GM-UAW Talks Hinge On Cost Of Retiree Health Care

Wednesday, September 19th 2007, 7:08 am

By: News On 6

DETROIT (AP) _ As bargainers for the United Auto Workers and General Motors Corp. continue to haggle across a table in Detroit, the big issue in the critical contract talks comes down to this: If GM pays the union to take on the company's huge retiree health care obligations, can the UAW's investments return more than the rate of health care inflation?

GM wants to unload much of its roughly $51 billion in unfunded retiree health costs to a trust that would be administered by the union. The UAW in exchange wants promises that GM will continue building cars at union-represented plants.

It's the key obstacle of the talks, and the complexities are what's dragging them out. The two sides have yet to agree on how much GM will put into the trust, a person who had been briefed on the bargaining said Wednesday. The person, who requested anonymity because the negotiations are private, said the talks likely would take several more days to complete.

Wednesday was the fifth day of bargaining since GM's contract with the UAW was scheduled to expire, but the union has extended the pact hour by hour. Negotiators went home for the night about 9 p.m. and were to meet again Thursday, GM spokesman Tom Wickham said.

Whatever GM and the union agree to likely will be copied when it comes to Ford Motor Co. and Chrysler LLC, and experts say other companies with large work forces also could follow.

``If this model of giving the union and its members some skin in the game to control health care works, then I think other companies with large future health care liabilities also would try to work with the unions they deal with and try to copy this model,'' said Glenn Melnick, a health care finance professor at the University of Southern California and an economist for the Rand Corp.

GM has been pushing hard for the union to take on the retiree health costs. All three automakers are interested in paying into a trust fund that the union would administer. The trusts, called Voluntary Employees Beneficiary Associations, or VEBAs, would let the companies remove the liabilities from their books and possibly raise their stock prices and credit ratings. In a recent note to investors, Morgan Stanley analyst Jonathan Steinmetz predicted that VEBAs would save the Detroit automakers $200 per vehicle.

But rising health care costs could give the union pause. Most economists think those costs will rise 6 percent to 8 percent annually ``for as far as the eye can see,'' Melnick said.

The stock market has risen around 10 percent to 12 percent per year since 1934, said Kevin Tynan, senior automotive analyst for Argus Research Corp. So in theory the union's investments should be able to meet or exceed health care costs.

But market volatility, plus GM's desire to pay far less than its entire health care obligation _ 65 percent to 70 percent, by most accounts _ will make it difficult on the union, Tynan said.

``It's a tall order,'' he said, adding that the UAW probably will go for less-risky investments that won't bring the 7 percent or so annual return needed to cover the inflation.

Yet the United Steel Workers union has made about 40 such trusts work for several years, often at far lower rates than GM is willing to contribute.

Typically the trusts, formed from the remnants of Bethlehem Steel and other companies, are run as independent insurance companies with their own governing boards, said USW spokesman Wayne Ranick.

Many were formed in crisis situations where companies were in bankruptcy protection, so the union did the best it could to start them, Ranick said.

If investments don't return more than health care inflation, the boards generally raise money either with increased costs for the retirees or with contributions from active workers, he said.

But the trusts don't always work. Larry Solomon, who worked at Caterpillar and was president of UAW local 751 from 1987 through 1996, said the company's VEBA ran out of money in October 2004.

If the UAW were to take on the costs for all three companies, it would have to cover roughly 540,000 retirees and surviving spouses. That would make it one of the largest health care consumers in the country, said Frank McArdle of Hewitt Associates, a human resources consulting company.

The federal government was providing health coverage to around 2.4 million civilian retirees in 2005, according to the National Association of Retired Federal Employees. Another major sponsor, the California Public Employees' Retirement System, provides health care and pension benefits to 455,200 retirees.

The California system has reported an average 14 percent rate of return on its investments over the last five years. The group lost money on its investments from 2000 to 2002 but rebounded in 2003 with a 23 percent return, according to its Web site.

The large numbers would give the UAW leverage to pressure health care providers to cut costs. It also gives the union employees incentive to shop for care at lower prices and manage their health better, said Melnick.

``It just puts the incentives in the right place,'' he said. ``A lot of economists feel that's the only solution to slowing down this juggernaut.''