Detroit Free Press
February 19, 2009
When the UAW and the Detroit Three agreed to create a health care trust in 2007, the move was heralded as a victory for the automakers, who would get to wipe billions of dollars in liabilities off their money-losing balance sheets at a huge discount.
But now, just two years later, the VEBA, which stands for Voluntary Employee Beneficiary Association, has become a major sticking point for the union and automakers as they try to finalize a deal that would help the automakers become more competitive and satisfy the requirements of the federal government.
As part of its $17.4 billion in loans to General Motors Corp. and Chrysler LLC, the government proposed that the union accept stock instead of cash to fund that VEBA.
The UAW has a tentative agreement with the Detroit Three on a variety of key areas – including wages, work rules and benefits – but it has drawn a line in the sand over the government’s stock proposal to fund the VEBA.
Retirees told the Free Press they are wary of the government’s proposal.
“It’s not good to tie the stock market in the VEBA plan,” said David Tyler, a Ford Motor Co. retiree who lives in Ypsilanti. “The volatility of the stock market is not in anybody’s control.”
Lance Wallach, a VEBA consultant with Plainview, N.Y.-based VEBA Plan, said the UAW already took a huge risk in 2007 when it agreed to set up the plan because it agreed to accept cash payments that were significantly less than the estimated future costs.
“This was a terrible deal,” Wallach said. “They got cheated once. Now, they are getting cheated again.”
Under the 2007 deal, the automakers were expected to put about $46.1 billion into the VEBA over time, ridding themselves of about $88 billion in estimated future health costs at a substantial discount.
GM originally agreed to pay $24.1 billion into the plan, with an additional $13.2 billion from Ford and $8.8 billion from Chrysler.
In December, when the federal government agreed to provide GM and Chrysler with $17.4 billion in loans, it included term sheets that required the union to consider accepting half the money due from GM and Chrysler for the retiree health care trust – but in stock instead of cash.
But the automakers’ stock price has been volatile and trading at historic lows, making its future value uncertain. On Wednesday, shares of GM closed at $2.06. Ford closed at $1.67 a share. Chrysler is a privately held company.
Ford has not applied for government loans and said the tentative agreements it has reached with the UAW on other issues will help it survive without federal aid – as long as it, too, reaches an agreement with the UAW for reduced or restructured VEBA obligations.
Doug Bernstein, a bankruptcy attorney and partner at Plunkett Cooney PC, said there is an additional risk with accepting stock instead of cash payments.
In any bankruptcy case, shareholders receive the lowest priority for debt payments and frequently don’t receive any payments.
On Wednesday, Moody’s investors Service said that the risk of a bankruptcy filing by GM and Chrysler remains high.
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Lance Wallach, CLU, ChFC, CIMC, speaks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at www.vebaplan.com.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. He does extensive expert witness work and has never lost a case.
Contact him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
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