UAW Cornered on VEBA?By Michelle Krebs February 27, 2009
By Bill Visnic
With the United Auto Workers (UAW) submitting to its rank and file a proposed Ford Motor Co. amendment to the 2007 labor contract that asks the UAW to accept half of Ford's obligation to the union's Voluntary Employee Benefit Association trust, UAW leadership appears to be choosing the lesser of potential evils.
If any of the Detroit Three automakers that owe payments to the VEBA -- an amount totaling nearly $60 billion -- declare or are otherwise forced into bankruptcy, the trust that was established to fund health-care costs for UAW retirees could be shattered, says one bankruptcy expert.
In particular, some had speculated that if General Motors Corp. or Chrysler LLC, the two Detroit automakers that have accepted billions in "bridge" loans from the U.S. Department of Treasury, were to declare bankruptcy, the VEBA obligation might legally be shifted to the Pension Benefit Guaranty Corp., the federal corporation that assumes payments for legally terminated corporate pension plans.
But the PBGC is not specifically or legally bound to take over the UAW's VEBA if any of the Detroit Three declare bankruptcy, said Doug Bernstein, practice group leader for banking, bankruptcy and creditors' rights at legal firm Plunkett Clooney.
Pension plans are the province of the government's PBGC -- and the UAW's VEBA technically is not a pension plan, Bernstein told AutoObserver.
He said that although the government has several options if the VEBA trust were endangered by deepening financial distress -- or bankruptcy -- for the Detroit Three who owe billions to the fund, it appears UAW management is taking a course of best discretion in asking its rank-and-file to approve the amendment that allows Ford to pay half of their VEBA obligation in the form of equity in the companies.
It is believed ratification of the amendment of the labor agreement between Ford and the UAW -- which also includes concessions on bonuses and other matters of pay -- would set a pattern for similar deals with GM and Chrysler. GM reportedly owes some $30 billion to the VEBA; Ford around $15 billion and Chrysler $9 billion.
Bernstein said the UAW's strategy to restructure the payments to the VEBA in an attempt to bolster the solvency of the Detroit automakers probably is preferable to doing nothing and perhaps watching one or more of the automakers declare bankruptcy. If an automaker goes bankrupt, he said it effectively is a roll of the dice regarding the outcome of the VEBA: a bankruptcy judge would have to rule on the outcome of the fund.
Bernstein also said that without having specific knowledge of the legal details of the VEBA, "this ought to be a wakeup call to the UAW." He said that if any automakers' financial situation deteriorates further, it could prompt a move to terminate the VEBA, even outside of bankruptcy.
But he said it is "a pretty drastic measure" to propose that unless there is a complete termination of the VEBA obligation, the company could not effectively reorganize.
Bernstein said even if UAW members agree to restructure their labor agreements with Ford, GM and Chrysler and also allow 50 percent of the VEBA payments to be comprised of company stock, the union should be worried about what the request says about the automakers' current financial situation.
Also, VEBAs historically have been far short of a certain bet. VEBA trusts at numerous industrial companies, including Caterpillar Inc. and Detroit Diesel Corp., ran dry of funds.
When the UAW agreed to the VEBA arrangement, it was touted the fund would pay for retiree health-care benefits for 80 years. But with the automakers deferring payments and seeking to make half of their VEBA commitments in company stock -- not to mention it may take many years for the stock market to bounce back with healthy investment rates of return -- prospects for long-term solvency of the UAW's VEBA could be debated.
Finally, Bernstein says that although it might not be the best course for the UAW, "bankruptcy would conceivably provide some economic benefits" for the automakers, particularly GM and Chrysler, both of which appear to need all of the liquidity so far provided by the bridge loans just to fund ongoing operations. Via bankruptcy, "you can shed unprofitable arrangements."
He said that even without bankruptcy, it is possible the government could step in to provide the necessary VEBA funding, just as it already has with loans to help GM and Chrysler maintain daily operations, irrespective of terms of the VEBA and whether it is necessary or proper for the PBGC to be involved.