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Posted October 11, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT A Lesson from Detroit UAW’s new VEBA & your OPEB Questions, success stories or anecdotes about benefit issues in government? Keep your eyes on the auto industry's groundbreaking labor agreements in Detroit. That's where the UAW's strike target, General Motors, reached a breakthrough deal over retiree medical costs with one of America's most sophisticated unions. Years ago, before foreign cars became popular in the U.S., the Michigan motto was: What's good for General Motors is good for America. Today's unfortunate corollary of that proud slogan is that what's bad for American carmakers is bad for America. And nowhere is that more true than the throbbing hangover of retiree medical benefits, which have crippled the U.S. auto industry with "legacy costs" that make them uncompetitive in world markets. Hence, it will be good for America if the new UAW deal brings about a practical solution to GM's health care cost problem and sets the stage for similar realistic solutions in America's manufacturing sector, which competes globally. 
States and cities are in the same hole as GM, only theirs is far deeper. GM's actuarial deficit for retiree medical costs is $50 billion. Latest estimates of unfunded "other post-employment benefits" (OPEB) liabilities of the states and localities exceed $1 trillion — 10 times those of the entire U.S. auto industry. GM investors face only a sliver of the problem heading toward our nation's taxpayers. Which brings us to the new GM-UAW VEBA deal in Detroit. The UAW is a savvy, scrappy labor union that knows when its back is against the wall. Unlike municipalities that typically face no competition for their compulsory tax revenues, auto companies face bankruptcy if their costs are so high that they become uncompetitive in world markets. The UAW knows that, and agreed to share the long-term liabilities and risks for retiree medical costs with the auto companies in order to save the golden goose.
Under a Voluntary Employee Beneficiary Association (VEBA), the auto employers would make annual contributions to a union-run retiree medical benefit plan — much like a 401(k). For the employers, this eliminates the corporate risk of runaway long-term medical costs and allows the carmakers to operate with a leaner cost structure that compares more favorably with foreign competitors like Toyota and Honda. The union is willing to accept this risk transfer in large part because the alternative, ultimately, would probably be declarations of bankruptcy — the route airline companies have taken. If bankruptcy were declared, employee members and retirees would get virtually nothing because OPEB benefits don't have the same protections as pensions. There is no Pension Benefit Guarantee Corporation for OPEB benefits. A VEBA trust fund is immune from bankruptcy, so the UAW leaders took half a loaf (59 percent, to be precise) just to be sure that there is at least some bread on the table. The motivation for public-sector employee unions to adopt a similar VEBA strategy is far less compelling. However, the numbers are equally ugly and will only get worse. Most state and local governments are just now beginning to wake up to the extent of their problem because of the accounting disclosures required by the Governmental Accounting Standards Board statement 45. Although a few entities have taken action to properly fund their OPEB liabilities, most public employers are still in the "study" mode. Unlike the auto industry, where there are three primary U.S. companies, there are 50 states and tens of thousands of localities, so the decision-making is far more fragmented. There are 100,000 cooks in this stew. What's important about the GM-UAW contract talks is that the concept of a defined-contribution solution to OPEB funding, with risk-sharing and cost-sharing between employers and employees, has penetrated the TV evening news and the minds of mainstream America. Taxpayers are becoming more familiar with these types of benefits plans, and some will start asking whether similar arrangements should also become the norm for public employees. To put this into perspective, if the GM-UAW deal became the pattern in state and local governments, the deficit now facing taxpayers would be cut by $500 billion! That's 20 times the annual cost of running operations of the entire state of California, America's most populous state. It's double what all state and local governments now spend annually on either public safety or welfare! That's what conventional governmental retiree medical promises are costing this country, in excess of the emerging private-sector model, based on GM's VEBA/FASB funding ratio. VEBAs are not the only form of defined-contribution plans available to public-sector employees and managers. They tend to be more union-controlled than other forms such as so-called (IRS) "Section 115" governmental trusts, which also permit pretax savings to accumulate and be spent without taxation when used for qualified medical purposes. Most governmental 457 deferred-compensation-plan administrators offer one or the other form of these plans already, so the vehicles are already available. As I pointed out previously in my Rx for Sick Leave column, a defined contribution OPEB plan is a far superior way to integrate sick leave benefits with OPEB funding. For new employees, they're attractive also because the benefits are far more portable than traditional unfunded retiree medical structures. State and local governments don't usually go broke, but their unmitigated OPEB costs could eventually drain the ability of many to provide vital public services and make them fiscal zombies. It's time to start solving the problem, and if the GM-UAW VEBA idea takes root in the mainstream economy, it could provide a noteworthy model for many state and local governments. Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
