Retiree Benefits Is UAW at the Wheel

Will U.S. automakers manage to lighten their legacy costs by transferring an estimated $100 billion of liabilities for retiree health care to the United Auto Workers?

As the UAW opens contract negotiations this week with General Motors and Ford, following the start of talks with Chrysler on Friday, July 20, expectations are that the three car companies will try to replicate deals struck earlier this month by Dana Corp. and late last year by Goodyear.

Both Dana and Goodyear moved all their liabilities for retiree health care off their books by agreeing to pay lump sums into trusts that unions will use to provide retirees with health care. (The Dana and Goodyear deals still have to be approved by the courts.)

Such trusts, known as voluntary employee beneficiary associations, or VEBAs, look like a possible solution to the burden that retiree health care obligations pose for the automakers.

Changes in benefits are a sensitive topic for union members. In fact, UAW president Ron Gettelfinger has suggested that retiree health benefits are not up for discussion.

The problem of the car companies’ extensive retiree health care costs “cannot be solved at the collective bargaining table,” Gettelfinger said in a speech in June. “The UAW believes it would be immoral and irresponsible to abandon the hundreds of thousands of retirees who helped build GM, Ford and Chrysler.”

But the extent of the automakers’ financial difficulties suggests that they will be looking at all possible solutions.

“Ford and GM have never been in as dire straits as they are now. They need to make further progress,” said Robert Shulz, a managing director at Standard & Poor’s. “We think there are going to be some creative approaches to the legacy issues, including health care.”

The amounts involved in retiree health care are considerable. Analysts estimate that the three car manufacturers’ liabilities for retiree health care come to about $100 billion, with GM responsible for about half that amount.

But transferring the responsibility for future retiree health care expenditures to a VEBA would require the car companies to come up with a significant amount of money to put into the VEBA. Such a move also means the UAW would be assuming the risk of future health care cost increases.

Dana’s VEBA deal is seen as particularly significant because the UAW was one of the two unions involved, along with the United Steelworkers.

The Dana deal made it “more probable” that the automakers could achieve something similar, said Mark Oline, a managing director at Fitch Ratings. “It’s becoming more evident that the UAW is willing to enter this type of settlement to divorce the fate of retiree health care from the fate of the manufacturers.”

But Dana’s unions were negotiating against the backdrop of the company’s bankruptcy, a situation that conceivably could have allowed the company to walk away from its promises regarding retiree health care. Shulz questioned whether the Dana deal is relevant to the auto negotiations, noting that although U.S. automakers are in bad shape financially, they’re not bankrupt.

“What someone’s negotiating in bankruptcy doesn’t necessarily translate to something like the current contract negotiations between GM, Ford and Chrysler and the UAW,” he said.

Goodyear’s case is also somewhat different from that of the car companies, Shulz said, because Goodyear was more stable financially than GM or Ford are, and thus better able to commit a sizable amount of cash to fund the VEBA.

Certainly the sums involved would be large.

Oline estimated that General Motors might have to come up with $30 billion to $35 billion in order to transfer its roughly $50 billion of retiree health care liabilities into a VEBA, and Ford might have to pay $13 billion to $17 billion.

“If you look at the transactions that have been done and the level of funding that would be required of Ford and GM, it does draw into question the sufficiency of the liquidity as the companies are still in the early stages of a long-term restructuring program,” he said, adding that Chrysler, whose liabilities are smaller, “is probably better positioned at this point to put an agreement into place.”

Oline said the car companies might consider alternative financing methods, like using company stock as part of the funding for the VEBA.

The good working relationship between Gettelfinger and auto company executives and the progress the two sides have made on improving productivity were grounds for some optimism going into the talks.

“They’ve been working through their problems, which bodes well for the negotiations,” said Harry Katz, dean of the School of Industrial and Labor Relations at Cornell.

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.