Union defers health care takeover talks

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http://www.businessweek.com/ap/financialnews/D8RP90EO1.htm

Union defers health care takeover talks

By TOM KRISHER and DEE-ANN DURBIN

DETROIT

United Auto Workers President Ron Gettelfinger has decided to temporarily shelve talk with General Motors Corp. about the union taking over retiree health care, but the issue remains part of the bargaining, a person briefed on the talks said Thursday.

The person, who asked not to be identified by name because the talks are private, said Gettelfinger rejected GM's latest retiree health care proposal on Tuesday night and wanted to move to other issues. GM, the lead company in talks with the union, wants to pay the UAW to set up a trust that would fund future retiree health care costs.

But since the company and union are so far apart on how much GM would pay, Gettelfinger wanted to talk about other issues, the person said.

"It's not off the table. It's just kind of being put off to the side for a while," the person said.

Now under discussion is a second offer from GM that doesn't include the trust but has larger cost cuts, including a drop in hourly wages, increased health care contributions, fewer guarantees of new work at U.S. factories, reduced vacation time and other items.

GM, as well as Ford Motor Co. and Chrysler LLC, are trying to cut what they say is about a $25 per hour labor cost gap with their Japanese competitors. Industry analysts say the costs must be reduced for the U.S. companies to survive.

The company and union are billions of dollars apart on how much GM would pay into the trust, the person briefed on the talks said. GM has about $51 billion in unfunded retiree health care liabilities, and analysts have said it wants to pay the union about 65 percent of the cost to form the trust, called a Voluntary Employees Beneficiary Association, or VEBA.

GM spokesman Tom Wickham would not comment on the VEBA developments. UAW spokesman Roger Kerson declined to comment.

On Thursday morning, a local union leader who also had been briefed on the talks said the VEBA was discussed by UAW bargainers on Wednesday.

"The VEBA's on the table. They're looking at the numbers right now," said the official, who also requested anonymity because the talks are private.

After breaking about 9 p.m. Wednesday night, talks resumed Thursday morning, Wickham said. The union's contract with GM has been extended hour by hour since Friday. With both sides far apart on the trust, the talks likely will take several more days to complete, the person briefed on the talks said.

If the VEBA goes through with all three automakers, the UAW would become one of the nation's largest consumers of health care.

In exchange for taking on the trust, the UAW wants promises that GM will continue building cars at union-represented plants.

If GM and the union agree on the VEBA, then Ford and Chrysler are likely to ask for a similar arrangement for their retiree health costs.

The VEBAs would let the companies remove the huge health care 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.

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 obligation, 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.

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 many 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.

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 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."

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Tough for me to see what there is to negotiate. GM says what they're willing to pay and the UAW says "OK." The US needs a universal health care plan and to kill the unions - they're going to sink the country. Always holding out their hands.