Potential PBGC problem: $13.5 billion GM liability

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Paying: Donald G.M. Coxe said GM's real function is to try to pay benefits.

A General Motors Corp. bankruptcy could become the Pension Benefit Guaranty Corp.'s biggest nightmare.

That's because the automaker could dump as much as $13.5 billion in unfunded pension liabilities onto the PBGC — the largest ever from a single company — if GM were unable to fund its U.S. defined benefit plans and terminated them.

The claim would be almost twice as large as the current record of $7.5 billion from the 2005 termination of the Chicago-based UAL Corp.'s United Airlines pension plans.

For this to happen, GM, Detroit, would have to terminate its plans and PBGC officials would have to agree to cover all the unfunded pension liabilities of the company's U.S. hourly and salaried plans. Together, the plans had a combined $84.5 billion in assets and $98.1 billion in liabilities as of Dec. 31, according to its 10-K report.

GM officials are considering, among other options related to a restructuring, filing for Chapter 11 bankruptcy protection or some sort of specialized government-backed bankruptcy protection. That way, GM could slash its debt and seek concessions from the United Auto Workers, including cuts in its retiree-health obligation.

“GM is a benefits-paying organization masking itself as an auto company. The real function of the company is trying to pay pensions and retiree health care. They could produce a car to compete with Toyota but couldn't pay the retiree liabilities they agreed to many years ago,” said Donald G.M. Coxe, chairman of Chicago-based Coxe Advisors LLC. Mr. Coxe doesn't invest in GM.

GM expects that it won't have to contribute to its U.S. plans until 2013 or 2014, according to a Securities and Exchange Commission filing in February. Its U.S. plans were overfunded by a combined $20 billion as recently as Dec. 31, 2007, according to the company's 10-K.

The GM defined benefit plans have less than $1 million in GM stock, according to its 10-K report.

GM's hourly and salaried 401(k) plans have combined assets of $20.3 billion, including $1.4 billion in GM stock, as of Dec. 31, 2007, according to its latest 11-K, filed last June. Based on a 91% drop in the share price since then, that stock would be worth $126 million now.

Last November, State Street Bank & Trust, Boston, investment manager for the GM company stock fund in the 401(k) plans, stopped participants from purchasing stock in GM because of its financial difficulty. (P&I Daily, Nov. 26, 2008.)

$41 billion in liabilities

The PBGC estimates its exposure to contingent liabilities of the Big Three U.S. automakers — GM; Ford Motor Co., Dearborn, Mich.; and Chrysler LLC, Auburn Hills, Mich. — totaled $41 billion as of Jan. 31. Only $13 billion of that represents net claim exposure, the PBGC estimates. The PBGC didn't have a separate breakout for each company. The net claim exposure represents what the PBGC estimated it would have to cover.

The Big Three's total pension liabilities have skyrocketed since Sept. 30 because of the market meltdown, said Gary Pastorius, PBGC spokesman. On that date, the PBGC had estimated total contingency liabilities of $46.7 billion, including $20.9 billion from automobile and other manufacturing companies. These liabilities represent the total unfunded vested benefits.

Ford had $37.4 billion in assets in its U.S. pension plans and $43.1 billion in liabilities as of Dec. 31, according to its 10-K report. Ford this year expects to contribute $1.5 billion to its pension plans worldwide. It didn't provide a U.S. plan breakout.

Chrysler had U.S. defined benefit assets of $21.6 billion as of Sept. 30, according to Pensions & Investments' Jan. 26 report on the largest U.S. retirement funds.

Chrysler's pension plan was overfunded by $3.1 billion, as of Dec. 31, 2007 (P&I Oct. 27, 2008). At that time, it was 113% funded with pension assets of $26.2 billion and pension liabilities of $23.1 billion. An updated funding level wasn't available.

Cerberus Capital Management LP, New York, owns 80.1% of Chrysler and Daimler AG, Stuttgart, the remaining 19.9%.

As of Sept. 30, the latest data available, the PBGC's single-employer program has a $10.7 billion deficit, with $61.6 billion in assets and $72.3 billion in liabilities, Mr. Pastorius said.

The PBGC paid out $4.3 billion in benefits for the year ended Sept. 30. It collected $1.5 billion in employer premiums in the same period, bolstering its financial position, he noted.

“While the gap between assets and liabilities (in the PBGC program) may be of considerable size, we currently are not liable for paying all the liabilities immediately,” Mr. Pastorius said. “On a cash-flow basis, we are in good shape to pay benefits as they come due. On an actuarial basis, we are in deficit.”

Mr. Coxe of Coxe Advisers said GM stock and bond investors are in a weak situation.

“When you have a market cap at $1.074 billion, what you have is a low-cost leap” for potential investors speculating on a rise in value, he said. “The market is saying not many investors are willing to take it.”

Bondholders “would still be stuck trying to pay for all” the retiree health-care liabilities unless a U.S. bankruptcy court would terminate the obligations, Mr. Coxe said, even if the bondholders secured the company or major assets in a potential bankruptcy reorganization.