GM Deal With Union Improves Health Care Mess, Sees A Ray Of Hope

For a strategy class last year, my group did a presentation on General Motors. We had very few positive things to say about the company. It was bleeding money. Health care and pension costs weighed down the company (retiree health care costs are esimated at $1,400 per car). It was slow to adapt to foreign competition and was equally slow with technical innovation. A recent strategy to goose sales by lowering sticker prices and getting rid of rebates fizzled.

GM cut a deal with its striking workers yesterday and, as Wall Street Journal writer Gregory Zuckerman put it, "foisted the retiree-health-care monkey onto the back of its union." The contract still has to be ratified by union members, but GM's stock jumped 9.4% and lifted Ford's stock as well.

What GM has done is restructure is obligations for its retirees by shifting its $51 billion in health care obligations to an independent trust called a voluntary employees beneficiary association. GM will contribute of to $35 billion to the trust. The union gets to manage the health care benefits.

Journalists are already thinking about the implications of GM's move. A sampling of articles:

-- "Is GM's Health Plan Contagious?" at BusinessWeek.com. "About half of the companies in transportation, communications, and finance have health-care benefits for retired workers. Northwest Airlines (NWA) retirees are now building a VEBA with funds from their bankruptcy settlement. For tax reasons, the trusts are most appealing to unionized companies, which get to make big up-front investments in them tax-free. They also can earn money on those funds without paying the Internal Revenue Service."

-- "What Might GM Trust Fund Mean For Workers Elsewhere?" at the Wall Street Journal. "The quick answer is that most employers aren't setting up so-called voluntary employees' beneficiary associations, or VEBAs, to make life easier for their retirees. They are doing it because it makes financial sense for the companies themselves. Under pension accounting rules, company-run VEBAs can improve a company's bottom line."