Intriguing solution proposed for automakers' spiraling legacy costs

7/13/2007

DETROIT - The domestic auto industry is on the rocks, contact talks are about to begin, and the spiraling "legacy" cost of retiree health care is making it harder for the Big Three to compete.

Suddenly, some think they see the outlines of a solution glimmering in Akron. Last December, Goodyear Tire and Rubber and the United Steel Workers Union signed a revolutionary contract.

It transfers responsibility for retiree health care from the company to the union, in return for a one-time payment of $1 billion from the company. Goodyear will still be responsible for health-care costs for those who are active employees.

Whether benefit levels stay the same for Goodyear retirees is an open question. There is one added benefit for the retirees, however: Under the old system, if Goodyear were to declare bankruptcy, the retirees might well lose their benefits.

With the obligations transferred to the union, that wouldn't happen.

Ideally, it might make sense for the nation to keep an eye on the Goodyear "experiment" for a couple years as a test case. Instead, there is pressure in the auto industry to follow that example and transfer retiree health costs - now.

Most think a similar proposal is going to be a central issue in contract talks between the United Autoworkers Union and Ford, General Motors, and Chrysler. The major questions are: How much will it cost, will it fly with the workers - and will it work?

What's being talked about is something like this: the automakers will contribute some portion - most likely 50 percent to 70 percent - of their current health-care pension obligations.

That money would be put into a fund that would be designed to be used only for the health-care obligations of retirees.

The union would take over control of the fund. It would be responsible for investing the fund, and for determining what benefit level retirees would get. The initial sums involved would be huge.

General Motors, say, would have to come up with $29 billion if it agreed to a payoff amounting to 60 percent of its pension obligations. Ford would pay $12.5 billion. Chrysler's precise contribution can't be determined until the deal to transfer the automaker to Cerberus Capital Management is complete.

Dean Smith, an expert on health-care finance with a lot of private sector experience, said he didn't think it would be hard for the automakers to come up that much cash. However, Mr. Smith, who is now a dean with the University of Michigan's school of public health, said he didn't think the unions would accept this - yet.

Part of the problem is that this would almost certainly lead to reduced benefits somewhere down the line.

Bradley Smith, an economist for a major European bank (BNP Paribas), was quoted as saying the future of the domestic auto industry rested on its ability to do something about runaway legacy costs.

The companies, he noted, "can't sustain those types of expenditures anymore. They have to find a way to get rid of that if they're ever going to be profitable again.'

That may well be true, since all the automakers have far more retirees than active employees. The proposal might also be good for the unions' long-term survival. After dwindling in membership for years, unions in charge of health-care obligations would become larger, more important, and have a lot more to do.

But not everybody is excited about letting the unions manage the funds.

Since the days of Walter Reuther, the United Auto Workers have been remarkably corruption-free. Other unions, however, have been linked to organized crime. The specter of a Dave Beck or Jimmy Hoffa in charge of billions of dollars of worker pension funds is not something to calm the faint of heart.

Even if everybody is above-board, the major auto companies, which are in business to make money, have been unable to find a way to make the health-care pension funds generate enough to be self-sustaining, despite their legions of accountants and economists.

How, some ask, could the unions do any better?

What nobody seems to be addressing - publicly at least - is that once the unions take over the health-care funds, benefits will have to be capped, if not reduced.

There is no way they can assume the current obligations for a payment of 60 cents on the dollar, and do anything else.

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Sobering Fact: Just before the terrorist attacks of Sept. 11, 2001, there were 4,008,000 people with jobs in Michigan.

Four years later, according to the U.S. Census Bureau, that figure had fallen to 3,796,000. All indications are that the number of jobs has fallen further since then. David Littmann, a libertarian economist now with the Mackinac Center, thought that was good news:

"It is healthy to see the number of employees going down," he said. "Productivity goes up, and frees up labor to work on other projects and expansions in other industries."

Nice theory. Except what expansions? What industries?