GM spokeswoman Renee Rashid-Merem says that money is separate from the company's cash reserves under an agreement approved by the U.S. District Court in Detroit through a "friendly" lawsuit that was part of the process that created the trust. The money can't be used for anything other than retiree health care. "We can't access it," she says.
Both Ford Motor Co. and Chrysler LLC also have large pools of untapped cash reserved specifically to cover retiree health care under the terms of the automaker's contracts signed in the fall of 2007 that were supposed to remove the retiree health-care burden from company balance sheets. At same time, new workers eventually hired to replace GM, Ford and Chrysler's current employees will no longer be eligible for post-retirement health benefits. For the automakers, the costly transition is worth it because it eliminates one of the major uncertainties carmakers have faced over the years — the soaring cost of health care. GM's combined pension and retiree health care costs run $7 billion annually and have cost GM more than $103 billion over the last 15 years, according to GM chairman Richard Wagoner. Ford's health care expense for both active and retired employees now runs $2.2 billion and will drop significantly thanks to the solution provided by the trusts. Once the retiree health-care liabilities are removed from company balance sheets, the gap in labor costs between Detroit and its non-union competitors in the south should drop to $250 per vehicle or even less, according to one estimate by the Center for Automotive Research. (Read "Don't Call It Bankruptcy")
However, transition from the old to the new benefit system isn't cheap and is stretching the financial reserves of the domestic companies. By 2020, GM, which has the largest retired population, will have transferred some $23 billion to the new Voluntary Employee Benefit Association, or VEBA, created by the contract (that amount includes the $13.5 billion that GM has already injected into the trust, plus another $9.5 billion yet to be contributed) Ford owes $13.6 billion to its VEBA, and Chrysler, which doesn't make its finances public, owes between $6 billion and $9 billion to its new retiree-health-care trust.
The unusual nature of the trusts is likely to become a factor in round two ofthe Big-Three appeal for federal aid, and could potentially present a conundrum for President-elect Obama. When retiree health care was just a deal between the automakers and the UAW, it was their decision as to who would get retirement health-care benefits and who wouldn't. But now that taxpayers may be asked to finance the automakers' survival, the future funding of the trusts becomes a public issue. As one Detroit insider notes, "On the one hand [Obama] doesn't want to take health care away from auto workers, but how can he justify a special deal for UAW members when there are 46 million uninsured in the U.S.? One possible answer is to lower the age of Medicare eligibility for everyone.
From the union's perspective, the health care benefits always represented deferred wages, says Jerry Tucker, a former member of the United Auto Workers board. In addition, as GM, Ford and Chrysler have cut their blue-collar payrolls in half from 300,000 to 150,000 over the past three years, the health care benefits have become more important, he said. "More than two-thirds of workers taking early retirement aren't eligible for Medicare. A lot of them didn't even want to retire," he said. UAW President Ron Gettelfinger said in the fall of 2007 that the VEBA trusts would protect the health care of retirees and eligible dependents for the next 80 years. However, the promise always depended on the health of the company. The promise is now suspect, says Stephen Diamond, an associated professor of law at Santa Clara University in California, who has studied the auto industry VEBA. Last summer, the UAW allowed GM to defer a $1.7 billion payment to the trust. The company's next scheduled payment of $4 billion is due in December 2009.
A union spokesman declined to say whether the financing of the VEBA was being discussed as the UAW and the automakers explore the ramifications of the current crisis and the possibility of additional concessions. "We're at the table every day," noted one union official who asked not to be identified.
And what becomes of the trusts should Washington say no to a bailout? Assets already paid in the VEBA trust would probably be safe if GM filed for bankruptcy, says Diamond. But chances of getting the deferred $1.7 billion back in a bankruptcy court are virtually nil. It's also unlikely that the assets in the trust would last 80 years since bankrupt automakers would be unlikely to make all the future trust contributions. "My guess is the trust would last 20 years," says Diamond. "It's a very difficult situation" he adds. "Autoworkers were sold a pile of goods by the union leadership and GM executives. They never disclosed the risks of bankruptcy like they should have."
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