Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 21, 1993 TAG: 9302190085
SECTION: BUSINESS PAGE: D-6 EDITION: METRO
SOURCE: ALEX BARNUM SAN FRANCISCO CHRONICLE
DATELINE: LENGTH: Long
NEW RETIREE BENEFITS RULE HAS EMPLOYERS GASPING
A new accounting rule designed to force companies to disclose the true costs of retiree health benefits is proving a bitter pill for corporate America and is wreaking havoc on retiree medical plans.The latest fallout from the new rule came when the nation's top automakers announced the largest annual losses in American business history. General Motors Corp. reported a $23.5 billion loss for 1992 that included a one-time $20.8 billion charge against earnings for future retiree health costs. And Ford Motor Co. reported a $7.4 billion loss after taking a charge of $7.5 billion.
The charges are the result of a change in accounting rules that for most companies began on Jan. 1. Few developments in recent years have sent a more resounding wake-up call to corporate America about the rising costs of health care.
Most companies are responding by shifting the costs of their plans to employees and retired workers and by tightening eligibility requirements. Some companies are simply eliminating retiree benefits for future employees.
Until now, employers were required to account for the costs of retiree health benefits they actually paid, a system known as "pay as you go."
But with health-care costs soaring and corporate "downsizing" programs adding dramatically to the ranks of the retired, the Financial Accounting Standards Board, a private, nongovernment professional organization which sets the nation's accounting rules, decided that companies are vastly understating the costs of paying future retirees' health bills.
So, as of Jan. 1, any company with more than 500 employees expected to get benefits is required to estimate future retiree health costs and add them to current medical costs. Under the new rule, called FAS Statement 106, the companies must deduct those costs from earnings on an ongoing basis.
The major immediate cost is that the rule requires companies to recognize obligations accrued over past years but yet to be paid. Those obligations can be taken in one-time charges against earnings - as General Motors, Ford and most other companies are doing - or spread out during 20 years.
On a national scale, the liability is enormous. The investment banking firm of Brown Bros. Harriman estimates that implementing the rule will cost companies on the Standard & Poor's 500 Index a whopping $148 billion. Because the charges are after-tax, they will have no impact on federal and state corporate tax collections.
Hardest hit by the new rule are heavy, smokestack industries - such as makers of autos, chemicals and steel - which are labor intensive, have many retired employees and offer liberal benefit plans.
High-technology companies, which are smaller and have younger employees, are less affected. Indeed, a survey by the benefits-consulting firm Foster Higgins found that less than 20 percent of companies in some areas have post-retirement health-benefit plans.
The new rule was intended to give investors a more realistic picture of a company's future health-care liabilities. By reducing book value and dragging down quarterly earnings, many analysts feared, the rule change would depress stock prices.
In the case of General Motors, the $20.8 billion charge did reduce the company's book value by 70 percent. But so far, the new rule has had little effect on stock prices because it does not affect cash flow and all companies have to conform.
Nonetheless, most employers are scrambling to reduce their retiree health liabilities. As many as 95 percent of the employers who provide retiree health benefits either are cutting back their programs or will do so eventually, according to the accounting firm of Arthur Andersen & Co.
Like other health-care costs, the cost of retiree benefits has been soaring.
In a survey of 1,380 companies, Foster Higgins found that the average cost of retiree medical plans last year increased 9.3 percent to $2,486 per retiree.
Some companies, including Primerica Corp., McDonnell Douglas and Unisys, are telling current retirees to pay the full costs of their health benefits or lose them. Retiree groups are suing those companies, charging that the actions violate their retirement agreements.
Several groups, including the American Association of Retired Persons, are fighting the cutbacks, charging that companies are using the accounting rule change as an excuse to drop retiree health plans.
Other companies are eliminating retiree health benefits for future employees or telling new hires they will have to pay the costs of their post-retirement health-care plans themselves.
Most companies, however, are keeping their retiree health plans, but moving to reduce the costs - by increasing employee contributions, raising the share of health-care costs paid by retirees and tightening eligibility requirements so that fewer employees qualify.
Hewlett-Packard Co., the Palo Alto, Calif., computer and instrument maker, plans to ask retirees to pay "a somewhat higher proportion" of their health-care benefits, although the details of the plan have not been completed, a spokesman said.
The company took a $332 million charge against 1992 earnings to pay for prior obligations.
"While most companies aren't totally abandoning post-retirement benefits, they are making it much harder for employees to have them," said Reid Linney, a manager for Foster Higgins.
In a survey of 95 companies, Foster Higgins found that 36 percent of respondents plan to decrease their contributions to retiree health plans, 21 percent plan to tighten eligibility requirements and 30 percent plan to increase employees' share of the costs.
Some of those surveyed said that such measures will end up saving the companies 33 percent to 50 percent of the costs of those programs.
Most affected by the changes will be active employees in their 30s and 40s, who will have to assume most of the responsibility for their post-retirement medical costs, Linney said.
"The message here is that if you're part of the baby boom generation, you'll have to save a lot more than you planned on to pay for your retirement," he said.