The Association of U S West Retirees



AT&T, Verizon may shift to union-run health funds
GM, UAW made similar deal last month

By Jeff Gree and John Uppert, Bloomberg News
The Tennessean
Wednesday, October 17, 2007

SOUTHFIELD, Mich. AT&T Inc., the biggest U.S. phone company, and No. 2 Verizon Communications Inc. may follow General Motors in trying to shift retiree health-care liabilities to a union-run fund, a trend that has broad implications for American workers.

The largest U.S. automaker reached a landmark agreement with the United Auto Workers last month to transfer as much as $50 billion in such obligations to a voluntary employee beneficiary association, or VEBA.  The telecommunications companies, which will negotiate new contracts with their unions in the next two years, reported a combined $71 billion in retiree liabilities last year.

"Telecommunications are the next big group that will be looking at VEBAs," said How ard Silverblatt, a Standard & Poor's analyst in New York.  The ratings service estimates companies in the S&P 500 had $387 billion in retiree health-care and insurance commitments at the end of last year.

"We'll be watching" how the GM union-run fund develops, said Alberto Canal, a spokesman for Verizon, which is focused on changing the health-care system to reduce costs.  Verizon spends $3.5 billion a year for coverage for 900,000 active workers, retirees and dependents, he said.

The GM agreement sets the stage for companies such as AT&T, Verizon and aircraft maker Boeing Co. to also restructure billions of dollars in retiree benefits, clearing out balance sheets and capping health-care costs that rose by an average of 8.4 percent last year in the United States.

Accounting rules change

Several companies are already looking into union-run funds, according to Andy Kramer, a partner and labor lawyer for Jones Day in Washington, who has helped GM, Goodyear Tire & Rubber Co. and auto-parts maker Dana Corp. establish such funds in the past two years.

He said he has received calls from telecommunications companies, auto-parts makers, and rubber and aluminum producers.  He declined to name them.

Interest in retiree health-care trusts has been rising since 2005, when GM set up a $3 billion fund that it controlled with the United Auto Workers as part of a plan to require union retirees to pay health-care premiums for the first time, said Lance Wallach, who runs VEBA Plan LLC, a consulting company in Plainview, N.Y.

About a third of Wallach's business is talking to private-equity investors and venture capitalists about the risks of retiree health-care liabilities and the potential for unlocking their value from companies' balance sheets, he said.  "These are venture-capital guys looking for an edge."

New accounting rules this year force companies to add retiree health-care costs as a liability on their balance sheets, a shift that turned GM and Ford Motor Co. shareholder value negative.  Offloading the funds to the union will reverse the shortfalls.

Exelon Corp., the largest U.S. utility owner by market value, is considering a retiree health-care trust fund, said Jennifer Medley, a spokeswoman for the Chicago-based company.  Exelon had $3.3 billion in retiree health-care liabilities at the end of last year, according to S&P.

Benefits can be locked in

The telecommunications industry is similar to the automotive business in that it has large union retiree-health obligations plus "readily available assets that you could contribute without killing your cash flow," S&P's Silverblatt said.

The industry also is much more profitable than the carmakers.

Verizon, AT&T and Qwest had combined profits of $14.1 billion last year, compared with losses of $15 billion at the three U.S.-based automakers.

For unions, the health insurance funds are a chance to lock in benefits before they are cut or eliminated.

Even a union at a healthy company is more likely to consider a VEBA now that GM has one, said Harry Katz, dean of the School of Industrial and Labor Relations at Cornell University in Ithaca, N.Y.