UAW and GM: Stuck in Neutral?

After a grueling weekend, GM and the UAW remain far apart on plans to fund an historic health-care trust fund

Intense negotiations between General Motors (GM) and the United Auto Workers union continued late Sunday, to try and tie up a labor deal that would likely set a precedent for similar deals at Ford (F) and Chrysler.

Neither side will comment, but some UAW locals told their members that negotiators were struggling to come to an agreement. In Grand Prairie, Tex., UAW Local 276 President Enrique Flores Jr. told his members on the local's Web site, "We understand the issues are complex and the effects far-reaching, however, solutions are certainly proving to be difficult."

Talks for a new four-year labor deal have been particularly grueling. As talks intensified over the weekend, the two sides remained far apart on key issues such as setting up a health-care fund to manage retiree medical benefits. GM is seeking a landmark contract that would shift management of retiree health care to the union. In exchange, the union would accept cash and assets to start a fund that would pay for union retirees' medical benefits.

Strike a Real Possibility

GM has $65 billion in health-care liabilities, about $50 billion of which are for its retired factory workers. The company wants to give the union assets worth 50% to 60% of the company's health-care liabilities. But the UAW has asked for more than 70%, sources say. JPMorgan (JPM) analyst Himanshu Patel estimates that the two sides will settle by establishing a fund equal to 60% to 70% of the liabilities.

"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."

UAW locals were prepared to strike if the union's negotiators felt they couldn't work out a deal with GM. Shaiken says a strike is a real possibility, but he predicts that it would be short-lived.

Big Cash Savings

If the two sides agree to a deal, here's how the health-care trust would work: GM would give the union a lump sum of money, which the UAW would invest the same way some unions invest pension funds. As long as the investment returns outpace health-care inflation, the fund should stay flush. Sources say the union will also demand GM agree to inject added funding should investment returns fall short and the fund drains too quickly.

Historically, 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."

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 a year in the first year, and growing after that, according to a research report from JPMorgan.

Better Bankruptcy Protection

What does the union get? In the long run, the UAW would get to control the protection of its benefits. Without such a trust fund in place, if one of the Big Three were to fall into bankruptcy, the creditors would get first crack at any cash, leaving retirees with no benefits or very limited pension and health-care coverage.

By taking the money now and setting up the health-care trust fund, the union is covered in case of a bankruptcy. Shaiken says the union could even sell the deal to its members by saying that they would be protected from someone like Steve Miller, the Delphi (DPHIQ) chairman who took the auto-parts company into bankruptcy and used the courts to demand steep concessions on wages and benefits from the union.

But the union takes on the risk that it will be able to manage the fund successfully. If they don't, the UAW could be in the position of cutting benefits for its own members. "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.

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