Outrageous Employee Compensation Liabilities Continue to Haunt General Motors; Will American Taxpayers End Up Paying the Bill?

Greg Wallace at What Attitude Problem? highlights this week's news on General Motors, building on the news previously highlighted here on this blogsite.

First, a Washington Post article states:

General Motors Corp., the world's biggest automaker, has offered buyout and early retirement packages to some of its nonunion, salaried workforce in North America as the company grapples with cutting costs.

The offers were sent in the first quarter in hopes of speeding the normal amount of attrition the company usually has...

GM is under pressure from investors to close plants and renegotiate union contracts. Its bonds fell last week to the lowest levels against government debt since at least 2001 after the company forecast its biggest quarterly loss in 13 years. The Detroit company is the third-biggest issuer of corporate debt...

With U.S. sales this year headed for the lowest market share in 80 years, GM is finding it tougher to cover rising health care costs for its 1.1 million employees, retirees and dependents and pay for increased costs for steel and other materials...

Then Ankle Biting Pundits weighs in with some strong observations:

...A substantial part of G.M.'s problem - but hardly the only issue - is that it is supporting about two and a half retirees for every worker. With health care costs more than $5 billion a year - and about $1,400 on a vehicle produced in the United States - many G.M. workers are expecting that long-cherished benefits could be pared back...

A posting on the blogsite notes that non-union General Motors' retirees are paying an increasingly large portion of their medical costs but union contracts do not yet require union retirees to make similar contributions. The author of the posting also notes that GM's problem is quite similar to the looming problem with Social Security - fewer people working to support more and more retirees.

In a different posting, Ankle Biting Pundits makes these additional comments:

...I hope the United Auto Workers union are happy. Thanks to their insane demands for lifetime health care for retirees, not wanting to contribute to rising health care costs, and an outdated, underfunded pension system, 25,000 of their members are going to heading to the unemployment line...

We take no joy in seeing anyone lose their job, that's not the reason we're mentioning this. Rather, we point out that what ails GM is a microcosm for what troubles America. The GM pension system is going bankrupt because an ever smaller number of workers are supporting a ever larger number of non-producers. Sound familiar (think Social Security)? The union could have cared less that health care and other costs were skyrocketing - they wanted to continue the free ride and refused to see how this stance could only lead to disaster for everyone...

It is not hard to imagine that the next step at some point in the near future is GM declaring bankruptcy and dumping its underfunded pension plan on the PBGC. It's really the only thing they can do to survive. The shame is that all those people who are going to have their pensions cut and their health care costs skyrocket can thank their labor unions for their plight (Granted, GM management was pretty stupid to go along with their ridiculous demands). And guess who's going to have to pay for that? Yup, us the taxpayers. Way to go UAW. Both your union members and we the taxpayers thank you.

For further examples of egregious union contract terms, read some of the comments posted to this most recent link.

A story in The Wall Street Journal states:

GM's North American operations, which posted a loss of $1.3 billion for the first quarter, already have been eliminating about 8,000 jobs a year through a combination of attrition and early-retirement programs since 2002...Those cost cuts haven't been enough to offset GM's sliding U.S. market share and declining revenue per vehicle.

...Mr. Wagoner said the newly announced cuts would be "an acceleration" of normal attrition...

GM's total North American work force was 181,000 as of Dec. 31. Of those, 111,000 are hourly workers in the U.S.

GM is the last of Detroit's Big Three...to announce a restructuring program within the past five years, a period during which market share for the three big, unionized U.S. auto makers has plunged from 68% in 2000 to just over 57% as of the end of May.

Reaction from the United Auto Workers, the large union that represents most GM manufacturing workers in North America, came late yesterday in a statement from its vice president and top GM negotiator, Richard Shoemaker. He said the union "is not convinced that GM can simply shrink its way out of its current problems. What's needed is an intense focus on rebuilding GM's U.S. market share, and the way to get there is by offering the right product mix of vehicles with world-class design and quality.

"It's one thing to present in a speech specific targets for job reductions and closing plants by the end of 2008," Mr. Shoemaker said, but in reality "various factors" will determine the actual outcome, including talks on a new labor agreement scheduled to take effect in 2007...

Morgan Stanley analyst Stephen Girsky said in a comment that Mr. Wagoner's plans represent "a small step in the right direction" but added, "The targeted employment reduction appears to be roughly in line with recent attrition and does not appear to be acceleration."...

Since then, he has sketched out a four-legged strategy for restoring profitability, that starts with boosting capital spending this year and next to speed the launches of several new models, including replacements for GM's aging lineup of large SUVs. Part two of the plan is a sweeping overhaul of U.S. marketing strategy. On legs three and four -- cost-cutting and reducing GM's burdensome health-care bill -- Mr. Wagoner has offered few details and appears to be avoiding drastic, short-term cuts. Much of his success will depend on the acquiescence of the UAW and suppliers that already are straining to meet GM's cost-cutting demands...

...cuts would save GM about $2.5 billion a year. That works out to savings of about $530 on average for every U.S. vehicle, using GM's 2004 sales. That is about only a third of the $1,500 higher cost per vehicle that GM suffers against foreign rivals because of its high worker costs, including health care for retirees.

A GM spokeswoman said yesterday that job cuts are only one part of GM's cost-reduction plan. The company also expects to save money in areas such as purchasing, productivity improvements and health care, she said.

On the key issue of GM's high health-care costs for workers and pensioners, Mr. Wagoner said GM management hasn't reached an agreement in talks with the UAW about ways to reduce GM's $5.6-billion-a-year U.S. health-care bill. "To be honest, I'm not 100% certain that we will," he said...

On the production front, Mr. Wagoner said GM needs "to get to 100% capacity utilization, or better" in North America, compared with about 85% in 2004. By the end of this year, based on plant closings already announced, GM will reduce its North American assembly capacity to five million vehicles from six million in 2002, Mr. Wagoner said.

"We expect to close additional assembly and component plants over the next few years, and to reduce our manufacturing employment levels in the U.S. by 25,000 or more in the 2005-2008 period," Mr. Wagoner said. He didn't identify specific plants that could be closed.

Mr. Wagoner faces a major challenge in GM's contract with the UAW. The current agreement, which expires in 2007, technically prohibits plant shutdowns, and guarantees UAW workers full pay and benefits if their plants are shuttered for a lengthy period...

...could refuse to renew those income and job protections in 2007, but the UAW has fought successfully to maintain them in each contract cycle since GM agreed to the provisions in 1990...

In his speech to shareholders, Mr. Wagoner said GM ultimately plans to "look at capacity utilization on a global basis." In other words, GM hopes to follow Japanese rivals such as Honda Motor Co. that can move production of various models rapidly from plant to plant based on sales patterns, or tool one plant to ship vehicles to any market, based on demand...

From a distance, the GM changes sound incremental and not of a size to reinvent the company's micro-economic business model. That does not bode well for the company. After all these years of struggling, you would think that management and the UAW would get the point that re-arranging the chairs on the GM Titanic will not fix the fundamental, structural problems. These people need to get real - and do it quickly.

As I have said in a previous posting: If you don't deal with economic reality, then it will deal with you - on its own terms. That does not bode well for the well-being and competitive strength of the American economy. Unless we significantly tackle the weaknesses embedded in the status quo, we are going to pay a hefty price. To be more precise, we are setting up the American economy for a fall which could deprive our children and grandchildren of the opportunity to live the American Dream. That is morally reprehensible.

When will people wake up and really pay attention?

ADDITIONAL INFORMATION:

Bankrupt pensions, related issues with private and public sector unions, and the misguided incentives that exist in public sector taxation have been discussed previously on Anchor Rising:

Misguided Incentives Drive Public Sector Taxation
If You Won't Deal With Economic Reality, Then It Will Deal With You
Underfunding Pensions, Public and Private, can Hurt Taxpayers
Bankrupt Public Pensions: A Time Bomb That Will Explode
Why Truly Free Markets & Timely, Transparent Information Are Needed to Protect the Freedom of American Citizens
RI Public Pension Problems
The Cocoon in which Entitled State Employees Live
The Union's Solution for the Future: Get More People in Unions
Bankrupt Public Pensions, Part II