January 23, 2007
Detroit
's auto makers and the United Auto Workers are examining a potentially
revolutionary plan that would shift to the union responsibility for tens
of billions of dollars in retiree health-care liabilities, according to
people familiar with the matter.
A deal is far from certain,
especially with formal national-contract talks months away. A big question
is where General Motors Corp. and Ford Motor Co. -- both saddled with
speculative, or "junk," credit ratings -- would get the cash
required to fund a handover of future retiree health-care obligations to a
union-managed fund. Another uncertainty is whether the UAW would want the
role of bad guy if the time came to cut future benefits.
The preliminary discussions highlight
the determination of the UAW and the Detroit auto giants to find a way to
restructure the U.S. auto industry without resorting to bankruptcy-court
protection, as many unionized steelmakers and airlines did.
The discussions also come at a
critical time in the national debate over health care and a system that
relies on employer-sponsored benefits. The subject is heating up ahead of
the 2008 presidential campaign, and it is expected to be a point in
tonight's State of the Union address by President Bush.
UAW leaders and Detroit auto
executives agree on this much: Detroit's status quo is unsustainable. UAW
leaders and company executives have tried to argue that without
health-care overhaul, thousands more U.S. manufacturing jobs will be at
risk. The UAW's official position is the federal government should step
in. Top executives of the Detroit auto makers have been more cautious but
have advocated proposals for the government to shoulder the burden of
"catastrophic" health costs.
One reason the UAW might agree to
such a deal is a union-controlled retiree fund, filled with cash, stock
and other assets, would remain solvent even in case one of the auto makers
filed for bankruptcy protection.
GM and Ford have been restructuring
their U.S. operations off and on for nearly 20 years, as their unionized
U.S. operations have steadily lost market share to lower cost, nonunion
operations established by Asian and European auto makers. The unionized
Detroit companies have almost closed the hourly productivity gap that once
existed between their plants and those of nonunion rivals. But the burden
of paying for UAW health-care benefits still adds roughly $1,500 a car to
the cost of U.S.-made Big Three vehicles -- a cost penalty the Detroit
auto makers can't offset by raising prices.
The Detroit auto makers and the UAW
are looking at an agreement this month between Goodyear Tire & Rubber
Co. and its largest union, the United Steelworkers. Under the deal, which
settled a strike, Goodyear agreed to transfer its $1.2 billion health-care
liability to a fund managed by the steelworkers union. Goodyear, in turn,
would put in $1 billion in cash and equity into the fund.
GM Chief Financial Officer Fritz
Henderson told auto analysts this month that "it would be fair to say
that we have more than a passing interest in the Goodyear agreement."
GM, according to people familiar with the matter, has hired advisers that
worked with Goodyear on their contract talks.
The UAW and GM discussed a plan for
shifting retiree health-care obligations to the union as far back as 2005,
when the UAW proposed the idea, say people familiar with the discussions.
GM leadership has since raised the
issue of retiree health care several times with UAW leaders, the people
familiar with the discussions say. GM's goal is to get what J.P. Morgan
Chase & Co. estimates is $55 billion in future union and current
health-care liabilities off the corporate balance sheet, as part of the
company's effort to regain an investment-grade credit rating. GM's junk
credit rating complicates its efforts to defend its position in the
U.S.
market and expand overseas, in the face of competition from
Japan
's Toyota Motor Corp.
The UAW hasn't agreed to the
proposal, according to two people familiar with the matter, citing its
previous concessionary deal and the 37,000 UAW members who took buyouts
and early-retirement offers from GM and its former unit, auto supplier
Delphi Corp., which is under bankruptcy-court protection. Because the
talks are early and an agreement isn't close, specifics such as how the
union would run the plan or plans aren't clear.
GM spokeswoman Katie McBride said the
auto maker is "looking at a number of health-care options, but we
aren't going to speculate on specific options we are exploring."
Ford, which has an estimated $22
billion in future and current health-care liabilities for its U.S. union
employees, also is studying such a proposal. Marty Mulloy, Ford's vice
president of labor affairs, said in an interview yesterday that "we
are taking a look at what happened with Goodyear. We are very familiar
with all of it and all that's out there. That's all I can say."
It also would make the UAW one of the
largest private-sector providers of health care in the U.S. Detroit's auto
makers have roughly one million union retirees and dependents. UAW
spokesman Roger Kerson declined to comment.
One reason the Goodyear model would
be tough to duplicate, said a person familiar with the matter, was because
Goodyear had inflation caps on future health care, whereas the auto makers
don't. A one-percentage-point change in assumptions about future
health-care liabilities can swing the estimated obligation by billions of
dollars.
The two sides also likely would clash
over appropriate levels of prefunding, said people familiar with the
discussions. "The UAW will want $1.10 on the dollar, with lots of
cash. The companies will want 50 cents on the dollar, with little cash.
But that can be easier to negotiate than the complexities of health-care
benefits sometimes," said one person familiar with the talks.
J.P. Morgan analyst Himanshu Patel
estimates Ford and GM could buy themselves out of their combined $77
billion in health-care liabilities and create a union-managed fund for $46
billion to $54 billion in cash, stock and convertible-debt proceeds.
Under the deal between the
steelworkers and Goodyear, future benefits to union retirees would be
administered by a trust, with its assets legally separate from the
company. If Goodyear runs into financial problems, or files for
bankruptcy-court protection, the money in the trust still would be
available for the exclusive benefit of the retirees, according to the
steelworkers union. The company's initial contribution included $700
million in cash and $300 million in Goodyear stock, according to the
union.
Mr. Patel said Goodyear was able to
transfer its health-care liability to its union for 80 cents on the
dollar. He estimated GM, Ford and Chrysler Group could do so for about 60
cents to 70 cents on the dollar.
For GM, this would be a cost of $33
billion to about $38 billion for what J.P. Morgan estimates is $55 billion
in UAW retiree health-care liabilities. He estimated Ford would need $13
billion to $15 billion to prefund its $22 billion in union retiree health
care. He estimated the money would be comprised of cash, stock-convertible
debt and billions of dollars the auto makers already have put away for
health-care retiree debts.
Chrysler Group could transfer its
estimated $15.6 billion union retiree liability for $9.4 billion, he said.
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