“General Motors has a problem. It has promised its workers big pensions and generous health care benefits when they retire. Paying for those promises will not be easy,” writes Floyd Norris in today’s New York Times.

“Not that it is especially easy to figure that out from G.M.’s financial statements. Accounting rules do not force companies to immediately face up to bad news from their pension plans. So the balance sheet impact is delayed. Eventually, however, reality will win out, and General Motors will have to come up with the money.”

“The fine print in G.M.’s 2001 annual report shows that its retiree benefit plans, including pensions and health care, have unfinanced liabilities of a staggering $61 billion. That is up from $34 billion in 1999 and reflects how the market has affected companies that made big promises to their workers. Some of that shows up in liabilities on the balance sheet, but about $11.5 billion does not.”

“G.M. patted itself on the back this week when it said it would report the value of newly granted stock options as an expense. ‘G.M. has a long practice of conservative accounting and accurate reporting on our financial condition and performance,’ G.M.’s chief executive, Rick Wagoner, said.”

“Mr. Wagoner is right to a point. G.M. once was known for its conservative accounting. But that reputation slipped in the 1980’s as the company tried to make its poor performance look a bit better. If he really wants to get it back, he could direct his accountants to come up with more realistic assumptions on pensions.”

“A little history is in order here. Back in the 1980’s, the Financial Accounting Standards Board set out to change pension accounting, which was then completely misleading. G.M. was one of the companies that angrily protested, making the novel argument that more realistic accounting would violate its union agreements. That argument did not fly, but the board did compromise in unfortunate ways. It said that companies could guess what profits their pension plans would return, and then report profits as if they had done so. And it allowed underfinanced plans to show an intangible asset — G.M.’s is now $6.2 billion — that made a bad situation look better than it was.”

“In the first half of this year, G.M.’s pension funds lost about 3 percent of their value. If the accounting rules required G.M. to report based on actual performance, rather than the 10 percent annual gains it optimistically assumes, I estimate that it would have posted a net loss of $2.3 billion rather than a $1.5 billion profit. Similarly, reported profits from 2000 and 2001 would have vanished.”