Season Investments


There Will Be Cuts

Posted on June 21, 2016

“It’s not a question of if there are going to be cuts. The question is where and when.” - Thomas Nyhan, executive director of the Central States Pension Fund

2016-06-21_nocuts.PNGThere has been much to say in recent years about the looming “retirement crisis” in America. In his Insight, Ostrich Finance, from a few weeks ago Elliott shed light on an epidemic of under saving and over spending amongst the majority of Americans. We have a general lack of financial preparedness in the private sector that will become more and more felt as the population ages. And to make matters worse, the perceived safety net of steady retirement income that is expected from public and private pension plans across the nation may not be as secure as many retirees had hoped.

The Central States Pension Fund is one of the largest and most storied public pension funds in the country. Established in 1955 for the benefit of the International Brotherhood of Teamsters, a prominent trucking industry union at the time, the fund’s early years were wrapped in controversy. Many of its directors had close personal and business ties to union leader (and mob boss) Jimmy Hoffa. For decades, pension fund assets were misappropriated and embezzled to the benefit of key players in organized crime. That all ended in the early 80’s when the US Department of Labor wrested control of the fund from the mob and appointed Morgan Stanley as a fiduciary over the management of the plan’s assets.

Today as a multiemployer fund the Central States Pension Fund covers over 400,000 participants across more than 1,500 contributing employers representing a variety of blue collar industries. That’s quite a responsibility, and many middle class Americans are depending on the prudent management of the fund’s assets to provide the lifeblood of steady income in their retirement years. Those middle class Americans are likely to be disappointed.

The pension fund’s official website provides a brief description of the fund in which it casually states,

“At year end 2014, Central States Pension Fund had assets of $17.8 billion with a liability for promised benefits of $35 billion.”

Whoa…what?! This matter-of-fact statement is embedded in an otherwise positive “About the Fund” page. You might even miss the bombshell if you weren’t actively looking for it. Unless we’re mistaken, $17.8 billion is only roughly half of $35 billion, meaning one of the largest and most important pension funds in the country is only 50% funded. It is, in fact, projected to run completely out of money in the year 2025.

How the fund got into this mess is not the topic of this Insight, but suffice it to say that steep declines during the financial crisis basically crippled the prospects of long-term solvency. Many are questioning whether or not the Wall Street suits commissioned with running the assets broke their fiduciary duty, and just today 51 Democratic lawmakers requested that the Government Accountability Office launch an investigation into the matter. The 17.2 billion dollar question is...

What can be done to right size the plan to ensure future solvency?

Up until about six weeks ago the answer to this question appeared crystal clear. The writing was on the wall, and it was long past time to face the reality that a reduction in benefits was necessary. With more than 5 participants for every 1 contributing employee, there was no realistic amount of growth that would turn the math on its head and allow the plan to cover the chasm of a funding gap that had been accumulated. 


Following this line of thinking, the fund’s trustees made a formal rescue plan proposal to the US Department of the Treasury under the Multiemployer Pension Reform Act of 2014. The proposal laid out the necessary changes that would move the pension plan towards long-term sustainability. “This was a very hard decision, a gut-wrenching decision. It’s not a question of if there are going to be cuts. The question is where and when.” said executive director Thomas Nyhan. 

There were, of course, many who opposed the suggested changes. Obviously the plan’s participants weren’t keen on the idea of having their retirement income messed with. And who’s to blame them? “I did everything I was supposed to.” said Ava Miller, 64, who, according to a Washington Post article, was facing a benefit reduction of over 50%. The same article quoted Karen Friedman of the Pension Rights Center as saying, “This is going to be a national crisis for hundreds of thousands, and eventually millions, of retirees and their families.” 

Not surprisingly, there were many members of Congress who voiced strong opinion that the US Treasury should reject the proposed rescue plan. And that’s exactly what happened on May 6th when Kenneth Feinberg, special master appointed by the US Treasury, issued a 10-page letter outlining the reasons why the rescue plan was rejected. Many saw this as a politically-driven decision to sidestep the fallout that would have come with the plan’s approval in the middle of an election year. In response, the plan’s trustees commented that, “the alleged defects in the Fund’s application could have been identified and corrected much earlier in the process, if Treasury had either pointed them out during their lengthy consideration of the Fund’s application, or by publishing final regulations in a timely manner, rather than waiting until just a few days before the deadline to reject our plan.” Joshua Gotbaum, former director of the Pension Benefit Guarantee Company, also called the decision an “act of political cowardice” that will result in “more and deeper benefit cuts” in the long-term.

So where does all this leave the 400,000 Central States Pension Plan participants? They’re still aboard the car heading towards the cliff. And it seems to be accelerating. Again, from the trustees’ response to the US Treasuries decision, 

Central States Pension Fund remains in critical and declining status, and is projected to run out of money in less than ten years. The fact that the federal government’s multiemployer pension insurance program, the Pension Benefit Guaranty Corporation (PBGC), is also running out of money means we may see our pension benefits ultimately reduced to virtually nothing when the Fund runs out of money.

And here’s the kicker…

At this time, only government funding, either directly to our Pension Fund or through the PBGC, will prevent Central States participants from losing their benefits entirely.

That’s right…it looks like the only hope for this swath of middle class America will be a good old fashioned government bailout, an option that is proactively being pursued by a bill introduced by Bernie Sanders (D-Vt).

The current reality of the Central States Pension Fund is a microcosm of a larger retirement crisis looming over the US. Public and private pensions across the country are struggling with funding shortfalls, and most are avoiding the necessary changes that will be required for future sustainability. As part of our suite of Family CFO services we assist our clients in understanding the multiple components of their retirement income and where there might be exposure to risk. Planning conservatively for realistic outcomes means we have to set a course for over-funding our clients’ objectives. This creates margin, opens up options and ultimately empowers them with freedom to pursue what makes their lives truly rich. This is what we’re all about as a business.

Ironically, perhaps there actually won’t be cuts for the participants affected by the events covered in this article. But as we all know, there is no such thing as a free lunch, and that missing $17.2 billion will have to be paid for by somebody. Regardless of how the saga of the Central States plan plays itself out, we can rest assured that the aggregate of pension benefits currently being promised to current and future retirees will most definitely have to be cut. In quoting the plan’s trustees, “It is now time for those who suggested that there is a better way to fix this critical problem to deliver on real solutions that will protect the retirement benefits of Central States participants.” Indeed, not just for those affected by Central States, but for all Americans who are counting on pension benefits to sustain them in retirement.

david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.

Subscribe to our Weekly Insight via email!


Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.