Tuesday, October 23, 2007

A Corporate Take on the GM/UAW VEBA

Cunningham_lawrence07_lowres Larry Cunningham (George Washington), guest-blogging over at the Conglomerate Blog, has an insightful analysis of the voluntary employee benefit associations being set up by GM to have unions handle retiree health liabilities.  Larry writes:

Wouldn’t it be wonderful if you could discharge your debts by paying 50 cents on the dollar? You’d have something in common with General Motors in its bargain with the United Auto Workers union.

The GM-UAW deal adapts an old vehicle, the VEBA (voluntary employee benefit association), in a radically voguish way. Traditional VEBAs, dating to 1928 and used by tens of thousands of US companies, are tax-advantaged vehicles that companies use to manage and fund employee benefits. The new twist, in the GM-UAW deal and others, makes the VEBA a vehicle that unions use to manage and fund those benefits . . . .

This new vogue in VEBAs shows the dire straits of some companies burdened by enormous financial legacy costs, due, in part, to bad old accounting rules and curious health care policies.

Until 1993, US accounting rules (GAAP) did not require companies to book a balance sheet liability for promises to employees to pay post-retirement health benefits. The results were bountiful—but often worthless—corporate promises to provide these benefits, contributing to the bankruptcy of some companies. Under the 1993 rule, huge balance sheet liabilities sprouted. This (along with increased costs and other factors) tended to curtail company promises (and reduced the number of companies with 200+ employees who provide such benefits from 66% before the change to 33% today).

But unlike my conclusion when it comes to union VEBAs - it is more likely than not that the retirees will suffer some day - Larry focuses (not surprisingly as a corporate guy) on the potential accounting problems for GM and investors:

Either way, the risk is that the obligation will remain with GM and not be transferred to the VEBA, as a matter of law or accounting, whatever balance sheet treatment GM adopts now. If so, investors may regret the deal; workers may get two bites at the apple. But there may be no other solution.



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One positive that can come out of the VEBA arrangement is that the public will be more familiar with VEBAs.
In addition to being a funding vehicle, VEBAs are also intended to be non commertcial insurers, offering plans not normally provided by commercial for profit insurers.
This opens up a wide area of potentially innovative and valuable products.
To learn more of this from the IRS's perspective, read General Counsel Memorandum 39817.
To access, go to:
Click on General Counsel Memoranda, and put 39817 in the box that appears.
Don Levit

Posted by: Don L. | Oct 24, 2007 9:36:22 AM

The $15B shortfall is to be borne by the 75,000 active GM employees who are members of the UAW.

That works out to $200K per member.

What a deal (let's hope for the UAW members' sake that Wall Street can work some magic with the $30B plus that GM will kick in and immediately deduct)!

Posted by: Juan Kelly | Oct 24, 2007 9:47:29 AM

VEBAs are alive and well in the multiemployer world and many have been successfully managed for years by joint labor management boards of trustees. Since many of the people who have long experience managing such VEBAs will be involved with the newly created VEBAs, they are not breaking new ground. The VEBAs with which I am familiar--some of which I have represented for more than 30 years--are well funded and healthy, well invested and will be around for many years to come providing excellant benefits at much lower cost than insured arrangements. I believe that a VEBA is a good solution to maintain benefits provided that it is appropriately funded from the inception.

Posted by: Joyce Mader | Oct 30, 2007 7:45:15 AM

Have you had any experience with VEBAs for small empoloyers in the same line of business either within one state or across 3 contiguous states?
Don Levit

Posted by: Don L. | Oct 30, 2007 1:54:12 PM

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