GM's 2-Tier Wage May Trump VEBA as Game Changer

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 recent ratification 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.”

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.