Health care plan a cost-cutting model

GM erases $50 billion in liabilities; other old-line industries can use system as example.

Christine Tierney / The Detroit News

General Motors Corp.'s plan to shift its health care liabilities into a trust administered by the United Auto Workers provides a fresh blueprint for other old-line American manufacturers seeking relief from costly obligations that undercut their competitiveness.

As part of a tentative contract agreement struck Wednesday with the UAW, GM will provide $35 billion to finance the trust, known as a voluntary employees' beneficiary association, or VEBA. As a result, GM wipes more than $50 billion in liabilities off its books.

Ford Motor Co. and Chrysler LLC are expected to conclude similar deals with the UAW, and other manufacturers are likely to be considering such a mechanism.

"This would be looked at at old industries where the legacy burden is significant," said Mike Whitty, adjunct professor at the University of Detroit Mercy College of Business and Administration.

"A VEBA would improve the long-term balance sheet of a firm, make it more attractive to investors, and help its competitiveness by helping it to secure funds at more favorable terms," said Whitty, a labor relations specialist.

Rising U.S. health care costs have become a huge burden to traditional manufacturers with unionized work forces that fought for defined pension and health care benefits.

Firms in newer industries tend to offer defined contributions, at best, toward employees' health care and pension benefits. But older manufacturers, such as Detroit's automakers, are bearing the full brunt of health care inflation.

VEBAs, which get favorable tax treatment, give the most benefit to old-line manufacturers with union workers. But all sorts of businesses could profit from the broader concept of unloading liabilities to expert third parties.

"Any business will want to reduce the uncertainty of future liabilities," said John Henke, president of Planning Perspectives Inc. in Birmingham. "This could prompt companies to offload their liabilities to organizations expert in certain areas."

Several manufacturers, such as Navistar International Corp., have VEBAs in place, and the U.S. automakers have established such trusts on a smaller scale.

But the mechanism attracted widespread attention in 2006 after Goodyear Tire & Rubber Co. formed a VEBA as part of its recovery plan.

Goodyear contributed $1 billion in assets to the trust in exchange for unloading current and future retiree health care liabilities for employees who are members of the United Steel Workers. It also cut its annual expenses.

"Goodyear was the most straightforward example -- their health care obligations went away," said Robert Schulz, analyst at Standard & Poor's Ratings Services.

"It's fair to imagine that most industrial companies with substantial post-retirement health care obligations -- typically unionized companies -- are looking at something like this."

You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.