The United Auto Workers and Ford Motor Co. said Monday they agreed to let the automaker change how it pays for a health care trust fund for retired workers, a deal that could serve as the model for cash-starved General Motors Corp. and Chrysler LLC.
Ford said the agreement allows it to make payments to the union-managed trust with up to 50 percent of company stock instead of cash. Having the UAW take equity frees up cash for operations.
“We will consider each payment when it is due and use our discretion in determining whether cash or stock makes sense at the time, balancing our liquidity needs and preserving shareholder value,” said Ford spokesman Mark Truby in a written statement.
Ford, like its Detroit and foreign competitors, is seeing a huge drop in sales as consumers shy away from purchasing new cars during a recession. However, the company has not asked for low-interest government loans. General Motors and Chrysler have asked for a total of $39 billion, and have received $17.4 billion so far.
Under terms of the government loans, the Treasury Department set targets for Chrysler and GM to exchange half their cash payments to the trusts, called voluntary employee beneficiary associations, or VEBAs, for equity in the companies. Money freed up by supporting the VEBA with equity would potentially pare down GM’s and Chrysler’s borrowings from the government.
For Ford, which isn’t receiving government aid but is trying to cut costs, the agreement announced Monday is another in a series of concessions from auto workers.
Terms of previous deals were not announced, but they were expected to eliminate the jobs bank in which laid-off workers get most of their pay, as well as lift work rules and make other changes that the government loan terms set out. The goal is for the companies’ labor costs to be competitive with Japanese rivals that have U.S. factories.
The UAW, meanwhile, said the health care trust deal helps save jobs, as a failure to help the auto companies cut costs could lead to a bankruptcy filing and massive layoffs.
Although Ford was not required to renegotiate terms of its VEBA with the UAW, the company entered talks with the union, and said it would not be “disadvantaged” as GM and Chrysler sought concessions.
The VEBAs were established as part of the landmark 2007 contract reached with the UAW. The trusts would pay health care bills for about 800,000 UAW retirees, spouses and dependents and move billions in liabilities off the companies’ books. GM expects to save about $3 billion a year, while Ford says it will save $1 billion annually.
Ford owes $6.3 billion to its VEBA at the end of this year. GM has to pay roughly $20 billion into its health care trust, while Chrysler must pay around $9.9 billion.
The UAW’s willingness to strike a deal with Ford first is significant, because it shows the union is acknowledging the challenges Ford is facing, said Hal Stack, director of the Labor Studies Center at Wayne State University in Detroit.
“The question is whether they make a similar agreement with GM and Chrysler,” he said. “It adds a certain element of risk to the equation for the UAW at a time when most people are nervous about any (financial) risk.”
The agreement between Ford and the UAW, along with other previously agreed to concessions, must be ratified by union members. The UAW is expected to meet with heads of its local branches this week. The change to the health care trust also requires court approval.
This is the second time this month Ford has reached an agreement with the UAW on cost-cutting initiatives. UAW struck a deal with Ford on other contract concessions after talks with GM and Chrysler briefly broke down. Talks resumed and all three automakers reached a deal with the UAW earlier this month.
GM spokeswoman Renee Rashid-Merem said negotiations between GM and the UAW are continuing but had nothing to announce related to the VEBA.
Chrysler declined comment.
A presidential task force will monitor the GM and Chrysler restructuring plans and decide if the companies will get more money. The Obama administration on Monday named Wall Street financier Steven Rattner to serve as auto counselor to Treasury Secretary Timothy Geithner.
Shares of Ford rose 15 cents, or 9.5 percent, to close at $1.73 Monday. Shares of GM were unchanged at $1.77 after hitting a 70-year low Friday.
