The Sparrow’s Point steel mill here was once the world’s largest steelmaking facility, with a workforce that topped 30,000. But automation and repeated rounds of cutbacks have chopped employment at “the Point” to just 2,500.
At the General Motors Corp. assembly plant on the East Side of this blue-collar port city, where 7,000 autoworkers once toiled, only 1,100 remain. And those survivors are slated to lose their jobs May 13, when GM permanently closes the 70-year-old factory.
The withering away of high-paying industrial jobs is old news. These days, people in Baltimore’s working-class neighborhoods have something more pressing on their minds: retiree benefits.
Just over two years ago, Bethlehem Steel Corp., then owner of Sparrow’s Point, collapsed into bankruptcy. That move ultimately stripped nearly 100,000 retirees of their health-care benefits, and now many GM workers and retirees wonder whether the automaker will follow the same path as Bethlehem Steel.
The Detroit company’s financial performance has been so dreary that bankruptcy rumors have surfaced of late. But GM, with a hefty $40 billion in cash on hand, has dismissed such speculation. And most observers call such talk premature or flat wrong.
“We see bankruptcy as unlikely” for Ford or GM, Morningstar analyst Phil Guziec said in a Friday commentary. Guziec said he holds that view “not because of any strengths of the business models of these automakers, but rather because many players … have a stake in seeing the companies avoid bankruptcy.”
At the top of that list, he said, is the United Auto Workers union, which is in a position to grant contract concessions that could help the struggling automakers save billions of dollars.
“It’s unlikely the UAW would kill the geese that are laying the golden eggs,” Guziec said. A bankruptcy filing, he contends, “would probably cost the UAW far more than the necessary concessions to keep the automaker afloat.”
Still, many people in Baltimore saw up close what happened to Bethlehem Steel retirees and are fearful what the future might bring.
“They all know people who worked at the Point. They’re neighbors, friends,” said Walter “Bud” Plummer, who heads the United Auto Workers local at the plant.
“It was devastating. A lot of them lost their houses,” Plummer said. Current and retired GM workers in his local “are worried it might come out the same way” for them.
Broken promise
For decades, Bethlehem had signed contracts promising its workers they’d receive health-care and pension benefits for life. But the beleaguered company eventually said it could no longer afford to honor its promise.
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After obtaining a bankruptcy court’s go-ahead, Bethlehem abruptly pulled the plug on the health-care benefits it had been providing to 95,000 retired workers and their families. About one-fifth, or 19,000, of those affected lived in the Baltimore area.
Some needed oxygen tanks to help them breathe, some depended on costly medications, and some needed rehabilitation services for bodies broken down by years of physical labor in the steel mill.
To make matters worse, many who had retired after putting in 30 years or more were still in their 50s, which put them at least a decade away from being eligible for federal Medicare coverage.
A “legalized swindle” is what one steelworkers union official called Bethlehem’s maneuver. But Bethlehem was neither the first nor the last steelmaker to elect bankruptcy.
In fact, more than a quarter-of-a-million retired steel industry workers have lost their health care when employers filed for bankruptcy protection, used bankruptcy law to terminate their retiree health-care and pension obligations and then sold the unburdened operating assets to pay off creditors.
When such companies went under, workers’ pensions generally stayed safe. A federally affiliated agency known as the Pension Benefit Guaranty Corp. assumed the steelmakers’ pension plans, which were underfunded by billions of dollars, and the workers have continued to receive their pension checks.
Unfortunately, there’s no similar program for guaranteeing the health-care benefits companies promised workers but can’t make good on.
“They retired and thought they’d be taken care of, and it didn’t happen like that,” said Sandy Wright, a machinist and steelworkers union representative at the Point.
Among the Bethlehem retirees, “There’s a lot of people out there who have to choose between food and prescriptions,” Wright said.
The painful fallout Bethlehem’s failure created helps explain why GM’s financial state is being so closely monitored in Baltimore. If the auto giant’s problems grow dire enough, workers fear, the Detroit company might opt for bankruptcy protection and then shrug off its retiree obligations, like Bethlehem.
For now, even though Asian carmakers continue to claim market share in the U.S., a leading credit-rating company this week lowered GM’s bonds to “junk” status, and retiree-benefit obligations continue to drain billions of dollars yearly from its coffers, GM is considered to be on solid financial footing.
Unlike steelmakers, which operate in a market in which commodity metals prices and economic cycles are the crucial factors, auto producers’ fortunes rise and fall, in part, depending on the popularity of their models. So it’s possible for a company to boost its fortunes with one hit car.
Although GM and Ford have been steadily losing sales to such rivals as Toyota and Hyundai, the U.S. companies managed for many years to keep a tight grip on the popular, and highly profitable, pickup truck and sport-utility vehicle categories.
But recently, high gas prices have cooled consumers’ interest in such vehicles. And foreign makers recently started to invade the once-unassailable sector with increasing success.
Foreign competition
Despite the differences, however, there are also some key similarities between the forces that have brought down so many American steelmakers and the pressures building on Ford and General Motors.
America’s steel and auto industries enjoyed almost complete domination of their domestic markets for many decades, and both lost that supremacy when they failed to respond adequately to competitive challenges from offshore rivals.
In those days, it didn’t make sense for a steelmaker to take on the steelworkers union over the benefits issue; doing so might spark a painful strike that would send business to a rival. It was easier, observers have noted, to secure labor peace in the 1950s, ’60s and ’70s by promising rewards that wouldn’t come due until far in the future.
In the early years, the number of retirees drawing benefits was minimal, compared with the number of workers on the job. But over time, increasing numbers of workers reached retirement age, punched out for the last time and applied for the pension and health-care benefits they’d been promised.
As the number of pensioners began to exceed the number of active workers, those obligations, known as legacy costs, turned into a competitive millstone.
Beginning in the 1970s, steelmakers from Japan and elsewhere began making inroads on the U.S. markets for steel and autos. At the same time, upstart U.S. companies began making steel using a mini-mill process that was more flexible and required much less capital.
The rivals often were more efficient than the mainstream U.S. makers. As their market share dwindled, alarmed domestic steel companies got religion and began to squeeze their cost structures. They closed inefficient plants and spent billions of dollars automating and upgrading other facilities.
By the latter part of the 1990s, the steelmakers’ painful restructuring had closed much of the productivity and quality gaps that existed. In the auto sector, U.S. companies completed a similar efficiency drive.
Even as they became more competitive operationally, however, U.S. producers still labored under a disadvantage. In the steel industry, for example, approximately four retired workers were drawing benefits for every active worker.
Because companies were afraid to pick up additional legacy costs, domestic steelmakers were unable to enter into mergers that would have generated economies of scale. Potential foreign buyers stayed away for the same reason.
The result? Many of the biggest steelmakers headed for bankruptcy court.
Road to freedom
While under bankruptcy protection, Bethlehem sold its assets to an Ohio company known as International Steel Group Inc., which became the nation’s biggest steelmaker by buying up the remains of bankrupt steel companies.
ISG was unwilling to acquire Bethlehem as long as the company was saddled with legacy obligations, and the bankruptcy court cleared Bethlehem to sever its retirees.
For Bethlehem and a number of other big steelmakers, declaring bankruptcy was a springboard to freedom from hugely expensive retiree obligations and to a subsequent round of mergers that made the whole sector more efficient.
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And the dumping of those companies’ legacy obligations clearly saved the jobs of many thousands of steelworkers, who ended up working for ISG.
ISG itself was acquired in April by a European company, Mittal Steel Co., as part of the steel industry’s accelerating global consolidation.
Joe Evans, who watched Bethlehem retirees struggling in the aftermath of the steelmaker’s bankruptcy, doesn’t spend much time thinking about global steel consolidation.
He wants to know how likely it is that he and fellow GM workers will end up without the retirement benefits they have been counting on.
“It’s scary to think about that,” Evans confessed.
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