Pensions weigh down automakers — and state

June 28, 2012
Pensions weigh down automakers — and state
Back when bankruptcy was considered a distant theoretical possibility for Detroit’s automakers and their promised pension payouts sacrosanct, Bill Ford Jr. frequently gigged his counterparts at General Motors Corp.

One line favored by the executive chairman of Ford Motor Co., usually delivered in the spirit of his trademark ribbing? That the world’s largest automaker was nothing more than a pension fund that happened to build cars and trucks on the side.

Turns out he was right — and a whole lot more. Because the dirty little secret of the promises undergirding the pensions expected by tens of thousands of retirees from the automakers, from municipalities and counties struggling to meet their obligations, is that times change, liabilities expand exponentially and the unthinkable becomes reality.

The struggle to match pension promises to millions of retirees amid times of soaring debt, intensifying competition, flatlining capital markets and, in the public sector, declining revenue is shaping up to be the inter-generational battle of our age. Arguably nowhere will that fight be more concentrated between pensioners and corporate executives, taxpayers and public-sector retirees, than here in southeast Michigan.

Everything has changed.

GM goes bankrupt and, with the help of American taxpayers, emerges with a lean balance sheet — not counting the $134 billion in pension liabilities to salaried and hourly employees around the world. Chrysler Group LLC goes bankrupt. Delphi Corp., the former GM parts unit, goes bankrupt, emerges and dumps its salaried pension plan on the quasi-governmental Pension Benefit Guaranty Corp., shafting thousands of retirees.

Even pensioners for Ford, who saw the Blue Oval stumble toward collapse before new leadership managed to avoid bankruptcy, now are faced with the kind of pension choices certain to generate heat, light, possible boycotts and a lot of potential lawsuits — proving that there are strict limits to the gauzy notion of the extended Ford family.

Ford is offering salaried pensioners a buyout or the option to stay within the Ford plan and expose themselves to all the risk, considering the past six years, that could imply. GM is offering 42,000 salaried retirees a choice between a lump-sum pension buyout or payments from an annuity administered by Prudential Insurance Co. in a bid to off-load $26 billion of its $36 billion salaried pension liability.

Automakers can generate cash by selling more cars and trucks, but public entities generally cannot without raising taxes or cutting services. Many cities, counties and school districts, technically barred by the state constitution from reneging on pension obligations, increasingly struggle to meet those obligations and provide decent services to taxpayers in an unsustainable balancing act.

This week, the city of Stockton, Calif., moved to become the largest city in the nation to file Chapter 9 bankruptcy because of the dismal California economy, punishing pension costs and other contractual obligations, the Associated Press reported. Wayne County’s pension fund is only 50 percent funded, and pension and health care obligations to Detroit’s public-sector retirees are north of $12 billion.

Those trends will not be easily reversed in a slow-growth economy plagued by global instability and weak leadership. Nor will public- and private-sector retirees idly accept any economic rationale that changes the rules after the game has been played.

That wasn’t part of the deal, they say, accurately. They planned their lives around the promise, however hollow it actually may have been. They looked forward to it, assumed it would be there, bargained that the trade-off for a working life of devotion would be repaid after the working was done.

That it may not be, at least not in the form they’d long expected, amounts to a maddening turn of betrayal that should be understandable on a human level. As easy as it may be for those outside the system looking in to ridicule an apparent sense of entitlement, the truth is that those folks and many before them were told repeatedly that they were entitled.

That was part of the deal — until it wasn’t. Retirees didn’t make the promises; union bargainers and company management did. Most retirees didn’t fail, at some grand strategic level, to see the changing competitive landscape or to understand clearly that exponentially expanding obligations would become impossible to honor; union bargainers and company management did.

In other words, people in authority on both sides of the tables public and private (willfully?) deceived themselves and the people who lived by their decisions. They made short-term decisions that could not be justified, financed or sustained over the medium and long term unless things stayed the same, which they seldom do.

On multiple occasions since 1995, GM pumped a total of $34 billion in cash and stock into its pension plans, spokesman Jim Cain said Wednesday. They include a $10.3 billion contribution in 1995; some $5 billion in Hughes Electronics tracking stock in 2000 and $3 billion more after the sale of Hughes in 2003; more than $13 billion in proceeds from a $17.6 billion bond issue, the largest ever at the time; and $2 billion in cash and stock over the last two years.

It wasn’t enough, and GM would need to pump another $25 billion into its pension plans — salaried, hourly and those outside the United States — to reach the elusive goal of being fully funded. Until they aren’t and the process begins again, which is why GM and Ford are trying to change the rules and sooner or later the public sector will have to try, too.

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