A federal court has ruled in favor of General Motors Corp. in its bid to recover as much as $253 million from the federal government for one of its underfunded pension plans.
The decision, by Judge Nancy Firestone of the U.S. Court of Federal Claims, is the first of its kind and may precipitate moves by other government contractors to try to recoup some of the underfunding of pension funds that existed when the contractors closed or sold divisions.
GM's suit comes at a time when corporate pension plans, which were robustly overfunded in the 1990s, have become collectively underfunded for a variety of reasons, including stock-market losses, low interest rates and corporate decision-making. Pension plans in the Standard & Poor's 500 had a net underfunding of $159 billion at the end of 2004, compared with net overfunding of $263 billion at the end of 1999. (See related article below.)
The U.S. government is likely to appeal the court's decision in the case of GM vs. U.S., and any potential recovery could take years. A spokesman for GM says it wouldn't be appropriate to comment until the matter has been fully resolved.
Still, the decision is significant. When companies have contracts with the government to provide goods or services, the government pays for salaries and pays a portion of the pension costs. When companies subsequently close or sell a unit with an overfunded pension plan, the government generally recovers the portion of the pension surplus attributable to the amounts it contributed to the pension fund.
GM argued that the government was similarly obligated to make contributions to an underfunded pension of a division GM sold in 1993, Allison Gas Turbine, which provided services to the government. In 1996, GM filed a claim for $253 million, and sued the government on Jan. 27, 2000, in the federal court of claims, which handles contract disputes.
In her decision, filed on June 28 in the Washington, D.C., court, Judge Firestone said the government should pay the allocable amount of the pension underfunding, though she didn't specify a dollar amount. However, the judge denied GM's motion to recover not only the underfunded amount, but a profit as well.
Contractors say that if the government was able to recover pension surplus during the good times, it is only fair that it share the pain in the bad times.
"The court rejected three of the arguments the government has asserted to avoid paying contractor pension claims," said Karen Manos, a lawyer with Howrey LLP, a global litigation firm that represents government contractors. Over the years, there have been numerous suits between contractors and the government over the disposition of surplus pension assets.
If the pension ruling is upheld by the Court of Appeals for the Federal Circuit, it could also establish a significant loophole in government contracts: the decision says that ceilings on government spending under contracts would not apply to pension claims.
Consequently, if government agencies are required to pay for underfunded pensions of divisions sold or closed by companies that have — or used to have — government contracts, they would have to seek additional appropriations from Congress, or cut spending in other areas.
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Airlines struggling to meet promises to their retirees aren't alone, though headline scanners may be forgiven for thinking so.
In fact, companies of all different stripes are having problems with their retirement plans — and proposals being debated by Congress could ground more pension plans.
Consider: While four major airlines pensions plans collectively face a shortfall of nearly $13 billion, another 30 companies in manufacturing, trade, agriculture, finance and insurance are "underfunded" by $60 billion, according to Greg Kelly, Washington affairs analyst for Susquehanna Financial Group.
The tally for airlines doesn't include United Airlines parent UAL Corp., which last week turned over to taxpayers, via the Pension Benefit Guaranty Corp., responsibility for plans with nearly a $10 billion deficit.
The proposed reforms, which cleared the House Education and Workforce Affairs Committee last week, could compel companies to pump even more cash into their retirement plans. The bill could next go to the House floor or be woven into other legislation. Among its provisions, the bill aims to stop companies from projecting long-term health in their pensions when the hear and now suggests otherwise.
UAL, for example, told shareholders as recently as 2000 that its pension plans were "fully funded" on a long-term basis even though those same plans were billions of dollars in deficit on a "termination-liability basis," a description of what would happen were the airline to walk away from its responsibility to it — which is what happened.
But United isn't the only company to have made such claims. Bethlehem Steel claimed its pension was 84% funded, but on the tougher termination basis it was only 45% funded when it was handed over to the PBGC. US Airways Group Inc.'s pilots pension plan was reportedly 94% funded, but when it was terminated it was only one-third funded.
Mr. Kelly said the Bush administration would like to see pension assets and liabilities both accounted for with current rates of interest and expenses, and although Congress may soften that stance it is still moving toward having companies contribute more to make up for pension shortfalls. "Severely underfunded plans are going to have to pony up more money faster," he said.
Changes to rates that companies use to calculate future obligations mean many companies may face 10% to 15% increases in near-term pension obligations, so they'll have to increase contributions accordingly.
Some of the companies that could be hit hardest by the reforms include Maytag Corp., which has an underfunded liability of $554 million, or about 46% of its total market capitalization. Another company, AK Steel Holding Corp., has $1.3 billion in underfunded liability, or one and a half times its stock market value.
A spokesman for Maytag said the company was following the pension debate but wouldn't comment. Alan McCoy, vice president of government and public relations for AK Steel, said the company is "watching this issue with keen interest," but didn't have an estimate of what the reforms might cost.
Pension accounting includes a mind-numbing array of assumptions used to calculate future obligations and potential investment returns. Layered on top of the assumptions are facts about changes in benefits, periodic adjustments in mortality rates, and actual gains and losses in pension assets. Each year a company applies these factors to arrive at a total amount of credits and charges to its pensions. If credits are greater than charges, under current law the company has met its minimum-funding requirement.
The proposed reforms would change the process a number of ways.
Currently, companies with underfunded plans can take a "holiday" from contributions if their pensions have a "credit balance" from large contributions in previous periods. That loophole is likely to close, said Mr. Kelly.
Lawmakers also are seeking to reduce the influence of historic performance on future estimates of assets and liabilities. Companies now look back five years to generate averages used to estimate future performance, which smooths pension returns. Changes proposed by the administration would reduce that historic period to as little as 90 days, while Congressional proposals suggest four years.
And companies with a severe funding shortfall of 40% or more may be given as few as seven years to fill the void.
Taken together, the changes will sweep more U.S. corporations into the pension dog house, Mr. Kelly contends.
Eliminating credit balances in particular "would in our opinion be a disincentive to companies to contribute to their pensions," said AK Steel's Mr. McCoy. AK Steel of Middletown, Ohio, is currently responsible for the pensions of 32,000 retirees and their dependents.
In January the company made a $150 million contribution to its pension plan, creating a credit balance the company may draw on to cover future contributions. Mr. McCoy said knowing that cash was there in the future should the company need it was "philosophically...a consideration" in making the one-time contribution.
Changes in the law that would require larger contributions from companies with credit ratings of less-than-investment grade also would hit AK Steel hard. The company was formed as a joint venture of the carbon-steel businesses of the former Armco Steel and Kawasaki Steel of Japan. AK Steel went public as a separate company in 1994 and has never had an investment-grade credit rating.
"To further burden a company simply because it doesn't have a prime credit rating would almost be a self-fulfilling prophecy," Mr. McCoy said.
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