More people forced into ER and early social security

[ERD50]

I do not believe the Heritage explanation for one simple reason --

I agree that the Heritage explanation was not full enough to satisfy me (but far better than the mediamatters). I wish they would have taken it a couple steps further. Either the case weakens as they dig into it, or they lose their audience in the numbers, I dunno (I suppose the cynic could say 'both' ).

Unless you also account for the hours that generated that deferred pay, you don't have an accurate gauge.

If they are indeed counting it, then yes. Well, tying any fixed costs to a hours worked is already getting kinda crazy (but possibly still useful if clearly and carefully applied). I'm getting deja-vu here, I seem to recall pointing out that increasing efficiency (fewer hours worked for same output) would actually increase those fixed costs on a 'per hour worked' basis, so it could all get very misleading.

-ERD50

 

[HFWR]

OK, I see. I thought your 'right wing canard' comment was directed to the Heritage Foundation (considered by many to be 'right wing'), and they didn't say 'paid' in their article.

-ERD50

He was probably referring to the usual union blah blah blah that comes from the right.

Not much unlike the opposite that comes from the left...

Methinks a lot of [-]sound and fury[/-] baloney...

There's [-]a lot of[/-] some truth in both stereotypes, so there's plenty of blame to go around...

And why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye?

 

[dex]

I do not believe the Heritage explanation for one simple reason -- as I understand the accounting rules (and I am a lawyer, not an accountant) the present value of expected pension obligations to future retirees goes on the balance sheet, not the income statement

Pension accounting is complex. The annual pension expense must first pass through the income statement to the balance sheet. How it is done depends upon the contract and GAAP. Simply, a company could estimate the number of retirees and fully fund their pension with some of the $ put on the balance sheet sheet as an asset with a contra account - the payout - to be put on the income sheet annually.

As to the $70/hr issue and retirees, I could see that as a component of Cost Accounting - which is a management tool, not a reporting tool. If you wanted to understand the cost/profit mix for a car you would use Cost Accounting. The retirees costs would be included in that analysis.

Cost accounting - Wikipedia, the free encyclopedia

 

[Finance Dave]

I do not believe the Heritage explanation for one simple reason -- as I understand the accounting rules (and I am a lawyer, not an accountant) the present value of expected pension obligations to future retirees goes on the balance sheet, not the income statement

So, for any year, with respect to labor, my current obligation is the present value of benefits promised to existing employees. I make appropriate actuarial assumptions (regarding how many will retire and when, what COLAS will be, how long they will live, etc) to calculate this number. I also must perform this calculation for current retirees (it is a little simpler since they are already retired). I then add the two numbers. That is my current balance sheet obligation for benefits. When Heritage says they are required to account for the present value of benefits to future employees in the current year, I believe they are referring to accounting on the balance sheet like this. But that says nothing about current per hour labor costs.


It is, rather, the income statement that performs this function. It should have the actual costs paid to current employees in wages plus health care payments made, plus payments made on pensions. For any year, the per hour labor costs (current plus legacy) could be viewed as the sum of these three numbers divided by the number of hours worked that year, which is how I believe the $70/hr was calculated. However, I believe that is misleading, because the payments to retirees actually represent deferred payment for work done long ago. Unless you also account for the hours that generated that deferred pay, you don't have an accurate gauge.

I am an accountant (CMA - Certified Management Accountant) and work in the Treasury function of a Fortune 500 manufacturing company. Although I don't currently calculate wages and benefits, I did have a role in the early 2000s where I did exactly that.

Per your bolded comment above, technically you are correct. However, what's not stated is that any costs over and above the expected benefits must go to the income statement. Let me provide an example. Let me also say that I'm simplifying the accounting to get the point across, as one cannot teach pension accounting on an internet forum in 1,000 words or fewer.

Case 1 - You have an obligation (according to the actuaries) of $1M. You have a balance sheet account that's worth...dare I say it.... $1M. In that case you have the obligations covered, so there will be no costs on the income statement in that year.

Case 2 - You have an obligation (according to the actuaries) of $1.1M. Note the reason this is higher than Case 1 is that the obligation is an estimate and must be recalculated annually...so something has changed. You have a balance sheet account that's worth...I see a trend... $1M. In this case, the company would have to "fund" the shortfall through the income statement to the tune of $100k for that year.

The result is that sometimes pension costs do go through the income statement...it depends on a variety of factors looked at by the actuaries.

Going back to the cost of an employee, I cannot speak for the Big3. However, I can say what I saw at our company. Our workforce is very similar in terms of required skills and part of the country (Midwest) that the Big3 operate in.

I will point out that we are self-insured. Why is this relevant? Because our health care costs are borne by all employees, so an aging workforce implies higher health care costs. In other words, the age of the workforce is a key factor in the overall wage/benefits picture. If 25% of our employees retired and were replaced by healthier (i.e. younger) employees, our health care costs would immediately decrease. This is not something very well explained in many stories, and I have no way of knowing whether the Big3 operate this same way or what their average employee age is....I just wanted to make it clear for my example below.

At our company in the early 2000s, the cost structure of having an employee on the books looked something like this:

• Wages
• Current health care costs (total $$ spent prior year divided by # employees)...this becomes the new "benefit" used for planning purposes.
• OPEB - Other Post-Employment Benefits (this is for future i.e. post-retirement healthcare and other costs such as life insurance) (See footnote 6 in the Heritage article)
• Unemployment compensation
• Holiday Pay
• Disability
• FICA (employee pays 6.2% and employer pays 6.2%)
• Medicare (employee pays 1.45% and employer pays 1.45%)
• Other (includes vacation costs when employees elect to have their vacation paid to them in lieu of taking time off, as well as other ancillary costs)

Our company did not include overtime averages, although some companies do.

I don't have exact figures for the above, and would not share them regardless, but suffice it to say that the total cost was more than double the wages only portion. In other words, if an employee made $25 in base salary, the other portions added together made up more than $25 in additional benefits. Wages were less than half of the total benefit the employee derived by being employed.

There are some who don't believe it's fair to "count" the non-wage piece because the employee can't take it home. Well, I disagree. Why? Let's try a fictitious example. Let's say I'm offered two jobs.



Job 1 -

• Wages of $100,000/year with no benefits

Job 2 -

• Wages of $80,000/year
• Free leased company car with all fuel and maintenance paid
• Free uniforms with laundry service
• Free financial advisory services annually
• On-site health/wellness programs at no charge
• Paid-for membership to local health club
• Free parking in secure garage in downtown
• One pair of safety shoes paid for annually
• Free child-care at company-operated licensed facility
• $ per $ match on 401-k contributions up to 6% of pay
• Cash balance plan with 6% of wages contributed by company annually
• Tuition reimbursement for self and family
• Company-funded lunches in on-site cafeteria
• 5 weeks vacation (not paid, but you still get your $80k/year)

Guess which job I'm taking, even though I can't "take it home".

 

[Gumby]

Thanks for that explanation, although I must confess that I now have no idea who is right as between the Heritage and UAW explanations of the $70 number.

In any event, as I mentioned earlier, the labor costs are but a portion of GM's problems. And I think the "get paid $70/hr number was demagoguery -- pushed in order to generate resentment among other workers, who will tend to look at the actual dollars in their own pay package and ignore all the other components of their own compensation.

 

[Finance Dave]

Thanks for that explanation, although I must confess that I now have no idea who is right as between the Heritage and UAW explanations of the $70 number.

In any event, as I mentioned earlier, the labor costs are but a portion of GM's problems. And I think the "get paid $70/hr number was demagoguery -- pushed in order to generate resentment among other workers, who will tend to look at the actual dollars in their own pay package and ignore all the other components of their own compensation.

I don't think either one is right or wrong...just a different slant on how to explain it. I agree we should say workers are "paid" that much...but I think it is fair to say it "costs" the automakers that much.

 

[Gumby]

but I think it is fair to say it "costs" the automakers that much.

Maybe yes, maybe no.

I pondered your explanation overnight, and it seems to me that even if you say the number is comprised of current sums paid out to employees plus funds paid to "top up" the pension fund, it still may be inaccurate. The one reason that stands out for me is that the "top up" number varies not just with labor cost, but also with current and expected future investment returns. To go to your example, suppose from year 1 to year 3 the workforce did not change at all (ignore the fact they they get older and assume no raises). The initial current value of the promised benefit is $1M and the fund is $1M. Now suppose during the next year, the fund loses money like it's 2008. The benefit number is still $1M, but the fund value is now $600K and the fund needs be topped up by $400K. Now suppose the next year, the market parties like like it's 2009 (sorry Prince). The benefit is still $1M, but the fund is now $1.2 M -- overfunded for the immediately foreseeable future.

Did the company's labor costs actually change between Year 1, Year 2 and Year 3? Will those costs drop for Year 4 due to the overfunding? No, because they are the exact same people making the same money (by my definition). But if you used the Heritage calculation, you would say labor costs went up in Year 2 and way down in Year 3 and probably will go down again in Year 4.

 

[landonew]

What is the proper value of an automotive worker's time and abilities? $29/hr or $14/hr or something else? You presume an awful lot to say new hires get $14/hr "as they should". Would you care to have me set your salary, since I know precisely what your time and abilities are worth? I think you probably would not like that at all. In fact, you would likely tell me that your proper salary is whatever you can negotiate with your employer and that I should butt the hell out. And you would be correct.

With all do respect, it seems as though you are applying a free-market theory to a non-free market situation. If trade unions were a naturally occuring phenomon, I would agree.

However, trade unions wouldn't exist (or at least would be far less prominant) "but for" the National Labor Relations Act (i.e. laws enabling employees to unionize without employer interference).

I deserve the rate I negotiate with my employer because he can refuse to pay it. GM did not have that option, as evidenced by the 54 day strike. For instance, if I tried to go on strike, my employer would not wait 54 days to hire someone else - my seat would likely still be warm for the next guy.


Thus, the "free market" approach you use to justify UAW's wage doesn't follow. That doesn't necessarily mean that it wasn't fair, just that your free market approach does not support it.

GM failed for the simple reason that they were unable to sell a sufficient number of cars at a sufficient price to cover their expenses. Period, end of story. Why that should be the case is a more complicated matter.

Yes, because their labor costs where higher than their competitors, thus inflating the cost of their cars. The other reasons you cite (i.e. outdated plant, poorer designs, etc.) really just cloud the issue. They may be viable to some degree or another, but they are difficult to dispute and/or quantify.


Regardless of the "time value of money", The present day economics are quite simple - GM's labor costs (notice how I say costs here) were double that of their competitors, which undeniably inflated the price of their product. Are some of these costs deferred compensation from last year (or last decade)? Maybe, but they are nonetheless a cost affecting GM's bottom line.

Simply put, Consumers buy fewer widgets at $3 than they do at $2. Cars are no different.

 

[rescueme]

The other reasons you cite (i.e. outdated plant, poorer designs, etc.) really just cloud the issue. They may viable to some degree or another, but they are difficult to dispute and/or quantify.

This is true.

Just to add to the discussion, I retired from a manufacturing plant that did have a union for the "production" side of the house (I was not in the union, with my various j*bs over the years).

However, being a vertical manufacturer in the early days I was there (e.g. all components were made in-house, from screws to the final production - exception being large scale stamping operations) there was a technology shift from the late 70's to the late 2000's, when I retired.

Within the union contract, there was wording that allowed for the improvement of "manufacturing technology" but did not specifically say if this needed to be done in/out of house.

To do it in-house would have been cost prohibitive, as the tools/machines would have required a great bit of investment. It was better (from a financial sense) to have another company who specialized in new manufacturing technology and was willing to invest in just a part of the total manufacturing cycle to make parts more efficiently, and for a better price than we could do on our own.

This was an evolution of the time when companies started looking at their "core business" and started to get rid of processes that they had to have, but not necessarily a major component of the final process - in our case assembly. While I did not work for a car company, our production process was very similar.

Other business (regardless of product) also started getting rid of processes that were not part of the core business; a good example is IT services that were farmed out to specialists in that area (such as IBM, Accenture, etc.) and not only designed/executed software but also took care of managing in-house desktop (e.g. PC's) from acquisition to maintenance.

Over the years, most manufactures migrated from vertically integrated to being involved in "final assembly" only. For example, GM is researching a diesel motor to be used with their pickup line (other than what they currently use), but they are looking to having the motor built by an outside company.

Changes in manufacturing over the last 30-50 years have driven the production of many products; however, the folks that supported the "old way" of doing things are still "on the books" till they pass, so regardless of industry, you may have considerable legacy costs.

Also part of the change in manufacturing is "lean production", where parts are ordered based upon production schedules, not stockpiled during economic downturns and used when things got better in order to keep employment "evened out" over the long term. Those days (like pension plans) are generally long gone.

The off-shore brands brought these changes to their manufacturing processes early on, when they established plants within CONUS. The existing U.S. brands had to "learn" how to do these processes in a much better way, along with changes in manufacturing "physiology" (how many people know/remember the story of Deming in this area?)

Things are not the same as they were in the past, and they certainly will not be the same in the future, as today.

Unfortunately, the "overhang" of long-term financial commitments to employees no longer with the company (generally union) will be an impact to U.S. based companies for quite a long term, IMHO.

 

[ziggy29]

Simply put, Consumers buy fewer widgets at $3 than they do at $2. Cars are no different.

True but perhaps a little oversimplistic. Maybe if the private sector middle class was getting the same deal today as they were getting back in the union heyday in the 1950s to 1970s, they could afford $3 more easily than they can afford $2 in actuality. And they'd probably feel better about financing something if they were pretty sure job security and raises were in their future.

Don't forget what's driving some of the public sector employee backlash: a private sector middle class that's shrinking and not keeping up. If we were keeping up, it would probably be far less of an issue to people, as we generally don't begrudge others of the deal we're paying for if we think we're getting a similarly fair deal.

I'm not defending the UAW per se here but I think there's too much angry emphasis placed on what they *are* continuing to get and not enough on what the rest of us are *not* getting even as some companies report record profits and haven't given out raises in several years. And frankly I'm increasingly seeing this as a corporatist divide-and-conquer strategy so we'll turn on each other instead of recognizing that we need to be looking at the corporatism infecting all our institutions, including government.

At this point, what this has to do with ER or Social Security is anyone's guess.

 

[MichaelB]

A couple of points here just to clarify:

WRT the Heritage Foundation numbers. What they are really saying is:

UAW worker @ 40 hours + overtime + fully funded benefit costs of current workers + unfunded benefit costs of previous workers > avg wage of all private sector workers.

duh.

Another more subtle but meaningful difference is one number includes medical benefits paid by the employer while the other may - and probably does - include medical benefits paid by Medicare. IOW, there is a benefit cost that is incurred and paid but not included in the number as presented.

Any number generated by any organization with an ideological mission needs to be used with care.

 

[growing_older]

When I was younger I also believed that SS was in danger and likely to be changed in ways that would make it unlikely to pay me anything meaningful. I was a pretty frugal saver as a result. Then....

Then the stock market wiped out several years of contributions and growth. The timeline for retirement gets extended to make the funds last longer. In the meantime, I'm getting older and at some point it's difficult if not impossible to change jobs/careers and start all over so you try to deal, and hope your health holds out.

As I near retirement, I had to change my plans and now I am very much counting on Social Security. As a younger worker, I had less "invested" in the system so could easily consider dumping it and doing something different. Now that I have sunk costs in years of contributions, I am much less willing to walk away from that. Plus with recent events (both market and personal) I am much less able to walk away from it.

 

[ziggy29]

When I was younger I also believed that SS was in danger and likely to be changed in ways that would make it unlikely to pay me anything meaningful. I was a pretty frugal saver as a result. Then....
As I near retirement, I had to change my plans and now I am very much counting on Social Security. As a younger worker, I had less "invested" in the system so could easily consider dumping it and doing something different. Now that I have sunk costs in years of contributions, I am much less willing to walk away from that. Plus with recent events (both market and personal) I am much less able to walk away from it.

This is true. Whether one thinks it's a "Ponzi scheme" or not, the simple truth is that the crash of many 401Ks over the 2000-09 period has made SS a more important component for many planning retirement, and I would suggest even some who supported its abolition a decade ago (assuming they'd have more than enough in their 401Ks) may be singing a different tune because their crippled 401Ks don't look like enough any more.

In this day and age when some many people lament having a 401K instead of a DB pension, is eliminating the last widespread pension-like retirement income in place for "more 401K" really going to be a popular sell today? I think not.

 

[ERD50]

I'm not defending the UAW per se here but I think there's too much angry emphasis placed on what they *are* continuing to get and not enough on what the rest of us are *not* getting even as some companies report record profits and haven't given out raises in several years. And frankly I'm increasingly seeing this as a corporatist divide-and-conquer strategy so we'll turn on each other instead of recognizing that we need to be looking at the corporatism infecting all our institutions, including government.

I'm sure that plays into it, but I think it ignores two things. One, it would drive the price of everything up, and every industry would need bailouts, until it all collapses. If raising wages was all it took to strengthen the economy, a minimum wage of $50/hr with full benefits should be made law. Two, you leave out the important third element - competition from outside the US. That is one thing that is flattening US wages now. We can't ignore it.

When a company starts making increased profits, they don't just decide to start paying higher-than-market rates for anything, be it steel, electricity, office supplies or wages. That would be silly. You pay what the market will bear. And that foreign competition is affecting what we can demand for wages, like it or not (and I'm sure the hungry people overseas like it).

At this point, what this has to do with ER or Social Security is anyone's guess.

Heck if I know, and I'm not going back to the OP to try to figure it out. But one more comment like that out of you young man, and you'll need to start shutting down the 'Bacon' and 'I love furry things with four legs' threads!

-ERD50

 

[ziggy29]

Two, you leave out the important third element - competition from outside the US. That is one thing that is flattening US wages now. We can't ignore it.

I'm definitely not ignoring this. But I am saying there could be factors that complicate matters in the other direction. It's probably true that public sector wages and benefits are not sustainable relative to the current private sector middle class realities. I do think there is some "equilibrium" between the divergence between the public sector/union deal and the private sector non-union deal. And the former may have to adjust with reality, but that doesn't mean we should just sit around and take it while supposedly American corporations increase profits by exporting good jobs. I'm not a strong protectionist, but I do think we are getting creamed by allowing relatively free trade with nations with 1/10 our labor costs and very little in the way of environmental protections or workplace safety laws in place. Exporting jobs should not be a free ride for U.S. business.

I suspect there's a sustainable sweet spot in there somewhere if the will was there to find it. Global trade is not a zero sum game, but neither is it always win-win, and strong emerging market labor gains is likely to mean U.S. labor losses. And while I'd like to see the entire world's prosperity increase, I don't think it's a good idea to let it increase so quickly that we allow our own throats to be slit in the process.

Frankly I think using the "global economy" as a justification for the destruction of the U.S. middle class isn't acceptable, and while we can't be too isolationist and protectionist, neither should we give up the farm.

 

[ERD50]

I'm not a strong protectionist, but I do think we are getting creamed by allowing relatively free trade with nations with 1/10 our labor costs and very little in the way of environmental protections or workplace safety laws in place. Exporting jobs should not be a free ride for U.S. business.

I agree that it isn't 'fair' if they are not required to have some reasonable level of safety and environmental protections in place. I think things are improving in that regard, but are mostly still far short of where they should be.

And while I'd like to see the entire world's prosperity increase, I don't think it's a good idea to let it increase so quickly that we allow our own throats to be slit in the process.

Frankly I think using the "global economy" as a justification for the destruction of the U.S. middle class isn't acceptable, and while we can't be too isolationist and protectionist, neither should we give up the farm.

I didn't mean it as justification, just an explanation. Though it is probably both - the 'justification' being the poor people who benefit from the flatter world.

I understand how you feel, but for me personally, I have a hard time trying to justify that my personal (relatively high) standard of living deserves any protection against someone with a much lower standard who is willing to work hard to improve it. If some of it comes at my expense, I think I should just be thankful for enjoying the fruits of the 'birth lottery' for as long as I have.

I guess what I'm saying is - how can we fight this, and should we? Outside of simply working to be more productive, and working to ensure comparable safety & environmental standards, I'm stuck.

-ERD50

 

[dex]

I guess what I'm saying is - how can we fight this, and should we? Outside of simply working to be more productive, and working to ensure comparable safety & environmental standards, I'm stuck.
-ERD50

You would deserve the Nobel Prize in Economics, if you could figure that one out. I haven't read about anyone that is trying to figure it out. I get the feeling people just want to get past this current economic downturn and not thinking about anything past that.

 

[MichaelB]

Frankly I think using the "global economy" as a justification for the destruction of the U.S. middle class isn't acceptable, and while we can't be too isolationist and protectionist, neither should we give up the farm.

I guess what I'm saying is - how can we fight this, and should we? Outside of simply working to be more productive, and working to ensure comparable safety & environmental standards, I'm stuck.

Things that would help:

Technical programs and schools that help individuals develop skills needed for higher value-add industry. Could include a separate high school track for industry skills instead of college prep.

All compensation, be it cash, stock or whatever, pays full payroll and progressive income taxes at Y2K scales.

Tort reform to lessen the enrichment factor that favors uninjured individuals and attorneys.

Health care reform to eliminate the need for business to employ “HR healthcare specialists”.

Intensive, immediate energy policy.

The US has an excellent culture of innovation and industry. We need to make it less hostile to small business, the last three would help that.

Bad schools produced bad teachers which produced worse students - repeat the cycle.

Clearly, until this changes the US will continue to generate individuals not qualified to produce the added value needed to raise the level of prosperity.

 

[Gumby]

Thus, the "free market" approach you use to justify UAW's wage doesn't follow. That doesn't necessarily mean that it wasn't fair, just that your free market approach does not support it.

I made no effort to "justify UAW's wage". I merely pointed out that you are an extremely arrogant young fellow if you presume to judge what the "proper" wage is for a UAW worker. Your uninformed judgment is, fortunately, not the standard of valuation for someone else's work.

 

[landonew]

I made no effort to "justify UAW's wage". I merely pointed out that you are an extremely arrogant young fellow if you presume to judge what the "proper" wage is for a UAW worker. Your uninformed judgment is, fortunately, not the standard of valuation for someone else's work.

I said it was the "proper wage" because I understood it to be competitive with the wage paid by GM's non-unionized competitors, not because I feel that UAW workers should get less or more.


To be clear, I don't personally care how much UAW workers, or anyone else for that matter, get paid. They could be compensated with livestock.

However, I do have a serious problem (as a tax payer) when the government shells out my tax dollars in such a callous fashion. When I see special interest groups, like the UAW, gaming the system, it angers me. My perception (be it wrong or right), is that the UAW successfully lobbied for the auto-bailout.

Regardless, UAW workers benefited from the bailout (i.e. they faired better than they otherwise would have under bankruptcy). Furthermore, their salaries were clearly not competitive with their non-unionized counterparts (regardless of whether they were paid $70/hour, or $24/hour). Consequently, the tax payers picked up a portion of the excess.


I believe that to be a reasonably objective statement of the facts (as well as my position). If you disagree, then so be it.

 

[MichaelB]

However, I do have a serious problem (as a tax payer) when the government shells out my tax dollars in such a callous fashion. When I see special interest groups, like the UAW, gaming the system, it angers me. My perception (be it wrong or right), is that the UAW successfully lobbied for the auto-bailout.

Do you think you, as a taxpayer, would have been better off by allowing GM to go broke? If so, in what way?

Regardless, UAW workers benefited from the bailout (i.e. they faired better than they otherwise would have under bankruptcy). Furthermore, their salaries were clearly not competitive with their non-unionized counterparts (regardless of whether they were paid $70/hour, or $24/hour). Consequently, the tax payers picked up a portion of the excess.

This is not clear. What part of the UAW are or have been paid by tax money and how much of UAW comp is excess?

 

[landonew]

Do you think you, as a taxpayer, would have been better off by allowing GM to go broke? If so, in what way?

I think that, as a taxpayer, I would be better served by a fiscally responsible government. I also think that each and every time a private entity is bailed out, it sets a precedent for the next one. It seems as though one bailout begets another (Bailout List: Banks, Car Companies, and More | Eye on the Bailout | ProPublica).

At what point does the cumulative cost outweigh the collective benefit? I can't answer that.

This is not clear. What part of the UAW are or have been paid by tax money and how much of UAW comp is excess?

Obviously, there is no precise mathematical formula. I (like gumby) am an attorney, not an accountant. As such, you are likely better suited to make such a projection than I am.

However, I will give it a shot (based on the available objective evidence, which is clearly insufficient).

The only objective evidence I have is the comparative labor costs, namely $70/hour (labor cost for GM) v. $40/hour (labor cost of non-unionized competitors).

If the comparative data is an accurate representation (which it probably isn't), then $.75 out of every $1.75 in compensation was excess.

Subtract compensation that was rendered immediately upon performance (i.e. salary, SS, medicare, health insurance, etc.)..... how much is left that is not excess?

But wait, how much was actually paid out before hand? Did some employees get a greater percentage of their excess benefits prior to bankruptcy than others?

Obviously we don't have adequate data to precisely answer "how much excess" was paid by the tax payer. But there appears to be a high likelihood, that at least some tax dollars went to excess compensation.

If you where a gambling man, how would you wager?

 

[landonew]

Do you think you, as a taxpayer, would have been better off by allowing GM to go broke? If so, in what way?

This is not clear. What part of the UAW are or have been paid by tax money and how much of UAW comp is excess?

Even better, one could argue that pensions and other deferred benefits are "conditional" compensation dependent upon Employer solvency.

Under that analysis, any monies received under the bailout, that would not have otherwise been received under bankruptcy, was excess.

 

[Bikerdude]

I made no effort to "justify UAW's wage". I merely pointed out that you are an extremely arrogant young fellow if you presume to judge what the "proper" wage is for a UAW worker. Your uninformed judgment is, fortunately, not the standard of valuation for someone else's work.

IMHO your value in the market place is determined by how quickly, and at what cost you can be replaced. In my experience, union employees that fall into the "easily replaced" camp must resort to other tactics to remain gainfully employed.

 

[Gumby]

Landonew: Your perception is wrong. Let me tell you how it played out and you might come to a different conclusion. (this is all from memory, so others with more specific information are free to chime in).

1. Far and away the largest problem on GM's balance sheet (until 2007) was OPEB (non-pension retiree benefits, mostly health insurance) based on GM's overly generous (in hindsight) past retiree health promises. In 2007, the UAW and GM negotiated the creation of a VEBA trust. The VEBA trust assumed the liability for retiree health benefits, which removed it from GM's balance sheet. In return, GM executed a convertible note covering contributions for a specified number of years into the future (I forget how many). This was widely viewed as a good thing for GM, its bondholders and its shareholders, because, inter alia, it put the risk of underestimated future benefits on the VEBA trust.

2. Unfortunately, gas prices rose precipitously in 2008 and the economy dropped like a stone. Demand for GM cars dried up. By late 2008, GM recognized they would soon run out of money and went to the federal government, hat in hand. After some initial foot dragging, they and Chrysler received some TARP funds. I believe the loan was secured with a senior lien.

3. In early 2009, the government started pressuring GM to work out a debt for equity swap. The debt at that time primarily consisted of unsecured bondholders and the VEBA trust (also unsecured). The government wanted both groups to take GM equity for half of their debt position. The UAW agreed to the deal. The unsecured bondholders rejected it.

4. After further negotiations between GM, the creditors and the government, GM filed a prearranged bankruptcy in June 2009. The federal government provided the DIP (Debtor in Possession) financing, which is money used to operate the company while it is in Chapter 11.

5. At that time, the creditors were as follows: The US government, to the extent of the DIP financing and the TARP loan -- secured by a superpriority lien because it was the DIP lender; a relatively small number of secured creditors; the unsecured bondholders; the VEBA trust unsecured note; trade creditors and, at the end of the line, existing equity.

6. Pursuant to 11 U.S.C. Sec. 363, and by agreement between the creditor groups and GM, the company's operating assets were sold to a new company. Equity in the new company was distributed 60% to the federal government, 12% to the Canadian government, 17.5% to the VEBA trust and 10% to the GM unsecured bondholders. Secured claims were paid in full and most trade creditors were paid in full (so they would keep supplying).

7. The default order of priority in bankruptcy is: 1) secured claims, starting with the DIP lender; 2) costs of administering the estate (i.e. the lawyers and bankers); 3) unsecured claims; 3) stockholders. And the general rule, absent other agreement, is that parties of equal rank should get treated equally.

8. Any bankruptcy is a multiparty negotiation carried out under the threat of litigation. Essentially, the parties jockey for legal position and then almost always make a deal. Looming over everything is the possibility that the company will cease operations and liquidate. Therefore, parties negotiate with an eye toward the maximum that could get if they litigate and what they could lose if the company liquidates. Companies are almost always worth more as a going concern than in liquidation.

9. The reason I mention this dynamic is that the parties can, and often do, agree to distribution that does not follow the strict rules of priority that would govern if the case were litigated to the bitter end. Also note that negotiation is done by creditors as a group and majority rules. If your class votes to accept certain treatment, you are usually stuck with it.

10. In GM, the secured creditors were paid in full. The unsecured trade creditors were also, for the most part, paid in full in the ordinary course. Old GM shareholders were wiped out. That leaves the two major unsecured creditors -- bondholders and VEBA. Note that the bondholders were equal in rank to the VEBA, not senior. Accordingly, absent agreement, they were entitled to be treated the same.

11. It is undisputed that the VEBA received a higher percentage recovery than the unsecured bondholders (I can't recall the specific recovery percentages). But, crucially, it was done by agreement. In my view, there are three factors that explain why the bondholders would agree to this outcome. First, the majority of the bonds were held by distressed hedge funds who purchased them for 20 cents on the dollar. They had a lot of room to give and still make a sizable profit. Second, the UAW does not lose the right to strike in a bankruptcy. They could have shut GM down and made certain that everyone walked away a loser (yes, it would have been a Pyrrhic victory). Third, there is case law under the Bankruptcy Code that permits a secured creditor to direct a portion of his recovery under a plan of reorganization to a lower class of creditor and bypass intermediate classes. Thus, in this case, the government could preferentially share some of its recovery with the VEBA trust if it wanted. No, this was not done here, but the threat existed and may have shaped the negotiation.

12. If I recall correctly, some individual bondholders objected but lost, because the court concluded that they would have received less in liquidation (which is the test). Although I could be thinking of Chrysler.

13. As I see it, for its efforts, the government got 60% of a new and improved GM, with a scrubbed balance sheet, no OPEB overhang and a brighter future. I am hopeful that we will profit from our investment

14. I do not see an argument that the taxpayers are paying the wages of the UAW members. If anything, one could argue that the bondholders were held up to pay for the OPEB expense, but as I noted above, they agreed to it because the alternatives were substantially worse. I believe that current wages at GM are quite competitive with the Japanese automakers (but I would dispute that their wages should be the standard. Maybe Honda workers should make more ? -- it all depends on how many cars Honda can sell and for what price).