"As of February 2012, the [United Auto Workers] trust holds a 41.5 percent stake in Chrysler and a 10.3 percent stake in General Motors," according to Politifact.com. Eventually, the trust will own 39 percent of General Motors and 55 percent in Chrysler once the trust is fully funded. Given this ownership stake, was the government bailout of the auto manufacturer's a giveaway to unions by the Obama administration, as many conservatives argue?
As background, unions made significant concessions in the years prior to and during the bailout to restore the auto manufacturers to profitability. Eye care coverage and dental coverage were lost and significant wage reductions were conceded as well, "including lower wages for new hires who now make about half the $29 that longtime union workers make." (As of last year, the wages of new hires were increased to $17 an hour.) Instead of guaranteed annual raises, the unions now get profit sharing, which means they get nothing in unprofitable and lean years. An infamously unproductive job bank was eliminated, where laid off workers sat getting paid for doing nothing often for months at a time until work picked up again. Cost of living adjustments were suspended and overtime no longer paid until workers worked over 40 hours. Pensions were eliminated and replaced by 401(k)'s for new hires. Strikes were banned at GM and Chrysler under the terms of the government bailout.
How much were these concessions worth to the companies? "Chrysler reportedly won health care concessions granted to Ford and GM in 2005 that were valued at $340 million annually for the automaker." Factory wages and benefits now cost the Big Three automakers around $20 less an hour per worker than they did four years ago, "bringing labor costs and benefits in line with non-union auto manufacturers like competitors Honda and Toyota." Specifically, Chrysler has managed to reduce its hourly labor costs in the past four years from $76 per hour to $49 per hour through buyouts of union workers who have been on the job for many years. As a result of this restructuring, GM will lower its 'break even' point to 10 million annual car sales from in excess of 16 million before the restructuring. While concessions in salary and benefits were significant, it is important to remember that labor costs make up only ten percent of producing a new vehicle.
Then why were unions given such a large ownership stake in the auto manufacturers? Businessweek.com notes that "The UAW won't directly own equity stakes in the car companies. The shares will be owned by a Voluntary Employee Benefits Trust, or VEBA, which invests cash and manages a portfolio to pay union healthcare benefits."
According to The Washington Post:
What happened is that the unions agreed in 2007 to set up an independently-managed trust fund to take over the burden for retiree benefits, which were crippling the Detroit automakers. Chrysler and GM agreed to pay about 65 percent to 70 percent of what they'd promised toward those benefits before, but they didn't have the cash to meet that obligation in 2009. Instead, they offered stock, which is how the union trust ended up with so many shares of the companies.
The VEBA gets GM and Chrysler out of the health care business. Such legacy costs were a significant burden on the company.
"The health care trust GM established would pay about 70 percent of GM's $51 billion obligation, or $36 billion into the VEBA. If the VEBA's investment appreciate in value, 340,000 pensioners will have their pension obligations met and , if not, the UAW will be at fault." The UAW must make a 7.2 percent annual return on investments to meet its future pension obligations. Chrysler will pay about 55 percent to 60 percent of what it owes, estimated between $10 billion and $11 billion, which will cover 82,000 retirees including future retirees.
The UAW could sell its shares in GM at any time, but is stuck with the shares of Chrysler for now since it is not a publicly traded company.
But should Chrysler recover and offer its stock to the public, and should that stock appreciate in value, and should the UAW ever choose to sell those shares for cash, it would have to turn any amount in excess of $4.25 billion to the U.S. Government. The terms of the Cerberus deal valued the firm at $9.25 billion just two years ago. Obviously that was an inflated price, but it does give some idea of what a recovered Chrysler might be worth. At that level, the VEBA's 55 percent stake would be worth $5.1 billion. So, basically the VEBA would be denied any serious participation in Chrysler's recovery. -- Doug Henwood, "The UAW's Chrysler stake: how 55% = 0%"
Also, the UAW has no right to vote its shares. "It gets just one seat on the nine seat Chrysler board and it will be required to vote its shares in accordance with the direction of the Independent Directors on the Chrysler Board," according to Henwood. Therefore, UAW influence on company policy is negligible.
Now that the UAW will own big stakes of GM and Chrysler some very serious questions arise. For example, should the fortunes of the auto manufacturer's decline the share price will lose value, meaning its health care obligations to tens of thousands of retirees will go unmet. In fact, GM shares have dropped by slightly over 25 percent in value since the initial public offering last year. (GM and Chrysler still owe toward retiree pensions, a fact that has depressed their stock price despite record profits.) Therefore, the auto unions are taking on a significant risk in this endeavor.
Alternatively, with unions interests more in line with those of management , the union may be in danger of being co-opted. Vision and dental care coverage has already been eliminated from the health care package to cut expenses. The auto union may be more agreeable to eliminating workers than in the past to increase profits. (Although the domestic auto industry as a whole has added 207,000 jobs since June 2009, it has lost over a million members in the last 30 years.) Therefore, union members may have to keep an eye on union officials who see their interests more tied to the profitability of the company than to the best interests of the rank and file.
Finally, what about the bond holders who many conservatives say were shortchanged in the deal receiving just pennies on the dollar of the value on their investment? Well, buying the bonds was a bet that in this case did not pay off and many of the bondholders purchased the bonds at fire side sale prices to begin with.
So, all in all, the auto manufacturers were able to get out from under any future obligations for the health care plans of retirees at 55 to 70 percent of what they owed. Some union handout!
Another conservative myth busted!