Wednesday, June 13, 2012

PART #1 ... GM, UAW, Michigan, U.S. Government and Taxpayer Bailouts

President Reagan advised us to face reality squarely when he said, "Don't be afraid to see what you see."

And in the movie "All the President's Men," Watergate informer "Deep Throat" told the journalists Woodward and Bernstein to "follow the money."

So let's do just that with respect to what's going on in Michigan regarding the GM and UAW bailouts, respectively. The reality I "see" says a lot about federal and state government, politics, unions and taxpayers. It will take some effort to tell the whole story simply and clearly, so please bear with me as we break it down into bite sized chunks.

What initially caught my attention was a recent article about annuity purchases by GM. So we'll start there with GM Acts to Pare Pension Liability which says in part:

"General Motors said it aims to reduce its pension obligations by $26 billion by overhauling its U.S. pension plan for retired white-collar workers, cutting by nearly 20% the biggest drag on its balance sheet.

GM also signaled it could consider a similar reworking of its pension plan for U.S. union retirees, which is roughly twice the size of the salaried-worker plan.

The pension obligations are a drag on the Detroit auto maker because they rise and fall on such factors as interest rates and the life expectancy of pensioners. GM's $134 billion in global pension obligations, which face a $25 billion shortfall, have long been a concern of investors and debt-ratings firms.

. . . GM said it will hand over all assets and obligations of its salaried retiree pension program and management responsibility to Prudential Financial through the purchase of a group annuity contract. Prudential could begin making pension payments starting next year. GM said retirees' payments won't change. . . .

GM, by year end, will have eliminated traditional pension plans for all current salaried employees. Newly hired hourly workers already receive a 401(k), though veteran factory workers still get a traditional pension.

GM faces pressure from investors to address the $71 billion in obligations to union-represented factory workers. That plan is underfunded by $10 billion. . . .

GM's underfunded pension plans remained following the company's 2009 bankruptcy that eliminated much of the company's debt. Mr. Ammann said GM's pension obligations, on a relative basis, are greater than at other global companies and limit its financial flexibility. . . .

Over the last decade, many companies' pension liabilities have grown at a faster pace than the businesses themselves, and the value of their pension assets has also failed to keep up, forcing firms to take steps to address their pension exposures.

The GM pension deal dwarfs previous agreements that others reached with insurers to reduce their pension liabilities. . . .

GM said it will spend roughly $29 billion to get Prudential to take over $26 billion in pension obligations. GM also estimated the pension buyouts will cost around $3 billion."


The $29 billion to purchase the pension annuity came from the taxpayers to GM and then on to Prudential in the form of a major portion of the recent GM federal bailout monies.

This also means that if GM doesn't survive or is otherwise unable to pay those pensions over time, its pension liability, thanks to the taxpayers, has been eliminated by buying the group annuity. And the pensions are in effect guaranteed to those affected beneficiaries going forward.

Of course, having already been used to buy an annuity, the $29 billion is no longer available to invest in strengthening GM's ongoing business.

Not being "afraid to see what I see," to me the reality is a straight pass through from the taxpayers to union members and in no way represented an investment in the future of GM.

And here's a bit more reality. Using the "follow the money" approach, GM was broke and the federal government granted it tens of billions in the form of a bailout. This was done in lieu of having GM follow normal bankruptcy procedures through a Chapter 11 filing.

Had that normal Chapter 11 bankruptcy process been followed, pensioners would not have received their full pensions, and GM would have had more money to fund its necessary investments going forward.

Thus, the practical effect of all this is that the U.S. taxpayers guaranteed the union pension benefits.

And we did this by borrowing from the Chinese.

Summing Up

In the next post, we'll catch up to today's situation in the Michigan state legislature concerning pensions, 401(k) plans and related obligations of taxpayers relative to public sector workers in Michigan.

But to repeat, GM retirees and even current workers are not dependent on the future success of GM for payment of their pension benefits. The federal government, aka U.S. taxpayers, has in effect borrowed money from the Chinese to buy an annuity for those beneficiaries.

Please stay tuned for part #2 of our reality based follow the money GM, UAW, government and taxpayer saga.

Thanks. Bob.

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