Health Costs Loom

Retirees’ Health Costs Loom Over U.A.W. Talks

That shift has the greatest impact on medical costs. Detroit automakers cover the health care expenses of both current and former union members — more than 1.1 million of them combined — and their dependents. That adds up to an annual bill of about $12 billion.

So even as the struggling car companies try to restructure, announcing plans in the last two years to shed more than 80,000 workers, their health care bill continues to rise as those people age.

The car companies’ ability, or willingness, to continue paying those generous benefits, including negligible co-payments for drugs and doctor visits, will be a crucial sticking point when pivotal negotiations begin Friday between the U.A.W. and the auto companies.

It may also be a touchy issue for active U.A.W. members and retirees, who must grapple with whether one group should bear the brunt of any cuts more than the other.

The stakes are enormous for both sides in talks that General Motors calls “the most important in a generation.”

The union is trying to protect a signature feature of the middle-class lifestyle that its blue-collar members have enjoyed. The retirees, roughly 600,000 of them, risk seeing an erosion of benefits that they had assumed would be secure when their working days ended.

“This is what we were promised,” said Jim Ziomek, who retired in 2002 from a Ford Motor parts distribution center in Livonia, Mich., after working for the company for 34 years. “You’re going to have a pension, you’re going to have health care. Well, now all of a sudden things have changed and they want to take it away.” G.M., Ford Motor and the Chrysler Group say these so-called legacy costs have hampered their fight against surging foreign competitors. Health care and pension benefits cost them $1,000 for each vehicle they sell, they say, compared with a few hundred dollars for companies like Toyota, Honda and Nissan.

The carmakers have long sought to lower these costs, but the status quo has remained largely in place after previous contracts, the most recent being signed in 2003. At that time, the companies were relatively healthy; they also feared a strike if they challenged the union.

The U.A.W.’s president, Ron Gettelfinger, has insisted publicly that neither the change in demographics nor the auto companies’ decline alters the union’s philosophy of fighting to keep previous contract gains. In fact, he recently said, workers have compromised enough on health care. The union has declined to say what will be discussed in negotiations.

But the union’s stance has changed since the current labor agreement was signed.

Mr. Gettelfinger, for example, put up little resistance to plant closings at G.M., Ford and Chrysler; he cut deals for lower wages with bankrupt parts suppliers like Delphi and Dana; and most important, he agreed to arrangements at G.M. and Ford that eroded the fully paid health care coverage that was one of the union’s most cherished achievements.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said the two sides have no choice but to find a health care solution.

“You probably have to do this now; there is no delaying,” Mr. Cole said. “If you put it off, the companies are going to be weaker, and the bargaining position may be less favorable” for the union.

In the last two years, G.M., Ford and Chrysler have collectively lost more than $30 billion, prompting them to announce plans to shut more than two dozen plants, and put a variety of operations up for sale, including Chrysler itself, which has been bought from DaimlerChrysler by a private equity group.

Talks begin Friday at Chrysler, and move to Ford and G.M. on Monday. The current contract expires Sept. 14.

In recent months, one unusual solution has come up in pre-negotiations between auto executives and the union, according to people with knowledge of the deliberations.

The automakers and the U.A.W. could create a health care trust, called a Voluntary Employee Beneficiary Association, that could take over the responsibility for worker and retiree benefits.

That would allow the three companies to get their combined long-term health care liability, about $100 billion, off their books, and would give the U.A.W. a more direct say in the benefits that its workers would receive.

But the solution carries an enormous price tag: the trust, known as a V.E.B.A., must be funded with cash upfront, with most of the liability accounted for.

The U.A.W. recently agreed to such an arrangement at Dana. It called for the company to pay upfront about 71 cents on the dollar for workers’ estimated health care expenses, or about $800 million.

In the U.A.W.’s case, the car companies would need to come up with far more money, probably in the range of $60 billion to $65 billion, experts say. The more money that is put in the trust, the less risk exists for the union.

But that presents a quandary for the automakers, who would have to fund it. The car companies have tens of billions of dollars in cash on hand, but need that money to run their operations, given that their debt ratings are in junk status, making it expensive for them to borrow money.

And Ford’s assets are already mortgaged to fund its turnaround plan, although it could use whatever it gets from selling its European luxury brands for its part of a trust.