General Motors ( GM) said Monday that its new labor agreement with the United Auto Workers will pass an estimated $46.7 billion in retiree health care liabilities to the union, leaving the automaker with $17.6 billion in obligations. The historic agreement, ratified by UAW members in a vote held last week, will set up a union-controlled health care trust fund, dubbed a VEBA, that will free GM from the crushing burden of its long-term health care obligations to its workers in 2010. It also set up a two-tier wage structure that allows the company to pay new hires at lower rates. GM, which detailed the agreement on a conference call with analysts Monday, said the pact "significantly reduces GM's manufacturing cost gap to competitors." Shares of GM were recently trading down $1.34, or 3.1%, to $41.30. The stock gained 12% last week, crossing the $40-mark for the first time in about three years, as investors contemplated the implications of the agreement. Shares of Ford ( F) were down 17 cents, or 1.8%, to $9.03. Investors are expecting the No. 2 U.S. automaker to negotiate its own labor agreement with the UAW soon. Chrysler, which was recently taken private by Cerberus Capital Management, reached its own agreement with the union last week. Details of that deal are still emerging.
For its part, GM said it will transfer $16 billion from an existing health care trust to the new VEBA and pay an additional $2.5 billion in cash upfront. GM expects the VEBA will reduce its health care liability for hourly employees to between $6 billion and $13 billion in 2010. Currently, those liabilities amount to $47 billion for GM. GM estimated it will reap $2.6 billion to $3.4 billion in annual pretax savings in 2010 and 2011 as a result of the deal. It anticipates $3.3 billion in VEBA-related positive cash flow by 2011, reversing the current $3.3 billion in outflows. The contract also prevents the UAW from negotiating to increase GM's funding for the VEBA or make any other payments to provide retiree medical benefits. The new wage structure will allow the company to hire thousands of new factory workers at a wage rate of $25.65 an hour, down from the $78.21 an hour it currently pays UAW workers. Existing workers, many of whom will be eligible for retirement in the coming years, will remain at the old rate. "I'd characterize the agreement as very fair for our employees and retirees, while at the same time significantly improving GM's competitiveness and largely eliminating a major risk on our balance sheet," said GM's CEO, Rick Wagoner.