New accounting for retiree health care. COSTS SURPRISE EMPLOYERS
Thirty-eight years ago, General Motors Corporation was spending only 5 percent of its benefits money on health care for its employees. Today, the automaker's health care plans are considered generous, extend to retired workers and their dependents, and represent more than 40 percent of its total benefit package. Last year, the company's 300,000 retiree families cost GM a whopping $800 million.
At many United States companies, health benefit costs have burgeoned as the number of retirees has surpassed the number of active workers. In some cases, the ratio is more than 2 to 1.
Yet, businesses have not had to account for these expenses the way they do with pension plans. Post-retirement benefit programs tend to be on a ``pay-as-you-go'' basis. As the programs are cashed in, some employers find they don't have the resources to back all their promises.
``Employers are absolutely shocked to see the magnitude of what they've promised,'' says Diana Scott, project manager at the Financial Accounting Standards Board (FASB).
To improve financial reporting and make companies more accountable to their investors, the board, a private-sector group that sets accounting standards, wants to change the way corporations record the value of retiree benefits. The new standard will require companies to charge future benefits to their current net worth and profitability. The rule is likely to start taking effect in 1990, Ms. Scott says.
It is also likely to have a tremendous impact.
Benefit consultants estimate that the unrecognized, and possibly unpayable, cost falls somewhere between $500 billion and $2 trillion.
According to the Actuarial Sciences Associates, many companies could find 25 percent to 30 percent of their earnings wiped out by FASB's new standard. Since the markets judge management by an earnings barometer, the rule could hammer stock prices and credit ratings, the actuarial group says.
``I think FASB is terribly underestimating the impact this is going to have on a lot of companies' financial statements,'' agrees Beach Hall, assistant director of health care benefits at GM.
``We are at a $2,000 disadvantage per employee because of retiree health care'' at GM, he says. ``That's over a dollar an hour disadvantage that Ford, Chrysler, and other well-established parts suppliers have that Japanese domestic plants do not and will not have for a couple of years.''
Companies provide these benefits to attract and retain workers, wrote Herb Nehrling, director of E.I. du Pont de Nemours's employee compensation and benefits division, in testimony to the US secretary of labor. But if the impact of the new standard is as severe as expected, he continued, employers may eliminate the retiree benefit, or attempt to curb this future liability.
The alternative to having the standard, which has been to not recognize mammoth future liabilities, can lead to a company's demise.
LTV Corporation, for example, was partly moved to bankruptcy by the size of its benefit burden. But the struggling corporation's creditors were unaware of this problem, and continued to lend money based on the incomplete balance sheet.
Companies with a high percentage of older workers have been feeling the pressure for some time. Not only has the cost of medical care continuously risen two or three times as fast as the consumer price index, but also more workers have been claiming health benefits as early retirees as companies have made retiring before 65 more attractive.
But people under age 65 are not covered by medicare, and can be costly for companies. ``They expect, and will receive, benefits until age 65,'' says Robert Harootyan at the American Association of Retired Persons.
Accountants say that with the impact of older workers on future health care costs expected to increase greatly in coming years, the federal government must provide employers with incentives to pre-fund retiree health benefits.
Right now, a company can't get a tax deduction for doing this.
``The government is cost-shifting to private employers as fast as they can,'' says Mr. Hall at GM. ``We have had to assume a great deal of responsibility for dependents of workers, and workers after 65, that the federal government used to pick up.''
Benefit consultants say this vacuum of funding vehicles has contributed to today's huge, unfunded health care liabilities. Congress is considering granting new tax incentives.
To keep companies from being devastated by the suddenness and immensity of the measure, the FASB is going to phase it in, allowing companies to take at least 15 years to work it into their balance sheets and income statements.