Ottawa and Toronto General Motors of Canada Ltd. will use billions of dollars in government loans to reduce its yawning pension deficit under a cost-cutting labour agreement that removes a major obstacle to the troubled auto maker obtaining $6-billion in federal and provincial aid.
The tentative agreement with the Canadian Auto Workers union paves the way for Ottawa and Ontario to join Washington in massive bailout of the staggering auto giant, which is expected to submit a new restructuring plan to U.S. President Barack Obama within days.
But the deal represents an apparent about-face for the Harper government, which has long insisted federal taxpayers would not subsidize GM pensioners. Ottawa is expected to argue that only the provincial portion of the bailout can be used for the pension plan, but critics are already saying that distinction is meaningless.
Mr. Obama and Prime Minister Stephen Harper have given GM until May 31 to submit a credible restructuring plan after rejecting the company's initial effort. However, the company is still expected to seek bankruptcy protection under Chapter 11 to deal with creditors in the United States, and may seek similar court protection in Canada.
The proposed labour deal announced yesterday maintains base wages for GM Canada workers.
It also spares the pensions of existing retirees, but current workers face significant cuts to pensions and benefits, including giving up a promised $3,500 lump sum that was meant to compensate a loss of holiday time.
GM Canada will use savings generated by the union agreement and as much as $2-billion from the government loans to make a $4-billion contribution to its pension shortfall, sources said yesterday. The company will then have six years to eliminate the remaining deficit, now said to be $7-billion.
“We have preserved our wages, we have preserved and secured our pension benefits and we have protected most of our core benefits,” CAW President Ken Lewenza told a news conference yesterday. “Those are important victories.”
He said this contract and the one the CAW and GM signed in February deliver about $22 an hour in cost savings – including productivity gains – leaving GM Canada with a labour cost of $57 an hour, roughly equivalent to Toyota Canada Inc.
In a release, GM said the tentative agreement is a “critical step forward toward ensuring GM's future in Canada.”
Ottawa and Ontario governments welcomed the tentative agreement, saying it was an important step in GM Canada's efforts to achieve a competitive cost structure that will allow it to return to profitability in the longer term.
Industry Minister Tony Clement has long argued that GM Canada's pension shortfall was a matter for the provincial government to resolve because it regulates the plan. Under the proposed deal, Ontario would contribute a third of the total Canadian restructuring package, and GM would use that provincial money to help reduce the pension shortfall.
Mr. Clement would continue to claim federal taxpayers are not subsidizing the pension plan.
That distinction is “hair splitting,” said Kevin Gaudet, federal director for the Canadian Taxpayers Federation, a conservative lobby group.
“No level of government, no taxpayer should be bailing out the pension plan, or anything of the company. It's ridiculous,” he said. “And their hairsplitting won't matter a whit to those taxpayers who have no pension plan.”
Mr. Gaudet was particularly critical of Mr. Harper, who started his political career as a Reform Party MP and served as the head of the right-wing National Citizens Coalition in Calgary before becoming Conservative Party leader.
“Mr. Harper may left his balls out West when it comes to taking a principle stand against bailing out this industry like he used believe in,” he said.
During a stop in Alberta, the Prime Minister said he was “glad in principle” that the company and union had reached a tentative agreement.
Ottawa indicated last December that Canadian governments would be a 20-per-cent partner with the American government in providing assistance to restructuring GM and Chrysler LLC. That proportion was meant to reflect Canada's share of North American production of the Detroit-based companies.
But after last week's closure of the truck assembly plant in Oshawa, GM Canada now represents only about 15 per cent of the company's North American production, and Canada's share of the bailout will be set accordingly, sources said yesterday.
Mr. Harper said the Canadian government had little choice except to participate in the “politically-driven restructuring” of GM and Chrysler, which was led by Washington.
“Either we participate in the restructuring or these companies, which are very big in the Canadian economy will simply be restructured out of Canada. And our judgment is that is simply not a reasonable alternative.”
Opposition politicians in both Ottawa and Queen's Park have largely ducked the issue of whether governments should provide assistance to the auto companies, mindful that the bailouts are broadly unpopular but have more support in heavily populated southern Ontario, where the manufacturing sector has been devastated by the recession.
Ontario Progressive Conservative MPP Christine Elliott, who represents the provincial riding that is home to GM's Oshawa plant, said governments “should not be picking winners and losers.”
But the leadership candidate is married to federal Finance Minister Jim Flaherty, who represents Oshawa federally. She did not criticize the decision to aid GM and Chrysler.
“We must ensure that any government money given to auto makers is done so in an open and transparent way,” Ms. Elliott said.
The automotive industry – including parts suppliers and both Detroit-based and foreign-owner auto makers – represented 1.5 per cent of Canada's $1.3-trillion economy in 2008, according to the Conference Board of Canada.
The North American auto makers alone accounted for 2 per cent of Ontario's output and 30,000 jobs, according to a report by the Toronto-based Centre of Spatial Economics. The parts suppliers that rely on those three companies accounted for 76,000 jobs. Combined, the auto and parts industries represented 3 per cent of Ontario's output.
“These huge impacts would appear to suggest that the government bailouts could pay for themselves,” said Derek Burleton, director of economic analysis at Toronto-Dominion Bank.
Still, plenty could go wrong that would make the government's investments in Chrysler and General Motors a bust, Mr. Burleton said.
“The increased cost competitiveness of GM mitigates, but does not eliminate the risk that these companies could fail down the road,” Mr. Burleton said. “So much will depend on how successful these companies are in selling vehicles and executing on their revival strategies.”