United Auto Workers revvingup the Big Three's VEBA

Just months after locking up an innovative deal to manage the crushing costs of medical coverage for the Big Three’s retirees, the United Auto Workers union is revving up a $50 billion trust fund that could liberate the struggling automakers from one of their most burdensome expenses — and prompt other employers to seek similarly creative solutions to their own retiree medical issues.

The union-run fund, known as a voluntary employees’ beneficiary association, or VEBA, is quickly taking shape, with several key outsiders recently tapped to help oversee the health-care trust. In addition, General Motors Corp., Ford Motor Co. and Chrysler LLC have been tweaking their balance sheets so they can fund the VEBA, which will allow them to offload billions of dollars in medical benefits owed to hundreds of thousands of retirees. And on April 28, Ford gained preliminary approval from a federal judge over its VEBA agreement with the UAW, making it the last of the automakers to gain such court approval.

It’s a confluence of events that could affect more than the Big Three, the UAW and the retirees. This VEBA — or at least the appeal of management finding relief from providing retiree medical care — has many corporations closely watching the developments.

“Settling these obligations is a top priority for scores of companies,” said Stephen Parahus, senior health-care consultant at Towers Perrin in New York. “A VEBA may not be the exact answer for every company in every one of these industries, but what the automakers are doing is still highly relevant.”

The Big Three’s VEBA was the foundation of the collective bargaining agreement the UAW reached with each of the companies last year. By agreeing to pony up tangible assets to prefund the VEBA, the automakers can distance themselves from roughly $85 billion in combined retiree medical obligations that have weighed on them for years. The UAW, in return, receives a total of about $52 billion in cash and securities from the companies over the next several years, which it will independently manage through the VEBA to help fund the long-term medical needs of unionized retirees.

To make sure the vehicle is prudently managed (the UAW estimates the VEBA is capable of paying out benefits to retirees for the next 80 years), a select group of health-care, labor and retirement experts has been tapped to oversee the fund. The courts have to approve the committee members, but at the top will be Robert Naftaly, a former Blue Cross Blue Shield of Michigan executive, who will serve as the VEBA’s chairman.

Mr. Naftaly will be joined on the oversight committee by Olena Berg-Lacey, a former assistant secretary of labor; Marianne Udow-Phillips, director of the Center for Healthcare Quality and Transformation, Ann Arbor, Mich.; Teresa Ghilarducci, a retirement policy guru at the New School for Social Research, New York; David Baker Lewis, founder of Detroit-based law firm Lewis & Munday; and Ed Welch, director of the Workers’ Compensation Center at Michigan State University’s School of Labor and Industrial Relations in East Lansing, Mich..

“They’re each incredibly talented and thoughtful individuals with great perspectives to offer on health care and labor,” said Suzanne Taranto, a West Patterson, N.J.-based principal and consulting actuary at Milliman Associates, the actuarial firm the UAW tapped last year to help craft the VEBA.

Several of these committee members were also involved when the UAW agreed to modify health-care benefits for GM and Ford retirees in 2005, Ms. Taranto added. “This is a massive conversion with significant responsibilities,” she said, “and you need experienced people overseeing it.”

Even for the most seasoned individuals, however, managing the VEBA will be a challenge. “Liquidity will be a huge issue,” said Ms. Taranto. The trick, she said, will be to find a way to balance the VEBA’s stream of long-term liabilities with a number of short-term variables, including medical inflation and the portion of retirees requiring coverage each year.

“You’re building a multibillion-dollar fund from the ground up here, so you need just about everything,” said Bob Stevenson, an attorney at Stevenson Keppelman Associates, Ann Arbor, Mich., an employee benefits law firm that helped structure VEBAs for both the state of Michigan and Tower Automotive.

The UAW and the VEBA’s trustees will likely seek a number of third parties to run the fund, including a bank to serve as the custodian for the fund’s assets, as well as investment consultants, actuarial consultants, investment managers and perhaps new health-care providers, Mr. Stevenson said. “As overwhelming as it may seem, it can all come together pretty quickly.”

While the VEBA doesn’t become responsible for officially providing benefits to retirees until 2010, GM, Ford and Chrysler are taking steps to free up cash to make their respective contributions of $30 billion, $13 billion and $9 billion to the fund.

Ford established a “temporary asset account” at the beginning of this year to help segregate assets that will be transferred to the VEBA, according to the company’s latest 10-K filing. Ford noted it contributed $2.73 billion in cash to the account earlier this year and transferred a combined $6.3 billion in secured and convertible notes for longer-term funding. Similarly, GM said in its 10-K that it has issued $4.4 billion in convertible notes and $4 billion in short-term notes, among other things, to help fund the VEBA.

Chrysler, which will make $7.1 billion in cash contributions to the VEBA, according to a UAW statement, is expected to issue a note with a face value of $1.2 billion that will be transferred to the VEBA.

The Big Three will continue making payments for their retiree health-care costs this year and next, but each company has stated it expects to realize substantial cost savings and better cash flow immediately thereafter.

There’s still a ways to go, however. While the VEBA agreements have been given preliminary approval in the federal courts, final rulings will not come until later this year. The Securities and Exchange Commission must also weigh in on the accounting treatment for these transactions. Timelines for both are not publicly known.

Mark Bruno is a reporter for Financial Week, a sister publication of Pensions & Investments.