GM can legally drop its retirees' benefits
Fort Worth Star-Telegram
By Jeffrey McCracken
Knight Ridder News Service

Saturday, May 28, 2005

If runaway medical bills are threatening the survival of automaker General Motors Corp., as executives have said, could GM 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 thinking of multibillion-dollar investors as they study the struggles at GM and wonder how to profit from them.

GM operates an assembly plant in Arlington.

There is no indication that GM's management is considering such a move. Neither GM nor the UAW would comment for this report. However, Johnson and law-review articles say automakers could immediately eliminate UAW retiree health benefits without fear of a legal strike and eventually win a protracted court battle.

Billions to be made

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

The report was issued 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 will 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 this one 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 because it summarizes what many multibillion-dollar-investment managers say when they discuss GM.

"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 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 said he doesn't advocate such a move. "The point is, this isn't unthinkable."

Johnson says, for example, that 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.

Forcing concessions

Johnson also says the threat of eliminating UAW retiree benefits 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.

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

Federal courts have been increasingly pro-employer in the last few years as companies have reduced retiree benefits.

GM has revoked a perceived promise to retirees before, charging white-collar retirees for their benefits starting in the late 1980s despite wording in 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. It expects to spend $5.6 billion in cash on health care in 2005. Hourly workers pay for 7 percent of their health care, salaried employees for 27 percent, according to GM.

Johnson's report is more than just idle speculation for many GM retirees, especially given GM's 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."

Legal arguments

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

There is also a good business argument that GM would never dare take such a risk but an equally good business one that a corporate raider would.

Courts have come to different conclusions in partially addressing the issue. Some cases support employees and unions, including a 1983 case that involved the UAW and the company Yard-Man, in which a court said companies can't terminate union retiree benefits unless specific contract language lets them.

But GM won Sprague v. GM, a landmark 1998 case that held that GM could shift 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.