Wednesday’s news brought the announcement by Ford Motor Company
that it will lay off 1,500 workers, this in addition to 1,000
layoffs declared earlier. After the stock market’s close the day
before, Ford had issued reduced profit forecasts, and its stock had
fallen sharply in after-hours trading.
The week before, the glooms had emanated from General Motors.
Both companies, and many other large U.S. industrial firms, face
crippling retiree health-care costs, negotiated into union
contracts over decades.
The Boston Globe’s Jeff Jacoby summarized GM’s dilemma in a column titled “GM’s
Health Care Problem — and Ours,” which appeared Thursday, June
16.
Jacoby wrote, “GM will spend more than $5.6 billion this year on
health coverage for 1.1 million people — a population greater than
Rhode Island’s — yet of that number, only 160,000 or so are
current employees: The great majority are retirees and their
families. And with GM planning to shed 25,000 jobs through
attrition over the next three years, its already lopsided ratio of
2.6 retirees per active employee is only going to get worse.”
America’s big companies could have seen this problem coming at
least 16 years ago. They were warned.
IN 1989, ONE OF THE BIG CONTROVERSIES in business concerned a rule
change proposed by the Financial Accounting Standards Board, the
governing body of the accounting industry. The rule, designated
FASB 106 (and pronounced FAZ-bee one-oh-six), required accrual
accounting of retiree health-care benefits.
In other words, companies would have to project a cost for
health-care benefits for their retirees over a certain amortization
period and write that amount, reduced to a yearly obligation, into
their ledgers right now as red ink. Until the FASB proposal,
companies had simply been negotiating those benefits, then paying
them on as “as you go” basis, which inaccuracy in bookkeeping FASB
saw the need to correct.
Dire predictions were made about the effect of implementing the
rule, which would reduce companies’ bottom lines by an amount that
everybody knew was big — but nobody knew exactly how big. Wild
guesses came forth about the total amount of value that might be
shed by American corporations: $400 billion, $1 trillion. Some
people thought the stock market would suffer a disastrous hit.
LOOKING BACK ON A STORY I wrote about FASB 106 at the time, in what
was then called Investor’s Daily (May 22, 1989), I find a
revealing exchange.
The FASB’s proposal required companies “to project health care
costs forward according to what FASB calls a ‘health care trend
rate.’
“Companies argue that the FASB…sets this rate too high,
‘substantially higher than any commonly accepted rate of inflation,
such as the CPI (consumer price index).’” This according to Robert
Willens, who was then senior vice president and senior tax and
accounting analyst for Shearson Lehman Hutton, Inc.
Dan R. Coulson, who was director of accounting at that time for
Ford, agued, “Really, a more prudent rate to use is the general
inflation rate, or CPI. In the long run, health care inflation and
general inflation must approximate one another.”
One wonders if that represented the thinking at Ford, GM,
Chrysler, U.S. Steel, and any number of old-line industrial
companies. It was, as we now know, spectacularly wrong.
Willens said in that same 1989 article that he saw health-care
costs continuing to rise at a rate “substantially higher than the
general inflation rate…for the foreseeable future.”
That was, indeed, pretty good foreseeing. Put health care’s
hyperinflation rate together with the demographics of an aging
population, and you have the elements of a simmering corporate
crisis, a crisis which has arrived now.
FASB 106 PASSED AND TOOK EFFECT, but no stock market crash
followed. Instead, companies often found ways to recognize their
new accounting obligations early. As a result, not all companies
did it at once, and those who took the initiative to do it early
could generally find a way to put offsetting income on their
balance sheets or to structure the FASB reckoning as a one-time
charge.
So what looked like it could have been a Wall Street storm
passed, and it appeared to be only a minor blow. But we can look
back now and see instead that it was a warning — not from social
scientists or pundits or politicians, but from one of the governing
bodies of business itself. And that American business treated that
warning more like a nuisance than the dire news it really was.
