GM, UAW Close to Agreement
Historic deal has the potential to change the U.S. auto industry
By Brendan Moore
3:15 PM ET: It appears that the United Auto Workers and General Motors are close to a settlement as they returned to the bargaining table for a ninth day this morning and have continued making accelerated and substantial progress towards the crux of the talks, a union-managed healthcare trust that would be funded by GM. Such a shift of healthcare responsibilities would signal a far-reaching change regarding the contentious issue of healthcare benefits in the auto industry.
The proposed fund would take over most of GM’s $51 billion USD unfounded obligation to health costs for their current population of retired workers. It is also believed that GM and the UAW are discussing the financial mechanisms to be employed regarding future healthcare and pension benefits for the union workers now employed at GM.
According to sources quoted by Reuters and the Associated Press, GM and the UAW have so far agreed on a very good financial structure for building a Voluntary Employee Beneficiary Association (VEBA trust) that would make the long-term health-care liabilities from GM’s books go away, and pay the promised medical benefits for union retirees.
However, it is a slow process as the methodology of funding the trust is staggeringly complex and the funding ratio is being negotiated concurrently. The UAW had representatives from Lazard, the invest banking firm, to assist them with the negotiations around the funding issues. It is not known whether the contributions by GM will be made in cash or stock or some combination of the two, but what is almost certain is that there will be no funding contributions from GM’s employee pension plan. Negotiations stalled concerning the funding ratios until GM starting proposing alternatives including reduced wages and employment, and at that point, the UAW became more flexible. Obviously, any agreement needs to be ratified by the members of the UAW, so the union is going with concessions most likely to generate the least amount of internal dissension.
One huge plus for the UAW regarding a VEBA is the following: in a Chapter 11 bankruptcy, pensions can be fairly easily terminated and replaced with less expensive plans. Just ask the airline or steel industry employees. A trust, on the other hand, is protected. I am not suggesting that any of the Big 3 are in danger of bankruptcy, but there is no denying that their earnings results have been dismal for quite sometime.
Any VEBA deal that gets done between GM and the UAW will register as a seismic event in American industry (particularly the manufacturing sector) simply because of its magnitude. There have been other VEBA agreements recently, but their size is dwarfed by the potential UAW fund. It must be remembered that whatever happens with GM with almost certainly happen with the UAW workers at Ford and Chrysler (the three companies together lost a combined $15 billion last year). If GM and UAW agree to an approximate GM-funded rate of 70% of total liabilities (about $34 billion currently), and that agreement holds for the Ford and Chrysler UAW workers, that means the fund will start life with around $60 billion in assets. This, by the way, will make it one of the Top 25 funds in the country, and will necessitate a fund management investment firm, union fund managers as liaisons, administrative vendors to pay out benefits, etc. It will also be quite an event in the fund management industry as all the big players will be wooing the UAW for that business.
GM has about 541,000 UAW retirees and their –fully-eligible spouses on their books right now and would find it vastly preferable to pay the union to set up the desired VEBA to get those individuals and their health-care liabilities off their balance sheet. The UAW, while not ecstatic about the idea, is willing to consider it for the quid pro quo of guarantees for GM to build current and future models in U.S. production facilities that use UAW labor.
Of course, the current GM-UAW negotiations are not just about healthcare. GM says it suffers an approximate $25-an-hour difference in added labor costs when compared to its Japanese competition and only part of it comes from healthcare-related costs (Japan has national healthcare, as do the countries that produce cars in Europe). Those other costs, like wages and benefits, are also being discussed during the current negotiations. A “two-tier” pay plan, one for current employees and one for all future employees, is also being discussed, but UAW officials have a very low level of interest in such a plan.
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