Can the VEBA stay afloat on GM stock?
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) this morning announced a a request for an exemption that — if granted — would allow the General Motors Company to transfer company securities including common stock, preferred stock and a $2.5 billion promissory note, to the revised Voluntary Employee Beneficiary Association (VEBA) health plan established for the company’s retirees.
GM Company is the successor company that purchased substantially all of the assets of General Motors Corporation, which filed for bankruptcy on June 1, 2009, and emerged reorganized in July.
This retiree health plan will cover approximately 700,000 retirees and dependents when it becomes effective on December 31 of this year.
The idea of the VEBA has been around for years, but as adopted by GM, Ford Motor and Chrysler it was a piece of financial engineering that removed obligations from their balance sheets by shifting the responsibility for retiree health care to an independent trust, which in theory will have its own income stream. It lowered automaker borrowing costs for a time. However, the funding never appeared in anywhere near the amounts promised to the UAW.
Under the proposal negotiated as part of the bankruptcy, GM would be allowed replace more than half of the contributions that it owed to the VEBA with 20% common stock, and the remainder of the contributions will be replaced with a $2.5 billion bond and $6.5 billion in preferred stock. These changes will save GM billions of dollars. It also would transfer the UAW assets of its old VEBA to new one.
“They also greatly increase the risks being assumed by retirees. Depending on the value of the company’s stock, the trustees of the retiree health-care trust fund may have to make further reductions in benefits in the coming years,” the UAW said at the time.
It is widely expected that GM, now largely held in private by U.S. taxpayers, will attempt to go public as soon as next year.
The large transfer of employer securities to the plan disregards regulations designed to protect plans under the Employee Retirement Income Security Act (ERISA). ERISA prohibits certain plans from holding large percentages of assets in the form of employer securities. The law gives the department authority, however, to grant exemptions that “protect the interests of plan participants and beneficiaries.”
Given that the government will hold about $41 billion in common and preferred equities as part of the taxpayer funded GM reorganization, it is not exactly a neutral regulator in this case.
Moreover, taxpayers are not going to recover anywhere near the money they have invested in automakers and their subsidiaries, according to a report just released last week by the Congressional Oversight Panel. /2009/09/taxpayers-will-take-big-losses-on-auto-bailouts/
A major condition of the proposal is the appointment of an independent fiduciary to represent the plan with regard to GM securities transactions. How such a person appointed by the government, and presumably pre-selected based on philosophy, can be neutral remains to be demonstrated.
The “independent fiduciary” will determine in advance of taking any action regarding the securities that the action is in the interests of the plan and its participants and beneficiaries.
The Department of Labor says exemption would allow the securities transfer, permit GM and its health plans to reimburse each other for benefit payments mistakenly paid by the wrong entity during the transition to the new plan, and permit GM to recover mistaken deposits to the plan.
The proposed exemption also requires the review of benefit payments by an independent third party administrator and auditor for each of the plans and an objective dispute resolution process. In addition, the proposal set time limits for return of mistaken deposits and an objective dispute resolution process.