades
As TheTruthAboutPLAs.com has stated many times, one of the reasons nonunion contractors are discouraged from competing for contracts on construction projects subject to government-mandated PLAs is because of typical provisions in a PLA that require employers to pay employee benefits into Big Labor’s MEPPs for the life of a PLA project.

In rare instances when nonunion employees (and union employees who do not belong to unions that are favored in PLAs) and their employers participate in PLA projects, employers must make benefit contributions to Big Labor’s MEPPs on behalf of their employees. These benefit contributions are forfeited to the MEPP unless employees join a union and meet vesting schedules defined by each plan.

An October 2009 report by Dr. John R. McGowan, “The Discriminatory Impact of Union Fringe Benefit Requirements on Nonunion Workers Under Government-Mandated Project Labor Agreements,” found that employees of nonunion contractors forced to perform work under government-mandated PLAs suffer a reduction in their take-home pay that is conservatively estimated at 20 percent.

Besides stealing benefits rightfully earned by construction employees working on a PLA project, PLA pension provisions are a windfall for Big Labor’s MEPPs because the MEPPs don’t have to pay future benefits to those employees. Though small in comparison to overall funding shortfalls, these contributions prop up insolvent MEPPs and hide the flawed structure and Ponzi-scheme economics of MEPPs.

For decades, merit shop firms have offered alternative retirement plans for their workforce in lieu of MEPPs because they know union MEPPs cannot be financially sustained in the long term. Construction industry stakeholders have only recently publicly addressed MEPP underfunding, partially because of scrutiny from the financial industry.

For example, data from Moody’s Global Corporate Finance’s Sept. 10, 2009, report, “Growing Multiemployer Pension Funding Shortfall is an Increasing Credit Concern,” measured the crisis faced by construction industry MEPPs. Using 2007 numbers as a starting point, Moody’s estimates that 2008 underfundings for construction MEPPs ballooned to $72.484 billion, or a 54 percent funded level. In other words, for every dollar that these construction MEPPs owe, they hold only 54 cents of invested assets.

With unemployment in the construction industry at 17 percent as of March 2012, it is no surprise that contractors (specifically union contractors) that participate in these MEPPs are going out of business. And when MEPP participants go belly up, the burden on employers remaining in the MEPPs becomes greater. Bankrupt contractors that can’t pay their fair share to MEPPs create additional liability for a MEPP’s remaining employer participants, which produces all sorts of disastrous consequences like forcing more employers out of business, weakening already struggling MEPPs and forcing the PBGC to step in.

The Blame Game
The recession, decline in construction industry union membership, high industry unemployment rate, and a looming construction industry workforce shortage point to future insolvency for many MEPPs.

In response, Big Labor has tried to exploit its political clout to fix its pension woes by pushing lawmakers and unelected bureaucrats at the National Labor Relations Board to pass rules that will make it easier for unions to organize and add new members to the basement of their MEPP scheme (see the Employee Free Choice Act/Card Check, Executive Order 13502, Ambush Elections, Micro Unions and Invasion of Privacy).

In addition, unions have ratcheted up rhetoric blaming their pension troubles on Wall Street and the recession.  Instead of pushing reasonable solutions like adjusting benefits, increasing contributions, preventing fraud and waste, executing sound investment and management strategies, and diverting hundreds of millions of dollars of discretionary union political spending to pension plans, unions are playing the blame game and posturing for a bailout from Uncle Sam. The union MEPP crisis is a key reason why unions are hijacking the Occupy Wall Street movement and asking this loaded question: If Wall Street can get a bailout, why shouldn’t union pension plans?

However, the shaky financial condition of some MEPPs was obvious pre-recession and occurred under the watch of union pension trustees, such as this example from a TheTruthAboutPLAs post:

The Sheet Metal Workers National Pension fund discloses the plan’s annual funding levels for plan participants here.  The SMWIA union’s own pension fund documents indicate that on 1/1/2008, the fund was just 52.2 percent funded.

So just three months after the Dow closed at an all-time high of 14,164 on 10/9/07, the pension fund took such a big loss in the stock market that the plan ended the year at 52.2 percent funded? Something doesn’t smell right.

This July 26, 2009, WSJ article points to similar anecdotes of pre-recession MEPP underfunding in other industries and inequality between the pension plans of rank-and-file members and Big Labor Bosses:

Poor management probably deserves a lot of the blame for the union decline, but the exact causes are a mystery. An even bigger mystery is that the unions do a far better job with funds created for their officers and employees than for mere workers. The SEIU Affiliates, Officers and Employees Pension Plan—which covers the staff and bosses at its locals—was funded as of 2007 at 102.2%. The plan for the folks at SEIU international headquarters was funded at 84.8%.

A September 2009 report on union pension plans by the Hudson Institute, “Comparing Union-Sponsored and Private Pension Plans: How Safe Are Workers’ Retirements?” found similar results and highlighted the disparities between union officer pension plans and union member plans. So does this piece.

Get to Know Your MEPP
The U.S. Department of Labor provides a list of all MEPPs in the critical and endangered status here. We’ve sorted through the growing list and identified construction industry MEPPs in this easy-to-search spreadsheet. Check to see if the MEPP you are participating in (or your competitors pay into) is in trouble.

For too long construction industry employees, contractors and lawmakers have been fooled into thinking union MEPPs deserve special treatment, are without fault and are a safe retirement strategy. The truth is that many plans are not in good shape and haven’t been healthy even in the best of economic times. Construction industry MEPPs have offered little transparency, accountability or meaningful solutions.  Workers, contractors and taxpayers should expect more of the same without proper education, oversight and corrective action.

Share your thoughts, concerns and anecdotes on this issue in the comments section.

Required Reading

• Multiemployer Pension Plans Face Uncertain Future (pdf)
• A Hitchhiker’s Guide to Taft-Hartley (pdf)
• Outstanding WSJ analysis in this editorial (8/15/10): “The Next Pension Bailout” (pdf)
• Construction Unions Push PLAs to Save Underfunded Union Pension Plans
• Construction Union Pension Plans and Project Labor Agreements
• New Report Finds PLA Pension Requirements Steal From Employee Paychecks, Harm Employers and Taxpayers
• Construction Unions Posture for Pension Bailout?

Readers can keyword search “pensions” to review the numerous posts TheTruthAboutPLAs.com has written about the link between government-mandated project labor agreements (PLAs) and MEPPs.

UPDATE 5/15/12: The WSJ wrote about this piece, “The Union Pension Bomb: Multi-employer plans look to be in big trouble,” 5/14/12. Take a look.