UAW agrees to new GM deal

Union agrees with change in funding for retiree health care, one of key obstacles GM needed to clear to avoid bankruptcy. But other hurdles remain.

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NEW YORK (CNNMoney.com) -- The United Auto Workers union has reached a deal with the Treasury Department and General Motors on changing its labor contract with the troubled automaker, one of the key obstacles that needed to be cleared for GM to potentially avoid being forced into bankruptcy in the next two weeks.

The union did not disclose any details of the agreement, but the deal is expected to be similar to previous pacts with Ford Motor (F, Fortune 500) and Chrysler LLC. The union would likely accept GM (GM, Fortune 500) stock rather than cash to cover future retiree health care costs at the company.

"Today's announcement is a positive development in GM's effort to restructure and become a strong, viable company going forward," an administration official said in a statement.

A GM spokesman had little comment other than to confirm the deal. Like the union, GM declined to share details about the agreement.

GM has proposed a restructuring plan that would leave the UAW trust funds that cover those health care costs with up to a 38% stake in the company. Treasury would hold a majority stake in GM under this plan.

The deal still needs to be ratified by rank and file union members at GM before it can take effect. And even if it is approved by UAW members, that will not be enough to keep the nation's largest automaker out of bankruptcy court.

The biggest hurdle for GM will be to get creditors holding $27 billion of its bonds to accept a debt-for-stock swap that would leave them with only 10% of the company. GM has until May 26 to reach an agreement with bondholders and a government-imposed deadline of June 1 to issue a new restructuring plan.

GM Chief Executive Fritz Henderson has repeatedly said that the difficulty in reaching an agreement with bondholders makes a GM bankruptcy filing "probable."

The union has already agreed to a number of changes in contracts with all the major automakers, including the elimination of the so-called "jobs bank," a program that guaranteed members close to a full salary during the life of the contract if they were laid-off and their unemployment benefits ran out.

GM, Ford and Chrysler had previously promised lifetime health care coverage for about 650,000 U.S. employees, retirees and their family members.

But the cost of providing the coverage had become a major competitive disadvantage compared to the nonunion U.S. plants operated by Asian rivals such as Toyota Motor (TM) and Honda Motor (HMC). According to some estimates, the health care expenses added about $1,500 to the cost of producing every vehicle.

So in its 2007 labor deals with GM, Ford and Chrysler, the UAW agreed to have the responsibility for that health care coverage shifted to trust funds administered by the union.

The companies were to each contribute billions in cash and other securities into the funds during 2008 and 2009 so the funds could start paying the benefits in 2010. GM was due to put about $20 billion into the fund.

But the sharp plunge in auto sales in 2008 and soaring losses at GM and Chrysler left them without enough cash needed to pay into the trust funds.

That was one reason why GM and Chrysler were forced to turn to Treasury for cash infusions to stay in business. Ford has so far avoided a federal bailout due to a stronger cash position.

Chrysler filed for bankruptcy last month, despite reaching a deal with the UAW that is expected to give it about a 55% stake in Chrysler.

UAW President Ron Gettelfinger recently said the union intends to sell the shares in GM and Chrysler that it will receive as soon as possible, rather than hang onto its large stakes in both companies. To top of page

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