GM Health Plan Transfer to Union Could Invite Corruption

gm:uaw logosThe strike lasted two days.  The effects, for better or worse, will last decades.  On Wednesday, September 26, the United Auto Workers (UAW) and General Motors (GM) reached a contract agreement effectively ending a walkout by nearly 75,000 hourly employees of the Big Three automaker.  Among the deal’s key features is a proposed shift of more than $35 billion from GM’s estimated $51 billion in unfunded retiree health care liabilities into a UAW-managed trust fund designed to appreciate in value.  Given the extensive occurrence of benefit fraud in many unions, if not necessarily the UAW, the transfer, to be funded by cash and stock, is raising concerns over the possibility of corruption and insolvency. 


The new fund would be a version of a financial instrument around a long time, and just now getting the attention it deserves.  It’s called a Voluntary Employee Beneficiary Association, or VEBA.  Established by Congress in 1928, a VEBA operates much like a pension fund.  According to the nonprofit group monitoring service Guidestar, there are currently around 2,700 employer- or employee-run VEBAs in force across a wide range of industries in this country.  Subject to Section 501(c)(9) of the IRS tax code, association holdings and earnings are tax-exempt, and contributions are tax-deductible.  Depending on how they are set up, VEBAs may or may not come under the jurisdiction of the Employee Retirement Income Security Act (ERISA).  The proposed United Auto Workers fund would be monitored by the Securities and Exchange Commission and a federal judge.  UAW members are now deciding on whether to ratify the amendment.  The vote, set for completion by October 10, is expected to be in favor of approval.          


The agreement enables General Motors to shed its obligations to cover health costs of current and future retirees.  GM would pay the union around 70 cents on the dollar.  Union officials expect the health plan to be fully self-funding for at least 80 years.  The automaker would contribute an initial $30 billion, to be followed by another $5.4 billion over the next several years.  In addition, GM would “backstop” the new trust fund with up to 20 annual payments of $165 million each in the event the fund is undercapitalized.  That would seem an expensive proposition.  But as GM pays the health care costs of some 340,000 current retirees and spouses, management is thinking long term, especially as the contract contains other favorable features.  Most importantly, the pact would enable GM to buy out expensive workers and replace them with cheaper ones, especially in non-production jobs.  “This agreement helps us close the fundamental competitive gaps that exist in our business,” said GM Chairman G. Richard Wagoner, Jr.  “The projected competitive improvements in this agreement will allow us to maintain a strong manufacturing presence in the United States along with significant future investments.” 


But the union also makes out well.  General Motors would have to keep open and maintain production levels at 16 of 18 unionized U.S. assembly plants through the life of the contract.  GM also would have to upgrade retirement benefits; observe a moratorium on outsourcing for certain jobs; pay a pair of 3 percent lump-sum payments plus a 4 percent payment in lieu of hourly wage increases; provide a $3,000 signing bonus for each new worker; convert 3,000 temporary workers to full-time status with benefits; and maintain co-payment status on worker medical prescriptions.  “We’re happy with this stuff,” said UAW President Ron Gettelfinger. 


The strike, though brief, was the culmination of a long-brewing showdown.  GM had seen labor costs escalate to the point where its continued presence in America was in jeopardy.  With per-worker wage-and-benefit costs in the neighborhood of $70-$75 an hour – the figure is roughly $50 an hour at Japanese rival Toyota – GM might have had to shift most, if not all, operations to foreign countries, including Mexico and China.  The Big Three automakers in 2006 lost a combined $15 billion.  GM in 2005 and 2006, respectively, lost $10.6 billion and $2 billion.  The number of union jobs has dropped accordingly.  The current total of 73,500 UAW hourly employees at GM represents a 70 percent drop from the 1994 figure of 246,000.  Active UAW membership in all industries in the U.S., Canada and Puerto Rico, according to the union, is only 640,000, down from the 1.2 million-1.5 million range during the 1960s and 70s.  Rising benefit costs have played no small part in this.  The $51 billion in unfunded retiree health care liabilities is well over double the company’s current $21 billion market capitalization.   


A far longer UAW strike back in 1970 laid much of the groundwork for the current crisis.  Some 400,000 GM workers, about 0.5 percent of the nation’s entire non-farm labor force, walked off their jobs that September.  Union leadership and members were emotionally charged, with their esteemed president, Walter Reuther, having died in a plane crash that spring.  From the UAW’s standpoint, it was payback time.  Three years earlier, Reuther had set aside cost-of-living adjustments in contract talks.  The strike would last 67 days, producing a clear union victory.  Not only did the new contract restore the cost-of-living adjustments, it enabled employees to retire with full benefits after just 30 years of service (“30 and out”) and forced the company to contribute far more to an already generous health plan established 20 years earlier.   


The current settlement may be less of a union victory, but its creation of a union-managed VEBA has some observers wondering if retirees will make out as well as the union leadership.  A group of dissenting UAW members believes the new pact is inadequately funded.  “They’d have to get Warren Buffett to manage this when it’s underfunded by 30 percent to beat health care inflation,” said Gregg Shotwell, a Delphi auto parts warehouse worker and member of UAW Local 2151, based in Coopersville, Mich. (located between Grand Rapids and Muskegon).  UAW workers at Caterpillar Inc. can attest first-hand to the potential downside.  Their VEBA, created in 1998, was depleted by the start of 2005, a casualty of rising health costs and poor management decisions.  Caterpillar, its retirees and the Auto Workers union are now in mutual litigation.  GM and the union cannot be said to be immune to a similar outcome. 


Then there is the possibility of corruption.  Many, if not most of the major union corruption stories over the past decade have involved benefit fraud, often running into the millions of dollars.  Among prominent cases documented in Union Corruption Update are:  a ripoff by leaders and business associates of Puerto Rico’s International Longshoremen Association Local 1740 of $8 million in benefit funds; the mail fraud and money-laundering by certain managers of the Illinois Teachers Retirement System; the loss of hundreds of millions of dollars, much of it union pension funds, managed by the Portland, Ore.-based Capital Consultants Inc.; a scheme hatched by union bosses and New York Mafia families to steer funds to selected investment advisers; a suit by the U.S. Department of Labor (DOL) against the financial-services firm ULLICO for investing more than $10 million from two Laborers pension funds in a risky real estate project near Las Vegas; and a $4.9 million consent decree signed by trustees of a union-connected fund settling DOL charges that they breached their fiduciary duties under ERISA by investing in a Florida real estate partnership with close ties to then-Democratic National Committee Chairman Terry McAuliffe.    


The new United Auto Workers-managed health care trust fund necessarily will operate as a tight network of labor officials, financial experts and health-care providers susceptible to the pull of favoritism at the expense of the best interests of retirees.  The trust fund would be controlled by a board answerable to the UAW.  Forbes automotive industry columnist Jerry Flint pulled no punches in the magazine’s October 15 issue: 


There will be billions in medical contracts to be given out.  The folks making the decisions will be low-paid union folks.  The folks wanting the contracts will be tempted to do what they can to get them.  It doesn’t take a lot of imagination to see the risk of corruption on a grand scale.     


Under the agreement, the UAW would build its own staff of auditors, financial experts and advisers to hire investment managers, and would hire a health-care consulting firm to analyze, negotiate and arrange for insurers to provide benefits to union retirees.  The union and its consultants would establish benefit and premium levels.       

In the wake of the GM-UAW settlement, Ford and Chrysler, with a combined roughly $40 billion in unfunded health care obligations, may go the VEBA route as well.  Chrysler, having been sold this year by Daimler AG to Cerberus Capital Management, is especially under competitive pressure.  The union knows that a prolonged strike against any of the Big Three could be mutually destructive to company and union alike; that’s why it took GM’s offer. Back in 1970, General Motors accounted for 50 percent of all U.S. motor vehicle sales; now that total is down to 24 percent.  Imports as a share of total U.S. sales have risen during this time from 15 percent to 49 percent.  Benefit costs may have had something to do with that.  Health-care obligations alone added an estimated $1,900 to the sticker price of every GM vehicle sold last year in the U.S. Transferring more than $35 billion in liabilities to a union trust fund was a painful, but necessary move.  Now it’s the job of the union to make sure that the people it represents receive what is theirs.  A lot of people will be watching, most of all, current and future retirees.  (Wall Street Journal, 9/27/07; Washington Post, 9/27/07, 9/29/07; Washington Times, 9/29/07; Forbes, 10/15/07; other sources).