When General Motors Corp. (GM) finally persuaded the United Auto Workers to slash $1 billion a year out of the company's crushing employee health-care costs last October, many applauded. But Leroy H. McKnight wasn't clapping. The Lansing (Mich.) retiree has enjoyed top-notch medical coverage from GM since 2000, when he called it quits after 31 years. The new deal will cost him and GM's 520,000 other UAW retirees and their dependents hundreds of dollars a year in extra insurance premiums and co-pays if it takes effect in April as planned.
On the other hand, GM'S 110,000 active union workers will pay hardly any of that. Their sacrifice: Forgoing pay hikes of $1 an hour, or roughly $2,000 a year, that had been slated for later this year and next. For McKnight, that's peanuts. "The cuts are almost entirely visited on retirees, because we didn't get to vote on them," he gripes.
So McKnight and several hundred other GM retirees have asked a Michigan court to force the UAW to renegotiate its deal with GM as well as a similar one with Ford Motor Co. (F). If they manage to derail the hard-fought agreements, it would be another big setback for the two auto makers. The fight is also being watched closely by other unionized employers itching to rein in retiree health costs, including those in auto parts, steel, and airlines. Says Arthur B. Smith Jr., a partner at Ogletree, Deakins, Nash, Smoak & Stewart who represents such companies: "This is a big test case."
The UAW and GM insist the accord is fair to retirees, but they're aware that the law is murky about changing negotiated retiree benefits. To preempt such a challenge, the two sides agreed to an unusual tactic when they reached the pact last October. The UAW actually sued GM, saying it had no right unilaterally to cut retirees' coverage, as GM had threatened to do. Then the parties told the court they had settled the dispute with the new pact. "The union and the company both saw that there was some risk in each legal position, so we agreed to seek court approval of the settlement," says GM spokesman Stefan Weinmann. Still, Michigan lawyer Mark S. Baumkel, who represents McKnight, argues that if GM can't unilaterally cut vested benefits, then neither can the union.
Even if McKnight & Co. have a point, their strategy could backfire. The judge in the case has set a "fairness" hearing for Mar. 6 to let all sides air their grievances. But reopening the pacts, which passed by a 62% vote at GM and just 51% at Ford, could give workers a chance to give thumbs-down to both in a revote. Without some measure of relief, GM might have to consider the bankruptcy filing some Wall Street analysts recommend. And there's one point all sides agree on: A bankrupt company is well within its rights to cut, or even abolish, retiree benefits.
By Aaron Bernstein