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GM, Ford, Chrysler Consider Union-Run Health Fund, People Say

From Bloomberg| June 12,2007

General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler may propose in next month's labor talks that the United Auto Workers manage a health-care fund financed by the automakers, five people with direct knowledge of the talks said.

The U.S. automakers have discussed a fund to eliminate most of a combined $114 billion in retiree health-care obligations, said the people, who didn't want to be identified because the discussions are private. The talks are preliminary so the fund's size and how much each company would contribute haven't been determined, they said.

Such a move ``would be an incredibly important development in capping the expenses and liabilities,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``The UAW wins security for its people.''

The car companies are trying to deal with health-care costs that GM Chief Executive Officer Rick Wagoner says cost them a combined $12 billion in 2006. Providing health care to 2 million employees, retirees and dependents contributed to losses at each of the U.S. automakers last year, while Japanese rivals posted record profits.

Goodyear Model

Under the proposal, the companies would contribute a percentage of their retiree liabilities to the fund, whose assets and investment proceeds would cover retiree medical benefits.

The idea was inspired by a Goodyear Tire & Rubber Co. plan, the people said. The Akron, Ohio-based tiremaker, with a health- care liability of $1.3 billion for United Steelworkers of America retirees, agreed in December to set up a health-care trust fund with a one-time $1 billion payment in cash and stock.

After the payment, Goodyear will have no further health- care obligation to current or future union retirees. The accord came after an 85-day strike.

The joint fund is one of several ideas for cutting labor costs being weighed by U.S. automakers as they prepare for next month's contract negotiations with the UAW, the people familiar said.

GM, Ford and Chrysler haven't decided whether to offer the proposal during the talks, which will replace the current four- year contract expiring in September, three of the people said. The companies are discussing a single provider to reduce administration costs and overlapping services, they said.

``It's almost certain the companies will bring up a health- care fund of some sort,'' said Harley Shaiken, a labor analyst at the University of California at Berkeley. ``My sense is that the unions will look at it, but it will be a tough sell.'' @@page@@

In the Loop

The UAW is aware of the discussions and is willing to consider the idea, one of the people familiar with the matter said.

Ford spokeswoman Marcey Evans, GM spokesman Dan Flores and Chrysler spokesman Dave Elshoff declined to comment on possible bargaining proposals. UAW spokesman Roger Kerson also declined to comment.

The union's acceptance of Cerberus Capital Management LP as a private-equity owner of Chrysler shows it's willing to embrace change, said John Casesa, managing partner of Casesa Strategic Advisors LLC in New York. DaimlerChrysler last month said it will sell 80.1 percent of Chrysler to New York private-equity fund Cerberus.

GM, Ford and the UAW last year agreed to a court settlement requiring union retirees to pay part of their health-care costs for the first time. Detroit-based GM and Ford, of Dearborn, Michigan, also pledged not to alter those retiree health-care benefits until after 2011 without union consent.

$114 Billion

Last year's settlement, as well as benefit reductions for salaried workers, helped GM cut retiree health-care liabilities 21 percent to $64 billion at the end of last year. Ford had retiree obligations of $31 billion, and the potential future tab of Auburn Hills, Michigan-based Chrysler is about $19 billion.

New York-based analysts Rod Lache of Deutsche Bank Securities and Himanshu Patel of JP Morgan Securities have said it's increasingly likely the automakers will get some sort of health-care fund or other restructuring of health-care costs this year. Lache raised his ratings on GM and Ford to a ``buy'' in February on the expectation.

Lehman Brothers analyst Brian Johnson in Chicago said in a report this week it may be difficult for the automakers to modify the plan scheduled to end in 2011 because a judge has to approve any changes.

GM has already bought out 34,400 union workers, and Ford and Chrysler together are trying to persuade 50,000 to leave as they cut production to match market-share losses to Toyota Motor Corp. and Honda Motor Co.

Labor's Influence Lost

``A massive shrinkage in the active workforce will undermine the UAW's power,'' Casesa said. ``That creates an incentive for the union to deal with these health-care issues now, rather than waiting until their power is reduced in 2011.''

Even with the recent concessions by the UAW, retiree benefits remain the U.S. carmakers' biggest cost disadvantage compared with Toyota in the U.S. The difference is as much as $22 an hour, according to the Harbour-Felax Group of Royal Oak, Michigan.

GM had about 357,000 union retirees in the U.S. at the end of last year. Toyota, which doesn't disclose U.S. health-care spending, has 269 U.S. retirees. Ford reported 570,000 active union and non-union employees, retirees and dependents.

The U.S.-based automakers had combined 2006 losses of more than $15 billion. Toyota, Honda and Nissan Motor Co. earned a collective $23 billion.

GM shares rose $1.32 on June 8 in New York Stock Exchange composite trading and have gained 25 percent in the last year. Ford shares gained 18 cents to $8.24, and DaimlerChrysler's U.S. shares increased $2.05 to $87.85.

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