Kaiser Daily Health Policy Report

Tuesday, September 04, 2007

Health Care Marketplace

      Some United Auto Workers members are opposed to the creation of a voluntary employee beneficiary association for management of retiree health benefits, which could be established during contract negotiations between the union and Ford Motor, General Motors and Chrysler Group, USA Today reports. They are concerned that the VEBA one day could go bankrupt and leave current and future retirees uninsured or underinsured (Silke Carty, USA Today, 9/4). Ford and GM in August asked UAW to assume responsibility for the health care benefits of more than 1.5 million working and retired employees. Under the arrangement, the companies would transfer retiree health care obligations to an independent trust fund that the union would manage. Such a request was largely anticipated and would free the automakers from future retiree health obligations. The contract negotiations began in July (Kaiser Daily Health Policy Report, 8/29).

According to USA Today, the automakers want to fund a VEBA at 60% to 70% of projected health care costs. Past attempts at creating a VEBA failed because UAW wanted the automakers to fund the VEBA at 100% of costs. David Cole, chair of the Center for Automotive Research, said the Big Three must fund a VEBA below full costs to be financially prudent, adding that if they pay more than 70% of costs, they would fail to reduce labor costs adequately to increase competitiveness with rival Asian automakers.

However, some labor activists are campaigning against a VEBA funded at that level. USA Today reports that Future of the Union, a "dissident labor group," has been working to sway union members to oppose a VEBA agreement in light of failed VEBAs established by UAW with Caterpillar and Detroit Diesel, both of which ran out of funds.

Funding Levels in Question
All three automakers want to establish a VEBA, but the "clock is ticking" because the contracts for all three companies expire on Sept. 14, according to USA Today (USA Today, 9/4). The Detroit News reports that the discussion on a VEBA has come down to "two critical questions: How much the automakers should pay, and how they should pay for it."

People close to the negotiations have said UAW agrees that it only will make sense for the automakers to establish a VEBA if they can do so at a reduction of total health care liabilities, but union leaders and the companies do not agree on the amount. An executive of one company told the News that his company could afford 60% but that 70% would be "pushing it." Fitch Ratings, which sets credit ratings for Ford and GM, has estimated that a VEBA could cost GM between $30 billion and $35 billion, Ford between $14 billion and $17 billion, and Chrysler between $6 billion and $9 billion, depending on how much of a discount is authorized. Signing a deal could raise credit ratings for Ford and GM, the automakers have said.

Funding Mechanisms Considered
Should a VEBA be approved, the companies also must decide how to fund it. Analysts have said that although GM and Ford have cash on their balance sheets, they need that funding for restructuring plans. Therefore, they would seek to fund a significant portion of a VEBA with stock. Cole said that funding a VEBA with stock might be beneficial to UAW because the value of Ford and GM stock likely will increase after signing contracts including a VEBA. "That alone could significantly increase the value of the stock," Cole said, adding, "They could take advantage of that kick." If the companies' stock improves as analysts expect under a VEBA deal, UAW could sell the shares and diversify its investments, according to the News.

Another funding option would be to spread the payments out over time. The News reports that both options might be a hard sell to UAW members because spreading payments out over time or taking stock payment from companies with financial troubles is risky. "Those benefits are vulnerable right now, and (union leaders) know it," Cole said, adding, "They have to have sustainably profitable companies, or they have no future" (Hoffman, Detroit News, 9/4).

The New York Times reports that UAW is being advised on the deal by financial consultant Lazard, with which it has consulted on past health care negotiations. If the negotiations for a VEBA fall through, the companies are likely to ask for "significant concessions in other aspects of the contract, including wages, benefits and work rules," according to the Times (Bunkley/Maynard, New York Times, 9/4).

UAW Unlikely To Select Lead Negotiator
UAW likely will negotiate contracts individually with each automaker instead of selecting a lead negotiator, which is a "break from traditional tactics," the Washington Post reports. In the past, UAW has picked the company with the best financial situation as its lead contract negotiator in order to increase its chances of "extracting major concessions," but sources close to the negotiations have said union officials are working with all three companies separately, according to the Post. UAW still could pick a lead company at any time (Freeman, Washington Post, 9/4).

Experts say that if a leader is chosen, it likely will be GM because it is "healthier than Ford and the most intent on creating a VEBA fund," the New York Times reports. However, the leader also could be Ford because UAW President Ron Gettelfinger has a long-standing relationship with the company. Chrysler is the least likely option (New York Times, 9/4).

Strike Vote Takes Place
With the contract's expiration near, UAW has asked its members to authorize a strike, and voting ended on Friday, the AP/Chicago Tribune reports. The move is standard and does not indicate that a strike will occur. The tally has not been finalized yet, but it is typical for authorization to be approved by a wide margin (Krisher, AP/Chicago Tribune, 9/3). Company executives and analysts have said a strike is not expected to occur because it could severely hinder the automakers or even bankrupt one of them, according to the Post (Washington Post, 9/4).

Comments
Bradley Rubin of BNP Paribas said, "It will be a bloodbath if [a VEBA] doesn't happen," adding, "That's why it has to happen." Cole said, "The discount and how to fund it are the really tricky issues right now," adding, "(But) from what I've heard, they're coming together. I think it's going to happen" (Detroit News, 9/4). David Gregory, a professor of law at St. John's University, said, "It would be really remarkable if there was a strike. You'd need a complete collapse of negotiations," adding, "A strike this time around could be absolutely lethal for the company being struck" (New York Times, 9/4).

UAW Vice President Cal Rapson, who is on the GM negotiation team, on Saturday in Flint, Mich., told hundreds of UAW members that UAW is "determined not to put any more costs on retirees for their health care" (Aguilar, Detroit News, 9/2).