UAW sticking point: Retiree health trust

NEW YORK — The health care trust the UAW is discussing with General Motors would shift the burden of retiree health care payments from the company to the union. The benefit for the company is clear, but it's much harder to find one for workers.

As contract talks between the United Auto Workers and General Motors Corp. continue, an apparent point of contention is the creation of a trust to cover GM's $51 billion unfunded obligation to health care for retirees.

Opponents of a trust, which would be created by the company, say retirees could face higher health care contributions, less insurance or even no insurance if the plan runs out of money, as happened at Caterpillar Inc.

"Given rising health care costs, will the union be left holding the bag in terms of responsibilities for health care funding in the future?" said John Russo, labor professor at the Williamson College of Business Administration at Youngstown State University.

The only reason the union would agree to such a trust is because it has no choice, said Paul M. Secunda, lecturer and assistant professor of law at University of Mississippi and co-editor of the workplaceprofblog.

"The alternative is bankruptcy," he said.

The trusts are called VEBAs, an acronym for "voluntary employees' beneficiary association." Typically, under a VEBA, the company shifts a fund to the union, which manages the money and pays retiree health costs from it.

The problem for workers is that the trusts are almost never 100 percent funded.

The trust at Goodyear Tire & Rubber Co. was 77 percent funded, Russo said. Wall Street analysts have been crunching the numbers for a 60 to 70 percent-funded trust at GM.

Proponents say that even partial funding under the VEBAs is better than none at all. Many companies have set aside nothing for many white-collar workers' retiree health care benefits.

The level of funding for a GM VEBA is probably the current sticking point in negotiations, analysts say. The cash-strapped company can't afford to go too high, and the battered union can't sell its members on a funding level that's too low.

If GM put $30- to $35 billion in a trust, "that would leave them with an uncomfortable level of liquidity given their restructuring program and the uncertainties of auto sales in the near term," said Mark Oline, a managing director at Fitch Ratings who follows the auto industry.

With a market capitalization of around $20 billion, the company would be limited in how much stock it could issue to fund the VEBA, while uncertain credit markets would also make a bond offering tricky, Oline said.

Creative financing for the VEBA could include staggered funding or contingent funding requirements, he said. Other options might include a "refund clause" for GM if health care inflation is less than expected

The trusts could create a way for the companies to alter their health care promises to retirees — something that's nearly impossible to accomplish when the promises have been made under a union contract.

The financial risks to the union of a VEBA would be tremendous, said Paul Schrade, 82, former UAW regional director for the western states.

"How can we tell how much money is going to be needed down the road?" he said. "Most bankruptcies in this country are because of health care."

Because any trust will be underfunded, "we know the union is going to have to go to retirees and demand more out-of-pocket expenses to cover the shortfall," said Gregg Shotwell, a union activist.

"What are they going to do, hire Warren Buffett to manage this fund to get 10 to 15 percent returns on their investments so they can beat health care inflation?" Shotwell said. "If the company can't manage it, why do they think the union can?"

If the Detroit Three agree to the trusts, they could create a fund as large as $60 billion, a size equivalent to the 20th-largest pension fund in the United States, according to corporate governance expert Stephen Davis, of Davis Global Advisors Inc. in Madison, Conn.

That could make UAW President Ron Gettelfinger a powerful — if unlikely — player in financial markets.

Larry Solomon, who worked at Caterpillar and was president of UAW local 751 from 1987 through 1996, said the company's VEBA ran out of money in October 2004.

"All the time I worked at Caterpillar, I was told, 'If you stay with us and work until you retire, you're going to have health care at no cost to you for the rest of your life,'" he said.

"I don't see it as going to be any good for the working class people," he said. "It's risky business, and sooner or later, they're going to find themselves without any health care."