VEBA in Auto Industry a Tricky Business

Implications: A VEBA in the auto industry will most likely be part of the collective agreements between the UAW and GM, Ford, and Chrysler; thus it will require renegotiation at the expiration of the agreement, most likely in 2011.  In addition, a VEBA would raise issues in pension-like underfunding.  There are also internal political implications for the UAW.

Analysis:

As the UAW collective bargaining negotiations with GM, Ford, and Chrysler continue, there is a great deal of speculation about a VEBA to address health care for retirees.  While a VEBA has been advocated as a means by which the companies will offload liabilities, the issues in negotiating a VEBA generate several considerations. Some are listed below.  I may add more as they come to mind.

1. A VEBA may not result in a complete and permanent offloading of retiree health care liabilities for the company(ies), if "complete and permanent offloading" is defined as no future financial responsibility for retiree health care.  If the parties agree to a VEBA, it is most likely to be part of the collective bargaining agreement.  The current agreement is a four-year agreement.  If the next agreement is a four-year agreement, the VEBA would expire with the agreement, e.g., in 2011, at which time it must be renegotiated, and every thing about the VEBA would be up for renegotiation.

2.  If a VEBA is negotiated, and the health insurance policies remain unchanged for the duration of the agreement, then the VEBA will operate much like a defined benefit pension plan. If the VEBA is determined to be actuarially underfunded because of low contributions, low investment earnings, and/or high payouts, then the underfunding would need to be addressed. Either the insurance plans must be renegotiated, perhaps mid-term of the agreement, or additional contributions would be required.

3.  On the union side, as the UAW is a highly political institution, it is important to think about a VEBA in terms of constituencies. The four relevant constituencies in the UAW are the national leadership/corporate council leadership, the local officers at each company, the active membership, and the retirees.  The retirees cannot vote on the contract, but they exert substantial influence because they vote in internal local elections for local officers; with the employment reductions and buyouts in the auto industry, many locals have more retirees than actives. Thus, the local leadership is likely to be very sensitive to retiree concerns.   As the retirees are likely to care most about VEBA, the question is whether the retirees can be be convinced in fairly short amount of time that they are better off with a VEBA than the traditional company funding?   Thus, even if the national/corporate council national leadership favors a VEBA,  the local leadership, most responsive to the retirees, is likely to be cautious.  Under UAW procedures, the local leadership must approve the national agreement before it goes to the employees for ratification.  Active employees are likely to be concerned about a VEBA as well as work and employment security (see item 5 below).

4. A VEBA represents some general political risk for the UAW.  If the VEBA is jointly administered, the UAW will share responsibility for retiree health care, and will likely be held responsible if the VEBA cannot meet its obligations.  Is this a political risk they are willing to take?

5. It is important to realize that a VEBA, if negotiated, will be only one component of a collective bargaining agreement. If a VEBA is important to the automakers, they may be asked to concede on other issues that are important to the UAW, such as investment in UAW-represented facilities.  The Goodyear-Steelworker VEBA, which is often held out as a model, was part of an agreement that included investment in unionized facilities.