[From the diaries by susanhu. Fascinating and troubling, Joe.] In addition to death and taxes, people growing up on the Saginaw Bay, have to face two other stark realities in life. One is that the area’s economic life blood is tied to the success of General Motors. The other is that, at some point in life, some time must be spent as a sport fisherman.
My stepfather is a master angler. He pulls perch and walleye from the Saginaw Bay at an alarming rate. But he has complained to me recently that the Bay is too crowded. I found this odd, since the population of my hometown has decreased from about 60,000 in the 1960s to somewhere around 30,000 today, this loss being almost directly related to the decline in the automobile industry.
“It’s all the shop rats,” my stepfather told me, referring to G.M. retirees. “They retire, get their boats and spend all their time on the Bay.”
I read a story in today’s New York Times that makes me think that some of those G.M. retirees might be fishing with a little more earnestness in the near future.
According to the Times, G.M.’s pension plan might be less than healthy:
The federal government contends that General Motors’ pension fund is $31 billion short of what it owes its work force, according to closely held government data, a figure in stark contrast to G.M.’s assurances that its pension plans are “fully funded.”
– snip –
[The $31 billion shortfall] was calculated by the Pension Benefit Guaranty Corporation, the federal agency whose job it is to insure employee pensions if a company fails to meet its obligations.
What is the Pension Benefit Guaranty Corporation (PBGC), you ask? You remember them. They are the taxpayer guaranteed government insurance agency that pays the pension obligations of bankrupt corporations. And while the PBGC may be a nice place for corporate obligations to be discharged, it is no great deal for the pensioners. The PBGC does not guarantee all the benefits lost by pensioners, so retirees can take some of the loss on the chin.
You might remember the PBGC from its most recent appearance on the national scene:
But the disparity of such estimates has grown increasingly important as some large companies like United Airlines have gone bankrupt, leaving the [PBGC], which took over United’s pension plan, with far greater unfunded obligations that previously thought.
Not to worry. G.M. would have you believe that this rather gruesome outlook is all a figment of some alarmists accountant’s imagination:
The discrepancy between the government’s and the company’s figures is the result of different assumptions made about how long G.M. would keep operating the pension. The federal guarantor made its estimate on what is called a termination basis – it measured the amount that G.M. would owe its workers if it were to terminate its pension plans immediately. G.M.’s calculation that its pension plan is fully funded assumes that the fund will keep going, rather than being ended.
Since 1994, companies with weak pension funds have been required by law to calculate the value of their pension funds on a termination basis and to send the information to the pension guaranty agency.
– snip –
In response to questions about the [PBGC’s] calculation, G.M. released a statement saying it considered it “unrealistic and not indicative of G.M.’s ability to provide future retirement benefits.”
Whew! I was starting to worry. So this will only be a problem if G.M. was going to consider bankruptcy. I mean, fuck, most individuals can’t even consider bankruptcy anymore, right? And G.M. They are never going under.
While General Motors is not in the same situation as United Airlines, it has been struggling on many fronts, losing $1.4 billion and exhausting more than $3 billion of cash in the first half of this year. Employee health care costs nearly $6 billion a year, more that steel, and that figure continues to rise. G.M.’s bond ratings have been cut to subinvestment grade, or junk, by the leading credit rating services, limiting its flexibility in raising cash.
Then there is trouble with Delphi, a struggling parts supplier that used to be a unit of G.M. and has said it will file for bankruptcy protection by the middle of this month unless it receives a multi-billion dollar bailout from G.M. and the United Auto Workers union.
Ah Delphi. For those of you who do not live in Michigan, and do not follow the business world with the astute attention to detail of a Bonddad, let me give you the local take on Delphi. Delphi is basically a big chunk of G.M. The chunk that made a whole lot of parts for automobiles. It was spun off in 1999 in what many locals view as a union busting effort. Delphi workers do the same jobs that G.M. workers used to do, only at lower rates, and with fewer benefits. And, many in the Delphi plants would tell you, at a far lower quality. Delphi was a G.M. exercise in externalization of costs. If you don’t know about externalization of costs, check out this movie, or for readers, the book.
Anyway, Delphi is about to go belly up. Unless G.M. does a major bailout. So either we stop making parts here once Delphi is gone, or G.M. takes on obligations it cannot really afford. In any event, things just aren’t looking that rosy in the auto industry. Bankruptcy is surely in the offing for Delphi, absent some outside intervention. Is it such a stretch to think it is in the offing for Delphi’s parent company?
On Monday, Fitch Ratings downgraded G.M. further, saying in a statement that among other factors it had “become increasingly concerned with the near-term financial costs that could fall on G.M. as part of Delphi’s restructuring.”
Late this week, the Senate is expected to debate a broad pension bill that would require companies with junk-level credit ratings to start disclosing their pension values on a termination basis. The bill, which has bipartisan support, is part of an effort to tighten the pension funding rules, in hopes of preventing more big failures like the one at United.
Well, I don’t think new accounting rules are going to help avert a United-like collapse at G.M. What they would do, is force G.M.’s $31 billion dollar pension shortfall into the light. It seems to me that debating the amount of G.M.’s pension shortfall is kind of like debating the reality of global warming. You can debate all you want. But at some point in time, someone is going to pay the piper. Or in this case, perhaps, the piper will be partially paid, with the guarantees of the American taxpayer, and a part of the piper’s bill will go unpaid.
In any event, I think those retirees fishing on the Saginaw Bay might have a little more pressure to bring home a good catch day in and day out. The fish they are eating, though likely reared in an environment polluted from the run-off at a nearby Dow Chemical plant, might become a dietary staple should G.M. disappear like the horse and buggy industry. And I feel kind of sorry for them. I know my stepdad isn’t going hungry, unless the fish stocks are just done run out. But I sure hope those shop rats brushed up on their fishing skills while they were working the line.
Crisis started over the last year. The PBGC was 23 billion short according to the PBGC’s latest annual report.
This will only get worse. United dumped its underfunded pension on the agency earlier this year which was the largest default in US history. Delta and Northwest declared bankrputcy earlier this year and they will most likely do the same adding to the agencies financial difficulties.
The PBGC does not insure 100% of pension benefits. As a result, there are a lot of people at United who got screwed when the company unloaded its pension on the organization.
Making the matter even worse is the estimate that there are a total of 450 billion underfunded pensions in the US market.
If the free markets are the salvation of mankind they’re made out to be, I have to ask:
Why are these companies allowed to make promises to their employees, break their promises, and expect the taxpayers to pay for it?
I don’t want the employees to go without pensions, but where is the “free market” solution to all of this?
No free market creditor would say “Sure, dump all those legacy costs on me, bud”. And any free market company whose customer or supplier said “Oh, those promises? I’m not going to fulfill them” would find its ass in court suing for just compensation.
Seems the least the govt should insist upon is a nice fat lump of stock if its going to keep bailing these corporations out. Make the shareholders face a 25%-75% dilution in share value when they ask the govt to come in and clean up the mess made by their “free market” corporation. My guess is then the free markets will find a way to avoid the situation.
Wal-mart financing its healthcare though medicare/medicaid.
Airlines financing their pensions through govt pension bailout.
Wall Street fat, dumb, and happy.
Yeah, this “free market” thing is a neat trick. Get big enough to have political influence, and dump all your risk and much of your costs on the US Govt.
I agree, especially with the apparent government subsidization of certain expensive employee benefits. The companies are clearly benefitting from certain government programs, yet somehow will maintaining their anti-government philosophy.
You make a really excellent point, I think. When a large corporation wants to enforce a bargained promise, American law likes to look to the “the freedom of contract,” a constitutional principle that is making a resurgence with all these conservative judges. You know, very few laws are going to stand in the way of a large corporation taking advantage of you as an individual anymore. For example, the Michigan Supreme Court just eliminated a longstanding common law defense that poor, disadvantaged people could avail themselves of when they were signing unfair contracts with large, well-represented corporations. The defense was to claim an “adhesion contract” which the law has recognized for centuries. Like the clauses in contracts when you make big ticket purchases (like cars, for instance). They are not fair to you. And you don’t have any power to bargain over whether they remain in the contract. If you object, then you don’t buy the car. But our Court, a body elected by insurance companies primarily, just eliminated that defense. Because, frankly, the law no longer protects people. It protects things a lot bigger, and more immortal than people.
But, in circumstances like this pension debacle, or when it comes time to bail out insurance companies who have managed risk poorly, I don’t hear too many laissez-faire economists or legal theorists piping up about “freedom of contract” or “let the market rule.”
Such hypocrisy, too. Conservatives are quick to call out welfare queens as a drag on the budget. And oh so quick to find ways for the law to set up a safety net for the robber barons of our day. I shouldn’t limit it to conservatives, probably. Because I honestly see the Democratic party as only the slightly less corporatist party, these days.
I wanted to get into the whole inequity of the American taxpayer, who will probably be stuck with the tab on some if not all of these unfunded pensions, but a) I didn’t think I had the expertise, and b) thought it was more than I wanted to bite off in one diary. But I’m glad you nailed it.
Also, I just wanted to say, that your economics lessons are very valued here, at least by me. I rarely comment, because I am to economics as Bush is to general intelligence. But I love reading.
I think your diary was great as-is. Its very accessible — I could see it in any daily newspaper I’ve ever read, from small town weekly to big town daily (hint hint).
(not having much to add to a great story, I’ve been more than happy to comment on the questions it raises)
You may also want to know that the guy who was brought in to “rescue” Delphi after the previous management was found cooking the books a la Andersen, is a disciple of W.L.Ross, a vulture capitalist and grave dancer.The new guy’s name is Steve Miller.W.L.Ross became famous by picking up steel companies, declaring bankruptcy and removing their legacy costs (pension and health).When he finished with this and saddled the PBGC with those burdens,he sold the portfolio of steel companies to an Indian billionaire who now owns the largest steel firm in the known universe, Mittal Steel. W.L. Ross has already declared his intent to do the same thing for the auto parts industry by stripping their legacy costs by taking them into bankruptcy.I would say he has got his man, Steve Miller, well positioned to do the job.
See, now this scares me. This is why I like to be informed — but not too informed. That is just unbelievable info you provide. Thanks.
If I remember right, back in 2003, GM had an $18B hole in their pension fund, which they filled by borrowing the money and investing it in the stock market. At the time, they assumed that they could generate returns of 9% annually, but it looks like their investments did not quite work out like they had planned.
To put all this in perspective, General Motor’s total market capitalization (price per share times the number of shares) is only $17.5B, so their pension deficit is bigger than their total net worth. (This still have a lot of cash on hand, so bankruptcy isn’t imminent, but it is a possibility.)
Thanks for the overall worth of GM. I had thought about that while writing the diary, and forgot to mention it (or look up the data). That makes the problem oh so clear.
So (as Ross Perot might say, pointing to a cheesy chart) if I was General Motors, and I had a total net worth of $50,000, then I would owe this underfunded pension plan $100,000, right?
Yeah. Makes bankruptcy seem like more of a possiblity to me. Especially with the popularity of $40,000 big-ass pick-up trucks about to tank. I always get so sick of goopers driving these fucking trucks to the convenience store. Well, welcome to gas price heaven. I am thinking GM is in a whole lot of trouble here.
Hi BostonJoe, good to see you on the front page.
I hardly know what to say about the demise of company funded pensions in America. It is just one more indication of the sorry state of affairs that has been allowed and encouraged on our corporatist controlled planet. Thanks for bringing the latest pending example of screwing the little guy to our attention.
For years they have been promoting ever more gas-guzzling cars–one could argue they have gotten away with it–but this year gas prices begin their inevitable, relentless climb, and GM has no fuel-efficient cars to fall back on.
They’re finished. Within the year 2006.
Those pensions are so gone.
Welcome to the world of free trade and the 401k.
The post war Giants, GM, Ford, Chrysler, Steel Companies, etc. and their unions pioneered the idea of retirement, health coverage, and paid very good wages to both blue collar and white collar employees. Unfortunatly this has put them at a severe disadvantage today.
Look at their competition, Toyota and Honda, Kia, Nissan, Hyundai etc.. These companies have virtually no pension costs, no retiree medical costs, in most of their markets they have little or no employee health care costs. What they offer today’s employees is not a pension, it is a self funded 401k program with no provision for retiree medical.
Yes, GM and Ford’s pensions are probably underfunded, primarily because there have been no good returns in the financial markets for the past 5-6 years. The Dow is lower now than in 2000, interest rates on bonds are falling behind cost of living increases in health care. Amazingly enough, pensioners are living longer and many more are coming to retirement age.
Yes, GM built trucks and SUV’s. Why not, it was a rational business decision, build a full size truck or SUV, bring in 8k+ in margin, build a car for more cost, bring in 1-2k in margin. Which would you pick? This is why, Nissan, Toyota and Honda are now building trucks and SUV’s. Does GM have cars, yes, of course they do, but the common wisdom of the market, the media and consumers, is that they suck so why even try one.
Shit, even the Detroit papers gush about every new toyota or honda, and rip apart any product from the big 3.
To equate, GM to Enron is an unfair comparision. Enron criminally cooked their books in an attempt to sell a flawed business model, it was fraud from day one. GM on the other hand has been a resonably good corporate citizen. It has provided hundreds of thousands of well paying jobs with excellent health care coverage and pensions and really built the middle class in America. It has not been without its flaws and the gains were not achieved without a fight, but it is not in the same mold as Enron.
The Delphi spin off, and the Visteon case at Ford, were largely attempts to retain jobs and remain competetive in the global marketplace. Perhaps misguided, but not criminal, and not purely union busting. If they had wanted to bust the unions, they would have just shut down all of their parts making businesses and bought from outsource suppliers with far lower labor costs just like Toyota and Honda. Instead they have tried to set up the parts side of the business as independent producers, free to supply parts to other companies. To some extent this has worked, however to truly compete their wage structure is too high and they are burdened by pesions and retiree health care costs which their competitors have never provided.
Look closly at the companies we trumpet as successes and cheer for while we rip apart their older competitors. We have become so brainwashed by the corporate media and the Wall Street definition of success that we actually root for companies that pay employees less for the same job. To a large extent this is an intended result of the 401k system. We have all become stockholders, desperate for high returns, usually to the detriment of our fellow Americans.
Oh yeah, to this point the PBGC is funded by fees from the companies with covered pensions, not the taxpayers. This may change as the shortfalls become greater, but it is not necessarily the fault of the companies with covered pensions. That being said, I do agree that the PBGC should get some stake in any company which dumped its pensions in a bankruptcy reorganization and emerged.
You make some excellent points, I think. The Enron comparison is certainly a bit over the top. I was being sensationalist, intentionally so. I think there is a big difference between GM and Enron.
I disagree a bit about the purpose of Visteon and Delphi spin-offs. I think that it was the only way for Ford and GM, respectively, to overcome the UAW. The automakers could not simply close plants and outsource everything. Visteon and Delphi were negotiated solutions between labor and corporations. I think, failed negotiated solutions. But I am very glad that labor had some power in these situations.
You make great points about America’s lack of competitiveness globally, in my view. I would attribute the bulk of that to an inane domestic policy. While many governments in the world have focused on taking care of people (health care, education, etc.) this has allowed their companies to gain a competitive advantage. I think it is one of the primary failures in current conservative ideology. Our government has failed to provide the basics, which would then allow our industries to be more competitive. That is my view anyway.
Also agree with you that we have been far to driven as a society toward the idea that “profit is all” in the 401K society you describe. I think a whole lot of moderation along these lines in public policy would be warranted.
As for the PBGC, it is a government guaranteed insurance program. While premiums have paid for benefits in the past, they will not pay for them when the program actually has to undertake to repay a portion of the money that has been promised to workers. I think you recognize this. That guarantee will fall to the taxpayer. That’s what is making the Senate nervous. They know the program has been mismanaged, like most insurance portfolios. They have undercharged on premiums in the face of known risks. A form of corporate welfare, backed by taxpayers promise to pay. And we will pay. At least that’s what my crystal ball tells me.
Thanks for taking the time to post such a response.
I agree that GM is the exact opposite of Enron in that it is being penalized for being good to its workers over the long haul.When times were good, GM took good care of its workers.It was simply blindsided by the German and Japanese auto invasion and let its quality erode.The perception of lower quality has haunted GM and made it impossible for it to sell its cars at anywhere near the quantities or the margins the Japanese enjoy, forcing it to seek refuge in the larger gas guzzlers.
What was once a trickle of problems that were manageable, has turned into a flood aided and abetted by an ignoramus President who launched an invasion that has come to bite one of America’s premier brands.
I believe that if GM bites the dust America will not be the same again.The old swagger will be gone.It will be the equivalent of our dropping the Bomb on Hiroshima.Come to think of it, that analogy may not be too farfetched.
Yeah. The Enron thing. Sensationalistic Title. But I agree with you. This is a different scandal altogether.
I agree with you that the passing of GM is going to mean a different era in America. I don’t mourn it as much as you do.
Bottom line. My state has gotten rich for a lot of years by producing a product. One of the chief results of building that product has been to drive the process of global warming. The two-cars in every garage society that we’ve all become accustomed to has to change. Either the cars get cleaner, or we have to fall back to some lesser technological and sustainable level. I’m very sad that the leadership of GM didn’t have the foresight to anticipate these changes, and grow with them. Or the leadership of our country for that matter.
Thanks for the response.
Our undoing is going to be swifter than I feared led as we are by a fool who does not even realize that his untimely invasion of a country is precipitating a chain reaction of massive proportions.It is bankrupting the country and making it impossible for corporations like GM to get back on their feet.This does not even take into account the human suffering he has let loose on both Iraqis and Americans.
I feel sorry for GM only because it is a corporation worth saving for the generosity that has propelled many millions toward middle class status in the post war era.I am probably one of the few that thinks like a socialist even though I am a capitalist at heart.I mourn the passing of a benevolent era in American history that moved a vast number of people into affluence,that included my own immigrant parents.I wonder what would take its place to make it possible for my children and grandchildren to retain their economic status.
May be as a privileged minority in the world we should accept the inevitable and change our profligate ways as countries like India and China replace us as the emerging superpowers.Very sad times for an old man like me to see the passing of an era right in front of my eyes.And the big fools in Washington and Detroit appear to be oblivious to the writing on the wall.
The way you describe the way you feel for you offspring. I am getting on middle age, and feel for mine too. One thought that comforts me sometimes (though not always) — I imagine our country after the fall. When we get back to the only truly important things. Family. Healthy food. A warm hearth. I think many would sacrifice their SUVs and McMansions and big screens, for a life of sustainable integrity. It’s going to be a hard, hard transition for a lot of us (myself included). But on my best days, I imagine the best of mankind will make it work. And then on the darker days, well — I can see a pretty bad place to where we may be headed.
Nice e-talking to you though. Good to know we aren’t alone. In thinking about the kind of apocalypse that is coming.