A Canary in the Underfunded Pension Coal Mine

In its purest form, hydrocarbon natural gas is composed primarily of methane, which is odorless and colorless. “Coal seam” natural gas is a natural byproduct of coal deposits. As recently as the 1980’s, coal miners would often bring canaries with them into the mines because canaries were known to be far more sensitive to air quality than humans. If the canary lost consciousness, the miners would know that the air quality in the mine was dangerous and it was past time to get out quickly.

On October 3, 2017, a bipartisan group of federal legislators introduced a bill to bail out the underfunded pension of the United Mine Workers of America. The American Miners Pension Act (AMP Act), sponsored by Senators Joe Manchin (Democrat, WV) and Shelley Moore Capito (Republican, WV) and Representatives David McKinley (Republican, WV) and Peter Welch (Democrat, VT), calls for loans to the UMWA pension fund capped at $600 million a year, to be funded from the Abandoned Mine Land Reclamation Fund.

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In the context of a national debt of over $13 trillion and a federal budget deficit of over $500 billion, the AMP Act is indeed a wee canary. However, much like an unwell canary in a coal mine, the AMP Act has rightfully drawn alarmist attention because it is an indicator of high risk.

That’s because the UMWA is far from the only under-funded pension plan in the country and this bailout would be the first of its kind. Out of nearly 1,400 union-run or “multiemployer” pension plans across the U.S., 85 percent of them are less than 70 percent funded and in the hole by about $500 billion more than they can pay. And $500 billion pales in comparison to deficits being run up by state and local government pension plans, which are by some estimates underfunded by as much as $5 trillion.

Following the body blow of the Great Recession, about 75% of state pension funds have undergone some kind of reform since 2009. These reforms help mitigate escalation of existing deficits through measures such as putting new participants into defined contribution plans (as opposed to defined benefit plans) increasing mandated contributions and freezing cost of living adjustments.

However, none of these reforms can create the massive capital needed to fund the promises made to former employees that were never adequately provided for at the time these promises were made. The State of Kentucky, for instance, has adopted all of the reforms mentioned above, yet still faces a $37 billion state pension deficit.

The arithmetic behind the UMWA’s pension funding woes is familiar. The fund has approximately $5.6 billion in unfunded pension promises and has no prospect of earning its way out of the hole because it has only one person paying into the pension fund for every seven retirees receiving benefits. Consequently, for every dollar that leaves the pension fund, it can at best collect less than 16 cents in new contributions.

Critics of the AMP Act point out that the Abandoned Mine Land Reclamation Fund is largely tapped out due to an earlier Congressional allocation of these funds to cover the UMWA’s underfunded healthcare plan.

Be that as it may, the plausible deniability and appearance of fiscal accountability that the Abandoned Mine Land Reclamation Fund provides will certainly prove useful to both critics and proponents of the bill with respect to the precedent that the AMP Act posits. The federal government is in no position to bail out anyone else’s pension funds on a regular basis. According to Moody’s, the unfunded pension liabilities of the US government exceed $3.5 trillion, its unfunded Medicare obligations exceed $3 trillion, and its Social Security funding gap is over $13 trillion.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

One comment

  1. I felt that Boone Pickens’ comments you quoted were a little self righteous after he and Carl Icahn almost sank Phillips Petroleum in 1984 … “we did it for the shareholders” !!

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