General Motors of Canada Ltd. faces a pension shortfall of more than $7-billion, a gap that poses a major obstacle to a cost-cutting deal with the Canadian Auto Workers union, and a political challenge for Ottawa and Ontario.
The federal government says the province has jurisdiction for settling the pension issue, and must also contribute one-third of the overall loan package that Canada could provide in collaboration with the U.S. government. However, Ontario officials say the pension deficit is part of GM Canada's overall financial problems, and needs to be solved as part of the overall restructuring package.
Premier Dalton McGuinty acknowledged yesterday that the cost of saving GM's Canadian operations may be higher than he had anticipated, as he learned from Ontario's participation in $3.8-billion assistance provided to Chrysler LLC last month. Everyone involved in the GM restructuring should apply the lessons they learned by going through a similar exercise with Chrysler, he said.
"When we come together at the table, and when we're really honest with each other, then I think we can accept that we're going to have to do some things that we didn't want to do," Mr. McGuinty said. "We came to the table with more money than we initially anticipated we'd have to come with for Chrysler."
Mindful of a potential political backlash if Ottawa is seen to be bailing out lucrative auto worker pensions, Industry Minister Tony Clement has insisted federal taxpayers will not be on the hook for GM Canada's pension shortfalls, which are regulated and guaranteed by the province.
The Ontario government's position is that the shortfall in the pension plans is a significant component of the GM situation and cannot be isolated from the overall negotiations, said an Ontario government source who asked not to be named.
"All of the parties - the unions, GM, U.S. Treasury and the Canadian and Ontario governments - are working together to try to keep GM viable now and sustainable in the long term," the source said.
The Canadian and Ontario governments will decide how much money they are prepared to lend GM once the company and the CAW present their plans for restructuring the company's operations and cutting overall labour costs.
Still, provincial Finance Minister Dwight Duncan warned that Ontario's Pension Benefits Guarantee Fund is not in a position to bail out the GM plan. He said it would be unfair to ask taxpayers to bail out any pension plans that are under water, including GM's, because about two-thirds of Ontarians don't even have a pension.
GM Canada's plan had a deficit of $4.5-billion in its most recent public information released in November, 2007, but sources said the amount ballooned to more than $7-billion at the end of 2008 on declines in the stock market last year.
Since then, the Toronto Stock Exchange's leading index has regained about 12 per cent of its value, paring the pension shortfall somewhat. As well, the CAW says it already gave GM Canada $500-million worth of pension savings in March when the union agreed to freeze basic benefits and eliminate cost-of-living adjustments for retirees. Those changes won't come into effect, however, unless GM signs a final loan agreement with the federal and Ontario governments.
GM Canada spokesman Stew Low said the latest public figures are still those from November, 2007.
With government officials acting as mediators, the union and company are huddled in talks this week aimed at wringing out further cost savings after governments said a March agreement did not provide enough to make the company competitive and viable over the longer term.
The Detroit-based parent, General Motors Corp., is negotiating with its United Auto Workers union to reach the level of concessions demanded by President Barack Obama in return for a U.S.-led bailout that would provide more than $30-billion (U.S.) in loans to the company.
Even with deals with unions and governments, GM is likely to file for bankruptcy protection in the United States - and its subsidiary may seek similar protection in Canada - to dramatically reduce its debt load.
A settlement of GM Canada's pension problem is likely to involve financial contributions from GM Canada and the Ontario government, plus a reduction in future benefits for unionized employees at GM Canada who are still working and will retire in future years.
The fund will face a big hit in payouts over the next few years as the auto maker reduces its hourly work force to about 4,400 by 2014, from more than 10,000 now. Based on the November, 2007, shortfall of $4.5-billion in the funds, the deficit would amount to more than $1-million for every active GM worker by 2014.