Big Three's magic pill: Union-run fund may cure health care headache
Friday, July 06, 2007
2007 UAW CONTRACT TALKS FOURTH IN AN OCCASIONAL SERIES
Big Three's magic pill: Union-run fund may cure health care headache
Bryce G. Hoffman / The Detroit News
-- This Rust Belt town of idled tire factories has long depended on Detroit's automobile industry for its survival. Now, the survival of Detroit's automakers may depend on a landmark labor agreement reached here.
In December, Akron's Goodyear Tire and Rubber Co. and the United Steelworkers signed a contract that transferred responsibility for retiree health care from the company to the union. Goodyear paid $1 billion up front, but it no longer has to carry those costs on its balance sheet.
Detroit automakers, desperate to rein in soaring health care expenses that undercut its ability to compete with foreign rivals, see a Goodyear-style deal as a potential game changer. The United Auto Workers, which proposed a similar arrangement during talks with General Motors Corp. in 2005, is studying the possibility.
When national contract negotiations begin later this month, a Goodyear-style health plan is expected to be a central issue at the bargaining table.
With a deal like this, the automakers would make a massive one-time cash payment to a union-managed fund, freeing the companies from all future responsibility for UAW retiree health care.
Analysts say such a deal would dramatically narrow the competitive gap dragging down Detroit automakers and give the UAW enough starting capital to guarantee retiree health benefits well into the future, assuming the funds are managed wisely.
The CEOs of GM and Ford Motor Co. have publicly expressed interest in such a deal, and sources familiar with the situation say they, along with DaimlerChrysler AG's Chrysler Group, see it as a way to bolster their tarnished credit ratings, improve cash flow and ultimately shore up earnings.
For the UAW, the agreement could preserve health care coverage at current levels for years to come and safeguard the benefits in case one or more of the automakers goes bankrupt in the next few years.
"There's probably no one single element that could have as big an impact as this one," one high-ranking company official told The Detroit News. "But this is not a slam-dunk by any means."
The Goodyear model
GM, along with Ford and Chrysler, will spend more than $10 billion on health care this year -- more than they will spend on steel, by some estimates.A study by the Troy-based Harbour-Felax Group found that health care costs add as much as $1,400 to the price of vehicles produced by Detroit automakers compared to those made by their Japanese rivals.
As U.S. automakers have downsized in the face of foreign competition, their retiree ranks have swelled. Of this year's $10 billion health care bill, $6.4 billion will go to retirees and their dependents.
While the annual costs are hard enough to shoulder, accounting rules compound the problem. They require the automakers to include the projected long-term cost of those benefits on their balance sheets. That is a big part of why credit ratings for GM and Ford are so low.
"The operations in North America can't sustain those types of expenditures anymore," said analyst Bradley Rubin of BNP Paribas. "It's just not feasible. They have to find a way to get rid of that if they're ever going to be profitable again."
Goodyear faced much the same dilemma.
"When I started, there were 14,000 workers out there," said Howard Kropff, benefits officer at USW Local 2 in Akron, as he gestured out his window at the quiet Goodyear factories that once produced many of the nation's tires. "That was 40 years ago."
Now, fewer than 500 workers labor there. But Kropff proudly notes that the other 13,500 all made it to retirement.
In October, the Steelworkers went on strike to protect the benefits promised to those retirees in better times. Though Goodyear had capped its contribution as part of a previous contract, the company insisted it could no longer afford to pay for retiree health care. The union said it already had given up enough three years earlier, citing the rising premiums retired workers were already being forced to pay.
As the talks dragged on without resolution, Goodyear proposed a novel solution. It would establish a voluntary employee beneficiary association, or VEBA, to pay for current and future retiree health care -- and transfer responsibility for those benefits from the company to the union.
The deal, which is awaiting final court approval, works like this: Goodyear will put $1 billion into a union-run trust fund to cover the cost of all current and future retiree health benefits.
That amount will be supplemented by contributions from active workers, who agreed to deposit a $1-an-hour cost-of-living raise into the retiree fund. The fund will be managed by investment professionals, but it will be up to the union to decide whether to continue offering the existing benefit plan or to modify it.
Goodyear will no longer have any responsibility for health benefits for union retirees. Prior to the deal, the cost of those benefits was set at $1.2 billion for accounting purposes, and Goodyear was able to eliminate that liability for 83 cents on the dollar.
According to the company, the deal will reduce its annual retiree expenses by an estimated $110 million and improve cash flow by $145 million annually.
As for the Steelworkers, the deal protects retiree health benefits from the threat of a Goodyear bankruptcy. Under the old system, those benefits were not guaranteed. If Goodyear had filed for Chapter 11 bankruptcy, retirees would have had to line up with all of the company's other unsecured creditors. If the union fund reaps strong investment returns, the union also may be able to eliminate some or all of the premiums retirees now pay.
"The money is there, and that's a big thing," Kropff said. "I'd rather have the money in our bank, with us managing the plans."
Active workers will still receive their health insurance through the company until they retire, when they will be covered by the union-run plan.
Goodyear shares, along with the company's credit rating, soared on news of the deal.
Help for Detroit
Many analysts believe a similar agreement could go a long way toward addressing Detroit's financial woes.
Himanshu Patel of JPMorgan believes GM and Ford could convince the UAW to take over retiree health care for 50 to 70 cents on the dollar.
At 60 cents on the dollar, Patel says Ford would see the most immediate relief, with earnings improving by 17 cents per share in 2008 and cash flow increasing by $600 million. Earnings would further improve by 25 cents per share in 2010, with Ford's cash flow up by nearly $1 billion.
GM's cash flow would also improve by $600 million in 2008, according to Patel's model, but the company would see little immediate earnings improvement. GM would generate $1.6 billion more in cash in 2010, with earnings improving by 73 cents per share.
Assuming the same 60 percent funding level, Patel estimates it would cost GM $29 billion to fund its portion of a Goodyear-style health care trust. He puts Ford's cost at $12.5 billion.
While that might seem like a steep price given the financial troubles at GM and Ford, Patel and other analysts say neither automaker should have too much difficulty raising the cash.
Both companies already have set aside significant sums to pay for retiree health care; the rest can be raised through asset sales and existing financing.
Wall Streeters like Patel have not analyzed how such a deal would work for Chrysler because it will no longer be a publicly traded company once its sale to private equity firm Cerberus Capital Management LP is finalized.
Patel notes that the UAW has hired its own financial advisers to advise it on a Goodyear-style health care deal.
"We think the UAW leadership will see the benefits of becoming an asset manager," he said.
UAW mum on health plan
Top UAW officials would not discuss the health care issue, but many members and retirees are already worried about the future of their health care benefits.
"It's caused me a lot of stress, and it's caused a lot of other people a lot of stress," said Bob Bowen, a Ford retiree and former president of UAW Local 849 in Ypsilanti. "You can see it in their eyes."
Bowen is the man many former Ypsilanti Ford workers go to with their questions and concerns. While he is worried that retirees could lose everything if Ford is forced into bankruptcy court, he is not sure a union-run trust like the one at Goodyear is the answer.
"At one time, I thought it would be ideal," Bowen said. "Now, I'm not certain they've got the expertise to handle that. We don't have the experience."
Bowen would rather see a national health care solution, and he believes the UAW's top leaders are missing an opportunity to make the union relevant again by leading the campaign to establish universal coverage.
Some observers say adopting a Goodyear-type plan could give the UAW far more clout in the national health care debate.
The UAW would become one of the largest health care providers in the nation. It would also become the manager of one of the country's largest private investment funds.
Using Patel's numbers, that fund would have a starting balance of nearly $42 billion -- higher if Chrysler also participated.
If UAW manages its own retiree health care, some say it could become a more attractive partner to other companies as well.
While the UAW has talked tough about maintaining the status quo, it has also shown some willingness to compromise on retiree health benefits. In 2005, workers at GM and Ford approved changes to their contracts that required retired workers to pick up a small part of their own health care tabs. Part of that agreement involved setting up a union-run VEBA, albeit on a much more modest scale.
That move saved the companies millions of dollars, but some analysts say it could also block a Goodyear-type deal until 2011 because the court settlements that finalized those deals prohibit either company from making further changes to retiree health benefits before then.
The high-ranking company official with knowledge of the companies' thinking says they will argue that they are not changing retiree benefits, but protecting them, since a Goodyear-type deal would preserve retiree benefits in the event of a bankruptcy.
That source said GM and Ford could fund their retiree health care obligations for something closer to 50 cents on the dollar.
"The issue is going to come down to what the funding level is," the person said, acknowledging that neither Ford nor GM are in as good a position to bargain as Goodyear was because they have not capped retiree health care liabilities. "There's no question that the hurdle is much, much higher."
To clear it, the automakers would be willing to make their own concessions to the UAW. That could include agreements to spare plants already marked for closure or promises of new investments.
Whether that is enough will likely be the subject of many late-night bargaining sessions come September, when current UAW contracts expire. Until then, both sides are keeping a close eye on what is happening at Goodyear.
You can reach Bryce Hoffman at (313) 222-2443 or bhoffman@detnews.com.
© Copyright 2007 The Detroit News. All rights reserved.
2007 UAW CONTRACT TALKS FOURTH IN AN OCCASIONAL SERIES
Big Three's magic pill: Union-run fund may cure health care headache
Bryce G. Hoffman / The Detroit News
-- This Rust Belt town of idled tire factories has long depended on Detroit's automobile industry for its survival. Now, the survival of Detroit's automakers may depend on a landmark labor agreement reached here.
In December, Akron's Goodyear Tire and Rubber Co. and the United Steelworkers signed a contract that transferred responsibility for retiree health care from the company to the union. Goodyear paid $1 billion up front, but it no longer has to carry those costs on its balance sheet.
Detroit automakers, desperate to rein in soaring health care expenses that undercut its ability to compete with foreign rivals, see a Goodyear-style deal as a potential game changer. The United Auto Workers, which proposed a similar arrangement during talks with General Motors Corp. in 2005, is studying the possibility.
When national contract negotiations begin later this month, a Goodyear-style health plan is expected to be a central issue at the bargaining table.
With a deal like this, the automakers would make a massive one-time cash payment to a union-managed fund, freeing the companies from all future responsibility for UAW retiree health care.
Analysts say such a deal would dramatically narrow the competitive gap dragging down Detroit automakers and give the UAW enough starting capital to guarantee retiree health benefits well into the future, assuming the funds are managed wisely.
The CEOs of GM and Ford Motor Co. have publicly expressed interest in such a deal, and sources familiar with the situation say they, along with DaimlerChrysler AG's Chrysler Group, see it as a way to bolster their tarnished credit ratings, improve cash flow and ultimately shore up earnings.
For the UAW, the agreement could preserve health care coverage at current levels for years to come and safeguard the benefits in case one or more of the automakers goes bankrupt in the next few years.
"There's probably no one single element that could have as big an impact as this one," one high-ranking company official told The Detroit News. "But this is not a slam-dunk by any means."
The Goodyear model
GM, along with Ford and Chrysler, will spend more than $10 billion on health care this year -- more than they will spend on steel, by some estimates.A study by the Troy-based Harbour-Felax Group found that health care costs add as much as $1,400 to the price of vehicles produced by Detroit automakers compared to those made by their Japanese rivals.
As U.S. automakers have downsized in the face of foreign competition, their retiree ranks have swelled. Of this year's $10 billion health care bill, $6.4 billion will go to retirees and their dependents.
While the annual costs are hard enough to shoulder, accounting rules compound the problem. They require the automakers to include the projected long-term cost of those benefits on their balance sheets. That is a big part of why credit ratings for GM and Ford are so low.
"The operations in North America can't sustain those types of expenditures anymore," said analyst Bradley Rubin of BNP Paribas. "It's just not feasible. They have to find a way to get rid of that if they're ever going to be profitable again."
Goodyear faced much the same dilemma.
"When I started, there were 14,000 workers out there," said Howard Kropff, benefits officer at USW Local 2 in Akron, as he gestured out his window at the quiet Goodyear factories that once produced many of the nation's tires. "That was 40 years ago."
Now, fewer than 500 workers labor there. But Kropff proudly notes that the other 13,500 all made it to retirement.
In October, the Steelworkers went on strike to protect the benefits promised to those retirees in better times. Though Goodyear had capped its contribution as part of a previous contract, the company insisted it could no longer afford to pay for retiree health care. The union said it already had given up enough three years earlier, citing the rising premiums retired workers were already being forced to pay.
As the talks dragged on without resolution, Goodyear proposed a novel solution. It would establish a voluntary employee beneficiary association, or VEBA, to pay for current and future retiree health care -- and transfer responsibility for those benefits from the company to the union.
The deal, which is awaiting final court approval, works like this: Goodyear will put $1 billion into a union-run trust fund to cover the cost of all current and future retiree health benefits.
That amount will be supplemented by contributions from active workers, who agreed to deposit a $1-an-hour cost-of-living raise into the retiree fund. The fund will be managed by investment professionals, but it will be up to the union to decide whether to continue offering the existing benefit plan or to modify it.
Goodyear will no longer have any responsibility for health benefits for union retirees. Prior to the deal, the cost of those benefits was set at $1.2 billion for accounting purposes, and Goodyear was able to eliminate that liability for 83 cents on the dollar.
According to the company, the deal will reduce its annual retiree expenses by an estimated $110 million and improve cash flow by $145 million annually.
As for the Steelworkers, the deal protects retiree health benefits from the threat of a Goodyear bankruptcy. Under the old system, those benefits were not guaranteed. If Goodyear had filed for Chapter 11 bankruptcy, retirees would have had to line up with all of the company's other unsecured creditors. If the union fund reaps strong investment returns, the union also may be able to eliminate some or all of the premiums retirees now pay.
"The money is there, and that's a big thing," Kropff said. "I'd rather have the money in our bank, with us managing the plans."
Active workers will still receive their health insurance through the company until they retire, when they will be covered by the union-run plan.
Goodyear shares, along with the company's credit rating, soared on news of the deal.
Help for Detroit
Many analysts believe a similar agreement could go a long way toward addressing Detroit's financial woes.
Himanshu Patel of JPMorgan believes GM and Ford could convince the UAW to take over retiree health care for 50 to 70 cents on the dollar.
At 60 cents on the dollar, Patel says Ford would see the most immediate relief, with earnings improving by 17 cents per share in 2008 and cash flow increasing by $600 million. Earnings would further improve by 25 cents per share in 2010, with Ford's cash flow up by nearly $1 billion.
GM's cash flow would also improve by $600 million in 2008, according to Patel's model, but the company would see little immediate earnings improvement. GM would generate $1.6 billion more in cash in 2010, with earnings improving by 73 cents per share.
Assuming the same 60 percent funding level, Patel estimates it would cost GM $29 billion to fund its portion of a Goodyear-style health care trust. He puts Ford's cost at $12.5 billion.
While that might seem like a steep price given the financial troubles at GM and Ford, Patel and other analysts say neither automaker should have too much difficulty raising the cash.
Both companies already have set aside significant sums to pay for retiree health care; the rest can be raised through asset sales and existing financing.
Wall Streeters like Patel have not analyzed how such a deal would work for Chrysler because it will no longer be a publicly traded company once its sale to private equity firm Cerberus Capital Management LP is finalized.
Patel notes that the UAW has hired its own financial advisers to advise it on a Goodyear-style health care deal.
"We think the UAW leadership will see the benefits of becoming an asset manager," he said.
UAW mum on health plan
Top UAW officials would not discuss the health care issue, but many members and retirees are already worried about the future of their health care benefits.
"It's caused me a lot of stress, and it's caused a lot of other people a lot of stress," said Bob Bowen, a Ford retiree and former president of UAW Local 849 in Ypsilanti. "You can see it in their eyes."
Bowen is the man many former Ypsilanti Ford workers go to with their questions and concerns. While he is worried that retirees could lose everything if Ford is forced into bankruptcy court, he is not sure a union-run trust like the one at Goodyear is the answer.
"At one time, I thought it would be ideal," Bowen said. "Now, I'm not certain they've got the expertise to handle that. We don't have the experience."
Bowen would rather see a national health care solution, and he believes the UAW's top leaders are missing an opportunity to make the union relevant again by leading the campaign to establish universal coverage.
Some observers say adopting a Goodyear-type plan could give the UAW far more clout in the national health care debate.
The UAW would become one of the largest health care providers in the nation. It would also become the manager of one of the country's largest private investment funds.
Using Patel's numbers, that fund would have a starting balance of nearly $42 billion -- higher if Chrysler also participated.
If UAW manages its own retiree health care, some say it could become a more attractive partner to other companies as well.
While the UAW has talked tough about maintaining the status quo, it has also shown some willingness to compromise on retiree health benefits. In 2005, workers at GM and Ford approved changes to their contracts that required retired workers to pick up a small part of their own health care tabs. Part of that agreement involved setting up a union-run VEBA, albeit on a much more modest scale.
That move saved the companies millions of dollars, but some analysts say it could also block a Goodyear-type deal until 2011 because the court settlements that finalized those deals prohibit either company from making further changes to retiree health benefits before then.
The high-ranking company official with knowledge of the companies' thinking says they will argue that they are not changing retiree benefits, but protecting them, since a Goodyear-type deal would preserve retiree benefits in the event of a bankruptcy.
That source said GM and Ford could fund their retiree health care obligations for something closer to 50 cents on the dollar.
"The issue is going to come down to what the funding level is," the person said, acknowledging that neither Ford nor GM are in as good a position to bargain as Goodyear was because they have not capped retiree health care liabilities. "There's no question that the hurdle is much, much higher."
To clear it, the automakers would be willing to make their own concessions to the UAW. That could include agreements to spare plants already marked for closure or promises of new investments.
Whether that is enough will likely be the subject of many late-night bargaining sessions come September, when current UAW contracts expire. Until then, both sides are keeping a close eye on what is happening at Goodyear.
You can reach Bryce Hoffman at (313) 222-2443 or bhoffman@detnews.com.
© Copyright 2007 The Detroit News. All rights reserved.
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