UAW Strikes GM

Yesterday morning, 73,000 UAW GM employees walked off their jobs to put pressure on the company to resolve issues concerning job security, wages, layoffs, and how much production goes overseas. Of particular interest is the initial funding of the Voluntary Employee Beneficiary Association (VEBA), which is the trust fund for retiree health care to be administered by the Union.

In today’s economy and job market, I can totally understand the concern over job security by the Union membership. Layoffs and the closing of plants are life-changing events that some people cannot recover from. And wages are always a contentious issue – there is a standard of living that many workers have gotten used to, and a reduction in those levels in an age of uncertainty is unsettling at best.

From an earlier post:

The whole idea behind a Union is to first and foremost protect the worker from abuses from the company they work for. Fair wages and other benefits are also part of the contracts as well as a certain amount of job security if the company runs into problems. A Union is not about telling a company how to run its business!! If anything, the contract that the Union and company signs is to protect the worker from mistakes the company’s management may make, which should help the company plan better.

Where the Union has been stung before is two-fold: The company asks for concessions due to the company losing money for the year, and closing the plants due to non-profitability. The company then turns around and gives executives multi-million dollar bonuses. The lack of credibility on the company’s part is obvious.

This now puts pressure on GM’s negotiators to come up with a workable solution that satisfies the Unions but still provides a profitable scenario for the company. Not an easy task, especially with the volatility of the automotive sector with changing consumer tastes and foreign automakers increasing their market share while Detroit struggles.

Part of the solution (from the automaker’s viewpoint) is VEBA. Excerpts from Newsweek on include:

The costs of providing health-care insurance have risen 78 percent this decade, according to a study by the Kaiser Family Foundation and Hewitt Associates. And that has caused many companies to drop coverage for retirees while others feverishly cut benefits. Last year three quarters of big American companies increased premiums for retirees under 65, and 58 percent raised rates on Medicare-eligible pensioners, according to the study.

Nowhere is the pain more acute than in Detroit, where General Motors, Ford and Chrysler are confronting a lifetime retiree medical tab of $100 billion. Providing medical insurance for 540,344 retirees and 180,681 workers adds about $1,500 to the cost of every car Detroit builds—which goes a long way toward explaining why America’s automakers lost a combined $15 billion last year. So the car companies are taking a cue from Goodyear, negotiating with the United Auto Workers to rid themselves of their retiree medical obligations by setting up a union-controlled trust known as a voluntary employees’ beneficiary association, or VEBA. (Among the benefits to employees: if an employer goes bankrupt, the retirees’ medical plan is protected from hungry creditors.)

In contract talks that have stretched well beyond a Sept. 14 deadline, GM and the UAW are haggling over how to create such a trust. The companies want to kick in about $70 billion to fund the trust, analysts say. That would wipe retiree health-care expenses off their books, which would immediately improve their credit ratings, cut costs and free up cash for other uses.

The union, however, wants more money in the fund—closer to the companies’ entire $100 billion obligation. The UAW may have good reason for wanting more. A retiree health-care fund set up by Caterpillar in 1998 went broke in 2004 when it couldn’t keep up with runaway medical bills.

It is this last paragraph that concerns me. Medical costs continue to escalate, possibly more than what the fund is able to keep up with. If the fund gets into trouble and needs an influx of cash, where is that going to come from? And the costs for administering the fund will also need to come from somewhere, and that is also a drain on the fund.

Is VEBA really a long-term solution for health care? From the standpoint of GM, it is. Consider this statement:

GM wants the trust, called a Voluntary Employees Beneficiary Association, or VEBA, so it can move much of its $51 billion in unfunded retiree health care liabilities off the books, potentially raising the stock price and credit ratings. It’s all part of the company’s quest to cut or eliminate about a $25-per-hour labor cost disparity with its Japanese competitors.

Yes, I have concerns about a Union-managed retirement health-care fund. A statement from the same article by a Union retiree:

…says unions have no business taking on the risk of doling out medical benefits to retirees.

While the auto companies need to be profitable to stay in business, it cannot do so without the Union’s cooperation. And the Union membership cannot live without the auto companies staying in business. A catch-22 if there ever was one. The problem is for the company and Union to come to an agreement that benefits both for the long-term, not a quick-fix, greed-ridden short-sighted agreement. And what that will be remains to be seen, not in the short-term, but with the clarity of 20/20 hindsight.