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Originally published May 29, 2007 at 12:00 AM | Page modified May 29, 2007 at 2:00 AM

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Unusual deal at hand on retiree health care

There's a silver lining in the Detroit automakers' financial distress. Things appear so bad that the companies and their main labor union...

The Christian Science Monitor

There's a silver lining in the Detroit automakers' financial distress. Things appear so bad that the companies and their main labor union might agree to something radical.

Right now, a growing burden of retiree health-care costs is one of the biggest challenges facing Ford, General Motors and a soon-to-be-independent Chrysler.

That liability — not shared by competitors like Toyota and Honda — goes a long way toward explaining why German-based DaimlerChrysler views its Chrysler Group as a clunker to be sold no matter the price.

And it explains why private investment firm Cerberus had to offer so little this month to become the buyer.

In this climate, a once-unthinkable idea is being seriously discussed: Spin the health-care problem off to the union.

The automakers would each agree to pour billions of dollars into a trust fund to help provide for the retiree insurance. With that one-time payment, the carmakers would win a cap on their future liability.

"That liability will be part of the upcoming negotiations for sure," says Tony Faria, an automotive expert at the University of Windsor, just across the Canadian border from Detroit. "The unions fully realize these companies are in trouble."

Unloading health care on the union is far from assured. But the current crisis is arguably the toughest in Detroit's history, making possible an experiment that could become a model for other industries.

"The auto companies would provide some major amount of funding," Faria says. "From there on, they'd be paying at a known rate, rather than an ever-escalating rate."

The arrangement, known as a "voluntary employee beneficiary association" (VEBA), is not a new idea. A number of state governments use so-called VEBA trusts to provide benefits for current workers such as teachers, for example.

Ford and General Motors already use VEBAs for some retiree health costs.

But the idea of turning to a VEBA as an escape hatch for a full-scale retiree health plan is still novel.

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In 2006, Goodyear Tire & Rubber reached such an accord with the United Steelworkers, agreeing to put $1 billion into the trust.

The amount falls a bit short of the estimated liability. But it's enough that the union saw a fighting chance that the new trust would be able to provide for the beneficiaries.

The steel union doesn't directly control the trust fund, but it plays a guiding role through the appointment of trustees.

"We needed to get a billion dollars for this to be feasible at all," says Wayne Ranick, a spokesman for the United Steelworkers International in Pittsburgh.

That same kind of arithmetic will be at work when the Big Three bargain with the UAW this summer and beyond.

For the Detroit automakers, the retiree health-care liability totals about $100 billion by some estimates, an amount more than double the stock-market value of the three firms.

In announcing the deal to sell Chrysler on May 14, DaimlerChrysler chairman Dieter Zetsche breathed an audible sigh of relief in unloading this liability.

It was "especially important," he said, that the retiree costs would be borne by the new Chrysler, not shared with Daimler, which had managed Chrysler since a 1998 merger.

Tackling the liability will be crucial for the new owners, helping to determine whether their $7.4 billion investment succeeds or fails.

The finances and demographics at the Big Three are scary for workers and management alike. The ranks of retirees already outnumber current workers.

Moreover, autoworkers stop work young, based on a "30 and out" system in place since 1970, which allows full retirement benefits after 30 years on the job.

Such bargaining victories by the UAW, starting in the years right after World War II, helped set a tone for an era in which factory jobs nationwide became tickets to middle-class living and secure retirements.

Now UAW bargaining could again help set the tone, this time during an era when unions are struggling to maintain their place amid global competition.

The Big Three also have a tradition of finding common ground, sometimes after hard battles, with the UAW.

Cerberus, the private-equity buyer of Chrysler, is expected to push hard for concessions. But it has made early overtures that its cost cutting won't become an all-out war on union jobs and benefits.

"John Snow, the Cerberus chairman, is from Toledo. He probably has some credibility when he says he wants to work successfully with unions," says John Paul MacDuffie, a management expert at the University of Pennsylvania's Wharton School.

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