A voluntary employees' beneficiary association (VEBA) is a form of trust fund permitted under American tax law whose sole purpose must be to provide employee benefits. Click here for a Wikipedia article on VEBAs.
What follows comes from note 17 on page 80 of the City's Comprehensive Annual Financial Report for the fiscal year ended 6/3/09, available online:
"Effective 1998, the City and the VEBA Board of Trustees entered into a funding agreement for the allocation of Retirement System annual excess earning (if any) to payment of City retiree health benefit costs thereby allowing the City to allocate the equivalent budgetary amount to prefund the City's VEBA. This agreement and all transfers were executed in compliance with Michigan Public Act 28 (PA 28). The Pension System's transfer to the VEBA was not fully compliant with Section 420 of the Internal Revenue Code with respect to the transfers to the VEBA. The City filed an application through the Internal Revenue Service Voluntary Correction Program and the IRS determined that $17.1 million dollars of plan assets, incorrectly distributed from the plan, should be returned to the plan, adjusted for income over a five year period beginning in FY09. . . .At the end of this fiscal year the City has repaid the Pension system $5.3 million, and the remaining liability over the next four years is $11.8 million.
"IRS REPAYMENT SCHEDULE
[End of quote.]
The City is doing the right thing by repaying the
pension system. But these payments add to the City's budget burdens.
Making the situation more serious is that these payments are being charged to employee benefits in the various departments of the City. So the benefits in the current fiscal year look more expensive than they really are. Therefore, the police department, the fire department, and other units also look more expensive than they would have been if the City were not repaying the pension system for mistakes made over a decade ago.