Was this the best course of action for GM shareholders? Should other pension plans follow suit and issue debt to finance their shortfalls? How should GM invest the proceeds of the debt issue?
GM in Dec 2002
Net income - $1.736 bn
Revenue - $177.3 bn
326000 ppl employed
EPS 3.35$

The 2 pension plans of GM are 1) The hourly plan - $2370 per month till 62 yrs. $1,420 per month after that, 65% surviving spouse.
For 2002, $4.3bn was paid to 340,000 beneficiaries. 2) Salaried plan – contribute 1.25% over 3,400$
For 2002, $2.1 bn for 117,000 employees. 2.5 retirees for every active worker.

GM pension plan in 2002
Losses of $9 bn
Increase in PBO of $4bn
Unfunding of pension plans by $19.3bn
Accumulated contributions by GM - $32,447 bn (1993-2002)

Causes * Steep declines in * equity valuations * interest rates

GM has always maintained a funding policy with respect to its US hourly and salaried pension plans of contributing annually at least the minimum required by ERISA and the PBGC to avoid a VRP.
Additional contributions required - $14.25 from 2003 to 2007 to avoid VRP’s imposed by PGBC and meet ERISA’s minimum funding requirements.
This would however impact GM’s cash flow statement – alleviate the impact of the recent large investment losses and increased liabilities.

So the cash cannot be used.

The other funding options remains are Debt and Equity.

The fund issued in 2003 –
In March, 108.2 mn shares of GM class H to its hourly and salaried pension plans & 41 mn shares to its VEBA trust for OPEB.
In June, $9.16 bn in Debt & $4bn in US convertible debentures.
GMAC also issues $4.48 bn in short term senior notes and debt.

Use of GMAC issue for general corporate use and GM issue to reduce the deficit in its pension plans.

The debt issue had tax benefits as compared to the equity issue.
So support of