Congress, FASB, G.M., and Other Corps Underestimate Our Intelligence

An article in the October 3 issue of the New York Times titled, G.M. and a U.S. Agency See Pensions in Different Lights , discusses how Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures employee pensions when companies can’t meet their obligations, contends that General Motors (GM) is $31 billion short in its pension fund while GM claims that its pensions are “fully funded.” The crux of the disagreement is that there are two legally acceptable ways to account for pension funding. PBGC measures the amount (in pension benefits) that GM would owe if its pension plans were terminated immediately (i.e. if GM were to go bankrupt tomorrow), while GM’s calculations are based on the assumption that business will continue indefinitely. This is all according to “closely held government data,” according to the article.

Now, get this… The article states, “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 [PBGC]. But Congress also enacted a measure keeping [the same] information secret, in response to the stated concerns of companies, who argued that the information could be misconstrued if shared with the public. Uhhh. Doesn't this translate into, "The public is restricted from viable information on which it might base its investing decisions..." Well, although I don’t think GM’s pension fund could be considered ‘weak,’ the article states that GM’s “estimate of its pensions on a termination basis continues to be secret.” PBGC’s estimate was released only in response to a “request under the Freedom of Information Act.” Oh, come on! Are these the lengths to which stakeholders must go to get relevant information?

The article further states, “Business groups say that reporting pension values on a termination basis would needlessly alarm and confuse employees.” Yeah, right. If I were a GM employee, I would construe that statement as a direct insult to my intelligence. Even the FASB, in response to concerns from financial statement users who would prefer that companies were required to include information on pension funding on a termination basis, decided that the requirement would be too confusing and “would not convey useful information about funding.” See FASB Statement No. 132 (revised Dec. 2003), page 20, paragraph A22. As an example, even in its third year of bankruptcy, United Airlines continued to calculate its pension funding on a continuing basis, under which it reported a $6 billion shortfall at the end of 2004. When the PBGC recalculated the funding, United’s shortage was $10.2 billion. Yes, 10 minus 6 equals 4, but we're talking about BILLIONS of dollars.

So, shall we assume that GM will be around forever, anyway, so why worry? NOT! Remember death and taxes? Today, Delphi, the nations largest auto parts supplier who, until 1999, was owned by GM, filed for bankruptcy court protection - "the largest filing ever in the domestic auto industry," according to a New York Times article. It appears that when GM spun off Delphi, they agreed to pay healthcare and pension benefits for Delphi retirees in the event that Delphi filed for bankruptcy within eight years. Hmmm... 99, 2000, 01, 02, 03, 04, 05 - Oops! Two years shy. AND, when the PBGC calculated Delphi's pension fund - guess what? - the company is about $11 billion short of its pension obligations. $11 BILLION!! Thats a TON of money! Financial analysts project that this could cost GM about $6 billion. By the way, GM is Delphi's largest customer. Ahh, what a tangled web we weave. Besides supporting retirees, healthcare costs have become increasingly burdensome for the auto industry as well, costing GM about $1,500 for every vehicle it produces in the U.S.

*Of note* - the first article mentioned here states that there is a bill "now moving through the senate," pushing for making the PBGC's method of pension fund calcultion the 'favored' method, unless FASB beats them to it with a new accounting standard. My personal opinion is that the FASB failed by not already issuing a standard that requires companies to disclose PBGC valuations in their annual reports.