oversight

Delphi Bankruptcy: Termination of Delphi Pension Plans

Published by the Government Accountability Office on 2012-07-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony before the Subcommittee on
                             TARP, Financial Services and Bailouts of
                             Public and Private Programs, Committee
                             on Oversight and Government Reform,
                             House of Representatives

                             DELPHI BANKRUPTCY
For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, July 10, 2012



                             Termination of Delphi
                             Pension Plans
                             Statement of A. Nicole Clowers, Director
                             Financial Markets and Community Investment Issues




GAO-12-909T
                                              July 10, 2012

                                              DELPHI BANKRUPTCY
                                              Termination of Delphi Pension Plans

Highlights of GAO-12-909T, a testimony
before the Subcommittee on TARP, Financial
Services and Bailouts of Public and Private
Programs, Committee on Oversight and
Government Reform, House of
Representatives

Why GAO Prepared This                         What GAO Found
Testimony                                     The termination of the six defined benefit plans the Delphi Corporation (Delphi)
                                              sponsored, and the provision of benefit protections to some Delphi employees
The Delphi Corporation was a global
supplier of mobile electronics and            but not others, culminated from a complex series of events involving Delphi, the
transportation systems that began as          General Motors Corporation (GM), various unions, the U.S. Department of the
part of GM and was spun off in 1999.          Treasury (Treasury), and the Pension Benefit Guaranty Corporation (PBGC).
Delphi filed for bankruptcy in 2005, and      When Delphi spun off from GM in 1999, three unions secured an agreement that
in July 2009, PBGC terminated                 GM would provide a retirement benefit supplement (referred to as "top-ups") for
Delphi's six defined benefit pension          their members should their pension plans be frozen or terminated and they were
plans and assumed trusteeship of the          to suffer a resulting loss in pension benefits. These three unions were: (1) the
plans. Because of the resulting               International Union, United Automobile, Aerospace, and Agricultural Implement
differences in participant benefits,          Workers of America (UAW); (2) the International Union of Electronic, Electrical,
questions have been raised about how          Salaried, Machine and Furniture Workers, AFL-CIO (IUE); and (3) the United
PBGC came to terminate the plans,             Steelworkers of America (USWA). No other Delphi employees had a similar
whether treatment for certain Delphi          agreement to receive a top-up, including salaried workers and hourly workers
workers was preferential, and the role        belonging to other unions. Over the course of events that unfolded over the next
of Treasury in these outcomes.                decade, the agreements with these three unions ultimately were preserved
                                              through the resolution of the bankruptcies of both GM and Delphi. Because
GAO’s testimony describes key events          Delphi’s pension plans were terminated with insufficient assets to pay all accrued
related to the termination of Delphi          benefits, and because PBGC must adhere to statutory limits on the benefits it
pension plans and the reasons for GM
                                              guarantees, many Delphi employees will receive a reduced pension benefit from
providing retirement benefit
                                              PBGC compared with the benefits promised by their defined benefit plans. Those
supplements to certain Delphi
employees, and Treasury's role in
                                              Delphi employees receiving the top-ups will have their reduced PBGC benefit
those events. The testimony is based          supplemented by GM while others will not.
on GAO’s March and December 2011
reports that examine these and other          As GM’s primary lender in bankruptcy, Treasury played a significant role in
related issues. In preparing these            helping GM resolve the Delphi bankruptcy. Treasury’s effort to restructure GM
reports, GAO relied on publicly               included helping GM find the best resolution of the Delphi bankruptcy from GM’s
available documents—such as GM and            perspective. This effort was guided by the following principles: preserving GM’s
Delphi bankruptcy filings, Treasury           supply chain, resolving Delphi’s bankruptcy as quickly as possible, and doing so
officials’ depositions, and company           with the least possible amount of investment by GM. However, court filings and
reports to the Securities and Exchange        statements from GM and Treasury officials suggest that Treasury deferred to
Commission—and on documents                   GM’s business judgment on decisions about the Delphi pension plans—that is,
received from groups GAO                      their sponsorship and the decision to honor existing top-up agreements.
interviewed, including Delphi, GM, the        According to public records and Treasury officials, Treasury agreed with GM’s
Delphi Salaried Retirees Association,         assessment that the company could not afford the potential costs of taking over
PBGC, and Treasury. GAO also                  sponsorship of the Delphi hourly plan, but that the company had solid
coordinated with the Special Inspector        commercial reasons to honor previously negotiated top-up agreements with
General for the Troubled Asset Relief         some unions. Nevertheless, Treasury officials said that Treasury did not explicitly
Program (SIGTARP) because of that
                                              approve or disapprove of GM's agreement to honor previously negotiated top-up
office’s work on Treasury’s role in
                                              agreements. PBGC officials stated that PBGC decided to terminate the plans
GM’s decision to provide top-ups for
certain hourly workers, including
                                              independently of Treasury input.
whether the Administration or Treasury
pressured GM to provide additional
funding for the hourly plan.
View GAO-12-909T. For more information,
contact A. Nicole Clowers at (202) 512-8678
or clowersa@gao.gov or Barbara Bovbjerg at
(202) 512-7215 or bovbjergb@gao.gov.


                                                                                      United States Government Accountability Office
Mr. Chairman, Ranking Member Quigley, and Members of the
Subcommittee:

Thank you for the opportunity to discuss our work on the termination of
Delphi’s pension plans. As you know, 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. 1 Following Delphi’s bankruptcy, the
Pension Benefit Guaranty Corporation (PBGC), the government
corporation that insures private-sector defined benefit (DB) plans,
terminated Delphi’s six plans in July 2009. The plans were estimated to
be underfunded by a combined $7.2 billion at termination, of which PBGC
expects to cover about $6 billion. 2 Since the termination, there has been
controversy over different pension benefit outcomes for certain unionized
and non-unionized Delphi retirees. Further, the involvement of the U.S.
Department of the Treasury (Treasury) in the bankruptcy of GM, Delphi’s
former parent company, raised questions for some about the role that
Treasury played in PBGC’s decision to terminate Delphi’s pension plans,
the decisions to provide retirement benefit supplements (“top-ups”) to
certain Delphi employees, and the resulting outcomes for Delphi plan
participants.

My testimony discusses key events related to the termination of Delphi
pension plans and the reasons for GM providing retirement benefit
supplements to certain Delphi employees, and Treasury’s role in those
events. My comments are based on our March and December 2011




1
 At the time of the spinoff, Delphi established two pension plans, with assets and liabilities
transferred from their GM counterparts: the Delphi Hourly-Rate Employees Pension Plan
(hourly plan) and the Delphi Retirement Program for Salaried Employees (salaried plan).
Delphi acquired four more plans after the spin-off from GM. Before bankruptcy
reorganization, GM’s legal name was General Motors Corporation. The legal name of the
new entity created in 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 statement). As of October 19, 2009, General Motors Company became
General Motors LLC. Throughout this statement, 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
 A DB plan promises a benefit that is generally based on an employee’s final pay and
years of service. The employer is generally responsible for funding all or most of the
benefit, investing and managing plan assets, and bearing the investment risk.




Page 1                                                                           GAO-12-909T
                            reports that examined these and related issues. 3 To construct a timeline
                            of events and identify Treasury’s role in those events for our reports, we
                            relied on publicly available documents, such as bankruptcy filings by GM
                            and Delphi, Treasury officials’ depositions, company reports to the
                            Securities and Exchange Commission, press releases; and documents
                            received from groups we interviewed, including Delphi, GM, the Delphi
                            Salaried Retirees Association (DSRA), PBGC, and Treasury. We
                            performed the work on which this statement is based from October 2010
                            to December 2011 in accordance with generally accepted government
                            auditing standards. Those standards require that we plan and perform the
                            audit to obtain sufficient, appropriate evidence to provide a reasonable
                            basis for our findings and conclusions based on our audit objectives. We
                            also coordinated with the Special Inspector General for the Troubled
                            Asset Relief Program (SIGTARP) because of that office’s work on
                            Treasury’s role in GM’s decision to provide top-ups for certain hourly
                            workers, including whether the Administration or Treasury pressured GM
                            to provide additional funding for the hourly plan.



Key Events Leading to
the Termination of
Delphi’s Pension
Plans
Three Unions Secured Top-   As part of Delphi’s spin-off from GM in 1999, GM was required to
Up Agreements in            collectively bargain with the unions affected by the spin-off—including the
Negotiations Following      International Union, United Automobile, Aerospace, and Agricultural
                            Implement Workers of America (UAW); the International Union of
Delphi’s Spin-Off from GM   Electronic, Electrical, Salaried, Machine and Furniture Workers, AFL-CIO
                            (IUE); and the United Steelworkers of America (USWA), as well as other




                            3
                             See GAO, Key Events Leading to the Termination of the Delphi Defined Benefit Plans,
                            GAO-11-373R (Washington, D.C.: Mar. 30, 2011); and GAO, Delphi Pension Plans: GM
                            Agreements with Unions Give Rise to Unique Differences in Participant Benefits,
                            GAO-12-168 (Washington, D.C.: Dec. 15, 2011). These products provide additional details
                            on the scope and methodology of this work.




                            Page 2                                                                    GAO-12-909T
“splinter” unions. 4 As a result of these negotiations, GM agreed to pay
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
difference between the amount PBGC would pay them and the benefit
amount promised by the Delphi plans. 5 Also, on December 22, 1999,
Delphi agreed to indemnify GM for all benefits provided by GM under the
UAW benefit guarantee. 6 At the time GM entered into these agreements,
Delphi’s salaried plan was fully funded while Delphi’s hourly plan was not
fully funded. 7




4
 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 and Display Union
Local 59; International Brotherhood of Teamsters; International Brotherhood of
Boilermakers; International Union of Operating Engineers; and United Catering Restaurant
Bar and Hotel Workers.
5
 “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.
6
 This indemnification would allow GM to have a claim against Delphi for any expenses
incurred by GM for coverage of guaranteed benefits.
7
 According to data provided by Delphi, based on a fair market valuation of plan assets the
Delphi salaried plan was 108.8 percent funded as of year-end 1998 and 122.7 percent
funded as of year-end 1999 while the Delphi hourly plan was 69.1 percent funded as of
year-end 1999. A plan is fully funded if as of a particular date, plan assets equal or exceed
the relevant measure of plan obligations. However, for the typical pension plan invested in
a mix of stocks and bonds, measures of funded status can be highly volatile, so that a
plan that is fully funded on one date could be substantially less than fully funded on a
subsequent date.




Page 3                                                                          GAO-12-909T
After Delphi Filed for    From 2001 to 2005, Delphi suffered large losses, and the company filed
Bankruptcy, Delphi and    for bankruptcy in October 2005. After Delphi filed for bankruptcy, Delphi
GM Agreed to Extend the   and GM agreed to extend the top-up agreements with UAW, IUE, and
                          USWA. 8 The splinter unions negotiated for other benefits at this time, but
Top-Up Agreements with
                          were not guaranteed top-ups. No other agreements were reached in
the Three Unions          relation to 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 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 the first phase, 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 the second
                          phase, upon “substantial consummation” of Delphi’s reorganization, the
                          remaining assets and liabilities in Delphi’s hourly plan would be
                          transferred to GM. No comparable arrangements were made for a
                          transfer of assets and liabilities for Delphi’s salaried plan or other smaller




                          8
                           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.




                          Page 4                                                                        GAO-12-909T
                        plans. In September 2008, Delphi froze its salaried plan and three of its
                        smaller plans, and in November 2008, Delphi froze its hourly plan. 9


Losses throughout the   Beginning in the fall of 2008, economic conditions deteriorated throughout
Automotive Industry     the automotive industry. Delphi experienced declining revenues as GM
Pushed Delphi Near      and other manufacturers sharply reduced production in response to
                        rapidly falling sales. According to documents provided by PBGC, when
Liquidation and GM to   Delphi’s financing agreement with its debtor-in-possession (DIP) lenders
Seek Assistance from    expired on April 21, 2009, Delphi’s operations were threatened by the
Treasury                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.




                        9
                         A freeze is an amendment to a DB 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, GAO-08-817 (Washington, D.C.: July 21, 2008).




                        Page 5                                                                         GAO-12-909T
GM’s losses in the fall of 2008 led the company to seek assistance from
Treasury through the Automotive Industry Financing Program (AIFP). 10
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). 11 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”). 12 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. 13 As GM’s primary lender, Treasury was


10
  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. The Helping
Families Save Their Homes 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(f),123 Stat. 1632, 1658.
Under EESA the appropriate committees of Congress must 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)). The Dodd-Frank Wall Street Reform and Consumer Protection Act,
enacted on July 21, 2010, (1) reduced Treasury’s authority to purchase or insure troubled
assets to $475 billion and (2) prohibited Treasury from using its authority under EESA to
incur any additional obligations for a program or initiative unless the program or initiative
already had begun before June 25, 2010. Pub. L. No. 111-203, § 1302, 124 Stat. 1376,
2133 (2010).
11
  Treasury established an internal working group—the auto team—to oversee AIFP and
provide analysis in support of the Auto Task Force.
12
  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,” to be addressed in bankruptcy court. New GM emerged on July 10, 2009.
13
  Deposition of Treasury Official at 185, No. 04-44481 (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).




Page 6                                                                          GAO-12-909T
                                                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 1). However, according to Treasury’s February 2010
                                                court motion, the Auto Task Force did not dictate what should be done
                                                with the Delphi pensions.

Table 1: Treasury’s Guiding Principles for Resolving GM’s Liabilities Related to Delphi

Principle                                             Treasury rationale
Development of a resolution that guaranteed           Treasury did not want GM’s attention, which was focused on its own restructuring, to
the “sanctity” of GM’s supply chain                   be diverted to finding suppliers for the products provided by Delphi.
Quick resolution of the Delphi bankruptcy             Treasury wanted Delphi’s bankruptcy to conclude sooner rather than later, given that
                                                      Delphi already had been in bankruptcy for 3 years.
A resolution that required the least possible         Because GM already had invested billions of dollars in Delphi during Delphi’s
amount of investment by GM                            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, No. 04-44481 (RDD) (S.D. N.Y. July 21, 2009).



                                                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 the second phase of the
                                                September 2008 agreement. Additionally, on June 1, 2009, Delphi
                                                announced that its hourly plan would be “addressed by GM.” 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. The second phase 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                             As part of the sale of the assets of old GM to new GM, GM negotiated
Maintained Delphi UAW                           with UAW—which represented its largest employee group—to modify
Top-Ups Based on UAW’s                          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
Continued Relationship                          all employment-related obligations and liabilities under any assumed
with GM                                         employee benefit plan relating to employees who are or were covered by



                                                Page 7                                                                                   GAO-12-909T
                         UAW collective bargaining agreements in its master sale and purchase
                         agreement, which included GM’s obligation to provide top-ups to Delphi
                         UAW retirees. 14 No other negotiations took place that resulted in
                         comparable obligations concerning top-ups for members of the two other
                         unions, IUE and USWA (although they had previously secured top-up
                         agreements with GM) or for the splinter unions or the salaried employees
                         who had no previous top-up agreements with GM.

                         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. 15 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.” 16 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   On June 1, 2009, Delphi, citing its inability to fund its plans and a lack of
That It Was Unable to    feasible alternatives, publicly stated that PBGC “may initiate an
Fund Its Plans and the   involuntary termination” of the Delphi salaried plan. Delphi and GM
                         entered into agreements with PBGC that provided PBGC an unsecured
Plans Were Terminated    claim in Delphi’s bankruptcy and released PBGC’s current claims and



                         14
                           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. In re GMC, 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).
                         15
                           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).
                         16
                          407 B.R. 512.




                         Page 8                                                                        GAO-12-909T
                            foreign liens on Delphi’s assets on July 21, 2009. 17 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 DB plans, and on August 10,
                            2009, PBGC assumed trusteeship of the plans. PBGC determined 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, 18 leaving plan participants to bear the
                            loss of the $1 billion difference through reduced benefit amounts provided
                            by PBGC, consistent with statutory limitations. 19


New GM Ultimately           The approval of the sale of old GM did not resolve IUE’s and USWA’s
Agreed to Provide Top-Ups   claims that new GM was required to continue to provide the pension
for IUE and USWA to Help    benefit guarantees in accordance with collectively bargained agreements.
                            Both old GM and new GM denied these claims. According to a company
Finalize Delphi’s           filing, new GM maintained that it was not obligated to assume or to
Bankruptcy                  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. 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




                            17
                               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.
                            18
                              GM also assumed about $2 billion in net liabilities when it accepted the transfer of about
                            a fourth of Delphi’s hourly plan in September 2008. In addition, GM expects to pay an
                            estimated $1 billion in top-up benefits to Delphi hourly employees.
                            19
                              PBGC pays participant benefits only up to certain limits set forth by the Employee
                            Retirement Income Security Act of 1974. 29 U.S.C. §§ 1322 and 1322a. Participants
                            whose benefits under the plan would otherwise exceed these statutory limits may have
                            their benefits reduced to the guaranteed amount, unless the plan has sufficient assets to
                            pay the nonguaranteed portion of their benefits, either in part or in full.




                            Page 9                                                                           GAO-12-909T
objections against Delphi’s proposed reorganization plan and sale. 20 On
July 15, 2009, DSRA filed an objection against Delphi’s bankruptcy based
on Delphi’s modified plan, including the termination of the salaried plan.
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.

While new GM maintained that it was not obligated to provide top-ups to
Delphi IUE and USWA retirees, it did have reason to want to resolve
Delphi’s bankruptcy, given GM’s reliance on Delphi for parts. 21 Moreover,
IUE and USWA, which still represented part of Delphi’s workforce,
needed to give their consent to finalize the sale of assets in Delphi’s
bankruptcy. 22 According to a GM official’s court declaration, a prolonged
cessation in the supply of parts from Delphi to GM would have had a
“devastating effect on GM, its ability to reorganize, and the communities
that depend on employment by GM and its community of parts




20
  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 and 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).
21
  According to a July 2009 declaration of a GM official, since the spin-off from GM, Delphi
was GM’s largest component parts supplier, accounting for approximately 11.3 percent of
GM’s North American purchases and 9.6 percent of GM’s global purchases in 2008.
Declaration of Randall L. Pappal in Support of Debtors’ Motion for Entry of Order
Approving (I) Master Disposition Agreement for Purchase of Certain Assets of Delphi
Corp., (II) Related Agreements, (III) Assumption and Assignment of Executory Contracts,
(IV) Agreement with PBGC, and (V) Entry into Alternative Transaction in Lieu Thereof, at
4, In re General Motors Corp., No. 09-50026 (Bankr. S.D.N.Y. July 8, 2009).
22
 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).




Page 10                                                                        GAO-12-909T
suppliers.” 23 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. 24 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 non-covered
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. 25 DSRA
amended its complaint on November 5, 2009, to include new GM,




23
  The July 2009 declaration of a GM official stated that Delphi was a sole-source, just-in-
time supplier of many critical parts to GM, including parts that are used in almost every
GM product line in North America and identified several ways in which a cessation of parts
delivery by Delphi could affect GM, including that (1) most parts that Delphi manufactures
for GM are not readily available from an alternate source, and while GM could accelerate
efforts to re-source Delphi parts in the event of a supply interruption, the sheer magnitude
of the parts to be re-sourced and revalidation required would take at least several months
to achieve; (2) because GM operates on a just-in-time inventory delivery system, GM
plants relying on just-in-time shipments may run out of inventory of such parts and have to
shut down within a matter of days, if Delphi ever ceased shipping even a small fraction of
production parts to GM; and (3) the shutdown of GM plants as a result of termination of
deliveries of affected parts from Delphi could idle tens of thousands of GM workers,
significantly decrease GM’s revenues, and increase GM’s costs to expedite resourcing
efforts.
24
 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.
25
 Complaint for Equitable Relief, No. 2.09-cv-13616 (E.D. Mich. Sept. 14, 2009).




Page 11                                                                        GAO-12-909T
                       Treasury, and the Auto Task Force as defendants. New GM, Treasury,
                       and the Auto Task Force were later removed as defendants in the case. 26

                       GM’s agreements with certain unions give rise to differences in participant
                       benefits. Because Delphi’s pension plans were terminated with
                       insufficient assets to pay all accrued benefits in July 2009, and because
                       PBGC must adhere to statutory limits on the amount of benefits it
                       guarantees to individuals, many Delphi retirees will receive less from
                       PBGC than their full benefit promised by Delphi. Based on PBGC’s
                       review of cases as of June 2011, when GAO conducted its study, just
                       under half of both the hourly and salaried plan participants had received
                       reductions in their promised benefits due to the application of statutory
                       benefit limits. 27 However, the approximately 60 percent of participants in
                       the hourly plan receiving the top-ups are protected from such benefit
                       reductions because GM will supplement their PBGC benefit to replace
                       any benefit loss, while other hourly employees as well as employees in
                       Delphi’s salaried plan and the other smaller plans are not protected from
                       such losses.


                       As GM’s primary lender in bankruptcy, Treasury played a significant role
Treasury Worked with   in helping GM resolve the Delphi bankruptcy in terms of GM’s interests.
GM to Resolve the      However, court filings and statements from GM and Treasury officials
                       suggest that Treasury deferred to GM’s business judgment about the
Delphi Bankruptcy      Delphi pension plans—that is, their sponsorship and the decision to honor
                       existing top-up agreements. According to public records and Treasury
                       officials, Treasury agreed with GM’s assessment that the company could
                       not afford the potential costs of sponsoring the Delphi hourly plan.


                       26
                         Delphi salaried retirees are in litigation against PBGC about termination of Delphi’s
                       pension plans. Black v. Pension Benefit Guar. Corp., No. 2:09-cv-13616 (Bankr. E.D.
                       Mich. filed Nov. 5, 2009). The court dismissed the retirees’ claims against new GM in
                       March 2010 and against Treasury and Treasury officials in September 2011. Black v.
                       Pension Benefit Guar. Corp., No. 2:09-cv-13616 (E.D. Mich. March 12, 2010) (Order
                       dismissing General Motors LLC). Order Granting Defendant United States Dep’t 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).
                       27
                         PBGC pays participants’ benefits only up to certain limits set forth by the Employee
                       Retirement Income Security Act of 1974 (ERISA) and related regulations. Participants
                       whose benefits under the plan would otherwise exceed these statutory limits may have
                       their benefits reduced to the guaranteed amount, unless the plan has sufficient assets to
                       pay the nonguaranteed portion of their benefits, either in part or in full.




                       Page 12                                                                       GAO-12-909T
                            Additionally, PBGC officials have maintained that their agency’s decision
                            to terminate the Delphi plans was made independent from Treasury’s
                            input. Treasury officials said that while Treasury did not explicitly approve
                            or disapprove of GM’s agreeing to honor previously negotiated top-up
                            agreements with some unions, it agreed that GM had solid commercial
                            reasons to enter into such an agreement.


Decisions Related to Plan   From Treasury’s initial discussions with PBGC about Delphi’s pensions in
Sponsorship                 April 2009 until after GM’s bankruptcy filing on June 1, 2009, Treasury
                            had anticipated that PBGC would terminate Delphi’s salaried pension
                            plan but that GM would assume the remaining portion of Delphi’s hourly
                            plan, as called for in the second phase of the September 2008
                            agreement. 28 According to a Treasury official’s deposition and our
                            interviews with Treasury officials, Treasury agreed with GM’s rationale not
                            to assume the now underfunded Delphi salaried plan, because that plan
                            had been fully funded when GM transferred it to Delphi in 1999. However,
                            the Treasury official’s deposition indicated that Treasury thought it was
                            reasonable for GM to assume the Delphi hourly plan for UAW-
                            represented workers, because of UAW’s continuing role with the new GM
                            and because the hourly plan, which covered both the UAW and other
                            union-represented workers, had not been fully funded at the time the plan
                            was transferred from GM to Delphi in 1999. 29

                            According to our review of the records, Treasury was involved in
                            discussions with PBGC and GM on how to address Delphi’s pensions
                            before GM’s bankruptcy filing. Specifically, according to a Treasury
                            official’s deposition, initial discussions with PBGC, GM, and Treasury in
                            April and May 2009 centered on trying to reach an agreement under
                            which, among other things, the Delphi salaried plan would be terminated
                            and GM would assume the hourly pension plan. According to PBGC
                            officials, discussions in April and May 2009 revolved around how to deal
                            with Delphi’s pension plans in light of the collapse of the automotive
                            market, growing concerns about Delphi’s imminent liquidation and
                            inability to maintain its pension plans, and GM’s own financial difficulties
                            and impending bankruptcy. However, PBGC officials told us that at this


                            28
                             Deposition of Treasury Official, No. 04-44481 (RDD) (S.D. N.Y. July 21, 2009).
                            29
                              According to the deposition, Treasury was not focused on the other unions’ plans at this
                            time but was concerned about UAW because of UAW’s role for new GM.




                            Page 13                                                                       GAO-12-909T
time, they had not reached any agreement with GM or Delphi about the
future of the Delphi pension plans.

According to court filings, GM officials first informed Treasury on June 3,
2009, (shortly after GM’s bankruptcy filing) that they had concerns about
taking on the hourly plan and had not built the cost of doing so into their
restructuring plan. In June 2009, GM developed and provided Treasury
with an assessment of the costs of Delphi’s pensions, which explained
that the restructuring plan did not assume the transfer of remaining Delphi
hourly or salaried plans. The assessment also stated that, subject to
certain conditions, GM was obligated to absorb the second transfer of
Delphi’s hourly plan but did not expect Delphi to meet those conditions. 30
GM also noted that it was not obligated to absorb Delphi’s salaried plans.
After reviewing GM’s calculations and engaging in discussions with GM’s
pension team, Treasury agreed with GM’s assessment that taking on the
Delphi hourly plan was a “3 billion dollar liability that GM could not
afford.” 31 In a legal brief, Treasury asserted that the department did not
dictate what should be done with the Delphi pensions and that Treasury
agreed with GM’s decisions. 32

According to PBGC, Treasury did not play an active role in PBGC’s
decision to terminate the Delphi plans, although by statute the Secretary
of the Treasury is one of PBGC’s three board members. 33 According to
PBGC officials, PBGC’s director informed the board of PBGC’s decision
to seek termination of the Delphi plans, gave the board advance notice of



30
   The assessment added that since the first transfer in September 2008, the unfunded
liability for the remainder of Delphi’s hourly plan had increased from $1.5 billion to
approximately $3.2 to 3.5 billion as of March 31, 2009.
31
  Deposition of Treasury Official, No. 05-44481 (RDD) (S.D. N.Y. July 21, 2009). Upon
termination in July 2009, PBGC calculated that the underfunding of the hourly plan totaled
$4.4 billion.
32
  Motion of Defendants U.S. Dep’t of the Treasury et al. to Dismiss or, in the Alternative,
for Summary Judgment at 24, No. 2:09-CV-13616 (E.D. Mich. Feb. 16, 2010).
33
  29 U.S.C. § 1302(d). As we reported in GAO-12-168, PBGC’s decision to terminate the
plans was ultimately precipitated by the apparent lack of a viable sponsor, impending
foreclosure on Delphi’s assets, and the prospect of increased losses for PBGC and the
plans that would occur upon liquidation. Our examination of PBGC termination decisions
for nine of its ten largest insurance claims (Delphi’s being the tenth) shows the agency
making assessments similar to those it made for the Delphi pension plans. See
GAO-12-168 for more details on this work.




Page 14                                                                         GAO-12-909T
                            subsequent implementation of that decision, and routinely kept the board
                            informed of the agency’s actions in the Delphi bankruptcy case,
                            consistent with PBGC’s practice in other large cases. The law gives the
                            board responsibility to establish and oversee PBGC policies, but
                            according to PBGC, the board decides broad policy issues that may arise
                            from cases without getting involved directly in those cases. 34 For their
                            part, Treasury officials acknowledged that the department had multiple
                            roles in this process by virtue of its roles in PBGC oversight and in
                            managing the U.S. investment in new GM, but noted that Treasury does
                            not communicate with PBGC about its GM investment activities. 35
                            Moreover, in response to questions from Congress, the Treasury
                            Secretary stated that Treasury did not make the decision to terminate
                            Delphi’s pension plans. 36


Decisions Related to Top-   Although GM decided not to assume the second installment of Delphi’s
Up Agreements               hourly plan, GM did decide to honor existing top-up agreements for
                            commercial reasons that Treasury found reasonable. As noted in a
                            Treasury official’s deposition, during GM’s bankruptcy process, GM was
                            prepared to honor the obligation of providing top-ups to Delphi UAW
                            retirees, while the situation was less clear in relation to comparable
                            agreements with IUE and USWA. GM officials told us that the company
                            agreed to honor the top-up agreement with UAW during its restructuring
                            because of its dependence on the union, whose members made up a
                            substantial part of GM’s workforce. As previously noted, GM agreed to
                            provide top-ups to the Delphi UAW retirees as part of GM’s master sale
                            and purchase agreement, to which Treasury gave its approval.

                            According to a Treasury official’s deposition, Treasury was kept apprised
                            of GM’s ongoing bargaining with IUE and USWA on a variety of issues,
                            including the top-ups. 37 According to Treasury officials, Treasury’s
                            consent for transactions greater than $100 million, which had been



                            34
                             29 U.S.C. § 1302(d) and (f).
                            35
                             GAO-10-492.
                            36
                             The Federal Bailout of AIG: Hearing before the H. Comm. on Oversight and Government
                                        th
                            Reform, 111 Cong. 310 (2010) (answers to questions for the record from Timothy
                            Geithner, Secretary of the Treasury).
                            37
                             Deposition of Treasury Official, No. 04-44481 (RDD) (S.D. N.Y. July 21, 2009).




                            Page 15                                                                     GAO-12-909T
required before GM’s bankruptcy, was not required of new GM.
Therefore, Treasury’s consent was not required when the settlement
agreement was signed 2 months after new GM began operations.
Negotiations resulted in the September 2009 settlement agreement
between new GM, old GM, IUE, and USWA. According to the agreement,
the parties entered into it after consideration of the “factual and legal
arguments regarding these issues, as well as the costs, risks, and delays
associated with litigating these issues.” 38

Although Treasury officials said Treasury did not explicitly approve or
disapprove of GM providing top-ups to the Delphi UAW, USWA, and IUE
retirees, Treasury subsequently commented on GM’s decision. In its legal
brief, Treasury stated that GM had solid commercial reasons for providing
the top-ups. 39 Specifically, Treasury stated that its aim in negotiating the
details of GM’s reorganization plan was to ensure that new GM would
assume only those liabilities of old GM that were “commercially
necessary” for new GM to operate. Treasury noted in the brief that
because of new GM’s dependence on the UAW workforce and the costs,
risks, and delays associated with litigating USWA’s and IUE’s claims
related to the Delphi bankruptcy, new GM had solid commercial reasons
to agree to provide the top-ups to the Delphi UAW, USWA, and IUE
retirees. Additionally, Treasury officials noted that, unlike the hourly plan,
the salaried plan was fully funded at the time GM transferred it to Delphi.
Also, because GM was never obligated to provide top-ups to the salaried
or other retirees not represented by UAW, IUE, and USWA, GM did not
have any legal obligation to agree to provide top-ups to these groups.


This concludes my prepared statement. I would be pleased to answer any
questions you may have.




38
  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.
39
 Motion of Defendants U.S. Dep’t of the Treasury et al. at 28, No. 2:09-cv-13616 (E.D.
Mich. Feb. 16, 2010).




Page 16                                                                     GAO-12-909T
                  For further information on this testimony or GAO’s March and December
GAO Contact and   2011 reports on the termination of Delphi’s pension plans, please contact
Staff             me at (202) 512-8678 or clowersa@gao.gov, or Barbara Bovbjerg,
                  Managing Director, Education, Workforce, and Income Security Issues at
Acknowledgments   (202) 512-7215 or bovbjergb@gao.gov. Other key contributors to this
                  statement include Mark M. Glickman, Sarah Farkas, Charles Jeszeck,
                  Heather Krause, Raymond Sendejas, Margie Shields, and Craig Winslow.
                  Contact points for our Congressional Relations and Public Affairs offices
                  may be found on the last page of this statement.




(544180)
                  Page 17                                                       GAO-12-909T
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