Retiree health care a key issue

DETROIT - No matter how much of the $96,000 hospital tab Don Hartman has to pay for quintuple-bypass surgery, he is still grateful for his health insurance from General Motors Corp.

Hartman, 79, a retired autoworker from Salem, Ohio, hasn't received all the bills from his February operation and doesn't know exactly what his share will be.

Who pays the health-care tab for Hartman and thousands of others like him is likely to be the major issue as contract talks begin between Detroit's three automakers and the United Auto Workers union.

GM, Ford Motor Co. and Chrysler Group would like to get rid of what amounts to an estimated $90.5 billion in unfunded liability for retiree health care, a problem coming to the forefront in the auto industry.

It also is an issue yet to be handled by many companies in other industries and even governments nationwide.

"It's a national, perhaps international, crisis," said Tom Clay, director emeritus of state affairs for the Citizens Research Council of Michigan, a nonpartisan group in Lansing that has studied Michigan's unfunded liabilities. "It's just not getting the attention it should be getting quite yet."

Nationwide, most government agencies are being required just this year to report the liability on their books. In a note to investors, Credit Suisse Group estimated the total cost to state and local governments nationally at $1.5 trillion.

Most agencies have set aside no money to handle the expense of retiree health care - hence, the term "unfunded liability." Instead, they pay the bills from annual operating budgets.

"There are very few states that do other than pay-as-you-go funding," said Robin Prunty, director of the public-finance department for Standard & Poor's Corp.

One answer to the problem of unfunded liability would be a national health-care plan. Another possible solution has emerged in some public and private sectors, most notably in the auto industry: a company-funded trust fund run by unions that pays retiree health-care expenses.

The idea surfaced last year in contract talks between Goodyear Tire & Rubber Co. of Akron, Ohio, and the United Steelworkers.

After a three-month strike, Goodyear agreed to put $1 billion into a union-run fund called a Voluntary Employees Beneficiary Association. In exchange, the union then assumed liability for the company's estimated $1.2 billion in retiree health-care costs for 30,000 hourly retirees and 12,000 active workers.

The auto companies, all of which are restructuring after suffering billions of dollars in losses, want the UAW to do the same thing.

At Goodyear, the deal was a good one because union members were worried that retiree health care could be canceled if the company went into bankruptcy, said Howard Kropff, financial secretary for a local in Akron, who was one of the union's bargainers.

"They had no funding set aside for our retiree medical," Kropff said. "They pay-as-you-go on it. So if the company ever walked away . . . ."

Goodyear funded about 83 percent of the total obligation. Analysts have said the auto companies will try to get the UAW to settle for 50 percent to 60 percent of the total.

Similar trusts have been set up in the public sector. In New York state, teachers' unions in the Poughkeepsie and Kingston school districts run trusts that pay health-care costs for active and retired employees.

In both cases, the districts pay the unions less than they would have paid an insurer. The unions then hire a company that negotiates lower rates with doctors and hospitals in exchange for quick bill payments, said Debra Kardas, president of Poughkeepsie's teachers' union.

The trusts, which are self-insured with a policy to cover catastrophes, also save money because, unlike insurance companies, they don't have to make a profit, Kardas said.

But some warn that the trusts may not work for a majority of state and local governments, even if they are unionized - and some are not.

Companies' wish list: Cut the compensation gap between Detroit's Big Three and Japanese automakers. The domestic companies pay about $70 to $76 an hour, while pay for Toyota, Honda and Nissan averages $48 an hour, according to annual reports.

The UAW's stance: President Ron Gettelfinger says the union is not ready to grant more cuts after approving health-care concessions to GM and Ford in 2005. But the union may give Chrysler a similar deal.

Other issues: Retiree health-care liability, estimated at $90.5 billion for the domestic automakers. Also, absenteeism and the jobs bank, in which employees get most of their pay even while on furlough.

SOURCE: Associated Press

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Vehicle Cost

For GM's Chevrolet Silverado pickup truck

Price: $40,000*.

Share of cost for retiree health benefits: $1,000.

Overall cost to GM for retiree health costs: $3.3 billion in 2006.

Number of retirees: 432,000 covered by GM medical benefits.

GM's total 2006 cost for health benefits: $4.8 billion, for employees and retirees.

*Prices vary by model and optional equipment.

Market share

U.S. automakers' share of the domestic market

1962: 87 percent*.

2002: 63.5 percent.

2007: 53.1 percent.

*Record

SOURCE: Bloomberg News

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