Strings on auto loans pose risk for GM retirees

Analysts question the plan of supporting retiree health care with GM stock.

Detroit Free Press

DETROIT — Retirement health care for as many as three-quarters of a million Americans will be placed at high risk if conditions proposed as part of auto rescue loans are enforced by the incoming Congress and Obama administration, labor experts say.

At issue is a condition of the federal loans that calls for General Motors Corp. and Chrysler LLC to use company stock or the equivalent to pay half, or $10.5 billion, of the cash owed to a union retiree health-care trust.

“It’s as if we, as a nation, learned nothing from Enron, essentially risking the health care of retired and active workers in such a cavalier fashion,” said Harley Shaiken, a professor at the University of California at Berkeley who specializes in labor issues. “The great Enron lesson was: Don’t put all your eggs in one basket. ... Putting half your eggs in the trust-fund basket is still a high level of risk.”

Enron workers lost the lion’s share of their retirement savings when the company’s once fast-gaining stock became virtually worthless. Enron workers received their matching contributions in Enron stock — then were prohibited from selling it until they were 50 — and many invested their own 401(k) contributions in company shares.

Since Enron’s collapse, many corporations have limited the amount of company stock their employees can hold in 401(k) accounts. Legislators and shareholder advocates argued for tougher regulations to protect individual investors.

That is why, Shaiken said, it is shocking that President George W. Bush “apparently bowed to political pressures from the Republican right in the Senate” and called for the retiree health care of so many Americans to be placed in jeopardy.

Shaiken says he believes the new Democratic Congress and President-elect Barack Obama will revisit conditions placed on the UAW, and particularly on the funding of the VEBA (voluntary employee beneficiary association), when they take office next year.

But others say it may not be possible for the automakers to achieve the degree of restructuring cost-cutting required to meet conditions of the federal loans by the end of March without abiding by the terms set by the Bush administration.

The White House agreed to provide as much as $17.4 billion in loans to carry GM and Chrysler through the first three months of 2009. But the automakers must demonstrate viability by March 31 or they will be forced to immediately pay back the loans or file for bankruptcy. As part of the loan agreement, the federal government set targets for restructuring that include union wage concessions, the change in VEBA funding and cutting the company’s bond debt by about two-thirds.

While the automakers can deviate from these targets, “absent a near-term economic recovery,” Citigroup auto analyst Itay Michaeli wrote in a note to investors, “we believe it would be difficult to deviate significantly from these targets and still demonstrate viability.”

Gary Chaison, professor of industrial relations at Clark University in Worcester, Mass., said that while the changes to VEBA funding are not optimal for the approximately 750,000 people for whom the new fund was supposed to provide health coverage beginning in 2010, it still may ensure more benefits than they otherwise would have received in retirement.

“I think this makes the best of a bad situation,” Chaison said. “If they pay a portion of the VEBA now, they might have enough to pay for the health-care benefits of the current retirees and they might get more later.”

But, Chaison said, his impression even from the time the UAW and automakers agreed to the VEBA in late 2007 was that it was questionable whether the health-care trust would last long enough to keep the commitments the UAW and automakers made.

Although the UAW described the VEBA as a solid plan to provide benefits to retirees and workers who were active as of the contract agreements last year, it was in part a defensive maneuver intended to protect workers from corporate bankruptcies that typically wipe out retiree benefits.

And it might not even have come to that, the UAW said when it pitched the VEBA to members. The automakers could have sought court approval to simply terminate retiree medical benefits.

At the time the UAW agreed to it, workers and analysts believed a VEBA would protect them from the risk of bankruptcy. While an automaker’s default seemed possible, just a year ago, few thought it would happen before the VEBA was funded and took effect in 2010.

But with the risk of illiquidity now an imminent possibility, the UAW on Dec. 3 agreed to postpone until 2012 the VEBA payments that were due from GM and Chrysler in 2010.

Now the government is asking the trust to accept half cash and half stock.

A UAW spokesman declined to comment on the proposed conditions for changing VEBA funding.

GM retiree Ralph Herndon said he isn’t worried about getting half of the VEBA funding from GM stock — he has faith the company will rebound and survive — but he is worried about the management of stocks on Wall Street in general.

“GM stock doesn’t bother me,” Herndon said. “I’m not going to worry about the VEBA, because all the worrying we do is going to change nothing. I’m cautiously optimistic it will work out. ... But if you expect me to save for my own retirement, someone needs to manage the managers on Wall Street better.”

Herndon said his 401(k) has dropped by half in the past year or so.

But many industry experts said the bet on GM stock is a risky one.

Several analysts this week cautioned that current GM equity investors could find the value of their holdings wiped out either by bankruptcy or by dilution from new government stakes in the company.

“The stock may go down to zero,” Chaison said. “My view of the VEBA is it was on shaky ground already. Now, if I were a retiree I would be hoping to come out of this with health-care benefits for the short-run. If I were a present employee, I wouldn’t count on the VEBA for health care. I would hope I would get a buyout or keep my job. The name of the game right now is to save jobs. Everything else is secondary.”