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entitled 'Delphi Corporation: Key Events Leading to Termination of the
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United States Government Accountability Office:
GAO:
Testimony:
Before the Committee on Oversight and Government Reform, House of
Representatives:
For Release on Delivery:
Expected at 9:00 a.m. EST:
Monday, November 14, 2011:
Delphi Corporation:
Key Events Leading to Termination of the Delphi Defined Benefit Plans:
Statement of Barbara D. Bovbjerg, Managing Director Education,
Workforce, and Income Security Issues:
GAO-12-234T:
GAO Highlights:
Highlights of GAO-12-234T, a testimony before the Committee on
Oversight and Government Reform, House of Representatives .
Why GAO Prepared This Testimony:
The Delphi Corporation (Delphi) was a global supplier of mobile
electronics and transportation systems that began as part of the
General Motors Corporation (GM) and was spun off as an independent
company in 1999. Delphi filed for bankruptcy in 2005, and in July
2009, Delphi's six defined benefit pension plans were terminated and
trusteed by the Pension Benefit Guaranty Corporation (PBGC).
In March 2011, GAO issued a report providing a timeline of key events
leading to the plans’ termination (GAO-11-373R). This report focused,
in particular, on events related to the reasons for GM providing
retirement benefit supplements to certain Delphi employees, but not to
others, and the role of the U.S. Department of the Treasury (Treasury)
in those events.
GAO was asked to testify on the information gathered on the
termination of Delphi’s pension plans for this previous report. In
preparing that report, GAO relied on publicly available documents—such
as bankruptcy filings by GM and Delphi, company reports to the
Securities and Exchange Commission, and press releases—and on
documents received from groups with whom we have talked, including
Delphi, GM, the Delphi Salaried Retiree Association, PBGC, and
Treasury.
What GAO Found:
The termination of the six defined benefit plans sponsored by Delphi,
and the provision of benefit protections to some Delphi employees but
not others, culminated from a complex series of events involving
Delphi, GM, various unions, Treasury, and PBGC.
When Delphi spun off from GM in 1999, three unions secured an
agreement that GM would provide a retirement benefit supplement
(referred to as “top-ups”) for their members should their pension
plans be frozen or terminated and they were to suffer a resulting loss
in pension benefits. These three unions were:
* the International Union, United Automobile, Aerospace, and
Agricultural Implement Workers of America (UAW);
* the International Union of Electronic, Electrical, Salaried, Machine
and Furniture Workers, AFL-CIO (IUE); and;
* the United Steelworkers of America (USWA).
After Delphi filed for bankruptcy in 2005, GM agreed to extend the top-
up agreements with these three unions in 2007, as well as to assume
some of the liabilities in Delphi’s hourly-employee pension plan. In
2008, GM agreed to take responsibility for approximately $3.4 billion
of Delphi’s hourly plan net liabilities, to be transferred to GM in
two phases. The first transfer—involving $2.1 billion—took place in
September 2008. However, in fall 2008, losses throughout the auto
industry pushed Delphi near liquidation and caused GM to seek
assistance from Treasury. In April and May 2009, Treasury worked with
GM to develop a restructuring plan, and helped GM to determine the
“best resolution” of the Delphi bankruptcy from GM’s perspective.
In June 2009, Delphi stated publicly that it was unable to fund its
plans. In July 2009, the “new GM,” which began operations following
GM’s bankruptcy, maintained the top-up agreements with UAW, which
represented GM’s largest employee group. However, GM concluded that
the Delphi hourly plan was a “$3 billion liability that [GM] could not
afford,” and Treasury agreed. The second transfer of Delphi’s hourly
plan net liabilities never took place. On July 22, 2009, PBGC
announced the termination of all six of Delphi’s defined benefit
plans. Because the plans were terminated with insufficient assets, and
because PBGC must adhere to statutory limits, many Delphi employees
will receive a reduced benefit from PBGC.
GM was not required to provide the top-ups to IUE and USWA under its
own bankruptcy settlement, but Delphi remained a significant—if not
the largest—supplier for GM, and GM was motivated to help resolve
Delphi’s bankruptcy. In September 2009, new GM agreed to provide top-
ups for IUE and USWA members as well, pursuant to the 1999 agreements.
None of these agreements provided for top-ups to members of other
unions or to any other noncovered employees, including all members of
Delphi’s salaried plan. As a result, Delphi employees covered by the
GM top-up agreements are protected from losses in pension benefits due
to PBGC’s benefit limits, while other employees are not.
View [hyperlink, http://www.gao.gov/products/GAO-12-234T]. For more
information, contact Barbara D. Bovbjerg at (202) 512-7215 or
bovbjergb@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to present information about the key
events leading to the termination of the defined benefit plans
sponsored by the Delphi Corporation (Delphi), a global supplier of
mobile electronics and transportation systems. Delphi began as part of
the General Motors Corporation (GM),[Footnote 1] but was spun off as
an independent company in 1999. In 2005, Delphi filed for bankruptcy,
[Footnote 2] and in 2009, Delphi's six qualified defined benefit plans
were terminated and trusteed by the Pension Benefit Guaranty
Corporation (PBGC). The termination of Delphi's plans culminated from
a complex series of events involving Delphi, GM, various unions, the
U.S. Department of the Treasury (Treasury), and PBGC.
[Side bar:
Delphi’s Six Defined Benefit Plans, Terminated as of July 31, 2009:
* Delphi Hourly-Rate Employees Pension Plan (hourly plan): 47,176
participants;
* Delphi Retirement Program For Salaried Employees (salaried plan):
20,203 participants;
* Packard-Hughes Interconnect Non-Bargaining Retirement Plan: 1,383
participants;
* ASEC Manufacturing Retirement Program: 533 participants;
* Packard-Hughes Interconnect Bargaining Retirement Plan: 165
participants;
* Delphi Mechatronic Systems Retirement Program: 148 participants.
Source: Pension Benefit Guaranty Corporation (PBGC). End of side bar]
This testimony presents information from a report we issued in March
2011.[Footnote 3] In that report, we provided a timeline of key events
leading to the termination of Delphi's plans, focusing, in particular,
on events related to the reasons for GM providing retirement benefit
supplements to certain Delphi employees, but not to others, and
Treasury's role in those events. To construct this timeline, we relied
on publicly available documents, such as bankruptcy filings by GM and
Delphi, company reports to the Securities and Exchange Commission,
press releases; and on documents received from groups with whom we
have talked, including Delphi, GM, the Delphi Salaried Retiree
Association (DSRA), PBGC, and Treasury. We conducted our work from
October 2010 to March 2011 in accordance with all sections of GAO's
Quality Assurance Framework that are relevant to our objectives. The
framework requires that we plan and perform the engagement to obtain
sufficient and appropriate evidence to meet our stated objectives and
to discuss any limitations in our work. We believe that the
information and data obtained, and the analysis conducted, provided a
reasonable basis for any findings and conclusions in that product. We
are continuing to conduct work on this topic, and plan to issue
another report that will compare PBGC's process for terminating
Delphi's pension plans with its process for terminating other large,
complex plans. We expect to issue this report in December 2011.
Summary:
During the 1999 spin-off negotiations between GM and Delphi,[Footnote
4] three unions secured benefit guarantees for their members:
International Union, United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW); the International Union of
Electronic, Electrical, Salaried, Machine and Furniture Workers, AFL-
CIO (IUE);[Footnote 5] and the United Steelworkers of America (USWA).
The benefit guarantees included an agreement that GM would provide a
retirement benefit supplement (referred to as "top-ups") to certain
Delphi employees who were members of these unions should their pension
plans be frozen or terminated and they were to suffer a resulting loss
in pension benefits. No other Delphi employees had a similar agreement
to receive a top-up, including salaried workers and hourly workers
belonging to other unions. Over the course of events that followed,
summarized in figure 1 and described in more detail below, the
agreements with these three unions were ultimately preserved through
the resolution of the bankruptcies of both GM and Delphi. Because
Delphi's pension plans were terminated with insufficient assets to pay
all accrued benefits, and because PBGC must adhere to statutory limits
on the benefits it guarantees,FF[Footnote 6]FF many Delphi employees
will receive a reduced pension benefit from PBGC compared with the
benefits promised by their defined benefit plans. Those Delphi
employees receiving the top-ups will have their reduced PBGC benefit
supplemented by GM while others will not.
Figure 1: Overview of Key Events Leading to Termination of Delphi's
Pension Plans:
[Refer to PDF for image: timeline]
Sept. 1998-Dec. 2000:
Delphi spins off from GM:
* Delphi becomes a separate corporate entity and sponsor of its
employees’ pension plans.
* Certain unions (UAW, IUE, and USWA) secure benefit guarantees from
GM for their members, including a pension benefit “top-up” should the
hourly plan be frozen or terminated.
* Delphi’s pension plan for salaried retirees is fully funded and its
plan for hourly retirees is not fully funded.
Jan. 2001-Feb. 2006:
Delphi suffers losses; files for bankruptcy:
* Funding of pension plans deteriorates.
* Delphi files for bankruptcy protection.
Mar. 2006-Nov. 2008:
Delphi attempts restructuring and sale; negotiates agreements with GM:
* Missed pension contributions by Delphi trigger liens on behalf of
plans and the Internal Revenue Service grants Delphi funding waivers.
* GM, Delphi, and unions extend GM top-up agreements.
* Delphi files reorganization plan that includes settlement agreement
with GM to transfer part of Delphi hourly plan to GM hourly plan.
* Proposed Delphi reorganization falls through when investors refuse
to fund Delphi’s reorganization plan.
* Delphi and GM amend their settlement agreement to transfer part of
Delphi’s hourly plan to GM.
* Delphi freezes all but one of its six defined benefit plans.
Nov. 2008-Nov. 2009:
Economic downturn contributes to GM bankruptcy and termination of
Delphi plans:
* Delphi nears liquidation following expiration of agreement with
debtor-in-possession lenders.
* Delphi states publicly it is unable to continue funding its pension
plans.
* GM enters bankruptcy and sells its assets to a new entity (“new GM”)
with assistance from Treasury.
* New GM agrees to honor the Delphi UAW top-ups based on UAW’s
continued relationship with GM.
* PBGC negotiates agreements concerning liens on foreign assets, and
terminates Delphi’s plans with the agreement of Delphi.
* New GM negotiates settlement agreements that include top-ups for IUE
and USWA to help resolve the Delphi bankruptcy.
* Delphi reorganization complete with sale of assets.
* Delphi Salaried Retiree Association files and amends complaint on
termination of Delphi’s salaried plan.
Sources: GM, Delphi, and Treasury documents.
[End of figure]
Three Unions Secured Top-Up Agreements in Negotiations Following
Delphi's Spin-Off from GM:
As part of Delphi's spin-off from GM in 1999, GM was required to
collectively bargain with the unions affected by the spin-off--
including UAW, IUE, and USWA, as well as other "splinter"
unions.FF[Footnote 7]FF As a result of these negotiations, GM agreed
to provide top-ups to "covered employees" with UAW, IUE, or USWA if
the Delphi pension plans were terminated or frozen at a later date,
covering any shortfall of benefits below the level promised by the
Delphi plans. "Covered employees" were generally defined as those who
had been represented by these unions as GM workers and now as Delphi
workers with no break in employment or seniority as of May 28, 1999.
The top-up benefits were part of separate benefit guarantee
agreements, signed between September and December 1999, between GM and
certain unions representing Delphi workers--specifically, the UAW,
IUE, and USWA. Also, on December 22, 1999, Delphi agreed to indemnify
GM for all benefits provided by GM under the UAW benefit
guarantee.FF[Footnote 8]FF At the time GM entered into these
agreements, Delphi's salaried plan was fully funded while Delphi's
hourly plan was not fully funded (see table 1).
Table 1: Funding History for Delphi's Salaried and Hourly Pension
Plans, 1999-2009:
Dollars in millions.
Salaried plan:
Assets[A];
1998: $2,449;
1999: $2,449;
2000: $2,455;
2001: $2,256;
2002: $1,959;
2003: $2,532;
2004: $2,703;
2005: $3,027;
2006: $3,439;
2007: $3,600;
2008: $2,371;
July 2009[C]: $2,456.
Liabilities[B];
1998: $2,251;
1999: $1,996;
2000: $2,260;
2001: $2,704;
2002: $3,131;
2003: $3,562;
2004: $4,087;
2005: $4,463;
2006: $4,346;
2007: $3,924;
2008: $4,419;
July 2009[C]: $4,574.
Net assets;
1998: $198;
1999: $453;
2000: $196;
2001: ($448);
2002: ($1,172);
2003: ($1,030);
2004: ($1,384);
2005: ($1,437);
2006: ($907);
2007: ($324);
2008: ($2,048);
July 2009[C]: ($2,119).
Funded percentage;
1998: 108.8%;
1999: 122.7%;
2000: 108.7%;
2001: 83.4%;
2002: 62.6%;
2003: 71.1%;
2004: 66.1%;
2005: 67.8%;
2006: 79.1%;
2007: 91.7%;
2008: 53.7%;
July 2009[C]: 53.7%.
Company Contributions;
1998: $0;
1999: $0;
2000: $0;
2001: $0;
2002: $0;
2003: $276;
2004: $0;
2005: $140;
2006: $126;
2007: $125;
2008: $105;
July 2009[C]: $0.
Hourly plan:
Assets[A];
1999: $2,806;
2000: $4,247;
2001: $3,780;
2002: $3,627;
2003: $4,854;
2004: $5,763;
2005: $6,621;
2006: $7,214;
2006: $7,015;
2008: $3,732;
July 2009[C]: $3,659.
Liabilities[B];
1999: $4,063;
2000: $4,620;
2001: $5,535;
2002: $6,323;
2003: $7,531;
2004: $8,408;
2005: $8,894;
2006: $10,212;
2007: $9,734;
2008: $6,792;
July 2009[C]: $7,035.
Net assets;
1999: ($1,257);
2000: ($373);
2001: ($1,756);
2002: ($2,695);
2003: ($2,677);
2004: ($2,646);
2005: ($2,273);
2006: ($2,998);
2007: ($2,720);
2008: ($3,060);
July 2009[C]: ($3,376).
Funded percentage;
1999: 69.1%;
2000: 91.9%;
2001: 68.3%;
2002: 57.4%;
2003: 64.5%;
2004: 68.5%;
2005: 74.4%;
2006: 70.6%;
2007: 72.1%;
2008: 54.9%;
July 2009[C]: 52.0%.
Company contributions;
1999: $1,225;
2000: $1,125;
2001: $0;
2002: $400;
2003: $714;
2004: $600;
2005: $485;
2006: $108;
2007: $69;
2008: $157;
July 2009[C]: $0.
Source: GAO analysis of Delphi Corporation data.
[A] Assets are year-end fair market values of plan assets.
[B] Liabilities are the projected benefit obligations, or present
value of benefits projected to be paid. Throughout this report, we
have characterized the value of plan assets and liabilities based on
available documents. It is often the case that the value of assets and
liabilities from these sources is substantially different than their
values at the point of termination. PBGC has reported that, at the
time they were terminated, the Delphi plans were underfunded by
approximately $7 billion on a termination basis.
[C] July 2009 figures are approximate as of July 31, 2009.
[End of table]
After Delphi Filed for Bankruptcy, Delphi and GM Agreed to Extend the
Top-Up Agreements with the Three Unions:
Over the period 2001 to 2005, Delphi suffered large losses, and the
company filed for bankruptcy in October 2005. During the bankruptcy,
Delphi failed to make required minimum contributions to the plans and,
as a result, liens were triggered by federal statute on behalf of the
plans. Beginning in March 2006, PBGC took steps to perfect these liens
in accordance with law.[Footnote 9] While Delphi was in bankruptcy and
attempting to restructure, in May 2007, the Internal Revenue Service
(IRS) granted Delphi waivers that temporarily allowed Delphi to forego
making minimum contributions to its plans and to provide letters of
credit as collateral for the waivers.
Shortly thereafter, Delphi and GM agreed to extend the top-up
agreements with UAW, IUE, and USWA. In June 2007, GM, Delphi, and UAW
entered into a memorandum of understanding (MOU) extending the GM
benefit guarantee for Delphi UAW workers, which would be enforceable
if benefit accruals for future credited service in the Delphi hourly
plan were frozen and if the plan were terminated. On August 5, 2007,
GM and Delphi entered into a MOU with Delphi IUE, and on August 16,
2007, with Delphi USWA, providing the same top-up guarantee as the
Delphi UAW MOU. The splinter unions negotiated for other benefits at
this time, but were not guaranteed top-ups; nor were any agreements
reached regarding top-ups for salaried workers.
In September 2007, GM and Delphi entered into a global settlement
agreement that included a plan to transfer assets and liabilities from
Delphi's hourly pension plan to the GM hourly pension plan, and for
Delphi to freeze new accruals to its hourly plan. The agreement did
not establish a specific effective date, but listed various conditions
that had to be met in order for it to become effective. Before
becoming effective, the agreement was modified in September 2008,
based on further negotiations described below.
Under Delphi's initial reorganization plan, the company planned to
emerge from bankruptcy without terminating its pension plans. However,
in April 2008, the deal with investors that would have made this
possible fell through. Five months later, in September 2008, Delphi
and GM amended their September 2007 global settlement agreement to
specify that GM would take responsibility for approximately $3.4
billion of net liabilities in Delphi's hourly plan in two phases. In
phase 1, GM would assume a portion of Delphi's hourly plan with net
liabilities of $2.1 billion. This transfer took place on September 29,
2008. In phase 2, upon "substantial consummation" of Delphi's
reorganization, the remaining assets and liabilities in Delphi's
hourly plan were to be transferred to GM. No comparable arrangements
were made concerning a transfer of assets and liabilities for Delphi's
salaried plan or other smaller plans.
In September 2008, Delphi froze its salaried plan and three of its
smaller plans, and in November 2008, Delphi froze its hourly plan as
well.[Footnote 10]
Losses throughout the Auto Industry Pushed Delphi Near Liquidation and
GM to Seek Assistance from Treasury:
Beginning in the fall of 2008, economic conditions deteriorated
throughout the auto industry. Delphi experienced declining revenues as
GM and other manufacturers sharply reduced production in light of
rapidly falling sales. According to documents provided by PBGC, when
Delphi's financing agreement with its debtor-in-possession (DIP)
lenders expired on April 21, 2009, Delphi's operations were threatened
by the prospect of imminent liquidation. On April 21, PBGC determined
that it would seek termination of the Delphi salaried and hourly
pension plans to avoid the losses that would result if the DIP lenders
were to foreclose on their collateral and break up Delphi's controlled
group. However, at the request of Delphi and the DIP lenders, PBGC
agreed not to proceed with the termination in order to allow the
parties to continue negotiating. In exchange, the DIP lenders agreed
to give PBGC advance notice of any decision to foreclose so that PBGC
could commence termination of the Delphi pension plans in time to
protect PBGC's claims.
GM's losses in the fall of 2008 led the company to seek assistance
from Treasury through the Automotive Industry Financing Program
(AIFP).[Footnote 11] As a condition of receiving this assistance, GM
was required to develop a restructuring plan to identify how the
company planned to achieve and sustain long-term financial viability.
In April and May 2009, Treasury worked with GM to develop a
restructuring plan through the Presidential Task Force on the Auto
Industry (Auto Task Force) and its staff (auto team).[Footnote 12] On
June 1, 2009, GM filed for bankruptcy and sought the approval of the
bankruptcy court for the sale of substantially all of the company's
assets to a new entity ("new GM").[Footnote 13] In court documents, a
Treasury official stated that Treasury was mandated by the President
to act in a "commercially reasonable manner" as it related to GM's
restructuring and ensure that the new GM assumed only those
liabilities of the old company that were thought to be "commercially
necessary" for the new company to operate.[Footnote 14] As GM's
primary lender, Treasury was concerned about GM's overall exposure to
risks related to distressed suppliers, including Delphi. Specifically,
Treasury was concerned about how GM's Delphi liabilities would fit
within the new company's business plan. According to a Treasury
official deposition, Treasury's mandate to restructure GM included
helping GM determine the "best resolution" of the Delphi bankruptcy
from GM's perspective, which was guided by three principles (see table
2).[Footnote 15] However, as Treasury asserted in a February 2010
court motion, the Auto Task Force did not dictate what should be done
with the Delphi pensions.[Footnote 16]
Table 2: Treasury's Three Guiding Principles for Resolving GM's
Liabilities Related to Delphi:
Principle: Development of a resolution that guaranteed the "sanctity"
of GM's supply chain;
Treasury rationale: Treasury did not want GM's attention, which was
focused on its own restructuring, to be diverted to finding suppliers
for the products provided by Delphi.
Principle: Quick resolution of the Delphi bankruptcy;
Treasury rationale: Treasury wanted Delphi's bankruptcy to conclude
sooner rather than later, given that Delphi had already been in
bankruptcy for 3 years by this point.
Principle: A resolution that required the least possible amount of
investment by GM;
Treasury rationale: Because GM had already invested billions of
dollars in Delphi during Delphi's bankruptcy process, Treasury
believed that GM should not provide additional money to Delphi absent
an overall resolution of the Delphi bankruptcy.
Source: Deposition of Treasury Official at 36 and 37, No. 05-44481
(RDD) (Bankr. S.D.N.Y. July 21, 2009).
[End of table]
In assisting with GM's reorganization, Treasury conducted analysis
confirming GM's assessment of the Delphi pension liabilities.
Specifically, in May 2009, Treasury had anticipated that Delphi's
salaried pensions would be terminated, but that GM would assume
additional liabilities for the Delphi hourly plan, as called for in
phase 2 of the September 2008 agreement. Additionally, on June 1,
2009, Delphi announced that its hourly plan would be "addressed by
GM." According to a Treasury official deposition, there was a
reasonable argument for GM to assume the Delphi hourly plan for UAW-
represented workers, given that UAW's role was continuing with the new
GM and that the hourly plan was not fully funded at the time the plan
was transferred from GM to Delphi in 1999. However, the phase 2
transfer called for Delphi to pay a $2.055 billion administrative
claim to GM, which it could not do. In the Treasury official's
deposition, it was noted that shortly after GM's bankruptcy filing, GM
notified Treasury that it had not built sufficient funding into its
restructuring plan to take on the hourly plan, but that it had built
in the assumption that it would provide the top-up for Delphi UAW
retirees. Treasury's auto team assessed GM's analysis on the potential
cost of GM taking on the Delphi hourly pension plan and agreed with
GM's conclusion that the hourly plan was a "$3 billion liability that
General Motors could not afford."[Footnote 17] Phase 2 of the transfer
of hourly plan liabilities from Delphi to GM was not in GM's
reorganization plan and never took place.
GM's Reorganization Maintained Delphi UAW Top-Ups Based on UAW's
Continued Relationship with GM:
As part of the sale of the assets of old GM to new GM, GM negotiated
with UAW--which represented its largest employee group--to modify
wages, benefits, and work rules to be more cost competitive. As a
result of these negotiations, GM and UAW agreed that new GM would
assume all employment-related obligations and liabilities under any
assumed employee benefit plan relating to employees that are or were
covered by UAW collective bargaining agreements in its master sale and
purchase agreement, to which Treasury gave its approval.[Footnote 18]
Thus, the master sale and purchase agreement included only GM's
obligation to provide top-ups to Delphi UAW retirees.[Footnote 19] No
other negotiations took place that resulted in comparable obligations
concerning top-ups for members of the two other unions, IUE and USWA,
even though they had previously secured top-up agreements with GM; nor
for the splinter unions or the salaried employees who had no previous
top-up agreements with GM. As noted in a Treasury official deposition,
because of the bargaining between GM and UAW concerning the GM
bankruptcy and new UAW agreement, GM was prepared to honor the
obligation of providing top-ups to UAW Delphi retirees, while the
situation regarding comparable obligations with the other unions was
less clear.
On June 19, 2009, IUE and USWA objected to the proposed sale of GM's
assets because retirees of Delphi represented by IUE and USWA would
not receive the same benefits as retirees of Delphi represented by
UAW.[Footnote 20] The court overruled these unions' objection to the
sale, stating that new GM needed a "properly motivated workforce to
enable [new GM] to succeed," requiring it to enter into "satisfactory
agreements with the UAW" and was not "similarly motivated in triaging
its expenditures to assume obligations for retirees of unions whose
members, with little in the way of exception, no longer work for GM."
[Footnote 21] Accordingly, the bankruptcy court approved the sale of
GM's assets on July 5, 2009, and those assets were conveyed to new GM
on July 10, 2009.
Delphi Publicly Stated That It Was Unable to Fund Its Plans and the
Plans Were Terminated:
On June 1, 2009, Delphi, citing its inability to fund its plans and a
lack of feasible alternatives, publicly stated that PBGC "may initiate
an involuntary termination" of the Delphi salaried plan. Delphi and GM
entered into agreements with PBGC that provided PBGC an unsecured
claim in Delphi's bankruptcy and released PBGC's current claims and
foreign liens on Delphi's assets on July 21, 2009. PBGC agreed to
release its $196 million of foreign liens (foreign subsidiaries had
not filed for bankruptcy) and other termination claims in exchange for
a $3 billion unsecured claim in Delphi's bankruptcy, a $70 million
cash contribution from GM, and 10 percent of the first $7.2 billion of
distributions from Delphi Automotive LLP, the newly-created British
partnership that purchased most of Delphi's assets. On July 22, 2009--
12 days after the sale of GM's assets to new GM--PBGC announced the
termination of all six of Delphi's qualified defined benefit plans,
and on August 10, 2009, PBGC assumed trusteeship of the plans. PBGC
stated that the Delphi pension plans were underfunded by $7 billion
when they were terminated. PBGC estimates that it will need to make up
about $6 billion of that shortfall using PBGC funds, leaving plan
participants to bear the loss of the $1 billion difference through
reduced benefit amounts provided by PBGC.
New GM Ultimately Agreed to Provide Top-Ups for IUE and USWA to Help
Finalize Delphi's Bankruptcy:
The approval of the sale of old GM did not resolve IUE's and USWA's
claims that new GM was required to continue to provide the pension
benefit guarantees in accordance with collectively bargained
agreements. Both old GM and new GM denied these claims. According to a
company filing, new GM maintained that it was not obligated to assume
or to continue to abide by old GM's collective bargaining agreements
with IUE and USWA, while old GM maintained that it was entitled to
cancel or terminate all obligations arising from collective bargaining
agreements between old GM and IUE or USWA.[Footnote 22] In the summer
of 2009, IUE and USWA shifted the focus of their objections from the
GM bankruptcy settlement to the Delphi bankruptcy settlement. On July
9 and July 15, 2009, IUE and USWA, along with some of the splinter
unions, filed objections against Delphi's proposed reorganization plan
and sale.[Footnote 23] On July 15, 2009, Delphi Salaried Retiree
Association (DSRA) filed an objection against Delphi's bankruptcy
based on Delphi's modified plan including the termination of the
salaried plan, among other things. On July 30, 2009, the Delphi
bankruptcy court overruled the IUE, USWA, and DSRA objections and
authorized the consummation of Delphi's modified reorganization plan.
Delphi remained a significant--if not the largest--supplier for GM.
Thus, although GM was not required to provide the top-ups to IUE and
USWA under its own bankruptcy settlement, GM was motivated to resolve
Delphi's bankruptcy, and Treasury, as previously noted, was interested
in a quick resolution of the Delphi bankruptcy that required the least
possible amount of investment by GM, but that guaranteed the
"sanctity" of GM's supply chain. According to the Delphi-GM master
disposition agreement, IUE's and USWA's consent was required to
finalize the sale of assets in Delphi's bankruptcy.[Footnote 24] As a
result, new GM continued negotiating with IUE and USWA to resolve
their objections against Delphi's bankruptcy case.
On September 10, 2009, new GM, old GM, IUE, and USWA signed a
settlement agreement that, among other things, required new GM to
provide top-ups to retirees of Delphi represented by IUE or USWA who
were covered by the benefit guarantee agreements that GM had entered
with IUE and USWA in 1999.[Footnote 25] The parties entered into this
agreement after consideration of the "factual and legal arguments
regarding these issues, as well as the costs, risks, and delays
associated with litigating these issues." In its February 2010 court
motion, Treasury noted that in light of these costs, new GM had solid
commercial reasons for agreeing to provide top-ups to Delphi retirees
represented by IUE or USWA. As part of the settlement agreement, IUE
and USWA agreed to withdraw their objections against Delphi's
bankruptcy, resulting in the completion of Delphi's reorganization on
October 6, 2009, with the sale of its assets.
The settlement agreement did not provide top-ups to the splinter
unions or to any other noncovered employees, including all members of
Delphi's salaried plan. On September 14, 2009, DSRA filed a complaint
against PBGC in U.S. district court related to the termination of
Delphi's salaried plan.[Footnote 26] DSRA amended its complaint on
November 5, 2009, to include new GM, Treasury, and the Auto Task Force
as defendants. However, in March 2010, the court dismissed the claim
against new GM,FF[Footnote 27]FF and in September 2011, dismissed the
claim against Treasury.FF[Footnote 28]
Mr. Chairman and Members of the Committee, this completes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Committee might have.
GAO Contact and Staff Acknowledgments:
For further information regarding this testimony, please contact me at
(202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this statement. Individuals who made key contributions to this
testimony include Margie K. Shields (Assistant Director), Mark M.
Glickman (Analyst-in-Charge), James Bennett, Julie DeVault, Heather
Krause, Edward Leslie, Kathy Leslie, and Craig Winslow.
[End of section]
Footnotes:
[1] Prior to bankruptcy reorganization, GM's legal name was General
Motors Corporation. The legal name of the new entity that was created
through the bankruptcy process is General Motors Company (the entity
that purchased the operating assets of the pre-reorganization
corporation, which we discuss later in this report). As of October 19,
2009, General Motors Company became General Motors LLC. Throughout
this report, in cases where a distinction is important, we refer to
the pre-reorganization corporation as "old GM" and the post-
reorganization company as "new GM."
[2] Voluntary Petition of Delphi Corporation, No. 05-44481 (RDD)
(Bankr. S.D.N.Y. Oct. 8, 2005).
[3] GAO, Key Events Leading to the Termination of the Delphi Defined
Benefit Plans, [hyperlink, http://www.gao.gov/products/GAO-11-373R]
(Washington, D.C.: Mar. 30, 2011).
[4] For the purposes of this report, "Delphi" refers to the company
prior to its emergence from Chapter 11 reorganization. Postbankruptcy
Delphi is DPH Holdings Corporation, a liquidating entity, and Delphi
Automotive LLP is a United Kingdom limited partnership, which was
created in 2009 and purchased most of Delphi's assets.
[5] Effective October 1, 2000, IUE merged with the Communications
Workers of America to become the Industrial Division of CWA (IUE-CWA);
for the purposes of this report, we continue to refer to this entity
as the IUE.
[6] When a plan is terminated without sufficient assets to pay all
promised benefits, PBGC determines the amount of benefit guaranteed
based on certain limits specified under the Employee Retirement Income
Security Act of 1974, 29 U.S.C. §§ 1322-1322b, and related
regulations, 29 C.F.R. §§ 4022.21, 4022.24 and 4022.25 (2010). While
PBGC does not expect to finalize benefit amounts for each participant
in Delphi's plans for several years, it anticipates that the
application of these limits will result in many participants receiving
a lower benefit from PBGC than that promised by their plans. For more
on PBGC guarantees and the benefit determination process, see GAO,
Pension Benefit Guaranty Corporation: More Strategic Approach Needed
for Processing Complex Plans Prone to Delays and Overpayments,
[hyperlink, http://www.gao.gov/products/GAO-09-716], (Washington,
D.C.: Aug. 17, 2009).
[7] The splinter unions include the International Association of
Machinists and Aerospace Workers; International Brotherhood of
Electrical Workers; Michigan Regional Council of Carpenters, Local 687
and Interior Systems, Local 1045; International Brotherhood of
Painters and Allied Trades of the United States and Canada, Sign &
Display Union Local 59; International Brotherhood of Teamsters;
International Brotherhood of Boilermakers; International Union of
Operating Engineers; and United Catering Restaurant Bar & Hotel
Workers.
[8] This indemnification would allow GM to have a claim against Delphi
for any expenses incurred by GM for coverage of guaranteed benefits.
[9] Perfecting a lien involves registering it with the proper legal
authority, resulting in it becoming a secured interest and thereby
receiving a higher priority in bankruptcy.
[10] A freeze is an amendment to a defined benefit plan to limit some
or all future pension accruals for some or all participants. For more
information on types of freezes and their effects, see: GAO, Defined
Benefit Pensions: Plan Freezes Affect Millions of Participants and May
Pose Retirement Income Challenges, [hyperlink,
http://www.gao.gov/products/GAO-08-817] (Washington, D.C.: July 21,
2008).
[11] In December 2008, Treasury established AIFP under the Troubled
Asset Relief Program (TARP) to help stabilize the U.S. automotive
industry and avoid disruptions that would pose systemic risk to the
nation's economy. TARP was originally authorized under the Emergency
Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343, div.
A, 122 Stat. 3765 (codified as amended at 12 U.S.C. §§ 5201-5261).
EESA originally authorized Treasury to purchase or guarantee up to
$700 billion in troubled assets. § 115(a), 122 Stat. 3780. The Public-
Private Investment Program Improvement and Oversight Act of 2009
amended EESA to reduce the maximum allowable amount of outstanding
troubled assets under EESA by almost $1.3 billion, from $700 billion
to $698.741 billion. Pub. L. No. 111-22, div A, § 402, 402(f),123
Stat. 1656, 1658. EESA requires that the appropriate committees of
Congress be notified in writing when the Secretary of the Treasury,
after consultation with the Chairman of the Board of Governors of the
Federal Reserve System, determines that it is necessary to purchase
other financial instruments to promote financial market stability. §
3(9)(B), 122 Stat. 3767 (codified at 12 U.S.C. § 5202(9)(B)).
[12] Treasury established an internal working group--referred to as
the auto team--to oversee AIFP and provide analysis in support of the
Auto Task Force.
[13] On June 1, 2009, GM filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code (11 U.S.C. §§ 1101-1174)
and conducted a court-supervised asset sale (under 11 U.S.C. § 363),
in which substantially all of the operating assets of the company were
sold to General Motors Company, or "new GM," and most of the company's
debt and liabilities remained in the possession of Motors Liquidation
Company, or "old GM," which is being addressed in bankruptcy court.
New GM began operations on July 10, 2009.
[14] Deposition of Treasury Official at 185, No. 05-44481 (RDD)
(S.D.N.Y. July 21, 2009) and Motion of Defendants U.S. Department of
the Treasury et al. at 10, No. 2:09-cv-13616 (E.D. Mich. Feb. 16,
2010).
[15] According to the December 19, 2008, pre-bankruptcy loan agreement
between Treasury and GM, Treasury had the right to review and prohibit
any "asset sale, investment, contract, commitment, or other
transaction not in the ordinary course of business proposed to be
entered into with a value in excess of $100 million," referred to as a
"material transaction." Treasury also needed to sign off on the
purchase agreement under which old GM sold substantially all of its
assets to new GM. This agreement established which contracts would be
assumed by new GM. After July 10, 2009, the only approval right,
pursuant to the new loan agreement, was if new GM needed funds from an
escrow account.
[16] The Special Inspector General for the Troubled Asset Relief
Program (SIGTARP) is conducting an audit of Treasury's role in GM's
decision to provide top-ups for hourly workers, including whether the
Administration or Auto Task Force pressured GM to provide additional
funding for the hourly plan. SIGTARP has not announced when it expects
to complete this audit.
[17] Deposition of Treasury Official, No. 05-44481 (RDD) (S.D.N.Y.
July 21, 2009).
[18] In re General Motors Corp, 407 B.R. 463, 481 (Bankr. S.D.N.Y.
2009) (Decision on debtor's motion for approval of (1) sale of assets
to Vehicle Acquisitions Holdings LLC; (2) assumption and assignment of
related executory contracts; and (3) entry into UAW retiree settlement
agreement).
[19] The master sale and purchase agreement outlined, among other
things, the assets being sold by old GM to new GM and the liabilities
being assumed by new GM from old GM.
[20] Objection to Debtors' Motion Pursuant to 11 U.S.C. §§ 105,
363(b), (f), (k) and (m), and 365 and Fed. R. Bankr. P. 2002, 6004,
and 6006, to (I) Approve (A) the Sale Pursuant to the Master Sale and
Purchase Agreement with Vehicle Acquisition Holdings LLC, a U.S.
Treasury-Sponsored Purchaser, Free and Clear of Liens, Claims,
Encumbrances, and Other Interests; (B) the Assumption and Assignment
of Certain Executory Contracts and Unexpired Leases; and (C) Other
Relief; and (II) Schedule Sale Approval Hearing, In re General Motors
Corporation, No. 09-50026(REG) (Bankr. S.D.N.Y. June 19, 2009).
[21] 407 B.R. 512.
[22] Settlement Agreement Between and Among GMCO/MLC-IUE-CWA and USWA
Regarding Retiree Health Care, Life Insurance, Pension Top-Up, and
Modification and GMCO Assumption of MLC-IUE-CWA CBA, dated Sept. 10,
2009.
[23] Preliminary Objection of IUE-CWA to Motion for Order Authorizing
and Approving the Equity Purchase and Commitment Agreement Pursuant to
Sections 105(a), 363(b), 503(b) and 507(a) of the Bankruptcy Code, No.
05-44481 (RDD), (Bankr. S.D.N.Y. July 9, 2009) and Joinder of United
Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union to Preliminary
Objection of IOUE Locals and IBEW and IAM to Debtors' Motion for Order
Authorizing and Approving Modified Plan of Reorganization, No. 05-
44481 (RDD), (Bankr. S.D.N.Y. July. 15, 2009). Objection to Debtors'
Proposed Modifications to Debtors' First Amended Plan of
Reorganization (As Modified) at 2, No. 05-44481 (RDD) (Bankr. S.D.N.Y.
July 15, 2009).
[24] Master Disposition Agreement among Delphi Corp.; GM Components
Holdings, LLC; Gen. Motors Co., Motors Liquidation Co.; DIP Holdco3,
LLC; and the Other Sellers and Other Buyers Party Hereto at 96 (July
26, 2009).
[25] Settlement Agreement Between and Among GMCO/MLC-IUE-CWA and USWA
Regarding Retiree Health Care, Life Insurance, Pension Top-Up, and
Modification and GMCO Assumption of MLC-IUE-CWA CBA, dated Sept. 10,
2009.
[26] Complaint for Equitable Relief, No. 2.09-cv-13616 (E.D. Mich.
Sept. 14, 2009).
[27] First Amended Complaint, No 2:09-cv-13616 (E.D. Mich. Nov. 5,
2009). On March 12, 2010, the court dismissed GM as a party to the
DSRA lawsuit. The court stated that if the plaintiffs showed new facts
and circumstances that demonstrated new GM's conduct is not subject to
the release and injunction provisions of the approved Delphi modified
plan and plan modification order, then the plaintiffs could bring a
future claim against new GM. Black v. Pension Benefit Guaranty Corp.,
No. 2:09-cv-13616 (E.D. Mich. March 12, 2010) (Order dismissing
General Motors LLC).
[28] In September 2011, the court dismissed the retirees' claims
against Treasury and Treasury officials. Order Granting Defendant
United States Department of the Treasury, Presidential Task Force on
the Auto Industry, Timothy F. Geithner, Steven L. Rattner, and Ron. A.
Bloom's Reviewed Motion to Dismiss, No. 09-13616 (E.D. Mich. Sept. 1,
2011).
[End of section]
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