Treasury Department Rejects Plan to Cut Pension Benefits for Teamsters



The Treasury Department on Friday rejected a plan to cut benefits for 270,000 union drivers and retirees who belong to a deeply troubled Teamster pension fund, a decision that could thwart the intentions of other large, financially struggling pension funds.

The move, welcomed by workers and retirees, reopened the vexing question of how to save the huge Central States pension fund, which is on track to go bankrupt in about 10 years. Its restructuring was seen as an important test case of what pension trustees can do when they discover they have promised more in benefits than their funds can hope to deliver.

Kenneth Feinberg, the Treasury’s special master appointed to review Central States’ planned reorganization, said the proposal was based on flawed assumptions and did not demonstrate it would successfully rescue the ailing fund.

The proposed cuts, which would have begun in July, were meant to rebuild the Central States pension fund and ensure its survival for decades. Sent to the Treasury for review in September, the reorganization would have been the first under a 2014 law allowing troubled pension funds to cut benefits, if that was the only way to keep them afloat. Previously, cutting pensions that workers had already earned had been illegal except in the most unusual circumstances.

If Central States fails, the benefits will be cut much more than they would have in the reorganization. And because Central States is so big, its failure could wipe out the federal insurance program for pensions of its type, stranding tens of thousands of other retirees who were never members of the Teamsters.

America’s aging population and improved health care mean there are now more retirees than ever, drawing their pensions for more years than expected, and creating potential solvency problems for fund trustees.

The Teamsters’ Central States pension fund is one of the largest of America’s multiemployer pension funds, led jointly by a union and multiple companies. It gained power and notoriety in the 1960s when the trucking industry was booming and the drivers’ nest eggs were invested in the construction of splashy hotels and casinos in Las Vegas.

In 1982, the union lost control of how the fund was invested because of the union’s ties to organized crime. Under a federal consent decree, the investment duties were shifted to a group of large banks, which followed mainstream investment practices. As the years went on, the trucking industry experienced a long, painful decline, leaving fewer employers and unionized drivers to support the pension plan with regular payroll contributions.

As of last fall, the Central States plan was paying $3.46 in benefits for every dollar of contributions it had received.

Mr. Feinberg said the reorganization had to be rejected because it failed to meet three statutory requirements.

For one thing, he said, the proposed reorganization counted on an assumption about future investment returns that federal regulators found unrealistic — even though that assumption is widely used by state and municipal pension plans, which are not subject to federal regulation.

The Central States trustees said the reorganization would succeed if the fund’s investments averaged 7.5 percent average annual returns.

That simply wasn’t credible, Mr. Feinberg said.

“The plan’s losing a fortune every month,” he said, referring to payouts to retirees, which are more than three times as much as the contributions coming in from drivers and their employers. A pension fund with negative cash flow needs very stable investment returns, but a 7.5 percent average suggests high volatility, at least under present market conditions.

He said he was also troubled by an assumption that in the future, drivers would join the Central States plan while they were still fairly young. He said that did not match reality.

The proposed reorganization also did not distribute benefit cuts equitably, he said. And finally, the plan was not explained in a way that affected workers and retirees could readily understand.

“It is technical,” he said. “Overly complex. It is not readily understandable.”

Thomas Nyhan, the executive director of the Central States pension fund, said the trustees had not decided how to respond to the Treasury’s rejection.

“We believe the rescue plan provided the only realistic solution to avoiding insolvency,” Mr. Nyhan said in a statement on Friday. The pension fund’s problems were just as grave as ever, he said, and since its failure posed a risk to the federal insurance plan, “Central States participants could see their pension benefits reduced to virtually nothing.”

Mr. Feinberg said there was nothing to stop the Central States fund from revising its proposal and trying again. While the Treasury had been vetting its application, he added, several other smaller pension funds had submitted their own reorganization plans, which would not be affected by the Central States decision.

The Labor Department and the Pension Benefit Guaranty Corporation had also reviewed the Central States proposal, and all three agencies found it unacceptably flawed, Mr. Feinberg said.

Before making his decision, Mr. Feinberg traveled to eight cities and met with hundreds of retired Teamsters. Virtually everyone who turned out was angry about the proposed cuts and skeptical that they were going to be fair to all 407,000 members of the Central States plan.

Some said they did not believe cutting the benefits would really save the pension fund, and they wanted to keep drawing their full benefits, since the fund would collapse anyway.

Other unions, and groups representing older adults, also came out against the Central States proposal, chiefly because of the way the 2014 law was enacted: It was attached to an omnibus budget bill and whisked through Congress with no debate, just as the members were leaving for the winter recess. Critics said the bill should have been thoroughly debated, given that it rolled back core legal protections that had been enacted for 40 years.

Some also called for giving more money to the Pension Benefit Guaranty Corporation, so it would survive the collapse of a pension fund like the Central States. Mr. Nyhan and other pension officials said they agreed that the federal insurance program should be strengthened, but that idea was ignored by Congress.

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