A MESSAGE TO UAW GM RETIREES
From UAW President Ron Gettelfinger, UAW Vice President Cal Rapson, and the UAW GM National Negotiating Committee
Dear Brothers and Sisters,
Two years ago we made a difficult decision to support limited reductions in retiree medical benefits for UAW-represented GM retirees. Our bargaining committee resisted this effort at major cost-shifting, and made key improvements while maintaining comprehensive health care coverages. That decision was intended to help secure your medical benefits for the long term by assisting GM in addressing its significant financial difficulties. In that process, we insisted on protecting our most vulnerable retirees – those with pensions of $8,000 or less and a benefit rate of $33.33 or less – by exempting them from monthly contribution, deductible and co-insurance provisions.
This year, in bargaining for a new UAW-GM National Agreement, GM again approached us seeking further reductions in your retiree medical benefits. We have spent several months in difficult and complex bargaining with GM on this subject. From the beginning we refused GM’s demands for benefit reductions.
GM argued they have the right to reduce or eliminate retiree medical benefits, as they have done with thousands of their salaried retirees. That issue could have been fought in the courts once the 2005 settlement expired in 2011. If GM prevailed in their argument, they would have the legal right to modify or even terminate your medical benefits.
Needless to say, we argued strenuously that GM does not have the right to modify your benefits, even after the expiration of an existing labor agreement. While we feel confident of that position, going to court always involves risk. We wanted to avoid the uncertainty that would be created had we been forced to rely on the courts to resolve the matter.
In addition, while we believe that GM is both legally and morally obligated to pay retiree medical benefits, the company’s obligation is largely unfunded. Continued benefits depend on GM’s financial health. If GM were to file for bankruptcy, retiree medical benefits could be cut or eliminated entirely. Unlike pension benefits, there is no required funding – and no government backstop – to protect retiree medical benefits. We have seen thousands of retirees at other companies lose their retiree medical benefits completely when the employer that promised to pay them sought “protection” in the bankruptcy courts.
We do not ever want to see UAW GM retirees in that position.
In these negotiations, we have obtained GM’s agreement (subject to ratification and court approval) to establish a funding mechanism that will protect your retiree medical benefits – at current levels – through establishment of a Voluntary Employee Beneficiary Association (VEBA).
A VEBA is an independent trust fund, similar in many respects to a pension trust. Money contributed to the VEBA can only be used to provide your health care benefits. It can never be used for any other purpose. Even if GM were to someday file for bankruptcy, the money in the VEBA would be secure.
Our most important principle in these discussions was that the VEBA must be funded with sufficient cash and other assets to provide lifetime solvency based on current levels of medical benefits, using reasonable assumptions about health care inflation, investment returns and numerous other factors.
We spent many weeks in intensive negotiations focused on achieving that goal. Throughout this process, we enlisted the help and assistance of outside experts, including Lazard Freres and Milliman, two of the best investment banking and actuarial firms in the country. We made it clear to GM that we would never agree to a VEBA that was “short” on the funding required to provide benefits at current levels on a lifetime basis.
We are pleased to report that after months of difficult bargaining, GM finally agreed to fund the VEBA in a manner sufficient to provide benefits at current levels on a lifetime basis for current and future retirees, based on reasonable projections.
A significant part of the VEBA funding described below is derived from sacrifices made by active members, including continued deferral of the September 2006 3 percent wage increase, continuation of the 2 cents-per-quarter COLA diversion from the 2005 agreement, an additional 4 cents-per-quarter COLA diversion over the 2007-2011 agreement, and conversion of the value of a wage increase otherwise payable in 2008 into an ongoing contribution to the VEBA beginning in 2009. Along with all UAW GM active employees, we are united in our desire to support and protect our retired brothers and sisters, and we are very proud of the agreement we have achieved.
Under the tentative agreement:
• GM will continue to provide retiree medical benefits without change through Jan. 1, 2010, at a projected cost of roughly $5.4 billion. This ongoing obligation is in addition to the VEBA funding amounts described below.
• Starting Jan. 1, 2010, responsibility for retiree medical benefits will shift to the new VEBA. The VEBA will be required to continue benefits without change, in accordance with the earlier court-approved settlement agreement, to the end of 2011.
• The funding level we have negotiated is expected to allow the VEBA to continue to provide benefits without change for the lifetime of current and future retirees. VEBA funding was calculated based on reasonable projections regarding medical inflation rates, investment returns and other factors. If actual experience is consistent with these projections, the VEBA will have sufficient assets to provide unchanged benefits on a lifetime basis. If actual experience is better than these projections (as a result, for example, of government action to finally address our country’s health care crisis), the VEBA’s funding status will exceed our projections, providing an additional layer of protection for your benefits. If actual experience is worse than projections (if, for example, investment returns are lower than projected on a long-term basis), the VEBA trustees may need to make benefit adjustments to maintain long-term solvency. But we have made every effort to obtain the necessary funding to minimize that risk. Your bargaining team believes the risk of a future VEBA shortfall is clearly preferable to the risk of relying on GM to continue providing retiree benefits indefinitely.
• In order to achieve long-term solvency, we did have to make one assumption about future cost savings. The 2005 settlement requires that monthly contributions (currently $10 single/$22 family) and co-pays and deductibles can increase by no more than 3 percent each year through 2011. Under the VEBA funding projections, we have assumed that this 3 percent cap on inflation increases remains in place through 2015 but will move to 4 percent starting in 2016. This change will have a relatively small impact. For example, in 2018 it would mean an expected monthly contribution $1 higher than it otherwise would have been. Twenty years from now, in 2027, the impact of the change would still be only $5 per month. Again, the actual experience of the fund may be better or worse than the projections, which may require the trustees to adjust these or other provisions over time.
In addition to GM’s obligation to continue the existing programs through Jan. 1, 2010 (at a cost of $5.4 billion), GM will provide funding for the VEBA as follows:
• $24.1 billion, funded by GM, effective Jan. 1, 2008 (although the VEBA does not take over responsibility for providing benefits until January 2010).
• Up to 20 additional annual $165 million payments to the VEBA by GM. These “backstop” payments are worth up to $1.6 billion and will be made any time the VEBA’s funding level is projected to be insufficient to provide current benefit levels for at least 25 years from the date of the required payment.
• A financial instrument, backed by GM, called a “convertible debenture” or “convertible note.” This note will have a face value of $4.3725 billion, and GM will be required to pay annual cash interest on this note for the benefit of the VEBA. In the event that the price of GM common stock increases above a certain level, the VEBA trustees may convert the note to GM stock, and then sell this stock, in order to diversify assets in the trust. This “conversion” mechanism allows the VEBA to benefit from increases in GM’s stock price. For example, if the price of GM’s stock increases approximately 50 percent anytime over the next five years, the value of the note would exceed $6 billion. If the “conversion” is not triggered, the note will continue in effect and the trustees can enforce GM’s obligation to pay the trust the face value of the note, along with accrued interest.
• A “pension pass through” arrangement, under which each retiree and surviving spouse currently receiving pension benefits will receive a special monthly pension benefit of $66.70, offset by a $51.67 contribution to the VEBA. Both the special pension benefit and the new VEBA contribution amount are fixed and will not escalate over time. The pension benefit is higher than the contribution requirement because it will be treated as taxable income in most situations. The combination of this special pension benefit, coupled with the additional VEBA contributions, will have little or no impact on the average retiree, since the special pension benefit will be sufficient to cover both the additional contribution to the VEBA and the payment of any additional taxes.
In addition to securing health care funding through the new VEBA, we put a high priority on improving pension incomes for current retirees. We are proud that the tentative agreement includes improved pension benefits for all classes of retirees, together with lump sums in all four years of the agreement. These increases will protect our retirees’ standard of living and will more than offset the cost of past and future Medicare premium increases.
We know that despite our efforts to minimize the impact of the health care changes negotiated in 2005, the additional monthly contributions, co-pays and deductibles have been difficult for many retirees and their families. We entered these negotiations determined to safeguard the health benefits and economic security of UAW GM retirees, so that you can look forward with confidence, not uncertainty. We are proud that we have been able to accomplish that goal to protect you and your family.
In grateful solidarity for your contributions to our union,
Ron Gettelfinger, Cal Rapson and your UAW GM National Negotiating Committee