Would GM risk gutting retiree health benefits?
Wall Street analyst says it could happen
By Jeffrey McCracken

Friday, May 27, 2005

If runaway medical bills are truly threatening the survival of General Motors Corp., as the automakers' executives have said, could GM simply eliminate UAW retiree health benefits?

It's a viable option, according to one of the most provocative reports to come out of Wall Street in some time.

The report, by Brian Johnson, who studies the auto industry for investors at the New York research firm Sanford Bernstein, provides a window into some of the current thinking of multibillion-dollar investors as they study the struggles at GM -- and wonder how to profit from them.

To be clear, there is absolutely no indication that GM's management is considering such a radical move.  Neither GM nor the UAW would comment for this report.  However, Johnson and various law-review pieces argue that employers like GM (or any automaker, for that matter) could immediately eliminate UAW retiree health benefits without fear of a legal strike and eventually win a protracted court battle.

Johnson's premise is that current GM management wouldn't resort to such a so-called nuclear option, but a corporate raider wouldn't hesitate, especially for the billions of dollars that could be made.

Ironically, the report was issued in mid-April, just days before Las Vegas billionaire Kirk Kerkorian quietly began buying up chunks of GM stock on April 22.  There has been wide-ranging speculation that Kerkorian would try to take on the UAW to knock down its benefit plan, one of the best in the country for employees.  Auto analysts like Johnson write hundreds of reports a year, but his has generated considerable buzz because it is one of the first to put on paper the idea of GM gutting its UAW retiree health-care obligations, and it summarizes what many multibillion-dollar investment managers say when they discuss GM.

Johnson says, for example, a corporate raider could buy GM for $19.7 billion, terminate UAW retiree benefits for savings of $8.6 billion in two years, sell GMAC Mortgage for $10.4 billion, and thereby own GM and the rest of GMAC, the automaker's financial-services subsidiary, for the bargain price of $700 million.

Johnson also argues that even if GM didn't go all the way and eliminate UAW retiree benefits, just the threat of it would force major UAW concessions for retirees or active workers. Retirees can vote in local union elections, so union officials would have to choose between putting all of the concessions on retirees or shifting some to active workers.

Far-reaching effects

Such an audacious move at GM, though now still only hypothetical, would certainly cause a pitched confrontation between GM and the UAW and rewrite the national employer-employee, union-management landscape.

It's worth noting that federal courts have been increasingly pro-employer in the last few years, siding with companies as they reduce retiree benefits.

GM has revoked a perceived promise to retirees before.  The automaker started charging white-collar retirees for their benefits in the late 1980s, despite wording in various GM benefit plan summaries in 1974 and 1977 that "your basic health-care coverages will be provided at GM's expense for your lifetimes."  GM was sued by retirees and won a lengthy court battle in 1998.

GM has 422,000 hourly and salaried retirees, including 166,000 in Michigan.  It expects to spend $5.6 billion in cash on health care in 2005.  Hourly workers pay for 7% of their health care, while salaried employees pay 27% of theirs, according to GM.

Johnson's report is more than just idle speculation for many GM retirees, especially given GM's current struggles and the increasing trend of employers toward trimming or eliminating retiree health care.  Union and nonunion retirees alike have become increasingly worried about the future of their health-care benefits, though usually the worry has more to do with GM going into bankruptcy, where it could legally shed its retiree obligations.

"The idea of GM changing or dropping our health care is a big topic with the people I know, with the various UAW retirees I talk with," said Mike McCarthy, a 51-year-old UAW member who retired from GM in 2002 after 30 years at the Pontiac truck plant.  "We are concerned that big changes are coming to our health-care plans.  I guess I think we will lose some of our health care unless there is a national health plan soon."

Compelling pros and cons

There are good legal arguments that GM could successfully quit covering its UAW retirees, and equally compelling legal arguments that it couldn't.

There is also a good business argument that GM would never dare take such a risk, but an equally compelling business one that a corporate raider like a Gordon Gekko-type -- the ruthless lead character in the 1987 movie "Wall Street" -- would jump at such a chance.

Making it all the more complex is that different courts have come to different conclusions in partially addressing the issue.  There are some cases that support employees and unions -- namely a 1983 case that involved the UAW and a company called Yard-Man Inc.  In that case, a court said companies can't terminate union retiree benefits unless specific contract language allows them to do so.

But there is the retiree case GM won, which supports employers.  That landmark 1998 case, Sprague v. GM, held that GM could start shifting some of the cost of health care to retirees because the automaker, while it was telling employees in some paperwork that they had free lifetime benefits, also had a disclaimer elsewhere saying that GM "reserves the right to amend, modify, suspend or terminate" the plan.

Most of the cases that are sympathetic to retirees are from the early-to-late 1980s. The more pro-management decisions are from the late 1990s.

"This idea of eliminating all UAW retiree health-care benefits is a weapon -- kind of a nuclear option -- and it's one I think a new owner of GM would activate," Johnson said in an interview last week.

"My gut tells me GM's current management would not try it, but that doesn't mean a Kerkorian wouldn't, or another aggressive owner who doesn't care what the UAW thinks," said Johnson, who emphasizes he doesn't advocate that GM cut UAW retiree benefits.  "The point is this isn't unthinkable."

Johnson's argument goes like this:  First, he contends UAW retirees are not covered by collective bargaining agreements.  A 1971 Supreme Court case involving Pittsburgh Glass said retirees are not covered by contracts between unions and employees because they are not employees any longer.

Also, retiree benefits are not a mandatory subject of collective bargaining, so if a company decides to cut or gut retiree benefits the union could not legally strike.

The UAW retirees would then have go to court themselves, where Johnson predicts GM could win.  He cites the Sprague case, the white-collar benefits suit GM won in 1998.  He notes GM has a similar disclaimer in its 2004 summary plan descriptions of GM hourly retiree benefits as it did in the old salaried plan descriptions in Sprague.

That disclaimer reads: "The company reserves the right to end, suspend or amend plans by action of its board of directors, subject to any applicable collective-bargaining agreement."  Courts could decide that even union plans can be changed -- if there's a disclaimer.

Finally, said Johnson, it would come down to the wording of the collective-bargaining agreement.  The GM-UAW 2003 agreement reads, in part, "health-care coverages an employee has at the time of retirement ... shall be continued."

The questions for the courts are:  How long does that coverage continue?  For life?  For the rest of the contract?  For as long as GM decides?

The federal courts are split.  Four circuit courts -- including the one that covers Michigan -- agree with the UAW, but three others side with management.

The Supreme Court might want to clarify the split, and given its conservative makeup would side with GM, Johnson said.

His reasoning has been used by management-side lawyers for the last few years, said Southfield lawyer Roger McClow, who has represented the UAW and union workers in many cases.  He, for one, doesn't think GM could win.

"Companies have tried at least 20 different times to get to the Supreme Court with this argument.  The retirees are a group of people who've spent their whole life earning these benefits.  These are obligations the company undertook and owes to them," said McClow, who reviewed Johnson's report.

McClow said several employers recently have tried -- and failed -- to chip away at the inference that union-negotiated retiree benefits are good for a lifetime and can't be modified unless stated otherwise.

Johnson's report, meanwhile, resonates with management-side lawyers such as Thomas Kienbaum, a Birmingham lawyer and former president of the Michigan State Bar who often represents companies in labor disputes.

"I'm sure the UAW sees these benefits as lifetime deals," he said. "I think the U.S. Supreme Court will eventually adopt the standard that these retiree benefits can be modified, they just won't do it soon enough for my tastes.  That said, I think GM would have a good argument and could win."