Ford Expects New UAW Contract To Generate Health Care Savings Quickly

Main Category: Health Insurance / Medical Insurance
Article Date: 19 Nov 2007 - 12:00 PDT

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Ford Motor managers on Thursday during a conference call said that the voluntary employees' beneficiary association arrangement in its new contract with United Auto Workers will allow it to see hourly health care cost savings before General Motors and Chrysler Group, the Detroit News reports. Ford Controller Peter Daniel said that the automaker will start saving on health care in the third quarter of 2008 (Hoffman, Detroit News, 11/16).

According to the Wall Street Journal, Ford will see health savings earlier than GM and Chrysler because under its contract, its VEBA is effective upon approval from a federal district court and a preclearance review by the Securities and Exchange Commission. Its Detroit rivals will need circuit court approval in addition to SEC's preclearance review (Kosdrosky/McCracken, Wall Street Journal, 11/16). Ford expects to receive the SEC nod by the third quarter of 2008. When that occurs, the company expects to realize an annual ongoing net cash gain of $1 billion. Ford still will be liable for retiree health care until the end of 2009, Daniel said.

As a result of the agreement, Ford ultimately expects to save $2 billion in health care costs annually, according to the News (Detroit News, 11/16). Under the VEBA, Ford will remove $23 billion in retiree health care liabilities from its books, which will be transferred to the UAW-controlled trust. The automaker will contribute $13.2 billion to the VEBA and will pay $2.2 billion in retiree health care costs until the VEBA is operational (Webster, Detroit Free Press, 11/15).

Bradley Rubin of BNP Paribas said, "It's not a perfect deal, but it's a good deal. And it does appear better than the ones GM and Chrysler got." Bruce Clark, senior vice president of Moody's Investors Service, said, "Despite the very constructive elements of the agreement, the cash flow benefits of the new contract will not really take hold until 2010" (Detroit News, 11/16).

UAW as Shareholder
Under terms of the contracts with GM and Ford, UAW could become "Detroit's biggest stockholder," the Free Press reports. Under the contracts, GM pledged a convertible note valued at $4.7 billion, or 16% of company stock, and Ford put forth a note worth $3.3 billion, or 15% of company stock, to the UAW-controlled trusts. The notes only will be converted to stock if the companies' stocks reach certain heights, but if that occurs, they "have the potential to make the VEBAs the largest shareholders in both publicly traded companies," according to the Free Press.

It has not been disclosed if each automaker will have its own VEBA or if all three will be combined into one. Gary Chaison, a professor of industrial relations at Clark University, said that UAW now will have a "much closer link" to the automakers' futures. He said, "They can no longer say: 'That's management's responsibility, you make those decisions,'" adding, "Now they are very much tied in with the health of their employers" (Merx/Higgins, Detroit Free Press, 11/16).

Reprinted with kind permission from http://www.kaisernetwork.org. You can view the entire Kaiser Daily Health Policy Report, search the archives, or sign up for email delivery at http://www.kaisernetwork.org/dailyreports/healthpolicy. The Kaiser Daily Health Policy Report is published for kaisernetwork.org, a free service of The Henry J. Kaiser Family Foundation. © 2005 Advisory Board Company and Kaiser Family Foundation. All rights reserved.

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