New rule forces companies to report cost of health care


January 17, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK — New York--What's a "fas-bee" and why is it terrorizing America's largest companies -- and their retirees?

Just the Financial Accounting Standards Board, a body of seven accountants who make the rules governing corporate America. But one new rule, FASB 106, has sparked turmoil by forcing companies to estimate retiree health care costs -- and to put the astronomical expense on their financial statements.

Ford Motor Co., Westinghouse Electric Corp. and other corporate giants are shuddering from the rule's impact. Some have taken multibillion-dollar charges against earnings -- turning a year's profit into a record loss. And many, in response, are slashing retiree health care benefits or re-examining early retirement programs.

In an age of global competition, the rule also highlights the unique position of U.S. companies. Alone among major international competitors, they are burdened with providing health and retirement benefits to current and former employees.

The new rule crystallizes a problem ignored for decades: Companies have been promising health care benefits to retirees without any idea how to pay the increasingly expensive tab.

FASB's response was simple enough. Its rule, which will affect most financial statements this April, forces companies to add up the costs of providing health care for retirees and for current employees when they retire.

Companies must treat the health care cost as a liability on their balance sheets. And though they do not have to set aside money to pay for it, they must subtract it as an expense when calculating profits.

Previously, companies had to show only how much they were paying for retirees' health care.

"All the rule does is tell companies to put down on paper the cost of what they've promised their employees. Most companies have no idea what this [amount] is," FASB spokeswoman Debbie Harrington said.

A blow to older companies

The new rule is a blow to the nation's fading corporate stars. Most of the new liabilities -- estimates start at $400 billion -- will hit older industries that led the way in providing millions of Americans with insurance coverage.

In the most drastic case, General Motors Corp. faces as much as $24 billion in future retirement health care costs -- two-thirds of the automaker's book value. Ford already has announced it will take a $7 billion charge in 1992, turning a profitable year into the worst loss in U.S. corporate history. And Bethlehem Steel Corp. could face a $1.6 billion charge to pay for its 68,000 retirees.

Companies are allowed to account for the costs as a one-time charge, as Ford is doing, or spread the expense over 20 years. Most companies, including GM and Bethlehem Steel, haven't announced what they're going to do.

Bond rating agencies say the new liabilities will influence how they rate companies, especially older ones with lots of retirees and generous benefits.

"It absolutely will affect how we look at companies. If they have that much liability, we can't ignore it," said Scott Sprinzen, a corporate finance analyst for the Standard & Poor's Rating Group.

S&P, which rates the ability of companies to repay debts, already has downgraded four companies due to their future health care liabilities, Mr. Sprinzen says.

Lower ratings make it more costly for companies to borrow money.

Wall Street's critical eye also extends to stock ratings and prices. Although no brokerage firm has recommended selling a company's stock because of the new liabilities, strategists say the new numbers should wipe 9 percent to 13 percent off the book value of the 500 most important stocks.

"It should influence their [investors'] thought process. You're acknowledging a liability, one that will keep growing," said Robert Willens, a tax and accounting specialist for the Shearson Lehman Bros. Inc. brokerage.

Although analysts and investors should have known all along that GM, Westinghouse and other big companies had huge commitments to pay retiree health benefits, they sometimes ignored what they didn't see on a financial statement, Mr. Willens said.

Slashing health benefits

To bolster their financial statements, about two dozen companies, including McDonnell Douglas Corp. and Unisys Corp., have cut health benefits to retirees or have told current employees not to expect health care benefits after retirement.

This has sparked an outcry against the new rule. Many retirees say companies are just using the rule as an excuse to slash

health care expenses.

Company executives, meanwhile, say the rule has forced them to look hard at whether they can afford to pay for retirees' health care.

"I really think it is ridiculous for us to account for this. The end result is that thousands lose their health care at a time when we're worried about 36 million people being without health insurance," said Robert Ripston, vice president for human resources at Ingersoll-Rand Inc., a maker of construction equipment.

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