DETAILS OF UAW CONTRACT

GM to shed billions in health, labor

The workings of VEBA unveiled

October 16, 2007, Detroit Free Press

BY JOE GUY COLLIER

FREE PRESS BUSINESS WRITER

General Motors Corp. officials said Monday that the new UAW contract would make the automaker more competitive by removing billions of dollars in retiree health care liabilities and by allowing the company to shift some of its workforce to lower wages and benefits.

A UAW-managed retiree health fund is expected to save GM about $3 billion a year starting in 2010, company officials said in a conference call with analysts and journalists.

GM also will be able to cut hourly labor costs by more than half for noncore positions, which are those deemed to not be directly related to manufacturing. GM said Monday that it expects to speak with the UAW about another round of buyouts and early retirement packages, possibly replacing thousands of workers with new hires at the lower cost.

GM Chairman and Chief Executive Officer Rick Wagoner called the deal an "innovative agreement" that is fair to workers and helps the company become more competitive. Several recently launched or soon-to-be launched vehicles, such as the redesigned Cadillac CTS and Chevrolet Malibu, should help the company profitably increase retail sales, he said.

"We look forward to steady and consistent improvement in our financial performance, combining the benefits of an improved cost structure with higher revenue," Wagoner said in the conference call.

But GM stock fell 3.6% Monday to close at $41.11 per share. The stock is still up 10% since the opening bell on Sept. 26, the day a tentative deal between the UAW and GM was announced.

The details released Monday confirm that the new contract dramatically cuts labor costs and reduces the risk of rising health care expenses, said Joe Phillippi, a principal with Short Hills, N.J.-based AutoTrends Consulting.

But GM's announcement came the same day oil prices spiked amid threats from Turkey to invade northern Iraq.

GM's conference call did not reveal major surprises but did fill in key details about the changes in the UAW-GM contract. Chief among the changes is the creation of a voluntary employee beneficiary association, or VEBA, to pay for hourly retiree health care expenses.

The expenses are estimated to be about $47 billion. Although the UAW approved it, GM does not expect to have the VEBA in place until 2010 because of legal challenges.

GM will continue to pay retiree health care expenses for the next two years. It also will put cash, stock and money from an existing VEBA into the new one. The total cost is expected to be $31.9 billion plus up to 19 payments of $165 million if the value of the VEBA does not keep up with health care costs.

GM Chief Financial Officer Fritz Henderson said the company is projecting that the deal will give GM a cash flow of $2.8 billion in 2010 and $3.3 billion in 2011. The savings should go up after 2011, Henderson said.

In addition to the savings from the VEBA, GM expects the new contract to significantly lower labor costs through a new two-tier wage and benefit system, Henderson said.

New hires in noncore positions, such as material movement, will get a different set of wages and benefits. They will receive base pay of $15.30 an hour, about half that of existing employees. They also will be on a different set of benefits and will not receive GM-provided retiree health care.

Henderson said the company should be able to shift jobs to this second tier because 65% to 75% of hourly workers will be eligible for retirement within the 4-year contract period.

GM plans to speak with the UAW about another attrition program, Henderson said. Last year, GM thinned its hourly ranks by 34,000 workers, or about one-third, through buyouts and early retirement.

Lehman Brothers analyst Brian Johnson forecasts 11,000 workers leaving GM in 2008 and as many as 25,000 by 2011. "Clearly, the magnitude of the carrot will be the critical driver of attrition," Johnson wrote in a note to investors Monday.

Contact JOE GUY COLLIER at 313-222-6512 or http://www.freep.com/apps/pbcs.dll/article?AID=/20071016/BUSINESS01/mailto:jcollier@freepress.com.