In 1979, Joseph Valenti of Des Plaines retired on disability after working for 35 years at International Harvester Co. Part of the promise made to Valenti when he left the Melrose Park plant was that Harvester would continue to provide free health insurance for him and his wife for the rest of their lives.
It was a promise commonly made by thousands of companies in those years. After all, the cost to the company wasn`t that much, and the retirees really appreciated the coverage.
But it`s a promise Navistar says it can`t keep anymore.
Harvester has been transformed into a truck company called Navistar International Corp., having sold its International Harvester farm equipment business and other operations in the 1980s in a dramatic downsizing to stay afloat. The company shrank to 13,000 employees from a high of 100,000 in the late 1970s.
But as the company sold businesses, it retained their retirement obligations-pension and health care, primarily. None of the buyers wanted to take on those burdens.
Today Valenti, now 68, is one of 40,000 Harvester/Navistar retirees, and his wife is one of 23,000 dependents. And Navistar says, the company will go bankrupt if changes aren`t made. There are too many retirees, the company is losing money and health insurance costs have surged at a rate of more than 20 percent a year in 8 of the last 10 years.
So, as a ”least worst” alternative, it is trying to force its workers-13,000 active employees and the 63,000 retired workers and their
dependents-to pick up some of their own health care costs, an average of $330 in premiums annually for those older than 65. The company`s unions have sued to block the move and have staged well-publicized protests in cities with Navistar plants to bring attention to the issue.
The preceding tale simply would be that of one company`s woes, except that every company is America is being forced to examine-and account for, on the balance sheet-its health-care promises to retirees.
Navistar is corporate America writ large. It is worse off than most because its work force is older. It retained obligations that are swamping it. Its promises are in collective bargaining agreements, and it isn`t making money. But in trying to shift more of the health-care cost to retirees, Navistar is the rule, not the exception.
”What Navistar is doing isn`t new,” said Stephen R. Miller, a partner in the employee benefits practice at McDermott Will & Emery.
The landmark Employee Retirement Income Security Act, or ERISA, which requires companies to fund pension promises and regulates them, doesn`t mention retiree health care. It wasn`t an issue in 1974, when the act was passed.
It is a huge issue now, brought on by a triple whammy:
– Rampant health cost inflation that began in the 1980s;
– Burgeoning numbers of retired workers, particularly those pre-age 65
(Medicare age) retirements so encouraged by companies in the `80s to cut payrolls; and
– An accounting rule that takes effect Dec. 15.
The rule is known as Financial Accounting Statement No. 106, or FAS 106, and it was issued by the Financial Accounting Standards Board, the independent body that establishes and interprets generally accepted accounting principles for U.S. companies.
Companies have been paying retiree medical costs out of general funds as the bills came in. There was no special pot set aside for these costs, as required for pension benefits. Nor have companies been forced to disclose what they may have to spend in the future.
As long ago as 1986, a congressional committee estimated the unfunded-and undisclosed-costs of retiree health costs for the Fortune 500 companies at $2 trillion, or 50 percent more than the aggregate $1.3 trillion total assets of those companies.
Recognizing the gargantuan nature of this time bomb, the accounting board said in December 1990 that, in fiscal years beginning after Dec. 15, 1992, companies must account for these health-care promises in future retirement as they are incurred each year by active workers.
The changeover for corporate America is mind-boggling. It has been estimated that the accounting change will depress corporate earnings of the Fortune 500 by 15 to 20 percent in the first year.
As an example, General Motors Corp.`s ”transition obligation” for retiree health cost is between $16 billion and $24 billion. This for a company that posted a record $4.45 billion loss last year and is trying to cut its payroll by more than 70,000 in the next several years. GM announced last week that it soon will begin shifting some health costs to white-collar workers and retirees.
In court documents, Navistar says its net assets total $500 million and its retiree health liability is $1.5 billion to $2.5 billion. Navistar lost $165 million last fiscal year and in the first nine months of this year posted $182 million in losses (including a $65 million pension settlement).
In accounting for the changeover obligation, companies have the option of doing it all at once or spreading it out over 20 years.
Some large companies, including Abbott Laboratories, General Electric Co., Du Pont Co., Philip Morris Cos., Monsanto Co. and Coca-Cola Co., have decided to take a one-time charge for the obligation. ”The rationale: It is better to report one bad year than 20 bad years,” writes Michael S. Melbinger in the September issue of the Employee Benefits Journal. Melbinger is a partner in the employee benefits practice of McDermott, Will & Emery.
Not surpisingly, FAS 106`s requirement to put these obligations on the balance sheet has caused many companies to look at what they are promising and what that might cost them. And what they have seen is staggering.
Nearly three-quarters of companies surveyed on this issue by Hewitt Associates said they have or plan to significantly change retiree health-care plans.
”The knee-jerk reaction that you`d expect is for companies just to drop these plans,” said Bob Vogrich, an actuarial consultant at Hewitt. But that`s not happening. A Hewitt survey of more than 1,000 major companies shows 80 percent offer retiree health care.
But companies are trying to control present costs and future liability by reducing benefits, restricting eligibility, requiring employee contributions, putting dollar caps on care, shifting to a managed-care plan and setting up separate, tightly controlled prescription drug programs.
”Some believed companies would never renege on these promises, would never risk the bad press of cutting off medical benefits to retirees,” said Miller. ”But if these numbers start giving companies a negative net worth, believe me, they`ll take a strike or bad press.”
”Companies generally ignored this until the late `80s,” said Vogrich. Ten years ago, he added, 70 to 80 percent of companies routinely offered free medical care to active employees. That is down to around 10 percent. ”Retiree medical care has been free,” Vogrich added. ”It won`t be free in the next century.”
There are dollars to provide pensions, Vogrich said, ”but retiree medical care is a purely unfunded promise that will be met by the
profitability of the company.”
Because ERISA is silent on this, said Miller, the courts have held that it is an issue of contract law. ”What was promised by whom, when and in what form” governs a company`s liability. ”This is where the beneficent chief executive can get in trouble in exit interviews,” said Miller. ”What you said before can hang you.”
ERISA didn`t include retiree health costs, partly because it wasn`t a big deal then, but also because pensions are apples and health costs are oranges. ”Pensions promise dollars, but with retiree medical care, you`re promising services, not dollars,” said Miller. ”And services take on hugely fluctuating values.”
Litigation in this area in the last decade generally has upheld the employer`s right to change or terminate retiree health benefits, at least for salaried employees, provided the employers have ”explicitly retained the right to modify or terminate such coverage.”
Navistar filed a petition for a declaratory judgment in federal court here July 28. The petition, if upheld, would allow the company to unilaterally make these changes without consulting the unions.
The company took that route because, it says, its 63,000 workers and retirees are covered by almost 100 combinations of health-care benefits. It is seeking to bring them together and create a class that can be offered one set of benefits. U.S. District Judge Wayne Alexander is expected to rule Sept. 11 on a motion to dismiss Navistar`s petition.
The United Auto Workers, the United Plant Guard Workers of America and the International Association of Machinists, among others, filed a federal class-action suit Aug. 21 in Dayton, trying to block Navistar from
unilaterally imposing the changes.
Valenti said: ”We know the company is hurting, but they should make these changes across the bargaining table.”
The union suit contends that, in collective bargaining, the company promised to continue providing health insurance ”throughout the lifetime of each retired employee and each surviving spouse of a retired employee.” They also argue the health plan in force is an ”employee welfare benefit plan within the meaning of ERISA.”
”This was a tough decision to make, but we must face the reality of Navistar`s disproportionately high health-care costs,” said Chairman and Chief Executive James C. Cotting in announcing the change. If nothing is done, he added, ”Navistar`s continued solvency will be threatened.”
The new health-care program includes reduced benefits and cost-sharing through premiums, deductibles and co-payments. It means Valenti and his wife will have to pay a total monthly premium of more than $70. And their deductibles and co-payments will have to total $2,000 before the company begins picking up the tab.
”You go to bed thinking you have insurance, you wake up to find out you don`t,” said Valenti. ”And they`re not guaranteeing nothing.”
Valenti added: ”The real issue isn`t us. The real issue is national health care.”
