The Ticking Time Bomb: An Ongoing Labor Dispute Shows the Problem With Union Pensions

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In Orange, CT, there have been two arrests over the last few weeks (the most recent on Saturday afternoon) in front of Dichello Distributors, where there is an ongoing labor battle between Teamsters, Local 443 and the company. The issue is over the company’s desire to exit the Teamsters’ grossly underfunded multi-employer pension plan, as well as asking union members to pay 10% of their medical premiums.

As the company advertises for replacement workers, Peter Deane, Vice President of Sales and General Manager of Dichello Distributors, stated in an interview:

The two major issues that the Teamsters refused to negotiate in any way, shape or form, were the pension and the health and welfare. They refused to have their members pay a portion of the healthcare which is fair in this day and age, and again, under-funded. But, and this is very important; Dichello needed to remain competitive in an industry dominated by non-union houses. That was the other goal we had to reach, and their pension is drastically under-funded. Our portion alone of the pension liability is $21 million. The pension, in their words is drastically under-funded, and is in critical condition, it’s unsustainable, and we’re just not willing to pay into a pension that very likely won’t be there for the men. Unfortunately, they seem to vehemently disagree with us on that point.

[snip]

Their pension fund, in their words is in critical condition. It’s less than 50% funded. It’s a multi-employer pension and it’s drastically under-funded. Dichello’s obligation into the pension has all been met. We’ve paid into that pension, exactly what we bargained for, for more than 30 years — for 35 years we’ve paid what we agreed to pay in, and at the end of the last contract we still have to pay $21 million because of the promises that the Teamsters made and the investments that they made. We cannot stay with their pension in all good faith.

As a unionized employer that, long ago, agreed to contribute money into a union multi-employer pension plan, Dichello Distributors is faced with what many similarly-situated employers are—paying money into a severely underfunded pension plan that, in turn, pools the money and distributes it to retirees (in many cases) of other companies.

The plan that Dichello Distributors pay into is the New England Teamsters & Trucking Industry Pension Fund, a union multi-employer plan that encompasses the members of 21 different Teamster locals throughout New England. While the pension plan has been underfunded for years, as of  2009, the plan was nearly $3 billion underfunded. As such, like many other union pension plans, it is listed in “critical” status. Even worse, it is projected to be in critical status for years to come.

Because of the gross underfunding of the Teamsters’ New England pension plan—caused, in part, by poorly-performing investments, as well as companies that have gone out of business no longer contributing to the fund—the cost of rehabilitating the fund must come from the remaining participating employers:

The Rehabilitation Plan contains two options which future contracts must conform to, both options apply to a Rehabilitation Period of ten years commencing October 1, 2011.  The Preferred Option requires employers to increase future contributions by 10% per annum for five years and by 8% per annum for the next five years.  Under the Preferred Option benefit accruals are unchanged.  The Default Option requires employers to increase future contributions by 12% per annum for five years and by 11% per annum for the next five years.  Under the Default Option benefit accruals are reduced by 60%.

In Dichello’s case, it appears that, if the company does not exit the plan now, its costs are going to skyrocket in October 2011 and for the foreseeable future. This is why some companies like Dichello Distributors choose to take the short-term pain of a labor dispute in order to preserve its longer-term viability.

Unfortunately, Dichello Distributors is not alone. Union multi-employer plans in the private-sector have been estimated to be as much as $165 billion underfunded (public-sector pension fund liabilities are much higher). In the private-sector, it is a time bomb that threatens to blow up a lot of companies’ financial well being. In the public-sector, the amount of underfunded plans are causing politicians (both Republican and Democrat alike) to take drastic measures to keep states and municipalities from going bankrupt. A few, like Central Falls, Rhode Island and Prichard, Alabama, already have.

Back in Orange, CT, as the members of Teamsters’ Local 443 picket Dichello Distributors, one can’t help but wonder if they truly understand the problem with their union pension.

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“I bring reason to your ears, and, in language as plain as ABC, hold up truth to your eyes.” Thomas Paine, December 23, 1776

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5 COMMENTS

  1. Those Pensions were designed in an era when when everybody thought the world was America’s oyster and that it would never change ……. enter competition and globalization.

    It’s a shame for the teamsters, but rationally the company has few other options.

    Where taxpayers really NEED to demand change is with Civil Servant pensions.

    That group is financially raping the taxpayers with pensions 2, 4, and even 6 times greater in value at retirement than that which a comparably paid Private Sector worker retiring at the SAME age and with the SAME years of service get from his employer…… and TAXPAYERS pay for 80-90% of Civil Servant pensions !

  2. A fifth grader would dispute the math, gents. Either we contribute 8-10% more so accruals will remain unchanged OR we contribute 11-12% more so we allow accruals to be reduced by 60%.

    Why would we contribute more under the Default Option than the Preferred Option in order to reduce accruals?

    May I suggest you do not know of what you speak!

    • May I suggest that you, sir, are the one who spoke prematurely or who knows not of what you speak?

      The Pension Protection Act of 2006 (PPA) required trustees of critically underfunded plans to institute a rehabilitation plan including a preferred and a default option. The preferred option is allowed to change ancilliary benefits and other features of the pension plan, while the default option generally reduces only benefit accruals and leaves the other largely benefits in place.

      Both options must be shown to result in a plan leaving critical status over a 10 year period. It is common for the default option to include unchanged accruals at a lower cost, paid for by forfeiting anculliary and other adjustable benefits. It is also common for the preferred option to include reduced accruals at a higher cost, while preserving ancuilliary benefits and other features.

      No, this wasn’t in the article. But, you do have an internet connection and could have done some research on your own before you spouted off like a semi-educated and belligerent fifth-grader.

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