General Motors Corp. says the new retiree health-care trust to be established with the United Auto Workers union could place roughly $3 billion in extra cash annually on the auto maker’s balance sheet as soon as 2010, although the agreement’s unprecedented 2-tier wage structure might be the biggest game changer.

GM and the UAW officially agreed on the Voluntary Employees’ Benefit Assn. (VEBA) with the ratification last week of a new 4-year collective-bargaining agreement.

GM will contribute a total of $31.9 billion to the health-care trust, which the UAW will manage. Although it will wipe $2.6 billion in short-term cash off the auto maker’s books this year and another $4 billion in liquidity by 2009, favorable cash flow will begin in 2010 at $2.8 billion and reach $3.3 billion in 2011.

The savings could go higher down the road, GM says, as it offers details of the historic contract in a presentation to Wall Street analysts and the financial press.

“There’s no question this contract is a huge deal,” says Brett Hoselton, an analyst with KeyBanc Capital Markets. “It’s a concession by the UAW, but a necessary one.”

Keeping plenty of cash on its books not only allows GM to better weather the economy’s ups and downs, it also provides the auto maker with money needed to develop future products. One industry expert recently estimated if GM had the much-lower health-care costs of its Asian rivals, it would translate into five additional vehicle programs every year.

But while the VEBA is a major piece to the puzzle, the conference call reveals the 2-tier wage structure likely will make the greatest difference in closing the competitive gap with Toyota Motor Corp. Under the current contract, that’s a $30 difference.

“It you turn the clock back five years, people would be shocked to see a 2-tier wage structure,” Hoselton tells Ward’s. “This stands out as the most significant item.”

GM confirms during the conference call that new hires performing non-core functions, such as material movement, will earn a starting wage of $14 per hour, or 50% less than what the estimated 16,000 existing employees performing those functions earn. Factoring in active and retiree health-care costs and pensions, newly hired non-core employees will earn $25.65 an hour, compared with the $78.21 hourly rate paid to existing employees.

The contract defines core functions as general assembly, engine/transmission assembly, productive maintenance and quality.

“This is a very carefully worded portion of the agreement,” GM Chief Financial Officer Fritz Henderson says.

GM will outsource other non-core functions such as housekeeping, which represents about 1,700 employees, before January 2009. It also will sub-contract large-scale construction projects and repairs to some facility equipment.

In return, the auto maker also has agreed to hire 2,800 temporary employees permanently at a tier-one wage and in-source another 3,000 tier-two positions if a business case warrants.

“An example of that would be kitting or sequencing that would be done on the outside today,” Henderson says. “We will work with the UAW to determine if it can be (in-sourced) competitively.”

GM expects the 2-tier wage structure to begin paying the greatest dividends after 2011, when 75% of its workforce becomes eligible for retirement. While the auto maker sees itself employing tier-one workers long term – mostly with tier-two employees moving into a core, tier-one function with commensurate wages and benefits excluding post-retirement health care from GM – it also sees the transition of a “significant number” of positions to the lower-pay structure.

“The ability to manage the second-tier wage is enhanced” by the pending retirements, Henderson notes.

GM also confirms plans to seek a second attrition program with the UAW. Last year, the program drew 34,410 takers. Henderson declines to give details, saying only that it is an issue GM must negotiate with the UAW on a “plant-by-plant” basis.

“We still don’t have the details on how they’re going to get there, but it’s really just a question of how much and when,” Hoselton says. “Do you make an offer company-wide? That’s a possibility.”

But given the 2-tier wage structure, plans for a second attrition and GM’s aging UAW membership, the possibility exists that the auto maker could turn its entire union workforce over before the end of the contract.

“It is not inconceivable, in our view,” says Himashu Patel, an analyst at JP Morgan Chase & Co., in a recent research note.

The VEBA, meanwhile, permanently shifts about $47.6 billion worth of GM’s estimated $64.3 billion in retiree health-care costs to the UAW. In doing so, it significantly narrows another competitive gap vs. foreign transplants – auto makers such as Toyota Motor Corp. and Honda Motor Co. Ltd. have a combined 1,200 retirees, while GM alone carries health-care costs for 432,000.

And once implemented – GM set a target date of no later than Jan. 1, 2010 – it ensures that the UAW cannot negotiate additional funding. “The agreement is intended to be a permanent one,” Henderson says.

Workers may make additional contributions through means such as wages, profit sharing or signing bonuses.

Additionally, the VEBA is closed, meaning it excludes new hires and covers only retirees and active UAW-represented employees with seniority as of Sept. 14. Also covered are an estimated 12,000 UAW-represented retirees and actives from Delphi Corp., as well as some retirees and actives from businesses that GM has closed or divested. New hires receive $1 per compensated hour in lieu of post-retirement health-care benefits.

Interestingly, the VEBA includes a $4.37 billion convertible note, which after five years the trust may redeem for 109 million newly issued shares of GM stock at roughly $40 per share. That potentially could give the VEBA a 16% stake in the company. GM will pay interest on the notes semi-annually at a rate of 6.75%.

Additional funding for the VEBA will come from a $16 million health-care trust the auto maker negotiated with the union in 2005 and a $2.5 billion cash contribution from GM. The auto maker also will contribute $5.4 billion through installment payments until the UAW takes over the VEBA in 2010, or whenever the trust gains final court approval.

The new labor contract excludes a wage increase for the first time since 1982. Instead, GM will provide a lump-sum payment of $3,000 in 2007 and performance-based bonuses of $2,600, $3,200 and $2,600 in 2008, 2009, and 2010, respectively. Cost-of-living adjustments shrink to $2.30 an hour from $2.47 in the 2005 contract.

GM revises language around its Jobs Bank program in the new agreement. Negotiated in 1984, the program provides UAW members displaced by the introduction of technology, outsourcing, productivity improvements or the transfer of work with layoff protection.

While in the program, workers perform functions such as job training and special assignments until permanent work is found. But the plan has become extremely costly for GM, and Wall Street considers it a method by which employees receive nearly full wages and benefits not to work. GM declines to say how many people participate in the program.

The new contract tightens rules governing the plan. For instance, an employee that refuses a new job at a location within 50 miles (80 km) of his current plant will be placed on leave without pay or benefits. Employees that refuse four offers outside of a 50-mile radius will be placed on leave without pay or benefits.

“We expect to be able to move people,” Henderson says.

GM landed the historic concessions in return for investment commitments at plants in the U.S. GM Chairman and CEO Rick Wagoner called the negotiations toward the deal the most complex and comprehensive he has experienced.

“It is an innovative agreement that addresses the needs of all the stakeholders,” Wagoner says during the presentation.