AFSCME 3357-HOF'S BLOG

UAW Contract Update
Friday Deadline Likely to Pass

The UAW contract with the formerly Big Three is likely to expire on Friday, September 15 without an agreement. Based on the lack of bombast from either side and a general agreement that some type of VEBA will be necessary to shift retiree health care to the union; I think it is likely that the negotiations will continue past the deadline, and the workers will agree to work without a contract. The alternatives are a strike by the union, or a lockout by management. Neither appears to be in either side's immediate best interests. Other issues on the table include changes to work rules according to the Detroit News.

I've had a couple of retirees complain to me about the UAW abandoning them with the VEBA. I honestly don't think that's accurate. (Though I didn't tell them that.) A VEBA helps the retirees in two ways: (1) it insures that they'll receive some health care over the long term, even if the company goes bankrupt; and (2) It increases the odds that their sons and daughters will stay employed. If the VEBA is only 70% funded as is expected, it will be interesting to see how the UAW administers it. Will the union keep benefits near the current level, drawing down the fund on an unsustainable level, or will the union impose immediate, deep benefit cuts? The union might be tempted to make only minor cuts and hope for a national health care plan to save the day.


Who Gets Hurt the Most with a VEBA?
GM Stockholders

The automakers want to pay for a substantial bit of the cost with equity. Given that the cost of a VEBA may exceed the current market capitalization of GM and Ford, if the VEBA is mostly paid for with stock, the retirees could end up with effective control of both automakers. I say retirees, but the plan manager would be the Union. Hmmm, who does GM management work for again? So if the Union's interest in compromising benefits with a VEBA is to insure benefits regardless of what happens to the automaker, how does funding it with equity make sense? Paying for a VEBA with equity seems like smoke and mirrors to me. I don't see how issuing shares to the VEBA makes sense from a union or management perspective. A VEBA could still be funded with equity if GM made a secondary offering of new shares to the public to pay for it, but that leaves current stockholders holding the bag.

There is an article on CNN Money that suggests that GM's stock price does not reflect the benefits of a VEBA. From an investor's point of view, I think that's exactly wrong. GM's stock price is too high especially because of the prospects of a VEBA. GM's big problem with retiree healthcare is that it is an off the balance sheet liability. Assets have not been reserved to fund it, unlike GM's pension liabilities which appear to be properly funded and reserved. General Motors' market capitalization, the total value of all its common stock is about $16 billion, not much bigger than the $12 billion market cap of Harley Davidson, and less than a tenth of Toyota's $211 billion market capitalization. Those analysts that suggest a VEBA will boost GM's share price fail to consider the effects of stock dilution. If GM has to fund a $50 billion VEBA with $20 billion in current assets and $30 billion in new shares, then current stockholders will only own a third as much of the company as they currently do. Moreover, it will be challenging to even fund $20 billion out of GM's assets without negatively affecting working capital, regardless of how the assets are currently shown on GM's books.

If the numbers above leave you scratching your head, it's probably because you're beginning to understand the dilemma that GM is in right now. All of the assets of the company are facing multiple claimants. In a way, GM can't offer equity to the retirees, because it effectively already pledged the company by underfunding the retiree healthcare in the first place. Perhaps GM's last hope will be if it can convince enough GM diehards to buy $50 billion in new stock to (partially) recapitalize the company, while, at the same time it dilutes the worth of its current shares (owned by some of these same loyalists) to a fraction of the current share price.

One couldn't blame a GM shareholder if he/she took the position: "Piss on the UAW, they've already got 90% of my money. Shut down the g-d factories and see how they like losing 90% of their money." Lucky for the Union that the cush jobs of GM managers and executives depend upon the doors staying open and factories running. A big tree takes a long time to die, and lots of creatures thrive in a dying tree.

Given how difficult the issues are, it wouldn't surprise me if the UAW goes many months before it actually strikes a deal. Look how long it took to resolve the Delphi mess. It might make sense to put off everything for a year and a half to see if we can get a political consensus on nationwide healthcare. If so, then the VEBA might not have to be funded at 70%, but rather at 30%. If GM can continue improving its finances in the meantime, maybe it has a chance.