Auto talks may solve potential health care crisis

updated 5:15 p.m. ET July 20, 2007

DETROIT - No matter how much of the $96,000 hospital tab Don Hartman has to pay for quintuple bypass surgery, he’s still grateful for his health insurance from General Motors Corp.

Hartman, 79, a retired auto worker from Salem, Ohio, still hasn’t received all the bills from his February operation and he doesn’t know exactly what his portion will be.

But just who pays the health care tab for Hartman and thousands of others like him is likely to be the major issue as contract talks open between Detroit’s three automakers and the United Auto Workers union.

GM, Ford Motor Co. and Chrysler Group would like to get rid of what amounts to an estimated $90.5 billion unfunded liability for retiree health care, a problem that is just now coming to the forefront in the auto industry and one that has yet to be handled by many companies and even governments nationwide.

Not just the automakers
“It’s a national, perhaps international crisis,” said Tom Clay, director emeritus of state affairs for the Citizens Research Council of Michigan, a nonpartisan group in Lansing that has studied Michigan’s unfunded liabilities. “It’s just not getting the attention it should be getting quite yet.”

Nationwide, most government agencies just this year are being required to report the liability on their books. Credit Suisse, in a note to investors, estimated the total cost to state and local governments nationally at a whopping $1.5 trillion.

Most agencies have set aside no money to handle the expense, instead paying the bills from annual operating budgets.

“There’s very few states that do other than pay-as-you-go funding,” said Robin Prunty, director of the public finance department for Standard & Poor’s.

In Michigan, which has struggled to balance its budget for years due mainly to troubles in its auto industry, the obligation is roughly $21 billion with no cash set aside to pay for it. New York state projects its obligation is $47 billion over the next 27 to 30 years.

Michigan allocates about $1 billion a year to provide health care for retired state and public school employees, and New York pays about $1.1 billion per year for state retirees. As more workers retire, the payments will grow, eating up cash that would have gone to essential services such as education or police protection.

“Something will have to give either on the revenue side or the spending side,” Clay said.

Short of a national health care plan, a possible solution has emerged in some public and private sectors, most notably in the upcoming auto talks. It’s a company-funded trust fund run by unions that pays retiree health care expenses.

The Goodyear example
The idea surfaced last year in contract talks between the Akron, Ohio-based Goodyear Tire & Rubber Co. and the United Steelworkers.

After a three-month strike, Goodyear agreed to put $1 billion into a union-run fund called a Voluntary Employees Beneficiary Association. In exchange, the steelworkers then assumed liability for the company’s estimated $1.2 billion in retiree health care costs for 30,000 hourly retirees and 12,000 active workers.

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