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Benefits Divide Threatens Labor Peace

The Wall Street Journal, By Vipal Monga and Kimberly S. Johnson,Tue, 30 Jun 2015
Many big companies are pushing to cut spending on employee benefits — from pensions to health insurance — and could face labor strikes as a result.

In all, major employers have about 400,000 union workers whose contracts are up for negotiation this year. They include the Detroit auto makers, whose workforces have a combined 140,000 members of the United Auto Workers; a group of railroad operators including CSX Corp., with 142,000 union employees; and telecom companies like Verizon Communications Inc., which is in talks with about 40,000 wireline workers.

Most labor talks involve some head-butting over benefits. But what’s different this time, corporate finance chiefs say, are a looming “Cadillac tax” on health-care plans and pension burdens that are dragging down profits.

At New York-based Verizon, executives want to “redesign and reshape” health plans in a bid to cut overall cost, said Fran Shammo, chief financial officer.

Verizon also aims to rein in pension expenses. Its obligations for defined-benefit pensions — the kind that guarantee retirees a set payout — totaled $25.3 billion at the end of 2014, up 10% from 2013.

The company began talks last week in Rye, N.Y., and Philadelphia with the Communications Workers of America and the International Brotherhood of Electrical Workers. Neither union liked its opening offer, which included pension-plan changes, increases in employee health-care premiums, a 2% boost in wages this year and next, and a lump-sum payment of $1,000 per worker in 2017 in lieu of a raise.

“They’re going to be very difficult negotiations,” said Mr. Shammo.

Verizon said in a statement that its union health plans for a worker with one or more family members cost an average $20,000 a year, well above the $16,800 national average.

The unions say they made many concessions during the financial crisis, and with companies raking in record profits, don’t want to give up any more.

Quarterly earnings for S&P 500 companies almost tripled from the first quarter of 2009 and this year’s first quarter, making hardship a tougher sell.

“Workers have been told to toe the line, but corporate executives are not toeing the line,” said Candice Johnson, a CWA spokeswoman. The union points to the company’s top five executives, who receive $44 million in pay last year.

“As far as unions are concerned, the bad times are over,” said Gary Chaison, professor of industrial-relations at Clark University in Worcester, Mass. With the economy growing, they “will try to back out of concessions they made in the past,” he said.

But big employers are looking ahead to 2018, when a hefty excise tax kicks in on generous employee health-care plans. The tax is spurring them to consider moving workers to less costly plans, such as those with high deductibles. The tax, meant to help fund insurance for the previously uninsured under the Affordable Care Act, is 40% a year on the amount by which employer-sponsored plans exceed $10,200 for individual coverage and $27,500 for family coverage.

The Detroit auto makers say health costs already are growing unsustainably fast, and they will be looking for ways to keep them in check. The three companies say they will spend over $2 billion on medical coverage for hourly workers in 2015, or at least $14,800 per active worker.

Bob Allard, who fixes machines at General Motors Co.’s powertrain plant in Toledo, Ohio, says he will vote against any cuts in health-care benefits. Since 2009, he has paid a $25 co-payment for primary-care visits. Before that, he paid nothing.

“I’m not giving another penny back,” said Mr. Allard.

According to Kristin Dziczek, at the nonprofit Center for Automotive Research, Mr. Allard’s $28.79-an-hour pay rises to $55 an hour, if benefits are included.

Fredrik Eliasson, CFO of Jacksonville, Fla.-based CSX, said his company will be subject to the Cadillac tax and has implemented consumer-driven plans and co-pays for prescription drugs to try to “ratchet back” costs. About 85% of the company’s workforce is unionized.

The labor talks offer companies an opening to reduce pension burdens, which have ballooned since the financial crisis, leaving many plans underfunded and weighing on profits.

At the end of last year, GM had a $76.7 billion pension obligation for its U.S. workers, 35% more than the auto maker’s market capitalization of $55.3 billion.

GM pared its pension obligations by $28 billion in 2012 by offering white-collar retirees lump-sum payments and handing responsibility for their pensions to Prudential Financial Inc. through a group annuity contract. But GM, whose talks with the UAW are set to start July 13, needs the union’s nod to do the same for its hourly workforce.

“This bargaining is absolutely critical” to the car companies, an industry official said.

The UAW, which represents workers at GM, Ford Motor Co., and Fiat Chrysler Automobiles NV previously said it is prepared to strike as a last resort.

In the last round of talks, in 2011, the UAW agreed to move newly hired workers into defined-contribution plans like 401(k)s, making them responsible for investment decisions. Workers and retirees got no pension increases for the first time since 1950, when the auto makers instituted pensions.