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Copyright (C)
2008 Veba
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President &
CEO, Lance

  • Member of the
    AICPA faculty of
  • AICPA author,
    instructor &
    national speaker.
  • National Society of
    Speaker of the
  • Writes financial
    articles for over 50
Copyright (C)
2008 Veba
Plan LLC
All rights
Most call VEBA good deal for GM
Plan offers security for employees

Brian J. O'Connor / The Detroit News
Fall 2007

The historic new contract tentatively agreed to by
General Motors Corp. and the United Auto Workers has
introduced a new phrase to the Motown vocabulary -- the
voluntary employees' beneficiary association, or VEBA for

Q . What is a VEBA?
A . A VEBA is a specialized tax-free health care trust fund
that will pay for the future benefit costs of a company's
current or retired workers. These trusts go back to the
1920s, when they were created after large employers
defaulted on promised benefits.
The idea is that employers set aside money today for
promised benefits so that if the company runs short of
cash or even ends up driven into bankruptcy, the money
still will be on hand to pay for pensions, health care or
other benefits. According to the Internal Revenue Service,
there were about 12,500 VEBA trusts in 2005.

Q . How does a VEBA work?
A . Employers make a tax-free contribution to a trust fund,
which, in GM's case, becomes the responsibility of the
UAW. The union will have to set up a board to oversee
the trust, set policies and select managers to invest and
oversee the money. Dollars in a VEBA grow tax-free and
are untaxed when used to pay benefits.
VEBAs all share a basic framework under the tax code,
with lots of room to customize each trust. We won't know
exactly how the GM VEBA will work until details are
released to the public.

Q . Is this a good deal for GM?
A . Almost everyone connected with business or the auto
industry says yes. The VEBA allows GM to get out from
under about $50 billion worth of future health care costs
for its union retirees -- at a discount. GM is expected to
pay $35 billion -- still a lot of cash, but less than $50
billion. In fact, there was no guarantee the bill wouldn't go
higher over the years.
Part of the health care issue for automakers is that deals
signed decades ago didn't anticipate today's longer life
spans, expensive high-tech treatments and cures and the
rapid rise in health care costs. In 2006, for example, those
costs rose by 6.9 percent -- twice the rate of inflation.
The VEBA also boosts GM stock by making the
automaker look more profitable. Recent changes to
pension and tax laws require corporations to account for
the estimated future cost of health care commitments on
their balance sheets today, and that cost soon will vanish
for GM. The company also won't have to pay out the
actual billions in cash that go for retiree health care each
year, easing its cash flow and adding to its bottom line.

Q . And what about the union?
A . The best thing about a VEBA is that it takes away
uncertainty for union workers. Don't forget, less than two
years ago some analysts were using the words "GM" and
"bankruptcy" in the same sentence. If the General went
belly-up, retirees could have seen all their benefits wiped
It also means the union won't have to fight GM over
retiree health benefit cuts, which the automaker could
have sought to save money on health care, such as
requiring co-pays, reducing coverage or capping

Q . Is there a down side?
A . You bet. The union is now in the health care financing
business. Before, GM offered a defined benefit plan. If a
bunch of retired workers needed $1 million hospital
treatments, GM had to cough it up. Now the union's VEBA
has to cover that cost. If the money runs out, the VEBA
can't go raising more cash like GM could by converting
shares of stock or selling off a bunch of new Malibus and
The union will have to invest the money wisely for the
long term, keep it safe from union politics and -- if the
money starts running short -- raise cash from members,
charge co-pays for service, cut benefits or do all three.

Q . Do VEBAs work?
A . Yes and no. Critics point to VEBAs at Caterpillar and
Detroit Diesel that ran out of cash. On the other hand, the
VEBA at Navistar (formerly International Harvester) was
set up when the company was in bankruptcy in 1992, and
still is going strong. Ford already has a limited VEBA in
place, and GM has one that was set up in 2005 to cover
some limited benefits costs. Retirees from the United
Steelworkers of America have VEBAs at four
Pennsylvania steel mills and Brinks Co. set aside $200
million of the $1.1 billion it got for the 2005 sale of its BAX
division for a VEBA. Another plan was set up by
Goodyear last year for $1 billion.

Q . What are the reasons a VEBA works or fails?
A .
There are three key elements in any VEBA,
said Lance Wallach, a financial planner who has
set up many plans and is president of VEBAplan.

The most important element is how much money is there
to start with. Ideally, the plan is 100 percent funded,
Wallach said. In GM's case, the plan is 70 percent
funded. That means the money will have to grow to cover
the costs (which rarely happens, Wallach says) or the
union will need to do a good job of managing the trust's
health care payouts.

Management: A VEBA needs a board that makes
responsible decisions about how to manage the fund and
where to invest its assets. This usually isn't a problem
with professional investment advisers, Wallach said.

Plan structure: The final key is how the trust manages the
care of its members and works to reduce costs. The
VEBA won't have any more leverage in getting discounts
from health care providers, drug companies and others,
so the trust should aim to actively manage the health care
of its members. That could include wellness incentives for
members to lose weight, stop smoking and take better
care of themselves, or moving to managed care or other

Q . Would GM have to bail out the union if the VEBA fell
short or health care costs rose by some tremendous
A . Experts say that would be rare in a VEBA, but some
reports say it could be in the GM deal.
The point of creating the trust fund is that the future
liability no longer belongs to the company. Accounting
rules require a company to carry expected costs on its
books, so if there was some chance GM would be putting
up more money to guarantee a VEBA, the company would
have to take some kind of charge, which runs counter to
the goal of entirely wiping those costs off its balance
GM is paying now so that it doesn't have to pay later.
Analysts say it's unlikely the company would agree to pay
twice for retiree health care when it argues that it couldn't
afford to pay even once.

Q . What if we get national health care or if the VEBA
investments make a tremendous amount? Would GM get
some money back?
A . We won't know until we see the details, but typically
when a union takes on all the future risk, there would be
no reason for it to share any unexpected gains. If,
however, GM guarantees the VEBA against some losses,
it might want a share of any excess gains in return.
million VEBA it On the other hand, GM is allowed to take
cash out of the $20 established in 2005, a fund created to
run through 2011 with money from deferred UAW salary
increases. The deal on that VEBA allowed GM to
withdraw cash equal to what the company spent on
health care for a period, which came to about $6 billion in

Q . Will GM just write a giant check for the VEBA?
A . VEBAs can be financed with cash, stock or a
combination. In the union's case, it probably wants an all-
cash deal, or at least as much cash as it can get. That
way the union doesn't bear the risk of GM stock dropping
if the automaker runs into more trouble.
GM, however, would rather fund the VEBA with its stock,
which would come out of the company's treasury holdings
and leave its cash supply untouched.

Q . Bottom line: Is this good or bad -- and for whom?
A . The VEBA gives the UAW insurance that its retirees
get benefits -- and insurance comes at a cost. In this
case, that's giving 30 percent discount on GM's cash
contribution and taking on most or all of the risk and
responsibility. On the other hand, if GM tanks, the union's
VEBA money stays in the trust fund, safe and sound.
The VEBA gives GM relief from a cash drain of more than
$3 billion annually and another $50 billion on its balance
Its stock will immediately gain and the cost of its labor will
drop to be more competitive with U.S. plants run by its
nonunion Japanese rivals.
If it works out as planned, both sides can stop wrangling
over retiree benefits, concentrate on building good cars
that sell at a good profit -- and keep all the promises
made to the loyal workers on the line. That's an outcome
that would have both GM and the UAW shouting, "Viva

You can reach Brian O'Connor at (313) 222-2145 or
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