Will Taxpayers Bail Out Ford's Retiree Health Fund?

Ford said it burned through $7.7 billion in its third-quarter ended September 30, reflecting operating losses and the carmaker's purchase of Ford Credit debt securities. To conserve cash, Ford has undertaken several cost reduction initiatives, including salaried job cuts and reduced capital spending (up to $1 billion in both 2009 and 2010). Even if management is successful in meeting its objective of trimming $5 billion in cash ouflows from North American operations, the company is still obligated to fund $13.2 billion owed to retired workers (and spouses) covered under terms of a Health Care Settlement Trust Agreement reached with the United Auto Workers union.

In conjunction with a 2007 collective bargaining agreement between Ford and the UAW, obligation to provide post-retirement health care benefits, such as medical, dental, and vision, shifted from the auto maker to a union-administered trust, called a voluntary employees beneficiary association (VEBA), after December 2009. Approved by a federal judge on August 29, funding terms of the settlement are outlined in the third-quarter 2008 regulatory filing:

Â· cash of $2.73 billion;
a $3 billion principal amount secured note, which bears interest from January 1, 2008 at 9.5% per annum, matures on January 1, 2018, and is secured on a second-lien basis with the collateral we have pledged as part of our secured Credit Agreement;
a $3.3 billion principal amount convertible note, which bears interest from January 1, 2008 at 5.75% per annum, matures on January 1, 2013, and is convertible into Ford Common Stock at a conversion price of $9.20 per share;
an obligation to continue to make payments for ongoing retiree health care costs through 2009, which we estimate to have a present value of $1.5 billion; and,
an obligation to make 15 annual installment payments of $52.3 million beginning in April 2008.

In addition to the foregoing payments, Ford agreed to transfer plan assets, with a fair value of $3.5 billion to the trust. At August 29, the cash of $2.73 billion, together with the interest payments of $238 million due on the notes (issued in April), and the first installment of $52.3 million, had been transferred to the planned retiree health account. If Ford runs out of cash, who will foot the bill for the other monies owed to the VEBA, including the principal amounts of the convertible notes -- American taxpayers?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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