To address the need for improved funding, the Pension Protection Act of 2006 (PPA) included new provisions designed to compel multiemployer plans in poor financial shape to take action to improve their long-term financial condition. The law established two categories of troubled plans—endangered status (commonly referred to as “yellow zone”, which includes an additional subcategory of “seriously endangered”) and a more serious critical status (commonly referred to as “red zone”). PPA further requires plans in both categories to develop strategies that include contribution increases, benefit reductions, or both, designed to improve their financial condition. These strategies must generally be adopted through the collective bargaining process, and plans are required to periodically report on progress made in implementing them. Because of the greater severity of critical status plans’ funding condition, such plans have an exception to ERISA’s anti-cutback rule in that they may reduce or eliminate certain so-called “adjustable benefits” such as early retirement benefits, post-retirement death benefits, and disability benefits for participants not yet retired. For example, if an approved rehabilitation plan eliminated an early retirement benefit, appropriate notice was provided, and the reduction is agreed to in collective bargaining, then participants not yet retired would no longer be able to receive early retirement benefits. PPA funding requirements took effect in 2008, just as the nation was entering a severe economic crisis. The dramatic decline in the value of stocks and other financial assets in 2008 and the accompanying recession broadly weakened multiemployer plans’ financial health. In response, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) and, later, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA) to provide funding relief to help plans navigate the difficult economic environment. For example, WRERA relief measures allowed multiemployer plans to temporarily freeze their funding status, and extended the timeframe for plans’ funding improvement or rehabilitation plans from 10 to 13 years. Generally, PRA allows a plan that meets certain solvency requirements to amortize investment losses from the 2008 market collapse over 29 years rather than 15 years, and to recognize such losses in the actuarial value of assets over 10 years instead of 5, so the negative effects of the market decline would be spread out over a longer period. Overall, since 2009, the funding status of multiemployer plans has improved, but a sizeable number of plans are still critical or endangered. According to plan-reported data, while the funding status of plans has not returned to 2008 levels, the percentage of plans in critical status declined from 34 percent in 2009 to 24 percent in 2011. The percentage of plans in endangered status declined to a greater extent, from 34 percent in 2009 to 16 percent in 2011. However, despite these improvements, 40 percent of plans have not emerged from critical or endangered status. In addition to the difficulties many multiemployer plans face, the challenges that PBGC faces have led us to designate its insurance programs as a “high-risk” federal program. As we noted earlier this year, because of long term challenges related to PBGC’s funding structure, the agency’s financial future is uncertain. We noted that weaknesses in its revenue streams continue to undermine the agency’s long-term financial stability. According to a 2011 survey of 107 critical status plans conducted by the Segal Company, the large majority of critical status plans have developed rehabilitation plans that both increase required employer contributions and reduce participant benefits in an effort to improve plans’ financial positions. Plan officials explained that these changes can have a range of effects and, in some cases, may severely affect employers and participants. While most critical status plans expect to recover from their current funding difficulties, about 25 percent do not and instead seek to delay eventual insolvency. The 2011 survey showed the large majority of critical status plans surveyed developed rehabilitation plans that included a combination of both contribution increases and benefit reductions to be implemented in the coming years. Of plans surveyed, 81 proposed increases in employer contributions and reductions to participant benefits, while 14 proposed contribution increases only and 7 proposed benefit reductions only. The magnitude of contribution increases and benefit reductions varied widely among plans. As Figure 1 illustrates, the rehabilitation plans of 7 critical status plans proposed no contribution increases, while those of 28 plans proposed first year increases of 20 percent or more. It is important to note that these data tell only a part of the story because some rehabilitation plans call for additional contribution increases in subsequent years. The vast majority of multiemployer plans surveyed developed rehabilitation plans that reduced benefit accruals and/or adjustable benefits in an effort to improve the financial condition of the plan. Thirty- two of the 107 multiemployer plans surveyed proposed, in their rehabilitation plans, to reduce accrual rates, and of these, the large majority proposed to cut accruals by more than 20 percent. Fifteen plans proposed to cut accruals by 40 percent or more. This doesn’t reflect all the changes plans made, because some plans reduced accrual rates prior to development of the rehabilitation plans. Furthermore, a majority of plans—88 out of 107—proposed to reduce one or more adjustable benefits. Typically, these reductions will apply to both active and vested inactive participants, but some plans applied them to only one participant group. While the data are informative, they do not get to the heart of the issue— what impact will these changes have on employers, participants, and plans themselves? As might be expected, the impacts on employers and participants will vary among plans. In some cases, employers and participants will be able to bear these changes without undue hardship. In other cases, the impacts were expected to be significant. For example, plan officials said employers outside the plan generally do not offer comparable pension or health insurance benefits, and increases in contributions puts contributing employers at a significant competitive disadvantage. Similarly, an official of a long-distance trucking firm said high contribution rates have greatly affected the firm’s cost structure and damaged its competitive position. In other cases, plans may have been unable to increase employer contribution rates as much as needed. For example, our review of one rehabilitation plan revealed that a 15 percent contribution increase resulted from a difficult balance between, among other factors, adequately funding the plan and avoiding excessive strain on contributing employers. According to the plan administrator, plan trustees determined many employers were in financial distress and a significant increase in contributions would likely lead to business failures or numerous withdrawals. Subsequently, five employers withdrew from the plan after the rehabilitation plan was adopted. Similarly, the reduction or elimination of adjustable benefits were significant and controversial for participants in some cases. Officials of several plans stated the reduction or elimination of early retirement benefits for participants working in physically demanding occupations would be particularly difficult for some workers. At the same time, some plans also eliminated or imposed limitations on disability retirement so workers who have developed physical limitations will have to either continue to work or retire on substantially reduced benefits. Importantly, while most plans expected to emerge from critical status eventually, a significant number did not and instead project eventual insolvency. According to the Segal survey, of 107 critical status plans, 67 expect to emerge from critical status within the statutory timeframes of 10 to 13 years, and 12 others in an extended rehabilitation period (See figure 2). However, 28 of the plans had determined that no realistic combination of contribution increases and benefit reductions would enable them to emerge from critical status, and their best approach is to forestall insolvency for as long as possible. Among these plans, the average number of years to expected insolvency was 12, with some expecting insolvency in less than 5 years and others not for more than 30 years. The majority of these plans expected insolvency in 15 or fewer years. Our contacts with individual plans provide insight into the stark choices faced by these plans. Four of the eight critical status plans we contacted expected to eventually become insolvent, and officials explained that their analyses concluded that no feasible combination of contribution increases or benefit reductions could lead them back to a healthy level of funding. Several indicated that efforts to do so would likely accelerate the demise of the plan. For example, plan documents noted that the actuary of one plan determined the plan would be able to emerge from critical status if contribution rates were increased by 24 percent annually for each of the next 10 years—a total increase of more than 850 percent. The trustees of this plan determined such a proposal would be rejected by both employers and workers, and would likely lead to negotiated withdrawals by employers. This, in turn, could result in insolvency of the plan, possibly as early as 2019. Instead, this plan opted for measures that officials believed are most likely to result in continued participation in the plan, which nonetheless are projected to forestall insolvency until about 2029. Similarly, according to officials of another plan, plan trustees concluded that the contribution increases necessary to avoid insolvency were more than employers in that geographic area could bear. In addition, the plan considered the impact of funding the necessary contribution increases through reductions to base pay. The plan found this infeasible because of the rising cost of living facing employees and their families. Consequently, the plan trustees adopted a rehabilitation plan forestalling insolvency until about 2025. In recent years, the total amount of financial assistance PBGC has provided to insolvent plans has increased markedly. From fiscal years 2006 to 2012, the number of plans needing PBGC’s help has increased significantly, from 33 plans to 49 plans. For fiscal year 2012 alone, PBGC provided $95 million in total financial assistance to help 49 insolvent plans provide benefits to about 51,000 retirees. Loans comprise the majority of financial assistance that PBGC has provided to insolvent multiemployer plans. Based on available data from fiscal year 2011, loans totaled $85.5 million and accounted for nearly 75 percent of total financial assistance.