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Auto talks may solve potential health care crisis

Detroit's big three automakers are hoping that the new contract talks with the union can slash retiree health care cost. One proposal is for them to set up trust funds managed by the union to pay the health care bill. If succeed, the talks might even have nationwide implications.
Don Hartman, right, and his wife Ann enjoy some time at a UAW Local 1714 retirees picnic in Lordstown, Ohio Wednesday, July 11, 2007. Hartman worked for General Motors for over 40 years.
Don Hartman, right, and his wife Ann enjoy some time at a UAW Local 1714 retirees picnic in Lordstown, Ohio Wednesday, July 11, 2007. Hartman worked for General Motors for over 40 years.Mark Stahl / AP
/ Source: The Associated Press

No matter how much of the $96,000 hospital tab Don Hartman has to pay for quintuple bypass surgery, he’s still grateful for his health insurance from General Motors Corp.

Hartman, 79, a retired auto worker from Salem, Ohio, still hasn’t received all the bills from his February operation and he doesn’t know exactly what his portion will be.

But just who pays the health care tab for Hartman and thousands of others like him is likely to be the major issue as contract talks open between Detroit’s three automakers and the United Auto Workers union.

GM, Ford Motor Co. and Chrysler Group would like to get rid of what amounts to an estimated $90.5 billion unfunded liability for retiree health care, a problem that is just now coming to the forefront in the auto industry and one that has yet to be handled by many companies and even governments nationwide.

Not just the automakers
“It’s a national, perhaps international crisis,” said Tom Clay, director emeritus of state affairs for the Citizens Research Council of Michigan, a nonpartisan group in Lansing that has studied Michigan’s unfunded liabilities. “It’s just not getting the attention it should be getting quite yet.”

Nationwide, most government agencies just this year are being required to report the liability on their books. Credit Suisse, in a note to investors, estimated the total cost to state and local governments nationally at a whopping $1.5 trillion.

Most agencies have set aside no money to handle the expense, instead paying the bills from annual operating budgets.

“There’s very few states that do other than pay-as-you-go funding,” said Robin Prunty, director of the public finance department for Standard & Poor’s.

In Michigan, which has struggled to balance its budget for years due mainly to troubles in its auto industry, the obligation is roughly $21 billion with no cash set aside to pay for it. New York state projects its obligation is $47 billion over the next 27 to 30 years.

Michigan allocates about $1 billion a year to provide health care for retired state and public school employees, and New York pays about $1.1 billion per year for state retirees. As more workers retire, the payments will grow, eating up cash that would have gone to essential services such as education or police protection.

“Something will have to give either on the revenue side or the spending side,” Clay said.

Short of a national health care plan, a possible solution has emerged in some public and private sectors, most notably in the upcoming auto talks. It’s a company-funded trust fund run by unions that pays retiree health care expenses.

The Goodyear example
The idea surfaced last year in contract talks between the Akron, Ohio-based Goodyear Tire & Rubber Co. and the United Steelworkers.

After a three-month strike, Goodyear agreed to put $1 billion into a union-run fund called a Voluntary Employees Beneficiary Association. In exchange, the steelworkers then assumed liability for the company’s estimated $1.2 billion in retiree health care costs for 30,000 hourly retirees and 12,000 active workers.

The auto companies, all of which are restructuring due to billions in losses, want the UAW to do the same thing. They’ve discussed the idea with the union in advance of the talks, which formally open on Friday with Chrysler and Monday with Ford and GM.

At Goodyear, the deal was a good one because union members were worried that retiree health care could be canceled if the company went into bankruptcy, said Howard Kropff, financial secretary for a local in Akron who was one of the union’s bargainers.

“They had no funding set aside for our retiree medical,” Kropff said. “They pay-as-you-go on it. So if the company ever walked away ...”

Goodyear funded about 83 percent of the total obligation, and analysts have said the auto companies will try to get the UAW to settle for 50 to 60 percent of the total.

But a recent agreement between auto parts supplier Dana Corp. and the UAW shows that may be low.

Although the UAW won’t comment on the prospect of a trust, earlier this month it agreed to a Goodyear-style deal with Dana, which is in Chapter 11 bankruptcy protection. In exchange for taking on a $1 billion retiree health care liability, the UAW received $780 million in cash and stock, or about 78 cents on the dollar.

“Our expectation for an equivalent GM/Ford health care deal at around 60 cents/dollar now seems increasingly optimistic,” JPMorgan analyst Himanshu Patel wrote in a recent note to investors.

Similar trusts already have been set up in the public sector. In New York state, teachers unions in the Poughkeepsie and Kingston school districts run trusts that pay health care costs for active and retired employees.

The trust fund model
In both cases, the districts pay the unions less than they would have paid an insurer. The unions then hire a company that negotiates lower rates with doctors and hospitals in exchange for quick bill payments, said Debra Kardas, president of Poughkeepsie’s teachers union.

The trusts, which are self insured with a policy to cover catastrophes, also save money because they don’t have to make a profit like insurance companies, Kardas said.

Other school districts and unions now are asking for information about the trusts, which started in Kingston in 1997.

But some warn that the trusts may not work for a majority of state and local governments, even if they’re unionized — and some are not.

“There’s no state that has one union. They all have many unions, and more than people would think,” said Dick Cauchi, health program director with the National Conference of State Legislatures. “I have not seen anything that suggests states themselves can go that direction” of handing off health costs to trusts run by unions.

The Goodyear and Dana trusts still must gain court approval, and some Goodyear workers fear that the union got hoodwinked.

“That money ain’t going to last forever,” said Ed Huth, 61, a 42-year employee in Akron who voted against the contract. “That’s not much money when it comes to health care.”

Heading into the contract talks, auto workers have the same fears.

Hartman, who retired in 1990 from GM’s assembly plant in Lordstown, Ohio, doesn’t trust either the union or the company to control the trust.

“I would want someone watching over each others’ shoulders,” he said.