The Obama administration believes it will successfully sell its equity stake in General Motors and Chrysler but heavy pension costs present financial risk and potential conflicts if the companies falter, a congressional report said.
The Government Accountability Office (GAO) said the US Treasury, industry, and the financial community have all “made a concerted effort” to ensure that General Motors Co and Chrysler do not fail, Reuters reported.
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But should the companies not become viable over the long term, then “interests may no longer be aligned,” the GAO said. The US Treasury could face a series of decisions that would pit the taxpayers’ investment over the health of the agency that insures corporate pension plans.
“This is not a choice the government wants to face, but this risk and its attendant challenges remain real,” the GAO, the investigative arm of Congress, said.
Corporate pensions are insured by the deficit-ridden Pension Benefit Guaranty Corp (PBGC), which has most recently absorbed failed pension plans from bankrupt US automotive parts suppliers.
Automakers sponsor some of the largest pension plans in the private sector. GM’s plans covered more than 700,000 hourly and salaried workers and retirees as of 2008. Chrysler’s plans covered about half the GM total, Reuters noted.
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By GlobalDataThe PBGC estimated its exposure to automaker and supplier pensions, where liabilities outpace assets, was roughly US$42bn in January 2009, the latest available figures cited by the GAO.
The pension agency said in November its potential exposure to future plan losses from financially weak companies in all sectors had more than tripled in 2009 due to the struggling economy.
The US Treasury put $50bn into GM last year in bailout and bankruptcy financing, representing a 60% stake once the reorganised company emerged from bankruptcy. It holds a nearly 10% stake in Chrysler which is now run by Fiat.
GM and Chrysler should be able to attract sufficient private investment and should return to profitability, Treasury officials told the GAO for its report on the impact pensions could have on companies that received taxpayer aid from a congressionally approved bailout fund.
GM said in a statement on Tuesday that it “continues to believe” its pensions are adequately funded to meet current obligations.
Chrysler is revamping its truck heavy lineup and Reuters noted that analysts have warned that it could be short on time to steer its faltering operations toward recovery.
Chief executive Sergio Marchionne last week reiterated the automaker “intends to break even” on an operating basis this year and would hit its target of selling 1.1m new vehicles in the US.
“We are confident that we can meet our ambitious but achievable goals,” Marchionne told the Automotive Forum 2010 in New York. “The amount of work that had been done to bring down the break even point – that number ended up being lower than most people thought.”
He added that “to the extent that we are producing cash…I feel a lot more comfortable today than I did 12 months ago.” As of Monday 29 March, Chrysler had stockpiled “just north” of $5bn in cash.
Chrysler said yesterday (6 April, 2010) it was aggressively pursuing its financial goals as the company achieved financial viability and fully expected to meet its obligations, including to employees and retirees.
The GAO said the ultimate impact of federal efforts on the viability of GM and Chrysler is unclear due to an improving but uncertain sales market and the sluggish economy.
“This, too, is the case for the companies’ pensions,” the GAO said.
The ability of GM and Chrysler to contribute fully to their pension plans over the next several years is mostly dependent on profitability. Both companies estimate large contributions may be needed within a few years in order to meet minimum funding requirements under federal law, the report said.
US Treasury officials told the GAO they would consider “all commercial options” for disposing of government equity in automakers should they fail to become profitable – including terminating pension plans.
The GAO recommended that the Treasury submit pension and other information to Congress to help mitigate potential conflicts with its dual roles of regulator and shareholder, Reuters said.
But Treasury officials told the GAO in written comments it would provide additional information to Congress on its investments in Chrysler and GM “as circumstances warrant.” They disagreed with the proposal for sharing pension data, saying any decision about that should be made by the automakers.
