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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (506)	7/12/1998 9:44:00 AM
From: Freedom Fighter	Respond to of 1722

Reynolds, Here's more info on the GM liabilities issue. Summed up, the U.S. pensions are almost fully funded but on a global basis there are still significant pension funding deficits. The term fully funded that gets tossed around also appears to be on an "economic basis" which probably means cash not according to GAAP. It appears that GAAP better reflects economic reality here. I am still working on the proper way to handle all this from a valuation perspective. I am sure you are supposed to subtract these labilities from the valuation. I am not sure how to handle charged expenses that are not cash that are ongoing. Following excerpts From the annual report: Five years ago our U.S. pension funds were underfunded by $12 billion; we had no net liquidity; and in that year alone we posted a loss of $2.6 billion. Today, our U.S. pension funds are essentially fully funded. At December 31, 1997, GM's total worldwide net unfunded pension position increased to $5.0 billion ($0.5 billion for the U.S. automotive sector's qualified hourly/salary plans and $4.5 billion for all other plans worldwide) from $4.8 billion a year ago ($1.9 billion for the U.S. automotive sector's qualified hourly/salary plans and $2.9 billion for all other plans worldwide). Excluding the impact related to the Hughes Transactions, GM's 1996 total worldwide net unfunded pension liability would have been $6.2 billion ($1.9 billion for the U.S. automotive sector's qualified hourly/salary plans and $4.3 billion for all other plans worldwide). Major factors contributing to the decrease in the unfunded position of the U.S. automotive sector's qualified hourly/salary plans included asset returns in excess of the assumed 10% asset earnings rate and contributions during the year, partially offset by the 50 basis point decrease in the discount rate used to measure the pension obligation at the end of 1997 compared to 1996. During 1997 and 1996, GM contributed $1.5 billion and $800 million in cash to its U.S. hourly pension plans. On an economic basis, GM continues to maintain a fully-funded status for its U.S. hourly and salaried pension plans at December 31, 1997.The economic basis of measuring the U.S. hourly and salaried pension liability differs from the Statement of Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for Pensions, basis required by GAAP, but GM believes it to be a better measure of GM's ongoing economic exposure for pension obligations and as such uses this as a measure to determine its funding.The economic basis discounts pension liabilities at the long-term asset earnings rate assumption fifty-seven Pensions (concluded) (currently 10.0%) rather than at a year-end market rate as required by SFAS No. 87 (currently 7.0%). In periods of low interest rates, as in the current market environment, the SFAS No. 87 liability will generally exceed the liability calculated on an economic basis, whereas in periods of high interest rates the economic basis liability will generally exceed the SFAS No. 87 liability. Total cash and marketable securities at December 31, 1997 were $14.5 billion compared with $17 billion at December 31, 1996. During 1997, GM elected to pre-fund part of its other postretirement benefits liability, which is primarily related to postretirement health care expenses, by creating a Voluntary Employees' Beneficiary Association (VEBA) trust to which it contributed $3 billion of its cash reserves.The VEBA assets had the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet. GM believes it has sufficient resources to meet anticipated future cash flow requirements. Accounts payable $15,782 $14,221 Notes and loans payable 93,027 85,300 Deferred income taxes 2,923 3,196 Postretirement other than pensions 41,168 43,190 Pensions (Note 14) 7,043 7,581 Accrued expenses 50,490 45,144