GM, UAW Announce Historic Agreement

Two-day strike is settled

Effect of the deal is expected to ripple out across industry

By Brendan Moore
with reporting by Chris Haak

09.26.2007

The United Auto Workers and General Motors have reached agreement on a new 4-year labor agreement that provides for 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 at GM as well as the rest of the domestic auto industry, and brings to end a brief two-day strike that shut down all of GM’s US manufacturing operations.

The proposed fund would take over most of GM’s $51 billion USD unfunded obligation to health costs for their current population of retired workers. The agreement calls for setting up 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. Most Wall Street industry analysts agree that such an agreement would reduce GM’s costs by approximately $3 billion dollars per year.

Negotiating the agreement was a slow 23-day (12 of those days after the previous agreement expired) process – not counting the months of shadow-boxing the UAW and GM engaged in before they sat down at the negotiating table. The methodology of funding the trust is staggeringly complex and the funding ratio was ardently negotiated by both parties. 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. There are also built-in trigger clauses in the agreement that will serve to indemnify both the UAW and GM from paying too much if external events drive up the costs of their respective participations in the agreement.

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 73,000 + members of the UAW, so the union is going with concessions most likely to generate the least amount of internal dissension. Many UAW-GM locals have lost over half their members to layoffs in the last 10 years, and so job security looms large for the UAW membership.

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 $35 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, which costs the company around $5 billion annually, and their overwhelming preference is to pay the union to set up the desired VEBA to get those individuals and their health-care liabilities off their balance sheet. To give you an example of just how important the healthcare issue is to GM, David Cole, director of the Center for Automotive Research, recently told a news reporter, “If GM and Toyota could swap health care costs, that would be the equivalent of five new products a year [for GM]. The U.S. automotive industry needs good new product, and a lot of the new product is tied up in the cost of health care.”

The UAW, while not ecstatic about the idea of taking on the healthcare liabilities, was willing to agree to the VEBA for the quid pro quo of guarantees for GM to build current and future models in U.S. production facilities that use UAW labor. Ron Gettelfinger of the UAW stated that the VEBA will be adequately funded to pay benefits for 80 years.

Of course, the current GM-UAW negotiations were not just about healthcare. GM said previously that 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, were also discussed during the current negotiations, but details are not available regarding the disposition of these contract items. A “two-tier” pay plan, one for current employees and one for all future employees, was also being discussed, but UAW officials have a very low level of interest in such a plan, so it most likely was shelved. And finally, the last part of the UAW-GM discussions centered on how large the “signing bonus” would be for the UAW members, which is the cash bonus they would receive from GM if they voted to ratify the deal.

The size of the signing bonus isn’t clear, but sources cited in this morning’s Wall Street Journal state that GM also secured agreement from the union to forego salary increases for the entire duration of the deal, and to receive 3%, 4%, and 3% lump-sum bonuses over the last three years of the deal instead.

Other provisions of the tentative agreement include:

  • Substantial changes to the Jobs Bank. It will continue to exist, but there will be fewer people sitting idle in the bank for any length of time.
  • A mechanism for GM to buy out many of its current workers and replace them with new employees at lower wages.
  • The hiring of 4,000 to 5,000 current temporary workers at the full tier-one wage-and-compensation rate.
  • A new, much lower new-hire pay scale for new workers hired after the temps are brought on board; perhaps even half of the current rate (but likely not for the skilled trades jobs).
  • Specific guarantees of investment in US plants for future products.

Ratification votes are expected to begin as early as this weekend, at which point the UAW will decide which company – Ford or Chrysler LLC – it will negotiate with next. Of course, agreements with those companies are likely to come much more easily than the one did with GM, because they will likely be patterned off of the GM deal.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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11 Comments

  1. Got to hand it to you – this is a better synopsis of the GM-UAW deal than the articles in the New York Times and USA TODAY provide. Kudos to the writers.

  2. I hope that GM takes the years before the next UAW agreement comes up to move as much of their production to Mexico and China as possible. The UAW can say they “won” as they’re working at their new jobs at WalMart.

  3. Thanks buckley – your kind words are appreciated! Brendan did the heavy lifting, and I filled in the details as they came to light this morning.

  4. What’s with the hatin’ on the UAW? The UAW members have the kind of middle-class job that everyone says we need in this country, and that everyone says are going away. Why is the UAW bad for wanting to keep their middle-class jobs? Can someone tell me why this makes people so mad?

  5. Much better coverage than the Miami papers, too. Lots of UAW retirees here, so you would think they would run a good article on it, but it doesn’t seem to be newsworthy here.

  6. The “hatin'” on the UAW is because the rest of the middle-class in the US is resentful that most of the UAW members get there (to the middle-class income bracket) so easy with such a low level of skills. Does that answer your question?

  7. Who thinks the UAW will siphon off money from the VEBA, raise your hands!

  8. Here’s hoping the money saved will all go into the cars themselves for better interiors, better engines, better design, etc.

  9. btw, this is a good article, as someone else said up top.

  10. I think the strike was just window-dressing so that the union guys could say they were hanging tough with GM. They knew all along there was no good alternative to the terms of the agreement, but they had to put on a show for the UAW faithful.

  11. mr.cynical got a good point, but I guess Gettlefinger might take a note and learned what happened to Alan Eagleson, former creator and executive director of the NHLPA (National Hockey league players association), Eagleson “played” with some money coming from the player pension funds.

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