CBO: Union pensions still facing insolvency under rescue bill

READ the CBO Estimate HERE

A labor-backed pension rescue measure pushed by House and Senate Democrats would only delay the projected insolvency of some ailing union retirement plans, according to new Congressional Budget Office estimates released at Senate Budget Chairman Michael B. Enzi's request.

The bill (HR 397) passed the House 264-169 in July with 29 Republicans joining a unified Democratic caucus. But top Republicans like Ways and Means ranking member Kevin Bradyof Texas and Education and Labor ranking member Virginia Foxx of North Carolina argue the measure is an unjustified "bailout" and won't advance in the GOP-controlled Senate. 

Enzi, R-Wyo., didn't have an immediate comment on the new CBO analysis, but it would seem to underscore the uphill climb the Democrats' bill has in that chamber. 

The legislation would generally require eligible plans to make interest payments for the first 29 years of the loan and repay the principal in the final year; under those terms the interest rate would be tied to 30-year Treasury bonds. Plans would qualify for a 0.5 percentage point discount from the comparable 30-year Treasury rate if they choose to start paying back principal in year 21, which many are expected to do.

In addition, if the new Treasury office set up to evaluate loan applications determines the plan won't be able to repay the loan in full and still remain solvent, smaller loans would be provided and grants would backfill the remainder needed to stay afloat. 

Factoring in the likelihood of loan repayments in the first decade and the upfront costs associated with the loans and grants, the CBO in July estimated the federal government would spend about $67.7 billion over the first 10 years. The bill's net cost would be reduced to $48.5 billion through certain tax offsets Democrats included.

Despite the aid provided in the bill, the CBO told Enzi that about 25 percent of the pension plans that receive 30-year loans under the bill "would become insolvent in the 30-year loan period and would not fully repay their loans." Also, “most of the remaining plans would probably become insolvent in the decade after they repay their loans,” the agency added, while noting that the analysis didn't account for possible renegotiation of loan terms.

In August, the Pension Benefit Guaranty Corporation — which is funded by premiums paid by pension plans to ensure payment of benefits in the event of insolvency — said there were about 125 union plans, covering 1.4 million people, expected to run out of cash in the next 20 years.

The House Democrats' bill, which was approved by the Ways and Means and Education and Labor committees earlier this year, would probably cover about 150 plans expected to receive financial assistance, the CBO said in July, including 130 of the most troubled plans likely requiring grants on top of loans. 

The CBO's July estimate didn't account for additional loan repayments using grants funded under the bill. While that prospect was among the House Republicans' chief complaints during debate in that chamber, that actually would lower the cost of the measure at least on paper. Under the alternative assumption that eligible plans would tap their grants to help repay loans, the net cost of the bill would drop by $26 billion over the first decade, the CBO said.

House Ways and Means Chairman Richard E. Neal has argued that the bill will be “very close to revenue-neutral” over the long term in part because pension plans will be able to use the low-interest loans to invest at higher returns. Supporters also argue that the pension plans have paid premiums to the PBGC to protect retirees from plan insolvency, and it is now time for the government to honor its commitments.

“This is not a bailout, this is simply a backstop to get these plans back on their feet,” Neal, D-Mass., said in July during House floor debate.

The PBGC multiemployer insurance program — which covers over 10 million people — itself is expected to run out of cash by the end of fiscal 2025, which would reduce payouts to "a fraction" of what they'd otherwise be and be limited to the amount of premium income the program collects. 

The CBO in its analysis at Enzi's request also came up with a slightly higher price tag using a higher “fair market” interest rate to measure the value of the repayments plans would make on loans in the coming decades. Adjusting the cost for the greater risk associated with private sector loans than the basically risk-free rate on Treasury bonds, the cost of loans made under the bill to troubled pension plans would be higher, by about $4.8 billion under the assumption that grants are tapped to help repay loans.

The CBO also noted in its new analysis that since the House-passed retirement savings package (HR 1994) now before the Senate includes some of the same revenue offsets, the net cost of the pension bill would be $3.7 billion higher if it can’t use those offsets.

Finally, it should be noted that the CBO hasn't updated its interest rate forecast used to calculate the pension bill's costs. The July estimate assumed the rate on 30-year Treasury bonds would be 3.8 percent as of Jan. 1, 2020, noting that if the rate were 1 percentage point lower, it would add about $10 billion to the 10-year cost of the bill as affected plans paid less interest.

The agency's August economic update pegs the rate on 10-year Treasury notes at 2.1 percent on average at that point. The spread between 10- and 30-year Treasuries hasn't really widened beyond roughly 0.5 percentage point this year, which implies something like a 2.6 percent 30-year rate early next year.

READ the CBO Estimate HERE

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