Monday, September 14, 2009

General Motors

For many years I have watched compliant politicians bow to the unions, often in collusion with business, and the result is a bigger and bigger pile of unfunded liabilities. The most notorious side-effect of that deference is the failure of General Motors.

Like many of the current Federal benefit programs the United Auto Workers used a young workforce to fund ever increasing benefits. But as the work force aged and more and more retirees began to draw on the promised benefits, General Motors found itself in trouble. Its pension fund failed to earn enough to balance what the company was paying out in benefits while the ratio of workers paying in to retirees taking out got smaller. Whether it was poor money management, over-exuberant forecasting of returns, or endless faith in the generosity of a government hungry for union votes, GM repeatedly came off the tracks, only to be reset by bailouts.

A recent history of quick-fix GM bailouts begins in 2001. Just as consumers peeked out their heads from the detritus of the imploded bubble the far more terrible collapse of the world trade center froze consumer spending. With car sales stalled completely General Motors found itself in dire straits. Unfunded pension fund liabilities threatened to topple the automotive giant. But as usual the government stepped up with tax incentives on big cars and trucks while GM unveiled its patriot-themed campaign to “keep America rolling” with 0% financing for 5 years on all new vehicle purchases. Hummer sales soared but the underlying problems at GM continued, ignored for the time being as the new SUVs’ revving engines drowned out any cries for real financial repairs.

One of those necessary repairs was a revamping of unrealistic assumptions on the rate of return earned in the pension fund itself. A New York Times article published August 25, 2002 said in part, (1)

“Lately, the focus is on GM’s pension fund, which totaled $80 billion two years ago but has dropped to $67 billion. Although the company's current pension payouts are not exceeding pension fund earnings, the market's volatility has destroyed GM’s assumption that it would earn a net return of 10 percent a year on the fund assets. Mr. Devine said GM was ready to transfer cash to fund some of the future liability at year-end, but he contends that cannot be done all at once without endangering GM’s product spending. Yet until the shortfall for future liability is funded, he acknowledged, the issue will not go away.

“'It doesn't get off the table until it gets off the table,' he said.”

At the end of 2002 GM’s unfunded pension obligations stood at $19.3 billion. In an attempt to fix the shortfall GM issued $13.2 billion of a new type of bond complete with Government subsidy (2). The proceeds were contributed to the fund along with a $4.26 billion “tax shield” created by that bond issuance. In theory GM should have been close to fully funded. Yet when it collapsed (again, and this time for real) in 2009, the unfunded pension liabilities were $13.5 billion. So from the time the quick-fix financing scheme was cooked up in 2002 to the final GM collapse in 2009, the unfunded liability in the pension fund grew by 50%. And GM became, as one commentator put it, “a benefits company funded by an auto company.”

The taxpayer is now invested in GM to the tune of $80 billion and growing. And the history of government bailouts to GM continues: we just added $3 billion more in taxpayer money to bribe individuals to buy cars through the “cash for clunkers” program!

But who is now responsible for the UAW pension fund? Normally the Pension Benefit Guaranty Corporation, an insurance company run by the U. S. Government similar to the FDIC, would step in and assume those liabilities. So the theory is by bankrupting GM and letting the emergent company continue to operate the pension fund the PBGC would avoid taking that loss. What happens if the new GM fails? It turns out that the PBGC and the American Taxpayer are on the hook, once again, for the benefits of the UAW. But the PBGC itself is just one more, all together now, “unfunded liability” of the US Treasury. The PBGC was formed to insure the pension funds of participating corporations. In concept it was supposed to be self-funding. In reality it has been in deficit every year since 2002. As Mr. Devine said earlier, “It doesn’t get off the table until it gets off the table.”

My next article will start to look at all the various insurance companies run by the Federal Government beginning with the Pension Benefits Guarantee Corporation.

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