Sept. 17 (Bloomberg) -- General Motors Corp. would limit union members' medical expenses in a proposed contract that shifts $50 billion in liabilities to an employee-run health fund, three people with knowledge of the matter said.

GM, the biggest U.S. automaker, also proposed a freeze in cost-of-living raises in talks on a new United Auto Workers contract, said the people, who asked not to be identified because they haven't been authorized to speak publicly.

Discussions to replace the four-year contract, which was due to expire Sept. 14, are scheduled to resume tomorrow morning after more than 12 hours of negotiations today. ``We've been bargaining really hard,'' said GM spokeswoman Katie McBride in an interview. ``We decided it was time to take a break.''

The proposals are central to GM's bid for union approval to get rid of retiree health-care liabilities that cost the automaker as much as $3.3 billion in cash in 2006. GM, Ford Motor Co. and Chrysler LLC are banking on expense cuts to help them survive after $15 billion in combined losses last year.

``While anything could change, the fact the two sides are continuing to talk is an encouraging sign,'' JPMorgan Chase & Co. analyst Himanshu Patel wrote in a report today predicting GM and the UAW probably will agree on a union-run health plan.

GM rose $1.01, or 3 percent, to $35.23 at 4:22 p.m. in New York Stock Exchange composite trading, the highest since July 19. The shares have gained 15 percent this year. GM credit- default swaps fell, signaling that investors now consider the company at lower risk of defaulting on its debt.

Ford shares also gained today after a Bear Stearns & Co. analyst said the No. 2 U.S.-based automaker may benefit from a renegotiated labor contract at GM. Shares of Ford were up 25 cents, or 3.1 percent, to $8.28.

Need for VEBA

GM and the UAW have agreed on the need for a so-called Voluntary Employee Beneficiary Association, or VEBA, to take retiree health-care obligations off company books, the people said. Detroit-based GM would contribute 55 percent to 60 percent of the value of its current liability to start the program, two of the people said. The talks may still unravel if the two sides can't agree on these and other terms, they said.

GM's offer of a cap on workers' out-of-pocket health-care expenses would cover active UAW members as well as retirees, the people said. GM proposed giving workers lump-sum bonuses in return for the union's acceptance of a freeze in base wages, the people said.

The union hasn't ruled out the cost-of-living freeze, a GM demand that spurred a 67-day strike in 1970, two of the people said. A new contract must be ratified by a majority of the more than 73,000 UAW members at GM. Bargaining began on July 23.

Political Risks

For UAW President Ron Gettelfinger, the political risks in a wage freeze are minimized by the fact that 64 percent of GM's union workers will be eligible to retire within the next five years, said Kristin Dziczek, an analyst at the Center for Automotive Research in Ann Arbor, Michigan.

``Never before have this many future retirees been eligible to vote on their potential retirement package,'' Dziczek said. ``They won't be looking at current wages for active workers, but at the retirement package.''

The two sides had resumed negotiations this morning at the UAW-GM training center in Detroit after taking a break at about 3 a.m., McBride said. They ended again about 9 p.m.

The old contract is being extended hour by hour as bargaining continues. GM's U.S. plants were operating as scheduled, spokesman Tom Wickham said.

McBride declined to comment on the talks. UAW spokesman Roger Kerson didn't return telephone messages left for comment.

Bond Gains

The company's 8.375 percent bond due July 2033 gained 1.5 cents to 85 cents on the dollar, according to Trace, the bond- price reporting system of the NASD. The yield was 10 percent.

GM credit-default swaps fell 62 basis points to 611 basis points in New York today. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

The UAW chose GM as the focus of negotiations, naming the company as its ``strike target'' on Sept. 13. The union wants to reach an agreement with GM, then try to adapt the terms at Ford and Chrysler. Those automakers agreed to operate under indefinite contract extensions while the GM talks continued. The contracts cover 180,681 active workers and 419,621 retirees and surviving spouses at GM, Ford and Chrysler.

GM reported $64 billion in future retiree health-care obligations for union and non-union employees at the end of last year. The automaker doesn't break out the union portion. The UAW's share is about $50 billion, people familiar with the breakdown said.

Toyota Comparison

GM and the other U.S. automakers estimate they pay $25 to $30 more an hour to American factory workers than Toyota Motor Corp. and Honda Motor Co. do at their U.S. plants.

The VEBA proposed by GM would include a ``rainy-day'' fund for additional GM contributions if medical costs rise more quickly than expected, the people said. The VEBA would also include a ``windfall'' provision in which the UAW would return some of GM's initial contribution if health-cost inflation is less than projected, or if the U.S. government enacts a national health plan that lowers the fund's medical costs, the people said.

The agreement may result in GM selling additional shares to raise cash for the fund, according to JPMorgan's Patel, who is based in New York.

If the VEBA were funded at 60 cents on the dollar, GM would gain $1.04 in additional earnings per share and cash flow savings of $1.8 billion annually by 2010, Patel estimated in his report today. The GM VEBA would be funded about 12 percent with equity, Patel wrote.

Objections to Fund

Three former UAW regional directors sent an open letter to the union yesterday objecting to the idea of creating a fund.

``Such a proposal, if ratified as part of a new collective agreement, would represent a radical shift in the traditions of our union,'' former UAW International Executive Board Members Paul Schrade, Warren David and Jerry Tucker wrote in an e-mailed statement confirmed by Tucker and David.

``Knowingly placing members at risk under such a plan, whether active or retired, is contrary to the mandate of the UAW Constitution,'' the directors wrote in the statement, which Tucker said was also sent to UAW bargainers. The group wants the UAW to discuss the idea with members before any agreement at the bargaining table, Tucker said.

Such provisions increase the chances of rank-and-file UAW approval because they restrict cash workers would receive in the future rather than now, said Dan Luria, an analyst at Michigan Manufacturing Technology Institute in Plymouth, Michigan.

Luria said the UAW may agree to a wage freeze partly because of concern that its GM contract may be too expensive for Ford, which lost $12.6 billion last year.

To contact the reporters on this story: John Lippert in Southfield, Michigan at jlippert@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

Last Updated: September 17, 2007 23:36 EDT