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

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

Pic Credit.

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