GM, UAW Look for Solution to $50 Billion Health Bill Negotiations between General Motors and the United Auto Workers may include the creation of a Voluntary Employees Beneficiary Association, or VEBA. The move could allow GM to clear its books of some $50 billion in unfunded retiree heath care liabilities, says consultant Lance Wallach.
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GM, UAW Look for Solution to $50 Billion Health Bill

Hear Consultant Lance Wallach

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ROBERT SIEGEL, host:

One central item in the GM-UAW contract dispute is the VEBA. That stands for the Voluntary Employee Beneficiary Association. It's a form of tax-exempt trust that an employer pays into. In this case, the union would take control of it. And its earnings and assets would pay for the health care of retirees.

Lance Wallach is a consultant who's worked on VEBA plants, and he joins us now from Plainview, New York, on Long Island.

Welcome to the program.

Mr. LANCE WALLACH (Financial Planning Consultant, VEBA): Thank you.

SIEGEL: How would this work exactly? GM would make one huge donation to a fund and that would rid it of responsibility for its retirees' health care?

Mr. WALLACH: GM would make a contribution for less than the true value of what they owe, and that would rid it of its future liability. In return, the union would be assured of having the money to pay for the benefits that were promised to the union members.

SIEGEL: Now, I want you to explain what seems to be a contradiction. The automaker is suffering from this backbreaking burden of the health care costs of its worker and retirees. But if a single, albeit a huge, charge against the company is made and payment is made into this fund, then it presumably would be manageable for the VEBA. Why? What happens in that transition that makes it affordable?

Mr. WALLACH: Well, what's actually happening here is General Motors has 100 percent obligation for some benefit in the future. In negotiation, they are reducing that benefit down to somewhere between 60 and 70 cents on the dollar. They will then put that money into the VEBA and hopefully, the union will be able to make do with less than the amount that was promised to them to pay for their future health benefits.

SIEGEL: This is - when we talk about the amount that was - when you add up all of the obligations that GM has made in past contract arrangements with UAW workers who are now either still working or employed, is this huge sum of money - we often hear $50 billion talked about. And you say that what GM would get here would be a one-time payment that would be 60 or 70 cents on the dollar. The reasoning of that would be that if it's all there and it's invested, then over time, it should go and it should cover the obligations down the road, the liabilities?

Mr. WALLACH: Well, the General Motors story is it should grow. I think the thinking of the union is, at least, we've got something as opposed to nothing if something happens to General Motors.

SIEGEL: Even if GM went under, we'd have the money. We could take care much of our health care costs.

Mr. WALLACH: That's exactly right. And I think the workers do have a valid fear in their thinking here.

SIEGEL: But here is where my lack of actuarial instincts get me, and I can't quite follow this. If GM could part with a huge sum of money - tens of billions of dollars now - and thereby say we are more competitive because we're not spending so much on the health care cost of our retirees, why couldn't they just as well do that within the corporate house of GM and set that money aside and have the same benefit?

Mr. WALLACH: You know, you've got a very good point, and maybe under proper actuarial assumptions, they might be able to. But I also think it's the way these things are counted for. Once they're rid of the money and once they're rid of that obligation for, say, 60 cents on the dollar, their books and everything else looks a lot better to investors. I've got a bunch of venture capital people calling me about the implications of a VEBA and what is a VEBA, and I guess people that invest in General Motors or similar companies that feel maybe they'll get the edge by understanding exactly what's going on.

SIEGEL: Well, Mr. Wallach, thank you very much for talking with us.

Mr. WALLACH: Thank you.

SIEGEL: It's consultant Lance Wallach, who has worked on VEBA. VEBA is Voluntary Employee Beneficiary Association. It's the tax-exempt trust fund that would be created in the GM-UAW contract talks, if those talks can be resolved.

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