After closing in on a groundbreaking labor deal that would shift management of retiree health care to the union, the United Auto Workers turned up the heat on General Motors (GM) management to get a deal done.
The union set a strike deadline of 11 a.m. EDT Sept. 24 to come to a tentative four-year labor agreement.
Sources close to the talks say the two sides have agreed on a framework for building a Voluntary Employee Beneficiary Assn. (VEBA) trust that would wipe long-term health-care liabilities from GM's books and pay medical benefits for union retirees.
But they were still negotiating over the weekend to find common ground on other issues such as wages, pension issues, job security, work rules, and other more typical contract items.
In a note displaying clear frustration, UAW President Ronald Gettelfinger told members to be prepared to walk out. "We're shocked and disappointed that General Motors has failed to recognize and appreciate what our membership has contributed during the past four years," Gettelfinger said in a statement. "Since 2003, our members have made extraordinary efforts every time the company came to us with a problem: the corporate restructuring, the attrition plan, the Delphi (DPHIQ) bankruptcy, the 2005 health care agreement. In every case, our members went the extra mile to find reasonable solutions."
Pressure for a Final Deal
Assuming GM and the union stick with the VEBA deal, the union may simply want GM to be more lenient on the rest of the contract, and the strike would pressure management to sign a tentative contract with some perks for workers. "A token strike is possible, but we suspect the primary motivation of the strike announcement, coming nine days after contract expiration, may be to pressure GM to finalize lingering issues in the contract," JPMorgan (JPM) analyst Himanshu Patel said in a research note.
On Sept. 21, GM and the UAW came to a basic agreement on the level of funding and how GM will come up with the money for a VEBA, say sources close to the talks. The UAW had financial advisers from investment banking firm Lazard (LAZ) in Detroit help to negotiate that aspect of the agreement since Sept. 18. But they left the talks Sept. 21 after terms of the VEBA deal appeared intact.
If it gets done, this VEBA deal will be unprecedented. Other companies and unions have set up VEBA funds to manage retiree health care, but this one would be groundbreaking due to its massive size. GM has $52.5 billion in retiree health-care liabilities that are only partly funded. To get the UAW to assume responsibility for paying that giant sum of medical benefits, GM would give the union cash and assets equal to an estimated range of 60% to 70% of the liability.
That means the UAW will run a fund with assets probably in the range of $30 billion to $35 billion. A deal done in July between parts maker Dana Corp. (DCNAQ) and the UAW and United Steelworkers set up a VEBA trust with assets equaling 71% of the liabilities. If GM and the UAW agree to that rate, the fund would start with about $35 billion.
Beyond the 73,000 workers at GM, the deal will likely set a pattern for a labor contract with rivals Ford Motor (F) and Chrysler; the UAW could end up with more than $60 billion in assets to manage health care at the Big Three. That would make it one of the 20 largest funds in the U.S., according to Pension and Investments, a newspaper covering money management.
The union will then hire an investment firm to manage the money and an administrator to dole out benefits.
The deal will also be watched closely by many companies with many retirees or an aging workforce. Health-care inflation of 10% a year has crippled many companies in a variety of industries, and they are wrestling with how to manage retiree benefits. "It sets a huge precedent," says Sean McAlinden, chief economist at the Center for Automotive Research. "It's now an option for everybody."
The new setback comes after Gettelfinger moved to put negotiations on the fast track over the weekend. In a message sent to union locals on Sept. 21, the UAW president wrote, "We are continuing to make progress; however, we are pushing to accelerate the negotiating pace at all levels." Gettelfinger stopped short of guaranteeing a deal soon. "In any negotiations, things change from one day to the next," he wrote, "and until we have a tentative settlement, or until the negotiations process breaks down, it is difficult to get information to you."
Sticking Point: Seed Money
The talks have been going hot and cold for the past week. GM tabled an offer to the UAW on Sept. 17 after making progress on talks for the VEBA trust, say sources close to the negotiations. The UAW refused the offer the next day as the sides were several billion dollars apart on the size of the proposed VEBA trust, sources say. Talks about the VEBA trust were never dropped, but the two sides decided to focus on other issues on Sept. 19.
Negotiating the VEBA trust has been very complicated. One veteran negotiator involved in the talks said this year's bargaining is the most complex that most people on either side of the table have seen. Sources say GM has believed the valuation of the health-care liability is too high. The two sides had debated the size of the liability and the funding requirement, which are based on an alchemy of assumptions on health-care inflation, interest rates, assumed investment returns, and actuarial tables.
Much of the debate has also centered on how much GM would give the union to seed the fund and how risky the assets are. The union also wants GM to help the fund if it gets in trouble. Gettelfinger does not want to be in the position of having to water down benefits for his own members, McAlinden says. But depending on the size and makeup of the fund, he may have to do so.
Other Big Items
One possibility, sources say, is that GM may raise health-care co-pays for union members. But the company could also boost pension benefits to offset higher health-care costs to retirees. GM's pension plan is overfunded by $17 billion. GM can't legally touch that money for other uses, but could use the fund's robust health to offer better pension payouts in exchange for higher health-care contributions from retirees.
But now with a strike deadline near, the two sides must come to terms on other big items. GM executives said before talks began that they wanted to cut union benefits such as a Jobs Bank—a paid furlough clause that pays workers on layoff indefinitely—cost-of-living increases, and work rules that restrict using cheaper contract labor for non-assembly work. The two sides have also been negotiating a signing bonus to speed the complex deal's ratification.
Assuming the deal is signed, GM and the UAW will have to get it ratified by GM workers. Since two-thirds of them can retire within five years, they will be very interested in their retiree benefits.
The union plans to have an information campaign to push ratification. Protecting benefits from bankruptcy court is one selling point. But the union also wants GM to guarantee employment levels and investment in U.S. plants as another carrot for voting workers. "The union will want this deal to protect a stronger GM at home, not just internationally," says Harley Shaiken, labor economist at the University of California at Berkeley. "What they get on future investment is very important."
Savings for New Models
The savings could be huge for GM. The company spends $3.3 billion a year on union retiree health care. Cutting that cost away would quickly boost cash flow. Subtract the investment returns that GM makes on investing $15 billion in health-care funds it has on its books now, and the company should save around $1.6 billion a year in cash, says Patel, the JPMorgan analyst.
That could help GM design more new models. It also will help GM get its North American business back to profitability. After two years of union concessions and job cuts, GM's home business is still running at just about breakeven. Clearly, GM will look to any new contract to help push it further into the black. But in the meantime, Gettelfinger wants to protect his members and take to them a deal he can get ratified.