Goodbye Pensions Hello Profits

October 17, 2005
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GRAND RAPIDS — After only six years as an independent business, Delphi Corp. has filed for Chapter 11 bankruptcy protection. The auto parts supplier was spun off of parent General Motors Corp. in 1999. It took along with it an obligation to pay the pensions and health-care costs of its former GM workers and retirees. That, according to CEO Robert S. "Steve" Miller, was the problem from the beginning.

But according to some union members, running the nearly $30 billion parts supplier into the ground in order to ditch its pension and health-care obligations was the plan from the beginning.

The train wreck was no accident. The bankruptcy was planned. GM wanted to renege on its obligations to workers. It wasn't creditors who forced Delphi into court, it wasn't debt, it was the desire to cheat workers out of their life savings," Gregg Shotwell wrote in his online column "Live Bait & Ammo." Shotwell is an employee of Delphi's Coopersville fuel injector plant, a United Auto Workers Local 2151 member, and a vocal labor rights activist. "GM spun off its liability to workers, not its assets. Bankruptcy was in the cards before the first shuffle. The bad hand we were dealt wasn't left to chance. The deck was stacked in a back room in Flint in 1998."

Whether it was premeditation, poor management or simple bad luck that brought about the bankruptcy, the incarnation of Delphi that re-emerges from Chapter 11 protection will be a very different entity.

"They're going to have to close plants and they're going to have to release workers who are employed in those plants," said Erich Merkle, an auto analyst with IRN Inc. in Grand Rapids. "They have got to get their overhead under control if they have any prospect of being a viable and profitable organization in the future."

Miller, in a letter to Delphi employees, said that the bankruptcy would see "a substantial segment of … U.S. manufacturing operations to be divested, consolidated or wound down." Leading up to the bankruptcy filing, Miller cited "legacy costs" as being the major force behind the company's ill fortunes.

The phrase "legacy costs" is a euphemism for union-negotiated health-care and pension obligations. One potential result of the bankruptcy is that Delphi would default on its pension plan. Miller has stated that the company would not do so, that instead it would like to cease paying retiree health benefits and lower hourly pay across the boards, according to motions filed by the company in bankruptcy court. If the company were to go back on Miller's word, it appears that the pension liability would revert to GM.

"What happens in terms of the pensions … that's really the $11 billion question," said Merkle. News reports have suggested that if Delphi were to default on its pension obligations, it could mean that GM would have to absorb $11 billion in debt. The Pension Benefit Guaranty Corp., the federal program that insures pension programs, said that Delphi's pension is underfunded by $10.8 billion, and that the PBGC would take on no more than $4.1 million of that sum should Delphi declare financial hardship. Should that transpire, GM could still be saddled with the balance.

"Would the union press GM to live up to that obligation if it was imposed upon them? That's the other big question," said Merkle. "Would it be in the UAW's best interest to drive General Motors out of business next?"

If the UAW were to force the issue, Merkle believes it is possible that it could result in GM seeking Chapter 11 protection. Other analysts have suggested that a GM bankruptcy is an unlikely repercussion. Wall Street analyst David Healy told CNN last week that GM's $32.3 billion in cash on hand, plus $50 billion in untapped credit, could easily absorb the Delphi pension. The terms of the spin-off agreement, according to an Oct. 10 report in the Wall Street Journal, allow GM the opportunity to buy back any portions of Delphi that might be more attractive and profitable after bankruptcy restructuring. So GM could actually come out ahead.

Regardless of the future impact to GM, Delphi's bankruptcy will have more immediate effects on its employees and on the economy of West Michigan.

"Delphi's workers, the UAW workers, the people that are retired with a Delphi pension — are they going to be better off as a result of this Chapter 11 filing? No. It's hard to envision that the Delphi employees would be better off," said Merkle. "However, in the long term, I think that Delphi will be much healthier as an organization than if they were forced to continue with the current contract."

Getting out from under that contract, whether through negotiation or actions of the bankruptcy court, is Delphi's only hope for survival, according to Merkle. The company is operating with that in mind, even if it means shedding employees and chopping wages.

"When you have labor costs at an hourly rate that are estimated to be about $27.50 an hour for unskilled labor, that's an astronomical amount of money," he said. "That's clearly higher than the national average for factory work. You just can't keep going on like that."

But over 1,000 of the people who earn that higher-than-average wage are employed in the two West Michigan plants. According to Merkle, the chances of those factories' long-term survival isn't certain.

"The one in Wyoming, it used to be about 2,500 employees. Now they're down to about 500. So if that one closes, it's awful for the 500 employees, but it wouldn't be devastating for our West Michigan economy. The plant out in Coopersville isn't going anywhere. That has to stay open because (GM) has to have those fuel injectors for their engines. So they will continue to produce at Coopersville. Now what will happen to the pay and the benefits for the workers there is anybody's guess."

In general terms, Merkle believes that the impact will be "relatively negligible" for the Grand Rapids area, though he fears that it could be "devastating" for the state as a whole.

"I think the east side will suffer most. Of course the west side will feel some impact. After all, we're not a separate state. We're still part of the state of Michigan. So, you are going to be looking at some revenue implications for the state … which can have some implications for the state as a whole."

Early last week, the bankruptcy court began moving on the Delphi restructure. The court approved "bridge orders" that cover temporary funding through loans and the ongoing payment of wages and salaries to employees. At the time the Business Journal went to press, the court had not decided on any further matters.

Lindsey Williams, corporate affairs manager for Delphi, told the Business Journal that it is too early in the restructuring process to address the future of specific plants or to offer any insight on the future of the pension funds.

According to court documents, the negotiations with the UAW will begin later this month. If a benefits-reduction agreement is not reached by December, Delphi will ask the court to nullify its union contract.        

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