The Corner

Who’s Looking Out for You?

Labor unions do not always look out for their members’ best interests.

This is not the assertion of some union-busting corporation, or a disgruntled union member. Rather, it is a statement from the AFL-CIO and Change to Win, the nation’s premier political umbrella groups for organized labor. A labor union, their amicus brief in the Supreme Court case Pyett v. Penn Plaza argues, has a “self-interest of its own to serve,” which can create a “direct conflict of interests with respect to an employee’s choice.”

The unions had a reason for their paradoxical argument against the trustworthiness of organized labor. They wanted the Court to invalidate a union-negotiated contract that had gone wrong. SEIU Local 32BJ, which represented security workers at 14 Penn Plaza, had bargained away the plaintiffs’ rights to sue their employers for age-discrimination. But the unions’ argument did not prevail in court — in a 5-4 ruling, the court upheld the contract, which forces the plaintiffs to take their discrimination allegations to arbitration, as their contract requires, instead of taking it to federal court.

At least the workers in the Pyett case had a chance to vote, up or down, on their contract. In theory, they had some input when their union collectively bargained away their rights. But that could change in some cases if the binding arbitration provision of the Employee Free Choice Act ever becomes law. The financial consequences for workers’ retirement plans could be very negative.

EFCA is best known for “card-check,” the process by which union organizers can represent a shop by having a bare majority sign cards. As currently written, the law also forces binding arbitration whenever a firm and its new union cannot agree on a contract within 120 days. It sticks both the firm and its workers with the new contract for two years.

Yesterday, business leaders held a conference call to discuss one possible consequence of this that would definitely put unions’ interests at odds with those of their employees. Employers could be forced, through binding arbitration, to enroll their workers in one of the union-controlled multi-employer pension funds that is bordering on insovency.

Imagine your workplace becomes a union shop and contract negotiations break down. Arbitrators could force your employer to enter the union’s multi-employer pension plan. Your employer then has to scrap your 401(k). The union can then cannibalize his contributions on your behalf to save their under-funded pension plan. Their plan might also subject you to long-term vesting requirements, so that you could be penalized heavily if you change jobs. And then, ultimately, you may receive almost nothing from them when you retire.

Employers can exit such plans only at great financial cost. UPS had to pay $6.1 billion to extricate itself from the under-funded Teamsters’ Central States fund last April.

Many union pension funds are in serious trouble, according to their IRS filings, and might need the kind of bailout that only binding arbitration can bring. Because unions are required to report on the funds’ health only annually, we do not have a clear picture of their status today, after the stock market collapse of last fall. We do know that as of 2006, the Sheet Metal Workers pension fund was valued at less than 42 percent of what it owed to retirees and current workers — this is considered very low. We also know that the Plumbers and Pipefitters National Pension Fund was only 57 percent funded.

Again, that was long before the downturn. Union members could be in a world of hurt next year when the numbers are finally reported for 2008.

When these pension plans become less than 65 percent funded, they usually enter what is known as the “Red Zone.” In that case, the government requires them to slash benefits for current workers (not retirees), or else to extract more money somehow from companies that fund the pension plan. One way of doing this is to bring on new blood by forcing new employers into the plan.

When the firms supporting a multi-employer pension plan go bankrupt, the remaining participating firms are forced to assume the additional liability. This forces some companies to pay for retiree benefits of workers who never worked for them in the first place, as in the case of YRC International. According to the Wall Street Journal, “roughly half of YRC’s contributions to a multi-employer union pension fund cover the costs of retirees who never worked for the Overland Park, Kan., company.” This is a phenomenon known as “Last Man Standing.”

Today, a smaller and smaller number of union workers are forced to fund a larger and larger number of retirees. “It’s like a magic Ponzi scheme, a little bit like Bernie Madoff,” said Diana Furchgott-Roth of the Hudson Institute, former chief economist of the U.S. Department of Labor. “When the new contributions came, he used them as payouts for the existing holders of the fund. That’s what you have with these pension schemes. That’s why it’s particularly dangerous to have this mandatory arbitration that could force a new group of workers into the Ponzi scheme and into supporting these under-funded plans. . . . Their pension contributions could be going for nothing at all.”

In cases where a multi-employer pension fund actually goes under, the workers get an extremely meager bailout from the federal Pension Benefit Guaranty Corporation. The maximum payout to a 30-year employee is less than $13,000 annually. That’s not a good deal for anyone.


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