Retiree health VEBAs may be start of trend

TOLEDO, Ohio—A financially troubled automotive components manufacturer's agreement to contribute nearly $800 million to special tax-exempt trusts to pay for retiree health care and other benefits could be a model for much bigger retiree health care financing and liability transfer deals.

Under the agreement reached last week between Toledo, Ohio-based Dana Corp. and the United Steelworkers and the United Auto Workers unions, Dana will contribute about $700 million to two voluntary employee beneficiary associations that will be set up by the unions and provide health care benefits to current and future retirees represented by the unions.

Dana, which will contribute the $700 million after it emerges from bankruptcy reorganization, also will contribute about $80 million in common stock of the reorganized company.

Much of the money will come from the purchase of Dana convertible preferred stock by Centerbridge Capital Partners L.P., a private equity investor.

After Dana--which lost $739 million last year on revenues of $8.5 billion--makes its contributions to the VEBAs, its responsibility to provide retiree health care benefits to current and future USW- and UAW-represented retirees will end. Union-appointed trustees will administer the VEBAs.

At the same time, retiree health care benefits no longer will be a subject of collective bargaining between Dana and the unions.

Through the arrangement and other parts of the settlement, which still must be approved by a bankruptcy court and ratified by USW and UAW members, Dana estimates it will save more than $100 million a year, while eliminating $1.1 billion in projected liability for retiree health care and other benefits from its financial statements.

The agreement mirrors one Goodyear Tire & Rubber Co. reached late last year with the USW, under which the Akron, Ohio-based tire manufacturer is contributing $1 billion to a retiree health care VEBA administered by USW-appointed trustees. Goodyear says the arrangement will improve its cash flow by $145 million a year, removing a projected $1.3 billion liability for USW retiree health care benefits from its financial statements.

Benefit experts say the Goodyear and Dana agreements likely will serve as models for similar, larger retiree health care transfer deals between employers and unions.

"There is a huge amount of interest in these deals. You have big liabilities and unions willing to negotiate," said Dave Osterndorf, chief health care actuary in the Milwaukee office of Towers Perrin.

"My educated guess is we will see more in the future," said Russell Greenblatt, a partner with the law firm Katten Muchin Rosenman L.L.P. in Chicago. "In some industries, these arrangements make sense for both sides."

For employers, the advantages of such arrangements are obvious: They can remove a huge unfunded liability from their financial statements. With that liability eliminated, employers' credit ratings likely will improve, making future borrowing both easier and cheaper.

Union members, in turn, also benefit. Through the employer contributions to the VEBAs, what had been an unfunded promise to provide retiree health care benefits would be backed by hard dollars that can't be used for any purpose other than to pay for benefits.

"The promise was rich, but the delivery could be zero" if a company later went bankrupt and liquidated, said Steve Ferruggia, a principal with Buck Consultants L.L.C.. in Secaucus, N.J.

In recent years, tens of thousands of union-represented retirees--especially those in the steel industry--lost rich health care benefits when their former employers collapsed and went out of business.

Through the VEBA liability transfer deals, unions are trading off what could be a future benefit reduction in exchange for financial security for the benefits, Mr. Ferruggia said.

In fact, at the time the Goodyear-USW VEBA deal was ratified, a USW spokesman said providing financial security for retiree health benefits was vital. "It is important to protect current and future retirees," he said.

Benefit observers say far bigger VEBA deals could be in the offing when the Big 3 automakers, which have enormous unfunded retiree health care liabilities, begin contract negotiations with the UAW. While neither side has stated their interest in a VEBA deal, observers say it likely will be on the negotiating table.

An auto industry VEBA would dwarf the Goodyear and Dana VEBAs. At the end of last year, General Motors Corp. alone had $47 billion in unfunded retiree health care liabilities.

While a VEBA for any of the Big 3 automakers would be gigantic, putting together a VEBA of such size would have certain advantages, Mr. Ferruggia said. Large VEBAs, for example, would be able to weather investment performance fluctuations better than smaller VEBAs, he said.

Securing the capital to fund such huge VEBAs, observers agree, would be challenging but by no means insurmountable.

Rather than contribute a lump sum amount to the VEBA, contributions possibly could be made over several years, Mr. Ferruggia said.

Still, noting the huge size of such VEBAs, "Until it is done, it is an open issue. We have never seen a 10-figure VEBA," Towers Perrin's Mr. Osterndorf said.