Dropout Nation

When it comes to the fiscal woes that are slowly plaguing National Education Association and American Federation of Teachers, one of the biggest lies with the array of affiliate-run Voluntary Employee Benefit Associations that provide health and disability insurance coverage to teachers in traditional districts. The NEA found this out the hard way four years ago when it had to take over its once-influential Indiana affiliate after its VEBA went insolvent amid a $67 million deficit and alleged financial mismanagement, while its Hawaii affiliate had to liquidate its insurance division after a spate of mismanagement that led it to owe $400,000 in back taxes and interest. For both union affiliates, traditional districts that contract with the multi-employer insurance plans, and teachers (who also pay into the plan and depend on the coverage), VEBAs can be trouble because they are prone to fiscal mismanagement (including, as in the case of the Indiana NEA’s trust, pouring investment dollars into hedge funds inappropriate as investment vehicles for operations geared toward covering hard-to-predict healthcare costs). The problems are even worse because insurance trusts are not required to report their financials in a timely manner the same way demanded of private insurers.

One can easily see an example of the troubles that may come by looking at the VEBA operated by the NEA’s Alaska affiliate, which has been the healthcare provider of only resort since 1996. The trust lost $349,447 during its 2010-2011 fiscal year, according to the Alaska NEA’s filing with the Internal Revenue Service. Despite revenues increasing by 8.4 percent during this past fiscal year, a 7.2 percent spike in the VEBA’s expenses — including a 7.3 percent increase in benefits paid out — wiped out the revenue gains. It appears that the union isn’t increasing rates enough to keep up with expenses or build up reserves needed to avoid an insolvency. The VEBA had just $263,828 in cash by the end of 2010-2011 versus $1.5 million at the beginning of the fiscal year. There is also another $10.9 million in costs on the books that have been “incurred but not reported”. For the Alaska NEA, the loss in 2010-2011 was just the latest in a long losing streak. During 2009-2010, the VEBA lost $1.8 million on revenue of $97 million, even after revenues increased by 15 percent. Except in 2008-2009, the VEBA has lost money every year for most of the past four years, according to a Dropout Nation analysis of the VEBA’s tax filings.

Then there’s the VEBA controlled by the NEA’s Indiana affiliate, whose fiscal collapse brought down the union in the Hoosier State, also remains in bad shape. In 2010-2011, the VEBA lost $6.6 million, nearly double the $3.6 million loss incurred during the previous fiscal year, according to its IRS filing. Revenues have all but dissipated, with traditional districts fleeing to other healthcare providers (and a few suing the trust for lost premium payments). The trust generated a negative $46,599 in 2010-2011 versus $1.1 million in revenue during the previous fiscal year; the trust suffered $465,045 in investment losses during 2010-2011, double the loss experienced in the previous year. The trust’s liabilities of $64 million were 11.4 percent higher than in 2009-2010, while its assets have only increased slightly. The trust did manage to increase its savings and temporary investments from $746,819 to $10.3 million. It has depended heavily on the NEA and its Indiana affiliate, which advanced $18.9 million to the VEBA in 2010-2011 to handle disability claims, capital calls from hedge funds, and legal expenses.

Then there is the insurance trust operated by the NEA’s Wisconsin affiliate. It earned $1 million in its 2010 fiscal and calendar year, versus a $42 million gain in the previous year, according to its IRS filing. Its revenue declined by six percent in 2010 to $858 million.  Although the trust’s benefits payout of $1.7 million in 2010 was triple the levels of the previous year, most of the VEBA’s funds were consumed by so-called “cost of contributions” of $853 million. Given that the cost of contributions is a new line item on its tax forms and doesn’t conform with the $874 million it reported to have paid out in benefits in 2009 on that year’s IRS filing, it is likely that the Wisconsin VEBA’s accountant didn’t fill the tax form out correctly. Since the last IRS filing came out just for 2010, it is hard to know the impact of the Dairy State’s abolition of collective bargaining and forced union dues payments on the trust’s financials in 2011 and 2012. But we will find out soon enough.