By failing to approve a federal rescue plan for
last night, the Senate effectively passed off the problem, and the decision, to President Bush.
As automakers and their employees and retirees hold their breath, the question is simple:
Will Bush "call" and ask to see the automakers' hand, or will he fold and authorize funding from the TARP
At stake is the bankruptcy of one or more of the automakers, which could lead to significant changes to the health-care provisions of these companies' employees and retirees.
According to the Employee Benefits Security Administration, if an employer declares bankruptcy under Chapter 11 of the Bankruptcy Code, the company generally continues to conduct business under the court's protection while attempting to reorganize its financial affairs. A Chapter 11 bankruptcy may or may not affect a pension or health plan. In some cases, plans continue to exist throughout the reorganization process.
If GM or Chrysler were to put themselves into Chapter 11 bankruptcy (GM has reportedly
), a complete restructuring of the health-care benefits that employees and retirees receive could result.
It is possible that current employees would be required to make some additional contributions to the health-care costs, in order to reduce the companyies' expense burdens. But it is unlikely that current-employee benefits would be discontinued because, especially in bankruptcy, the company would want to retain its workers. At most risk would be the coverage afforded to retirees and the United Auto Workers' voluntary employee beneficiary association, or VEBA, funding.
In July, GM announced that it would cancel the
offered to its retirees once those individuals qualified for Medicare. Instead, these retirees were offered a $300-per-month pension increase. Michelle Bunker, a GM Healthcare spokeswoman, said at the time: "GM reserves the right to adjust the benefits paid to their retirees at any time and these benefits could be changed in the future at their
A bankruptcy could provide GM an opportunity to remove this benefit altogether and save $3,600 annually for each salaried retiree over 65. A call to GM requesting comment was not returned.
Also at risk is the health-care benefit offered to retirees under 65. Essentially, this is a continuance of the employee benefit. Employees taking early retirement will have factored this health coverage into their decision to take the early retirement. This
, is exposed to the real possibility of discontinuance in the event of bankruptcy for GM.
At the Senate Banking, Housing and Urban Affairs Committee hearings, the president of the UAW, Ron Gettelfinger, said that in the event of the failure of the automakers the health care of the retirees, especially for the estimated 40% that are younger than 65 and therefore ineligible for Medicare could be lost and that $3 billion of the annual cost would have to be picked up by the federal government.
So What Do Retirees Think of the Back and Forth?
Chuck White, leader of a Ford retiree group, acknowledged that the retirees of the automakers are, despite protestations to the contrary, treated better than the majority of manufacturer companies, saying "Gettelfinger just wants funding
for the VEBA. In the event of failure, a judge would consider competitive manufacturing companies as a benchmark for benefits. Salaried
automaker retirees are better treated than the average retiree."
White said "in Chapter 11 the judge would decide what remains, not the companies. The judge would require the companies give what other manufacturers give to retirees that are not Medicare eligible. I think a judge would make this happen. The retirees didn't really lose health care when they received their stipends, and maybe the UAW should not be so strident about the VEBA as the populist view of this is anti-auto industry -- we don't get the benefits, so why should they? It is a brave new world. The old days are over."
Another retiree said, "Employees need to realize that retirement perks are perks. The only retirement guarantee is that your paycheck will stop."
Chuck Austin, a Chrysler retiree group leader said, "Bankruptcy would be a disaster for retirees. Early retirees, pre-65, would lose all health care benefits and early retirement supplemental pay. Chrysler and Ford retirees receiving Social Security and Medicare would lose about $4,000 per year in health-care spending accounts from the companies."
Jack Dickinson, of the GM retiree support group
, expressed concern on the effect bankruptcy might have on retirees. He said: "Retirees had to stop and consider giving up health care and pension lifetime benefits before accepting higher-paid jobs. These benefits were part of the retirees' compensation as many did not make the salary at the car companies that they were offered at other jobs."
Your call, Mr. President.
Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.