GM bankruptcy could hurt local retirees, employees
JANESVILLE Doris Thom worries every day that General Motors might declare bankruptcy.
The 88-year-old Janesville woman and her husband retired years ago from the Janesville plant, but they still receive pensions and health care benefits from GM.
“If we lost our pensions, and we lost our health benefits, I don’t know what we’re going to do,” she said. “It’s a very scary situation.”
It might be tempting to ignore GM’s financial woes, seeing as the company is ending production at the Janesville plant Dec. 23 whether or not it declares bankruptcy.
But Thom and thousands of local GM retirees and soon-to-be laid-off workers don’t have that luxury.
A GM bankruptcy could have a big effect on those people and the community in general, despite the probable closing of the Janesville plant, experts said.
GM, Chrysler and Ford are asking the federal government for a $25 billion package to help them stave off Chapter 11 bankruptcy, also known as reorganization. The companies have been burning through billions of dollars a month as they face declining sales and a collapsing credit market.
The Big Three say bankruptcy of any one of them could spell disaster for the entire auto industry, and by extension the U.S. economy. They argue people won’t buy vehicles from a company in bankruptcy, and one company’s collapse would throw the entire auto supply chain out of whack.
According to a General Motors Web site promoting the bailout, 1 in 10 American jobs are tied to the auto industry. The site says 3 million jobs would be lost in the first year alone if the auto industry collapses, sending the economy into a tailspin.
But some say bankruptcy, far from causing the collapse of the auto industry, is exactly what these companies need to emerge as stronger, more efficient corporations. Reorganization would allow the auto companies to shed expensive obligations such as health care and extensive unemployment benefits, said Barry Gerhart, professor of human resources at the University of Wisconsin Business School.
“People who would like GM to go to bankruptcy … see that as one way to change the provisions of the union contract,” Gerhart said. “Without bankruptcy, GM would have to negotiate those changes.”
Fortunately for retirees such as Thom, pensions would be safe in the case of a GM bankruptcy, Gerhart said. The federal Pension Benefit Guaranty Corporation backs pensions up to a certain amount for companies that can no longer fund their pension plans.
If GM terminates its pension plan in 2008, the PBGC will guarantee up to $4,300 a month—almost $52,000 a year—for workers age 65 and older, with a lower maximum for younger workers. A 55-year-old retiree, for example, would receive a maximum of $1,900 a month, or $23,000 a year.
“The retirement benefits for those in the plan, those are fairly well protected,” Gerhart said. “Health care, that’s different.”
If GM declares bankruptcy, a bankruptcy court would decide which obligations it’s required to uphold. So GM might no longer fulfill health care provisions or unemployment benefits negotiated in union contracts, and it could stop contributing to pensions of current employees.
United Airlines, for example, saved $7 billion a year after declaring bankruptcy in 2002 by eliminating 25,000 jobs, replacing traditional pensions with 401(k) plans, reducing cost structure and cutting pay.
When Delphi Corp., an auto parts manufacturer, declared bankruptcy in 2005, it announced goals of cutting union wages by up to 60 percent, cutting health care benefits and freeing itself from pension obligations inherited when Delphi split from GM in 1999. The company is still in the reorganization process.
“It’s really hard to know what would happen (if GM declared bankruptcy),” Gerhart said. “To compete in the labor market, they’re going to have some sort of health care plan for employees.
“Retirees, there’s no guarantee there.”
That’s troubling for Thom, who depends on GM for her and her husband’s health care. She said she can’t understand why the government won’t grant the auto bailout when it bailed out financial giant Citigroup last week with little discussion. She hopes things improve with a new Congress and new president set to take office in January, she said.
“I’m hoping that they can hold out until Obama takes the presidency, because he as much as promised the autoworkers would receive some help,” she said.
No one knows what will happen to auto dealers and consumers if one of the Big Three goes under, said Chris Snyder, general counsel of the Wisconsin Automobile and Truck Dealers Association.
“We haven’t had a major manufacturer like that go bankrupt,” he said.
Daewoo Motor, a small South Korean car company, declared bankruptcy in 2000 and closed shop, leaving dealers stuck with inventory and customers without warrantees, Snyder said. (GM bought the company in 2002.)
Similarly, a bankrupt American car company could close dealerships and leave dealers holding the bag, he said.
“There are some protections for when a dealer goes out of business,” he said. “The manufacturer has to buy back certain inventory, certain parts and things like that. In the event of a bankruptcy, (the manufacturer) wouldn’t have to honor those obligations.”
There are 450 franchised domestic dealerships in Wisconsin, each employing an average of 30 people, Snyder said.
“If we lose 100 dealers or 150 dealers statewide, that’s about 4,500 jobs,” he said.
GM already has announced it is delaying incentive payments until at least December, Snyder said. That means dealers won’t be immediately reimbursed for deals such as employee pricing and rebates.
“The dealers still have to make payroll, and a lot of that money was already earmarked to pay people and pay their operating costs,” he said.
Consumers wouldn’t escape the fallout either, Snyder said.
A bankrupt auto company might not have to meet obligations to consumers, he said. So, for example, the company could change a five-year warrantee to a two-year one.
Plus, a bankruptcy for one company would affect all companies, potentially limiting supply, he said.
“(The auto companies) share the same suppliers, so if the suppliers lose one of the domestic contracts, they can’t continue on because they don’t have the cash flow,” Snyder said. “Then all of the supplies get bogged down. The end result there is that the supplies aren’t there to build those other import vehicles.”
The Big Three were rebuffed in their first efforts to get a $25 billion aid package earlier this month.
Congress told Ford, Chrysler and General Motors to come back with a more detailed proposal that shows the need for the money and offers a long-term plan. Many legislators and President George W. Bush have expressed opposition to the plan.
Last week, President-elect Barack Obama said he was “surprised” the companies hadn’t presented a better proposal.
Many Republicans favor using a $25 billion loan included in the original financial bailout package to help automakers’ deal with their financial problems. That money was supposed to be used to develop fuel-efficient cars. Democrats tend to oppose that plan because it diverts money intended to help the environment.
More hearings are expected on the proposed bailout this week, and Congress could consider legislation next week if legislators are satisfied with the companies’ plans.