VEBAs in the Auto Industry: How Companies are Dumping Union-Negotiated Health Care Plans
by Jack Rasmus
copyright 2007
Once partners in pioneering employer-union health benefit plans in the early 1950s, the United Auto Workers Union, the UAW, and the big-three auto companies—General Motors, Chrysler, and Ford—now find themselves jointly presiding over the rapid dismantling of that very same system as it approaches its final stage of terminal illness!
The transition vehicle which now makes possible the accelerating collapse of Employer financed health benefit plans is called a VEBA. VEBA officially stands for ‘Voluntary Employee Beneficial Association’. On the shop floor in the auto industry, however, it is sarcastically referred to by autoworker 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.
What’s a VEBA and What Is It Worth?
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 in toto from the companies 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.
The 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% funding ratio would be considered severely underfunded, a candidate for bankruptcy, and would be at significantly great risk of collapse!
The estimated $50 billion collective shortfall for the three auto company VEBAs also represents the dollar amount that the Union and its members may eventually have to come up with in the years immediately ahead to ensure the VEBA funds remain solvent. The day of reckoning for funding the $50 billion shortfall may come sooner than later, as the auto companies know full well. For new, emerging U.S. financial accounting rules being rolled out this year and next will require trust funds like VEBAs and pensions to be valued accurately and fully funded going forward. That will require additional major financing and contributions by whomever ‘owns and manages’ a fund if it is ‘under water’. The auto companies are thus conveniently exiting the game just in time, leaving the union and workers holding the bag.
The Three VEBAs
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 securities element thus is about 15% of the total $35 billion. GM will therefore have to get a federal exemption to the legally allowable limit of only 10% of company stock in such funds. The 10% limit was established in order to avoid ‘Enron-like’ events where funds overloaded with company stock become worthless when the company goes bankrupt, leaving nothing for employees. The point is that the under-funding in the GM VEBA may rise well beyond $20 billion should the value of the securities in the VEBA fall—which may well happen should recession occur in the US in the near term as appears increasingly likely. That possibility aside, the GM VEBA shortfall therefore is at least $20 billion.
In the case of Chrysler the actual amount in the VEBA and its unfunded liability is more murky. 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 even more poorly funded than GM’s. Whereas GM’s fund will have roughly $35 billion in it at transfer, or about 70% funded, Chrysler’s VEBA is reportedly only 53% funded according to business sources. Given that the total liability for all the ‘big three’ US auto companies is about $100 billion, and assuming the remaining $45 billion ($100 billion – GM’s $55 billion) is evenly divided between Chrysler and Ford, then the Chrysler VEBA total liability is estimated around $22 billion. Sources like the Financial Times reports Chrysler’s VEBA currently has no more than $8.8 billion in the fund. Chryslers’ VEBA shortfall therefore may be around $13 billion.
With bargaining about to commence between the UAW and Ford as this article is written, 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 in it 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 of October 26, 2007, one of the participants on the bargaining teams, 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�. It is virtually certain that Ford will contribute less than Chrysler’s $8.8 billion to its VEBA. Most likely 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.
In summary, the total un-funded liability for the VEBAs for the three companies combined now being dumped on the union and the autoworkers is approximately $50 billion by best available estimates: $100 billion total liability minus the $35 billion for GM’s VEBA, and $8.8 and $7 billion respectively for Chrysler’s and Ford’s.
UNFUNDED LIABILITIES OF THE UAW VEBAs
Contributions to VEBAs Estimated Total Liabilities Unfunded Liabilities
GM: $35 billion $55.0 billion * $20.0 billion
Chrysler: $8.8 billion $22.5 billion ** $13.7 billion
Ford $7.0 billion $22.5 billion ** $15.5 billion
Totals: $50.8 billion $100 billion $49.2 billion
* Wall St. source estimate
** Writer’s estimate based on publicly reported total liabilities
This scenario of grossly underfunded liabilities raises the key strategic question: where will the UAW and autoworkers get $50 billion future financing—especially given the likelihood of imminent recession, continuing double digit rises in health care costs, anticipated sharply rising worker retirement rates as the companies quickly push a new round of employee buyouts, and, as especially noted, given the pending stringent new accounting rules to require full financing and solvency of such funds by accounting agencies?
When VEBAs Go Bust
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 Corp. in 1998. The VEBA there ran out of funds in 2004. The union has been in litigation ever since. Other UAW VEBAs recently at Detroit Diesel and Case are reportedly faring no better.
Other unions like the United Steelworkers have also set up VEBAs and they too are doing poorly. Which leads one to suspect that perhaps VEBAs are not meant to be long term solutions, but only transitional devices, ‘halfway houses’, ‘holding pens’, on the way to what is the real endgame—i.e. to get workers to ‘cash out’ their respective share of the fund at some future point and go buy some individual insurance based health plan coverage.
The latter is called a ‘Health Savings Account’, or HSA. HSA’s represent the fundamental strategic direction Bush and Corporate America want to drive the health benefits system longer term. A VEBA is the intermediate stage on the way to HSAs and what Bush & Co. call ‘consumer driven healthcare’. As the editorial page of the Wall St. Journal recently suggested, 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)�. Corporate sources thus clearly see the link between VEBAs and eventually converting VEBAs to a more individualized, consumer driven health care system with HSAs playing the central role.
If this preceding scenario is correct, the long term corporate-government plan may be somewhat similar to what has been happening with defined benefit pensions on the retirement benefits side for the past decade: namely, convert the Defined Benefit Pension plans to interim ‘Cash Balance’ plans and then allow workers to ‘cash out’ and go purchase an individual 401k pension plan. VEBAs on the healthcare side are thus close cousins to Cash Balance Plans on the pension side.
Unattractive Alternatives
It is highly likely that the under-funding crisis for the auto industry VEBAs 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 as VEBAs go bust.
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% or more in the new UAW-GM contract, it is not likely that wage diversion would be supported by union members.
An alternative route to saving an under-funded VEBA might be for the government to prop up VEBA funds in general by setting up an agency similar to the Pension Benefit Guarantee Corporation, the PBGC, which currently administers the dismantling of pension funds. A PBGC ‘socializes’ the costs of pension funds going bankrupt by 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 get a cash out about half of what they would have earned in retirement from their now defunct pensions. Something similar might be instituted for VEBAs. At present, however, it is politically not likely 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 amount 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 simply move money from one leaky bucket to another. It’s not a real solution to under-funded VEBAs or under-funded pensions.
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 U.K. are now being allowed to pilot such ‘leveraged buy outs’ of pension funds, in effect ‘buying’ the fund and then managing it at a profit (and cutting benefits to make it profitable 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 simply ‘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 a $1 trillion dollars at taxpayers’ expense in the 1980s. Companies are ‘bailed out’ by government-funded special deals all the time. Why not VEBAs? But what government might thus do for businesses, it is not likely to repeat for a union and its members. That’s just not how the current U.S. capitalistic system operates. Thus, case by case bailout of troubled, underfunded VEBAs is a highly unlikely option.
Yet the preceding option may be the long term solution UAW leadership may very well be hoping for. UAW union leaders surely know the precarious under-funded condition of the current auto industry VEBAs. It may be that Gettlefinger and staff are hoping the VEBAs can be kept afloat for a few years until some kind of national health insurance can be enacted by Democratic Party congresses. At that point they could roll the VEBAs into such an arrangement and get out from under the liability.
On the other hand, currently proposed plans by all Democratic Party presidential candidates are essentially plans to ensure that insurance companies maintain a central role in any future health benefits financing system as individual companies like GM, Chrysler, Ford and others exit from direct financing of those health benefits. If this is what the current UAW leadership is thinking, it is a highly risky gamble. But then, they themselves 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 recently 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%. A UAW-FORD contract and VEBA will almost certainly pass as well, given the passage at GM and Chrysler.
Despite the approval of the VEBAs in recent contracts, internal UAW membership opposition to the contracts was significant if not sufficient to prevent passage. 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 long respected local union presidents and leaders came out publicly opposed to the VEBA deals and overall contract. As did several retired, regional directors and international UAW executive board members, who voiced their opposition in writing and in communications to the membership, laying out their concerns in particular with VEBA.
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? Why were the union and autoworkers willing to agree to such a massive shift of income from themselves to the companies, and, in particular, agree to assume the risky $50 billion liability represented by the VEBAs? The answer to this key question is perhaps complex but not impossible to comprehend.
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. The assurances were dubious at best, and in most part will not be delivered. But most autoworkers still want desperately to believe them. To begin with, there was the assurance by UAW President 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 itself 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. Even the company made it clear the investment was depended on market conditions. Nor did investment mean a guarantee of no lay offs.
In fact, no sooner than the GM contract was ratified, the CFO of the company, its chief financial officer, declared in a public forum that investment did not mean there would be no layoffs in the future. On October 3, GM announced it planned to close 13 plants, four more than originally announced, and within the next four years. A few days later GM also announced plans for a new early retirement ‘buy out’ package for 18,000 more of its remaining 73,000 workers. Moving them out would make way for the now much lower paid, second wage tier workers now earning only $14-$16 an hour compared to the $28 an hour average of 1st tier wage workers.
Concurrent with the above assurances (the carrot) was the threat (the stick)—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. That way at least something could be saved of past worker contributions to healthcare should GM go bankrupt.
Fears of bankruptcy at Chrysler and Ford were projected as even more likely. Given that the 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, the threat of bankruptcy was an easy sell. Similarly, having publicly announced intentions to sell off divisions of the company, at Ford it was easier still to raise the bankruptcy red flag. Companies typically raise such threats in negotiations. But what was qualitatively somewhat new now was the union itself aggressively pushing the ‘fear factor’ on behalf of the company in the appeal to its members. In plants and local unions where the vote was particularly close, UAW staff descended on union meetings and played the company’s ‘bankruptcy card’ threat to the hilt.
The Profitability of Terror
But in reality neither GM, nor even the other companies, are approaching financial collapse. On October 19, for example, the major story appeared in the business press that GM had achieved a record 9.1 million in global vehicle sales of for the past year. And the most recent quarter was the highest on record with sales of 2.38 million cars worldwide. GM senior management further announced it expected another record year to come. While GM’s sales in the U.S. had dropped 6% in the most recent quarter, that was largely due to the company’s decision not to sell to car rental fleet companies, i.e. its own unilateral decision. Finally, GM noted it did not expect its sales in the U.S. next year, 2008, to decline despite rising gasoline prices and housing market woes. This is hardly a picture of a company about to go bankrupt!
When examined globally the big three companies worldwide are highly profitable and have aggressive expansion plans—outside the U.S. GM in particular 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 US 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. One must remember most of the current workforce in auto has spent most their working lives over the past thirty years, i.e. since the beginning of concession bargaining in 1978, living with the constant fear of loss of their jobs. That fear of job loss and deep, decades-long ingrained insecurity has a real, not imagined, basis.
In the 1980s there were 350,000 autoworkers at GM alone. That declined to 270,000 in the mid 1990s. Today it is only 73,000 and rapidly still falling. That kind of constant, massive job loss generates a level of insecurity that is easily preyed upon by management and union negotiators alike. Given the fact that over half of the remaining 73,000 workers at GM will approach retirement in the next four years, the insecurity and anxiety is such that many older workers are inclined to agree to the severest terms imposed on them so long as they can ‘reach the magic retirement finish line’. And they outnumber the younger workers and union members. The companies know this. So does the union. Consequently assurances of job security and false promises of the continuation of health benefits, combined with exaggerated scenarios of pending company bankruptcies (i.e. threats of job loss), can play a deciding role in contract ratification votes in the auto industry. And so they have in the recent agreements.
The Strategic Significance of VEBAs
The coming of VEBAs in auto means VEBAs will not only become generalized throughout the industry, but will now quickly spread throughout other unionized companies in the U.S. There probably is not a major company with a union contract that will not now assign a team of human resources, lawyers, and accountants to quickly 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.
VEBAs are strategically significant as well because they represent the analogue in negotiated health benefits that Cash Balance Plans represent to negotiated defined benefit pensions. Cash Balance plans have been the device over the past decade to convert defined benefit pensions to an intermediary stage (i.e. Cash Balance plan) on the way to fully privatizing pensions in the form of an eventual 401k plan. VEBAs are the same halfway house on the way to converting union negotiated health benefit plans to privatized, individual Health Savings Accounts. VEBAs, like Cash Balance plans, are thus transition vehicles to the eventual ‘cashing out’ of benefits and to a full privatization benefit delivery system. That’s the essence of Bush’s and corporate America’s plans for a so-called ‘ownership society’.
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 VEBAs represents the further, and now accelerating, decline of the union-employer negotiated health benefit plans. Employers today are clearly getting out of the game of providing either retirement or health benefits for their employees. However, nothing equivalent is being proposed to replace those two benefits so central to the American workers’ standard of living. VEBAs and Cash Balance plans represent the ‘wake’ before the funeral for the post World War II retirement and health benefits systems that are now in their final stages of decline.
What VEBAs also represent is a major acceleration in the shift of relative income from workers to corporations and their investors. An example of how much an income shift can be 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% 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. That’s $20 billion that the companies once paid but no longer have to; and $20 billion the workers did not but now do. That’s a $20 billion income shift—each year and every year going forward. And that’s only three companies.
VEBAs also represent a fundamental change in both the institution of collective bargaining and the very nature of Unionism in America. 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 new, aggressive Corporate Offensive launched about that same time. Nationwide bargaining agreements were broken up, balkanized, and instead of collective bargaining characterized by expanding in scope and magnitudes, the primary focus of bargaining increasingly was on concessions in and on reductions in the magnitudes or 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 yet a new phase or stage and the further fundamental transformation in the nature of collective bargaining, and even unions themselves. With VEBA the focus is not just on reducing the values or magnitudes of contracts, but now on rolling back the very scope of bargaining and on the incremental, piecemeal dismantling of contracts. 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. One can easily imagine, for example, not only the rapid spread of VEBAs throughout various industries, but also the extension of the basic concept inherent in a VEBA—i.e. the idea of negotiating the spinning off entire sections of contracts, excluding them from future bargaining, and even turning their function over to third parties. For example, the imminent trend, now piloting in the U.K., is for third parties such as insurance companies and investment banks to ‘buy out’ pension plans and directly managing them for profit.
This new condition, symbolized by the advent and spread of VEBAs might be identified as the era of ‘Corporate Unionism’. In the era of Corporate Unionism, unions increasingly cooperate directly with management in the process of contract dismantlement and 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.