Tuesday, November 16, 2010

Oh, Lord, let's have transparency, just not yet

Mark Hemingway has been doing a yeoman's job in reporting on the looming collapse of union pensions. As he has reported, there are massive pension liabilities that many unions have that a new rule by the Financial Accounting Standards Board was going to make public.
On Nov. 1, the Financial Accounting Standards Board (FASB) ceases to take public comment on a new rule requiring that companies more accurately report liabilities they have from participation in multiemployer pension plans. Unless FASB is persuaded otherwise, the rule takes effect Dec. 15.

There are some 1,500 multiemployer pension plans in the United States, which are unique to unions. In these plans, multiple companies pay into the pension plan, but each company assumes the total liability.

Under “last man standing” accounting rules, if five companies are in a plan and four go bankrupt, the fifth company is responsible for meeting the pension obligations for the employees of the other four companies.

What this means is that companies with union labor often have pension liabilities that are several multiples higher than the pension expenditures they report — the Kroger grocery store chain shocked analysts last year when it disclosed its multiemployer pension liabilities more than doubled in a year to $1.2 billion.

Ratings agencies such as Moody’s and Standard and Poor’s have been highlighting the lack of transparency in union pension plans. Now Wall Street wants union businesses to be upfront about their liabilities.
Businesses with such pension liabilities would have a lot of trouble scoring loans once banks realized that they had such future debts on their books.

Hemingway now reports back that the FASB has delayed the implementation of their transparency rules. Union businesses have a reprieve for another six months or so. They can hope for more federal money in a bailout, but in the new post-election climate, that is not likely. So it will become clear for all the problems that such businesses are facing due to their promised pension plans. And delay in making the exact figures public won't help.
And even if FASB didn’t enact the rule requiring disclosure of pension liabilities, the cat’s still outta the bag. Banks and Wall Street are rapidly waking up the fact that these pension liabilities exist and are already demanding they be disclosed before they make loans, extend credit etc. The underlying problem — that union pension plans are massively in debt and in an accounting death spiral — won’t be going away any time soon.
We're all just waking up to the fact that private companies are on the hook for the same sorts of devastating pension promises that local and state governments are now confronting. A reprieve from making the information public isn't going to paper over the truth. If a bubble can loom, all these pension liabilities that were promised during the good times are indeed looming before us. Unfortunately, politicians and businesses never seemed to have learned the lesson of the seven fat and seven lean years. And they'll all be coming to the federal government for a bailout, but the money just isn't there. Lesson: don't promise to pay tomorrow money that you don't have today and are just hoping will be around tomorrow. It won't, especially when your creditors find out what you've done.