Someone Else Has to Tell Retirees 'No'
Firms Escape Health Costs By Creating Trusts, Giving Unions
Control of Funds
By Kris Maher
The Wall Street Journal
Monday, January 29, 2007
Every week, Mike Mormile receives up to 50 calls from
retirees and widows who can't pay a prescription-drug bill
or who missed a mailing explaining medical benefits. One
man said he was going to have to sell his house to keep
buying his infirm wife's medicine.
Mr. Mormile isn't in human resources, insurance, or
politics. He's a member of the United Steelworkers union,
and one of the four people overseeing a special trust that
provides certain benefits to thousands of retired
steelworkers and their spouses who lost all of them when
Bethlehem, LTV, Acme Metals and Georgetown Steel went
bankrupt between 2000 and 2003. His job is to help
determine when to add a new benefit or cut a program or
increase premiums. Sometimes he can help the caller,
sometimes not. To please everybody, he says, "We'd be out
of money in a matter of months."
As more companies look for ways to shed the burden of
funding open-ended retiree health benefits -- so-called
legacy costs -- and more unions try to keep some of them,
his experience offers a glimpse of what to expect.
Faced with crippling legacy costs, more companies are
considering the trust approach. The Steelworkers and
Goodyear Tire & Rubber Co. agreed last month that the
company will make a one-time payment for retiree health
benefits into a trust. The trust would be governed by a
committee consisting of three members designated by the
Steelworkers and four independent members jointly selected
by Goodyear and the union. That committee would manage the
trust's assets and maintain the benefit programs. The union
and the company will no longer bargain over retiree health
benefits, according to the union.
Executives at General Motors Corp. and other big auto makers
recently expressed interest in the Goodyear agreement,
because a similar deal could allow them to relinquish the
massive, but unfunded, amount of money needed for retiree
health-care benefits they currently carry on their books.
Such agreements effectively mean "the employer is getting
out of the retiree medical-coverage business," says Russell
Greenblatt, a partner with the law firm Katten Muchin
Rosenman LLP in Chicago, which has worked with companies to
set up similar trusts.
Goodyear agreed to put $1 billion into the trust and to
provide for cost-of-living allowance and profit-sharing
contributions that the union estimated could amount to an
additional $135 million. However, the trust is $200 million
short of estimated future retiree medical costs.
"If they have really good investment returns, they can say,
'We're going to improve the benefits,' " says Derek Guyton,
a principal with Mercer Health & Benefits in Chicago, who
estimates that 25% of large companies have a version of
these trusts. But poor returns could easily result in
higher co-payments for retirees or the need to trim
benefits, he says.
The Teamsters set up a union-funded trust in 2001 that now
covers about 15,000 retirees who didn't meet the eligibility
requirements of their company's plan. To receive benefits
from the trust, the retirees have to pay a monthly premium,
which the union had been able to keep flat until this year.
Effective March 1, some premiums will increase between 3%
and 10% for some retirees. For a low-cost plan with a $500
deductible and basic medical coverage up to $100,000,
average $250 monthly premiums are increasing $25.
John Slatery, director of the benefits department at the
Teamsters, says he tries to keep costs down by directing
members to discounted networks and generic drugs and by
getting them more involved in their health-care decisions.
He says the trust receives and disburses about $15 million a
year and has reserves of about $4 million.
Mr. Slatery says the trust operates like a small insurance
company, but he outsources many administrative and other
functions and has only one full-time and several part-time
people assigned to the trust. He sees further premium hikes
ahead. "We're going to have to pass the costs on, or reduce
benefits or come up with more efficient ways of providing
it," he says.
The trusts that are used to pay for retiree health-care
benefits are created through an organization called a
voluntary employees' beneficiary association. VEBAs have
been around in various forms since the 1920s but have
proliferated in the past 10 or so years due to accounting
rule changes and as more companies take advantage of tax
benefits on the money they contribute to VEBA trusts, says
Mark Wilkerson, a consultant in Spokane, Wash., who helps
state and local governments set up VEBAs. There were about
12,500 VEBAs in 2005, according to the Internal Revenue
Bankruptcies in the airline and steel industries that led to
the loss of retiree medical benefits for tens of thousands
of workers, have made VEBAs more attractive to unions.
Unlike pensions, which are guaranteed by the federal Pension
Benefit Guaranty Corp., retiree health-care benefits are not
protected by the government.
The United Steelworkers trust that Mr. Mormile helps run,
created in 2002, grew out of discussions between the leaders
of the union and investor Wilbur Ross, who wanted to buy the
bankrupt steel makers without assuming legacy costs. The
union, trying to save jobs for current workers but also
protect its retirees, suggested forming a trust fund to pay
for some benefits. It also agreed to manage the fund
through a committee of three representatives from the union
and one from the company.
Mr. Mormile and the three other committee members meet once
a quarter to discuss the state of the trust and options for
adding new benefits for retirees. Unlike the Goodyear plan
which has a limited company contribution, the steelworkers
fund also receives contributions from Mittal Steel Co.,
which bought out Mr. Ross's company, based on earnings and
At first, the fund had only $20 million to $30 million, and
couldn't provide any benefits, leaving retirees with only
Medicare or any insurance they might be able to buy on their
own. As steel-industry profits have grown, the fund has
received more contributions and began offering benefits in
2005, three years after the fund was established.
After listening to retirees, the committee decided the
biggest expense was prescription drugs, and offered a
prescription-drug plan. Under the plan, retirees pay $10 a
month, which entitles them to unlimited generic drugs with a
$5 co-pay, and coverage of up to $6,000 a year in brand-name
prescription drugs. Last year, it also decided to reimburse
41,000 retirees for Medicare premiums paid in the first six
months of the year.
Doing so has been difficult at times. More than 100
retirees said last year that they missed an August deadline
to sign up for the Medicare reimbursement, because the
mailing list provided by bankrupt steel companies was
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