City retiree health funds need more cash
Detroit — The independent health care trusts established to administer benefits for Detroit city retirees post-bankruptcy are running out of cash, but officials say they’ll have a stopgap fix this month.
The voluntary employee beneficiary associations, or VEBAs, were a key component of the city’s landmark restructuring plan, significantly lowering $4.3 billion in long-term liability for health care and other post-benefits.
Part of Detroit’s goal through its debt-cutting plan was to unload its liability for health care benefits to general and public safety retirees who retired by Dec. 31, 2014.
The city issued $450 million in new promissory notes toward funding the two trusts. But just six months out of bankruptcy, those notes — valued at around 60 cents on the dollar — haven’t yet gained adequate value in the bond markets, leaving Detroit’s VEBA overseers in search of short-term cash.
Costs are about $3 million per month for both funds. Each now has about $4 million to $5 million in cash remaining.
An attorney for the VEBAs says a deal is being finalized to secure a $50 million loan over two years to shore up the trusts. A closing date on the loan is scheduled for this month, said attorney Michael VanOverbeke, who is general counsel for the trusts.
“We have identified a source of money ... ,” said VanOverbeke, who declined to name the bank involved. “I would be alarmed if we were in August and we didn’t have a solution yet as to how we were going to come up with the money. But we’re not in August.”
“We feel the financing is moving along the way it should,” VanOverbeke added. “Come June, July, August, September, we’re going to have the cash we need to pay.”
The loan, he said, is expected to provide the health care trust boards with sufficient cash flow to continue to pay benefits over the next two years. At that time, they should be able to monetize all, or a portion of, the B Notes.
In recent months, the two VEBA boards have been looking at options that will keep the trusts properly funded for the next few years and have embarked on a broader analysis to best sustain them in the future.
The general VEBA has 9,406 participants. For the police and fire, there are 7,735, officials said.
The IRS tax-exempt trusts are used across the country to protect and hold assets. In Detroit, they began providing health and welfare benefits to eligible retirees and their beneficiaries in January.
The VEBAs received start-up cash from foundations and a Rate Stabilization Reserve Fund maintained by the city’s employee benefits plan.
Each VEBA has a seven-member board that manages contributions for retiree health care benefits and decides what benefits will be provided, who would be covered and how to pay for it for the rest of members’ lives.
The notes for the VEBAs are an obligation of the city that eventually have to be paid off. The city is to make interest payments to the VEBAs of 4 percent twice each year for 20 years, and 6 percent twice annually for the final decade.
The pending loan is among the options that the VEBAs have examined to bolster the trusts. Officials also floated a separate proposal that would ask Detroit’s pension funds to lend $25 million apiece to the trusts over two years.
Keeping trusts sustainable
The Police and Fire Retirement System board, through its spokesman, said that the VEBA boards “appear close to engaging additional funding.”
“We are hopeful that the VEBA Boards and staff are working diligently to secure funding through the sale of B Notes or other investment methods to ensure continued health care payments for retirees,” Bruce Babiarz, PFRS spokesman wrote in an email.
To address questions about VEBAs and other post-bankruptcy concerns, the city’s pension boards are planning a June 10 meeting for retirees at Fellowship Chapel in Detroit.
The VEBA boards, with actuaries and health care experts, are evaluating the best routes for keeping the trusts sustainable in the long term. When established, the trusts had less than the full amount needed to cover all future retirement benefits.
City Councilman Scott Benson and President Brenda Jones, who each sit on one of the city’s two pension boards, recently spearheaded an effort of their own to ensure the VEBA trusts remain viable in future years.
The pair has been working on a mechanism that would allow employees, residents and others to donate to a yet-to-be-established charitable fund.
They have asked retirement system staff to study the concept, as well as a proposal by Jones to add an option to contribute to the VEBAs on city and/or state income taxes.
Benson says he expects the foundation concept will be studied in August and should be ready to go online prior to the 2016-17 fiscal year.
“To me, it was just another creative idea of how to help fill that gap,” he said of the proposal.
The first-term councilman and General Retirement System trustee said there are a lot of “challenges” with the VEBA trusts, a component of the city’s historic bankruptcy that he noted wasn’t often talked about and “could have been done better.”
“I believe that one of the biggest hits of the bankruptcy was medical for our retirees,” Benson said.
VEBAs ‘very successful’
General city retiree William C. Plumpe says about $120 a month has been dedicated from the VEBA toward his health care savings account.
With $750 to $1,000 a month in new health care expenses, he’s getting by with his pension and Social Security payments. He hopes much of the cost will be picked up by Medicare when he turns 65 in a couple of years.
“I believe there is sufficient funding to ensure the $120 a month, but no more,” he said. “I am hoping that somebody makes some kind of contribution to the VEBA in the near future to help defray costs,” he added, suggesting the state could kick in.
New York-based VEBA consultant Lance Wallach said VEBAs have been around for decades and, with smaller entities, have been “very successful.”
A trust also came into play for the automakers as they were emerging from bankruptcy.
“The trick with a VEBA is to fund it with enough money, make good investments and to use conservative interest rate assumptions,” Wallach said.
“The problem is, it’s tough to know what returns will be like in future years and how many employees will be in it.”