Friday, September 14, 2007

The UAW's Negotiations With the "Big Three" Automakers Over Retiree Health Benefits and Why They are Important to California Health Reform

The health care reform debate in California has come down to whether there should be an individual mandate to purchase health insurance and whether a big chunk of the cost of the program should be put on the employer community in the form of a 7.5% payroll tax for businesses that don't provide their workers with coverage.

Organized labor is firmly behind the Democratic legislature's efforts to deny Governor Schwarzenegger his individual mandate and to lay much of the program's incremental costs on the employer community.

Labor does not want a reversal in the long-term tradition of the employer being responsible for providing and paying for the biggest share of private health care in America.

That is understandable.

It is also shortsighted.

We only need look to the tough negotiations going on today in Detroit between the United Auto Workers (UAW) and "The Big Three" automakers over the unfunded cost of retiree health benefits.

GM, Ford, and Chrysler simply couldn't be in worse financial shape. The market cap for the biggest, General Motors the people who make all of those Chevy's and Cadillacs, is $17 billion. Compare that with the market cap for United Healthcare at $65 billion––one of the smaller health plans, Coventry Health Care, has a market cap of $9 billion.

What does it say when our biggest health care insurer has a market cap almost four times the icon of American industry?

A big reason (and surely not the only reason) our auto companies can't compete in the world is the burden of their health care costs. A big reason their market cap is so low is because of the enormous unfunded liabilities they carry to provide health care benefits to retirees--about $90 billion--that comes right off the top of their net worth.

If the auto companies can't do a deal with the UAW to get rid of a lot of this, the companies may go broke and the retired auto workers might get far less or nothing--just like the steel and airline workers did when those industries restructured through the bankruptcy courts.

Right now, negotiations are going on between the auto industry and the union to create a Voluntary Employee Beneficiary Association (VEBA). The companies would transfer all of these retiree health care liabilities into the VEBA and off their books. The auto companies would have no more long-term liability for these costs and their ability to survive and compete would be greatly enhanced.

In exchange for getting rid of $90 billion in liability, the companies would transfer assets (maybe including company stock) equal to only 60% to 70% of the liability.

So the UAW has a tough choice. Refuse to let the companies off the hook for 60 - 70 cents on the dollar and risk the companies going broke leading to more layoffs for current workers and maybe getting nothing for their retirees--or take the deal.

Not a great spot for anyone.

But finally, the health care rubber is finally hitting the road. It happened first in the steel industry, then airlines, and now auto.

This was inevitable. And, one way or another, the UAW has to get the best deal they can.

So in light of what's going on in Detroit, how can the California labor unions think the best long-term answer to funding California health reform can be found with the employer community?
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