Editor's note: This is an updated version of a previously published story.
Negotiators for General Motors (GM) and the United Auto Workers union kept bargaining past midnight on Sept. 14, when the current contract expired, in hopes of reaching a new labor deal, say sources close to the talks.
Union locals were prepared to strike if a deal was not reached. But UAW President Ronald Gettelfinger decided to keep bargaining past midnight in search of a deal with GM. One source said talks would go "hour by hour" in search of a deal. Since the union selected GM as its target on Sept. 13, its labor pact could serve as a model for the deal the union will ink with Ford Motor (F) and Chrysler.
The biggest sticking point in this year's important contract negotiations is GM's wish to off-load its retiree health-care coverage into a union-managed health-care trust fund seeded by money and assets from GM. The deal would cut GM's health-care costs and protect union retiree benefits if the company went bankrupt, but the two sides couldn't agree on how much in assets GM would have to give the union.
Picking GM as the target shows the union is willing to manage its own health-care benefits. But throughout bargaining, GM has tried to get the union to take assets worth 50% to 60% of the company's $65 billion in health-care liabilities while the UAW wants more than 70%, sources say.
"There is a second Rubicon that needs to be crossed," says Harley Shaiken, a professor of labor economics at the University of California at Berkeley. "And that is how much is in the fund and how risky the assets are."
Nuts and Bolts
Here's how the health-care trust would work. GM, Ford, and Chrysler collectively have about $112 billion in health-care liabilities. The union would assume those liabilities in exchange for a big chunk of cash, stocks, and other assets from the Big Three.
The union would take some amount, say $78 billion, or 70% of the total liabilities, in cash, stocks, and other assets, and invest those proceeds to grow the fund the same way a pension plan manages its assets. From the fund, they would pay out union members' medical costs.
So long as the union can invest the funds at a rate higher than health-care cost inflation, the plan will work. That has historically been the case. Union pension plans earn about 16% annually, and GM's health-care inflation has been about 8% to 10%.
"From my perspective, if the price is right, it would be beneficial to agree to the health-care fund," says Jeff Manning, president of UAW Local 31 in Fairfax, Kan. "But I'd have to see what they're willing to do."
The two sides negotiated until 2 a.m. Friday morning, says a source close to talks.
What's In It for Involved Parties?
If a deal is made, GM and then, presumably, Ford and Chrysler, would strip most of the health-care liabilities from their books. The cash savings for GM would be roughly $700 million a year in the first year, and growing after that, according to a research report from JPMorgan (JPM).
What does the union get? In the long run, the UAW would get to control the protection of its benefits. If one of the Big Three were to fall into bankruptcy, the creditors get first crack at any cash, leaving retirees with no benefits, or very limited pension and health-care coverage.
But if the union takes the money now and sets up the health-care trust fund, they are covered in case of a bankruptcy. Shaiken says the union could even sell the deal to its members by saying they would be protected from someone such as Delphi (DPHIQ) Chairman Steve Miller, who took the parts company into bankruptcy and used the courts to demand steep concessions on wages and benefits from the union.
Another open question is how GM would come up with the $35 billion or more needed to seed the trust fund. The company has $23.6 billion in cash, but couldn't use all of it for the fund. GM could include stock or some convertible debt, but all of that gives the union some risk in GM's stock performance.
"The possibility of health-care costs going through the roof and the stock market going through the floor would create huge problems," Shaiken says.
That's why the union is looking for GM and the other automakers to provide some safety funding later on if the investments go sour. The union may also want some guarantees that certain plants will remain open in the U.S. "The UAW doesn't want to be in the position of funding the development of new plants in India and China with concessions," Shaiken says.
In another indicator that UAW President Gettelfinger is willing to manage health-care plans, sources close to the talks say the union has started looking at different firms that could administer the health-care benefits and others that would invest the assets.
At midnight Sept. 14, union leaders were waiting to hear from top negotiators about a possible walkout. They could still strike if Gettelfinger feels they are at an impasse.
A long-term strike would be devastating for GM, analysts say. But a short one lasting just a few days could be just disruptive enough to get Gettelfinger a deal he can sell to his members, Shaiken says, but without causing serious financial damage to the carmaker. He added: "Some think a strike is not even possible. It may be unlikely, but it could happen."