Wednesday, November 26, 2008

UAW faces deeper cuts to clinch auto rescue

UAW faces deeper cuts to clinch auto rescue
November 26, 2008

DETROIT (Reuters) -- The union contract hailed as the deal to save Detroit automakers a year ago is in danger of coming undone in the face of the industry's push to secure the federal bailout it now sees as its best bet to survive.

The centerpiece of the historic UAW contract, the creation of a trust to take over the estimated $80 billion retiree health care liability of the Detroit 3, seems certain to be re-examined as General Motors and its rivals seek government aid to survive a brutal downturn in car sales.

UAW President Ron Gettelfinger said the creation of that Voluntary Employee Beneficiary Association -- or VEBA -- trust would safeguard retiree health care for 80 years.

Wall Street analysts, meanwhile, hailed the deal as a game-changer for Detroit, one that could level the playing field with competitors led by Toyota Motor Corp.

But with GM running short of cash and pleading for a share of a $25 billion federal bailout, the UAW faces increasing pressure to accept concessions that would rewrite provisions for funding the VEBA even before it takes effect from 2010.

Those are likely to include a more limited payout for the VEBA health care trust, which could imply reduced benefits for future retirees. The union will also face pressure to abandon a "jobs bank" program that pays wages to laid-off workers.

"They have got to make some adjustments to the VEBA, because there is no way they can afford to make those payments," said Erich Merkle, a Crowe Horwath consultant.

A UAW spokesman was not available for comment.

With automakers seeking a rescue and sales at 25-year lows, analysts expect GM, Ford Motor Co. and Chrysler LLC to present revised restructuring plans designed to show executives, creditors and factory workers accepting new sacrifices.

Cutting or eliminating the "jobs bank" where idle workers may receive nearly full pay and benefits for up to two years, and deferring or reducing payments to the VEBA are two avenues of likely union concessions, analysts said.

"After the federal government, this is a most likely source of liquidity to help tide them over," Fitch Ratings managing director Mark Oline said of the VEBA.

Gettelfinger has said broad changes to the VEBA are not being considered, but analysts believe the union would be willing to make some compromises.


GM, Ford and Chrysler collectively have pledged about $48 billion to the VEBA fund through transfers of current trusts and future payments to cover a share of the liabilities.

"I don't think the UAW is going to be a challenge here," IHS Global Insight analyst Aaron Bragman said. "You will see them come back with even more concessions, because they realize the alternative is that they are all out of a job."

In July, the UAW allowed GM to defer $1.7 billion of payments for the VEBA for two years -- in exchange for a note paying 9 percent interest.

The fact the union and the automakers have had a federal court certify the VEBA agreement could make changes difficult, but not impossible. The deal would be "tricky to renegotiate, but that doesn't mean it is off-limits," Standard & Poor's credit analyst Gregg Lemos Stein said.

"In this environment, we don't think it would be an insurmountable challenge," he said.

S&P expects GM and Chrysler to run short of cash by early in 2009 without a market improvement it does not expect, or external support. Ford has until mid to late 2009.


While the jobs bank has been a lightning rod for controversy and seized as a symbol of Detroit's excess, the 2007 contract sharply curtailed the program. The Detroit-based companies are also not the only ones to pay idled workers.

Both Toyota Motor Corp. and Honda Motor Co. have retained idled U.S. workers during plant closures this year -- Toyota at its Texas truck plant and Honda in Alabama and Ohio.

"I think the jobs bank for sure has to go," Merkle said. "Even if it didn't cost them anything, there is a problem of political appearances, and it's very hard for anyone outside the auto industry to understand."

JP Morgan analyst Himanshu Patel expects "shared sacrifice" to be a major theme, whether part of an immediate bailout of the U.S. auto industry or a more comprehensive plan that takes shape under the Obama administration.

"Such multi-party concession deals take months, not weeks, to negotiate," Patel said in a note to clients.

Setting up GM to operate profitably in a much weaker U.S. market will require UAW concessions on the VEBA, jobs bank and a cut in wages and benefits for active workers, Patel said.

Gregg Shotwell, now a GM retiree and a persistent critic of the UAW leadership as a union member, said he expected the jobs bank to be eliminated and VEBA reduced. He believes UAW workers are resigned to the changes.

"We warned that the VEBA was not bankruptcy-proof and now it is looking shaky, and I'm one of these guys depending on the VEBA," Shotwell said.

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