One of the legacy costs that GM was not able to reduce in the bailout was pension costs, a whopping $128b obligation as of the end of 2010. And though the plan is “only” underfunded by $10.8b at the end of June according to GM, Kenneth Hackel, president of CT Capital LLC (and author of two textbooks on valuing securities) recently told Bloomberg
The financial risk because of [GM’s pension liability] is higher than people understand. The cold reality is if you used a conservative discount rate and you wanted to close out the plans, you would have to raise about $35 billion.
With GM’s market cap sagging into the low-$30b range (currently around $34b), the risk of pension liabilities growing larger than GM’s market capitalization is very real. And as lower interest rates and a weak stock market reduce pension fund returns, the obligations grow, in turn putting pressure on GM’s stock price. And it’s not like nobody saw this coming: a GAO report released in April 2010 issued dire warnings about the state of GM and Chrysler’s pension obligations. Now, according to the ace reporters at Reuters, GM and the UAW have hashed out a buyout deal giving workers the option of being bought out of their pensions. Which has us dying to know: what’s a UAW pension worth in cash?
Details like buyout amounts and the size of dent they’ll leave on “Fortress Balance Sheet” are not specified, as Reuters has only a negotiating letter to go on. The quote in question is posted in its entirety at the factoryrat.com forum, and reads
The parties further discussed the possibility of amending the Plan to provide additional options for certain current retirees that would help GM manage its pension risk and
benefit such retirees that voluntarily agree to participate. To this end, the parties agreed that the National Parties may mutually agree during the term of this Agreement to
amend the Plan to add retirement options for some or all existing retirees that help GM reduce the volatility and risk related to the Plan and benefit existing retirees by providing
an additional voluntary option.
But the union dissidents who leaked the letter seem to be as angry about the possibility of a voluntary buyout offer as mistrustful of any agreement that could be reached without a vote by the union membership. In the words of Greg Shotwell,
the UAW colluded with the company to amend the plan after ratification to reduce the cost for GM… GM not only underfunded the pension, GM took lump sum bonuses and retirement incentives from the pension fund. Now GM and the UAW conspire to further drain the pension by offering retirees buyouts from the pension. Assuming that buyouts would come from the pension, a mass exodus for the buyout door would further erode the pension plan’s feasibility.
LaborNotes puts the paranoia into perspective
Gary Walkowicz, a bargaining committeeperson at Ford, said workers need to look for hidden concessions or loopholes not explained in the union’s “Highlights” handout.
At GM in 2009, for example, a seemingly harmless clause said the parties “will work together…to arrive at innovative ways to staff [small car] operations.” That language was used to justify slashing wages at a Michigan small-car plant, where 40 percent of the workforce was placed on permanent second-tier wages—without a vote.
Though a voluntary buyout seems like the most innocuous option, there are clearly downsides… and by not publicizing the agreement, the UAW is fanning the flames of dissent. In response to the union’s ubiquitous “Contract Highlights” pamphlets, the factoryrat.com forum has created its own Contract Lowlights pamphlet [PDF], detailing the major grievances of mainstream UAW dissent. It can be easy to only look at a business from 40,000 feet, especially on the internet, so reading about the view from the ground level is definitely worth a few minutes of your time. Meanwhile, bailout-strengthened “Fortress Balance Sheet” and vague agreement notwithstanding, GM’s pension situation still looks to be stuck between a rock and a hard place.