Health care fix may be tough sell
Rather than creating a trust fund to handle all of the future health
care obligations for Detroit automakers' hourly UAW members, upcoming
labor talks between the union and companies could result in a fund that
picks up just a fraction of those costs, a leading industry analyst said
Morgan Stanley analyst Jonathan Steinmetz told investors that a
Voluntary Employee Beneficiary Association trust could come out of the
negotiations but that it is unlikely to address all of the health care
obligations Chrysler Group, Ford Motor Co. and General Motors Corp. have
-- which he estimated at $112 billion.
Instead, he said, the new contract could establish the so-called VEBA,
set the table for expanding it in 2010 or 2011, and cap the rate of
growth in company spending for health care.
"We don't think the status quo will prevail but we don't think the
entire Goodyear-style solution will take place," he said referring to a
health care deal agreed to by Goodyear Tire Co. and the tire maker's
union that put about $1 billion in health care obligations into a trust.
It was a deal that insured the health care obligations into the future
but at a reduced up-front cost to the company.
One benefit to the UAW of such a deal, Steinmetz said, is that a VEBA
would reduce the risk of health care benefits being lost if an automaker
goes bankrupt. In the future, the companies may be in worse financial
shape -- and unable to set up such a trust.
On the downside, the UAW would likely have to make significant health
care concessions that rank-and-file members may not be ready to accept,
and benefits may not keep pace with inflation.
Long-term health care obligations could be cut by $5 billion at GM and
$3.6 billion at Ford if the inflation rate on active members' health
care in retirement could be moved to 3% from 5%, the analyst said.
"The status quo makes cash generation very difficult for the Detroit
Three," Steinmetz said. "Health care spending due to health care
inflation will rise if this situation does not change. GM spends almost
$5 billion a year on health care."
The automakers would want a discount on what they have to pay to set up
the trust and the size of the reduction is sure to be a major sticking
point. Steinmetz estimated that a cut of 15% to 20% could be mutually
The impact of the 2008 presidential election and hopes of some kind of
legislative solution may throw a kink in the talks, he cautioned.
The idea of creating a VEBA to pay for future obligations has been
picking up steam in Detroit.
The Wall Street Journal reported Tuesday that UAW President Ron
Gettelfinger proposed the idea in 2005 during negotiations with GM over
retiree health care concessions, but the company wanted to go with the
plan that it had been working on for some time.
The UAW declined comment Tuesday.
Harley Shaiken, a professor at the University of California at Berkeley
who specializes in labor issues, cautions that the idea of a VEBA will
be a tough sell to union members, who will be wary of the risk.
"I think it is going to be a hard sell. It is not out of the question,
but there will be a lot of resistance to it," he said. "The goal of the
UAW leadership is clear. They want to provide as secure as possible a
route for health care for the members. If they feel a VEBA will do that,
they may be more open."