Monday, June 28, 2010

Funding retiree healthcare in the Private Sector

At the joint Senate-House hearing, the issue of funding the Postal Service's retiree health care obligation was raised by every witness.   There is near unanimity among all non-governmental stakeholders on this issue which can be summarized in four bullet points.
  1. The Postal Service cannot be a viable enterprise, maintain current service levels, pay wages at or near current levels, and price products at levels that allow mail to be a competive mode for delivering advertising, other firms of business and personal communications and parcels as long as the retiree health obligations hang over its head.  
  2. The Postal Service's obligation has been overstated by the Office of Personnel Management.
  3. The Postal Service has overpayment of its obligation for civil service pensions exceeds its obligation for retiree health benefits.  Fixing this problem would eliminate most if not all of the Postal Service's annual obligation for retiree health benefits.
  4. The only obstacle to fixing the problem is budget scoring and pay-go rules.
Delegate Norton asked the panel of postal customers, how they handle funding retiree health and pension benefits in the private sector and did not receive any clear answer to her question.   This is not because the panel did not want to answer the question but because most firms on the panel did not offer retiree health benefits or pensions.  

Today, Bloomberg reported that Ford would cover its quarterly obligation for its retiree health benefits by issuing $610 million  in shares of Ford stock and handing it over to the United Auto Workers Retiree Medical Benefits Trust.  Ford has not always used to stock as in December it made its $610 million payment in cash.  Ford has the obligation to make funds to the Trust until 2022 and prior to making payments it had an obligation of $13.2 billion most of which s funded with Ford debt that the trust holds.

The description of Ford's debt obligations to the United Auto Workers Retiree Medical Benefits Trust from its first quarter 2010 10Q is as follows:

At March 31, 2010 we had outstanding $7.1 billion in amortizing notes due to the UAW VEBA Trust made up of a non-interest bearing Amortizing Guaranteed Secured Note maturing June 30, 2022 with a par value of $6.7 billion ("Note A") and a non-interest bearing Amortizing Guaranteed Secured Note maturing June 30, 2022 with a par value of $6.5 billion ("Note B").  For Note A, we had outstanding $3.1 billion ($4.7 billion par value net of $1.6 billion unamortized discount) using an effective yield of 9.2%.  For Note B, we had outstanding $4 billion ($5.9 billion par value net of $1.9 billion unamortized discount) using an effective yield of 9.9%.  The Notes allow for prepayments on the annual scheduled principal payment dates.  The Notes are secured on a second lien basis, limited to the lesser of an aggregate $3 billion or the outstanding principal amount of obligations thereunder, with collateral securing our obligations under the Credit Agreement.

Under Note B, we have the option, subject to certain conditions, of making each payment in cash, Ford Common Stock, or a combination of cash and Ford Common Stock.  Any Ford Common Stock to be delivered in satisfaction of such payment obligation is to be valued based on its volume-weighted average price per share for the 30 trading-day period ending on the second business day prior to the relevant payment date.

Ford has the obligations that it has for retiree health benefits because it agreed to the funding in return for concessions by the United Auto Workers on contract provisions. Similar obligations were made by GM and Chrysler, although both GM and Chrysler have paid a higher share of their obligation than Ford in the form of company stock.

Why would Ford use stock?  "Paying in stock means Ford could deploy the cash it saves to reduce its debt and improve its balance sheet"  Ford needs to conserve cash so that it can pay down the $31.3 billion in debt that it holds.   Ford has so much debt because it borrowed heavily in early 2008 which allowed it to avoid the structured bankruptcy fate of GM and Chrysler.   

The Postal Service has only the option of paying cash.   Privatizing the Postal Service would give it the same options that companies like GM, Ford, and Chrysler have to pay these obligations without using cash.  As long as the Postal Service remains part of the federal government, its only option will be cash payments and pay-go rules will determine how much the Postal Service and therefore employees and postal customers must pay.

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