GM Proposes Cap on Worker Health Costs, Pay Freeze, People Say

By John Lippert and Jeff Green, Bloomberg.com, Sept. 16, 2007

Sept. 16 (Bloomberg) -- General Motors Corp. offered to cap out-of-pocket health costs for United Auto Workers members to help gain approval for a union-run fund that would let GM shed $50 billion in retiree medical-care obligations, three people with knowledge of the matter said.

GM, the biggest U.S. automaker, also proposed a freeze in cost-of-living raises and base wages in negotiations on a new four-year UAW contract, said the people, who asked not to be identified because they haven't been authorized to speak publicly. The union hasn't ruled out the cost-of-living freeze, a GM demand that spurred a 67-day strike in 1970, two of the people said.

The proposals, which may change because talks are still in progress, are at the heart of GM's bid for union approval to get rid of retiree medical-care liabilities that cost the automaker as much as $3.3 billion in cash last year. GM, Ford Motor Co. and Chrysler LLC lost a combined $15 billion last year and are banking on the talks for cost cuts that would help them survive.

``An agreement like this would give the UAW four years in which the nuclear options are off the table,'' said Dan Luria, an analyst at Michigan Manufacturing Technology Institute, referring to workers' concerns that they might have to pay more for health-care coverage or lose it altogether.

A new contract must be ratified by a majority of the more than 73,000 UAW members at GM.

`Strike Target'

The UAW chose GM as the focus of negotiations, naming the company as its ``strike target'' Sept. 13. The union wants to reach an agreement with GM, then try to adapt the terms at Ford and Chrysler, which agreed to operate under indefinite contract extensions while the GM bargaining continued.

The contracts cover 180,681 active workers and 419,621 retirees and surviving spouses at GM, Ford and Chrysler.

GM and the UAW have agreed on the need for a so-called Voluntary Employee Beneficiary Association, or VEBA, to take retiree health-care obligations off company books, the people said. GM would contribute 55 percent to 60 percent of the value of its current liability to start the program, two of the people said. The talks may still unravel if the two sides can't agree on these and other terms, they said.

Katie McBride, a GM spokeswoman, declined to comment on the talks, which resumed today at the UAW-GM training center in Detroit. Negotiators adjourned late yesterday after meeting almost non-stop for two days. UAW spokesman Roger Kerson didn't return telephone messages left for comment.

Health-Care Costs

The old contract, which was set to expire at 11:59 p.m. Sept. 14, continues to be extended hour by hour, McBride said. Bargaining began July 23.

The U.S. automakers estimate they pay $25 to $30 more an hour to American factory workers than Toyota Motor Corp. and Honda Motor Co. do at their U.S. plants.

GM reported $64 billion in future retiree health-care obligations for union and non-union employees at the end of last year. The automaker doesn't break out the union portion. The UAW share is about $50 billion, people familiar with the breakdown said.

The VEBA proposed by GM would include a ``rainy-day'' fund for additional GM contributions if medical costs rise more quickly than expected, the people said. The VEBA would also include a ``windfall'' provision in which the UAW would return some of GM's initial contribution if health-cost inflation is less than projected, or if the U.S. government enacts a national health plan that lowers the fund's medical costs, the people said.

GM's offer of a cap on workers' health-care costs would cover active UAW members as well as retirees, the people said.

Approval Chances

GM proposed providing lump-sum bonuses for workers in return for the union's acceptance of a freeze in base wages, the people said.

Such provisions increase the chances of rank-and-file UAW approval because they restrict cash workers would receive in future rather than now, said Luria, who is based in Plymouth, Michigan.

Luria said the UAW may agree to a wage freeze in part because of concern that its GM contract may be too expensive for Ford, which lost $12.6 billion last year.

To contact the reporters on this story: John Lippert in Southfield, Michigan at jlippert@bloomberg.net ; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net