BEFORE EMERGENCY BOARD No Between. The Railroads Represented By The National Carriers Conference Committee

Transcription

1 CARRIERS SUBMISSION No. 1 BEFORE EMERGENCY BOARD No. 243 Between The Railroads Represented By The National Carriers Conference Committee And Their Employees Represented By American Train Dispatchers Association, International Association of Machinists and Aerospace Workers, International Brotherhood of Electrical Workers, Transportation Communications International Union, Transport Workers Union, And The Rail Labor Bargaining Coalition. National Mediation Board Case Nos. A-13569; A-13570; A-13572; A-13573; A-13574; A-13575; A CARRIERS SUBMISSION No. 1: SUMMARY OF POSITION October 10, 2011 C

2 TABLE OF CONTENTS Page INTRODUCTION... 1 ARGUMENT... 5 I. The Carriers Proposal is Based on a Pattern Agreement... 5 A. The Pattern Principle... 5 B. The UTU Pattern Agreement Should Be Followed... 7 C. The Coalitions Arguments Against the Pattern Are Unpersuasive... 9 II. The Carriers Proposal Equals or Exceeds Applicable Benchmarks A. The General Labor Market B. Comparison to Recent Union Settlements C. Comparison to Transportation Industry Settlements D. Comparison to Cost of Living Increases III. The Carriers Proposal Maintains the Employees Preferred Position IV. The Coalition Unions Proposals Are Not Justified by Recent Railroad Profitability V. The Coalitions Proposals Are Not Justified by Changes in Railroad Productivity CONCLUSION C

3 INTRODUCTION On April 21, 2011, the freight rail carriers represented by the National Carriers Conference Committee ( NCCC ) reached a voluntary agreement with the largest single railroad employee union, the United Transportation Union ( UTU ), on a package of wage and benefit changes. 1 This Agreement, which was ratified by the UTU membership on September 2, 2011, provides a significant increase in total employee compensation, including a 17 percent wage increase over six years. The UTU leadership has described the new agreement as follows: In an economic environment that has our brothers and sisters in other industries in a vice grip of difficult times, our agreement delivers more than just a 17 percent wage increase, a 6½-year cap on health care insurance premiums, certification pay, a faster process for new hires to reach full-pay rates and no work-rules give-backs. The 17 percent wage increase is significantly higher than the rate of price inflation giving you a greater boost in purchasing power than any other national contract in the past 40 years. (App. A-14). 1 The participating railroads include six Class I carriers, which together employ more than 90% of the employees at issue: BNSF Railway Company ( BNSF ), CSX Transportation, Inc. ( CSXT ), The Kansas City Southern Railway Company ( KCSR ), Norfolk Southern Railway Company ( Norfolk Southern ), Soo Line Railroad ( Soo ), and Union Pacific Railroad Company ( Union Pacific ). The additional participating railroads are: Alton & Southern Railway Company, The Belt Railway Company of Chicago, Brownsville and Matamoros Bridge Company, Central California Traction Company, Columbia & Cowlitz, Consolidated Rail Corporation, Gary Railway Company, Indiana Harbor Belt Railroad Company, Kansas City Terminal Railroad Company, Longview Switching Company, Los Angeles Junction Railway Company, New Orleans Public Belt Railroad, Norfolk & Portsmouth Belt Line Railroad Company, Northeast Illinois Regional Commuter Railroad Corporation, Oakland Terminal Railway, Port Terminal Railroad Association, Portland Terminal Railroad Company, South Carolina Public Railways, Terminal Railroad Association of St. Louis, Texas City Terminal Railway, Union Pacific Fruit Express, Western Fruit Express Company, Wichita Terminal Association, and Winston-Salem Southbound Railway Company (collectively Carriers ). C

4 In other words, the new UTU Agreement represents an extremely generous settlement, providing total compensation increases in excess of what most other employees in the United States (unionized or not) have received in recent years. In a world in which many employees are subject to a wage freeze if not wage cuts as well as substantial increases in health care cost-sharing, the railroad employees represented by the UTU have a settlement that ensures that they will remain among the most wellcompensated workers in America. It is also worth emphasizing that the UTU Agreement reflects an important quid pro quo: above-market general wage increases ( GWIs ) in exchange for changes in the national health care plan that covers employees represented by UTU. These changes start to bring the plan currently one of the richest in the nation closer to the current mainstream of employer health plans. The Carriers respectfully urge this Emergency Board to recommend a similar settlement for all of the disputes with employees represented by the remaining rail unions. 2 More specifically, the Carriers proposed total compensation package includes the following main elements: 2 The unions participating in this proceeding include: Brotherhood of Maintenance of Way Employes Division ( BMWED ), Brotherhood of Locomotive Engineers & Trainmen ( BLET ), Brotherhood of Railway Carmen ( BRC ), International Association of Machinists and Aerospace Workers ( IAM ), Brotherhood of Railroad Signalmen ( BRS ), Transportation Communications International Union ( TCU ), Transport Workers Union ( TWU ), International Brotherhood of Electrical Workers ( IBEW ), National Conference of Firemen and Oilers ( NCFO ), Yardmasters Department Div. of UTU ( YDM ), American Train Dispatchers Association ( ATDA ), Sheet Metal Workers International Association ( SMWIA ), and International Brotherhood of Boilermakers, Blacksmiths, Iron Ship Builders, Forgers and Helpers ( IBB ) (collectively Coalition Unions ). 2 C

5 (1) Wages: Total wage increases of 17% over six years, including 2% GWI in % GWI in % GWI in % GWI in % GWI in % GWI in 2015 (2) Extra Compensation: Additional compensation analogous to special elements of compensation under the UTU pattern, including: Equivalent entry rate changes (or lump sums) Special wage adjustment equal to 0.5% GWI (for certification pay) (3) Health Care: A continued freeze on employee contribution rates, plus a limited set of plan design changes that will start to bring the railroad health care plan into closer alignment with most other employer plans. (4) Work Rules: No work rule changes. 3 In the sections below, we summarize the main reasons why the Board should recommend this proposal. In Part I, we discuss the pattern principle, and explain why it is critical that any recommendations stay within the pattern set by the UTU Agreement. In Part II, we show that that the Carriers proposal is better, by all objective measures, than the vast majority of other recent settlements, and is particularly generous in an era of high unemployment and economic uncertainty. In Part III, we explain that the Carriers 3 As explained in the Carriers Submission No. 6 (Work Rules), while the UTU pattern agreement contains no work rule changes, the Carriers are willing to redistribute the components of the pattern to fund special priorities for individual unions, so long as the total value received remains equivalent to the pattern. 3 C

6 proposal will maintain the preferred position of railroad employees, who already enjoy compensation and benefits superior to those of most American workers. These are good, high value jobs, and will remain so for the life of this agreement. We then turn to the two main arguments advanced by the Coalitions for a much richer package. In Part IV, we show that railroad profitability is not a justification for above-market compensation increases, especially when the Coalitions have never been and are not now willing to accept any risk of a future decline in profitability. Likewise, in Part V, we show that increases in railroad productivity over the last few decades do not justify additional compensation increases, especially when most such productivity increases are not fairly attributed to increased skill or effort by railroad employees. 4 * * * * The bottom line here is that the UTU pattern is fair and reasonable, especially given the current economic climate. Indeed, the total increase in compensation is more than 20 percent on top of current above-market wages and benefits which is more than fair when so many Americans remain unemployed, or employed in low-wage, nobenefit jobs. There is no compelling reason to depart from the terms of the UTU Agreement, especially when doing so would effectively punish the largest rail labor union for having the fortitude and foresight to negotiate and ratify a voluntary settlement in this round of national collective bargaining. 4 A number of these arguments are discussed in more detail in the Carriers expert reports and issue-specific submissions. In addition to this Summary, the Carriers submissions include (1) History and Context of the Dispute, (2) Total Compensation, (3) Wages, (4) Health Care Plan Design, (5) Work Rules, and (6) Miscellaneous Compensation Issues. 4 C

7 ARGUMENT The Board should recommend a settlement that adheres to the pattern set by the new UTU Agreement. There are three main reasons why this is so. The two contrary arguments offered by the Coalition Unions are unconvincing. I. THE CARRIERS PROPOSAL IS BASED ON A PATTERN AGREEMENT. A. The Pattern Principle Since 1937 when national wage and rules movements first began presidential emergency boards have relied on the pattern principle as one of the most important guides for crafting recommendations to settle rail labor disputes. 5 In essence, the pattern principle provides that once a union and the multi-carrier group reach agreement, the terms of that agreement should, absent compelling circumstances, set the parameters for agreements with the non-settling unions. Indeed, following a pattern is critical to the long-term stability of railroad industry labor relations. See Report of Emergency Board No. 242 (Dec. 30, 2007) at This is so for several reasons: 5 See Report of Emergency Board No. 131 (May 23, 1960) at 8 ( [I]t is an inescapable fact that pattern settlements, despite sporadic deviations, have been characteristic of the industry for many years, so much so that any deviation from an established pattern during a current wage movement would be likely to have serious repercussions. ); see also, e.g., Report of Emergency Board No. 231 (July 18, 1996) at 7; Report of Emergency Board No. 220 (Mar. 31, 1992) at 6; Report of Emergency Board No. 211 (July 15, 1986) at 11; Report of Emergency Board No. 195 (July 21, 1982) at 4-5; Report of Emergency Board No. 187 (Sept. 2, 1975) at 15-16; Report of Emergency Board No. 186 (Apr. 16, 1975) at 8-9; Report of Emergency Board No. 181 (Mar. 31, 1972) at 8-9; Report of Emergency Board No. 174 (Jan. 13, 1969) at 5; Report of Emergency Board No. 169 (Jan. 28, 1967) at 6; Report of Emergency Board No. 157 (Nov. 9, 1963) at 11-12; Report of Emergency Board No. 137 (May 19, 1961) at 12; Report of Emergency Board No. 116 (Dec. 22, 1956) at 13; Report of Emergency Board No. 114 (Nov. 7, 1955) at C

8 (1) Under the Railway Labor Act ( RLA ), representation is on a craft-bycraft basis. This has led to a high degree of fragmentation in union representation, with a total of 13 organizations. Rivalries among these organizations directly impact labor relations no union wants to be outdone by its peers. See Report of Emergency Board No. 220 (May 28, 1992) at 6 ( [C]ompetition between and among unions for supremacy of benefits, with its ineluctably destabilizing consequences, is damaging to the public interest. ). (2) Likewise, employees in the various crafts all work together, side-by-side, and so are bound to compare their wages and other benefits. Morale and cooperation and therefore carrier operations suffer when one group edges ahead (or lags behind). See Report of Emergency Board No. 169 (Jan. 28, 1967) at 6 (departure from the pattern would probably nurture employee dissatisfaction and catch-up demands, and hamper collective bargaining and the negotiation of future contracts. ); Report of Emergency Board No. 231 (Aug. 16, 1996) at 8 (same). (3) Failure to follow a pattern would discourage early settlements. In fact, it encourages each organization to wait, hoping to better the gains achieved by the others. It would also lead to leap-frog bargaining between rounds, as any union that fell behind in one round attempts to outdo the others in the next. The end result would be a destabilizing spiral, undermining national bargaining itself. See Report of Emergency Board No. 186 (Apr. 16, 1975) at 8-9 ( To revert back to the days of continual crisis bargaining between the Carriers and thirteen or more unions, each seeking to piggy-back and improve upon the gains made by the others, is unthinkable. ). 6 C

9 (4) Any such destabilization of national bargaining would be directly contrary to the public interest. The chief purpose of the RLA is to avoid strikes and other disruptions to commerce. See 45 U.S.C. 151a. National handling has been remarkably successful in achieving that purpose. Over the last 30 years, there have been only three brief strikes resulting from nationally handled disputes. Thus, in short, departures from a pattern are inherently destructive of the broader system of collective bargaining. Report of Emergency Board No. 176 (Nov. 2, 1969) at 8. See also Report of Emergency Board No. 194 (Aug. 19, 1982) at 4-5 (following a pattern is necessary if stability of labor-management relations is to be preserved in this industry. ). As we now show, these principles are fully applicable here. B. The UTU Pattern Agreement Should Be Followed In this case, a clear pattern was set by the Carriers recent settlement with the UTU, the largest single rail labor union. The UTU Agreement was reached through extensive, arms-length negotiations over a period of more than 16 months. It was unanimously endorsed by the UTU General Chairmen. 6 More importantly, the UTU Agreement was overwhelmingly supported by the membership, with a total of 60 percent voting to ratify the new agreement. 6 A copy of the full agreement is provided as Carriers Exhibit 1. The UTU has been vocal in describing this agreement as one of the best in its history. For example, the UTU s website quotes National Legislative Director James Stem as stating This is a very good agreement, regardless of economic conditions; but it is especially good given its increase over price inflation.... [it] provides significant financial improvement and economic stability for our families. (App. A- 15). 7 C

10 The main UTU settlement was followed by a similar agreement with the Yardmasters. The Yardmasters Agreement matches the wage and plan design changes of the UTU Agreement. It also provides an extra wage increase of 12.5 cents per hour. This amount was negotiated to reflect comparable value for the certification pay element of the UTU Agreement, and to resolve all of the Yardmasters other work rule demands. See Carriers Ex. 2 (Yardmasters Agreement). The Yardmasters Agreement was also ratified by a wide margin. The UTU agreements set a pattern for the other unions. All of the policy rationales of the pattern principle are fully applicable here. If the other unions obtain more from this Board than UTU negotiated in a voluntary settlement, it would undermine the UTU leadership s credibility with its members, fracture working relationships among employees, and incentivize the UTU to hold out for a leapfrog agreement in the next round. More importantly, it would send the message to all of rail labor that there is no percentage in reaching a voluntary settlement far better to wait until some other Union takes the plunge, and then seek to one-up it. Indeed, if anything, the UTU pattern should set a ceiling, not a floor. Unless the pattern is the very best that the non-settling unions could do with some chance that they could do worse there would always be an incentive for hold-out Unions to try their luck at an emergency board. There would be no reason not to roll the dice. This would undermine voluntary negotiation and mediation, and encourage resort to the emergency board process in every round of national handling, along with the concomitant increased risk of strikes and other disruptions to commerce. 8 C

11 C. The Coalitions Arguments Against the Pattern Are Unpersuasive To be sure, the Coalition Unions reject the idea that the UTU Agreement sets a pattern in this round. They apparently recognize that the existence of a pattern would be fatal to their position, and so offer various theories as to why the UTU Agreement should be ignored. None of those arguments have merit. First, the Coalitions have argued that the UTU is only one union, and that a single union agreement cannot set a pattern. 7 That is not correct. It is in fact well-settled that a single union agreement can and often does set a pattern, especially when the union in question is as large and significant as the UTU. For example, PEB No. 159 faced a dispute involving just one non-operating union, the BRS, at a time when similar disputes were pending with ten other unions. See Report of Emergency Board No. 159 (Apr. 3, 1964) at 7. In crafting its recommendations, the Board noted that its recommendations would set a pattern for the other unions: An increase in the wages of any craft or class of railroad labor may have an important effect on the wage settlements made with other railway labor organizations. The persistent demand for uniformity of wage adjustments on the part of both operating and non-operating employees is one of the realities which this Board cannot ignore. Id. at 23. That prediction proved correct the three emergency boards appointed several months later all based their recommendations on the BRS pattern established by PEB No See Report of Emergency Board No. 161 (Aug. 18, 1964) at 7; Report of 7 The Coalitions argument ignores the fact that the Carriers have also reached agreement with the Yardmasters. The Yardmasters are, of course, affiliated with the UTU, but they have craft autonomy and had their own unique demands, which were separately negotiated with the Carriers. 9 C

12 Emergency Board No. 162 (Oct. 20, 1964) at 7; Report of Emergency Board No. 163 (Aug. 18, 1964) at 7. The same has been true in other rounds as well. See, e.g., Report of Emergency Board No. 221 (May 28, 1992) at 11 (single non-operating craft agreement set pattern for all other non-operating crafts). Second, the Coalitions have made the related point that the UTU represents less than a majority of all railroad employees. 8 They argue that a pattern does not exist unless at least 50 percent of the industry has signed on. Again, that is not correct. A pattern can be set by substantially less than 50 percent of the workforce. PEB No. 114, for example, recommended wage increases based on a pattern set by the operating crafts, which at the time were about 30 percent of the industry. See Report of Emergency Board No. 114 (Nov. 7, 1955) at 22. Thus, a single agreement covering less than a majority can easily set a pattern, especially where, as here, a large and important Organization took the lead in reaching agreement with the carriers. Report of Emergency Board No. 228 (May 8, 1996) at Third, the Coalitions argue that the UTU Agreement should be discounted because it is an operating employee agreement, whereas most of the Coalition members are nonoperating employees. But PEBs have never balked at applying operating employee patterns to non-operating employees, or vice versa. See, e.g., Report of Emergency Board No. 114 (Nov. 7, 1955) at 22 (applying operating employee pattern); Report of 8 The Coalitions consistently understate the percentage of employees represented by UTU, claiming that it is somewhere between 20 and 25 percent. In fact, the UTU (including Yardmasters) represents more than 39,000 employees, accounting for approximately 30 percent of the entire unionized workforce in national bargaining. 10 C

13 Emergency Board No. 228 (May 8, 1996) at (same). That is especially true where, as here, all of the core issues are common to all of the unions, and the elements of value obtained in the pattern agreement can be translated to value for the remaining unions. Unlike in past rounds, there are no unique items in the pattern it is all just compensation and health care plan design. Fourth, the Coalitions assert that plan design changes to the UTU health care plan cannot set a pattern because the other Unions are party to a separate health care plan. We address this argument in detail in the Carriers Submission 5: Health Care Plan Design. The short and sufficient answer is that the plans are identical in all material respects, and their experience is combined for purposes of setting the rate at which the Carriers fund plan costs. Thus, it makes perfect sense to apply changes to both plans. Finally, the Coalitions assert that even if there is a pattern, the Board should depart from it and order a richer package in light of recent carrier profits and various other factors. But deviations from a pattern may be justified only by special [and] compelling circumstances. Report of Emergency Board No. 220 (May 28, 1992) at 6. None of the factors identified by the Coalitions satisfy their burden to show special and compelling circumstances. To the contrary, all of the arguments they identify such as profitability, inflation, and the like necessarily apply to all crafts equally, including the UTU, and so do not justify any deviation from the pattern. * * * * Thus, for all of these reasons, the Board should recommend a settlement based on the UTU pattern agreement. 11 C

14 II. THE CARRIERS PROPOSAL EQUALS OR EXCEEDS APPLICABLE BENCHMARKS. Beyond the policy considerations that support the pattern principle, the Carriers proposal should be adopted here because it is fair and reasonable and in fact quite generous when measured against external benchmarks. Not only does the proposed total compensation increase exceed projected increases in cost of living by a wide margin, it is richer than the vast majority of collective bargaining agreements negotiated in other industries over the last 2 ½ years. In order to compare compensation increases under the Carriers proposal to the rest of American industry, we start from the premise that the proper measuring stick is total compensation. See Carriers Submission No. 3 (Total Compensation) at 5-7. Under the Carriers proposal, the projected total increase including the overall value of wages, health care benefits, and the special wage adjustment equivalent of certification pay, but excluding various other increases, such as lump sums, FELA payments, and retirement benefits is 20.8 percent over six years. That increase is better than any comparator, including the overall labor market, the union labor market, the transportation sector, and cost of living. A. The General Labor Market The most appropriate comparator for the Carriers proposal is the aggregate American workforce, including both union and non-union workers. The labor market in which the Carriers compete for talent is not limited to the unionized segment, and so it makes no sense to limit compensation comparisons to just unionized employers. See Carriers' Ex. 3 (Report of Dr. Murphy) at 16, C

15 The UTU pattern substantially exceeds recent and projected compensation increases in the general labor market. In 2010, average compensation for all employees on private sector payrolls increased by 1.11 percent, far less than the average 3.47 percent increase under the Carriers proposal. See Bureau of Labor Statistics ( BLS ) Employer Cost for Employee Compensation (App. A-6) at 111. The same is also true if we measure the proposed increases against comparable industries. Compensation for employees in the transportation sector grew an average of just 2.23 percent in 2010, again far less than the yearly increases under the Carriers proposal. See id. at 538 (Table 19). Likewise, the Carriers proposed increases exceed projected growth in the Employment Cost Index through 2015 by 5.33 percent. See Carriers Ex. 6 (Report of Dr. Evans) at 33 (referring to Congressional Budget Office projections). Furthermore, these data while compelling do not fully capture just how generous the Carriers proposal is in the current economic climate. There is a stark contrast between how railroad employees will fare under the UTU pattern and the current plight of many American workers. Economic growth has stagnated. See Carriers Ex. 6 (Report of Dr. Evans) at 35 (citing Federal Reserve statements). In particular, there is no denying that the overall job market is truly dismal. By some accounts, more than 25 million people are unemployed or underemployed. See BLS Employment Report August 2011 (App. A-7). According to recent government figures, unemployment is running at over 9 percent, and has topped 8 percent for more than 30 months, the longest streak since the 1930s. Id. Other estimates put the true rate of unemployment above 12 percent or even higher: 13 C

16 Moreover, projected unemployment rates are not encouraging, indicating that high unemployment will continue to suppress compensation growth for the foreseeable future. See Carriers Ex. 6 (Report of Dr. Evans) at 32, Even among those who have kept their jobs, the prospects for many remain grim. Hundreds of thousands of employees including essentially all federal government employees have suffered wage cuts or wage freezes. See Peter Baker and Jackie Calmes, Amid Deficit Fears, Obama Freezes Pay, New York Times (Nov. 29, 2010) (App. A-16). To an extent rarely seen in recessions since the Great Depression, wages for a swath of the labor force this time have taken a sharp and swift fall. Sudeep Reddy, Downturn s Ugly Trademark: Steep, Lasting Drop in Wages, The Wall Street Journal (Jan. 11, 2011) (App. A-23). 14 C

17 In addition, employees are increasingly being asked to pick up a larger share of spiraling health care costs. Health-care reform doesn t change the fact that costs are going up, and cost-shifting is going to continue to occur between the employer's portion of the cost and the individual s portion of costs. See Karen Pallarito, Health Care Reform: Employees Face Greater Cost-Sharing, U.S. News & World Rep. (Sept. 9, 2010) at 1 (App. A-12); see also N.C. Aizenman, Health Care Costs Shifted to Workers as Premiums Surge, Wash. Post (Sept. 27, 2011) (App. A-13). Given these economic conditions, the Coalition Unions vehement objections to an almost 21 percent increase in total compensation are hard to understand, to say the least. In a climate in which so many of their fellow Americans are suffering, the Coalition Unions seem disconnected at best and avaricious at worst when they turn up their noses at such an enormous increase in compensation. Assessed against the broader economic context, the Carriers proposal is extremely fair, even generous. B. Comparison to Recent Union Settlements Even if we limit the comparison to wage growth in unionized private industry, as the Coalitions would prefer, the Carriers proposal still comes out ahead: Average Annual GWI: Large Private Industry Settlements Since January 1, % Weighted Average 1.82% UTU Pattern Agreement 3.04% 15 C

18 A list of private industry settlements covering at least 1,000 employees is provided in Table A.1 contained in Attachment A. 9 Thus, the Carriers proposed annual wage increase is more than a full percentage point higher than the average negotiated by unions throughout the economy, and higher than the annual increase in percent of other settlements. C. Comparison to Transportation Industry Settlements The same holds true even if we further narrow the comparison to wage growth under recent union settlements in the transportation industry. Indeed, when compared to recent settlements in this sector, the UTU pattern is even higher above the norm: Average Annual GWI: Transportation Sector Settlements Since January 1, % Weighted Average 2.01% UTU Pattern Agreement 3.04% A list of the transportation industry settlements covering at least 600 employees is provided in Table A.2 contained in Attachment A. Of course, the Coalition Unions have pointed to a few selected agreements that, they contend, provide higher compensation increases than the UTU pattern. For example, they have relied on the Amtrak and Massachusetts Bay Commuter Railroad 9 This analysis relies on a comparison of general wage increases rather than total compensation because, for the most part, reported summaries of labor agreements only reflect changes in wages. 16 C

19 ( MBCR ) settlements. Those settlements are hardly good comparators. Both Amtrak and the MBCR are government-funded, public sector employers, and so are not subject to the financial discipline imposed by the competitive market. Moreover, MBCR operates in an urban, high-wage area, whereas many Class I railroad employees live in lowerwage rural areas. For these reasons, prior PEBs have rejected attempts to link freight rail wage rates to urban transit wage rates. See Report of Emergency Board No. 219 (Jan,. 15, 1991) at 61-62; Report of Emergency Board No. 221 (May 28, 1992) at 10, 12. Moreover, because the freight railroads generally set the pattern for Amtrak, it is reasonable to presume that the unions made that deal in order to avoid the anticipated freight pattern. Thus, it is especially odd to point to Amtrak as a basis for a freight railroad settlement. D. Comparison to Cost of Living Increases The Coalition Unions have also made the remarkable and unsupported claim that the UTU pattern does not even allow employees to keep up with increases in the cost of living. From 2010 through 2015, the Congressional Budget Office projects inflation (as measured in terms of the Consumer Price Index) at 9.1 percent. See Carriers Ex. 6 (Report of Dr. Evans) at 33. That is less than half the increase in compounded GWIs provided under the pattern. As a result, over the course of the wage increases provided in the UTU Agreement, employees will enjoy real wage growth totaling 9.14 percent. Id. This continues past trends just since 2001, Coalition employees have seen wage growth of 30.5 percent versus a 23.1 percent increase in the CPI, resulting in real wage growth over the last ten years of 7.4 percent. Id. at C

20 III. THE CARRIERS PROPOSAL MAINTAINS THE EMPLOYEES PREFERRED POSITION. The above-market increase proposed by the Carriers will perpetuate the advantage in total compensation that Coalition employees already have over their peers. The baseline for rail employees compensation before any of the Carriers proposed increases is already among the highest in the country. Railroad industry employees receive higher total compensation than employees in 82 percent of other industries. See Carriers Ex. 6 (Report of Dr. Evans) at 22. Indeed, even before any increases in this round, Coalition employees were already better compensated than virtually any peer group: Average Hourly Total Compensation Comparison (2010) All Private Industry Transportation Industry Unionized Private Industry Coalition Union Employees Total Compensation $31.86 $26.00 $37.44 $46.58 Wages and Salaries $22.11 $17.34 $22.98 $26.66 Total Benefits $9.75 $8.66 $14.46 $19.92 Paid Leave $2.35 $1.59 $2.76 $6.34 Overtime Pay $0.95 $0.77 $1.10 $0.96 Health and Life Insurance $2.71 $2.64 $4.80 $6.27 Pensions (Including RRA) $1.22 $1.19 $2.63 $6.09 Legally Required Benefits $2.52 $2.48 $3.18 $0.26 See Carriers Exhibit 4 (Report of Dr. Fay) at 7, 95 (explaining that legally required benefits include Social Security, Medicare, unemployment insurance, and workers compensation for comparator groups). Thus, Coalition employees enjoy a substantial compensation premium, even over other unionized employees: 18 C

21 Total Compensation Premium of Carrier Employees (2010) Unionized Private Industry Carrier Employees Premium Over Unionized Workers Premium as Percentage Total Compensation $37.44 $46.58 $ % Wages and Salaries $22.98 $26.66 $ % Total Benefits $14.46 $19.92 $ % Paid Leave $2.76 $6.34 $ % Overtime Pay $1.10 $0.96 -$ % Health and Life Insurance $4.80 $6.27 $ % Pensions (Including RRA) $2.63 $6.09 $ % Legally Required Benefits $3.18 $0.26 -$ % Id. at 10. This premium is even higher when Coalition employees are compared to others in the same sector. See Carriers Ex. 6 (Report of Dr. Evans) at 20 (showing a total compensation premium of 79 percent over other transportation workers). Moreover, in addition to the highly competitive compensation, railroad jobs are becoming increasingly safer and easier in many respects. Employees have better access to technology, better working conditions, better communications, and better quality of life. Safety, in particular, has never been better in the railroad industry than it is now. See Carriers Ex. 7 (Report of Dr. Gallamore and Mr. Gray) at 46. Workers in the rail industry have lower injury rates than most other major industries, including trucks, inland water transportation, airlines, agriculture, mining, manufacturing, construction, and even grocery stores: 19 C

22 Rail Accident & Injury Rates Have Plunged Train Accidents Per Million Train-Miles: Down 77% '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 ' is preliminary. Source: FRA Injuries Per 200,000 Rail Employee-Hours: Down 82% RRs Are Safer Than Most Other Industries (Injuries Per 200,000 Employee-Hours) RRs All Private Industry Data are Mining Manuf. Inland water Constr. Agric. Grocery stores Air Transp. Trucks Source: U.S. Bureau of Labor Statistics See (App. A-5). Proof that railroad employees are starting from a highly preferred position is found in behavior of job-seekers in the labor market. As the Carriers data show, there is intense competition for virtually every available railroad job: 180 Number of Applicants per Hire , Norfolk Southern and Union Pacific Applicants per Hire Year Source: Company data from Norfolk Southern and Union Pacific. 20 C

23 Furthermore, once people obtain a railroad job, they do not leave voluntarily, but rather have extraordinarily long tenures as compared to individuals in comparable jobs in other industries: Carriers Ex. 5 (Report of Dr. Topel) at 20. If a railroad employee is involuntarily laid off due to merger or a similar transaction, he or she may be entitled to very generous job protection as much as six years of pay in the relatively rare circumstance where the individual is not quickly returned to service. 10 Moreover, most employees who are laid 10 A mosaic of agreements, legislation, and regulatory measures insulate railroad employees from changes in employment status. These include the Railroad Unemployment Insurance Act, the Washington Job Protection Agreement of 1936, Surface Transportation Board-imposed conditions on carrier transactions, and many others. The array of protective benefits for railroad employees exceeds anything available to virtually any other group of American workers. 21 C

24 off even for long periods of time choose to return to work if given the opportunity. Id. at The Carriers proposed agreement ensures that employees will continue to enjoy all of the benefits that make these jobs so popular. Moreover, in addition to the abovemarket compensation increases discussed above, the pattern does not require any work rule changes that might (even arguably) affect quality of life. Employees are not being asked to work longer hours, learn new skills, take on more responsibility, or assume any other additional burdens. Railroad workers will continue to do the same work they are doing now, just at a higher level of real compensation. Moreover, while the Coalition Unions ignore the continued freeze on employee contributions and concentrate their complaints on the plan design changes to the MMCP in-network benefits, the fact is that these changes are quite modest and squarely within the mainstream of employer plans. The Carriers proposal includes: An employee co-insurance rate of only 5 percent, which is much more generous than most plans, with out-of-pocket maximum limits of $1000 per individual and $2000 per family; For larger families and the plan covers many more dependents than most the $2000 maximum is especially generous; Unusually low deductibles, at $200 per person and $400 per family; Additional preventative services coverage, at no cost to employees, as required by the recently enacted health care legislation; and Modest co-pay increases for more expensive brand name drugs, with reduced copayments for generic drugs, including only $5 for up to a 90 day supply by mail. 22 C

25 See Carriers Submission No. 5 (Health Care Plan Design) at 5-6. In short, employees will still be entitled to health benefits that are better than what most Americans receive. Indeed, it is worth emphasizing that railroad jobs are precisely the kind of jobs that many commentators have identified as the key to renewed American prosperity. These are not the sort of part-time, low-wage, no-benefit positions that unions and others decry. And the railroad industry, unlike many other employers, is committed to its long-term partnership with its unions. In many sectors, unions and union-negotiated compensation are under intense fire, but here the unions are assured of maintaining and even increasing the total compensation afforded their members. At the same time, the railroads are hiring, adding more people to the union rolls. By asking for more indeed, much more the Coalition Unions seem to have lost perspective for the context in which their demands are made. IV. THE COALITION UNIONS PROPOSALS ARE NOT JUSTIFIED BY RECENT RAILROAD PROFITABILITY. Undaunted by all of the foregoing considerations, the Coalition Unions are asking for hundreds of millions more in total compensation than UTU-represented employees will receive. If there is one central theme to the Unions case, it is that the Carriers should pay more than the UTU pattern because railroad operating profits are currently healthy and increasing. As a corollary to this argument, the Coalitions point to the last settlement in 2007, arguing that the Carriers paid more at that time than they are offering now, despite an increase in operating profit since There are, however, multiple flaws with the Coalition Unions reliance on profitability. 23 C

26 First, as a matter of labor economics, employer profitability is not and never has been a consideration in setting appropriate levels of employee compensation. As explained by Dr. Murphy, compensation is a function of supply and demand for labor in the relevant market. Profitability, by contrast, is a function of the price of outputs and the cost of inputs. There is no logical reason why there should be a correlation between the two. See Carriers Ex. 3 (Report of Dr. Murphy) at Second, there is no historic relationship between profitability and compensation in this industry. Railroad employees have never accepted wage cuts during times of poor performance, and so there is no reason they should receive above-market increase during periods of relatively good performance. Indeed, the Coalitions argument appears to be a one-way ratchet: wages go up when profits are high, but do not go down when the reverse is true. That is not reasonable. As PEB No. 223 explained, if employees are expected to take pay cuts in periods of the carrier s losses, they should expect to share greater benefits in periods of the carrier s prosperity. When no pay cuts are requested in non-profit years, a different result may be justified. Report of Emergency Board No. 223 (Oct. 20, 1993) at 15. Third, during bargaining, the Carriers offered to link compensation increases to financial performance, as they did in some local agreements with the BLET, UTU and ATDA. Profit-sharing is an increasingly popular concept in union settlements, as recent automotive manufacturer agreements illustrate. But the Coalition Unions have refused to even consider that idea. They only want upside, with no downside risk exposure should Carrier profits begin to falter. 24 C

27 Fourth, as Arbitration Board No. 559 pointed out, short-term profitability does not equal a right to wage increases. In that case, the union argued that surging rail profitability justified compensation increases beyond those negotiated by the parties in an unratified agreement: The organization [says] that the justification for greater increase lies in the record profits reaped by the industry over the last several years, especially last year. The organization s witness analyzes the financial reports and the economic data and advises that the fortunes of the industry have never been better: net income is at a record high; earnings are up all over; operating ratios continue to fall; earnings per share are escalating; return on investment could not be better; etc. See Award of Arbitration Board No. 559 at 7-8. But the Board firmly rejected that theory, observing as follows: We think that before jumping into this thicket, we are better off to step back and ask ourselves, what will this exercise gain us? We do not think that bigness alone or profits by themselves are persuasive reasons for recommending wage increases. If that were so, the biggest company in the country should have the highest wage rates for its employees. But that is not the case, and it is not the case because it makes no sense.... Thus, in our view, the union s claim that current profit levels justify greater wage increases does not fly. Id. at 8 (emphasis added). 11 Fifth, the Coalitions overstate the railroads recent economic strength. There is no doubt that the industry has done much better in recent years all railroad employees can be justifiably proud of better revenues, better profits, better stock prices, and the like. But for all that, railroads are still not consistently earning their cost of capital. See 11 See also, e.g., Report of Emergency Board No. 228 (May 8, 1996) at (better profits do not trump pattern considerations). 25 C

28 Carriers Ex. 7 (Report of Dr. Gallamore and Mr. Gray) at 1. Indeed, notwithstanding the Coalitions effort to paint a picture of the Carriers unwavering financial prosperity, the Carriers have not been immune to recent financial cycles. This is unsurprising, given that the broader economy drives demand for goods shipped by rail and affects shipping prices. From 2008 to 2009, the Carriers freight revenue fell by more than 22 percent and net income fell by approximately 21 percent. Likewise, over the same period, the Carriers return on equity fell by more than 26 percent. Id. at 13, 16, 26. This abrupt decline in highlights the fragility of the Carriers recent gains and the substantial uncertainty surrounding any predictions of future financial success. Sixth, in addition to overstating current performance, the Coalitions understate or ignore the risks for the future: The railroads are, of course, sensitive to larger economic trends. Anemic projected growth in the U.S. and world-wide may have a very serious impact on railroad profitability in the coming months and years. Economic forecasts show that variable costs, such as fuel prices and health care expenditures, are likely to continue to rise beyond the general rate of inflation and will have a significant impact on the Carriers. Substantial barriers to growth, such as infrastructure limitations, unfunded capital expenditure requirements (like positive train control), potential greenhouse gas legislation, and potential government regulation mean that future growth in the industry is by no means guaranteed. The Carriers also face the risk of disruptions in their supply chains for locomotives, rolling stock, rails, ties, and fuel. The seasonality of many products shipped by rail and the related fluctuation in the demand for shipping creates the potential for alternating periods in which demand exceeds capacity, causing increased congestion and reduced train velocities. These issues are exacerbated by the impact of weather-related events. Fluctuating 26 C

29 demand also increases the costs associated with storage of locomotives, rolling stock, and other equipment. Thus, it is clear that the industry continues to face very real risks to future performance. 12 This is especially true when such a large percentage of Carrier revenues must be invested back into infrastructure in order to maintain the existing physical plant, let alone grow. Id. Forty cents out of every revenue dollar is reinvested in infrastructure and equipment. It is this consistent reinvestment of profits that has created the improvement in financial health that the Coalitions now cite: $10 $9 $8 Railroad Net Income vs. Reinvestments* in Their Networks Reinvestments* (right scale, $ bil) $22 $21 $20 $7 $6 $5 Class I RRs Net income (left scale, $ bil) $19 $18 $17 $4 $3 correlation = 94% $16 $15 $ *Capital spending plus maintenance expenses minus depreciation. Data are for Class I railroads. Source: AAR $14 12 Cautionary tales abound in other industries. Airlines are a prime example. Studies of airline industry economics reveal that labor costs have swung back and forth as the industry s earnings have ebbed and flowed. [D]uring strong financial periods, labor attempts to extract some of the profits. Severin Borenstein and Nancy Rose, How Airline Markets Work... Or Do They?, National Bureau of Econ. Research Working Paper (App. A-10) at 42. But because of the multi-year process of collective bargaining, wage bill stickiness means that labor cost changes may [be] out of sync with profit changes, exacerbating the profit swings. Id. Thus, for example, when airline industry profit rates grew from 1993 to 2000, labor costs also rose. But when industry volume suddenly dropped after 9/11, high labor costs accelerated the industry s fall into bankruptcy, ultimately resulting in deep cuts in both wages and jobs. Id. at Fig. 12, C

30 Undercutting the industry s ability to invest by diverting resources to unwarranted payments to labor would risk undermining the positive industry growth and stability that benefits carriers and employees alike. Finally, the Coalitions corollary argument that they did better in 2007 when the industry was less profitable ignores several important considerations. For one, the Coalitions seem to forget that the last national agreements were signed just before the socalled Great Recession. At the same time that rail freight volumes were crashing in 2008 and 2009 and at the same time that millions were losing their jobs Coalition employees received annual wage increases of 4.0 percent and 4.5 percent. In other words, the Carriers overpaid in the 2007 agreements, and that is hardly an argument for a further over-payment now. If anything, it suggests that the Coalitions should accept less to make up for the excessive increases in compensation over the life of the last agreement. In any event, it makes no sense to point to the last round as a basis for setting compensation in this round. Patterns in the industry are generally set round-by-round. If it were otherwise, then compensation increases would always be the same they would not fluctuate to reflect new or changed circumstances. * * * * For all these reasons, therefore, the Coalitions argument from profitability is unconvincing. That is especially so when the UTU which had the same arguments regarding current railroad profitability accepted a deal that the other Unions now reject as inadequate. 28 C

31 V. THE COALITIONS PROPOSALS ARE NOT JUSTIFIED BY CHANGES IN RAILROAD PRODUCTIVITY. The Coalitions secondary theme one that they have raised in every PEB and negotiation for decades is that above-market compensation increases are justified by improvements in railroad productivity. They point to improvements in freight ton-miles per man hour, noting that there has been a dramatic rise since the 1980 Staggers Act, including a steady decrease in total employment. While that may be true as far as it goes, it does not justify compensation increases for these employees. First, any implication that railroad productivity improvements are the result of increased effort, output, or efficiency of rail workers are factually unsupportable. Productivity improvements since the passage of the Staggers Act are largely a function of factors that have nothing to do with labor: Impact of Economies of Density. Economies of density exist if increasing the output produced over a given network results in a less than proportional increase in cost. The biggest factor in the post-staggers productivity growth is that the substantial growth of output and substantial reduction of network. Industry consolidation, track abandonment, and growth of traffic volume all combined to produce a tremendous increase in traffic density. For example, traffic density doubled between 1985 and Significance of Product Mix. Between 1980 and 2009, railroad freight tonnage grew by about 30 percent and the length of haul increased by 50 percent, leading to a near doubling of revenue ton miles. The increases in tonnage and length of haul largely reflected the growth of coal and intermodal traffic. But total rail tonnage peaked in 2006, and has declined substantially since Intermodal traffic began to decline in 2006, while coal traffic started declining in Technological Improvements. Railroads productivity gains can also be attributed to technological advances, particularly in locomotives, rails, maintenance of way equipment, and communication technologies. As a result, the average train was 4% longer, had 54% more total load weight, and went 50% farther in 2008 than in The technological advances in railroads have been embodied in improved capital equipment and do not indicate any changes in the intrinsic productivity of labor. 29 C