Transcript Public Sector VEBA Webinar

Webinar
VEBAS PRE-FUNDING RETIREE
HEALTH BENEFITS…
And a lot more.
VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS
 Whether you are a benefits manager, administrator
charged with finding a solution to manage retiree
medical liabilities or an investor analyzing a company
with post-retirement benefits on the books, this
webinar is a must attend event.
 This is your opportunity to hear from and ask
specific questions of the leading expert on
VEBAs! Plus, Mr. Wallach has offered 10
minutes of free consultation to webinar
participants within one week after the event!
Hear from benefits expert, Lance Wallach, as he
provides valuable guidance on the implications of
VEBAs and the potential benefits they can offer.
Topics of discussion will include:
 An overview of the GM and Ford agreements
 How they work: The proper formation and operation of
a VEBA
Who Should Attend?
From Private, Public Sector and Multi-Employer
Entities including
 Plan administrators
 Plan Benefit Managers
 Key considerations for plan design, administration
and investments
 HR personnel as well as:
 Alternatives to VEBAs
 Health Care Benefit Consultants
 Pros and cons for employers and special
considerations for public-sector employers
 Investor perspective: The potential impact of a VEBA
on large, publicly traded companies

 Compliance Officers
 Attorneys

As well as analysts from Hedge Funds, Private
Equity and Venture Capital companies investing in
companies with or considering a VEBA
VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS
 Presented by:
Lance Wallach, CLU, CHFC, CIMC
A member of the AICPA faculty of teaching
professionals and an AICPA course developer,
is a frequent and popular speaker on VEBAs,
retirement plans, reducing health insurance
costs, and captive insurance at accounting and
benefits conventions. He has authored
numerous books including Tax Planning and
Asset Protection Using VEBAs Mr. Wallach
writes for over fifty publications including
AICPA Planner, Accounting
 Today, CPA Journal, Enrolled Agents Journal,
Financial Planning, Registered Representative,
Tax Practitioners Journal, CPA/Law Forum,
Employee Benefit News, Health Underwriter,
Advisor and the American Medical Association
News. Mr. Wallach is listed in Who's Who in
Finance and Industry and is frequently quoted
in the press for his expertise on VEBAs—
including Bloomberg.com, Washington Post
and USA Today. He has also been featured on
television and radio financial talk shows
including NPR.
Accounting Today:
Reduce Other Post-Employment Benefits Liability with a VEBA
By Lance Wallach
June 16, 2008
In 1994, the Government Accounting
Standards Board (GASB) established
standards for public employee pension plans.
Government and public employers have to
report and account for pension benefits costs.
However, until recent years, there was no such
standard in place for other post-employment
benefits (OPEBs) for state and local
government workers.
Private sector employers have
been required
\
to report OPEBs for over 15 years under the
FASB Standards106/158.
Government and public sector employers have
been required to report OPEBs since August
2004 after the issuance of GASB Statement 45.
This means that all government employers
must now keep their promise of providing
retiree benefits. They need to be calculated
accurately, accrued during the employee’s
years of work with the employer, and
recognized as a financial obligation as OPEB
costs. These costs are to be reported on
financial statements of large public sector
employers beginning with the first financial
report period after December 15, 2006, and on
small employers beginning in 2008.
The intent of GASB 45 was to bring
government and public accounting standards
into line with private company standards. This
requires reporting pensions as well as nonpension post-employment benefits. As the
name states, OPEBs are benefits other than
pensions. Many state and local governments,
public schools, public universities and other
public and government agencies provide postemployment benefits that are non-pensionrelated. These benefits can include health care
benefits including vision, dental, prescription
and health insurance; life insurance; legal
benefits and other non-pension-related work
benefits.
Until these changes were put in place with
GASB 45 and enforced, readers of government
and public financial statements had incomplete
information on the costs of services provided
by state and local governments and public
employers, and were therefore unable to
analyze the financial position and long-term
health of these government and public
agencies.
Accounting Today:
Reduce Other Post-Employment Benefits Liability with a VEBA
By Lance Wallach
June 16, 2008
Actuarial calculations are used to derive the
OPEB cost. In order to keep the calculations
up to date, they must be recalculated every two
to three years depending on the size of the
employer. For example, employers with less
than 100 employees can use a simplified
alternative method for measuring the OPEB
cost, but these employers still need to reevaluate and re-assess every three years. The
costs and obligations for post-employment
benefits are determined using the actuarial
present value of the post-employment benefits
- in other words, the present value on term of
service and the terms of the OPEB plan that
are presently in place.
There are assumptions that are made in the
actuarial evaluations. They include:
There are assumptions that are made in the
actuarial evaluations. They include:
· Healthcare cost factors: age, industry,
family, geography, gender.
· Expected long-term and/or short term rate of
return on plan assets.
· Projected salary scale.
· Death rates.
· Projected inflation of medical care costs.
· Employee turnover rate.
· Retirement rates; this can vary extensively
from year to year.
· Any promises made to retirees.
· Discounts or benefits designed into the plan.
Accounting Today:
Reduce Other Post-Employment Benefits Liability with a VEBA
By Lance Wallach
After the actuarial evaluations are completed,
each employee gains a different attribution
period, which is based on their period of
eligibility – date of hire to date of full eligibility
(i.e. retirement). With all this said, GASB only
requires that employers report OPEBs;
employers are not required or even obligated
to fund the OPEB cost. However, not doing so
can affect significantly an employer’s credit
rating and cost of issuing debt financing.
The largest OPEB cost for an employer is
health care benefits. The majority of public
sector employers, with more than 200
employees, offer some form of postemployment health benefits. Unfortunately,
with the uncontrollable increases in health
care costs happening annually, and severe
budget cuts being put in place across nearly
all public and government agencies, the
continuing use of “pay-as-you-go” will become
more difficult and create new financial
liabilities for employers. Add to this state laws
that require employers to allow retirees to
remain on the active health plan until Medicare
steps in, and the reduction in federal and state
subsidies, and employers are struggling to
subsidize the gap between the blended plan
cost (active employees and retirees) and the
actual retiree cost. Even if the employer is not
contributing to the retiree health care plan, this
amount adds additional liability.
In December 2004, a report from Standard and
Poor’s, stated that: “The new [GASB 45]
reporting may reveal cases in which the
actuarial funding of post-employment health
benefits would seriously strain operations, or,
further, may uncover conditions under which
employers are unable or unwilling to fulfill
these obligations. In such cases, these
liabilities may adversely affect the employer's
creditworthiness. All Standard & Poor's rated
employers will be monitored closely in terms
of their reporting under GASB 45. Upon
implementation of these new standards, we
will include the new information as part of our
ongoing analytical surveillance of ratings."
The following year, in June 2005, Fitch Ratings
released its report, saying: “Fitch's credit
focus will be on understanding each issuer's
[GASB 45] liability and its plans for addressing
it. Fitch also will review an entity's reasoning
for developing its plan. An absence of action
taken to fund OPEB liabilities or otherwise
manage them will be viewed as a negative
rating factor. Steady progress toward reaching
the actuarially determined annual contribution
level will be critical to sound credit quality."
Everyone is working towards a solution that
will benefit both employers and employees.
But it takes constant monitoring by both
employers and employees.
Accounting Today:
Reduce Other Post-Employment Benefits Liability with a VEBA
By Lance Wallach
One solution that could benefit everyone is
considering a VEBA plan.
VEBAs have been successfully established to
help reduce health costs and establish
financially sound OPEB plans that have proven
to be both efficient and effective. The VEBA
can help employers develop strategies that can
lower their liabilities. Many private sector
employers have benefited from the
introduction and use of a VEBA for their OPEB
plan.
A well designed GASB 45 OPEB involves many
different risk management strategies and
funding techniques. Any benefit promise made
by an employer should be partially or fully
funded in a qualified trust to enable actuaries
the use of long-term discount rates during the
calculations. One approach to this funding
source could be issuing OPEB obligation
bonds or finance pools. The employer can
then successfully take these finance strategies
and blend a defined-benefit approach with a
defined-contribution strategy to create a
successfully managed OPEB plan with
reduced liabilities.
These two basic forms of post-employment
benefit plans specify either the amount of
benefits to be provided to an employee at the
end of their employment period, or stipulate
only the amount to be contributed by the
employer to a member’s account for each year
of active employment.
A defined-benefit OPEB plan is where the
terms are specified and the benefits provided
from the time of retirement or other
employment separation. These benefits can be
dollar-specific or the type/level of coverage for example, a dollar payment based on a flat
rate or years of service, or defined medical
coverage, prescription drugs or a percentage
of the premiums. Unfortunately, the defined
benefit OPEB plan is complicated where the
reporting makes assumptions on future
medical costs, mortality rates, the availability
of Medicare, and the probability of future
events.
Accounting Today:
Reduce Other Post-Employment Benefits Liability with a VEBA
By Lance Wallach
A defined-contribution OPEB plan considers
the individual. It takes into account individual
contributions while active, rather than the
benefits the beneficiaries are to receive postemployment. Benefits for the definedcontribution plan consist of contributions,
earnings on investments of these
contributions, and forfeitures on the member’s
account. This makes the plan easier to report
on, but does not specify the amount of benefits
received by the employee after retirement.
GASB accrual standards only apply to definedbenefit OPEB plans. Defined contributions are
considered “funded,” as the employer cost
equals the required contribution. Therefore,
changing the way retiree healthcare and other
post-employment benefits are paid can lower
or even eliminate the unfunded other postemployment benefits liability.
Now that the public sector and government
agencies have to report other postemployment benefits, the VEBA can establish
the best plan for the least liability for
employers. State and local governments and
public services can look at the private sector
and see the benefits it has gained from using
VEBAs. They can see how it can help soften
the financial impact of the new, significant
reporting obligation.
Lance Wallach is a frequent speaker at national
conventions and writes for more than 50
publications. He was the National Society of
Accountants Speaker of the Year. Lance
welcomes your contact. Email [email protected] or call 516-938-5007 for more
info.
DISCLAIMER: 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.
 Why VEBAs in the PS market?
 How does GASB relate to costs?
 What 'vehicles' can employers use?
 How does a VEBA work for pre-funding retiree
health?
 Reference Material / Articles of Interest
“VEBA” – the “Buzz” Word in Employee Benefits
Voluntary employees’ beneficiary associations (VEBAs) are
being used to manage retiree medical liabilities
Key factors:
Financial commitment by an employer +
Acceptance of responsibility by the union/retirees
Employer pays:
Fixed payments
Active wage deferrals
Other
Retirees pay:
Retiree contributions
Coinsurance and deductibles
Plan changes, which are determined by the trustees
Plan trustees will include representatives of the retirees
Why VEBAs in the Public Sector Market?
Private employers are limited in their retiree health funding options
Implications of pulling too much revenue away from taxable income
Cafeteria plan rules for employee funding
Drain on available cash for other profit-making investments
Public employers do not have the tax limitations of private employers
GASB liability reporting is triggering a fresh look at
how to fund or pre-fund retiree health benefits
Advantage of public sector trusts:
No limits on amount that can be funded
Because a government entity is not subject
to income tax
Polling Question
What type of jurisdiction do you represent?
State
County, City or Town
School district
Transit group
Federal employer
Other jurisdiction/instrumentality
Non-profit organization
Insurance company
Administrative service provider
Other
 Why VEBAs in the PS market?
 How does GASB relate to costs?
 What 'vehicles' can employers use?
 How does a VEBA work for pre-funding retiree
health?
 Reference Material / Articles of interest
How Does GASB Relate to Costs?
The Governmental Accounting Standards Board (GASB) statements of
accounting principles for:
• Statement 45 for Employers
• Statement 43 for Plan Disclosure
Requires Disclosure—NOT Funding
What is OPEB?
Other Post Employment Benefits (OPEB)
Medical benefits
Dental
Vision
Prescription drugs
Life insurance
Legal services
OPEB Reporting is phased in by
size of employer
GASB Has Taken Hold
As of November 2007, Standard & Poor’s
Ratings Services reported:
40 states have completed an actuarial valuation
OPEB liabilities are nearly $400 billion
Employers are considering the following
actions:
Move from pay-as-you-go to prefunding a trust to get a
more advantageous discount rate
Review legal basis for establishing trusts and issuing
bonds
Use a carefully managed and forecasted pay-as-you-go
funding plan
Adjust employee contribution levels
Reduce benefits
Create different benefit tiers for new employees
Contain health care costs in current plans
What Have Public Employers Learned?
WHAT HAVE STATES LEARNED?
Maryland
 $14 billion
OPEB liability
 $2 billion annual prefunding contribution
compared to annual pay-go of $311 million
California
 $48 billion
OPEB liability
 $3.6 billion annual prefunding contribution
compared to annual pay-go of $1.2 billion
New Jersey
 $20 billion
OPEB liability
 $5 billion prefunding contribution compared to
annual pay-go of $1.2 billion
26 States
 $300+ billion
OPEB liability
 $35.6 billion annual prefunding contribution
compared to annual pay-go of $8.3 billion
Experience already shows moving from pay-go to
pre-funding increases annual costs 6 – 10 times.
NOTE: Collected from state reports, press articles, and Credit Suisse, “You Dropped a Bomb on Me, GASB” March 2007.
Polling Question
What has your jurisdiction already done regarding GASB OPEB liabilities?
Nothing but discussion
Initial actuarial valuation
Valuations and plan changes
Valuations and contribution/eligibility changes
Benefit curtailment
Not applicable
OPEB Requirements for Plan Assets
To use accumulated plan assets to offset
OPEB liabilities, plan assets must be:
Transferred to an irrevocable trust or
equivalent arrangement
Dedicated to providing benefits to retirees
and their beneficiaries under the terms
of the plan
Legally protected from creditors of the
employer and plan administrator
Advantage of funding:
Higher discount rate, which will result in a
lower Annual Required Contribution
(ARC)
 Why VEBAs in the PS market?
 How does GASB relate to costs?
 What 'vehicles' can employers use?
 How does a VEBA work for pre-funding retiree
health?
 Reference Material / Articles of interest
The Ideal Trust Structure
Employer and employee contributions tax exempt
Federal and state income tax
FICA
Permit employee after-tax or pre-tax contributions
Trust investment earnings tax exempt
Benefit payments tax exempt
GASB OPEB qualified asset
Plan assets protected by exclusive benefit trust
The Bad News?
No single vehicle exists
to fill all these criteria.
The Good News: There are Some Attractive Possibilities
Potential Vehicles:
501(c)(9) VEBA
115 or Integral Governmental Trust
401(h) Medical Account
What to think about
The Government Finance Officers Association (GFOA) recommends that if a
government elects to establish a trust fund, it should consider the following:
Legal environment
Impact on ARC
Leveraging costs and investing expertise
Trust vehicles and pros and cons
Administrative and reporting requirements
Governance structure
Satisfying GASB irrevocable trust requirements, but still being flexible
Pre-funding: Establishing a Trust
Source of Funding
Contributions
Bond Proceeds
Accrued sick and vacation leave
Level of Prefunding
Must determine level of prefunding
Proportion of benefits prefunded will dictate discount
rate, a key factor in determining the size of the
obligation
Assess scenarios to model the impact
on funding and liabilities
Irrevocable or Not?
 If trust is not irrevocable, cannot
count assets as OPEB assets in the
financial statement
 Full disclosure and a plan to
manage the cost is what rating
agencies want to assign rating risk
 Why VEBAs in the PS market?
 How does GASB relate to costs?
 What 'vehicles' can employers use?
 How does a VEBA work for pre-funding
retiree health?
 Reference Material / Articles of Interest
VEBAs—A Quick Primer
Voluntary Employees’ Beneficiary Associations (VEBAs) are tax-favored trusts authorized under
IRC § 501(c)(9) that allow employers to make tax-deductible contributions to a trust to fund
health and welfare benefits
A VEBA trust is typically coupled
with a group health plan
VEBAs are used for the
following types of arrangements:
Single employer collectivelybargained trusts
Taft-Hartley trusts
Retiree committee trusts
Governmental plan retiree trusts
26
VEBA Requirements—Tax Treatment
Benefits—Medical coverage provided under a
VEBA, and medical benefits paid or
reimbursed by a VEBA, are excluded from
retirees’ incomes
Deductions—Employer contributions to a
VEBA are deductible when contributed,
subject to IRC 419/419A limitations (but note
that these limits don’t apply to governmental
VEBAs)
Income—Investment income of a VEBA on
reserves held for retiree medical benefits
may be subject to unrelated business income
tax (but note that UBIT doesn’t apply to
governmental VEBAs)
Employee contributions to a VEBA are
allowed, but must be on an after-tax basis.
VEBA Requirements – General Structure
A VEBA must meet the following
requirements:
Must be an employee association
Membership in the association must be voluntary
Must be used to provide life, sickness, accident, or other
permissible benefits to its members and dependents
(no deferred compensation)
No part of the net earnings of a VEBA may inure to the
benefit of an employer, private shareholder, or
individual
No reversion to contributing employer
VEBA Requirements – Permissible Benefits
Provides life, sickness, accident or other similar benefits
Benefits may include health, disability, life, AD&D,
vacation, supplemental unemployment benefits,
severance, education, child care facilities, legal services,
disaster relief loans
Retiree Health Reimbursement Arrangements
Cannot include commuting expenses, accident or property
insurance, loans, pensions, annuity, profit sharing or any
other deferred compensation benefits or malpractice
insurance
Certain de minimis benefits are permitted
VEBA Requirements—Membership
Organization must be formed on behalf of
employees who associate together to receive the
benefits provided by the organization
Employees must share an employment-related
common bond
VEBA meets employee organization standard if 90%
of membership are employees, former employees,
etc. and their dependents
VEBA Requirements—Nondiscrimination Rules
VEBAs cannot discriminate, either in eligibility or in benefits, in favor of
officers, shareholders, or highly compensated employees of an employer
contributing to or otherwise funding the association
But these nondiscrimination rules do not apply if the employees/retirees are
collectively-bargained
Special rules apply for contributions for “key” employees
VEBA Requirements—Documentation
Trust agreement
Plan of benefits
Contracts with service providers
For example, claims administrators, insurance
carriers, investment managers, enrollment
administrators, pharmacy benefit managers,
subrogation, wellness, COBRA services,
actuaries, auditors, lawyers
VEBA Requirements—Governance
VEBA must be controlled by the employee membership, an independent trustee(s) or trustees or
other fiduciaries at least some of whom are designated on behalf of the employee members
Appointment of VEBA trustees varies depending on the type of trust
VEBA Requirements—Government Filings
VEBAs must apply to the IRS for a determination
letter on Form 1024 to obtain recognition of taxexempt status
Generally, VEBAs must file an annual information
return on Form 990
Governmental units and their affiliates do not have
to file the Form 990
VEBAs should appeal to employers
Collectively Bargained Workforce
Wants flexibility to allow after-tax employee contributions
Wants to be able to contribute pre-tax mandatory
employee contributions
Does not have statutory authority to contribute to a 115
trust that meets GASB OPEB trust rules
Integral IRC Section 115 Trusts
Section 115(1) of the IRC provides that gross income does
not include income derived from the exercise of any
essential government function which accrues to a state or
political subdivision
The establishment of a trust to provide medical benefits to
retired employees and their dependents is an essential
governmental function
Employer contributions to the trust are not taxable to retirees
Medical benefits or insurance received by retirees from the
trust will not be taxable
Private letter ruling may be necessary
Section 115 Requirements—Tax Treatment
Benefits—Medical coverage provided under a
Section 115 trust, and medical benefits paid
or reimbursed by the trust, are excluded from
retirees’ incomes
Deductions—Employer contributions to a
Section 115 trust are deductible when
contributed, without limitation
Income—Investment income of a Section 115
trust on reserves held for retiree medical
benefits is not subject to unrelated business
income tax
Employee contributions to a Section 115 trust are not permitted.
Section 115 Trusts
Governmental entities may jointly form trusts to minimize legal and
administrative costs
Several states have passed new laws that authorize the creation of trust
funds in order to accumulate assets for OPEB
State-only solution v. all governmental agencies
401(h) Accounts
A 401(h) Account is a separate Retiree Medical Account within a
Defined Benefit Pension Plan
Can pay benefits for retirees and their dependents
Funding must be subordinate to funding the retirement plan
obligations
Overfunding can be transferred to the 401(h) account
Contributions for medical benefits cannot exceed 25% of the
total contributions to the plan
Funds must be able to revert to the employer
401(h) Account Issues
Pre-tax employer contributions
Pre-tax employee contributions permitted through a mandatory “pickup” arrangement in which all
eligible employees must participate
Possible employee dissatisfaction stemming from mandatory and irrevocable “pickup”
arrangement
Additional administration required: separate funding and accounting for pension and medical
benefits
Sponsors of well-funded pension plans may not be able to make
contributions because of funding limit
VEBA 501(c)(9) Trust Pros and Cons
Advantages
 Medical benefits are provided taxfree to retiree (beneficiary)
 Investment earnings are taxexempt
 No contribution or benefit
limitations
 Flexibility
Disadvantages
 Permits only after-tax employee
contributions, no pre-tax employee
contributions
 Requires IRS approval
 Nondiscrimination rules (not
applicable to collectively bargained
plans)
115 Trust Pros and Cons
Advantages
Disadvantages
 Medical benefits are provided taxfree to retiree (beneficiary)
 Unclear whether retiree pre-tax
contributions are allowed
 Investment earnings are taxexempt
 Unclear whether employee can
contribute prospective leave
accruals
 No formal IRS filing
 No contribution or benefit
limitations
 Varying state laws for
establishment and governance of
trusts
 Exclusive benefit rule
 No formal guidance from IRS yet
 Flexibility
 Nondiscrimination rules (not
applicable to collectively bargained
plans)
401(h) Pros and Cons
Advantages
 Medical benefits are provided taxfree to retiree (beneficiary)
 Investment earnings are taxexempt
 No vesting required
 Mandatory employee contributions
can be pre-tax
 No nondiscrimination testing
Disadvantages
 Mandatory employee contributions
and irrevocable “pick-up”
arrangement
 Contributions must be incidental to
retirement benefit
 Annual 401(h) contributions cannot
exceed 25% of total aggregate
contributions
 Must be part of a 401(a) defined
benefit or money purchase plan
 Additional administration required for
retirement system
Operational Considerations—Plan Design
Plan Sponsors will need to determine
eligibility rules
type of benefit plan
contributions
Operational Considerations – Plan Design:
Five Medicare Part D Strategies
1.Obtain the 28% federal subsidy to Plan
Sponsors for providing Rx coverage equivalent
to Part D
2.Qualify your plan as its own PDP (>50% Federal
subsidy)
3.Contract with a PDP on a group basis
4.Keep the current Rx program
5.Cease covering prescription drugs and shift
subsidy to other retiree benefits
Consider the PROS and CONS of each strategy!
Operational Considerations—Plan Administration
Determine which plan administrative processes will be handled
by trustees and staff and/or delegated to vendors
Develop vendor procurement process
Determine performance standards for vendors
Issue RFPs, obtain bids and interview vendors
Select vendors and negotiate vendor contracts
Evaluate vendor performance
Operational Considerations—Plan Investments
Determine whether plan investment strategy will be handled by trustees and/or delegated to
investment managers
Develop investment manager selection process
Determine goals for investment managers
Issue RFPs, obtain bids and interview investment managers
Select investment managers and negotiate contracts
Evaluate performance of investment
managers
Operational Considerations—Professional Advisors
Identify, interview and select professional advisors to assist with complex tasks
Actuarial services
Auditors
Attorneys
Evaluate performance of professional advisors
Pension Protection Act—Public Safety Retirees
“Public safety officers” may direct up to $3,000 of annual retirement
benefits to be paid tax-free for health insurance or long-term care
insurance, effective 1/1/07
Applies to §401(a), §403(b) and §457 plans
Available only if disability or normal retirement age at separation
from service
Direct payment only, reimbursement to retiree not permitted
Health insurance may cover retiree, plus spouse and dependents
Payments may be made for insured or self-insured coverage
Numerous administrative issues (e.g., definition of
NRA, election after termination, coordination with
plans and insurers, tax reporting, survivor benefits)
 Why VEBAs in the PS market?
 How does GASB relate to costs?
 What 'vehicles' can employers use?
 How does a VEBA work for pre-funding retiree
health?
 Reference Material/Articles of interest
Disclosure Requirements—Terminology
Actuarial Accrued Liability (AAL)
The AAL is the portion of the actuarial present value of total projected benefits
allocated to years of employment prior to the measurement date
Normal Cost
The Normal Cost is the portion of the actuarial present value of total projected
benefits allocated to the year following the measurement date
Annual Required Contribution (ARC)
The ARC is equal to the normal cost and the amortization of the unfunded
accrued liability. There is no requirement that the ARC is funded
Net OPEB Obligation (NOO)
The NOO is the cumulative difference between the ARC and the actual
contributions made (if any). At transition the NOO may be set at zero
Implicit Rate Subsidy
An implicit rate subsidy is the spread between the actual cost of retiree health
care premiums and those of active participants when a government insures
both in a single group at a blended rate
Obscure Health-Benefit Scheme Is Central Issue in Auto Talks
The Washington post
September 9, 2007
“We heard at the end of our careers that we were not going to get what was promised all the
years we were coming into work everyday,” said Larry Solomon, former president of UAW
Local 751 in Decatur, Ill. “We felt betrayed.”
The form of funding is also important. A VEBA funded with cash is less risky than one funded
with stock in a shaky company.
Because VEBAs are so complicated, vigorously educating employees on how they work is key
to their success, said Lance Wallach, a VEBA consultant. “A few years ago, a lot of the
casinos in Atlantic City started calling me about setting up a VEBA for them,” he said. “I told
them it wouldn’t work because a lot of the workforce were not English-speaking. Part of
making this work should be communicating to workers.”
Some of the more successful VEBAs, analysts say, are run by states and municipalities, which
can raise taxes if their VEBAs run low on money. Government entities in California, Idaho,
Indiana, Montana, Oregon and Washington have created VEBAs, and many more expect to do
so in the next few years because the Government Accounting Standards Board recently began
requiring disclosure of post-employment benefit obligations. ……..
Talks Continue Between GM and UAW
By Jacqueline Fell
Posted: Sunday, September 16, 2007 at 9:45 a.m.
The call hasn’t come telling union workers at General Motors to walk off the job. But there still isn't a new contract between the
United Auto Workers and General Motors. Some say the fact that no one is talking, could be a good sign.
General Motors and the United Auto Workers restarted negotiations Saturday morning around 11. The night before, the parties
were at the table until 4:30 in the morning.
Union members were on stand-by Thursday night putting picket signs together and waiting to see if a possible strike would
come when the contract expired at midnight.
Someone close to the negotiations say a deal is not expected to be reached Saturday. At the core of the talks between GM and
the UAW is high health care costs.
That’s where VEBA comes in. It's an innovative way to pay for healthcare. It's a trust that would be funded by the auto
company but used by union workers. But members NBC 25 News spoke to this past week, say they know nothing about it.
NBC 25 talked to an expert on a voluntary employee’s beneficiary association - or VEBA.
Lance Wallach, specializes in these plans, and says this type of fund could save General Motors and bring stability to the
UAW.
GM is the strongest of the Big Three U.S. Automakers… but it also has one of the highest expenses - healthcare costs for
retired and active employees. Last year GM spent $4.8 billon on healthcare. It's a liability, some analysts say, could shut GM
down for good.
"You don't want General Motors to go out of business...this probably is the only solution," says Lance Wallach.
Wallach says a voluntary employee beneficiary association could be the saving grace for the automaker. But is it the best for
the UAW?
"The plusses for the UAW are that they know the money will be available whether General Motors stays in business of goes
out of business," says Wallach. "Through this VEBA they're going to get a lot less than they would normally get from the
obligation General Motors currently has to the workers.”"
In Wallach's opinion, if the two don't come to an agreement on a VEBA plan, both could lose out.
"If they don't take this they're putting General Motors out of business."
Lance Wallach is a frequent speaker on VEBAs, pensions, and tax-oriented strategies at accounting, legal and medical
conventions throughout the United States. He speaks at more than 70 conventions a year about VEBAs; he can be reached at
516/938-5007.
AT&T, Verizon May Follow GM, Let Unions Take on Retiree Costs
By Jeff Green and John Lippert
Oct. 15, 2007 (Bloomberg) – AT&T
Oct. 15, 2007 (Bloomberg) – AT&T Inc., the biggest U.S. phone company, and No. 2 Verizon Communications Inc. may follow
General Motors Corp. in trying to shift retiree health-care liabilities to a union-run fund, a move that has helped boost GM’s
shares 39 percent this year.
The largest U.S. automaker reached a landmark agreement with the United Auto Workers last month to transfer $50 billion in
such obligations to a Voluntary Employee Beneficiary Association, or VEBA. The telecommunications companies, which will
both negotiate new contracts with their unions in the next two years, reported a combined $71 billion in retiree liabilities last
year.
“We’ll be watching” how the GM union-run fund develops, said Alberto Canal, a spokeman for New York-based Verizon. He
declined to give additional details. Verizon spends $3.5 billion a year for health-care coverage for 900,000 active workers,
retirees and dependents, he said.
Verizon and AT&T both have a union that may set a precedent for so-called VEBAs in separate talks with GM that started last
week. The Communications Workers of America’s industrial unit is considering a union-run fund for a GM plant it represents in
Ohio. Michael Coe, a spokesman for San Antonio-based AT&T, declined to comment.
“Telecommunications are the next big group that will be looking at VEBAs,” said Howard Silverblatt, an analyst at Standard &
Poor’s in New York. The ratings service estimates companies in the S&P 500 had $387 billion in retiree health-care and
insurance commitments at the end of last year.
Sparked in 2005
Interest in retiree health-care trusts has been rising since 2005, when GM set up a $3 billion fund that it controlled with the
United Auto Workers as part of a plan to require union retirees to pay health-care premiums fort the first time, said Lance
Wallach, who runs VEBA Plan LLC, a consulting company in Plainview, New York.
About a third of Wallach’s business is talking to private-equity investors and venture capitalists about the risks of retiree
health-care liabilities and the potential for unlocking their value from companies’ balance sheets, he said. “These are venturecapital guys looking for an edge.”
GM Allowed to take up to $6B out of fund
By Sharon Silke Carty
USA TODAY
Motors' soaring health care costs have created a tempting pool of money the automaker is considering dipping into.
The hitch: That money is squirreled away in a fund designed to ensure that retirees will have their health care paid for by the automaker.
While discussing first-quarter results Tuesday, GM Chief Financial Officer John Devine said the company is considering tapping into the
$20 billion Voluntary Employee's Beneficiary Association fund. The company is entitled to draw out cash equal to what it spent last year
on health care and what it has spent so far this year.
That means GM could take $6 billion from the fund, Devine said, because its health care costs have been rising. For the first quarter alone,
the company could account for $700 million in health care expenses. Once it takes money out of the fund, it is not required to replace it.
And the money could be used for general business expenses, Devine said.
“'It is a source of liquidity if we need it," he said. "We can extract it pretty aggressively, if we have to."
Health care costs are a concern for the automaker.
It expects to spend $5.6 billion on health care for active and retired workers and their families this year, compared with $5.2 billion last
year. That adds more than $1,000 to the price of each vehicle it produces, the company has said.
GM is working with the United Auto Workers union to try to reduce some of those costs. As part of its current union contract, which runs
until 2007, GM and the union agreed to examine ways to cut costs by changing HMOs and preferred provider plans.
But GM executives have said they'd like to give union workers the same plan salaried workers get, which would cost union workers more.
Salaried workers pay for 27% of their health care, while union workers pay for about 7%, according to GM.
After a meeting with GM last week, top union officials said that's not something they'll likely agree to. “'If they'd like to give the salaried
employees our plan, we'd be happy to share it with them," said Richard Shoemaker, UAW vice president.
Lance Wallach, an accountant who specializes in VEBA plans, said GM's intention to pull money out of its health care account is a
warning shot to the union.
And, "If General Motors gets away with this, it's something that could resonate through the auto industry," he said.
But Dallas Salisbury, president of the Employee Benefit Research Institute, said GM is planning to use the VEBA the way it was intended.
"This is really a shock absorber account that in essence, buys them some time to analyze what they actually want to do," he said. "It gives
them greater flexibility in the end."