By SHARON TERLEP And MATTHEW DOLAN
The Wall Street Journal, November 7, 2011
DETROITāRetirement trust funds created to cover billions of dollars in medical costs for unionized workers and their families are running short, forcing the funds to cut costs, trim benefits, and ask retirees and companies to pony up more cash.
The biggest such fundāa trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependentsāis underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.
The funds, known as VEBAs, or voluntary employee beneficiary associations, are being hit by rising medical costs and poor investment performance. Their funding comes in part from company stock, rather than just cash payments, making them vulnerable to the market’s volatility.
Fearing a shortfall, the UAW is looking for answers in its U.S. government-orchestrated bailout deals with General Motors Corp. and Chrysler. The union, under new labor accords reached last month with GM, Ford Motor Co. and Chrysler, will seek to divert 10% of active workers’ profit-sharing checks into the VEBA funds, but the plan still needs to clear legal hurdles and could get blocked by the auto makers.
Improved investment returns could reduce the shortfall over time. And, if the union doesn’t win approval to transter funds, it has some leeway to make benefit cuts before the funds run short of cash because UAW retirees still get richer benefits than most retired workers,
Without some sort of intervention, the gap could grow quickly. This past summer, Joe Ashton, the UAW’s top official dealing with GM, said the VEBA performance was weighing on the union. “It’s definitely an issue,” he said.
The UAW also isn’t the only union being squeezed.
In Pittsburgh, the United Steel Workers union is laboring to provide benefits to tens of thousands of employees covered by more than 30 VEBAs. “No matter how good your investment performance is, you are not going to be able to keep up with health-care inflation,” says Tom Conway, vice president of the USW. “The trustees are having to take a serious look at increasing premiums, and the retiree contribution has to be bigger.”
Union-run VEBAs gained popularity in the last decade as a way to clear retiree-benefit obligations off companies’ books and shift the burden to independent trust funds. Often, they were last-ditch efforts by unions to salvage health-care benefits for their members amid major restructurings or bankruptcies. But now that the VEBAs are running low on cash, unions are the ones doing the slashing.
Two years ago, when the UAW VEBA cut its ties with auto makers and became an independent trust, it quickly trimmed some prescription benefits, including free Viagra, and boosted co-payments for retirees. Next year, it will increase deductibles and out-of-pocket payments by participants, according to a statement posted on its Web site this fall.
Vincent Forbes, a GM retiree from Lansing, Mich., says he has managed without the dental and vision benefits he lost in the shift to the VEBA. “It’s the reality of what people are dealing with today,” he says. “Other people have to pay for these kinds of benefits. I don’t mind paying a little bit more.”
VEBA benefits are considered generous by many standards and many other retirees have lost benefits as companies eliminated retiree health-care funding. Just 26% of large U.S. companies that provide health care extend those benefits to retirees, down from 37% a decade ago, according to the Kaiser Family Foundation.
The UAW first agreed to let the Detroit Three auto makers offload their obligation to fund health-care benefits for retirees in a 2007 labor agreement. By the end of that year, GM had spent $4.6 billion on health care for active and retired workers, more than it spent on steel.
Under the 2007 pact, the auto companies paid into the separate trust immediately and agreed to a series of future payments. Combined, the three auto makers committed $54 billion. Today, the trust is one of the largest private health-care providers in the nation.
Since then, the Detroit car companies have heralded the agreement as transformative because their health-care costs had made them uncompetitive with their nonunionized rivals.
In 2009, when GM and Chrysler fell into bankruptcy, the government-brokered restructuring allowed the auto makers to use more company stock to fulfill their obligation to contribute to the VEBA. (The trust cashed out its holdings in Ford in 2010.)
That year, it also became clear that the UAW would have to do something to shore up the VEBA. The fund was stretched because returns were falling short of assumptions and health-care costs were rising faster than expected, people involved in the restructuring say. The volatility increased after the UAW agreed to accept more payments from GM and Chrysler in stock. GM shares have dropped 28% since its IPO last year, further affecting the VEBA’s bottom line.
GM declined to comment.
“At that time, everybody understood the VEBA would probably not cover all of retirees’ health care benefits and that the UAW or trustees of the VEBA would have to made decisions about cutbacks,” said Steven Rattner, who headed the Obama administration’s bailout and restructuring of the U.S. auto industry. “It was going to their problem, not the companies’ problem.”
The UAW VEBA has indeed fallen short of the 9% annual return that was assumed at the fund’s creation to be enough to provide current benefits to retirees for 80 years, says UAW President Bob King . Health-care costs, meantime, have risen far more quickly than the 5% a year assumed by the union.
According to VEBA trust officials, the funds for all autos averaged a 9.7% rate of return in 2010. They decline to say how the funds have performed in 2011 but, in response to written questions, they say the fund has adopted a more conservative assumption of 7% going forward. At GM, the fund currently has total assets of $33.23 billion and total benefit obligations of $44.68 billion, resulting in an $11.4 billion, or 26%, shortfall.
In negotiations this year with GM, union bargainers sought help to cover itsVEBA costs, according to two people familiar with the discussions. GM quickly shot down the idea but the two sides reached a compromise.
The UAW, if it clears legal hurdles, will look to transfer 10% of the profit sharing GM pays current workers under the contract directly to the VEBA. Such a step is expected to increase funding by around $40 million a year. The original court settlements bar the company from making additional direct contributions, but they permit this transfer, according to lawyers who worked on the deal. GM, in negotiations, expressed “serious threshold accounting, tax, legal and other concerns,” according to UAW documents. If those concerns are addressed within a year, the union could begin diverting cash.
Mr. King, speaking to reporters, said he is “really confident” the transfer from profit sharing will clear regulatory hurdles.
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