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.