Car Companies Look to VEBA For Salvation

Image via WikipediaCar Companies and UAW Create a VEBA to Save on Benefit Costs

"What the hell is a VEBA?" you may ask. Some government agency? A new vulture investment group? Nope.

Buried in all the discussion about jets, jobs, and bailouts is the fact that US automakers are trying to hang on until 2009 when changes to their collective bargaining agreements kick in. These changes, negotiated in 2007 will save the auto makers billions of dollars by shifting the burden of major health care costs for current employees and retirees to something called a Voluntary Employee Benefit Association, or VEBA.

For an explanatory example, we turn to the UAW website created to explain a what the hell a VEBA is, in fairly plain English, to the UAW rank and file members from Chrysler.

LEGAL DISCLAIMER: The expensive attorneys retained by Human Race Horses require us to state that the following document is written to explain a complex benefit vehicle to people who work with this even less frequently than your average HR Generalist. This means it is dull, difficult to comprehend, and essentially will function best if taken as textual Ambien. May cause drowsiness. Do not operate heavy industrial equipment, drive automobiles, or seek to pilot your private corporate jet while reading! Please proceed with caution, or if you are a benefits geek!

Voluntary Employee Benefit Association on behalf of UAW Chrysler retirees

What is a VEBA?

A VEBA is an independent trust fund, similar in many respects to a pension trust.

Money contributed to the VEBA can only be used to provide your health care benefits. It can never be used for any other purpose. Even if Chrysler were to someday file for bankruptcy or be taken over by another group of owners, the money in the VEBA would be secure.

Solvency:

During these negotiations, the UAW bargaining team insisted that the independent VEBA trust must be funded with sufficient cash and other assets to provide lifetime solvency for your medical benefits, using reasonable assumptions about health care inflation, investment returns and numerous other factors.

We enlisted the help and assistance of outside experts, including Lazard Freres and Milliman, two of the best investment banking and actuarial firms in the country. We made it clear to Chrysler that we would never agree to a VEBA that was short on the funding required to provide benefits at current levels on a lifetime basis.

We are pleased to report that after months of difficult bargaining, Chrysler agreed to fund the VEBA in a manner sufficient to provide medical benefits on a lifetime basis for current and future retirees, based on reasonable projections.

Contributions from active workers:

A significant part of the VEBA funding is derived from sacrifices made by active UAW Chrysler workers, including a deferral of all COLA payments until an aggregate sum of $1.01 has been reached, which will put wages of Chrysler workers at parity with GM and Ford workers.

In addition to the aggregate deferral of $1.01, active Chrysler workers will contribute a 2 cents-per-quarter permanent COLA diversion and an additional 4 cents-per-quarter COLA diversion during the 2007-2011 agreement.

Active UAW members will also contribute the value of a wage increase otherwise payable in 2008 into an ongoing contribution to the VEBA beginning in 2009.

The UAW bargaining team and UAW Chrysler active workers are united in our desire to support and protect our retired brothers and sisters.

$8.8 billion in contributions from Chrysler:

In order to secure long-term funding for retiree health care, Chrysler will contribute $8.8 billion in cash and securities to the independent VEBA trust, including:

• $7.1 billion in cash contributions, beginning on Jan. 1, 2008 (although the VEBA does not take over responsibility for providing benefits until January 2010).

• Up to 20 additional annual $50 million payments. These "backstop" payments have a present value of $487 million and will be made any time the VEBA's funding level is projected to be insufficient to provide current benefit levels for at least 25 years from the date of the required payment.
• A financial instrument, backed by Chrysler, called a "debenture". This note will have a face value of $1.2 billion, and Chrysler will be required to pay annual cash interest on this note for the benefit of the VEBA.
  

Additional sources of VEBA funding:

On top of the $8.8 billion described above, the independent VEBA trust will have these additional sources of funding:

• A financial instrument issued by Chrysler, called a warrant, with a potential equity upside value of $605 million.
• Co-pension pass through arrangement, under which each retiree and surviving spouse currently receiving pension benefits will receive a special monthly pension benefit of $66.70, offset by a $51.67 contribution to the VEBA.
• Chrysler pays $1.5 billion in benefits until 2010, before the VEBA takes effect
• Chrysler will continue to provide retiree medical benefits at the modified levels described on pages 5-6, through Jan. 1, 2010, at a projected cost of roughly $1.5 billion.
  
  This obligation is in addition to the VEBA funding amounts described above.

The pension benefit is higher than the contribution requirement because it will be treated as taxable income in most situations. The combination of this special pension benefit, coupled with the additional VEBA contributions, will have little or no impact on the average retiree, since the special pension benefit will be sufficient to cover both the additional contribution to the VEBA and the payment of any additional taxes.

$10.3 billion total contribution by Chrysler: The total contribution by Chrysler for retiree health care, including the continuation of benefits through 2010 and the VEBA funding commitments described above (excluding the potential value of the warrant and the pension pass through arrangement) is equal to $10.3 billion.

VEBA trust pays benefits beginning on Jan. 1, 2010. Starting Jan. 1, 2010 (or later depending on final court approval) responsibility for retiree medical benefits will shift to the new VEBA.

The VEBA will pay health care benefits for UAW Chrysler retirees at the modified levels described on pages 5-6.

Sufficient resources to pay lifetime benefits: The funding level we have negotiated is expected to allow the VEBA to continue to provide benefits at modified levels for the lifetime of current and future retirees. VEBA funding was calculated based on reasonable projections regarding medical inflation rates, investment returns and other factors. If actual experience is consistent with these projections, the VEBA will have sufficient assets to provide modified benefits on a lifetime basis.

If actual experience is better than these projections (as a result, for example, of government action to finally address our country's health care crisis), the VEBA's funding status will exceed our projections, providing an additional layer of protection for your benefits.

If actual experience is worse than projections (if, for example, investment returns are lower than projected on a long-term basis), the VEBA trustees may need to make benefit adjustments to maintain long-term solvency. But we have made every effort to obtain the necessary funding to minimize that risk. Your bargaining team believes the risk of a future VEBA shortfall is clearly preferable to the risk of relying on Chrysler to continue providing retiree benefits indefinitely.

Contributions by retirees capped at 3% until 2016, 4% afterward: In order to achieve long-term solvency, the UAW bargaining team had to make an assumption about future cost savings. The proposed agreement assumes that monthly contributions for retirees under the modified benefit plan ($11 single/$22 family) and co-pays and deductibles can increase by no more than 3 percent each year through 2015.

Under the VEBA funding projections, we have assumed that this 3 percent cap on inflation increases remains in place through 2015 but will move to 4 percent starting in 2016. This change will have a relatively small impact. For example, in 2018 it would mean an expected monthly contribution $1 higher than it otherwise would have been. Twenty years from now, in 2027, the impact of the change would still be only $5 per month. Again, the actual experience of the fund may be better or worse than the projections, which may require the trustees to adjust these or other provisions over time.

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