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For Union HVAC Contractors: The Truth About "Unfunded Liabilities"

May 1, 2013
The unfunded liability in commercial HVAC is viewed as a debt owed by the contractor, even if the business is healthy and will be in business for decades. If that contractor sells his business or becomes non-union, he must pay his company proportionate share of unfunded liability.

I had breakfast last month with a commercial contractor friend whose union company focuses on controls and the hydronics balancing market. We talked about many topics, but the one that really made me sit up was the issue of unfunded liabilities — something that is a big issue for unionized contracting firms across the U.S.

For those who don’t know, the phrase, “unfunded liabilities,” refers to a liability or other expense that doesn’t have savings or investments set aside to pay it. In other words, the party responsible for paying an unfunded liability pays for it out of current income or by borrowing it from someone or someplace else. An example of this issue that impacts all Americans is the Social Security system.

There is a risk in this because a payee may not receive that which he or she is entitled to if the payer goes through a difficult financial period. It also increases the payer’s current liabilities.

In the mechanical systems contracting world, unfunded liability exists in union retirement plans. According to the Mechanical Contractors Association of America (MCAA), this is a nationwide problem where there isn’t enough money in the plan to provide all current retireees and journeymen the pension benefits they are entitled to by the plan.

“The unfunded liability is viewed as debt owed by the contractor, even if the contractor is healthy and will be in business for decades to come,” according to the MCA Kansas City website. “If a contractor withdraws from the plan and becomes non-union, the firm is required to pay its proportionate share of the unfunded liability.”

Ladies and gentlemen, this will be a significant amount of money. It is, in effect, an albatross around the contractor’s neck.

Oh, one other interesting point: if a contractor in the union pension plan goes out of business, his or her share of the unfunded liability gets passed on to the remaining contracting firms participating in the plan. That means they have to increase their costs. As more companies go out of business, those costs spiral upward and, according to the MCAA, could make mechanical contractors unable to compete for new jobs.

As companies go out of business and more people retire, there are fewer people paying into the system. At some point, the money simply runs out. Unfortunately, today there are more union workers who are north of 40 years old than who are under 40.

Some other statisics: 76% of mechanical contractor owners 50 or older plan to retire in the next 10 years and 48% of them are currently working on succession plans. Baby boomers constitute 37% of today’s workforce.

Do you see the problem?

Last year, the MCAA published a comprehensive Inventory of Construction Industry Pension Plans — 2012 Edition. In the forward to this report, MCAA President Mac Lynch said its purpose is to “summarize and analyze key trends at work impacting our [pension} plans over the past decade. By taking a close look at this compendium of information, we can better understand how these construction industry plans have evolved and where they may be headed.”

That’s great. But to me the solution is fairly straightforward. Either bring new people into the industry, or change the plans. Both are easier said than done. The HVAC industry has been fairly unsuccessful at attracting young people into our technical and management positions. 

Revamping pension funds to be more flexibile in an age of economic volatility and employment uncertainty is something already underway, but it needs to be done fairly and in a win-win-win scenerio for contractor owners, retirees, and the unions. MCAA and other trade associations have been hard at work in this problem for years.

The truth about unfunded liabilities is that it’s a giant problem for our entire nation in general, for the HVAC industry in particular. And it needs to be solved sooner rather than later.

What are your thoughts on this? Please comment below or tweet me or email me.