Already a Bloomberg.com user?
Sign in with the same account.
For about a month now, analysts and media have been clattering about the potential for big health care concessions from the United Auto Workers union in this year’s contract talks. The crux of the analysis is that the Big Three could get a deal like Goodyear Tire & Rubber got from the United Steelworkers and save a big chunk.
The Steelworkers agreed to take $1.3 billion in retiree health care liabilities off Goodyear’s books in exchange for a $1 billion trust fund to pay for the health care benefits. That means that basically, the union will manage the fund the way the Teamsters managed its pension fund. Cutting that liability saves Goodyear $110 million in benefits costs.
Deutsche Bank likes the deal so much that last week the firm upgraded Ford and General Motors stock from a hold to a buy. But is this deal really applicable to the Detroit carmakers?
It’s a daunting task. GM executives are looking at the deal and have talked to Goodyear. But there are huge differences. First, Goodyear’s liability was between $1.2 billion and $1.6 billion. GM’s is between $60 billion and $70 billion. That’s an awfully big fund to try to split out.
Second, any deal that touches retirees this year can only take a cut out of benefits for future retirees, says Lehman Bros. analyst Brian Johnson. When GM got a $1 billion cash health care concession in 2006 from the UAW, it was challenged in court by existing retirees. The courts upheld the union’s concession, but froze retiree benefits at the newly-cut level until 2011. A new deal for those retirees requires court approval.
GM can cut its $5 billion-plus annual health care bill, about two-thirds of which is for retirees. The company can certainly negotiate cuts from its active workers. And it can get concessions or a Goodyear-like deal for future retirees. Since GM still has plenty of workers over 50 who are within striking distance of retirement, the company can make headway on future costs.
The bottom line is that GM can cut its $1,600 per vehicle benefits penalty versus Toyota, Honda and Nissan, but it will have a big handicap for years to come. The good enws is that for now, GM has cash to deal with it. GM has $20 billion in cash and another $14 billion in a trust just for health care costs. But the company will have to slowly manage its health care csots down.
Here’s that tough issue with all of this. Plenty of people have said to me in recent years that the UAW needs to wake up and cut Detroit’s health care bill. That’s a dispassionate and pragmatic way to look at it.
But it avoids the real thorny issue. If GM and other companies don’t pay the medical bills and the government doesn’t do anything, then who takes care of these people? The answer is, all of us. I have more than a few friends who have been forced to take a big hand, either financially or personally, in the care of elderly parents and relatives. It’s not easy, and it’s not cheap.