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Non-Tech : The ENRON Scandal -- Ignore unavailable to you. Want to Upgrade?

To: Baldur Fjvlnisson who wrote (4027)	5/13/2002 1:05:53 PM
From: Baldur Fjvlnisson	Respond to of 5185

Page 2 of 2 from Pollyanna Pensions Elizabeth MacDonald, 05.27.02 Goodyear's fund might well earn its projected 10% return over the next several decades, as it insists it will. But if it falls short, the grim reality will sooner or later show up in earnings statements. At some point pension benefits have to be paid in cash, and if the assets on hand are inadequate, the company may have to raise the pension cost being booked on its income statement as well as its cash contributions to the fund. While the accounting rules are aimed at smoothing out the effect of the stock market's ups and downs on reported earnings, there is one place where problems have to be owned up to immediately, and that is on the balance sheet. If a pension plan is underfunded and experiences a loss resulting from poor investments, the company will immediately take a hit to shareholders' equity, explains Adrien LaBombarde, a pension actuary at the benefits consulting firm Milliman USA of Seattle. That can have a real effect if it makes lenders more cautious and raises a company's borrowing costs. General Motors started out 2001 with $78 billion in pension plan assets. But then the plan lost $4.4 billion and ended up the year underfunded by $9 billion. The poor pension performance cut its stockholders' equity by a third, to $19.7 billion. GM has a huge retired work force and underfunded benefit liabilities, one reason Standard & Poor's downgraded its credit rating last October. The automaker says there is no reason to worry about its pension accounting and that in March it contributed $2.2 billion in cash to its pension plan. That's a lot of money to take out of the cash account. GM had the good fortune of enjoying higher sales and successful forays into the capital markets, which doubled its cash to $17.3 billion. So the pension payment didn't hurt that much--this time. Even if you are bullish about the stock market over the next 20 years, you might want to be bearish about companies that are raising assumed pension fund returns. It could be that they are straining to find paper profits when their business operations are not providing enough real ones. "It is a belly laugh because it just looks like companies are pulling the levers of the pension accounting machine to get the income they want," says accounting expert Ciesielski. Additional reporting by Josephine Lee.