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Plainview, NY 11803
ph: 516-938-5007
fax: 516-938-6330
Email:
LaWallach@aol.com
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AT&T, Verizon May Follow GM, Let Unions Take on
Retiree Costs
2007-10-15 00:01 (New York)
By Jeff Green and John Lippert
Oct. 15 (Bloomberg) -- AT&T Inc., the biggest U.S. phone
company, and No. 2 Verizon Communications Inc. may follow
General Motors Corp. in trying to shift retiree health-care liabilities
to a union-run fund, a move that has helped boost GM's shares 39
percent this year.
The largest U.S. automaker reached a landmark agreement with
the United Auto Workers last month to transfer $50 billion in
such obligations to a Voluntary Employee Beneficiary Association,
or VEBA. The telecommunications companies, which will both
negotiate new contracts with their unions in the next two years,
reported a combined $71 billion in retiree liabilities last year.
``We'll be watching'' how the GM union-run fund develops,
said Alberto Canal, a spokesman for New York-based Verizon. He
declined to give additional details. Verizon spends $3.5 billion
a year for health-care coverage for 900,000 active workers,
retirees and dependents, he said.
Verizon and AT&T both have a union that may set a precedent
for so-called VEBAs in separate talks with GM that started last
week. The Communications Workers of America's industrial unit is
considering a union-run fund for a GM plant it represents in Ohio.
Michael Coe, a spokesman for San Antonio-based AT&T, declined
to comment.
``Telecommunications are the next big group that will be
looking at VEBAs,'' said Howard Silverblatt, an analyst at
Standard & Poor's in New York. The ratings service estimates
companies in the S&P 500 had $387 billion in retiree health-care
and insurance commitments at the end of last year.
Setting the Stage
The GM agreement sets the stage for companies such as AT&T,
Verizon and aircraft maker Boeing Co. to also restructure
billions of dollars in retiree benefits, clearing out balance
sheets and capping health-care costs that rose by an average of
8.4 percent last year in the U.S.
Like GM, AT&T and Verizon might also get a share-price boost
from union-run funds, said George Foley, who oversees $1.1
billion in assets at Glenmede Trust Co. in Philadelphia. While
the gains may be smaller, ``the opportunity to move long-term
legacy liabilities off the balance sheet is dramatic,'' he said.
AT&T shares have risen 18 percent, and Verizon has gained 22
percent so far this year.
Several companies are already looking into union-run funds,
according to Andy Kramer, a partner and labor lawyer for Jones
Day in Washington, who has helped GM, Goodyear Tire & Rubber
Co. and auto-parts maker Dana Corp. establish such funds in the
last two years. He said he has received calls from
telecommunications
companies, auto-parts makers, and rubber and aluminum
producers. He declined to name them.
Sparked in 2005
Interest in retiree health-care trusts has been rising since
2005, when GM set up a $3 billion fund that it controlled with
the United Auto Workers as part of a plan to require union
retirees to pay health-care premiums for the first time, said
Lance Wallach, who runs VEBA Plan LLC, a consulting
company in Plainview, New York.
About a third of Wallach's business is talking to private-
equity investors and venture capitalists about the risks of
retiree health-care liabilities and the potential for unlocking
their value from companies' balance sheets, he said. ``These are
venture-capital guys looking for an edge.''
Exelon Fund
New accounting rules this year force companies to add
retiree health-care costs as a liability on their balance sheets,
a shift that turned GM and Ford Motor Co. shareholder value
negative, Kramer said. Offloading the funds to the union will
reverse the shortfalls.
Exelon Corp., the largest U.S. utility owner by market value,
is considering a retiree health-care trust fund, said Jennifer
Medley, a spokeswoman for the Chicago-based company.
Exelon had $3.3 billion in retiree health-care liabilities
at the end of last year, according to S&P.
The company's workers are represented by the International
Brotherhood of Electrical Workers. Jim Spellane, a spokesman for
the union, said in an e-mailed statement that ``a number of
utilities have VEBAs to cover retiree health-care costs.'' He
declined to comment on Exelon.
Prospects that AT&T and Verizon might follow GM and Exelon
could get a boost from the negotiations between GM and the
International Union of Electronic Workers-Communication Workers
of America.
The industrial bargaining unit of the CWA is seeking a new
agreement for 2,300 active workers and 21,000 retirees and
surviving spouses at GM's Moraine, Ohio, sport-utility vehicle
plant that may include a union-run fund, local President Jim
Clark, 52, said in an interview. The current agreement expires
today.
The union will consider a fund for the plant if GM provides
sufficient funding, he said. That may set a precedent for
telecommunications companies, too. ``Anything we do in the labor
area has an impact on all unions, not just the CWA,'' he said.
Large Obligations
The Washington-based telecommunications union also
represents workers at AT&T, Verizon and Qwest Communication
International Inc. in Denver, the second-, fourth- and 13th-
largest companies ranked by retiree obligations in the S&P 500.
The union will negotiate with Verizon and Qwest next year and
AT&T in 2009.
``We've watched developments regarding the VEBA,'' said
Qwest spokesman Robert Toevs.
The telecommunications industry is similar to the automotive
business in that it has large union retiree-health obligations
plus ``readily available assets that you could contribute without
killing your cash flow,'' S&P's Silverblatt said.
Verizon, AT&T and Qwest had combined profits of $14.1
billion last year, compared with losses of $15 billion at the
three U.S.-based automakers.
Verizon Swaps
Credit-default swaps tied to Verizon bonds, used to
speculate on the company's ability to repay its debt, have fallen
3 basis points to about 18 basis points this year, according to
CMA Datavision in London. A decline in the five-year contracts
suggests improvement in the perception of credit quality; an
increase suggests the opposite.
Contracts tied to AT&T have risen 5 basis points to about 23
basis points, CMA prices show.
For unions, the funds are a chance to lock in benefits
before they are cut or eliminated.
Healthy Option
Even a union at a healthy company is more likely to consider
a VEBA now that GM has one, said Harry Katz, dean of the School
of Industrial and Labor Relations at Cornell University in Ithaca,
New York.
``Unions don't have the bargaining power they once had, and
this is one way to defend existing benefits and avoid less
agreeable concessions,'' he said. ``The relative power of labor
is lowered in both healthy and unhealthy industries.''
Employers may be more willing to come up with the funds to
create a retiree trust than they are willing to guarantee
benefits far into the future, said Katz, who has studied
telecommunication unions.
The new UAW fund for GM takes effect in January 2010. It
will cover 412,356 active workers, retired members and surviving
spouses and is designed to pay benefits for at least another 80
years, union President Ron Gettelfinger said. GM will contribute
$24.1 billion in cash and a $4.3725 billion bond convertible to
GM shares and pledge as much as $1.6 billion over 20 years to
help prevent a shortfall.
``One of the real benefits to the retiree in this whole deal
is that sum of money is forever allocated; it can't be taken
away,'' said Kramer, who has represented companies for Jones
Day since 1983.
The UAW has already run a retiree health-care fund at
truckmaker Navistar International Corp. since 1994. Gettelfinger
last week won an agreement with Chrysler LLC similar to the GM
deal and is seeking one with Ford.
`Less Risk'
Unions also stand to gain greater influence over public and
corporate policy as they invest in health-care funds, said Ron
Blackwell, chief economist for the AFL-CIO, a federation of U.S.
unions representing 10 million workers.
``They are going to be activist investors,'' Blackwell said.
The International Association of Machinists & Aerospace
Workers at Lockheed Martin Corp. might consider a VEBA if one
were proposed, said union spokesman Frank Larkin. The Society
of Professional Engineering Employees in Aerospace at Boeing
hasn't ruled out a VEBA, union spokesman Bill Dugovitch said.
Boeing spokesman Todd Blecher and Scott Lusk, a spokesman
for Bethesda, Maryland-based Lockheed, both declined to
comment on potential future bargaining issues.
The unions also take a risk by assuming responsibility for
health care, said Susan Helper, an economics professor who
focuses on labor issues at Case Western Reserve University in
Cleveland.
VEBA Failure
The UAW has negotiated at least one union-controlled fund
that failed. Six years after Caterpillar Inc., the world's
biggest maker of earth-moving equipment, handed over control of a
$32.3 million trust to the union as part of a 1998 agreement, the
fund ran out of money. Retirees who lost health-care benefits
sued the company, receiving class-action status for the case in a
federal court in Nashville in July.
The UAW applied lessons from the Caterpillar experience in
making the GM deal, said Sean McAlinden, an analyst at the Center
for Automotive Research in Ann Arbor, Michigan.
``The-life-and-death cycle of companies is getting more
finite,'' McAlinden said. ``We cannot in this economy make long-
term promises, and so these independent trusts will have to stand
in their place.''
--With reporting by Crayton Harrison in Dallas; James
Gunsalus in Seattle; Rachel Layne, Christopher Condon and
Edmond Lococo in Boston; Mike Ramsey, Jeff Bennett and
Bill Koenig in Southfield, Michigan; Shannon Harrington,
Linda Shen, Jim Polson, Heather Burke, Courtney Dentch and Jack
Kaskey in New York; and Dale Crofts and Joe Carroll in Chicago.
Editor: Langeland (sjp/dsv/tla)
To contact the reporters on this story:
Jeff Green in Southfield, Michigan, at +1-248-827-2945 or
jgreen16@bloomberg.net;
John Lippert in Southfield, Michigan, +1-248-827-2941 or
jlippert@bloomberg.net
To contact the editor responsible for this story:
Dave Versical at +1-248-827-2944 or
dversical@bloomberg.net
Retiree Costs
2007-10-15 00:01 (New York)
By Jeff Green and John Lippert
Oct. 15 (Bloomberg) -- AT&T Inc., the biggest U.S. phone
company, and No. 2 Verizon Communications Inc. may follow
General Motors Corp. in trying to shift retiree health-care liabilities
to a union-run fund, a move that has helped boost GM's shares 39
percent this year.
The largest U.S. automaker reached a landmark agreement with
the United Auto Workers last month to transfer $50 billion in
such obligations to a Voluntary Employee Beneficiary Association,
or VEBA. The telecommunications companies, which will both
negotiate new contracts with their unions in the next two years,
reported a combined $71 billion in retiree liabilities last year.
``We'll be watching'' how the GM union-run fund develops,
said Alberto Canal, a spokesman for New York-based Verizon. He
declined to give additional details. Verizon spends $3.5 billion
a year for health-care coverage for 900,000 active workers,
retirees and dependents, he said.
Verizon and AT&T both have a union that may set a precedent
for so-called VEBAs in separate talks with GM that started last
week. The Communications Workers of America's industrial unit is
considering a union-run fund for a GM plant it represents in Ohio.
Michael Coe, a spokesman for San Antonio-based AT&T, declined
to comment.
``Telecommunications are the next big group that will be
looking at VEBAs,'' said Howard Silverblatt, an analyst at
Standard & Poor's in New York. The ratings service estimates
companies in the S&P 500 had $387 billion in retiree health-care
and insurance commitments at the end of last year.
Setting the Stage
The GM agreement sets the stage for companies such as AT&T,
Verizon and aircraft maker Boeing Co. to also restructure
billions of dollars in retiree benefits, clearing out balance
sheets and capping health-care costs that rose by an average of
8.4 percent last year in the U.S.
Like GM, AT&T and Verizon might also get a share-price boost
from union-run funds, said George Foley, who oversees $1.1
billion in assets at Glenmede Trust Co. in Philadelphia. While
the gains may be smaller, ``the opportunity to move long-term
legacy liabilities off the balance sheet is dramatic,'' he said.
AT&T shares have risen 18 percent, and Verizon has gained 22
percent so far this year.
Several companies are already looking into union-run funds,
according to Andy Kramer, a partner and labor lawyer for Jones
Day in Washington, who has helped GM, Goodyear Tire & Rubber
Co. and auto-parts maker Dana Corp. establish such funds in the
last two years. He said he has received calls from
telecommunications
companies, auto-parts makers, and rubber and aluminum
producers. He declined to name them.
Sparked in 2005
Interest in retiree health-care trusts has been rising since
2005, when GM set up a $3 billion fund that it controlled with
the United Auto Workers as part of a plan to require union
retirees to pay health-care premiums for the first time, said
Lance Wallach, who runs VEBA Plan LLC, a consulting
company in Plainview, New York.
About a third of Wallach's business is talking to private-
equity investors and venture capitalists about the risks of
retiree health-care liabilities and the potential for unlocking
their value from companies' balance sheets, he said. ``These are
venture-capital guys looking for an edge.''
Exelon Fund
New accounting rules this year force companies to add
retiree health-care costs as a liability on their balance sheets,
a shift that turned GM and Ford Motor Co. shareholder value
negative, Kramer said. Offloading the funds to the union will
reverse the shortfalls.
Exelon Corp., the largest U.S. utility owner by market value,
is considering a retiree health-care trust fund, said Jennifer
Medley, a spokeswoman for the Chicago-based company.
Exelon had $3.3 billion in retiree health-care liabilities
at the end of last year, according to S&P.
The company's workers are represented by the International
Brotherhood of Electrical Workers. Jim Spellane, a spokesman for
the union, said in an e-mailed statement that ``a number of
utilities have VEBAs to cover retiree health-care costs.'' He
declined to comment on Exelon.
Prospects that AT&T and Verizon might follow GM and Exelon
could get a boost from the negotiations between GM and the
International Union of Electronic Workers-Communication Workers
of America.
The industrial bargaining unit of the CWA is seeking a new
agreement for 2,300 active workers and 21,000 retirees and
surviving spouses at GM's Moraine, Ohio, sport-utility vehicle
plant that may include a union-run fund, local President Jim
Clark, 52, said in an interview. The current agreement expires
today.
The union will consider a fund for the plant if GM provides
sufficient funding, he said. That may set a precedent for
telecommunications companies, too. ``Anything we do in the labor
area has an impact on all unions, not just the CWA,'' he said.
Large Obligations
The Washington-based telecommunications union also
represents workers at AT&T, Verizon and Qwest Communication
International Inc. in Denver, the second-, fourth- and 13th-
largest companies ranked by retiree obligations in the S&P 500.
The union will negotiate with Verizon and Qwest next year and
AT&T in 2009.
``We've watched developments regarding the VEBA,'' said
Qwest spokesman Robert Toevs.
The telecommunications industry is similar to the automotive
business in that it has large union retiree-health obligations
plus ``readily available assets that you could contribute without
killing your cash flow,'' S&P's Silverblatt said.
Verizon, AT&T and Qwest had combined profits of $14.1
billion last year, compared with losses of $15 billion at the
three U.S.-based automakers.
Verizon Swaps
Credit-default swaps tied to Verizon bonds, used to
speculate on the company's ability to repay its debt, have fallen
3 basis points to about 18 basis points this year, according to
CMA Datavision in London. A decline in the five-year contracts
suggests improvement in the perception of credit quality; an
increase suggests the opposite.
Contracts tied to AT&T have risen 5 basis points to about 23
basis points, CMA prices show.
For unions, the funds are a chance to lock in benefits
before they are cut or eliminated.
Healthy Option
Even a union at a healthy company is more likely to consider
a VEBA now that GM has one, said Harry Katz, dean of the School
of Industrial and Labor Relations at Cornell University in Ithaca,
New York.
``Unions don't have the bargaining power they once had, and
this is one way to defend existing benefits and avoid less
agreeable concessions,'' he said. ``The relative power of labor
is lowered in both healthy and unhealthy industries.''
Employers may be more willing to come up with the funds to
create a retiree trust than they are willing to guarantee
benefits far into the future, said Katz, who has studied
telecommunication unions.
The new UAW fund for GM takes effect in January 2010. It
will cover 412,356 active workers, retired members and surviving
spouses and is designed to pay benefits for at least another 80
years, union President Ron Gettelfinger said. GM will contribute
$24.1 billion in cash and a $4.3725 billion bond convertible to
GM shares and pledge as much as $1.6 billion over 20 years to
help prevent a shortfall.
``One of the real benefits to the retiree in this whole deal
is that sum of money is forever allocated; it can't be taken
away,'' said Kramer, who has represented companies for Jones
Day since 1983.
The UAW has already run a retiree health-care fund at
truckmaker Navistar International Corp. since 1994. Gettelfinger
last week won an agreement with Chrysler LLC similar to the GM
deal and is seeking one with Ford.
`Less Risk'
Unions also stand to gain greater influence over public and
corporate policy as they invest in health-care funds, said Ron
Blackwell, chief economist for the AFL-CIO, a federation of U.S.
unions representing 10 million workers.
``They are going to be activist investors,'' Blackwell said.
The International Association of Machinists & Aerospace
Workers at Lockheed Martin Corp. might consider a VEBA if one
were proposed, said union spokesman Frank Larkin. The Society
of Professional Engineering Employees in Aerospace at Boeing
hasn't ruled out a VEBA, union spokesman Bill Dugovitch said.
Boeing spokesman Todd Blecher and Scott Lusk, a spokesman
for Bethesda, Maryland-based Lockheed, both declined to
comment on potential future bargaining issues.
The unions also take a risk by assuming responsibility for
health care, said Susan Helper, an economics professor who
focuses on labor issues at Case Western Reserve University in
Cleveland.
VEBA Failure
The UAW has negotiated at least one union-controlled fund
that failed. Six years after Caterpillar Inc., the world's
biggest maker of earth-moving equipment, handed over control of a
$32.3 million trust to the union as part of a 1998 agreement, the
fund ran out of money. Retirees who lost health-care benefits
sued the company, receiving class-action status for the case in a
federal court in Nashville in July.
The UAW applied lessons from the Caterpillar experience in
making the GM deal, said Sean McAlinden, an analyst at the Center
for Automotive Research in Ann Arbor, Michigan.
``The-life-and-death cycle of companies is getting more
finite,'' McAlinden said. ``We cannot in this economy make long-
term promises, and so these independent trusts will have to stand
in their place.''
--With reporting by Crayton Harrison in Dallas; James
Gunsalus in Seattle; Rachel Layne, Christopher Condon and
Edmond Lococo in Boston; Mike Ramsey, Jeff Bennett and
Bill Koenig in Southfield, Michigan; Shannon Harrington,
Linda Shen, Jim Polson, Heather Burke, Courtney Dentch and Jack
Kaskey in New York; and Dale Crofts and Joe Carroll in Chicago.
Editor: Langeland (sjp/dsv/tla)
To contact the reporters on this story:
Jeff Green in Southfield, Michigan, at +1-248-827-2945 or
jgreen16@bloomberg.net;
John Lippert in Southfield, Michigan, +1-248-827-2941 or
jlippert@bloomberg.net
To contact the editor responsible for this story:
Dave Versical at +1-248-827-2944 or
dversical@bloomberg.net
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