Run Some Retiree Benefits
GM, Ford Explore Moving Obligation For Health Care
By Jeffrey McCracken
The Wall Street Journal
Tuesday, January 23, 2007
Detroit's auto makers and the United Auto Workers are
examining a potentially revolutionary plan that would shift
to the union responsibility for tens of billions of dollars
in retiree health-care liabilities, according to people
familiar with the matter.
A deal is far from certain, especially with formal
national-contract talks months away. A big question is
where General Motors Corp. and Ford Motor Co. -- both
saddled with speculative, or "junk," credit ratings -- would
get the cash required to fund a handover of future retiree
health-care obligations to a union-managed fund. Another
uncertainty is whether the UAW would want the role of bad
guy if the time came to cut future benefits.
The preliminary discussions highlight the determination of
the UAW and the Detroit auto giants to find a way to
restructure the U.S. auto industry without resorting to
bankruptcy-court protection, as many unionized steelmakers
and airlines did.
The discussions also come at a critical time in the national
debate over health care and a system that relies on
employer-sponsored benefits. The subject is heating up
ahead of the 2008 presidential campaign, and it is expected
to be a point in tonight's State of the Union address by
UAW leaders and Detroit auto executives agree on this much:
Detroit's status quo is unsustainable. UAW leaders and
company executives have tried to argue that without
health-care overhaul, thousands more U.S. manufacturing jobs
will be at risk. The UAW's official position is the federal
government should step in. Top executives of the Detroit
auto makers have been more cautious but have advocated
proposals for the government to shoulder the burden of
"catastrophic" health costs.
One reason the UAW might agree to such a deal is a
union-controlled retiree fund, filled with cash, stock and
other assets, would remain solvent even in case one of the
auto makers filed for bankruptcy protection.
GM and Ford have been restructuring their U.S. operations
off and on for nearly 20 years, as their unionized U.S.
operations have steadily lost market share to lower cost,
nonunion operations established by Asian and European auto
makers. The unionized Detroit companies have almost closed
the hourly productivity gap that once existed between their
plants and those of nonunion rivals. But the burden of
paying for UAW health-care benefits still adds roughly
$1,500 a car to the cost of U.S.-made Big Three vehicles --
a cost penalty the Detroit auto makers can't offset by
The Detroit auto makers and the UAW are looking at an
agreement this month between Goodyear Tire & Rubber Co. and
its largest union, the United Steelworkers. Under the deal,
which settled a strike, Goodyear agreed to transfer its $1.2
billion health-care liability to a fund managed by the
steelworkers union. Goodyear, in turn, would put in $1
billion in cash and equity into the fund.
GM Chief Financial Officer Fritz Henderson told auto
analysts this month that "it would be fair to say that we
have more than a passing interest in the Goodyear
agreement." GM, according to people familiar with the
matter, has hired advisers that worked with Goodyear on
their contract talks.
The UAW and GM discussed a plan for shifting retiree
health-care obligations to the union as far back as 2005,
when the UAW proposed the idea, say people familiar with the
GM leadership has since raised the issue of retiree health
care several times with UAW leaders, the people familiar
with the discussions say. GM's goal is to get what J.P.
Morgan Chase & Co. estimates is $55 billion in future union
and current health-care liabilities off the corporate
balance sheet, as part of the company's effort to regain an
investment-grade credit rating. GM's junk credit rating
complicates its efforts to defend its position in the U.S.
market and expand overseas, in the face of competition from
Japan's Toyota Motor Corp.
The UAW hasn't agreed to the proposal, according to two
people familiar with the matter, citing its previous
concessionary deal and the 37,000 UAW members who took
buyouts and early-retirement offers from GM and its former
unit, auto supplier Delphi Corp., which is under
bankruptcy-court protection. Because the talks are early
and an agreement isn't close, specifics such as how the
union would run the plan or plans aren't clear.
GM spokeswoman Katie McBride said the auto maker is "looking
at a number of health-care options, but we aren't going to
speculate on specific options we are exploring."
Ford, which has an estimated $22 billion in future and
current health-care liabilities for its U.S. union
employees, also is studying such a proposal. Marty Mulloy,
Ford's vice president of labor affairs, said in an interview
yesterday that "we are taking a look at what happened with
Goodyear. We are very familiar with all of it and all
that's out there. That's all I can say."
It also would make the UAW one of the largest private-sector
providers of health care in the U.S. Detroit's auto makers
have roughly one million union retirees and dependents. UAW
spokesman Roger Kerson declined to comment.
One reason the Goodyear model would be tough to duplicate,
said a person familiar with the matter, was because Goodyear
had inflation caps on future health care, whereas the auto
makers don't. A one-percentage-point change in assumptions
about future health-care liabilities can swing the estimated
obligation by billions of dollars.
The two sides also likely would clash over appropriate
levels of prefunding, said people familiar with the
discussions. "The UAW will want $1.10 on the dollar, with
lots of cash. The companies will want 50 cents on the
dollar, with little cash. But that can be easier to
negotiate than the complexities of health-care benefits
sometimes," said one person familiar with the talks.
J.P. Morgan analyst Himanshu Patel estimates Ford and GM
could buy themselves out of their combined $77 billion in
health-care liabilities and create a union-managed fund for
$46 billion to $54 billion in cash, stock and
Under the deal between the steelworkers and Goodyear, future
benefits to union retirees would be administered by a trust,
with its assets legally separate from the company. If
Goodyear runs into financial problems, or files for
bankruptcy-court protection, the money in the trust still
would be available for the exclusive benefit of the
retirees, according to the steelworkers union. The
company's initial contribution included $700 million in cash
and $300 million in Goodyear stock, according to the union.
Mr. Patel said Goodyear was able to transfer its health-care
liability to its union for 80 cents on the dollar. He
estimated GM, Ford and Chrysler Group could do so for about
60 cents to 70 cents on the dollar.
For GM, this would be a cost of $33 billion to about $38
billion for what J.P. Morgan estimates is $55 billion in UAW
retiree health-care liabilities. He estimated Ford would
need $13 billion to $15 billion to prefund its $22 billion
in union retiree health care. He estimated the money would
be comprised of cash, stock-convertible debt and billions of
dollars the auto makers already have put away for
health-care retiree debts.
Chrysler Group could transfer its estimated $15.6 billion
union retiree liability for $9.4 billion, he said.
---- Kris Maher
contributed to this article.
Jeffrey McCracken at