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How some companies are clearing retiree-health-benefit liabilities off their balance sheets.
Avital Louria Hahn, CFO Magazine
December 1, 2007
Voluntary employee beneficiary associations, or VEBAs, have existed in some form since 1928, but only recently have companies begun to shift not just a portion of their health-benefits expense but the entire obligation to trusts administered by unions. The appeal for a company is clear: It negotiates a lump-sum payment that allows it to clear a costly obligation off its books.
In a move that may be of great interest to other large companies, General Motors recently unloaded $47 billion in retiree-health-care obligations to a VEBA with a $30 billion payment. In so doing it followed in the footsteps of Dana, Goodyear Tire & Rubber, and others, with large companies such as Verizon Communications watching to see how it plays out.
The deals, which, according to attorney Andrew Kramer, are considered transfers of balance-sheet liabilities for retiree health benefits under FAS 106, must win court approval. They must also win union approval, which means unions must feel confident they can administer the funds appropriately.
Some wonder whether the $30 billion that the United Auto Workers Union will receive will suffice. Says attorney Robert Buydens of Butzel Long in Detroit, who has structured VEBAs, "$17 billion is not being paid for." He continues, "If you think you can invest fast enough and well enough to make up for that, that's good. But if you can't, obviously there is going to be a deficiency."
Companies interested in exploring the VEBA option should assess their rights and obligations with respect to modification or termination of retiree health benefits, be prepared to disclose plenty of data, and expect the union(s) to file a class-action lawsuit on behalf of members (this is a required legal step en route to court approval). It's wise to hire a financial adviser to help determine a buyout number, time horizon of the funding, and attendant analysis of benefits.