The Association of U S West Retirees



UAW May 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 President Bush.

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 raising prices.

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 discussions.

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 convertible-debt proceeds.

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.

Write to Jeffrey McCracken at