GM Wins Ground In U.S. Pension Suit
A Federal Court Backs Effort To Recover $253 Million For an Underfunded Plan
By Ellen E. Schultz
THE WALL STREET JOURNAL
Wednesday, July 6, 2005

A federal court has ruled in favor of General Motors Corp. in its bid to recover as much as $253 million from the federal government for one of its underfunded pension plans.

The decision, by Judge Nancy Firestone of the U.S. Court of Federal Claims, is the first of its kind and may precipitate moves by other government contractors to try to recoup some of the underfunding of pension funds that existed when the contractors closed or sold divisions.

GM's suit comes at a time when corporate pension plans, which were robustly overfunded in the 1990s, have become collectively underfunded for a variety of reasons, including stock-market losses, low interest rates and corporate decision-making.  Pension plans in the Standard & Poor's 500 had a net underfunding of $159 billion at the end of 2004, compared with net overfunding of $263 billion at the end of 1999.

The U.S. government is likely to appeal the court's decision in the case of GM vs. U.S., and any potential recovery could take years.  A spokesman for GM says it wouldn't be appropriate to comment until the matter has been fully resolved.

Still, the decision is significant.  When companies have contracts with the government to provide goods or services, the government pays for salaries and pays a portion of the pension costs.  When companies subsequently close or sell a unit with an overfunded pension plan, the government generally recovers the portion of the pension surplus attributable to the amounts it contributed to the pension fund.

GM argued that the government was similarly obligated to make contributions to an underfunded pension of a division GM sold in 1993, Allison Gas Turbine, which provided services to the government.  In 1996, GM filed a claim for $253 million, and sued the government on Jan. 27, 2000, in the federal court of claims, which handles contract disputes.

In her decision, filed on June 28 in the Washington, D.C., court, Judge Firestone said the government should pay the allocable amount of the pension underfunding, though she didn't specify a dollar amount.  However, the judge denied GM's motion to recover not only the underfunded amount, but a profit as well.

Contractors say that if the government was able to recover pension surplus during the good times, it is only fair that it share the pain in the bad times.

"The court rejected three of the arguments the government has asserted to avoid paying contractor pension claims," said Karen Manos, a lawyer with Howrey LLP, a global litigation firm that represents government contractors.  Over the years, there have been numerous suits between contractors and the government over the disposition of surplus pension assets.

If the pension ruling is upheld by the Court of Appeals for the Federal Circuit, it could also establish a significant loophole in government contracts: the decision says that ceilings on government spending under contracts would not apply to pension claims.

Consequently, if government agencies are required to pay for underfunded pensions of divisions sold or closed by companies that have -- or used to have -- government contracts, they would have to seek additional appropriations from Congress, or cut spending in other areas.

Write to Ellen E. Schultz at ellen.schultz@wsj.com

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