HEALTHCARE SPECIAL: VEBAs in the Auto Industry
Once partners in pioneering employer-union health benefit plans in the early 1950s, the United Auto Workers Union (UAW) and the big-three auto companies—General Motors, Chrysler, and Ford—now find themselves jointly presiding over the rapid dismantling of that very system. The transition vehicle which now makes possible the accelerating collapse of employer financed health benefit plans is called a VEBA (Voluntary Employee Beneficial Association). On the shop floor in the auto industry it is sarcastically referred to by the rank and file as Vandalizing Employee Benefits Again.
This past October the UAW and GM established a VEBA health benefits fund. It was quickly followed by a Chrysler-UAW VEBA. And as this article is being written, the UAW and Ford Motor Co. have begun preliminary discussions on establishing the same, as the company and union prepare for general contract negotiations.
With a VEBA, what were once health benefit plans funded by the companies—with defined dollar contributions per employee per every hour worked deposited into the fund—are now transferred to the union to manage and run. The companies transfer the plans and the funds that remain left in them; the union now “owns” and administers them. The companies abandon all financial responsibility and liability for providing or financing health care benefits; the union assumes that same full liability and responsibility.
One problem is that the VEBAs of the U.S. big three auto companies are severely under-funded—individually and collectively. They have a total liability of approximately $100 billion, according to a New York Times article of October 6, 2007. However, the three will have only available total funds upon transfer to the UAW of around $50-$52 billion. That leaves about $48-$50 billion short. By any definition from any fiduciary source, a trust fund (a VEBA, pension, or other) with only a 50 percent funding ratio would be considered severely underfunded, a candidate for bankruptcy, and would be at significantly great risk of collapse.
The day of reckoning for funding the $50 billion shortfall may come sooner than later, as the auto companies know full well. Thus, the auto companies are conveniently exiting the game just in time, leaving the union and workers holding the bag.
Various sources estimate the GM VEBA fund’s total liability as high as $55 billion and its available funds at only around $35 billion, which leaves roughly $20 billion under-funded. But the available $35 billion includes only $29.9 billion cash and $4.4 billion company securities. The point is that under-funding in the GM VEBA may rise well beyond $20 billion should the value of the securities in the VEBA fall.
In the case of Chrysler the actual amount in the VEBA and its unfunded liability is murkier. Recently purchased by a private equity firm, Cerberus Capital Management, Chrysler is no longer a public company and need not report its finances in as much detail as GM or Ford. But it appears that Chrysler’s VEBA is reportedly only 53 percent funded, according to business sources. Chryslers’ VEBA shortfall may be around $13 billion.
With bargaining about to commence between the UAW and Ford, it is virtually certain that a third VEBA will be agreed to by the union. The only question is what percentage of the total liability will be available at transfer. Ford claims it is financially the least profitable of the big three. It will no doubt request even greater contract concessions from the UAW and offer less of a contribution to its VEBA than Chrysler or GM. In a Wall St. Journal article, one of the participants on the bargaining team, noted that “the two sides still haven’t agreed what Ford’s retiree health-care liability is—let alone how it will be funded.” One thing is certain, however, Ford is “trying to figure out a way to get more than GM got.” Ford will most likely contribute around $7 billion. With a total liability of around $22 billion, and available funds of $7 billion, that leaves an unfunded liability for the Ford-VEBA of roughly $15 billion.
UAW union leadership has thus far been unable to save other VEBAs it has negotiated in recent years. The most notable example was the early VEBA set up with the UAW-represented unit at Caterpillar in 1998. The VEBA there ran out of funds in 2004.
Other unions like the United Steelworkers have also set up VEBAs and they too are doing poorly. This leads one to suspect that perhaps VEBAs are not meant to be long term solutions, but only transitional devices on the way to what is the real endgame—to get workers to cash out their respective share of the fund at some future point and go buy an individual insurance health plan, called a Health Savings Account (HSA). HSAs represent the fundamental long-term direction Bush and corporate America want to drive the health benefits system. A VEBA is the intermediate stage on the way to HSAs and what Bush & Co. call consumer-driven healthcare. The editorial page of the Wall St. Journal recently suggested that once the VEBAs are transferred, the UAW should “rethink its coverage plans, using the new generation of consumer driven health care options (such as personal health savings accounts).”
It is likely that the VEBA under-funding crisis will further deteriorate. There will be few choices or options for effectively dealing with it. The following are some of possible, and not so attractive, alternatives.
First, the union can attempt to restore its under-funded VEBAs by raising dues for its members to restore the VEBA funds. Or, it can reduce benefit levels. Or both. Retiree members will resist benefit cutting and favor dues increasing. Actively working union members will reject the dues increasing and prefer benefit cutting. The two elements in the union—retirees and actively working members—will thus attempt to protect their respective interests at the other group’s expense. Internal dissension in the union will grow, undermining further the union’s future bargaining effectiveness. Both groups in turn will blame the union, since the union will now have to make the unpalatable decision to cut benefits or raise dues—not the companies and management as before.
Instead of raising dues the union could negotiate with the company to divert part of current hourly wages to the fund. But with new two tier wage structures and wage cuts of 50 percent or more in the new UAW-GM contract, it is not likely that wage diversion would be supported by union members.
An alternative route might be for the government to prop up VEBA funds by setting up an agency similar to the Pension Benefit Guarantee Corporation (PBGC), which currently administers the dismantling of pension funds. A PBGC socializes the costs with contributions from other companies whose funds are more stable. The PBGC then uses those contributions to partially pay out workers whose pensions go bust. Workers can cash out about half of what they would have earned in retirement from their now defunct pensions. At present, however, it is politically unlikely that a PBGC-like agency for VEBAs would happen.
Another possible route is for the government to change rules that now allow companies to transfer money from company pension funds to health care, in effect increasing the limits that can be transferred. Companies siphoning off pension funds to pay for rising health care costs has been going on for more than a decade now. The practice has contributed to a parallel crisis of under-funding for defined benefit pension plans. This option would move money from one leaky bucket to another. It’s not a real solution.
Government might let private sources like insurance companies and investment banks buy out an under-funded VEBA (at bargain discount prices of course) and then cash out workers from the VEBA at a fraction of its value. Insurance companies in the UK are now being allowed to pilot such leveraged buyouts of pension funds, in effect buying the fund and then managing it at a profit (and cutting benefits in the process). The concept could easily extend to VEBA funds. Severe cuts in benefit levels would almost certainly accompany such an option, however.
Finally, the government could bail out VEBAs on a case-by-case basis at direct taxpayer expense. After all, the Savings and Loan banks were bailed out to the tune of $1 trillion dollars at taxpayers’ expense in the 1980s. But what government might do for businesses, it is not likely to repeat for a union and its members. Thus, case by case bailouts of troubled, underfunded VEBAs is unlikely.
Yet the preceding option may be the long-term solution UAW leadership may be hoping for. It may be that UAW President Gettlefinger and staff are hoping VEBAs can be kept afloat for a few years until some kind of national health insurance can be enacted by a Democratic-controlled Congress. At that point they could roll the VEBAs into such an arrangement and get out from under the liability.
On the other hand, almost all Democratic Party presidential candidates are proposing plans to ensure that insurance companies maintain a central role in any future health benefits financing system. If this is what the current UAW leadership is thinking, it is a highly risky gamble. But then, they will be retired and comfortably out of the picture.
The Selling of VEBA
The recently negotiated union contracts at GM and Chrysler containing VEBA agreements were nonetheless ratified by UAW autoworkers this past fall. GM’s was ratified by about a 2 to 1 vote. Chrysler’s ratification margin was about 55 percent. A UAW-FORD contract and VEBA will almost certainly pass as well.
Despite this approval, a number of large plants, both at GM, and in particular at Chrysler, voted by significant margins to turn down the proposed contracts. Significant rank and file movements also began to appear during the ratification process, although they were not able to link up in time to form an effective national opposition movement. Many highly-regarded and respected local union presidents and leaders came out publicly against the VEBA deals and overall contract, as did several retired, regional directors and international UAW executive board members. There was even a flurry of outside legal opposition to the GM-VEBA deal aimed at obtaining a temporary restraining order to stop the vote. This legal move was based on the argument that UAW leadership did not fully or properly inform the membership during the voting of the full details of the financing of the VEBA, as was required under federal securities laws.
Why then, one might ask, did the recent auto industry contracts, containing not only VEBAs with $50 billion under-funded liability, but tens of billions of dollars of wage and other concessions as well, nonetheless pass? First, it must be recognized that major verbal assurances were given by both the auto companies and the UAW leadership to the workers to get them to vote for the contracts. To begin with, there was the assurance by Gettlefinger that the VEBAs would have sufficient funding to ensure payments to retirees for 80 more years—a claim without any verifiable proof or substance. Then there was the assurance by GM that in exchange for offloading the VEBA from the company to the union (as well as in exchange for the historic wage cuts and other concessions), the company would provide more job security. Specifically, it would place a moratorium on outsourcing of jobs and would commit to new investment in 17 of the companies’ 82 plants in the U.S.
These two major assurances were presented to workers essentially as guarantees, although no such guarantees were made if one consulted the fine print. The outsourcing moratorium could be lifted and investment in plants does not necessarily mean job-creating investment. The company even made it clear the investment was depended on market conditions and investment didn’t mean a guarantee of no layoffs.
Indeed, on October 3, GM announced its plans to close 13 plants within the next 4 years—4 more than originally announced. A few days later GM also announced plans for an early retirement buyout package for 18,000 of its remaining 73,000 workers, making way for a second wage tier of workers earning $14-$16 an hour compared to the $28 an hour average of first tier wage workers.
Concurrent with the above assurances was the threat— pushed by both the company and the union—that if major concessions were not agreed to in the contracts GM might well go bankrupt. If that happened, it was argued, there would be nothing left in the health fund to pay for benefits. Better that the union take over the fund in the form of a VEBA and manage it, the UAW argued to its members.
Fears of bankruptcy at Chrysler and Ford were projected as even more likely, given that Chrysler was recently bought out by the private equity firm, Cerberus International Management, a company notorious for buying then splitting up and selling off parts of companies. Ford, having publicly announced its intentions to sell off divisions, made it easier still to raise the bankruptcy red flag. Companies typically raise such threats in negotiations. What was somewhat new was the union aggressively pushing the fear factor on behalf of the company. In plants and local unions where the vote was close, UAW staff descended on union meetings and played the company’s bankruptcy card to the hilt.
In reality, neither GM nor the other companies are approaching financial collapse. On October 19, for example, a major story in the business press reported GM’s record 9.1 million in global vehicle sales for the past year. The most recent quarter was the highest on record, with sales of 2.38 million cars worldwide. This is hardly a picture of a company about to go bankrupt.
GM now sells more than a million cars a year in China and is rapidly expanding its output there as well as in India and Russia, including a new state-of-the-art plant in St. Petersburg in that country. Similarly, Chrysler recently announced plans to double its sales outside the U.S., particularly in China and Europe. Despite this global focus and profitability, the UAW bargaining team, it was reported to this writer by a seasoned UAW negotiator, does not insist in contract negotiations with the companies that they provide it data reflecting their worldwide operations and profitability. Only the relatively weaker U.S. data is provided as a basis of U.S. bargaining. The union thus negotiates with half a dataset, while the companies view themselves truly as international entities and calculate their profitability worldwide.
In short, the selling of the VEBA deals was made possible by the cumulative decades of what can only be called the terrorizing of autoworkers by their companies and with the increasing assistance of the union in that task.
The coming of VEBAs in the auto industr means VEBAs will now quickly spread throughout other unionized companies in the U.S. Every major company will assign a team to study how to implement a VEBA of its own. Many will attempt to reopen current contracts with their unions in order to negotiate the changes. Already Bloomberg, the financial news company, reports that companies like AT&T, Verizon, and others have internal preparations underway to shift their health benefits to VEBAs.
If the rise of private, individualized 401k pensions marked the beginning of the demise of traditional, employer- union negotiated defined benefit pension plans, the coming of VEBA represents the further, and now accelerating, decline of the union-employer negotiated health benefit plans. This means a major acceleration in the shift of relative income from workers to corporations and their investors. An example of how much income can shift is shown by the following calculation: GM estimates that its total cost per hour per employee is approximately $78. Most studies show health benefit contributions are equivalent to about 20 percent of the total hourly labor costs. That’s about $14 based on the above $78 assumption. With VEBA, GM will no longer have to pay the $14 per hour per employee. For GM that’s savings equivalent to about $2.1 billion per year. Add another $2 billion at least for Chrysler and Ford. Now factor in rising health care costs over a typical contract term, and the total corporate savings comes to at least $15 billion. Include the discounted future value of those savings and the total savings easily equals $20 billion.
VEBAs also represent a fundamental change in both the institution of collective bargaining and the nature of unionism in the U.S. From the late 1940s to the mid-1970s, collective bargaining expanded in scope, adding new areas to contracts like health benefits, pensions, cost of living clauses, job banks, and a host of other innovations. Collective bargaining also expanded in terms of magnitude, as levels of funding for these areas were increased and wages were also raised in synch with rising productivity levels. This was the golden age of contract bargaining—and of what might be called “contract unionism.”
From about 1978-1982 on, however, a major shift occurred reflecting the aggressive corporate offensive launched about that same time. Nationwide bargaining agreements were broken up, balkanized, and the primary focus of bargaining increasingly was on concessions and reductions in the dollar value levels in contracts. Wage gains also increasingly fell behind productivity year after year. This period, which lasted until the present, might be called “concessionary unionism,” with its focus on minimizing the reduction of magnitudes and values in bargaining.
But VEBA funds may represent the beginning of a further fundamental transformation in the nature of collective bargaining and in unions themselves. With VEBAs, unions now find themselves directly cooperating with companies on the actual dismemberment of contracts and jointly eliminating previously sacrosanct contract provisions won over the course of many decades—i.e., negotiating spinning off entire sections of contracts, excluding them from future bargaining and turning their function over to third parties, such as insurance companies and investment banks to buy out pension plans and directly manage them for profit.
This new condition might be identified as the era of “corporate unionism” where unions become even more integrated with the strategies, aims, and objectives of global corporate management. Corporate unionism means, at the level of collective bargaining, the basic outsourcing of the union contracts themselves. VEBAs clearly lie in that orbit and are strategic precursors to a new corporatism in union-company relations.
Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush, 2006 (www.kyklosproductions.com). He is also a past national VP of UAW Local 1981 and currently co-chair of the National Writers Union, UAW 1981, in northern California.