WASHINGTON (Reuters) - Bankruptcy at one of the major U.S. automakers would trigger immediate concern about pensions for almost 800,000 workers and retirees and raise the political and financial stakes of the Obama administration’s bid to remake the industry.
Demands for aggressive restructuring of General Motors Corp GM.N and Chrysler LLC by the administration's autos task force could push one or both companies into court within weeks. A Chapter 11 filing would raise the possibility of pension defaults, reduced benefits and long-term liabilities for the deficit-ridden government agency that insures them.
“This is high politics,” said Gary Chaison, a labor relations expert at Clark University. “There are too many workers involved. The social implications are too big. I think any type of bankruptcy would have to protect the collective bargaining agreement and the pensions.”
The autos task force has unprecedented authority to overhaul GM and Chrysler and President Barack Obama has so far weighed in personally. Unions are a key Obama constituent and pension and labor experts believe the panel’s White House and Treasury leaders are mindful of the impact a court restructuring could have on workers and retirees.
The United Auto Workers (UAW) union asked members this week to lobby the White House on pensions and other legacy issues and a group of salaried retirees will meet with the task force on Friday.
Still, GM and Chrysler would enter uncharted territory if they slide into bankruptcy, although there are precedents in the airline and steel industries of bankrupt, heavily unionized companies freezing or canceling pensions to save money.
A TALE OF TWO TROUBLES
Chrysler’s situation is acute since the government has voiced doubts it can survive absent an alliance or merger. GM is a much bigger company with nearly 90,000 hourly and salaried workers and nearly 500,000 retirees covered by pension plans.
The auto task force, which oversees nearly $23 billion in delivered and promised aid to the companies, has given Chrysler until the end of next week to complete an alliance with Fiat SpA FIA.MI or face probable bankruptcy. Analysts warn that Chapter 11 would almost certainly lead to liquidation.
GM has through May to restructure or face insolvency.
“There is (pension) underfunding generally across all industry sectors and a greater risk of bankruptcy. Many companies are in a precarious financial state,” said Jeffrey Speicher, spokesman for the U.S. government’s pension insurer, the Pension Benefit Guaranty Corp (PBGC).
“The automaker pension plans are the biggest we insure.”
The PBGC reported an $11 billion deficit for fiscal 2008, which ended last September 30, but automaker plans carry significant liabilities that could increase the red ink. Changes in law in recent years were aimed at reducing the PBGC’s deficit.
The underfunded liability -- the difference between assets and promised benefits if plans were terminated today -- was estimated at $41 billion for GM, Chrysler and Ford Motor Co F.N at the end of 2008, the latest PBGC figures show.
GM accounted for half the shortfall and only $4 billion of that gap would be insured if plans were terminated now, according to the PBGC. Chrysler had a $9 billion shortfall of which $2 billion would be covered.
WORST CASE SCENARIO
The hardest hit in any termination would be retirees and those close to retirement.
The agency’s estimates are worst-case scenarios. GM, for instance, calculated its year-end shortfall at $12.4 billion with investments losing ground on weaker equity investments and declining interest rates.
GM’s pensions would be the largest ever assumed by the government if they failed.
“It’s by no means a given that it will occur (in any bankruptcy) and nobody wants to see that happen,” GM spokeswoman Julie Gibson said. “We don’t want to see that happen. The government doesn’t want to see that happen.”
Bradley Belt, a former PBGC director and currently chief executive of Palisades Capital Advisors LLC, told Reuters pensions could survive Chapter 11 under certain conditions.
“It’s not a foregone conclusion they would terminate,” Belt said.
It is also possible Chrysler pensions could be fully funded in a liquidation and not revert to the government.
Pension experts also do not see a near-term problem for PBGC if automakers default given the substantial size of pension assets -- $80 billion for GM and $20 billion for Chrysler. Those figures would double current PBGC assets.
“The administration would be factoring in PBGC, but they’d essentially be looking at the fact that (the agency) would have no short-term cash flow problems no matter what happens here,” Dallas Salisbury, chief executive of the Employee Benefit Research Institute, told Reuters Financial Television.
“Their real need, I’m sure, is focusing on making sure Chrysler and General Motors succeed, regrow and then are able to fund these pension programs,” he added.
Reporting by John Crawley; editing by Patrick Fitzgibbons and Andre Grenon
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