updated 9/20/2007 5:15:38 PM ET 2007-09-20T21:15:38

Negotiators for General Motors Corp. and the United Auto Workers, trying to craft a new contract, are still discussing the automaker’s proposal to pay the union to form a trust and take over the company’s huge retiree health care obligation, according to two people who have been briefed on the talks.

The people, who spoke on condition of anonymity because the talks are private, said noneconomic issues, which include grievance procedures, absenteeism and other items, had been settled.

The discussions about the trust took place even though UAW President Ron Gettelfinger on Tuesday rejected a GM offer on the trust, called a Voluntary Employees Beneficiary Association, or VEBA, according to one of the people briefed on the talks.

“I can tell you it’s being worked on,” the person said Thursday.

GM, which has been picked by the union as the lead company and potential strike target in this year’s bargaining, badly wants the UAW to agree to the trust. Whatever agreement is reached with GM likely would be used as a pattern for the other two Detroit automakers, Ford Motor Co. and Chrysler LLC.

Both people who had been briefed on the talks said that all economic issues including pay, work rules, job security promises and health care contributions, are contingent on whether a VEBA is agreed to, so the negotiations have been slowed.

The UAW is seeking to trade taking on the trust for pledges from GM that it will build new vehicles in U.S. factories, the people said.

Deutsche Bank analyst Rod Lache said in a note to investors Thursday that the union has agreed to the concept of a VEBA, but so far doesn’t like the company’s terms.

“The UAW knows that GM cannot sign a contract that excludes a VEBA deal at this point, and that they cannot accept the consequences of an uncompetitive cost structure either,” Lache wrote. “Without a VEBA deal, GM has threatened to begin a much more aggressive downsizing of its U.S. manufacturing base.”

Lache wrote that GM knows it is risking a strike.

“It is our belief that the most likely outcome is that GM and the UAW will reach a compromise and pursue a VEBA solution after a few days of drama,” he wrote.

Since the company and union are billions of dollars apart on how much GM would pay into the trust, Gettelfinger wanted to talk about other issues, one of the people said.

Now under discussion is a second offer from GM that doesn’t include the trust but has larger cost cuts, including up to a $5 drop in hourly wages, increased health care contributions, fewer guarantees of new work at U.S. factories, reduced vacation time and other items.

GM, as well as Ford and Chrysler, are trying to cut what they say is about a $25 per hour labor cost gap with their Japanese competitors. Industry analysts say the costs must be reduced for the U.S. companies to survive.

GM has about $51 billion in unfunded retiree health care liabilities, and analysts have said it wants to pay the union about 65 percent of the cost to form the trust. The union has hired an outside consultant to study GM’s proposal, the people said.

GM spokesman Tom Wickham and UAW spokesman Roger Kerson declined to comment on the talks Thursday.

The union’s contract with GM has been extended hour by hour since Friday. With both sides far apart on economic issues, the talks likely will take several more days to complete, one of the people briefed on the talks said.

If the VEBA goes through with all three automakers, the UAW would become one of the nation’s largest consumers of health care. At all three companies, the UAW would be responsible for health benefits for roughly 540,000 retirees and spouses.

GM stock fell 51 cents, or 1.6 percent, to close at $34.47.

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