General Motors has America's biggest corporate pension fund. And the accounting for that fund could represent the biggest illusion among American corporations.
It is no secret that pension accounting is a hall of mirrors that distorts the appearance of both pension plans and the companies that sponsor them. But a new analysis of the 500 largest American companies finds that the accounting allows nearly all of them to inflate their net worth.
The biggest discrepancy is at GM; if the company's balance sheet were adjusted to portray the full magnitude of its pension assets and obligations, the analysis found, its net worth would fall by about $38 billion - wiping out shareholders' equity.
The study "shows the General without its clothes, and it's not pretty," said the author of the new report, Jack T. Ciesielski, publisher of The Analyst's Accounting Observer of Baltimore.
To be sure, General Motors and its fund are not in immediate danger. It has made all contributions required under current rules, and the fund had assets of about $100 billion at the end of 2004, far more than it needs to pay benefits coming due at about $7.4 billion a year.
But Ciesielski's report comes as concerns mount about GM's financial outlook, given its competitive pressures and growing health care costs.
The Securities and Exchange Commission is reviewing the pension accounting of GM, Ford Motor Co. and several other large companies.
And last month, the Financial Accounting Standards Board, which writes the accounting rules for American business, began preliminary work on a complete revision of the current pension accounting procedures.
When the SEC began its review last fall, an official said the agency had not found violations of the securities laws by GM or the other companies, but wanted to see whether their pension calculations were connected with efforts to "smooth" earnings.
A GM spokesman said that while Ciesielski's analysis "might be a topic for some type of theoretical debate," GM was abiding by the accounting rules now in place.
"This is a complicated accounting issue, and the average investor has to do a little bit of homework," said the spokesman, Jerry Dubrowski. "Our disclosures are comprehensive, and the reason that he's able to provide so much information in his analysis is because of our disclosures."
Ciesielski, a member of the Emerging Issues Task Force of the Financial Accounting Standards Board, also adjusted the balance sheets of the 500 largest American companies with pension funds.
Virtually all reported an inflated value for their shareholders' equity as a result of their pension accounting, he contended. But GM had by far the biggest discrepancy, or "equity gap," as Ciesielski calls it.
In its annual report, GM reported a net worth, or shareholders' equity, of $27.7 billion at the end of 2004. But that figure includes several pension-related items that are little better than "accounting placeholders," Ciesielski said, numbers that poorly reflect the actual size of GM's obligations to its pensioners and the investments it has made to secure them.
GM did nothing unusual or improper in using these numbers; it simply followed standard pension accounting rules. When Ciesielski removed these numbers and replaced them with figures that he believes more closely correspond to economic reality, GM ended up with a negative shareholders' equity of $10 billion - a $38 billion swing from the reported amount.
"Negative shareholders' equity is not a death sentence," Ciesielski said in an interview, explaining that he was not trying to predict whether GM might one day go bankrupt or default on its pension obligations. Rather, he said, his study showed just how much the current accounting rules for pensions could obscure a company's true financial condition.
GM was not the only company to end up with a net worth of less than zero in Ciesielski's analysis. So did Boeing Co., Goodyear Tire & Rubber Co. and UST Inc.
But even before Ciesielski did his adjustments, Lucent Technologies Inc., Delta Air Lines Inc., Maytag Corp. and Qwest Communications International Inc. had negative shareholders' equity. His revisions only made their conditions worse.
The accounting rules for company pensions have no direct connection with the pension-financing rules, which are being scrutinized by Congress in light of the huge pension failure at United Airlines.
As it happens GM has complied energetically with the funding rules, even taking the unusual step in 2003 of issuing $18 billion in bonds and putting the proceeds into its pension fund. In its annual report and other public documents, the company states that its pension plan is fully financed under the funding rules, and that it expects not to owe any more pension contributions until 2010.
The way the accounting for pensions now works, most of the routine ups and downs of a pension fund are kept off the sponsoring company's balance sheet. Instead, they are kept in running tabs that are expected to net each other out over the long term. The argument for doing things this way is that a pension fund is a long-term entity and its year-to-year fluctuations might not be meaningful.
The trouble is, the big fluctuations of the past few years have not all canceled one another out and the accumulations are growing very large. When they reach a certain point, companies are supposed to start slicing off a bit every year and counting it as part of that year's labor costs. That can reduce corporate earnings, sometimes for years.