The announcements by Senators Arlen Specter (R-Penn.) and Blanche Lincoln (D-Ark.) that they intend to vote against cloture on the so-called Employee Free Choice Act (EFCA) has taken the legislation out of the headlines for now, as EFCA supporters seem short of the 60 votes needed in the Senate to end debate.
But EFCA opponents should not become complacent. Organized labor and its allies in Congress continue pushing this bill, and they are not about to go quietly. And this legislation may be even more damaging than even its opponents think.
EFCA would make secret ballots in organizing elections a dead letter by mandating the National Labor Relations Board (NLRB) to certify a union as exclusive bargaining representative for employees at a company as soon as a bare majority of employees sign union cards. This process, known as "card check," exists under current law, but requires that employers forgo a secret ballot election.
Under EFCA, employers would have no say, and the union would be certified as soon as it collected signatures from 50 percent-plus-one of employees. Union organizers ask workers to sign cards out in the open, often under pressure. Many employees will sign cards just to be left alone.
EFCA's card check provision helped provoke a backlash against the legislation as people found out more about it. However, EFCA's second provision, which has not received as much attention, but could be even more devastating economically.
Just how damaging? Enough to force some healthy companies into bankruptcy, according to one businessman whose company could be severely affected. Specifically, EFCA's binding arbitration provision could lead to newly unionized companies being forced to assume unsupportable new pension liabilities. Thus explained Brett McMahon of the construction firm Miller & Long, speaking at the Heritage Foundation this week.
EFCA supporters have tried to sell the legislation's binding arbitration provision as a guarantee of first contract. In fact, it's a recipe for a government-imposed contract. Under this provision, the company and the newly certified union have 90 days to negotiate a contract.
If they have not reached a contract after that time, they must negotiate for another 30 days, at the end of which period a federally appointed arbitrator may step in and impose a contract. This creates perverse incentives for union negotiators to stall, and thus get a lot of what they want through arbitration.
McMahon describes this 120-day period as "a good time to start liquidating," since newly unionized companies would then be required to enter into union pension funds, most of which are supposed to back multi-employer defined-benefit plans. "The problem's they have no money," he said.
Employers who wish to back out of such plans must pay a withdrawal fee, because, unlike single employer private pension funds, multi-employer funds are insured primarily by the participating employers, not the Pension Benefit Guaranty Corporation (PBGC). This is an especially bad deal for workers, who could face huge losses when their pension funds default. Unlike single employer plans, which the PBGC insures for up to $54,000 per worker per year, the PBGC can only pay out to a miserly $12,870 per year.
For the company, it means millions (in some cases billions) in new liabilities, which must be stated under FASB 157 mark-to-market valuation rules, which, as my colleague John Berlau has noted, force companies to overstate liabilities by making them price assets at what are essentially liquidation prices.
Thus, otherwise healthy companies can suddenly find themselves burdened with pension obligations they cannot support. To illustrate how bad these could get, McMahon cited the example of United Parcel Service, for which the least expensive option was to pay $6.1 billion to get out of the Teamsters' Central States pension fund.
One particularly pernicious reason so many union pension are underfunded is shareholder activism. McMahon cited the example of the California Public Employee Retirement System (CalPERS), which, as a result of eschewing investments in politically incorrect industries such as tobacco, has suffered opportunity losses of 17 to 18 percent.
As Diana Furchtgott-Roth of the Hudson Institute notes in a recent study, "collectively bargained pension plans…perform quite poorly relative to plans sponsored unilaterally by employers for non-union employees."
McMahon rightly characterized shareholder activism as a dereliction of fiduciary duty by pension fund administrators. "Their duties are fiduciary. Their duties are to the people who put their money in their trust," he said. "They don't act properly" by making investment decisions based on political criteria, rather than on which investments can provide the best returns.
Shareholder activists often seek to promote a broad leftist ideological agenda, often in concert with other left-liberal constituencies, as the new Blue-Green Alliance makes clear.
With several major American companies struggling to manage with legacy costs, of which pensions form a significant part, the last thing the nation's economy needs is for more companies to become burdened with such costs. As EFCA supporters promise better pay and benefits for workers if the legislation is passed, workers themselves should consider what EFCA would really deliver.
You can't get better pay and benefits when jobs disappear.