Pension Bailout (Just the Beginning)

Posted On Jul 17, 2019 By Dave Gonigam

  • As if supporting your own retirement isn’t enough…
  • … Uncle Sam is about to offer your help to 1.3 million others
  • Bad news is good news this earnings season
  • “Executed” North Korean might be alive and well
  • Japanese restaurant bans Japanese customers
  • Homebuilders sit on their hands… the trouble with being “law-abiding”… lucrative business opportunity with self-driving vehicles… and more!

Struggling to shore up your retirement savings? Imagine being on the hook for someone else’s retirement at the same time.

Last week, the House Ways and Means Committee voted for a taxpayer bailout of so-called multiemployer pension plans. Typically, these plans are administered by trustees for a labor union and multiple employers. They cover about 1.3 million Americans.

Many of these plans are in dire financial shape — “critical and declining” is the official terminology. In 2017, a plan covering about 4,000 retired ironworkers in Ohio cut benefits for current (not future) retirees. Nothing like that had happened in more than 40 years.

A much larger plan, the Central States Pension Fund, covers about 385,000 Teamsters. We first mentioned it in our virtual pages three years ago; we heard back from a reader whose husband was set to retire under the plan in 2021 and had his promised monthly benefit slashed by 45%.

Central States has $22.9 billion of unfunded obligations on its books; it’s at risk of outright insolvency by 2024.

In theory, these pensions are covered by the Pension Benefit Guaranty Corp. — sort of an FDIC for private-sector pensions. Emphasis on “in theory.”

The PBGC has $2.3 billion in assets to cover multiemployer plans. Go back two paragraphs and you’ll see that’s barely 10% of Central States’ funding gap. Among all multiemployer plans, the unfunded liability totals $56.2 billion.

Thus the bill in Congress — named the Butch Lewis Act. Mr. Lewis was a trucker for USF Holland, covered by Central States. He died of a stroke a few years ago and his widow took a 40% cut to her joint survivor benefit.

“A bailout is what they did for Wall Street and big banks,” says Hasan Solomon of the International Association of Machinists and Aerospace Workers — who, as you might imagine, supports the legislation.

Well, he’s got a point. And it probably won’t be the last time we hear that line of argument.

The bill passed on a party-line vote, 25-17. It will likely pass the full House.

Republicans object that the bill amounts to a blank check for multiemployer plans, with no requirements to reform the way they do business. The bill’s opponents also have a point.

And yet House Ways and Means Committee Chairman Richard Neal (D-Massachusetts) is confident the GOP-controlled Senate will pass some sort of compromise bill and the president will sign it by year-end.

Neal’s probably right: Central States covers nearly 44,000 workers and retirees in Michigan alone; Trump’s margin of victory over Hillary Clinton in Michigan was 11,000 votes.

Heck, he’ll probably hold the signing ceremony in Macomb County (suburban Detroit, flipped from Obama to Trump between 2012 and 2016).

But that’s not the end of the problem: When it comes to solvency, the rest of Corporate America’s old-style pension plans are only a few years behind the multiemployer ones.

This spring, Goldman Sachs analyzed the 200 biggest pension plans among the S&P 500 companies. They’re underfunded to the tune of $240 billion. Ten of those plans — including huge ones like American and Delta Airlines — have pension assets that amount to less than 70% of their promised future benefits.

That’s actually better than the situation two years ago. The plans’ stock investments have rallied, and their fixed-income investments have benefited from rising interest rates.

But how much more gas does the stock rally have in the tank? And we already know the Fed is set to start cutting interest rates at the end of this month.

Meanwhile, the PBGC has precious few resources to cover these plans if they enter a “critical and declining” state. The PBGC has $109.9 billion in assets to backstop these companies… but it already has $107.5 billion in liabilities incurred from previous pension plan collapses. That’s a cushion of only $2.4 billion.

The Butch Lewis Act might be the first pension bailout. But it won’t be the last. You heard it here first.

The major U.S. stock indexes are drifting lower as we approach the midpoint of the week. At last check the S&P 500 had dipped a bit below 3,000.

Treasuries are rallying, the yield on a 10-year note back to 2.08%. Gold has rallied smartly to $1,422. Crude has backed off to $57.29 — basically where it was a week ago, after a quick trip above $60.

The Commerce Department issued the June numbers on housing starts — a little below expectations. But permits — a better indicator of future activity — tumbled 6.1% for the month, and that wasn’t expected at all. If there’s a surge in demand for housing, homebuilders are in no rush to accommodate.

The big earnings number of the day is Bank of America, which beat analyst estimates and is up 1.5% on the day. Most of the big banks have reported now; the real “meat” of earnings season won’t get going till next week.

“Earnings estimate revisions have gone from bad to worse,” says our Mike Burnick, with a preview of coming attractions.

“According to FactSet data, estimated earnings for the second quarter have fallen by 2.5% since March 31.

“Wall Street’s consensus forecast calls for a year-over-year earnings decline of 2.6% for the second quarter. This would mark the first time the S&P has reported two quarters in a row of declining earnings since 2016.”

Sounds grim, right? Not so fast: “Downward earnings revisions create sour sentiment heading into earnings reporting season,” says Mike, “but they also lower the bar, making it easier for companies to step over them and report positive profit surprises when reporting actually begins.

“In fact, when earnings revisions are this negative, history shows us stocks often perform well.”

Yep. Earnings season this summer won’t be about the numbers as much as the “guidance” for the rest of the year. If that’s good, the major indexes might well power higher into record territory.

And now a 5 follow-up to a massive media mistake…

From the Reuters newswire: “A North Korean nuclear envoy who steered talks before a failed summit with the United States in February is alive, a South Korean legislator said on Tuesday, contradicting a South Korean news report that he had been executed.

“There has been a series of conflicting reports in recent weeks about the fate of North Korea’s negotiators after a second summit between North Korean leader Kim Jong Un and U.S. President Donald Trump broke down in Vietnam in February.”

My God, that’s a lot of weasel words. Let’s put it in plain English. Back up six weeks: A right-wing newspaper in South Korea claimed that several of Kim’s aides had been either executed or sent to hard labor as punishment for the failed meeting.

U.S. media uncritically retailed the story, even though the paper relied on a single anonymous source, and the paper has a history of scoops about the North that turn out to be false. But because this story fueled a narrative that made Trump look bad, U.S. media ran with it anyway.

As we related in early June, the narrative started unraveling when one of the people supposedly shipped off to a labor camp turned up at a concert, sitting only a few seats away from Kim.

Now comes word that one of the people supposedly executed is still alive — at least according to a South Korean lawmaker.

But Reuters — one of the three major news agencies that everyone else in the West relies on — is trying to hide behind “a series of conflicting reports.” Oy…

As far as one restaurant in Japan is concerned, the customer is not always right. Dig this…

Japan Today Tweet

It’s a tiny ramen place on Ishigaki Island, called Yaeyama Style. Indeed it’s so small — maybe a dozen or so seats — that a while back, owner Akio Arima asked customers to order at least one bowl of ramen each.

“Despite putting up signs with the requirement all over the restaurant,” reports the website Oddity Central, “some Japanese customers still insisted [on splitting] a bowl between two people. Others brought food and drinks from outside to consume inside his venue or bring their babies and toddlers, which Yaeyama Style does not allow.”

So Arima made a simple decision — only tourists allowed.

Yes, traffic is down. For the moment, he thinks it’s a more-than-acceptable trade-off. “I’m going to stick with it for now, and take some time to relax and clean the restaurant.”

After our uncommon take yesterday on the Eric Garner case, we got an email from a reader we more or less expected…

“Mr. Garner was arrested for breaking the law precisely 18 times in the past for selling untaxed cigarettes. This wasn’t his first rodeo for being a criminal.

“If I can’t sell illegal cigarettes, he shouldn’t either. Sad that I read you are on the criminal’s side in this story.

“If I have to abide by the law, everyone else has to also.”

We got a similar email from a reader after we first explored the case nearly five years ago. “The only thing relevant,” he said: “Garner resisted arrest. Period. End of sentence.”

At first we had trouble formulating a response. Then we stumbled upon a speech Samuel Adams gave a few weeks after the Declaration of Independence.

“If ye love wealth better than liberty,” he said, “the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsel or your arms. Crouch down and lick the hands of those who feed you. May your chains set lightly upon you. May posterity forget that ye were our countrymen.”

Last today, a reader weighs in with a business opportunity for the age of self-driving vehicles.

“I have extensive background in the transportation and logistics business. Others and myself have had very serious discussions about the future of the industry and in particular self-driving trucks.

“Manufacturers still have a lot of bugs to work out, especially the fact that an 80,000-pound rig mistaking a pedestrian on a bike or the side of a trailer for open space and careening through persons or vehicles would result in litigation that would bankrupt any company using them. It will come, eventually, but there is still likely a 10-year horizon or more before any widespread adoption.

“In that time span, though, the open opportunity for mechanics and repair shops will be in the recovery and repair of said self-driving vehicles. Especially in the case of commercial trucks, if anything goes wrong during transit, the truck has one option: Stop and kick on the flashers. Many people do not realize how often drivers can make enough roadside repairs to get to a repair shop.

“When there is no driver available, the computer has no choice but to park on the side of the road and wait for the tow truck. And with modern commercial vehicles, there are a LOT of things that can go wrong. There are already multiple data links in the vehicle, any of which can shut down the truck, and a self-driving vehicle will be even more vulnerable to these issues. Cars won’t be much different.

“There will be a good business for those repair shops that prepare for these changes in equipment and training for their mechanics, as recovery and repair of self-driving vehicles stuck in the middle of nowhere with flashers blinking and inoperable will need to be addressed.

“The adage in the business is that it’s never a case of ‘if’ but ‘when,’ and it never happens when it is convenient. The businesses that are prepared for this inevitable eventuality will do quite well going forward.”

The 5: Far-thinking you are. Thanks for weighing in.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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