It's easy to understand why some former auto workers are nervous about General Motors Corp.'s (GM) bold plan to off-load $51 billion in retiree health-care obligations onto the United Auto Workers. Just take a look at Caterpillar Inc. (CAT) In 1998, the equipment giant set up a similar type of health-care trust to defray increases in retiree medical costs. By October, 2004, it ran dry, and retirees saw as much as $281 extra taken from their monthly pension checks. Now the retirees, union, and company are in litigation.
You might think that disaster would make anyone, management or labor, think twice about a so-called Voluntary Employee Beneficiary Association, or VEBA. Not so. Soaring health-care costs have prompted companies and unions in a slew of troubled industries to set up the trusts. The latest, and by far the largest, is the tentative deal between General Motors Corp. and the UAW that would create a roughly $35 billion trust--$16 billion less than current liabilities--to fund and administer benefits for the company's retirees and dependents. But others, including Ford (F) and Chrysler, are expected to follow. "This [will] set a precedent," says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. "There will be other funds like this created."
For employers with aging workers and lots of retirees, a VEBA may be the only way, short of an elusive national health-care plan, to strip crushing liabilities from their books. While GM will take a big one-time hit, the ongoing drain of retiree health care, which now costs $1,400 per car, will finally end. For unions, a trust can provide an opportunity to safeguard members from losing benefits in the event of a corporate bankruptcy. There now are about 12,000 VEBAs nationwide. The United Steelworkers alone have set up more than 40. Last year the International Brotherhood of Electrical Workers developed a complex one involving a number of employers who contribute funds to a trust for construction tradesmen. "The VEBA is sensible," says investor Wilbur Ross, who established a union-controlled trust when he restructured several steel companies. "We figured the union is probably in a better position to figure out how to allocate [funds] to the workers."
The endorsement of a respected union leader such as UAW President Ronald Gettelfinger could ease the worries of labor groups in other industries and prompt them to follow suit. Certainly, there are many companies that would love to unload medical liabilities from their balance sheets onto union-led trusts. One-third of all large U.S. businesses offer health care to current and retired workers. And that group includes more than old industrial outfits. About half of the companies in transportation, communications, and finance have health-care benefits for retired workers. Northwest Airlines Corp. (NWA) retirees are now building a VEBA with funds from their bankruptcy settlement. For tax reasons, the trusts are most appealing to unionized companies, which get to make big up-front investments in them tax-free. They also can earn money on those funds without paying the Internal Revenue Service.
Government employers are also interested in VEBAs--about 80% have retiree health plans. Paying those benefits out of ever-tighter budgets looks perilous (especially in the wake of a new accounting rule requiring health liabilities to be valued accurately). So many are now using VEBAs to help employees save for medical costs tax-free. "Public employers are saying 'Uh-oh, we need to do something about this,'" says Mark Wilkerson, senior consultant with VEBA Service Group, a Spokane (Wash.)-based benefit consultancy which has worked on such trusts with governments in Washington and Montana. Still, few expect public employees to let their employers off the hook by accepting a proposal like GM's, which funds only 70% of the long-term promise. Governments are a lot less likely to go bankrupt than struggling Detroit carmakers.
Getting a VEBA established is no easy task. GM and the UAW reached their deal only after weeks of haggling over its terms. They fought over health-care inflation rates, actuarial tables, assumed investment returns, and how much money should seed the trust. Another tricky issue: whether a company is still on the hook if a trust's investments go sour (GM has limited exposure).
Like investment funds everywhere, VEBAs sometimes underperform inflation. Truckmaker Navistar International Corp. (NAVZ) set up an employee trust in 1992 with $500 million, or 50% of liabilities, and a promise to put more money in later. The plan has kept benefits in place, but co-pays have risen and the VEBA is underfunded. There's no guarantee that won't happen to UAW workers as well, but it's better by far than losing all of their retiree medical benefits if the companies they worked for fell into bankruptcy.
The Solution to Detroit’s Health-Care Woes?
If the Big Three transfer long-term medical liability to a trust run by the UAW, here’s what the plan would look like:
The Big Three would have to seed the fund with about $70 billion in cash and securities, making it one of the 20 largest benefits funds in the U.S.
The fund is supposed to pay for an estimated $100 billion in medical costs over the next 80 years.
The Big Three spend $350 million a year to manage health benefits. That would be the trust’s obligation.
Some 1.5 million retirees and dependents across the country could draw benefits from the fund.
If the fund’s investment adviser fails to generate returns that match health-care inflation and make up for underfunding, members could have reduced benefits.
By David Welch and Nanette Byrnes