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General Motors Reaches Agreement With Union on Health-Care Costs

Posted on: Monday, 17 October 2005, 21:00 CDT

By Stacey Hirsh, The Baltimore Sun

Oct. 18--General Motors Corp. yesterday announced a tentative agreement with the United Auto Workers union to dramatically slash its health-care costs, a move that promises pain for hundreds of thousands of GM workers and retirees but was viewed as a necessary step to save the troubled automaker.

Neither the company nor the union gave particulars on just how workers and retirees would be affected, and even the president of UAW Local 239 in Baltimore was waiting yesterday to be briefed. But GM said in a statement that the deal is expected to cut its annual employee health-care costs by $3 billion before taxes and save it $1 billion a year in cash. Last year, the company spent $5.2 billion on health care.

The company also said the deal will cut its retiree health care liabilities by about $15 billion, or 25 percent.

GM announced the deal as it reported a $1.6 billion loss for its third quarter, compared with a profit of $315 million in the third quarter of 2004. The automaker said it is considering selling a controlling interest in its profitable financing subsidiary, General Motors Acceptance Corp., and restated its plans to close manufacturing plants and cut 25,000 jobs in the next several years.

"Over the past four months, we have done a lot of detailed work on this, and have at this point a reasonably clear line of sight on our overall manufacturing restructuring plan," GM Chairman and Chief Executive Officer Rick Wagoner said in a statement. "Our next steps will be to work this plan in detail with the affected unions."

The tentative agreement will have implications across the auto industry, putting pressure on Ford, Chrysler and the UAW to make similar cuts at the other of the Big Three automakers, said Bill Adams, a management-side labor consultant for the Fort Wright, Ky. consulting firm Adams, Nash, Haskell & Sheridan.

"If they were the most profitable organizations in the world, this gives the companies a license to cut costs," Adams said. "If the UAW made a concession for GM, try to convince me as Chrysler and Ford why you're not going to give me the same deal or better."

Analysts said the bankruptcy filing by Delphi Corp. earlier this month likely played a role in bringing GM management and labor to an agreement, by demonstrating how grim GM's future might be if the current situation persisted. Delphi was spun off from GM in 1999 and is still the automaker's biggest supplier.

GM has said it may owe its former workers who are now Delphi employees as much as $12 billion as part of an agreement with the UAW that makes the workers eligible for certain health care benefits. The company said it could not estimate its liabilities from the Delphi bankruptcy with any certainty, but said it is most likely they will be somewhere in the middle of the range between zero and $12 billion.

Fred Swanner, president of UAW Local 239, which represents former workers of the GM Baltimore van assembly plant that closed in May, said yesterday that he had not yet been briefed by union officials in Michigan about the specifics of the tentative health care agreement with GM and how it would affect workers.

GM and the UAW have been in discussions for months about reducing health care costs. GM, the world's largest health care provider, has been seeking concessions from the union. The union responded by saying it would not reopen its national labor contract but that it would work with the company to find a "mutually agreeable" way to cut health care costs.

On average, GM hourly workers and retirees now pay 7 percent of their health care costs and salaried employees pay 31 percent, according to the company.

"This was no doubt difficult for the UAW to do, but they're looking at something that would have been even more difficult, which is the possibility of the loss of jobs if GM does not become more competitive," said Harley Shaiken, a professor University of California-Berkeley who specializes in labor issues.

"What the industry is confronted with is change or die," agreed David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., adding that the Delphi bankruptcy filing proved that "death really is an option."

GM's U.S. market share has gone from 50 percent in the 1970s to about 25 percent today as it has lost footing to international competitors with lower production costs. Two key components of GM's cost disadvantage are health care and pension expenses. For every vehicle GM produced in 2004, the company spent $1,525 on health care. General Motors covers more than 750,000 hourly employees, retirees and their dependents.

Andrew Cierkowski, 27, worked at GM's Broening Highway plant from 1997 until it closed in May. He's currently in the company's job bank program, which allows workers from closed factories to collect GM pay and benefits if they go to school, volunteer full time or sit in a room with other local GM workers for 40 hours a week that would otherwise have been spent working the assembly line.

Cierkowski said he and others on GM's payroll currently don't contribute anything toward their health care costs. He doesn't have to pay deductibles or co-payments for doctors' visits, and his co-payments on prescriptions are minimal, he said.

"GM pays for all that," said Cierkowski, who worked in the body shop at the Baltimore plant.

So Cierkowski wasn't surprised to learn that GM and UAW were negotiating to lower health care costs.

"Previously, I never paid anything," he said, noting that his friends who don't work for GM "are paying an arm and a leg for itI'm not opposed to paying for some of the health care."

Shaiken of the University of California-Berkeley surmised that the impact of the tentative agreement would "almost assuredly" stretch beyond increased copays for workers and retirees.

"The big issue is what happens to retiree health care benefits, and I suspect there's some painful choices [the UAW] had to face there, but we won't know until we see the details," he said.

GM said it will contribute $1 billion a year in 2006, 2007 and 2011 to a new Defined Contribution Voluntary Employee Benefit Association, created to help diffuse the impact of reduced health care coverage on retirees.

Analysts said the deal -- which is still subject to ratification by UAW members -- could start resolving some of the company's problems. It can only help to make GM more competitive, however, if the company begins making cars that consumers want to buy, analysts said.

"Their problems are beyond this," said David Zoia, editorial director at wardsauto.com, an automotive information company in Southfield, Mich. "This doesn't fix everything in GM. They still have overcapacity issues, and there are still severe pension cost issues that they are under pressure on. They definitely have to keep rolling out new product and get things that are a little bit more exciting out there on the market."

Wall Street welcomed the news yesterday. GM's stock closed at $30.09, up $2.11 or 7.54 percent, on the New York Stock Exchange and were up by more than $3.50 at times during the session.

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Source: The Baltimore Sun, Maryland

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