Detroit retiree health care trusts get $50 million loan
Detroit — A $50 million cash infusion has come through for the independent health care trusts established to administer benefits for Detroit city retirees post-bankruptcy.
The voluntary employee beneficiary associations, or VEBAs, were created through the city’s landmark restructuring plan to significantly lower $4.3 billion in long-term liability for general and public safety retiree health care and other post-benefits.
The Detroit News reported earlier this month that the trusts were running out of cash and had been working on the stopgap fix.
Attorney Michael VanOverbeke, general counsel for the trusts, confirmed that the Detroit Police and Fire Retirement Healthcare Trust and the General Retiree Healthcare Trust closed Friday on a two-year financing deal with Citi that will allow the VEBAs to continue to pay current retiree healthcare benefits.
“This is great news because it means the plans have liquidity within them now to continue to pay the level of benefits that they deem are appropriate for the next few years,” Vanoverbeke said Tuesday.
The city issued $450 million in new promissory notes toward funding the two trusts. But just over 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.
The funding deal will keep the trusts funded for the next two years and avoid immediate liquidation of the notes.
“While the VEBAs maintain the risk that the Series B Notes may fall in value and a forced sale in the discounted market may be required, we believe that the financing provided by Citi is the best choice to maximize the benefits that can ultimately be paid to retirees,” VanOverbeke wrote in an email.
The loan, VanOverbeke 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.
The interest rate on draw down of funds from the Citi loan is 5.58 percent.
In recent months, the two VEBA boards had been looking at options that will keep the trusts properly funded for the next few years and 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.
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.
The notes for the VEBAs are an obligation of the city that eventually have to be paid off.
When established, the trusts had less than the full amount needed to cover all future retirement benefits.
The VEBA boards, with actuaries and health care experts, are evaluating the best routes for keeping the trusts sustainable in the long term.
VanOverbeke said the trusts will be meeting with actuaries in the coming weeks to discuss an initial evaluation on plan design and funding strategies.