Health Costs Are Key to GM-UAW Talks
September 19, 2007
By TOM KRISHER and DEE-ANN DURBIN
DETROIT - The United Auto Workers would become one of the nation's largest consumers of health care if it takes over retiree obligations from Detroit's automakers, a huge responsibility that would test the union's ability to control rising health care costs.
Health care is at the heart of bargaining between the UAW and General Motors Corp., which was set to continue Thursday. The union's contract with GM has been extended hour by hour since Friday.
The negotiations are dragging on because of a complex plan to unload GM's roughly $51 billion in unfunded retiree health costs to a trust administered by the union. In exchange, the UAW wants promises that GM will continue building cars at union-represented plants.
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. Ford Motor Co. and Chrysler LLC are likely to ask for a similar arrangement for their retiree health costs.
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. Analysts say companies across the country may copy the model if it works.
"A VEBA may not be the right solution for all companies, but it might be one vehicle to help level the playing field in today's global marketplace," PricewaterhouseCoopers told investors in a note Wednesday.
But rapidly rising health care costs may be giving the union pause. Most economists think those costs will rise 6 percent to 8 percent annually "for as far as the eye can see," said Glenn Melnick, a health care finance professor at the University of Southern California and an economist for Rand Corp.
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 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 annual return needed to cover the inflation.
GM has underestimated its health care cost inflation by about 1 percentage point every year for the last six years, and the UAW knows that, said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor. He said the union will get enough money to protect the fund.
"I think the UAW has won that argument," he said.
Union-managed health care trusts have worked in other industries. The United Steel Workers union has had about 40 such trusts work for several years, and they were funded at far lower rates than GM is willing to contribute.
Typically those 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.
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, Ranick said.
But the trusts don't always work. Larry Solomon, who worked at Caterpillar Inc. and was president of UAW Local 751 from 1987 through 1996, said the company's VEBA ran out of money in October 2004.
McAlinden said the UAW fund would be so large the union can hire the finest health care managers in the country. It also would likely have a governing board.
"This is one of the most honest unions in the United States. It's going to be very, very public," McAlinden said.
McAlinden said it's possible UAW-represented retirees will have to pay more for their health care, but GM could make up for that by increasing the size of their pensions. GM's pension fund is now overfunded by $17 billion, he said.
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. The nation's largest public pension fund, 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, Melnick said.
"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."
