VEBA Is New Buzzword for Retirees

Today General Motors became the latest company to offload retiree healthcare liabilities to a trust. Who will be next?

The landmark settlement between General Motors and its unions on Thursday highlights the need for old-line companies to drastically pare costs to compete with non-unionized competitors. The key element of the deal is that GM can remove from its balance sheet the value of its future retiree health benefits, historically a big source of concern for GM and other automakers, as well as other traditional manufacturing companies that are desperately trying to compete in the increasingly global marketplace.

GM estimates its future health-care costs for retirees to be $50 billion. The proposed deal reportedly calls for GM to shift the liability to a trust, called a voluntary employees’ beneficiary association, or VEBA. GM would contribute as much as $35 billion to the trust, or about 70 percent of its estimated future retiree costs.

The balance is supposed to come from investment gains made over the 80-year life of the trust, The New York Times reported. However, the carmaker won’t be required to stash cash in the trust immediately, so it is unclear how the VEBA will be financed. A spokesman for GM declined to comment further about details concerning the VEBA structure and its funding.

VEBAs became popular after a 2003 tax court ruling made the trusts more viable. The ruling, in response to a dispute brought by Wells Fargo & Co., eases the annual funding restriction on companies setting up new trusts, allowing employers to contribute large lump-sum amounts for current retirees and take the full tax deduction.

That’s important for companies looking to reinforce their balance sheets, especially in light of an accounting change issued last year. As CFO.com reported in September 2006, the Financial Accounting Standards Board issued FAS 158, which required companies to record the funded status of retirement plans on their balance sheets. Included in that reported number are interest-rate effects, an ever-changing risk that some companies view as especially burdensome.

The prospect of booking the obligation and its attendant interest-rate risk sent some companies with less-than-stellar balance sheets scrambling for ways to unload the liability. VEBAs are one solution. The VEBA bears the financial risk associated with managing the plan and its assets. The union manages the trust, and the assets grow tax-free and are untaxed when used to pay benefits, according to the Detroit News.

In July, two companies announced the formation of new VEBA trusts for non-pension health benefits. In one deal, Dana Corp., the bankrupt auto-parts maker, said two of its largest unions, the United Steel Workers and the United Auto Workers, agreed to replace the company’s health-care and long-term disability obligations for union retirees and employees with a VEBA. Under the arrangement Dana will contribute $700 million in cash and $80 million in common stock of the reorganized Dana to the trust. In exchange, the unions will allow Dana to terminate its obligation to provide union workers with non-pension retiree benefits and long-term employee disability benefits.

In the other deal, Goodyear Tire & Rubber said it would transfer all non-pension retiree health-care benefits from its balance sheet in exchange for a $1 billion lump-sum payment into a VEBA, from which future benefits payments will be made.

When Goodyear announced the creation of its VEBA, rating agency Moody’s Investors Service noted that the transaction would have a positive effect on the “qualitative factors” that are used to calculate credit ratings, meaning that by removing the liabilities from its balance sheet, Goodyear helped to bolster its credit score.

The non-pension healthcare benefits being segregated into VEBAs at Goodyear and Dana are also referred to as “other post-retirement employee benefits” (OPEBs). In a July report on OPEBs, Moody’s named other companies that may be in a position to negotiate a similar deal with their unions: Ford, General Motors, Chrysler, AMR, UAL, Delta, Qwest, Alcatel, Lucent Technologies, Eastman Kodak, and Consol Energy. All the companies cited by the report currently have OPEB obligations that exceed $1 billion and represent more than 5 percent of the company’s total assets.

“Only a ‘small group’ of companies will be in a position to reach agreement with their unions,” added Wesley Smyth, Moody’s senior accounting analyst, explaining that the 5 percent mark is important because it indicates that OPEB obligations are a significant issue for the company. If that’s the case, unions may be more willing to negotiate a lump-sum payment with a company. Striking such a deal might be better than running the risk of “drastic reductions of OPEB benefits if the companies’ financial profile were to deteriorate further,” according to the report.

Roughly one-third of large companies have VEBAs that hold OPEB, as well as pension benefits, noted The Wall Street Journal. They include heavily unionized companies such as Ford, Conagra Foods, Duke Energy, and Texas Instruments.

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