Health benefits rule makes firms look sick Accounting change slashes net worth

November 12, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- General Motors Corp., the country's largest manufacturer, is being forced to acknowledge how much maintaining the heartbeat of America really costs.

Last weekend it announced it had obligations of $16 billion to $24 billion for post-retirement health care for workers. Subtract what GM is committed to pay -- but yet to fund -- for pensions, and the result is a company with no net worth.

GM's plight is likely the most egregious example, but it is not the only company in the midst of revealing corporate destitution to the public.

A prospectus issued early last month by Chrysler Corp. disclosed a similar story. Ford Motor Co., too, has vast obligations, though the figures are significantly smaller in relation to its equity base.

In the past, companies were able to hide the extent of future health-care commitments. But by the first quarter of 1993, they will have to disclose their obligations to conform with a rule, Rule 106, passed last year by the Financial Accounting Standards Board.

For old-line manufacturers with vast work forces, benefit-laden contracts and stale markets, the results could be alarming.

"Intellectually, you could argue that what many of these companies do is manufacture products to generate cash to pay health-care costs," said Paul Ehrlichman, a partner at Brandywine Asset Management.

The new accounting rule doesn't add a dime to corporate expenses, which will continue to be paid as they are incurred. But it does force the companies to fess up about how much they owe and how truly large those costs will rise in the future because of commitments made in the past.

"The problem has been there for a long time, companies are simply nowbeing forced to report the magnitude," said Scott Sprinzen, a vice president at Standard & Poor's Corp. "GM is extreme, but it's not unique."

Typically, companies promised to pay future health-care costs for an employee in exchange for current work, but the employer delayed disclosing the price tag for that commitment until the employee turned over the medical bill -- often years later.

Initially, the costs were too small to be material, said Kim 'N Petrone, assistant project manager for the new rule at the Accounting Standards Board, but hordes of early retirees, soaring health-care inflation, changes in government policy and lots of promises have now made it highly relevant.

Black & Decker Corp., Armco and Bethlehem Steel Corp. all indicate they are examining the extent of their obligations. So, too, are all major tire, aluminum and chemical manufacturers.

What they find may show that in the last years of the 20th century, the medical industry came to be the biggest industry of them all.

Companies have a choice of recognizing the full extent of their obligations immediately or amortizing it over 20 years. Some of the richer ones, such as IBM and General Electric Co., have moved already, swallowing multibillion-dollar hits to their earnings. So have less burdened, smaller companies such as Abbott Laboratories, General Mills and Dayton Hudson.

The most troubled companies are likely to stretch it out as long as possible. "It depends on what their balance sheets can handle," Ms. Petrone said. "That's the squeal."

And for many, a squeal may quickly turn into a gasp.

Take the case of GM, once the global model for industrial strength. Total stockholders' equity measured $28 billion on Sept. 30. The company acknowledges $7.2 billion in unfunded pensions. Subtract another $24 billion in unfunded medical obligations, and the company's accounts are deeply in the hole.

The company argues that such calculations overstate the negative impact of the charge, suggesting it's a "non-cash" item since no actual payments need be made immediately. But they will someday, as those medical costs are incurred.

"It's a deferred cash item, not a non-cash item," Mr. Ehrlichman responds. "It's a real liability, it's a real cost of business."

For Chrysler, the implications are equally severe. As of June 30, its shareholder equity was $6 billion. Subtract from that a potential expense for retiree health care of $4 billion to $6 billion and unfunded pension liability of $3.62 billion.

Under obligation

Some companies reporting FASB 106 obligations:

5+General Motors. .. .. . . . $16 billion to

. . . . . . . . . . . . . .... .$24 billion

Ford Motor. . . . . $5billion to $9 billion

Chrysler. . . ... . $4 billion to $6 billion

General Electric. . . . . . ... $1.8 billion

Abbott Laboratories. . .. ......$128 million

General Mills. . . . . . . .... $115 million

Dayton Hudson. . . . . . . . .. $86 million

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