The UAW is betting on the value of new stock.
The U.S. Department of Labor’s Employee Benefits Security Administration announced a proposed exemption in the Federal Register today that, if granted, would allow the Chrysler to transfer about $4.59 billion promissory note and company securities to the Voluntary Employees Beneficiary Association (VEBA) plan established to provide health benefits for the company’s retirees.
Following the same request by General Motors Company last month, Chrysler wants an exemption under the Employee Retirement Income Security Act (ERISA) to allow the VEBA plan to hold stock and debt of the reorganized Chrysler. The retiree health plan would cover about 120,000 retirees and dependents when it becomes effective on Jan. 1, 2010.
At the time they were originally proposed, VEBAs at the auto companies were a piece of financial engineering that allowed the transfer of billions of dollars in health care obligations from the books of the auto companies, thereby lowering their borrowing costs. The promised cash contributions from the auto companies never materialized in the amounts that were promised.
Follow the Feds!
Now GM and Chrysler want to use securities in the reorganized companies to fund the health care but need a Federal exemption to do so. Ford Motor Company also has a similar agreement with the Untied Auto Workers union that allows it to use stock in lieu of cash payments. It is not clear when either Chrysler or General Motors will attempt a public stock offering.
Because such transactions are inherently risky, ERISA prohibits certain plans from holding large percentages of plan 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.”
It appears that the UAW has little choice but to go along with the controversial plan.
When VEBAs were established the UAW said, “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.”
On May 31, 2009, the bankruptcy court issued an opinion allowing old Chrysler to sell substantially all of its assets to a New Chrysler company, Chrysler Group, which is owned by the Canadian Government, the U.S. Treasury, Fiat and the VEBA plan.
A recent Inspector General report to Congress said that taxpayers have little chance of recovering their investment in Chrysler and GM since the new stock when issued would have to trade above historical highs of the stock of the old, now failed, companies.
According to the Department of Labor, the exemption would allow the securities transfer, permit Chrysler Group 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 the automaker to recover mistaken deposits to the plan.
The assets of the VEBA plan will be held by the same trust that holds the assets of the plans established by Ford and General Motors for their respective retirees. There will be separate accounting for each plan maintained by the three companies that are now funded through a single trust.
The primary condition of the proposal is the appointment of an independent fiduciary to represent the plan with regard to New Chrysler securities transactions. 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 proposed exemption also requires the review of benefit payments by an independent third party administrator and auditor for each of the plans and a dispute resolution process. In addition, the proposal sets time limits for the return of mistaken deposits and an objective dispute resolution process.