VEBA Shortfalls And Rising Health Care Costs: A Recipe For Disaster

The Voluntary Employee Beneficiary Association, or VEBA, was initiated as a way to get retiree healthcare costs off the books of Detroit's auto makers. While VEBA makes balance sheets look better, they are still an exorbitant legacy costs for the Big Three, and things are about to get a lot worse. Reuters reports that a U.S. Department of Labor document shows that GM's VEBA obligations were underfunded by 40 percent in 2o11, versus 26 percent in 2010. Ford didn't fare much better, with a 37 percent deficit in 2011, up from 26 percent the previous year. While VEBA was designed to safeguard the health benefits of 824,000 retirees if the Big Three's fortunes go south, VEBA was forced to take payment in stock rather than cash, something the UAW was opposed to but ultimately complied with. The declining value of the shares is cited as a primary cause of the funding shortfall. Increased health care costs are another giant disaster-in-waiting for the Big Three. As Reuters reports "The GM VEBA trust said if the rate of health care cost increases moves up by 1 percent, its benefit obligation would increase by $6.4 billion. For the Ford trust, a 1 percent swing would increase the obligation by $3.8 billion." Given the rate of increases in health care costs in America, the automakers are in an extremely precarious position relative to their health care legacy costs – the very same costs that hurt them so badly in the first place, and the very same costs that were supposed to be shed post-bankruptcy. from The Truth About Cars http://www.thetruthaboutcars.com

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