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UAW's VEBA Board Autoworkers’ Health Care Benefits in Peril

November 10, 2008
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Related Topics: Retirement/Pensions, Benefit Design and Communication, Labor Relations, Latest News
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Caretakers of the United Auto Workers’ health care trust are concerned that the slumping fortunes of Detroit’s Big Three automakers could leave retirees without health care benefits.

“Obviously, we’re as worried as” the public is, says Teresa Ghilarducci, a member of the 11-person board overseeing the UAW-run health care trust and a professor of economic policy analysis at the New School for Social Research in New York.

She said that given the deteriorating financial state of the industry, the health care trust may not last as long as the 80 years UAW leaders first projected.

Ford and General Motors announced further heavy financial losses Friday, November 7. Ford revealed a pretax operating loss of $2.98 billion for the third quarter. GM reported $2.5 billion in third-quarter losses and said in a statement that its “estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.”

“Immediate federal funding is needed for the U.S. automotive industry to weather this downturn,” GM president Fritz Henderson said in a conference call with investors.

Chrysler, which is privately run by private equity firm Cerberus Capital Management, does not publicly disclose its finances. The company was in talks with GM regarding a possible merger, but GM said Friday that it would not pursue a merger with Chrysler in the short term.

A union-run health care trust known as a voluntary employee benefit association, or VEBA, was supposed to help the automakers escape bankruptcy by capping the amount they would pay for retiree health care expenses. For the retirees, the VEBA was described as insurance against losing retiree health care benefits should the automakers file for bankruptcy. The money would be available for retiree health care regardless of how the automakers fared.

But in July, GM deferred paying $1.7 billion into the VEBA, angering GM retirees.

“What we were promised in the last contract in 2007 in exchange for very deep concessions was that our health care would be guaranteed in the event of bankruptcy,” says Gregg Shotwell, 58, a former GM plant worker and union member who retired last month. “That was a lie. Because no money actually changed hands. Here we are today on the verge of bankruptcy and the VEBA is not funded. I’ve already been at the back of the line with [former GM subsidiary] Delphi. I don’t want to be at the back of the line in my retirement.”

The UAW is scheduled to take over responsibility for providing health benefits to more than 700,000 members and dependents January 1, 2010. Union president Ron Gettelfinger rallied UAW members to support the VEBA in 2007 by saying it would secure retiree health care benefits for the next 80 years. Ghilarducci says that given the current state of the industry, there is a “low probability” that the fund will last that long. Current retirees’ health care benefits were not in doubt, however.

“I’m convinced that current retirees won’t lose a penny,” she said. “If there are tradeoffs, we’ll trade the future generations for the current generation.”

The total value of the health care trust is to be about $60 billion, with GM providing around $33 billion, Ford roughly $15 billion and Chrysler about $9 billion. Each company will fund and manage the VEBA separately until 2010, after which the UAW will keep the funds for each company’s retirees separate.

Part of the VEBA is to be funded by the deferral of a 3 percent wage increase for current UAW workers. Layoffs of union workers, however, could reduce the amount paid into the VEBA, though the agreement with the UAW had some provisions in place to safeguard against the possibility of layoffs.

Meanwhile, the UAW-run VEBA has been seeded several million dollars to begin operations. The union is looking for a chief investment officer and a person to manage retiree health benefits.

The industry’s fortunes have fallen rapidly. In April 1990, GM’s stock traded above $90 per share. Today, GM shares are worth less than $5. The credit crisis, weak consumer demand and high fuel costs have propelled the industry to the brink of insolvency and Washington to seek a federal bailout.

“If we get the money [for the VEBA], we’ll be OK,” Ghilarducci says. “If the companies go bankrupt, then we’ll stand in line with all the other creditors.”

—Jeremy Smerd

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