A Sickening Outcome For GM Retirees


A Sickening Outcome For GM Retirees
Joann Muller, 05.29.09, 7:25 PM ET




General Motors’ 377,000 retired autoworkers might as well kiss their gold-plated health benefits goodbye.

A trust fund set up a few years ago to protect those benefits–while allowing General Motors to clean up its balance sheet–is seriously underfunded. Now, the United Automobile Workers union is about to discover that it’s no better at managing escalating health care costs than GM.

UAW members voted overwhelmingly this week to accept new labor concessions aimed at helping GM speed its way through a bankruptcy reorganization should it file for Chapter 11 on Monday, as expected.

As part of the deal, the union agreed to forgive $20 billion that GM owes to the retiree health care trust. In exchange, the union will receive a 17.5% stake in a reorganized GM, plus $6.5 billion in preferred shares, a $2.5 billion note and a warrant to purchase a further 2.5% of GM in the future. In total, the changes will save GM $13 billion, the union said.

Owning a piece of GM is a risky proposition for the union, President Ronald Gettelfinger said Friday. "Right now, the value [of that 17.5% stake] is zero. That means a dramatic reduction in benefits for retirees and a lot of risk in the future."

When the so-called Voluntary Employment Beneficiary Association (or VEBA trust) was established during 2007 contract talks, GM’s future health care obligation for retirees was estimated at about $54 billion. To help GM restructure its balance sheet, the union agreed to accept about 60 cents on the dollar and put the money in the new VEBA, under the assumption that independent trustees would manage the fund’s growth to ensure retiree benefits were protected. Assets in an existing health care fund, then estimated at about $14 billion, were to be transferred to get the new VEBA up and running, and GM would make periodic cash contributions to pay off the remainder of the debt.

Then the economy tanked and everything changed. GM went broke and needed $19.4 billion in taxpayer loans to stay afloat, with another $30 billion government investment likely in bankruptcy.

Meanwhile, the value of that $14 billion starter fund fell to $9.4 billion. The preferred shares will pay a 9% dividend, or $585 million a year, which will help rebuild it a little, but GM doesn’t have to start paying back the $2.5 billion note until 2013. Only if GM recovers, and shares in the restructured company rise in a few years, will the trust fund see any financial benefit from its 17.5% stake. That warrant for another 2.5% of GM? It’s not exercisable until GM’s market cap hits $75 billion. It’s about $450 million right now. Most retirees won’t live to see that day.

The union is already sounding the warning bell to its retired members. Retirees will lose their dental and vision insurance beginning in July (not to mention their prescription coverage for erectile dysfunction and heartburn). Further cutbacks are likely in 2010 and 2011, as the union looks to stretch the VEBA to meet benefits.

Said Gettelfinger: "We’re satisfied we’ve done the right thing to give us a lifeline … until the company can rebound."

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