AT&T, Verizon May Follow GM, Let Unions Take on Retiree Costs

By Jeff Green and John Lippert - Oct. 15, 2007 (Bloomberg)

AT&T Inc., the biggest U.S. phone company, and No. 2 Verizon Communications Inc. may follow General Motors Corp. in trying to shift retiree health-care liabilities to a union-run fund, a move that has helped boost GM’s shares 39 percent this year.

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

“We’ll be watching” how the GM union-run fund develops, said Alberto Canal, a spokeman for New York-based Verizon. He declined to give additional details. Verizon spends $3.5 billion a year for health-care coverage for 900,000 active workers, retirees and dependents, he said.

Verizon and AT&T both have a union that may set a precedent for so-called VEBAs in separate talks with GM that started last week. The Communications Workers of America’s industrial unit is considering a union-run fund for a GM plant it represents in Ohio. Michael Coe, a spokesman for San Antonio-based AT&T, declined to comment.

“Telecommunications are the next big group that will be looking at VEBAs,” said Howard Silverblatt, an analyst at Standard & Poor’s 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.

Setting the Stage

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 U.S.

Like GM, AT&T and Verizon might also get a share-price boost from union-run funds, said George Foley, who oversees $1.1 billion in assets at Glenmede Trust Co. in Philadelphia. While the gains may be smaller, “the opportunity to move long-term legacy liabilities off the balance sheet is dramatic,” he said.

AT&T shares have risen 18 percent, and Verizon has gained 22 percent so far this year.

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 last two years.

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

Sparked in 2005

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 fort the first time, said Lance Wallach, who runs VEBA Plan LLC, a consulting company in Plainview, New York.

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.”
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Lance Wallach, CLU, ChFC, CIMC, speaks and writes about benefit plans, tax reductions strategies, and financial plans. He has authored numerous books for the AICPA, Bisk Total tape, and others. He can be reached at (516) 938-5007 or lawallach@aol.com. For more articles on this or other subjects, feel free to visit his website at www.vebaplan.com.

Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications, is quoted regularly in the press, and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. He does extensive expert witness work and has never lost a case. Contact him at 516.938.5007 or visit www.vebaplan.com.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.