GM: More Troubles Coming Down the Road

The Government Accountability Office has a report out today on the unfunded liabilities of the GM and Chrysler pensions.  The most controversial aspect of the bankruptcy reorganizations orchestrated by the Obama administration is that the companies reaffirmed their obligation to their retirement plans, which are often terminated when a company undergoes a bankruptcy.

For the most part, the terms of the restructuring called for current levels of employee benefits-- including pension benefits--to remain in place for at least 1 year. Specifically, the master sale agreements for both companies stipulate that, in general, union employees are to be provided employee benefits that are "not less favorable in the aggregate" than the benefits provided under the employee pension and welfare benefit plans, and contracts and arrangements currently in place; nonunion employees are to receive current levels of compensation and benefits until at least 1 year after the date the agreements are signed.

 A lot of people--including me--regarded this as a gift to the UAW, at the expense not only of the bondholders who had lent the firms money, but also of the company's future chances at profitability.

The GAO report offers a rather dour picture of the plans' funding status:

Nevertheless, according to GM's projections utilizing valuation methods defined under PPA, large cash contributions may be needed to meet its funding obligations to its U.S. pension plans beginning in 2013 (see fig. 4). GM officials told us that cash contributions are not expected to be needed for the next few years because it has a relatively large "credit balance" based on contributions made in prior years that can be used to offset cash contribution requirements that would otherwise be required until that time.47 As of October 1, 2008, GM had about $36 billion of credit balance in its hourly plan and about $10 billion in its salaried plan. However, once these credit balances are exhausted, GM projects that the contributions needed to meet its defined benefit plan funding requirements will total about $12.3 billion for the years 2013 and 2014, and additional contributions may be required thereafter. In its 2008 year-end report, GM noted that due to significant declines in financial markets and deterioration in the value of its plans' assets, as well as the coverage of additional retirees, including Delphi employees, it may need to make significant contributions to its U.S. plans in 2013 and beyond.

Similarly, Chrysler's management expects that contributions to meet minimum funding requirements may begin to increase significantly in 2013, but are projected to be relatively minimal until then (see fig. 5). Chrysler, like GM, intends to use credit balances to offset the contribution requirements for some of its plans. As of end-of-year 2009, Chrysler had credit balances of about $3.5 billion for its UAW Pension Plan and about $1.9 billion across the other eight plans for which it provided funding information. In addition, Chrysler also has $600 million in payments from Daimler to help meet its funding requirements over the next few years.49 Nevertheless, Chrysler's funding projections reveal that about $3.4 billion.

As Pete Davis notes:

GAO notes the complicated role played by the federal government, which guaranteed those pensions and now owns GM and Chrysler. GM and Chrysler bought union peace by overpromising pension benefits, knowing that the taxpayers stood behind those promises. Now what should the government do, take it out on the auto workers or hit the taxpayers to benefit the auto workers? Your elected officials will have little difficulty making this decision, invariably hitting future taxpayers to benefit favored constituents, like the auto workers.

Too true, but how likely is that?  There are a lot of scary big numbers floating around about the potential unfunded liabilities of the Pension Benefit Guarantee Corp., which guarantees private sector pensions.  They are indeed huge, and I think it more likely than not that the PBGC will eventually need a bailout.  But not for the total amount of its potential unfunded liabilities; many of those companies will keep operating.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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