The Obama administration is now working with state attorney generals to rip off pension funds to bail out mortgage borrowers who don’t even need help. Pension funds that millions of Americans rely on for their retirement will suffer. Bank shareholders will also suffer. I explain how and why in a commentary at The Washington Examiner website. The government is trying to get mortgage servicers to write off portions of loans that are owned by other people or institutions — like the pension funds that millions depend on. That undermines property rights. Last fall, intellectuals with ties to the Obama administration proposed a much larger, but conceptually similar, bailout that could cost taxpayers a trillion dollars, the idea being to temporarily increase consumer spending through the next election.
pension funds
The Obama administration and its congressional allies are now pushing for billions more in bailouts for mismanaged union pension funds, and teachers unions.
The union pension bailout bill “would transfer tens of billions of dollars worth of retiree liabilities” from unions “to taxpayers.” It would bail out the massively underfunded pension fund of the SEIU, a corrupt left-wing union that uses mobs to intimidate, and occasionally beat up, its critics and creditors. (The SEIU serves as a security force for Obama allies and liberal Congressmen seeking to keep Tea Party protesters away from their events.) The union pension funds are estimated to be underfunded by $165 billion.
The Obama administration is also proposing a multi-billion dollar teacher bailout sought by the teachers’ unions. Although education spending per student has quadrupled, after inflation, since 1960, and teacher class sizes have shrunk considerably, the Obama administration wants to increase spending even further to prevent states from laying off any teachers. Even the The Washington Post, which endorsed Obama and has endorsed every Democratic presidential candidate since 1952, considers this unwise and financially reckless “wasteful spending.” (The SAT has been “recentered” in recent years to hide the fact that SAT scores have effectively gone down even as education spending has skyrocketed. My 1986 SAT score of 1520 out of 1600 would be a perfect 1600 on the relevant portions of today’s SAT, thanks to “recentering.”) Ironically, no additional spending would be needed to prevent layoffs if teachers would simply accept small pay cuts. (The average school teacher in Montgomery County, Maryland, makes $76,483 in base pay–which hasn’t stopped school officials from threatening to sue the County for supposedly inadequate school funding.)
While pushing an unnecessary teacher bailout, the administration has shown little interest in the plight of the unemployed. It deliberately removed from the $800 billion stimulus package billions in transportation spending that would have stimulated the economy, after feminist leaders complained that such projects would employ blue-collar men, many of whom are now unemployed (80 percent of those who have lost their jobs in the recession are men). The transportation spending was replaced with wasteful welfare spending, and other provisions of the stimulus package largely repealed the limits on welfare passed in the reforms of 1996.
The Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs). It was just the beginning: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports The New York Times.
At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes. Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.
Fannie and Freddie helped spawn the mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk. ”From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.” They paid their CEOs millions, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses. As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.
The Obama administration refuses to reform these mortgage giants, saying it is “too hard” to do. Earlier, Senate Democrats blocked reform of the mortgage giants in a party-line vote.
(Obama received $125,000 in contributions from these mortgage giants as a Senator, second only to the corrupt Senator Chris Dodd, who is retiring this year due to his financial scandals. Dodd is the chief drafter of the financial “reform” bill.)
The financial “reform” bills recently passed by the House and Senate do nothing to reform Fannie Mae and Freddie Mac. But they will increase pressure on banks to make risky loans in depressed neighborhoods, and increase credit card costs.
The Obama administration also recently provided billions for the international bailout of Greece, which came close to bankruptcy thanks to its socialist policies and pensions for people who retire as early as age 50 (in many ordinary occupations, like hairdressers).
Congress has long used its control of the federal government’s purse strings as a club with which to force states to change laws that fall under state governments’ traditional police powers, such as speed limits and legal drinking ages, by threatening to cut federal highway funds. Given the current trend in government growth, I expect the categories of funds so manipulated to expand.
The two most notorious policies so crammed down states’ throats — the 55-mph speed limit and the 21 legal drinking age — constituted nanny-state social engineering of the worst kind: government forcing behavior on certain citizens for their own good.
However, when it is the money of the nation’s taxpayers, rather than behavior politicians don’t like, that is at stake, pulling such funding may be called for. In his Washington Examiner column today, Hugh Hewitt proposes such a solution to prevent a federal bailout of underfunded state public employee pensions.
Federal spending power was used to oblige states to lower their speed limits to 55 miles per hour a few years back. The same authority could be employed to oblige states to curtail public employee pensions. A new federal statute, stating simply that the Treasury will not be sending assistance to any state awarding any new six-figure pensions under any circumstances, would be approved by overwhelming margins.
The federal government discouraging state government profligacy is very different from its manipulating federal funds to enact state-level policies over which it should have no authority. For that reason, comparing the two is troubling, even when accomplished by similar means. Still, if the federal government is ever to withdraw funding for any reason, it should be to rein in its own, and other governments’, power.
As the strain on state and local government budgets around the country worsens, public employee unions have gone on the defensive, painting themselves as scapegoats for the financial crisis, reports The Wall Street Journal. Union leaders claim that elected officials are taking their financial troubles out on their workers. Yet if public employees are victims of anything, it is of union chiefs’ over-promising of lavish compensation well into the future.
Many on the left (including labor leaders) often call on everyone to pay their “fair share” (usually of taxes). By the logic of their own rhetoric, public employees should do their “fair share” of cutting back during the recession. That hasn’t been the case.
Many private-company workers have seen their retirement accounts shrivel, while public-sector benefits have been relatively unscathed. Defined-contribution plans such as 401(k)s had $3.33 trillion in assets at the end of 2009, down 4% from $3.48 trillion in 2006, according to the Federal Reserve. Such accounts have lost value even though companies and workers contributed $100 billion over that period.
The rise in public-sector benefits has attracted the ire of citizens like Paul Nelson, a semi-retired investor in Upper Saddle River, N.J. Mr. Nelson, 59 years old, has a son at Northern Highlands Regional High School, where the principal says the school may have to cut teachers and increase class size. “Most public employees have retirement and health-care plans that private-sector employees can only dream of,” says Mr. Nelson.
State and local politicians bear a major share of the blame, not only by extending collective bargaining to the public sector, but also by acceding to union demands time and again. While undesirable, this is understandable. Public officials don’t face the competitive pressures to hold down costs that private businesses face. And while they do face constraints in the size of their budgets and potential negative reaction from taxpayers, those constraints only function in the present.
Thus, many public sector collective bargaining agreements back load benefits, in the form of pensions, well into the future. By the time the bill for those benefits comes due, the politicians who negotiated the union agreements will be out of office, leaving the mess for someone else to sort out. And quite a mess it is.
At the root of governments’ problems today are promises made in past decades. As a group, state and local governments have promised an estimated $3.35 trillion in pension and health-care benefits to be paid over the next three decades, but are estimated to have 70% of the money to cover those payments, according to the Pew Center on the States. Pension and health costs can consume 20% of city and state budgets.
California offers a view of the fallout. The state’s largest pension fund, the California Public Employees’ Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds.
It wasn’t long ago that California was going the other way, based on a different set of assumptions. In 1999, the state’s Democratic-controlled legislature and then-governor Gray Davis passed a law expanding benefits for many state employees. A proposal prepared by Calpers—the $200 billion fund that manages money for 1.6 million of the state’s employees, retirees and their beneficiaries—forecast that the boosted benefits would be paid for entirely by investment gains.
In addition to being optimistically generous, public employee pension funds have underperformed because of politicized investment strategies that seek to advance social goals rather than focus exclusively on maximizing returns, as fiduciary duty requires. (It is worth noting that union officials sit on many state employee pension fund boards.)
While some public sector unions have agreed to concessions, it’s been when their employers — state and local governments — are facing financial disaster, as in the case of Toledo, Ohio, which as the Journal reported yesterday, “narrowly averted having the state take over its finances by filling a $48 million budget gap late Tuesday. To tackle that deficit, Mayor Michael Bell had to take on the city’s police and firefighters’ unions and propose other controversial measures.”
As other states and cities work out ways to bring their budgets under control, public employee unions may have to agree to more such concessions, due to dire state of those governments’ finances. But they never should have gotten to that point in the first place.
Worse, many union bosses may decide to wait for a taxpayer bailout rather than make concessions. As columnist Mark Hemingway explains in today’s Washington Examiner, pension underfunding is also a major problem among private sector unions, where a bailout effort is already under way. As he notes, “Rep. Earl Pomeroy, D-N.D., has introduced legislation to explicitly put taxpayers on the hook for failing union plans.”
(Subscription needed for Wall Street Journal links.)
At Biggovernment.com, blogger Mandy/Liberty Chick has a good, concise account of the rise of shareholder resolutions as a favorite tool of organized labor. By leveraging their pension funds to purchase shares in companies they are trying to organize, unions can bring pressure on those companies, usually as part of a corporate campaign — a coordinated attack on a company’s reputation and ability to do business. She focuses specifically on the use of shareholder resolutions by the Service Employees International Union (SEIU), which has recently emerged as arguably the most powerful union in America.
Utilizing your proxy vote and providing feedback to the board as an active shareholder is a good thing! But as others have noted, the potential for abuse also exists, if union shareholders engage the board for purposes other than their pension investment interests. Drucker (and lawmakers in the 1970’s) expected that shareholders and their trustees would either engage to positively affect the stock, or they’d sell it if they didn’t like the company’s management. Perhaps it is this observation that SEIU’s Andy Stern has seized upon. Rather than sell the stock, maybe Stern wants to control the companies in which his pension trust is invested. It may have less to do with protecting pension investments and more to do with unionizing workers at those companies.
You Don’t Want a Union? This is My Baseball Bat & I Call It “Shareholder Resolution”
Of all those companies that have been SEIU’s protest targets, most have been the very same corporations in which the $1.9 billion SEIU Master Trust and some of parent Change to Win Investment Group’s $217 billion are invested. Is it also coincidence that many of these corporations were also the very targets of SEIU unionization efforts?
In early 2009, Andy Stern and Anna Burger wrote to the White House and Congress, demanding a list of financial reforms be legislated immediately, including a central regulator, and control over executive compensation and bonuses. Then in April, SEIU Master Trust director Stephen Abrecht sent a letter to 29 financial firms in which the trust holds investments, demanding that the companies’ directors investigate more than $5 billion in paid bonuses that SEIU says were based upon false metrics. Among those firms on the list were AIG, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Citigroup, PNC Financial Services and others.
Shortly thereafter, SEIU proposed a number of shareholder resolutions to the boards of many of the companies on that same list, requesting everything from ousting CEOs or board members to controlling employee compensation structures. Meanwhile, outside on the streets, SEIU’s protests were often coordinated with company meetings and events. As banks and the U.S. Chamber of Commerce fought against the Employee Free Forced Choice Act legislation, SEIU levied shareholder resolutions against them and issued more demands to Congress for immediate consumer protection and financial reform.
When Anna Burger then testified in front of the Congressional Financial Services Committee in September, not only did she push for a central bank regulator and other financial reforms, but she concluded her testimony by calling for the unionization of bank workers, insisting that the bank workers could then “speak out in protection of consumers” without fear to prevent future crisis.
Not surprising, since SEIU has had its eye on unionizing bank workers for quite some time, placing repeated pressure on banks for years and conducting endless rounds of their infamous corporate campaigns.
The bullying aspects of such tactics is bad enough. Even worse is the effect that using pension funds for objectives other than increasing shareholder value can have on the funds themselves — and on the workers who depend on those funds for their retirement. As Diana Fuchtgott-Roth, former chief economist at the Department of Labor, notes in her study of union pension fund performance, published by the Hudson Institute, “an analysis of the financial status of individual pension plans shows that collectively bargained pension plans perform poorly when compared to plans sponsored unilaterally by single employers for non-union employees.”
The rise of private equity has hindered unions’ ability to wield the resolution weapon. In the case of SEIU, it has forced it to become more aggressive in other corporate campaign tactics, including street protests, such as one in October during the American Bankers Association meeting in Chicago, “where some of the protestors dressed in Grim Reaper garb chased down meeting attendees, brandishing cleavers and butcher knives emblazoned with bloody-looking slogans.”
The precarious state of union pensions is a motivating factor behind unions’ aggressive campaigning in favor of the misnamed Employee Free Choice Act (EFCA), which would allow unions to corral in more members into paying into their pension funds. EFCA’s card-check provision, which would effectively eliminate secret ballots in organizing elections, has proven politically unpopular. However, EFCA’s binding arbitration hasn’t received as much attention.
This provision would enjoin a federally appointed arbitrator — who would be unlikely to know much about the company — to impose a contract after 120 days if the newly unionized company’s management and the union representing its employees could not reach an agreement. This would give union negotiators who don’t get what they want in negotiations an incentive to hold out for arbitration, in the knowledge that they would be certain to do no worse than management’s final offer.
EFCA supporters have been trying to sell this provision as a guarantee of reaching a first contract, but in reality it would take the actual negotiating between the parties out of the contract process. Thus, an employer could find itself facing huge new liabilities in the form of pension obligations.
For more on pension fund activism, see here, here, and here.
In a new poll, Gallup finds public support for organized labor at its lowest level since it began taking the survey.
Gallup finds organized labor taking a significant image hit in the past year. While 66% of Americans continue to believe unions are beneficial to their own members, a slight majority now say unions hurt the nation’s economy. More broadly, fewer than half of Americans — 48%, an all-time low — approve of labor unions, down from 59% a year ago.
These results are from the 2009 installment of Gallup’s annual Work and Education survey, conducted Aug. 6-9. The 48% of Americans now approving of unions represents the first sub-50% approval since Gallup first asked the question in the 1930s. The previous low was 55%, found in both 1979 and 1981.
Those numbers could go even lower, if much of the public learns more about the ways in which the Obama administration and Democrats in Congress are bending over backwards to please that loyal consituency, as F. Vincent Vernuccio and I argue in The American Spectator today. Particularly, the unions are getting considerable help from the administration and from their allies in Congress in trying to keep their grossly underfunded union pension funds from going bust, as Irwin Stelzer also notes in his Washington Examiner column today.
Detroit can astound even the most seasoned political cynic, and now it’s done it again. As the Detroit Free Press reports, the trustees of the city’s two public employee pension funds have been enjoying perks that even some CEOs would envy, apparently on the pensioners’ dime.
The trustees who oversee Detroit’s two public pensions, their lawyers and staff spent $380,000 over the past year circling the globe to attend conferences — often traveling in packs, with virtually no limitation on where they went or how often they traveled.
Trustee Ronald Gracia spent the most time on the road — billing the General Retirement System for $105,000 in travel, including three trips to Singapore and $18,600 on travel to Hong Kong, according to records provided by the pension funds.
The two public pensions, with 21 trustees, have guarded their travel records from scrutiny. The Free Press sued to get the records — which are actually only summaries from the past year.
The funds have yet to turn over actual receipts that would show, for instance, where trustees and staffers stayed and how they spent some of the money. Other documents have been destroyed.
Such apparent graft by public officials is hardly new, but today it should ring alarm bells about defined benefit pension funds in general, and union pension funds specifically. Many union pension funds today are severely underfunded, so any workers who could be made to join such funds should be concerned.
The so-called Employee Free Choice Act’s binding arbitration provision would do just that, by enjoining a federally appointed arbitrator to impose a contract on a newly unionized company that could include a provision for workers to join the pension fund of the union that now represents them, and for the employer to pay into it. (Thanks to Marc Scribner for the Free Press link.)
A federal appeals court has refused to block the Administration’s illegal auto bailout, which rips off taxpayers and pension funds to enrich the UAW union. The pension funds that challenged the bailout will now appeal to the U.S. Supreme Court. The bailout violates the federal TARP statute by diverting financial-system bailout funds to a takeover of the auto industry. And the government’s reorganization plan for Chrysler violates federal bankruptcy laws by ripping off lenders to give the company to the UAW union.
As I noted earlier, the Indiana State Teachers’ Retirement Fund is challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government’s unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.
(The bailouts have been counterproductive. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).
The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of “financial institution,” which the Administration claims includes virtually any institution, financial or not. The bailout statute defines “financial institutions” eligible for the bailout as “including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company.” Never mind that Congress listed as examples of “financial institutions” only entities that were banks, insurance companies, or financial institutions, not automakers. (Congress rejected auto bailout legislation last year precisely because it lacked safeguards against the use of bailout money to prop up uncompetitively high UAW wages — exactly what the Obama Administration is using the money for now. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute).
Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that using the money for auto bailouts violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term’s definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.
But if that’s not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government’s incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.
Indiana Treasurer Richard Mourdock was right to raise these important legal questions in court. Mourdock correctly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. By cheating Chrysler’s lenders, the government’s plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.
The federal government’s poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.
On June 2, the Second Circuit Court of Appeals entered a temporary stay of the bankruptcy judge’s ruling rubberstamping the government’s plans for Chrysler, in an appeal brought by the Indiana State Teachers’ Retirement Fund. On June 5, however, it refused to block the government’s plan for Chrysler. The case is In re Chrysler, LLC, Docket # 09-2311-mb.
As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Supreme Circuit should rule in favor of its appeal. The Supreme Court should grant review, since the issues are of overriding national importance, and the Second Circuit has created a circuit split by countenancing circumvention of the bankruptcy laws as long applied in circuits across the country.
The federal government poured billions of dollars into Chrysler, which then went bankrupt and merged with Fiat. But Chrysler may never revive, thanks to absurdly generous compensation for the company’s union employees. The Obama Administration has refused to cut union wages substantially, though it had no compunction about ripping off the pension funds and other lenders who loaned money to Chrysler to try to keep it afloat. Even union members seem surprised by how little they were asked to sacrifice.
Moderate Democrat Mickey Kaus, who reluctantly voted for Obama, notes that the federal bailout may yet fail:
“Before the deal, Chrysler’s UAW workers made $28 an hour. After the deal, they’ll make $28 an hour. They gave up a scheduled increase in wages, plus a couple of scheduled bonuses. That explains why Chrysler’s Belvidere, Illinois workers told TV station WIFR that ‘the plan is not nearly as drastic as they expected.’ …
“As for Chrysler’s ‘chance for long-term success,’ it appears vanishingly small. Italian manufacturer FIAT is supposed to save Chrysler with new products, but according to a recent Automotive News article, ‘four of the six new vehicles from Fiat will enter the small-car segment,’ which is highly competitive but ‘covers only 14 percent of the entire U.S. light-vehicle market.’ ‘The volumes need to be big for Chrysler to survive,’ [market analyst Tracy Handler] said. ‘Will they be? I have doubts about that.’
“See also this BBC article (“it’s madness”). Pathetically, Chrysler hopes that even if they don’t save the company the new small cars will ‘[b]urnish the environmental image of Chrysler brands,” says Automotive News. Unfortunately, the pipeline for those brands’ other, larger, products–burnished or not–is pretty much empty.
“If Chrysler workers were paid, say, not $28 an hour instead of $24–still not bad–the firm might actually have a ‘chance for long term success’ through charging lower prices. But that wasn’t a sacrifice Obama was ready to ask (even if Belvidere workers were apparently willing).”
While saddling Chrysler with excessive compensation costs and union ownership, the Obama Administration has inflicted a body blow to its ability to sell its traditional lines of large vehicles by radically ratcheting up federal CAFE fuel-economy standards, which harm the Detroit automakers more than their foreign competitors. 50,000 jobs could be destroyed as a result. Meanwhile, the global-warming regulations backed by the Administration will destroy millions of jobs and “decrease average household purchasing power,” thus cutting auto sales and further hurting automakers like Chrysler.
One of Obama’s own advisers now says that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” He compares Obama’s tax increases to those that deepened the Great Depression.
In the Depression, President Hoover imposed regressive excise taxes that burdened consumers. Obama is now doing the same thing through his proposed $2 trillion cap-and-trade carbon tax. Obama privately admitted to the San Francisco Chronicle (which didn’t report it) that under his “plan of a cap and trade system, electricity rates would necessarily skyrocket.” As Obama admitted, that cost would be directly passed “on to consumers” — just the way Herbert Hoover’s 1932 excise tax increase was. Although the tax’s supporters claim it will cut greenhouse gas emissions, it may perversely increase them and also result in dirtier air. It is also chock full of corporate welfare, regional favoritism, political pay-offs, and give-aways to special interests.
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