Issue 27 • JUNE 3, 2009

Another One Bites the Dust

To no one’s surprise, former American icon General Motors filed for bankruptcy this week, taking $19.4 billion in taxpayer-funded bailout money down with it.¹

Washington’s response ... more of the same ... taxpayers will fork over another $30 billion to help with GM’s bankruptcy rehabilitation efforts.²

In a bygone era of American industrial might a half-century ago, a former GM boss told Congress, “What was good for our country was good for General Motors, and vice versa.”³

If that’s true, then what does GM’s sad slide into insolvency tell us about the future of our economy?

One interesting tidbit I noticed about GM’s bankruptcy filing is the fact that 650,000 retired GM workers are about to have their pension benefits drastically altered as a result. GM’s pension plan, meant to provide for the retirement needs of active and retired GM workers, is underfunded to the tune of a $12 to $13 billion deficit.⁴

That means there have been far more promises to pay future retirement benefits than there is actual money in the “kitty” to make good on these promises.

Promises to Keep ... Paid in Stock, Not Cash

As part of the bankruptcy plan, GM pensioners were asked to forgo $20 billion in cash owed by GM for future retiree benefits ... instead the pensions will receive newly issued GM stock!⁵

Former GM auto workers everywhere are hoping the new GM shares turn out to be a far better investment than the old GM shares!

But this story highlights what could be another financial storm brewing in today’s financial crisis: the sorry state of pension and retirement plans across America.

The government agency that backstops pension plans for 44 million corporate employees, like GM’s, reported that its deficit TRIPLED in the last six months  to $33.5 billion. In the auto sector alone, the Pension Benefit Guaranty Corporation (PBGC) says retirement assets are $77 billion SHORT of the money needed to meet obligations. PBGC guarantees $42 billion of this amount.⁶

In other words, that’s the amount we are all on the hook for as taxpayers. But it gets even worse when you look at the nation’s public pensions set up by state and local governments across the land.

‘A Crisis That’s Been Looming for Years’

As of December 2008, public pensions in the U.S. were underfunded by more than $1 trillion.⁷

The recession, beginning in 2007, certainly hasn’t helped these pension plans play catch up either. In fact, cities and states are running huge deficits now, and being forced to cut back on vital services due to the ongoing recession. So there’s certainly no money left to contribute to under-funded pensions.

How did these plans get so underfunded in the first place? Why didn’t they provide for future retiree benefits during the “boom” years? Sadly, it’s a familiar story ... perhaps learned from Wall Street bankers.

“Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy,” according to a Bloomberg story. Where have we heard this before...? Pension fund accountants use a “grab bag of tricks” to make pension plans appear healthy when, in fact, they’re already terribly upside-down. A favorite trick is to “set unrealistically high expected rates of return.”⁸

That way, state and local governments don’t have to earmark as much money in each year’s budget toward retirement costs ... freeing up more funds for useful vote-getting projects.

Take the nation’s largest public pension plan, the California Public Employees’ Retirement System (CALPERS), as an example:

Over the past seven years, CALPERS said it EXPECTED to earn a +7.75% rate of return annually on its pension assets.

But in the ten years ended December 2008, the CALPERS fund ACTUALLY earned just +3.3% per year ... and in 2008, the fund tanked -27% in value. Ouch!

No wonder Governor Schwarzenegger’s home state is in danger of having its credit rating “terminated.”

What this really amounts to is a shameful passing of the buck to future generations of taxpayers at the federal, state and local levels. Higher tax rates are likely on the horizon if we hope to dig ourselves out of this hole.

Maybe California tax-free muni-bonds are a good hedge ... then again, maybe not.

Good investing,

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

¹ Washington Post: “Rescue Plan Would Give U.S. Most of GM’s Stock,” 5/27/09
² Ibid.
³ Spero News: “Is what’s good for GM good for America,” 3/3/09
⁴ CNNMoney.com: “Will the GM bankruptcy work?” 6/3/09
⁵ Ibid.
⁶ Wall Street Journal: “Shortfall Triples at U.S. Pension Guaranty Agency,” 5/21/09
⁷ Bloomberg: “Hidden Pension Fiasco May Foment Another $1 Trillion Bailout,” 3/3/09
⁸ Ibid.