Automakers to revisit old idea in UAW talks
As Detroit automakers and the UAW prepare to kick off formal negotiations for a new labor contract this week, a not-so-revolutionary idea is winning new life as a possible way to deal with retiree health care obligations -- estimated at $90 billion to $115 billion -- facing the companies.
All three automakers are interested in an idea to create a special trust fund into which they can pump money now to pay for retirees' health care costs in the future.
The Free Press has learned that at least one automaker, General Motors Corp., hopes to cut its obligation by 35%, which analysts say the union will not approve, because benefits would have to be cut more than members could accept.
But at a higher level of funding, such a plan could appeal to workers who want to ensure they will have benefits even if an automaker goes bankrupt.
In exchange for putting the money into the fund, which would likely be controlled by the UAW, the companies would rid their books of the obligations and likely get some sort of reduction in the total they pay.
Developing such a fund on a large scale could have profound effects for the companies and the union.
But the UAW has agreed to other such funds -- known in the industry as a voluntary employee benefit association, or VEBA -- in the past, so the big question of these negotiations may not be over whether to create a VEBA fund.
It'll be about the money.
Looking for big break
GM wants a major discount on its estimated $64-billion retiree health care liability, and a person familiar with GM's strategy says it won't consider the VEBA as a solution if it has to pay more than 65 cents on the dollar.
"If we get the 60% or 65% VEBA that everybody thinks GM has to have, retirement health care benefits and active worker benefits at Toyota may be higher than at the UAW-Big Three," said Sean McAlinden, the chief labor economist at the Center for Automotive Research in Ann Arbor.
"For the workers, this would mean they are getting less for their dues," McAlinden added.
One possible solution to offset this could be an agreement to increase the pension benefits, since GM's pension is already overfunded, he said.
Jonathan Steinmetz, lead author of a Morgan Stanley note to investors, wrote that the UAW is unlikely to accept a VEBA funded at less than 76 cents on the dollar -- or 76% of the obligation -- out of fear it would not last beyond 2030.
At the same time, he wrote, 90 cents or more probably would not be palatable to the automakers.
Steinmetz doubts that the UAW would agree to put all retiree health care obligations into a VEBA this summer.
A partial VEBA could cover certain pools of retirees or certain types of coverage.
"We believe the UAW will want to take smaller steps before exposing itself to actual health care inflation," Steinmetz wrote.
But Argus Research analyst Kevin Tynan said he would not be shocked by a larger deal.
"I would say, despite the almost triple-digit billions, there's a pretty good shot it gets done, though I'd be surprised if the union ... did less than 80 cents on the dollar," he said.
Other matters will come into play at the negotiating table this summer, McAlinden said, including the threat that the automakers may further reduce the number of U.S. workers, favoring a move to less costly locations for production, such as Mexico.
"That's what the union has to decide," McAlinden said. "If we give them these concessions, will they walk away from that plant in Mexico? ... I think in a carefully constructed new agreement they can guarantee that U.S. business."
The idea of a VEBA, while gaining new attention, is not new. Part of the health care concessions the UAW gave to GM and Ford Motor Co. during the current contract included creating a trust to pay for some retiree health care costs.
The retiree health care liability, which Morgan Stanley pegs at $112 billion, is continually cited by Detroit automakers as one of their largest cost challenges to compete with the likes of Toyota Motor Corp.
The idea of a health trust is getting more attention in large part because Goodyear Tire and Rubber recently agreed to create one to address all of its $1.2 billion in health care liabilities.
Goodyear agreed to pay cash and stock worth as much as $1 billion -- about 83 cents on the dollar -- into a fund controlled by the United Steelworkers to cover current and future retirees' health care.
A tough sell
Andy Kramer, a lawyer from Jones Day, who helped to craft the VEBAs at Goodyear and a similar one at Toledo-based auto parts supplier Dana Corp., acknowledged it can be a tough sell.
At the bargaining table for Goodyear and Dana, Kramer said, they pushed the point that the trust would provide a level of security for retiree health benefits that did not otherwise exist. If a corporation files for bankruptcy, a judge could void the health care liabilities leaving workers with nothing.
If the liability is transferred to a VEBA, that risk is removed.
"Currently in the auto industry, the union would say you have these benefits for life, but the companies take the position ... that they're not benefits for life," Kramer said.
Industry observers, such as University of Windsor auto industry expert Tony Faria, believe that putting the union in charge of paying for health care through thick and thin would impose confusing challenges for the union.
"Certainly as health care costs continue to rise and retired workers live longer, obligations are going to continue to grow," he said, "and now the UAW is going to be in the not desirable position of having to -- at some point in the future -- tell their members that copays are going to have to be higher."
Mike Risk, 48, an hourly worker at the GM truck plant in Shreveport, La., said it upsets him to think the UAW is going into contract talks ready to make such a concession.
"The one thing I really need and depend on is my health care," said Risk, whose father is a GM retiree. "I understand" the automakers "don't have the money to cover this, but then again, it's their fault they agreed to it."
Ed Pietrowski, a GM assembly worker in Bowling Green, Ky., likes the security a VEBA might provide. "Would I trust the union more than the company? Yeah," he said. "I would hope they would keep the health care the same using the money they have in the union coffers. ... Maybe they should take the $50-a-month union dues and put them toward health care."
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