General Motors (GM) and the United Auto Workers on Sept. 17 inched closer to the kind of "transformational" deal that the struggling auto giant has been looking for.
Sources close to the talks say that negotiators for the union and management are making steady progress and are closer than they have ever been to agreeing on a deal that would set up a health-care fund to manage the union's retiree medical plans.
The two sides could come to a deal within days, but talks have been tense and there's still the big issue of health-care coverage to settle. UAW leaders sent a note to some of its locals today saying that they may need to set a deadline for a deal. Though a strike is unlikely, it still is not out of the question.
Negotiating the Cash Payment
If they strike a deal, the UAW could be managing a fund with roughly $35 billion in assets just for GM's workers, and billions more if Ford Motor (F) and Chrysler do a similar deal. A fund covering union retirees at all three domestic automakers would include about 1.5 million people. The labor pact with GM will likely set the pattern for deals with Ford and Chrysler. "They have been at it for a while, but they could be zeroing in," says Harley Shaiken, a labor economics professor at the University of California at Berkeley. "The stakes are so high."
GM is seeking to get the UAW to agree to managing retiree health care, which is an estimated $52.5 billion long-term liability, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. GM wants the union to accept a sum of cash and assets worth 50% to 60% of the liability. The union wants more cash to ensure that, if investment returns fall short of the health-care inflation rate of 8% to 10%, the UAW won't have to cut member benefits.
That has been the sticking point. If GM gets its way, it would contribute about $30 billion. The UAW, which recently set up a health-care trust, called a voluntary employee benefits association (VEBA), with parts maker Dana Corp. (DCN), recently got 71%, Citigroup (C) capital markets analyst Itay Michaeli wrote in a research report. At that rate, GM would need to pony up about $35 billion.
Within a Few Billion
The two sides got down to comparing models for what the fund should look like and they're within several billion dollars, says one source close to talks. The problem with striking a deal is that both sides must make a slew of assumptions to determine the liability and amount of funding needed to keep a VEBA trust flush without cutting benefits or asking union retirees and workers for bigger contributions. "GM believes the liability is overstated," says David Cole, chairman of the Center for Automotive Research.
What's the health-care inflation rate? What return rate should fund planners assume? A slight variation in any measure can change the liability significantly and could require GM to put a few billion dollars more into the fund. The union also wants to make sure that if the fund were to show poor returns, GM and the other automakers would come back with more money to keep the fund viable. Says McAlinden: UAW President Ron Gettelfinger "wants to make a statement that he protected everyone's co-pays."
If a deal is done, 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 in the first year and higher after that, according to a research report from JPMorgan (JPM) analyst Himanshu Patel.
What does the union get? In the long run, the UAW would get to control the protection of its benefits in case one of the Big Three were to fall into bankruptcy. In bankruptcy court, only pension funds get any kind of protection and creditors get first crack at any cash. That would leave little or nothing for health-care coverage.
UAW Members Weigh In
Not all union workers and retirees are sold. Three retired UAW directors sent an open letter to Gettelfinger urging the union president to refuse the VEBA trust. "It's just shifting risk onto retired workers," says Jerry Tucker, former director of the UAW's Region 5, which oversees locals in the southern Midwest and Southwest. "Even if we get 70 cents on the dollar, you've got unfunded liabilities."
Retirees like Tucker and two others who signed the letter to Gettelfinger may not get a vote to ratify the UAW deal that the companies and UAW leaders sign this fall. But they can make their case to workers. In GM's case, the voice of retirees can have some impact. They make their case to active workers at the union hall. McAlinden says that 66% of GM's workers can retire within five years. They may share some concerns with the current rank and file.
For that reason, the UAW is planning an information campaign to show its voting members how the VEBA will secure their benefits, says one source close to union leadership.
Limiting Unemployment Benefits
There are plenty of other thorny issues. GM has also sought to reduce unemployment benefits paid through what the UAW calls the Jobs Bank. Right now, workers get most of their take-home pay while on furlough until GM finds work for them. Some UAW workers in the Jobs Bank have been known to earn nearly full pay for years while never building a car.
GM wants to limit the benefit and force workers in the Jobs Bank to either take a buyout or transfer to an open job after a set period. The automaker also wants to cut the union's cost-of-living allowance (COLA), which gives them extra pay to keep pace with inflation. COLA payments cost GM more than $300 million last year.
The two sides remained in negotiations Tuesday afternoon.